<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Asia Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Asia Fund at February 28, 1999
and the results of its operations, the changes in its net assets and the
financial highlights for the periods presented, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 16, 1999
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 83.2%
Indonesia - 9.2%
405,500 Astra Agro Lestari 96,356
1,493,500 Gudang Garam 2,078,648
50,820 Gulf Resources Ltd ADR * 381,150
450,000 HM Sampoerna * 328,430
3,788,500 Indah Kiat Pulp & Paper * 900,238
954,000 International Nickel * 480,373
544,120 PT Daya Guna Samudera 264,749
2,331,000 PT Indofood Sukses Makmur Tbk * 1,246,277
380,000 PT Indosat (Persero) Tbk 524,583
1,750,000 PT Pabrik Kertas Tjiwi Kimia * 346,535
280,000 Semen Gresik 294,653
97,000 Tambang Timah Persero (Foreign Registered) 54,331
340,000 Telekomunikasi Indonesia 105,799
----------
7,102,122
----------
Korea - 19.9%
16,030 Cheil Jedang Corp 431,048
12,470 Dae Duck Electronics 896,902
270,040 Daewoo Corp 690,826
90,000 Daewoo Heavy Industries 303,065
88,000 Hana Bank 819,943
68,400 Housing & Commercial Bank 1,059,403
94,000 Hyundai Heavy Industries 1,843,890
118,250 Kookmin Bank 802,186
102,742 Medison Ltd 965,699
8,000 Pohang Iron & Steel ADR * 125,000
26,150 Pohang Iron & Steel (b) 1,394,499
52,233 Saehan Precision 785,523
127,000 Samsung Corp 607,233
20,724 Samsung Display Devices 838,445
4,533 Samsung Electronics 319,366
41,346 Samsung Electronics GDR (1/2 Voting) 1,711,724
5,040 SK Telecom ADR 51,030
2,287 SK Telecom (b) 1,741,186
----------
15,386,968
----------
Malaysia - 13.1%
227,000 Berjaya Sports Toto 301,671
65,000 Carlsberg Brew Malaysia 174,474
395,000 Genting Berhad 899,145
699,000 Golden Hope Plantations Berhad 699,000
272,000 Guinness Anchor Berhad 264,842
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------
<S> <C> <C>
Malaysia- continued
1,575,000 Kumpulan Guthrie Berhad 1,007,171
645,000 Magnum Corp Berhad 332,684
1,573,000 Malaysian International Shipping (Foreign Registered) 2,053,179
26,000 Nestle Malaysia 100,579
383,600 Rothmans of Pall Mall Berhad 2,210,747
214,000 Sime Darby Berhad 238,779
9,354,000 Tan Chong International Ltd 893,416
3,118,000 Tan Chong Motor Holdings Berhad 894,374
----------
10,070,061
----------
Phillippines - 15.5%
2,785,170 Aboitiz Equity Ventures Inc * 98,679
11,646,000 Alaska Milk Corp * 657,797
4,342,000 Ayala Corp 1,421,322
10,097,054 Cosmos Bottling Corp 725,847
4,061,000 Digital Telecommunications * 110,518
20,715,139 DMCI Holdings Inc * 925,400
178,500 Equitable Banking Corp 279,551
1,173,500 International Container Terminal * 64,475
263,557 Ionics Circuits Inc 58,869
466,990 Manila Electric Class B 1,450,726
60,000 Metro Bank & Trust Co 431,322
5,288,000 Petron Corp 651,666
243,840 Philippine Commercial International Bank 1,114,339
106,570 Philippine Long Distance Telephone 2,476,149
691,500 San Miguel Corp Class B 1,136,226
3,216,000 Solid Group Inc * 46,238
593,000 SPI Technologies Inc 338,748
----------
11,987,872
----------
Singapore - 7.9%
55,650 Creative Technology Ltd 720,671
445,000 Natsteel Electronics 1,240,418
1,008,000 Natsteel Ltd 954,146
132,310 Singapore Press Holdings 1,505,967
724,000 Singapore Technologies Engineering Ltd 622,253
254,000 Venture Manufacturing 1,069,396
----------
6,112,851
----------
Thailand - 17.6%
301,700 Advanced Info Service Public Co Ltd (Foreign Registered) (b) 2,101,876
485,600 Bangkok Bank Plc (Foreign Registered) (b) * 819,743
50,200 Bangkok Insurance (Foreign Registered) (b) 228,671
315,900 BEC World Public Co Ltd (Foreign Registered) (b) 1,523,633
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Thailand- continued
920,200 Cogeneration Public Co (Foreign Registered) (b) * 536,290
129,650 Delta Electronics Public Co Ltd (Foreign Registered) (b) 569,737
14,500 Grammy Entertainment Plc (Foreign Registered) (b) 62,165
347,000 Hana Microelectronic Plc (Foreign Registered) (b) * 781,029
306,500 Italian-Thai Development Public Co Ltd (b) * 624,169
184,700 KCE Electronics Plc (Foreign Registered) (b) * 346,436
1,160,000 Krung Thai Bank Public Co Ltd (b) * 505,091
420,300 Land & House Public Co Ltd (Foreign Registered) (b) * 236,503
340,600 PTT Exploration and Production Public Co Ltd (Foreign Registered) (b) * 2,245,113
228,576 Shinawatra Computer Public Co Ltd (Foreign Registered) (b) * 630,850
1,601,500 Shinawatra Satellite (Foreign Registered) (b) * 826,068
1,109,000 Siam Commercial Bank Plc (Foreign Registered) (b) * 468,027
1,107,000 Telecomasia (Foreign Registered) * 541,338
1,504,230 United Broadcasting Plc (Foreign Registered) (b) * 604,594
----------
13,651,333
----------
TOTAL COMMON STOCKS (Cost $77,928,240) 64,311,207
----------
PREFERRED STOCKS - 2.3%
Korea - 2.3%
71,000 Samsung Electronics (Non Voting) 1,793,134
----------
TOTAL PREFERRED STOCKS (Cost $1,077,524) 1,793,134
----------
FULLY PAID SWAPS - 8.1%
Singapore - 8.1%
487,000 Development Bank of Singapore Local Share Swap (c) 2,373,842
574,000 Oversea Chinese Banking Corp Local Share Swap (c) 2,551,043
514,000 Overseas Union Bank Local Share Swap (c) 1,373,577
----------
6,298,462
----------
TOTAL FULLY PAID SWAPS (Cost $7,568,683) 6,298,462
----------
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares/
Par Value ($) Description Value ($)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
RIGHTS & WARRANTS - 1.4%
Korea - 0.0%
41,826 Samsung Corp Rights 3/12/99 * 29,058
-----------
Phillippines - 0.7%
1,141,900 Jolliebee FDS Warrants 2/24/03 * 535,037
-----------
Thailand - 0.7%
228,576 Shinawatra Computer Public Co Ltd (Foreign Registered) Rights 3/15/99 * 538,979
-----------
TOTAL RIGHTS & WARRANTS (Cost $1,330,198) 1,103,074
-----------
DEBT OBLIGATIONS - 3.5%
China - 0.0%
$ 100,000 Qingling Motor Co CV, 3.50% due 1/22/02 22,000
-----------
Thailand - 0.8%
$ 757,000 Tipco Asphalt Public Co, 2.75% due 9/19/06 601,815
-----------
U.S. Government - 2.7%
$2,188,094 U.S. Treasury Inflation Indexed Note, 3.375% due 1/15/07 (a) 2,110,144
-----------
TOTAL DEBT OBLIGATIONS (Cost $2,846,011) 2,733,959
-----------
SHORT-TERM INVESTMENTS - 2.1%
Cash Equivalents - 2.1%
$1,600,000 First National Bank of Chicago Time Deposit, 4.81% due 3/01/99 1,600,000
-----------
TOTAL SHORT-TERM INVESTMENTS (Cost $1,600,000) 1,600,000
-----------
TOTAL INVESTMENTS - 100.6%
(Cost $92,350,656) 77,839,836
Other Assets and Liabilities (net) - (0.6%) (435,815)
-----------
TOTAL NET ASSETS - 100.0% $77,404,021
===========
</TABLE>
4
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
- --------------------------------------------------------------------------------
Notes to the Schedule of Investments
ADR American Depositary Receipt
GDR Global Depository Receipt
(a) This security is held as collateral for open futures contracts.
(b) Valued by management (Note 1).
(c) A derivitive security whose price is linked to the return on the
underlying security.
* Non-income producing security.
5
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
- --------------------------------------------------------------------------------
At February 28, 1999, industry sector diversification of the Fund's
equity investments was as follows:
Industry Sector (Unaudited)
Electronic Equipment 13.0%
Telecommunications 13.0
Food and Beverage 7.5
Banking 6.0
Communications 5.0
Consumer Goods 5.0
Oil and Gas 4.4
Construction 3.6
Conglomerates 3.2
Real Estate 2.9
Machinery 2.9
Transportation 2.9
Utilities 2.7
Financial Services 2.7
Automotive 2.4
Services 2.4
Metals and Mining 2.1
Paper and Allied Products 1.7
Health Care 1.3
Aerospace 0.8
Computers 0.5
Insurance 0.3
Miscellaneous 13.7
-----
100.0%
=====
6 See accompanying notes to the financial statements.
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities - February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at value (cost $92,350,656) (Note 1) $ 77,839,836
Foreign currency, at value (cost $436,161) (Note 1) 546,166
Cash 60,476
Receivable for open swap contracts (Notes 1 and 6) 1,562,618
Dividends and interest receivable 305,392
Receivable for expenses waived or borne by Manager (Note 2) 22,429
-------------
Total assets 80,336,917
-------------
Liabilities:
Payable for investments purchased 666,155
Net payable for open forward foreign currency contracts (Notes 1 and 6) 47,206
Accrued Malaysian repatriation taxes (Note 1) 2,095,148
Payable to affiliate for (Note 2):
Management fee 59,824
Shareholder service fee 8,974
Accrued expenses 55,589
-------------
Total liabilities 2,932,896
-------------
Net assets $ 77,404,021
=============
Net assets consist of:
Paid-in capital $ 102,381,252
Accumulated undistributed net investment income 157,775
Accumulated net realized loss (10,148,159)
Net unrealized depreciation (14,986,847)
-------------
$ 77,404,021
=============
Net assets attributable to Class III Shares $ 77,404,021
=============
Shares outstanding - Class III 10,094,391
=============
Net asset value per share - Class III $ 7.67
=============
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Statement of Operations - Year Ended February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income:
Dividends (net of foreign tax expense of $247,716) $ 1,264,034
Interest 434,917
------------
Total income 1,698,951
------------
Expenses:
Management fee (Note 2) 740,141
Custodian fees 220,870
Audit fees 39,468
Transfer agent fees 27,929
Legal fees 2,188
Registration fees 2,081
Trustees fees (Note 2) 638
Miscellaneous 8,426
Fees waived or borne by Manager (Note 2) (221,148)
------------
820,593
Shareholder service fee - Class III (Note 2) 111,021
------------
Net expenses 931,614
------------
Net investment income 767,337
------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments (8,572,598)
Closed swap contracts (3,120,181)
Foreign currency, forward contracts and foreign currency related
transactions 831,460
------------
Net realized loss (10,861,319)
------------
Change in net unrealized appreciation (depreciation) on:
Investments (Note 1) (17,018,505)
Open swap contracts 1,562,618
Foreign currency, forward contracts and foreign currency related
transactions 54,965
------------
Net unrealized loss (15,400,922)
------------
Net realized and unrealized loss (26,262,241)
------------
Net decrease in net assets resulting from operations $(25,494,904)
============
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from February 18, 1998
Year Ended (commencement of operations)
February 28, 1999 to February 28, 1998
----------------- --------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 767,337 $ 9,195
Net realized gain (loss) (10,861,319) 82,979
Change in net unrealized appreciation (depreciation) (15,400,922) 414,075
------------ ------------
Net increase (decrease) in net assets resulting
from operations (25,494,904) 506,249
------------ ------------
Distributions to shareholders from:
Net investment income - Class III (877,511) --
In excess of net investment income - Class III (673,683) --
------------ ------------
(1,551,194) --
------------ ------------
Net share transactions - Class III (Note 5) 64,289,234 39,654,636
------------ ------------
Total increase in net assets 37,243,136 40,160,885
Net assets:
Beginning of period 40,160,885 --
------------ ------------
End of period (including accumulated
undistributed net investment income
of $157,775 and $110,171, respectively) $ 77,404,021 $ 40,160,885
============ ============
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from February 18, 1998
Year Ended (commencement of operations)
February 28, 1999 to February 28, 1998
----------------- --------------------
<S> <C> <C>
Net asset value, beginning of period $ 10.44 $ 10.00
---------- ----------
Income (loss) from investment operations:
Net investment income 0.08(b) 0.01(b)
Net realized and unrealized gain (loss) (2.69) 0.43
---------- ----------
Total from investment operations (2.61) 0.44
---------- ----------
Less distributions to shareholders from:
Net investment income (0.08) --
In excess of net investment income (0.08) --
---------- ----------
(0.16) --
---------- ----------
Net asset value, end of period $ 7.67 $ 10.44
========== ==========
Total Return (a) (25.03%) 4.40%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 77,404 $ 40,161
Net expenses to average daily net assets 1.26% 2.52%*
Net investment income to average daily net assets 1.04% 2.86%*
Portfolio turnover rate 61% 1%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts: $ 0.02 $ 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
periods shown.
(b) Computed using average shares outstanding throughout the period.
10 See accompanying notes to the financial statements.
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Asia Fund (the "Fund"), which commenced operations on February 18,
1998, is a series of GMO Trust (the "Trust"). The Fund is registered under
the Investment Company Act of 1940, as amended, as an open-end,
non-diversified management investment company. The Fund is advised and
managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or
"GMO"). The Trust was established as a Massachusetts Business Trust under
the laws of the Commonwealth of Massachusetts on June 24, 1985. The
Declaration of Trust permits the Trustees to create an unlimited number of
series ("Funds"), each of which issues a separate series of shares, and to
subdivide a series into classes.
The Fund seeks long-term capital appreciation through investment in and
exposure to equity and equity-related securities of issuers in countries
in Asia.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost
which approximates market value. Other assets and securities for which no
quotations are readily available are valued at fair value as determined in
good faith by the Trustees or other persons acting at their direction.
On September 1, 1998, the Malaysian government introduced capital controls
effectively eliminating trading of the Malaysian ringgit. Effective
February 4, 1999, the Malaysian government modified these restrictions.
Funds invested in Malaysia as of February 15, 1999 and repatriated within
one year of September 1, 1998, or one year from the date of the investment
if after September 1, 1998, are subject to a graduated repatriation tax on
the principal invested with a maximum of 30%. The Fund has recorded an
accrual in the amount of $2,095,148 for potential repatriation tax on
principal invested prior to February 15, 1999. The accrual for Malaysian
repatriation taxes is included in the change in net unrealized
appreciation (depreciation) on investments in the Statement of Operations.
Funds invested in Malaysia on or after February 15, 1999 are subject to a
repatriation tax on capital gains of 30% for currency repatriated in less
than one year of the initial investment and 10% for currency repatriated
after one year of the initial investment. The Fund has not made any
additional investments in Malaysia on or after February 15, 1999 and
accordingly no tax provision for capital gains has been accrued.
11
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the prevailing
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at prevailing exchange rates when
accrued or incurred The Fund does not isolate realized and unrealized
gains and losses attributable to changes in exchange rates from gains and
losses that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent net exchange gains and losses on disposition of
foreign currencies, currency gains and losses realized between the trade
and settlement dates on securities transactions and the difference between
the amount of investment income and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent amounts actually received
or paid.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or
all of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency
contracts are marked to market daily and the change in value is recorded
by the Fund as an unrealized gain or loss. Realized gains or losses equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed are recorded upon delivery
or receipt of the currency or, if a forward currency contract is offset by
entering into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market
risk in excess of the unrealized gain or loss reflected in the Fund's
Statement of Assets and Liabilities. In addition, the Fund could be
exposed to risk if the counterparties are unable to meet the terms of the
contracts or if the value of the currency changes unfavorably to the U.S.
dollar. The U.S. dollar value of the currencies the Fund has committed to
buy or sell is shown under Note 6 and represents the currency exposure the
Fund has acquired or hedged through currency contracts as of February 28,
1999.
Swap agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to the equity markets. The Fund enters into total return swap agreements
which involve a commitment by one party in the agreement to pay interest
in exchange for a market linked return based on a notional amount. To the
extent that the total return of the security or index underlying the
transaction exceeds or falls short of the offsetting interest rate
obligation, the Fund will receive a payment from or make a payment to the
counterparty, respectively. Total return swaps are marked to market daily
based upon quotations from market makers and the change, if any, is
recorded as unrealized gain or loss in the Statement of Operations.
Payments received or made at the end of the measurement period are
recorded as realized gain or loss in the Statement of Operations. Entering
into these agreements involves, to varying degrees, elements of credit and
market risk in excess of the amounts recognized on the Statement of Assets
and Liabilities. Such risks involve the possibility that
12
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
there will be no liquid market for these agreements, that the counterparty
to the agreements may default on its obligation to perform or that there
may be unfavorable changes in the price of the security or index
underlying these transactions. See Note 6 for a summary of the open swap
agreements as of February 28, 1999.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
federal income tax purposes. Therefore, no provision for federal income or
excise tax is necessary. Taxes on foreign interest and dividend income
have been withheld in accordance with the applicable country's tax treaty
with the United States.
Dividends received by shareholders of the Fund which are derived from
foreign source income and foreign taxes paid by the Fund are to be
treated, to the extent allowable under the Code, as if received and paid
by the shareholders of the Fund.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
foreign currency and swap transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
----------------- ------------------------ ---------------
$831,461 $731,157 ($1,562,618)
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
13
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date, or when the Fund is informed of the
ex-dividend date, if later. Interest income is recorded on the accrual
basis and is adjusted for the accretion of discounts. In determining the
net gain or loss on securities sold, the cost of securities is determined
on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is 1.20% of the amount
invested. In the case of cash redemptions, the fee is .40% of the amount
redeemed. These fees 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. All purchase premiums
and redemption fees are paid to and recorded by the Fund as paid-in
capital. Purchase premiums are included as part of "shares sold" and
redemption fees are included as part of "shares repurchased",
respectively, as summarized in Note 5. For the year ended February 28,
1999, the Fund received $764,300 in purchase premiums and $1,282 in
redemption fees. There is no premium for reinvested distributions.
Normally, no purchase premium is charged with respect to in-kind purchases
of Fund shares. A purchase premium of up to .20% may be charged on certain
in-kind transactions.
Investment risk
Investments in emerging countries present certain risks that are not
inherent in many other securities. Many emerging countries present
elements of political and/or economic instability. The securities markets
of emerging countries are generally smaller and less developed than the
securities markets of the U.S. and developed foreign markets. Further,
countries may impose various types of foreign currency regulations or
controls which may impede the Fund's ability to repatriate amounts it
receives. The Fund may acquire interests in securities in anticipation of
improving conditions in the related countries. These factors may result in
significant volatility in the values of its holdings. The markets for
emerging countries are relatively illiquid. Accordingly, the Fund may not
be able to realize in an actual sale amounts approximating those used to
value its holdings.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 1.00% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
14
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
GMO agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding custody fees, brokerage commissions, certain other transaction
costs (including stamp duties and transfer taxes), shareholder service
fees and extraordinary expenses) exceed .81% of average daily net assets.
Effective March 1, 1999, GMO's contractual management fee was reduced to
.81% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding custody fees,
brokerage commissions, certain other transaction costs (including stamp
duties and transfer taxes), shareholder service fees and extraordinary
expenses) exceed the management fee.
The Manager has entered into a Consulting Agreement with Dancing Elephant,
Ltd. (the "Consultant") with respect to the management of the portfolio.
Payments made by the Manager to the Consultant will not affect the amounts
payable by the Fund to the Manager or the Fund's expense ratio.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999, was $638. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
For the year ended February 28, 1999, cost of purchases and proceeds from
sales of investments, other than short term obligations, were as follows:
Purchases Proceeds
--------- --------
U.S. Government Securities $ 2,125,168 $ --
Investments (non-U.S. Government
securities) 111,351,861 39,939,092
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in the value of investments held
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
------------------- ------------------- ------------------ ------------------
<S> <C> <C> <C>
$92,546,640 $3,803,513 $18,510,317 $14,706,804
</TABLE>
4. Principal shareholders
At February 28, 1999, 63.4% of the outstanding shares of the Fund were
held by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
15
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including the purchase premiums and redemption fees received by
the Fund, were as follows:
<TABLE>
<CAPTION>
Period from February 18, 1998
Year Ended (commencement of operations)
February 28, 1999 to February 28, 1999
---------------------------- ---------------------------
Class III: Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold 6,185,511 $ 63,691,637 3,845,283 $ 39,654,636
Shares issued to
shareholders in
reinvestment of
distributions 113,130 916,087 -- --
Shares
repurchased (49,533) (318,490) -- --
------------ ------------ ------------ ------------
Net increase 6,249,108 $ 64,289,234 3,845,283 $ 39,654,636
============ ============ ============ ============
</TABLE>
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1999 is as
follows:
Short forward currency contract
Net
Settlement Units Unrealized
Date Deliver/Receive of Currency Value Depreciation
---------- --------------- ----------- ---------- ------------
3/23/99 SGD 11,334,785 $6,589,650 $(47,206)
Currency Abbreviation:
SGD Singapore Dollar
16
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Swap agreements
<TABLE>
<CAPTION>
Notional Expiration Net Unrealized
Amount Date Description Appreciation
- ---------------- ---------- ------------------------------------- ----------------
<S> <C> <C> <C>
$ 1,240,294 3/02/99 Agreement with Indosuez W.I. Carr $ 943,167
Ltd. dated 3/02/98 to receive (pay)
the notional amount multiplied by
the return on the Thailand SET
Index and to pay the notional
amount multiplied by 6 month LIBOR
adjusted by a specified spread.
811,867 3/03/99 Agreement with Indosuez W.I. Carr 619,451
Ltd. dated 3/03/98 to receive (pay)
the notional amount multiplied by
the return on the Thailand SET
Index and to pay the notional
amount multiplied by 6 month LIBOR
adjusted by a specified spread.
-----------
$ 1,562,618
===========
</TABLE>
17
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
February 28, 1999
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1999, all the Fund's distributions are
from investment company taxable income.
The Fund has elected to defer to March 1, 1999 post-October capital losses of
$850,240 and foreign currency losses of $54,871.
At February 28, 1999 the Fund had a capital loss carryforward available to
offset future capital gains, if any, of the following amount:
Year of Expiration Amount
------------------ ------
2007 $ 9,101,937
18
<PAGE>
GMO Asia Fund
(A Series of GMO Trust)
Portfolio Managers
Mr. R. Jeremy Grantham and Mr. Arjun Divecha are primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. Grantham has been with GMO
since its founding in 1977. Mr. Divecha is the principal of Dancing Elephant
Ltd., which serves as consultant to the Fund. Dancing Elephant Ltd. has an
exclusive consulting management agreement with GMO.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO Asia Fund returned -25.0% for the fiscal year
ended February 28, 1999. The Fund's benchmark, the GMO Asia 7 Index, returned
- -17.2% during the same period. The Morgan Stanley Emerging Markets Far East Free
Index was down -27.4% over the same period. Consistent with the Fund's
investment objectives and policies, the Fund was invested substantially in
common stocks throughout the period.
Country selection added 4.3%. The fund was strongly overweight Thailand,
Singapore and Korea and held no investments in Taiwan. Korea returned +15% and
Taiwan lost -27 % for the period.
Stock selection detracted 12%, relative to the benchmark. Most of our
underperformance was during the last quarter in 1998 when low quality stocks had
a massive rally. We had anticipated that the bottoming process of the Asian
crisis would take longer, with greater pain than the markets are currently
anticipating. Thus, we had a high quality bias in the portfolio, coupled with
export earners, which we expected to benefit from currency weakness. However,
Asian currencies appreciated and interest rate sensitive stocks (including
financials) soared. As a result, our defensive stance hurt performance. The
poorest quality stocks (in terms of ROE) outperformed the highest quality stocks
by 30% to 40% this quarter. A bright spot in stock selection was our overweight
position on Singaporean banks (the only financials in Asia we like), which
gained 150% to 200%.
Outlook
Looking at the positioning of the portfolio going forward, we have reduced the
emphasis on high quality exporters and moved towards economically sensitive
stocks. Our country weights remain broadly the same, with large overweights in
Korea, Thailand and Singapore and large underweights in China and Taiwan. As a
result of the capital controls imposed in Malaysia, we have not moved money in
or out of the country, but have retargeted the portfolio towards high yielding
multinationals (such as Rothmans, Nestle, Carlsberg and Guinness). These
companies have strong franchises, are extremely cheap on fundamentals and pay
double-digit dividends, which can be freely repatriated and are not subject to
capital controls. Our models have turned
<PAGE>
extremely positive on Malaysia and we will probably add to our position once
controls are fully lifted.
The overall portfolio has a minor bet on smaller, value-oriented companies
vis-a-vis the benchmark. The sources of predicted outperformance are 70% country
selection and 30% stock selection. The fund is underweight banks and financials
(as they will require massive recapitalization in the form of rights issues) and
overweight consumer and service oriented companies.
The three elements that caused the Asian crisis - over investment, focus on top
line GDP growth and politically driven lending - cause us to worry about China
more than any other Asian economy. The China crisis is ahead of us, not behind
us, unlike the rest of Asia. Nevertheless, we foresee a slow unfolding of this
crisis rather than a catastrophic event, which should have only a minor impact
on the other Asian markets.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
- --------------------------------------------------------------------------------
Comparison of Change in Value of a $10,000 Investment in
GMO Asia Fund Class III Shares and the MSCI EMF Asia Idex
As of February 28, 1999
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Since
1 Year Inception
- --------------------------------------------------------------------------------
Class 2/18/98
III -26.2% -22.5%
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
GMO Asia Fund
Date Class III Shares MSCI EMF Asia Index GMO Asia 7 Index
---- ---------------- ------------------- ----------------
1/31/98 9,880 10,000 10,000
2/18/98 10,423 10,690 11,030
3/31/98 6,797 7,144 6,789
6/30/98 5,522 6,122 6,233
9/30/98 8,440 8,189 9,720
12/31/98 7,694 8,048 9,111
2/28/99
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 120 bp on the purchase and 40 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Past performance
is not indicative of future results. Information is unaudited.
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Evolving Countries Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Evolving Countries Fund at
February 28, 1999 and the results of its operations, the changes in its net
assets and the financial highlights for the periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 16, 1999
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
COMMON STOCKS - 82.0%
Brazil - 6.1%
145,000 Brahma ON 42,277
1,200,000 Companhia Petroquimica do Sul 24,289
24,293,000 Companhia Siderurgica Nacional SA 216,588
23,909,000 Electrobras 311,220
27,691 Souza Cruz (Registered) 173,486
7,000 Telebras Holders ADR 451,938
17,000,000 Telebras Receipts 577,590
15,800 Vale Do Rio Doce 140,106
5,000 Vidraria Santa Marina 6,024
----------
1,943,518
----------
Chile - 5.1%
4,900 Banco BHIF ADR * 49,306
4,700 Banco de Edward ADR 51,113
6,000 Banco Santander ADR 85,875
3,000 Banco Santiago ADR 54,188
9,600 Chilectra SA ADR 186,048
4,600 Compania Cervecerias 89,125
12,400 Compania de Telefones de Chile ADR 274,350
12,100 Distribucion y Servicio ADR * 135,369
10,800 Empresa Natl de Electricidad ADR 136,350
14,100 Gener SA ADR 211,500
41,000 Quinenco SA ADR 333,125
----------
1,606,349
----------
China - 0.8%
140,000 China Telecom Ltd Class H * 248,459
----------
Egypt - 1.0%
725 Al Ahram Beverage Co * 48,044
4,700 Eastern Tobacco Co 138,165
2,270 Egyptian International Pharmaceuticals Industries Co 130,181
----------
316,390
----------
Greece - 2.6%
999 Alpha Credit Bank 114,692
1,964 Ergo Bank 159,479
3,989 Hellenic Bottling Co 133,035
8,008 Hellenic Telecommunication Organization SA 210,924
2,997 National Bank of Greece 219,228
----------
837,358
----------
India - 0.9%
50 Castrol India 942
13,000 Satyam Computer Service * 279,953
----------
280,895
----------
Indonesia - 5.1%
6,450,000 Bank International * 182,461
349,000 Gudang Garam 485,737
9,000 Gulf Resources Ltd ADR * 67,500
90,000 HM Sampoerna * 65,686
See accompanying notes to the financial statements. 1
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Indonesia - continued
1,321,000 Indah Kiat Pulp & Paper * 313,901
96,000 International Nickel * 48,339
124,500 PT Daya Guna Samudera 60,577
185,000 PT Indofood Sukses Makmur Tbk * 98,911
127,500 PT Indosat (Persero) Tbk 176,011
482,000 PT Pabrik Kertas Tjiwi Kimia * 95,446
6,500 Semen Gresik 6,841
---------
1,601,410
---------
Korea - 15.0%
9,360 Cheil Jedang Corp 251,691
149,000 Daewoo Corp 381,177
25,000 Daewoo Heavy Industries 84,185
54,000 Daewood Electronics * 238,333
13,700 Hana Bank 127,650
6,100 Housing & Commercial Bank 94,479
9,400 Hyundai Heavy Industries 184,389
21,033 Hyundai Merchant Marine 260,441
14,300 Kookmin Bank 97,009
14,000 Korea Electric Power Corp 330,691
11,000 LG Chemicals Ltd 119,575
6,000 LG Electronics Co 60,564
5,000 LG Information & Communication 145,484
4,000 Pohang Iron & Steel ADR * 62,500
11,520 Pohang Iron & Steel (b) 614,326
93,000 Samsung Corp 444,667
2,343 Samsung Electro Mechanics 44,619
8,779 Samsung Electronics 618,512
1,796 Samsung Electronics GDR 144A (1/2 Voting) 74,354
7,614 Samsung Electronics GDS 144A (Non Voting) 109,071
24,317 Samsung Heavy Industries Co Ltd * 106,927
100 SK Telecom (b) 75,373
17,600 Ssangyong Oil Refining 253,175
---------
4,779,192
---------
Malaysia - 10.7%
297,000 Berjaya Sports Toto 394,697
63,000 Carlsberg Brew Malaysia 169,105
66,400 Genting Berhad 151,147
140,000 Golden Hope Plantations Berhad 140,000
194,000 Guinness Anchor Berhad 188,895
415,000 Highlands and Lowlands Berhad 250,092
28,000 Kuala Lumpur Kepong Berhad 40,158
934,000 Kumpulan Guthrie Berhad 597,268
204,000 Malaysian International Shipping (Foreign Registered) 266,274
77,000 Nestle Malaysia 297,868
114,000 Rothmans of Pall Mall Berhad 657,000
1,077,000 Tan Chong International Ltd 102,866
503,000 Tan Chong Motor Holdings Berhad 144,282
---------
3,399,652
---------
2 See accompanying notes to the financial statements.
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Mexico - 1.0%
8,700 Alfa SA Class A 21,411
22,000 Carso Global Telecom Class A 93,923
18,000 Cemex SA Class B 55,419
5,900 Grupo Carso SA de CV Class A 19,617
20,000 Grupo Industrial Bimbo Class A 39,779
6,000 Grupo Modelo SA Class C 13,320
4,000 Grupo Televisa SA PTG Certs (1A,L & D) * 54,847
6,000 Kimberly Clark Class A 18,533
---------
316,849
---------
Pakistan - 0.3%
77,760 Pakistan State Oil 103,312
---------
Phillippines - 6.8%
792,000 Ayala Corp 259,255
270,000 Ayala Land Inc 79,718
363,000 Benpres Holdings Corp * 48,462
700,000 Cosmos Bottling Corp 50,321
43,900 Equitable Banking Corp 68,752
1,400,000 Filinvest Land * 113,222
94,410 Manila Electric Class B 293,289
28,680 Metro Bank & Trust Co 206,172
1,581,000 Petron Corp 194,834
2,800 Philippine Commercial International Bank 12,796
21,250 Philippine Long Distance Telephone 493,742
139,500 San Miguel Corp Class B 229,217
491,000 SM Prime Holdings 94,544
---------
2,144,324
---------
Poland - 0.1%
3,500 Agora SA GDR 38,763
---------
Russia - 5.5%
11,900 Gazprom ADR 144A 104,423
103,000 Irkutskenergo ADR 243,101
32,600 Lukoil Holding Co ADR 684,600
74 Norilsk Nickel RDC * 25,900
59,000 Norilsk Nickel (Registered) (b) * 67,850
43,140 RAO Gazprom ADR (Reg S) 378,554
16,500 Rostelecom ADR 80,438
46,000 Rostelecom (b) * 36,340
23,000 Surgutneftegaz ADR 116,141
---------
1,737,347
---------
South Africa - 12.8%
27,000 Amalgamated Bank of South Africa 117,676
19,560 Anglo American Corp of South Africa 610,007
10,900 Anglo American Platinum Corp 179,115
4,000 Anglo Gold Ltd 145,924
20,563 Bidvest Group Ltd * 158,662
See accompanying notes to the financial statements. 3
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
South Africa - continued
20,000 Comparex Holding Ltd 156,578
18,800 De Beers Centenary Link Units 324,107
5,500 De Beers Consolidated Mines Ltd ADR 94,188
33,029 Dimension Data Holdings * 134,355
3,028 Edgars Stores Ltd 12,904
140,700 Firstrand 148,763
7,900 Investec Group Ltd 302,738
16,300 Liberty Life Association of Africa Ltd 224,437
9,900 Nedcor Ltd 200,397
47,600 Rembrandt Group Ltd 311,955
68,300 Sasol Ltd 266,254
41,400 South Africa Brews 601,453
33,000 Standard Bank Investment Corp 93,753
----------
4,083,266
----------
Thailand - 5.8%
21,500 Advanced Info Service Public Co Ltd (Foreign Registered) (b) 149,786
138,100 Bangkok Bank Plc (Foreign Registered) (b) * 233,127
198,000 Bank of Ayudhya Plc (Foreign Registered) (b) * 59,687
17,200 BEC World Public Co Ltd 82,958
16,000 Delta Electronics Public Co Ltd 70,311
19,900 Delta Electronics Public Co Ltd (Foreign Registered) (b) 87,449
68,200 Electricity Generating Public Co Ltd (Foreign Registered) (b) * 148,023
15,000 Grammy Entertainment Plc (Foreign Registered) (b) 64,309
41,700 Italian-Thai Development Public Co. Ltd (b) * 84,920
208,000 KR Precision Plc (Foreign Registered) (b) * 75,241
88,000 Krung Thai Bank Public Co Ltd * 38,317
201,000 Krung Thai Bank Public Co Ltd (b) * 87,520
25,400 PTT Exploration and Production Public Co Ltd (Foreign Registered) (b) * 167,428
4,636 Shinawatra Computer Public Co Ltd (Foreign Registered) (b) * 12,795
7,000 Siam Cement Plc (Foreign Registered) (b) * 144,802
131,200 Siam Commercial Bank Plc (Foreign Registered) (b) * 55,370
65,000 Telecomasia Corp Public Co Ltd * 31,786
116,900 Telecomasia (Foreign Registered) * 57,166
85,000 Thai Farmers Bank Plc (Foreign Registered) (b) * 142,350
94,600 Thai Telephone & Telecommunications (Foreign Registered) (b) * 12,674
28,000 United Broadcasting Plc (Foreign Registered) (b) * 11,254
46,200 United Broadcasting Plc * 18,569
----------
1,835,842
----------
Venezuela - 2.4%
44,900 Compania Anonima Nacional Telefonos de Venezuela (CANTV) Sponsored ADR 698,756
32,300 Siderurgica Venezolana (Sivensa) Registered ADR Class A 64,600
----------
763,356
----------
TOTAL COMMON STOCKS (Cost $33,547,176) 26,036,282
----------
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares/
Par Value($) Description Value ($)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
DEBT OBLIGATIONS - 7.1%
United States - 7.1%
$2,332,933 U.S. Treasury Inflation Indexed Note, 3.375% due 1/15/07 (a) * 2,249,818
-----------
TOTAL DEBT OBLIGATIONS (Cost $2,265,632) 2,249,818
-----------
INVESTMENT FUNDS - 3.6%
Taiwan - 3.2%
183,400 R.O.C. Taiwan Fund 1,008,700
-----------
United States - 0.4%
15,000 Morgan Stanley Emerging Markets Fund 129,375
-----------
TOTAL INVESTMENT FUNDS (Cost $1,299,461) 1,138,075
-----------
PREFERRED STOCKS - 4.2%
Brazil - 3.6%
497,372 Banco Bradesco Receipts * 1,961
24,834,578 Banco Bradesco SA 97,901
1,000,000 Banco Estado Sao Paulo 26,506
190,000 Brahma PN 70,506
24,145,000 Electrobras Class B (Registered) 324,648
6,650,000 Elektro 29,164
451,898 Investimentos Itau SA 182,937
280,000 Itaubanco SA (Registered) 96,482
1,330,000 Petroleo Brasileiro SA (Petrobras) 103,266
3,177,000 Telebras Receipts 201,797
-----------
1,135,168
-----------
Korea - 0.6%
11,600 Samsung Display Devices 190,094
-----------
TOTAL PREFERRED STOCKS (Cost $1,911,185) 1,325,262
-----------
RIGHTS & WARRANTS - 0.3%
Korea - 0.1%
30,629 Samsung Corp Rights 3/12/99 21,279
-----------
Phillippines - 0.2%
132,000 Jolliebee FDS Warrants 2/24/03 * 61,849
-----------
Thailand - 0.0%
4,636 Shinawatra Computer Public Co Ltd (Foreign Registered) Rights 3/15/99 * 10,932
-----------
TOTAL RIGHTS & WARRANTS (Cost $80,166) 94,060
-----------
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS - 4.1%
Cash Equivalents - 4.1%
$ 1,300,000 First National Bank of Chicago Time Deposit, 4.81% due 3/01/99 1,300,000
-----------
TOTAL SHORT-TERM INVESTMENTS (Cost $1,300,000) 1,300,000
-----------
TOTAL INVESTMENTS - 101.3%
(Cost $40,403,620) 32,143,497
Other Assets and Liabilities (net) - (1.3%) (425,208)
-----------
TOTAL NET ASSETS - 100.0% $31,718,289
===========
</TABLE>
Notes to the Schedule of Investments:
ADR American Depositary Receipt
GDR Global Depository Receipt
GDS Global Depository Shares
(a) All or a portion of this security is held as collateral for open
swap contracts.
(b) Valued by management (Note 1).
144A Securities exempt from registration under Rule 144A of the
securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to qualified buyers.
* Non-income producing security.
6 See accompanying notes to the financial statements.
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
- --------------------------------------------------------------------------------
At February 28, 1999, industry sector diversification of the Fund's
equity investments was as follows:
Industry Sector (Unaudited)
Telecommunications 9.6%
Utilities 9.4
Food and Beverage 8.4
Banking 8.1
Electronic Equipment 7.3
Financial Services 6.5
Oil and Gas 6.2
Conglomerates 6.0
Consumer Goods 5.6
Metals and Mining 4.9
Real Estate 3.1
Communications 3.0
Transportation 1.8
Paper and Allied Products 1.4
Machinery 1.3
Services 1.2
Construction 1.0
Computers 0.9
Automotive 0.8
Insurance 0.8
Chemicals 0.5
Health Care 0.4
Miscellaneous 11.8
-----
100.0%
=====
See accompanying notes to the financial statements. 7
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities - February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at value (cost $40,403,620) (Note 1) $ 32,143,497
Foreign currency, at value (cost $307,786) (Note 1) 326,656
Cash 107,418
Receivable for investments sold 65,623
Receivable for Fund shares sold 2,880
Dividends and interest receivable 220,363
Net receivable for open forward foreign currency contracts (Notes 1 and 6) 28,675
Receivable for open swap contracts (Notes 1 and 6) 484,966
Receivable for expenses waived or borne by Manager (Note 2) 9,920
------------
Total assets 33,389,998
------------
Liabilities:
Payable for investments purchased 791,926
Accrued Malaysian repatriation taxes (Note 1) 743,860
Accrued capital gain taxes payable (Note 1) 52,578
Payable to affiliate for (Note 2):
Management fee 20,045
Shareholder service fee 3,692
Accrued expenses 59,608
------------
Total liabilities 1,671,709
------------
Net assets $ 31,718,289
============
Net assets consist of:
Paid-in capital $ 54,817,168
Distributions in excess of net investment income (41,489)
Accumulated net realized loss (14,529,528)
Net unrealized depreciation (8,527,862)
------------
$ 31,718,289
============
Net assets attributable to Class III Shares $ 31,718,289
============
Shares outstanding - Class III 5,527,608
============
Net asset value per share - Class III $ 5.74
============
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Statement of Operations - Year Ended February 28, 1999
- --------------------------------------------------------------------------------
Investment income:
Dividends (net of foreign tax expense of $160,220) $ 1,813,293
Interest 301,190
------------
Total income 2,114,483
------------
Expenses:
Management fee (Note 2) 343,836
Custodian fees 180,037
Audit fees 45,044
Transfer agent fees 26,285
Registration fees 7,846
Legal fees 1,089
Trustees fees (Note 2) 184
Miscellaneous 22,155
Fees waived or borne by Manager (Note 2) (145,463)
------------
481,013
Shareholder service fee - Class III (Note 2) 64,403
------------
Net expenses 545,416
------------
Net investment income 1,569,067
------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments (12,257,134)
Closed swap contracts (701,354)
Foreign currency, forward contracts and foreign
currency related transactions (648,208)
------------
Net realized loss (13,606,696)
------------
Change in net unrealized appreciation (depreciation) on:
Investments (Note 1) (8,017,740)
Foreign currency, forward contracts and foreign
currency related transactions 8,276
Open swap contracts 484,966
------------
Net unrealized loss (7,524,498)
------------
Net realized and unrealized loss (21,131,194)
------------
Net decrease in net assets resulting from operations $(19,562,127)
============
See accompanying notes to the financial statements. 9
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from August 29, 1997
Year Ended (commencement of operations)
February 28, 1999 to February 28, 1998
----------------- --------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 1,569,067 $ 93,049
Net realized loss (13,606,696) (1,508,831)
Change in net unrealized appreciation (depreciation) (7,524,498) (1,003,364)
------------ ------------
Net decrease in net assets resulting from operations (19,562,127) (2,419,146)
------------ ------------
Distributions from shareholders from:
Net investment income - Class III (1,117,606) --
------------ ------------
Net share transactions - Class III (Note 5) 12,699,670 42,117,498
------------ ------------
Total increase (decrease) in net assets (7,980,063) 39,698,352
Net assets:
Beginning of period 39,698,352 --
------------ ------------
End of period (including distributions in excess
of net investment income of $41,489 and
accumulated undistributed net investment
income of $137,543, respectively) $ 31,718,289 $ 39,698,352
============ ============
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from August 29, 1997
Year Ended (commencement of operations)
February 28, 1999 to February 28, 1998
----------------- --------------------
<S> <C> <C>
Net asset value, beginning of period $ 8.61 $ 10.00
---------- ----------
Income from investment operations:
Net investment income 0.23 0.03+
Net realized and unrealized loss (2.94) (1.42)
---------- ----------
Total from investment operations (2.71) (1.39)
---------- ----------
Less distributions to shareholders:
From net investment income (0.16) --
---------- ----------
Total distributions (0.16) --
---------- ----------
Net asset value, end of period $ 5.74 $ 8.61
========== ==========
Total Return (a) (31.60%) (13.90%)
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 31,718 $ 39,698
Net expenses to average
daily net assets 1.27% 1.65%*(b)
Net investment income to average
daily net assets 3.65% 0.78%*
Portfolio turnover rate 158% 56%
Fees and expenses voluntarily waived or
borne by the Manager consisted of
the following per share amounts: $ 0.02 $ 0.03
</TABLE>
+ Computed using average shares outstanding throughout the period.
* Annualized.
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(b) Includes stamp duties and transfer taxes not waived or borne by the
manager, which approximate .16% of average daily net assets.
See accompanying notes to the financial statements. 11
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Evolving Countries Fund (the "Fund"), which commenced operations on
August 29, 1997, is a series of GMO Trust (the "Trust"). The Fund is
registered under the Investment Company Act of 1940, as amended, as an
open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24,
1985. The Declaration of Trust permits the Trustees to create an unlimited
number of series ("Funds"), each of which issues a separate series of
shares, and to subdivide a series into classes.
The Fund seeks long-term capital appreciation consistent with a prudent
level of risk through investment in equity and equity-related securities
traded in the securities markets of newly industrializing countries in
Asia, Latin America, the Middle East, Southern Europe, Eastern Europe, and
Africa.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost
which approximates market value. Other assets and securities for which no
quotations are readily available are valued at fair value as determined in
good faith by the Trustees or other persons acting at their direction.
The Fund may be subject to capital gains and repatriation taxes imposed by
certain countries in which it invests. The Fund has recorded an accrual in
the amount of $52,578 for potential capital gains taxes at February 28,
1999. The accrual for capital gains taxes is included in net realized and
unrealized loss in the Statement of Operations.
On September 1, 1998, the Malaysian government introduced capital controls
effectively eliminating trading of the Malaysian ringgit. Effective
February 4, 1999, the Malaysian government modified these restrictions.
Funds invested in Malaysia as of February 15, 1999 and repatriated within
one year of September 1, 1998, or one year from the date of the investment
if after September 1, 1998, are subject to a graduated repatriation tax on
the principal invested with a maximum of 30%. The Fund has recorded an
accrual in the amount of $743,860 for potential repatriation tax on
principal invested prior to February 15,
12
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
1999. The accrual for Malaysian repatriation taxes is included in the
change in net unrealized appreciation (depreciation) on investments in the
Statement of Operations. Funds invested in Malaysia on or after February
15, 1999 are subject to a repatriation tax on capital gains of 30% for
currency repatriated in less than one year of the initial investment and
10% for currency repatriated after one year of the initial investment. The
Fund has not made any additional investments in Malaysia on or after
February 15, 1999 and accordingly no tax provision for capital gains has
been accrued.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the prevailing
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at prevailing exchange rates when
accrued or incurred. The Fund does not isolate realized and unrealized
gains and losses attributable to changes in exchange rates from gains and
losses that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent net exchange gains and losses on disposition of
foreign currencies, currency gains and losses realized between the trade
and settlement dates on securities transactions and the difference between
the amount of investment income and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent amounts actually received
or paid.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or
all of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency
contracts are marked to market daily and the change in value is recorded
by the Fund as an unrealized gain or loss. Realized gains or losses equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed are recorded upon delivery
or receipt of the currency or, if a forward currency contract is offset by
entering into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market
risk in excess of the unrealized gain or loss reflected in the Fund's
Statement of Assets and Liabilities. In addition, the Fund could be
exposed to risk if the counterparties are unable to meet the terms of the
contracts or if the value of the currency changes unfavorably to the U.S.
dollar. The U.S. dollar value of the currencies the Fund has committed to
sell is shown under Note 6, and represents the currency exposure the Fund
has acquired or hedged through currency contracts as of February 28, 1999.
Swap agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to the equity markets. The Fund enters into total return swap agreements
which involve a commitment by one party in the agreement to pay interest
in exchange for a market linked return
13
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
based on a notional amount. To the extent that the total return of the
security or index underlying the transaction exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make a payment to the counterparty, respectively. Total return swaps
are marked to market daily based upon quotations from market makers and
the change, if any, is recorded as unrealized gain or loss in the
Statement of Operations. Payments received or made at the end of the
measurement period are recorded as realized gain or loss in the Statement
of Operations. Entering into these agreements involves, to varying
degrees, elements of credit and market risk in excess of the amounts
recognized on the Statement of Assets and Liabilities. Such risks involve
the possibility that there will be no liquid market for these agreements,
that the counterparty to the agreements may default on its obligation to
perform or that there may be unfavorable changes in the price of the
security or index underlying these transactions. See Note 6 for a summary
of the open swap agreements as of February 28, 1999.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
federal income tax purposes. Therefore, no provision for federal income or
excise tax is necessary. Taxes on foreign interest and dividend income
have been withheld in accordance with the applicable country's tax treaty
with the United States.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
foreign currency and passive foreign investment company transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
----------------- ----------- ---------------
($630,493) $630,493 --
14
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date, or when the Fund is informed of the
ex-dividend date, if later. Interest income is recorded on the accrual
basis and is adjusted for the accretion of discounts. In determining the
net gain or loss on securities sold, the cost of securities is determined
on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is 1.60% of the amount
invested. In the case of cash redemptions, the fee is .40% of the amount
redeemed. The fees 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. All purchase premiums
and redemption fees are paid to and recorded by the Fund as paid-in
capital. Purchase premiums are included as part of "shares sold" and
redemption fees are included as part of "shares repurchased",
respectively, as summarized in Note 5. For the year ended February 28,
1999, the Fund received $418,667 in purchase premiums and $57,085 in
redemption fees. There is no premium for reinvested distributions. While
no purchase premium is normally charged with respect to in-kind purchases
of Fund shares, a purchase premium of up to 20% may be charged on certain
in-kind transactions.
Investment risk
Investments in securities of emerging countries present certain risks that
are not inherent in many other investments. Many emerging countries
present elements of political and/or economic instability. The securities
markets of emerging countries are generally smaller and less developed
than the securities markets of the U.S. and developed foreign markets.
Further, countries may impose various types of foreign currency
regulations or controls which may impede the Fund's ability to repatriate
amounts it receives. The Fund may acquire interests in securities in
anticipation of improving conditions in the related countries. These
factors may result in significant volatility in the values of its
holdings. The markets for emerging countries are relatively illiquid.
Accordingly, the Fund may not be able to realize in an actual sale amounts
approximating those used to value its holdings.
15
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .80% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding custody fees, brokerage commissions, certain other transaction
costs (including stamp duties and transfer taxes), shareholder service
fees and extraordinary expenses) exceed .65% of average daily net assets.
Effective March 1, 1999, GMO's contractual management fee was reduced to
.65% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding custody fees,
brokerage commissions, certain other transaction costs (including stamp
duties and transfer taxes), shareholder service fees and extraordinary
expenses) exceed the management fee.
The Manager has entered into a Consulting Agreement with Dancing Elephant,
Ltd. (the "Consultant") with respect to the management of the portfolio.
Payments made by the Manager to the Consultant will not affect the amounts
payable by the Fund to the Manager or the Fund's expense ratio.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999, was $184. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1999, were as
follows:
Purchases Proceeds
--------------- ------------------
U.S. Government securities $ 2,265,630 $ --
Investments (non-U.S. Government
securities) 72,508,570 60,685,326
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in the value of investments held
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
------------------- ------------------- ------------------ ------------------
<S> <C> <C> <C>
$40,849,098 $1,987,530 $10,693,131 $8,705,601
</TABLE>
16
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
4. Principal shareholders
At February 28, 1999, 57.69% of the outstanding shares of the Fund were
held by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including the purchase premiums and redemption fees received by
the Fund, were as follows:
<TABLE>
<CAPTION>
Period from August 29, 1997
Year Ended (commencement of operations)
February 28, 1999 to February 28, 1999
---------------------------- ----------------------------
Class III: Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold 3,158,638 $ 26,166,632 4,671,266 $ 42,593,027
Shares issued to
shareholders in
reinvestment of
distributions 134,305 804,354 -- --
Shares
repurchased (2,378,020) (14,271,316) (58,581) (475,529)
------------ ------------ ------------ ------------
Net increase 914,923 $ 12,699,670 4,612,685 $ 42,117,498
============ ============ ============ ============
</TABLE>
17
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1999 is as
follows:
Short forward currency contracts
<TABLE>
<CAPTION>
Net
Settlement Units Unrealized
Date Deliver of Currency Value Appreciation
-------------- ---------------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
3/3/99 BRL 646,000 $ 311,325 $ 28,675
==========
</TABLE>
Currency Abbreviation:
BRL Brazilian Real
Swap agreements
<TABLE>
<CAPTION>
Net
Notional Expiration Unrealized
Amount Date Description Appreciation
- ------------------ ---------- ------------------------------------ -------------
<S> <C> <C> <C>
$ 500,000 3/11/99 Agreement with Goldman Sachs $ 484,716
International dated 9/25/98
to receive (pay) the notional
amount multiplied by the
return on the Korea Stock
Price Index and to pay the
notional amount multiplied by
6 month LIBOR adjusted by a
specified spread.
1,691,915 4/30/99 Agreement with Goldman Sachs 250
International dated 4/30/98 to
receive (pay) the notional amount
multiplied by the return on the
Thailand SET Index and to pay the
notional amount multiplied by 6
month LIBOR adjusted by a
specified spread.
-------------
$ 484,966
=============
</TABLE>
18
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
February 28, 1999
- --------------------------------------------------------------------------------
At February 28, 1999, the Fund had a capital loss carryforward available to
offset future capital gains, if any, of the following amounts:
Year of Expiration Amount
------------------ ------
2006 $ 353,921
2007 $ 10,409,816
The Fund has elected to defer to March 1, 1999 post-October capital losses of
$3,320,063 and foreign currency losses of $77,814.
19
<PAGE>
GMO Evolving Countries Fund
(A Series of GMO Trust)
Portfolio Managers
Mr. R. Jeremy Grantham and Mr. Arjun Divecha are primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. Grantham has been with GMO
since its founding in 1977. Mr. Divecha is the principal of Dancing Elephant
Ltd., which serves as consultant to the Fund. Dancing Elephant Ltd. has an
exclusive consulting management agreement with GMO.
Management Discussion and Analysis of Fund Performance
The Class III shares of the Evolving Countries Fund returned -31.6% for the
fiscal year ended February 28, 1999. During that period, the benchmark, the IFC
Investable Composite, returned -24.8%. Consistent with the Fund's investment
objectives and policies, the Fund was invested substantially in equity
securities throughout the period.
It was a very difficult year for emerging markets, with the Asia crisis, which
began in 1997, spilling over to Russia in mid 1998 and Brazil in early 1999.
There were huge divergences in market returns, ranging from Greece being up 135%
(in US$) to Russia losing 72% of its value.
Country Allocation
We use four valuation models to evaluate the attractiveness of countries. While
the momentum, reversal and macroeconomic models outperformed the benchmark, the
value model was hard hit. Given that value forms the largest part of our
process, this hurt relative performance.
We started the year moderately overweight in Asia and gradually increased our
weighting to a large overweight. In the first half of the year this hurt
performance as the Asian markets continued their decline. However, during the
second half, the Asian markets rebounded strongly, vindicating our overweight
stance.
While we had reduced our weight in Russia by June, we still had a large
overweight and this had a large impact on performance. In addition, Portugal and
Greece (both of which were extremely underweight going into the year) continued
their bull runs as European convergence became a major theme.
Within Country Stock Selection
Stock selection hurt performance, particularly in Latin America, as there was a
flight to quality, causing cheap stocks to underperform. On the other hand, our
focus on software companies in India paid off handsomely.
Outlook
Following steep declines over the past two years, emerging markets have fallen
to extremely cheap levels both in absolute terms and relative to international
developed markets. When compared to developed markets, emerging markets look
favorable, as valuations are as low as we have ever seen them. Although it is
possible that emerging equities will not recover all their
<PAGE>
losses, we expect they will outperform the developed markets over the next
decade by a wide margin (150%+).
The difficult global environment and harsh local conditions have forced emerging
countries to make and implement hard decisions, all of which benefit minority
foreign investors. Companies have begun to focus on core competencies - reducing
debt levels, selling assets and taking a greater interest in minority
shareholders. With the prominent exception of a few countries, these major
structural changes are having a large impact on most emerging markets in much
the same way the corporate restructuring movement benefited U.S. and European
economies over the last decade.
The Asian crisis seems to have abated and we foresee the economies hitting
bottom during the third or fourth quarters of 1999. The widespread restructuring
that has begun in Asia is our main reason for optimism. Korea has progressed the
most, while neighboring Asian countries have responded more slowly with the rate
of change accelerating since January. In addition, we are starting to see the
positive effects of the currency devaluation and, most encouraging, the absence
of widely anticipated higher inflation. Currency stabilization has allowed
countries to lower interest rates, to the point where short-term money rates are
now at 4% in Thailand and 7% in Korea. Overall, we see the Asian economies
getting back to trend growth over the next two to three years.
We continue to be very positive about Korea, one of the few emerging countries
that has succeeded in creating global brands (e.g., Samsung, Hyundai and
Daewoo). Thailand is also attractive, though reform is progressing at a slower
pace. Indonesia remains in transition, with political and economic uncertainty
unlikely to be resolved until the elections in early June. Taiwan remains an
overvalued market, and is subject to anticipated volatility exported from the
U.S. high tech sector. Chinese exports have been falling and the government has
been inflating economic statistics to achieve the 8% growth they forecasted. We
remain underweight in Taiwan and China, which we believe to be overvalued
markets, and are modestly overweight in India and Pakistan.
Prospects for Latin America will be tied to developments in Brazil, a country
that is an enigma for value investors. While the market is extremely cheap and
long-term prospects look attractive, the macroeconomic picture is fraught with
perils. We are inclined to take the long view and allow the cheapness to take us
to a moderate overweight slowly. Chile is the most efficiently managed economy
in Latin America, but has been hit hard by the drop in commodity prices. With
cheap valuations and positive reforms we remain overweight. Though Mexico has
been making a smooth transition to multi-party democracy, it has had little
impact on the market. Uncompleted banking reforms in the aftermath of the 1995
crisis make it vulnerable to spillovers from Brazil, and with 95% of their
exports directed to the U.S., are extremely vulnerable to a slowdown in the U.S.
economy. We currently hold a significant underweight position in Mexico.
Our hope is that the devaluation in Brazil is the last of the fallout from the
crisis in Asia. We think it unlikely that China/Hong Kong will be forced to
devalue, but if this were to happen we could see further Asian currency
weakness.
During most of 1998, we were underweight the majority of the European markets,
which are very expensive. We continue to be extremely negative on the regions
with the exception of Poland, which, with falling inflation and robust economic
growth, remains the best candidate for continuing recovery. We continue to
maintain a modest position in Russia. As interest rates rise in South Africa,
economic recovery is stifled. We have been reducing our overweight there,
increasing weights in countries where valuations are more attractive.
<PAGE>
Overall, we are heavily overweight Asia, underweight Mediterranean and close to
neutral on Latin America.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Evolving Countries Fund Class III Shares and the IFC Investable Composite
As of February 28, 1999
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Since
1 Year Inception
- --------------------------------------------------------------------------------
8/29/97
Class III -33.0% -30.7%
- --------------------------------------------------------------------------------
[LINE GRRAPH APPEARS HERE]
GMO Evolving Countries Fund
Date Class III Shares IFC Investable Composite
---- --------------------------- ------------------------
1/31/97
8/29/97 9,840 10,000
9/30/97 9,899 10,327
12/31/97 8,000 8,333
3/31/98 8,826 8,918
6/30/98 6,278 7,025
9/30/98 4,896 5,500
12/31/98 6,077 6,497
2/28/99 5,772 6,454
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchases at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 160 bp on the purchase and 40 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Past performance
is not indicative of future performance. Information is unaudited.
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of GMO Foreign Fund (A Series
of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Foreign Fund at February 28,
1999 and the results of its operations, the changes in its net assets and the
financial highlights for the periods presented, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 22, 1999
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
COMMON STOCKS - 95.3%
Argentina - 0.2%
57,500 YPF SA ADR 1,667,500
----------
Australia - 4.5%
363,591 Australia and New Zealand Banking Group Ltd 2,348,027
896,538 Broken Hill Proprietary Ltd 6,730,567
2,840,000 Burns Philp & Co Ltd * 370,335
501,000 Burswood Ltd 339,095
229,100 Caltex Australia Ltd 523,515
365,607 Capral Aluminum Ltd 510,803
5,874,100 Crown Limited * 2,881,543
711,262 Email Ltd 1,192,477
490,510 Foodland Associated 3,654,986
2,232,358 Goodman Fielder Ltd 2,065,412
3,365,000 Menzies Gold NL * 169,249
3,614,012 MIM Holdings Ltd 1,570,885
296,888 Newcrest Mining Ltd * 444,290
2,920,091 Oil Search Ltd 2,592,920
700,000 Orogen Minerals Ltd 621,571
54,000 Orogen Minerals Ltd GDR 144A 486,000
4,758,371 Pasminco Ltd 3,841,124
1,193,990 Qantas Airways Ltd 3,150,984
603,543 Rothmans Holdings Ltd 4,759,579
1,501,276 Western Mining Corp Holdings Ltd 4,661,087
549,994 Westpac Banking Corp 3,636,150
741,706 Wills (WD & HO) Holdings Ltd 2,113,981
----------
48,664,580
----------
Austria - 0.3%
4,827 Oesterreichische Brau Beteiligungs AG 230,023
42,920 Oesterreichische Laenderbank AG 2,308,656
7,170 Radex-Heraklith AG 198,110
1,991 Universale Bau AG 62,137
4,264 VA Technologie AG (Bearer) 329,997
3,270 Wienerberger Baustoffindustrie AG 646,136
----------
3,775,059
----------
Belgium - 3.5%
24,920 Almanij NV 1,927,225
1,142 Bekaert SA 468,858
6,164 CBR Cimenteries NPV 542,337
25,192 Cie Francois De Enterprises 4,424,723
14,854 Credit Commercial Dexia 2,250,225
19,398 Electrabel SA 8,091,779
100,135 Fortis (B) 3,643,954
See accompanying notes to the financial statements. 1
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Belgium - continued
100,135 Fortis (B) Strip 1,099
18,162 GIB Holdings Ltd 762,603
5,649 Groupe Bruxelles Lambert NPV 1,054,202
31,133 Kredietbank NPV 2,394,046
2,807 Petrofina SA Bruxelles 1,297,879
25,972 Solvay Et Cie 1,784,774
34,919 Tractebel 6,144,673
66,209 UCB SA 3,437,808
----------
38,226,185
----------
Canada - 0.7%
143,720 Abitibi Consolidated Inc 1,147,285
137,100 Air Canada Inc * 554,031
42,893 Alliance Forest Products Inc (d) * 473,116
295,000 Boliden Ltd * 289,235
118,149 Cambridge Shopping Centres Ltd * 712,260
82,500 Canadian Hotel Income Properties 437,231
33,500 Canfor Corp 102,087
73,264 Concord Pacific Group * 33,975
101,500 Iamgold (International African Mining Gold) * 316,032
220,100 KAP Resources Ltd * 8,020
200,000 Meridian Gold Inc * 1,126,201
67,137 Oxford Properties Group * 673,816
633,600 Semi-Tech Class A * 33,579
38,800 St Laurent Paperboard * 302,021
124,300 Tembec Inc Class A * 658,761
25,640 Trizec Hahn Corp (Sub-Voting) 501,080
----------
7,368,730
----------
Denmark - 0.0%
12,300 Alm Brand AS Class B 228,837
----------
France - 8.9%
9,722 Accor SA 2,262,533
38,603 Alcatel Alsthom Cie Generale d'Electricite SA 4,152,891
22,990 Axa SA 2,998,188
43,351 Banque Nationale de Paris 3,459,688
12,507 Banque Paribas Class A 1,077,770
60,005 BIC SA 3,095,913
11,188 Bouygues 2,781,789
5,442 Chargeurs International SA 250,906
6,170 Christian Dior 709,145
13,251 Club Mediterranee SA * 1,266,981
3,351 Colas SA 636,023
2 See accompanying notes to the financial statements.
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
France - continued
78,430 Compagnie Generale d'Industrie et de Participations 4,257,474
50,876 Credit Lyonnais * 2,234,524
7,679 Dollfus-Mieg and Cie * 50,999
67,999 Elf Aquitaine SA 7,091,361
3,073 Elf Gabon 263,293
10,754 Eridania Beghin-Say SA 1,558,287
45,227 France Telecom SA 4,232,487
18,250 Gaz Et Eaux 806,366
3,556 Generale Des Eaux 927,105
8,750 Groupe Andre 998,953
17,539 Groupe Danone 4,368,605
2,299 Guyenne Et Gascogne 959,016
7,334 Imetal 869,497
4,540 Labinal SA 884,622
10,498 Lafarge Coppee SA 996,842
86,210 Lagardere Groupe 3,312,296
3,401 Louis Vuitton Moet Hennessy 724,289
55,506 Lyonnaise Des Eaux 11,095,665
48,774 Michelin SA Class B 2,173,791
60,803 Pechiney SA Class A 2,009,069
24,827 Pernod Ricard 1,468,982
19,747 Peugeot SA 2,633,788
46,002 Rhone Poulenc SA Class A 2,108,321
13,860 Saint-Gobain 2,154,418
45,557 Seita 2,700,551
17,025 Sidel (Bearer) 1,197,977
13,876 Societe Generale Paris 2,036,569
15,717 Sommer Allibert 388,200
18,442 Sophia SA 745,005
36,585 SPIE Batignolles 2,148,623
4,427 Strafor Facom 301,304
6,315 Sylea (Bearer) 311,953
68,544 Thomson CSF 2,031,593
27,038 Total SA 2,819,692
111,290 Usinor Sacilor 1,365,845
9,260 Vallourec 264,599
27,056 Worms et Compagnie SA * 395,020
----------
97,578,808
----------
Germany - 7.0%
128,500 Bankgesellschaft Berlin AG 1,953,693
63,990 Bayer AG 2,265,402
135,000 Bayerische Hypotheken und Wechsel-Bank AG 2,208,124
See accompanying notes to the financial statements. 3
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Germany - continued
3,800 Bayerische Motorenwerke AG 2,744,814
65,500 BHF Bank AG 2,484,236
28,700 Brau und Brunnen * 1,795,809
9,945 Cologne Reinsurance (Registered) 12,281,764
148,000 Commerzbank AG 4,159,155
182,810 Continental AG 4,555,429
103,100 Deutsche Bank AG 5,381,615
210,940 Dresdner Bank 7,340,433
12,740 Holzmann (Philipp) * 1,643,277
8,700 Kali und Salz Beteiligungs AG 1,169,927
3,331 Koelnische Rueckversicherungs-Gesellschaft AG 4,205,096
168,500 Lufthansa AG 3,708,666
5,354 Metro AG 378,502
3,100 Munich Reinsurance (Registered) 625,476
3,100 Munich Reinsurance * 618,330
55,000 Rheinmetall AG 1,418,842
137,360 RWE AG 5,986,242
60,400 Siemens AG 3,812,486
116,200 Veba AG 6,199,346
----------
76,936,664
----------
Hong Kong - 3.3%
3,200,900 Amoy Properties Ltd 2,313,580
310,000 Cheung Kong Holdings 2,110,613
3,355,052 Dairy Farm International 3,589,906
293,000 Goldlion Holdings Ltd 17,396
221,449 Great Eagle Holdings Ltd 204,364
1,444,800 Hang Lung Development Co Ltd 1,389,276
945,000 HKR International Ltd 585,460
1,766,000 Hong Kong Electric Holdings Ltd 5,026,014
5,338,641 Hong Kong Land Holdings 5,605,573
1,216,407 Hysan Development Co Ltd 1,460,112
302,000 Jardine International Motor Holdings Ltd 109,141
83,200 Lai Fung Holdings Ltd 5,155
8,440,000 Lai Sun Development 522,887
6,250,000 Lai Sun Garment International Ltd 363,009
1,110,266 Liu Chong Hing Bank Ltd 1,010,277
1,173,000 National Mutual Asia Ltd 832,693
400,000 New World Development Co Ltd 738,279
220,000 Orient Overseas International Ltd 50,544
7,704,073 Regal Hotels International Ltd 815,377
7,460,882 Semi Tech (Global) Co Ltd * 170,446
5,827,000 South China Morning Post Ltd 2,500,697
4 See accompanying notes to the financial statements.
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------
<S> <C> <C>
Hong Kong - continued
681,500 Swire Pacific Ltd Class A 2,779,568
1,844,500 Swire Pacific Ltd Class B 1,124,877
1,816,500 Wharf Holdings Ltd 2,098,374
183,912 Wing On Co * 49,849
758,486 Winsor Industrial Corp Ltd 90,066
429,243 Winsor Properties Holdings Ltd 104,710
----------
35,668,243
----------
India - 0.1%
59,007 Mahindra & Mahindra GDR (Reg S) 144A 340,765
115,000 Videsh Sanchar Nigam GDR 1,101,125
----------
1,441,890
----------
Indonesia - 0.1%
1,401,000 Indah Kiat Pulp & Paper * 332,911
627,640 PT Daya Guna Samudera 305,386
----------
638,297
----------
Ireland - 0.2%
130,335 Allied Irish Banks Plc 2,255,004
----------
Italy - 7.2%
146,411 Assicurazioni Generali SPA 5,657,438
456,578 Banca Commerciale Italiana SPA 2,851,876
65,113 Banca di Legano SPA 410,997
140,039 Banca Nazionale Del Lavora SPA * 418,140
236,958 Banca Toscana 1,110,715
534,369 Banco Ambrosiano Veneto SPA (Non Convertible) 1,413,715
207,500 Comau Finanziaria SPA 510,234
1,601,012 Credito Italiano 8,418,477
168,447 Danieli & Co Di Risp (Non Convertible) 473,377
238,352 Edison SPA 2,190,018
356,652 ENI SPA 2,055,452
31,984 Ericsson SPA 1,204,288
146,530 Falck Acciaierie and Ferriere Lombarde 1,198,357
242,902 Fiat SPA 730,609
29,074 Fiat SPA (Non Convertible) 47,076
72,520 Gruppo Editoriale L' Express 871,717
172,607 IFIL Finanziaria di Partecipazioni SPA (Non Convertible) 384,643
650,940 Industriali Riunite SPA * 721,715
1,697,304 Istituto Nazionale Delle Assicurazioni 4,117,706
165,256 Italcementi Fabbriche Riunite Cemento SPA (Non Convertible) 780,062
572,322 Italgas SPA 2,921,439
309,998 Magneti Marelli SPA 471,316
240,701 Mediaset SPA 2,272,374
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Italy - continued
43,386 Mediobanca SPA 492,939
1,030,934 Montedison SPA (Non Convertible) 831,805
210,955 Montefibre SPA 125,746
462,667 Olivetti and Co SPA * 1,422,100
58,000 Pagnossin SPA 231,757
199,293 RAS SPA 2,108,980
76,677 Rinascente per l'Esercizio di Grandi Magazzini SPA 677,586
122,196 SAI di Risp 602,292
278,952 San Paolo IMI SPA 4,868,891
2,499,372 Seat Pagine Gialle Di Risp 2,387,006
131,669 Sirti SPA 781,959
1,329,906 Telecom Italia Mobile SPA (Non Convertible) 5,372,448
805,692 Telecom Italia SPA 8,481,860
879,362 Telecom Italia SPA (Non Convertible) 5,936,716
72,569 Toro Assicurazioni 916,120
159,857 Unicem Di Risp 728,255
68,306 Unione Cementi Marchino Emiliane e di Augusta-Casale 764,826
1,697,304 Unione Immobiliaer SPA * 940,924
----------
78,903,951
----------
Japan - 17.7%
81,000 Aida Engineering 259,418
25,200 Aiful Corp 1,701,239
41,300 Akita Bank 145,499
18,875 Amway Japan Ltd ADR 77,859
117,000 Arisawa Manufacturing 1,184,298
296,000 Asahi Breweries Ltd 3,921,719
316,000 Bridgestone Corp 7,071,049
263,000 Canon Inc 5,630,173
19,300 Chubu Electric Power Co Inc 338,340
131,000 Chugai Pharmaceutical Co Ltd 1,253,139
58,580 Circle K Japan Co Ltd 2,621,659
38,800 Credit Saison Co 815,895
212,000 Dainippon Ink & Chemicals Inc 630,729
104,000 Dainippon Printing Co Ltd 1,447,147
76,000 Daiwa House Industry Co Ltd 778,896
281 East Japan Railway Co 1,690,973
505,000 Fuji Electric Co 1,008,723
190,000 Fuji Photo Film Co Ltd 6,981,879
130,000 Fujitec Co 914,876
413,000 Fujitsu Ltd 5,151,622
37,000 H I S Co Ltd 904,341
66,000 Hitachi Credit Corp 1,234,893
6 See accompanying notes to the financial statements.
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Japan - continued
50,312 Hokkaido Electric Power 763,267
384,000 Honda Motor Co Ltd 14,790,392
104,000 Hosiden Corp 1,757,438
62,000 Japan Airport Terminal Co Ltd 373,097
141 Japan Tobacco Inc 1,283,439
107,650 Kansai Electric Power 2,050,476
271,000 Kao Corp 5,413,148
90,000 Kinden Corp 1,183,312
17,000 Kirin Beverage 272,229
954,000 Marubeni Corp 1,583,970
67,000 Marui Co Ltd 1,095,491
230,000 Matsushita Electric Industrial Co Ltd 3,847,872
583,000 Minebea Co Ltd 5,798,062
412,000 Minolta Co Ltd 1,986,212
203,000 Mitsubishi Corp 1,094,985
126,000 Mitsubishi Trust & Banking 1,070,442
383,000 Mitsui & Co 2,085,276
97,000 Nihon Unisys Ltd 1,357,101
301,000 Nikko Securities 951,327
45,400 Nintendo Co Ltd 3,826,380
44,700 Nippon Electric Glass Co 539,866
112,000 Nippon Meat Packers Inc 1,520,708
75,000 Nippon Soda Chemical Co Ltd 331,226
2,910 Nippon Television Network 822,845
37,900 Nitta Corp 199,322
171 NTT Mobile Communication Network Inc 6,946,650
130,000 Onward Kashiyama Co Ltd 1,435,314
107,000 Orix Corp 6,691,445
37,080 Paris Miki Inc 968,799
66,000 Pioneer Electronics Corp 1,176,485
28,000 Rinnai Corp 521,534
62,000 Rohm Co Ltd 6,061,526
685,000 Sakura Bank Ltd 1,489,507
46,000 Sanrio Co Ltd * 717,236
100,000 Sekisui House Ltd 1,024,020
179,000 Shibusawa Warehouse 511,429
27,000 Shimachu Co 509,735
167,750 Shin-Etsu Chemical Co Ltd 3,930,426
115,000 Shionogi and Co Ltd 890,729
68,000 Showa Corp 267,071
26,500 SMC 2,144,121
68,500 Sony Corp 5,184,408
See accompanying notes to the financial statements. 7
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Japan - continued
70,000 Sumitomo Bakelite Co Ltd 471,976
301,000 Sumitomo Trust & Banking 948,791
380,000 Suzuki Motor Corp 4,195,533
250,000 Takeda Chemical Industries Ltd 8,596,713
127,000 TDK Corp 9,108,892
312,000 Terumo Corp 6,363,590
26,000 Tokyo Broadcasting System Inc 282,680
6,500 Tokyo Ohka Kokyo 179,140
85,000 Tokyo Seimitsu Co Ltd 3,159,292
19,000 Toppan Printing Co Ltd 222,427
478,000 Toshiba Corp 2,965,091
126,000 Tsubaki Nakashima Co Ltd 775,221
15,000 Unicharm Corp 643,489
165,000 UNY Co Ltd 2,643,616
283,000 Yamanouchi Pharmaceutical Co Ltd 8,634,303
111,000 Yamatake Honeywell 975,752
101,000 Yamato Kogyo Co 496,275
-----------
192,895,465
-----------
Korea - 0.9%
22,600 Cheil Jedang Corp 607,716
390 Daehan Flour Mill 17,723
114,350 Daewoo Corp 292,534
70,000 Dongwon Securities 915,407
43,886 Hana Bank GDR 425,694
4,902 Hankook Tire Manufacturing 20,153
15,671 Hansol Paper Manufacturing Ltd 144,734
41,000 Hyundai Motor Service Co GDR 144A 89,175
65,000 Kookmin Bank GDR (Registered) 144A 458,250
68 Korea Trust * 255,000
96,946 LG Electronics Co 978,572
22,290 Nhong Shim 1,120,421
42,890 Pacific Chemical Corp 592,432
102,000 Pantech Co Ltd 511,876
122,300 Samsung Corp 584,761
48,241 Samsung Display Devices 1,951,720
136,803 Shinhan Bank 838,596
6,746 Sindoricom Co Ltd 215,034
136 SK Telecom (c) 103,542
-----------
10,123,340
-----------
8 See accompanying notes to the financial statements.
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Malaysia - 0.3%
914,800 Genting Berhad 2,082,374
315,000 New Straits Times 265,263
407,000 Resorts World Berhad 533,384
477,000 Tanjong 815,921
----------
3,696,942
----------
Netherlands - 5.9%
142,763 ABN Amro Holdings NV 2,907,120
69,979 Aegon NV 7,305,529
117,082 Akzo Nobel NV 4,440,600
560,358 ASM International NV * 2,801,790
14,410 Bam Groep 703,927
13,143 Buhrmann NV Maastricht 245,993
71,739 Dordtsche Petroleum 2,764,177
95,422 Elsevier NV 1,550,293
32,071 Endemol Entertainment 1,091,384
13,329 Fugro NV 257,522
56,682 Hal Trust Class B 1,238,231
66,932 Hal Trust (Participating Units) 1,462,145
36,957 Heidemij Holdings NV 269,787
43,865 Hunter Douglas NV 1,425,323
26,054 ING Groep NV 1,458,640
44,664 Kon Bolswessanen 612,874
97,831 Koninklijke KPN NV 5,133,432
49,739 Koninklijke Numico NV 2,320,542
12,285 Koninklijke Pakhoed 298,037
83,507 Koninklijke Volker Wessels 1,283,377
114,130 Laurus NV 3,257,441
86 Moeara Enim Petroleum 1,652,114
20,560 Nedlloyd 238,111
94,957 Philips Electronics 6,619,179
26,189 Philips NV ADR 1,823,409
14,547 Roto Smeets D Boer 511,007
53,918 Royal Dutch Petroleum 2,367,539
98,442 TNT Post Group NV 3,366,216
21,285 Unilever NV CVA 1,535,120
17,833 Van Ommeren (Koninklijke) (Participating Certificate) 529,536
29,567 Vedior NV 628,046
30,122 Vendex NV * 806,821
29,107 Wereldhave NV 1,568,853
----------
64,474,115
----------
See accompanying notes to the financial statements. 9
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
New Zealand - 1.3%
880,000 Air New Zealand Class B 1,457,417
7,463,617 Brierley Investment Ltd 1,721,140
1,958,825 Carter Holt Harvey Ltd 1,796,585
38,750 DB Group Ltd 49,147
105,248 Fisher and Paykel Industries Ltd 386,123
705,957 Fletcher Challenge Buildings 1,091,477
909,247 Fletcher Challenge Energy 1,582,101
2,395,891 Fletcher Challenge Ltd 1,042,220
1,870,521 Fletcher Challenge Paper 1,294,049
273,307 Lion Nathan Ltd 657,473
1,841,203 Progressive Enterprise 1,794,853
7,039,327 Trans Tasman Properties Ltd 1,475,725
485,082 Wrightson Ltd 99,150
----------
14,447,460
----------
Norway - 0.8%
297,000 Christiania Bank OG Kreditkasse 1,065,471
139,700 Den Norske Bank Class A 490,578
33,800 Dyno Industrier AS 503,809
25,900 Elkem AS Class A 351,702
15,395 Leif Hoegh and Co AS 176,965
30,000 Norsk Data AS Class B ADR (b) * 300
26,582 Norsk Hydro AS 901,569
5,400 Norske Skogindustrier AS Class A 160,639
74,800 Orkla A/S Class A 1,001,554
33,200 Orkla-Borregaard AS Class B (Non Voting) 385,827
331,800 Saga Petroleum Class A 2,787,179
37,900 Schibsted AS 447,628
27,000 Unitor AS 238,742
----------
8,511,963
----------
Poland - 0.0%
40,000 Bank Handlowy W Warszawie 385,298
----------
Portugal - 0.1%
24,500 Sonae Investimentos 947,238
----------
Russia - 0.1%
8,715,000 Irkutskenergo (Registered) (c) 422,678
141,384 Mosenergo ADR 284,024
----------
706,702
----------
10 See accompanying notes to the financial statements.
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Singapore - 0.5%
268,000 Cycle & Carriage Ltd 980,488
988,512 Jardine Matheson Holdings Ltd 2,589,901
562,263 Jardine Strategic Holdings Ltd 815,281
755,000 Singapore Land Ltd 1,490,708
----------
5,876,378
----------
South Africa - 1.8%
108,400 Anglo American Corp of South Africa 3,380,610
533,200 Barlow Ltd 2,457,282
513,000 C.G. Smith Ltd 1,221,429
185,300 De Beers Centenary Link Units 3,194,518
128,714 Goldfields Ltd 689,799
82,900 Goldfields of South Africa Ltd 131,141
250,700 Johnnies Industrial Corp 1,177,622
123,000 Liberty Life Association of Africa Ltd 1,693,608
2,535,100 Murray & Roberts Holdings Ltd 859,356
2,160,000 Sanlam Limited * 1,541,114
592,000 Sasol Ltd 2,307,797
79,756 Standard Bank Investment Corp 226,587
1,300,814 Sun International Ltd 157,484
40,000 Western Areas Gold Mining Co Ltd * 106,860
----------
19,145,207
----------
Spain - 6.2%
25,800 Acerinox SA 676,895
208 Aguas De Barcelona * 12,894
64,000 Argentaria Corporacion Bancaria de Espana SA 1,531,581
16,000 Azucarera Ebro Agricolas SA 327,042
390,066 Banco Bilbao Vizcaya SA 5,776,350
46,530 Banco Popular Espanol 3,120,885
294,146 Banco Santander SA (Registered) 5,844,468
79,812 Bankinter SA 2,864,965
45,607 Corporacion Mapfre (Registered) 996,295
216,548 Endesa 5,738,454
304,580 FENOSA SA 5,179,123
48,361 Hidroelec Cantabrico 2,481,877
534,243 Iberdrola SA 8,357,130
25,950 Metrovacesa SA 668,011
49,000 Midesa 1,357,653
75,860 Repsol SA 3,988,888
40,000 Tabacalera SA Class A 897,520
362,688 Telefonica de Espana SA 16,562,655
92,174 Vallehermoso SA 1,124,154
----------
67,506,840
----------
See accompanying notes to the financial statements. 11
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Sweden - 0.1%
39,000 Castellum AB 401,303
162,400 Munksjo AB 1,028,349
----------
1,429,652
----------
Switzerland - 3.9%
1,649 Ascom Holding AG (Bearer) 2,196,315
1,642 Banque Cantonale Vaudoise (Bearer) 494,056
656 Banque Cantonale Vaudoise * 189,459
2,186 Belimo Automation AG 693,944
379 Bobst SA (Bearer) 423,712
45,422 CS Holdings (Registered) 7,052,862
1,825 Fischer (George) AG (Registered) 598,237
291 Flughafen Immobilien 605,476
3,197 Forbo Holdings AG (Registered) 1,301,701
2,365 Hero AG (Bearer) 1,230,606
815 Holderbank Financiere Glarus AG (Bearer) 848,156
3,526 Jelmoli (Registered) 618,063
1,703 Keramik (Bearer) * 411,338
5,045 Kraftwerk Laufenberg (Bearer) 783,358
2,149 Merkur Holding AG (Registered) 475,315
2,626 Nestle AG (Registered) 4,956,427
2,896 Novartis AG (Registered) 5,080,316
158 Roche Holdings (Participating Certificate) 2,000,828
416 Societe Generale de Surveillance Holding SA (Bearer) 312,922
291 Stratec Holding AG Class B (Registered) 485,987
1,554 Sulzer Gebrueder AG (Registered) 916,925
2,368 Sulzer Medica AG 392,202
4,003 Swatch Group AG (Bearer) 2,541,500
168 Swiss Insurance Co 359,408
1,347 Swiss Reinsurance (Bearer) 3,016,469
3,835 Zellweger Luwa AG (Bearer) 2,286,629
3,191 Zurich Allied * 2,118,451
----------
42,390,662
----------
Thailand - 0.1%
428,900 First Bangkok City (Foreign Registered) (b) * 115
645,900 Jasmine International Public Co (Foreign Registered) * 143,649
9,000 Telecomasia Corp Public Co Ltd GDR 144A * 42,606
462,200 Telecomasia Corp Public Co Ltd (Foreign Registered) * 226,022
487,700 Thai Telephone & Telecommunications (Foreign Registered) (c) * 65,340
204,800 Total Access Communication * 423,936
----------
901,668
----------
</TABLE>
12 See accompanying notes to the financial statements.
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
United Kingdom - 19.6%
356,441 Allied Domecq Plc 2,754,165
263,321 Allied Zurich Plc * 3,887,258
69,028 Amstrad Plc 55,291
283,777 Anglian Water Plc 3,323,205
320,000 Arjo Wiggins Appleton Plc 621,576
1,722,281 ASDA Group 4,297,289
218,084 BAA 2,457,822
290,056 Bank of Scotland 4,200,614
199,536 Barclays Plc 5,325,480
124,000 Bass Plc 1,722,278
155,000 BBA Group 938,612
722,613 Berkley Group 6,529,011
1,003,347 BG Plc 5,908,518
965,000 Billiton Plc 2,087,006
137,000 BOC Group Plc 1,847,971
135,200 Boots Co 2,165,904
246,953 BPB Industries Plc 949,485
284,000 British Aerospace 1,799,398
286,115 British Airways Plc 2,111,876
274,821 British American Tobacco 2,507,299
282,600 British Energy Plc 3,021,941
245,000 British Land Co 2,019,361
532,499 British Petroleum Co Plc 7,549,961
1,091,250 British Steel Plc 2,167,746
1,151,655 British Telecom Plc 19,887,646
613,611 BTR Siebe Plc 2,587,760
185,000 Cable & Wireless 2,529,518
666,375 Capital Shopping Centres Plc 4,131,352
408,800 Caradon Plc 1,001,993
1,064,527 Centrica Plc 1,978,232
287,601 Commercial Union Plc 4,236,475
280,000 Cookson Group 722,182
762,767 Costain Group Plc * 223,006
432,916 Diageo Plc 4,764,492
56,000 Dixons Group 1,053,219
240,000 Elementis Plc 282,593
177,000 Enterprise Oil 764,178
68,927 Flextech Plc * 860,180
616,000 Gallaher Group Plc 4,370,679
250,000 General Electric Plc 1,994,490
223,598 Glaxo Wellcome Plc 7,164,080
162,474 Granada Group 3,302,996
See accompanying notes to the financial statements. 13
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
United Kingdom - continued
510,586 Great Portland Estates Plc 1,623,648
154,139 Great Universal Stores Plc 1,963,099
133,000 Greenalls Group Plc 820,304
172,008 Hanson Plc 1,416,362
401,546 Hillsdown Holdings Plc 437,428
174,944 HSBC Holdings 5,100,737
84,909 Hyder Plc 1,080,032
113,136 Imperial Chemical Industries Plc 980,076
137,816 Imperial Tobacco Group Plc 1,616,671
80,000 Johnson Matthey 586,012
632,472 Ladbroke Group 2,938,338
726,000 Lasmo Plc 1,395,662
211,000 Marks & Spencer 1,409,552
306,140 Mirror Group Plc 946,542
80,000 National Grid Group Plc 578,002
287,600 National Power 2,292,158
218,924 National Westminster Bank 4,534,761
80,000 Next 929,160
143,000 Norwich Union Plc 1,033,178
114,000 Nycomed Amersham Plc 748,816
160,107 Peninsular & Oriental Steam Navigation Co 1,885,212
109,086 Powergen Plc 1,334,260
80,000 Prudential Corp 1,082,952
2,148,935 Raglan Property Plc 877,861
179,630 Railtrack Group Plc 4,466,148
100,130 RMC Group 1,088,492
232,544 Rolls-Royce 1,016,091
326,824 Royal & Sun Alliance Insurance 2,740,900
297,799 Safeway Plc 1,279,751
184,300 Scottish Hydro-Electric Plc 1,708,013
400,000 Scottish Power Plc 3,735,230
153,771 Scottish & Newcastle Plc 1,689,900
240,593 Severn Trent Plc 3,445,744
35,000 Smith (WH) Group Plc 305,582
180,392 Smithkline Beecham Plc 2,540,204
82,481 Standard Chartered 1,076,989
180,000 Sun Life & Province Holding 1,415,848
646,579 Tarmac 1,108,327
221,000 Tate & Lyle 1,610,891
200,773 Terranova Foods Plc 260,527
193,263 Thames Water Plc 3,185,859
156,228 TI Group Plc 972,327
14 See accompanying notes to the financial statements.
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
United Kingdom - continued
284,000 Tomkins Plc 1,031,640
78,200 Unilever Plc 751,658
267,000 United Assurance Group Plc 2,258,436
138,904 United Utilities 1,761,279
271,030 Viglen Technology Plc 134,599
271,030 Viglen Technology Plc (Entitlement Letters) * --
127,000 Whitbread Plc Class A 1,824,982
299,762 Williams Plc 1,848,842
119,146 Wolseley 767,305
-------------
213,740,525
-------------
TOTAL COMMON STOCKS (Cost $934,245,364) 1,040,533,203
-------------
PREFERRED STOCKS - 1.3%
Brazil - 0.0%
6,439,529 Gerdau SA 43,447
2,809,994 Metalurgica Gerdau SA 33,178
-------------
76,625
-------------
France - 0.1%
16,605 Casino Guichard Perrachon 963,357
-------------
Germany - 1.0%
1,800 Bayerische Motoren Werke AG 731,102
3,641 Dyckerhoff AG (Non Voting) 939,273
52,800 GEA AG 1,118,651
29,772 Metro AG Class I 1,130,805
23,144 Rheinmetall AG 467,476
5,150 Villeroy & Boch (Non-Voting) 582,301
146,700 Volkswagen AG 5,765,229
-------------
10,734,837
-------------
Italy - 0.1%
362,131 Fiat SPA 558,529
41,082 IFI Istituto Finanziario 584,016
-------------
1,142,545
-------------
Korea - 0.1%
22,000 Daewoo Securities Ltd 148,345
27,310 Dongwon Securities Co 189,953
68,540 Jinro Ltd * 82,349
30,000 LG Securities Co * 178,995
27,230 Shinyoung Securities 231,461
-------------
831,103
-------------
TOTAL PREFERRED STOCKS (Cost $14,830,471) 13,748,467
-------------
See accompanying notes to the financial statements. 15
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares/
Par Value Description Value ($)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS - 0.8%
Bermuda - 0.3%
JPY 477,000,000 Sanwa International Finance, 1.25% due 8/01/05 4,170,986
-----------
Hong Kong - 0.1%
USD 860,000 Sino Land Co, 5.00% due 2/26/01 (d) 756,800
-----------
Japan - 0.2%
USD 2,200,000 SB Treasury Co, 9.40% due 12/29/49 (d) 2,068,000
-----------
Korea - 0.0%
KRW 19,462 Shinhan Bank, 15.00% due 12/2/48 (e) 159
-----------
Mexico - 0.0%
USD 870,000 Grupo Financiero Invermexico, 7.50% due 6/16/01 130,500
-----------
Singapore - 0.2%
USD 1,830,000 Keppel Corp, 2.00% due 8/12/02 144A 1,770,525
-----------
TOTAL CONVERTIBLE BONDS (Cost $8,926,266) 8,896,970
-----------
INVESTMENT FUNDS - 0.2%
Chile - 0.0%
85,050 Five Arrows Chile Investment Trust Ltd 144,585
56,700 Five Arrows Chile Investment Trust Ltd Convertible Units * 100,926
5,564 Five Arrows Chile Investment Trust Ltd Warrants 5/31/99 * 56
-----------
245,567
-----------
India - 0.1%
157,150 India Fund Class A * 591,623
40,000 India Liberalisation (c) (d) * 381,600
11,000 Morgan Stanley India Fund Inc * 89,375
-----------
1,062,598
-----------
Korea - 0.0%
39,500 Korea Investment Fund * 162,938
-----------
Russia - 0.1%
38,000 First Russian Frontiers Trust Plc * 680,530
180,000 First Russian Frontiers Trust Plc Warrants 6/03/2001 * 36,526
-----------
717,056
-----------
</TABLE>
16 See accompanying notes to the financial statements.
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares/
Par Value(%) Description Value ($)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
South Africa - 0.0%
25,352 New South Africa Fund Inc 251,936
---------------
TOTAL INVESTMENT FUNDS (Cost $5,619,383) 2,440,095
---------------
RIGHTS & WARRANTS - 0.0%
Canada - 0.0%
116,600 KAP Resources Ltd Class A Warrants 8/5/2000 * 772
---------------
Hong Kong - 0.0%
82,190 Hysan Development Co Ltd Warrants 4/30/99 * 159
134,725 Wharf Holdings Ltd Warrants 12/31/99 * 5,043
---------------
5,202
---------------
Italy - 0.0%
5,456 Toro Assicurazioni Warrants 12/31/00 * 39,589
---------------
Korea - 0.0%
7,109 LG Securities Co Preferred Rights 3/22/99 * 13,654
40,278 Samsung Corp Rights 3/12/99 * 27,982
---------------
41,636
---------------
TOTAL RIGHTS & WARRANTS (Cost $240,175) 87,199
---------------
SHORT-TERM INVESTMENTS - 4.3%
Cash Equivalents - 4.3%
$ 3,900,000 Republic Bank of New York Time Deposit, 4.81% due 3/01/99 3,900,000
42,940,577 The Boston Global Investment Trust (a) 42,940,577
---------------
46,840,577
---------------
TOTAL SHORT-TERM INVESTMENTS (Cost $46,840,577) 46,840,577
---------------
TOTAL INVESTMENTS - 101.9%
(Cost $1,010,702,236) 1,112,546,511
Other Assets and Liabilities (net) - (1.9%) (20,898,738)
---------------
TOTAL NET ASSETS - 100.0% $1,091,647,773
===============
</TABLE>
See accompanying notes to the financial statements. 17
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
- --------------------------------------------------------------------------------
Notes to the Schedule of Investments:
ADR American Depositary Receipt
GDR Global Depository Receipt
JPY Japanese Yen
KRW Korean Won
USD United States Dollar
(a) Represents investment of security lending collateral (Note 1).
(b) Bankrupt issuer.
(c) Valued by management (Note 1).
(d) Security is restricted as to public resale. The aggregate
market value of restricted securities is $3,679,516 or .34% of
net assets.
(e) Warrants included in position of security.
144A Securities exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to qualified
institutional buyers.
* Non-income producing security.
18 See accompanying notes to the financial statements.
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
- --------------------------------------------------------------------------------
At February 28, 1999, industry sector diversification of the Fund's
investments was as follows:
Industry Sector (Unaudited)
Banking 12.0%
Utilities 7.3
Telecommunications 7.3
Consumer Goods 7.1
Insurance 6.4
Conglomerates 6.3
Oil and Gas 5.2
Electronic Equipment 4.4
Services 4.3
Retail Trade 3.7
Construction 3.7
Machinery 3.6
Health Care 3.6
Food and Beverage 3.4
Automotive 3.2
Real Estate 3.2
Chemicals 3.0
Metals and Mining 2.5
Financial Services 1.9
Transportation 1.8
Communications 1.5
Computers 1.3
Paper and Allied Products 1.1
Aerospace 0.6
Textiles 0.3
Miscellaneous 1.3
-----
100.0%
=====
See accompanying notes to the financial statements. 19
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities - February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at value (cost $1,010,702,236) (Note 1) $ 1,112,546,511
Foreign currency, at value (cost $15,733,945) (Note 1) 15,629,035
Cash 95,472
Receivable for investments sold 4,843,745
Receivable for fund shares sold 5,000,000
Dividends and interest receivable 1,412,259
Foreign withholding taxes receivable 1,034,812
Receivable for expenses waived or borne by Manager (Note 2) 209,352
---------------
Total assets 1,140,771,186
---------------
Liabilities:
Payable upon return of securities loaned (Note 1) 42,940,577
Payable for investments purchased 4,300,074
Payable for fund shares repurchased 100,000
Accrued Malaysian repatriation taxes (Note 1) 829,585
Payable to affiliate for (Note 2):
Management fee 644,906
Shareholder service fee 124,519
Accrued expenses 183,752
---------------
Total liabilities 49,123,413
---------------
Net assets $ 1,091,647,773
===============
Net assets consist of:
Paid-in capital $ 978,419,841
Distributions in excess of net investment income (5,330,621)
Accumulated undistributed net realized gain 17,702,240
Net unrealized appreciation 100,856,313
---------------
$ 1,091,647,773
===============
Net assets attributable to:
Class II Shares $ 33,779,775
===============
Class III Shares $ 927,108,342
===============
Class IV Shares $ 130,759,656
===============
Shares outstanding:
Class II 2,864,266
===============
Class III 78,531,599
===============
Class IV 11,072,392
===============
Net asset value per share:
Class II $ 11.79
===============
Class III $ 11.81
===============
Class IV $ 11.81
===============
</TABLE>
20 See accompanying notes to the financial statements.
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Statement of Operations - Year Ended February 28, 1999
- --------------------------------------------------------------------------------
Investment income:
Dividends (net of foreign tax expense of $2,266,080) $ 23,059,551
Interest (including security lending income of $263,028) 3,531,007
------------
Total income 26,590,558
------------
Expenses:
Management fee (Note 2) 8,363,703
Custodian fees 869,080
Registration fees 58,272
Audit fees 56,999
Legal fees 23,950
Transfer agent fees 42,006
Trustees fees (Note 2) 10,667
Miscellaneous 7,583
Fees waived or borne by Manager (Note 2) (2,741,305)
------------
6,690,955
Shareholder service fee (Note 2)
Class II 123,856
Class III 1,314,116
Class IV 164,581
------------
Net expenses 8,293,508
------------
Net investment income 18,297,050
------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 33,204,754
Foreign currency, forward contracts and foreign currency
related transactions (1,594,849)
------------
Net realized gain 31,609,905
------------
Change in net unrealized appreciation (depreciation) on:
Investments (Note 1) (47,505,737)
Foreign currency, forward contracts and foreign currency
related transactions (172,478)
------------
Net unrealized loss (47,678,215)
------------
Net realized and unrealized loss (16,068,310)
------------
Net increase in net assets resulting from operations $ 2,228,740
============
See accompanying notes to the financial statements. 21
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (decrease) in net assets: Year Ended Year Ended
February 28, 1999 February 28, 1998
--------------- ---------------
<S> <C> <C>
Operations:
Net investment income $ 18,297,050 $ 16,444,114
Net realized gain 31,609,905 1,341,628
Change in net unrealized appreciation (depreciation) (47,678,215) 106,316,685
--------------- ---------------
Net increase in net assets resulting from operations 2,228,740 124,102,427
--------------- ---------------
Distributions to shareholders from:
Net investment income
Class I -- (265,008)
Class II (1,237,030) (647,192)
Class III (18,110,163) (18,851,879)
Class IV (3,254,066) --
--------------- ---------------
Total distributions from net investment income (22,601,259) (19,764,079)
--------------- ---------------
Distributions to shareholders from:
Net realized gains
Class I -- (5,149)
Class II (536,347) (12,389)
Class III (7,886,316) (348,959)
Class IV (1,226,681) --
--------------- ---------------
Total distributions from net realized gains (9,649,344) (366,497)
--------------- ---------------
Net share transactions: (Note 5)
Class I -- (4,265,890)
Class II (19,441,415) 26,425,821
Class III 104,968,005 98,158,725
Class IV (85,018,178) 198,193,992
--------------- ---------------
Increase in net assets resulting from net share transactions 508,412 318,512,648
--------------- ---------------
Total increase (decrease) in net assets (29,513,451) 422,484,499
Net assets:
Beginning of period 1,121,161,224 698,676,725
--------------- ---------------
End of period (including distributions in excess of net
investment income of $5,330,621 and $343,662, respectively.) $ 1,091,647,773 $ 1,121,161,224
=============== ===============
</TABLE>
22 See accompanying notes to the financial statements.
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class I share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from March 1, 1997 Period Ended
to January 9, 1998 February 28, 1997*
--------------- ---------------
<S> <C> <C>
Net asset value, beginning of period $ 10.65 $ 9.88
--------------- ---------------
Income from investment operations:
Net investment income 0.18(c) 0.06
Net realized and unrealized gain 0.28 0.78
--------------- ---------------
Total from investment operations 0.46 0.84
--------------- ---------------
Less distributions to shareholders from:
Net investment income (0.22) (0.07)
Net realized gains (0.00)(e) --
--------------- ---------------
Total distributions (0.22) (0.07)
--------------- ---------------
Net asset value, end of period $ 10.89(d) $ 10.65
=============== ===============
Total Return (a) 4.31% 8.53%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ -- $ 4,891
Net expenses to average
daily net assets 0.88%** 0.89%**(b)
Net investment income to average
daily net assets 1.82%** 0.98%**
Portfolio turnover rate 19% 13%
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.03 $ 0.02
</TABLE>
* Period from July 10, 1996 (commencement of operations) to Fe
** Annualized.
(a) The total returns would have been lower had certain expenses not been
waived during the periods shown.
(b) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .01% of average daily net assets for the period
ended February 28, 1997.
(c) Computed using average shares outstanding throughout the period.
(d) All Class I shares of the Fund were exchanged for Class II shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
(e) The per share realized gain distribution was $0.004.
See accompanying notes to the financial statements. 23
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class II share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
February 28, 1999 February 28, 1998 February 28, 1997*
------------- ------------- -------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 12.09 $ 10.65 $ 10.02
------------- ------------- -------------
Income from investment operations:
Net investment income 0.20(c) 0.18(c) 0.06
Net realized and unrealized gain (loss) (0.14) 1.48 0.65
------------- ------------- -------------
Total from investment operations 0.06 1.66 0.71
------------- ------------- -------------
Less distributions to shareholders from:
Net investment income (0.25) (0.22) (0.08)
Net realized gains (0.11) (0.00)(d) --
------------- ------------- -------------
Total distributions (0.36) (0.22) (0.08)
------------- ------------- -------------
Net asset value, end of period $ 11.79 $ 12.09 $ 10.65
============= ============= =============
Total Return (a) 0.36% 15.94% 7.08%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 33,780 $ 53,949 $ 21,957
Net expenses to average
daily net assets 0.82% 0.82% 0.84**%(b)
Net investment income to average
daily net assets 1.64% 1.60% 0.83%**
Portfolio turnover rate 27% 19% 13%
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.03 $ 0.03 $ 0.02
</TABLE>
* Period from September 30, 1996 (commencement of operations) to
February 28, 1997.
** Annualized.
(a) The total returns would have been lower had certain expenses not been
waived during the periods shown.
(b) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .02% of average daily net assets.
(c) Computed using average shares outstanding throughout the period.
(d) The per share realized gain distribution was $0.004.
24 See accompanying notes to the financial statements.
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
February 28, 1999 February 28, 1998 February 28, 1997*
-------------- -------------- --------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 12.10 $ 10.66 $ 10.00
-------------- -------------- --------------
Income from investment operations:
Net investment income 0.20(c) 0.21(c) 0.08
Net realized and unrealized gain (loss) (0.12) 1.45 0.66
-------------- -------------- --------------
Total from investment operations 0.08 1.66 0.74
-------------- -------------- --------------
Less distributions to shareholders from:
Net investment income (0.26) (0.22) (0.08)
Net realized gains (0.11) (0.00)(d) --
-------------- -------------- --------------
Total distributions (0.37) (0.22) (0.08)
-------------- -------------- --------------
Net asset value, end of period $ 11.81 $ 12.10 $ 10.66
============== ============== ==============
Total Return (a) 0.48% 15.95% 7.37%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 927,108 $ 847,427 $ 671,829
Net expenses to average
daily net assets 0.75% 0.75% 0.76%
Net investment income to average
daily net assets 1.60% 1.80% 1.24%
Portfolio turnover rate 27% 19% 13%
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.03 $ 0.03 $ 0.02
</TABLE>
* Period from June 28, 1996 (commencement of operations) to February 28,
1997.
** Annualized.
(a) The total returns would have been lower had certain expenses not been
waived during the periods shown.
(b) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .01% of average daily net assets.
(c) Computed using average shares outstanding throughout the period.
(d) The per share realized gain distribution was $0.004.
See accompanying notes to the financial statements. 25
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from January 9, 1998
Year Ended (commencement of operations)
February 28, 1999 to February 28, 1998
--------------- ---------------
<S> <C> <C>
Net asset value, beginning of period $ 12.11 $ 10.90
--------------- ---------------
Income from investment operations:
Net investment income 0.22(d) --(b)
Net realized and unrealized gain (loss) (0.15) 1.21
--------------- ---------------
Total from investment operations 0.07 1.21
--------------- ---------------
Less distributions to shareholders from:
Net investment income (0.26) --
Net realized gains (0.11)
--------------- ---------------
Total distributions (0.37) --
--------------- ---------------
Net asset value, end of period $ 11.81 $ 12.11
=============== ===============
Total Return (a) 0.53% 11.10%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 130,760 $ 219,785
Net expenses to average
daily net assets 0.69% 0.69%*
Net investment income to average
daily net assets 1.81% 0.26%*
Portfolio turnover rate 27% 19%
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.03 $ (c)
</TABLE>
* Annualized.
(a) The total returns would have been lower had certain expenses not been
waived during the periods shown.
(b) Net investment income earned was less than $.01 per share. Computed using
average shares outstanding throughout the period.
(c) Fees or expenses voluntarily waived or borne by the manager were less than
$.01 per share.
(d) Computed using average shares outstanding throughout the period.
26 See accompanying notes to the financial statements.
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Foreign Fund (the "Fund") is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended,
as an open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24,
1985. The Declaration of Trust permits the Trustees to create an unlimited
number of series ("Funds"), each of which issues a separate series of
shares, and to subdivide a series of shares into classes.
The Fund seeks maximum total return through investment primarily in equity
securities of non-U.S. issuers.
Prior to January 9, 1998, the Fund offered three classes of shares: Class
I, Class II, and Class III. Effective January 9, 1998, Class I shares
ceased operations and all shares were exchanged for Class II shares, and
Class IV shares commenced operations. The principal economic difference
between the classes of shares is the level of shareholder service fee
borne by the classes. Eligibility for and automatic conversion between the
various classes of shares is generally based on the total amount of assets
invested with GMO, as more fully outlined in the Trust's prospectus.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost
which approximates market value. Other assets and securities for which no
quotations are readily available are valued at fair value as determined in
good faith by the Trustees or other persons acting at their direction.
27
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Certain investments in securities held by the Fund were valued on the
basis of a price provided by a principal market maker. These prices may
differ from the value that would have been used had a broader market for
the securities existed and the differences could be material to the
financial statements.
On September 1, 1998, the Malaysian government introduced capital controls
effectively eliminating trading of the Malaysian ringgit. Effective
February 4, 1999, the Malaysian government modified these restrictions.
Funds invested in Malaysia as of February 15, 1999 and repatriated within
one year of September 1, 1998, or one year from the date of the investment
if after September 1, 1998, are subject to a graduated repatriation tax on
the principal invested with a maximum of 30%. The Fund has recorded an
accrual in the amount of $829,585 for potential repatriation tax on
principal invested prior to February 15, 1999. The accrual for Malaysian
repatriation taxes is included in the change in net unrealized
appreciation (depreciation) on investments in the Statement of Operations.
Funds invested in Malaysia on or after February 15, 1999 are subject to a
repatriation tax on capital gains of 30% for currency repatriated in less
than one year of the initial investment and 10% for currency repatriated
after one year of the initial investment. The Fund has not made any
additional investments in Malaysia on or after February 15, 1999 and
accordingly no tax provision for capital gains has been accrued.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the prevailing
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at prevailing exchange rates when
accrued or incurred. The Fund does not isolate realized and unrealized
gains and losses attributable to changes in exchange rates from gains and
losses that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent net exchange gains and losses on disposition of
foreign currencies, currency gains and losses realized between the trade
and settlement dates on securities transactions and the difference between
the amount of investment income and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent amounts actually received
or paid.
Forward currency contracts
The Fund may enter into forward currency contracts in connection with
settling planned purchases or sales of securities or to hedge the currency
exposure associated with some or all of the Fund's portfolio securities. A
forward currency contract is an agreement between two parties to buy and
sell a currency at a set price on a future date. The market value of a
forward currency contract fluctuates with changes in forward currency
exchange rates. Forward currency contracts are marked to market daily and
the change in value is recorded by the Fund as an unrealized gain or loss.
Realized gains or losses equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed
are recorded upon delivery or receipt of the currency or, if a forward
currency contract is offset by entering into another forward currency
contract with
28
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
the same broker, upon settlement of the net gain or loss. These contracts
may involve market risk in excess of the unrealized gain or loss reflected
in the Fund's Statement of Assets and Liabilities. In addition, the Fund
could be exposed to risk if the counterparties are unable to meet the
terms of the contracts or if the value of the currency changes unfavorably
to the U.S. dollar. There were no forward foreign currency contracts
outstanding as of February 28, 1999.
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of delay in
recovery or even loss of rights in the collateral should the borrower of
the securities fail financially. The Fund receives compensation for
lending its securities. At February 28, 1999, the Fund loaned securities
having a market value of $40,418,074 collateralized by cash in the amount
of $42,940,577 which was invested in a short-term instrument.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryover for
federal income tax purposes. Therefore, no provision for federal income or
excise tax is necessary. Taxes on foreign interest and dividend income
have been withheld in accordance with the applicable country's tax treaty
with the United States. Dividends received by shareholders of the Fund
which are derived from foreign source income and foreign taxes paid by the
Fund are to be treated, to the extent allowable under the Code, as if
received and paid by the shareholders of the Fund.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. The Fund declares separate dividends from net
investment income on each class of shares.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
foreign currency and passive foreign investment company transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The
29
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
calculation of net investment income per share in the financial highlights
table excludes these adjustments.
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
----------------- ----------- ---------------
$(682,750) $682,750 $--
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date, or when the Fund is informed of the
ex-dividend date, if later. Interest income is recorded on the accrual
basis and is adjusted for the accretion of discounts. In determining the
net gain or loss on securities sold, the cost of securities is determined
on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds. Investment
income, common expenses and realized and unrealized gains and losses are
allocated pro-rata among the classes of shares of the Fund based on the
relative net assets of each class. Shareholder service fees, which are
directly attributable to a class of shares, are charged to that class'
operations.
Investment risk
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments of domestic securities.
These risks may involve adverse political and economic developments
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .75% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net
30
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
assets of each class at the annual rate of .22% for Class II shares, .15%
for Class III shares, and .09% for Class IV shares.
GMO agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding brokerage commissions, certain other transaction costs
(including stamp duties and transfer taxes), shareholder service fees and
extraordinary expenses) exceed .60% of average daily net assets.
Effective March 1, 1999, GMO's contractual management fee was reduced to
.60% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding brokerage
commissions, certain other transaction costs (including stamp duties and
transfer taxes), shareholder service fees and extraordinary expenses)
exceed the management fee.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999, was $10,667. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1999 aggregated
$300,940,708 and $289,021,174, respectively.
At February 28, 1999 the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
Gross
Aggregate Gross Unrealized Unrealized Net Unrealized
Cost Appreciation Depreciation Appreciation
--------------- ---------------- --------------- ---------------
$1,017,637,567 $217,094,029 $122,185,085 $94,908,944
4. Principal shareholder
At February 28, 1999, 12.26% of the outstanding shares of the Fund were
held by one shareholder.
31
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
Period from March 1, 1997
to January 9, 1998
-----------------------------------
Class I: Shares Amount
------------ ------------
Shares sold 826,358 $ 9,729,112
Shares issued to
shareholders in
reinvestment of
distributions 24,544 270,157
Shares repurchased (1,310,014) (14,265,159)
------------ ------------
Net decrease (459,112) $ (4,265,890)
============ ============
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1999 February 28, 1998
----------------------------- ----------------------------
Class II: Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold 854,704 $ 10,796,765 2,339,569 $ 25,766,240
Shares issued to
shareholders in
reinvestment of
distributions 146,654 1,773,377 59,960 659,581
Shares repurchased (2,597,721) (32,011,557) -- --
------------ ------------ ------------ ------------
Net increase
(decrease) (1,596,363) $(19,441,415) 2,399,529 $ 26,425,821
============ ============ ============ ============
</TABLE>
32
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Share transactions - continued
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1999 February 28, 1998
------------------------------- -------------------------------
Class III: Shares Amount Shares Amount
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Shares sold 17,082,138 $ 209,494,684 29,233,963 $ 347,802,219
Shares issued to
shareholders in
reinvestment of
distributions 1,616,582 19,533,092 851,431 9,367,832
Shares repurchased (10,176,725) (124,059,771) (23,128,254) (259,011,326)
------------- ------------- ------------- -------------
Net increase 8,521,995 $ 104,968,005 6,957,140 $ 98,158,725
============= ============= ============= =============
<CAPTION>
Period from January 9,
1998
(commencement of
Year Ended operations)
February 28, 1999 to February 28, 1998
------------------------------- -------------------------------
Class IV: Shares Amount Shares Amount
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Shares sold 445,359 $ 5,633,670 18,491,750 $ 202,184,682
Shares issued to
shareholders in
reinvestment of
distributions 128,073 1,542,577 -- --
Shares repurchased (7,653,734) (92,194,425) (339,056) (3,990,690)
------------- ------------- ------------- -------------
Net increase
(decrease) (7,080,302) $ (85,018,178) 18,152,694 $ 198,193,992
============= ============= ============= =============
</TABLE>
33
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
February 28, 1999
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1999, all the Fund's distributions are
from investment company taxable income, except that the Fund has designated
29.92% as net capital gain dividends.
The Fund has elected to defer to March 1, 1999 post-October currency losses of
$1,285,056.
34
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
GMO Foreign Fund
(A Series of GMO Trust)
Portfolio Managers
Mr. Jui Lai and Ms. Ann Spruill are responsible for the management of the GMO
International Active Division. Mr. Jui and Ms. Spruill have been portfolio
managers with GMO for eleven and nine years, respectively. The GMO Foreign Fund
is managed on a geographic basis by Ms. Spruill, Mr. Lai, Mr. Hoyt Ludington and
Mr. Richard Mattione.
Management Discussion and Analysis of Fund Performance
For the fiscal year ended February 28, 1999, the Class III shares of the GMO
Foreign Fund returned +0.5%, underperforming its MSCI EAFE benchmark, which
returned +4.9%, by 4.4% after fees. The underperformance was attributable to
stock selection, as country selection was neutral.
Eleven of the twenty equity markets within the Morgan Stanley Capital
International Europe, Australia, and Far East (EAFE) Index posted positive
returns in local currencies over the past twelve months, and thirteen of the
twenty posted positive returns in U.S. dollars. However, while the S&P 500 Index
returned +19.7%, the MSCI EAFE Index returned only +4.9%. The lower return of
the MSCI EAFE Index was the result of two major influences: continued weakness
in Asia and a moderation of returns in Europe.
Australia was the only Pacific market to show a rise in local currency and in
U.S. dollar terms during the fiscal year. The rise in U.S. dollar terms was a
mere 1%. Japan's index fell 11.2%, but recovered about half of that decline on a
mild rise in the currency. The other Pacific markets declined between 5.7% (New
Zealand) and 27.7% (Malaysia) in local currency terms. It should be noted that
Malaysia, because of its imposition of exchange controls, was removed from the
MSCI EAFE Index at the end of September 1998.
Europe returned 10.8% in U.S. dollar terms during the fiscal year. Four of the
markets beat the United States. Finland was the best industrial country market
during this time, returning 79.4% in U.S. dollar terms. Belgium, Italy and
France also beat the performance of the S&P 500. Five European markets fell
during the fiscal year. Norway had the worst performance, falling 22.4% in local
currency terms on concerns about the effects of weak oil prices. Currency
movements had a relatively mild effect on performance. Most continental
currencies were consolidated into the euro as of January 1, 1999. They had been
strong prior to the introduction of the euro but slipped back, and for the
fiscal year appreciated slightly less than 2% against the U.S. dollar. The
British pound moved in the opposite direction, declining almost 3% against the
U.S. dollar.
Our country selection was neutral during the fiscal year. The biggest single
negative factor was our position in emerging markets, which reduced performance
by 79 basis points. An underweight position in Finland, the best performing
market, cost 64 basis points. However, these losses were neutralized by other
positive country selection decisions. An underweight position in Japan (the Fund
started the fiscal year with a weight in Japan of 19.4% against the EAFE
benchmark weight of 24.5%), added 57 basis points, while overweight positions in
Belgium and Spain added 52 basis points and 47 basis points, respectively.
The key factor in the Fund's underperformance was weak stock selection. Value
(as measured by price to book, price to earnings and price to cash flow ratios,
along with dividend yield) performed poorly during the fiscal year,
underperforming the MSCI EAFE Index by 216 basis
<PAGE>
points. The only factor with positive returns was cheapness on cash flow, which
was helped by strength in telecom stocks and the interest in restructuring
stories (which often have gross cash flow but little earnings). The worst
performance was turned in by stocks cheap on price to book, the most traditional
value measure. These issues undershot the MSCI EAFE Index by 767 basis points
during the fiscal year. Our stock selection beat the markets in Italy, the
United Kingdom and Japan. However, we were behind in larger markets such as
Germany and France.
At the end of the fiscal year we held an 18.4% weight in Japan. This is 2.7%
underweight relative to the benchmark, or roughly half the underweight
maintained one year ago. On balance we have become somewhat more positive on
Japan. Japan's statistical positives are numerous, and, in some cases,
long-standing: the underperformance of the market, its attractiveness on price
to book ratio and an ROE that seems considerably below that which could be
realized. More recently there seems to be a broader recognition of the need for
restructuring so as to boost ROE, with many companies announcing restructuring
plans. Thus there has been some progress on one of the concerns mentioned last
year - that Japanese management was showing little interest in taking the truly
radical measures necessary to boost earnings, rather than the more modest
measures that at best allow short-term survival. We are currently most
overweight in Spain, Italy, Australia and Belgium. We are most underweight in
Switzerland, with roughly comparable underweights in the United Kingdom and
Japan.
Currency Hedging
Currency hedging added 1 basis point to our total return over the past fiscal
year. This was due primarily to a hedge of the 0.3% Malaysian ringgit exposure.
This position had to be (and was) closed in September 1998 after the imposition
of exchange controls.
Our policy is generally to be unhedged, recognizing that in doing so we achieve
the desired exposure to the underlying real assets (the business operations).
However, to protect the dollar value of our investments, we will on occasion
hedge out a particular currency, either because it is significantly overvalued
or because the currency seems at risk due to unfavorable economic developments.
At the end of the fiscal year there were no hedges in place.
Malaysia Valuation
With the imposition of foreign exchange controls in Malaysia, it was necessary
to review the valuation of our holdings there. Initially, we applied a 35%
discount, which had been reduced to 30% at the end of the fiscal year (in line
with the schedule announced in mid-February for gradual removal of those
controls). We anticipate adjusting that discount in line with the schedule
announced by the government, which would bring the discount to zero in September
1999 if the government follows through on its timetable.
MSCI used the imposition of exchange controls to review its posture on Malaysia.
Effective at the end of September 1998, Malaysia was removed from all of the
industrial country benchmarks that MSCI produces, including the MSCI EAFE
benchmark. MSCI was using only a 15% discount on Malaysian stocks at the end of
the fiscal year but, if the timetable is followed, both GMO and MSCI will be
using the same 0% discount in September 1999.
Emerging Markets
Emerging markets have grown considerably in recent years in terms of the number
of investable markets and the number of stocks listed, although the sharp
setback last year in a number of the markets reduced market capitalization. Our
investments in emerging markets have been on an opportunistic stock-picking
basis using GMO's traditional long-term value investment philosophy. Our policy
is to invest up to 10% of the portfolio in emerging markets, subject to
<PAGE>
stock selection opportunities and attractive valuations relative to the
developed markets. At the end of the fiscal year 3.6% of the GMO Foreign Fund
was invested in emerging markets, with South Africa (a recent investment) almost
exactly half of the emerging exposure. Because of the extremely weak performance
of emerging markets, our exposure there diminished our returns by 79 basis
points during the past fiscal year, and thus worsened our performance relative
to the MSCI EAFE Index.
Outlook
The Foreign Fund is managed with a long-term investment horizon and consequent
low turnover. We typically buy company stocks at relatively low price to
earnings, low price to cash flow, low price to book or asset ratios, and high
dividend yield. Currently the Foreign Fund stands at a discount to the market on
the first three of these ratios, while having a higher dividend yield.
We believe that this is an opportune time to invest in foreign markets. In
Europe we see an increasing number of companies starting to adopt a more
positive attitude to shareholder value which, in line with the U.S. experience,
should impact returns positively. In much of Asia there has been a return to
realistic valuations, along with a greater recognition of the need to change
earlier business practices and to restructure. Furthermore, the relative
inefficiencies of foreign markets, along with the attractive position of value
stocks, should allow us to achieve superior returns.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Foreign Fund Class III Shares and the MSCI EAFE Index
As of February 28, 1999
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Since
1 Year 5 Year 10 Year Inception
- --------------------------------------------------------------------------------
9/30/96
Class II 0.4% n/a n/a 9.5%
- --------------------------------------------------------------------------------
Class III 0.5% 8.6% 10.4% n/a
- --------------------------------------------------------------------------------
1/9/98
Class IV 0.5% n/a n/a 10.2%
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
GMO Foreign Fund
Date Class III Shares MSCI EAFE Index
---- ---------------- ---------------
1/31/89
2/28/89 10,000 10,000
3/31/89 10,062 9,804
6/30/89 10,125 9,199
9/30/89 11,470 10,339
12/31/89 12,198 10,807
3/31/90 12,091 8,670
6/30/90 12,926 9,498
9/30/90 10,483 7,485
12/31/90 11,001 8,273
3/31/91 11,941 8,888
6/30/91 11,241 8,403
9/30/91 12,401 9,123
12/31/91 12,359 9,276
3/31/92 12,384 8,175
6/30/92 13,263 8,348
9/30/92 12,025 8,474
12/31/92 11,789 8,147
3/31/93 13,213 9,124
6/30/93 14,043 10,041
9/30/93 15,430 10,707
12/31/93 16,642 10,800
3/31/94 17,284 11,177
6/30/94 17,598 11,748
9/30/94 18,025 11,760
12/31/94 17,726 11,640
3/31/95 17,591 11,857
6/30/95 18,722 11,943
9/30/95 19,796 12,441
12/31/95 20,181 12,944
3/31/96 20,760 13,318
6/30/96 21,526 13,528
9/30/96 21,569 13,512
12/31/96 23,069 13,727
3/31/97 23,286 13,513
6/30/97 26,083 15,266
9/30/97 27,127 15,158
12/31/97 24,652 13,970
3/31/98 27,861 16,025
6/30/98 27,596 16,195
9/30/98 24,031 13,892
12/31/98 28,092 16,761
2/28/99 26,929 16,313
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period. The Fund commenced
operations on June 28, 1996 subsequent to a transaction involving, in essence,
the reorganization of the GMO International Equities Pool of the Common Fund for
Non-Profit Organizations (the "GMO Pool") as the Foreign Fund. All information
relating to the time periods prior to June 28, 1996 relates to the GMO Pool.
Performance for Class IV and Class II shares may vary due to different
shareholder service fees. Past performance is not indicative of future
performance. Information is unaudited.
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Global Properties Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Global Properties Fund at
February 28, 1999 and the results of its operations, the changes in its net
assets and the financial highlights for the periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 22, 1999
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
REAL ESTATE INVESTMENTS - 97.9%
Canada - 10.3%
13,700 Brookfield Properties Corp 163,365
9,000 Canadian Hotel Income Properties 47,698
37,722 Concord Pacific Group * 17,493
49,591 Oxford Properties Group * 497,717
4,000 Trizec Hahn Corp (Sub-Voting) REIT 77,750
-------------
804,023
-------------
Finland - 1.4%
20,000 Sponda Oyj 113,068
-------------
France - 13.6%
5,163 Compagnie Fonciere Klepierre 460,783
1,357 Silic 235,364
9,101 Sophia SA 367,655
-------------
1,063,802
-------------
Hong Kong - 0.7%
31,275 Great Eagle Holdings Ltd 28,862
115,000 Tai Cheung Holdings Ltd 25,382
-------------
54,244
-------------
Japan - 7.6%
8,000 Daibiru Corp 47,872
5,000 Hankyu Realty Co Ltd 18,584
10,000 Heiwa Real Estate Co Ltd 27,054
5,000 Keihanshin Real Estate 18,331
26,000 Mitsubishi Real Estate Co Ltd 256,603
13,000 Mitsui Fudosan Co Ltd 104,197
7,000 Sankei Building Co Ltd 21,239
11,000 Sumitomo Realty and Development Co Ltd 35,415
6,180 TOC Co Ltd 51,513
5,000 Tokyo Rakutenchi 14,159
-------------
594,967
-------------
Netherlands - 9.0%
17,555 German City Estates NV (Bearer) 194,637
2,000 Melia Inversiones Americanas NV * 67,534
5,779 Nagron Nationaal Grandbezit NV 145,275
2,058 Vastned Retail NV 113,071
4,972 Vastned (Offices) NV 182,298
-------------
702,815
-------------
New Zealand - 6.8%
821,458 Trans Tasman Properties Ltd 172,210
1,736,363 Trans Tasman Properties Ltd (Convertible) 364,011
-------------
536,221
-------------
See accompanying notes to the financial statements. 1
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Singapore - 0.9%
25,000 DBS Land Ltd 30,923
20,000 Singapore Land Ltd 39,489
-------------
70,412
-------------
Sweden - 5.2%
140,500 Hufvudstaden AB Class A 407,197
-------------
United Kingdom - 11.9%
1,926,166 Hemingway Properties Plc 678,858
100,000 Nursing Home Properties 251,514
-------------
930,372
-------------
United States - 30.5%
6,000 Arden Realty Group Inc REIT 140,250
4,500 Bedford Properties Investments Inc REIT 71,438
3,000 Boston Properties Inc REIT 96,938
3,000 Bradley Real Estate Inc REIT 57,375
2,000 Brandywine Realty Trust REIT 32,875
8,500 Crescent Real Estate Equities REIT 177,438
800 Crestline Capital Corp REIT 10,200
4,500 Eastgroup Properties Inc REIT 78,750
5,000 Felcor Lodging Trust Inc REIT 118,125
10,200 First Industrial Realty Trust Inc REIT 263,925
3,000 Gables Residential Trust REIT 69,375
2,000 Glimcher Realty Trust REIT 29,625
8,696 Host Marriott Corp REIT 94,026
18,000 Meditrust Companies 220,500
2,000 Parkway Properties Inc REIT 52,750
20,498 Patriot American Hospitality REIT Preferred 111,458
360 Patriot American Hospitality REIT Preferred Series B 8,550
3,500 Prentiss Properties Trust REIT 70,000
6,000 Reckson Associates Realty Corp 127,500
960 Reckson Service Industries Inc * 4,800
4,000 Simon Property Group Inc REIT 101,750
3,000 Smith (Charles E) Residential Realty REIT 88,125
7,000 Starwood Hotels & Resorts REIT 217,000
5,000 Urban Shopping Centers Inc REIT 150,000
-------------
2,392,773
-------------
TOTAL REAL ESTATE INVESTMENTS (Cost $9,748,600) 7,669,894
-------------
2 See accompanying notes to the financial statements.
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Value ($)
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS - 97.9%
(Cost $9,748,600) 7,669,894
Other Assets and Liabilities (net) - 2.1% 161,937
-------------
TOTAL NET ASSETS - 100.0% $ 7,831,831
=============
Notes to the Schedule of Investments:
* Non-income producing security.
REIT - Real Estate Investment Trust
See accompanying notes to the financial statements. 3
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities - February 28, 1999
- --------------------------------------------------------------------------------
Assets:
Investments, at value (cost $9,748,600) (Note 1) $ 7,669,894
Foreign currency, at value (cost $34,560) 34,562
Cash 53,853
Receivable for investments sold 87,777
Dividends receivable 4,902
Foreign withholding taxes receivable 19,217
Receivable for expenses waived or borne by Manager (Note 2) 5,736
--------------
Total assets 7,875,941
--------------
Liabilities:
Payable to affiliate for (Note 2):
Management fee 4,581
Shareholder service fee 915
Accrued expenses 38,614
--------------
Total liabilities 44,110
--------------
Net assets $ 7,831,831
==============
Net assets consist of:
Paid-in capital $ 9,920,598
Distributions in excess of net investment income (134,280)
Accumulated undistributed net realized gain 121,631
Net unrealized depreciation (2,076,118)
--------------
$ 7,831,831
==============
Net assets attributable to Class III Shares $ 7,831,831
==============
Shares outstanding - Class III 984,265
==============
Net asset value per share - Class III $ 7.96
==============
4 See accompanying notes to the financial statements.
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
Statement of Operations - Year Ended February 28, 1999
- --------------------------------------------------------------------------------
Investment income:
Dividends (net of foreign tax expense of $24,879) $ 421,130
Interest 16,379
------------
Total income 437,509
------------
Expenses:
Management fee (Note 2) 67,365
Custodian fees 60,290
Audit fees 35,203
Transfer agent fees 25,757
Legal fees 183
Trustees fees (Note 2) 182
Miscellaneous 252
Fees waived or borne by Manager (Note 2) (74,378)
------------
114,854
Shareholder service fee - Class III (Note 2) 13,472
------------
Net expenses 128,326
------------
Net investment income 309,183
------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 140,137
Foreign currency and foreign currency related transactions 18,140
------------
Net realized gain 158,277
------------
Change in net unrealized appreciation (depreciation) on:
Investments (2,051,199)
Foreign currency and foreign currency related transactions 3,527
------------
Net unrealized loss (2,047,672)
------------
Net realized and unrealized loss (1,889,395)
------------
Net decrease in net assets resulting from operations $ (1,580,212)
============
See accompanying notes to the financial statements. 5
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ---------------------------------------------------------------------------------------------------------
Year Ended Year Ended
February 28, 1999 February 28, 1998
------------ ------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 309,183 $ 287,620
Net realized gain 158,277 86,654
Change in net unrealized appreciation (depreciation) (2,047,672) 15,639
------------ ------------
Net increase (decrease) in net assets resulting from operations (1,580,212) 389,913
------------ ------------
Distributions to shareholders from:
Net investment income - Class III (329,064) (306,831)
In excess of net investment income - Class III (38,660) --
Net realized gains - Class III (221,135) --
------------ ------------
(588,859) (306,831)
------------ ------------
Net share transactions - Class III (Note 5) (60,157) 513,622
------------ ------------
Total increase (decrease) in net assets (2,229,228) 596,704
Net assets:
Beginning of period 10,061,059 9,464,355
------------ ------------
End of period (including distributions in excess of net
investment income of $134,280 and $111,901,
respectively.) $ 7,831,831 $ 10,061,059
============ ============
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------------------------
Year Ended Year Ended Period Ended
February 28, February 28, February 28,
1999 1998 1997 *
--------- --------- ---------
<S> <C> <C> <C>
Net asset value, beginning of period $ 10.14 $ 10.06 $ 10.00
--------- --------- ---------
Income from investment operations:
Net investment income 0.40 0.30 0.04
Net realized and unrealized gain (loss) (1.97) 0.10 0.02 (b)
--------- --------- ---------
Total from investment operations (1.57) 0.40 0.06
--------- --------- ---------
Less distributions to shareholders from:
Net investment income (0.33) (0.32) --
In excess of net investment income (0.06) -- --
Net realized gains (0.22) -- --
--------- --------- ---------
Total distributions (0.61) (0.32) --
--------- --------- ---------
Net asset value, end of period $ 7.96 $ 10.14 $ 10.06
========= ========= =========
Total Return (a) (15.87%) 4.07% 0.60%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 7,870 $ 10,061 $ 9,464
Net expenses to average
daily net assets 1.43% 1.43% 1.98%**
Net investment income to average
daily net assets 3.44% 2.89% 2.39%**
Portfolio turnover rate 26% 15% 0%
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.10 $ 0.08 $ 0.05
</TABLE>
* Period from December 20, 1996 (commencement of operations) to February 28,
1997.
** Annualized.
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(b) The amount shown for a share outstanding does not correspond with the
aggregate net realized and unrealized gain (loss) on investments for the
period ended February 28, 1997 due to the timing of purchases and
redemptions of Fund shares in relation to fluctuating market values of the
investments of the Fund.
See accompanying notes to the financial statements. 7
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Global Properties Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on June
24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series into classes.
The Fund seeks long-term capital growth primarily through investment in
securities of issuers throughout the world which are engaged in or related
to the real estate industry or which own significant real estate assets.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost
which approximates market value. Other assets and securities for which no
quotations are readily available are valued at fair value as determined in
good faith by the Trustees or other persons acting at their direction.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the prevailing
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at prevailing exchange rates when
accrued or incurred The Fund does not isolate realized and unrealized
gains and losses attributable to changes in exchange rates from gains and
losses that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent net exchange gains and losses on disposition of
foreign currencies, currency gains and losses
8
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
realized between the trade and settlement dates on securities transactions
and the difference between the amount of investment income and foreign
withholding taxes recorded on the Fund's books and the U.S. dollar
equivalent amounts actually received or paid.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary. Taxes on foreign interest and dividend income have been
withheld in accordance with the applicable country's tax treaty with the
United States. Dividends received by shareholders of the Fund which are
derived from foreign source income and foreign taxes paid by the Fund are
to be treated, to the extent allowable under the Code, as if received and
paid by the shareholders of the Fund.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
foreign currency and passive foreign investment company transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
----------------- ------------------------ ---------------
$36,162 $(35,206) $(956)
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
9
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
The Fund's investments in REIT equity securities may at times result in
the Fund's receipt of cash in excess of its interest in the REIT's
earnings. The excess amount cannot be determined by the Fund at the time
of receipt. If the Fund distributes amounts which are subsequently
determined to exceed REIT earnings, such amounts would constitute a return
of capital to Fund shareholders for federal income tax purposes.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date, or when the Fund is informed of the
ex-dividend date, if later. Interest income is recorded on the accrual
basis and is adjusted for the accretion of discounts. In determining the
net gain or loss on securities sold, the cost of securities is determined
on the identified cost basis. Dividends representing a return of capital
are reflected as a reduction of cost.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .60% of the amount
invested. In the case of cash redemptions, the fee is .30% of the amount
redeemed. All purchase premiums and redemption fees are paid to and
recorded by the Fund as paid-in capital. Purchase premiums are included as
part of "shares sold" and redemption fees are included as part of "shares
repurchased", respectively, as summarized in Note 5. For the year ended
February 28, 1999, the Fund received $310 in purchase premiums and $2,046
in redemption fees. There is no premium for reinvested distributions.
Investment risks
There are certain additional risks involved in investing in real estate
related securities rather than a more diversified portfolio of
investments. Since the Fund's investments are concentrated in real estate
related securities, the value of its shares can be expected to change in
light of factors affecting the real estate industry, including local or
regional economic conditions, changes in zoning laws, changes in real
estate values and property taxes, and changes in interest rates. The value
of the Fund's shares may fluctuate more widely than the value of shares of
a portfolio that invests in a broader range of industries. Additionally,
there are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets.
10
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .75% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding custody fees, brokerage commissions, certain other transaction
costs (including stamp duties and transfer taxes), shareholder service
fees and extraordinary expenses) exceed .60% of average daily net assets.
Effective March 1, 1999, GMO's contractual management fee was reduced to
.60% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding custody fees,
brokerage commissions, certain other transaction costs (including stamp
duties and transfer taxes), shareholder service fees and extraordinary
expenses) exceed the management fee.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999, was $182. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1999, aggregated
$2,219,255 and $2,505,490, respectively.
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in the value of investments held
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
------------------- ------------------- ------------------ ------------------
<S> <C> <C> <C>
$9,797,163 $222,747 $2,350,016 $2,127,269
</TABLE>
4. Principal shareholder
At February 28, 1999, 69% of the outstanding shares of the Fund were held
by one shareholder, who is an affiliate of the Manager.
11
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including the purchase premiums and redemption fees received by
the Fund, were as follows:
Year Ended Year Ended
Class III: February 28, 1999 February 28, 1998
---------------------- ---------------------
Shares Amount Shares Amount
--------- --------- --------- ---------
Shares sold 6,092 $ 51,612 24,144 $ 243,500
Shares issued to
shareholders in
reinvestment of
distributions 65,429 570,231 27,655 270,122
Shares repurchased (79,398) (682,000) -- --
--------- --------- --------- ---------
Net increase
(decrease) (7,877) $ (60,157) 51,799 $ 513,622
========= ========= ========= =========
12
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
February 28, 1999
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1999, all the Fund's distributions are
from investment company taxable income, except that the Fund has designated .01%
as net capital gain dividends.
13
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
GMO Global Properties Fund
(A Series of GMO Trust)
Portfolio Managers
Mr. Eyk Van Otterloo and Mr. Wilson Magee are primarily responsible for the
day-to-day management of the Fund. Mr. Van Otterloo has been with GMO since its
founding in 1977. Mr. Magee joined GMO in January 1997 following 15 years of
experience in the real estate industry.
Management Discussion and Analysis of Performance
The Class III shares of the Global Properties Fund (GPF) returned -15.9% during
the twelve months ended February 28, 1999. During the same period, the Salomon
Brothers World Property Equity Index returned -19.3%.
Securities of real estate companies posted poor returns for the second
consecutive year. During the last twelve months, four countries contributed
significantly to the poor performance of global property stocks - Hong Kong,
Japan, United Kingdom and the United States. Together, these countries
constitute over 70% of the benchmark capitalization.
Fund performance was enhanced by country allocations. Overweights in France and
the Netherlands were very positive contributors to relative performance as were
under-weights of the United States and Hong Kong. Our allocation to the US was
half that of its benchmark weight and to Hong Kong, less than one-third, but we
maintained neutral weights in Japan and the United Kingdom. Securities positions
in the UK were defensive and enabled the Fund to outperform the UK by over 900
basis points. Stock selection was generally negative in terms of value added,
however. Stock selection added value in Japan, the Netherlands and the UK, but
was negative in Australia (New Zealand), Canada and the US. Foreign exchange
added value although the Fund did not employ any currency hedges during the
year.
Security Selection
Property stocks are selected using a three-tier process. First, property markets
are analyzed to identify prospective fundamental property trends within the
context of macroeconomic trends that are meaningful to property investment,
namely interest rate changes, inflation, real GDP growth and demographics.
Second, country allocations are established utilizing our country models of
relative real estate and securities index values. Initial currency hedging
strategies are also established. Finally, fundamental securities analysis is
employed to select securities of undervalued companies.
<PAGE>
Outlook
The outlook for property stocks varies by country. Within Europe, France, the
Netherlands and Sweden markets are recovering with little commercial
construction and improving prospects for property companies. The repricing of UK
property stocks during the second half of 1998 makes them more attractive
despite near equilibrium conditions in commercial markets. Both Canada and the
US offer strong economic and property fundamentals combined with the most
attractive valuations found in any investable countries. Momentum for property
stocks remains weak in both countries, however, and we are nervous about
possible over-capacity in some US cities.
Following steep declines in prices for property companies in Asia, these markets
have begun to rebound lately. Returns from trough prices have been attractive,
but we are nervous that current prices reflect the anticipation of an immediate
turnaround. In almost every Asian market, property fundamentals are well below
those seen during peak years and supplies of most property types are excessive.
Valuing Asian property companies is particularly difficult as fundamentals
bottom. We are optimistic about the long-term outlook for property companies
with significant commercial exposure in Japan, but are negative about Australia,
particularly companies with exposure to Sydney office where oversupply looms as
a long-term problem.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Global Properties Fund Class III Shares and the
Salomon Smith Barney World Equity Property Index
As of February 28, 1999
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Since
1 Year Inception
- --------------------------------------------------------------------------------
12/20/96
Class III -16.6% -6.0%
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Date GMO Global Properties Fund Salomon Smith Barney
Class III Shares World Equity Property Index
---- --------------------- ---------------------------
<S> <C> <C>
1/31/96
12/20/96 9,940 10,000
12/31/96 10,010 10,238
3/31/97 10,049 9,901
6/30/97 10,318 10,728
9/30/97 10,989 10,920
12/31/97 10,191 9,211
3/31/98 10,232 9,481
6/30/98 9,842 8,349
9/30/98 8,761 7,398
12/31/98 9,239 7,992
2/28/99 8,729 7,708
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 60 bp on the purchase and 30 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Information is
unaudited.
<PAGE>
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Tax-Managed International Equities Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statement of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Tax-Managed International
Equities Fund at February 28, 1999 and the results of its operations, the
changes in its net assets and the financial highlights for the period July 29,
1998 (commencement of operations) through February 28, 1999, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at February 28, 1999 by
correspondence with the custodian and brokers, provides a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 16, 1999
<PAGE>
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 94.9%
Australia - 4.1%
7,700 Amcor Ltd 38,308
6,000 Australia and New Zealand Banking Group Ltd 38,747
7,500 Bank of Western Australia 14,437
30,100 Burswood Ltd 20,373
1,600 Coca Cola Amatil Ltd 6,301
7,500 Commonwealth Bank of Australia 112,702
4,700 Consolidated Rutile Ltd * 2,130
18,200 Crown Limited * 8,928
8,700 Email Ltd 14,586
9,700 National Australia Bank Ltd 161,723
17,000 News Corp Ltd 119,285
2,800 Normandy NFM Ltd 5,738
5,000 OPSM Protector Ltd 9,376
16,000 Pioneer International Ltd 32,240
16,800 PMP Communications Ltd 32,965
7,400 Resolute Ltd 5,192
26,600 Telstra Corporation 135,706
1,700 Weston (George) Foods Ltd 7,073
-------------
765,810
-------------
Austria - 1.2%
300 Austria Tabakwerke AG 22,160
1,096 Austrian Airlines 36,094
1,000 Boehler Uddeholm (Bearer) 47,928
200 Brau Union AG 10,407
150 Oesterreichische Brau Beteiligungs AG 7,148
309 OMV AG 28,493
2,100 Voest-Alpine Stahl AG 64,686
-------------
216,916
-------------
Belgium - 0.5%
500 Electrafina NPV 59,498
400 Solvay Et Cie 27,488
-------------
86,986
-------------
Denmark - 0.6%
100 Codan Forsikring 10,631
80 Kapital Holding AS 3,928
180 Tele Danmark AS Class B 21,635
2,600 Tryg Baltica Forsikring 65,264
200 Unidanmark AS Class A (Registered) 14,234
-------------
115,692
-------------
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Finland - 0.4%
4,000 Enso OY Class R 35,348
1,800 Kemira OY 10,868
4,000 Rautaruukki OY 25,029
-------------
71,245
-------------
France - 11.3%
1,000 Axa SA 130,413
1,630 Banque Nationale de Paris 130,084
3,330 Banque Paribas Class A 286,957
20 Bongrain 7,662
100 Brocacef Holding 1,570
140 Chargeurs International SA 6,455
1,170 Christian Dior 134,473
40 Colas SA 7,592
500 Compagnie Generale d'Industrie et de Participations 27,142
570 Compagnie Parisienne de Reescompte 22,720
820 Credit Local de France SA 110,269
280 Credit National 15,983
100 Damart SA 6,861
40 Eiffage SA 2,815
10 Elf Gabon 857
300 Eramet 11,362
710 Eridania Beghin-Say SA 102,881
40 Esso S.A.F. 3,245
10 Fromageries Bel SA 7,245
210 Gaz Et Eaux 9,279
1,890 Groupe Danone 470,760
10 Guyenne Et Gascogne 4,171
80 Imetal 9,485
40 Nord-Est 1,155
850 Pernod Ricard 50,293
2,600 Saint-Gobain 404,148
90 Sylea (Bearer) 4,446
9,390 Usinor Sacilor 115,242
120 Vallourec 3,429
-------------
2,088,994
-------------
Germany - 8.2%
4,200 Bankgesellschaft Berlin AG 63,856
9,850 BASF AG 341,145
2,700 Bayer AG 95,587
1,150 Bilfinger & Berger 21,587
4,300 Deutsche Telekom AG 197,310
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Germany - continued
400 Douglas Holdings AG 19,057
800 Heidelberg Port-Zement 54,448
100 Leirheit AG 3,403
500 Munich Reinsurance (Registered) 100,883
500 Munich Reinsurance * 99,731
200 Thyssen AG 40,507
9,000 Veba AG 480,155
6 Walter Bau AG 566
-------------
1,518,235
-------------
Hong Kong - 2.8%
75,000 Amoy Properties Ltd 54,209
21,000 Cathay Pacific Airways Ltd 23,446
71,000 Chinese Estates Holdings Ltd 10,813
7,000 CLP Holdings Ltd 32,977
54,000 Hang Lung Development Co Ltd 51,925
4,000 Hang Seng Bank 32,526
10,000 Henderson Land Development Co Ltd 43,497
20,000 Hong Kong Land Holdings 21,000
9,215 Hong Kong Telecommunications 15,402
40,000 Jardine International Motor Holdings Ltd 14,456
50,000 Mandarin Oriental 24,250
29,000 New Asia Realty & Trust Class A 23,955
38,212 Sino Land 18,372
18,000 Swire Pacific Ltd Class A 73,415
50,000 Tai Cheung Holdings Ltd 11,035
111,000 Wheelock and Co Ltd 68,410
-------------
519,688
-------------
Hungary - 0.3%
3,000 Danubius Hotel & Spa * 56,653
-------------
Indonesia - 0.2%
80,000 PT Daya Guna Samudera 38,925
-------------
Ireland - 0.9%
3,800 Crean (James) 5,423
2,000 Elan Corp ADR * 153,375
3,000 Greencore 11,757
-------------
170,555
-------------
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Italy - 6.2%
3,000 Banco Ambrosiano Veneto SPA (Non Convertible) 7,937
4,000 Burgo (Cartiere) SPA 22,833
13,000 Caffaro 15,127
1,000 Danieli & Co Di Risp (Non Convertible) 2,810
70,000 ENI SPA 403,423
1,000 Fila Holding SPA ADR 8,813
14,000 IFIL Finanziaria di Partecipazioni SPA (Non Convertible) 31,198
5,750 Luxottica Group ADR 65,766
10,000 Pirelli & Co 16,356
2,000 Pirelli & Co di Risp 3,205
280 Reno de Medici SPA * 695
1,000 Rinascente 4,435
5,090 San Paolo IMI SPA 88,842
4,000 Sirti SPA 23,755
5,000 Sorin Biomedica SPA 19,485
64,000 Telecom Italia Mobile SPA 429,967
2,000 Unicem Di Risp 9,111
-------------
1,153,758
-------------
Japan - 11.0%
2,000 Aida Engineering 6,405
1,000 Aoki International 4,635
7,000 Atsugi Nylon Industrial 5,310
16,000 Cosmo Oil Co Ltd 22,655
11,000 Daido Steel Co Ltd 14,834
4,000 Dainippon Pharmaceutical Co Ltd 16,317
3,000 Daio Paper Corp 12,364
1,000 Daito Trust Construction Co Ltd 8,647
3,000 Ezaki Glico Co Ltd 17,674
1,000 Fanuc Co 37,337
18,000 Fuji Bank 70,847
7,000 Fukuyama Transporting Co Ltd 27,198
4,000 Furukawa Co Ltd 5,360
4,000 Heiwa Corp 56,974
21,000 Hitachi Ltd 132,743
2,000 Honda Motor Co Ltd 77,033
5,000 Itoham Foods Inc 20,480
2,000 Izumiya Co Ltd 17,868
4,000 Japan Radio Co 15,137
2,000 Joshin Denki Co Ltd 5,461
6,000 Kamigumi Co Ltd 26,397
4,000 Kansai Paint Co 10,518
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Japan- continued
6,000 Kawasaki Heavy Industries Ltd 11,479
1,000 Kissei Pharmaceutical Co Ltd 16,983
1,000 Kokusai Denshin Denwa 34,724
18,000 Kubota Corp 44,298
5,000 Kurabo Industries Ltd 5,183
1,000 Kyushu Electric Power Co Inc 15,929
1,000 Maeda Road Construction 5,900
50,000 Marubeni Corp 83,017
6,000 Meiji Seika Kaisha Ltd 24,374
2,000 Mitsubishi Belting 4,973
22,000 Mitsubishi Heavy Industries 81,770
17,000 Mitsubishi Material 29,802
5,000 Mitsubishi Paper Mills Ltd 8,344
14,000 Mitsui Trust & Banking Co Ltd 13,805
3,000 Mizuno Corporation 7,965
1,000 MOS Food Services 12,364
3,000 Nagase & Co 11,429
1,000 Nintendo Co Ltd 84,282
5,000 Nippon Beet Sugar 8,007
5,000 Nippon Flour Mills Co Ltd 12,979
20,000 Nippon Oil Co Ltd 70,291
14,000 Nippon Shinpan Co 28,909
7,000 Nippon Suisan Kaisha Ltd * 7,493
3,000 Nisshin Oil Mills Ltd 7,307
4,000 NOF Corp 7,181
17,000 Orient Corp 38,255
1,000 Ryosan Co 16,856
1,000 Sankyo Co Ltd 21,492
10,000 Sanyo Electric Company 28,234
4,000 Seino Transportation Co Ltd 21,239
5,000 Sekisui House Ltd 51,201
1,000 Seven-Eleven Japan 75,095
4,000 Shikoku Electric Power 63,043
6,000 Shionogi and Co Ltd 46,473
8,000 Snow Brand Milk Products Co Ltd 38,769
4,000 Stanley Electric Co Ltd 12,878
5,000 Sumitomo Corp 25,116
2,000 Suzuki Motor Corp 22,082
2,000 Takara Standard Co 14,176
2,000 Takeda Chemical Industries Ltd 68,774
7,000 Toagosei Co Ltd 12,035
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Japan - continued
7,000 Tokyo Ink Manufacturing Co Ltd 14,218
2,000 Toshiba Tungaloy Co Ltd 5,478
4,000 Toyo Seikan Kaisha 76,190
3,000 Toyo Suisan Kaisha 23,742
5,000 Yakult Honsha Co Ltd 28,066
6,000 Yamaha Motor Co 39,646
5,000 Yodogawa Steel Works 17,910
9,000 Yokohama Rubber Co 25,411
-------------
2,037,361
-------------
Korea - 1.8%
3,300 Dongwon Securities 43,155
8,150 Housing & Commercial Bank 126,230
4,274 Hyundai Industrial Development 22,147
1,100 Korea Electric Power Corp 25,983
750 Korea Electric Terminal Co 34,021
2,100 Pacific Chemical Corp 29,007
71 Samsung Electronics 5,002
71 SK Telecom (a) 54,055
-------------
339,600
-------------
Malaysia - 0.1%
20,000 Berjaya Group Berhad 4,368
2,000 Cement Industries of Malaysia Berhad 1,016
4,000 Edaran Otomobil Berhad 6,158
6,000 Golden Hope Plantations Berhad 6,000
1,000 Oriental Holdings Berhad 1,645
-------------
19,187
-------------
Mexico - 0.1%
4,300 TV Azteca SA ADR 22,575
-------------
Netherlands - 3.8%
800 Aegon NV 83,517
600 Akzo Nobel NV 22,756
500 Boskalis Westminster CVA 6,422
880 Buhrmann NV Maastricht 16,471
400 DSM NV (Bearer) 34,689
100 Gamma Holdings NV 4,638
500 Hollandsche Beton Groep NV 4,775
700 Hoogovens & Staalf CVA 21,093
4,900 Kon Bolswessanen 67,237
2,700 Koninklijke KPN NV 141,676
100 Koninklijke Ten Cate 3,837
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Netherlands - continued
3,100 Royal Dutch Petroleum 136,121
1,400 Unilever NV CVA 100,971
400 Wereldhave NV 21,560
200 Wolters Kluwer CVA 38,531
-------------
704,294
-------------
New Zealand - 1.8%
83,000 Air New Zealand Class B 137,461
200,000 Brierley Investment Ltd 46,121
40,000 Fletcher Challenge Buildings 61,844
10,000 Telecom Corp of New Zealand * 50,838
165,000 Trans Tasman Properties Ltd 34,591
-------------
330,855
-------------
Norway - 0.9%
23,000 Christiania Bank OG Kreditkasse 82,511
19,500 Den Norske Bank Class A 68,477
600 Dyno Industrier AS 8,943
200 Norsk Hydro AS 6,783
600 SAS Norge ASA Class B 4,926
-------------
171,640
-------------
Portugal - 1.6%
570 Cimpor Cimentos de Portugal SA (Registered) 15,893
12,500 Electricidade de Portugal 269,498
1,000 Mota & Co. SA 11,164
-------------
296,555
-------------
Russia - 0.2%
2,000 Lukoil Holding Co ADR 42,000
-------------
Singapore - 5.1%
105,000 Chuan Hup Holdings Ltd 37,195
1,500 Creative Technology Ltd 19,425
17,000 Cycle & Carriage Ltd 62,195
4,000 Development Bank of Singapore (Foreign Registered) 29,036
5,000 Fraser & Neave 16,986
740,000 Goldtron * 51,568
74,000 Hai Sun Hup Group Ltd 19,768
100,000 Haw Par Brothers International Ltd 112,079
17,000 Hotel Properties Ltd 7,404
59,000 Jardine Strategic Holdings Ltd 85,550
15,000 Overseas Chinese Banking (Foreign Registered) 100,174
13,000 Overseas Union Bank Ltd (Foreign Registered) 47,561
17,600 Singapore Airlines Ltd (Foreign Registered) 129,803
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Singapore - continued
75,000 Straits Trading Co Ltd 66,202
18,000 United Overseas Bank (Foreign Registered) 105,575
208,000 Van Der Horst Ltd * 46,504
-------------
937,025
-------------
Spain - 4.1%
7,400 Banco Bilbao Vizcaya SA 109,584
100 Empresa Nacional de Celulosas SA 1,651
5,600 Endesa 148,398
2,000 Europistas Concesionaria Espanola SA * 16,905
200 Fabricacion de Automoviles Renault de Espana SA * 7,904
6,600 FENOSA SA 112,227
1,100 Hidroelec Cantabrico 56,452
5,800 Repsol SA 304,977
-------------
758,098
-------------
Sweden - 1.4%
8,800 Astra AB Class A 174,135
2,400 Astra AB Class B 47,345
1,600 Svenska Cellulosa Class B 31,856
-------------
253,336
-------------
Switzerland - 5.3%
10 Bobst SA (Bearer) 11,180
100 Financiere Richemont AG Class A 151,134
30 Forbo Holdings AG (Registered) 12,215
60 Hilti AG (Participating Certificate) 38,715
220 Nestle AG (Registered) 415,238
20 Pargesa Holdings SA (Bearer) 27,880
20 Societe Generale de Surveillance Holding SA (Bearer) 15,044
50 Societe Generale de Surveillance Holding SA (Registered) 10,007
60 Swatch Group AG (Bearer) 38,094
120 Swiss Reinsurance (Bearer) 268,728
-------------
988,235
-------------
United Kingdom - 21.0%
6,306 Anglian Water Plc 73,847
8,800 Associated British Foods 68,303
30,000 Bass Plc 416,680
25,000 Billiton Plc 54,068
9,024 British Airways Plc 66,608
67,600 British Steel Plc 134,286
12,000 British Telecom Plc 207,225
61,295 BTR Siebe Plc 258,497
7,500 Christian Salvesen Plc 9,252
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
United Kingdom - continued
50,000 Coats Viyella 30,839
9,000 Courtaulds Textiles Plc 21,915
4,600 Delta Plc 9,285
14,165 Elementis Plc 16,679
10,500 Gallaher Group Plc 74,500
11,000 Greenalls Group Plc 67,845
20,348 Guardian Royal Exchange 115,884
700 Hambros Plc Class A * 2,019
15,000 Hillsdown Holdings Plc 16,340
5,800 HSBC Holdings 165,878
3,100 Hyder Plc 39,432
22,300 Inchcape 53,587
3,400 Lonrho Plc 22,114
7,370 Marley Plc 14,522
16,800 MFI Furniture Group 8,881
11,000 National Power 87,669
4,300 National Westminster Bank 89,070
34,100 Powergen Plc 417,086
18,000 Rank Group Plc 68,630
10,000 Rentokil Plc 74,012
1,500 RMC Group 16,306
12,700 Safeway Plc 54,577
28,300 Scottish Power Plc 264,267
10,000 Sears Plc 56,871
8,300 Signet Group Plc * 5,385
7,500 Smithkline Beecham Plc 105,612
8,700 Somerfield Plc 52,126
10,300 Storehouse Plc 24,916
7,700 Tesco 21,834
4,716 Thames Water Plc 77,741
7,700 TI Group Plc 47,923
1,900 Unigate 12,997
12,000 Unilever Plc 115,344
10,700 United Biscuits Plc 31,112
13,800 United Utilities 174,982
4,000 Vodafone Group Plc 73,889
7,300 Yorkshire Water 53,561
-------------
3,874,396
-------------
TOTAL COMMON STOCKS (Cost $17,487,447) 17,578,614
-------------
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares/
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
PREFERRED STOCKS - 0.8%
Brazil - 0.2%
3,000,000 Cemig 38,747
-------------
Germany - 0.2%
300 Draegerwerk AG 3,935
100 Dyckerhoff AG (Non Voting) 25,797
100 Villeroy & Boch (Non-Voting) 11,307
100 Walter Bau AG 10,978
-------------
52,017
-------------
Italy - 0.2%
1,000 Banca Nazionale dell'Agricoltura 1,021
2,000 IFI Istituto Finanziario 28,432
-------------
29,453
-------------
Korea - 0.2%
1,300 Samsung Electronics (Non Voting) 32,832
-------------
TOTAL PREFERRED STOCKS (Cost $201,594) 153,049
-------------
CONVERTIBLE SECURITIES - 0.5%
Poland - 0.5%
DEM 140,000 Elektrim SA, 2.00% due 5/30/04 84,864
-------------
TOTAL CONVERTIBLE SECURITIES (Cost $96,905) 84,864
-------------
RIGHTS & WARRANTS - 0.0%
Hong Kong - 0.0%
5,100 Chinese Estates Holdings Warrants 11/24/00 * 151
5,100 Chinese Estates Holdings Warrants 11/24/99 * 211
-------------
362
-------------
TOTAL RIGHTS & WARRANTS (Cost $283) 362
-------------
TOTAL INVESTMENTS - 96.2%
(Cost $17,786,229) 17,816,889
Other Assets and Liabilities (net) - 3.8% 712,184
-------------
TOTAL NET ASSETS - 100.0% $ 18,529,073
=============
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
- --------------------------------------------------------------------------------
Notes to the Schedule of Investments:
ADR American Depositary Receipt
(a) Valued by management (Note 1).
*Non-income producing security.
See accompanying notes to the financial statements. 11
<PAGE>
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
- --------------------------------------------------------------------------------
At February 28, 1999, industry sector diversification of the
Fund's equity investments was as follows:
Industry Sector (Unaudited)
Utilities 12.1%
Banking 11.7
Consumer Goods 10.7
Telecommunications 7.9
Oil and Gas 6.1
Services 5.7
Insurance 4.9
Conglomerates 4.8
Chemicals 3.5
Metals and Mining 3.5
Health Care 3.4
Machinery 3.3
Transportation 2.6
Construction 2.1
Food and Beverage 1.9
Real Estate 1.8
Retail Trade 1.8
Electronic Equipment 1.7
Paper and Allied Products 1.3
Textiles 1.2
Communications 1.0
Financial Services 1.0
Automotive 1.0
Miscellaneous 5.0
------
100.0%
======
12 See accompanying notes to the financial statements.
<PAGE>
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities - February 28, 1999
- --------------------------------------------------------------------------------
Assets:
Investments, at value (cost $17,786,229) (Note 1) $ 17,816,889
Foreign currency, at value (cost $779,544) (Note 1) 737,144
Cash 32,184
Dividends and interest receivable 19,038
Foreign withholding taxes receivable 2,294
Receivable for expenses waived or borne by Manager (Note 2) 28,251
-------------
Total assets 18,635,800
-------------
Liabilities:
Payable for investments purchased 5,614
Net payable for open forward foreign currency contracts 32,847
Accrued Malaysian repatriation taxes (Note 1) 3,223
Payable to affiliate for (Note 2):
Management fee 10,767
Shareholder service fee 2,153
Accrued expenses 52,123
-------------
Total liabilities 106,727
-------------
Net assets $ 18,529,073
=============
Net assets consist of:
Paid-in capital $ 18,573,024
Accumulated undistributed net investment income 27,931
Accumulated net realized loss (23,215)
Net unrealized depreciation (48,667)
-------------
$ 18,529,073
=============
Net assets attributable to:
Class III Shares $ 18,529,073
=============
Shares outstanding:
Class III 1,907,929
=============
Net asset value per share:
Class III $ 9.71
=============
See accompanying notes to the financial statements. 13
<PAGE>
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Statement of Operations
Period from July 29, 1998 (commencement of operations) through
February 28, 1999
- -------------------------------------------------------------------------------
Investment income:
Dividends (net of foreign tax expense of $8,470) $ 75,753
Interest 30,064
--------------
Total income 105,817
--------------
Expenses:
Management fee (Note 2) 50,861
Custodian fees 81,864
Audit fees 45,507
Transfer agent fees 15,861
Legal fees 1,230
Trustees fees (Note 2) 59
Registration fees 14
Miscellaneous 1,870
Fees waived or borne by Manager (Note 2) (160,652)
--------------
36,614
Shareholder service fee - Class III (Note 2) 10,172
--------------
Net expenses 46,786
--------------
Net investment income 59,031
--------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments (34,138)
Foreign currency, forward contracts and foreign
currency related transactions (10,775)
--------------
Net realized loss (44,913)
--------------
Change in net unrealized appreciation (depreciation) on:
Investments (Note 1) 27,437
Foreign currency, forward contracts and foreign
currency related transactions (76,104)
--------------
Net unrealized loss (48,667)
--------------
Net realized and unrealized loss (93,580)
--------------
Net decrease in net assets resulting from operations $ (34,549)
==============
14 See accompanying notes to the financial statements.
<PAGE>
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------
Period from July 29, 1998
(commencement of operations)
through February 28, 1999
-------------------------
Increase (decrease) in net assets:
Operations:
Net investment income $ 59,031
Net realized loss (44,913)
Change in net unrealized appreciation (depreciation) (48,667)
-------------
Net decrease in net assets resulting from operations (34,549)
-------------
Distributions to shareholders from:
Net investment income - Class III (58,701)
In excess of net investment income - Class III (8,556)
-------------
(67,257)
-------------
Net share transactions - Class III (Note 5) 18,630,879
-------------
Total increase in net assets 18,529,073
Net assets:
Beginning of period -
-------------
End of period (including accumulated
undistributed net investment income of $27,931) $ 18,529,073
=============
See accompanying notes to the financial statements. 15
<PAGE>
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout the period)
- ----------------------------------------------------------------------------
Period from July 29, 1998
(commencement of operations)
through February 28, 1999
-------------------------
Net asset value, beginning of period $ 10.00
-------
Income (loss) from investment operations:
Net investment income 0.04
Net realized and unrealized loss (0.28)
-------
Total from investment operations (0.24)
-------
Less distributions to shareholders:
From net investment income (0.04)
In excess of net investment income (0.01)
-------
Total distributions (0.05)
-------
Net asset value, end of period $ 9.71
=======
Total Return (a) (2.44%)
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 18,529
Net expenses to average
daily net assets 0.69%*
Net investment income to average
daily net assets 0.87%*
Portfolio turnover rate 20%
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amount: $ 0.12
* Annualized
(a) Calculation excludes purchase premiums. The total return would have been
lower had certain expenses not been waived during the period shown.
16 See accompanying notes to the financial statements.
<PAGE>
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Tax-Managed International Equities Fund (the "Fund"), which commenced
operations on July 29, 1998, is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended,
as an open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24,
1985. The Declaration of Trust permits the Trustees to create an unlimited
number of series ("Funds"), each of which issues a separate series of
shares, and to subdivide a series into classes.
The Fund seeks to maximize after-tax total return through investment in a
portfolio of common stocks of non-U.S. issuers.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost
which approximates market value. Other assets and securities for which no
quotations are readily available are valued at fair value as determined in
good faith by the Trustees or other persons acting at their direction.
On September 1, 1998, the Malaysian government introduced capital controls
effectively eliminating trading of the Malaysian ringgit. Effective
February 4, 1999, the Malaysian government modified these restrictions.
Funds invested in Malaysia as of February 15, 1999 and repatriated within
one year of September 1, 1998, or one year from the date of the investment
if after September 1, 1998, are subject to a graduated repatriation tax on
the principal invested with a maximum of 30%. The Fund has recorded an
accrual in the amount of $3,223 for potential repatriation tax on
principal invested prior to February 15, 1999. The accrual for Malaysian
repatriation taxes is included in the change in net unrealized
appreciation (depreciation) on investments in the Statement of Operations.
Funds invested in Malaysia on or after February 15, 1999 are subject to a
repatriation tax on capital gains of 30% for currency repatriated in less
than one year of the initial investment and 10% for currency repatriated
after one year of the initial investment. The Fund has not made any
additional investments in Malaysia on or after February 15, 1999 and
accordingly no tax provision for capital gains has been accrued.
17
<PAGE>
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the prevailing
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at prevailing exchange rates when
accrued or incurred. The Fund does not isolate realized and unrealized
gains and losses attributable to changes in exchange rates from gains and
losses that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent net exchange gains and losses on disposition of
foreign currencies, currency gains and losses realized between the trade
and settlement dates on securities transactions and the difference between
the amount of investment income and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent amounts actually received
or paid.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or
all of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency
contracts are marked to market daily and the change in value is recorded
by the Fund as an unrealized gain or loss. Realized gains or losses equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed are recorded upon delivery
or receipt of the currency or, if a forward currency contract is offset by
entering into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market
risk in excess of the unrealized gain or loss reflected in the Fund's
Statement of Assets and Liabilities. In addition, the Fund could be
exposed to risk if the counterparties are unable to meet the terms of the
contracts or if the value of the currency changes unfavorably to the U.S.
dollar. The U.S. dollar value of the currencies the Fund has committed to
buy or sell is shown under Note 6 and represents the currency exposure the
Fund has acquired or hedged through currency contracts as of February 28,
1999.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
federal income tax purposes. Therefore, no provision for federal income or
excise tax is necessary. Taxes on foreign interest and dividend income
have been withheld in accordance with the applicable country's tax treaty
with the United States. Dividends received by shareholders of the Fund
which are derived from foreign source income and foreign taxes paid by the
Fund are to be treated, to the extent allowable under the Code, as if
received and paid by the shareholders of the Fund.
18
<PAGE>
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Income dividends and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily
due to foreign currency and passive foreign investment company
transactions and redemptions in-kind. Gains resulting from such in-kind
transactions amounted to $135,849.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
----------------- ------------------------ ---------------
$36,157 $21,698 ($57,855)
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date, or when the Fund is informed of the
ex-dividend date, if later. Interest income is recorded on the accrual
basis and is adjusted for the accretion of discounts. In determining the
net gain or loss on securities sold, the cost of securities is determined
on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds.
19
<PAGE>
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .60% of the amount
invested. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. Purchase premiums are included as part of "shares sold"
as summarized in Note 5. For the period ended February 28, 1999, the Fund
received $122,027 in purchase premiums. There is no premium for cash
redemptions or reinvested distributions. While no purchase premium is
normally charged with respect to in-kind purchases of Fund shares, a
purchase premium of up to .10% may be charged on certain in-kind
transactions.
Investment risk
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .75% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding brokerage commissions, certain other transaction costs
(including stamp duties and transfer taxes), shareholder service fees and
extraordinary expenses) exceed .54% of average daily net assets.
Effective March 1, 1999, GMO's contractual management fee was reduced to
.54% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding brokerage
commissions, certain other transaction costs (including stamp duties and
transfer taxes), shareholder service fees and extraordinary expenses)
exceed the management fee.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the period ended February 28, 1999, was $59. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
20
<PAGE>
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the period ended February 28, 1999, aggregated
$19,818,692 and $2,099,550, respectively.
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in the value of investments held
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------------------- -------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
$17,817,175 $1,262,730 $1,263,016 ($286)
</TABLE>
4. Principal shareholders
At February 28, 1999, 86.6% of the outstanding shares of the Fund were
held by four shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including the purchase premiums received by the Fund, were as
follows:
Period from July 29, 1998
(commencement of operations)
to February 28, 1999
------------ ------------
Class III: Shares Amount
------------ ------------
Shares sold 2,083,735 $ 20,337,787
Shares issued to shareholders in
reinvestment of distributions 835 8,274
Shares repurchased (176,641) (1,715,182)
------------ ------------
Net increase 1,907,929 $ 18,630,879
============ ============
21
<PAGE>
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1999 is as
follows:
Short forward currency contract
<TABLE>
<CAPTION>
Settlement Units Net Unrealized
Date Deliver/Receive of Currency Value Depreciation
---- --------------- ----------- ----- ------------
<S> <C> <C> <C> <C>
10/21/99 HKD 2,986,756 $380,916 $(4,916)
</TABLE>
Forward cross currency contract
<TABLE>
<CAPTION>
Settlement Net Unrealized
Date Deliver/Units of Currency Receive/In Exchange For Depreciation
---- ------------------------- ----------------------- ------------
<S> <C> <C> <C> <C> <C>
4/13/00 JPY 56,398,518 DEM 826,837 $(27,931)
</TABLE>
Currency Abbreviations:
DEM German Mark
HKD Hong Kong Dollar
JPY Japanese Yen
22
<PAGE>
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
February 28, 1999
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1999, all the Fund's distributions are
from investment company taxable income.
23
<PAGE>
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Portfolio Managers
Mr. R. Jeremy Grantham, Mr. Nardin Baker and Mr. Jon Lal are primarily
responsible for the management of the Fund's portfolio. Mr. Grantham, who
oversees the Fund's overall strategy, has been a portfolio manager at Grantham,
Mayo, Van Otterloo & Co. LLC for more than fifteen years.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO Tax-Managed International Equities Fund returned
- -2.4% since its inception on July 29, 1998 to February 28, 1999. The Fund's
benchmark, the GMO EAFE-Lite Index, returned -0.8% during the same period.
Consistent with the Fund's investment objectives and policies, the Fund was
invested substantially in non-U.S. equity securities throughout the period.
For the 7-month life of the Fund, superior macro bets were not enough to
overcome the combination of the startup overhead (trading costs and interim cash
position while getting invested) and the underperformance of the value (value
stocks returned -4.9% while growth stocks returned +2.3% during the 7 months)
and defensive stocks.
The 7-month life of the Fund can be divided into two distinct regimes. The
first, stretching from inception to October 16th, was marked by a flight to high
quality, defensive and liquid stocks and countries. The second regime was
initiated by an aggressive response from the world's central banks (prompted by
the U.S. Federal Reserve's discount rate cut on October 17th) to address the
tight liquidity and credit conditions in the financial markets. As a result, the
second regime was dominated by strong outperformance of low quality, aggressive
and illiquid stocks and countries.
The Fund's defensive orientation served it well in the first regime but caused
it to underperform in the second. Superior macro value-oriented bets
(particularly in Asia) partially offset the seesaw effects of the regime shifts.
In the first regime, the Fund outperformed the benchmark by 5%. The long-term
orientation of this fund means that it is usually positioned defensively and is
underweight stocks that are especially vulnerable to difficult economic and
market conditions (a multi-factor model that includes bankruptcy risk, leverage
and ROE volatility is used). Overweights in utilities and consumer defensive
stocks, combined with an underweight in financial stocks (including banks and
brokerage), were the main contributors to the 5% outperformance in the first
regime.
The aggressive response by the policy makers (the ISI Group counted 64 interest
rate cuts around the world in the 4th quarter of 1998 alone) was unprecedented.
The long-term
<PAGE>
value orientation of the Fund emphasizes value over timing. As a result, the
Fund lost its advantage over the benchmark during the second regime as low
quality, aggressive, illiquid stocks (especially financials) rode the wave of
liquidity to reach all time highs.
The Fund's overweights in a strongly rebounding Asia (Singapore +16% and Korea
+52% since October 17th 1998) partially offset the underperformance from the
defensive and value orientation into the teeth of a massive liquidity driven
rally.
Outlook
An unusually favorable global environment over the last five years has resulted
in excellent returns for multinational stocks. The collapse of the Soviet Union
and the propagation of free trade and laissez-faire ideals in formerly command
economies have created tremendous opportunities for the Coca-Colas and Nestles
of the world. Current valuations for multinationals, however, imply continued
earnings growth at a rate similar to the unusually favorable one during the last
five years, which is a rate far higher than long-term historical norms.
Emerging markets and multinationals are highly correlated and emerging markets
are about the cheapest they have been in the last decade (since they were
"re-discovered" as an asset class), both on absolute terms and relative to
developed markets. Therefore, the Fund is overweight in emerging markets and
underweight multinationals. In addition to being a good hedge, this bet provides
exposure to cheap companies (emerging and multinationals are on opposite
extremes of value at 1.4x and 3.3x book, and 18x and 27x earnings respectively)
with good growth prospects (as emerging economies are growing more rapidly than
developed ones).
The underweight in multinationals is primarily in European stocks as their
valuations are more extreme (European multinationals are 5x book and 26x
earnings, versus 2x book and 16x earnings for European mid-cap stocks). In
addition to an allocation to emerging markets, the underweight in multinationals
has been allocated to mid-cap stocks in Continental Europe and UK, which are
historically cheap.
In a typical year, U.S. equity market M&A constitutes about 7% of market
capitalization. The corresponding figure for Japan has been around 1% for many
years as there has not been the same emphasis on shareholder value. Things are
changing though, as more and more Japanese companies are restructuring (Sony for
example is laying off 10% of its global workforce) in an effort to enhance
profitability. As a result, the Japanese M&A figure for last year was 3%.
Valuations in Japan are about 1/3 of their 1989 peak and l/2 of Europe. The Fund
was underweight Japanese equities at inception and has since moved close to a
neutral weight on Japan. The Fund is likely to soon be overweight Japanese
equities if the early signs of an economic recovery (from a 10-year recession)
are sustained.
As a result of the Asian crisis, South East Asia is even cheaper than Japan. The
Fund is overweight South East Asia as economic recovery is already well under
way.
<PAGE>
The overweights in emerging markets and Asia are likely to result in high
payoffs as these economies recover. The overweights in small companies and
against multinationals are likely to pay off as the focus returns to earnings
and earnings growth. The long-term value and defensive positioning of the GMO
Tax-Managed International Equities Fund means that it is expected to be less
vulnerable to crisis conditions in financial markets than other international
equity funds.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
- --------------------------------------------------------------------------------
Comparison of Change in Value of a $10,000 Investment in
GMO Tax-Managed International Equities Fund Class III Shares and the
MSCI EAFE Index
As of February 28, 1999
- --------------------------------------------------------------------------------
Total Return
- --------------------------------------------------------------------------------
Since Inception
- --------------------------------------------------------------------------------
Class 7/29/98
III -3.0%
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GMO Tax-Managed International
Equities Fund
Date Class III Shares MSCI EAFE Index GMO EAFE - Lite Index
- ------ ---------------------------- --------------- ---------------------
<S> <C> <C> <C>
1/31/98
7/29/98 9,940 10,000 10,000
9/30/98 8,648 8,512 8,497
12/31/98 10,097 10,270 10,205
2/28/99 9,698 9,996 9,923
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 60 bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Past performance is not indicative of future
performance. Information is unaudited.
- --------------------------------------------------------------------------------
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Emerging Markets Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Emerging Markets Fund at
February 28, 1999 and the results of its operations, the changes in its net
assets and the financial highlights for the periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 16, 1999
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
COMMON STOCKS - 77.9%
Argentina - 0.1%
603,468 Garovaglio Y Zorraquin * 537,301
118,514 Nobelza Piccardo 438,677
-------------
975,978
-------------
Brazil - 2.8%
4,400,000 Belgo Mineira (Registered) 112,386
9,350,000 Coelba ON 148,699
1,676,280,000 Companhia de Acos Especiais Itabira-Acesita 412,001
212,248,500 Companhia Siderurgica Nacional SA 1,892,336
417,700,000 Electrobras 5,437,146
2,000,000 Ericsson Telecom 17,359
16,290,000 Light Servicos Electricidade SA 828,239
268,194,000 Telebras Receipts 9,112,133
281,200 Souza Cruz (Registered) 1,761,735
117,900 Unibanco GDR 1,591,650
-------------
21,313,684
-------------
Chile - 4.5%
15,000 Administradora de Fondos de Pensiones Provida ADR 230,625
41,300 Banco de Edward ADR 449,138
55,800 Banco Santander ADR 798,638
122,200 Banco Santiago ADR 2,207,238
123,300 Chilectra SA ADR 2,389,554
97,400 Chilquinta ADR 759,720
125,200 Chilquinta ADR 144A 976,560
12,000 Compania Cervecerias 232,500
215,300 Compania de Telefones de Chile ADR 4,763,513
69,200 Cristalerias de Chile SA ADR 873,650
28,800 Distribucion y Servicio ADR * 322,200
41,200 Embotelladora Andina ADR Class A 538,175
381,100 Empresa Natl de Electricidad ADR 4,811,388
150,300 Enersis SA ADR 3,663,563
351,663 Gener SA ADR 5,274,945
36,600 Laboratorio Chile SA ADR 487,238
26,000 Madeco SA ADR 178,750
197,100 Masisa SA ADR 1,207,238
388,590 Quinenco SA ADR 3,157,294
37,800 Soc Quimica Y Minera de Chile ADR 1,134,000
697,200 Telex Chile ADR * 653,625
9,300 Vina Concha Y Toro SA ADR 265,050
-------------
35,374,602
-------------
China - 0.4%
620,000 China Resources Enterprise 812,236
858,000 China Telecom Ltd Class H * 1,522,700
78,000 Huaneng Power International ADR * 682,500
-------------
3,017,436
-------------
Colombia - 0.1%
24,300 Banco Ganadero SA ADR 425,250
-------------
See accompanying notes to the financial statements. 1
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Czech Republic - 0.7%
21,000 Alpha Effect * 491,435
302,600 Ceske Energeticke Zavody AS * 391,846
21,397 IF Zivnobanka 279,561
84,249 IPS Praha 213,546
46,000 PF IKS KB Plus 315,197
23,700 Restitucni IF 730,088
323,988 SP Vseobecny 605,796
27,366 Spif Cesky * 304,314
150,576 Spif Vynosovy 979,299
75,300 SPT Telecom AS * 851,120
----------
5,162,202
----------
Egypt - 2.3%
10,000 Al Ahram Beverage Co GDR 144A * 345,800
3,000 Al Ahram Beverage Co * 198,801
89,700 Al Ahram Beverages Co GDR (Reg S) * 3,094,650
64,200 Commercial International Bank GDR (Reg S) 683,730
252,059 Eastern Tobacco Co 7,409,705
8,000 Egypt Gas Co 544,644
39,800 Egyptian International Pharmaceuticals Industries Co 2,282,468
39,270 Miraco 804,066
44,000 Oriental Weavers Co 1,042,486
46,000 Suez Cement Co GDR 809,600
31,681 Suez Cement Co GDR 144A 557,586
11,250 Torrah Portland Cement 238,739
----------
18,012,275
----------
Greece - 3.3%
39,441 Alpha Credit Bank 4,528,112
72,210 Alpha Leasing (Registered) 1,279,874
16,700 Aluminum of Greece (Registered) 1,230,706
23,016 Bank of Piraeus 1,115,071
24,924 Commercial Bank of Greece 3,061,290
8,940 Econ Viomihanies (b) * 6,954
79,270 Elais SA 1,766,063
23,666 Ergo Bank 1,921,702
58,050 Hellas Can Packaging SA 1,267,554
40,954 Hellenic Bottling Co 1,365,832
82,900 Hellenic Petroleum * 746,694
65,996 Hellenic Telecommunication Organization SA 1,738,277
20,237 Intracom SA (Registered) 1,460,295
135,210 Michaniki SA 1,176,341
3,910 Minoan Lines 102,986
24,000 National Bank of Greece 1,755,578
62,210 Nikas SA 1,015,609
----------
25,538,938
----------
Hungary - 0.0%
28,151 Fotex (Registered) 12,343
----------
2 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
India - 3.7%
7 Aptech Ltd 129
602 Aptech Ltd * 11,081
2,091 Aptech Ltd 38,491
170 Arvind Mills Ltd 154
360 Arvind Mills Ltd 326
2,425 Bajaj Auto Ltd GDR 27,617
100 Bank of India 45
200 Bausch & Lomb India Ltd * 459
83,500 BFL Software Ltd * 1,747,288
2,000 Bharat Petrol Corp 9,912
4,453 BSES Ltd 16,153
5,208 BSES Ltd 18,892
22,400 Ciba Specialty Chemicals * 75,638
2,050 Cipla Ltd 52,841
125,450 Cipla Ltd 3,233,626
20,000 CMC Ltd 210,943
4 Core Healthcare Ltd * 1
500 Corporation Bank * 834
11,800 Digital Equipment 100,995
112,400 Digital Equipment 962,018
1,500 DSQ Software Ltd 15,931
500 DSQ Software Ltd * 5,310
850 Escorts Ltd 1,349
610 Escorts Ltd * 968
1,192,600 Garden Silk Mills 251,515
54 Glaxo India Ltd 869
537 Glaxo India Ltd * 8,644
48,275 Godfrey Phillips India 858,090
100 Great Eastern Shipping Co 52
1,365 Great Eastern Shipping Co 704
14,825 HCL Hewlett Packard Ltd 170,744
4,265 HCL Infosystems Ltd 49,121
32,250 Hero Honda Motors Ltd 506,327
18,520 Hero Honda Motors Ltd * 290,765
10,780 Hero Honda Motors * 168,640
2,450 Hero Honda Motors * 38,327
100 Hindalco Industries Ltd * 1,041
100 Hindustan Petroleum Corp Ltd 487
1,100 Hindustan Petroleum Corp Ltd * 5,233
50 Hoechst Marion Roussel Ltd 630
100 Hoechst Marion Roussel Ltd 1,261
369,770 India Cements 246,947
10 Industrial Credit & Investment Corp of India Ltd 10
255 Industrial Credit & Investment Corp of India Ltd 244
400 Industrial Development Bank of India 299
100 Industrial Development Bank of India 75
100 Industrial Finance Corp of India 30
See accompanying notes to the financial statements. 3
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
India - continued
1,500 Industrial Finance Corp of India 457
600 ITC Ltd 10,865
44,249 ITC Ltd * 801,304
187 Larsen & Toubro 807
300 Mahanagar Telephone 1,125
300,000 Mcdowell & Co Ltd 186,292
2,297,600 National Aluminum * 866,816
750 NIIT Ltd 43,585
153,150 NIIT Ltd 8,900,105
32,850 Novartis India Ltd * 678,938
100 Oil & Natural Gas Corp * 326
200 Oriental Bank of Commerce 143
4,600 Oriental Bank of Commerce 3,298
100 Pentafour Software 1,867
300 Pentafour Software & Export 5,601
26,369 Pfizer Inc * 583,300
3,631 Pfizer Ltd 80,320
11,441 Reliance Industries 37,507
93 Reliance Industries 305
400,500 Reliance Petroleum Ltd * 181,128
100 Reliance Petroleum Ltd * 45
214,600 Sanghi Polyester Ltd * 20,115
400 Sanghi Polyester Ltd * 37
21,710 Satyam Computer Service 467,522
59,250 Satyam Computer Service * 1,275,940
96,293 Smithkline Beecham Consumer Healthcare Ltd * 1,437,344
157 Smithkline Beecham Plc 2,344
79,600 Software Solutions Integrated 1,348,583
150 State Bank of India 515
50 State Bank of India 172
420 Sterlite Industries Ltd 1,543
280 Tata Iron & Steel 823
147 Tata Iron & Steel 432
1,115 Videocon International 1,103
420,000 Vikas WSP Ltd 2,262,636
43,200 Visualsoft India Ltd * 708,359
10,900 Zee Telefilms Ltd 171,386
1,500 Zee Telefilms Ltd * 23,585
----------
29,237,629
----------
Indonesia - 2.8%
2,829,000 Barito Pacific Timber * 88,031
3,155,000 Ciputra Development * 44,625
1,875,000 Dynaplast * 95,474
10,252,000 Gajah Tunggal TBK * 232,011
4,158,000 Gudang Garam 5,787,089
78,100 Gulf Resources Ltd ADR * 585,750
2,116,500 HM Sampoerna * 1,544,716
925,000 Indah Kiat Pulp & Paper * 219,802
4 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Indonesia - continued
1,625,000 Indorama Synthetics * 179,279
140,000 Indosat ADR Class B 1,820,000
3,072,000 International Nickel * 1,546,863
10,020,500 PT Asuransi Lippo Life Tbk 396,851
2,348,000 PT Daya Guna Samudera 1,142,450
2,977,000 PT Indofood Sukses Makmur Tbk * 1,591,663
696,000 PT Indosat (Persero) Tbk 960,815
3,072,500 PT Pabrik Kertas Tjiwi Kimia * 608,416
334,500 Semen Gresik 352,006
4,582,000 Tambang Timah Persero (Foreign Registered) 2,566,438
4,266,000 Telekomunikasi Indonesia 1,327,468
128,000 Telekomunikasi Indonesia ADR Class B 816,000
100 Unggul Indah Corp * 12
7,753,500 United Tractors * 350,936
----------
22,256,695
----------
Israel - 1.8%
1,058,561 Bank Hapoalim 2,051,216
1,671,950 Bank Leumi Le Israel 2,491,840
303,200 Bezeq Israeli Telecommunication Corp Ltd * 1,059,639
33,100 Blue Square Chain Stores * 427,049
25,700 Blue Square Sponsored ADR 308,400
9,900 ECI Telecommunications Ltd 363,825
21,200 Elbit Medical Imaging Ltd ADR 238,500
116,657 Elbit Medical Imaging Ltd (Tel Aviv) 1,398,402
51,501 Formula Systems Ltd * 1,334,002
9,210 Koor Industries 887,777
10,300 Koor Industries Ltd ADR 195,056
1 Machteshim Agan Industries * 2
15,000 Nice Systems Ltd Sponsored ADR * 450,000
9,100 Nice Systems Ltd * 272,149
272,939 Supersol Ltd 692,138
20,460 Supersol Ltd ADR 255,750
48,000 Teva Pharmaceutical Industries Ltd ADR 1,941,000
----------
14,366,745
----------
Korea - 12.2%
88,203 Cheil Jedang Corp 2,371,785
70,280 Chosun Brewery Co Ltd 1,028,208
197,880 Daelim Industrial Co. Ltd * 881,443
1,482,000 Daewoo Corp 3,791,304
234,000 Daewood Electronics * 1,032,775
211,000 Dong-Ah Construction 1,077,850
126,420 Hankuk Glass 2,376,510
348,000 Hanwha Corp * 1,151,941
100,000 Housing & Commercial Bank 1,548,835
21,175 Housing & Commercial Bank Korea GDR 332,977
64,000 Hyundai Electronics Industries * 1,192,644
617,434 Hyundai Engineering & Construction * 3,911,004
84,011 Hyundai Heavy Industries 1,647,948
See accompanying notes to the financial statements. 5
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Korea - continued
237,306 Hyundai Industrial Development 1,229,685
87,950 Hyundai Motor Service Co 783,535
1,578,200 Kohap Co Ltd * 1,902,611
255,345 Kookmin Bank GDR (Registered) 1,800,182
10,490 Korea Chemical 488,705
2,760 Korea Container Terminal 87,977
160,000 Korea Electric Power Corp 3,779,322
470,300 Korean Air Lines 3,486,409
167,050 LG Cable & Machinery Ltd 1,324,385
49,000 LG Information & Communication 1,425,746
130,000 LG Semicon * 1,211,279
12,130 Lotte Chilsung Beverage 446,138
65,390 Nhong Shim 3,286,870
310,584 Pohang Iron & Steel (d) 16,562,492
25,358 S1 Corporation 3,917,174
3 Sam Yang 26
89,599 Samsung Display Devices 3,624,970
62,000 Samsung Electro Mechanics 1,180,711
104,702 Samsung Electronics 7,376,635
20 Samsung Electronics GDS 144A (Non Voting) 287
5,000 Samsung Fire & Marine Insurance 1,593,788
66,000 Samsung Securities * 1,502,329
263,000 Shinhan Bank 1,612,178
197,782 Shinsegae Department Store 4,073,646
5,759 SK Telecom (d) 4,384,560
523,000 Ssangyong Cement 3,218,790
120,870 Ssangyong Oil Refining 1,738,710
307,390 Tai Han Electric Wire 1,720,982
----------
96,105,346
----------
Lebanon - 0.6%
217,064 Banque Libanaise 3,310,226
31,508 Banque Libanaise GDR Class B 480,497
139,000 Solidere GDR (Reg S) 1,233,625
----------
5,024,348
----------
Malaysia - 4.6%
1,782,000 Berjaya Sports Toto 2,368,184
333,000 Carlsberg Brew Malaysia 893,842
1,623,900 Cold Storage 854,684
376,000 Esso Berhad * 277,053
175,000 Faber Group Berhad * 18,882
1,177,700 Genting Berhad 2,680,817
2,165,700 Golden Hope Plantations Berhad 2,165,700
944,000 Guinness Anchor Berhad 919,158
781,000 Highlands and Lowlands Berhad 470,655
1,152,500 IGB Corp Berhad 315,421
4,723,800 IOI Corporation Berhad 2,573,228
229,000 Kemayan Corporation Berhad 19,284
414,000 Kumpulan Guthrie Berhad 264,742
6 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Malaysia - continued
168,000 Land & General Berhad * 35,368
4,278,100 Magnum Corp Berhad 2,206,599
1,137,400 Malakoff Berhad 2,529,218
2,035,000 Malaysian International Shipping (Foreign Registered) 2,656,211
727,000 Malaysian Tobacco Co Berhad 616,037
328,000 Nestle Malaysia 1,268,842
1,676,900 Oriental Holdings Berhad 2,758,059
1,947,600 Resorts World Berhad 2,552,381
642,800 Rothmans of Pall Mall Berhad 3,704,558
770,000 Sarawak Enterprises Corp 297,868
109,620 Silverstone * 1,298
14,502,000 Tan Chong International Ltd 1,385,109
3,802,700 Tan Chong Motor Holdings Berhad 1,090,774
636,700 Tanjong 1,089,092
58,000 Tiong Nam Transport Holdings Berhad 25,032
124,000 Tractors Holdings Berhad 47,968
3,491,700 Westmont Industries Berhad (b) * 9,189
----------
36,095,253
----------
Mexico - 6.4%
430,100 Alfa SA Class A 1,058,508
2,666,415 Altos Hornos De Mexico * 2,196,344
24,000 Carso Global Telecom Class A 102,461
220,000 Cemex SA Class B 677,348
818,000 Cifra SA de CV * 1,051,773
430,273 Cintra SA CPO Class A (Registered) 215,245
181,915 Controladora Coml Mexicana Classes B and C 151,672
1,601,680 Cydsa SA Class A 1,625,009
312,000 Dina (Consorcio Grupo Dina) * 104,992
203,400 Empresas ICA Sociedad Controladora ADR 915,300
19,000 Empresas La Moderna SA de CV Class A * 111,462
1,332,000 Formento Economico Mexicano SA de CV 3,498,925
644,600 Grupo Carso SA de CV Class A 2,143,271
1,500,000 Grupo Casa Autrey 825,716
1,697,705 Grupo Financiero Banamex Class B * 2,592,176
103,529 Grupo Financiero Banamex Class L * 145,596
13,855,795 Grupo Financiero Bancomer SA Class B 3,270,831
328,963 Grupo Financiero Bancomer SA Class L 60,803
8,697,700 Grupo Financiero Probursa SA de CV * 1,048,442
139,432 Grupo Financiero Santander Class B * 23,951
8,232,755 Grupo Financiero Serfin SA de CV Class B * 537,548
3,918,820 Grupo Gigante SA Class B * 1,141,595
554,818 Grupo Mexico Class B 1,524,287
80,200 Grupo Mexico Desarollo Class B ADR * 12,511
505,500 Grupo Radio Centro SA ADR 2,243,156
6,255,000 Grupo Situr SA de CV Class B * 56,549
71,200 Grupo Televisa SA GDR * 2,002,500
2,022,500 Grupo Tribasa SA ADR * 2,780,938
136,400 Herdez Class BCP 43,571
See accompanying notes to the financial statements. 7
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Mexico - continued
10,000 Ispat International NV Class A (Registered) 72,500
172,200 Telefonos de Mexico ADR Class L 9,847,688
434,200 TV Azteca SA ADR 2,279,550
1,398,800 Vitro SA ADR 6,294,600
----------
50,656,818
----------
Pakistan - 0.9%
1,002,000 Fauji Fertilizer 883,184
700 Hub Power Co Ltd 179
337,166 Hub Power Co Ltd GDR 1,989,114
500 Karachi Electric Supply * 84
106,880 Lever Brothers Pakistan Ltd 1,224,150
498,840 Pakistan State Oil 662,762
6,174,600 Pakistan Telecom Corp Ltd Class A 2,183,120
6,600 Pakistan Telecom Corp Ltd GDR * 204,600
297 Sui Southern Gas Pipelines Ltd * 54
----------
7,147,247
----------
Peru - 0.0%
115,486 Cervecerias 41,903
63 Milpo Minera Class T 159
----------
42,062
----------
Phillippines - 3.5%
15,753,000 Aboitiz Equity Ventures Inc * 558,129
1,459,000 Alsons Cement 239,733
10,311,600 Ayala Corp 3,375,427
9,825,000 Belle Corporation * 484,313
28,286,400 Cosmos Bottling Corp 2,033,425
22,832,000 Digital Telecommunications * 621,359
3,544,297 DMCI Holdings Inc * 158,333
13,139,500 EEI Corporation * 418,305
579,000 Equitable Banking Corp 906,778
484,900 Far East Bank & Trust 616,240
2,482,000 Filinvest Land * 200,727
1,814,000 International Container Terminal * 99,665
1,909,543 Ionics Circuits Inc 426,522
8,925,000 JG Summit Holdings Inc Class B * 687,420
270,000 La Tondena Distillers Inc * 218,357
491,920 Manila Electric Class B 1,528,173
245,670 Metro Bank & Trust Co 1,766,049
4,289,000 Metro Pacific Corp * 211,422
8,723,000 Petron Corp 1,074,978
179,810 Philippine Commercial International Bank 821,725
247,070 Philippine Long Distance Telephone 5,740,651
150,000 Philippine National Bank * 240,693
1,871,400 San Miguel Corp Class B 3,074,958
9,474,000 SM Prime Holdings 1,824,262
----------
27,327,644
----------
8 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Poland - 0.3%
85,000 Agora SA GDR 144A 941,375
234,502 Okocimskie Zaklady Piwowarskie SA * 1,289,910
----------
2,231,285
----------
Russia - 2.6%
37,000 Ao Torgory Dom Gum ADR 25,900
2,649,789 Chelabinsky Tube Work (d) * 177,271
17,100 Dalmoreproduct * 171
422,800 Electrocila * 359,380
29,221 Elisb * 292
672,700 Irkutskelectrosviaz (d) * 121,355
1,611,100 Irkutskenergo ADR 3,802,518
483 Irkutskenergo RDC (d) 4,685,100
4,931,400 Irkutskenergo (Registered) (d) 239,173
89,030 Kirovsky Plant (d) * 62,321
646,500 Komineft (d) 181,343
289,725 Lukoil Holding Co ADR 6,084,225
300 Moscow City Telephone Network (d) * 20,040
2,590,387 Norilsk Nickel (Registered) (d) * 2,978,945
135,000 Russia Petroleum * 13,500
19,700 Seversky Tube Works ADR * 40,007
3,035,700 St Petersburg Telephone (d) 878,228
811,380 Uralmash Zavody 144A (d) 159,274
1,810,200 Uralmash Zavody ADR (Registered) * 724,080
----------
20,553,123
----------
South Africa - 16.0%
1,256,737 Amalgamated Bank of South Africa 5,477,304
573,618 Anglo American Corp of South Africa 17,889,104
219,180 Anglo American Platinum Corp 3,601,699
122,845 Anglo Gold Ltd 4,481,513
114,500 Anglovaal Industries Inc * 462,990
83,500 Anglovaal Ltd 310,008
246,462 Bidvest Group Ltd * 1,901,676
463,800 Comparex Holding Ltd 3,631,041
6,929,404 Consolidated African Mines * 704,685
906,880 De Beers Centenary Link Units 15,634,348
534,750 De Beers Consolidated Mines Ltd ADR 9,157,594
1,139,500 Del Monte Royal Foods Ltd * 384,432
658,730 Dimension Data Holdings * 2,679,580
34,281 Edgars Stores Ltd 146,089
3,094,200 Firstrand 3,271,511
78,219 Goldfields Ltd 419,188
166,000 Investec Group Ltd 6,361,324
7,379,095 ISCOR 1,262,605
539,640 Liberty Life Association of Africa Ltd 7,430,394
1,031,710 Malbak Ltd 499,617
2,135,615 Mawenzi Resources Ltd 158,577
223,840 Murray & Roberts Holdings Ltd 75,878
400,620 Nedcor Ltd 8,109,402
See accompanying notes to the financial statements. 9
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- ----------------------------------------------------------------------------------------
<S> <C> <C>
South Africa - continued
78,637 Polifin Ltd 72,354
443,720 Randfontein Estates 834,437
164,000 Randgold Resources Ltd GDR 144A * 590,400
309,500 Randgold & Exploration Co * 199,839
1,553,870 Rembrandt Group Ltd 10,183,555
705,968 Sappi Ltd 2,518,465
1,821,210 Sasol Ltd 7,099,632
468,660 South Africa Brews 6,808,620
864,580 Standard Bank Investment Corp 2,456,272
7,981,060 Sun International Ltd 966,230
-----------
125,780,363
-----------
Sri Lanka - 0.3%
238,891 Aitken Spence & Co 340,144
4,590,170 Blue Diamonds Jewelry Ltd * 66,017
54,250 Development Finance Corp 90,898
134,865 Hayleys Ltd 244,398
285,305 John Keells Holdings Ltd 796,047
333,600 Lanka Walltile Ltd 32,386
404,200 Lion Brewery Ceylon Ltd * 165,680
304,000 National Development Bank 533,410
-----------
2,268,980
-----------
Taiwan - 0.5%
1,608,800 Ambassador Hotel * 914,312
1,252,400 Chia Hsin Food & Synthetic * 397,527
1,320,000 China Steel 734,220
1,238,008 China Trust Commercial Bank * 871,995
11,130 First Bank * 18,673
594,900 Taipei Business Bank * 647,412
933,342 Taitung Business Bank * 283,558
637,000 Wan Yu Paper (b) * 193
1,662,000 Yieh Loong Co * 339,132
-----------
4,207,022
-----------
Thailand - 6.2%
389,500 Advanced Info Service Public Co Ltd (Foreign Registered) (d) 2,713,558
741,100 Ban Pu Coal Public Co Ltd (Foreign Registered) (d) * 938,290
316,300 Bangchak Petroleum Public Co Ltd (Foreign Registered) (d) * 50,852
441,100 Bangchak Petroleum Public Co Ltd * 70,916
4,112,800 Bangkok Bank Plc (Foreign Registered) (d) * 6,942,830
90,800 Bangkok Insurance (Foreign Registered) (d) 413,612
240,000 Bangkok Rubber Public Co Ltd (Foreign Registered) * 54,019
1,115,700 Bangkok Rubber Public Co Ltd * 251,122
2,768,000 Bank of Ayudha Public Co Ltd * 834,405
340,000 BEC World Public Co Ltd 1,639,871
352,000 BEC World Public Co Ltd (Foreign Registered) (d) 1,697,749
2,487,500 Cogeneration Public Co (Foreign Registered) (d) * 1,449,709
393,700 CP Feedmill Public Co Ltd (Foreign Registered) (d) * 477,356
25,800 Delta Electronics Public Co Ltd 113,376
615,400 Delta Electronics Public Co Ltd (Foreign Registered) (d) 2,704,330
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Thailand - continued
1,306,460 Electricity Generating Public Co Ltd (Foreign Registered) (d) * 2,835,564
387,900 Grammy Entertainment Plc (Foreign Registered) (d) 1,663,023
587,700 Hana Microelectronic Plc (Foreign Registered) (d) * 1,322,797
1,950,000 Industrial Finance Corp of Thailand 548,633
2,477,000 Industrial Finance Corp of Thailand (Foreign Registered) (d) 696,905
1,930,978 International Broadcasting Plc (Foreign Registered) (d) * 776,117
93,600 Italian-Thai Development Public Co Ltd * 190,611
492,900 Italian-Thai Development Public Co Ltd (d) 1,003,762
631,000 Krung Thai Bank Public Co Ltd (d) 274,752
1,837,200 Land & House Public Co Ltd (Foreign Registered) (d) * 1,033,794
151,100 Lanna Lignite Plc Ltd (Foreign Registered) (d) 152,841
2,627,600 National Petrochemical (Foreign Registered) (d) * 1,161,720
4,505,050 Padaeng Industry Plc ( Foreign Registered) (d) * 1,026,070
91,200 PTT Exploration and Production Public Co Ltd (Foreign Registered) (d) * 601,158
1,583,000 Regional Container Lines Plc (Foreign Registered) (d) 901,360
1,859,000 Ruang Khao Fund (Foreign Registered) (d) * 249,062
32,400 Saha Pathana International Holdings Plc (Foreign Registered) (d) * 18,883
24,500 Saha Pathanapibul (Foreign Registered) (d) 25,603
2,230,500 Saha Union Public Co Ltd (Foreign Registered) (d) 881,562
136,196 Shinawatra Computer Public Co Ltd (Foreign Registered) (d) * 375,889
99,600 Siam Cement Plc (Foreign Registered) (d) * 2,060,322
469,000 Siam City Cement (Foreign Registered) (d) * 1,269,266
414,300 Siam Commercial Bank Plc (Foreign Registered) (d) * 174,845
399,000 Siam Pulp & Paper (Foreign Registered) (d) * 539,912
201,512 Singer Plc (Foreign Registered) (d) * 199,784
3,108,050 Star Block Co Ltd (Foreign Registered) * 41,641
2,131,000 Telecomasia (Foreign Registered) * 1,042,089
257,700 Thai Airways International (Foreign Registered) (d) * 338,352
2,561,300 Thai Farmers Bank Plc (Foreign Registered) (d) * 4,289,423
1,540,850 Thai German Ceramics Industry (Foreign Registered) (d) * 350,944
10,757,880 Thai Petrochemical (Foreign Registered) (d) * 1,700,737
105,200 Thai Plastic & Chemical (Foreign Registered) (d) * 123,325
279,300 Tipco Asphalt Public Co Ltd * 497,681
----------
48,720,422
----------
Turkey - 0.1%
128,010 Sabanci Holding GDR (Registered) 739,258
----------
Venezuela - 1.2%
2,534,473 Banco Provincial 2,637,572
218,606 Ceramica Carabobo Class B ADR * 131,164
165,200 Compania Anonima Nacional Telefonos de Venezuela (CANTV) Sponsored ADR 2,570,925
9,796,385 Electricidad De Caracas 3,000,503
778 International Briquettes Holding * 3,890
35,181 Mantex SA Class A Sponsored ADR * 255,062
408,275 Siderurgica Venezolana (Sivensa) Class A 12,789
23 Siderurgica Venezolana (Sivensa) Class B 1
126,766 Siderurgica Venezolana (Sivensa) Registered ADR Class A 253,532
530 Siderurgica Venezolana (Sivensa) Registered ADR Class B 1,394
</TABLE>
See accompanying notes to the financial statements. 11
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Venezuela - continued
723,926 Venepal SA Class B GDR 144A 43,436
733,683 Venezolana de Cementes 294,942
226,157 Venezolana de Cementes Tipo II 90,522
-------------
9,295,732
-------------
TOTAL COMMON STOCKS (Cost $890,352,732) 611,888,680
-------------
PREFERRED STOCKS - 8.3%
Brazil - 6.8%
7,831,000 Acos Villares SA * 184,925
22,920,000 Alpargatas de Sao Paolo 706,930
7,334,457 Banco Bradesco Receipts * 28,914
943,950,774 Banco Bradesco SA 3,721,213
67,516,200 Banco Estado Sao Paulo 1,789,586
148,940,000 Banco Nacional (b) * 718
33,080,000 Belgo Mineira (Registered) 561,164
372,525,003 Bombril SA 969,463
2,583,000 Brahma PN 958,511
47,500,000 Caemi Mineracao e Metalurgica SA 927,108
60,942,827 Cemig 787,117
167,200,000 Cia Energetica de Sao Paolo SA (Registered) 1,865,388
34,000,000 Cia Energetica Perna Class A 63,084
1,123,059,000 Companhia de Acos Especiais Itabira-Acesita 297,678
13,889,000 Copene-Petroquimica do Nordeste SA Class A 1,107,773
195,099,710 Electrobras Class B (Registered) 2,623,268
162,100,000 Elektro * 710,896
594,000,000 Fertilizantes Fosfatados 1,230,940
659,062,710 Gerasul 390,673
17,500,000 Gerdau SA 118,072
3,187,000 Industrias Klabin de Papel e Celulose SA 599,002
6,337,459 Investimentos Itau SA 2,565,526
1,336,261 Iochpe Maxion * 8,114
559,080,000 Iparanga Brasil de Petroleo 2,128,546
6,680,000 Itaubanco SA (Registered) 2,301,783
43,900,000 Lojas Americanas (Registered ) 148,308
42,420,000 Mesbla (Registered) * 2,044
1,045,540 Nova Usiminas Class A * 1,249,609
19,045 Nova Usiminas Class B * 229,458
335,746,000 Olvebra * 55,014
199,400,000 Petrobras Distrib 1,268,472
65,494,000 Petroleo Brasileiro SA (Petrobras) 5,085,175
830,000 Sadia Frigobras SA (Registered) 292,000
415,600,000 Siderurgica de Tubarao 1,402,024
220,000 Suzano (Registered) 83,759
192,000 Telebras Holders ADR 12,396,000
49,522,000 Telebras Receipts 3,145,542
6,520,152 Unipar 942,673
12 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares/
Par Value($) Description Value ($)
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Brazil - continued
499,000 Varig (Registered) 199,600
13,100,000 Votorantim Celulose e Papel SA 148,361
----------
53,294,431
----------
Korea - 1.3%
115,590 Dongbu Steel Co 269,253
391,263 Samsung Electronics (Non Voting) 9,881,509
----------
10,150,762
----------
Russia - 0.2%
100,800 Krasny Red Oct 144A (d) 153,317
129,200 Lukoil Holding Sponsored ADR (Foreign Registered) 439,280
384,800 Lukoil Holding (d) * 684,944
2,339 Moscow City Telephone Network (d) 111,103
30 Rostelecom (d) 8
1,834,100 St Petersburg Telephone 132,055
15,230,200 Unified Energy Systems (d) 228,453
----------
1,749,160
----------
TOTAL PREFERRED STOCKS (Cost $137,316,137) 65,194,353
----------
DEBT OBLIGATIONS - 3.6%
U.S. Government - 3.6%
$ 29,433,232 U.S. Treasury Inflation Indexed Note, 3.375% due 1/15/07 (c) 28,384,667
----------
TOTAL DEBT OBLIGATIONS (Cost $28,563,440) 28,384,667
----------
INVESTMENT FUNDS - 2.8%
Brazil - 0.1%
76,400 Brazil Fund Inc 749,675
----------
Chile - 0.3%
22,000 Chile Fund Inc 203,500
711,900 Five Arrows Chile Investment Trust Ltd 1,210,230
474,600 Five Arrows Chile Investment Trust Ltd Convertible Units * 844,788
----------
2,258,518
----------
Czech Republic - 0.0%
10,000 Sporitelni Privatizacni * 294,408
----------
India - 0.0%
100 Uti Masterplus 1991 Unit * 43
10,400 UTI Masterplus 1991 * 4,423
----------
4,466
----------
Kazakhstan - 0.1%
450,000 Kazakhstan Investment Fund (d) (e) * 1,125,000
----------
</TABLE>
See accompanying notes to the financial statements. 13
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares/
Par Value($) Description Value ($)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Poland - 1.0%
603,111 CHP Investors (d) (e) * 486,047
4,102,132 OBP Investors (d) (e) 5,408,174
2,060,116 Templeton Emerging European Fund (d) * 1,992,132
----------
7,886,353
----------
Romania - 0.2%
4,500 Romanian Investment Fund (d) (e) * 1,350,000
----------
Russia - 0.8%
10,000,000 New Century Holdings LP (d) (e) * 6,166,000
----------
Thailand - 0.1%
1,500,000 Ruam Pattana Fund (Registered) (d) * 204,984
70 Thailand International Fund IDR 507,500
----------
712,484
----------
Ukraine - 0.1%
25,000 Societe Generale Thalmann Ukrania Fund (e) * 956,250
----------
United States - 0.1%
71,400 Morgan Stanley Emerging Markets Fund 615,825
----------
TOTAL INVESTMENT FUNDS (Cost $36,722,706) 22,118,979
----------
EQUITY LINKED SECURITIES - 1.9%
Chile - 1.9%
$ 8,794,292 Citibank-Nassau Chilean Equity Time Deposit, 3.50% due 4/9/99 (e) (f) * 5,971,324
$ 4,040,743 Citibank-Nassau Chilean Equity Time Deposit, 3.50% due 5/3/99 (e) (f) * 2,881,454
$ 6,405,773 Citibank-Nassau Chilean Equity Time Deposit, 3.50% due 6/14/99 (e) (f) * 5,516,011
----------
14,368,789
----------
Russia - 0.0%
32,787 Renaissance Sberbank Note (d) (e) (g) * 344,123
----------
TOTAL EQUITY LINKED SECURITIES (Cost $30,391,032) 14,712,912
----------
CONVERTIBLE SECURITIES - 1.0%
Indonesia - 0.4%
$ 28,000,000 APP Finance (VI) Convertible, 0.00% due 11/18/12 3,920,000
----------
Korea - 0.1%
$ 500,000 Daewoo Corp Convertible, Zero Coupon, due 12/31/07 400,000
----------
Poland - 0.0%
DEM 25,000 Elektrim SA, 2.00% due 5/30/04 15,154
----------
South Africa - 0.1%
$ 1,100,000 Randgold Finance Convertible, 7.00% due 10/03/01 539,000
----------
</TABLE>
14 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares/
Par Value($) Description Value ($)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Thailand - 0.3%
$ 5,030,000 Bangkok Bank Public Co Convertible, 3.25% due 3/3/04 2,112,600
$ 358,000 Bangkok Land Convertible, 4.50% due 10/13/03 17,900
$ 1,814,000 MDX Public Co Ltd Convertible, 4.75% due 9/17/03 90,700
CHF 2,800,000 NTS Steel Group Convertible, 1.00% due 12/17/03 154,584
$ 630,000 Somprasong Land Co Convertible, 3.88% due 1/21/04 12,600
----------
2,388,384
----------
Venezuela - 0.1%
$ 1,195,000 Global Investment Financial Corp Convertible, 11.00% due 3/19/01 597,500
----------
TOTAL CONVERTIBLE SECURITIES (Cost $15,636,312) 7,860,038
----------
RIGHTS & WARRANTS - 0.3%
Brazil - 0.0%
4,375 Cosipa Preferred Rights 12/31/25 * --
84,234,574 Mesbla Preferred Rights 12/31/25 * 4
----------
4
----------
Indonesia - 0.0%
226,076 Indah Kiat Pulp & Paper Warrants 4/13/01 * 21,744
----------
Malaysia - 0.0%
98,666 Amsteel Corp Warrants 5/19/00 * 4,154
43,600 UMW Holding Berhad Warrants 1/26/00 * 7,343
----------
11,497
----------
Mexico - 0.0%
38,886 Grupo Mexico Class B Warrants 8/9/01 * 89,842
----------
Phillippines - 0.2%
2,523,700 Jolliebee FDS Warrants 2/24/03 * 1,182,478
----------
South Africa - 0.0%
2,461 Randfontein Estates Warrants 7/01/02 * 1,192
----------
Thailand - 0.1%
954,500 Industrial Finance Corp of Thailand Rights 3/8/99 12,788
511,196 Shinawatra Computer Public Co Ltd (Foreign Registered) Rights 3/15/99 * 1,205,393
----------
1,218,181
----------
TOTAL RIGHTS & WARRANTS (Cost $2,562,699) 2,524,938
----------
SHORT-TERM INVESTMENTS - 7.7%
Cash Equivalents - 5.9%
32,192,700 The Boston Global Investment Trust (a) 32,192,700
$ 14,000,000 Wachovia Bank Time Deposit, 4.60% due 3/01/99 14,000,000
----------
46,192,700
----------
</TABLE>
See accompanying notes to the financial statements. 15
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Par Value($) Description Value ($)
- --------------------------------------------------------------------------------
U.S. Government - 1.8%
$ 14,500,000 U. S. Treasury Bill, 4.36% due 3/04/99 (c) 14,494,623
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $60,687,501) 60,687,323
------------
TOTAL INVESTMENTS - 103.5%
(Cost $1,202,232,559) 813,371,890
Other Assets and Liabilities (net) - (3.5%) (27,443,697)
------------
TOTAL NET ASSETS - 100.0% $785,928,193
=============
Notes to the Schedule of Investments:
ADR American Depositary Receipt
GDR Global Depository Receipt
GDS Global Depository Shares
RDC Russian Depository Certificate
BRL Brazilian Real
CHF Swiss Franc
DEM German Mark
(a) Represents investment of security lending collateral
(Note 1).
(b) Bankrupt issuer.
(c) Security has been segregated to cover margin
requirements on open swap contracts.
(d) Valued by management (Note 1).
(e) Security is restricted as to public resale. The
aggregate market value of restricted securities is
$29,421,362, or 3.7% of net assets.
(f) A derivative security whose price is linked to the
return on a basket of Chilean asset investments.
(g) A derivative security whose price is linked to the
return on a Russian basket of securities.
144A Securities exempt from registration under Rule 144A of
the Securities Act of 1933. These securities may be
resold in transactions exempt from registration,
normally to qualified institutional buyers.
* Non-income producing security.
16 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
- --------------------------------------------------------------------------------
At February 28, 1999, industry sector diversification of the Fund's
equity investments was as follows:
Industry Sector (Unaudited)
Banking 10.5%
Telecommunications 9.6
Metals and Mining 7.8
Conglomerates 7.3
Utilities 6.5
Electronic Equipment 6.2
Financial Services 5.9
Food and Beverage 5.5
Construction 4.4
Oil and Gas 4.3
Consumer Goods 4.2
Services 2.0
Communications 1.9
Paper and Allied Products 1.8
Real Estate 1.6
Chemicals 1.4
Computers 1.3
Insurance 1.3
Transportation 1.1
Machinery 1.0
Automotive 1.0
Textiles 0.9
Health Care 0.7
Retail Trade 0.2
Miscellaneous 11.6
-----
100.0%
=====
See accompanying notes to the financial statements. 17
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities - February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at value (cost $1,202,232,559) (Note 1) $ 813,371,890
Foreign currency, at value (cost $18,798,791) (Note 1) 18,933,017
Cash 23,212
Receivable for investments sold 9,293,246
Net receivable for open forward foreign currency contracts (Notes 1 and 5) 814,699
Receivable for open swap contracts (Notes 1 and 5) 530,311
Foreign withholding taxes receivable 996,425
Dividends and interest receivable 5,175,776
Receivable for expenses waived or borne by Manager (Note 2) 130,255
---------------
Total assets 849,268,831
---------------
Liabilities:
Payable for investments purchased 21,258,449
Accrued Malaysian repatriation taxes (Note 1) 7,250,217
Payable upon return of securities loaned (Note 1) 32,192,700
Accrued capital gain taxes payable (Note 1) 1,565,264
Payable to affiliate for (Note 2):
Management fee 619,730
Shareholder service fee 83,494
Accrued expenses 370,784
---------------
Total liabilities 63,340,638
---------------
Net assets $ 785,928,193
===============
Net assets consist of:
Paid-in capital $ 1,545,722,995
Distributions in excess of net investment income (3,684,069)
Accumulated net realized loss (359,889,449)
Net unrealized depreciation (396,221,284)
---------------
$ 785,928,193
===============
Net assets attributable to:
Class III Shares $ 524,741,263
===============
Class IV Shares $ 261,186,930
===============
Shares outstanding:
Class III 83,107,843
===============
Class IV 41,401,009
===============
Net asset value per share:
Class III $ 6.31
===============
Class IV $ 6.31
===============
</TABLE>
18 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Statement of Operations - Year Ended February 28, 1999
- --------------------------------------------------------------------------------
Investment income:
Dividends (net of foreign tax expense of $2,914,845) $ 36,595,604
Interest (including security lending income of $702,733) 7,188,579
-------------
Total income 43,784,183
-------------
Expenses:
Management fee (Note 2) 11,112,844
Custodian fees 1,974,341
Audit fees 89,360
Registration fee 50,298
Transfer agent fees 43,443
Legal fees 33,837
Trustees fees (Note 2) 9,977
Miscellaneous 259,892
Fees waived or borne by Manager (Note 2) (2,342,168)
-------------
11,231,824
Shareholder service fee (Note 2)
Class III 998,387
Class IV 468,171
-------------
Net expenses 12,698,382
-------------
Net investment income 31,085,801
-------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments (299,747,084)
Closed futures contracts (39,572)
Closed swap contracts (7,334,268)
Foreign currency, forward contracts and foreign
currency related transactions (16,631,554)
-------------
Net realized loss (323,752,478)
-------------
Change in net unrealized appreciation (depreciation) on:
Investments (Note 1) (211,086,257)
Open swap contracts 3,703,459
Foreign currency, forward contracts and foreign
currency related transactions 6,328,861
-------------
Net unrealized loss (201,053,937)
-------------
Net realized and unrealized loss (524,806,415)
-------------
Net decrease in net assets resulting from operations $(493,720,614)
=============
See accompanying notes to the financial statements. 19
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1999 February 28, 1998
--------------- ---------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 31,085,801 $ 22,024,564
Net realized gain (loss) (323,752,478) 81,402,501
Change in net unrealized appreciation (depreciation) (201,053,937) (341,634,031)
--------------- ---------------
Net decrease in net assets
resulting from operations (493,720,614) (238,206,966)
--------------- ---------------
Distributions to shareholders from:
Net investment income
Class I -- (129,011)
Class II -- (254,928)
Class III (16,087,702) (35,349,550)
Class IV (9,786,346) --
--------------- ---------------
Total distributions from net investment income (25,874,048) (35,733,489)
--------------- ---------------
Net realized gains
Class I -- (503,907)
Class II -- (1,133,793)
Class III (10,825,261) (100,204,482)
Class IV (8,023,682) --
--------------- ---------------
Total distributions from net realized gains (18,848,943) (101,842,182)
--------------- ---------------
In excess of net realized gains
Class I -- (266,871)
Class II -- (600,460)
Class III (49,311) (53,068,677)
Class IV (36,550) --
--------------- ---------------
Total distributions in excess of net realized gains (85,861) (53,936,008)
--------------- ---------------
(44,808,852) (191,511,679)
--------------- ---------------
Net share transactions: (Note 4)
Class I -- 1,328,062
Class II -- 4,693,314
Class III (77,844,893) (324,321,493)
Class IV (183,333,072) 606,255,395
--------------- ---------------
Increase (decrease) in net assets resulting from
net share transactions (261,177,965) 287,955,278
--------------- ---------------
Total decrease in net assets (799,707,431) (141,763,367)
Net assets:
Beginning of period 1,585,635,624 1,727,398,991
--------------- ---------------
End of period (including distributions in excess of
net investment income of $3,684,069 and
accumulated undistributed net investment
income of $22,378,753, respectively) $ 785,928,193 $ 1,585,635,624
=============== ===============
</TABLE>
20 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class I share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from March 1, 1997 Period Ended
to January 9, 1998 February 28, 1997 *
------------------ -------------------
<S> <C> <C>
Net asset value, beginning of period $ 12.48 $ 10.86
--------- ---------
Income (loss) from investment operations:
Net investment income 0.14+ 0.01
Net realized and unrealized gain (loss) (2.69) 1.61
--------- ---------
Total from investment operations (2.55) 1.62
--------- ---------
Less distributions to shareholders from:
Net investment income (0.26) --
Net realized gains (0.71) --
In excess of net realized gains (0.37) --
--------- ---------
Total distributions (1.34) --
--------- ---------
Net asset value, end of period $ 8.59(d) $ 12.48
========= =========
Total Return (a) (21.66%) 14.92%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ -- $ 1,748
Net expenses to average
daily net assets 1.41%**(c) 1.45%**(c)
Net investment income to average
daily net assets 1.21%** 0.77%**
Portfolio turnover rate 88% 41%
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amount: $ 0.02 (b)
</TABLE>
+ Computed using average shares outstanding throughout the period.
* Period from January 2, 1997 (commencement of operations) to February 28,
1997.
** Annualized
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(b) Fees and expenses voluntarily waived or borne by the Manager were less
than $0.01 per share.
(c) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .20% and .04% of average daily net assets for
the periods ended February 28, 1997 and January 9, 1998, respectively.
(d) All Class I shares of the Fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
See accompanying notes to the financial statements. 21
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class II share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from November 29, 1996
Period from October 31, 1997 (commencement of operations)
to January 9, 1998 to February 4, 1997
------------------ -------------------
<S> <C> <C>
Net asset value, beginning of period $ 11.40 $ 10.74
-------- --------
Income (loss) from investment operations:
Net investment income 0.03+ 0.05
Net realized and unrealized gain (loss) (1.75) 1.10
-------- --------
Total from investment operations (1.72) 1.15
-------- --------
Less distributions to shareholders from:
Net investment income (0.14) (0.07)
Net realized gains (0.61) 0.00
In excess of net realized gains (0.32) --
-------- --------
Total distributions (1.07) (0.07)
-------- --------
Net asset value, end of period $ 8.61(e) $ 11.82(d)
======== ========
Total Return (a) (15.72%) 10.73%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ -- $ --
Net expenses to average
daily net assets 1.38%*(b) 1.33%*(b)
Net investment income to average
daily net assets 1.58%* 6.14%*
Portfolio turnover rate 88% 41%
Fees and expenses voluntarily waived or
borne by the Manager consisted
of the following per share amounts: (c) (c)
</TABLE>
+ Computed using average shares outstanding throughout the period.
* Annualized
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(b) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .07% and .02% of average daily net assets for
the periods ended February 4, 1997 and January 9, 1998, respectively.
(c) Fees and expenses voluntarily waived or borne by the Manager were less
than $.01 per share.
(d) All Class II shares of the Fund were exchanged for Class III shares on
February 4, 1997. Amount represents ending net asset value per share on
February 4, 1997.
(e) All Class II shares of the Fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
22 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.56 $ 12.49 $ 10.54 $ 9.52 $ 12.13
---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income 0.25 0.16+ 0.13 0.10 0.05
Net realized and unrealized gain (loss) (3.19) (1.76) 1.96 1.06 (2.37)
---------- ---------- ---------- ---------- ----------
Total from investment operations (2.94) (1.60) 2.09 1.16 (2.32)
---------- ---------- ---------- ---------- ----------
Less distributions to shareholders from:
Net investment income (0.19) (0.25) (0.14) (0.01) (0.07)
Net realized gains (0.12) (0.71) -- (0.13) (0.22)
In excess of net realized gains (0.00)(d) (0.37) -- -- --
---------- ---------- ---------- ---------- ----------
Total distributions (0.31) (1.33) (0.14) (0.14) (0.29)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 6.31 $ 9.56 $ 12.49 $ 10.54 $ 9.52
========== ========== ========== ========== ==========
Total Return (a) (30.96%) (12.94%) 19.98% 12.24% (19.51%)
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 524,741 $ 913,615 $1,725,651 $ 907,180 $ 384,259
Net expenses to average
daily net assets 1.16% 1.24%(c) 1.24%(c) 1.35% 1.58%
Net investment income to average
daily net assets 2.75% 1.30% 1.40% 1.31% 0.85%
Portfolio turnover rate 76% 88% 41% 35% 50%
Fees and expenses voluntarily waived
or borne by the Manager consisted of
the following per share amounts: $ 0.02 $ 0.03 0.02 (b) --
</TABLE>
+ Computed using average shares outstanding throughout the period.
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(b) Fees and expenses voluntarily waived or borne by the Manager were less
than $.01 per share.
(c) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .06% and .035% of average daily net assets for
the years ended February 28, 1997 and 1998, respectively.
(d) The distribution in excess of net realized gains was $0.0005.
See accompanying notes to the financial statements. 23
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from January 9, 1998
Year Ended (commencement of operations)
February 28, 1999 to February 28, 1998
----------------- --------------------
<S> <C> <C>
Net asset value, beginning of period $ 9.56 $ 8.62
--------- ---------
Income (loss) from investment operations:
Net investment income 0.28 0.01+
Net realized and unrealized gain (loss) (3.21) 0.93
--------- ---------
Total from investment operations (2.93) 0.94
--------- ---------
Less distributions to shareholders from:
Net investment income (0.20) --
Net realized gains (0.12)
In excess of net realized gains (0.00)(d) --
--------- ---------
Total distributions (0.32) --
--------- ---------
Net asset value, end of period $ 6.31 $ 9.56
========= =========
Total Return (a) (31.01%) 10.90%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 261,187 $ 672,020
Net expenses to average
daily net assets 1.12% 1.22%*(b)
Net investment income to average
daily net assets 2.87% 0.65%*
Portfolio turnover rate 76% 88%
Fees and expenses voluntarily waived
or borne by the Manager consisted
of the following per share amounts: $ 0.02 (c)
</TABLE>
+ Computed using average shares outstanding throughout the period.
* Annualized
(a) Calculation excludes purchase premiums and redemption fees. The total
return would have been lower had certain expenses not been waived during
the period shown.
(b) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .04% of average daily net assets.
(c) Fees and expenses voluntarily waived or borne by the Manager were less
than $.01 per share.
(d) The distribution in excess of net realized gains was $0.0005.
24 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Emerging Markets Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on June
24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series into classes.
The Fund seeks long-term capital appreciation consistent with a prudent
level of risk through investment in equity and equity-related securities
traded in the securities markets of newly industrializing countries in
Asia, Latin America, the Middle East, Southern Europe, Eastern Europe and
Africa.
Prior to January 9, 1998, the Fund offered three classes of shares: Class
I, Class II, and Class III. Effective January 9, 1998, Class I and Class
II shares ceased operations and all shares were exchanged for Class III
shares, and Class IV shares commenced operations. The principal economic
difference among the classes of shares is the level of shareholder service
fee borne by the classes. Eligibility for and automatic conversion between
the various classes of shares is generally based on the total amount of
assets invested with GMO, as more fully described in the Trust's
prospectus.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost
which approximates market value. Other assets and securities for which no
quotations are readily available are valued at fair value as determined in
good faith by the Trustees or other persons acting at their direction.
Certain investments in securities held by the Fund were valued on the
basis of a price provided by a principal market maker. These prices may
differ from the value that would have been used had a broader market for
the securities existed and the differences could be material to the
financial statements.
25
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
The Fund may be subject to capital gains and repatriation taxes imposed by
certain countries in which it invests. The Fund has recorded an accrual in
the amount of $1,565,264 for potential capital gains taxes at February 28,
1999. The accrual for capital gains taxes is included in net realized and
unrealized loss in the Statement of Operations.
On September 1, 1998, the Malaysian government introduced capital controls
effectively eliminating trading of the Malaysian ringgit. Effective
February 4, 1999, the Malaysian government modified these restrictions.
Funds invested in Malaysia as of February 15, 1999 and repatriated within
one year of September 1, 1998, or one year from the date of the investment
if after September 1, 1998, are subject to a graduated repatriation tax on
the principal invested with a maximum of 30%. The Fund has recorded an
accrual in the amount of $7,250,217 for potential repatriation tax on
principal invested prior to February 15, 1999. The accrual for Malaysian
repatriation taxes is included in the change in net unrealized
appreciation (depreciation) on investments in the Statement of Operations.
Funds invested in Malaysia on or after February 15, 1999 are subject to a
repatriation tax on capital gains of 30% for currency repatriated in less
than one year of the initial investment and 10% for currency repatriated
after one year of the initial investment. The Fund has not made any
additional investments in Malaysia on or after February 15, 1999 and
accordingly no tax provision for capital gains has been accrued.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the prevailing
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at prevailing exchange rates when
accrued or incurred. The Fund does not isolate realized and unrealized
gains and losses attributable to changes in exchange rates from gains and
losses that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent net exchange gains and losses on disposition of
foreign currencies, currency gains and losses realized between the trade
and settlement dates on securities transactions and the difference between
the amount of investment income and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent amounts actually received
or paid.
Forward currency contracts
The Fund may enter into forward currency contracts in connection with
settling planned purchases or sales of securities or to hedge the currency
exposure associated with some or all of the Fund's portfolio securities. A
forward currency contract is an agreement between two parties to buy and
sell a currency at a set price on a future date. The market value of a
forward currency contract fluctuates with changes in forward currency
exchange rates. Forward currency contracts are marked to market daily and
the change in value is recorded by the Fund as an unrealized gain or loss.
Realized gains or losses equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed
are recorded upon delivery or receipt of the currency or, if a forward
currency contract is offset by entering into another forward currency
contract with the same broker, upon settlement of the net gain or loss.
These contracts may involve market risk in excess of the unrealized gain
or loss reflected in the Fund's Statement of Assets and Liabilities. In
addition, the Fund could be exposed to risk if the counterparties are
unable to meet the terms of the contracts or if the value of the currency
changes
26
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
unfavorably to the U.S. dollar. The U.S. dollar value of the currencies
the Fund has committed to sell is shown under Note 5, and represents the
currency exposure the Fund has acquired or hedged through currency
contracts as of February 28, 1999.
Futures contracts
The Fund may purchase or sell index futures contracts. Stock index futures
contracts represent commitments for future delivery of cash based upon the
level of a specified index of equity securities at a specified price at a
given date. The Fund may use futures contracts to manage its exposure to
the stock and currency markets. Buying futures tends to increase the
Fund's exposure to the underlying instrument. Selling futures tends to
decrease the Fund's exposure to the underlying instrument or hedge other
Fund instruments. Upon entering into a futures contract, the Fund is
required to deposit with its custodian, in a segregated account in the
name of the futures broker, an amount of cash or U.S. government
obligations in accordance with the initial margin requirements of the
broker or exchange. Futures contracts are marked to market daily and an
appropriate payable or receivable for the change in value ("variation
margin") is recorded by the Fund. The payable or receivable is
subsequently settled. Gains or losses are recognized but not considered
realized until the contracts expire or are closed. Futures contracts
involve, to varying degrees, risk of loss in excess of the variation
margin disclosed in the Statement of Assets and Liabilities. Losses may
arise from the changes in the value of the underlying instrument, if there
is an illiquid secondary market for the contracts or if counterparties do
not perform under the contract terms. Futures contracts are valued at the
settlement price established each day by the board of trade or exchange on
which they are traded. As of February 28, 1999, there were no outstanding
futures contracts.
Swap agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to the equity markets. The Fund enters into total return swap agreements
which involve a commitment by one party in the agreement to pay interest
in exchange for a market linked return based on a notional amount. To the
extent that the total return of the security or index underlying the
transaction exceeds or falls short of the offsetting interest rate
obligation, the Fund will receive a payment from or make a payment to the
counterparty, respectively. Total return swaps are marked to market daily
based upon quotations from market makers and the change, if any, is
recorded as unrealized gain or loss in the Statement of Operations.
Payments received or made at the end of the measurement period are
recorded as realized gain or loss in the Statement of Operations. Entering
into these agreements involves, to varying degrees, elements of credit and
market risk in excess of the amounts recognized on the Statement of Assets
and Liabilities. Such risks involve the possibility that there will be no
liquid market for these agreements, that the counterparty to the
agreements may default on its obligation to perform or that there may be
unfavorable changes in the price of the security or index underlying these
transactions. See Note 5 for a summary of all open swap agreements as of
February 28, 1999.
27
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of delay in
recovery or even loss of rights in the collateral should the borrower of
the securities fail financially. The Fund receives compensation for
lending its securities. At February 28, 1999, the Fund loaned securities
having a market value of $29,375,886 collateralized by cash in the amount
of $32,192,700 which was invested in a short-term instrument.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
federal income tax purposes. Therefore, no provision for federal income or
excise tax is necessary. Taxes on foreign interest and dividend income
have been withheld in accordance with the applicable country's tax treaty
with the United States. Dividends received by shareholders of the Fund
which are derived from foreign source income and foreign taxes paid by the
Fund are to be treated, to the extent allowable under the Code, as if
received and paid by the shareholders of the Fund.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. The Fund declares separate dividends from net
investment income on each class of shares.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
foreign currency and passive foreign investment company transactions and
redemptions in-kind. Gains resulting from such in-kind transactions
amounted to $2,801,930.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
----------------- ----------- ---------------
($31,274,575) $69,236,430 ($37,961,855)
28
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date, or when the Fund is informed of the
ex-dividend date, if later. Interest income is recorded on the accrual
basis and is adjusted for the accretion of discounts. In determining the
net gain or loss on securities sold, the cost of securities is determined
on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds. Investment
income, common expenses and realized and unrealized gains and losses are
allocated pro-rata among the classes of shares of the Fund based on the
relative net assets of each class. Shareholder service fees, which are
directly attributable to a class of shares, are charged to that class'
operations.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is 1.60% of the amount
invested. In the case of cash redemptions, the fee is .40% of the amount
redeemed. These fees 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. All purchase premiums
and redemption fees are paid to and recorded by the Fund as paid-in
capital. These fees are allocated relative to each class' net assets on
the share transaction date. Purchase premiums are included as part of each
class' "shares sold" and redemption fees are included as part of each
class' "shares repurchased", respectively, as summarized in Note 4. For
the year ended February 28, 1999, the Fund received $1,857,307 in purchase
premiums and $1,085,444 in redemption fees. There is no premium for
reinvested distributions. While no purchase premium is normally charged
with respect to in-kind purchases of Fund shares, a purchase premium of up
to .20% may be charged on certain in-kind transactions.
Investment risk
Investments in securities of emerging countries present certain risks that
are not inherent in many other investments. Many emerging countries
present elements of political and/or economic instability. The securities
markets of emerging countries are generally smaller and less developed
than the securities markets of the U.S. and developed foreign markets.
Further, countries may impose various types of foreign currency
regulations or controls which may impede the Fund's ability to repatriate
amounts it receives. The Fund may acquire interests in securities in
anticipation of improving conditions in the related countries. These
factors may result in significant volatility in the values of its
holdings. The markets for emerging countries are relatively illiquid.
Accordingly, the Fund may not be able to realize in an actual sale amounts
approximating those used to value its holdings.
29
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 1.00% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of each class at the annual rate of .15%
for Class III shares and .105% for Class IV shares.
GMO agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding custody fees, brokerage commissions, certain other transaction
costs (including stamp duties and transfer taxes), shareholder service
fees and extraordinary expenses) exceed .81% of average daily net assets.
Effective March 1, 1999, GMO's contractual management fee was reduced to
.81% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding custody fees,
brokerage commissions, certain other transaction costs (including stamp
duties and transfer taxes), shareholder service fees and extraordinary
expenses) exceed the management fee.
The Manager has entered into a Consulting Agreement with Dancing Elephant,
Ltd. (the "Consultant") with respect to the management of the portfolio.
Payments made by the Manager to the Consultant will not affect the amounts
payable by the Fund to the Manager or the Fund's expense ratio.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999, was $9,977. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1999, were as
follows:
Purchases Proceeds
------------ ------------
U.S. Government securities $ 33,590,790 $ 5,019,459
Investments (non-U.S. Government
securities) 735,059,246 949,051,267
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in the value of investments held
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
------------------- ------------------- ------------------ ------------------
<S> <C> <C> <C>
$1,213,901,940 $46,435,536 $446,965,586 $400,530,050
</TABLE>
30
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
4. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums and redemption
fees received by the Fund, were as follows:
Period from March 1, 1997
to January 9, 1998
---------------------------
Class I: Shares Amount
-------- -----------
Shares sold 654,767 $ 8,075,897
Shares issued to
shareholders in
reinvestment of
distributions 94,886 892,506
Shares repurchased (889,721) (7,640,341)
-------- -----------
Net increase/(decrease) (140,068) $ 1,328,062
======== ===========
Period from October 31, 1997
to January 9, 1998
------------------------------
Class II: Shares Amount
---------- ------------
Shares sold 1,860,787 $ 20,571,162
Shares issued to
shareholders in
reinvestment of
distributions 215,746 1,989,181
Shares repurchased (2,076,533) (17,867,029)
---------- ------------
Net increase -- $ 4,693,314
========== ============
31
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Share transactions - continued
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1999 February 28, 1998
------------------------------ ------------------------------
Class III: Shares Amount Shares Amount
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Shares sold 16,151,855 $ 124,491,194 41,704,905 $ 476,637,263
Shares issued to
shareholders in
reinvestment of
distributions 3,383,887 22,834,853 17,410,973 170,165,033
Shares
repurchased (31,966,910) (225,170,940) (101,692,012) (971,123,789)
------------- ------------- ------------- -------------
Net decrease (12,431,168) $ (77,844,893) (42,576,134) $(324,321,493)
============= ============= ============= =============
<CAPTION>
Period from January 9, 1998,
Year Ended (commencement of operations)
February 28, 1999 to February 28, 1998
------------------------------ ------------------------------
Class IV: Shares Amount Shares Amount
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Shares sold 1,052,163 $ 11,220,974 73,482,774 $ 636,013,851
Shares issued to
shareholders in
reinvestment of
distributions 1,540,180 10,691,678 -- --
Shares
repurchased (31,493,803) (205,245,724) (3,180,305) (29,758,456)
------------- ------------- ------------- -------------
Net increase/
(decrease) (28,901,460) $(183,333,072) 70,302,469 $ 606,255,395
============= ============= ============= =============
</TABLE>
32
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
5. Financial instruments
A summary of outstanding financial instruments at February 28, 1999 is as
follows:
Short forward currency contract
<TABLE>
<CAPTION>
Net
Units of Unrealized
Settlement Date Deliver Currency Value Appreciation
---------------- ---------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
3/03/99 BRL 18,354,000 $ 8,845,301 $ 814,699
</TABLE>
See Notes to Schedule of Investments for definition of currency
abbreviation.
Swap agreements
<TABLE>
<CAPTION>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
---------- ---------- ------------------------------------------------ --------------
<S> <C> <C> <C>
$2,500,000 3/11/99 Agreement with Goldman Sachs International dated $2,423,576
9/25/98 to receive (pay) the notional amount
multiplied by the return on the Korea Stock
Price Index and to pay the notional amount
multiplied by 6 month LIBOR adjusted by
a specified spread.
5,000,000 4/13/99 Agreement with Goldman Sachs International dated 98,782
10/13/98 to receive (pay) the notional amount
multiplied by the return on the MSCI Taiwan
Index and to pay the notional amount multiplied
by 6 month LIBOR adjusted by a specified spread.
5,000,000 4/29/99 Agreement with Goldman Sachs International dated 226,870
10/14/98 to receive (pay) the notional amount
multiplied by the return on the MSCI Taiwan
Index and to pay the notional amount multiplied
by 6 month LIBOR adjusted by a specified spread.
</TABLE>
33
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Swap agreements - continued
<TABLE>
<CAPTION>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
---------- ---------- ------------------------------------------------ --------------
<S> <C> <C> <C>
$10,848,366 6/10/99 Agreement with Goldman Sachs $(857,940)
International dated 8/18/98 to receive
(pay) the notional amount multiplied by
the return on the Korea Stock Price
Index and to pay the notional amount
multiplied by 4 month LIBOR adjusted by
a specified spread.
1,413,431 6/23/99 Agreement with Goldman Sachs International dated (51,115)
6/23/98 to receive (pay) the notional amount
multiplied by the return on the Thailand SET
Index and to pay the notional amount multiplied
by 3 month LIBOR adjusted by a specified spread.
2,970,851 6/28/99 Agreement with Indosuez W.I. Carr Ltd. (571,497)
dated 6/27/98 to receive (pay) the
notional amount multiplied by the
change in market value of Pohang Iron &
Steel common stock (including
dividends) and to pay the notional
amount multiplied by 6 month LIBOR
adjusted by a specified spread.
4,499,745 6/28/99 Agreement with Indosuez W.I. Carr Ltd. (464,548)
dated 6/27/98 to receive (pay) the
notional amount multiplied by the
change in market value of SK Telecom
common stock (including dividends) and
to pay the notional amount multiplied
by 6 month LIBOR adjusted by a
specified spread.
5,996,294 6/29/99 Agreement with Lehman Brothers Finance S.A. (226,940)
dated 6/29/98 to receive (pay) the notional
amount multiplied by the return on the Thailand
SET Index and to pay the notional amount
multiplied by 3 month LIBOR adjusted by a
specified spread.
</TABLE>
34
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Swap agreements - continued
<TABLE>
<CAPTION>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
---------- ---------- ------------------------------------------------ --------------
<S> <C> <C> <C>
$ 496,368 11/02/99 Agreement with Credit Suisse First Boston dated $(61,442)
11/02/98 to receive (pay) the change in market
value of a basket of selected securities
(including dividends) and to pay the notional
amount multiplied by 6 month LIBOR
adjusted by a specified spread.
5,000,000 2/25/00 Agreement with Credit Suisse Financial Products 14,565
dated 2/23/99 to receive (pay) the notional
amount multiplied by the return on the MSCI
Taiwan Index and to pay the notional amount
multiplied by 12 month LIBOR adjusted by a
specified spread.
--------
$530,311
========
</TABLE>
35
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
February 28, 1999
- --------------------------------------------------------------------------------
At February 28, 1999, the Fund had a capital loss carryforward available to
offset future capital gains, if any, of the following amounts:
Year of Expiration Amount
------------------ ------
2007 $252,511,867
The Fund has elected to defer to March 1, 1999 post-October capital losses of
$98,650,874 and foreign currency losses of $2,029,395.
36
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
GMO Emerging Markets Fund
(A Series of GMO Trust)
Portfolio Managers
Mr. R. Jeremy Grantham and Mr. Arjun Divecha are primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. Grantham has been with GMO
since its founding in 1977. Mr. Divecha is the principal of Dancing Elephant
Ltd., which serves as consultant to the Fund. Dancing Elephant Ltd. has an
exclusive consulting management agreement with GMO.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO Emerging Markets Fund returned -31.0% for the
fiscal year ended February 28, 1999. The Fund's benchmark, the IFC Investable
Composite, returned -24.8% during the same period. Consistent with the Fund's
investment objectives and policies, the Fund was invested substantially in
equity securities throughout the period.
It was a very difficult year for emerging markets, with the Asia crisis, which
began in 1997, spilling over to Russia in mid 1998 and Brazil in early 1999.
There were huge divergences in market returns, ranging from Greece being up 135%
(in US$) to Russia losing 72% (in US$) of its value.
Country Allocation
We use four valuation models to evaluate the attractiveness of countries. While
the momentum, reversal and macroeconomic models outperformed the benchmark, the
value model was hard hit. Given that value forms the largest part of our
process, this hurt relative performance.
We started the year moderately overweight in Asia and gradually increased our
weighting to a large overweight. In the first half of the year this hurt
performance as the Asian markets continued their decline. However, during the
second half, the Asian markets rebounded strongly, vindicating our overweight
stance.
While we had reduced our weight in Russia by June, we still had a large
overweight and this had a large impact on performance. In addition, Portugal and
Greece (both of which were extremely underweight going into the year) continued
their bull runs as European convergence became a major theme.
Within Country Stock Selection
Stock selection hurt performance, particularly in Latin America as there was a
flight to quality, causing cheap stocks to underperform. On the other hand, our
focus on software companies in India paid off handsomely.
<PAGE>
Outlook
Following steep declines over the past two years, emerging markets have fallen
to extremely cheap levels both in absolute terms and relative to international
developed markets. When compared to developed markets, emerging markets look
favorable, as valuations are as low as we have ever seen them. Although it is
possible that emerging equities will not recover all their losses, we expect
they will outperform the developed markets over the next decade by a wide margin
(150%+).
The difficult global environment and harsh local conditions have forced emerging
countries to make and implement hard decisions, all of which benefit minority
foreign investors. Companies have begun to focus on core competencies - reducing
debt levels, selling assets and taking a greater interest in minority
shareholders. With the prominent exception of a few countries, these major
structural changes are having a large impact on most emerging markets in much
the same way the corporate restructuring movement benefited U.S. and European
economies over the last decade.
The Asian crisis seems to have abated and we foresee the economies hitting
bottom during the third or fourth quarters of 1999. The widespread restructuring
that has begun in Asia is our main reason for optimism. Korea has progressed the
most, while neighboring Asian countries have responded more slowly with the rate
of change accelerating since January. In addition, we are starting to see the
positive effects of the currency devaluation and, most encouraging, the absence
of widely anticipated higher inflation. Currency stabilization has allowed
countries to lower interest rates, to the point where short-term money rates are
now at 4% in Thailand and 7% in Korea. Overall, we see the Asian economies
getting back to trend growth over the next two to three years.
We continue to be very positive about Korea, one of the few emerging countries
that has succeeded in creating global brands (e.g., Samsung, Hyundai and
Daewoo). Thailand is also attractive, though reform is progressing at a slower
pace. Indonesia remains in transition, with political and economic uncertainty
unlikely to be resolved until the elections in early June. Taiwan remains an
overvalued market, and is subject to anticipated volatility exported from the
U.S. high tech sector. Chinese exports have been falling and the government has
been inflating economic statistics to achieve the 8% growth they forecasted. We
remain underweight in Taiwan and China, which we believe to be overvalued
markets, and are modestly overweight in India and Pakistan.
Prospects for Latin America will be tied to developments in Brazil, a country
that is an enigma for value investors. While the market is extremely cheap and
long-term prospects look attractive, the macroeconomic picture is fraught with
perils. We are inclined to take the long view and allow the cheapness to take us
to a moderate overweight slowly. Chile is the most efficiently managed economy
in Latin America, but has been hit hard by the drop in commodity prices. With
cheap valuations and positive reforms we remain overweight. Though Mexico has
been making a smooth transition to multi-party democracy, it has had little
impact on the market. Uncompleted banking reforms in the aftermath of the 1995
crisis make it vulnerable to spillovers from Brazil, and with 95% of their
exports directed to the U.S., are extremely vulnerable to a slowdown in the U.S.
economy. We currently hold a significant underweight position in Mexico. Our
hope is that the devaluation in Brazil is the last of the fallout from the
crisis in Asia. We think it unlikely that China/Hong Kong will be forced to
devalue, but if this were to happen we could see further Asian currency
weakness.
During most of 1998, we were underweight the majority of the European markets,
which are very expensive. We continue to be extremely negative on the regions
with the exception of Poland, which, with falling inflation and robust economic
growth, remains the best candidate for
<PAGE>
continuing recovery. We continue to maintain a modest position in Russia. As
interest rates rise in South Africa, economic recovery is stifled. We have been
reducing our overweight there, increasing weights in countries where valuations
are more attractive.
Overall, we are heavily overweight Asia, underweight Mediterranean and close to
neutral on Latin America.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
- --------------------------------------------------------------------------------
Comparison of Change in Value of a $10,000 Investment in
GMO Emerging Markets Fund Class III Shares and the IFC Investable Composite
As of February 28, 1999
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Since
1 Year 5 Year Inception
- --------------------------------------------------------------------------------
Class 12/9/93
III -32.3% -8.6% -4.8%
- --------------------------------------------------------------------------------
Class 1/9/98
IV -32.4% n/a -22.4%
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Date GMO Emerging Markets Fund IFC Investable Composite
Class III Shares
---- ------------------------- ------------------------
1/31/93
12/09/93 9,840 10,000
12/31/93 10,838 11,127
3/31/94 10,946 9,812
6/30/94 10,837 9,500
9/30/94 13,125 11,776
12/31/94 11,519 9,792
3/31/95 9,601 8,352
6/30/95 10,722 9,082
9/30/95 10,808 9,051
12/31/95 10,071 8,967
3/31/96 11,012 9,642
6/30/96 11,790 10,060
9/30/96 11,234 9,834
12/31/96 11,243 9,809
3/31/97 12,466 10,743
6/30/97 14,041 11,392
9/30/97 14,393 10,364
12/31/97 11,232 8,363
3/31/98 11,727 8,950
6/30/98 8,415 7,051
9/30/98 6,692 5,520
12/31/98 7,988 6,521
2/28/99 7,747 6,478
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 160 bp on the purchase and 40 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Performance for
Class IV shares may be different due to lower shareholder service fees. Past
performance is not indicative of future performance. Information is unaudited.
- --------------------------------------------------------------------------------
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO International Small Companies Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO International Small Companies
Fund at February 28, 1999 and the results of its operations, the changes in its
net assets and the financial highlights for the periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 22, 1999
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
COMMON STOCKS - 96.0%
Austria - 2.4%
747 Allgemeine Baugesellschaft AG 82,002
18,523 Austrian Airlines 610,009
1,721 Bau Holdings AG 65,651
15,810 Boehler Uddeholm (Bearer) 757,738
6,789 Brau Union AG 353,254
2,070 BWT AG 432,881
3,089 Interunfall Versicherung AG 430,651
1,203 Oesterreichische Brau Beteiligungs AG 57,327
8,646 Oesterreichische Laenderbank AG 465,066
12,238 Radex-Heraklith AG 338,140
3,175 Universale Bau AG 99,089
226 Wiener Allianz Versicherungs AG 31,384
2,510 Wolford AG 130,604
-------------
3,853,796
-------------
Canada - 4.9%
24,990 Air Canada Inc * 100,986
9,750 Alberta Energy Ltd 208,952
19,590 Anderson Exploration Ltd * 158,329
16,690 BCE Mobile Communications * 475,436
9,508 BCT Telus Communications Inc 263,919
3,169 BCT Telus Communications Inc Class A (Non Voting) 82,715
16,690 CAE Industries Inc 95,640
11,480 Cameco Corp 244,506
11,580 Canadian Natural Resources * 159,949
12,740 Canadian Tire Corp Ltd Class A 324,091
8,200 Cominco Ltd 112,719
20,460 Cott Corp 65,738
14,860 Dofasco Inc 187,042
28,180 Domtar Inc 168,016
16,400 Donohue Inc Class A 332,454
58,000 Echo Bay Mines Ltd * 104,896
3,860 Enbridge Inc 181,557
8,110 International Comfort Products Corp * 48,354
18,960 Ipsco Inc 320,920
8,680 Loewen Group Inc 16,388
14,570 Mackenzie Financial Corp 172,774
21,910 Macmillan Bloedel Ltd 219,173
24,410 Methanex Corp * 104,302
17,270 Mitel Corp * 121,845
10,710 Molson Co Ltd Class A 152,544
See accompanying notes to the financial statements. 1
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Canada- continued
2,100 Molson Co Ltd Class B 29,632
13,900 Moore Corporation Ltd 145,952
27,210 National Bank of Canada Montreal 378,543
28,200 Nexfor Inc 109,288
14,200 NS Power Holdings Inc 171,209
99,820 Numac Energy Inc * 145,481
17,180 Power Corp of Canada Ltd 336,885
5,110 Quebecor Inc Class B 111,712
16,846 Ranger Oil Ltd * 47,095
9,360 Rio Algom Ltd 97,351
6,470 Rogers Communications Class B * 102,011
10,520 Sears Canada Inc 149,838
5,736 Sobeys Inc 75,999
21,330 Stelco Inc Class A 117,283
7,330 Suncor Energy Inc 214,389
9,070 Torstar Corp Class B 95,537
18,140 Transalta Corp 293,821
200 TVA Group Inc Class B * 2,252
42,070 TVX Gold Inc * 55,462
5,980 United Dominion Industries Ltd 115,480
15,250 Westcoast Energy Inc 299,039
6,080 Weston (George) Ltd 245,697
-------------
7,763,201
-------------
Denmark - 0.0%
800 Hafnia Holdings (Registered) Class A (c) * 1
-------------
Finland - 0.8%
3,000 Asko OY 45,447
1,200 Finnilines 36,357
1,300 Huhtamaki OY Class I 43,369
900 Instrumentarum OY Class B 26,675
6,000 Kemira OY 36,226
4,200 Kesko OY 59,661
250 Kone Corp Class B 28,404
3,400 Metra AB Class B 63,450
3,000 Orion-Yhtyma OY Class B 61,551
4,000 Outokumpu Class A 35,084
2,500 Pohjola Group Insurance Class B 137,219
15,400 Raisio Group Plc Class V 94,670
4,200 Rauma OY 48,411
8,310 Rautaruukki OY 51,997
2 See accompanying notes to the financial statements.
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Finland - continued
3,200 Sampo Insurance Co Ltd Class A 105,735
2,000 Stockmann AB Class B 34,140
5,800 Tieto Corp 232,394
4,800 Valmet OY 50,057
-------------
1,190,847
-------------
France - 9.1%
7,620 BIC SA 393,148
3,670 Castorama Dubois Investment 773,519
6,750 Club Mediterranee SA * 645,395
15,630 Compagnie Generale d'Industrie et de Participations 848,455
3,280 Compagnie Parisienne de Reescompte 130,739
4,880 Credit Commercial de France 420,526
39,030 Credit Lyonnais * 1,714,236
2,020 Eridania Beghin-Say SA 292,704
2,230 Essilor International 851,898
3,980 Gaz Et Eaux 175,854
730 Groupe Andre 83,341
2,530 Hermes International 186,218
4,330 Imetal 513,352
11,190 Moulinex * 132,665
1,150 Pathe SA 301,717
9,660 Pechiney SA Class A 319,188
5,630 Pernod Ricard 333,120
2,800 Primagaz 224,380
269 Sagem Applic Gen D Electric 155,325
2,210 Seb SA 145,562
18,140 Seita 1,075,312
3,550 Simco Union Habit (Registered) 316,048
799 Societe Eurafrance 396,012
5,140 Sodexho Alliance 841,851
4,650 Synthelabo 1,077,057
5,140 Technip SA 462,680
5,560 TV Francaise 994,869
1,749 Unibail (Bearer) 215,036
25,770 Usinor Sacilor 316,271
-------------
14,336,478
-------------
Germany - 8.2%
6,080 Adidas Salomon AG 582,001
4,290 Altana AG 274,084
1,210 Ava Allgemeine Handelsgesellschaft der Verbraucher
AG * 458,521
6,950 Axa Colonia Konzern AG 617,978
See accompanying notes to the financial statements. 3
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Germany- continued
290 Axel Springer Verlag AG 318,348
22,870 Bankgesellschaft Berlin AG 347,712
6,170 Beiersdorf AG (Bearer) 457,185
30,070 Berliner Kraft & Licht AG Class A 655,235
23,550 BHF Bank AG 893,187
5,450 Bilfinger & Berger 102,305
960 Buderus AG 334,067
22,580 Continental AG 562,669
857 DBV-Winterthur Holding AG 319,862
12,500 Degussa-Huels AG * 433,611
4,290 Douglas Holdings AG 204,386
9,790 FAG Kugelfischer 82,214
4,200 Friedrich Krupp AG 617,814
7,910 Gehe AG 442,843
1,740 Hamburgische Electricitaets-Werke AG 43,932
7,045 Heidelberg Port-Zement 479,486
6,000 Henkel KGAA (Bearer) 449,858
4,730 Hochtief AG 156,290
630 Holzmann (Philipp) * 81,261
14,470 IWKA AG 282,743
870 Karstadt AG 328,057
9,790 Lahmeyer AG 499,949
180 Linde AG 101,169
1,740 MAN AG 474,465
12,830 Metallgesellschaft 236,613
940 Preussag AG 455,061
1,470 Schering AG 188,963
770 Schmalbach-Lubeca 93,825
3,520 Schwarz Pharma AG 194,363
2,220 SGL Carbon AG 104,791
13,610 SKW Trostberg AG 307,025
720 Suedzucker AG 290,860
7,720 Vereins Und Westbank 228,815
340 Wella AG 205,279
-------------
12,906,827
-------------
Hong Kong - 1.5%
1,000 Asia Financial Holdings 142
18,000 Asia Satellite Telecom 29,041
131,000 Associated International Hotels 38,043
188,000 Chinese Estates Holdings Ltd 28,633
66,000 Cross Harbour Tunnel Co Ltd 41,954
4 See accompanying notes to the financial statements.
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Hong Kong- continued
48,400 Dah Sing Financial Services 94,017
666 Dickson Concept International Ltd 516
6,000 Grand Hotel Holdings Ltd Class A 829
59,000 Great Eagle Holdings Ltd 54,448
572,000 Guangdong Investment Ltd 98,929
40,000 Guoco Group 61,953
108,000 Hang Lung Development Co Ltd 103,850
135,000 Henderson Investment Ltd 76,232
134,400 HKR International Ltd 83,265
85,500 Hong Kong Aircraft Engineering Co Ltd 140,702
54,000 Hong Kong & Shanghai Hotels 37,379
138,000 Hopewell Holdings Ltd 60,560
96,000 Hysan Development Co Ltd 115,233
13,000 IMC Holdings 906
100,000 Kumagai Gumi Ltd 35,494
434,000 Lai Sun Garment International Ltd 25,207
1,076,000 Lippo China Resources 41,664
200 Mingly Corp 28
500 New Asia Realty & Trust Class A 413
94,000 New World Infrastructure * 103,733
27,100 Realty Development Corp Ltd Class A 28,682
300,000 Regal Hotels International Ltd 31,751
66,000 Shangri La Asia 47,278
840,000 South China Morning Post Ltd 360,492
24,000 Television Broadcasting Ltd 71,401
664,000 Top Glory International Holdings 57,421
298,101 Tsim Sha Tsui Properties Ltd 284,721
14,000 Varitronix International 24,756
108,000 Wheelock and Co Ltd 66,561
147,000 Wing On Co * 39,844
18,000 Wing On International Holdings Ltd 12,081
125,500 Winsor Properties Holdings Ltd 30,615
23,000 Yue Yuen Industrial Holdings 32,952
-------------
2,361,726
-------------
Italy - 2.2%
716,220 Bca Naz Agricol Di Risp (Non-Cv) 650,999
303,490 Finmeccanica SPA (Non Convertible) * 261,528
102,000 Fornara SPA (c) * 4,164
213,400 Grassetto SPA (c) * 1
3,500 Recordati Industria Chimica e Farmaceutica SPA 33,619
51,140 Recordati Industria Chimica e Farmaceutica SPA
(Non Convertible) 257,116
See accompanying notes to the financial statements. 5
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Italy - continued
69,713 Reno de Medici SPA * 172,952
45,350 Rinascente 201,123
308,800 Snia BPD SPA (Non Convertible) 311,866
339,464 Unicem Di Risp 1,546,483
-------------
3,439,851
-------------
Japan - 22.4%
6,000 Alps Electric Co Ltd 104,172
89,000 Amada Co Ltd 438,062
23,000 Amano Corp 183,186
221,000 Aoki Corp * 89,406
9,000 Aoki International 41,719
20,800 Aoyama Trading 560,978
83,000 Atsugi Nylon Industrial 62,958
13,000 Bandai Co 136,410
46,000 Canon Sales Co Inc 664,897
2,000 Chudenko Corp 37,927
20,000 Chugai Pharmaceutical Co Ltd 191,319
96,000 Citizen Watch Co 649,709
202,000 Cosmo Oil Co Ltd 286,018
23,700 CSK Corp 669,153
43,000 Daicel Chemical Industries Ltd 114,159
90,000 Daido Steel Co Ltd 121,365
17,000 Dainippon Pharmaceutical Co Ltd 69,347
22,000 Daio Paper Corp 90,670
46,900 Daito Trust Construction Co Ltd 405,558
94,000 Denki Kagaku Kogyo 141,812
3,000 Denny's Japan Co Ltd 69,785
39,000 Ezaki Glico Co Ltd 229,760
109,000 Fuji Heavy Industries Ltd 638,475
74,000 Fujisawa Pharmaceutical Co Ltd 950,493
23,000 Fujitec Co 161,863
21,000 Fujiya Co Ltd * 40,885
61,000 Fukuyama Transporting Co Ltd 237,008
45,000 Furukawa Co Ltd 60,303
111,000 Gakken Co Ltd 117,876
89,000 General Sekiyu (KK) 288,791
6,000 Godo Shusei Co Ltd 14,109
44,000 Hankyu Department Stores Inc 271,083
174,000 Hanwa Co Ltd 139,317
165,000 Haseko Corp * 69,532
600 Hitachi Ltd 3,793
6 See accompanying notes to the financial statements.
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Japan - continued
30,000 Hitachi Maxell Ltd 504,425
96,000 Hitachi Metals Ltd 271,858
27,000 Hokuetsu Paper Mills 117,193
15,000 House Foods Corp 220,480
25,000 Hyogo Bank Ltd (c) * 2
66,000 INAX Corp 423,869
35,000 Intec Inc 362,832
12,000 Itoham Foods Inc 49,153
28,000 Izumiya Co Ltd 250,147
22,000 Japan Airport Terminal Co Ltd 132,389
64,000 Japan Steel Works Ltd * 71,740
99,000 Japan Synthetic Rubber Co Ltd 463,085
46,000 JGC Corp 93,047
33,000 Joshin Denki Co Ltd 90,114
25,000 Kamigumi Co Ltd 109,987
34,000 Kandenko Co 221,222
91,000 Kaneka Corp 674,926
10,000 Katokichi Co Ltd 135,272
155,000 Keihin Electric Express Railway Co Ltd 476,823
214,000 Keio Teito Electric Railway Co Ltd 892,794
20,000 Kikkoman Corp 124,062
14,000 Kissei Pharmaceutical Co Ltd 237,758
34,000 Kokusai Kogyo Co Ltd 140,700
5,000 Kokuyo Co Ltd 74,378
22,000 Komori Corp 396,797
48,000 Koyo Seiko Co Ltd 256,890
108,000 Kurabo Industries Ltd 111,960
64,000 Kuraray Co 629,482
207,000 Kureha Chemical Industry Co Ltd 532,111
10,000 Kyowa Exeo Corp 58,576
6,000 Kyudenko Corp 35,499
69,000 Lion Corp 270,999
100 Mabuchi Motor Co 6,726
55,000 Maeda Corp 151,117
35,000 Maeda Road Construction 206,490
51,000 Makino Milling Machine Co Ltd 278,963
45,000 Makita Corp 431,226
25,000 Matsushita Refrigeration Co 88,496
51,000 Mitsubishi Belting 126,802
152,000 Mitsubishi Gas Chemical Co Inc 394,572
200 Mitsubishi Kasei Corp 489
See accompanying notes to the financial statements. 7
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Japan - continued
76,000 Mitsubishi Oil Co Ltd * 137,075
27,000 Mori Seiki Co Ltd 273,300
12,000 Nagase & Co 45,714
50,000 Nagoya Railroad Co Ltd 168,984
34,000 Nankai Electric Railway Co Ltd 159,612
22,000 NGK Spark Plug Co 241,972
10,000 NHK Spring Co Ltd 38,264
23,000 Nichicon Corp 278,171
72,000 Nichiei Co Ltd 66,751
3,000 Nihon Unisys Ltd 41,972
101,000 Nippon Chemi-Con Corp 340,497
33,000 Nippon Hodo Co 153,527
54,000 Nippon Meat Packers Inc 733,198
23,000 Nippon Paint Co 39,933
117,000 Nippon Sheet Glass Co Ltd 349,077
22,000 Nippon Shokubai Corp 114,960
54,000 Nippon Suisan Kaisha Ltd * 57,800
46,000 Nissan Fire & Marine Insurance Co Ltd 131,429
31,000 Nisshin Oil Mills Ltd 75,508
259,000 Nisshin Steel Co Ltd 233,569
41,000 Nisshinbo Industries Inc 136,494
59,000 Nissho Iwai Corp 40,775
55,000 Nitto Boseki Co Ltd 117,278
50,000 Nitto Denko Corp 748,420
31,000 NSK Ltd 140,826
35,000 Okamoto Industries Inc 77,876
53,000 Olympus Optical Co Ltd 576,233
255,600 Onoda Cement Co Ltd 678,584
51,000 Onward Kashiyama Co Ltd 563,085
2,000 Oyo Corp 30,021
22,000 Q.P. Corp 156,123
273,000 Renown Inc * 149,558
5,000 Rinnai Corp 93,131
45,000 Royal Co Ltd 617,067
5,000 Ryosan Co 84,282
20,000 Sanden Corp 150,358
69,000 Sankyo Aluminum Industry Co Ltd * 58,154
29,000 Sanrio Co Ltd * 452,170
145,000 Sanyo Securities Co Ltd * 1,222
47,000 Seino Transportation Co Ltd 249,558
6,000 Shimachu Co 113,274
8 See accompanying notes to the financial statements.
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Japan - continued
118,000 Shionogi and Co Ltd 913,965
325,000 Showa Denko 273,915
33,000 Showa Electric Wire & Cable 45,891
124,000 Showa Shell Sekiyu 652,137
5,000 Skylark Co Ltd 89,338
61,000 Stanley Electric Co Ltd 196,393
59,000 Sumitomo Bakelite Co Ltd 397,809
35,000 Taiyo Yuden Co Ltd 369,027
27,895 Takara Standard Co 197,722
63,000 Tanabe Seiyaku Co Ltd 324,425
69,000 Teikoku Oil Co Ltd 183,186
53,000 Tobu Railway Co Ltd 152,322
95,000 Toda Corp 452,381
800 Toho Co Ltd 97,699
52,000 Tokai Carbon Co Ltd 100,362
42,000 Tokuyama Corp 140,885
14,000 Tokyo Broadcasting System Inc 152,212
107,000 Tokyo Construction Co Ltd * 66,734
76,000 Tokyo Electric Co Ltd 287,602
88,000 Tokyo Ink Manufacturing Co Ltd 178,744
38,000 Tokyo Rope Manufacturing Co Ltd 47,080
30,000 Tokyo Style Co Ltd 311,504
24,000 Toshiba Tungaloy Co Ltd 65,740
17,000 Toyo Engineering Corp 17,337
10,000 Toyo Suisan Kaisha 79,140
36,000 Tsubakimoto Chain 75,853
162,000 Victor Co of Japan Ltd 1,069,077
49,000 Wacoal Corp 516,637
10,000 Yamatake Honeywell 87,906
62,000 Yodogawa Steel Works 222,082
18,000 Yokogawa Electric Corp 85,411
89,000 Yokohama Rubber Co 251,285
-------------
35,484,952
-------------
Malaysia - 1.6%
23,000 Aluminum Co of Malaysia 5,811
17,000 Ayer Hitam Tin Dredging * 3,713
33,000 Carlsberg Brew Malaysia 88,579
52,000 Cement Industries of Malaysia Berhad 26,411
13,000 DMIB Berhad 3,524
44,000 Edaran Otomobil Berhad 67,737
42,000 Esso Berhad * 30,947
See accompanying notes to the financial statements. 9
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Malaysia - continued
31,000 Faber Group Berhad * 3,345
56,000 Golden Plus Holdings * 16,063
183,000 Guinness Anchor Berhad 178,184
36,000 Highlands and Lowlands Berhad 21,695
53,000 Hong Leong Industries Berhad 37,239
208,000 IJM Corp Berhad Class A 117,137
132,000 Innovest Berhad * 23,621
308,000 IOI Corporation Berhad 167,779
73,000 Johan Holdings Berhad 11,814
53,000 Kedah Cement Berhad 31,103
123,000 Kemayan Corporation Berhad 10,358
70,000 Kian Joo Can Factory 96,711
133,000 Malayan Cement Berhad 42,700
128,000 Malayan United Industries Berhad 20,884
23,000 Malayawata Steel 5,508
129,000 Malaysia Mining Berhad 61,784
11,000 Malaysian Airline Systems 4,950
66,000 Malaysian Mosaics 22,058
3,000 Malaysian Oxygen Berhad 5,684
72,000 Malaysian Pacific Industries 111,789
99,000 Malaysian Plantations * 22,145
4,200 Matsushita Electric Co Berhad 13,153
503,000 Metroplex Berhad 76,774
636,000 Mulpha International 93,726
369,000 Multi Purpose Holdings * 132,063
420,000 Naluri Berhad 67,421
53,000 New Straits Times 44,632
62,000 Oriental Holdings Berhad 101,974
28,000 OYL Industries Berhad 56,368
16,000 Palmco Holdings Berhad 4,589
40,000 Pan Malaysia Cement 9,684
146,000 Pernas International Hotel & Property 34,195
22,000 Perusahaan Otomobil Nasional Berhad 30,684
103,000 Petronas Dagangan Berhad 109,505
357,000 Promet Berhad * 27,245
312,000 Rekapacific Berhad * 37,768
94,000 RJ Reynolds Berhad 96,968
23,000 Sarawak Enterprises Corp 8,897
8,000 Sime Darby 2,055
9,000 Sistem Television Malaysia 2,439
246,000 Sungei Way Holdings * 68,621
10 See accompanying notes to the financial statements.
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Malaysia - continued
882,000 Tan Chong International Ltd 84,241
294,000 Tan Chong Motor Holdings Berhad 84,332
90,000 Technology Resources Industries 41,447
28,000 Tractors Holdings Berhad 10,832
73,000 UMW Holdings Berhad 75,689
32,000 United Engineers * 21,053
-------------
2,575,628
-------------
Norway - 0.0%
1 SAS Norge ASA Class B 8
-------------
Singapore - 1.2%
141,000 Asia Food & Properties Ltd * 25,380
1,755,000 Chuan Hup Holdings Ltd 621,690
15,000 Cycle & Carriage Ltd 54,878
30,000 Datacraft Asia Ltd 60,000
16,000 Elec & Eltek International Co Ltd 87,200
30,000 Fraser & Neave 101,916
70,000 Hotel Properties Ltd 30,488
7,000 Jurong Shipyard 26,423
22,000 Keppel Fels Ltd 38,839
102,000 Keppel Land Ltd 104,843
65,000 Natsteel Electronics 181,185
62,000 Natsteel Ltd 58,688
41,000 Parkway Holdings Ltd 71,905
56,000 Prima Ltd 93,659
5,000 Rothmans Industries Ltd 29,326
28,000 Singapore Land Ltd 55,285
77,000 United Industrial Corp Ltd 31,748
31,000 Venture Manufacturing 130,517
67,000 Want Want Holdings 74,370
146,000 Wing Tai Holdings 86,481
-------------
1,964,821
-------------
Sweden - 6.4%
13,900 AGA AB Class A 182,806
14,570 AGA AB Class B 190,730
10,330 Atlas Copco AB 254,728
6,370 Atlas Copco AB Class B 155,527
31,650 Avesta Sheffield AB 116,394
16,622 Celsius Industrier AB Class B 259,086
20,170 Enator AB 573,514
19,270 Gambro AB Class A 153,700
See accompanying notes to the financial statements. 11
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Sweden - continued
11,160 Gambro AB Class B 89,014
34,034 Indstrivarden AB Class A 497,331
16,210 Kinnevik Investment Class B 335,570
25,670 Mo Och Domsjo AB Class B 670,508
2,100 Modern Times Group AB * 34,011
6,370 Sandivik AB Class B 121,784
13,700 Scancem AB Class A 475,463
9,260 Scania AB Class A 236,800
7,910 Scania AB Class B 205,167
37,830 Securitas AB Class B 624,204
38,790 Skandia Forsakrings AB 710,898
11,770 SKF AB Class B 161,959
17,370 Ssab Swedish Steel Class A 182,965
233,084 Stena Line AB Class B 234,163
9,937 Svedala Industries 154,887
29,140 Svenska Handelsbanken Class B 894,213
13,535 Svenska Kullagerfabriken AB 178,829
51,380 Sydkraft AB Class A 1,363,960
40,488 Sydkraft AB Class C 808,577
8,398 Tryggtia Compulsory Acq Shs * 249,527
-------------
10,116,315
-------------
Switzerland - 3.3%
580 Adecco SA (Bearer) 304,199
80 Ares-Serono SA Class B (Bearer) 131,949
260 Ascom Holding AG (Registered) 66,388
200 Baloise Holdings 173,217
130 Banca del Gottardo 123,357
270 Banque Cantonale Vaudoise (Bearer) 81,239
1,900 BK Vision AG (Bearer) * 355,336
60 Bobst AG (Registered) 33,125
40 Bobst SA (Bearer) 44,719
1,250 Clariant Namen AG 594,355
50 Ems-Chemie Holding AG (Bearer) * 255,340
190 Forbo Holdings AG (Registered) 77,361
210 Helvetia Patria Holding 165,936
300 Hero Lenzburg AG (Registered) 38,508
280 Hilti AG (Participating Certificate) 180,670
180 Intershop Holdings AG (Bearer) 115,400
60 Jelmoli (Bearer) 52,586
190 Jelmoli (Registered) 33,305
40 Julius Baer Holdings (Bearer) 121,486
12 See accompanying notes to the financial statements.
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Switzerland - continued
45 Kuoni Reisen Holdings AG (Registered) 183,223
50 Motor-Columbus (Bearer) 96,615
140 Movenpick Holdings (Bearer) 76,906
1,540 Oerlikon-Buhrle (Registered) 183,593
90 Pargesa Holdings SA (Bearer) 125,462
190 Pharma Vision * 133,349
300 Rieter Holdings AG (Registered) 175,563
1,340 Sairgroup Zuerich (Registered) 288,520
190 Saurer Group Holdings (Registered) * 87,851
60 Schindler-Holding AG (Participant Certificates) 97,305
100 Schindler-Holding AG (Registered) 171,837
170 Schweizerische Industrie-Gesellschaft Holding AG
(Registered) 88,810
320 Sika Finanz AG (Bearer) 82,371
90 Societe Generale de Surveillance Holding SA
(Registered) 18,012
370 Sulzer Gebrueder AG (Registered) 218,315
80 Vontobel Holding AG Class B 129,740
60 Zellweger Luwa AG (Bearer) 35,775
-------------
5,141,723
-------------
United Kingdom - 32.0%
140,600 AMEC 415,570
38,366 Amstrad Plc 30,731
8,060 Anglian Water Plc 94,388
56,125 Arcadia Group 181,623
113,680 Arjo Wiggins Appleton Plc 220,815
481,170 ASDA Group 1,200,574
163,660 Associated British Ports 705,273
111,540 Barratt Development 466,373
124,200 Beazer Holmes Plc 334,267
87,052 Berisford International 290,071
217,900 BICC Group 308,932
138,090 Blue Circle Industries 688,831
68,710 Bowthorpe Holdings 414,702
131,240 BPB Industries Plc 504,592
129,790 British Land Co 1,069,767
198,925 Bunzl Co 717,025
204,000 Caradon Plc 500,016
23,870 Charter Plc (Registered) 132,501
43,710 Christian Salvesen Plc 53,918
47,908 Cobham Group Plc 602,477
68,800 Cordiant Communications Group 168,545
77,502 Costain Group Plc * 22,659
See accompanying notes to the financial statements. 13
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
United Kingdom - continued
11,281 Dawson International 2,801
132,331 Debenhams Plc 924,295
65,330 Delta Plc 131,870
180,450 Electrocomponents Plc 1,049,364
213,574 Elementis Plc 251,477
191,359 English China Clays Plc 731,139
51,962 Express Dairies Plc 99,892
94,374 Fairview Holdings Plc 142,116
80,580 First Leisure Plc 273,669
89,070 Glynwed International 275,392
79,810 Great Portland Estates Plc 253,793
110,990 Greenalls Group Plc 684,553
35,619 Greycoat Plc 90,157
127,896 Hammerson Plc 813,411
102,310 Hazlewood Foods 193,403
91,670 Hepworth Plc 226,157
188,738 Hillsdown Holdings Plc 205,604
47,463 Hyder Plc 603,724
174,414 Inchcape 419,117
109,820 Johnson Matthey 804,447
936,787 Ladbroke Group 4,352,123
27,074 Laing (John) 110,600
9,009 Laing (John) Class A (Non Voting) 36,658
46,130 Laird Group 163,320
818,817 Lasmo Plc 1,574,094
73,980 Lex Service 500,137
186,776 Lonrho Africa Plc 146,615
173,646 Lonrho Plc 1,129,414
124,829 Marley Plc 245,971
50,998 Meyer International 276,959
260,260 MFI Furniture Group 137,589
111,550 Mirror Group Plc 344,897
120,430 Morgan Crucible 399,363
286,460 NFC Plc 702,131
95,425 Northern Foods Plc 165,101
56,262 Ocean Group Plc 757,106
247,720 Pilkington 248,030
112,130 Premeir Farnell Plc 352,079
89,355 Provident Financial Plc 1,395,680
142,920 Racal Electronics 915,831
148,911 Rexam Plc 474,725
14 See accompanying notes to the financial statements.
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
United Kingdom - continued
89,988 Rexam Plc Class B * 139,836
219,340 Rugby Group 339,084
90,230 Saatchi & Saatchi Plc 244,287
259,600 Scottish Hydro-Electric Plc 2,405,861
259,097 Securicor Plc 2,499,780
32,280 Selfridges Plc 123,076
27,830 Severn Trent Plc 398,578
352,170 Signet Group Plc * 228,491
58,960 Slough Estates 313,587
118,110 Smith (WH) Group Plc 1,031,207
38,036 Southwest Water 641,022
183,250 St James's Place Capital 854,279
206,742 Storehouse Plc 500,113
859,204 Tarmac 1,472,796
83,570 Tate & Lyle 609,150
653,480 Taylor Woodrow Plc 1,766,602
201,870 Telewest Communications Plc * 879,636
94,374 Terranova Foods Plc 122,462
3,600 Thames Water 44,656
49,716 Thames Water Plc 819,547
56,199 Transport Development Group Plc 209,772
52,590 Unigate 359,744
206,610 United Biscuits Plc 600,745
232,433 United Biscuits Plc Class B * 89,366
87,226 Viglen Technology Plc 43,318
96,926 Viglen Technology Plc (Entitlement Letters)* -
110,760 Wilson (Connolly) Holdings 223,571
402,435 Wimpey (George) 851,005
135,780 Yorkshire Water 996,240
-------------
50,536,265
-------------
United States - 0.0%
2,125 Ultramar Diamond Shamrock Corp 41,969
-------------
TOTAL COMMON STOCKS (Cost $171,944,665) 151,714,408
-------------
See accompanying notes to the financial statements. 15
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares
Par Value ($) Description Value ($)
- --------------------------------------------------------------------------------
PREFERRED STOCKS - 1.4%
Germany - 1.4%
4,290 Fresenius Medical Care AG (Non Voting) 729,949
480 Friedrich Grohe AG (Non Voting) 120,665
4,340 GEA AG 91,950
1,260 Henkel KGAA 100,971
720 MAN AG 139,897
290 Porsche AG (Non Voting) 595,310
9,840 Volkswagen AG 386,707
-------------
2,165,449
-------------
United Kingdom - 0.0%
12,618 Hyder Plc 24,964
-------------
TOTAL PREFERRED STOCKS (Cost $2,437,870) 2,190,413
-------------
RIGHTS & WARRANTS - 0.0%
Singapore - 0.0%
1,650 Haw Par Brothers International Ltd Warrants
7/18/2001 * 489
-------------
TOTAL RIGHTS & WARRANTS (Cost $3,322) 489
-------------
SHORT-TERM INVESTMENTS - 5.1%
Cash Equivalents - 2.5%
3,984,929 The Boston Global Investment Trust (b) 3,984,929
-------------
U.S. Government - 2.6%
4,325,000 U. S. Treasury Bill, 4.40% due 1/06/2000 (a) 4,154,250
-------------
TOTAL SHORT-TERM INVESTMENTS (Cost $8,147,179) 8,139,179
-------------
TOTAL INVESTMENTS - 102.5%
(Cost $182,533,036) 162,044,489
Other Assets and Liabilities (net) - (2.5%) (3,902,955)
-------------
TOTAL NET ASSETS - 100.0% $158,141,534
=============
16 See accompanying notes to the financial statements.
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
- --------------------------------------------------------------------------------
Notes to the Schedule of Investments
(a) This security is held as collateral for open futures
contracts (Note 6).
(b) Represents investment of security lending collateral
(Note 1).
(c) Bankrupt issuer.
* Non-income producing security.
See accompanying notes to the financial statements. 17
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
- --------------------------------------------------------------------------------
At February 28, 1999, industry sector diversification of the
Fund's equity investments was as follows:
Industry Sector (Unaudited)
Services 11.3%
Construction 10.2
Consumer Goods 7.3
Machinery 7.1
Retail Trade 6.0
Health Care 5.0
Utilities 4.7
Conglomerates 4.3
Electronic Equipment 4.3
Banking 4.0
Chemicals 3.7
Metals and Mining 3.1
Transportation 2.9
Oil and Gas 2.8
Financial Services 2.8
Real Estate 2.5
Insurance 1.9
Paper and Allied Products 1.9
Communications 1.7
Textiles 1.7
Automotive 1.6
Food and Beverage 1.4
Telecommunications 1.1
Aerospace 0.9
Computers 0.3
Miscellaneous 5.5
------
100.0%
======
18 See accompanying notes to the financial statements.
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities - February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at value (cost $182,533,036) (Note 1) $ 162,044,489
Foreign currency, at value (cost $101,049) (Note 1) 104,260
Receivable for variation margin on oper futures contrats (Notes 1 and 6) 238,975
Dividends and interest receivable 558,904
Receivable for investments sold 1,173,820
Foreign withholding taxes receivable 171,188
Receivable for expenses waived or borne by Manager (Note 2) 97,255
-------------
Total assets 164,388,891
-------------
Liabilities:
Net payable for open forward foreign currency contracts (Notes 1 and 6) 996,439
Accrued Malaysian repatriation taxes (Note 1) 433,301
Payable upon return of securites loaned (Note 1) 3,984,929
Due to custodian 576,537
Payable to affiliate for (Note 2):
Management fee 161,114
Shareholder service fee 19,332
Accrued expenses 75,705
-------------
Total liabilities 6,247,357
-------------
Net assets $ 158,141,534
=============
Net assets consist of:
Paid-in capital $ 179,227,004
Accumulated undistributed net investment income 4,386,622
Distributions in excess of net realized gain (3,273,894)
Net unrealized depreciation (22,198,198)
-------------
$ 158,141,534
=============
Net assets attributable to Class III Shares $ 158,141,534
=============
Shares outstanding - Class III 14,345,328
=============
Net asset value per share - Class III $ 11.02
=============
</TABLE>
See accompanying notes to the financial statements. 19
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Statement of Operations - Year Ended February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income:
Dividends (net of foreign tax expense of $560,293) $ 4,485,218
Interest (including securities lending income of $22,686) 566,988
------------
Total income 5,052,206
------------
Expenses:
Management fee (Note 2) 2,608,681
Custodian fees 231,351
Audit fees 55,910
Transfer agent fees 27,307
Registration fees 5,655
Legal fees 4,036
Trustees fees (Note 2) 2,006
Miscellaneous 3,879
Fees waived or borne by Manager (Note 2) (1,686,651)
------------
1,252,174
Shareholder service fee - Class III (Note 2) 313,042
------------
Net expenses 1,565,216
------------
Net investment income 3,486,990
------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 4,884,473
Closed futures contracts 4,404,976
Closed swap contracts 1,851,520
Foreign currency, forward contracts and foreign currency related
transactions (2,985,900)
------------
Net realized loss 8,155,069
------------
Change in net unrealized appreciation (depreciation) on:
Investments (Note 1) (18,979,751)
Open futures contracts (1,788,157)
Open swap contracts (1,437,500)
Foreign currency, forward contracts and foreign currency related
transactions 1,410,624
------------
Net unrealized loss (20,794,784)
------------
Net realized and unrealized loss (12,639,715)
------------
Net decrease in net assets resulting from operations $ (9,152,725)
============
</TABLE>
20 See accompanying notes to the financial statements.
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1999 February 28, 1998
----------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 3,486,990 $ 4,505,291
Net realized gain 8,155,069 29,987,922
Change in net unrealized appreciation (depreciation) (20,794,784) (20,830,611)
------------ ------------
Net increase (decrease) in net assets resulting
from operations (9,152,725) 13,662,602
------------ ------------
Distributions to shareholders from:
Net investment income - Class III (3,362,663) (4,394,112)
Net realized gains - Class III (6,450,138) (28,025,043)
------------ ------------
(9,812,801) (32,419,155)
------------ ------------
Net share transactions - Class III (Note 5) (57,047,497) 17,258,306
------------ ------------
Total decrease in net assets (76,013,023) (1,498,247)
Net assets:
Beginning of period 234,154,557 235,652,804
------------ ------------
End of period (including accumulated
undistributed net investment income
of $4,386,622 and distributions in
excess of net investment income of
$665,119, respectively) $158,141,534 $234,151,557
============ ============
</TABLE>
See accompanying notes to the financial statements. 21
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29,
---------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 12.22 $ 13.46 $ 12.95 $ 11.95 $ 14.45
-------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income 0.55 0.27 0.23 0.18 0.18
Net realized and unrealized gain (loss) (1.15) 0.42 0.55 1.16 (1.52)
-------- -------- -------- -------- --------
Total from investment operations (0.60) 0.69 0.78 1.34 (1.34)
-------- -------- -------- -------- --------
Less distributions to shareholders from:
Net investment income (0.21) (0.26) (0.07) (0.17) (0.20)
In excess of net investment income -- -- -- (0.02) --
Net realized gains (0.39) (1.67) (0.20) (0.15) (0.96)
In excess of net realized gains -- -- (0.00) -- --
-------- -------- -------- -------- --------
Total distributions (0.60) (1.93) (0.27) (0.34) (1.16)
-------- -------- -------- -------- --------
Net asset value, end of period $ 11.02 $ 12.22 $ 13.46 $ 12.95 $ 11.95
======== ======== ======== ======== ========
Total Return (a) (5.06%) 6.92% 5.99% 11.43% (9.66%)
Ratios/Supplemental Data:
Net assets, end of period (000's) $158,142 $234,155 $235,653 $218,964 $186,185
Net expenses to average daily net assets 0.75% 0.75% 0.76%(b) 0.76%(b) 0.76%(b)
Net investment income to average daily net assets 1.67% 1.93% 1.75% 1.84% 1.45%
Portfolio turnover rate 8% 79% 13% 13% 58%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts: $ 0.27 $ 0.12 $ 0.10 $ 0.07 $ 0.08
</TABLE>
(a) Calculation excludes purchase premiums and redemption fees. The total
return would have been lower had certain expenses not been waived during
the periods shown.
(b) Includes stamp duties and taxes not waived or borne by the Manager, which
approximate .01% of average daily net assets.
22 See accompanying notes to the financial statements.
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO International Small Companies Fund (the "Fund") is a series of GMO
Trust (the "Trust"). The Fund is registered under the Investment Company
Act of 1940, as amended, as an open-end, non-diversified management
investment company. The Fund is advised and managed by Grantham, Mayo, Van
Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as
a Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series into
classes.
The Fund seeks maximum total return through investment primarily in equity
securities of small capitalization foreign companies traded on a major
stock exchange of a foreign country.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost
which approximates market value. Other assets and securities for which no
quotations are readily available are valued at fair value as determined in
good faith by the Trustees or other persons acting at their direction.
On September 1, 1998, the Malaysian government introduced capital controls
effectively eliminating trading of the Malaysian ringgit. Effective
February 4, 1999, the Malaysian government modified these restrictions.
Funds invested in Malaysia as of February 15, 1999 and repatriated within
one year of September 1, 1998, or one year from the date of the investment
if after September 1, 1998, are subject to a graduated repatriation tax on
the principal invested with a maximum of 30%. The Fund has recorded an
accrual in the amount of $433,301 for potential repatriation tax on
principal invested prior to February 15, 1999. The accrual for Malaysian
repatriation taxes is included in the change in net unrealized
appreciation (depreciation) on investments in the Statement of Operations.
Funds invested in Malaysia on or after February 15, 1999 are subject to a
repatriation tax on capital gains of 30% for currency repatriated in less
than one year of the initial investment and 10% for currency repatriated
after one year of the initial investment. The Fund has not made any
additional investments in Malaysia on or after February 15, 1999 and
accordingly no tax provision for capital gains has been accrued.
23
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the prevailing
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at prevailing exchange rates when
accrued or incurred The Fund does not isolate realized and unrealized
gains and losses attributable to changes in exchange rates from gains and
losses that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent net exchange gains and losses on disposition of
foreign currencies, currency gains and losses realized between the trade
and settlement dates on securities transactions and the difference between
the amount of investment income and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent amounts actually received
or paid.
Forward currency contracts
The Fund may enter into forward currency contracts in connection with
planned purchases or sales of securities or to hedge the currency exposure
associated with some or all of the Fund's portfolio securities. A forward
currency contract is an agreement between two parties to buy and sell a
currency at a set price on a future date. The market value of a forward
currency contract fluctuates with changes in forward currency exchange
rates. Forward currency contracts are marked to market daily and the
change in value is recorded by the Fund as an unrealized gain or loss.
Realized gains or losses equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed
are recorded upon delivery or receipt of the currency or, if a forward
currency contract is offset by entering into another forward currency
contract with the same broker, upon settlement of the net gain or loss.
These contracts may involve market risk in excess of the unrealized gain
or loss reflected in the Fund's Statement of Assets and Liabilities. In
addition, the Fund could be exposed to risk if the counterparties are
unable to meet the terms of the contracts or if the value of the currency
changes unfavorably to the U.S. dollar. The U.S. dollar value of the
currencies the Fund has committed to sell is shown under Note 6, and
represents the currency exposure the Fund has acquired or hedged through
currency contracts as of February 28, 1999.
Futures contracts
The Fund may purchase and sell stock index futures contracts. Stock index
futures contracts represent commitments for future delivery of cash based
upon the level of a specified index of equity securities at a specified
price at a given date. The Fund may use futures contracts to manage its
exposure to the stock market. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government obligations in
accordance with the initial margin requirements of the broker or exchange.
Futures contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. The payable or receivable is subsequently settled. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
24
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 28, 1999.
Swap agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund enters into swap agreements to manage its exposure to
the equity markets. The Fund enters into total return swap agreements
which involve a commitment by one party in the agreement to pay interest
in exchange for a market linked return based on a notional amount. To the
extent that the total return of the security or index underlying the
transaction exceeds or falls short of the offsetting interest rate
obligation, the Fund will receive a payment from or make a payment to the
counterparty, respectively. Total return swaps are marked to market daily
based upon quotations from market makers and the change, if any, is
recorded as unrealized gain or loss in the Statement of Operations.
Payments received or made at the end of the measurement period are
recorded as realized gain or loss in the Statement of Operations. Entering
into these agreements involves, to varying degrees, elements of credit and
market risk in excess of the amounts recognized on the Statement of Assets
and Liabilities. Such risks involve the possibility that there will be no
liquid market for these agreements, that the counterparty to the
agreements may default on its obligation to perform or that there may be
unfavorable changes in the price of the security or index underlying these
transactions. At February 28, 1999, there were no open swap agreements.
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of delay in
recovery or even loss of rights in the collateral should the borrower of
the securities fail financially. The Fund receives compensation for
lending its securities. At February 28, 1999, the Fund loaned securities
having a market value of $3,322,217 collateralized by cash in the amount
of $3,984,929 which was invested in a short-term instrument.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
federal income tax purposes. Therefore, no provision for federal income or
excise tax is necessary. Taxes on foreign interest and dividend income
have been withheld in accordance with the applicable country's tax treaty
with the United States. Dividends received by shareholders of the Fund
which are derived from foreign source income and foreign taxes paid by the
Fund are to be treated, to the extent allowable under the Code, as if
received and paid by the shareholders of the Fund.
25
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
foreign currency and passive foreign investment company transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
----------------- ------------------------ ---------------
$4,927,414 $(4,927,414) $ --
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date, or when the Fund is informed of the
ex-dividend date, if later. Interest income is recorded on the accrual
basis and is adjusted for the accretion of discounts. In determining the
net gain or loss on securities sold, the cost of securities is determined
on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is 1.00% of the amount
invested. In the case of cash redemptions, the fee is .60% of the amount
redeemed. All purchase premiums and redemption fees are paid to and
recorded by the Fund as paid-in capital. Purchase premiums are included as
part of "shares sold" and redemption fees are included as part of "shares
repurchased," respectively, as summarized in Note 5. For the year ended
February 28, 1999, the Fund received $99,039 in purchase premiums and
26
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
$451,511 in redemption fees. There is no premium for reinvested
distributions. While no purchase premium is normally charged with respect
to in-kind purchases of Fund shares, a premium of up to .10% may be
charged on certain in-kind transactions.
Investment risk
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of 1.25% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding brokerage commissions, certain other transaction costs
(including stamp duties and transfer taxes), shareholder service fees and
extraordinary expenses) exceed .60% of average daily net assets.
Effective March 1, 1999, GMO's contractual management fee was reduced to
.60% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding brokerage
commissions, certain other transaction costs (including stamp duties and
transfer taxes), shareholder service fees and extraordinary expenses)
exceed the management fee.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999, was $2,006. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1999, aggregated
$14,779,900 and $68,612,899 respectively.
27
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in the value of investments held
were as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
$183,184,573 $21,895,622 $43,035,706 $21,140,084
4. Principal shareholder
At February 28, 1999, 18.9% of the outstanding shares of the Fund were
held by one shareholder.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including the purchase premiums and redemption fees received by
the Fund, were as follows:
Year Ended Year Ended
Class III: February 28, 1999 February 28, 1998
-------------------------- --------------------------
Shares Amount Shares Amount
---------- ------------ ---------- ------------
Shares sold 816,456 $ 9,903,936 2,671,927 $ 37,883,371
Shares issued to
shareholders in
reinvestment of
distributions 718,062 8,300,432 2,808,143 30,552,594
Shares
repurchased (6,353,000) (75,251,865) (3,825,152) (51,177,659)
---------- ------------ ---------- ------------
Net increase/
(decrease) (4,818,482) $(57,047,497) 1,654,918 $ 17,258,306
========== ============ ========== ============
28
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1999 is as
follows:
Forward currency contracts
Net
Unrealized
Settlement Deliver/ Units Appreciation
Date Receive of Currency Value (Depreciation)
---------- -------- ------------- ------------ --------------
Buys
04/09/99 AUD 8,960,240 $ 5,565,101 $ (217,823)
04/09/99 CAD 4,302,075 2,849,688 67,268
08/27/99 EUR 42,893,013 47,566,826 (1,216,996)
08/27/99 GBP 6,614,490 10,587,749 (194,736)
04/09/99 HKD 7,875,385 1,015,431 431
04/09/99 JPY 671,700,897 5,691,115 (96,779)
08/27/99 NOK 81,229,968 10,179,102 (291,512)
08/27/99 SEK 9,545,246 1,173,082 (35,522)
-----------
$(1,985,669)
===========
Sales
04/09/99 AUD 705,371 $ 438,097 $ 1,903
04/09/99 CAD 3,962,832 2,624,974 11,842
08/27/99 CHF 1,453,650 1,022,288 12,339
08/27/99 EUR 6,902,132 7,654,219 175,739
08/27/99 GBP 19,363,727 30,995,326 452,294
04/09/99 HKD 3,102,236 399,994 6
04/09/99 JPY 3,499,954,785 29,654,041 126,368
08/27/99 NOK 47,266,890 5,923,116 138,697
08/27/99 SEK 16,731,840 2,056,293 61,365
04/09/99 SGD 672,320 391,323 8,677
-----------
$ 989,230
===========
Currency Abbreviations:
AUD Australian Dollar HKD Hong Kong Dollar
CAD Canadian Dollar JPY Japanese Yen
CHF Swiss Franc NOK Norwegian Kroner
EUR Euro SEK Swedish Krona
GBP British Pound SGD Singapore Dollar
29
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Futures contracts
Net
Unrealized
Number of Expiration Appreciation
Contracts Type Date Contract Value (Depreciation)
--------- ------------- ---------- ------------ --------------
Buys
133 ALL ORDS March 1999 $ 5,966,862 $ 181,298
77 CAC40 March 1999 3,459,681 (61,042)
54 GXU8 March 1999 7,274,215 (143,271)
42 Hang Seng IDX March 1999 2,664,386 140,295
39 IBEX35 March 1999 4,269,025 84,308
40 MIB30 March 1999 7,966,195 674,887
-----------
$ 876,475
===========
Sells
162 FTSE100 March 1999 $ 15,983,763 $(1,175,536)
132 TOPIX March 1999 12,443,489 31,680
55 IDX March 1999 489,254 1,089
2 TSE36 March 1999 232,527 4,820
-----------
$(1,137,947)
===========
At February 28, 1999, the Fund has cash and/or securities to cover any
margin requirements on open futures contracts.
30
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
February 28, 1999
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1999, all the Fund's distributions are
from investment company taxable income, except that the Fund has designated
3.28% as net capital gain dividends.
The Fund has elected to defer to March 1, 1999 post-October capital losses of
$995,842.
31
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
GMO International Small Companies Fund
(A Series of GMO Trust)
Portfolio Managers
Mr. R. Jeremy Grantham and Mr. Christopher Darnell are primarily responsible for
the day-to-day management of the Fund's portfolio. Each of these individuals has
been a portfolio manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than
fifteen years.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO International Small Companies Fund returned
- -5.1% for the fiscal year ended February 28, 1999 as compared to 4.9% for EAFE
and 6.1% for the GMO EAFE-Lite Index. Consistent with the Fund's investment
objective and policies, the Fund was invested substantially in common stocks
that ranked within the smallest 50% by market capitalization within each
country.
The fiscal year was an extraordinarily volatile year in the global equity
markets. As was the case in the U.S., the international markets got off to a
very strong start. However, the global financial crisis that ensued in the third
quarter effectively wiped out all of these returns. The global equity markets
then rebounded sharply in late 1998, a period in which EAFE-Lite rose by 20.1%.
Europe, which accounted for 79% of EAFE-Lite at year-end, returned 11% for the
fiscal year in local terms. Japan declined by -11.3%, however the strengthening
of the Japanese yen relative to the dollar (6.8%) offset the majority of the
decline in local terms.
In Europe, Finland (+76%), Belgium (+40%), Italy (+23%), France (+19%) and Spain
(+17%) were the strongest performing markets. Most of the other major European
countries had significant positive returns. Austria (-7.1%), Norway (-27.8%) and
Denmark (+1.3%) were the only notable exceptions. Outside of Japan, the Pacific
Rim markets were weak with the exception of Australia, which returned 10.8%.
Canada returned -4.6%.
Country selection detracted slightly from the Fund's performance for the year,
primarily due to an overweight in Canada, which underperformed, and an
underweight in Finland, which outperformed. An overweight in the strong
performing Italian market helped offset these losses.
Currency selection added slightly to performance, led by an underweight in the
poor performing British pound as well as the Fund's cash position in a period of
increasing value in the U.S. dollar. An underweight in the yen, which rallied
late in the year, partially offset some of these gains.
Stock selection was the most significant factor in the Fund's underperformance
during the fiscal year. During this period, a strategy emphasizing smaller
stocks in the EAFE universe severely lagged the performance of large,
multinational stocks in most EAFE ex-Japan markets by a wide margin. The effect
was particularly concentrated within Europe, where the largest companies
outperformed the smallest companies by more than seventeen percentage points for
the year. The Fund, however, did benefit from its allocation to Japanese small
stocks, which outperformed the rest of the Japanese market by over 16% in 1998.
However, the benefit was more than offset by the extremely poor performance of
small U.K. stocks, which lagged the U.K. market by an equivalent amount.
<PAGE>
Outlook
International small-cap stocks are at their cheapest valuation levels in twenty
years and are the most attractive opportunity in the international markets. The
International Small Companies Fund emphasizes those markets in which GMO
believes small- and mid-cap stocks are particularly well-positioned to
outperform.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO International Small Companies Fund Class III Shares and the
Salomon EMI World ex U.S. Index
As of February 28, 1999
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Since
1 Year 5 Year Inception
- --------------------------------------------------------------------------------
Class 10/14/91
III -6.6% 1.3% 6.9%
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
GMO International Salomon EMI World GMO EAFE-
Date Small Companies Fund ex U.S. Index Lite Index
Class III Shares
1/31/91
10/14/91 9,900 10,000 10,000
12/31/91 9,402 9,951 10,290
3/31/92 8,956 8,978 9,321
6/30/92 9,848 9,345 9,711
9/30/92 8,892 8,852 9,645
12/31/92 8,707 8,444 9,269
3/31/93 10,051 9,709 10,254
6/30/93 11,406 10,735 11,076
9/30/93 12,432 11,393 11,893
12/31/93 13,493 11,072 12,404
3/31/94 14,900 12,062 12,544
6/30/94 15,175 12,503 12,999
9/30/94 14,768 12,415 13,176
12/31/94 14,132 12,010 13,050
3/31/95 13,708 11,936 13,412
6/30/95 14,075 11,930 13,710
9/30/95 14,694 12,402 14,273
12/31/95 14,827 12,639 14,818
3/31/96 15,535 13,365 15,320
6/30/96 16,018 13,956 15,587
9/30/96 15,731 13,640 15,729
12/31/96 16,286 13,556 16,337
3/31/97 16,178 13,306 16,330
6/30/97 17,405 14,263 18,213
9/30/97 17,417 13,688 18,423
12/31/97 15,709 12,280 17,264
3/31/98 18,400 14,392 20,044
6/30/98 18,231 14,340 20,369
9/30/98 15,548 12,170 17,487
12/31/98 17,045 13,772 21,001
2/28/99 16,335 13,462 20,421
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 100 bp on the purchase and 60 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Past performance
is not indicative of future performance. Information is unaudited.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Currency Hedged International Core Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Currency Hedged International
Core Fund at February 28, 1999 and the results of its operations, the changes in
its net assets and the financial highlights for the periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 1999 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 16, 1999
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
COMMON STOCKS - 89.8%
Australia - 6.5%
14,800 Acacia Resources 19,759
11,000 AMP Ltd 124,546
45,595 Australia and New Zealand Banking Group Ltd 294,447
33,300 Australian Gas & Light 218,335
31,300 Bank of Western Australia 60,251
19,609 Boral Ltd 28,249
8,400 BRL Hardy Ltd 32,078
86,934 Broken Hill Proprietary Ltd 652,638
12,600 Caltex Australia Ltd 28,792
48,300 Capital Property Trust 62,083
31,300 Capral Aluminum Ltd 43,730
1,700 Coca Cola Amatil Ltd 6,695
7,300 Coca-Cola Beverage * 10,970
43,298 Coles Myer Ltd 231,219
119,800 Colonial Ltd 452,960
20,156 Commonwealth Bank of Australia 302,884
6,300 Computershare Ltd 39,902
37,700 CRA Ltd 471,333
9,500 CSL Ltd 84,893
111,163 CSR Ltd 267,823
113,600 Delta Gold 167,885
9,690 Foodland Associated 72,204
161,029 Fosters Brewing Group Ltd 461,958
2,210 G E Crane Holdings Ltd 12,831
76,300 General Property Trust Units 127,922
20,127 Goodman Fielder Ltd 18,622
56,800 Harvey Norman Holdings 546,684
22,600 Infrastructure Trust of Australia Group 22,945
11,200 Jupiters Ltd 29,001
7,400 Leighton Holdings 24,354
6,300 Lend Lease Corp Ltd 78,240
7,900 Macquarie Bank Ltd 83,884
16,800 Mayne Nickless Ltd 54,768
40,600 MIM Holdings Ltd 17,647
16,900 Mirvac Ltd 20,988
57,600 Mirvac Property Trust 52,935
44,129 National Australia Bank Ltd 735,741
124,600 National Food Ltd 241,396
132,900 National Mutual Holdings 219,515
104,900 National Mutual Property Trust 82,073
See accompanying notes to the financial statements. 1
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Australia - continued
266,303 News Corp Ltd 1,868,578
230,315 Normandy Mining Ltd 197,359
24,349 North Broken Hill Peko Ltd 36,287
51,900 Pacific Dunlop Ltd 90,559
4,537 Perpetual Trustees Australia 56,345
159,252 Pioneer International Ltd 320,890
20,474 PMP Communications Ltd 40,174
198,435 Qantas Airways Ltd 523,677
133,035 QCT Resources Ltd 63,608
8,052 Rothmans Holdings Ltd 63,499
5,604 Santos Ltd 15,520
61,497 Schroders Property 93,175
16,351 Simsmetal Ltd 60,411
13,800 Southcorp Holdings Ltd 53,128
12,000 St George Bank 75,483
13,300 Stockland Trust Group 31,383
7,000 Suncorp Metway Ltd 39,016
43,500 Tabcorp Holdings 305,228
233,700 Telstra Corporation 1,192,273
68,100 Western Mining Corp Holdings Ltd 211,433
13,100 Westfarmers Ltd 131,322
144,100 Westfield America Trust 143,166
35,000 Westfield Holdings Ltd 208,704
174,365 Westfield Trust Units 357,297
109,750 Westpac Banking Corp 725,585
17,600 Woodside Petroleum Ltd 86,009
------------
13,495,289
------------
Austria - 3.1%
7,545 Brau Union AG 392,592
1,697 EA-Generali AG 375,371
1,065 Energie-Versorgung Niederoesterreich AG 140,292
10,628 Erste Bank Der Oesterreichischen Sparkassen AG 501,093
155 Leykam-Muerztaler Papier und Zellstoff AG * 3,599
10,681 Oesterreichische Brau Beteiligungs AG 508,985
2,910 Oesterreichische Elektrizitaetswirtschafts AG 466,390
25,801 Oesterreichische Laenderbank AG 1,387,829
2,990 OMV AG 275,711
8,037 Radex-Heraklith AG 222,065
6,302 Universale Bau AG 196,679
65,701 Voest-Alpine Stahl AG 2,023,779
------------
6,494,385
------------
2 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Belgium - 1.4%
1,300 Almanij NV 100,537
450 Arbed SA 32,949
1,050 CBR Cimenteries NPV 92,384
7,100 Cockerill Sambre SA 31,878
3,200 Compagnie Benelux Paribas SA 225,170
1,950 Credit Commercial Dexia 295,405
1,375 Electrabel SA 573,574
1,850 Electrafina NPV 220,143
10,750 Fortis (B) 391,197
250 Glaverbel NPV 25,248
1,350 Groupe Bruxelles Lambert NPV 251,934
760 Petrofina SA Bruxelles 351,403
3,540 Solvay Et Cie 243,266
675 Tessenderlo Chemie 33,270
------------
2,868,358
------------
Canada - 2.9%
2,300 Abitibi Consolidated Inc 18,360
11,761 Agrium Inc 93,496
13,570 BCT Telus Communications Inc 376,670
4,523 BCT Telus Communications Inc Class A (Non Voting) 118,056
9,000 Biochem Pharma Inc * 220,603
14,700 CAE Industries Inc 84,237
6,900 Canadian Hotel Inc 332,772
20,600 Canadian Marconi Co 256,562
3,400 Canadian Tire Corp Ltd Class A 86,492
13,889 Cominco Ltd 190,922
6,200 Dofasco Inc 78,039
6,400 Donohue Inc Class A 129,738
21,100 Falconbridge Ltd 234,134
12,079 Imperial Oil Ltd 186,446
15,800 Inco Ltd * 197,827
3,650 Ipsco Inc 61,780
7,381 Macmillan Bloedel Ltd 73,834
7,100 Magna International Class A 423,319
27,800 Methanex Corp * 118,788
12,700 Molson Co Ltd Class A 180,888
16,600 Moore Corporation Ltd 174,303
5,842 Nexfor Inc 22,640
9,100 Noranda Inc 97,963
11,700 NS Power Holdings Inc 141,067
2,700 Placer Dome Inc 29,513
See accompanying notes to the financial statements. 3
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Canada - continued
5,800 Potash Corp of Saskatchewan 329,096
5,500 Quebecor Inc Class B 120,238
11,000 Rogers Cantel Mobile Communications Class B * 169,427
9,500 Seagram Ltd 439,914
13,100 Transalta Corp 212,186
53,100 Transcanada Pipelines Ltd 728,168
1,700 Westcoast Energy Inc 33,336
------------
5,960,814
------------
Finland - 0.0%
2,600 Enso OY Class R 22,976
300 Instrumentarium OY Class A 9,024
800 Kesko OY 11,364
800 Metra AB Class A 15,369
250 Stockmann AB Class A 5,777
------------
64,510
------------
France - 9.8%
1,655 Accor SA 385,157
4,489 Air Liquide Class L 669,195
13,600 Assurances Generales De France (Bearer) 768,864
7,579 Banque Nationale de Paris 604,853
750 Banque Paribas Class A 64,630
310 Bongrain 118,766
750 Christian Dior 86,201
1,500 Clarins 108,677
1 Colas SA 190
8,520 Compagnie Generale d'Industrie et de Participations 462,497
2,200 Credit Local de France SA 295,844
25,468 Credit Lyonnais * 1,118,579
4,620 Elf Aquitaine SA 481,802
4,674 Eridania Beghin-Say SA 677,277
120 Essilor International 45,842
130 Fromageries Bel SA 94,187
250 Generale Des Eaux 65,179
9,300 Groupe Danone 2,316,439
290 Imetal 34,382
18,243 Lafarge Coppee SA 1,732,271
960 Louis Vuitton Moet Hennessy 204,445
4,567 Lyonnaise Des Eaux 912,945
8,935 Pernod Ricard 528,673
6,595 Peugeot SA 879,619
1,700 Remy Cointreau SA * 26,686
4 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
France - continued
4,170 Renault SA 194,549
25,885 Rhone Poulenc SA Class A 1,186,337
15,560 Saint-Gobain 2,418,668
4,530 Seita 268,532
2,370 SGS Thomson Microelectronics * 211,125
17,260 Skis Rossignol 238,734
1,133 Societe Eurafrance 561,553
5,967 Societe Generale Paris 875,772
10,039 SPIE Batignolles 589,587
3,660 Strafor Facom 249,101
3,580 Total SA 373,345
32,500 Usinor Sacilor 398,867
------------
20,249,370
------------
Germany - 4.3%
350 Axel Springer Verlag AG 384,213
21,400 BASF AG 741,168
20,750 Bayer AG 734,601
250 Bayerische Motorenwerke AG 180,580
2,300 Bilfinger & Berger 43,175
750 Buderus AG 260,990
5,000 Commerzbank AG 140,512
7,690 Continental AG 191,627
4,700 Deutsche Bank AG 245,331
24,850 Deutsche Telekom AG 1,140,266
4,300 Dresdner Bank 149,634
9,250 FAG Kugelfischer 77,680
500 Fresenius Medical Care AG 29,145
1,350 Friedrich Krupp AG 198,583
25,600 Hamburgische Electricitaets-Werke AG 646,355
3,405 Heidelberg Port-Zement 231,746
600 Lahmeyer AG 30,640
4,850 Leirheit AG 165,047
150 Linde AG 84,307
13,955 Lufthansa AG 307,148
400 Schmalbach-Lubeca 48,740
1,200 SGL Carbon AG 56,644
22,850 Siemens AG 1,442,306
272 Suedzucker AG 109,880
3,000 Thyssen AG 607,605
11,000 Veba AG 586,857
------------
8,834,780
------------
See accompanying notes to the financial statements. 5
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Hong Kong - 3.0%
178,500 Amoy Properties Ltd 129,018
25,000 Asia Satellite Telecom 40,334
349,500 CLP Holdings Limited 1,646,510
97,000 Dairy Farm International 103,790
6,000 Dao Heng Bank 16,340
133 Dickson Concept International Ltd 103
760,000 Elec & Eltek International Holdings Ltd 145,178
57,281 Great Eagle Holdings Ltd 52,862
26,700 Guoco Group 41,354
110,300 Hang Lung Development Co Ltd 106,061
800 Hang Seng Bank 6,505
768 HKR International Ltd 476
146,300 Hong Kong Aircraft Engineering Co Ltd 240,757
517,000 Hong Kong Electric Holdings Ltd 1,471,376
71,000 Hong Kong Ferry Co Ltd 73,312
400 Hong Kong Telecommunications 669
600 Hysan Development Co Ltd 720
4,800 Kowloon Motor Bus Co Ltd 8,085
127 Kumagai Gumi Ltd 45
1,400 Lai Sun Garment International Ltd 81
220,000 Lane Crawford International Ltd Class B 8,235
796 Leading Spirit Conrowa Electric * 8
432,400 Mandarin Oriental ADR 209,714
127,600 New Asia Realty & Trust Class A 105,404
815 New World Development Co Ltd 1,504
1,000 Oriental Press Group 99
6,100 Realty Development Corp Ltd Class A 6,456
4,090,000 Regal Hotels International Ltd 432,874
900 Shaw Brothers Ltd 348
150,000 Shun Tak Holdings Ltd 24,588
587,972 South China Morning Post Ltd 252,332
27,000 Sun Hung Kai Properties Ltd 183,828
42,500 Swire Pacific Ltd Class A 173,341
914,054 Tan Chong International Ltd 87,303
297,000 Wharf Holdings Ltd 343,087
258,200 Wheelock and Co Ltd 159,131
3,180 Wing Lung Bank 9,358
92,000 Yue Yuen Industrial Holdings 131,806
------------
6,212,992
------------
6 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Italy - 4.2%
24,600 AEM SPA 56,980
26,436 Alitalia Linee Aeree * 99,249
12,600 Alleanza Assicurazioni SPA 134,997
36,600 Assicurazioni Generali SPA 1,414,253
19,700 Banca Commerciale Italiana SPA 123,050
55,000 Banca di Roma * 79,697
5,200 Banca Popolare di Bergamo Credit 135,858
17,200 Banca Popolare di Milano 147,274
58,300 Banco Ambrosiano Veneto SPA (Non Convertible) 154,237
127,297 Banco di Napoli di Risp 152,317
4,000 Burgo (Cartiere) SPA 22,833
26,700 Credito Italiano 140,395
800 Edison SPA 7,351
117,400 Fiat SPA 353,120
74,170 Fiat SPA (Non Convertible) 120,095
60,000 Finmeccanica SPA * 68,500
450,580 HPI SPA 276,000
52,700 IFIL Finanziaria di Partecipazioni SPA 181,653
84,500 IFIL Finanziaria di Partecipazioni SPA (Non 188,303
Convertible)
3,200 Industrie Natuzzi SPA ADR 61,800
166,592 Istituto Nazionale Delle Assicurazioni 404,157
22,350 Italcementi Fabbriche Riunite Cemento SPA (Non 105,499
Convertible)
17,200 Italcementi SPA 195,421
2,300 Italmobiliare SPA 60,343
2,250 Luxottica Group ADR 25,734
14,300 Mediobanca SPA 162,472
7,800 Mondadori Editore 119,874
299,100 Montedison SPA 298,787
160,200 Montedison SPA (Non Convertible) 129,257
66,135 Parmalat Finanziaria SPA 92,928
65,700 Pirelli & Co 107,462
17,050 RAS SPA 180,428
16,800 RAS SPA (Non Convertible) 120,981
42,793 San Paolo IMI SPA 746,919
20,650 Sirti SPA 122,637
78,000 Telecom Italia Mobile SPA 524,022
158,246 Telecom Italia Mobile SPA (Non Convertible) 639,270
63,936 Telecom Italia SPA (Non Convertible) 431,642
8,200 Toro Assicurazioni 103,518
166,592 Unione Immobiliaer SPA * 92,353
------------
8,581,666
------------
See accompanying notes to the financial statements. 7
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Japan - 14.3%
7,000 Acom Ltd 413,569
800 Advantest Corp 60,750
9,000 Anritsu Corp 65,765
8,200 Arabian Oil Co Ltd 109,333
15,000 Asahi Bank 65,740
89,000 Atsugi Nylon Industrial 67,509
3,000 Autobacs Seven 91,530
4,000 Bandai Co 41,972
30,000 Bank Of Tokyo-Mitsubishi 361,568
17,000 Brother Industries Ltd 50,004
8,000 Canon Inc 171,260
32,000 Canon Sales Co Inc 462,537
13,800 Chubu Electric Power Co Inc 241,922
40,000 Chugai Pharmaceutical Co Ltd 382,638
10,500 Chugoku Electric Power Co Inc 165,487
180,000 Cosmo Oil Co Ltd 254,867
7,000 Credit Saison Co 147,198
1,000 CSK Corp 28,234
32,000 Daicel Chemical Industries Ltd 84,956
18,000 Daiichi Seiyaku Co Ltd 273,982
38,000 Daishowa Paper Manufacturing * 130,030
34,000 Daiwa House Industry Co Ltd 348,453
19,000 Ezaki Glico Co Ltd 111,934
19,700 Fanuc Co 735,533
23,000 Fuji Bank 90,527
6,000 Fuji Electric Co 11,985
800 Fuji Photo Film Co Ltd 29,397
17,000 Fukuyama Transporting Co Ltd 66,051
29,000 Gakken Co Ltd 30,796
49,000 General Sekiyu (KK) 158,997
17,000 Hankyu Corp 71,496
75,000 Hino Motors 243,363
257,000 Hitachi Ltd 1,624,526
7,700 Hokkaido Electric Power 116,814
1,200 Hokuriku Electric Power 18,215
9,000 Honda Motor Co Ltd 346,650
8,000 Hosiden Corp 135,188
8,000 House Foods Corp 117,590
8,000 Hoya Corp 391,066
3,000 INAX Corp 19,267
16,000 Industrial Bank of Japan 79,966
8 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Japan - continued
12,000 Intec Inc 124,399
18,000 Itoham Foods Inc 73,729
4,000 Ito-Yokado 233,291
12,000 Japan Airport Terminal Co Ltd 72,212
170,000 Japan Energy Co Ltd 151,875
34,000 Japan Radio Co 128,664
23,000 Japan Synthetic Rubber Co Ltd 107,585
171 Japan Tobacco Inc 1,556,511
1,000 Kandenko Co 6,507
19,400 Kansai Electric Power 369,524
2,000 Katokichi Co Ltd 27,054
38,000 Kawasaki Kisen 54,446
134,000 Keio Teito Electric Railway Co Ltd 559,039
2,300 Keyence Corp 270,999
14,000 Kirin Brewery Co Ltd 165,782
6,000 Kissei Pharmaceutical Co Ltd 101,896
2,000 Kokusai Denshin Denwa 69,448
146,000 Kubota Corp 359,309
64,000 Kurabo Industries Ltd 66,346
9,000 Kyocera Corp 424,779
97,000 Kyowa Hakko Kogyo Co Ltd 458,635
37,100 Kyushu Electric Power Co Inc 590,973
29,000 Maeda Corp 79,680
24,000 Marubeni Corp 39,848
25,000 Marudai Food Co Ltd 40,666
21,000 Meiji Milk Products 62,124
1,000 Meiji Seika Kaisha Ltd 4,062
161,000 Mitsubishi Electric Corp 483,068
6,000 Mitsubishi Gas Chemical Co Inc 15,575
297,000 Mitsubishi Heavy Industries 1,103,894
102,000 Mitsubishi Oil Co Ltd * 183,970
12,000 Mitsubishi Trust & Banking 101,947
7,000 Mitsui Marine & Fire Insurance Co 33,097
18,000 Mitsui Petrochemical Industries Ltd 70,544
8,000 Mochida Pharmaceutical Co Ltd 36,005
8,000 MOS Food Services 98,913
300 Namco Ltd 6,321
44,000 Nichii Co Ltd 246,608
146,000 Nichirei 326,085
9,800 Nintendo Co Ltd 825,959
32,000 Nippon Carbon Co Ltd 45,040
See accompanying notes to the financial statements. 9
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Japan - continued
6,000 Nippon Chemi-Con Corp 20,228
19,000 Nippon Hodo Co 88,394
25,000 Nippon Meat Packers Inc 339,444
58,000 Nissan Motor Co 226,330
23,000 Nisshin Oil Mills Ltd 56,022
98,000 Nisshinbo Industries Inc 326,254
273,000 Nissho Iwai Corp 188,673
120,000 NKK Corp 70,796
64,000 Odakyu Electric Railway 215,761
96,000 Oki Electric Industry 298,559
17,000 Okumura Corp 65,765
5,000 Ono Pharmaceutical Co Ltd 183,312
37,000 Onward Kashiyama Co Ltd 408,512
9,000 Promise Co 409,608
13,000 Q.P. Corp 92,255
103,000 Renown Inc * 56,426
8,000 Royal Co Ltd 109,701
8,000 Ryosan Co 134,850
60,000 Sagami Railway Co Ltd 150,695
36,000 Sakura Bank Ltd 78,281
17,000 Sanwa Bank Ltd 174,083
4,500 Secom Co Ltd 349,305
60,000 Seino Transportation Co Ltd 318,584
32,000 Sekisui House Ltd 327,686
38,200 Shikoku Electric Power 602,056
5,000 Shionogi and Co Ltd 38,727
12,000 Shiseido Co Ltd 145,638
1,000 Showa Denko 843
50,000 Showa Shell Sekiyu 262,958
15,000 Skylark Co Ltd 268,015
35,000 Snow Brand Milk Products Co Ltd 169,617
11,000 Sony Corp 832,533
44,000 Stanley Electric Co Ltd 141,660
44,000 Sumitomo Bakelite Co Ltd 296,671
22,000 Sumitomo Bank 265,335
34,000 Sumitomo Electric 357,910
14,000 Taisho Pharmaceutical Co Ltd 371,681
8,000 Takara Standard Co 56,705
15,000 Takuma Corp 102,402
20,000 Tanabe Seiyaku Co Ltd 102,992
6,700 TDK Corp 480,548
10 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Japan - continued
49,000 Teijin Ltd 175,929
84,000 Teikoku Oil Co Ltd 223,009
9,000 TOA Corp 14,640
98,000 Toei Co Ltd 273,392
9,900 Tohoku Electric Power Co Inc 152,776
9,000 Tokai Bank 44,071
3,000 Tokyo Electron 136,536
50,000 Tokyo Gas Co 117,151
111,000 Tomen Corp 84,197
27,000 Toshiba Corp 167,484
12,000 Toto Limited 86,068
7,000 Toyo Suisan Kaisha 55,398
227,000 Toyobo Co Ltd 283,152
7,000 Yakult Honsha Co Ltd 39,292
13,000 Yamato Transport Co Ltd 174,977
4,000 Yoshitomi Pharmaceutical Industries Ltd 36,544
------------
29,445,505
------------
Malaysia - 4.3%
17,000 Aluminum Co of Malaysia 4,295
119,500 AMMB Holdings Berhad 109,437
225,500 Arab Malaysian Finance (Foreign Registered) 71,211
348,000 Berjaya Group Berhad 76,011
73,000 Berjaya Leisure Berhad 29,968
218,700 Berjaya Sports Toto 290,641
50,700 Carlsberg Brew Malaysia 136,089
65,000 Cement Industries of Malaysia Berhad 33,013
213,000 DMIB Berhad 57,734
122,500 Edaran Otomobil Berhad 188,586
65,000 Genting Berhad 147,961
349,000 Golden Hope Plantations Berhad 349,000
90,000 Guinness Anchor Berhad 87,632
356,000 Highlands and Lowlands Berhad 214,537
550,000 Hong Leong Properties Berhad 99,868
213,300 IGB Corp Berhad 58,377
299,000 IOI Corporation Berhad 162,876
82,000 Jaya Tiasa Holdings Berhad 107,463
110,300 Kedah Cement Berhad 64,729
374,000 Kuala Lumpur Kepong Berhad (Malaysia) 536,395
385,900 Kumpulan Guthrie Berhad 246,773
282,000 Magnum Corp Berhad 145,453
187,550 Malayan Cement Berhad 60,213
See accompanying notes to the financial statements. 11
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Malaysia - continued
57,000 Malaysia Mining Berhad 27,300
270,000 Malaysian International Shipping 468,947
155,500 Malaysian International Shipping 202,968
(Foreign Registered)
55,000 Malaysian Pacific Industries 85,395
363,600 Malaysian Resources Corp 110,037
3,000 Matsushita Electric Co Berhad 9,395
574,000 MBF Capital Berhad * 89,876
339,000 Multi Purpose Holdings * 121,326
88,000 Nestle Malaysia 340,421
168,000 New Straits Times 141,474
319,680 Oriental Holdings Berhad 525,789
30,000 OYL Industries Berhad 60,395
259,500 Pan Malaysia Cement 62,826
96,300 Perlis Plantations 98,327
531,000 Pernas International Hotel & Property 124,366
234,000 Perusahaan Otomobil Nasional Berhad 326,368
128,100 Petronas Dagangan Berhad 136,191
321,300 Petronas Gas Berhad 697,559
125,000 Rashid Hussain Berhad * 79,605
630,000 Renong Berhad * 143,408
102,000 Resorts World Berhad 133,674
169,000 RJ Reynolds Berhad 174,337
109,000 Rothmans of Pall Mall Berhad 628,184
167,000 Sarawak Enterprises Corp 64,603
65,000 Shell Refinery Co 66,711
375,000 TA Enterprise Berhad 107,566
574,400 Tan Chong Motor Holdings Berhad 164,762
139,000 Tenaga Nasional 230,447
236,000 UMW Holdings Berhad 244,695
------------
8,945,214
------------
New Zealand - 0.2%
14,600 Air New Zealand Class B 24,180
88,600 Brierley Investment Ltd (New Zealand) 20,432
187,200 Brierley Investment Ltd (Australia)* 41,847
51,400 Carter Holt Harvey Ltd 47,143
3,500 Fisher and Paykel Industries Ltd 12,840
9,800 Fletcher Challenge Buildings 15,152
9,500 Fletcher Challenge Energy 16,530
12 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
New Zealand - continued
22,800 Fletcher Challenge Paper 15,773
16,300 Lion Nathan Ltd 39,212
52,000 Telecom Corp of New Zealand * 264,356
4,200 Wharehouse Group Ltd * 15,849
------------
513,314
------------
Norway - 0.5%
6,300 Aker RGI ASA Class A 67,644
6,800 Bergesen d.y. ASA Class A 92,768
2,600 Bergesen d.y. ASA Class B 34,485
25,900 Christiania Bank OG Kreditkasse 92,915
79,700 Den Norske Bank Class A 279,879
2,400 Dyno Industrier AS 35,773
6,300 Elkem AS Class A 85,549
5,500 Fred Olsen Energy * 37,864
5,700 Kvaerner Industrier AS 111,242
200 Leif Hoegh and Co AS 2,299
3,850 Norske Skogindustrier AS Class A 114,530
7,800 Petroleum Geo-Services * 88,676
5,200 SAS Norge ASA Class B 42,696
------------
1,086,320
------------
Portugal - 0.5%
3,266 Banco Commercial Portugues (Registered) 98,200
20,112 Electricidade de Portugal 433,611
10,591 Portugal Telecom SA 518,648
------------
1,050,459
------------
Singapore - 4.7%
60,000 Cerebos Pacific Ltd 93,380
36,000 Chuan Hup Holdings Ltd 12,753
500 City Developments 2,091
367,000 Comfort Group 101,234
41,000 Creative Technology Ltd 530,952
102,890 Development Bank of Singapore (Foreign 746,879
Registered)
247,984 Hai Sun Hup Group Ltd 66,244
87,564 Haw Par Brothers International Ltd 98,141
35,308 Inchcape Berhad 38,753
508 Inchcape Marketing Services * 282
174,441 Jardine Matheson Holdings Ltd 457,035
261,500 Jardine Strategic Holdings Ltd 379,175
85,000 Marco Polo Developments Ltd 84,901
71,000 Metro Holdings Ltd 61,022
93,000 Overseas Chinese Banking (Foreign Registered) 621,080
See accompanying notes to the financial statements. 13
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Singapore - continued
285,000 Overseas Union Bank Ltd (Foreign Registered) 1,042,683
5,000 Prima Ltd 8,362
72,100 Robinson and Co Ltd 183,390
43,000 Shangri-La Hotel Ltd 64,425
355,000 Singapore Airlines Ltd (Foreign Registered) 2,618,177
101,000 Singapore Land Ltd 199,419
120,170 Singapore Press Holdings 1,367,789
324,000 Singapore Telecom 460,976
214,000 Straits Trading Co Ltd 188,897
39,000 Times Publishing Ltd 57,979
273,000 United Overseas Land 172,805
187,000 Wing Tai Holdings 110,767
------------
9,769,591
------------
Spain - 2.4%
2,300 Aceralia SA 27,723
13,550 Acerinox SA 355,501
10,800 Banco Popular Espanol 724,383
8,500 Compania Espanola de Petroleos SA 315,384
8,050 Dragados & Construcciones SA 311,058
14,600 Endesa 386,895
3,960 Fomento de Construcciones y Contratas SA 280,822
14,596 Iberdrola SA 228,324
38,920 Repsol SA 2,046,500
7,958 Telefonica de Espana SA 363,413
------------
5,040,003
------------
Sweden - 2.2%
23,808 Assi Doman 431,977
55,700 Avesta Sheffield AB 204,839
12,700 BTL AB Class B * 69,439
14,200 Electrolux AB Class B 268,887
800 Esselte AB Class A 12,323
800 Esselte AB Class B 12,762
1,900 Foreningssparbanken AB Class A 43,382
48,000 Mo Och Domsjo AB Class B 1,253,775
7,700 Nordbanken Holdings AB 46,508
7,500 Scancem AB Class A 260,290
2,800 Skandia Forsakrings AB 51,315
3,300 Skandinaviska Enskilda Banken Class A 36,769
10,155 Skanska AB Class B 332,647
4,100 SKF AB Class B 56,417
14 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Sweden - continued
14,400 Ssab Swedish Steel Class A 151,680
4,900 Ssab Swedish Steel Class B 50,718
38,200 Svenska Cellulosa Class B 760,558
1,200 Svenska Handelsbanken Class A * 42,377
7,200 Svenska Kullagerfabriken AB 95,129
21,700 Trelleborg AB Class B 194,222
3,350 Volvo AB Class A 85,055
------------
4,461,069
------------
Switzerland - 3.3%
120 Baloise Holdings 103,930
470 Clariant Namen AG 223,477
9,400 CS Holdings (Registered) 1,459,577
40 Financiere Richemont AG Class A 60,453
30 Forbo Holdings AG (Registered) 12,215
70 Holderbank Financiere Glarus AG (Bearer) 72,848
100 Jelmoli (Bearer) 87,644
240 Merkur Holding AG (Registered) 53,083
1,025 Nestle AG (Registered) 1,934,630
813 Novartis AG (Registered) 1,426,208
400 Oerlikon-Buhrle (Registered) 47,686
20 Pharma Vision * 14,037
300 Sairgroup Zuerich (Registered) 64,594
30 Schweizerische Industrie-Gesellschaft Holding 15,672
AG (Registered)
20 Sika Finanz AG (Bearer) 5,148
350 Swiss Reinsurance (Bearer) 783,789
1,130 UBS AG (Registered) 351,699
------------
6,716,690
------------
United Kingdom - 22.2%
43,100 Allied Domecq Plc 333,027
30,400 Allied Zurich Plc * 448,778
1,660 Anglian Water Plc 19,440
33,340 Arcadia Group 107,890
74,200 Arjo Wiggins Appleton Plc 144,128
198,238 ASDA Group 494,627
76,300 Associated British Foods 592,217
13,200 Associated British Ports 56,884
39,190 Barratt Development 163,862
44,890 Bass Plc 623,492
18,800 Beazer Holmes Plc 50,598
236,000 BG Plc 1,389,759
28,600 BPB Industries Plc 109,961
See accompanying notes to the financial statements. 15
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
United Kingdom - continued
127,781 British Airways Plc 943,179
24,400 British Energy Plc 260,918
383,000 British Steel Plc 760,822
133,700 British Telecom Plc 2,308,833
133,511 BTR Siebe Plc 563,051
45,600 Cable & Wireless 623,492
29,200 Cable & Wireless Communications * 345,692
21,180 Carlton Communications 209,011
110,400 Centrica Plc 205,159
250,800 Coats Viyella 154,686
95,200 Courtaulds Textiles Plc 231,816
19,200 Delta Plc 38,756
8,900 Electrocomponents Plc 51,756
84,008 Elementis Plc 98,917
54,200 English China Clays Plc 207,086
10,900 First Leisure Plc 37,019
41,500 Great Portland Estates Plc 131,969
10,600 Great Universal Stores Plc 135,001
66,056 Greenalls Group Plc 407,414
15,700 Greycoat Plc 39,739
19,752 Guardian Royal Exchange 112,490
28,500 Hammerson Plc 181,258
119,512 Hazlewood Foods 225,921
261,372 Hillsdown Holdings Plc 284,728
9,500 Hyder Plc 120,839
83,000 Inchcape 199,449
77,591 Ladbroke Group 360,472
56,300 Laird Group 199,326
68,900 Land Securities 894,612
15,600 Laporte Plc 140,700
17,000 Legal & General Group 212,425
101,401 Lonrho Plc 659,524
196,052 Marley Plc 386,313
54,569 MEPC Plc 406,501
204,300 MFI Furniture Group 108,005
10,700 Mirror Group Plc 33,083
165,493 National Power 1,318,971
25,000 National Westminster Bank 517,847
14,700 Next 170,733
65,700 Norcros Plc 85,780
53,200 Northern Foods Plc 92,045
16 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
United Kingdom - continued
92,059 Powergen Plc 1,125,998
14,208 Provident Financial Plc 221,922
12,500 Railtrack Group Plc 310,788
28,700 Rentokil Plc 212,416
91,773 Reuters Holdings Plc 1,279,812
28,190 RMC Group 306,447
33,400 Royal Bank of Scotland Group 652,783
209,100 Royal & Sun Alliance Insurance 1,753,611
22,000 Rugby Group 34,010
82,308 Safeway Plc 353,708
23,400 Sainsbury (J) 134,952
104,705 Scottish Hydro-Electric Plc 970,361
69,042 Scottish Power Plc 644,719
34,221 Selfridges Plc 130,476
24,400 Severn Trent Plc 349,454
50,900 Slough Estates 270,719
26,800 Smith & Nephew Plc 77,280
243,828 Smithkline Beecham Plc 3,433,483
61,200 Smiths Industries Plc 935,325
23,900 St James's Place Capital 111,418
18,300 Standard Chartered 238,951
73,830 Storehouse Plc 178,596
243,140 Tarmac 416,776
76,866 Taylor Woodrow Plc 207,798
54,700 Telewest Communications Plc * 238,352
41,516 Thames Water Plc 684,374
28,110 Thistle Hotels Plc 62,595
35,700 TI Group Plc 222,189
76,047 Transport Development Group Plc 283,858
16,100 Unigate 110,133
332,312 Unilever Plc 3,194,183
135,868 United Biscuits Plc 395,054
25,352 United Biscuits Plc Class B * 9,747
160,000 United Utilities 2,028,773
55,540 Viglen Technology Plc (Entitlement Letters)* -
104,330 Vodafone Group Plc 1,927,203
53,500 Whitbread Plc Class A 768,792
344,069 Wilson (Connolly) Holdings 694,510
See accompanying notes to the financial statements. 17
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
United Kingdom - continued
7,400 Wolseley 47,656
94,288 Yorkshire Water 691,806
22,230 Zeneca 924,499
------------
45,635,528
------------
TOTAL COMMON STOCKS (Cost $198,896,987) 185,425,857
------------
PREFERRED STOCKS - 0.4%
Australia - 0.0%
17,800 Sydney Harbour Casinos 17,021
------------
Austria - 0.1%
4,177 Bau Holdings AG (Non Voting) 107,755
------------
Germany - 0.2%
150 Hugo Boss 251,934
1,300 Villeroy & Boch (Non-Voting) 146,989
2,250 Volkswagen AG 88,424
------------
487,347
------------
Italy - 0.1%
90,800 Fiat SPA 140,044
4,500 IFI Istituto Finanziario 63,971
------------
204,015
------------
TOTAL PREFERRED STOCKS (Cost $1,169,110) 816,138
------------
INVESTMENT FUNDS - 0.1%
Australia - 0.1%
142,300 Advance Property Fund 130,775
17,700 Franked Income Fund 59,790
------------
190,565
------------
TOTAL INVESTMENT FUNDS (Cost $220,508) 190,565
------------
RIGHTS & WARRANTS - 0.0%
France - 0.0%
155,500 Eurotunnel SA Warrants 12/31/01 & 10/31/03 * 22,191
3,420 Generale Des Eaux Warrants 5/2/2001 * 9,611
------------
31,802
------------
18 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Hong Kong - 0.0%
38,275 Century City International Warrants 12/31/99 * 49
9,400 Gold Peak Industries Ltd Warrants 8/6/00 * 546
9,960 Hysan Development Co Ltd Warrants 4/30/99 * 19
100 Innovative International Holding Warrants 8/31/99* -
24,025 Kumagai Gumi Warrants 12/31/99 * 701
71,049 Lai Sun Hotel International Warrants 4/30/99 * 92
450 Wharf Holdings Ltd Warrants 12/31/99 * 17
------------
1,424
------------
Singapore - 0.0%
113,800 Asia Food & Properties Ltd Warrants 7/12/02 * 8,535
9,500 Haw Par Brothers International Ltd Warrants
7/18/2001 * 2,814
------------
11,349
------------
TOTAL RIGHTS & WARRANTS (Cost $82,291) 44,575
------------
SHORT-TERM INVESTMENTS - 11%
Cash Equivalents - 9.2%
$15,000,000 Wachovia Bank Time Deposit, 4.60% due 3/01/99 15,000,000
3,952,257 The Boston Global Investment Trust (b) 3,952,257
------------
18,952,257
------------
U.S. Government - 1.8%
$ 3,900,000 U. S. Treasury Bill, 4.40% due 1/06/2000 (a) 3,746,019
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $22,705,924) 22,698,276
------------
TOTAL INVESTMENTS - 101.3%
(Cost $223,074,820) 209,175,411
Other Assets and Liabilities (net) - (1.3%) (2,769,351)
------------
TOTAL NET ASSETS - 100.0% $206,406,060
============
See accompanying notes to the financial statements. 19
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
- --------------------------------------------------------------------------------
Notes to the Schedule of Investments
(a) This security is held as collateral for open futures contracts.
(b) Represents investment of security lending collateral (Note 1).
* Non-income producing security.
20 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
- --------------------------------------------------------------------------------
At February 28, 1999, industry sector diversification of the Fund's
equity investments was as follows:
Industry Sector (Unaudited)
Utilities 9.7%
Banking 9.1
Consumer Goods 8.1
Telecommunications 6.2
Services 5.1
Construction 4.9
Transportation 4.4
Electronic Equipment 4.1
Chemicals 4.0
Insurance 3.9
Conglomerates 3.8
Oil and Gas 3.6
Food and Beverage 3.6
Metals and Mining 3.5
Health Care 3.5
Machinery 2.9
Real Estate 2.7
Communications 2.3
Automotive 2.2
Retail Trade 1.9
Paper and Allied Products 1.8
Financial Services 1.7
Textiles 1.1
Aerospace 0.2
Computers 0.1
Miscellaneous 5.6
-----
100.0%
=====
See accompanying notes to the financial statements. 21
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities - February 28, 1999
- --------------------------------------------------------------------------------
Assets:
Investments, at value (cost $223,074,820) (Note 1) $ 209,175,411
Foreign currency, at value (cost $497,196) (Note 1) 504,413
Receivable for investments sold 929,843
Dividends and interest receivable 411,929
Foreign withholding taxes receivable 322,112
Receivable for variation margin on open futures contracts
(Notes 1 and 6) 20,106
Net receivable for open forward foreign currency contracts
(Notes 1 and 6) 1,360,038
Receivable for expenses waived or borne by Manager (Note 2) 69,947
-------------
Total assets 212,793,799
-------------
Liabilities:
Due to custodian 29,537
Payable for investments purchased 429,000
Accrued Malaysian repatriation taxes (Note 1) 1,713,378
Payable upon return of securities loaned (Note 1) 3,952,257
Payable to affiliate for (Note 2):
Management fee 118,361
Shareholder service fee 18,156
Accrued expenses 127,050
-------------
Total liabilities 6,387,739
-------------
Net assets $ 206,406,060
=============
Net assets consist of:
Paid-in capital $ 225,369,307
Distributions in excess of net investment income (982,318)
Accumulated net realized loss (4,429,944)
Net unrealized depreciation (13,550,985)
-------------
$ 206,406,060
=============
Net assets attributable to:
Class III Shares $ 97,450,066
=============
Class IV Shares $ 108,955,994
=============
Shares outstanding:
Class III 10,505,539
=============
Class IV 11,752,364
=============
Net asset value per share:
Class III $ 9.28
=============
Class IV $ 9.27
=============
22 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Statement of Operations - Year Ended February 28, 1999
- --------------------------------------------------------------------------------
Investment income:
Dividends (net of foreign tax expense of $958,232) $ 8,387,759
Interest (including securities lending income of $63,425) 1,279,602
------------
Total income 9,667,361
------------
Expenses:
Management fee (Note 2) 2,606,569
Custodian fees 594,719
Audit fees 57,641
Transfer agent fees 43,939
Legal fees 5,134
Registration fees 3,612
Trustees fees (Note 2) 3,373
Miscellaneous 4,175
Fees waived or borne by Manager (Note 2) (1,442,434)
------------
1,876,728
Shareholder service fee - (Note 2)
Class III 229,359
Class IV 174,904
------------
Net expenses 2,280,991
------------
Net investment income 7,386,370
------------
Realized and unrealized gain (loss):
Net realized gain on:
Investments 9,727,657
Closed futures contracts 21,925,323
Foreign currency, forward contracts and foreign currency
related transactions 13,061
------------
Net realized gain 31,666,041
------------
Change in net unrealized appreciation (depreciation) on:
Investments (Note 1) (26,611,666)
Open futures contracts (4,880,274)
Foreign currency, forward contracts and foreign currency
related transactions 1,021,012
------------
Net unrealized loss (30,470,928)
------------
Net realized and unrealized gain 1,195,113
------------
Net increase in net assets resulting from operations $ 8,581,483
============
See accompanying notes to the financial statements. 23
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
Increase (decrease) in net assets: February 28, 1999 February 28, 1998
----------------- -----------------
<S> <C> <C>
Operations:
Net investment income $ 7,386,370 $ 12,109,056
Net realized gain 31,666,041 87,568,440
Change in net unrealized appreciation (depreciation) (30,470,928) (6,942,524)
------------- -------------
Net increase in net assets resulting from operations 8,581,483 92,734,972
------------- -------------
Distributions to shareholders from:
Net investment income
Class III (1,029,703) (12,103,195)
Class IV (1,302,562) --
------------- -------------
Total distributions from net investment income (2,332,265) (12,103,195)
------------- -------------
In excess of net investment income
Class III (2,513,584) --
Class IV (3,179,653) --
------------- -------------
Total distributions in excess of net investment income (5,693,237) --
------------- -------------
Net realized gains
Class III (28,178,223) (108,544,439)
Class IV (33,629,347) --
------------- -------------
Total distributions from net realized gains (61,807,570) (108,544,439)
------------- -------------
(69,833,072) (120,647,634)
------------- -------------
Net share transactions - (Note 5)
Class III (78,616,879) (313,055,281)
Class IV (224,207,117) 330,350,503
------------- -------------
Increase (decrease) in net assets resulting from
net share transactions (302,823,996) 17,295,222
------------- -------------
Total decrease in net assets (364,075,585) (10,617,440)
Net assets:
Beginning of period 570,481,645 581,099,085
------------- -------------
End of period (including distributions in excess of
net investment income of $982,318 and
$7,787,554, respectively) $ 206,406,060 $ 570,481,645
============= =============
</TABLE>
24 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29
--------------------------------------------------
1999 1998 1997 1996*
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 11.92 $ 12.68 $ 11.54 $ 10.00
Income from investment operations:
Net investment income 0.23 + 0.27 + 0.22 0.23
Net realized and unrealized gain (loss) (0.36)(c) 1.72 1.63 1.44
Total from investment operations (0.13) 1.99 1.85 1.67
Less distributions to shareholders from:
Net investment income (0.08) (0.27) (0.28) (0.06)
In excess of net investment income (0.21) - - -
Net realized gains (2.22) (2.48) (0.43) (0.07)
Total distributions (2.51) (2.75) (0.71) (0.13)
Net asset value, end of period $ 9.28 $ 11.92 $ 12.68 11.54
Total Return (a) (1.84%) 17.98% 16.55% 16.66%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 97,450 $207,653 $581,099 407,227
Net expenses to average
daily net assets 0.69% 0.69% 0.72%(b) 0.69%**
Net investment income to average
daily net assets 2.07% 2.15% 2.25% 1.89%**
Portfolio turnover rate 68% 96% 84% 7%
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.05 $ 0.05 $ 0.04 $ 0.05
</TABLE>
* Period from June 30, 1995 (commencement of operations) to February 29,
1996.
** Annualized
+ Computed using average shares outstanding throughout the period.
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(b) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .03% of average daily net assets.
(c) The amount shown for a share outstanding does not correspond with the
aggregate net realized and unrealized gain (loss) on investments for the
period ended February 28, 1999 due to the timing of purchases and
redemptions of Fund shares in relation to fluctuating market values of the
investments of the Fund.
See accompanying notes to the financial statements. 25
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from January 9, 1998
Year Ended (commencement of operations)
February 28, 1999 to February 28, 1998
----------------- --------------------
<S> <C> <C>
Net asset value, beginning of period $ 11.92 $ 10.87
--------- ---------
Income from investment operations:
Net investment income 0.24 + 0.01 +
Net realized and unrealized gain (loss) (0.36)(b) 1.04
--------- ---------
Total from investment operations (0.12) 1.05
--------- ---------
Less distributions to shareholders from:
Net investment income (0.09) -
In excess of net investment income (0.22) -
Net realized gains (2.22) -
--------- ---------
Total distributions (2.53) -
--------- ---------
Net asset value, end of period $ 9.27 $ 11.92
========= =========
Total Return (a) (1.79%) 9.66%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 108,956 $ 362,829
Net expenses to average
daily net assets 0.63% 0.63% *
Net investment income to average
daily net assets 2.17% 0.72% *
Portfolio turnover rate 68% 96%
Fees and expenses voluntarily waived or
borne by the Manager consisted of the
following per share amounts: $ 0.05 $ 0.01
</TABLE>
+ Computed using average shares outstanding throughout the period.
* Annualized
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(b) The amount shown for a share outstanding does not correspond with the
aggregate net realized and unrealized gain (loss) on investments for the
period ended February 28, 1999 due to the timing of purchases and
redemptions of Fund shares in relation to fluctuating market values of the
investments of the Fund.
26 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Currency Hedged International Core Fund (the "Fund") is a series of
GMO Trust (the "Trust"). The Fund is registered under the Investment
Company Act of 1940, as amended, as an open-end, non-diversified
management investment company. The Fund is advised and managed by
Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust
was established as a Massachusetts Business Trust under the laws of the
Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust
permits the Trustees to create an unlimited number of series ("Funds"),
each of which issues a separate series of shares, and to subdivide a
series into classes.
The Fund seeks maximum total return through investment in a portfolio of
common stocks of non- U.S. issuers and through management of the Fund's
foreign currency positions.
Prior to January 9, 1998, the Fund offered three classes of shares: Class
I, Class II, and Class III. Effective January 9, 1998, Class I and Class
II shares ceased to be offered, and Class IV shares commenced operations.
The principal economic difference among the classes of shares is the level
of shareholder service fee borne by the classes. Eligibility for and
automatic conversion between the various classes of shares is generally
based on the total amount of assets invested with GMO, as more fully
described in the Trust's prospectus.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost
which approximates market value. Other assets and securities for which no
quotations are readily available are valued at fair value as determined in
good faith by the Trustees or other persons acting at their direction.
On September 1, 1998, the Malaysian government introduced capital controls
effectively eliminating trading of the Malaysian ringgit. Effective
February 4, 1999, the Malaysian government modified these restrictions.
Funds invested in Malaysia as of February 15, 1999 and repatriated within
one year of September 1, 1998, or one year from the date of the investment
if after September 1, 1998, are subject to a graduated repatriation tax on
the principal invested with a maximum of 30%. The Fund has recorded an
accrual in the amount of $1,713,378 for potential repatriation tax on
principal invested prior to
27
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
February 15, 1999. The accrual for Malaysian repatriation taxes is
included in the change in net unrealized appreciation (depreciation) on
investments in the Statement of Operations. Funds invested in Malaysia on
or after February 15, 1999 are subject to a repatriation tax on capital
gains of 30% for currency repatriated in less than one year of the initial
investment and 10% for currency repatriated after one year of the initial
investment. The Fund has not made any additional investments in Malaysia
on or after February 15, 1999 and accordingly no tax provision for capital
gains has been accrued.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the prevailing
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at prevailing exchange rates when
accrued or incurred The Fund does not isolate realized and unrealized
gains and losses attributable to changes in exchange rates from gains and
losses that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent net exchange gains and losses on disposition of
foreign currencies, currency gains and losses realized between the trade
and settlement dates on securities transactions and the difference between
the amount of investment income and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent amounts actually received
or paid.
Futures contracts
The Fund may purchase and sell stock index futures contracts. Stock index
futures contracts represent commitments for future delivery of cash based
upon the level of a specified index of equity securities at a specified
price at a given date. The Fund may use futures contracts to manage its
exposure to the stock market. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government obligations in
accordance with the initial margin requirements of the broker or exchange.
Futures contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. The payable or receivable is subsequently settled. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 28, 1999.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or
all of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency
28
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
contract fluctuates with changes in forward currency exchange rates.
Forward currency contracts are marked to market daily and the change in
value is recorded by the Fund as an unrealized gain or loss. Realized
gains or losses equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed are
recorded upon delivery or receipt of the currency or, if a forward
currency contract is offset by entering into another forward currency
contract with the same broker, upon settlement of the net gain or loss.
These contracts may involve market risk in excess of the unrealized gain
or loss reflected in the Fund's Statement of Assets and Liabilities. In
addition, the Fund could be exposed to risk if the counterparties are
unable to meet the terms of the contracts or if the value of the currency
changes unfavorably to the U.S. dollar. The U.S. dollar value of the
currencies the Fund has committed to buy or sell is shown under Note 6 and
represents the currency exposure the Fund has acquired or hedged through
currency contracts as of February 28, 1999.
Swap agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to the equity markets. The Fund enters into total return swap agreements
which involve a commitment by one party in the agreement to pay interest
in exchange for a market linked return based on a notional amount. To the
extent that the total return of the security or index underlying the
transaction exceeds or falls short of the offsetting interest rate
obligation, the Fund will receive a payment from or make a payment to the
counterparty, respectively. Total return swaps are marked to market daily
based upon quotations from market makers and the change, if any, is
recorded as unrealized gain or loss in the Statement of Operations.
Payments received or made at the end of the measurement period are
recorded as realized gain or loss in the Statement of Operations. Entering
into these agreements involves, to varying degrees, elements of credit and
market risk in excess of the amounts recognized on the Statement of Assets
and Liabilities. Such risks involve the possibility that there will be no
liquid market for these agreements, that the counterparty to the
agreements may default on its obligation to perform or that there may be
unfavorable changes in the price of the security or index underlying these
transactions. At February 28, 1999, there were no open swap agreements.
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of delay in
recovery or even loss of rights in the collateral should the borrower of
the securities fail financially. The Fund receives compensation for
lending its securities. At February 28, 1999, the Fund loaned securities
having a market value of $3,249,193 collateralized by cash in the amount
of $3,952,257 which was invested in a short-term instrument.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal
29
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
income or excise tax is necessary. Taxes on foreign interest and dividend
income have been withheld in accordance with the applicable country's tax
treaty with the United States.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. The Fund declares separate dividends from net
investment income on each class of shares.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
foreign currency and passive foreign investment company transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
--------------------- -------------------------- -----------------
$7,444,368 ($7,444,368) $0
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date, or when the Fund is informed of the
ex-dividend date, if later. Interest income is recorded on the accrual
basis and is adjusted for the accretion of discounts. In determining the
net gain or loss on securities sold, the cost of securities is determined
on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds. Investment
income, common expenses and realized and unrealized gains and losses are
allocated pro-rata among the classes of shares of the Fund based on the
relative net assets of each class. Shareholder service fees, which are
directly attributable to a class of shares, are charged to that class'
operations.
30
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .60% of the amount
invested. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. These fees are allocated relative to each class' net
assets on the share transaction date. Purchase premiums are included as
part of each class' "shares sold" as summarized in Note 5. For the year
ended February 28, 1999, the Fund received $10,896 in purchase premiums.
There is no premium for cash redemptions or reinvested distributions.
While no purchase premium is normally charged with respect to in-kind
purchases of Fund shares, a purchase premium of up to .10% may be charged
on certain in-kind purchases.
Investment risk
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .75% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of each class at the annual rate of .15%
for Class III shares and .09% for Class IV shares.
GMO agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding brokerage commissions, certain other transaction costs
(including stamp duties and transfer taxes), shareholder service fees and
extraordinary expenses) exceed .54% of average daily net assets.
Effective March 1, 1999, GMO's contractual management fee was reduced to
.54% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding brokerage
commissions, certain other transaction costs (including stamp duties and
transfer taxes), shareholder service fees and extraordinary expenses)
exceed the management fee.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999, was $3,373. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
31
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1999, aggregated
$227,329,158 and $582,161,681, respectively.
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in the value of investments held
were as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
---------------- ------------------ ------------------ ---------------
$228,113,052 $16,438,641 $35,376,282 $18,937,641
4. Principal shareholders
At February 28, 1999, 50% of the outstanding shares of the Fund were held
by two shareholders, each holding in excess of 10% of the outstanding
shares of the Fund.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums received by
the Fund, were as follows:
Class III: Year Ended Year Ended
February 28, 1999 February 28, 1998
----------------------------- ----------------------------
Shares Amount Shares Amount
------------- -------------- ------------ --------------
Shares sold 563,792 $ 5,359,120 8,582,791 $ 112,053,373
Shares issued to
shareholders in
reinvestment of
distributions 3,031,071 31,219,975 10,291,607 116,658,063
Shares
repurchased (10,514,340) (115,195,974) (47,260,509) (541,766,717)
------------- ------------- ------------ -------------
Net decrease (6,919,477) $ (78,616,879) (28,386,111) $(313,055,281)
============= ============= ============ =============
32
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Share transactions - continued
Period from January 9, 1998
Class IV: Year Ended (commencement of operations)
February 28, 1999 to February 28, 1998
--------------------------- ----------------------------
Shares Amount Shares Amount
----------- ------------- ------------- ------------
Shares sold -- $ 6,173 31,203,675 $339,183,949
Shares issued to
shareholders in
reinvestment of
distributions 3,403,005 35,243,016 -- --
Shares
repurchased (22,085,761) (259,456,306) (768,555) (8,833,446)
----------- ------------- ------------- ------------
Net increase/
(decrease) (18,682,756) $(224,207,117) 30,435,120 $330,350,503
=========== ============= ============= ============
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1999 is as
follows:
Forward currency contracts
Net Unrealized
Settlement Units Appreciation
Date Deliver/Receive of Currency Value (Depreciation)
----------- ----------------- -------------- ------------ --------------
Buys
4/9/99 AUD 6,739,373 $ 4,185,746 $ (53,486)
4/9/99 CAD 22,972,399 15,216,880 162,219
8/27/99 CHF 21,333,696 15,003,046 (400,411)
8/27/99 DKK 32,686,240 4,865,367 (89,700)
8/27/99 EUR 62,227,536 69,008,125 (1,956,554)
8/27/99 GBP 15,101,566 24,172,927 (464,186)
4/9/99 HKD 134,926,706 17,397,095 40,186
4/9/99 JPY 4,825,040,004 40,881,081 (714,424)
33
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Forward currency contracts - continued
Net Unrealized
Settlement Units Appreciation
Date Deliver/Receive of Currency Value (Depreciation)
----------- ---------------- -------------- ------------ --------------
8/27/99 NOK 169,722,980 $ 21,268,351 $ (580,837)
4/9/99 NZD 16,025,052 8,402,432 (90,045)
8/27/99 SEK 252,008,613 30,971,105 (972,785)
4/9/99 SGD 4,288,008 2,495,829 (92,464)
-------------
$ (5,212,487)
=============
Sales
4/9/99 AUD 26,196,277 $ 16,270,202 $ 218,163
4/9/99 CAD 24,872,288 16,475,363 (317,178)
8/27/99 CHF 43,164,070 30,355,383 614,490
8/27/99 DKK 61,389,724 9,137,899 227,809
8/27/99 EUR 98,338,794 109,054,226 3,088,186
8/27/99 GBP 46,961,786 75,171,267 1,376,445
4/9/99 HKD 194,108,066 25,027,784 (75,567)
4/9/99 JPY 9,080,729,915 76,938,234 (868,691)
8/27/99 NOK 126,469,096 15,848,114 352,942
4/9/99 NZD 17,721,119 9,291,732 74,681
8/27/99 SEK 282,659,034 34,737,950 1,504,577
4/9/99 SGD 13,050,817 7,596,208 376,668
-------------
$ 6,572,525
=============
Currency Abbreviations:
AUD Australian Dollar HKD Hong Kong Dollar
CAD Canadian Dollar JPY Japanese Yen
CHF Swiss Franc NOK Norwegian Kroner
DKK Danish Krona NZD New Zealand Dollar
EUR Euro SEK Swedish Krona
GBP British Pound SGD Singapore Dollar
34
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Futures contracts
Net Unrealized
Number of Contract Appreciation
Contracts Type Expiration Date Value (Depreciation)
------------ ------------ --------------- ------------- ---------------
Buys
117 DAX March 1999 $ 15,760,799 $ 559,527
103 CAC 40 March 1999 4,627,885 (6,357)
23 MIB 30 March 1999 4,580,562 355,500
------------
$ 908,670
============
Sales
34 ALL ORDS March 1999 $ 1,525,363 $ (41,974)
17 FTSE 100 March 1999 1,677,069 (72,773)
8 HANG SENG March 1999 507,502 (27,446)
23 IBEX 35 March 1999 2,517,630 (50,290)
14 TSE 35 March 1999 1,627,691 (8,963)
22 OMX STOCK March 1999 195,701 2,200
4 TOPIX March 1999 377,075 (8,707)
------------
$ (207,953)
============
At February 28, 1999, the Fund has cash and/or securities to cover any
margin requirements on open futures contracts.
35
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
February 28, 1999
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1999, all the Fund's distributions
are from investment company taxable income, except that the Fund has
designated 25.29% of distributions as net capital gain dividends.
The Fund has elected to defer to March 1, 1999 post-October capital losses
of $5,807,525.
36
<PAGE>
GMO Currency Hedged International Core Fund
(A Series of GMO Trust)
Portfolio Managers
Mr. R. Jeremy Grantham and Mr. Christopher Darnell are primarily responsible
for the day-to-day management of the Fund's portfolio. Each of these individuals
has been a portfolio manager at Grantham, Mayo, Van Otterloo & Co. LLC for more
than fifteen years.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO Currency Hedged International Core Fund returned
- -1.8% for the fiscal year ended February 28, 1999 as compared to 6.4% for the
GMO EAFE-Lite Hedged Index. Consistent with the Fund's investment objectives and
policies, the Fund was invested substantially in common stocks throughout the
period.
The fiscal year was an extraordinarily volatile year in the global equity
markets. As was the case in the U.S., the international markets got off to a
very strong start. However, the global financial crisis that ensued in the third
quarter effectively wiped out all of these returns. The global equity markets
then rebounded sharply in late 1998, a period in which EAFE-Lite rose by 20.1%.
Europe, which accounted for 79% of EAFE-Lite at year-end, returned 11% for the
fiscal year in local terms, Japan declined by -11.3%, however the strengthening
of the Japanese yen relative to the dollar (6.8%) offset the majority of the
decline in local terms.
In Europe, Finland (+76%), Belgium (+40%), Italy (+23%), France (+19%) and Spain
(+17%) were the strongest performing markets. Most of the other major European
countries had significant positive returns. Austria (-7.1%), Norway (-27.8%) and
Denmark (+1.3%) were the only notable exceptions. Outside of Japan, the Pacific
Rim markets were weak with the exception of Australia, which returned 10.8%.
Effect of Country Weights
County selection added modestly to the Fund's performance for the year. Although
the Fund was, on average, 11% underweight in Europe during the year, the
positive contribution derived from overweighting Italy more than offset the
Fund's underweight positions in the rest of the region. Overweight positions in
Canada and Singapore, which both underperformed EAFE-Lite for the year, somewhat
offset the benefit from overweighting Italy and underweighting Japan.
Effect of Stock Selection
Stock selection was the largest source of underperformance as to Fund's tilts
towards small-cap and value stocks were not rewarded in the bull market
environment that
<PAGE>
continued to favor the largest international stocks. The performance of the
developed international markets was extremely narrow; for calendar year l998
only 25 stocks accounted for over 50% of EAFE's return. The Fund's underweight
positions in this group of companies, particularily in the telecommunications
and pharmacutical sectors, were a contributing factor to its underperfomance.
The majority of the Fund's underperformance was concentrated in Europe, where
the Fund's strategy of emphasizing value and mid-cap stocks (i.e., the smallest
20% to 25% of stocks in the EAFE universe) and underweighting large,
multinational stocks detracted from performance. The Fund's Japanese holdings
added value, as the Fund held no weight in the poor-performing bank sector and
an overweight position in Japanese small-cap stocks added value. Although strong
stock selection within Japan added positively to the Fund's overall performance,
the effect was not sufficient to compensate for underperformance in Europe.
Portfolio Structure and Outlook
The events of the past several years (the bull market in the U.S. and Europe,
the collapse of Southeast Asian markets aid the poor performance of the Japanese
stock market and economy) have driven valuations significantly away from fair
value. Today value is exceptionally well positioned for picking countries and
companies. Spreads between the cheapest and most expensive countries (even after
excluding Southeast Asia) have reached their most attractive levels in fourteen
years. European value stocks are exceptionally attractive, having reached their
cheapest levels in fifteen years. Small international stocks have fallen to
levels that represent a once in forty-year opportunity (i.e., a three- to
four-standard deviation move away from their fair value).
The Fund's strategy of emphasizing stocks and countries with attractive
valuations will continue to capitalize on these misvaluations. We recognize that
it has been extremely difficult to endure the underperformance of a value-driven
strategy over the past several years, however, today the Fund's strategy is
well-positioned to capitalize on the conditions that will bring value and
smaller EAFE stocks in line with more normal historical levels. It is our
expectation that clients will be handsomely rewarded for their patience as the
market cycle turns in favor of value.
As of year-end, the Fund now neutral on the Japanese market relative to the
benchmark. While significant reform is still needed to tackle the problems of
excess saving and investment in Japan, we believe Japan is much less susceptible
in a world of expensively valued U.S. and European markets. The Fund remains
underweight in the yen, as we believe that a weaker yen is a precondition to
restoring the viability of the Japanese economy. The Fund remains underweight in
Europe in favor of ex-Japan Asia, where the markets have very strong upside
potential and are trading at extremely cheap levels.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
- --------------------------------------------------------------------------------
Comparison of Change in Value of a $10,000 Investment in
GMO Currency Hedged International Core Fund Class III Shares and the
MSCI EAFE Index
As of February 28, 1999
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Since
1 Year Inception
- --------------------------------------------------------------------------------
Class 6/30/95
III -2.4% 13.0%
- --------------------------------------------------------------------------------
Class 1/9/98
IV -2.4% 6.2%
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Date GMO Currency Hedged
International Core Fund GMO EAFE-Lite
Class III Shares MSCI EAFE Index Hedged Index
----------------------- --------------- ------------
1/31/95
6/30/95 9,940 10,000 10,000
9/30/95 10,666 10,417 10,950
12/31/95 11,235 10,838 11,610
3/31/96 11,767 11,151 12,299
6/30/96 12,229 11,327 12,737
9/30/96 12,326 11,314 12,922
12/31/96 12,952 11,494 13,469
3/31/97 13,399 11,314 14,185
6/30/97 14,528 12,782 15,867
9/30/97 15,347 12,692 16,551
12/31/97 14,622 11,697 15,924
3/31/98 17,164 13,418 18,794
6/30/98 17,070 13,560 19,151
9/30/98 13,777 11,631 15,649
12/31/98 15,687 14,034 18,422
2/28/99 15,654 13,659 18,885
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 60 bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Performance for Class IV shares may be different due to
lower shareholder service fees. Past performance is not indicative of future
performance. Information is unaudited.
- --------------------------------------------------------------------------------
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of GMO International Core Fund
(A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO International Core Fund at
February 28, 1999 and the results of its operations, the changes in its net
assets and the financial highlights for the periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 22, 1999
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
COMMON STOCKS - 92.3%
Australia - 6.5%
44,596 Amalgamated Holdings Ltd 127,660
138,300 AMP Ltd 1,565,888
638,075 Australia and New Zealand Banking Group Ltd 4,120,612
180,691 Australian Gas & Light 1,184,721
22,700 Bank of Western Australia 43,696
645,267 Boral Ltd 929,574
1,118,700 Broken Hill Proprietary Ltd 8,398,400
165,969 Caltex Australia Ltd 379,255
553,100 Capital Property Trust 710,936
257,600 Capral Aluminum Ltd 359,903
1,526,787 Coles Myer Ltd 8,153,302
1,145,700 Colonial Ltd 4,331,851
136,787 Commonwealth Bank of Australia 2,055,497
447,662 Consolidated Rutile Ltd * 202,922
101,149 Cortecs Plc * 37,685
28,100 Coventry Group Ltd 88,465
476,000 CRA Ltd 5,951,051
105,300 CSL Ltd 940,970
1,401,096 CSR Ltd 3,375,641
576,600 Cultus Petroleum * 162,908
781,254 Delta Gold 1,154,585
53,682 Energy Resources of Australia Class A 56,668
293,731 Foodland Associated 2,188,707
2,141,472 Fosters Brewing Group Ltd 6,143,431
45,490 G E Crane Holdings Ltd 264,110
963,928 General Property Trust Units 1,616,088
3,521,031 Goodman Fielder Ltd 3,257,712
6,607 Hardie (James) Industries Ltd 14,564
159,873 Harvey Norman Holdings 1,538,734
175,000 Jupiters Ltd 453,138
100,500 Leighton Holdings 330,749
103,800 Lend Lease Corp Ltd 1,289,092
211,600 Mayne Nickless Ltd 689,813
1,166,579 MIM Holdings Ltd 507,071
148,488 Mirvac Ltd 184,407
11,594 Mount Leyshon Gold Mines 14,183
561,408 National Australia Bank Ltd 9,360,079
831,873 National Food Ltd 1,611,641
1,005,700 National Mutual Holdings 1,661,142
See accompanying notes to the financial statements.
1
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments- continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Australia - continued
1,134,650 National Mutual Property Trust 887,747
3,531,407 News Corp Ltd 24,778,947
2,880,111 Normandy Mining Ltd 2,467,999
653,960 Pacific Dunlop Ltd 1,141,075
1,372,717 Pioneer International Ltd 2,766,001
256,721 PMP Communications Ltd 503,738
1,934,879 Qantas Airways Ltd 5,106,218
129,007 Rothmans Holdings Ltd 1,017,358
1,180,292 Santos Ltd 3,268,744
1,306,039 Schroders Property 1,978,803
216,469 Sea World Property Trust 127,696
141,940 Simsmetal Ltd 524,419
289,100 Southcorp Holdings Ltd 1,113,003
116,600 St George Bank 733,440
88,200 Suncorp Metway Ltd 491,596
503,700 Tabcorp Holdings 3,534,329
2,945,200 Telstra Corporation 15,025,601
14,999 W H Soul Pattison & Co Ltd 279,409
916,467 Western Mining Corp Holdings Ltd 2,845,401
175,200 Westfarmers Ltd 1,756,313
2,718,300 Westfield America Trust 2,700,685
471,100 Westfield Holdings Ltd 2,809,161
2,299,508 Westfield Trust Units 4,712,002
1,729,691 Westpac Banking Corp 11,435,428
363,300 Woodside Petroleum Ltd 1,775,402
---------------
169,237,366
---------------
Austria - 3.1%
2,023 Austria Mikro Systeme International 66,511
25,556 Austria Tabakwerke AG 1,887,760
47,739 Austrian Airlines 1,572,165
47,415 Boehler Uddeholm (Bearer) 2,272,495
84,489 Brau Union AG 4,396,246
19,429 EA-Generali AG 4,297,629
121,497 Erste Bank Der Oesterreichischen Sparkassen AG 5,728,385
7,655 Interunfall Versicherung AG 1,067,216
9,192 Leykam-Muerztaler Papier und Zellstoff AG * 213,414
24,390 Mayr-Melnhof Karton AG (Bearer) 1,161,729
43,209 Oesterreichische Brau Beteiligungs AG 2,059,053
65,063 Oesterreichische Elektrizitaetswirtschafts AG 10,427,745
See accompanying notes to the financial statements.
2
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments- continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Austria - continued
319,709 Oesterreichische Laenderbank AG 17,197,067
23,217 OMV AG 2,140,863
220,591 Radex-Heraklith AG 6,095,010
650,276 Voest-Alpine Stahl AG 20,030,364
---------------
80,613,652
---------------
Belgium - 1.4%
15,675 Almanij NV 1,212,249
7,400 Arbed SA 541,827
2,030 Bekaert SA 833,434
15,275 CBR Cimenteries NPV 1,343,966
89,000 Cockerill Sambre SA 399,592
35,400 Compagnie Benelux Paribas SA 2,490,948
2,050 Compagnie Maritime Belge SA 70,550
18,100 Credit Commercial Dexia 2,741,960
23,975 Electrabel SA 10,001,051
23,800 Electrafina NPV 2,832,107
4,921 Fortis (B) 179,077
3,550 Glaverbel NPV 358,525
11,600 Groupe Bruxelles Lambert NPV 2,164,763
12,200 Petrofina SA Bruxelles 5,640,942
59,260 Solvay Et Cie 4,072,297
5,150 Tessenderlo Chemie 253,838
29,100 Union Miniere NPV 948,114
---------------
36,085,240
---------------
Canada - 2.1%
80,019 Abitibi Consolidated Inc 638,774
36,000 Agrium Inc 286,187
70,200 Alcan Aluminum Ltd 1,702,100
79,304 BCE Inc 3,209,986
73,256 BCT Telus Communications Inc 2,033,406
24,418 BCT Telus Communications Inc Class A (Non Voting) 637,343
54,500 Biochem Pharma Inc * 1,335,873
45,200 Canadian Hotel Inc 2,179,901
19,175 Canadian Hunter Exploration Ltd * 139,732
25,000 Canadian Tire Corp Ltd Class A 635,972
109,111 Cominco Ltd 1,499,870
165,500 Dofasco Inc 2,083,140
167,918 Domtar Inc 1,001,167
121,700 Donohue Inc Class A 2,467,055
See accompanying notes to the financial statements.
3
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments- continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Canada - continued
226,500 Falconbridge Ltd 2,513,332
76,007 Fletcher Challenge Ltd Class A 704,934
246,002 Gulf Canada Resources Ltd 585,059
3,600 Hollinger Inc 39,709
28,010 Hudsons Bay Co 270,915
38,600 Imasco Ltd 846,413
72,300 Inco Ltd * 905,247
2,200 Ipsco Inc 37,238
210,700 Laidlaw Inc 1,619,159
26,500 Magna International Class A 1,579,993
60,700 Methanex Corp * 259,367
63,600 Molson Co Ltd Class A 905,863
80,400 Moore Corporation Ltd 844,213
27,641 Nexfor Inc 107,121
76,700 Noranda Inc 825,687
103,100 NS Power Holdings Inc 1,243,074
37,300 Potash Corp of Saskatchewan 2,116,426
45,800 Quebecor Inc Class B 1,001,259
58,400 Renaissance Energy Ltd * 514,554
133,100 Rogers Cantel Mobile Communications Class B * 2,050,066
166,600 Seagram Ltd 7,714,700
58,706 Teck Corp Class B 414,189
110,400 Transalta Corp 1,788,195
344,404 Transcanada Pipelines Ltd 4,722,864
23,101 United Dominion Industries Ltd 446,104
66,200 Westcoast Energy Inc 1,298,125
---------------
55,204,312
---------------
Finland - 0.6%
41,700 Amer Group Class A 617,978
29,600 Cultor OY Class 1 272,945
449,700 Enso OY Class R 3,973,948
82,500 Finnair Class A 426,558
1,700 Huhtamaki OY Class I 56,713
26,738 Instrumentarium OY Class A 804,235
156,900 Kesko OY 2,228,746
7,100 Kone Corp Class B 806,682
25,200 Metra AB Class A 484,108
9,200 Metra AB Class B 171,688
38,500 Outokumpu Class A 337,684
See accompanying notes to the financial statements.
4
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments- continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Finland - continued
83,800 Partek OY 708,334
6,200 Rauma OY 71,464
185,901 Rautaruukki OY 1,163,215
42,250 Stockmann AB Class A 976,298
19,400 Stockmann AB Class B 331,158
29,000 UPM-Kymmene OY 752,892
8,900 Valmet OY 92,815
---------------
14,277,461
---------------
France - 10.3%
27,839 Accor SA 6,478,776
58,250 Air Liquide Class L 8,683,587
142,500 Assurances Generales De France (Bearer) 8,056,113
13,870 Axa SA 1,808,824
80,773 Banque Nationale de Paris 6,446,204
54,720 Banque Paribas Class A 4,715,407
29,450 BIC SA 1,519,451
4,332 Bongrain 1,659,653
10,070 Bull SA * 64,115
21,672 Christian Dior 2,490,859
109,270 Compagnie Generale d'Industrie
et de Participations 5,931,584
9,919 Credit Commercial de France 854,754
13,867 Credit Local de France SA 1,864,756
265,509 Credit Lyonnais * 11,661,415
76,090 Elf Aquitaine SA 7,935,141
79,988 Eridania Beghin-Say SA 11,590,501
7,140 Essilor International 2,727,601
964 Fromageries Bel SA 698,432
120,980 Groupe Danone 30,133,635
26,950 Imetal 3,195,111
234,614 Lafarge Coppee SA 22,277,860
55,485 Lyonnaise Des Eaux 11,091,467
109,175 Pernod Ricard 6,459,746
105,582 Peugeot SA 14,082,171
87,741 Remy Cointreau SA * 1,377,343
232,610 Renault SA 10,852,274
418,968 Rhone Poulenc SA Class A 19,201,749
157,636 Saint-Gobain 24,503,161
4,920 Seb SA 324,056
25,310 Seita 1,500,339
See accompanying notes to the financial statements.
5
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments- continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
France - continued
14,065 Societe Eurafrance 6,971,094
71,765 Societe Generale Paris 10,532,890
126,891 SPIE Batignolles 7,452,261
70,383 Thomson CSF 2,086,099
34,380 Total SA 3,585,361
456,220 Usinor Sacilor 5,599,117
---------------
266,412,907
---------------
Germany - 6.4%
7,850 Adidas Salomon AG 751,432
113,545 AGIV AG 2,393,165
16,050 Axa Colonia Konzern AG 1,427,130
523,750 BASF AG 18,139,564
433,900 Bayer AG 15,361,118
3,900 Bayerische Motorenwerke AG 2,817,046
66,387 Bayerische Vereinsbank 3,760,419
176,780 Berliner Kraft & Licht AG Class A 3,852,096
252,066 Continental AG 6,281,214
44,100 Deutsche Bank AG 2,301,932
319,100 Deutsche Telekom AG 14,642,207
118,650 Douglas Holdings AG 5,652,765
72,900 Dresdner Bank 2,536,823
24,478 FAG Kugelfischer 205,561
19,200 Fresenius Medical Care AG 1,119,178
10,250 Friedrich Krupp AG 1,507,760
90,555 Heidelberg Port-Zement 6,163,219
3,500 Hochtief AG 115,648
208,363 Klockner Humboldt Deutz * 1,598,826
8,000 Linde AG 4,496,384
22,650 Lufthansa AG 498,524
11,100 MAN AG 3,026,760
12,100 Phoenix AG 201,898
800 Preussag AG 387,286
43,109 Schering AG 5,541,512
17,550 Schwarz Pharma AG 969,055
496,250 Siemens AG 31,323,610
135,342 SKW Trostberg AG 3,053,148
1,050 Suedzucker AG 424,171
32,350 Thyssen AG 6,552,003
See accompanying notes to the financial statements.
6
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments- continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Germany - continued
325,400 Veba AG 17,360,302
2,850 Viag AG 1,521,432
---------------
165,983,188
---------------
Hong Kong - 3.4%
637,000 Amoy Properties Ltd 460,418
28,000 Asia Satellite Telecom 45,174
7,977,000 Cathay Pacific Airways Ltd 8,905,947
389,000 Cheung Kong Holdings 2,648,479
3,582,122 Chinese Estates Holdings Ltd 545,565
3,610,000 CLP Holdings Ltd 17,006,873
876,000 Dairy Farm International 937,320
832,800 Dao Heng Bank 2,268,024
322,766 Dickson Concept International Ltd 249,956
3,571,300 Elec & Eltek International Holdings Ltd 682,201
1,211,128 Great Eagle Holdings Ltd 1,117,688
1,019,700 Guoco Group 1,579,349
3,153,700 Hang Lung Development Co Ltd 3,032,502
5,671,000 Henderson Investment Ltd 3,202,301
1,112,400 Hong Kong Aircraft Engineering Co Ltd 1,830,609
5,374,800 Hong Kong Electric Holdings Ltd 15,296,614
818,700 Hong Kong Ferry Co Ltd 845,355
3,480,800 Hong Kong Telecommunications 5,817,994
11,000 Hutchison Whampoa 76,312
69,000 Johnson Electric Holding 182,240
12,000 Kowloon Motor Bus Co Ltd 20,212
622 Kumagai Gumi Ltd 221
2,221,700 Lai Sun Garment International Ltd 129,039
369,322 Leading Spirit Conrowa Electric * 3,480
3,038,462 Mandarin Oriental 1,473,654
657,017 Mount Batten Corp * 1,272
1,369,800 New Asia Realty & Trust Class A 1,131,518
322,000 New World Development Co Ltd 594,314
514,000 Pacific Plywood Holding Ltd * 6,634
200 Paul Y ITC Construction Holdings Ltd 17
61,000 Realty Development Corp Ltd Class A 64,561
33,504,371 Regal Hotels International Ltd 3,546,008
10,000 San Miguel Brewery Ltd 994
325,000 Shaw Brothers Ltd 125,843
2,683,000 Shun Tak Holdings Ltd 439,793
See accompanying notes to the financial statements.
7
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments- continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Hong Kong - continued
6,891,000 South China Morning Post Ltd 2,957,320
784,000 Sun Hung Kai Properties Ltd 5,337,808
3,844,800 Wheelock and Co Ltd 2,369,581
54,204 Wing Lung Bank 159,511
39,000 Winsor Properties Holdings Ltd 9,514
1,325,200 Yue Yuen Industrial Holdings 1,898,580
---------------
87,000,795
---------------
Italy - 4.2%
621,315 Alitalia Linee Aeree * 2,332,606
92,500 Alleanza Assicurazioni-RNC 624,483
378,000 Assicurazioni Generali SPA 14,606,222
387,000 Banca Commerciale Italiana SPA 2,417,278
339,000 Banca Intesa SPA 1,871,850
57,300 Banca Popolare di Bergamo Credit 1,497,046
43,000 Banca Popolare di Milano 368,185
515,000 Banco Ambrosiano Veneto SPA (Non Convertible) 1,362,472
910,000 Banco di Napoli di Risp 1,088,858
534,000 Benetton Group Spa 867,574
57,000 Bulgari SPA 282,824
146,300 Burgo (Cartiere) SPA 835,124
1,552,500 Compart SPA * 1,020,850
512,500 Credito Italiano 2,694,839
174,000 Credito Italiano (Non Convertible) 649,429
2,076,700 Dalmine SPA * 483,296
23,150 Ericsson SPA 871,663
206,600 Falck Acciaierie and Ferriere Lombarde 1,689,624
1,833,200 Fiat SPA 5,513,963
807,720 Fiat SPA (Non Convertible) 1,307,845
1,031,500 Finmeccanica SPA * 1,177,622
157,250 Fondiaria SPA 731,914
588,000 Grassetto SPA (c) * 3
2,660,570 HPI SPA 1,629,718
419,000 IFIL Finanziaria di Partecipazioni SPA 1,444,266
654,850 IFIL Finanziaria di Partecipazioni SPA
(Non Convertible) 1,459,289
521,100 Industriali Riunite SPA * 577,758
33,600 Industrie Natuzzi SPA ADR 648,900
2,376,792 Istituto Nazionale Delle Assicurazioni 5,766,163
203,150 Italcementi Fabbriche Riunite Cemento SPA
(Non Convertible) 958,934
124,000 Italcementi SPA 1,408,852
See accompanying notes to the financial statements.
8
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments- continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Italy - continued
36,600 Italmobiliare SPA 960,246
46,200 Luxottica Group ADR 528,413
374,940 Magneti Marelli SPA 570,053
2,000 Marzotto & Figli SPA 21,955
284,000 Mediobanca SPA 3,226,726
5,500 Mondadori Editore 84,527
4,249,798 Montedison SPA 4,245,346
1,451,400 Montedison SPA (Non Convertible) 1,171,057
649,975 Pirelli & Co 1,063,130
209,500 RAS SPA 2,216,994
209,500 RAS SPA (Non Convertible) 1,508,660
235,000 Saipem SPA 799,711
617,681 San Paolo IMI SPA 10,781,143
260,000 Sirti SPA 1,544,095
982,472 SMI (Societa Metallurgica Italy) 520,920
77,500 Sopaf SPA * 46,792
137,000 Sorin Biomedica SPA 533,891
1,066,500 Telecom Italia Mobile SPA 7,164,992
1,491,269 Telecom Italia Mobile SPA (Non Convertible) 6,024,309
255,001 Telecom Italia SPA 2,684,503
525,263 Telecom Italia SPA (Non Convertible) 3,546,136
31,000 Toro Assicurazioni 391,348
2,376,792 Unione Immobiliaer SPA * 1,317,607
---------------
109,142,004
---------------
Japan - 13.2%
258,000 Amada Co Ltd 1,269,886
73,000 Anritsu Corp 533,426
497,000 Aoki Corp * 201,062
65,600 Aoki International 304,088
26,600 Arabian Oil Co Ltd 354,667
200,000 Asahi Bank 876,528
344,000 Atsugi Nylon Industrial 260,936
31,000 Autobacs Seven 945,807
85,000 Bandai Co 891,909
398,000 Bank Of Tokyo-Mitsubishi 4,796,797
75,000 Banyu Pharmaceutical Co Ltd 1,201,643
68,000 Best Denki Co Ltd 487,147
81,000 Brother Industries Ltd 238,255
187,000 Canon Inc 4,003,203
See accompanying notes to the financial statements.
9
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments- continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Japan - continued
229,000 Canon Sales Co Inc 3,310,030
205,800 Chubu Electric Power Co Inc 3,607,788
37,000 Chudenko Corp 701,643
181,000 Chugai Pharmaceutical Co Ltd 1,731,437
95,200 Chugoku Electric Power Co Inc 1,500,413
1,092,000 Cosmo Oil Co Ltd 1,546,195
24,000 Credit Saison Co 504,678
210,500 CSK Corp 5,943,321
466,000 Daicel Chemical Industries Ltd 1,237,168
202,000 Daiei Inc 502,233
143,000 Daiichi Seiyaku Co Ltd 2,176,637
321,000 Dainippon Pharmaceutical Co Ltd 1,309,431
149,000 Dainippon Screen Manufacturing Co Ltd 546,271
102,000 Daio Paper Corp 420,379
65,000 Daishowa Paper Manufacturing * 222,419
76,600 Daito Trust Construction Co Ltd 662,382
267,000 Daiwa House Industry Co Ltd 2,736,384
47,000 Denso Corp 816,013
415 East Japan Railway Co 2,497,345
15,000 Eisai Co Ltd 280,657
199,000 Ezaki Glico Co Ltd 1,172,364
11,300 Familymart 498,095
131,900 Fanuc Co 4,924,711
305,000 Fuji Bank 1,200,464
600 Fuji Photo Film Co Ltd 22,048
9,000 Fujisawa Pharmaceutical Co Ltd 115,601
708,000 Fujita Corp 346,094
189,000 Fukuyama Transporting Co Ltd 734,336
345,000 Furukawa Co Ltd 462,326
231,000 Gakken Co Ltd 245,310
267,000 General Sekiyu (KK) 866,372
195,000 Gunze Ltd 428,951
435,000 Hankyu Corp 1,829,456
107,500 Heiwa Corp 1,531,184
206,000 Hino Motors 668,437
10,000 Hitachi Chemical Co 65,402
1,683,300 Hitachi Ltd 10,640,329
54,000 Hitachi Maxell Ltd 907,965
497,000 Hitachi Metals Ltd 1,407,434
See accompanying notes to the financial statements.
10
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments- continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Japan - continued
139,900 Hokkaido Electric Power 2,122,377
78,000 Hokuetsu Paper Mills 338,559
21,200 Hokuriku Electric Power 321,797
115,000 Honda Motor Co Ltd 4,429,414
246,000 House Foods Corp 3,615,879
40,000 Hoya Corp 1,955,331
6,000 Hyogo Bank Ltd (c) * 1
92,000 INAX Corp 590,847
215,000 Industrial Bank of Japan 1,074,547
144,000 Intec Inc 1,492,794
703,000 Itochu Corp 1,232,398
71,000 Itoham Foods Inc 290,822
35,000 Ito-Yokado 2,041,298
99,000 Japan Airport Terminal Co Ltd 595,752
113,000 Japan Aviation Electronics 317,143
145,000 Japan Energy Co Ltd 129,541
193,000 Japan Radio Co 730,358
542,000 Japan Synthetic Rubber Co Ltd 2,535,272
1 Japan Telecom Co Ltd 9,102
1,767 Japan Tobacco Inc 16,083,944
73,000 JGC Corp 147,661
201,000 Joshin Denki Co Ltd 548,875
217,000 Kamigumi Co Ltd 954,690
186,000 Kandenko Co 1,210,215
229,000 Kaneka Corp 1,698,441
92,000 Kanematsu NNK Corp 288,445
148,000 Kankaku Securities Co Ltd * 152,179
126,000 Kansai Electric Power 2,400,000
52,000 Katokichi Co Ltd 703,413
187,000 Kawasaki Kisen 267,931
843,000 Keio Teito Electric Railway Co Ltd 3,516,941
90,000 Keisei Electric Railway 267,004
23,300 Keyence Corp 2,745,335
213,000 Kikkoman Corp 1,321,264
64,000 Kinden Corp 841,467
52,000 Kirin Brewery Co Ltd 615,761
163,000 Kissei Pharmaceutical Co Ltd 2,768,184
35,000 Kokusai Denshin Denwa 1,215,339
150,000 Kokusai Electric 962,073
See accompanying notes to the financial statements.
11
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments- continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Japan - continued
506,000 Komatsu Ltd 2,477,758
304,000 Konica Corp 1,278,517
77,000 Koyo Seiko Co Ltd 412,094
378,000 Kubota Corp 930,265
359,000 Kurabo Industries Ltd 372,162
58,000 Kyocera Corp 2,737,463
239,000 Kyowa Hakko Kogyo Co Ltd 1,130,038
247,200 Kyushu Electric Power Co Inc 3,937,699
30,000 Kyushu Matsushita Electric 298,609
23,000 Lintec 208,386
98,000 Lion Corp 384,897
500 Long Term Credit Bank of Japan 8
400 Mabuchi Motor Co 26,903
268,000 Maeda Corp 736,351
87,000 Maeda Road Construction 513,274
102,000 Makita Corp 977,446
671,000 Marubeni Corp 1,114,092
112,000 Marudai Food Co Ltd 182,183
27,000 Maruichi Steel Tube 314,033
32,000 Matsushita Communications 1,655,963
67,000 Meidensha Corp 125,360
16,000 Meiji Milk Products 47,332
215,000 Meiji Seika Kaisha Ltd 873,409
116,000 Minolta Co Ltd 559,225
1,268,000 Mitsubishi Electric Corp 3,804,534
113,000 Mitsubishi Gas Chemical Co Inc 293,333
3,015,000 Mitsubishi Heavy Industries 11,206,195
859,000 Mitsubishi Oil Co Ltd * 1,549,313
102,000 Mitsubishi Paper Mills Ltd 170,215
275,000 Mitsubishi Steel Manufacturing 220,185
151,000 Mitsubishi Trust & Banking 1,282,832
170,000 Mitsui Marine & Fire Insurance Co 803,793
252,000 Mitsui Petrochemical Industries Ltd 987,611
21,000 MOS Food Services 259,646
49,000 Nagase & Co 186,667
272,000 Nagoya Railroad Co Ltd 919,275
24,200 Namco Ltd 509,903
38,000 National House Industrial 280,236
122,000 New Oji Paper Co Ltd 602,545
See accompanying notes to the financial statements.
12
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments- continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Japan - continued
84,000 Nichicon Corp 1,015,929
619,000 Nichii Co Ltd 3,469,322
363,000 Nichimen Corp 391,606
425,000 Nichirei 949,220
285,000 Nikon Corp 3,987,358
75,700 Nintendo Co Ltd 6,380,110
43,000 Nippon Chemical 111,985
11,000 Nippon Flour Mills Co Ltd 28,555
60,000 Nippon Hodo Co 279,140
44,000 Nippon Kayaku Co Ltd 203,590
181,000 Nippon Meat Packers Inc 2,457,573
1,327,000 Nippon Oil Co Ltd 4,663,793
54,000 Nippon Paint Co 93,755
174,000 Nippon Paper Industries 665,790
211,000 Nippon Suisan Kaisha Ltd * 225,849
278 Nippon Telegraph & Telephone 2,291,479
5,800 Nippon Television Network 1,640,034
300,000 Nissan Motor Co 1,170,670
264,000 Nisshin Oil Mills Ltd 643,034
850,000 Nisshinbo Industries Inc 2,829,751
934,000 Nissho Iwai Corp 645,495
34,000 Nissin Food Products Co Ltd 719,258
18,000 Nitto Denko Corp 269,431
56,000 NOF Corp 100,531
503,000 Oki Electric Industry 1,564,324
152,000 Okumura Corp 588,015
257,000 Omron Corp 2,794,185
57,000 Ono Pharmaceutical Co Ltd 2,089,760
193,000 Onoda Cement Co Ltd 512,389
195,000 Onward Kashiyama Co Ltd 2,152,971
62,000 Promise Co 2,821,745
202,000 Q.P. Corp 1,433,493
820,000 Renown Inc * 449,220
67,500 Rinnai Corp 1,257,269
38,000 Rohm Co Ltd 3,715,129
166,000 Royal Co Ltd 2,276,292
71,000 Ryosan Co 1,196,797
261,000 Sagami Railway Co Ltd 655,525
466,000 Sakura Bank Ltd 1,013,300
See accompanying notes to the financial statements.
13
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments- continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Japan - continued
39,000 Sanden Corp 293,198
87,000 Sankyo Co Ltd 1,869,785
26,000 Santen Pharmaceutical Co 487,568
226,000 Sanwa Bank Ltd 2,314,286
83,000 Sanwa Shutter Corp 367,257
102,000 Sapporo Breweries Ltd 423,818
28,500 Secom Co Ltd 2,212,263
549,000 Seino Transportation Co Ltd 2,915,044
53,000 Seiyu 183,144
112,000 Sekisui Chemical 707,965
339,000 Sekisui House Ltd 3,471,429
290,200 Shikoku Electric Power 4,573,738
512,000 Shionogi and Co Ltd 3,965,681
21,000 Shiseido Co Ltd 254,867
15,300 Sho Bond Construction Co 377,826
13,000 Shochiku Co 50,181
1,119,000 Showa Denko 943,110
266,000 Showa Shell Sekiyu 1,398,938
161,000 Skylark Co Ltd 2,876,696
293,000 Snow Brand Milk Products Co Ltd 1,419,933
145,000 Sony Corp 10,974,294
211,000 Stanley Electric Co Ltd 679,326
111,000 Sumitomo Bakelite Co Ltd 748,420
288,000 Sumitomo Bank 3,473,477
1,013,000 Sumitomo Corp 5,088,479
239,000 Sumitomo Heavy Industries Ltd 533,797
119,000 Suzuki Motor Corp 1,313,864
96,000 Taisho Pharmaceutical Co Ltd 2,548,673
46,000 Taiyo Yuden Co Ltd 485,006
111,000 Takara Standard Co 786,776
158,000 Takuma Corp 1,078,635
458,000 Tanabe Seiyaku Co Ltd 2,358,517
61,900 TDK Corp 4,439,688
1,119,000 Teikoku Oil Co Ltd 2,970,796
498,000 Toei Co Ltd 1,389,279
234,200 Tohoku Electric Power Co Inc 3,614,161
113,000 Tokai Bank 553,333
63,000 Tokio Marine & Fire Insurance Co 674,336
98,000 Tokuyama Corp 328,732
See accompanying notes to the financial statements.
14
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments- continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Japan - continued
68,000 Tokyo Broadcasting System Inc 739,317
267,000 Tokyo Construction Co Ltd * 166,523
69,000 Tokyo Dome Corp 354,741
264,000 Tokyo Electric Co Ltd 999,039
140,100 Tokyo Electric Power 2,827,977
38,000 Tokyo Electron 1,729,456
107,000 Tokyo Ink Manufacturing Co Ltd 217,337
288,900 Tokyo Steel Manufacturing Co 1,295,363
46,000 Tokyo Style Co Ltd 477,640
1,000 Tokyu Corp 2,419
48,000 Toyo Seikan Kaisha 914,286
120,000 Toyo Suisan Kaisha 949,684
1,092,000 Toyobo Co Ltd 1,362,124
86,000 Tsumura and Co 289,928
36,000 Uniden Corp 290,063
86,000 Ushio Inc 923,422
90,000 Victor Co of Japan Ltd 593,932
81,000 Wacoal Corp 854,033
186,000 Yakult Honsha Co Ltd 1,044,046
53,000 Yamaha Corp 490,021
209,000 Yamato Transport Co Ltd 2,813,089
188,000 Yamazaki Baking Co Ltd 2,528,850
4,000 Yasuda Fire & Marine Insurance Co 18,137
73,200 Yoshitomi Pharmaceutical Industries Ltd 668,764
---------------
341,037,380
---------------
Malaysia - 2.8%
535,000 Aluminum Co of Malaysia 135,158
711,000 Amalgamated Steel Mills Berhad 71,100
1,100,000 AMMB Holdings Berhad 1,007,368
11,000 Arab Malaysian Development Berhad 1,433
1,427,000 Arab Malaysian Finance (Foreign Registered) 450,632
8,000 Ayer Hitam Tin Dredging * 1,747
832,000 Berjaya Group Berhad 181,726
982,000 Berjaya Leisure Berhad 403,137
1,148,300 Berjaya Sports Toto 1,526,030
307,000 Carlsberg Brew Malaysia 824,053
971,000 Cement Industries of Malaysia Berhad 493,166
1,173,800 Edaran Otomobil Berhad 1,807,034
301,000 Ekran Berhad * 70,893
See accompanying notes to the financial statements.
15
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments- continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Malaysia - continued
348,200 Esso Berhad * 256,568
121,400 Faber Group Berhad * 13,098
506,000 Genting Berhad 1,151,816
2,766,000 Golden Hope Plantations Berhad 2,766,000
345,000 Guinness Anchor Berhad 335,921
1,600,000 Highlands and Lowlands Berhad 964,211
397,400 Hong Leong Industries Berhad 279,226
3,160,000 Hong Leong Properties Berhad 573,789
214,600 IGB Corp Berhad 58,733
483,000 IJM Corp Berhad Class A 272,005
448,000 Innovest Berhad * 80,168
2,981,000 IOI Corporation Berhad 1,623,861
762,000 Jaya Tiasa Holdings Berhad 998,621
1,071,000 Kedah Cement Berhad 628,508
799,000 Kuala Lumpur Kepong Berhad 1,145,934
2,851,000 Kumpulan Guthrie Berhad 1,823,139
295,000 Landmark Berhad 63,270
1,412,000 Leader Universal Holdings * 369,721
2,019,000 Magnum Corp Berhad 1,041,379
2,015,750 Malayan Cement Berhad 647,162
1,628,000 Malayan United Industries Berhad 265,621
457,500 Malayawata Steel 109,559
367,000 Malaysia Mining Berhad 175,774
1,090,000 Malaysian Airline Systems 490,500
619,000 Malaysian International Shipping 1,075,105
3,010,600 Malaysian International Shipping
(Foreign Registered) 3,929,625
229,000 Malaysian Oxygen Berhad 433,895
597,000 Malaysian Pacific Industries 926,921
2,213,333 Malaysian Resources Corp 669,824
83,710 Matsushita Electric Co Berhad 262,144
5,610,000 MBF Capital Berhad * 878,408
511,000 MBF Holdings Berhad * 26,895
1,184,000 Multi Purpose Holdings * 423,747
182,000 Naluri Berhad 29,216
269,000 Nestle Malaysia 1,040,605
743,000 New Straits Times 625,684
2,218,600 Oriental Holdings Berhad 3,649,013
114,000 OYL Industries Berhad 229,500
2,221,600 Pan Malaysia Cement 537,861
See accompanying notes to the financial statements.
16
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments- continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Malaysia - continued
879,500 Perlis Plantations 898,016
1,997,000 Pernas International Hotel & Property 467,718
3,695,000 Perusahaan Otomobil Nasional Berhad 5,153,553
103,000 Petaling Garden Berhad 71,558
662,600 Petronas Dagangan Berhad 704,448
2,196,000 Petronas Gas Berhad 4,767,632
1,944,000 Pilecon Engineering Berhad 480,884
751,000 Promet Berhad * 57,313
1,121,000 Rashid Hussain Berhad * 713,900
4,384,000 Renong Berhad * 997,937
868,000 Resorts World Berhad 1,137,537
1,564,000 RHB Capital Berhad 1,004,253
1,161,000 RJ Reynolds Berhad 1,197,663
347,000 Rothmans of Pall Mall Berhad 1,999,816
1,715,000 Sarawak Enterprises Corp 663,434
846,400 Shell Refinery Co 868,674
36,540 Silverstone * 433
121,000 Sime Darby 31,079
1,182,000 Sime Darby Berhad 1,318,863
48,000 Sime UEP Properties Berhad 47,747
1,900,000 TA Enterprise Berhad 545,000
9,455,000 Tan Chong International Ltd 903,062
4,657,000 Tan Chong Motor Holdings Berhad 1,335,824
1,143,000 Telekom Malaysia Berhad 2,451,434
2,104,000 Tenaga Nasional 3,488,211
1,464,000 Time Engineering Berhad * 233,084
1,517,000 UMW Holdings Berhad 1,572,889
220,000 Uniphone Telecommunications 43,421
234,000 Westmont Industries Berhad (c) * 616
925,500 YTL Corp 1,278,651
---------------
72,281,154
---------------
New Zealand - 0.1%
60,000 Air New Zealand Class B 99,369
589,200 Brierley Investment Ltd 135,872
174,700 Carter Holt Harvey Ltd 160,230
23,200 Fisher and Paykel Industries Ltd 85,114
65,400 Fletcher Challenge Buildings 101,115
62,800 Fletcher Challenge Energy 109,273
178,600 Fletcher Challenge Energy 306,089
See accompanying notes to the financial statements.
17
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments- continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
New Zealand - continued
151,200 Fletcher Challenge Paper 104,602
78,600 Lion Nathan Ltd 189,082
345,750 Telecom Corp of New Zealand * 1,757,713
19,000 Tranz Rail Holdings Ltd 44,313
19,600 Wharehouse Group Ltd * 73,961
---------------
3,166,733
---------------
Norway - 0.4%
37,400 Aker RGI ASA Class A 401,566
70,500 Bergesen d.y. ASA Class A 961,789
25,600 Bergesen d.y. ASA Class B 339,544
168,000 Christiania Bank OG Kreditkasse 602,691
600,000 Den Norske Bank Class A 2,106,992
16,600 Dyno Industrier AS 247,433
58,400 Elkem AS Class A 793,027
61,600 Fred Olsen Energy * 424,076
52,150 Kvaerner Industrier AS 1,017,770
9,900 Leif Hoegh and Co AS 113,800
34,650 Norske Skogindustrier AS Class A 1,030,768
82,500 Petroleum Geo-Services * 937,914
50,600 SAS Norge ASA Class B 415,461
---------------
9,392,831
---------------
Portugal - 0.7%
115,783 Banco Commercial Portugues (Registered) 3,481,291
67,532 Banco Espirito Santo e Commercial de Lisboa
(Registered) 1,925,241
26,510 Cimpor Cimentos de Portugal SA (Registered) 739,174
272,091 Electricidade de Portugal 5,866,230
132,295 Portugal Telecom SA 6,478,569
---------------
18,490,505
---------------
Singapore - 4.7%
558,461 Asia Food & Properties Ltd * 100,523
337,000 Cerebos Pacific Ltd 524,483
208,000 Chuan Hup Holdings Ltd 73,682
10,000 City Developments 41,812
3,533,000 Comfort Group 974,550
474,950 Creative Technology Ltd 6,150,630
297,000 Cycle & Carriage Ltd 1,086,585
2,634,096 DBS Land Ltd 3,258,202
1,806,700 Development Bank of Singapore
(Foreign Registered) 13,114,837
479,309 First Capital Corp Ltd 350,714
See accompanying notes to the financial statements.
18
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments- continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Singapore - continued
2,481,037 Hai Sun Hup Group Ltd 662,763
1,170,203 Haw Par Brothers International Ltd 1,311,552
755,104 Hotel Properties Ltd 328,878
2,397,421 Jardine Matheson Holdings Ltd 6,281,243
4,771,911 Jardine Strategic Holdings Ltd 6,919,271
323,000 Keppel Land Ltd 332,003
770,200 Lum Chang Holdings Ltd 185,617
684,600 Metro Holdings Ltd 588,390
212,000 Natsteel Ltd 200,674
2,343,556 Neptune Orient Lines Ltd * 796,156
1,823,000 Overseas Chinese Banking (Foreign Registered) 12,174,506
1,954,000 Overseas Union Bank Ltd (Foreign Registered) 7,148,780
286,508 Prima Ltd 479,177
707,308 Robinson and Co Ltd 1,799,076
433,699 Shangri-La Hotel Ltd 649,793
4,246,000 Singapore Airlines Ltd (Foreign Registered) 31,314,866
574,000 Singapore Land Ltd 1,133,333
922,250 Singapore Press Holdings 10,497,154
4,000,000 Singapore Telecom 5,691,057
2,211,168 Straits Trading Co Ltd 1,951,786
684,000 Times Publishing Ltd 1,016,864
173,000 United Engineers 116,539
5,003,960 United Industrial Corp Ltd 2,063,189
1,051,000 United Overseas Land 665,267
377,900 Wearne Brothers Ltd 280,901
---------------
120,264,853
---------------
Spain - 2.2%
171,600 Acerinox SA 4,502,136
179,840 Argentaria Corporacion Bancaria de Espana SA 4,303,742
99,600 Banco Popular Espanol 6,680,423
8,130 Cristaleria Espanola SA 424,638
57,000 Dragados & Construcciones SA 2,202,526
175,300 Endesa 4,645,395
199,256 FENOSA SA 3,388,178
43,500 Fomento de Construcciones y Contratas SA 3,084,787
503,920 Repsol SA 26,497,235
---------------
55,729,060
---------------
See accompanying notes to the financial statements.
19
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments- continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Sweden - 2.5%
14,950 AGA AB Class A 196,615
232,260 Assi Doman 4,214,167
899,800 Avesta Sheffield AB 3,309,055
266,000 BTL AB Class B * 1,454,384
5,100 Custos AB Class B 93,777
47,000 Electrolux AB Class B 889,978
53,788 Esselte AB Class A 828,566
39,300 Esselte AB Class B 626,924
22,200 Foreningssparbanken AB Class A 506,880
176,453 Gambro AB Class A 1,407,413
112,775 Gambro AB Class B 899,508
54,196 Indstrivarden AB Class A 791,953
29,000 Kinnevik Investment Class B 600,341
602,600 Mo Och Domsjo AB Class B 15,740,100
69,600 Nordbanken Holdings AB 420,380
19,200 Perstorp AB Class B 185,874
24,400 Scancem AB Class A 846,810
27,500 Skandia Forsakrings AB 503,988
38,000 Skandinaviska Enskilda Banken Class A 423,405
262,046 Skanska AB Class B 8,583,825
129,800 SKF AB Class B 1,786,094
321,100 Ssab Swedish Steel Class A 3,382,264
72,000 Ssab Swedish Steel Class B 745,251
262,763 Stena Line AB Class B 263,979
445,272 Svenska Cellulosa Class B 8,865,316
12,600 Svenska Handelsbanken Class A * 444,959
1,200 Svenska Handelsbanken Class B 36,824
122,200 Svenska Kullagerfabriken AB 1,614,552
360,000 Trelleborg AB Class B 3,222,114
71,450 Volvo AB Class A 1,814,092
---------------
64,699,388
---------------
Switzerland - 3.7%
3,310 ABB Ltd (Bearer) 4,043,132
2,200 Adecco SA (Bearer) 1,153,859
1,090 Alusuisse Lonza Group AG (Registered) * 1,211,822
1,690 Baloise Holdings 1,463,683
3,850 Clariant Namen AG 1,830,613
105,900 CS Holdings (Registered) 16,443,532
5,130 Holderbank Financiere Glarus AG (Bearer) 5,338,698
See accompanying notes to the financial statements.
20
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments- continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Switzerland - continued
1,000 Jelmoli (Bearer) 876,436
4,080 Merkur Holding AG (Registered) 902,412
11,465 Nestle AG (Registered) 21,639,540
6,267 Novartis AG (Registered) 10,993,902
2,940 Rieter Holdings AG (Registered) 1,720,520
781 Roche Holdings (Participating Certificate) 9,890,169
6,270 Sairgroup Zuerich (Registered) 1,350,016
110 Saurer Group Holdings (Registered) * 50,861
610 Sika Finanz AG (Bearer) 157,020
5,940 Swiss Reinsurance (Bearer) 13,302,025
7,480 UBS AG (Registered) 2,328,063
3,050 Zurich Allied * 2,024,844
---------------
96,721,147
---------------
United Kingdom - 24.0%
862,420 Allied Domecq Plc 6,663,787
381,500 Allied Zurich Plc * 5,631,867
728,580 AMEC 2,153,457
179,925 Anglian Water Plc 2,107,033
490,430 Arcadia Group 1,587,051
1,125,400 Arjo Wiggins Appleton Plc 2,186,005
2,158,095 ASDA Group 5,384,695
1,147,018 Associated British Foods 8,902,798
904,100 BAA 10,189,270
102,047 Bank of Scotland 1,477,853
929,530 Barratt Development 3,886,569
1,128,760 Bass Plc 15,677,731
855,600 Beazer Holmes Plc 2,302,728
3,908,892 BG Plc 23,018,714
604,200 Blue Circle Industries 3,013,916
42,100 Britannic Plc 809,330
2,044,503 British Airways Plc 15,090,916
592,000 British Energy Plc 6,330,463
32,800 British Petroleum Co Plc 465,050
1,086,300 British Steel Plc 2,157,913
733,483 British Telecom Plc 12,666,341
2,061,962 BTR Siebe Plc 8,695,840
589,600 Cable & Wireless 8,061,642
335,000 Cable & Wireless Communications * 3,965,991
4,450 Carlton Communications 43,914
See accompanying notes to the financial statements.
21
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments- continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
United Kingdom - continued
4,411,400 Centrica Plc 8,197,793
174,100 Christian Salvesen Plc 214,759
2,662,593 Coats Viyella 1,642,207
504,400 Dawson International 125,248
1,177,717 Diageo Plc 12,961,458
23,000 Electrocomponents Plc 133,751
1,277,940 Elementis Plc 1,504,736
1,308,882 English China Clays Plc 5,000,937
2,048,700 Eurotunnel SA Units (Registered) * 2,806,125
54,050 Express Dairies Plc 103,906
305,130 Fairview Holdings Plc 459,489
143,100 First Leisure Plc 486,002
119,700 General Electric Plc 954,962
228,600 Great Portland Estates Plc 726,941
460,300 Great Universal Stores Plc 5,862,335
769,735 Greenalls Group Plc 4,747,495
137,252 Guardian Royal Exchange 781,665
276,800 Hammerson Plc 1,760,431
2,492,860 Hillsdown Holdings Plc 2,715,622
187,585 Hyder Plc 2,386,059
5,400 IMI Plc 19,551
1,446,659 Ladbroke Group 6,720,888
39,646 Laing (John) 161,958
335,500 Land Securities 4,356,202
868,950 Lasmo Plc 1,670,469
209,325 Legal & General Group 2,615,641
738,611 Lonrho Africa Plc 579,795
1,036,411 Lonrho Plc 6,740,942
106,800 Marks & Spencer 713,460
329,860 Meggitt 890,414
741,117 MEPC Plc 5,520,803
311,200 Meyer International 1,690,059
1,799,680 Mirror Group Plc 5,564,359
90,200 National Grid Group Plc 651,697
2,259,790 National Power 18,010,413
217,700 National Westminster Bank 4,509,407
2,363,800 Northern Foods Plc 4,089,752
1,104,600 Peninsular & Oriental Steam Navigation Co 13,006,334
2,635,632 Pilkington 2,638,927
See accompanying notes to the financial statements.
22
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments- continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
United Kingdom - continued
1,575,774 Powergen Plc 19,273,717
109,135 Provident Financial Plc 1,704,634
445,700 Racal Electronics 2,856,046
500,025 Railtrack Group Plc 12,432,142
1,049,300 Reuters Holdings Plc 14,632,919
708,150 Rio Tinto Plc 9,155,062
429,730 RMC Group 4,671,504
713,035 Royal Bank of Scotland Group 13,935,841
1,104,000 Royal & Sun Alliance Insurance 9,258,663
305,600 Rugby Group 472,436
1,022,600 Safeway Plc 4,394,485
491,500 Sainsbury (J) 2,834,579
1,668,083 Scottish Hydro-Electric Plc 15,459,076
890,698 Scottish Power Plc 8,317,404
758,390 Selfridges Plc 2,891,559
470,545 Severn Trent Plc 6,739,089
92,730 Shell Transport & Trading (Registered) 517,709
3,396,924 Signet Group Plc * 2,203,958
444,900 Slough Estates 2,366,263
1,143,700 Smith & Nephew Plc 3,297,973
2,200 Smith (WH) Group Plc 19,208
2,601,588 Smithkline Beecham Plc 36,634,470
483,400 Smiths Industries Plc 7,387,841
170,400 St James's Place Capital 794,374
217,800 Standard Chartered 2,843,906
439,447 Storehouse Plc 1,063,031
3,423,730 Tarmac 5,868,753
203,500 Tate & Lyle 1,483,332
1,558,525 Taylor Woodrow Plc 4,213,278
416,400 Telewest Communications Plc * 1,814,438
393,630 Terranova Foods Plc 510,782
339,400 Tesco 962,382
697,975 Thames Water Plc 11,505,825
370,526 Thistle Hotels Plc 825,080
1,868,054 TI Group Plc 11,626,338
235,000 Unigate 1,607,527
3,873,740 Unilever Plc 37,234,388
2,016,599 United Biscuits Plc 5,863,524
2,394,775 United Biscuits Plc Class B * 920,743
See accompanying notes to the financial statements.
23
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments- continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
United Kingdom - continued
1,793,850 United Utilities 22,745,713
723,310 Viglen Technology Plc (Entitlement Letters) * --
405,300 Vodafone Group Plc 7,486,775
1,020,805 Whitbread Plc Class A 14,668,907
2,077,200 Wimpey (George) 4,392,530
1,313,032 Yorkshire Water 9,633,926
83,240 Zeneca 3,461,778
---------------
619,177,774
---------------
United States - 0.0%
44,812 Homestake Mining Co 395,408
---------------
Zimbabwe - 0.0%
77,171 Zimbabwe Platinum Mines Ltd * 17,011
---------------
TOTAL COMMON STOCKS (Cost $2,575,639,421) 2,385,330,169
---------------
PREFERRED STOCKS - 0.8%
Australia - 0.0%
145,200 Sydney Harbour Casinos 138,849
---------------
Austria - 0.0%
3,412 Allgemeine Baugesellschaft AG 217,240
---------------
Germany - 0.6%
14,300 Fresenius Medical Care AG (Non Voting) 2,433,163
72,450 Henkel KGAA 5,805,835
3,150 MAN AG 612,051
2,116 Porsche AG (Non Voting) 4,343,709
136,150 RWE 3,960,655
---------------
17,155,413
---------------
Italy - 0.2%
196,722 Autostrade Concession Auto Class A 1,731,932
971,700 Fiat SPA 1,498,691
58,400 IFI Istituto Finanziario 830,206
---------------
4,060,829
---------------
TOTAL PREFERRED STOCKS (Cost $18,232,921) 21,572,331
---------------
See accompanying notes to the financial statements.
24
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments- continued
(showing percentage of total net assets)
February 28, 1999
Shares/
Par Value($) Description Value ($)
- --------------------------------------------------------------------------------
INVESTMENT FUNDS - 0.1%
Australia - 0.1%
1,735,300 Advance Property Fund 1,594,751
359,033 Capcount Property Trust 191,730
151,600 Franked Income Fund 512,100
---------------
2,298,581
---------------
TOTAL INVESTMENT FUNDS (Cost $2,537,799) 2,298,581
---------------
RIGHTS & WARRANTS - 0.0%
France - 0.0%
1,096,728 Eurotunnel SA Warrants 12/31/01 & 10/31/03 * 156,511
24,647 Generale Des Eaux Warrants 5/2/2001 * 69,264
---------------
225,775
---------------
Hong Kong - 0.0%
206,725 Century City International Warrants 12/31/99 * 267
104,212 Chinese Estates Holdings Ltd Warrants 11/24/00 * 4,304
104,212 Chinese Estates Holdings Ltd Warrants 11/24/00 * 3,094
225 Denway Investment Warrants 11/30/99 * --
293,200 Gold Peak Industries Ltd Warrants 8/6/00 * 17,029
2,600 Innovative International Holding
Warrants 8/31/99 * 3
323,924 Kumagai Gumi Warrants 12/31/99 * 9,449
855 Lai Sun Hotel International Warrants 4/30/99 * 1
75,000 Shell Co Manufacturing Warrants 11/3/99 * 223
---------------
34,370
---------------
Singapore - 0.0%
101,959 Asia Food & Properties Ltd Warrants 7/12/02 * 7,647
139,475 Haw Par Brothers International Ltd
Warrants 7/18/2001 * 41,308
---------------
48,955
---------------
United Kingdom - 0.0%
2,311,000 Eurotunnel SA Warrants 12/31/01 & 10/31/03 * 296,178
---------------
TOTAL RIGHTS & WARRANTS (Cost $515,082) 605,278
---------------
SHORT-TERM INVESTMENTS - 11.0%
Cash Equivalents - 9.7%
112,650,328 The Boston Global Investment Trust (b) 112,650,328
$ 135,900,000 Wachovia Bank Time Deposit, 4.60% due 3/01/99 135,900,000
---------------
248,550,328
---------------
See accompanying notes to the financial statements.
25
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments- continued
(showing percentage of total net assets)
February 28, 1999
Par Value($) Description Value ($)
- --------------------------------------------------------------------------------
U.S. Government - 1.3%
$ 36,000,000 U. S. Treasury Bill, 4.40% due 1/06/2000 (a) 34,578,730
---------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $283,195,291) 283,129,058
---------------
TOTAL INVESTMENTS - 104.2%
(Cost $2,880,120,514) 2,692,935,417
Other Assets and Liabilities (net) - 4.2% (108,973,835)
---------------
TOTAL NET ASSETS - 100.0% $ 2,583,961,582
===============
Notes to the Schedule of Investments
ADR American Depositary Receipt
(a) All or a portion of this security is held as collateral for
open futures contracts (Note 6).
(b) Represents investment of security lending collateral
(Note 1).
(c) Bankrupt issuer.
* Non-income producing security.
See accompanying notes to the financial statements.
26
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Schedule of Investments- continued
(showing percentage of total net assets)
February 28, 1999
- --------------------------------------------------------------------------------
At February 28, 1999, industry sector diversification of the
Fund's equity investments was as follows:
Industry Sector (Unaudited)
Banking 9.9%
Utilities 9.1
Consumer Goods 7.9
Services 5.7
Transportation 5.0
Paper and Allied Products 5.0
Construction 4.9
Telecommunications 4.8
Conglomerates 4.4
Chemicals 4.4
Electronic Equipment 3.7
Health Care 3.9
Computers 0.2
Oil and Gas 3.4
Insurance 3.2
Food and Beverage 3.7
Machinery 2.8
Automotive 2.7
Retail Trade 2.6
Real Estate 2.4
Communications 2.2
Metals and Mining 1.6
Financial Services 1.0
Textiles 0.7
Aerospace 0.2
Miscellaneous 4.6
------
100.0%
======
See accompanying notes to the financial statements.
27
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities - February 28, 1999
- --------------------------------------------------------------------------------
Assets:
Investments, at value (cost $2,880,120,514) (Note 1) $ 2,692,935,417
Foreign currency, at value (cost $447,191) (Note 1) 410,014
Cash 89,854
Receivable for Fund shares sold 6,650
Receivable for investments sold 33,449,108
Dividends and interest receivable 5,463,071
Foreign withholding taxes receivable 2,903,685
Receivable for variation margin on open futures contracts
(Notes 1 and 6) 843,225
Receivable for expenses waived or borne by Manager
(Note 2) 751,874
---------------
Total assets 2,736,852,898
---------------
Liabilities:
Payable upon return of securities loaned (Note 1) 112,650,328
Payable for investments purchased 7,259,191
Accrued Malaysian repatriation taxes (Note 1) 13,029,271
Net payable for open forward foreign currency contracts
(Notes 1 and 6) 12,917,605
Payable for Fund shares repurchased 4,679,869
Payable to affiliate for (Note 2):
Management fee 1,531,926
Shareholder service fee 280,499
Accrued expenses 542,627
---------------
Total liabilities 152,891,316
---------------
Net assets $ 2,583,961,582
===============
Net assets consist of:
Paid-in capital $ 2,767,246,583
Accumulated undistributed net investment income 4,494,422
Accumulated undistributed net realized gain 25,366,381
Net unrealized depreciation (213,145,804)
---------------
$ 2,583,961,582
===============
Net assets attributable to:
Class II Shares $ 18,295,165
===============
Class III Shares $ 1,998,447,051
===============
Class IV Shares $ 567,219,366
===============
Shares outstanding:
Class II 900,016
===============
Class III 98,063,484
===============
Class IV 27,849,815
===============
Net asset value per share:
Class II $ 20.33
===============
Class III $ 20.38
===============
Class IV $ 20.37
===============
28
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Statement of Operations - Year Ended February 28, 1999
- --------------------------------------------------------------------------------
Investment income:
Dividends (net of foreign tax expense of $8,239,851) $ 73,836,313
Interest (including securities lending income of $769,765) 10,515,637
-------------
Total income 84,351,950
-------------
Expenses:
Management fee (Note 2) 25,130,562
Custodian fees 1,946,978
Audit fees 82,592
Legal fees 64,467
Transfer agent fees 54,804
Trustees fees (Note 2) 32,117
Registration fees 4,569
Miscellaneous 15,534
Fees waived or borne by Manager (Note 2) (9,237,518)
-------------
18,094,105
Shareholder service fee (Note 2)
Class II 34,547
Class III 3,917,568
Class IV 650,990
-------------
Net expenses 22,697,210
-------------
Net investment income 61,654,740
-------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 214,975,581
Closed futures contracts 83,568,557
Closed swap contracts 56,985,438
Foreign currency, forward contracts and foreign
currency related transactions (27,125,650)
-------------
Net realized gain 328,403,926
-------------
Change in net unrealized appreciation (depreciation) on:
Investments (Note 1) (384,179,414)
Open futures contracts (14,886,503)
Open swap contracts (38,660,933)
Foreign currency, forward contracts and foreign
currency related transactions 37,726,058
-------------
Net unrealized loss (400,000,792)
-------------
Net realized and unrealized loss (71,596,866)
-------------
Net decrease in net assets resulting from operations $ (9,942,126)
=============
See accompanying notes to the financial statements.
29
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1999 February 28, 1998
----------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 61,654,740 $ 87,907,070
Net realized gain 328,403,926 442,745,155
Change in net unrealized appreciation (depreciation) (400,000,792) (97,965,526)
--------------- ---------------
Net increase (decrease) in net assets resulting from
operations (9,942,126) 432,686,699
--------------- ---------------
Distributions to shareholders from:
Net investment income
Class I -- (104,457)
Class II (178,442) (1,185,156)
Class III (24,881,986) (115,540,157)
Class IV (7,130,973) --
--------------- ---------------
Total distributions from net investment income (32,191,401) (116,829,770)
--------------- ---------------
In excess of net investment income
Class I -- --
Class II (173,986) --
Class III (24,260,672) --
Class IV (6,952,911) --
--------------- ---------------
Total distributions in excess of net investment income (31,387,569) --
--------------- ---------------
Net realized gains
Class I -- (411,274)
Class II (1,663,218) (4,695,006)
Class III (244,048,618) (446,289,351)
Class IV (68,183,244) --
--------------- ---------------
Total distributions from net realized gains (313,895,080) (451,395,631)
--------------- ---------------
Net share transactions: (Note 4)
Class I -- 261,289
Class II 8,149,764 (8,131,121)
Class III (758,532,071) (974,400,627)
Class IV (20,202,197) 601,324,132
--------------- ---------------
Decrease in net assets from net fund share transactions (770,584,504) (380,946,327)
--------------- ---------------
Total decrease in net assets (1,158,000,680) (516,485,029)
Net assets:
Beginning of period 3,741,962,262 4,258,447,291
--------------- ---------------
End of period (including accumulated undistributed
net investment income of $4,494,422 and
of $13,664,487, respectively) $ 2,583,961,582 $ 3,741,962,262
=============== ===============
</TABLE>
See accompanying notes to the financial statements.
30
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class I share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from September 10, 1996
Period from March 1, 1997 (commencement of operations)
to January 9, 1998 to February 28, 1997
------------------ --------------------
<S> <C> <C>
Net asset value, beginning of period $ 24.36 $ 24.17
------- -------
Income (loss) from investment operations:
Net investment income 0.47(c) 0.14
Net realized and unrealized gain (loss) (0.58) 1.38
------- -------
Total from investment operations (0.11) 1.52
------- -------
Less distributions to shareholders:
From net investment income (0.74) (0.26)
From net realized gains (2.92) (1.07)
------- -------
Total distributions (3.66) (1.33)
------- -------
Net asset value, end of period $ 20.59(d) $ 24.36
======= =======
Total Return (a) (0.83%) 6.38%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ -- $ 208
Net expenses to average
daily net assets 0.82%* 0.85%*(b)
Net investment income to average
daily net assets 2.22%* 1.12%*
Portfolio turnover rate 68% 97%
Fees and expenses voluntarily waived
or borne by the Manager consisted
of the following per share amounts: $ 0.06 $ 0.04
</TABLE>
* Annualized
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(b) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .03% of average daily net assets.
(c) Computed using average shares outstanding throughout the period.
(d) All Class I shares of the fund were exchanged for Class II shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
See accompanying notes to the financial statements.
31
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class II share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from September 26, 1996
Year Ended Year Ended (commencement of operations)
February 28, 1999 February 28, 1998 to February 28, 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net asset value, beginning of period $ 23.16 $ 24.36 $ 24.60
---------- ---------- ----------
Income (loss) from investment operations:
Net investment income 0.39(c) 0.52(c) 0.14
Net realized and unrealized gain (loss) (0.46) 1.94 0.96
---------- ---------- ----------
Total from investment operations (0.07) 2.46 1.10
---------- ---------- ----------
Less distributions to shareholders:
From net investment income (0.24) (0.74) (0.27)
In excess of net investment income (0.24) -- --
From net realized gains (2.28) (2.92) (1.07)
---------- ---------- ----------
Total distributions (2.76) (3.66) (1.34)
---------- ---------- ----------
Net asset value, end of period $ 20.33 $ 23.16 $ 24.36
========== ========== ==========
Total Return (a) (0.76%) 11.60% 4.51%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 18,295 $ 12,500 $ 25,302
Net expenses to average
daily net assets 0.76% 0.76% 0.80%*(b)
Net investment income to average
daily net assets 1.71% 2.14% 0.98%*
Portfolio turnover rate 60% 68% 97%
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.06 $ 0.07 $ 0.05
</TABLE>
* Annualized
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(b) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .04% of average daily net assets.
(c) Computed using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
32
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 23.20 $ 24.37 $ 24.62 $ 22.32 $ 25.56
---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income 0.42 (c) 0.54 (c) 0.59 0.36 0.27
Net realized and unrealized gain (loss) (0.47) 1.96 1.02 3.09 (1.57)
---------- ---------- ---------- ---------- ----------
Total from investment operations (0.05) 2.50 1.61 3.45 (1.30)
---------- ---------- ---------- ---------- ----------
Less distributions to shareholders:
From net investment income (0.25) (0.75) (0.33) (0.39) (0.35)
In excess of net investment income (0.24) -- -- -- --
From net realized gains (2.28) (2.92) (1.53) (0.76) (1.59)
---------- ---------- ---------- ---------- ----------
Total distributions (2.77) (3.67) (1.86) (1.15) (1.94)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 20.38 $ 23.20 $ 24.37 $ 24.62 $ 22.32
========== ========== ========== ========== ==========
Total Return (a) (0.68%) 11.71% 6.72% 15.72% (5.31%)
Ratios/Supplemental Data:
Net assets, end of period (000's) $1,998,447 $3,046,510 $4,232,937 $4,538,036 $2,591,646
Net expenses to average
daily net assets 0.69% 0.69% 0.71%(b) 0.71%(b) 0.70%(b)
Net investment income to average
daily net assets 1.84% 2.19% 2.34% 1.93% 1.48%
Portfolio turnover rate 60% 68% 97% 14% 53%
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.06 $ 0.07 $ 0.06 $ 0.03 $ 0.03
</TABLE>
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(b) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .02% of average daily net assets.
(c) Computed using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
33
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from January 9, 1998
Year Ended (commencement of operations)
February 28, 1999 to February 28, 1998
----------------- --------------------
<S> <C> <C>
Net asset value, beginning of period $ 23.19 $ 20.61
----------- -----------
Income (loss) from investment operations:
Net investment income 0.42(b) 0.02(b)
Net realized and unrealized gain (loss) (0.46) 2.56
----------- -----------
Total from investment operations (0.04) 2.58
----------- -----------
Less distributions to shareholders:
From net investment income (0.25) --
In excess of net investment income (0.25) --
From net realized gains (2.28) --
----------- -----------
Total distributions (2.78) --
----------- -----------
Net asset value, end of period $ 20.37 $ 23.19
=========== ===========
Total Return (a) (0.60%) 12.52%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 567,219 $ 682,952
Net expenses to average
daily net assets 0.63% 0.63%*
Net investment income to average
daily net assets 1.85% 0.68%*
Portfolio turnover rate 60% 68%
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.06 $ 0.01
</TABLE>
* Annualized
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(b) Computed using average shares outstanding throughout the period.
See accompanying notes to the financial statements.
34
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO International Core Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on June
24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series into classes.
The Fund seeks maximum total return through investment in a portfolio of
common stocks of non- U.S. issuers.
Prior to January 9, 1998, the Fund offered three classes of shares: Class
I, Class II, and Class III. Effective January 9, 1998, Class I shares
ceased operations and all shares were exchanged for Class II shares, and
Class IV shares commenced operations. The principal economic difference
among the classes of shares is the level of shareholder service fee borne
by the classes. Eligibility for and automatic conversion between the
various classes of shares is generally based on the total amount of assets
invested with GMO, as more fully described in the Trust's prospectus.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost
which approximates market value. Other assets and securities for which no
quotations are readily available are valued at fair value as determined in
good faith by the Trustees or other persons acting at their direction.
35
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
On September 1, 1998, the Malaysian government introduced capital controls
effectively eliminating trading of the Malaysian ringgit. Effective
February 4, 1999, the Malaysian government modified these restrictions.
Funds invested in Malaysia as of February 15, 1999 and repatriated within
one year of September 1, 1998, or one year from the date of the investment
if after September 1, 1998, are subject to a graduated repatriation tax on
the principal invested with a maximum of 30%. The Fund has recorded an
accrual in the amount of $13,029,271 for potential repatriation tax on
principal invested prior to February 15, 1999. The accrual for Malaysian
repatriation taxes is included in the change in net unrealized
appreciation (depreciation) on investments in the Statement of Operations.
Funds invested in Malaysia on or after February 15, 1999 are subject to a
repatriation tax on capital gains of 30% for currency repatriated in less
than one year of the initial investment and 10% for currency repatriated
after one year of the initial investment. The Fund has not made any
additional investments in Malaysia on or after February 15, 1999 and
accordingly no tax provision for capital gains has been accrued.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the prevailing
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at prevailing exchange rates when
accrued or incurred The Fund does not isolate realized and unrealized
gains and losses attributable to changes in exchange rates from gains and
losses that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent net exchange gains and losses on disposition of
foreign currencies, currency gains and losses realized between the trade
and settlement dates on securities transactions and the difference between
the amount of investment income and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent amounts actually received
or paid.
Futures contracts
The Fund may purchase and sell stock index futures contracts. Stock index
futures contracts represent commitments for future delivery of cash based
upon the level of a specified index of equity securities at a specified
price at a given date. The Fund may use futures contracts to manage its
exposure to the stock market. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government obligations in
accordance with the initial margin requirements of the broker or exchange.
Futures contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. The payable or receivable is subsequently settled. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 28, 1999.
36
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Forward currency contracts
The Fund may enter into forward currency contracts in connection with
settling planned purchases or sales of securities or to hedge the currency
exposure associated with some or all of the Fund's portfolio securities. A
forward currency contract is an agreement between two parties to buy and
sell a currency at a set price on a future date. The market value of a
forward currency contract fluctuates with changes in forward currency
exchange rates. Forward currency contracts are marked to market daily and
the change in value is recorded by the Fund as an unrealized gain or loss.
Realized gains or losses equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed
are recorded upon delivery or receipt of the currency or, if a forward
currency contract is offset by entering into another forward currency
contract with the same broker, upon settlement of the net gain or loss.
These contracts may involve market risk in excess of the unrealized gain
or loss reflected in the Fund's Statement of Assets and Liabilities. In
addition, the Fund could be exposed to risk if the counterparties are
unable to meet the terms of the contracts or if the value of the currency
changes unfavorably to the U.S. dollar. The U.S. dollar value of the
currencies the Fund has committed to buy or sell is shown under Note 6 and
represents the currency exposure the Fund has acquired or hedged through
currency contracts as of February 28, 1999.
Swap agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to the equity markets. The Fund enters into total return swap agreements
which involve a commitment by one party in the agreement to pay interest
in exchange for a market linked return based on a notional amount. To the
extent that the total return of the security or index underlying the
transaction exceeds or falls short of the offsetting interest rate
obligation, the Fund will receive a payment from or make a payment to the
counterparty, respectively. Total return swaps are marked to market daily
based upon quotations from market makers and the change, if any, is
recorded as unrealized gain or loss in the Statement of Operations.
Payments received or made at the end of the measurement period are
recorded as realized gain or loss in the Statement of Operations. Entering
into these agreements involves, to varying degrees, elements of credit and
market risk in excess of the amounts recognized on the Statement of Assets
and Liabilities. Such risks involve the possibility that there will be no
liquid market for these agreements, that the counterparty to the
agreements may default on its obligation to perform or that there may be
unfavorable changes in the price of the security or index underlying these
transactions. At February 28, 1999, there were no open swap agreements.
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of delay in
recovery or even loss of rights in the collateral should the borrower of
the securities fail financially. The Fund receives compensation for
lending its securities. At February 28, 1999, the Fund loaned securities
having a market value of $105,443,245 collateralized by cash in the amount
of $112,650,328 which was invested in a short-term instrument.
37
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
federal income tax purposes. Therefore, no provision for federal income or
excise tax is necessary. Taxes on foreign interest and dividend income
have been withheld in accordance with the applicable country's tax treaty
with the United States. Dividends received by shareholders of the Fund
which are derived from foreign source income and foreign taxes paid by the
Fund are to be treated, to the extent allowable under the Code, as if
received and paid by the shareholders of the Fund.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. The Fund declares separate dividends from net
investment income on each class of shares.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
foreign currency and passive foreign investment company transactions. The
Fund also utilized earnings and profits distributed to shareholders on
redemption of shares as a part of the dividends paid deduction for income
tax purposes.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
----------------- ------------------------ ---------------
$20,083,139 $(54,083,137) $33,999,998
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
38
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date, or when the Fund is informed of the
ex-dividend date, if later. Interest income is recorded on the accrual
basis and is adjusted for the accretion of discounts. In determining the
net gain or loss on securities sold, the cost of securities is determined
on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds. Investment
income, common expenses and realized and unrealized gains and losses are
allocated pro-rata among the classes of shares of the Fund based on the
relative net assets of each class. Shareholder service fees, which are
directly attributable to a class of shares, are charged to that class'
operations.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .60% of the amount
invested. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. These fees are allocated relative to each class' net
assets on the share transaction date. Purchase premiums are included as
part of each class' "shares sold" as summarized in Note 5. For the year
ended February 28, 1999, the Fund received $1,233,011 in purchase
premiums. There is no premium for cash redemptions or reinvested
distributions. While no purchase premium is normally charged with respect
to in-kind purchases of Fund shares, a premium of up to .10% may be
charged on certain in-kind transactions.
Investment risk
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .75% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of each class at the annual rate of .22%
for Class II shares, .15% for Class III shares, and .09% for Class IV
shares.
GMO agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding brokerage commissions, certain other transaction costs
(including stamp duties and transfer taxes), shareholder service fees and
extraordinary expenses) exceed .54% of average daily net assets.
39
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Effective March 1, 1999, GMO's contractual management fee was reduced to
.54% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding brokerage
commissions, certain other transaction costs (including stamp duties and
transfer taxes), shareholder service fees and extraordinary expenses)
exceed the management fee.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999, was $32,117. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1999, aggregated
$1,887,171,276 and $2,912,517,715, respectively.
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in the value of investments held
were as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ------------ ------------ ------------
$2,909,443,789 $213,911,297 $430,419,669 $216,508,372
4. Principal shareholder
At February 28, 1999, 10.33% of the outstanding shares of the Fund were
held by one shareholder.
40
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums received by
the Fund, were as follows:
Period from March 1, 1997 to
January 9, 1998
----------------------------
Class I: Shares Amount
----------- -----------
Shares sold 129,549 $ 3,082,734
Shares issued to
shareholders in
reinvestment of
distributions 23,945 515,731
Shares
repurchased (162,048) (3,337,176)
----------- -----------
Net increase/
(decrease) (8,554) $ 261,289
=========== ===========
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1999 February 28, 1998
--------------------------- -----------------------------
Class II: Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares sold 885,462 $ 19,191,959 763,855 $ 18,068,147
Shares issued to
shareholders in
reinvestment of
distributions 73,790 1,596,701 274,162 5,880,162
Shares
repurchased (598,960) (12,638,896) (1,537,107) (32,079,430)
------------ ------------ ------------ ------------
Net increase/
(decrease) 360,292 $ 8,149,764 (499,090) $ (8,131,121)
============ ============ ============ ============
</TABLE>
41
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Share transactions - continued
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1999 February 28, 1998
--------------------------------- ---------------------------------
Class III: Shares Amount Shares Amount
----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Shares sold 11,023,810 $ 257,852,698 19,930,602 $ 489,010,908
Shares issued to
shareholders in
reinvestment of
distributions 12,569,888 274,662,387 23,749,073 513,606,936
Shares
repurchased (56,861,371) (1,291,047,156) (86,021,674) (1,977,018,471)
----------- --------------- ----------- ---------------
Net decrease (33,267,673) $ (758,532,071) (42,341,999) $ (974,400,627)
=========== =============== =========== ===============
<CAPTION>
Period from January 9, 1998
Year Ended (commencement of operations)
February 28, 1999 to February 28, 1998
------------------------------- -------------------------------
Class IV: Shares Amount Shares Amount
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Shares sold 6,658,423 $ 166,390,526 32,918,242 $ 678,472,578
Shares issued to
shareholders in
reinvestment of
distributions 3,674,092 80,195,331 -- --
Shares
repurchased (11,932,488) (266,788,054) (3,468,454) (77,148,446)
------------- ------------- ------------- -------------
Net increase/
(decrease) (1,599,973) $ (20,202,197) 29,449,788 $ 601,324,132
============= ============= ============= =============
</TABLE>
42
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1999 is as
follows:
Forward currency contracts
<TABLE>
<CAPTION>
Net
Unrealized
Settlement Units Appreciation
Date Deliver/Receive of Currency Value (Depreciation)
----------- ----------------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
Buys
04/09/99 AUD 55,711,429 $ 34,601,719 $ 96,472
08/27/99 AUD 51,377,576 31,948,563 (850,881)
04/09/99 CAD 176,896,697 117,176,088 1,876,149
08/27/99 CHF 71,434,550 50,236,763 (728,518)
08/27/99 EUR 638,756,062 708,357,761 (19,627,886)
08/27/99 GBP 16,035,487 25,667,845 (477,355)
04/09/99 HKD 213,927,980 27,583,311 42,357
04/09/99 JPY 27,342,288,900 231,662,810 (1,873,666)
08/27/99 NOK 1,069,238,491 133,988,573 (4,238,366)
08/27/99 SEK 110,226,794 13,546,543 (519,462)
04/09/99 SGD 10,202,400 5,938,291 (61,709)
------------
$(26,362,865)
============
Sales
04/09/99 AUD 258,340,723 $160,452,409 $ 1,820,281
04/09/99 CAD 69,754,705 46,205,405 (225,405)
08/27/99 CHF 113,207,241 79,613,651 2,132,249
08/27/99 EUR 162,883,823 180,632,368 2,662,204
08/27/99 GBP 102,969,956 164,822,990 3,003,004
04/09/99 HKD 913,732,957 117,814,325 (362,287)
04/09/99 JPY 44,890,521,935 380,343,595 1,796,149
08/27/99 NOK 493,979,187 61,901,594 1,883,914
08/27/99 SEK 93,132,172 11,445,666 402,743
04/09/99 SGD 14,123,920 8,220,806 332,408
------------
$ 13,445,260
============
</TABLE>
43
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Currency Abbreviations:
AUD Australian Dollar HKD Hong Kong Dollar
CAD Canadian Dollar JPY Japanese Yen
CHF Swiss Franc NOK Norwegian Kroner
EUR Euro SEK Swedish Krona
GBP British Pound SGD Singapore Dollar
Futures contracts
<TABLE>
<CAPTION>
Net
Unrealized
Number of Expiration Contract Appreciation
Contracts Type Date Value (Depreciation)
----------- ------------ ---------- ------------ --------------
<S> <C> <C> <C> <C>
Buys
1,096 DAX March 1999 $147,639,617 $ 2,239,390
1,053 MATIF CAC 40 March 1999 47,312,257 352,116
325 MIB 30 March 1999 64,725,333 4,622,107
216 TOPIX March 1999 20,362,073 463,850
------------
$ 7,677,463
============
Sales
425 ALL ORDS March 1999 $ 19,067,041 $ (389,694)
1,103 FTSE 100 March 1999 108,812,182 (7,127,186)
62 HANG SENG March 1999 3,933,142 (188,824)
26 IBEX 35 March 1999 2,846,016 (30,020)
1,320 OMX March 1999 11,742,085 119,547
17 TSE 35 March 1999 1,976,482 28,627
------------
$ (7,587,550)
============
</TABLE>
At February 28, 1999, the Fund has cash and/or securities to cover any margin
requirements on open futures contracts.
44
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
February 28, 1999
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1999, all the Fund's distributions are
from investment company taxable income, except that the Fund has designated
51.80% as net capital gain dividends.
45
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
GMO International Core Fund
(A Series of GMO Trust)
Portfolio Managers
Mr. R. Jeremy Grantham and Mr. Christopher Darnell are primarily responsible for
the day-to-day management of the Fund's portfolio. Each of these individuals has
been a portfolio manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than
fifteen years.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO International Core Fund returned -0.7% for the
fiscal year ended February 28, 1999 as compared to 4.9% for EAFE and 6.1% for
the GMO EAFE-Lite Index. The Fund's underperformance is almost entirely
attributable to the underperformance of European value and small-cap stocks,
whose performance sharply lagged large, expensively-valued companies. Consistent
with the Fund's investment objectives and policies, the Fund was invested
substantially in common stocks throughout the period.
Effect of Country Weights (Local Currency Terms)
The fiscal year was an extraordinarily volatile year in the global equity
markets. As was the case in the U.S., the international markets got off to a
very strong start. However, the global financial crisis that ensued in the third
quarter effectively wiped out all of these returns. The global equity markets
then rebounded sharply in late 1998, a period in which EAFE-Lite rose by 20.1%.
Europe, which accounted for 79% of EAFE-Lite at year-end, returned 11% for the
fiscal year in local terms. Japan declined by -11.3%, however the strengthening
of the Japanese yen relative to the U.S. dollar (6.8%) offset the majority of
the decline in local terms.
In Europe, Finland (+76%), Belgium (+40%), Italy (+23%), France (+19%) and Spain
(+17%) were the strongest performing markets. Most of the other major European
countries had significant positive returns. Austria (-7.1%), Norway (-27.8%) and
Denmark (+1.3%) were the only notable exceptions. Outside of Japan, the Pacific
Rim markets were weak with the exception of Australia, which returned 10.8%.
Country selection added modestly to the Fund's performance for the year.
Although the Fund was, on average, 9.7% underweight in Europe during the year,
the positive contribution derived from overweighting Italy more than offset the
Fund's underweight positions in the rest of the region. Overweight positions in
Canada and Singapore, which both underperformed EAFE-Lite for the year, somewhat
offset the benefit from overweighting Italy and underweighting Japan.
Effect of Currency Weights
The dollar weakened by -0.6% in the fiscal year relative to an EAFE-Lite basket
of currencies. European currencies rallied by 5.0% in advance of the
introduction of the Euro, but lost all of that gain in the 2 months after the
Euro's introduction. The yen rallied by 6.8%. The Fund's underweight in the
Japanese yen and overweight in the Canadian dollar detracted from performance.
Effect of Stock Selection
Stock selection was the largest source of underperformance as the Fund's tilts
towards small-cap and value stocks were not rewarded in the bull market
environment that continued to favor the largest international stocks. The
performance of the developed international markets was
<PAGE>
extremely narrow; for calendar year 1998 only 25 stocks accounted for over 50%
of EAFE's return. The Fund's underweight positions in this group of companies,
particularly in the telecommunications and pharmaceutical sectors, were a
contributing factor to its underperformance.
The majority of the Fund's underperformance was concentrated in Europe, where
the Fund's strategy of emphasizing value and mid-cap stocks (i.e., the smallest
20% to 25% of stocks in the EAFE universe) and underweighting large,
multinational stocks detracted from performance. The Fund's Japanese holdings
added value, as the Fund held no weight in the poor-performing bank sector and
an overweight position in Japanese small-cap stocks added value. Although strong
stock selection within Japan added positively to the Fund's overall performance,
the effect was not sufficient to compensate for underperformance in Europe.
Portfolio Structure and Outlook
The events of the past several years (the bull market in the U.S. and Europe,
the collapse of Southeast Asian markets and the poor performance of the Japanese
stock market and economy) have driven valuations significantly away from fair
value. Today value is exceptionally well positioned for picking countries and
companies. Spreads between the cheapest and most expensive countries (even after
excluding Southeast Asia) have reached their most attractive levels in fourteen
years. European value stocks are exceptionally attractive, having reached their
cheapest levels in fifteen years. Small international stocks have fallen to
levels that represent a once in forty-year opportunity (i.e., a three- to
four-standard deviation move away from their fair value).
The Fund's strategy of emphasizing stocks and countries with attractive
valuations will continue to capitalize on these misvaluations. We recognize that
it has been extremely difficult to endure the underperformance of a value-driven
strategy over the past several years, however, today the Fund's strategy is
well-positioned to capitalize on the conditions that will bring value and
smaller EAFE stocks in line with more normal historical levels. It is our
expectation that clients will be handsomely rewarded for their patience as the
market cycle turns in favor of value.
As of year-end, the International Core Fund is now neutral on the Japanese
market relative to the EAFE-Lite benchmark for the first time since the Fund's
inception in 1987. While significant reform is still needed to tackle the
problems of excess saving and investment in Japan, we believe Japan is much less
susceptible in a world of expensively valued U.S. and European markets. The Fund
remains underweight in the yen, as we believe that a weaker yen is a
precondition to restoring the viability of the Japanese economy. The Fund
remains underweight in Europe in favor of ex-Japan Asia, where the markets have
very strong upside potential and are trading at extremely cheap levels.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
- --------------------------------------------------------------------------------
Comparison of Change in Value of a $10,000 Investment in
GMO International Core Fund Class III Shares and the MSCI EAFE Index
As of February 28, 1999
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Since
1 Year 5 Year 10 Year Inception
- --------------------------------------------------------------------------------
Class 9/26/96
II -1.4% n/a n/a 6.0%
- --------------------------------------------------------------------------------
Class
III -1.3% 5.2% 8.9% n/a
- --------------------------------------------------------------------------------
Class 1/9/98
IV -1.2% n/a n/a 9.8%
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GMO International Core Fund
Date Class III Shares MSCI EAFE Index GMO EAFE - Lite Index
---- --------------------------- --------------- ---------------------
<S> <C> <C> <C>
1/31/89
2/28/89 9,940 10,000 10,000
3/31/89 9,934 9,804 9,853
6/30/89 9,842 9,199 9,365
9/30/89 11,105 10,339 10,538
12/31/89 11,629 10,807 11,090
3/31/90 11,509 8,670 9,314
6/30/90 12,118 9,498 10,190
9/30/90 10,189 7,485 8,141
12/31/90 10,686 8,273 8,922
3/31/91 11,717 8,888 9,559
6/30/91 11,241 8,403 9,033
9/30/91 12,398 9,123 9,869
12/31/91 12,231 9,276 10,073
3/31/92 12,064 8,175 9,125
6/30/92 13,130 8,348 9,506
9/30/92 12,328 8,474 9,441
12/31/92 12,090 8,147 9,073
3/31/93 13,651 9,124 10,038
6/30/93 14,418 10,041 10,842
9/30/93 15,611 10,707 11,642
12/31/93 16,922 10,800 12,142
3/31/94 17,569 11,177 12,279
6/30/94 17,880 11,748 12,725
9/30/94 17,973 11,760 12,898
12/31/94 17,622 11,640 12,774
3/31/95 17,584 11,857 13,129
6/30/95 18,356 11,943 13,421
9/30/95 18,798 12,441 13,972
12/31/95 19,441 12,944 14,505
3/31/96 19,874 13,318 14,996
6/30/96 20,243 13,528 15,258
9/30/96 20,219 13,512 15,397
12/31/96 21,297 13,727 15,992
3/31/97 20,978 13,513 15,986
6/30/97 22,584 15,266 17,828
9/30/97 23,120 15,158 18,034
12/31/97 21,494 13,970 16,900
3/31/98 25,083 16,025 19,621
6/30/98 24,981 16,195 19,939
9/30/98 21,200 13,892 17,118
12/31/98 24,417 16,761 20,558
2/28/99 23,362 16,313 19,991
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 60 bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Performance for Class IV and Class II shares may vary
due to different shareholder service fees. Past performance is not indicative of
future performance. Information is unaudited.
- --------------------------------------------------------------------------------
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of GMO Global Hedged Equity
Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Global Hedged Equity Fund at
February 28, 1999 and the results of its operations, the changes in its net
assets and the financial highlights for the periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 22, 1999
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
Par Value ($)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
MUTUAL FUNDS - 87.2%
511,113 GMO Emerging Markets Fund 3,225,125
478,547 GMO Evolving Countries Fund 2,746,857
761,055 GMO International Core Fund 15,510,296
107,770 GMO International Small Companies Fund 1,187,624
249,112 GMO REIT Fund 2,274,394
216,227 GMO Small Cap Growth Fund 2,352,550
196,808 GMO Small Cap Value Fund 2,300,690
783,929 GMO U.S. Core Fund 14,573,247
-----------
TOTAL MUTUAL FUNDS (Cost $50,995,142) 44,170,783
-----------
COMMON STOCKS - 0.0%
Hong Kong - 0.0%
400 Johnson Electric Holding 1,063
-----------
Italy - 0.0%
12,500 Grasselto SPA (b) --
-----------
United Kingdom - 0.0%
17,870 Viglen Technology Plc (Entitlement Letters)* --
-----------
TOTAL COMMON STOCKS (Cost $7,537) 1,063
-----------
DEBT OBLIGATIONS - 4.8%
U.S. Government Agency - 4.8%
$ 2,500,000 Federal Farm Credit Bank Floating Rate Note, CPI + 3.00%, 4.34% 2,415,000
due 2/14/02 (a) -----------
TOTAL DEBT OBLIGATIONS (Cost $2,412,917) 2,415,000
-----------
SHORT-TERM INVESTMENTS - 7.4%
Cash Equivalents - 5.9%
$ 3,000,000 Wachovia Bank Time Deposit, 4.60% due 3/01/99 3,000,000
-----------
U.S. Government - 1.5%
$ 800,000 U. S. Treasury Bill, 4.40% due 1/06/2000 (a) 768,416
-----------
TOTAL SHORT-TERM INVESTMENTS (Cost $3,770,420) 3,768,416
-----------
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
TOTAL INVESTMENTS - 99.4%
(Cost $57,186,016) 50,355,262
Other Assets and Liabilities (net) - 0.6% 315,440
-----------
TOTAL NET ASSETS - 100.0% $50,670,702
===========
</TABLE>
Notes to the Schedule of Investments
(a) This security is held as collateral for open futures contracts.
(b) Bankrupt issuer.
* Non-income producing security.
2 See accompanying notes to the financial statements.
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities - February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
Assets:
<S> <C>
Investments, at value (cost $57,186,016) (Note 1) $ 50,355,262
Foreign currency, at value (cost $41,901) (Note 1) 41,901
Cash 3,252
Interest receivable 8,543
Receivable for open swap contracts (Notes 1 and 6) 4,764
Net receivable for open forward foreign currency contracts (Notes 1 and 6) 176,302
Receivable for variation margin on open futures contracts (Notes 1 and 6) 133,218
Receivable for expenses waived or borne by Manager (Note 2) 28,683
------------
Total assets 50,751,925
------------
Liabilities:
Payable to affiliate for (Note 2):
Management fee 27,093
Shareholder service fee 861
Accrued expenses 53,269
------------
Total liabilities 81,223
------------
Net assets $ 50,670,702
============
Net assets consist of:
Paid-in capital $ 87,842,040
Accumulated undistributed net investment income 322,600
Accumulated net realized loss (30,115,257)
Net unrealized depreciation (7,378,681)
------------
$ 50,670,702
============
Net assets attributable to Class III Shares $ 50,670,702
============
Shares outstanding - Class III 6,678,751
============
Net asset value per share - Class III $ 7.59
============
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Statement of Operations - Year Ended February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income:
Dividends from investment company shares $ 1,928,921
Interest 1,040,682
------------
Total income 2,969,603
------------
Expenses:
Management fee (Note 2) 892,689
Custodian fees 72,686
Audit fees 40,979
Transfer agent fees 27,853
Legal fees 2,187
Trustees fees (Note 2) 1,365
Registration fees 502
Miscellaneous 1,474
Fees waived or borne by Manager (Note 2) (837,881)
------------
201,854
Shareholder service fee - Class III (Note 2) 27,988
------------
Net expenses 229,842
------------
Net investment income 2,739,761
------------
Realized and unrealized gain (loss): Net realized gain (loss) on:
Investments (16,527,223)
Realized gain distributions from investment company shares 13,755,524
Closed futures contracts (16,413,258)
Closed swap contracts (7,095,984)
Foreign currency, forward contracts and foreign currency related
transactions 1,790,288
------------
Net realized loss (24,490,653)
------------
Change in net unrealized appreciation (depreciation) on:
Investments (22,832)
Open futures contracts 7,158,419
Open swap contracts 4,125,795
Foreign currency, forward contracts and foreign currency related
transactions (1,254,452)
------------
Net unrealized gain 10,006,930
------------
Net realized and unrealized loss (14,483,723)
------------
Net decrease in net assets resulting from operations $(11,743,962)
============
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1999 February 28, 1998
----------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 2,739,761 $ 6,813,996
Net realized gain (loss) (24,490,653) 17,777,218
Change in net unrealized appreciation (depreciation) 10,006,930 (27,674,481)
------------- -------------
Net decrease in net assets resulting from operations (11,743,962) (3,083,267)
------------- -------------
Distributions to shareholders from:
Net investment income - Class III (2,739,761) (6,516,906)
In excess of net investment income - Class III (2,683,188) --
Net realized gains - Class III -- (19,721,985)
In excess of net realized gains - Class III -- (7,564,405)
------------- -------------
(5,422,949) (33,803,296)
------------- -------------
Net share transactions - Class III (Note 5) (102,868,056) (89,109,720)
------------- -------------
Total decrease in net assets (120,034,967) (125,996,283)
Net assets:
Beginning of period 170,705,669 296,701,952
------------- -------------
End of period (including accumulated undistributed net
investment income of $322,600 and distributions in excess of
net investment income of $1,571,288, respectively) $ 50,670,702 $ 170,705,669
============= =============
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29,
-------------------------------------------------------------------------------------
1999 1998 1997 1996 1995*
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 8.72 $ 10.69 $ 10.64 $ 10.12 $ 10.00
------------ ------------ ------------ ------------ ------------
Income from investment operations:
Net investment income (e) 0.17(c) 0.35 0.24 0.21 0.11
Net realized and unrealized gain (loss) (0.88) 0.52 0.01 0.55 0.08
------------ ------------ ------------ ------------ ------------
Total from investment operations (0.71) (0.17) 0.25 0.76 0.19
------------ ------------ ------------ ------------ ------------
Less distributions to shareholders:
From net investment income (0.21) (0.35) (0.20) (0.24) (0.07)
In excess of net investment income (0.21) -- -- -- --
From net realized gains -- (1.05) -- -- --
In excess of net realized gains -- (0.40) -- -- --
------------ ------------ ------------ ------------ ------------
Total distributions (0.42) (1.80) (0.20) (0.24) (0.07)
------------ ------------ ------------ ------------ ------------
Net asset value, end of period $ 7.59 $ 8.72 $ 10.69 $ 10.64 $ 10.12
============ ============ ============ ============ ============
Total Return (a) (8.13%) (1.63%) 2.34% 7.54% 1.92%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 50,671 $ 170,706 $ 296,702 $ 382,934 $ 214,638
Net expenses to average
daily net assets (d) 0.17% 0.58% 0.91%(b) 0.78% 0.92**%
Net investment income to average
daily net assets (e) 1.99% 2.93% 1.99% 2.44% 2.85**%
Portfolio turnover rate 21% 277% 463% 214% 194%
Fees and expenses voluntarily waived or
borne by the Manager consisted of
the following per share amounts: $ 0.05 $ 0.04 $ 0.02 $ 0.005 $ 0.006
</TABLE>
* Period from July 29, 1994 (commencement of operations) to February 28,
1995.
** Annualized
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(b) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximates .02% of average daily net assets.
(c) Computed using average shares outstanding throughout the period.
(d) On August 20, 1997, the Fund began to invest a substantial portion of its
assets in other funds of GMO Trust and revised its voluntary waiver. Net
expenses exclude expenses incurred indirectly through investment in
underlying funds. See Note 2.
(e) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund
invests.
6 See accompanying notes to the financial statements.
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Global Hedged Equity Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on June
24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series into classes.
The Fund seeks total return consistent with minimal exposure to general
equity market risk, either directly or through investment in other Funds
of the Trust ("underlying Funds"). On August 20, 1997, the Fund began to
invest a substantial portion of its assets in underlying Funds.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Shares of underlying Funds are valued at their net asset value as reported
on each business day. Portfolio securities listed on a securities exchange
for which market quotations are available are valued at the last quoted
sale price on each business day, or if there is no such reported sale, at
the most recent quoted bid price. Unlisted securities for which market
quotations are readily available are valued at the most recent quoted bid
price. Securities which are primarily traded on foreign exchanges are
generally valued at the preceding closing values of such securities on
their respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost
which approximates market value. Other assets and securities for which no
quotations are readily available are valued at fair value as determined in
good faith by the Trustees or other persons acting at their direction.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings, other assets and
liabilities are translated to U.S. dollars based on the prevailing
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at prevailing exchange rates when
accrued or incurred. The Fund does not isolate realized and unrealized
gains and losses attributable to changes in exchange rates from gains
7
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
and losses that arise from changes in the market value of investments.
Such fluctuations are included with net realized and unrealized gain or
loss on investments. Net realized gains and losses on foreign currency
transactions represent net exchange gains and losses on disposition of
foreign currencies, currency gains and losses realized between the trade
and settlement dates on securities transactions, and the difference
between the amount of investment income and foreign withholding taxes
recorded on the Fund's books and the U.S. dollar equivalent amounts
actually received or paid.
Futures contracts
The Fund may purchase and sell stock index futures contracts. Stock index
futures contracts represent commitments for future delivery of cash based
upon the level of a specified index of equity securities at a specified
price at a given date. The Fund may use futures contracts to manage its
exposure to the stock. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government obligations in
accordance with the initial margin requirements of the broker or exchange.
Futures contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. The payable or receivable is subsequently settled. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 28, 1999.
Forward currency contracts
The Fund may enter into forward currency contracts in connection with
settling planned purchases or sales of securities or to hedge the currency
exposure associated with some or all of the Fund's portfolio securities. A
forward currency contract is an agreement between two parties to buy and
sell a currency at a set price on a future date. The market value of a
forward currency contract fluctuates with changes in forward currency
exchange rates. Forward currency contracts are marked to market daily and
the change in value is recorded by the Fund as an unrealized gain or loss.
Realized gains or losses equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed
are recorded upon delivery or receipt of the currency or, if a forward
currency contract is offset by entering into another forward currency
contract with the same broker, upon settlement of the net gain or loss.
These contracts may involve market risk in excess of the unrealized gain
or loss reflected in the Fund's Statement of Assets and Liabilities. In
addition, the Fund could be exposed to risk if the counterparties are
unable to meet
8
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
the terms of the contracts or if the value of the currency changes
unfavorably to the U.S. dollar. The U.S. dollar value of the currencies
the Fund has committed to buy or sell is shown under Note 6 and represents
the currency exposure the Fund has acquired or hedged through currency
contracts as of February 28, 1999.
Swap agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to the equity markets. The Fund enters into total return swap agreements
which involve a commitment by one party in the agreement to pay interest
in exchange for a market linked return based on a notional amount. To the
extent that the total return of the security or index underlying the
transaction exceeds or falls short of the offsetting interest rate
obligation, the Fund will receive a payment from or make a payment to the
counterparty, respectively. Total return swaps are marked to market daily
based upon quotations from market makers and the change, if any, is
recorded as unrealized gain or loss in the Statement of Operations.
Payments received or made at the end of the measurement period are
recorded as realized gain or loss in the Statement of Operations. Entering
into these agreements involves, to varying degrees, elements of credit and
market risk in excess of the amounts recognized on the Statement of Assets
and Liabilities. Such risks involve the possibility that there will be no
liquid market for these agreements, that the counterparty to the
agreements may default on its obligation to perform or that there may be
unfavorable changes in the price of the security or index underlying these
transactions. See Note 6 for a summary of the open swap agreement as of
February 28, 1999.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryover for
federal income tax purposes. Therefore, no provision for federal income or
excise tax is necessary. Taxes on foreign interest and dividend income
have been withheld in accordance with the applicable country's tax treaty
with the United States.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
foreign currency transactions.
9
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
----------------- ------------------------ ---------------
$4,577,076 $(4,747,946) $170,870
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
Security transactions and related investment income Security transactions
are accounted for on trade date. Dividend income is recorded on the
ex-dividend date, or when the Fund is informed of the ex-dividend date, if
later. Interest income is recorded on the accrual basis and is adjusted
for the accretion of discounts. In determining the net gain or loss on
securities sold, the cost of securities is determined on the identified
cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds. In
addition, the Fund will also incur fees and expenses indirectly as a
shareholder in the underlying funds. Because the underlying funds have
varied expense and fee levels and the Fund may own different proportions
of underlying funds at different times, the amount of fees and expenses
indirectly incurred by the Fund will vary. (See Note 2).
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .37% of the amount
invested. Prior to June 30, 1997, the premium on cash purchases was .50%
of the amount invested. In the case of cash redemptions, the fee is 1.40%
of the amount redeemed. The Manager may waive the fee on cash redemptions
if it is not necessary to incur costs relating to the early termination of
hedging transactions to meet redemption requests. All purchase premiums
and redemption fees are paid to and are recorded by the Fund as paid-in
capital. Purchase premiums are included as part of "shares
10
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
sold" and redemption fees are included as part of "shares repurchased,"
respectively, as summarized in Note 5. For the year ended February 28,
1999, the Fund received $23,781 in purchase premiums and $43,941 in
redemption fees. There is no premium for reinvested distributions. While
no purchase premium is normally charged with respect to in-kind purchases
of Fund shares, a purchase premium of up to .10% may be charged on certain
in-kind transactions.
Investment risk
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .65% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares. The Fund will invest in Class III shares of each underlying Fund
being offered. Like the management fee (as described below), the
shareholder service fee will be waived (but not below zero) to the extent
of the indirect shareholder service fees paid in connection with the
Fund's investment in shares of underlying Funds.
On August 20, 1997, the Fund revised its voluntary expense waiver to
include certain expenses incurred indirectly by the Fund through
investment in underlying Funds. GMO agreed to waive a portion of its fee
(but not below zero) and bear other expenses to the extent that the Fund's
annual expenses (including the management fee but excluding custody fees,
brokerage commissions, certain other transaction costs (including transfer
taxes), shareholder service fees and extraordinary expenses ("fund
expenses")) plus the amount of fees and expenses (excluding shareholder
service fee and fund expenses (as defined above) incurred indirectly by
the Fund through investment in underlying Funds) exceed .50% of average
daily net assets. Because GMO will not waive the management fees below
zero, and because the amount of fees and expenses incurred indirectly by
the Fund will vary, the operating expenses (excluding shareholder service
fees and fund expenses) incurred indirectly by the Fund through investment
in underlying Funds may exceed .50% of the Fund's average daily net
assets. For the year ended February 28, 1999, operating expenses
(excluding shareholder service fees and fund expenses) incurred indirectly
by the Fund were .41% of the Fund's average daily net assets.
11
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Effective March 1, 1999, GMO's contractual management fee was reduced to
.50% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding custody fees,
brokerage commissions, certain other transaction costs (including transfer
taxes), shareholder service fees and extraordinary expenses ("fund
expenses")) plus the amount of fees and expenses, excluding shareholder
service fees and fund expenses (as defined above) incurred indirectly by
the Fund through investment in underlying Funds exceed the management fee.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999, was $1,365. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1999, were as
follows:
Purchases Proceeds
------------- -------------
U.S. Government securities $ 3,847,520 $ 1,443,750
Investments (non-U.S. Government
securities) 20,940,047 119,683,411
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- -------------
$60,699,394 $50,083 $10,394,215 $10,344,132
4. Principal shareholders
At February 28, 1999, 52.8% of the outstanding shares of the Fund were
held by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
12
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares, including the purchase premiums and
redemption fees received by the Fund, were as follows:
Year Ended Year Ended
February 28, 1999 February 28, 1998
------------------------------- -----------------------------
Class III: Shares Amount Shares Amount
-------------- -------------- ------------- -------------
Shares sold 977,477 $ 8,484,590 58,635 $ 595,622
Shares issued to
shareholders in
reinvestment of
distributions 613,717 4,694,941 3,493,801 30,813,859
Shares
repurchased (14,483,783) (116,047,587) (11,741,685) (120,519,201)
----------- ------------- ----------- -------------
Net decrease (12,892,589) $(102,868,056) (8,189,249) $ (89,109,720)
=========== ============= =========== =============
13
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1999 is as
follows:
Futures contracts
Net
Unrealized
Number of Expiration Contract Appreciation
Contracts Type Date Value (Depreciation)
- ----------- -------------- --------------- -------------- --------------
Sales
4 ALL ORDS March 1999 $ 179,455 $ (2,193)
5 DAX March 1999 673,538 64,652
16 FT-SE 100 March 1999 1,578,418 (32,910)
2 HANG SENG March 1999 126,876 (6,862)
2 IBEX March 1999 218,924 (4,387)
16 MATIF CAC 40 March 1999 718,895 31,379
1 MIB30 March 1999 199,155 22,574
23 OMX March 1999 204,597 2,465
79 S&P 500 March 1999 24,401,125 (742,215)
10 TOPIX March 1999 942,689 (61,697)
---------
$(729,194)
=========
At February 28, 1999, the Fund had cash and/or securities to cover any
margin requirements on open futures contracts.
Forward currency contracts
Net
Unrealized
Settlement Units Appreciation
Date Deliver/Receive of Currency Value (Depreciation)
- ---------- --------------- ------------ ---------- --------------
Buys
04/09/99 AUD 969,580 $ 602,195 $ (7,805)
08/27/99 CHF 196,700 138,330 (1,670)
08/27/99 EUR 622,112 689,900 (10,100)
08/27/99 GBP 1,480,428 2,369,707 (43,704)
04/09/99 HKD 3,959,801 510,566 566
04/09/99 JPY 365,357,590 3,095,563 (124,437)
---------
$(187,150)
=========
14
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Forward currency contracts - continued
Net
Unrealized
Settlement Units Appreciation
Date Deliver/Receive of Currency Value (Depreciation)
- ---------- --------------- ------------ ---------- --------------
Sales
04/09/99 AUD 1,292,625 $ 802,834 $ 12,166
08/27/99 CHF 810,693 570,124 6,881
08/27/99 EUR 2,417,031 2,680,402 39,242
08/27/99 GBP 2,182,297 3,493,181 61,781
04/09/99 HKD 5,118,102 659,915 85
04/09/99 JPY 444,040,000 3,762,214 237,785
08/27/99 SEK 1,563,468 192,146 5,512
--------
$363,452
========
Currency Abbreviations:
AUD Australian Dollar HKD Hong Kong Dollar
CHF Swiss Franc JPY Japanese Yen
EUR Euro SEK Swedish Krona
GBP British Pound
Swap agreement
Net
Notional Expiration Unrealized
Amount Date Description Appreciation
- -------------- ---------- ---------------------------------- ------------
$15,050,313 5/31/99 Agreement with Deutsche Bank AG $ 4,764
dated 5/26/98 to pay (receive)
the notional amount multiplied by
the return on the EAFE Index
(including dividends) and to
receive the notional amount
multiplied by 6 month LIBOR
adjusted by a specified spread.
15
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Federak Tax Information - (Unaudited)
February 28, 1999
- --------------------------------------------------------------------------------
The Fund has elected to defer to March 1, 1999 post-October capital losses of
$16,892,263.
At February 28, 1999, the Fund had a capital loss carryforward available to
offset future capital gains, if any, of the following amount:
Year of Expiration Amount
------------------ -----------
2007 $10,447,067
16
<PAGE>
GMO Global Hedged Equity Fund
(A Series of GMO Trust)
Portfolio Managers
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Forrest Berkley are
primarily responsible for the day-to-day management of the Fund's portfolio. Mr.
Grantham has been with GMO since its founding in 1977. Mr. Darnell has been with
GMO and involved in portfolio management for more than 15 years. Mr. Berkley has
been with GMO and involved in portfolio management for more than 10 years.
Management Discussion and Analysis of Fund Performance
The Class III shares of the Global Hedged Equity Fund returned -8.1% for the
fiscal year ending February 28, 1999. During that period the Fund's benchmark,
The Salomon Smith Barney 3 Month T-Bill, returned +4.9%.
The Fund's objective is to outperform the Salomon Smith Barney 3 Month T-Bill
Index by adding the alpha (value added) of our U.S. and international equity
funds, as well as the value added of our asset allocation strategy, to a
short-term fixed income return. As of February 28, 1999, the Fund held 43% of
its assets in long U.S. equities, 33% in developed international equities and
12% in emerging markets equities. The remaining 12% of the Fund was invested in
U.S. Treasuries and cash holdings. The long equity exposure is hedged, using
short EAFE futures and short international equity swaps combined to represent
the GMO EAFE-Lite Index as well as short S&P 500 futures, totaling approximately
100% of the value of the long assets.
The Fund currently invests in the GMO Core Fund, GMO REIT Fund, GMO Small Cap
Growth Fund, GMO Small Cap Value Fund, GMO Evolving Countries Fund, GMO Emerging
Markets Fund, GMO International Small Companies Fund and GMO International Core
Fund.
The GMO Global Hedged Equity Fund's performance for the fiscal year was hurt by
the poor performance of the GMO International Core Fund relative to EAFE-Lite.
For the fiscal year, the GMO International Core Fund returned -0.7%, trailing
the GMO EAFE-Lite Index by 6.8%. Returns for the Fund relative to the benchmark
were hurt by the Fund's value orientation relative to a market that favored
large, growth-oriented international stocks.
The emerging markets position also negatively affected the relative performance
of the GMO Global Hedged Equity Fund. The 12% weight in emerging markets was
hedged half with short S&P 500 futures and half with short EAFE futures and
international equity swaps. This position reflected the expectation that
emerging markets would outperform richly valued developed equity markets.
However, during the year, developed markets continued to trend upwards, while
emerging markets fell sharply in the wake of the financial collapse in Southeast
Asia. The Fund's position in emerging equities detracted 4.2% from performance
for the period.
For the fiscal year, the U.S. equity funds held long by the Fund as a group
returned 5.1%, significantly underperforming the S&P 500 return of 19.8%. The
GMO U.S. Core Fund, which accounts for the majority of the U.S. equity holdings,
underperformed the S&P 500 Index by 4.8%. Diversification into the GMO Small Cap
Value, Small Cap Growth and REIT Funds was unsuccessful in adding value. Though
these funds did reasonably well against their respective underlying benchmarks,
they lagged the S&P 500 Index, which continued its strong run.
<PAGE>
The 12% Treasury position was enhanced with bond futures for most of the fiscal
year. As interest rate spreads narrowed, this exposure added value for the
period.
Outlook
GMO's global equity alpha is positioned to benefit as the extremes of the
current market environment work their way out of the system. Our expectation is
that emerging equities, which are trading at a fraction of their replacement
cost, will significantly outperform developed market equities over the next
three to five years. Long positions in global small stocks and REITs, with their
strong earnings growth and historically cheap valuations, also look likely to
add value relative to overpriced large-cap equities.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Global Hedged Equity Fund Class III Shares and the
Salomon Smith Barney 3 Month T-Bill Index
As of February 28, 1999
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Since
1 Year Inception
7/29/94
Class III - 9.8% -0.1%
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
<TABLE>
Date GMO Global Hedged Equity Fund Salomon Smith Barney
Class III Shares 3 Month T-Bill Index
<S> <C> <C>
1/31/94
7/29/94 9,963 10,000
9/30/94 9,983 10,075
12/31/94 10,004 10,206
3/31/95 10,105 10,349
6/30/95 10,436 10,500
9/30/95 10,613 10,648
12/31/95 10,809 10,793
3/31/96 10,860 10,932
6/30/96 10,921 11,071
9/30/96 11,027 11,215
12/31/96 11,251 11,360
3/31/97 11,083 11,504
6/30/97 11,052 11,653
9/30/97 11,364 11,804
12/31/97 11,071 11,957
3/31/98 11,083 12,110
6/30/98 10,630 12,265
9/30/98 10,503 12,417
12/31/98 10,287 12,559
2/28/99 9,959 12,649
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 37 bp on the purchase and 140 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Past performance
is not indicative of future performance. Information is unaudited.
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of GMO Japan Fund (A Series of
GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Japan Fund at February 28, 1999
and the results of its operations, the changes in its net assets and the
financial highlights for the periods presented, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 16, 1999
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
COMMON STOCKS - 96.4%
Automotive - 2.8%
21,000 Autobacs Seven 640,708
40,000 Honda Motor Co Ltd 1,540,666
5,500 Mabuchi Motor Co 369,912
127,000 Nissan Motor Co 495,584
47,000 Suzuki Motor Corp 518,921
-------------
3,565,791
-------------
Banking - 4.2%
70,000 Asahi Bank 306,785
139,000 Bank Of Tokyo-Mitsubishi 1,675,263
107,000 Fuji Bank 421,146
75,000 Industrial Bank of Japan 374,842
51,000 Mitsubishi Trust & Banking 433,274
163,000 Sakura Bank Ltd 354,437
79,000 Sanwa Bank Ltd 808,976
64,000 Sumitomo Bank 771,884
39,000 Tokai Bank 190,973
-------------
5,337,580
-------------
Chemicals - 4.1%
271,000 Daicel Chemical Industries Ltd 719,469
243,000 Japan Synthetic Rubber Co Ltd 1,136,662
48,000 Kureha Chemical Industry Co Ltd 123,388
251,000 Mitsubishi Gas Chemical Co Inc 651,563
308,000 Mitsui Petrochemical Industries Ltd 1,207,080
22,000 Nagase & Co 83,810
79,000 Nichimen Corp 85,225
20,000 Nippon Paint Co 34,724
13,000 Shin-Etsu Chemical Co Ltd 304,593
418,000 Showa Denko 352,297
49,000 Sumitomo Bakelite Co Ltd 330,383
38,000 Tokuyama Corp 127,467
55,000 Tokyo Ink Manufacturing Co Ltd 111,715
-------------
5,268,376
-------------
Computers and Office Equipment - 0.2%
35,000 NCR Japan Ltd 197,640
7,000 Nihon Unisys Ltd 97,935
-------------
295,575
-------------
Construction - 3.4%
560,000 Aoki Corp * 226,549
18,000 Chudenko Corp 341,340
46,000 Daiwa House Industry Co Ltd 471,437
See accompanying notes to the financial statements. 1
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Construction- continued
64,000 Kajima Corp 153,729
216,000 Maeda Corp 593,477
12,000 Maeda Road Construction 70,796
405,000 Mitsui Engineering & Shipbuilding * 358,407
54,000 Okumura Corp 208,900
67,000 Onoda Cement Co Ltd 177,876
262,000 Sato Kogyo Co Ltd 178,862
58,000 Sekisui House Ltd 593,932
131,000 Shokusan Jutaku Sogo Co Ltd * 131,386
62,000 Takara Standard Co 439,461
30,000 Toda Corp 142,857
162,000 Tokyo Construction Co Ltd * 101,037
15,000 Toyo Exterior Co Ltd 145,765
-------------
4,335,811
-------------
Consumer Goods - 4.7%
15,000 Bandai Co 157,396
71,000 Ezaki Glico Co Ltd 418,281
300 Fuji Photo Film Co Ltd 11,024
13,000 Hitachi Maxell Ltd 218,584
42,000 Minolta Co Ltd 202,478
38,600 Nintendo Co Ltd 3,253,266
800 Sega Enterprises 15,103
94,000 Ushio Inc 1,009,322
44,000 Victor Co of Japan Ltd 290,367
39,000 Yakult Honsha Co Ltd 218,913
28,000 Yamaha Corp 258,879
-------------
6,053,613
-------------
Electric - 3.3%
34,000 Kinden Corp 447,029
42,000 Kokusai Electric 269,381
401,000 Mitsubishi Electric Corp 1,203,169
296,000 Oki Electric Industry 920,556
25,000 Showa Electric Wire & Cable 34,766
88,000 Stanley Electric Co Ltd 283,321
107,000 Sumitomo Electric 1,126,363
-------------
4,284,585
-------------
Electronics - 9.2%
13,400 Aiwa Co 282,343
74,000 Canon Inc 1,584,155
61,900 Fanuc Co 2,311,142
3,000 Hirose Electric Co. Ltd 203,540
2 See accompanying notes to the financial statements.
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Electronics - continued
86,000 Japan Aviation Electronics 241,365
39,000 Kyocera Corp 1,840,708
40,000 Nichicon Corp 483,776
35,000 Ryosan Co 589,971
43,000 Sony Corp 3,254,446
16,000 Tokyo Electron 728,192
44,000 Toshiba Corp 272,937
-------------
11,792,575
-------------
Financial Services - 0.8%
3,000 Acom Ltd 177,244
19,000 Credit Saison Co 399,536
2,000 Hitachi Credit Corp 37,421
143,000 New Japan Securities Co Ltd * 136,190
7,000 Promise Co 318,584
-------------
1,068,975
-------------
Food and Beverage - 6.4%
9,000 Denny's Japan Co Ltd 209,355
114,000 House Foods Corp 1,675,651
70,000 Itoham Foods Inc 286,726
12,000 Ito-Yokado 699,874
22,000 Katokichi Co Ltd 297,598
60,000 Kikkoman Corp 372,187
88,000 Kirin Brewery Co Ltd 1,042,056
19,000 Meiji Seika Kaisha Ltd 77,185
34,000 Mercian Corp 134,968
34,000 Nichirei 75,938
109,000 Nippon Meat Packers Inc 1,479,975
127,000 Nippon Suisan Kaisha Ltd * 135,938
50,000 Nisshin Oil Mills Ltd 121,787
11,000 Nissin Food Products Co Ltd 232,701
100,700 Q.P. Corp 714,618
103,000 Snow Brand Milk Products Co Ltd 499,157
26,000 Toyo Suisan Kaisha 205,765
-------------
8,261,479
-------------
Health Care - 2.7%
4,000 Hoya Corp 195,533
63,000 Kyowa Hakko Kogyo Co Ltd 297,876
99,000 Lion Corp 388,824
86,000 Sankyo Co Ltd 1,848,293
63,000 Shiseido Co Ltd 764,602
-------------
3,495,128
-------------
See accompanying notes to the financial statements. 3
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Insurance - 0.6%
68,000 Tokio Marine & Fire Insurance Co 727,855
-------------
Leisure - 0.3%
26,000 Heiwa Corp 370,333
-------------
Machinery - 4.3%
117,000 Amada Co Ltd 575,879
162,000 Furukawa Co Ltd 217,092
809,000 Mitsubishi Heavy Industries 3,006,903
15,000 Mori Seiki Co Ltd 151,833
17,000 Rinnai Corp 316,646
9,000 SMC 728,192
100,000 Toshiba Tungaloy Co Ltd 273,915
95,000 Tsubakimoto Chain 200,169
-------------
5,470,629
-------------
Metals and Mining - 1.5%
155,000 Hitachi Metals Ltd 438,938
18,000 Maruichi Steel Tube 209,355
138,000 Nachi Fujikoshi Co 198,887
44,000 Nitto Denko Corp 658,609
234,000 Tomen Corp 177,497
53,000 Yodogawa Steel Works 189,844
-------------
1,873,130
-------------
Oil and Gas - 3.9%
456,000 Cosmo Oil Co Ltd 645,664
64,000 General Sekiyu (KK) 207,670
516,000 Mitsubishi Oil Co Ltd * 930,670
751,000 Nippon Oil Co Ltd 2,639,418
87,600 Showa Shell Sekiyu 460,703
60,000 Teikoku Oil Co Ltd 159,292
-------------
5,043,417
-------------
Paper and Allied Products - 1.6%
31,000 Daio Paper Corp 127,762
167,000 Hokuetsu Paper Mills 724,863
226,000 Nippon Paper Industries 864,762
52,000 Sumitomo Forestry Co Ltd 350,611
-------------
2,067,998
-------------
Pharmaceuticals - 5.3%
207,000 Chugai Pharmaceutical Co Ltd 1,980,152
65,000 Daiichi Seiyaku Co Ltd 989,381
101,000 Dainippon Pharmaceutical Co Ltd 412,002
4 See accompanying notes to the financial statements.
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Pharmaceuticals - continued
127,000 Fujisawa Pharmaceutical Co Ltd 1,631,252
70,000 Kaken Pharmaceutical Co Ltd 332,743
19,000 Kissei Pharmaceutical Co Ltd 322,672
20,000 Taisho Pharmaceutical Co Ltd 530,973
118,000 Tanabe Seiyaku Co Ltd 607,653
-------------
6,806,828
-------------
Retail Trade - 0.7%
7,000 Aoki International 32,448
26,000 Best Denki Co Ltd 186,262
48,000 Hankyu Department Stores Inc 295,727
52,000 Joshin Denki Co Ltd 141,997
45,000 Nichii Co Ltd 252,212
-------------
908,646
-------------
Services - 5.2%
96,000 Canon Sales Co Inc 1,387,611
82,200 CSK Corp 2,320,860
65,000 Kamigumi Co Ltd 285,967
504,000 Nissho Iwai Corp 348,319
28,000 Secom Co Ltd 2,173,451
30,000 Sumitomo Corp 150,695
-------------
6,666,903
-------------
Technology - 7.8%
9,000 Advantest Corp 683,439
98,000 Dainippon Screen Manufacturing Co Ltd 359,292
732,000 Hitachi Ltd 4,627,054
8,600 Keyence Corp 1,013,300
300 Murata Manufacturing Co Ltd 13,502
47,000 NEC Corp 474,555
40,400 TDK Corp 2,897,632
-------------
10,068,774
-------------
Telecommunications - 2.0%
109,000 Gakken Co Ltd 115,752
104,000 Japan Radio Co 393,561
26,000 Matsushita Communications 1,345,470
44,000 Nitsuko Corp 179,857
44,000 Tokyo Broadcasting System Inc 478,382
-------------
2,513,022
-------------
Textiles - 2.9%
145,000 Gunze Ltd 318,963
146,000 Kurabo Industries Ltd 151,353
238,000 Nisshinbo Industries Inc 792,330
See accompanying notes to the financial statements. 5
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Textiles - continued
87,000 Onward Kashiyama Co Ltd 960,556
294,000 Renown Inc * 161,062
35,000 Tokyo Style Co Ltd 363,422
258,000 Toyobo Co Ltd 321,820
67,000 Wacoal Corp 706,422
-------------
3,775,928
-------------
Tobacco - 3.7%
518 Japan Tobacco Inc 4,715,047
-------------
Transportation- 7.5%
238 East Japan Railway Co 1,432,212
37,000 Fujita Kanko Inc 313,401
76,000 Fukuyama Transporting Co Ltd 295,289
76,000 Hankyu Corp 319,629
27,000 Japan Airport Terminal Co Ltd 162,478
476,000 Kawasaki Kisen 682,006
203,000 Keio Teito Electric Railway Co Ltd 846,903
173,000 Keisei Electric Railway 513,241
138,000 Nagoya Railroad Co Ltd 466,397
42,000 Nankai Electric Railway Co Ltd 197,168
51,000 Odakyu Electric Railway 171,934
69,000 Royal Co Ltd 946,169
152,000 Sagami Railway Co Ltd 381,761
85,000 Seino Transportation Co Ltd 451,327
68,000 Skylark Co Ltd 1,215,002
27,000 Toei Co Ltd 75,322
89,000 Yamato Transport Co Ltd 1,197,918
-------------
9,668,157
-------------
Utilities - 7.3%
20,600 Chubu Electric Power Co Inc 361,129
45,400 Chugoku Electric Power Co Inc 715,533
59,600 Hokkaido Electric Power 904,172
21,800 Hokuriku Electric Power 330,904
108,000 Kansai Electric Power 2,057,143
20,000 Kokusai Denshin Denwa 694,480
106,800 Kyushu Electric Power Co Inc 1,701,239
109,900 Shikoku Electric Power 1,732,094
54,500 Tohoku Electric Power Co Inc 841,041
-------------
9,337,735
-------------
TOTAL COMMON STOCKS (Cost $129,578,985) 123,773,890
-------------
6 See accompanying notes to the financial statements.
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Par Value($) Description Value ($)
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS - 3.1%
Cash Equivalents - 3.1%
$ 4,000,000 Wachovia Bank Time Deposit, 4.60% due 3/01/99 4,000,000
-------------
TOTAL SHORT-TERM INVESTMENTS (Cost $4,000,000) 4,000,000
-------------
TOTAL INVESTMENTS - 99.5%
(Cost $133,578,985) 127,773,890
Other Assets and Liabilities (net) - 0.5% 615,582
-------------
TOTAL NET ASSETS - 100.0% $ 128,389,472
=============
Notes to the Schedule of Investments
* Non-income producing security.
See accompanying notes to the financial statements. 7
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities - February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at value (cost $133,578,985) (Note 1) $ 127,773,890
Foreign currency, at value (cost $194,974) (Note 1) 196,789
Cash 44,146
Cash on deposit at broker (Note 1) 580,394
Dividends and interest receivable 85,987
Receivable for variation margin on open futures contracts (Notes 1 and 6) 35,474
Receivable for expenses waived or borne by Manager (Note 2) 27,423
-------------
Total assets 128,744,103
-------------
Liabilities:
Payable for investments purchased 31,449
Payable for Fund shares repurchased 154,067
Payable to affiliate for (Note 2):
Management fee 74,911
Shareholder service fee 15,056
Accrued expenses 79,148
-------------
Total liabilities 354,631
-------------
Net assets $ 128,389,472
=============
Net assets consist of:
Paid-in capital $ 196,656,608
Distributions in excess of net investment income (23,093)
Accumulated net realized loss (62,482,979)
Net unrealized depreciation (5,761,064)
-------------
$ 128,389,472
=============
Net assets attributable to Class III Shares $ 128,389,472
=============
Shares outstanding - Class III 20,716,627
=============
Net asset value per share - Class III $ 6.20
=============
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Statement of Operations - Year Ended February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income:
Dividends (net of foreign tax expense of $219,456) $ 1,246,267
Interest (including security lending income of $2,026) 89,905
------------
Total income 1,336,172
------------
Expenses:
Management fee (Note 2) 1,071,652
Custodian fees 180,328
Audit fees 45,446
Transfer agent fees 26,646
Legal fees 1,380
Trustees fees (Note 2) 1,368
Registration fees 948
Miscellaneous 2,359
Fees waived or borne by Manager (Note 2) (558,538)
------------
771,589
Shareholder service fee - Class III (Note 2) 214,330
------------
Net expenses 985,919
------------
Net investment income 350,253
------------
Realized and unrealized gain (loss): Net realized gain (loss) on:
Investments (25,155,759)
Closed futures contracts (881,109)
Foreign currency and foreign currency related
transactions (134,003)
------------
Net realized loss (26,170,871)
------------
Change in net unrealized appreciation (depreciation) on:
Investments 20,304,260
Open futures contracts 55,680
Foreign currency and foreign currency related transactions 119,102
------------
Net unrealized gain 20,479,042
------------
Net realized and unrealized loss (5,691,829)
------------
Net decrease in net assets resulting from operations $ (5,341,576)
============
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1999 February 28, 1998
----------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 350,253 $ 439,226
Net realized loss (26,170,871) (37,355,312)
Change in net unrealized appreciation (depreciation) 20,479,042 22,020,921
----------------- -----------------
Net decrease in net assets resulting from operations (5,341,576) (14,895,165)
----------------- -----------------
Net share transactions - Class III (Note 5) (15,421,445) (54,749,266)
----------------- -----------------
Total decrease in net assets (20,763,021) (69,644,431)
Net assets:
Beginning of period 149,152,493 218,796,924
----------------- -----------------
End of period (including distributions in excess of
net investment income of $23,093 and $444,014,
respectively) $ 128,389,472 $ 149,152,493
================= =================
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29
----------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 6.36 $ 7.02 $ 8.52 $ 9.12 $ 11.13
--------- --------- --------- --------- ---------
Income (loss) from investment operations:
Net investment income (loss) 0.01 0.01 --(c) (0.01)(c) --(c)
Net realized and unrealized gain (loss) (0.17) (0.67) (1.50) 0.79 (1.08)
--------- --------- --------- --------- ---------
Total from investment operations (0.16) (0.66) (1.50) 0.78 (1.08)
--------- --------- --------- --------- ---------
Less distributions to shareholders:
From net investment income -- -- -- -- --
In excess of net investment income -- -- (0.00) -- --
From net realized gains -- -- -- (1.38) (0.93)
--------- --------- --------- --------- ---------
Total distributions -- -- (0.00) (1.38) (0.93)
--------- --------- --------- --------- ---------
Net asset value, end of period $ 6.20 $ 6.36 $ 7.02 $ 8.52 $ 9.12
========= ========= ========= ========= =========
Total Return (a) (2.52%) (9.40%) (17.69%) 8.29% (10.62%)
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 128,389 $ 149,152 $ 218,797 $ 126,107 $ 60,123
Net expenses to average
daily net assets 0.69% 0.69% 0.70%(d) 0.92% 0.83%
Net investment income (loss) to average
daily net assets 0.25% 0.21% 0.01% (0.13%) (0.02%)
Portfolio turnover rate 102% 128% 4% 23% 60%
Fees and expenses voluntarily waived or
borne by the Manager consisted
of the following per share amounts: $ 0.02 $ 0.02 $ 0.03 0.01 $ (b)
</TABLE>
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(b) Fees and expenses waived or borne by the Manager were less than $.01 per
share.
(c) Based on average month end shares outstanding.
(d) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .01% of average daily net assets.
See accompanying notes to the financial statements. 11
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Japan Fund (the "Fund") is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended,
as an open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24,
1985. The Declaration of Trust permits the Trustees to create an unlimited
number of series ("Funds"), each of which issues a separate series of
shares, and to subdivide a series into classes.
The Fund seeks maximum total return through investment in Japanese
securities, primarily in common stocks of Japanese companies.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost
which approximates market value. Other assets and securities for which no
quotations are readily available are valued at fair value as determined in
good faith by the Trustees or other persons acting at their direction.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the prevailing
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at prevailing exchange rates when
accrued or incurred The Fund does not isolate realized and unrealized
gains and losses attributable to changes in exchange rates from gains and
losses that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent net exchange gains and losses on disposition of
foreign currencies, currency gains and losses realized between the trade
and settlement dates on securities transactions and the difference between
the amount of investment income and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent amounts actually received
or paid.
12
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Futures contracts
The Fund may purchase and sell stock index futures contracts. Stock index
futures contracts represent commitments for future delivery of cash based
upon the level of a specified index of equity securities at a specified
price at a given date. The Fund may use futures contracts to manage its
exposure to the stock market. Buying futures tends to increase the Fund's
exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. Upon entering into a futures contract, the Fund is required
to deposit with its custodian, in a segregated account in the name of the
futures broker, an amount of cash or U.S. government obligations in
accordance with the initial margin requirements of the broker or exchange.
Futures contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. The payable or receivable is subsequently settled. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from changes in the value of the underlying
instrument, if there is an illiquid secondary market for the contracts or
if counterparties do not perform under the contract terms. Futures
contracts are valued at the settlement price established each day by the
board of trade or exchange on which they are traded. See Note 6 for all
open futures contracts as of February 28, 1999.
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of delay in
recovery or even loss of rights in the collateral should the borrower of
the securities fail financially. The Fund receives compensation for
lending its securities. At February 28, 1999, the Fund had no securities
out on loan.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary. Taxes on foreign interest and dividend income have been
withheld in accordance with the applicable country's tax treaty with the
United States.
13
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
foreign currency and passive foreign investment company transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
----------------- ------------------------ ---------------
$70,668 $257,449 ($328,117)
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date, or when the Fund is informed of the
ex-dividend date, if later. Interest income is recorded on the accrual
basis and is adjusted for the accretion of discounts. In determining the
net gain or loss on securities sold, the cost of securities is determined
on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .40% of the amount
invested. In the case of cash redemptions, the fee is .61% of the amount
redeemed. All purchase premiums and redemption fees are paid to and
recorded by the Fund as paid-in capital. Purchase premiums are included as
part of "shares sold" and redemption fees are included as part of "shares
repurchased", respectively, as summarized in Note 5. For the year ended
February 28, 1999, the Fund received $51,395 in purchase premiums and
14
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
$88,245 in redemption fees. There is no premium for reinvested
distributions. While no purchase premium is normally charged with respect
to in-kind purchases of Fund shares, a purchase premium of up to .10% may
be charged on certain in-kind transactions.
Investment risk
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .75% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding brokerage commissions, certain other transaction costs
(including stamp duties and transfer taxes), shareholder service fees and
extraordinary expenses) exceed .54% of average daily net assets.
Effective March 1, 1999, GMO's contractual management fee was reduced to
.54% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding brokerage
commissions, certain other transaction costs (including stamp duties and
transfer taxes), shareholder service fees and extraordinary expenses)
exceed the management fee.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999, was $1,368. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1999, aggregated
$138,518,861 and $155,486,953, respectively.
15
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in the value of investments held
were as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ------------ ------------ ------------
$138,770,263 $8,106,847 $19,103,220 $10,996,373
4. Principal shareholders
At February 28, 1999, 52.85% of the outstanding shares of the Fund were
held by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including the purchase premiums and redemption fees received by
the Fund, were as follows:
Year Ended Year Ended
Class III: February 28, 1999 February 28, 1998
-------------------------- ---------------------------
Shares Amount Shares Amount
---------- ------------ ----------- ------------
Shares sold 7,008,018 $ 42,026,700 4,316,975 $ 32,950,333
Shares repurchased (9,737,557) (57,448,145) (12,050,534) (87,699,599)
---------- ------------ ----------- ------------
Net decrease (2,729,539) $(15,421,445) (7,733,559) $(54,749,266)
========== ============ =========== ============
16
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
6. Financial instruments
A summary of outstanding futures contracts purchased at February 28, 1999
is as follows:
Number of Net Unrealized
Contracts Type Expiration Date Contract Value Appreciation
--------- ---- --------------- -------------- ------------
23 TOPIX March 1999 $2,168,184 $35,474
============
At February 28, 1999, the Fund had cash and/or securities to cover any
margin requirements on open futures contracts.
17
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
At February 28, 1999, the Fund had a capital loss carryforward available to
offset future capital gains, if any, of the following amounts:
Year of Expiration Amount
------------------ ------
2005 $ 43,013
2006 $ 22,345,866
2007 $ 34,928,863
18
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
GMO Japan Fund
(A Series of GMO Trust)
Portfolio Managers
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Forrest Berkley are
primarily responsible for the day-to-day management of the Fund's portfolio. Mr.
Grantham and Mr. Darnell have been portfolio managers at Grantham, Mayo, Van
Otterloo & Co. LLC for more than fifteen years. Mr. Berkley has been with GMO
and involved in portfolio management for more than ten years.
Management Discussion and Analysis of Fund Performance
The Class III shares of the GMO Japan Fund outperformed the MSCI Japan Index for
the fiscal year ended February 28, 1999, with a total return of -2.5% versus
- -5.5% for the MSCI Japan Index. Consistent with the Fund's investment objective
and policies, the Fund was invested substantially in common stocks throughout
the period.
The Japanese market declined by 11.3% during the fiscal year in local currency
terms. The strengthening of the yen relative to the dollar (6.8%) significantly
increased the return for dollar-denominated investors.
The Fund's strong performance for the fiscal year was provided by several major
decisions in the portfolio. First, an underweight position in banks (i.e., zero
weight) added value, as the banking sector significantly underperformed the rest
of the market. Next, the Fund's overweight in small-cap stocks (i.e., the
smallest 20% of MSCI Japan) had a positive impact on performance as the spread
between small- and large-cap stocks was more than 25% in favor of smaller
stocks. Last, an overweight position in defensive stocks also benefited the
portfolio's performance.
Outlook
Despite strong performance this year, small stocks in Japan remain attractively
valued. The Japanese market has been cheap on quantitative measures for several
years as a result of the weaknesses in the banking sector and structural
problems. We expect however, that a weaker yen is likely if monetary policy is
to be the primary mechanism for reflating the economy.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
- --------------------------------------------------------------------------------
Comparison of Change in Value of a $10,000 Investment in
GMO Japan Fund Class III Shares and the MSCI Japan Index
As of February 28, 1999
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Since
1 Year 5 Year Inception
- --------------------------------------------------------------------------------
6/8/90
CLASS III -3.5% -7.0% -2.5%
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Date GMO Japan Fund MSCI Japan Index
Class III Shares
---- -------------- ----------------
1/31/90
6/8/90 9,960 10,000
6/30/90 9,870 9,737
9/30/90 7,420 7,252
12/31/90 8,177 8,300
3/31/91 8,995 9,015
6/30/91 8,449 8,535
9/30/91 8,894 9,039
12/31/91 8,585 9,041
3/31/92 7,189 7,045
6/30/92 7,241 6,488
9/30/92 7,478 7,369
12/31/92 7,384 7,101
3/31/93 8,671 8,424
6/30/93 9,461 10,053
9/30/93 10,049 10,403
12/31/93 9,345 8,911
3/31/94 11,213 10,360
6/30/94 12,556 11,582
9/30/94 11,853 10,965
12/31/94 11,757 10,821
3/31/95 11,172 10,591
6/30/95 10,507 9,921
9/30/95 10,901 10,367
12/31/95 11,305 10,896
3/31/96 11,488 10,935
6/30/96 11,697 11,020
9/30/96 11,083 10,404
12/31/96 9,858 9,207
3/31/97 8,891 8,121
6/30/97 10,967 10,043
9/30/97 9,466 8,759
12/31/97 7,547 7,028
3/31/98 7,873 7,172
6/30/98 7,468 6,844
9/30/98 6,698 5,820
12/31/98 8,461 7,382
2/28/99 8,046 7,273
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 40 bp on the purchase and 61 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Past performance
is not indicative of future performance. Information is unaudited.
- --------------------------------------------------------------------------------
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
Pelican Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Pelican Fund at February 28, 1999
and the results of its operations, the changes in its net assets and the
financial highlights for the periods presented, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 16, 1999
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
COMMON STOCKS - 87.9%
Advertising - 0.1%
7,500 Cordiant Communications Group Plc Sponsored ADR 92,813
10,000 Saatchi & Saatchi Plc ADR 133,750
------------
226,563
------------
Aerospace - 0.1%
5,000 Boeing Company 177,813
------------
Automotive - 2.1%
20,000 General Motors Corp 1,651,250
60,000 Mascotech Industries Inc 907,500
50,000 Michelin SA Class B 2,231,782
------------
4,790,532
------------
Banking and Financial Services - 11.8%
25,000 American Express Co 2,712,500
425,000 Bangkok Bank Public Co Ltd* 717,252
35,000 Bank One Corp 1,881,250
10,000 BankAmerica Corp 653,125
100,000 Block (HR) Inc 4,537,500
70,000 Chase Manhattan Corp 5,573,750
125,000 Citigroup Inc 7,343,750
2,500 First Union Corp 133,281
20,000 PNC Bank Corp 1,041,250
50,000 Wells Fargo Co 1,837,500
------------
26,431,158
------------
Chemicals - 0.3%
20,000 Albemarle Corp 472,500
1,000 PPG Industries Inc 52,063
10,000 Wellman Inc 93,125
------------
617,688
------------
Computer and Office Equipment - 2.1%
105,000 Compaq Computer Corp 3,701,250
5,000 Hewlett - Packard Co 332,188
50,000 Intergraph Corp* 276,563
25,000 Maxtor Corp * 206,250
5,000 Silicon Graphics Inc * 79,688
------------
4,595,939
------------
Consumer Goods - 2.3%
55,000 Eastman Kodak 3,640,313
25,000 Mattel Inc 659,375
15,000 Maytag Corp 840,938
------------
5,140,626
------------
Electronic Equipment - 0.6%
2,500 Advanced Micro Devices Inc* 44,688
125,000 International Rectifier Corp* 859,375
40,000 National Semiconductor Corp* 420,000
------------
1,324,063
------------
See accompanying notes to the financial statements. 1
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Food and Beverage - 3.7%
57,500 Anheuser-Busch Cos Inc 4,409,531
5,000 Coors (Adolph) Co 297,813
37,500 Nestle SA ADR 3,538,931
5,000 RJR Nabisco Holdings Corp 136,563
------------
8,382,838
------------
Health Care - 1.9%
75,000 Acuson Corp* 1,125,000
15,000 Bausch & Lomb Inc 904,688
15,000 Baxter International Inc 1,055,625
35,000 Beverly Enterprises Inc* 181,563
50,000 Owens and Minor Holdings Co 637,500
35,000 PhyCor Inc* 190,313
5,000 Quest Diagnostics Inc* 106,875
------------
4,201,564
------------
Insurance - 2.8%
42,500 Allstate Corp 1,593,750
20,000 Chartwell Re Corp 432,500
10,000 Cigna Corp 785,000
100,000 Reliance Group Holdings Inc 1,031,250
5,000 St. Paul Cos Inc 161,875
125,000 TIG Holdings Inc 2,000,000
30,000 USF & G Corp 251,250
------------
6,255,625
------------
Machinery - 1.9%
10,000 Baker Hughes Inc 180,000
2,500 Cummins Engine Inc 102,500
15,000 FMC Corp* 767,813
25,000 Milacron Inc 445,313
75,000 Pall Corp 1,589,063
50,000 Stanley Works 1,215,625
------------
4,300,314
------------
Manufacturing - 9.8%
87,500 American Greetings Corp 2,072,656
57,500 Clayton Homes Inc 711,563
75,000 Corning Inc 4,012,500
30,000 General Electric Co 3,009,375
35,000 Griffon Corp* 315,000
32,500 International Business Machines Corp 5,525,000
87,500 Owens Corning 2,783,594
15,000 Rockwell International Corp 666,563
22,500 United Technologies Corp 2,787,188
------------
21,883,439
------------
Metals and Mining - 0.6%
5,000 Alcan Aluminum Ltd 121,563
25,000 Allegheny Teledyne Inc 515,625
60,000 Amcol International Corp 570,000
15,000 Placer Dome Inc 164,063
------------
1,371,251
------------
2 See accompanying notes to the financial statements.
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Oil and Gas - 4.8%
15,000 Amerada Hess Corp 680,625
6,000 Atlantic Richfield Co 327,750
15,000 Cabot Oil & Gas Corp, Class A 164,063
35,000 Enron Oil & Gas Co 577,500
125,000 Gulf Canada Resources Ltd 289,063
25,000 Kerr-McGee Corp 714,063
50,000 Lasmo Plc ADR* 293,750
25,000 Mitchell Energy Class A 278,125
50,000 Mitchell Energy Class B 612,500
7,500 Mobil Corp 623,906
125,000 Occidental Petroleum Corp 1,882,813
5,000 Texaco Inc 232,813
10,000 Triton Energy Ltd* 55,000
125,000 Union Pacific Resources Group Inc 1,117,188
40,000 Unocal Corp 1,127,500
62,500 USX - Marathon Group 1,292,969
30,000 Westcoast Energy Inc 586,875
------------
10,856,503
------------
Paper and Allied Products - 1.6%
75,000 Abitibi-Consolidated Inc 600,000
25,000 Fort James Corp 746,875
25,000 Kimberly-Clark Corp 1,181,250
15,000 Tenneco Inc 449,063
12,500 Weyerhaeuser Co 696,875
------------
3,674,063
------------
Pharmaceuticals - 1.8%
5,000 Glaxo Wellcome Plc ADR* 320,313
30,000 Lilly (Eli) and Co 2,840,625
12,500 Mylan Laboratories Inc 341,406
7,500 Smithkline Beecham PLC 533,438
------------
4,035,782
------------
Primary Materials - 0.2%
15,000 Crown Cork & Seal Co Inc 416,250
------------
Primary Processing - 0.4%
7,500 Du Pont (E I) De Nemours & Co Inc 384,844
37,500 Intermet Corp 468,750
------------
853,594
------------
Real Estate - 6.7%
12,500 Avalonbay Communities Inc 394,531
25,000 Boston Properties Inc 807,813
50,000 Brandywine Realty Trust 821,875
10,000 Crown American Realty Trust 74,375
2,500 Duke Realty Investments Inc 54,531
90,000 Equity Office Properties Trust 2,317,500
62,500 Equity Residential Properties Trust 2,562,500
155,000 JP Realty Inc 2,867,500
25,000 Mack-Cali Realty Corp 723,438
See accompanying notes to the financial statements. 3
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Real Estate - continued
10,000 Prime Group Realty Trust 137,500
12,500 Reckson Associates Realty Corp 265,625
25,000 Spieker Properties Inc 893,750
100,000 Summit Properties Inc 1,656,250
75,000 United Dominion Realty Trust Inc 740,625
35,000 Walden Residential Properties Inc 584,063
------------
14,901,876
------------
Retail Trade - 5.9%
75,000 Federated Department Stores* 2,854,688
40,000 Saks Inc * 1,437,500
60,000 Sears Roebuck & Co 2,437,500
182,500 Toys R Us Inc* 2,577,813
45,000 Wal-Mart Stores Inc* 3,886,875
------------
13,194,376
------------
Services - 7.2%
85,000 Browning-Ferris Industries Inc 2,677,500
20,000 Hilton Hotels Corp 316,250
52,500 Manpower Inc 1,256,719
100,000 Modis Professional Services Inc * 1,368,750
12,500 Ogden Corp 305,469
10,000 Safety-Kleen Corp* 139,375
207,500 Waste Management Inc 10,141,537
------------
16,205,600
------------
Technology - 5.8%
35,000 Data General Corp* 483,438
40,000 Electronic Data Systems Corp 1,860,000
5,000 GTECH Holdings Corp* 113,125
112,500 Information Resources Inc* 942,188
15,000 Intel Corp 1,799,063
150,000 Parametric Technology Corp * 2,306,250
132,500 Storage Technology Corp* 4,612,656
15,000 Xerox Corp 827,813
------------
12,944,533
------------
Telecommunications - 5.3%
10,000 CBS Corporation 368,750
10,000 Cox Communications Inc* 707,500
75,000 GTE Corp 4,865,625
65,000 MediaOne Group Inc* 3,542,500
20,000 SBC Communications Inc 1,057,500
25,000 US WEST Inc 1,332,813
------------
11,874,688
------------
Tobacco - 0.3%
25,000 Imperial Tobacco Group Plc 583,128
------------
Transportation - 3.1%
15,000 Airborne Freight Corp 585,000
15,000 AMR Corp* 831,563
50,000 Canadian Pacific Ltd 928,125
See accompanying notes to the financial statements. 5
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Shares
Par Value($) Description Value ($)
- --------------------------------------------------------------------------------
Transportation - continued
15,000 Delta Air Lines Inc 912,188
10,000 KLM 280,000
85,000 Ryder System Inc 2,295,000
12,500 Sabre Group Holdings Inc* 490,625
2,500 UAL Corp* 149,375
10,000 US Airways Group Inc* 473,750
------------
6,945,626
------------
Utilities - 4.7%
15,000 Cinergy Corp 437,813
15,000 Duke Energy Co 853,125
12,500 Illinova Corp 296,875
100,000 Niagara Mohawk Power Corp* 1,462,500
5,000 Pacific Corp 89,688
30,000 Reliant Energy Inc 804,375
95,000 Texas Utilities 4,031,563
25,000 TransCanada Pipeline Ltd 345,313
67,500 Unicom Corp 2,400,469
------------
10,721,721
------------
TOTAL COMMON STOCKS (Cost $144,258,129) 196,907,153
------------
PREFERRED STOCKS - 0.3%
Banking and Financial Services - 0.1%
5,000 Unocal Corp Convertible Preferred 6.25% 235,625
------------
Metals and Mining - 0.2%
25,000 Freeport-McMoran Corp Preferred 425,000
------------
TOTAL PREFERRED STOCKS (Cost $1,154,170) 660,625
------------
DEBT OBLIGATIONS - 10.6%
Banking and Financial Services - 0.4%
$1,000,000 General Motors Acceptance Corp, 5.50% due 12/15/01 986,980
------------
Computer and Office Equipment - 1.1%
2,500,000 International Business Machines Corp, 6.50% due
1/15/28 2,444,100
------------
Electronic Equipment - 0.4%
1,250,000 Advanced Micro Devices Inc, 6.00% due 5/15/05 987,500
------------
Food and Beverage - 0.6%
500,000 Anheuser-Busch Cos Inc, 7.10% due 6/15/07 523,180
130,000 Anheuser-Busch Cos Inc, 8.50% due 3/1/17 134,225
750,000 General Foods Corp, 7.00% due 6/15/11 750,833
------------
1,408,238
------------
Real Estate - 0.6%
1,250,000 HMH Properties Inc, 9.50% due 5/15/05 1,285,916
------------
See accompanying notes to the financial statements. 5
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 28, 1999
Par Value($) Description Value ($)
- --------------------------------------------------------------------------------
Technology - 0.8%
$1,000,000 Data General Corp, 6.00% due 5/15/04 917,500
1,000,000 VLSI Technology Inc, 8.25% due 10/01/05 873,670
------------
1,791,170
------------
Transportation - 1.2%
1,000,000 AMR Corp, 9.00% due 8/1/12 1,140,860
500,000 Seariver Maritime Inc Floating Rate Note, 4.91% due
10/1/11 498,125
1,000,000 United Air Lines Inc, 9.13% due 1/15/12 1,142,180
------------
2,781,165
------------
U.S. Government - 5.5%
6,100,000 U.S. Treasury Bond, 11.13% due 8/15/03 7,472,500
1,250,000 U.S. Treasury Bond, 10.75% due 8/15/05 1,605,663
1,250,000 U.S. Treasury Note, 7.75% due 2/15/01 1,308,788
1,500,000 U.S. Treasury Note, 6.625% due 5/15/07 1,615,545
------------
12,002,496
------------
TOTAL DEBT OBLIGATIONS (Cost $23,007,962) 23,687,565
------------
SHORT-TERM INVESTMENT - 0.5%
Repurchase Agreement - 0.5%
1,185,000 State Street Bank and Trust Co Repurchase Agreement,
dated 2/26/99, due 3/01/99, with a maturity value of
$1,185,321 and an effective yield of 3.25%,
collateralized by a U.S. Treasury Bill, with a rate
of 4.71%, a maturity date of 8/26/99 and a market
value of $1,210,550 (Cost $1,185,000) 1,185,000
------------
TOTAL INVESTMENTS - 99.3%
(Cost $169,605,261) 222,440,343
Other Assets and Liabilities (net) - 0.7% 1,496,247
------------
TOTAL NET ASSETS - 100.0% $223,936,590
============
Notes to the Schedule of Investments:
ADR - American Depositary Receipt
Floating Rate Notes - The rates shown on floating rate notes
are the current interest rates at February 28, 1999, which
are subject to change based on the terms of the security.
* Non-income producing security.
6 See accompanying notes to the financial statements.
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities - February 28, 1999
- --------------------------------------------------------------------------------
Assets:
Investments, at value (cost $169,605,261) (Note 1) $222,440,343
Cash 440,876
Dividends and interest receivable 575,015
Receivable for investments sold 1,295,224
Receivable for Fund shares sold 12,235
Receivable for expenses waived or borne by Manager (Note 2) 13,688
------------
Total assets 224,777,381
------------
Liabilities:
Payable for investments purchased 275,175
Payable for Fund shares repurchased 320,398
Payable to affiliate for management fee (Note 2) 156,063
Accrued expenses and other liabilities 89,155
------------
Total liabilities 840,791
------------
Net Assets (equivalent to $15.73 per share based
on 14,235,537 shares outstanding, unlimited shares authorized) $223,936,590
============
Net Assets consist of:
Paid-in capital $164,191,931
Accumulated undistributed net investment income 686,825
Accumulated undistributed net realized gain 6,222,752
Net unrealized appreciation 52,835,082
------------
Net assets $223,936,590
============
See accompanying notes to the financial statements. 7
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Statement of Operations - Year Ended February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income:
Dividends (net of withholding taxes of $28,629) $ 3,641,721
Interest 2,433,840
------------
Total income 6,075,561
------------
Expenses:
Management fee (Note 2) 2,078,258
Custodian and transfer agent fees 158,277
Audit fees 38,501
Registration fees 23,797
Legal fees 6,678
Trustees fees (Note 2) 2,278
Miscellaneous 13,083
------------
Total expenses 2,320,872
Less: expenses waived or borne by Manager (Note 2) (127,155)
------------
Net expenses 2,193,717
------------
Net investment income 3,881,844
------------
Realized and unrealized gain (loss):
Net realized gain on:
Investments 30,658,316
Foreign currency and foreign currency related transactions 26
------------
Net realized gain 30,658,342
Change in net unrealized appreciation (depreciation) on:
Investments (25,781,297)
------------
Net realized and unrealized gain 4,877,045
------------
Net increase in net assets resulting from operations $ 8,758,889
============
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
February 28, 1999 February 28, 1998
------------------ ------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 3,881,844 $ 3,875,531
Net realized gain 30,658,342 33,485,867
Change in net unrealized appreciation (depreciation) (25,781,297) 18,746,336
------------------ ------------------
Net increase in net assets resulting from operations 8,758,889 56,107,734
------------------ ------------------
Distributions to shareholders from:
Net investment income (4,037,021) (4,850,393)
Net realized gains (31,637,977) (30,617,038)
------------------ ------------------
(35,674,998) (35,467,431)
------------------ ------------------
Fund share transactions: (Note 5)
Proceeds from sale of shares 20,859,512 21,012,484
Net asset value of shares issued to shareholders
in payment of distributions declared 35,005,102 33,903,533
Cost of shares repurchased (41,297,725) (46,639,378)
------------------ ------------------
Net increase in net assets resulting
from Fund share transactions 14,566,889 8,276,639
------------------ ------------------
Total increase (decrease) in net assets (12,349,220) 28,916,942
Net assets:
Beginning of period 236,285,810 207,368,868
------------------ ------------------
End of period (including accumulated
undistributed net investment income
of $686,825 and $404,381, respectively) $ 223,936,590 $ 236,285,810
================== ==================
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Financial Highlights
(For a share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 17.78 $ 16.31 $ 14.52 $ 11.99 $ 12.08
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.30 0.32 0.33 0.31 0.37
Net realized and unrealized gain (loss) 0.43 4.13 2.27 3.04 0.46
-------- -------- -------- -------- --------
Total from investment operations 0.73 4.45 2.60 3.35 0.83
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.31) (0.40) (0.27) (0.29) (0.37)
From net realized gains (2.47) (2.58) (0.54) (0.53) (0.55)
-------- -------- -------- -------- --------
Total distributions (2.78) (2.98) (0.81) (0.82) (0.92)
-------- -------- -------- -------- --------
Net asset value, end of period $ 15.73 $ 17.78 $ 16.31 $ 14.52 $ 11.99
======== ======== ======== ======== ========
Total Return (a) 3.89% 28.97% 18.40% 28.54% 7.38%
Ratios/Supplemental Data:
Net assets, end of period (000's) $223,937 $236,286 $207,369 $177,238 $117,920
Net expenses to average
daily net assets 0.95% 0.95% 0.95% 1.05% 1.10%
Net investment income to average
daily net assets 1.68% 1.77% 2.10% 2.42% 2.51%
Portfolio turnover rate 34% 28% 27% 32% 40%
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.01 $ 0.01 $ 0.01 $- $-
</TABLE>
(a) The total returns would have been lower had certain expenses not been
waived during the periods shown.
10 See accompanying notes to the financial statements.
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
The Pelican Fund (the "Fund") is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended,
as an open-end, diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC ("the
Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24,
1985. The Declaration of Trust permits the Trustees to create an unlimited
number of series ("Funds"), each of which will issue a separate series of
shares.
The Fund seeks long-term capital growth primarily through investment in
equity securities.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term debt obligations with a remaining maturity of sixty days or
less are valued at amortized cost which approximates market value. Other
assets and securities for which no quotations are readily available are
valued at fair value as determined in good faith by the Trustees.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. In connection with transactions in repurchase
agreements, if the seller defaults and the value of the collateral
declines or if the seller enters insolvency proceedings, realization of
collateral by the Fund may be delayed or limited.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary. Taxes on foreign interest and dividend income are withheld in
accordance with the applicable country's tax treaty with the United
States.
11
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
market discount.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
----------------- ----------- ---------------
$437,621 ($437,621) $0
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis. In determining the net gain or loss on securities sold, the
cost of securities is determined on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds.
2. Management fee and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .90% of
average daily net assets. GMO agreed to waive a portion of its fee and
bear other expenses to the extent that the Fund's annual expenses
(including the management fee but excluding brokerage commissions, certain
other transaction costs (including transfer taxes), and extraordinary
expenses) exceed .95% of average daily net assets.
Effective March 1, 1999, GMO entered into a binding agreement effective
until February 29, 2000 to reimburse the Fund to the extent that the
Fund's total annual operating expenses (including the management fee but
excluding brokerage commissions, certain other transaction costs
(including transfer taxes), and extraordinary expenses) exceed .95% of
average daily net assets.
12
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 28, 1999
- --------------------------------------------------------------------------------
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999, was $2,278. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
For the year ended February 28, 1999, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
Purchases Proceeds
----------- -----------
U.S. Government securities $126,375 $10,949,063
Investments (non-U.S. Government securities) $71,873,377 $75,599,738
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
-------------- ---------------- ---------------- --------------
$170,706,155 $67,092,682 $15,358,494 $51,734,188
4. Principal shareholder
At February 28, 1999, 40.70% of the outstanding shares of the Fund were
held by one shareholder.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
Year Ended Year Ended
February 28, 1999 February 28, 1998
----------------- -----------------
Shares sold 1,214,307 1,196,670
Shares issued to shareholders in
reinvestment of distributions 2,112,963 2,012,397
Shares repurchased (2,378,657) (2,636,304)
----------------- -----------------
Net increase 948,613 572,763
Fund shares:
Beginning of period 13,286,924 12,714,161
----------------- -----------------
End of period 14,235,537 13,286,924
================= =================
13
<PAGE>
Pelican Fund
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
February 28, 1999
- --------------------------------------------------------------------------------
For fiscal year ended February 28, 1999, all of the Fund's distributions
are from investment company taxable income, except that the Fund has
designated 76.67% distributions as net capital gain dividends.
14
<PAGE>
Pelican Fund
(A Series of the GMO Trust)
Portfolio Manager
Mr. Richard Mayo is responsible for the management of the GMO Pelican Fund. Mr.
Mayo has been a portfolio manager with GMO since its founding in 1977 and began
his career in the late 1960's.
Management Discussion and Analysis of Fund Performance
In 1998, the investment environment and the baseball season shared one
remarkable similarity: a singular focus on home runs. Mark McGwire broke a
milestone batting record by hitting a total of 70 home runs, smashing the
previous record of 61. Big growth stocks (Microsoft, Lucent Technologies, Dell
Computer, etc.) achieved similar record-setting results that left we value
investors - singles and doubles hitters - greatly disappointed at the margin of
victory that was produced by growth investing.
Due to the shortfall in performance, I am sure you are wondering about the
merits of our approach and its execution and what can be expected in the future.
A shortfall versus the market should stimulate a review and re-examination of
our investment process. I did that throughout 1998, and though I am frustrated
that we were not "winners," I think we encountered a phenomenon that distorted
results. Could we have done better - of course! There are not many years in my
investment career that I could have said no to this question. I always review
how the portfolio was constructed and the changes that should have been made
based on fundamental mistakes, as well as successful adjustment to new
information and updated analysis. The shortfall of actual results from ideal
results consistently measures around 2 percentage points per year; in 1998 it
was slightly higher, about 3-4 percentage points. It was higher because
throughout the year we held the belief that the stock market was overvalued; I
still believe this is correct, but at times we were too risk-averse in the
context of individual situations. For instance, why weren't we buying more
Anheuser-Busch as it lagged early in the year? Our fundamental analysis detected
a key change in the environment, as beer prices began to rise. Doubling the
position would have added at least 30 basis points to relative performance,
considering the fact that we did take some profits and rotated into laggards,
which we thought offered better risk-rewards. We could have stayed with the big
stock winners such as General Electric, Eli Lilly, IBM, etc. somewhat longer,
adding perhaps 50 basis points. However, even though we recognized the desire of
investors to own large capitalization growth stocks, it would have been
difficult to capture all of the performance in light of our belief that most
large cap stocks are overvalued. We don't think money managers should abandon
their disciplines for potential short-term gains. As we saw in September and
October, investors' expectations can change quickly.
We could have mitigated the impact of our mistakes. We correctly
identified most investments that were not performing fundamentally according to
our expectations and stopped buying or started selling. This was the wrong
tactic: the speed and
<PAGE>
magnitude of the reaction of investors (or the faster receipt of information)
required ruthless elimination of companies not meeting expectations. Not
executing in this fashion probably penalized results another 100 basis points.
When we look at the portfolio, we might conclude the penalty was higher;
however, selling a stock that has missed targets in the short term but still has
long-term potential hasn't always been the correct strategy. Eastman-Kodak and
Digital Equipment were great successes in the past and both required patience.
Unfortunately, patience was a negative in 1998.
We obviously made some mistakes in 1998. For example, we could have
reduced the negative impact by slowing our accumulation of Toys R Us once we
concluded the "turnaround" was more difficult and would take longer than we
initially thought. TIG Holdings was a mistake that probably was not going to
improve - an obvious conclusion since the company agreed to be acquired at a
price 30% below our price target - faulty analysis or judgment being affected by
the hope for bailout by an acquisition. Our analysis was shortsighted in some
small stocks, but when we last saw such declines in 1990, they were
opportunities, even with deteriorating fundamentals.
The other part of my analysis relates to the dramatic stock declines
experienced from August to October. In hindsight, we were right: the market was
overvalued and was risky. The adjustment in the third quarter was rapid, as the
average stock dropped 46% peak to trough, greater than in 1987. I would fault us
for not perceiving more quickly that this was an opportunity and therefore not
moving more aggressively - or maybe the correct criticism is that we were too
price sensitive. With the bold easing by the Federal Reserve previous
constraints were not appropriate. By historical measures, we did move rapidly
for two weeks - buying several large blocks of stock - Parametric Technology,
Waste Management, Crown Cork & Seal, and Data General, all great values that
produced very good returns. More would have been better. We also diluted the
impact of this opportunistic approach by continuing to accumulate some very good
risk-reward situations, such as REITS, or inexpensive asset plays, such as
select energy companies.
If I structured the analysis into these categories I reach the following
conclusions.
- --------------------------------------------------------------------------------
Not capitalizing on good analysis 35 bp
Not pushing winners further 50 bp
Eliminating mistakes sooner 100 bp
Mistakes - higher than normal 150 bp
Not aggressively opportunistic in October 125 bp
- ----------------------------------------- ------
Total Shortfall 460 bp
- --------------------------------------------------------------------------------
We could have achieved results that were 4% better (allowing for some
slippage). Maybe this is analysis in hindsight, but we should always try to
understand how we can improve. Our charter is to deliver above average
performance, and adaptation is necessary to achieve a high standard.
<PAGE>
Most frustrating though was the environment and the home-run hitters. The
magnitude of the gain of a limited number of stocks compared to all other stocks
was unprecedented. Many of you have seen my chart of growth versus value last
year. I include it here as a reminder:
[GRAPHIC]
Growth beat value by 28 percentage points in 1998, the greatest margin of
victory in 50 years. As a result, the twenty largest growth companies account
for 33% of the S&P 500 and are expected to account for 60% of the total growth
in the index going forward. We think it is appropriate to be skeptical of this
expectation, so we were very much under-weighted - more than 20 percentage
points - in this category, penalizing performance by 7 percentage points.
We were also overwhelmed by size. While the 50 largest companies in the
S&P 500 were up 40% last year, the remaining 450 stocks were up only 9%. We did
not have a market weighting in the largest companies. We stressed value and did
not qualitatively adjust to the need of very large mutual funds to concentrate
on the largest market cap stocks. We think most were overpriced in 1998 and are
more so today due to exceedingly optimistic growth expectations. Taking out the
fastest growing companies mentioned above, our weighting was 12 points below the
market and hurt us by 4 percentage points.
The obvious question is, are we missing something? Multinationals have the
opportunity to grow faster because they participate in more of the world's GNP.
This belief enhanced the valuation of these companies early in the year; but
with the Southeast Asian crisis and Russia's collapse, some growth favorites
reported earnings shortfalls in the second half. Investors expected Coca-Cola's
earnings to grow 19% in 1998 and were shocked with a 15% decline. Proctor &
Gamble had consistent volume shortfalls and Disney finished the year with an 18%
earnings decline. These stocks started the year
<PAGE>
selling at earnings multiples of 41x, 33x, and 36x respectively, not good
potential risk-adjusted returns if earnings were not met. That is why we avoided
them.
The other group to look at is the fast growers, companies such as
Microsoft, Dell Computer, Cisco, and Lucent Technology. They all participate in
a technology revolution - networking and the Internet. Yes, there is a great
future, but at what price? The stock price of some may be justified, but we are
affected by historical analysis of the ability of companies to sustain high
growth rates. Some succeed, but the vast majority can't deliver rapid growth in
the longer term. We are biased by the statistics below.
---------------------------------------------------------------
Probability of Remaining a Growth Stock
1965 - 98
------------------------------
5 Years 10 Years 20 Years
------- -------- --------
All Growth Stocks 42% 19% 5%
Health Care 33 22 10
Technology 32 11 3
Source: Sanford Bernstein
---------------------------------------------------------------
An examination of growth stocks historically shows only a handful of
today's companies will meet current targets. Maybe some investors can ride the
wave of enthusiasm, but failures to meet growth targets can be painful, and how
many investors will know when to get out? This will be the dilemma of the big
growth investor in the future - aggravated by the fact that the very large funds
now own the same stocks.
One additional penalty, due to the correlation of performance and market
capitalization (see S&P 500 Performance chart Appendix 1) was our investment in
mid-cap and smaller companies, a sector where we increasingly found value. These
stocks started the year undervalued and continued to get cheaper and reached
unprecedented valuations on the downside. Our small stock valuation chart (see
U.S. Small Stocks chart Appendix 2) graphically demonstrates the change. We had
20% of the portfolio invested in stocks outside the S&P 500, and as a group they
were about unchanged for the year - - another 5-6 percentage point penalty.
<PAGE>
Summarizing this analysis suggests size and growth were the biggest
restraints on our performance and could explain our shortfall compared to the
S&P 500:
- --------------------------------------------------------------------------------
Underweight Large Growth 7 percentage points
Underweight Mega Cap 4 percentage points
Overweight Small 5 percentage points
---------------- ---------------------
Total 16 percentage points
- --------------------------------------------------------------------------------
We didn't overcome this burden with superior execution and aggravated the
situation due to risk aversion. We added to the low-risk portion of the
portfolio during the year: cash, bonds, and total return stocks - utilities and
REITS - which reduced performance by 4 percentage points.
If you were not going to own the "racehorses", like Microsoft, up 52% from
October 8 until December 31, you had to have perfect execution and selection in
the remainder of the market. We didn't measure up to that standard, but some of
our shortfalls make us enthusiastic about the opportunities in the future.
One of our traditional investment approaches proved difficult: buying
companies where investors had low expectations, yet where we saw the opportunity
for improvement. Our largest position, Waste Management, fell into this
grouping. Unfortunately, this methodology didn't appeal to the managers that
were getting the bulk of the mutual fund inflows. There was no patience. The
market did not reward moderately growing companies until they demonstrated
profit improvement, which was very frustrating for us since we have had great
success picking stocks with a longer time horizon. I refer to Eastman-Kodak,
Digital Equipment, Tandem, and the drug companies in 1994. It was not that long
ago that the ability of IBM to grow was in doubt. Money flows into the market
were concentrated in the largest funds. And money managers, faced with a
volatile world economy and slowing profit growth, sought safety in a select
group of companies to the exclusion of other investment possibilities.
And that is what excites us now. The divergence is too extreme (see
Relative Strength chart Appendix 3). Specifically look again at Waste
Management. It delivered the profitability hoped for in the second half, but it
now sells at a 45% discount to the market. It can grow 10-12% in a slow growth
environment. This should have more appeal as a few more big companies face
slowing profit growth (Latin America with Southeast Asia will be hard to
overcome). Investors want stability and growth. That is exactly what H.R. Block
has delivered since we have owned it, but now it sells at a 30% discount. In
addition, both of these companies have demonstrated their ability to raise
prices, a rarity in today's low inflation, slow-growth environment. Storage
Technology, which we have owned for years, gets steadily better. It dominates
the tape drive storage business. Every 5-6 quarters, the company has difficulty
with a product transition, resulting in an earnings shortfall not tolerated by
investors in this environment. Every stock price setback has been a very good
time to buy the stock. We have bought the declines and sold the rallies, which
produced good gains last year and now we have another opportunity. I could
mention other stocks such as Modis Professional Services,
<PAGE>
an information technology staffing company with 15-20% growth, a 13x earnings
multiple, and a recently completed repurchase of 23% of its stock without using
debt; Kimberly-Clark, an improving consumer products company valued at 60% of
Procter & Gamble; Federated Department Stores, the largest U.S. Department store
chain that is assumed to have no growth yet has sufficient excess cash flow to
produce minimum earnings gains of 5-6% just by paying down debt and repurchasing
stock.
Some turnarounds haven't succeeded - yet. Toys R Us is down 60% from its
highs, but we can liquidate the company and make a gain. Acuson is the leader in
ultrasound medical imaging, a potential acquisition target for Hewlett-Packard,
and has plans to improve profitability. Browning-Ferris - the attitude of
management is changing, and some managers are being changed. We hope
profitability improvement is next, and it sells at 14x depressed earnings.
(Subsequently, in March, Allied Waste announced a takeover of Browning Ferris at
$45.00 per share, a 29% premium over last sale.) More broadly, we are very
encouraged by the number of recent acquisitions in the mid-cap value sector, at
large premiums.
All of the above companies we will own in greater size. They are some of
our highest confidence situations. We have more today. The market has given us
an opportunity, and we are encouraged by the risk-reward to make bigger, more
concentrated bets.
Speaking of bigger bets - we find the valuation of REITS irresistible
today. They underperformed the market last year by 45%, yes 45%, in a group that
produced 9% earnings (cash flow) growth, better than the S&P 500. We think the
cash flow growth will be better than most companies' again in 1999. This should
catch investors' attention, and with yields of 7% and potential growth of 5-7%,
they will be hard to ignore. We think the REITS should be at least 10% of the
portfolio - - they have the added feature that they may provide stability in
turbulent markets.
Our confidence in our approach is sustained by our belief that divergences
are addressed. We have seen value reversals in 1973-74 and 1990. Small stocks
have done the same. Our frustration is being early, but after doing a
comprehensive review our conviction is higher. We outperformed the average value
fund, we avoided the potential disaster of increasing the small stock bet, and
we resisted the lure of cheap price to book valuations which would have led us
into one of the worst parts of the market - cyclicals. And if I adjust for our
risk-averse bias, assuming the market was (and is) overvalued, adding back the 4
percentage points penalty means we were performing better than the conventional
value indices. Is that fair?
This year will prove the answer. Markets cannot stay overvalued for long
periods, and this feels like the longest. And if an adjustment is in order, what
we lost in relative performance, we should then make up in 1999. Then we will
see how we did versus other fully invested value managers. I think very well.
<PAGE>
Thank you for wading through this lengthy description of last year. I am
certainly concerned about the degree of our shortfall but also believe a major
portion of it was unavoidable if we are going to adhere to our style and
capabilities. I know it has been a disappointment to you, but I think we
understand the environment, have improved our "tactics," and have the
opportunity to make up the large gap of the last year and a half. I'd like to
make just one final comment. Mark McGwire's home run total broke a record held
by Roger Maris in 1961. That was 37 years ago. Roger Maris broke Babe Ruth's
record of 60 homers, which stood for 34 years. Judging from baseball, these
phenomena are not repeated often!
** We recently received a letter from Mutual Funds magazine, dated April 9,
1999, announcing that the Pelican Fund had been elevated to five stars, the
highest rating for risk adjusted return.
<PAGE>
S&P 500 Performance Appendix 1
================================================================================
[GRAPHIC]
Source: Merrill Lynch
- --------------------------------------------------------------------------------
Grantham, Mayo, Van Otterloo & Co. LLC
<PAGE>
U.S. Small Stocks Now as Cheap as in 1973 to 1974 Appendix 2
================================================================================
Small Stocks vs. S&P 500
Price/Sales
[A LINE GRAPH COMPARING THE PRICE/SALES OF SMALL STOCKS TO THAT OF SIMILAR
STOCKS IN THE S&P 500 FROM 1974 TO 1998 APPEARS HERE.]
Small is 2.3 Standard Deviations Cheap
Price/Fair Value
[A LINE GRAPH COMPARING THE PRICE/FAIR VALUE OF SMALL STOCKS TO THAT OF SIMILAR
STOCKS IN THE S&P 500 FROM 1964 TO 1998 APPEARS HERE.]
Small is 2.8 Standard Deviations Cheap
Price/Book
[A LINE GRAPH COMPARING THE PRICE/BOOK OF SMALL STOCKS TO THAT OF SIMILAR
STOCKS IN THE S&P 500 FROM 1964 TO 1998 APPEARS HERE.]
Small is 3.4 Standard Deviations Cheap
Price/Earnings
[A LINE GRAPH COMPARING THE PRICE/EARNINGS OF SMALL STOCKS TO THAT OF SIMILAR
STOCKS IN THE S&P 500 FROM 1964 TO 1998 APPEARS HERE.]
Small is 2.5 Standard Deviations Cheap
Note: Average slopes upward from 1976 to 1995 to reflect growing
institutional acceptance of small stocks.
- --------------------------------------------------------------------------------
Grantham, Mayo, Van Otterloo & Co. LLC
<PAGE>
Relative Strength Appendix 3
================================================================================
12/31/74 to 12/31/98
[A LINE GRAPH DEPICTING THE RELATIVE STRENGTH OF THE S&P 500/BARRA VALUE INDEX
FROM 1975 TO 1998 APPEARS HERE.]
- --------------------------------------------------------------------------------
Grantham, Mayo, Van Otterloo & Co. LLC
<PAGE>
- --------------------------------------------------------------------------------
Comparison of Change in Value of a $10,000 Investment in
GMO Pelican Fund and the S&P 500 Index
As of February 28, 1999
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Since
1 Year 5 Year Inception
- --------------------------------------------------------------------------------
5/31/89
3.8% 17.0% 13.9%
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Date GMO Pelican Fund S&P 500 Index
---- ---------------- -------------
1/31/89
5/31/89 10,000 10,000
6/30/89 9,910 9,943
9/30/89 10,530 11,008
12/31/89 10,349 11,235
3/31/90 10,020 10,898
6/30/90 10,341 11,582
9/30/90 8,870 9,990
12/31/90 9,436 10,885
3/31/91 10,902 12,466
6/30/91 10,848 12,438
9/30/91 11,223 13,104
12/31/91 11,786 14,202
3/31/92 12,052 13,845
6/30/92 12,460 14,109
9/30/92 12,729 14,554
12/31/92 13,288 15,288
3/31/93 14,540 15,955
6/30/93 15,251 16,033
9/30/93 15,806 16,446
12/31/93 15,959 16,828
3/31/94 15,556 16,189
6/30/94 15,502 16,257
9/30/94 16,620 17,052
12/31/94 16,451 17,050
3/31/95 17,962 18,710
6/30/95 19,466 20,496
9/30/95 20,724 22,125
12/31/95 21,356 23,457
3/31/96 22,575 24,716
6/30/96 23,167 25,825
9/30/96 23,536 26,623
12/31/96 25,775 28,843
3/31/97 25,775 29,616
6/30/97 28,904 34,786
9/30/97 31,969 37,392
12/31/97 32,614 38,465
3/31/98 35,718 43,830
6/30/98 35,968 45,277
9/30/98 32,225 40,773
12/31/98 36,419 49,456
2/28/99 35,582 49,923
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period. Past performance is
not indicative of future performance. Information is unaudited.
- --------------------------------------------------------------------------------
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO U.S. Core Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO U.S. Core Fund (formerly GMO
Core Fund) at February 28, 1999 and the results of its operations, the changes
in its net assets and the financial highlights for the periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 1999 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 12, 1999
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- ------------------------------------------------------------------------------
Common Stocks -- 92.6%
Advertising -- 0.1%
60,000 Interpublic Group Inc 4,488,750
---------------
Aerospace -- 0.6%
241,700 Allied Signal Inc 10,000,338
59,000 General Dynamics Corp 3,565,813
45,500 Lockheed Martin Corp 1,714,781
70,000 Northrop Grumman Corp 4,361,875
---------------
19,642,807
---------------
Automotive -- 3.6%
14,900 Dana Corp 562,475
47,200 Eaton Corp 3,274,500
682,000 Ford Motor Co 40,451,124
738,800 General Motors Corp 60,997,174
134,600 Genuine Parts Co 4,029,588
179,100 Goodyear Tire & Rubber Co 8,283,375
3,600 ITT Industries Inc 140,625
59,600 Lear Corp* 2,104,625
---------------
119,843,486
---------------
Banking and Financial Services -- 9.3%
23,200 American Express Co 2,517,200
148,150 Amsouth Bancorp 6,963,050
261,550 Bank One Corp 14,058,313
614,109 BankAmerica Corp 40,108,993
89,500 Bankers Trust New York Corp 7,786,500
240,134 Bear Stearns Inc 10,280,735
243,607 Citigroup Inc 14,311,911
278,700 Countrywide Credit Industry Inc 10,555,763
275,700 Dime Bancorp Inc 6,823,575
116,200 Donaldson Lufkin & Jenrette 6,623,400
204,500 Edwards (AG) Inc 6,659,031
100,700 Federal Home Loan Mortgage Corp 5,928,713
279,800 Federal National Mortgage Association 19,586,000
64,400 Fifth Third Bancorp 4,254,425
17,400 First American Corp 705,788
319,000 First Union Corp 17,006,688
133,200 Firstar Corp 11,155,500
220,300 Franklin Resources Inc 7,008,294
6,400 Golden West Financial Corp 601,200
See accompanying notes to the financial statements. 1
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- ------------------------------------------------------------------------------
Banking and Financial Services -- continued
89,500 Greenpoint Financial Corp 2,746,531
60,400 Huntington Bancshares Inc 1,917,700
284,800 Lehman Brothers Holding Inc 15,094,400
1,400 M & T Bank Corp 666,050
457,900 MBNA Corp 11,104,075
160,100 Merrill Lynch 12,287,675
31,000 MGIC Investment Corp 1,055,938
181,812 Morgan Stanley Dean Witter & Co 16,453,986
101,600 National City Corp 7,099,300
46,500 Old Kent Financial Corp 2,040,188
234,400 Paine Webber Group Inc 8,760,700
127,350 Providian Financial Corp 13,005,619
60,400 Republic New York Corp 2,736,875
47,300 Suntrust Banks Inc 3,213,444
235,800 U.S. Bancorp 7,619,288
49,600 Unionbancal Corp 1,559,300
122,853 Washington Mutual Inc 4,914,120
196,800 Wells Fargo & Co 7,232,400
---------------
312,442,668
---------------
Chemicals -- 1.1%
118,200 Eastman Chemical Co 5,577,563
72,300 Great Lakes Chemical Corp 2,815,181
71,400 PPG Industries Inc 3,717,263
247,700 Praxair Inc 8,654,019
130,300 Rohm & Haas Co 4,071,875
295,300 Union Carbide Corp 12,993,200
---------------
37,829,101
---------------
Computer and Office Equipment -- 3.0%
96,600 Apple Computer Inc* 3,362,888
124,400 Electronic Data Systems Corp 5,784,600
403,900 EMC Corp* 41,349,262
148,300 Gateway 2000 Inc* 10,779,556
105,900 IBM Corp 18,003,000
34,100 Lexmark International Group Inc* 3,518,694
29,900 Micron Technology Inc* 1,722,988
40,700 Symbol Technologies Inc 2,157,100
469,000 Unisys Corp* 13,982,063
---------------
100,660,151
---------------
2 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- ------------------------------------------------------------------------------
Construction -- 2.8%
181,600 Georgia-Pacific Corp 13,302,200
956,200 Home Depot Inc 57,073,187
385,200 Lowes Co Inc 22,847,174
---------------
93,222,561
---------------
Consumer Goods -- 1.9%
107,800 Eastman Kodak Co 7,135,013
211,300 Fortune Brands Inc 6,365,413
33,600 Hasbro Inc 1,243,200
75,000 Johnson Controls 4,612,500
128,600 Mattel Co 3,391,825
278,300 Maytag Corp 15,602,194
197,500 Newell Co 8,393,750
52,100 Nike Inc, Class B 2,793,863
191,600 VF Corp 9,220,750
147,200 Whirlpool Corp 6,403,200
---------------
65,161,708
---------------
Electronic Equipment -- 1.3%
137,800 Cooper Industries Inc 6,028,750
460,000 General Instrument Corp* 13,455,000
117,700 Harris Corp 3,663,413
49,900 Litton Industries* 2,800,638
329,200 Raytheon Co, Class B 17,591,625
---------------
43,539,426
---------------
Food and Beverage -- 2.3%
312,300 Anheuser Busch Cos Inc 23,949,505
81,185 Archer Daniels Midland Co 1,227,923
85,600 Bestfoods 4,017,850
44,000 Heinz (HJ) Co 2,395,250
210,200 McDonald's Corp 17,867,000
230,100 RJR Nabisco Holdings Corp 6,284,606
314,600 Seagrams Co Ltd 14,589,575
92,600 Unilever NV ADR 6,707,713
---------------
77,039,422
---------------
Health Care -- 4.3%
30,600 Becton Dickinson & Co 1,025,100
872,600 Columbia HCA Healthcare Corp 15,597,725
417,600 Healthsouth Corp* 4,854,600
94,000 Hillenbrand Industries Inc 3,936,250
See accompanying notes to the financial statements. 3
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- ------------------------------------------------------------------------------
Health Care -- continued
972,900 Johnson & Johnson 83,061,337
198,900 Pharmacia & Upjohn Inc 10,827,619
189,200 Tenet Healthcare Corp* 3,724,875
186,000 United Healthcare Corp 9,172,125
135,900 Wellpoint Health Network* 10,719,113
---------------
142,918,744
---------------
Insurance -- 3.7%
253,900 Aetna Life and Casualty Co 18,804,469
53,500 AMBAC Inc 2,996,000
181,400 Cigna Corp 14,239,900
79,700 Cincinnati Financial Corp 2,794,481
100,200 CNA Financial Corp* 3,400,538
539,736 Conseco Inc 16,158,347
59,400 Hartford Financial Services Group Inc 3,211,313
93,000 Humana Inc* 1,627,500
228,900 Loews Corp 17,897,119
600 MBIA Inc 36,938
155,400 Old Republic International Corp 2,923,463
30,000 Pacificare Health Systems, Class B* 2,167,500
157,800 Safeco Corp 6,341,588
283,300 Saint Paul Cos Inc 9,171,838
316,400 Torchmark Corp 10,520,300
169,618 Transamerica Corp 12,307,906
---------------
124,599,200
---------------
Manufacturing -- 1.7%
116,800 American Greetings Corp 2,766,700
121,000 Leggett & Platt Inc 2,533,438
253,200 Minnesota Mining and Manufacturing Co 18,752,625
310,500 Owens Illinois Inc* 7,432,594
128,600 Rockwell International Corp 5,714,663
112,400 Temple Inland Inc 6,736,975
119,100 United Technologies Corp 14,753,513
---------------
58,690,508
---------------
Metals and Mining -- 0.3%
188,600 Phelps Dodge Corp 9,147,100
---------------
Oil and Gas -- 4.1%
107,000 Amerada Hess Corp 4,855,125
4 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- ------------------------------------------------------------------------------
Oil and Gas -- continued
403,800 Atlantic Richfield Co 22,057,574
178,800 Burlington Resources Inc 5,788,650
104,000 Chevron Corp 7,995,000
78,050 Columbia Energy Group 3,941,525
118,400 Consolidated Natural Gas Co 6,504,600
80,900 Diamond Offshore Drilling Inc 1,673,619
204,900 Enron Oil & Gas 3,380,850
3,500 Exxon Corp 232,969
193,400 Mobil Corp 16,088,463
590,400 Occidental Petroleum Corp 8,892,900
293,400 Phillips Petroleum Co 11,350,913
99,800 Sonat Inc 2,526,188
349,200 Texaco Inc 16,259,625
295,500 Union Pacific Resources Group 2,641,031
387,900 Unocal Corp 10,933,931
513,600 USX - Marathon Group 10,625,100
89,900 Vastar Resources Inc 3,461,150
---------------
139,209,213
---------------
Paper and Allied Products -- 0.1%
35,000 Mead Corp 1,065,313
105,160 Sonoco Products Co 2,576,420
39,000 Westvaco Corp 872,625
---------------
4,514,358
---------------
Pharmaceuticals -- 6.3%
1,803,500 Abbott Laboratories 83,750,030
79,800 Allergan Inc 6,503,700
407,500 American Home Products Corp 24,246,249
401,500 Amgen Inc* 50,137,312
48,095 McKesson HBOC Inc 3,270,460
140,500 Pfizer Inc 18,537,219
417,200 Schering Plough Corp 23,337,124
3,700 Warner Lambert Co 255,531
66,900 Watson Pharmaceutical Inc* 3,232,106
---------------
213,269,731
---------------
Primary Materials -- 0.4%
195,000 Crown Cork & Seal Inc 5,411,250
141,300 Rubbermaid Inc 4,671,731
28,200 Vulcan Materials Co 3,799,950
---------------
13,882,931
---------------
See accompanying notes to the financial statements. 5
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- ------------------------------------------------------------------------------
Primary Processing -- 0.3%
46,100 Dow Chemical Co 4,535,088
145,900 Nucor Corp 6,501,669
6,800 USX-US Steel Group Inc 172,125
---------------
11,208,882
---------------
Printing and Publishing -- 0.3%
82,300 Dow Jones and Co Inc 3,868,100
24,200 Gannett Co Inc 1,536,700
23,900 New York Times Co, Class A 740,900
5,200 Washington Post Co, Class B 2,859,350
---------------
9,005,050
---------------
Refining -- 0.2%
65,200 Royal Dutch Petroleum Co 2,860,650
101,000 Tosco Corp 2,089,438
---------------
4,950,088
---------------
Retail Trade -- 8.0%
237,900 Albertsons Inc 13,560,300
119,100 American Stores Co 4,019,625
243,700 Autozone Inc* 8,529,500
268,300 Best Buy Co Inc* 24,884,824
195,700 Dillards Department Stores Inc 4,868,038
81,200 Food Products Lion Inc 791,700
693,725 Gap Inc 44,875,335
570,800 Kmart Corp* 9,989,000
144,100 Kroger Co* 9,321,469
5,000 Penney (JC) Co Inc 180,625
15,900 Rite Aid Corp 657,863
338,700 Staples Inc* 9,959,914
258,200 TJX Cos Inc 7,374,838
551,700 Toys R Us Inc* 7,792,763
1,256,400 Wal Mart Stores Inc 108,521,549
365,800 Walgreen Co 11,705,600
82,600 Winn-Dixie Stores Inc 3,618,913
---------------
270,651,856
---------------
6 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- ------------------------------------------------------------------------------
Services -- 1.6%
12,000 BHC Communications Inc, Class A 1,374,000
50,400 Cendant Corp* 834,750
191,500 Fluor Corp 6,738,406
42,900 Hertz Corp 1,707,956
151,200 Marriott International Inc, Class A 5,443,200
570,400 Time Warner Inc 36,790,799
---------------
52,889,111
---------------
Technology -- 13.8%
65,000 Adobe Systems Inc 2,616,250
445,500 BMC Software Inc* 18,209,813
88,100 Ceridian Corp* 6,310,163
1,224,400 Cisco Systems Inc* 119,761,624
191,300 Computer Sciences Corp 12,745,363
276,300 Dell Computer Corp* 22,138,537
192,500 First Data Corp 7,363,125
161,600 Grainger (WW) Inc 7,191,200
751,300 Intel Corp 90,109,043
868,700 Microsoft Corp* 130,413,587
913,800 Novell Inc* 17,704,875
340,400 Oracle Corp* 19,019,850
406,400 Seagate Technology Corp* 11,760,200
6,800 Xerox Corp 375,275
---------------
465,718,905
---------------
Telecommunications -- 12.0%
102,700 Airtouch Communications Inc* 9,352,119
85,900 Alltel Corp 5,143,263
386,300 Ameritech Corp 25,254,362
994,700 AT & T Corp 81,689,737
634,414 Bell Atlantic Corp 36,439,153
458,000 Bellsouth Corp 21,182,500
178,800 Cablevision Systems Corp* 11,622,000
197,500 Century Telephone Enterprises Inc 12,195,625
97,800 Comcast Corp 6,937,688
691,500 GTE Corp 44,861,062
293,985 MCI Worldcom Inc* 24,253,762
710,040 SBC Communications 37,543,364
230,700 Sprint Corp 19,796,944
187,300 Tele-Communications Inc, Class A* 11,764,781
See accompanying notes to the financial statements. 7
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Telecommunications-- continued
516,100 US West Inc 27,514,580
325,900 Viacom Inc, Class B* 28,801,412
--------------
404,352,352
--------------
Tobacco -- 1.7%
1,417,300 Philip Morris Cos Inc 55,451,862
--------------
Transportation -- 1.9%
120,100 AMR Corp* 6,658,044
966,200 Burlington Northern Santa Fe Railroad Co 32,005,374
235,800 CSX Corp 9,255,150
149,600 Norfolk Southern Corp 4,198,150
161,800 UAL Corp* 9,667,550
59,400 USAir Group Inc* 2,814,075
--------------
64,598,343
--------------
Utilities -- 5.9%
283,000 Baltimore Gas and Electric Co 7,251,875
437,000 Central & South West Corp 10,843,063
389,800 Coastal Corp 12,473,600
143,400 Consolidated Edison Inc 6,703,950
87,600 Dominion Resources Inc 3,383,550
420,100 DTE Energy Co 16,593,950
98,100 El Paso Energy Corp 3,574,519
884,800 Entergy Corp 24,995,599
254,600 Firstenergy Corp 7,447,050
343,400 General Public Utilities Inc 13,693,075
110,900 Keyspan Energy Corp 2,938,850
356,100 Niagara Mohawk Power Corp* 5,207,963
286,300 Peco Energy Co 10,145,756
358,000 PG & E Corp 11,277,000
105,500 Potomac Electric Power Co 2,571,563
290,200 PP & L Resources Inc 7,400,100
439,200 Public Service Enterprise Group Inc 16,689,600
171,300 Reliant Energy Inc 4,592,981
51,300 Scana Corp 1,205,550
53,000 Teco Energy Inc 1,146,125
435,300 Texas Utilities Co 18,473,044
278,000 Unicom Corp 9,886,375
--------------
198,495,138
--------------
TOTAL COMMON STOCKS (COST $2,500,368,468) 3,117,423,452
---------------
8 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares/
Par Value ($) Description Value ($)
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 13.5%
Cash Equivalents -- 5.9%
$ 835,132 BankBoston Eurodollar Time Deposit, 5.005%
due 4/30/99(a) 835,132
55,837,493 Merrimac Cash Fund Premium Class(a) 55,837,493
$142,000,000 Prudential Securities Group Inc, Master Note,
5.075% due 6/14/99(a) 142,000,000
--------------
198,672,625
--------------
U.S. Government -- 0.5%
$ 15,000,000 U.S. Treasury Bill, 4.53%, due 4/29/99(b) 14,886,675
--------------
Repurchase Agreements -- 7.1%
$169,408,180 Salomon Smith Barney Inc. Repurchase
Agreement, dated 2/26/99, due 3/1/99, with a
maturity value of $169,464,932 and an
effective yield of 4.02%, collateralized by a
U.S. Treasury Obligation with a rate of
5.50%, maturity date of 2/28/03 and market
value, including accrued interest, of
$172,796,344. 169,408,180
$ 70,185,496 Prudential Securities Inc. Repurchase
Agreement, dated 2/26/99, due 3/1/99, with a
maturity value of $70,209,242 and an
effective yield of 4.06%, collateralized by a
U.S. Treasury Obligation and U.S. Government
Agency Obligations with rates ranging from
5.50% to 8.00%, maturity dates ranging from
8/15/99 to 3/01/35 and an aggregate market
value, including accrued interest, of
$71,589,268. 70,185,496
--------------
239,593,676
--------------
TOTAL SHORT-TERM INVESTMENTS
(COST $453,158,749) 453,152,976
--------------
TOTAL INVESTMENTS -- 106.1%
(COST $2,953,527,217) 3,570,576,428
Other Assets and Liabilities (net) -- (6.1)% (205,226,729)
--------------
TOTAL NET ASSETS -- 100% $3,365,349,699
==============
Notes to the Schedule of Investments:
ADR - American Depositary Receipt
* Non-income producing security.
(a) Represents investments of security lending collateral (Note 1).
(b) Security has been segregated to cover margin requirements on
open financial futures contracts.
See accompanying notes to the financial statements. 9
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1999
- --------------------------------------------------------------------------------
Assets:
Investments, at value (cost $2,953,527,217) (Note 1) $3,570,576,428
Dividends and interest receivable 5,529,848
Receivable for expenses waived or borne by Manager (Note 2) 567,158
Receivable for Fund shares sold 250,000
--------------
Total assets 3,576,923,434
--------------
Liabilities:
Payable upon return of securities loaned (Note 1) 198,672,625
Payable for Fund shares repurchased 6,068,506
Payable to affiliate for (Note 2):
Management fee 1,405,866
Shareholder service fee 332,976
Payable for open swap contracts (Notes 1 and 6) 4,358,815
Payable for variation margin on open futures contracts
(Notes 1 and 6) 533,970
Accrued expenses 200,977
--------------
Total liabilities 211,573,735
--------------
Net assets $3,365,349,699
==============
Net assets consist of:
Paid-in capital $2,529,367,882
Accumulated undistributed net investment income 6,948,920
Accumulated undistributed net realized gain 217,699,382
Net unrealized appreciation 611,333,515
--------------
$3,365,349,699
==============
Net assets attributable to:
Class II shares $ 41,683,734
==============
Class III shares $1,780,010,556
==============
Class IV shares $1,543,655,409
==============
Shares outstanding:
Class II 2,244,091
==============
Class III 95,765,511
==============
Class IV 83,082,861
==============
Net asset value per share:
Class II $ 18.57
==============
Class III $ 18.59
==============
Class IV $ 18.58
==============
10 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Operations -- Year Ended February 28, 1999
- -------------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Dividends (net of withholding taxes of $163,712) $ 51,303,558
Interest (including securities lending income of $557,686) 14,217,993
------------
Total income 65,521,551
------------
Expenses:
Management fee (Note 2) 18,661,431
Custodian and transfer agent fees 506,993
Registration fees 91,643
Legal fees 70,318
Audit fees 49,808
Trustees fees (Note 2) 33,918
Miscellaneous 16,393
Fees waived or borne by Manager (Note 2) (7,700,727)
------------
11,729,777
Shareholder service fee (Note 2)
Class II 71,239
Class III 3,282,900
Class IV 1,400,256
------------
Net expenses 16,484,172
------------
Net investment income 49,037,379
------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 704,992,058
Closed futures contracts 31,688,788
Closed swap contracts (112,444,024)
------------
Net realized gain 624,236,822
------------
Change in net unrealized appreciation (depreciation) on:
Investments (164,842,026)
Open futures contracts (17,721,044)
Open swap contracts 11,884,813
------------
Net unrealized loss (170,678,257)
------------
Net realized and unrealized gain 453,558,565
------------
Net increase in net assets resulting from operations $502,595,944
============
</TABLE>
See accompanying notes to the financial statements. 11
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------------------------
Year Ended February 28,
---------------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 49,037,379 $ 56,402,615
Net realized gain 624,236,822 612,092,124
Change in net unrealized appreciation (depreciation) (170,678,257) 380,077,253
-------------- --------------
Net increase in net assets resulting from operations 502,595,944 1,048,571,992
-------------- --------------
Distributions to shareholders from:
Net investment income
Class I -- (154,654)
Class II (438,239) (635,110)
Class III (32,457,119) (50,102,134)
Class IV (20,082,410) --
-------------- --------------
Total distributions from net investment income (52,977,768) (50,891,898)
-------------- --------------
Net realized gains
Class I -- (3,363,020)
Class II (7,077,306) (12,616,955)
Class III (420,933,348) (918,932,927)
Class IV (249,579,720) --
-------------- --------------
Total distributions from net realized gains (677,590,374) (934,912,902)
-------------- --------------
(730,568,142) (985,804,800)
-------------- --------------
Net share transactions: (Note 5)
Class I -- (7,566,242)
Class II 27,619,700 (50,419,336)
Class III (396,156,147) (643,189,534)
Class IV 257,262,203 1,217,792,446
-------------- --------------
Increase (decrease) in net assets resulting from net
share transactions (111,274,244) 516,617,334
-------------- --------------
Total increase (decrease) in net assets (339,246,442) 579,384,526
Net assets:
Beginning of period 3,704,596,141 3,125,211,615
-------------- --------------
End of period (including accumulated undistributed
net investment income of $6,948,920 and
$10,889,309, respectively) $3,365,349,699 $3,704,596,141
============== ==============
</TABLE>
12 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Financial Highlights
(For a Class I share outstanding throughout each period)
- ---------------------------------------------------------------------------------------------------------
Period from Period from July 2, 1996
March 1, 1997 (commencement of operations)
to January 9, 1998 to February 28, 1997
------------------ ----------------------------
<S> <C> <C>
Net asset value, beginning of period $20.12 $18.97
------ ------
Income from investment operations:
Net investment income 0.27+ 0.20
Net realized and unrealized gain 3.60 2.88
------ ------
Total from investment operations 3.87 3.08
------ ------
Less distributions to shareholders:
From net investment income (0.28) (0.19)
From net realized gains (6.05) (1.74)
------ ------
Total distributions (6.33) (1.93)
------ ------
Net asset value, end of period $17.66(a) $20.12
====== ======
Total Return (b) 20.54% 16.84%
Ratios/Supplemental Data:
Net assets, end of period (000's) -- $ 9,104
Net expenses to average daily net assets 0.61%* 0.61%*
Net investment income to average daily net assets 1.56%* 1.55%*
Portfolio turnover rate 60% 107%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following per
share amounts: $ 0.04 $ 0.02
</TABLE>
+ Computed using average shares outstanding throughout the period.
(a) All Class I shares of the Fund were exchanged for Class II shares on January
9, 1998. Amount represents ending net asset value per share on January 9,
1998.
(b) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
* Annualized.
See accompanying notes to the financial statements. 13
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Financial Highlights
(For a Class II share outstanding throughout each period)
- --------------------------------------------------------------------------------------------------------------------
Period from
June 7, 1996
Period from Period from (commencement
Year Ended January 9, 1998 March 1, 1997 of operations) to
February 28, to February 28, to November 17, February 28,
1999 1998 1997 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $19.98 $17.65 $20.10 $20.12
------ ------ ------ ------
Income from investment operations:
Net investment income 0.25+ 0.04+ 0.24+ 0.25
Net realized and unrealized gain 2.55 2.29 3.99 2.92
------ ------ ------ ------
Total from investment operations 2.80 2.33 4.23 3.17
------ ------ ------ ------
Less distributions to shareholders:
From net investment income (0.29) 0.00 (0.22) (0.30)
From net realized gains (3.92) 0.00 (3.90) (2.89)
------ ------ ------ ------
Total distributions (4.21) 0.00 (4.12) (3.19)
------ ------ ------ ------
Net asset value, end of period $18.57 $19.98 $20.21 $20.10
====== ====== ====== ======
Total Return (a) 14.99% 13.20% 23.00% 17.46%
Ratios/Supplemental Data:
Net assets, end of period (000's) $41,684 $16,958 $2,037 $64,763
Net expenses to average daily
net assets 0.55% 0.55%* 0.55%* 0.55%*
Net investment income to
average daily net assets 1.29% 1.53%* 1.66%* 1.63%*
Portfolio turnover rate 71% 60% 60% 107%
Fees and expenses voluntarily waived or
borne by the Manager consisted of the
following per share amounts: $ 0.04 $ 0.01 $ 0.03 $ 0.03
</TABLE>
+ Computed using average shares outstanding throughout the period.
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
* Annualized.
14 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Financial Highlights
(For a Class III share outstanding throughout each period)
- -----------------------------------------------------------------------------------------------------
Year Ended February 28/29,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $ 19.99 $ 20.12 $ 19.46 $ 15.45 $ 15.78
---------- ---------- ---------- ---------- ----------
Income from investment
operations:
Net investment income 0.26+ 0.35 0.36 0.41 0.41
Net realized and unrealized
gain 2.55 5.89 3.58 5.49 0.66
---------- ---------- ---------- ---------- ----------
Total from investment
operations 2.81 6.24 3.94 5.90 1.07
---------- ---------- ---------- ---------- ----------
Less distributions to
shareholders:
From net investment income (0.29) (0.32) (0.39) (0.42) (0.39)
From net realized gains (3.92) (6.05) (2.89) (1.47) (1.01)
---------- ---------- ---------- ---------- ----------
Total distributions (4.21) (6.37) (3.28) (1.89) (1.40)
---------- ---------- ---------- ---------- ----------
Net asset value, end
of period $ 18.59 $ 19.99 $ 20.12 $ 19.46 $ 15.45
========== ========== ========== ========== ==========
Total Return (a) 15.02% 36.69% 22.05% 39.08% 7.45%
Ratios/Supplemental Data:
Net assets, end of
period (000's) $1,780,011 $2,317,103 $3,051,344 $3,179,314 $2,309,248
Net expenses to average
daily net assets 0.48% 0.48% 0.48% 0.48% 0.48%
Net investment income to
average daily net assets 1.36% 1.67% 1.78% 2.25% 2.63%
Portfolio turnover rate 71% 60% 107% 77% 99%
Fees and expenses
voluntarily waived or
borne by the Manager consisted
of the following per share
amounts: $ 0.04 $ 0.05 $ 0.04 $ 0.01 $ 0.01
</TABLE>
+ Computed using average shares outstanding throughout the period.
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
See accompanying notes to the financial statements. 15
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Financial Highlights
(For a Class IV share outstanding throughout each period)
- ----------------------------------------------------------------------------------------------------------
Period from January 9, 1998
Year Ended (commencement of operations)
February 28, 1999 to February 28, 1998
------------------ ----------------------------
<S> <C> <C>
Net asset value, beginning of period $ 19.99 $ 17.65
---------- ----------
Income from investment operations:
Net investment income 0.27+ 0.04+
Net realized and unrealized gain 2.55 2.30
---------- ----------
Total from investment operations 2.82 2.34
---------- ----------
Less distributions to shareholders:
From net investment income (0.31) 0.00
From net realized gains (3.92) 0.00
---------- ----------
Total distributions (4.23) 0.00
---------- ----------
Net asset value, end of period $ 18.58 $ 19.99
========== ==========
Total Return (a) 15.07% 13.26%
Ratios/Supplemental Data:
Net assets, end of period (000's) $1,543,655 $ 1,370,535
Net expenses to average daily net assets 0.435% 0.435%*
Net investment income to average daily net
assets 1.41% 1.670%*
Portfolio turnover rate 71% 60%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following $ 0.04 $ 0.01
per share amount:
</TABLE>
* Annualized.
+ Computed using average shares outstanding throughout the period.
(a) Calculation excludes purchase premiums. The total return would have been
lower had certain expenses not been waived during the period shown.
16 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO U.S. Core Fund (the "Fund"), formerly named the GMO Core Fund, is a
series of GMO Trust (the "Trust"). The Fund is registered under the
Investment Company Act of 1940, as amended, as an open-end, diversified
management investment company. The Fund is advised and managed by Grantham,
Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was
established as a Massachusetts Business Trust under the laws of the
Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust
permits the Trustees to create an unlimited number of series ("Funds"),
each of which issues a separate series of shares, and to subdivide a series
of shares into classes.
The Fund seeks a total return greater than that of the Standard & Poor's
500 Stock Index through investment of substantially all of its assets in
common stocks chosen from the Wilshire 5000 Index and primarily in common
stocks chosen from among the 1,200 companies with the largest equity
capitalization whose securities are listed on a United States national
securities exchange.
Prior to January 9, 1998, the Fund offered three classes of shares: Class
I, Class II, and Class III. Effective January 9, 1998, Class I shares
ceased operations and all shares were exchanged for Class II shares.
Additionally, Class IV commenced operations on January 9, 1998. The
principal economic difference among the classes of shares is the level of
shareholder service fee borne by the classes. Eligibility for and automatic
conversion between the various classes of shares is generally based on the
total amount of assets invested with GMO, as more fully outlined in the
Trust's prospectus.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Other assets and
securities for which no quotations are readily available are valued at fair
value as determined in good faith by the Trustees.
Futures contracts
The Fund may purchase and sell futures contracts on the domestic stock
indices. Stock index futures contracts represent commitments for future
delivery of cash based upon the level of a specified index of equity
securities at a specified price at a given date. The Fund may use futures
contracts to manage its exposure to the stock markets. Buying futures tends
to increase the Fund's exposure to the underlying instrument. Selling
futures tends to decrease the Fund's exposure to the underlying instrument
or hedge other Fund instruments. Upon entering into a futures contract, the
Fund is required to deposit with its custodian, in a segregated account in
the name of the futures broker, an amount of cash or U.S.
17
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
government obligations in accordance with the initial margin requirements
of the broker or exchange. Futures contracts are marked to market daily and
an appropriate payable or receivable for the change in value ("variation
margin") is recorded by the Fund. The payable or receivable is liquidated
on the following business day. Gains or losses are recognized but not
considered realized until the contracts expire or are closed. Futures
contracts involve, to varying degrees, risk of loss in excess of the
variation margin disclosed in the Statement of Assets and Liabilities.
Losses may arise from changes in the value of the underlying instrument, if
there is an illiquid secondary market for the contracts, or if
counterparties do not perform under the contract terms. Futures contracts
are valued at the settlement price established each day by the board of
trade or exchange on which they are traded. See Note 6 for all open futures
contracts as of February 28, 1999.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Security lending
The Fund may lend its securities to qualified brokers. The loans are
collateralized at all times with cash or securities with a market value at
least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1999, the Fund loaned securities having a
market value of $193,295,995, collateralized by cash in the amount of
$198,672,625, which was invested in short-term instruments.
Swap agreements
The Fund may enter into swap agreements to manage its exposure to the
equity markets. A swap is an agreement to exchange the return generated by
one instrument for the return generated by another instrument. The Fund
enters into equity swap agreements which involve a commitment by one party
in the agreement to pay interest in exchange for a market linked return
based on a notional amount. To the extent that the total return of the
security or index underlying the transaction exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make a payment to the counterparty, respectively. The Fund also enters
into contracts for differences in which the Fund agrees with the
counterparty that its return will be based on the relative performance of
two different groups or "baskets" of securities, adjusted by an interest
rate payment. Swaps are marked to market daily based upon quotations from
market makers and the change, if any, is recorded as unrealized gain or
loss in the Statement of Operations. Payments received or made at the end
of the measurement period are
18
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
recorded as realized gain or loss in the Statement of Operations. Entering
into these agreements involves, to varying degrees, elements of credit and
market risk in excess of the amounts recognized on the Statement of Assets
and Liabilities. Such risks involve the possibility that there will be no
liquid market for these agreements, that the counterparty to the agreements
may default on its obligation to perform, or that there may be unfavorable
changes in the price of the security or index underlying these
transactions. See Note 6 for a summary of all open swap agreements as of
February 28, 1999.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary. Taxes on foreign dividend income are withheld in accordance with
the applicable country's tax treaty with the United States.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. The Fund declares separate dividends from net investment
income on each class of shares.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for redemptions in-kind. Gains resulting from such
in-kind transactions amounted to $24,453,818.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated Accumulated Undistributed
Undistributed Net Net Realized
Investment Income Gain Paid-in Capital
--------------------- --------------------------- -----------------
-- $ 23,966,277 $ (23,966,277)
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
19
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis and is adjusted for the accretion of discounts. In
determining the net gain or loss on securities sold, the cost of securities
is determined on the identified cost basis.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds. Investment
income, common expenses and realized and unrealized gains and losses are
allocated pro-rata among the classes of shares of the Fund based on the
relative net assets of each class. Shareholder service fees, which are
directly attributable to a class of shares, are charged to that class'
operations.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .14% of the amount
invested. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. This fee is allocated relative to each class' net assets
on the share transaction date. Purchase premiums are included as part of
each class' "shares sold", as summarized in Note 5. For the year ended
February 28, 1999, the Fund received $413,382 in purchase premiums. There
is no premium for cash redemptions, reinvested distributions or in-kind
transactions.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .525% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of each class at the annual rate of .22%
for Class II shares, .15% for Class III shares, and .105% for Class IV
shares.
GMO agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding brokerage commissions, certain other transaction costs (including
transfer taxes), shareholder service fees and extraordinary expenses)
exceed .33% of average daily net assets.
Effective March 1, 1999, GMO's contractual management fee was reduced to
.33% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding brokerage
commissions, certain other transaction costs (including transfer taxes),
shareholder service fees and extraordinary expenses) exceeds the management
fee.
20
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999 was $33,918. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1999, aggregated
$2,340,944,870 and $3,140,987,574, respectively.
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
- ------------------------- ------------------------ ------------------------ ------------------------
<S> <C> <C> <C>
$ 2,957,677,077 $ 760,259,705 $ 147,360,354 $ 612,899,351
</TABLE>
4. Principal shareholder
At February 28, 1999, 13.3% of the outstanding shares of the Fund were held
by one shareholder.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums received by the
Fund, were as follows:
Period from March 1, 1997 to
Class I: January 9, 1998
---------------------------------
Shares Amount
-------------- ---------------
Shares sold 99,736 $ 2,066,431
Shares issued to shareholders
in reinvestment of distributions 185,582 3,406,784
Shares repurchased (737,826) (13,039,457)
============== ===============
Net decrease (452,508) $ (7,566,242)
============== ===============
21
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Share transactions -- continued
<TABLE>
<CAPTION>
Period from March 1, 1997 to
November 17, 1997 and from
Year Ended January 9, 1998 to
Class II: February 28, 1999 February 28, 1998
--------------------------------- ---------------------------------
Shares Amount Shares Amount
---------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
Shares sold 1,137,984 $ 23,036,514 848,657 $ 15,209,664
Shares issued to shareholders
in reinvestment of distributions 394,655 7,372,964 715,803 13,252,065
Shares repurchased (137,205) (2,789,778) (3,937,206) (78,881,065)
---------------- --------------- -------------- ----------------
Net increase (decrease) 1,395,434 $ 27,619,700 (2,372,746) $ (50,419,336)
================ =============== ============== ================
<CAPTION>
Year Ended Year Ended
Class III: February 28, 1999 February 28, 1998
--------------------------------- ----------------------------------
Shares Amount Shares Amount
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Shares sold 7,724,323 $ 155,828,896 24,696,860 $ 486,032,574
Shares issued to shareholders
in reinvestment of distributions 23,463,193 440,891,297 51,611,877 948,323,899
Shares repurchased (51,356,934) (992,876,340) (112,049,490) (2,077,546,007)
---------------- --------------- --------------- ----------------
Net decrease (20,169,418) $ (396,156,147) (35,740,753) $ (643,189,534)
================ =============== =============== ================
<CAPTION>
Period from January 9, 1998
Year Ended (commencement of operations)
Class IV: February 28, 1999 to February 28, 1998
--------------------------------- ----------------------------------
Shares Amount Shares Amount
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Shares sold 22,393,827 $ 428,114,213 68,811,049 $ 1,222,405,143
Shares issued to shareholders
in reinvestment of distributions 14,303,391 268,384,348 -- --
Shares repurchased (22,187,638) (439,236,358) (237,768) (4,612,697)
---------------- --------------- --------------- ----------------
Net increase 14,509,580 $ 257,262,203 68,573,281 $ 1,217,792,446
================ =============== =============== ================
</TABLE>
22
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1999 is as
follows:
Long futures contracts
<TABLE>
<CAPTION>
Number of Net Unrealized
Contracts Type Expiration Date Contract Value Depreciation
----------- -------------- ----------------- ---------------- ------------------
<S> <C> <C> <C> <C>
392 S&P 500 March 1999 $121,079,000 $(1,259,056)
118 Russell 2000 March 1999 23,207,650 (97,825)
------------------
$(1,356,881)
==================
</TABLE>
At February 28, 1999, the Fund has sufficient cash and/or securities to
cover any commitments or margin on open futures contracts.
Swap agreements
<TABLE>
<CAPTION>
Notional Amount Expiration Net Unrealized
Fund/Counterparty Date Description Depreciation
------------------- ------------ ----------------------------------------- -----------------
<C> <C> <S> <C>
$ 13,170,695/ 9/14/99 Agreement with Deutsche Bank AG dated $ (1,956,784)
9,908,972 9/18/98 to pay (receive) the notional
amount multiplied by the return on the
Standard & Poor's 500 Index (including
dividends) less the notional amount
multiplied by 6 month LIBOR adjusted by
a specified spread and to receive (pay)
the counterparty's notional amount
multiplied by the return on the Russell
2000 Index (including dividends) less
the counterparty's notional amount
multiplied by 6 month LIBOR adjusted by
a specified spread.
</TABLE>
23
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Swap agreements -- continued
<TABLE>
<CAPTION>
Notional Amount Expiration Net Unrealized
Fund/Counterparty Date Description Depreciation
------------------- ------------ ----------------------------------------- -----------------
<C> <C> <S> <C>
$ 109,020,037/ 2/18/00 Agreement with Morgan Stanley Capital $ (1,170,922)
108,989,166 Services, Inc. dated 2/18/99 to pay
(receive) the notional amount
multiplied by the return on the
Standard & Poor's 500 Index (including
dividends) less the notional amount
multiplied by 3 month LIBOR adjusted by
a specified spread and to receive (pay)
the change in market value of a basket
of selected securities (including
dividends) less the counterparty's
notional amount multiplied by 3 month
LIBOR adjusted by a specified spread.
101,511,704/ 2/18/00 Agreement with Morgan Stanley Capital (1,347,204)
101,395,697 Services, Inc. dated 2/18/99 to pay
(receive) the notional amount
multiplied by the return on the
Standard & Poor's 500 Index (including
dividends) less the notional amount
multiplied by 3 month LIBOR adjusted by
a specified spread and to receive (pay)
the change in market value of a basket
of selected securities (including
dividends) less the counterparty's
notional amount multiplied by 3 month
LIBOR adjusted by a specified spread.
</TABLE>
24
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Swap agreements -- continued
<TABLE>
<CAPTION>
Net Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
------------------- ------------ ----------------------------------------- -----------------
<C> <C> <S> <C>
$ 35,748,090/ 2/18/00 Agreement with Morgan Stanley Capital $ 116,095
35,748,113 Services, Inc. dated 2/18/99 to pay
(receive) the notional amount
multiplied by the return on the
Standard & Poor's 500 Index (including
dividends) less the notional amount
multiplied by 3 month LIBOR adjusted by
a specified spread and to receive (pay)
the counterparty's notional amount
multiplied by the return on the Russell
2000 Index (including dividends) less
the counterparty's notional amount
multiplied by 3 month LIBOR adjusted by
a specified spread.
-----------------
$ (4,358,815)
=================
</TABLE>
25
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1999, all the Fund's distributions
are from investment company taxable income, except that the Fund has
designated 86.7% of distributions as net capital gain dividends.
26
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
- ------------------
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Robert Soucy are
primarily responsible for the day-to-day management of the Fund's portfolio.
Mssrs. Grantham and Darnell have each been portfolio managers at Grantham, Mayo,
Van Otterloo & Co. LLC for more than fifteen years; Mr. Soucy for more than ten
years.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The Class III shares of the GMO U.S. Core Fund returned 15.0% for the fiscal
year ended February 28, 1999, as compared to 19.7% for the S&P 500. Consistent
with the Fund's investment objectives and policies, the Fund was invested
substantially in common stocks throughout the period.
The Fund's underperformance for the period is attributed to its overweight in
small-cap stocks, as well as its bias in favor of value stocks in the portfolio.
Most of the relative performance shortfall came in the fourth quarter of 1998,
when concerns over a global financial crisis evaporated and the U.S. market
staged a remarkable rally. The Fund's value bias was counter-productive during
this period.
Excluding the impact of swaps, return from sector selection was positive,
exceeding the benchmark by over 200 basis points. However, the swaps, most of
which are designed to give the portfolio exposure to small and small value
stocks, more than offset positive sector selection. The Fund was also overweight
electric utilities during the year, which appeared significantly undervalued
relative to their historic levels. This positioning worked against the Fund
during the year as electric utilities underperformed the S&P 500. These losses
were partially offset by gains from the Fund's strategy of overweighting long
distance telephone companies, including AT&T and MCI, which outperformed during
the period.
The Fund's small underweight position in technology, the strongest performing
S&P 500 sector during the period, detracted from performance. Also detracting
from performance were the overweight positions in poor-performing industrial
sectors, including auto/transportation and other energy stocks. Positive
contributors to performance included an overweight position in retail stocks,
which added over 100 basis points. Underweight positions in consumer staple
stocks, particularly the beverage and soft drink industry, also added to
performance as did the underweights in such industrial sectors as
materials/processing and producer durable stocks.
Stock selection was disappointing for the fiscal year detracting 228 basis
points. Stock selection was strong in certain industries, including retail and
health care stocks. However, this was more than offset by weak selection among
utility, financial and integrated oil stocks.
For the fiscal year, the momentum and fair value strategies were successful in
adding value. The momentum strategy was especially powerful in the fourth
quarter of 1998. The cash flow and neglect strategies, on the other hand, did
not add value. We would expect these strategies to perform better in more
difficult market conditions.
<PAGE>
GMO U.S. Core Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Outlook
- -------
Although the U.S. Core Fund's emphasis away from the largest capitalization
stocks and overweight in small-cap issues was detrimental to performance in
fiscal 1998, small-cap stocks appear on our valuation measures to be trading at
extremely cheap levels relative to large-cap stocks. Therefore, we are
maintaining the current positioning in the Fund with respect to market
capitalization. Including the impact of swaps, the Core portfolio currently is
underweight in the largest 50 stocks by 18%, and overweight in the smallest
stocks by about 10%.
The Fund's focus on value stocks, which was also not productive in fiscal 1998,
is also being maintained in the portfolio. The strength of the S&P 500, and
especially of the largest capitalization stocks in the Index, has exceeded our
expectations. However, in our view, should the bull market falter, the portfolio
is well-positioned to add value relative to the benchmark. With a resumption of
more normal market conditions, the portfolio is positioned to continue its
pattern of long-term outperformance relative to the S&P 500.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO U.S. Core Fund Class III Shares and the S&P 500 Index
As of February 28, 1999
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Since
1 Year 5 Year 10 Year Inception
- --------------------------------------------------------------------------------
Class III 14.9% 23.4% 19.1% n/a
- --------------------------------------------------------------------------------
6/7/96
Class II* 14.8% n/a n/a 25.1%
- --------------------------------------------------------------------------------
1/9/98
Class IV 14.9% n/a n/a 26.1%
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION> U.S. Core Fund-III
As of 2/28/99
Date GMO U.S. Core Fund S&P 500 Index
Class III Shares
<S> <C> <C>
2/28/89 9,986 10,000
3/31/89 10,266 10,233
6/30/89 11,062 11,136
9/30/89 12,345 12,329
12/31/89 12,582 12,584
3/31/90 12,315 12,206
6/30/90 13,064 12,972
9/30/90 11,297 11,189
12/31/90 12,413 12,191
3/31/91 14,407 13,963
6/30/91 14,183 13,931
9/30/91 14,889 14,676
12/31/91 16,123 15,906
3/31/92 15,691 15,507
6/30/92 16,176 15,802
9/30/92 16,432 16,301
12/31/92 17,080 17,122
3/31/93 18,183 17,870
6/30/93 18,591 17,957
9/30/93 19,518 18,420
12/31/93 19,860 18,848
3/31/94 19,250 18,132
6/30/94 19,289 18,208
9/30/94 20,117 19,099
12/31/94 20,330 19,096
3/31/95 22,187 20,955
6/30/95 24,616 22,956
9/30/95 27,288 24,780
12/31/95 29,123 26,272
3/31/96 30,172 27,682
6/30/96 31,184 28,924
9/30/96 32,052 29,818
12/31/96 34,252 32,304
3/31/97 35,090 33,170
6/30/97 40,789 38,961
9/30/97 45,578 41,879
12/31/97 46,273 43,081
3/31/98 52,333 49,090
6/30/98 53,409 50,711
9/30/98 48,286 45,666
12/31/98 57,698 55,391
2/28/99 57,574 55,914
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 14 bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Performance for Class IV and Class II shares may vary
due to different shareholder service fees. Past performance is not indicative of
future performance. Information is unaudited.
* Class II performance includes Class III performance for the period November
17, 1997 to January 9, 1998, during which no Class II shares were outstanding.
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Currency Hedged International Bond Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of GMO Currency
Hedged International Bond Fund at February 28, 1999 and the results of its
operations, the changes in its net assets and the financial highlights for
the periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Trust's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits,
which included confirmation of securities at February 28, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 22, 1999
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEBT OBLIGATIONS -- 90.1%
Argentina -- 0.2%
USD 1,000,000 Republic of Argentina Par Bond,
Variable Rate, Step Up, 5.75%, due 3/31/23 667,500
--------------
Australia -- 5.6%
GBP 8,700,000 Commonwealth Bank Australia Series EMTN, 8.13%, due 12/7/06 16,209,196
AUD 2,620,000 Queensland Treasury Corp, 8.00%, due 9/14/07 1,867,005
--------------
18,076,201
--------------
Brazil -- 1.6%
USD 10,000,000 Brazil New Money Bond,
Variable Rate, 6 mo. LIBOR + .88%, 6.19%, due 4/15/09 5,231,250
--------------
Bulgaria -- 1.4%
USD 10,000,000 Bulgaria Discount Series B Interest Strips, Basket 2,
0.00%, due 1/28/10 - 7/28/24 1,000,000
USD 15,000,000 Bulgaria Discount Strips, 0.00%, due 7/28/24/(a)/ 3,055,977
USD 1,000,000 Bulgaria FLIRB Series B,
Variable Rate, Step Up, 3.00%, due 7/28/12 595,000
--------------
4,650,977
--------------
Canada -- 6.2%
CAD 3,750,000 Government of Canada, 10.25%, due 3/15/14 3,709,755
CAD 8,000,000 Government of Canada Real Return, 4.25%, due 12/1/21 5,918,940
CAD 5,000,000 Government of Canada Real Return, 4.25%, due 12/1/26 3,502,385
GBP 3,500,000 Province of Quebec, 8.62%, due 11/4/11 6,806,337
--------------
19,937,417
--------------
Cayman Islands -- 5.6%
GBP 3,000,000 Chester Asset Receivables, Inc., Deal 2,
Variable Rate, 3 mo. GBP LIBOR + .10%, 6.54%, due 6/15/01 4,801,194
CAD 4,000,000 Government of Canada (Cayman), 7.25%, due 6/1/08 2,917,522
USD 4,000,000 Great Point CBO Ltd. Series 98-1A Class A1, 144A,
Variable Rate, 6 mo. LIBOR + .30%, 5.71%, due 10/15/10 3,942,500
USD 6,650,000 Pemex Finance Ltd Series 1A Class A2, 144A, 6.30%,
due 5/15/10 6,467,125
--------------
18,128,341
--------------
Chile -- 1.4%
USD 4,750,000 Banco Santander, 6.50%, due 11/1/05 4,577,813
--------------
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Denmark -- 0.5%
DKK 9,680,000 Kingdom of Denmark Bullet, 8.00%, due 3/15/06 1,750,761
--------------
Ecuador -- 0.1%
USD 551,418 Republic of Ecuador PDI (Registered), PIK,
Variable Rate, 6 mo. LIBOR + .81%, 6.00%, due 2/17/15 149,572
--------------
France -- 2.9%
FRF 21,000,000 Auxiliare Credit Foncier, 10.00%, due 4/20/01 3,969,309
FRF 30,000,000 Auxiliare Credit Foncier, 6.25%, due 3/28/03 5,451,537
--------------
9,420,846
--------------
Germany -- 1.1%
GBP 2,000,000 KFW International Finance, 10.63%, due 9/3/01 3,585,276
--------------
Italy -- 5.2%
GBP 7,000,000 Republic of Italy, 10.50%, due 4/28/14 16,870,342
--------------
Japan -- 6.5%
GBP 2,300,000 Export Import Bank of Japan, 10.75%, due 5/15/01 4,065,956
GBP 3,000,000 Japan Finance Corp Municipal Enterprises, 9.13%, due 2/16/05 5,654,259
GBP 6,000,000 Kobe City, 9.50%, due 10/20/04 11,390,220
--------------
21,110,435
--------------
Jordan -- 0.2%
USD 1,000,000 Hashemite Kingdom of Jordan Par Bond,
Variable Rate, Step Up, 144A, 5.50%, due 12/23/23 560,000
--------------
Mexico -- 3.5%
FRF 10,000,000 Mexico Par Bond, 6.63%, due 12/31/19 1,301,213
CHF 22,000,000 Mexico Par Bond, 3.75%, due 12/31/19 9,982,058
--------------
11,283,271
--------------
New Zealand -- 1.0%
NZD 6,200,000 New Zealand Index Linked Bond, 4.50%, due 2/15/16 3,322,532
--------------
Nigeria -- 0.3%
USD 1,603,625 Central Bank of Nigeria Par Bond,
Variable Rate, Step Up, 6.25%, due 11/15/20 1,018,302
--------------
Norway -- 0.6%
SEK 13,700,000 A/S Eksportfinans, 7.50%, due 8/16/01 1,805,757
--------------
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Russia -- 0.0%
USD 488,893 Russia Vnesheconombank IAN,
Variable Rate, 6 mo. LIBOR + .81%, 5.97%, due 12/15/15 48,889
--------------
Supra National -- 3.0%
AUD 16,100,000 European Bank for Reconstruction and Development, Zero
Coupon, due 2/10/28 1,661,684
CAD 2,700,000 European Investment Bank, 8.50%, due 8/30/05 2,028,354
GBP 3,000,000 International Bank for Reconstruction and
Development, 11.50%, due 11/9/03 6,079,590
--------------
9,769,628
--------------
Sweden -- 5.9%
SEK 35,000,000 Government of Sweden Index Linked Bond, 4.00%, due 12/1/20 4,621,347
SEK 73,200,000 Kingdom of Sweden, 6.00%, due 2/9/05 9,836,361
SEK 6,100,000 Kingdom of Sweden, 6.50%, due 10/25/06 851,341
SEK 24,800,000 Kingdom of Sweden, 8.00%, due 8/15/07 3,797,915
--------------
19,106,964
--------------
United States -- 36.8%
Asset Backed Securities -- 29.9%
USD 4,000,000 American Express Credit Account Master Trust Series 98-1A,
Variable Rate, 1 mo. LIBOR + .09%, 5.03%, due 1/17/06 3,994,000
USD 7,500,000 BEA CBO Series 98-1A Class A2A, 6.72%, due 6/15/10 7,233,984
USD 5,000,000 Chyps CBO Series 97-1A Class A2A, 144A, 6.72%, due 1/15/10 4,873,438
USD 5,000,000 CS First Boston Mortgage Securities Corp, Series
98-C1 Class A1B, 6.48%, due 5/17/08 4,970,000
USD 1,500,000 Discover Card Master Trust I Series 94-2 Class A,
Variable Rate, 1 mo. LIBOR + .35%, 5.29%, due 10/16/04 1,508,250
USD 22,000,000 Discover Card Trust I Series 97-3 Class A,
Variable Rate, 1 mo. LIBOR + .13%, 5.07%, due 4/16/07 21,972,501
USD 5,000,000 Dreamworks Film Trust Series 1 Class A,
Variable Rate, 3 mo. LIBOR + .22%, 5.25%, due 10/15/06 4,975,000
USD 6,500,000 Health Care Receivables Securitization Program 96-1
Class A, 144A, 7.20%, due 7/01/00 6,516,250
USD 5,000,000 MBNA Master Credit Card Trust Series 95-G Class A,
Variable Rate, 1 mo. LIBOR + .21%, 5.15%, due 10/15/02 5,007,500
USD 3,000,000 MBNA Master Credit Card Trust Series 95-J Class A,
Variable Rate, 1 mo. LIBOR + .23%, 5.17%, due 4/15/05 3,007,800
USD 4,000,000 MBNA Master Credit Card Trust Series 98-A Class A,
Variable Rate, 1 mo. LIBOR + .11%, 5.05%, due 8/15/05 3,993,750
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Asset Backed Securities -- continued
USD 104,925 New York City Tax Lien Series 96-1 Class B, 144A,
6.91%, due 5/25/05 105,417
USD 5,000,000 Prime Credit Card Master Trust Series 92-2 Class A2,
7.45%, due 11/15/02 5,030,000
USD 5,000,000 Rhyno CBO Delaware Corp Series 97-1 Class A-2, 144A,
Variable Rate, Step Up, 6.33%, due 9/15/09 5,271,094
USD 10,000,000 SHYPPCO Finance Company Series B Class A-2B, 6.64%,
due 6/15/10 9,790,000
USD 5,000,000 Student Loan Marketing Association Series 96-4 Class
A2, Variable Rate, 3 mo. U.S. Treasury Bill +
.64%, 5.14%, due 7/25/09 4,913,281
USD 3,465,000 TMS Auto Grantor Trust Series 96-1 Class CTFS,
7.10%, due 12/20/02 3,492,720
--------------
96,654,985
--------------
Corporate Debt -- 1.8%
SEK 44,000,000 Toyota Motor Credit, 7.50%, due 8/06/01 5,742,718
--------------
U.S. Government -- 1.5%
USD 10,100,000 U.S. Treasury 0.00% Receipts, due 2/15/14/(a)/ 3,893,614
USD 1,000,000 U.S. Treasury Inflation Indexed Note, 3.38%, due
1/15/07/(b)/ 997,704
--------------
4,891,318
--------------
U.S. Government Agency -- 3.6%
USD 5,000,000 Agency for International Development Floater
(Support of India), Variable Rate, 3 mo. LIBOR
+ .10%, 5.07%, due 2/01/27 4,850,000
USD 2,166,667 Agency for International Development Floater
(Support of Zimbabwe) Variable Rate, 3 mo. U.S.
Treasury Bill x 115%, 4.94%, due 1/01/12 2,058,334
USD 5,000,000 Federal Home Loan Bank,
Variable Rate, CPI + 3.15%, 4.75%, due
2/15/02/(b)/ 4,842,500
--------------
11,750,834
--------------
Total United States 119,039,855
--------------
Venezuela -- 0.5%
USD 500,000 Republic of Venezuela, 9.25%, due 9/15/27 283,750
USD 2,000,000 Republic of Venezuela Discount Bond Series A,
Variable Rate, 6 mo. LIBOR + .81%, 5.81%, due
3/31/20 1,240,000
--------------
1,523,750
--------------
TOTAL DEBT OBLIGATIONS (COST $292,727,947) 291,635,679
--------------
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LOAN ASSIGNMENTS -- 0.3%
Russia -- 0.3%
USD 15,750,278 Russia Vnesh Restructured Loan Agreements* 1,122,207
--------------
TOTAL LOAN ASSIGNMENTS (COST $9,762,343) 1,122,207
--------------
Shares
-----------
PREFERRED STOCKS -- 2.9%
United States-- 2.9%
10,000 Bear Stearns Managed Income Securities Plus Fund,
13.27% 9,330,730
--------------
TOTAL PREFERRED STOCKS (COST $9,778,893) 9,330,730
--------------
Principal Amount
-----------------
CALL OPTIONS PURCHASED -- 0.5%
Options on Bonds -- 0.2%
SEK 332,000,000 Sweden Government Bond, Expires 4/27/99, Strike
110.114 478,269
--------------
Options on Currency -- 0.3%
USD 22,000,000 Euro, Expires 4/06/99, Strike 1.15 919,600
USD 8,600,000 Japanese Yen, Expires 4/16/99, Strike 122 115,240
--------------
1,034,840
--------------
Options on Futures -- 0.0%
USD 3,230,000 Eurodollar, Expires 3/15/99, Strike 95 32,300
--------------
TOTAL CALL OPTIONS PURCHASED
(Cost $1,348,144) 1,545,409
--------------
PUT OPTIONS PURCHASED -- 0.0%
Options on Currency -- 0.0%
USD 22,000,000 Euro, Expires 4/06/99, Strike 1.20 --
USD 8,600,000 Japanese Yen, Expires 4/16/99, Strike 112.00 71,380
--------------
71,380
--------------
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares / Par Value Description Value ($)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL PUT OPTIONS PURCHASED
(COST $354,100) 71,380
--------------
RIGHTS AND WARRANTS -- 0.0%
Mexico -- 0.0%
16,414,000 United Mexican States Warrants, Expires 6/30/03** --
--------------
Nigeria -- 0.0%
1,602 Central Bank of Nigeria Payment Adjusted Warrants,
Expires 11/15/20** --
--------------
Venezuela -- 0.0%
14,280 Republic of Venezuela Recovery Warrants,
Expires 04/15/20** --
--------------
TOTAL RIGHTS AND WARRANTS (COST $0) --
--------------
SHORT-TERM INVESTMENTS -- 4.3%
Cash Equivalents -- 0.0%
USD 2,358 BankBoston Eurodollar Time Deposit, 5.005% due
4/30/99/(c)/ 2,358
800 Merrimac Cash Fund Premium Class/(c)/ 800
--------------
3,158
--------------
Commercial Paper -- 4.3%
USD 13,809,000 Baker Hughes, 4.87%, due 3/01/99 13,809,000
--------------
TOTAL SHORT-TERM INVESTMENTS
(COST $13,812,158) 13,812,158
--------------
TOTAL INVESTMENTS-- 98.1%
(COST $327,783,585) 317,517,563
Other Assets and Liabilities (net) -- 1.9% 6,193,737
--------------
TOTAL NET ASSETS -- 100% $ 323,711,300
==============
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Notes to the Schedule of Investments:
EMTN -- Euromarket Medium Term Note
FLIRB -- Front Loaded Interest Reduction Bond
IAN -- Interest Arrears Notes
PDI -- Past Due Interest
PIK -- Payment In Kind
CPI -- Consumer Price Index
144A -- Securities exempt from registration under Rule
144A of the Securities Act of 1933. These securities
may be resold in transactions exempt from
registration, normally to qualified institutional
buyers.
Variable and step up rates -- The rates shown on
variable and step up rate notes are the current
interest rates at February 28, 1999, which are
subject to change based on the terms of the
security, including varying reset dates.
Currency Abbreviations:
AUD - Australian Dollar GBP - British Pound
BEF - Belgian Franc ITL - Italian Lira
CAD - Canadian Dollar JPY - Japanese Yen
CHF - Swiss Franc NZD - New Zealand
Dollar
DKK - Danish Krone SEK - Swedish Krona
EUR - Euro USD - United States
Dollar
FRF - French Franc
(a) Valued by management (Note 1).
(b) All or a portion of this security has been
segregated to cover margin requirements on
open financial futures contracts.
(c) Represents investments of security lending
collateral (Note 1).
* Non-performing. Borrower not currently paying
interest.
** Non-income producing security.
See accompanying notes to the financial statements. 7
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Assets and Liabilities -- February 28, 1999
- -----------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (cost $327,783,585) (Note 1) $317,517,563
Cash 6,178
Cash at interest on deposit at brokers (Note 1) 3,384,164
Receivable for investments sold 1,739,698
Interest receivable 4,532,302
Receivable for variation margin on open futures contracts (Notes 1 and 6) 34,419
Net receivable for open forward foreign currency contracts (Notes 1 and 6) 260,078
Receivable for expenses waived or borne by Manager (Note 2) 88,601
------------
Total assets 327,563,003
------------
Liabilities:
Payable upon return of securities loaned (Note 1) 3,158
Written options outstanding, at value (premiums $1,186,284) (Notes 1 and 6) 1,029,420
Payable for open swap contracts (Notes 1 and 6) 2,042,889
Payable for Fund shares repurchased 500,000
Payable to affiliate for (Note 2):
Management fee 137,808
Shareholder service fee 40,120
Accrued expenses 98,308
------------
Total liabilities 3,851,703
------------
Net assets $323,711,300
============
Net assets consist of:
Paid-in capital $313,688,588
Accumulated undistributed net investment income 19,566,701
Accumulated undistributed net realized gain 3,345,278
Net unrealized depreciation (12,889,267)
------------
$323,711,300
============
Net assets attributable to:
Class III shares $323,711,300
============
Shares outstanding:
Class III 30,919,079
============
Net asset value per share:
Class III $ 10.47
============
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Operations -- Year Ended February 28, 1999
- -----------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Interest (including securities lending income of $12,463) $24,408,225
Dividends 1,327,000
-----------
Total income 25,735,225
-----------
Expenses:
Management fee (Note 2) 1,920,646
Custodian and transfer agent fees 232,534
Audit fees 67,346
Legal fees 5,766
Trustees fees (Note 2) 3,740
Registration fees 126
Miscellaneous 3,549
Fees waived or borne by Manager (Note 2) (1,273,399)
-----------
960,308
Shareholder service fee (Note 2)
Class III 576,196
-----------
Net expenses 1,536,504
-----------
Net investment income 24,198,721
-----------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 9,487,594
Closed futures contracts 7,573,216
Closed swap contracts (1,427,896)
Written options 5,432,625
Foreign currency, forward contracts and foreign currency related
transactions (13,772,824)
-----------
Net realized gain 7,292,715
-----------
Change in net unrealized appreciation (depreciation) on:
Investments (16,272,656)
Open futures contracts (570,868)
Open swap contracts (1,452,602)
Written options (448,501)
Foreign currency, forward contracts and foreign currency related
transactions (2,147,439)
-----------
Net unrealized loss (20,892,066)
-----------
Net realized and unrealized loss (13,599,351)
-----------
Net increase in net assets resulting from operations $10,599,370
===========
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28,
-----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $24,198,721 $ 24,636,532
Net realized gain 7,292,715 61,872,060
Change in net unrealized appreciation (depreciation) (20,892,066) (34,536,133)
------------- -------------
Net increase in net assets resulting from operations 10,599,370 51,972,459
------------- -------------
Distributions to shareholders from:
Net investment income
Class I -- (93,768)
Class III (6,307,979) (22,677,467)
------------- -------------
Total distributions from net investment income (6,307,979) (22,771,235)
------------- -------------
Net realized gains
Class I -- (232,835)
Class III (14,428,617) (65,046,883)
------------- -------------
Total distributions from net realized gains (14,428,617) (65,279,718)
------------- -------------
(20,736,596) (88,050,953)
------------- -------------
Net share transactions: (Note 5)
Class I -- (1,008,924)
Class III 12,943,319 (112,148,597)
------------- -------------
Increase (decrease) in net assets resulting from net
share transactions 12,943,319 (113,157,521)
------------- -------------
Total increase (decrease) in net assets 2,806,093 (149,236,015)
Net assets:
Beginning of period 320,905,207 470,141,222
------------- -------------
End of period (including accumulated undistributed net
investment income of $19,566,701 and $2,799,507,
respectively) $323,711,300 $320,905,207
============= =============
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class I share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from Period from
March 1, 1997 January 2, 1997
to (commencement of operations)
January 9, 1998 to February 28, 1997
---------------- ----------------------------
<S> <C> <C>
Net asset value, beginning of period $12.16 $11.75
------- -------
Income from investment operations:
Net investment income 0.69+ 0.11
Net realized and unrealized gain 0.90 0.30
------- -------
Total from investment operations 1.59 0.41
------- -------
Less distributions to shareholders:
From net investment income (0.87) --
From net realized gains (2.23) --
------- -------
Total distributions (3.10) --
------- -------
Net asset value, end of period $10.65(a) $12.16
======= =======
Total Return (b) 14.30% 3.49%
Ratios/Supplemental Data:
Net assets, end of period (000's) -- $1,162
Net expenses to average daily net assets 0.53%* 0.53%*
Net investment income to average daily net
assets 6.60%* 5.91%*
Portfolio turnover rate 135% 90%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following
per share amounts: $ 0.04 $ 0.01
</TABLE>
* Annualized.
+ Computed using average shares outstanding throughout the period.
(a) All Class I shares of the Fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
(b) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
See accompanying notes to the financial statements. 11
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29,
-----------------------------------------------------
1999 1998 1997 1996 1995 +
----- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.66 $ 12.16 $ 10.92 $ 9.99 $ 10.00
--------- --------- --------- --------- ---------
Income from investment operations:
Net investment income 0.74 0.88 0.66 1.05 0.24
Net realized and unrealized gain
(loss) (0.39) 0.73 2.07 1.62 (0.09)
-------- -------- -------- -------- --------
Total from investment operations 0.35 1.61 2.73 2.67 0.15
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.16) (0.88) (0.60) (1.04) (0.16)
From net realized gains (0.38) (2.23) (0.45) (0.42) --
In excess of net realized gains -- -- (0.44) (0.28) --
-------- -------- -------- -------- --------
Total distributions (0.54) (3.11) (1.49) (1.74) (0.16)
-------- -------- -------- -------- --------
Net asset value, end of period $ 10.47 $ 10.66 $ 12.16 $ 10.92 $ 9.99
======== ======== ======== ======== ========
Total Return (a) 3.20% 14.44% 25.57% 27.36% 1.49%
Ratios/Supplemental Data:
Net assets, end of period (000's) $323,711 $320,905 $468,979 $236,162 $238,664
Net expenses to average daily net
assets 0.40% 0.40% 0.40% 0.40% 0.40%*
Net investment income to average
daily net assets 6.30% 6.50% 6.86% 8.54% 8.46%*
Portfolio turnover rate 116% 135% 90% 85% 64%
Fees and expenses voluntarily
waived or borne by the Manager
consisted of the following per $ 0.04 $ 0.05 $ 0.03 $ 0.03 $ 0.01
share amounts:
</TABLE>
+ Period from September 30, 1994 (commencement of operations) to February 28,
1995.
* Annualized.
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
12 See accompanying notes to the financial statements.
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Currency Hedged International Bond Fund (the "Fund") is a series of GMO
Trust (the "Trust"). The Fund is registered under the Investment Company
Act of 1940, as amended, as an open-end, non-diversified management
investment company. The Fund is advised and managed by Grantham, Mayo, Van
Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a
Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series into classes.
The Fund seeks high total return by investing primarily in investment grade
bonds denominated in various currencies including U.S. dollars and
multicurrency units, while generally attempting to hedge substantially all
of its foreign currency risk. The Fund generally seeks to provide a total
return greater than that provided by the international fixed income
securities market.
Prior to January 9, 1998, the Fund offered three classes of shares: Class
I, Class II and Class III. Effective January 9, 1998, Class I shares ceased
operations and all shares were exchanged for Class III shares, and Class II
shares ceased to be offered. The principal economic difference among the
classes of shares is the level of shareholder service fee borne by the
classes. Eligibility for and automatic conversion between the various
classes of shares is generally based on the total amount of assets invested
with GMO, as more fully outlined in the Trust's prospectus.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost which
approximates market value. Other assets and securities for which no
quotations are readily available are valued at fair value as determined in
good faith by the Trustees or other persons acting at their direction.
13
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Some fixed income securities and options thereon are valued at the closing
bid for such securities as supplied by a primary pricing source chosen by
the Manager. The Manager evaluates such primary pricing sources on an
ongoing basis, and may change any pricing source at any time. The Manager
is kept informed of erratic or unusual movements (including unusual
inactivity) in the prices supplied for a security and has the power to
override any price supplied by a source (by taking a price supplied by
another source) because the Manager has other reasons to suspect that a
price supplied may not be reliable.
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from yield
data relating to investments or securities with similar characteristics.
Certain investments in securities held by the Fund were valued on the basis
of a price provided by a principal market maker. The prices provided by the
principal market makers may differ from the value that would be realized if
the securities were sold and the differences could be material to the
financial statements. At February 28, 1999, the total value of these
securities represented 17% of net assets. Included in this total are U.S.
Government backed securities and highly rated collateralized debt
obligations that represent 13% of net assets at February 28, 1999
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the prevailing exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at prevailing exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
net exchange gains and losses on disposition of foreign currencies,
currency gains and losses realized between the trade and settlement dates
on securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid.
Futures contracts
The Fund may use futures contracts to manage its exposure to the bond and
currency markets. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments. Upon
entering into a futures contract, the Fund is required to deposit with its
custodian, in a segregated account in the name of the futures broker, an
amount of cash or U.S. government obligations in accordance with the
initial margin requirements of the broker or exchange. Futures contracts
are marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. Gains or
losses are recognized but not considered realized until the contracts
expire or are closed. Futures contracts involve, to varying degrees, risk
of loss in excess of the variation margin disclosed in the Statement of
Assets and Liabilities. Losses may arise from the changes in the value of
the underlying instrument, if there is an illiquid secondary market for the
14
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 28, 1999.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or all
of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency contracts
are marked to market daily and the change in value is recorded by the Fund
as an unrealized gain or loss. Realized gains or losses equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed are recorded upon delivery or receipt
of the currency or, if a forward currency contract is offset by entering
into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market risk
in excess of the unrealized gain or loss reflected in the Fund's Statement
of Assets and Liabilities. In addition, the Fund could be exposed to risk
if the counterparties are unable to meet the terms of the contracts or if
the value of the currency changes unfavorably to the U.S. dollar. The U.S.
dollar value of the currencies the Fund has committed to buy or sell is
shown under Note 6 and represents the currency exposure the Fund has
acquired or hedged through currency contracts as of February 28, 1999.
Options
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. When the Fund writes a call
or put option, an amount equal to the premium received is recorded as a
liability and subsequently marked to market to reflect the current value of
the option written. Premiums received from writing options which expire are
treated as realized gains. Premiums received from writing options which are
exercised or closed are offset against the proceeds or amounts paid on the
transaction to determine the realized gain or loss. The Fund as a writer of
an option has no control over whether the underlying securities may be sold
(call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. See Note 6 for all open written
option contracts as of February 28, 1999.
The Fund may also purchase put and call options. The Fund pays a premium
which is included in the Fund's Statement of Assets and Liabilities as an
investment and subsequently marked to market to reflect the current value
of the option. The risk associated with purchasing put and call options is
limited to the premium paid.
Loan agreements
The Fund may invest in direct debt instruments which are interests in
amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates. The Fund's investments in loans may be in the form of
participations in loans or assignments of all or a portion of loans from
third parties. A loan is often administered by a bank or other financial
institution (the lender) that acts as agent for all holders. The agent
administers the terms of the loan, as specified in the loan agreement. When
15
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
investing in a loan participation, the Fund has the right to receive
payments of principal, interest and any fees to which it is entitled only
from the lender selling the loan agreement and only upon receipt by the
lender of payments from the borrower. The Fund generally has no right to
enforce compliance with the terms of the loan agreement with the borrower.
As a result, the Fund may be subject to the credit risk of both the
borrower and the lender that is selling the loan agreement. When the Fund
purchases assignments from lenders it acquires direct rights against the
borrower on the loan. Direct indebtedness of emerging countries involves a
risk that the governmental entities responsible for the repayment of the
debt may be unable or unwilling to pay the principal and interest when due.
Indexed securities
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to increase
or decrease its exposure to different underlying instruments and to gain
exposure to markets that may be difficult to invest in through conventional
securities. Indexed securities may be more volatile than their underlying
instruments, but any loss is limited to the amount of the original
investment.
Swap agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to interest rates and credit risk. The Fund may enter into interest rate,
total return and credit default swap agreements. Interest rate swap
agreements involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments with respect to a notional
amount of principal. Total return swap agreements involve commitments to
pay interest in exchange for a market-linked return based on a notional
amount. To the extent the total return of the security or index underlying
the transaction exceeds or falls short of the offsetting interest rate
obligation, the Fund will receive a payment from or make a payment to the
counterparty, respectively. Credit default swaps involve the payment of a
specified rate based on the notional amount. The Fund receives payment upon
a default of the underlying security. In connection with these agreements,
cash or securities may be set aside as collateral by the Fund's custodian
in accordance with the terms of the swap agreement. The Fund earns interest
on cash set aside as collateral, which is paid by the counterparty. At
February 28, 1999, $3,384,164 in cash has been set aside. Swaps are marked
to market daily based upon quotations from market makers and the change, if
any, is recorded as unrealized gain or loss in the Statement of Operations.
Payments received or made at the end of the measurement period are recorded
as realized gain or loss in the Statement of Operations. Net payments of
interest on interest rate swap agreements are recorded as interest income.
Entering into these agreements involves, to varying degrees, elements of
credit and market risk in excess of the amounts recognized on the Statement
of Assets and Liabilities. Such risks involve the possibility that there
will be no liquid market for these agreements, that the counterparty to the
agreements may default on its obligation to perform and that there may be
unfavorable changes in the fluctuation of interest rates. See Note 6 for a
summary of open swap agreements as of February 28, 1999.
16
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower fail financially.
The Fund receives compensation for lending its securities. At February 28,
1999, the Fund loaned securities having a market value of $2,632,
collateralized by cash in the amount of $3,158, which was invested in
short-term instruments.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for foreign currency transactions and redemptions
in-kind. Gains resulting from such in-kind transactions amounted to
$494,085.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
17
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
------------------------ ------------------------- ---------------------
<S> <C> <C>
$(1,123,548) $825,655 $297,893
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis, and is adjusted for the accretion of
discounts. Dividend income is recorded on the ex-dividend date. In
determining the net gain or loss on securities sold, the cost of securities
is determined on the identified cost basis. Interest income on U.S.
Treasury inflation indexed securities is accrued daily based upon an
inflation adjusted principal. Additionally, any increase in the principal
or face amount of the securities adjusted for inflation is recorded as
interest income.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .15% of the amount
invested. The premium will be reduced by 50% with respect to any portion of
a purchase that is offset by a corresponding redemption occurring on the
same day. In addition, the purchase premium 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. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. Purchase premiums are included as part of each class'
"shares sold" as summarized in Note 5. For the year ended February 28,
1999, the Fund received $201,714 in purchase premiums. There is no premium
for cash redemptions or reinvested distributions.
Investment risk
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments,
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets. The risks described above apply to an even greater
extent to investments in emerging markets. The securities markets of
emerging countries are generally smaller, less developed, less liquid, and
more volatile than the securities markets of the U.S. and developed foreign
markets.
18
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .50% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on average daily net assets at the annual rate of .15% for Class III
shares.
GMO agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding brokerage commissions, certain other transaction costs (including
transfer taxes), shareholder service fees and extraordinary expenses)
exceed .25% of average daily net assets.
Effective March 1, 1999, GMO's contractual management fee was reduced to
.25% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding brokerage commissions
and certain other transaction costs) exceed the management fee.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999, was $3,740. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
For the year ended February 28, 1999, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Proceeds
------------------ ---------------------
<S> <C> <C>
U.S. Government securities $ 7,751,100 $ 13,081,136
Investments (non-U.S. Government securities) 426,484,621 410,415,766
</TABLE>
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
------------------------ ----------------------- ---------------------- --------------------
<S> <C> <C> <C>
$327,869,152 $7,078,034 $17,429,623 $10,351,589
</TABLE>
19
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
4. Principal shareholders
At February 28, 1999, 82.2% of the outstanding shares of the Fund were held
by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums received by the
Fund, were as follows:
<TABLE>
<CAPTION>
Period from March 1, 1997
to January 9, 1998
-------------------------------
Class I: Shares Amount
------------ --------------
<S> <C> <C>
Shares sold 6,040 $ 71,065
Shares issued to shareholders in
reinvestment of distributions 30,405 326,603
Shares repurchased (132,046) (1,406,592)
---------- --------------
Net decrease (95,601) $ (1,008,924)
========== ==============
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1999 February 28, 1998
------------------------------ -------------------------------
Class III: Shares Amount Shares Amount
------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Shares sold 12,392,112 $ 135,897,894 12,690,672 $ 148,729,246
Shares issued to shareholders in
reinvestment of distributions 1,908,812 20,116,214 7,589,419 82,702,082
Shares repurchased (13,476,925) (143,070,789) (28,743,588) (343,579,925)
----------- --------------- ----------- --------------
Net increase (decrease) 823,999 $ 12,943,319 (8,463,497) $ (112,148,597)
=========== =============== =========== ==============
</TABLE>
20
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1999 is as
follows:
<TABLE>
<CAPTION>
Forward currency contracts
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
-------------- ---------------- --------------------- --------------- -------------------
<S> <C> <C> <C> <C>
Buys
4/20/99 AUD 1,400,000 $ 869,683 $ (35,138)
5/05/99 CAD 49,000,000 32,456,938 (283,613)
4/13/99 JPY 370,000,000 3,138,733 46,018
3/02/99 NZD 9,200,000 4,821,965 (70,305)
-------------------
$ (343,038)
===================
Sales
4/20/99 AUD 6,800,000 $ 4,224,173 $ 89,851
5/05/99 CAD 6,400,000 4,239,273 41,004
5/13/99 EUR 55,500,000 61,172,655 (86,580)
4/27/99 GBP 34,900,000 55,863,383 617,656
4/13/99 JPY 1,030,000,000 8,737,554 377,491
3/02/99 NZD 9,200,000 4,821,965 128,555
6/03/99 NZD 6,200,000 3,253,550 830
-------------------
$ 1,168,807
===================
</TABLE>
<TABLE>
<CAPTION>
Forward cross currency contracts
Net Unrealized
Settlement Appreciation
Date Deliver/Units of Currency Receive/In Exchange For (Depreciation)
-------------- ----------------------------- ----------------------------- -------------------
<S> <C> <C> <C>
3/16/99 CHF 66,562,422 EUR 41,800,000 $ (101,477)
3/09/99 EUR 46,385,484 SEK 412,899,019 (641,678)
3/16/99 EUR 20,400,000 CHF 32,534,923 84,043
3/09/99 SEK 596,026,735 EUR 66,200,000 93,421
-------------------
$ (565,691)
===================
</TABLE>
21
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Futures contracts
Net Unrealized
Number of Expiration Contract Appreciation
Contracts Type Date Value (Depreciation)
-------------- ---------------------------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
Buys
145 Australian Government Bond 3 yr. March 1999 $ 10,699,016 $ (205,034)
207 Canadian Government Bond 10 yr. June 1999 17,002,935 (221,619)
584 German Government Bond 10 yr. March 1999 93,809,732 (1,259,890)
45 Japanese Government Bond 10 yr. June 1999 49,285,714 (48,338)
14 Swiss Government Bond March 1999 1,254,793 12,183
13 Swiss Government Bond June 1999 1,151,798 (2,724)
----------------
$ (1,725,422)
================
Sales
3 Australian Government Bond 10 yr. March 1999 $ 277,023 $ 3,332
1 Japanese Government Bond March 1999 1,106,195 (429)
110 Swedish Government Bond 10 yr. March 1999 14,920,726 281,450
149 U.K. Gilt June 1999 27,916,613 343,115
302 U.S. Treasury Bond June 1999 34,654,500 377,895
----------------
$ 1,005,363
================
</TABLE>
At February 28, 1999, the Fund has sufficient cash and/or securities to
cover any margin requirements on open futures contracts.
22
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Written option transactions
Puts Calls
Principal Amount Principal Amount
of Contracts of Contracts
(000's omitted) Premiums (000's omitted) Premiums
------------------ --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Outstanding, beginning
of period 249,100 $ 5,746,705 139,100 $ 5,859,350
Options written 8,600 541,284 8,600 645,000
Options closed (41,600) (470,080) (41,600) (468,000)
Options exercised -- -- (97,500) (5,391,350)
Options expired (207,500) (5,276,625) -- --
---------------- ------------- --------------- -------------
Outstanding, end
of period 8,600 $ 541,284 8,600 $ 645,000
================ ============= =============== =============
</TABLE>
<TABLE>
<CAPTION>
Summary of written options outstanding
Principal Amount
of Contracts Expiration
(000's omitted) Exercise Price Date Value
------------------ --------------- ------------------ ---------------
<S> <C> <C> <C> <C>
USD Call/JPY Put 8,600 USD 112.70 JPY 11/16/99 $ 614,040
USD Put/JPY Call 8,600 USD 112.70 JPY 11/16/99 415,380
--------------
$ 1,029,420
==============
</TABLE>
23
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Swap agreements
<TABLE>
<CAPTION>
Notional Net
Amount Expiration Unrealized
Fund/Counterparty Date Description Depreciation
----------------------- ------------ ------------------------------------------------- --------------
<S> <C> <C> <C>
Credit Default Swaps
288,000,000,000 ITL 3/31/03 Agreement with Morgan Guaranty Trust Company $ (167,259)
dated 3/26/98 to pay .07% per year times the
notional amount. The Fund receives payment
only upon a default event in Italy, the
notional amount times the difference between
the par value and the then-market value of
Italy BTP, 6.00% due 11/01/07.
6,036,000,000 BEF 3/31/03 Agreement with Morgan Guaranty Trust Company (168,258)
dated 3/26/98 to pay .07% per year times the
notional amount. The Fund receives payment
only upon a default event in Belgium, the
notional amount times the difference between
the par value and the then-market value of
Kingdom of Belgium, 5.75% due 3/28/08.
Interest Rate Swaps
27,300,000 CHF 6/05/05 Agreement with Morgan Guaranty Trust Company (515,924)
dated 6/03/98 to pay the notional amount
multiplied by 3.245% and to receive the
notional amount multiplied by 6 month Floating
Rate Swiss LIBOR adjusted by a specified spread.
23,700,000 CHF 6/10/05 Agreement with Credit Suisse Financial Products (595,004)
dated 6/08/98 to pay the notional amount
multiplied by 3.2625% and to receive the
notional amount multiplied by 6 month Floating
Rate Swiss LIBOR adjusted by a specified spread.
</TABLE>
24
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Swap agreements -- continued
<TABLE>
<CAPTION>
Notional Amount Expiration Net Unrealized
Fund/Counterparty Date Description Depreciation
----------------------- ------------ ------------------------------------------------ --------------
<S> <C> <C> <C>
14,200,000 CHF 6/11/05 Agreement with Morgan Guaranty Trust Company $ (393,142)
dated 6/09/98 to pay the notional amount
multiplied by 3.245% and to receive the
notional amount multiplied by 6 month Floating
Rate Swiss LIBOR adjusted by a specified
spread.
10,700,000 CHF 9/16/05 Agreement with Morgan Guaranty Trust Company (203,302)
dated 9/14/98 to pay the notional amount
multiplied by 3.1175% and to receive the
notional amount multiplied by 6 month Floating
Rate Swiss LIBOR adjusted by a specified
spread.
Total Return Swap
1,739,698 USD/ 4/05/99 Agreement with Morgan Guaranty Trust Company -
3,000,000 USD dated 2/26/99 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Brazil
Discount ZL Floating Rate Note due
4/15/24 and to pay initial market value
multiplied by 1 month LIBOR adjusted
by a specified spread.
--------------
$ (2,042,889)
==============
</TABLE>
See Notes to the Schedule of Investments for definitions of currency
abbreviations.
25
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1999, all the Fund's distributions
are from investment company taxable income, except that the Fund has
designated 33.08% of distributions as net capital gain dividends.
26
<PAGE>
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
- ------------------
Mr. William L. Nemerever and Mr. Thomas F. Cooper are primarily responsible for
the day-to-day management of the Fund's portfolio. Each of these individuals has
been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The Class III shares of the Currency Hedged International Bond Fund returned
+3.2% for the fiscal year ended February 28, 1999, compared to +10.3% for the
J.P. Morgan Non-U.S. Government Bond Index (Hedged). Consistent with the Fund's
investment objectives and policies, the Fund was substantially invested in
investment-grade, foreign and domestic fixed income instruments throughout the
period.
The Fund underperformed the benchmark during the fiscal year by 7.1%. While bond
market selection added value to the portfolio, currency, emerging and issue
selection were negative and reduced portfolio return. The continued decline in
short-term interest rates across the globe was beneficial for portfolio returns,
especially in the fourth quarter of 1998. The portfolio's underweight position
in Japanese bonds and overweight position in UK Gilts added value. However,
several unanticipated developments resulted in the Fund's underperforming the
benchmark during the fiscal year.
. The Russian decision to default on its domestic debt and devalue its
currency reduced returns, given the Fund's exposure to emerging country
debt.
. The collapse of Long-Term Capital Management prompted hedge funds and other
investors to unwind short Japanese yen positions. The result was a 15
percent appreciation in the yen during the month of October, which
negatively affected returns, given the Fund's underweight yen position.
. The portfolio's overweight position in British pounds also negatively
affected returns while overweight positions in Canadian dollars and Swedish
krona added value.
. In addition, the panic-driven flight to liquidity during the fourth quarter
caused spreads to widen on the Fund's holdings of highly rated, but less
liquid asset-backed securities, governments and agencies.
Outlook
- -------
The Fund is structured to benefit from outperformance in the Australian,
Canadian, Swedish, U.S. and emerging bond markets. We expect the Danish, Euro,
Japanese and Swiss bond markets to underperform. Our strategy maintains a market
duration in each country. Strong relative performance is expected from the
Canadian dollar, Swedish krona and U.K. pound, while the Euro, Japanese yen and
Swiss franc and U.S. dollar are expected to underperform.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Currency Hedged International Bond Fund Class III Shares and the
JP Morgan Non-U.S. Government Bond Index (Hedged)
As of February 28, 1999
--------------------------------
Average Annual Total Return
--------------------------------
Since
Inception
1 Year 9/30/94
Class --------------------------------
III 3.0% 15.8%
--------------------------------
[LINE GRAPH APPEARS HERE]
J.P. Morgan Non-U.S.
GMO Currency Hedged Int'l. Bond Fund Government Bond Index
Date Class III Shares (Hedged)
---- ------------------------------------ ---------------------
1/31/94
9/30/94 9,985 10,000
12/31/94 9,961 10,162
3/31/95 10,265 10,625
6/30/95 11,138 11,126
9/30/95 11,933 11,548
12/31/95 12,729 12,045
3/31/96 13,024 12,149
6/30/96 13,934 12,482
9/30/96 14,819 13,014
12/31/96 15,766 13,524
3/31/97 16,019 13,694
6/30/97 16,699 14,151
9/30/97 17,782 14,651
12/31/97 18,251 15,046
3/31/98 18,895 15,516
6/30/98 19,051 15,872
9/30/98 19,284 16,721
12/31/98 19,286 16,872
2/28/99 19,140 16,962
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 15 bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Past performance is not indicative of future
performance. Information is unaudited.
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Domestic Bond Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Domestic Bond Fund at February
28, 1999 and the results of its operations, the changes in its net assets and
the financial highlights for the periods presented, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 16, 1999
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
DEBT OBLIGATIONS -- 92.8%
Asset Backed Securities -- 29.1%
$5,000,000 Augusta Funding Series 96-F2,
Variable Rate, 3 mo. LIBOR + .30%, 144A,
5.31%, due 4/15/06 4,940,601
11,887,168 Augusta Funding VI Series 96-A3, 144A, 7.38%, due 4/15/13 12,665,382
1,229,562 Dilmun Capital Corp,
Variable Rate, 6 mo. LIBOR + .88%, 6.07%, due 11/15/03 1,229,538
3,000,000 Great Point CBO Ltd. Series 98-1A Class A1, 144A,
Variable Rate, 6 mo. LIBOR + .30%, 5.71%, due 10/15/10 2,956,851
10,000,000 JC Penney Master Credit Card Trust Series E Class A,
5.50%, due 6/15/07(a) 9,793,726
279,801 New York City Tax Lien Series 96-1 Class B, 144A, 6.91%,
due 5/25/05 281,090
5,000,000 Northstar CBO Ltd. Series 97-2 Class A2, 144A, 6.62%, due
7/15/09 5,405,445
960,058 Resolution Trust Corp 94-C1 Class A1,
Variable Rate, 1 mo. LIBOR + .45%, 5.45%, due 6/25/26 959,584
5,000,000 Rhyno CBO Delaware Corp Series 97-1 Class A-2, 144A,
Variable Rate, Step Up, 6.33%, due 9/15/09 5,271,070
2,637,000 SMS Student Loan Trust 94-B Certificates,
Variable Rate, 1 mo. LIBOR + .75%, 5.67%, due 10/25/23 2,629,065
4,932,000 SMS Student Loan Trust 95-A Certificates,
Variable Rate, 1 mo. LIBOR + .65%, 5.59%, due 4/25/25 4,880,190
8,000 Society Student Loan Trust 93-A Class B,
Variable Rate, 1 mo. LIBOR + .75%, 5.39%, due 7/25/03 7,961
-------------
51,020,503
-------------
Corporate Debt -- 1.1%
1,000,000 Banco Santander, 6.50%, due 11/01/05 963,726
1,000,000 Pemex Finance Ltd Series 1A Class A2,
144A, 6.30%, due 5/15/10 972,476
-------------
1,936,202
-------------
Foreign Government Obligations -- 5.2%
25,000,000 Bulgaria Discount Strips due 7/28/24(b) 5,093,271
20,000,000 Republic of Ecuador Discount Bond Series A Receipts, Zero
Coupon, due 2/28/25 3,945,031
-------------
9,038,302
-------------
U.S. Government -- 0.3%
517,245 U.S. Treasury Inflation Indexed Note, 3.38%, due
1/15/07(c) 498,829
-------------
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Government Agency -- 57.1%
$10,000,000 Agency for International Development Floater (Support of India),
Variable Rate, 3 mo. LIBOR + .10%, 5.07%, due 2/01/27 9,699,976
8,000,000 Agency for International Development Floater (Support of Jamaica),
Variable Rate, 6 mo. LIBOR + .30%, 5.36%, due 12/01/14(a) 7,919,976
6,288,667 Agency for International Development Floater (Support of Jamaica),
Variable Rate, 6 mo. U.S. Treasury Bill + .75%, 5.35%, due 3/30/19 6,225,757
15,000,000 Agency for International Development Floater (Support of Morocco),
Variable Rate, 6 mo. LIBOR + .15%, 5.21%, due 10/29/26 14,587,476
20,000,000 Agency for International Development Floater (Support of Morocco),
Variable Rate, 6 mo. LIBOR - .015%, 5.05%, due 2/01/25 18,999,976
25,000,000 Agency for International Development Floater (Support of Portugal),
Variable Rate, 6 mo. LIBOR, 5.06%, due 1/01/21 24,249,976
9,382,500 Agency for International Development Floater (Support of Sri Lanka),
Variable Rate, 6 mo. LIBOR + .20%, 5.26%, due 6/15/12 9,288,651
9,533,335 Agency for International Development Floater (Support of Zimbabwe),
Variable Rate, 3 mo. U.S. Treasury Bill x 115%, 4.94%, due 1/01/12 9,056,644
-------------
100,028,432
-------------
TOTAL DEBT OBLIGATIONS (COST $163,117,706) 162,522,268
-------------
Shares PREFERRED STOCKS -- 10.7%
- ---------
Preferred Stocks -- 10.7%
10,000 Bear Stearns Managed Income Securities Plus Fund 13.27% 9,330,706
10,000 Home Ownership Funding 2 Preferred 144A, 13.338% 9,323,826
-------------
18,654,532
-------------
TOTAL PREFERRED STOCKS (COST $19,698,328) 18,654,532
-------------
Principal CALL OPTIONS PURCHASED -- 0.0%
Amount
- -----------
Options on Futures -- 0.0%
$1,107,500 Eurodollar, Expires 3/15/99, Strike 95 11,075
-------------
TOTAL CALL OPTIONS PURCHASED
(COST $22,490) 11,075
-------------
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 2.7%
Commercial Paper -- 2.7%
$4,770,000 Baker Hughes, 4.87%, due 3/01/99 4,770,000
-------------
TOTAL SHORT-TERM INVESTMENTS
(COST $4,770,000) 4,770,000
-------------
TOTAL INVESTMENTS -- 106.2%
(Cost $187,608,524) 185,957,875
Other Assets and Liabilities (net) -- (6.2)% (10,887,205)
-------------
TOTAL NET ASSETS -- 100% $ 175,070,670
=============
</TABLE>
Notes to the Schedule of Investments:
Variable rates -- The rates shown on variable notes are the
current interest rates at February 28, 1999, which are
subject to change based on the terms of the security,
including varying reset dates.
144A - Securities exempt from registration under Rule 144A
of the Securities Act of 1933. These securities may be
resold in transactions exempt from registration, normally to
qualified institutional buyers.
(a) All or a portion of this security has been segregated to
cover collateral requirements on reverse repurchase
agreements.
(b) Valued by management (Note 1).
(c) All or a portion of this security has been segregated to
cover margin requirements on open financial futures
contracts.
See accompanying notes to the financial statements. 3
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Assets and Liabilities -- February 28, 1999
- -------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (cost $187,608,524) (Note 1) $ 185,957,875
Dividends and interest receivable 1,631,241
Receivable for open swap contracts (Notes 1 and 6) 5,029,278
Receivable for expenses waived or borne by Manager (Note 2) 25,352
-------------
Total assets 192,643,746
-------------
Liabilities:
Payable to affiliate for (Note 2):
Management fee 35,061
Shareholder service fee 21,037
Due to custodian 145,780
Payable for reverse repurchase agreements (Notes 1 and 6) 17,236,610
Payable for variation margin on open futures contracts (Notes 1 and 6) 71,958
Accrued expenses and other liabilities 62,630
-------------
Total liabilities 17,573,076
-------------
Net assets $ 175,070,670
=============
Net assets consist of:
Paid-in capital $ 175,082,832
Accumulated undistributed net investment income 1,320,248
Accumulated net realized loss (5,082,853)
Net unrealized appreciation 3,750,443
=============
$ 175,070,670
=============
Net assets attributable to:
Class III shares $ 175,070,670
=============
Shares outstanding:
Class III 18,150,835
=============
Net asset value per share:
Class III $ 9.65
=============
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Operations -- Year Ended February 28, 1999
- --------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Interest (including securities lending income of $5,983) $ 14,591,343
Dividends 2,994,250
------------
Total income 17,585,593
------------
Expenses:
Management fee (Note 2) 678,052
Interest expense (Notes 1 and 6) 57,981
Custodian and transfer agent fees 52,173
Audit fees 43,198
Registration fees 4,798
Legal fees 4,750
Trustees fees (Note 2) 2,921
Miscellaneous 2,198
Fees waived or borne by Manager (Note 2) (516,760)
------------
329,311
Shareholder service fee (Note 2)
Class III 406,832
------------
Net expenses 736,143
------------
Net investment income 16,849,450
------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 5,322,232
Closed futures contracts 209,042
Closed swap contracts (4,257,123)
------------
Net realized gain 1,274,151
------------
Change in net unrealized appreciation (depreciation) on:
Investments (8,552,936)
Open futures contracts 424,231
Open swap contracts 5,141,534
------------
Net unrealized loss (2,987,171)
------------
Net realized and unrealized loss (1,713,020)
------------
Net increase in net assets resulting from operations $ 15,136,430
============
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended
February 28, February 28,
1999 1998
--------------- ---------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 16,849,450 $ 32,189,416
Net realized gain 1,274,151 14,245,198
Change in net unrealized appreciation (depreciation) (2,987,171) 9,064,186
------------- -------------
Net increase in net assets resulting from operations 15,136,430 55,498,800
------------- -------------
Distributions to shareholders from:
Net investment income
Class I -- (206,797)
Class III (18,501,522) (34,705,546)
------------- -------------
Total distributions from net investment income (18,501,522) (34,912,343)
------------- -------------
Net realized gains
Class I -- (76,406)
Class III (4,552,278) (10,245,112)
------------- -------------
Total distributions from net realized gains (4,552,278) (10,321,518)
------------- -------------
In excess of net realized gains
Class I -- --
Class III (5,488,875) --
------------- -------------
Total distributions in excess of net realized gains (5,488,875) --
------------- -------------
(28,542,675) (45,233,861)
------------- -------------
Net share transactions: (Note 5)
Class I -- (3,679,073)
Class III (242,933,466) (149,668,125)
------------- -------------
Decrease in net assets resulting from net share transactions (242,933,466) (153,347,198)
------------- -------------
Total decrease in net assets (256,339,711) (143,082,259)
Net assets:
Beginning of period 431,410,381 574,492,640
------------- -------------
End of period (including accumulated undistributed net
investment income of $1,320,248 and $2,980,545, respectively) $ 175,070,670 $ 431,410,381
============= =============
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Financial Highlights
(For a Class I share outstanding throughout each period)
- -------------------------------------------------------------------------------------------------
Period from Period from September 10, 1996
March 1, 1997 (commencement of operations)
to January 9, 1998 to February 28, 1997
------------------ ------------------------------
<S> <C> <C>
Net asset value, beginning of period $10.16 $10.01
------ ------
Income from investment operations:
Net investment income 0.56+ 0.36
Net realized and unrealized gain 0.56 0.13
------ ------
Total from investment operations 1.12 0.49
------ ------
Less distributions to shareholders:
From net investment income (0.68) (0.29)
From net realized gains (0.27) (0.03)
In excess of net realized gains -- (0.02)
------ ------
Total distributions (0.95) (0.34)
------ ------
Net asset value, end of period $10.33(a) $10.16
====== ======
Total Return (b) 11.52% 4.93%
Ratios/Supplemental Data:
Net assets, end of period (000's) -- $3,630
Net expenses to average daily net assets 0.38%* 0.38%*
Net investment income to average daily net assets 6.31%* 5.83%*
Portfolio turnover rate 59% 25%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts: $ 0.02 $ 0.01
</TABLE>
* Annualized.
+ Computed using average shares outstanding throughout the period.
(a) All Class I shares of the Fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
(b) The total returns would have been lower had certain expenses not been waived
during the periods shown.
See accompanying notes to the financial statements. 7
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Financial Highlights
(For a Class III share outstanding throughout each period)
- ------------------------------------------------------------------------------------------------------------------
Year Ended February 28/29,
-----------------------------------------------------
1999 1998 1997 1996 1995*
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.26 $ 10.18 $ 10.40 $ 10.13 $ 10.00
--------- --------- --------- --------- ---------
Income from investment operations:
Net investment income 0.68 0.67 0.58 0.66 0.24
Net realized and unrealized gain (loss) (0.15) 0.38 (0.09) 0.58 0.07
--------- --------- --------- --------- ---------
Total from investment operations 0.53 1.05 0.49 1.24 0.31
--------- --------- --------- --------- ---------
Less distributions to shareholders:
From net investment income (0.68) (0.70) (0.60) (0.60) (0.18)
From net realized gains (0.21) (0.27) (0.08) (0.37) --
In excess of net realized gains (0.25) -- (0.03) -- --
--------- --------- --------- --------- ---------
Total distributions (1.14) (0.97) (0.71) (0.97) (0.18)
--------- --------- --------- --------- ---------
Net asset value, end of period $ 9.65 $ 10.26 $ 10.18 $ 10.40 $ 10.13
========= ========= ========= ========= =========
Total Return (a) 5.03% 10.71% 4.93% 12.50% 3.16%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 175,071 $ 431,410 $ 570,862 $ 310,949 $ 209,377
Net operating expenses to average daily net
assets 0.25% 0.25% 0.25% 0.25% 0.25%**
Interest expense to average daily net assets 0.02% -- -- -- --
Total net expenses to average daily net
assets 0.27% 0.25% 0.25% 0.25% 0.25%**
Net investment income to average daily net
assets 6.21% 6.14% 6.15% 6.52% 6.96%**
Portfolio turnover rate 17% 59% 25% 70% 65%
Fees and expenses voluntarily waived or
borne by the Manager consisted of the
following per share amounts: $ 0.02 $ 0.02 $ 0.02 $ 0.01 $ 0.01
</TABLE>
* For the period from August 18, 1994 (commencement of operations) to
February 28, 1995.
** Annualized.
(a) The total returns would have been lower had certain expenses not been
waived during the periods shown.
8 See accompanying notes to the financial statements.
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Domestic Bond Fund (the "Fund") is a series of GMO Trust (the "Trust").
The Fund is registered under the Investment Company Act of 1940, as
amended, as an open-end, non-diversified management investment company. The
Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series into classes.
The Fund seeks high total return through investment in U.S. government
securities and other investment grade bonds denominated in U.S. dollars
while generally maintaining a portfolio duration of approximately four to
six years (excluding short-term investments).
Prior to January 9, 1998, the Fund offered three classes of shares: Class
I, Class II and Class III. Effective January 9, 1998, Class I shares ceased
operations and all shares were exchanged for Class III shares, and Class II
shares ceased to be offered. The principal economic difference among the
classes of shares is the level of shareholder service fee borne by the
classes. Eligibility for and automatic conversion between the various
classes of shares is generally based on the total amount of assets invested
with GMO, as more fully described in the Trust's prospectus.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Other assets and
securities for which no quotations are readily available are valued at fair
value as determined in good faith by the Trustees or other persons acting
at their direction.
Some fixed income securities and options thereon are valued at the closing
bid for such securities as supplied by a primary pricing source chosen by
the Manager. The Manager evaluates such primary pricing sources on an
ongoing basis, and may change any pricing source at any time. The Manager
is kept informed of erratic or unusual movements (including unusual
inactivity) in the prices supplied for a security and has the power to
override any price supplied by a source (by taking a price supplied by
another source) because the Manager has other reasons to suspect that a
price supplied may not be reliable.
9
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from yield
data relating to investments or securities with similar characteristics.
Certain investments in securities held by the Fund were valued on the basis
of a price provided by a principal market maker. The prices provided by
principal market makers may differ from the value that would be realized if
the securities were sold and the differences could be material to the
financial statements. At February 28, 1999, the total value of these
securities represented 81% of net assets. Included in this total are U.S.
Government backed securities and highly rated collateralized debt
obligations that represent 68% of net assets at February 28, 1999.
Futures contracts
The Fund may use futures contracts to manage its exposure to the bond
markets. Buying futures tends to increase the Fund's exposure to the
underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instruments or hedge other Fund instruments.
Upon entering into a futures contract, the Fund is required to deposit with
its custodian, in a segregated account in the name of the futures broker,
an amount of cash or U.S. government obligations in accordance with the
initial margin requirements of the broker or exchange. Futures contracts
are marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. The payable
or receivable is liquidated on the following business day. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from changes in the value of the underlying
instrument, if there is an illiquid secondary market for the contracts, or
if counterparties do not perform under the contract terms. Futures
contracts are valued at the settlement price established each day by the
board of trade or exchange on which they are traded. See Note 6 for all
open futures contracts as of February 28, 1999.
Options
The Fund may write call and put options on securities it owns or in which
it may invest. When the Fund writes a call or put option, an amount equal
to the premium received is recorded as a liability and subsequently marked
to market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
offset against the proceeds or amounts paid on the transaction to determine
the realized gain or loss. If a written put option is exercised, the
premium reduces the cost basis of the securities purchased by the Fund. The
Fund as a writer of an option has no control over whether the underlying
securities may be sold (call) or purchased (put) and as a result bears the
market risk of an unfavorable change in the price of the security
underlying the written option. There is the risk the Fund may not be able
to enter into a closing transaction because of an illiquid market. At
February 28, 1999, the Fund had no written option contracts outstanding.
10
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults, the value of
the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements with certain banks
and broker/dealers whereby the Fund sells portfolio assets concurrent with
an agreement by the Fund to repurchase the same assets at a later date at a
fixed price. In connection with these agreements, the Fund establishes
segregated accounts with its custodian in which the Fund maintains cash,
U.S. Government Securities or other liquid high grade debt obligations
equal in value to its obligations in respect of reverse repurchase
agreements. Reverse repurchase agreements 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. At February 28, 1999, the Fund had entered into reverse
repurchase agreements having a market value of $17,236,610, collateralized
by securities with a market value of $17,713,702. See Note 6 for a summary
of open reverse repurchase agreements as of February 28, 1999.
Indexed securities
The Fund may also invest in indexed securities whose redemption values
and/or coupons are linked to the prices of other securities, securities
indices, or other financial indicators. The Fund uses indexed securities to
increase or decrease its exposure to different underlying instruments and
to gain exposure to markets that may be difficult to invest in through
conventional securities. Indexed securities may be more volatile than their
underlying instruments, but any loss is limited to the amount of the
original investment.
Security lending
The Fund may lend its securities to qualified brokers. The loans are
collateralized at all times with cash or securities with a market value at
least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1999 there were no securities on loan.
11
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Swap agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to interest rates. The Fund may enter into interest rate and total return
swap agreements. Interest rate swap agreements involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. Total return swap
agreements involve commitments to pay interest in exchange for a market
linked return based on a notional amount. To the extent that the total
return of the security or index underlying the transaction exceeds or falls
short of the offsetting interest rate obligation, the Fund will receive a
payment from or make a payment to the counterparty, respectively. Swaps are
marked to market daily based upon quotations from market makers and the
change, if any, is recorded as unrealized gain or loss in the Statement of
Operations. Net payments of interest on interest rate swap agreements are
recorded as interest income. Payments received or made at the end of the
measurement period are recorded as realized gain or loss in the Statement
of Operations. Entering into these agreements involves, to varying degrees,
elements of credit and market risk in excess of the amounts recognized on
the Statement of Assets and Liabilities. Such risks involve the possibility
that there will be no liquid market for these agreements, that the
counterparty to the agreements may default on its obligation to perform and
that there may be unfavorable changes in the fluctuation of interest rates.
See Note 6 for a summary of the open swap agreement as of February 28,
1999.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for redemptions in-kind. Gains resulting from such
in-kind transactions amounted to $204,875.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
12
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Accumulated
Undistributed Net Accumulated Undistributed
Investment Income Net Realized Gain Paid-in Capital
--------------------- ------------------------- -------------------
$(8,225) $249,574 $(241,349)
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis and is adjusted for the accretion of
discounts. Dividend income is recorded on the ex-dividend date. In
determining the net gain or loss on securities sold, the cost of securities
is determined on the identified cost basis. Interest income on U.S.
Treasury inflation indexed securities is accrued daily based upon an
inflation adjusted principal. Additionally, any increase in the principal
or face amount of the securities adjusted for inflation is recorded as
interest income.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .25% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on average daily net assets at the annual rate of .15% for Class III
shares.
GMO agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding brokerage commissions, certain other transaction costs (including
transfer taxes), shareholder service fees and extraordinary expenses)
exceed .10% of average daily net assets.
Effective March 1, 1999, GMO's contractual management fee was reduced to
.10% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding brokerage
commissions, certain other transaction costs (including transfer taxes),
shareholder service fees and extraordinary expenses) exceed the management
fee.
13
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999, was $2,921. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
For the year ended February 28, 1999, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Proceeds
------------------ -------------------
<S> <C> <C>
U.S. Government securities $ 3,850,800 $ 78,034,731
Investments (non-U.S. Government 40,014,294 159,587,711
securities)
</TABLE>
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
---------------- ------------------ ------------------ ----------------
$187,608,524 $2,683,913 $4,334,562 $1,650,649
4. Principal shareholders
At February 28, 1999, 29% of the outstanding shares of the Fund were held
by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
Period from March 1, 1997
to January 9, 1998
--------------------------------
Class I: Shares Amount
-------------- ----------------
Shares sold 46,389 $ 476,298
Shares issued to shareholders in
reinvestment of distributions 27,963 283,203
Shares repurchased (431,611) (4,438,574)
============== ================
Net decrease (357,259) $ (3,679,073)
============== ================
14
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Share transactions -- continued
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1999 February 28, 1998
-------------------------------- --------------------------------
Class III: Shares Amount Shares Amount
-------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Shares sold 7,444,098 $ 76,654,884 22,386,390 $ 227,678,006
Shares issued to shareholders in
reinvestment of distributions 2,308,399 23,190,329 3,685,870 37,365,549
Shares repurchased (33,636,371) (342,778,679) (40,102,345) (414,711,680)
============== ================ ============== ================
Net decrease (23,883,874) $ (242,933,466) (14,030,085) $ (149,668,125)
============== ================ ============== ================
</TABLE>
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1999 is as
follows:
Short futures contracts
<TABLE>
<CAPTION>
Number of Net Unrealized
Contracts Type Expiration Date Contract Value Appreciation
------------- ------------------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
212 U.S. Treasury Note 5 Yr. June 1999 $ 23,525,375 $ 175,559
166 U.S. Treasury Note 10 Yr. June 1999 19,048,500 195,765
16 U.S. Treasury Bond June 1999 1,935,500 490
----------------
$ 371,814
================
</TABLE>
At February 28, 1999, the Fund has sufficient cash and/or securities to
cover any commitments or margin on open futures contracts.
Reverse repurchase agreements
<TABLE>
<CAPTION>
Face Value Description Market Value
---------- ----------- ------------
<S> <C> <C>
$ 7,610,450 Bear Stearns, 5.39%, dated 2/16/99, to be repurchased at $ 7,610,450
$7,642,329 on 3/16/99.
9,626,160 Bear Stearns, 4.99%, dated 2/25/99, to be repurchased at 9,626,160
$9,744,912 on 5/25/99.
=============
$ 17,236,610
=============
Average balance outstanding........................................................ $ 8,422,076
Average interest rate.............................................................. 5.87%
Maximum balance outstanding........................................................ $ 17,236,610
Average shares outstanding......................................................... 18,747,025
Average balance per share outstanding.............................................. $ .45
</TABLE>
15
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Average balance outstanding was calculated based on daily balances
outstanding during the period that the Fund had entered into reverse
repurchase agreements.
Total return swap agreements
<TABLE>
<CAPTION>
Net
Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
--------------- ------------- ---------------------------------------------- ---------------
<S> <C> <C> <C>
$100,000,000 5/21/99 Agreement with Morgan Guaranty Trust Company $ 5,314,719
dated 5/19/98 to receive the notional amount
multiplied by the return on the Merrill
Lynch Total Return U.S. Treasury Index and
to pay the notional amount multiplied by 3
month LIBOR adjusted by a specified spread.+
25,000,000 11/12/00 Agreement with Morgan Guaranty Trust Company (285,441)
dated 11/09/98 to receive (pay) the notional
amount multiplied by the return on the
Lehman Aggregate Index and to pay the
notional amount multiplied by 3 month LIBOR
adjusted by a specified spread.+
==============
$ 5,029,278
==============
</TABLE>
+This swap agreement is valued by management (Note 1).
16
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
Federal Income Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1999, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 15.73% of distributions as net capital gain dividends.
17
<PAGE>
GMO Domestic Bond Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
- ------------------
Mr. William L. Nemerever and Mr. Thomas F. Cooper are primarily responsible for
the day-to-day management of the Fund's portfolio. Each of these individuals has
been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The Class III shares of the GMO Domestic Bond Fund returned 5.0% for the fiscal
year ended February 28, 1999, as compared with the 6.6% return of the Lehman
Brothers Government Bond Index. Consistent with the Fund's investment objectives
and policies, the Fund was substantially invested in high-quality, domestic
fixed income instruments throughout the period.
During the year, the majority of the Fund's assets were invested in U.S. agency
and asset-backed securities. The flight to liquidity during the second half of
1998 in the aftermath of the Russian crisis and the failure of Long-Term Capital
Management caused spreads to widen on many of these highly rated, but less
liquid issues. Finally, the issues held in this Fund have short effective
maturities.
At the fiscal year end approximately 29% of the Fund was invested in
highly-rated, floating rate, asset-backed securities. These included issues
backed by auto, truck, credit card and health care receivables. Also,
approximately 57% of the Fund was invested in U.S. government agency issues that
offer higher yields than similar maturity U.S. Treasury securities. The
remainder of the Fund was split between sovereigns (6%) and corporates (6%) and
cash equivalents (2%).
GMO expects the Fund to recoup losses experienced during the fiscal year either
because spreads narrow or through the realization of higher yields on these high
quality issues. The maturity exposure of the fund is managed to approximate that
of the U.S. treasury market. As such, the Fund will remain exposed to capital
changes resulting from shifts in U.S. interest rates.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Domestic Bond Fund Class III Shares and the
Lehman Brothers Government Bond Index
As of February 28, 1999
--------------------------------
Average Annual Total Return
--------------------------------
Since
Inception
1 Year 8/18/94
Class --------------------------------
III 5.0% 8.0%
--------------------------------
[LINE GRAPH APPEARS HERE]
GMO Domestic Bond Fund Lehman Brothers Government
Date Class III Shares Bond Index
------- ---------------------- ------------------------
1/31/94
8/18/94 10,000 10,000
9/30/94 9,890 9,927
12/31/94 9,939 9,962
3/31/95 10,377 10,431
6/30/95 11,036 11,078
9/30/95 11,272 11,275
12/31/95 11,785 11,790
3/31/96 11,506 11,523
6/30/96 11,560 11,578
9/30/96 11,785 11,773
12/31/96 12,143 12,116
3/31/97 12,035 12,018
6/30/97 12,472 12,435
9/30/97 12,876 12,852
12/31/97 13,352 13,278
3/31/98 13,510 13,478
6/30/98 13,899 13,834
9/30/98 14,662 14,599
12/31/98 14,427 14,586
2/28/99 14,162 14,322
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period. Past performance is
not indicative of future performance. Information is unaudited.
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Emerging Country Debt Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Emerging Country Debt Fund at
February 28, 1999 and the results of its operations, the changes in its net
assets and the financial highlights for the periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 22, 1999
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligations -- 78.7%
Argentina -- 12.3%
ARP 4,400,000 Provincia Corrientes Series 1, PIK,
Variable Rate, 1 mo. Peso Deposit Rate, 2.69%,
due 4/01/09 1,342,537
ARP 2,500,000 Provincia Corrientes Series 2, PIK,
Variable Rate, 1 mo. Peso Deposit Rate, 2.69%,
due 4/01/09 762,805
ARP 15,000,000 Republic of Argentina, 8.75%, due 7/10/02 12,304,922
ARP 32,323,800 Republic of Argentina Bocon Pro 1, PIK,
Variable Rate, 1 mo. Peso Deposit Rate, 2.69%,
due 4/01/07 20,954,204
DEM 3,830,000 Republic of Argentina Discount Bond,
Variable Rate, 6 mo. DEM LIBOR + .81%, 4.50%,
due 3/31/23 1,332,854
USD 8,500,000 Republic of Argentina Discount Bond,
Variable Rate, 6 mo. LIBOR + .81%, 6.06%, due
3/31/23 5,971,250
USD 42,350,000 Republic of Argentina Par Bond,
Variable Rate, Step Up, 5.75%, due 3/31/23 28,268,625
USD 5,640,000 Republic of Argentina PDI (Global Bearer),
Variable Rate, 6 mo. LIBOR + .81%, 6.19%, due
3/31/05 4,624,800
USD 2,585,000 Republic of Argentina PDI (Global Registered),
Variable Rate, 6 mo. LIBOR + .81%, 6.19%, due
3/31/05 2,119,700
ARP 35,134,370 Republic of Argentina Pro 1 Co-Participation
Rights, Variable Rate, 1 mo. Peso Deposit Rate,
2.69%, due 4/01/07 17,665,601
--------------
95,347,298
--------------
Bosnia & Herzegovina -- 0.3%
DEM 25,244,000 Bosnia & Herzegovina Series A, Step Up, 2.00%, due
12/11/17 1,842,017
DEM 12,335,000 Bosnia & Herzegovina Series B, Zero Coupon, due
12/11/17** 138,472
--------------
1,980,489
--------------
Brazil -- 9.6%
USD 297,742 Brazil Capitalization Bond, PIK, 8.00%, due 4/15/14 169,154
USD 6,500,000 Brazil DCB (Bearer),
Variable Rate, 6 mo. LIBOR + .88%, 6.19%, due 3,120,000
4/15/12
USD 525,000 Brazil Discount ZL Bond,
Variable Rate, 6 mo. LIBOR + .81%, 6.13%, due
4/15/24 292,031
USD 4,000,000 Brazil FLIRB (Bearer),
Variable Rate, Step Up, 5.00%, due 4/15/09 1,760,000
USD 32,320,000 Brazil FLIRB (Registered),
Variable Rate, Step Up, 5.00%, due 4/15/09 14,220,800
USD 12,551,055 Brazil MYDFA Trust Certificates,
Variable Rate, 6 mo. LIBOR + .81%, 6.25%, due
9/15/07 6,808,947
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Brazil -- continued
USD 91,000,000 Brazil New Money Bond,
Variable Rate, 6 mo. LIBOR + .88%, 6.19%, due
4/15/09 47,604,376
-------------
73,975,308
-------------
Bulgaria -- 4.3%
USD 4,750,000 Bulgaria Discount Bond Series A,
Variable Rate, 6 mo. LIBOR + .81%, 5.88%, due
7/28/24 3,313,125
USD 551,707 Bulgaria Discount Bond Series B,
Variable Rate, 6 mo. LIBOR + 1.31%, 6.38%, due
7/28/24 384,816
USD 18,000,000 Bulgaria Discount Series B Interest Strips, Basket
2, 0.00%, due 1/28/10 - 7/28/24 1,800,000
USD 7,033,687 Bulgaria FLIRB (Global Bearer), Series A,
Variable Rate, Step Up, 2.50%, due 7/28/12 4,185,044
USD 1,000,000 Bulgaria FLIRB (Global Registered), Series A,
Variable Rate, Step Up, 2.50%, due 7/28/12 595,000
USD 37,644,572 Bulgaria FLIRB Series B,
Variable Rate, Step Up, 3.00%, due 7/28/12 22,398,520
USD 5,000,000 Bulgaria Par Bond, Series B Strips, Tranche B,
0.00%, due 7/28/24 585,000
-------------
33,261,505
-------------
Costa Rica -- 0.2%
USD 501,584 Central Bank of Costa Rica Interest Series A,
Variable Rate, 3 mo. LIBOR + .81%, 6.21%, due
5/21/05 446,410
USD 346,632 Central Bank of Costa Rica Interest Series B,
Variable Rate, 3 mo. LIBOR + .81%, 6.21%, due
5/21/05 308,502
USD 1,000,000 Central Bank of Costa Rica Principal Bond Series
A, 6.25%, due 5/21/10 790,000
-------------
1,544,912
-------------
Dominican Republic -- 1.1%
USD 15,957,000 Dominican Republic Discount Bond,
Variable Rate, 6 mo. LIBOR + .81%, 6.06%, due
8/30/24 8,776,350
-------------
Ecuador -- 5.9%
USD 4,000,000 Republic of Ecuador (Global Bearer),
Variable Rate, 6 mo. LIBOR + .81%, 6.00%, due
12/21/04 1,900,000
USD 43,465,000 Republic of Ecuador Discount Bond (Global
Registered), Variable Rate, 6 mo. LIBOR + .81%,
6.00%, due 2/28/25 19,559,250
USD 14,000,000 Republic of Ecuador Par Bond,
Variable Rate, Step Up, 3.50%, due 2/28/25 5,460,000
USD 26,131,918 Republic of Ecuador PDI (Global Bearer
Capitalization Bond), PIK, Variable Rate, 6 mo.
LIBOR + .81%, 6.63%, due 2/27/15 7,088,283
</TABLE>
2 See accompanying notes to financial statements.
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ecuador -- continued
USD 43,206,306 Republic of Ecuador PDI (Registered), PIK,
Variable Rate, 6 mo. LIBOR + .81%, 3.25%, due
2/27/15 11,719,710
-------------
45,727,243
-------------
Ivory Coast -- 4.2%
FRF 25,000,000 Ivory Coast Discount Bond,
Variable Rate, Step Up, 3.00%, due 3/31/28 1,338,868
FRF 528,720,000 Ivory Coast FLIRB,
Variable Rate, Step Up, 2.00%, due 3/29/18 18,582,019
FRF 267,029,875 Ivory Coast PDI,
Variable Rate, Step Up, 1.90%, due 3/29/18 12,960,021
-------------
32,880,908
-------------
Jordan -- 3.7%
USD 4,530,215 Hashemite Kingdom of Jordan Par Bond,
Variable Rate, Step Up, 5.50%, due 12/23/23 2,491,618
USD 31,250,000 Hashemite Kingdom of Jordan Par Bond,
Variable Rate, Step Up, 144A, 5.50%, due
12/23/23 17,500,000
USD 9,578,948 Hashemite Kingdom of Jordan PDI,
Variable Rate, 6 mo. LIBOR + .81%, 6.00%, due
12/23/05 8,333,685
-------------
28,325,303
-------------
Macedonia -- 1.0%
USD 22,890,020 Macedonia Capitalization Bond, PIK,
Variable Rate, 6 mo. LIBOR + .81%, 3.50%, due
7/02/12 8,011,507
-------------
Mexico -- 16.0%
USD 19,000 Mexico Discount Bond Series A,
Variable Rate, 6 mo. LIBOR + .81%, 6.12%, due
12/31/19 14,583
USD 26,500,000 Mexico Discount Bond Series D,
Variable Rate, 6 mo. LIBOR + .81%, 6.10%, due
12/31/19 21,431,875
DEM 30,000,000 Mexico Discount Bond,
Variable Rate, 6 mo. DEM LIBOR + .81%, 4.06%, due
12/31/19 11,934,561
FRF 335,250,000 Mexico Par Bond, 6.63%, due 12/31/19 43,623,153
CHF 72,000,000 Mexico Par Bond, 3.75%, due 12/31/19 32,668,553
USD 3,000,000 Mexico Par Bond, Series A, 6.25%, due 12/31/19 2,242,500
USD 15,659,000 Mexico Par Bond, Series B, 6.25%, due 12/31/19 11,697,073
-------------
123,612,298
-------------
Nigeria -- 3.7%
USD 44,814,575 Central Bank of Nigeria Par Bond,
Variable Rate, Step Up, 6.25%, due 11/15/20 28,457,252
-------------
</TABLE>
See accompanying notes to financial statements. 3
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Peru -- 1.7%
USD 7,775,000 Peru FLIRB,
Variable Rate, Step Up, 3.25%, due 3/07/17 4,159,625
USD 5,150,000 Peru FLIRB,
Variable Rate, Step Up, 144A, 3.25%, due 3/07/17 2,755,250
USD 9,000,000 Peru Par Bond,
Variable Rate, Step Up, 3.00%, due 3/07/27 4,140,000
USD 3,200,000 Peru PDI,
Variable Rate, Step Up, 4.00%, due 3/07/17 1,884,000
-------------
12,938,875
-------------
Russia -- 0.2%
RUB 107,450,000 Russia Federal Loan Bond Series 25018, 14.00%, due
9/12/01 232,525
RUB 39,463,513 Russia Federal Loan Bond Series 25021, 15.00%, due
1/17/01 85,400
USD 9,623,679 Russia Vnesheconombank IAN,
Variable Rate, 6 mo. LIBOR + .81%, 5.97%, due
12/15/15 962,368
-------------
1,280,293
-------------
South Korea -- 0.7%
USD 6,000,000 Export Import Bank of Korea, 7.10%, due 3/15/07 5,784,828
-------------
Supra National -- 0.8%
ZAR 250,000,000 International Bank for Reconstruction and
Development, Zero Coupon, due 5/14/12 6,521,388
-------------
Tunisia -- 0.7%
JPY 200,000,000 Banque Centrale De Tunisie, 4.35%, due 8/15/17 1,078,803
JPY 800,000,000 Banque National Development Touristique, 4.75%,
due 6/09/17 4,652,339
-------------
5,731,142
-------------
United States -- 4.9%
Asset Backed Securities -- 3.6%
USD 2,299,254 Americredit Automobile Receivables Trust 97-C
Class A2,
Variable Rate, 1 mo. LIBOR + .10%, 5.04%, due
3/05/01 2,298,105
USD 6,000,000 Chase Credit Card Master Trust 98-6 Class A,
Variable Rate, 1 mo. LIBOR + .26%, 5.20%, due
9/15/04 6,015,000
USD 15,000,000 Dreamworks Film Trust Series 1 Class A,
Variable Rate, 3 mo. LIBOR + .22%, 5.25%, due
10/15/06 14,925,000
USD 5,000,000 SHYPPCO Finance Company Series B Class A-2B,
6.64%, due 6/15/10 4,895,000
-------------
28,133,105
-------------
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Government Agency -- 1.3%
USD 1,166,750 Agency for International Development Floater (Support
of C.A.B.E.I.),
Variable Rate, 6 mo. U.S. Treasury Bill + .40%,
5.00%, due 10/01/12 1,120,080
USD 9,000,000 Federal Home Loan Bank,
Variable Rate, CPI + 3.15%, 4.75%, due
2/15/02(a) 8,716,500
-------------
9,836,580
-------------
Total United States 37,969,685
-------------
Venezuela -- 6.5%
USD 1,856,569 Republic of Venezuela DCB DL Odd Lot,
Variable Rate, 6 mo. LIBOR + .88%, 5.94%, due
12/18/07 1,153,733
USD 1,236,860 Republic of Venezuela DCB IL Odd Lot,
Variable Rate, 6 mo. LIBOR + .88%, 5.94%, due
12/18/08 760,341
USD 13,391,251 Republic of Venezuela DCB IL,
Variable Rate, 6 mo. LIBOR + .88%, 5.94%, due
12/18/08 8,084,968
USD 5,000,000 Republic of Venezuela Discount Bond Series A,
Variable Rate, 6 mo. LIBOR + .81%, 5.81%, due
3/31/20 3,100,000
USD 206,428 Republic of Venezuela FLIRB Series A,
Variable Rate, 6.13%, due 3/31/07 115,470
USD 13,761,840 Republic of Venezuela FLIRB Series A,
Variable Rate, 6 mo. LIBOR + .88%, 6.13%, due
3/31/07 8,394,722
USD 305,999 Republic of Venezuela FLIRB Series B Odd Lot,
Variable Rate, 6 mo. LIBOR + .88%, 6.13%, due
3/31/07 183,599
CHF 32,380,800 Republic of Venezuela FLIRB,
Variable Rate, 6 mo. CHF LIBOR + .88%, 2.50%, due
3/31/07 12,513,455
USD 17,398,538 Republic of Venezuela New Money Bond Series A,
Variable Rate, 6 mo. LIBOR + 1%, 6.06%, due
12/18/05 10,613,107
USD 990,295 Republic of Venezuela New Money Bond Series B Odd
Lot, Variable Rate, 6 mo. LIBOR + .88%, 6.06%,
due 12/18/05 604,081
FRF 39,175,000 Republic of Venezuela Par Bond, 7.71%, due 3/31/20 4,581,194
-------------
50,104,670
-------------
Vietnam -- 0.9%
USD 3,000,000 Vietnam Discount Bond,
Variable Rate, 6 mo. LIBOR + .81%, 6.44%, due 1,260,000
3/13/28
USD 8,000,000 Vietnam Par Bond,
Variable Rate, Step Up, 3.00%, due 3/12/28 2,080,000
USD 12,591,000 Vietnam PDI,
Variable Rate, Step Up, 3.00%, due 3/14/16 3,462,525
-------------
6,802,525
-------------
TOTAL DEBT OBLIGATIONS (COST $678,545,652) 609,033,779
-------------
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LOAN ASSIGNMENTS -- 8.5%
Algeria -- 3.9%
JPY 376,793,704 Algeria Tranche 1, JPY 6 mo. LIBOR + .8125%,
(1.4375%) 1,047,972
USD 3,600,000 Algeria Tranche 2, 6 mo. LIBOR + .8125%, (6.375%) 1,764,000
JPY 8,731,773,548 Algeria Tranche 3 Loan, JPY 6 mo. LIBOR + .8125%,
(1.4375%) 22,077,809
FRF 90,564,324 Algeria Tranche 3, FRF 6 mo. LIBOR + .81%,
(4.4375%) 5,304,849
-------------
30,194,630
-------------
Cameroon -- 0.1%
FRF 18,396,841 Republic of Cameroon Tranche B* 431,042
-------------
431,042
-------------
Congo Republic -- 0.7%
FRF 102,097,964 Republic of Congo Loan Agreement* 3,075,654
EUR 8,195,761 Republic of Congo Loan Agreement* 1,619,515
USD 4,179,127 Republic of Congo Loan Agreement* 794,034
-------------
5,489,203
-------------
Russia -- 3.7%
EUR 5,000,000 International Bank for Economic Cooperation Loan
Agreement* 439,120
USD 396,440,310 Russia Vnesh Restructured Loan Agreements* 28,246,372
-------------
28,685,492
-------------
United States -- 0.0%
DEM 5,208,190 Russia Vnesheconombank Foreign Trade Obligation* 149,821
-------------
149,821
-------------
Yugoslavia -- 0.1%
USD 1,400,368 Yugoslavia New Financing Agreement Tranche A* 434,114
USD 1,499,573 Yugoslavia New Financing Agreement Tranche C* 464,868
-------------
898,982
-------------
TOTAL LOAN ASSIGNMENTS
(COST $234,265,304) 65,849,170
-------------
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LOAN PARTICIPATIONS -- 5.7%
Algeria -- 0.0%
JPY 118,636,364 Algeria Tranche 1, JPY 6 mo. LIBOR + .8125%,
(1.4375%) (Participation with Bank of America) 329,962
-------------
Cameroon -- 0.3%
NLG 28,052,902 Cameroon Loan Agreement, (Participation with Bank
of America and Salomon)* 1,956,476
-------------
Jamaica -- 0.5%
USD 5,062,500 Jamaica Refinancing Agreement Tranche B, LIBOR +
.81%, (6.25%), (Participation with Chase
Manhattan Bank and Salomon) 4,050,000
-------------
Morocco -- 4.7%
JPY 366,000,804 Morocco Restructuring and Consolidating Agreement
Tranche A, Japanese Long Term Fixed Prime +
.2175%, (3.0175%), (Participation with J.P.
Morgan) 2,136,161
JPY 4,330,098,891 Morocco Restructuring and Consolidating Agreement
Tranche A, Japanese Long Term Floating Prime +
.1175%, (2.3175%), (Participation with Bankers
Trust and J.P. Morgan) 25,272,596
USD 10,952,370 Morocco Restructuring and Consolidating Agreement
Tranche A, LIBOR + .8125%, (6.0625%) 8,570,230
-------------
35,978,987
-------------
Russia -- 0.1%
CHF 1,500,000 International Bank for Economic Cooperation Loan
Agreement (Participation with Oppenheimer)* 62,108
DEM 2,000,000 International Bank for Economic Cooperation Loan
Agreement, (Participation with Salomon)* 89,807
DEM 1,500,000 International Bank for Economic Cooperation Loan
Agreement, (Participation with Salomon)* 67,356
JPY 900,000,000 International Investment Bank Loan Agreement,
(Participation with Bank of America)* 530,973
-------------
750,244
-------------
Yugoslavia -- 0.1%
USD 2,100,416 Yugoslavia New Financing Agreement Tranche B,
(Participation with Chase Manhattan Bank)* 651,129
USD 352,431 Yugoslavia New Financing Agreement Tranche C,
(Participation with Chase Manhattan Bank)* 109,254
-------------
760,383
-------------
TOTAL LOAN PARTICIPATIONS (COST $51,020,745) 43,826,052
-------------
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PROMISSORY NOTES -- 0.9%
Kenya -- 0.6%
GBP 5,058,280 Republic of Kenya Promissory Notes, 0.00%, due
7/30/01 - 1/30/03 4,423,593
-------------
Nigeria -- 0.2%
USD 3,000,000 Nigeria Promissory Notes, 5.09%, due 1/05/10 1,305,000
-------------
Romania -- 0.1%
USD 1,242,873 Romania Trade Finance Promissory Notes, 0.00%, due
6/05/01 - 12/05/01 752,942
-------------
TOTAL PROMISSORY NOTES
(COST $7,607,658) 6,481,535
-------------
Principal Amount
-----------------
CALL OPTIONS PURCHASED -- 0.0%
Options on Futures -- 0.0%
USD 2,832,500 Eurodollar, Expires 3/15/99, Strike 95 28,325
-------------
TOTAL CALL OPTIONS PURCHASED
(COST $82,309) 28,325
-------------
Shares RIGHTS AND WARRANTS -- 0.0%
-------------
Mexico -- 0.0%
164,946,000 United Mexican States Warrants, Expires
6/30/03** --
-------------
Nigeria -- 0.0%
43,477 Central Bank of Nigeria Payment Adjusted Warrants,
Expires 11/15/20** --
-------------
Venezuela -- 0.0%
35,700 Republic of Venezuela Recovery Warrants,
Expires 04/15/20** --
-------------
TOTAL RIGHTS AND WARRANTS (COST $0) --
-------------
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares/
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS -- 3.2%
Cash Equivalents -- 0.3%
USD 330,359 BankBoston Eurodollar Time Deposit, 5.005% due
4/30/99(b) 330,359
1,000,000 Merrimac Cash Fund Premium Class(b) 1,000,000
USD 1,000,000 Prudential Securities Group Inc, Master Note,
5.075% due 6/14/99(b) 1,000,000
------------
2,330,359
------------
Commercial Paper -- 2.9%
USD 22,478,000 Baker Hughes, 4.87%, due 3/01/99 22,478,000
------------
TOTAL SHORT-TERM INVESTMENTS
(COST $24,808,359) 24,808,359
------------
TOTAL INVESTMENTS -- 97.0%
(Cost $996,330,027) 750,027,220
Other Assets and Liabilities (net) -- 3.0% 23,593,740
------------
TOTAL NET ASSETS -- 100% $773,620,960
============
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Notes to the Schedule of Investments:
DCB - Debt Conversion Bond
FLIRB - Front Loaded Interest Reduction Bond
IAN - Interest Arrears Note
PIK - Payment In Kind
PDI - Past Due Interest
144A - Securities exempt from registration under Rule
144A of the Securities Act of 1933. These
securities may be resold in transactions exempt
from registration, normally to qualified
institutional buyers.
Variable and Step up rates - The rates shown on
variable and step up rate notes are the current
interest rates at February 28, 1999, which are
subject to change based on the terms of the
security, including varying reset dates.
Currency Abbreviations:
ARP - Argentinian Peso JPY - Japanese Yen
CHF - Swiss Franc NLG - Netherlands Guilder
DEM - German Mark RUB - Russian Ruble
EUR - Euro TRL - Turkish Lira
FRF - French Franc USD - United States Dollar
GBP - British Pound ZAR - South African Rand
(a) Security has been segregated to cover margin requirements on open financial
futures contracts.
(b) Represents investments of security lending collateral (Note 1).
* Non-performing. Borrower not currently paying interest.
** Non-income producing security.
10 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at value (cost $996,330,027) (Note 1) $750,027,220
Cash at interest on deposit at brokers (Note 1) 6,785,750
Receivable for open swap contracts (Notes 1 and 6) 21,166,981
Receivable for investments sold 35,431,691
Receivable for Fund shares sold 496
Interest receivable 16,439,103
Net receivable for open forward foreign currency contracts (Notes 1 and 6) 6,093,320
Receivable for closed swap contracts (Notes 1 and 6) 672,126
Receivable for expenses waived or borne by Manager (Note 2) 111,420
------------
Total assets 836,728,107
------------
Liabilities:
Due to custodian 1,172,895
Payable for investments purchased 46,013,191
Payable upon return of securities loaned (Note 1) 2,330,359
Written options outstanding, at value (premiums $1,550,063) (Notes 1 and 6) 12,421,500
Payable for variation margin on open futures contracts (Notes 1 and 6) 87,341
Payable for Fund shares repurchased 400,968
Payable to affiliate for (Note 2):
Management fee 303,046
Shareholder service fee 76,198
Payable for closed swap contracts (Notes 1 and 6) 104,978
Accrued expenses and other liabilities 196,671
------------
Total liabilities 63,107,147
------------
Net assets $773,620,960
============
Net assets consist of:
Paid-in capital $989,509,857
Accumulated undistributed net investment income 14,414,488
Accumulated net realized loss (174,326)
Net unrealized depreciation (230,129,059)
------------
$773,620,960
============
Net assets attributable to:
Class III shares $450,336,336
============
Class IV shares $323,284,624
============
Shares outstanding:
Class III 65,316,585
============
Class IV 46,885,196
============
Net asset value per share:
Class III $ 6.89
============
Class IV $ 6.90
============
</TABLE>
See accompanying notes to the financial statements. 11
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Operations -- Year Ended February 28, 1999
- ------------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Interest (including securities lending income of $11,115) $ 84,103,284
-------------
Total income 84,103,284
-------------
Expenses:
Management fee (Note 2) 3,666,332
Custodian fees 460,704
Audit fees 92,625
Registration fees 53,061
Transfer agent fees 36,484
Legal fees 22,692
Trustees fees (Note 2) 7,216
Miscellaneous 4,928
Fees waived or borne by Manager (Note 2) (1,314,674)
-------------
3,029,368
Shareholder service fee (Note 2)
Class III 544,857
Class IV 370,029
-------------
Net expenses 3,944,254
-------------
Net investment income 80,159,030
-------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 4,893,233
Closed futures contracts (5,576,470)
Closed swap contracts (48,763,738)
Written options 27,000
Foreign currency, forward contracts and foreign currency related
transactions (9,786,122)
-------------
Net realized loss (59,206,097)
-------------
Change in net unrealized appreciation (depreciation) on:
Investments (326,992,124)
Open futures contracts 605
Open swap contracts 12,949,955
Written options (10,871,437)
Foreign currency, forward contracts and
foreign currency related transactions 6,265,306
-------------
Net unrealized loss (318,647,695)
-------------
Net realized and unrealized loss (377,853,792)
-------------
Net decrease in net assets resulting from operations $(297,694,762)
=============
</TABLE>
12 See accompanying notes to financial statements.
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
February 28,
------------------------------------
1999 1998
-------------- --------------
Increase (decrease) in net assets:
<S> <C> <C>
Operations:
Net investment income $80,159,030 $ 48,250,976
Net realized gain (loss) (59,206,097) 142,856,114
Change in net unrealized appreciation (depreciation) (318,647,69) (73,348,483)
----------- ------------
Net increase (decrease) in net assets
resulting from operations (297,694,76) 117,758,607
----------- ------------
Distributions to shareholders from:
Net investment income
Class I -- (615,704)
Class II -- (162,060)
Class III (7,987,181) (37,765,550)
Class IV (9,997,511) --
----------- ------------
Total distributions from net investment income (17,984,692) (38,543,314)
----------- ------------
Net realized gains
Class I -- (2,479,219)
Class II -- (728,281)
Class III (33,861,250) (156,588,472)
Class IV (42,566,783) --
----------- ------------
Total distributions from net realized gains (76,428,033) (159,795,972)
----------- ------------
In excess of net realized gains
Class III (58,659) --
Class IV (73,741) --
----------- ------------
Total distributions in excess of net realized
gains (132,400) --
----------- ------------
(94,545,125) (198,339,286)
----------- ------------
Net share transactions: (Note 5)
Class I -- 2,299,312
Class II -- 494,022
Class III 168,649,238 (3,460,212)
Class IV 226,245,142 296,725,667
----------- ------------
Increase in net assets resulting from net share
transactions 394,894,380 296,058,789
----------- ------------
Total increase in net assets 2,654,493 215,478,110
Net assets:
Beginning of period 770,966,467 555,488,357
----------- ------------
End of period (including accumulated undistributed net
investment income of $14,414,488 and $45,421,506,
respectively) $773,620,960 $770,966,467
=========== ============
</TABLE>
See accompanying notes to the financial statements. 13
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Financial Highlights
(For a Class I share outstanding throughout each period)
- --------------------------------------------------------------------------------------------------
Period from Period from December 31,
March 1, 1997 1996
to January 9, (commencement of operations)
1998 to February 28, 1997
---------------- --------------------------
<S> <S> <C>
Net asset value, beginning of period $14.08 $12.87
------ ------
Income from investment operations:
Net investment income 1.05+ 0.10
Net realized and unrealized gain 0.94 1.11
------ ------
Total from investment operations 1.99 1.21
------ ------
Less distributions to shareholders:
From net investment income (0.84) --
From net realized gains (4.25) --
------ -------
Total distributions (5.09) --
------ -------
Net asset value, end of period $10.98(a) $14.08
====== =======
Total Return (b) 15.42% 9.40%
Ratios/Supplemental Data:
Net assets, end of period (000's) -- $ 36
Net expenses to average daily net assets 0.66%* 0.71%*
Net investment income to 9.27%* 6.06%*
average daily net assets
Portfolio turnover rate 255% 152%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following
per share amounts: $ 0.02 --(c)
</TABLE>
* Annualized.
+ Computed using average shares outstanding throughout the period.
(a)All Class I shares of the Fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
(b)Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during the
periods shown.
(c)Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
14 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class II share outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from March 21, 1997
(commencement of operations)
to January 9, 1998
--------------------------
<S> <C>
Net asset value, beginning of period $ 13.74
--------
Income from investment operations:
Net investment income 0.92+
Net realized and unrealized gain 1.42
--------
Total from investment operations 2.34
--------
Less distributions to shareholders:
From net investment income (0.84)
From net realized gains (4.25)
--------
Total distributions (5.09)
--------
Net asset value, end of period $ 10.99(a)
========
Total Return (b) 18.34%
Ratios/Supplemental Data:
Net assets, end of period (000's) --
Net expenses to average daily net assets 0.60%*
Net investment income to average daily net assets 8.61%*
Portfolio turnover rate 255%
Fees and expenses voluntarily waived or borne by the Manager consisted of
the following per share amount: $ 0.02
</TABLE>
* Annualized.
+ Computed using average shares outstanding throughout the period.
(a) All Class II shares of the fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
(b) Calculation excludes purchase premiums and redemption fees. The total return
would have been lower had certain expenses not been waived during the period
shown.
See accompanying notes to the financial statements. 15
<PAGE>
GMO Emerging Country Debt Fund
(A series of GMO Trust)
Financial Highlights
(For Class III shares outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29,
-----------------------------------------------------
1999 1998 1997 1996 1995*
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 11.64 $ 14.09 $ 11.76 $ 8.39 $ 10.00
--------- --------- --------- --------- ---------
Income from investment operations:
Net investment income 0.92+ 1.13+ 1.48 1.35 0.48
Net realized and unrealized gain (4.41) 1.51 6.40 3.84 (1.59)
(loss)
--------- --------- --------- --------- ---------
Total from investment (3.49) 2.64 7.88 5.19 (1.11)
operations
--------- --------- --------- --------- ---------
Less distributions to shareholders:
From net investment income (0.23) (0.84) (1.58) (1.17) (0.40)
From net realized gains (1.03) (4.25) (3.97) (0.65) --
In excess of net realized gains --(a) -- -- -- (0.10)
--------- --------- --------- --------- ---------
Total distributions (1.26) (5.09) (5.55) (1.82) (0.50)
--------- --------- --------- --------- ---------
Net asset value, end of period $ 6.89 $ 11.64 $ 14.09 $ 11.76 $ 8.39
========= ========= ========= ========= =========
Total Return (b) (32.94)% 22.27% 74.32% 63.78% (11.65)%
Ratios/Supplemental Data:
Net assets, end of period (000's) $450,336 $460,387 $555,452 $615,485 $243,451
Net expenses to average daily net 0.56% 0.53% 0.57% 0.50% 0.50%**
assets
Net investment income to average
daily net assets 10.99% 8.62% 8.35% 12.97% 10.57%**
Portfolio turnover rate 272% 255% 152% 158% 104%
Fees and expenses voluntarily
waived or borne by the Manager
consisted of the following per $ 0.02 $ 0.03 $ 0.03 $ 0.02 $ 0.01
share amounts:
</TABLE>
* For the period from April 19, 1994 (commencement of operations) to
February 28, 1995.
** Annualized.
+ Computed using average shares outstanding throughout the period.
(a) The distribution in excess of net realized gains was $.002.
(b) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
16 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Country Debt Fund
(A series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from January 9, 1998
Year Ended (commencement of operations)
February 28, 1999 to February 28, 1998
------------------ ----------------------------
<S> <C> <C>
Net asset value, beginning of period $ 11.63 $ 10.99
-------- --------
Income from investment operations:
Net investment income 0.91+ 0.10+
Net realized and unrealized gain (loss) (4.37) 0.54
-------- --------
Total from investment operations (3.46) 0.64
-------- --------
Less distributions to shareholders:
From net investment income (0.24) --
From net realized gains (1.03) --
In excess of net realized gains --(b) --
-------- --------
Total distributions (1.27) --
-------- --------
Net asset value, end of period $ 6.90 $ 11.63
======== ========
Total Return (a) (32.82)% 5.82%
Ratios/Supplemental Data:
Net assets, end of period (000's) $323,285 $310,580
Net expenses to average daily net assets 0.51% 0.50%*
Net investment income to average daily net 10.87% 7.17%*
assets
Portfolio turnover rate 272% 255%
Fees and expenses voluntarily waived or
borne by the Manager consisted of the
following per share amounts: $ 0.02 --(c)
</TABLE>
* Annualized.
+ Computed using average shares outstanding throughout the period.
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(b) The distribution in excess of net realized gains was $.002.
(c) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
See accompanying notes to the financial statements. 17
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Emerging Country Debt Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on June
24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series into classes.
The Fund seeks high total return by investing primarily in sovereign debt
of countries in Asia, Latin America, the Middle East, Southern Europe,
Eastern Europe and Africa.
Prior to January 9, 1998, the Fund offered three classes of shares: Class
I, Class II and Class III. Effective January 9, 1998, Class I and Class II
shares ceased operations and all shares were exchanged for Class III
shares. Additionally, Class IV shares commenced operations on January 9,
1998. The principal economic difference among the classes of shares is the
level of shareholder service fee borne by the classes. Eligibility for and
automatic conversion between the various classes of shares is generally
based on the total amount of assets invested with GMO, as more fully
outlined in the Trust's prospectus.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost which
approximates market value. Other assets and securities for which no
quotations are readily available are valued at fair value as determined in
good faith by the Trustees or other persons acting at their direction.
Some fixed income securities and options thereon are valued at the closing
bid for such securities as supplied by a primary pricing source chosen by
the Manager. The Manager evaluates such primary pricing sources on an
ongoing basis, and may change any pricing source at any time. The Manager
is informed of erratic or unusual movements (including unusual inactivity)
in the prices supplied for a security and has the power to override any
price supplied by a source (by taking a price supplied by another source)
because the Manager has other reasons to suspect that a price supplied may
not be reliable.
18
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from yield
data relating to investments or securities with similar characteristics.
Certain investments in securities held by the Fund were valued on the basis
of a price provided by a principal market maker. The prices provided by
principal market makers may differ from the value that would be realized if
the securities were sold and the differences could be material to the
financial statements. At February 28, 1999 the total value of these
securities represented 9% of net assets. Included in this total are U.S.
Government backed securities and highly rated collateralized debt
obligations that represent 2% of net assets at February 28, 1999.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the prevailing exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at prevailing exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
net exchange gains and losses on disposition of foreign currencies,
currency gains and losses realized between the trade and settlement dates
on securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid.
Futures contracts
The Fund may use futures contracts to manage its exposure to the bond and
currency markets. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments. Upon
entering into a futures contract, the Fund is required to deposit with its
custodian, in a segregated account in the name of the futures broker, an
amount of cash or U.S. government obligations in accordance with the
initial margin requirements of the broker or exchange. Futures contracts
are marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. Gains or
losses are recognized but not considered realized until the contracts
expire or are closed. Futures contracts involve, to varying degrees, risk
of loss in excess of the variation margin disclosed in the Statement of
Assets and Liabilities. Losses may arise from changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 28, 1999.
19
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Forward currency contracts
The Fund may enter into forward currency contracts in connection with
settling planned purchases or sales of securities or to hedge the currency
exposure associated with some or all of the Fund's portfolio securities. A
forward currency contract is an agreement between two parties to buy and
sell a currency at a set price on a future date. The market value of a
forward currency contract fluctuates with changes in forward currency
exchange rates. Forward currency contracts are marked to market daily and
the change in value is recorded by the Fund as an unrealized gain or loss.
Realized gains or losses equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed
are recorded upon delivery or receipt of the currency or, if a forward
currency contract is offset by entering into another forward currency
contract with the same broker, upon settlement of the net gain or loss.
These contracts may involve market risk in excess of the unrealized gain or
loss reflected in the Fund's Statement of Assets and Liabilities. In
addition, the Fund could be exposed to risk if the counterparties are
unable to meet the terms of the contracts or if the value of the currency
changes unfavorably to the U.S. dollar. The U.S. dollar value of the
currencies the Fund has committed to buy or sell is shown under Note 6 and
represents the currency exposure the Fund has acquired or hedged through
currency contracts as of February 28, 1999.
Options
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. When the Fund writes a call
or put option, an amount equal to the premium received is recorded as a
liability and subsequently marked to market to reflect the current value of
the option written. Premiums received from writing options which expire are
treated as realized gains. Premiums received from writing options which are
exercised or closed are offset against the proceeds or amounts paid on the
transaction to determine the realized gain or loss. The Fund as a writer of
an option has no control over whether the underlying securities may be sold
(call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. See Note 6 for a summary of open
written option contracts as of February 28, 1999.
The Fund may also purchase put and call options. The Fund pays a premium
which is included in the Fund's Statement of Assets and Liabilities as an
investment and subsequently marked to market to reflect the current value
of the option. The risk associated with purchasing put and call options is
limited to the premium paid.
Loan agreements
The Fund may invest in direct debt instruments which are interests in
amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates. The Fund's investments in loans may be in the form of
participations in loans or assignments of all or a portion of loans from
third parties. A loan is often administered by a bank or other financial
institution (the lender) that acts as agent for all holders. The agent
administers the terms of the loan, as specified in the loan agreement. When
investing in a loan participation, the Fund has the right to receive
payments of principal, interest and any fees to which it is entitled only
from the lender selling the loan agreement and only upon receipt by the
lender of payments from the borrower. The Fund generally has no right to
enforce compliance with the terms of the loan agreement with the borrower.
As a result, the Fund may be subject to the credit
20
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
risk of both the borrower and the lender that is selling the loan
agreement. When the Fund purchases assignments from lenders it acquires
direct rights against the borrower on the loan. Direct indebtedness of
emerging countries involves a risk that the governmental entities
responsible for the repayment of the debt may be unable or unwilling to pay
the principal and interest when due.
Indexed securities
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to increase
or decrease its exposure to different underlying instruments and to gain
exposure to markets that may be difficult to invest in through conventional
securities. Indexed securities may be more volatile than their underlying
instruments, but any loss is limited to the amount of the original
investment.
Swap agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to interest rates and credit risk. The Fund may enter into interest rate,
total return and credit default swap agreements. Interest rate swap
agreements involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments with respect to a notional
amount of principal. Total return swap agreements involve commitments to
pay interest in exchange for a market linked return based on a notional
amount. To the extent the total return of the security or index underlying
the transaction exceeds or falls short of the offsetting interest rate
obligation, the Fund will receive a payment from or make a payment to the
counterparty, respectively. Credit default swaps involve the payment of a
specified rate based on the notional amount. The Fund receives payment upon
a default of the underlying security. In connection with these agreements,
cash or securities may be set aside as collateral by the Fund's custodian
in accordance with the terms of the swap agreement. The Fund earns interest
on cash set aside as collateral, which is paid by the counterparty. At
February 28, 1999, $6,785,750 in cash has been set aside. Swaps are marked
to market daily based upon quotations from market makers and the change, if
any, is recorded as unrealized gain or loss in the Statement of Operations.
Payments received or made at the end of the measurement period are recorded
as realized gain or loss in the Statement of Operations. Net payments of
interest on interest rate swap agreements are recorded as interest income.
Entering into these agreements involves, to varying degrees, elements of
credit and market risk in excess of the amounts recognized on the Statement
of Assets and Liabilities. Such risks involve the possibility that there
will be no liquid market for these agreements, that the counterparty to the
agreements may default on its obligation to perform and that there may be
unfavorable changes in the fluctuation of interest rates. See Note 6 for a
summary of open swap agreements as of February 28, 1999.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure
21
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
that the market value of the underlying assets remains sufficient to
protect the Fund in the event of default by the seller. Collateral for
certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the Fund and the
counterparty. In connection with transactions in repurchase agreements, if
the seller defaults and the value of the collateral declines or if the
seller enters insolvency proceedings, realization of collateral by the Fund
may be delayed or limited.
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1999, the Fund loaned securities having a
market value of $2,231,965 collateralized by cash in the amount of
$2,330,359, which was invested in short-term instruments.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. The Fund declares separate dividends from net
investment income on each class of shares.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for foreign currency transactions.
22
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
The following reclassification represents the cumulative amount necessary
to report the stated components of net assets on a tax basis, excluding
certain temporary differences, as of February 28, 1999. This
reclassification has no impact on net investment income, realized gain/loss
and net asset value of the Fund and is primarily attributable to certain
differences in the computation of distributable income and capital gains
under federal tax rules versus generally accepted accounting principles.
The calculation of net investment income per share in the financial
highlights table excludes these adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
------------------------ ------------------------ ------------------------
<S> <C> <C>
$ (93,181,356) $ 93,208,700 $ (27,344)
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis, and is adjusted for the accretion of
discounts. Income is not recognized and discounts are not amortized on
securities for which collection is not expected. In determining the net
gain or loss on securities sold, the cost of securities is determined on
the identified cost basis. Interest income on U.S. Treasury inflation
indexed securities is accrued daily based upon an inflation adjusted
principal. Additionally, any increase in the principal or face amount of
these securities adjusted for inflation is recorded as interest income.
Allocation of operating activity
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds. Investment
income, common expenses and realized and unrealized gains and losses are
allocated pro-rata among the classes of shares of the Fund based on the
relative net assets of each class. Shareholder service fees, which are
directly attributable to a class of shares, are charged to that class'
operations.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .50% of the amount
invested. In the case of cash redemptions, the fee is .25% of the amount
redeemed. These fees 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. 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. All purchase premiums and redemption fees are paid to and
recorded by the Fund as paid-in capital. These fees are allocated relative
to each
23
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
class' net assets on the share transaction date. Purchase premiums are
included as part of each class' "shares sold" and redemption fees are
included as part of each class' "shares repurchased", respectively, as
summarized in Note 5. For the year ended February 28, 1999, the Fund
received $1,751,839 in purchase premiums and $298,604 in redemption fees.
There is no premium for reinvested distributions.
Investment risk
Investments in emerging country debt present certain risks that are not
inherent in many other securities. Many emerging countries present elements
of political and/or economic instability, which may result in the fund's
inability to collect on a timely basis, or in full, principal and interest
payments. Further, countries may impose various types of foreign currency
regulations or controls which may impede the fund's ability to repatriate
amounts it receives. The fund may acquire interests in securities or bank
loans which are in default at the time of acquisition in anticipation of
improving conditions in the related countries. These factors may result in
significant volatility in the values of its holdings. The markets for
emerging country debt are relatively illiquid. Accordingly, the fund may
not be able to realize in an actual sale amounts approximating those used
to value its holdings.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .50% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of each class at the annual rate of .15%
for Class III shares and .10% for Class IV shares.
GMO agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding custody fees, brokerage commissions, certain other transaction
costs (including transfer taxes), shareholder service fees and
extraordinary expenses) exceed .35% of average daily net assets.
Effective March 1, 1999, GMO's contractual management fee was reduced to
.35% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding brokerage
commissions, certain other transaction costs (including transfer taxes),
shareholder service fees and extraordinary expenses) exceed the management
fee.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999, was $7,216. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
24
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
3. Purchases and sales of securities
For the year ended February 28, 1999, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Proceeds
------------------- --------------------
<S> <C> <C>
U.S. Government securities $ 8,693,183 $ 8,997,193
Investments (non-U.S. Government securities) 2,207,914,280 1,901,429,863
<CAPTION>
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
----------------------- ---------------------- ---------------------- ---------------------
<S> <C> <C> <C>
$ 997,754,408 $ 17,229,699 $ 264,956,887 $ 247,727,188
</TABLE>
4. Principal shareholders
At February 28, 1999, 31.0% of the outstanding shares of the Fund were held
by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums and redemption
fees received by the Fund, were as follows:
<TABLE>
<CAPTION>
Period from
March 1, 1997 to
January 9, 1998
-------------------------------
Class I: Shares Amount
--------------- ---------------
<S> <C> <C>
Shares sold 665,873 $ 9,485,099
Shares issued to shareholders
in reinvestment of
distributions 224,120 2,611,210
Shares repurchased (892,559) (9,796,997)
=============== ===============
Net increase (decrease) (2,566) $ 2,299,312
=============== ===============
</TABLE>
25
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Share transactions -- continued
Period from March 21, 1997
(commencement of operations)
to January 9, 1998
-------------------------------
Class II: Shares Amount
--------------- ---------------
<S> <C> <C>
Shares sold 159,652 $ 2,197,620
Shares issued to shareholders
in reinvestment of
distributions 76,497 890,341
Shares repurchased (236,149) (2,593,939)
--------------- ---------------
Net increase -- $ 494,022
=============== ===============
<CAPTION>
Year Ended Year Ended
February 28, 1999 February 28, 1998
---------------------------- -------------------------------
Class III: Shares Amount Shares Amount
------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Shares sold 45,405,396 $ 367,745,404 20,511,879 $ 265,135,023
Shares issued to shareholders
in reinvestment of
distributions 3,380,175 32,138,997 15,802,080 183,720,164
Shares repurchased (23,019,717) (231,235,163) (36,173,053) (452,315,399)
------------- ------------- -------------- ---------------
Net increase (decrease) 25,765,854 $ 168,649,238 140,906 $ (3,460,212)
============= ============= ============== ===============
<CAPTION>
Period from January 9, 1998
Year Ended (commencement of operations)
February 28, 1999 to February 28, 1998
---------------------------- -------------------------------
Class IV: Shares Amount Shares Amount
------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Shares sold 21,916,084 $ 239,168,023 26,699,294 $ 296,725,667
Shares issued to shareholders
in reinvestment of
distributions 5,400,677 51,286,039 -- --
Shares repurchased (7,130,859) (64,208,920) -- --
------------- ------------- -------------- ---------------
Net increase 20,185,902 $ 226,245,142 26,699,294 $ 296,725,667
============= ============= ============== ===============
</TABLE>
26
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1999 is as
follows:
Forward currency contracts
<TABLE>
<CAPTION>
Net
Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
--------------- ------------------ ------------------- --------------- ---------------
Buys
<S> <C> <C> <C> <C>
3/01/99 CHF 76,400,000 $ 52,741,050 $ (243,124)
3/01/99 EUR 145,150 159,370 (1,325)
---------------
$ (244,449)
===============
Sales
3/01/99 CHF 76,400,000$ 52,741,050 $ 3,642,713
5/28/99 CHF 76,400,000 53,226,093 237,868
5/13/99 EUR 91,200,000 100,521,552 (142,272)
4/27/99 GBP 1,500,000 2,401,005 35,670
4/13/99 JPY 6,935,000,000 58,830,033 2,541,648
5/05/99 ZAR 30,000,000 4,753,027 22,142
---------------
$ 6,337,769
===============
<CAPTION>
Short futures contracts
Net Unrealized
Number of Appreciation
Contracts Type Expiration Date Contract Value (Depreciation)
----------- ------------------------------- -------------------------------- ----------------
<S> <C> <C> <C> <C>
77 German Government Bond March 1999 $ 12,368,749 $ 156,041
7 Japanese Government Bond March 1999 7,728,614 (85,053)
150 U.S. Long Bond June 1999 18,145,313 4,650
----------------
$ 75,638
================
</TABLE>
At February 28, 1999, the Fund has cash and/or securities to cover any
margin requirements on open futures contracts.
27
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Written option transactions
Puts
Principal Amount
of Contracts
(000's omitted) Premiums
------------------ --------------
Outstanding, beginning of period $ -- $ --
Options written 27,500 740,125
Options exercised (10,000) (27,000)
Options expired -- --
Options sold -- --
------------------ --------------
Outstanding, end of period $ 17,500 $ 713,125
================== ==============
Calls
Principal Amount
of Contracts
(000's omitted) Premiums
------------------ --------------
Outstanding, beginning of period $ -- $ --
Options written 17,500 836,938
Options exercised -- --
Options expired -- --
Options sold -- --
------------------ --------------
Outstanding, end of period $ 17,500 $ 836,938
================== ==============
28
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Summary of written options outstanding
<TABLE>
<CAPTION>
Principal
Amount of
Contracts Exercise Expiration
(000's omitted) Price Date Value
----------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
USD Put/RUB Call 17,500 USD 6.8325 RUB 3/19/99 $ --
USD Call/RUB Put 17,500 USD 6.8325 RUB 3/19/99 12,421,500
--------------
$ 12,421,500
==============
<CAPTION>
Swap agreements
Net
Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
---------------------- ----------- ---------------------------------------------- ---------------
<S> <C> <C> <C>
Credit Default Swaps
10,000,000 USD 9/15/00 Agreement with Morgan Guaranty Trust Company $ (341,596)
dated 9/10/98 to pay 2.20% per year times
the notional amount. The Fund receives
payment only upon a default event in Poland,
the notional amount times the difference
between the par value and the then-market
value of Republic of Poland Past Due
Interest "PDI" Bond due 10/27/14.
15,000,000 USD 11/03/00 Agreement with Credit Suisse Financial (203,217)
Products dated 10/29/97 to pay 3.45% per
year times the notional amount. The Fund
receives payment only upon a default event
in Bulgaria, the notional amount times the
difference between the purchase cost of
59.50 USD and the then-market value of
Bulgaria FLIRB Note Series A due 7/28/12.
</TABLE>
29
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Swap agreements -- continued
Net
Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
---------------------- ----------- ---------------------------------------------- ---------------
<S> <C> <C> <C>
10,000,000 USD 11/07/00 Agreement with Credit Suisse Financial $ 797,066
Products dated 11/04/97 to pay 3.50% per
year times the notional amount. The Fund
receives payment only upon a default event
in Brazil, the notional amount times the
difference between the purchase cost of
74.75 USD and the then-market value of
Brazil Debt Conversion "DCB" Bond due
4/15/12.
10,000,000 USD 12/18/00 Agreement with Morgan Guaranty Trust Company (72,107)
dated 12/11/98 to pay 6.50% per year times
the notional amount. The Fund receives
payment only upon a default event in
Argentina, the notional amount times the
difference between the par value and the
then-market value of Republic of Argentina
Floating Rate Bond due 3/31/05.
20,000,000 USD 3/01/01 Agreement with Morgan Guaranty Trust Company (147,924)
dated 2/24/99 to pay 4.60% per year times
the notional amount. The Fund receives
payment only upon a default event in
Bulgaria, the notional amount times the
difference between the par value and the
then-market value of Bulgaria IAB Floating
Rate Bond due 7/28/11.
21,500,000 USD 5/29/01 Agreement with Credit Suisse Financial 10,068,938
Products dated 5/21/97 to pay 4.78% per year
times the notional amount. The Fund
receives payment only upon a default event
in Ecuador, the notional amount times the
difference between the par value and the
then-market value of Republic of Ecuador
Past Due Interest "PDI" Floating Rate Note
due 2/27/15.
</TABLE>
30
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Swap agreements -- continued
<TABLE>
<CAPTION>
Net
Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
---------------------- ----------- ---------------------------------------------- ---------------
<S> <C> <C> <C>
47,000,000 USD 5/29/01 Agreement with Credit Suisse Financial $ 8,164,680
Products dated 5/23/97 to pay 3.30% per year
times the notional amount. The Fund
receives payment only upon a default event
in Ecuador, the notional amount times the
difference between the purchase cost of
60.25 USD and the then-market value of the
Republic of Ecuador Past Due Interest "PDI"
Floating Rate Note due 2/27/15.
25,000,000 USD 9/10/01 Agreement with Credit Suisse Financial 4,671,379
Products dated 9/05/97 to pay 1.75% per year
times the notional amount. The Fund
receives payment only upon a default event
in Brazil, the notional amount times the
difference between the purchase cost of
83.625 USD and the then-market value of
Brazil Debt Conversion "DCB" Bond due
4/15/12.
10,000,000 USD 5/15/03 Agreement with Banque Paribas dated 5/12/98 564,967
to pay .75% per year times the notional
amount. The Fund receives payment only upon
a default event, the notional amount times
the difference between the par value and the
then-market value of any series of Banco
Latinoamericano de Exportaciones S.A. Euro
Medium Term Notes. +
</TABLE>
31
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Swap agreements -- continued
<TABLE>
<CAPTION>
Net
Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
---------------------- ----------- ---------------------------------------------- ---------------
<S> <C> <C> <C>
10,000,000 USD 5/15/03 Agreement with Banque Paribas dated 10/01/98 $ (272,389)
to pay 3.50% per year times the notional
amount. The Fund receives payment only upon
a default event, the notional amount times
the difference between the par value and the
then-market value of any series of Banco
Latinoamericano de Exportaciones S.A. Euro
Medium Term Notes. +
15,000,000 USD 6/20/03 Agreement with Goldman Sachs International
dated 1/14/99 to receive 11.60% per year 2,185,264
times the notional amount. The Fund pays
only upon a default event in Colombia, the
notional amount times the difference between
the par value and the then-market value of
Republic of Colombia, 7.625% due 2/15/07.
Interest Rate Swaps
2,400,000 CHF 6/05/05 Agreement with Morgan Guaranty Trust Company (59,619)
dated 6/03/98 to pay the notional amount
multiplied by 3.245% and to receive the
notional amount multiplied by 6 month
Floating Rate Swiss LIBOR adjusted by a
specified spread.
3,300,000 CHF 6/10/05 Agreement with Credit Suisse Financial (82,847)
Products dated 6/08/98 to pay the notional
amount multiplied by 3.2625% and to receive
the notional amount multiplied by 6 month
Floating Rate Swiss LIBOR adjusted by a
specified spread.
2,500,000 CHF 6/11/05 Agreement with Morgan Guaranty Trust Company (69,215)
dated 6/09/98 to pay the notional amount
multiplied by 3.245% and to receive the
notional amount multiplied by 6 month
Floating Rate Swiss LIBOR adjusted by a
specified spread.
</TABLE>
32
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Swap agreements -- continued
<TABLE>
<CAPTION>
Net
Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
---------------------- ----------- ---------------------------------------------- ---------------
<S> <C> <C> <C>
13,500,000 CHF 6/11/05 Agreement with Morgan Guaranty Trust Company $ (153,110)
dated 9/30/98 to pay the notional amount
multiplied by 3.245% and to receive the
notional amount multiplied by 6 month
Floating Rate Swiss LIBOR adjusted by a
specified spread.
Total Return Swaps
15,928,049 USD/ 3/08/99 Agreement with Morgan Guaranty Trust Company (212,859)
14,500,000 USD dated 2/18/99 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of United
Mexican States, 11.50% due 5/15/26 and
to pay initial market value multiplied
by 1 month LIBOR adjusted by a specified
spread.
26,875,000 RUB/ 3/11/99 Agreement with Morgan Guaranty Trust Company 4,005,787
3,891,593 USD dated 6/30/98 to pay the notional amount
multiplied by the change in market value
(including accrued interest) of Russia
RB PA GKO Participation #21088 due
8/26/98 and to receive initial market
value multiplied by 2 month LIBOR
adjusted by a specified spread.
18,566,636 USD/ 3/12/99 Agreement with Morgan Guaranty Trust Company (1,033,719)
24,600,000 USD dated 1/08/99 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Republic
of Argentina Discount L Floating Rate
Note due 3/31/23 and to pay initial
market value multiplied by 2 month LIBOR
adjusted by a specified spread.
</TABLE>
33
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Swap agreements -- continued
<TABLE>
<CAPTION>
Net
Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
---------------------- ----------- ---------------------------------------------- ---------------
<S> <C> <C> <C>
13,251,826 USD/ 3/12/99 Agreement with Morgan Guaranty Trust Company $ (516,441)
14,000,000 USD dated 1/26/99 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Republic
of Argentina, 11.375% due 1/30/17 and to
pay initial market value multiplied by 2
month LIBOR adjusted by a specified
spread.
7,128,066 USD/ 3/15/99 Agreement with Morgan Guaranty Trust Company 451,902
7,000,000 USD dated 12/10/98 to receive the notional
amount multiplied by the change in
market value (including accrued
interest) of Korea Republic, 8.875% due
4/15/08 and to pay initial market value
multiplied by 3 month LIBOR adjusted by
a specified spread.
10,938,261 USD/ 3/22/99 Agreement with Morgan Guaranty Trust Company (143,372)
13,000,000 USD dated 2/17/99 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Mexico
Discount Floating Rate Note Series A due
12/31/19 and to pay initial market value
multiplied by 1 month LIBOR adjusted by
a specified spread.
14,757,465 USD/ 3/26/99 Agreement with Morgan Guaranty Trust Company (281,250)
25,000,000 USD dated 2/24/99 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Brazil
Discount ZL Floating Rate Note due
4/15/24 and to pay initial market value
multiplied by 1 month LIBOR adjusted by
a specified spread.
</TABLE>
34
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Swap agreements -- continued
<TABLE>
<CAPTION>
Net
Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
---------------------- ----------- ---------------------------------------------- ---------------
<S> <C> <C> <C>
9,397,951 USD/ 4/01/99 Agreement with Morgan Guaranty Trust Company $ (265,799)
10,000,000 USD dated 2/24/99 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Republic
of Argentina, 11.375% due 1/30/17 and to
pay initial market value multiplied by 1
month LIBOR adjusted by a specified
spread.
7,242,818 USD/ 4/01/99 Agreement with Morgan Guaranty Trust Company (88,962)
9,000,000 USD dated 2/24/99 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Republic
of Argentina Floating Rate Bond due
3/31/05 and to pay initial market value
multiplied by 1 month LIBOR adjusted by
a specified spread.
4,059,295 USD/ 4/05/99 Agreement with Morgan Guaranty Trust Company --
7,000,000 USD dated 2/26/99 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Brazil
Discount ZL Floating Rate Note due
4/15/24 and to pay initial market value
multiplied by 1 month LIBOR adjusted by
a specified spread.
10,585,313 USD/ 4/06/99 Agreement with Morgan Guaranty Trust Company (602,666)
20,000,000 USD dated 1/04/99 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Brazil
Debt Conversion Floating Rate Bond due
4/15/12 and to pay initial market value
multiplied by 3 month LIBOR adjusted by
a specified spread.
</TABLE>
35
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Swap agreements -- continued
<TABLE>
<CAPTION>
Net
Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
---------------------- ----------- ---------------------------------------------- ---------------
<S> <C> <C> <C>
14,015,556 USD/ 4/07/99 Agreement with Morgan Guaranty Trust Company $ 286,451
20,000,000 USD dated 1/29/99 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Republic
of Argentina Discount L Floating Rate
Note due 3/31/23 and to pay initial
market value multiplied by 2 month LIBOR
adjusted by a specified spread.
12,439,167 USD/ 4/12/99 Agreement with Morgan Guaranty Trust Company 275,861
22,000,000 USD dated 2/09/99 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Brazil
Discount ZL Floating Rate Note due
4/15/24 and to pay initial market value
multiplied by 2 month LIBOR adjusted by
a specified spread.
11,162,188 USD/ 5/14/99 Agreement with Morgan Guaranty Trust Company (408,473)
15,000,000 USD dated 2/17/99 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Republic
of Argentina Discount L Floating Rate
Note due 3/31/23 and to pay initial
market value multiplied by 3 month LIBOR
adjusted by a specified spread.
14,441,889 USD/ 5/26/99 Agreement with Morgan Guaranty Trust Company (354,000)
23,600,000 USD dated 2/24/99 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Republic
of Bulgaria FLIRB Series A Floating Rate
Note due 7/28/12 and to pay initial
market value multiplied by 3 month LIBOR
adjusted by a specified spread.
</TABLE>
36
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Swap agreements -- continued
<TABLE>
<CAPTION>
Net
Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
---------------------- ----------- ---------------------------------------------- ---------------
<S> <C> <C> <C>
3,917,376 USD/ 6/04/99 Agreement with Bank of America dated 6/26/97 $ (1,938,979)
625,189,248,812 TRL to receive the notional amount multiplied by
the change in market value (including
accrued interest) of Turkey Indexed
Linked Bond due 6/04/99 and to pay
initial market value multiplied by 3
month LIBOR adjusted by a specified
spread.
776,766 USD/ 6/04/99 Agreement with Bank of America dated (407,948)
116,727,003,674 TRL 11/13/97 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Turkey
Indexed Linked Bond due 6/04/99 and to
pay initial market value multiplied by 3
month LIBOR adjusted by a specified
spread.
4,178,333 USD/ 8/26/99 Agreement with Morgan Guaranty Trust Company (192,778)
10,000,000 USD dated 2/24/99 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Republic
of Ecuador Par Floating Rate Note due
2/28/25 and to pay initial market value
multiplied by 6 month LIBOR adjusted by
a specified spread.
4,694,227 USD/ 11/26/99 Agreement with Bank of America dated (2,456,044)
900,000,000,000 TRL 11/25/97 to receive the notional amount
multiplied by the change in market value
(including accrued interest) of Turkey
Indexed Linked Bond due 11/26/99 and to
pay initial market value multiplied by 3
month LIBOR adjusted by a specified
spread.
===============
$ 21,166,981
===============
</TABLE>
See Notes to the Schedule of Investments for definitions of currency
abbreviations.
+ This swap agreement is valued by management (Note 1).
37
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1999, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 44.85% of distributions as net capital gain dividends.
38
<PAGE>
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
- ------------------
Mr. Thomas F. Cooper and Mr. William L. Nemerever are primarily responsible for
the day-to-day management of the Fund's portfolio. Each of these individuals has
been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The Class III shares of the Emerging Country Debt Fund returned -32.9% for the
fiscal year ending February 28, 1999, which compared unfavorably with the -18.5%
return on the J.P. Morgan Emerging Market Bond Index Plus. Consistent with the
Fund's investment objectives and policies, the Fund was substantially invested
in sovereign debt instruments of emerging countries throughout the period.
The Fund underperformed the benchmark during the fiscal year by 14.4%.
Performance for emerging country debt was extraordinarily volatile. Sovereign
spreads increased sharply from 650 basis points in July 1998 to more than 1700
basis points in September, as Russia defaulted on its domestic debt and devalued
the ruble. Other factors also hurt performance, including the collapse in
commodity prices, liquidations of speculative positions by hedge funds and
growing concerns about Venezuela and Brazil. The Fund lost 35.1% in absolute
terms during this two-month period, while underperforming the Index by 13.3%.
The Fund recovered a portion of the loss in the fourth quarter in response to
several factors, including the Fed's decision to ease monetary policy, agreement
to an IMF package for Brazil and diminishing concerns about the election results
in Venezuela. Sovereign spreads declined to about 1100 basis points by year-end.
Our exposure to longer-dated, less marketable instruments and our overweight
exposure to Russia hurt performance throughout the fiscal year. In 1999,
sovereign spreads have remained relatively stable between 1100 and 1200 basis
points, despite problems in Ecuador and the decision by Brazil to devalue the
real. The Fund's holdings of less liquid, less marketable, higher yielding
issues performed poorly throughout the period. The best performance during this
period was recorded by the more liquid and lower yielding debt issued by South
Korea, Panama, Poland and Peru. The worst performing countries were Russia,
Ecuador, Brazil and Venezuela. The Fund remained fully invested throughout the
period.
Outlook
- -------
Volatility in the emerging markets has created new opportunities for risk
tolerant investors with sufficiently long investment horizons. Issues with
limited marketability currently offer sizable spreads. The Fund is overweight in
Bulgaria, Ecuador, Morocco and Nigeria and holds a modest overweight position in
Russia. It holds issues of many countries not in the benchmark including:
Algeria, Colombia, Costa Rica, Dominican Republic, Jamaica, Jordan, Macedonia,
South Africa, Tunisia and Turkey. Spreads are significantly above historic
levels, providing opportunities to acquire undervalued securities.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Emerging Country Debt Fund Class III Shares and the
JP Morgan Emerging Markets Bond Index Plus
As of February 28, 1999
----------------------------------------
Average Annual Total Return
----------------------------------------
Since
1 Year Inception
----------------------------------------
Class 4/19/94
III -33.4 15.9
----------------------------------------
Class 1/9/98
IV -33.3 -26.4
----------------------------------------
[LINE GRAPH APPEARS HERE]
Date GMO Emerging Country Debt Fund J.P. Morgan Emerging Markets
Class III Shares Bond Index Plus
1/31/94
4/19/94 9,950 10,000
6/30/94 9,741 9,906
9/30/94 10,587 10,982
12/31/94 9,535 10,062
3/31/95 8,770 8,948
6/30/95 11,065 10,991
9/30/95 12,128 11,741
12/31/95 13,835 12,800
3/31/96 14,753 13,309
6/30/96 17,312 14,781
9/30/96 20,528 16,652
12/31/96 22,926 17,832
3/31/97 23,817 17,971
6/30/97 27,308 19,664
9/30/97 31,393 21,020
12/31/97 30,034 20,153
3/31/98 31,800 21,203
6/30/98 28,322 19,936
9/30/98 18,435 15,703
12/31/98 20,864 17,261
2/28/99 20,514 16,859
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 50 bp on the purchase and 25 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Performance for
Class IV shares may be different due to lower shareholder service fees. Past
performance is not indicative of future performance. Information is unaudited.
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Fundamental Value Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Fundamental Value Fund at
February 28, 1999 and the results of its operations, the changes in its net
assets and the financial highlights for the periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 12, 1999
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks -- 92.4%
Advertising-- 0.1%
10,000 Cordiant Communications Group PLC ADR 121,250
-----------
Aerospace-- 0.2%
5,000 Boeing Company 177,813
-----------
Automotive-- 2.5%
10,000 General Motors Corp 825,625
20,000 Mascotech Industries Inc 302,500
20,000 Michelin (CGDE), Class B 891,342
-----------
2,019,467
-----------
Banking and Financial Services-- 9.7%
10,000 American Express Co 1,085,000
7,500 Bank One Corp 403,125
35,000 Block (HR) Inc 1,588,124
27,500 Chase Manhattan Corp 2,189,687
45,000 Citigroup Inc 2,643,749
2,500 Wells Fargo & Co 91,875
-----------
8,001,560
-----------
Chemicals-- 0.4%
10,000 Engelhard Corp 178,125
2,500 PPG Industries Inc 130,156
-----------
308,281
-----------
Computer and Office Equipment-- 4.4%
17,500 Electronic Data Systems Corp 813,750
5,000 Hewlett Packard Co 332,188
12,500 IBM Corp 2,124,999
25,000 Intergraph Corp* 138,283
22,500 Maxtor Corp* 185,625
-----------
3,594,845
-----------
Consumer Goods-- 1.6%
20,000 Eastman Kodak Co 1,323,749
-----------
Electronic Equipment-- 0.8%
50,000 International Rectifier Corp* 343,750
20,000 National Semiconductor Corp* 210,000
15,000 Stewart & Stevenson Services Corp 125,625
-----------
679,375
-----------
</TABLE>
See accompanying notes to financial statements. 1
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Food and Beverage-- 4.0%
20,000 Anheuser Busch Cos Inc 1,533,749
7,500 Bestfoods 352,031
10,000 Fresh Del Monte Produce Inc* 184,375
12,500 Nestle SA ADR 1,179,644
-----------
3,249,799
-----------
Health Care-- 1.8%
25,000 Acuson Corp* 375,000
5,000 Bausch & Lomb Inc 301,563
7,500 Baxter International Inc 527,813
10,000 Haemonetics Corp* 166,875
25,000 Phycor Inc* 135,938
-----------
1,507,189
-----------
Insurance-- 2.9%
5,000 Aetna Life and Casualty Co 370,313
15,000 Allstate Corp 562,500
12,500 Chartwell Re Corp 270,313
25,000 Reliance Group Holdings Inc 257,813
55,000 TIG Holdings Inc 880,000
-----------
2,340,939
-----------
Machinery-- 2.2%
5,000 Baker Hughes Inc 90,000
5,000 Caterpillar Inc 227,813
7,500 FMC Corp* 383,906
15,000 Milacron Inc 267,188
20,000 Pall Corp 423,750
17,500 Stanley Works 425,469
-----------
1,818,126
-----------
Manufacturing-- 7.1%
40,000 American Greetings Corp 947,500
31,250 Clayton Homes Inc 386,719
25,000 Corning Inc 1,337,499
12,500 General Electric Co 1,253,906
32,500 Owens Corning 1,033,906
7,500 Tenneco Inc 224,531
5,000 United Technologies Corp 619,375
-----------
5,803,436
-----------
Metals and Mining-- 0.8%
25,000 Amcol International Corp 237,500
</TABLE>
2 See accompanying notes to financial statements.
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Metals and Mining-- continued
7,500 Barrick Gold Corp 132,656
10,000 Newmont Mining Corp 172,500
10,000 Placer Dome Inc 109,375
-----------
652,031
-----------
Oil and Gas-- 4.9%
5,000 Burlington Resources Inc 161,875
8,333 EEX Corp* 50,519
20,000 Enron Oil & Gas 330,000
100,000 Gulf Canada Resources Ltd 231,250
7,500 Kerr-McGee Corp 214,219
22,500 Mitchell Energy, Class B 275,625
40,000 Occidental Petroleum Corp 602,500
2,500 Texaco Inc 116,406
5,000 Total SA ADR 258,125
50,000 Union Pacific Resources Group 446,875
15,000 Unocal Corp 422,813
30,000 USX - Marathon Group 620,625
15,000 Westcoast Energy Inc 293,438
-----------
4,024,270
-----------
Paper and Allied Products-- 2.3%
32,500 Abitibi-Consolidated Inc 260,000
10,000 Fort James Corp 298,750
5,000 International Paper Co 210,000
15,000 Kimberly Clark Corp 708,750
7,500 Weyerhaeuser Co 418,125
-----------
1,895,625
-----------
Pharmaceuticals-- 1.9%
12,500 Lilly (Eli) & Co 1,183,594
5,000 Smithkline Beecham PLC ADR 355,625
-----------
1,539,219
-----------
Primary Materials-- 0.4%
12,500 Crown Cork & Seal Inc 346,875
-----------
Printing and Publishing-- 0.3%
10,000 News Corporation Ltd ADR 283,750
-----------
Real Estate-- 10.6%
34,800 Amli Residential Properties Trust 693,825
37,500 Brandywine Realty Trust 616,406
</TABLE>
See accompanying notes to financial statements. 3
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Real Estate-- continued
40,000 Equity Office Properties 1,030,000
25,000 Equity Residential Properties Trust 1,025,000
70,000 JP Realty Inc 1,294,999
15,000 Mack-Cali Realty Corp 434,063
10,000 Reckson Associates Realty Corp 212,500
22,500 Simon Property Group Inc 572,344
12,500 Spieker Properties Inc 446,875
75,000 Summit Properties Inc 1,242,188
12,500 Tower Realty Trust Inc 243,750
35,000 United Dominion Realty Trust Inc 345,625
35,000 Walden Residential Properties Inc 584,063
-----------
8,741,638
-----------
Retail Trade-- 6.2%
27,500 Federated Department Stores Inc* 1,046,719
20,000 Saks Inc* 718,750
25,000 Sears Roebuck & Co 1,015,625
72,500 Toys R Us Inc* 1,024,063
15,000 Wal Mart Stores Inc 1,295,624
-----------
5,100,781
-----------
Services-- 7.1%
32,500 Browning Ferris Industries Inc 1,023,750
7,500 Hilton Hotels Corp 118,594
20,000 Manpower Inc 478,750
40,000 Modis Professional Services Inc* 547,500
75,000 Waste Management Inc 3,665,624
-----------
5,834,218
-----------
Technology-- 5.6%
2,500 Avnet Inc 99,219
37,500 Compaq Computer Corp 1,321,874
20,000 Data General Corp* 276,250
10,000 G TECH Holdings Corp* 226,250
50,000 Information Resources Inc* 418,750
20,000 Parametric Technology Corp* 307,500
50,000 Storage Technology Corp* 1,740,624
3,000 Xerox Corp 165,563
-----------
4,556,030
-----------
Telecommunications-- 3.5%
25,000 GTE Corp 1,621,874
</TABLE>
4 See accompanying notes to financial statements.
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Telecommunications-- continued
12,500 MediaOne Group Inc* 681,250
10,000 US West Inc 533,125
-----------
2,836,249
-----------
Transportation-- 2.6%
5,000 AMR Corp* 277,188
25,000 Canadian Pacific 464,063
5,000 Delta Air Lines Inc 304,063
25,000 Ryder System Inc 675,000
2,500 UAL Corp* 149,375
5,000 USAir Group Inc* 236,875
-----------
2,106,564
-----------
Utilities-- 8.5%
20,000 Cinergy Corp 583,750
10,000 Dominion Resources Inc 386,250
50,000 DPL Inc 890,625
5,000 Duke Power Co 284,375
5,000 Illinova Corp 118,750
65,000 Niagara Mohawk Power Corp* 950,625
20,000 Pacificorp 358,750
10,000 Public Service Enterprise Group Inc 380,000
25,000 Reliant Energy Inc 670,313
35,000 Texas Utilities Co 1,485,312
25,000 Unicom Corp 889,063
-----------
6,997,813
-----------
Total Common Stocks (Cost $63,419,536) 75,860,892
-----------
Preferred Stocks -- 4.2%
Metals and Mining-- 0.8%
37,500 Freeport McMoran Corp $0.00 637,500
-----------
Oil and Gas-- 1.0%
17,500 Unocal Corp Convertible 6.25% 144A 824,688
-----------
Primary Processing-- 0.6%
10,000 Armco Inc Convertible $3.625 455,000
-----------
Real Estate-- 0.6%
25,000 Reckson Associates Realty Corp 7.625% 510,938
-----------
</TABLE>
See accompanying notes to financial statements. 5
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares/
Par Value ($) Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Transportation -- 0.9%
15,000 Union Pacific Capital Trust 6.25% 144A* 716,250
-----------
Utilities -- 0.3%
5,000 Texas Utilities Co Convertible 9.25% 260,938
-----------
Total Preferred Stocks (Cost $4,240,781) 3,405,314
-----------
DEBT OBLIGATIONS -- 1.4%
Electronic Equipment -- 0.2%
$ 250,000 Advanced Micro Devices Inc, 6.00% due 5/15/05 195,000
-----------
Oil and Gas -- 1.2%
$1,000,000 Noram Energy Corp, 6.00% due 3/15/12 970,000
-----------
TOTAL DEBT OBLIGATIONS (COST $1,010,953) 1,165,000
-----------
Short-Term Investments -- 9.2%
Cash Equivalents -- 7.2%
$1,330,503 BankBoston Eurodollar Time Deposit, 5.005% due 4/30/99(a) 1,330,503
535,143 Merrimac Cash Fund Premium Class(a) 535,143
$4,000,000 Prudential Securities Group Inc, Master Note, 5.075% due
6/14/99(a) 4,000,000
-----------
5,865,646
-----------
Repurchase Agreements -- 2.0%
$1,667,816 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/26/99, due 3/1/99, with a maturity value of $1,668,375
and an effective yield of 4.02%, collateralized by a U.S.
Treasury Obligation with a rate of 7.00%, maturity date of
7/15/06 and market value, including accrued interest, of
$1,701,173. 1,667,816
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $7,533,462) 7,533,462
-----------
TOTAL INVESTMENTS -- 107.2%
(COST $76,204,732) 87,964,668
Other Assets and Liabilities (net)-- (7.2)% (5,902,841)
-----------
TOTAL NET ASSETS-- 100% $82,061,827
===========
</TABLE>
6 See accompanying notes to financial statements.
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Notes to the Schedule of Investments:
ADR - American Depositary Receipt
144A - Securities exempt from registration under rule 144A of
the Securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to qualified
institutional investors.
* Non-income producing security.
(a) Represents investments of security lending collateral
(Note 1).
See accompanying notes to financial statements. 7
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Assets and Liabilities -- February 28, 1999
- --------------------------------------------------------------------------------------------------
Assets:
<S> <C>
Investments, at value (cost $76,204,732) (Note 1) $87,964,668
Receivable for investments sold 431,359
Dividends and interest receivable 185,628
Receivable for expenses waived or borne by Manager (Note 2) 17,454
------------
Total assets 88,599,109
------------
Liabilities:
Payable for investments purchased 465,400
Payable upon return of securities loaned (Note 1) 5,865,646
Payable to affiliate for (Note 2):
Management fee 47,823
Shareholder service fee 8,700
Due to custodian 116,339
Accrued expenses 33,374
------------
Total liabilities 6,537,282
------------
Net assets $82,061,827
============
Net assets consist of:
Paid-in capital $66,338,560
Accumulated undistributed net investment income 179,770
Accumulated undistributed net realized gain 3,783,492
Net unrealized appreciation 11,760,005
============
$82,061,827
============
Net assets attributable to:
Class III shares $82,061,827
============
Shares outstanding:
Class III 11,614,256
============
Net asset value per share:
Class III $ 7.07
============
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Operations -- Year Ended February 28, 1999
- --------------------------------------------------------------------------------------------------
Investment Income:
<S> <C>
Dividends (net of withholding taxes of $18,174) $ 2,173,897
Interest (including securities lending income of $18,311) 222,314
-----------
Total income 2,396,211
-----------
Expenses:
Management fee (Note 2) 742,814
Audit fees 30,935
Custodian and transfer agent fees 21,707
Legal fees 1,208
Registration fees 1,014
Trustees fees (Note 2) 913
Miscellaneous 2,892
Fees waived or borne by Manager (Note 2) (207,233)
-----------
594,250
Shareholder service fee (Note 2)
Class III 148,563
-----------
Net expenses 742,813
-----------
Net investment income 1,653,398
-----------
Realized and unrealized gain (loss):
Net realized gain on:
Investments 28,697,706
Foreign currency, forward contracts and foreign currency related
transactions 49
-----------
Net realized gain 28,697,755
-----------
Change in net unrealized appreciation (depreciation) on:
Investments (26,005,300)
Foreign currency, forward contracts and foreign currency related
transactions 69
-----------
Net unrealized loss (26,005,231)
-----------
Net realized and unrealized gain 2,692,524
-----------
Net increase in net assets resulting from operations $ 4,345,922
===========
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------------------------
Year Ended Year Ended
February 28, 1999 February 28, 1998
---------------- ----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 1,653,398 $ 3,498,576
Net realized gain 28,697,755 70,085,215
Change in net unrealized appreciation (depreciation) (26,005,231) (21,715,271)
------------ -------------
Net increase in net assets resulting from operations 4,345,922 51,868,520
------------ -------------
Distributions to shareholders from:
Net investment income
Class III (1,820,272) (4,080,386)
------------ -------------
Total distributions from net investment income (1,820,272) (4,080,386)
------------ -------------
Net realized gains
Class III (43,849,538) (60,475,201)
------------ -------------
Total distributions from net realized gains (43,849,538) (60,475,201)
------------ -------------
(45,669,810) (64,555,587)
------------ -------------
Net share transactions: (Note 5)
Class III (3,650,568) (92,859,874)
------------ -------------
Decrease in net assets resulting from net share
transactions (3,650,568) (92,859,874)
------------ -------------
Total decrease in net assets (44,974,456) (105,546,941)
Net assets:
Beginning of period 127,036,283 232,583,224
------------ -------------
End of period (including accumulated undistributed net
investment income of $179,770 and $389,111,
respectively) $82,061,827 $127,036,283
============ =============
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------------------------
Year Ended February 28/29,
-----------------------------------------------------------
1999 1998 1997 1996 1995
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $11.92 $ 16.33 $ 15.04 $ 12.54 $ 12.49
------ ------- ------- ------- -------
Income from investment operations:
Net investment income 0.18 0.35 0.33 0.37 0.34
Net realized and unrealized
gain 0.19 3.90 2.53 3.26 0.55
------ ------- ------- ------- -------
Total from investment
operations 0.37 4.25 2.86 3.63 0.89
------ ------- ------- ------- -------
Less distributions to shareholders:
From net investment income (0.20) (0.38) (0.32) (0.37) (0.32)
From net realized gains (5.02) (8.28) (1.25) (0.76) (0.52)
------ ------- ------- ------- -------
Total distributions (5.22) (8.66) (1.57) (1.13) (0.84)
------ ------- ------- ------- -------
Net asset value, end of period $ 7.07 $ 11.92 $ 16.33 $ 15.04 $ 12.54
====== ======= ======= ======= =======
Total Return (a) 2.30% 30.43% 20.03% 29.95% 7.75%
Ratios/Supplemental Data:
Net assets, end of period
(000's) $82,062 $127,036 $232,583 $212,428 $182,871
Net expenses to average daily
net assets 0.75% 0.75% 0.75% 0.75% 0.75%
Net investment income to
average daily net assets 1.67% 1.84% 2.15% 2.61% 2.84%
Portfolio turnover rate 34% 21% 25% 34% 49%
Fees and expenses voluntarily
waived or borne by the
Manager consisted of the
following per share
amounts: $ 0.02 $ 0.04 $ 0.02 $ 0.01 $ 0.01
</TABLE>
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
See accompanying notes to the financial statements. 11
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Fundamental Value Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, diversified management investment company. The
Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series into classes.
The Fund seeks long-term capital growth through investment primarily in
equity securities.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Other assets and
securities for which no quotations are readily available are valued at fair
value as determined in good faith by the Trustees.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
12
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Security lending
The Fund may lend its securities to qualified brokers. The loans are
collateralized at all times with cash or securities with a market value at
least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1999, the Fund loaned securities having a
market value of $5,614,388, collateralized by cash in the amount of
$5,865,646, which was invested in short-term instruments.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary. Taxes on foreign dividend income are withheld in accordance with
the applicable country's tax treaty with the United States.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for REIT securities.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
<TABLE>
<CAPTION>
Accumulated
Undistributed Net Accumulated Undistributed
Investment Income Net Realized Gain Paid-in Capital
---------------------- -------------------------- -------------------
<S> <C> <C>
$(42,467) $42,467 --
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
13
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis and is adjusted for the accretion of discounts. In
determining the net gain or loss on securities sold, the cost of securities
is determined on the identified cost basis. Dividends representing a return
of capital are reflected as a reduction of cost.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .15% of the amount
invested. The Manager may waive such premium to the extent that a
transaction results in minimal brokerage and transaction costs to the Fund.
All purchase premiums are paid to and recorded by the Fund as paid-in
capital. Purchase premiums are included as part of "shares sold" as
summarized in Note 5. For the year ended February 28, 1999, the Fund
received $25 in purchase premiums. There is no premium for cash
redemptions, reinvested distributions or in-kind transactions.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .75% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding brokerage commissions, certain other transaction costs (including
transfer taxes), shareholder service fees and extraordinary expenses)
exceed .60% of average daily net assets.
Effective March 1, 1999, GMO's contractual management fee was reduced to
.60% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding brokerage
commissions, certain other transaction costs (including transfer taxes),
shareholder service fees and extraordinary expenses) exceed the management
fee.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999 was $913. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
14
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1999, aggregated
$37,113,080 and $79,345,197, respectively.
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
------------------ ------------------- ------------------- -----------------
<S> <C> <C> <C>
$76,550,876 $19,025,567 $7,611,775 $11,413,792
</TABLE>
4. Principal shareholders
At February 28, 1999, 99.8% of the outstanding shares of the Fund were held
by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including the purchase premiums received by the Fund, were as
follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
Class III: February 28, 1999 February 28, 1998
---------------------------- -----------------------------
Shares Amount Shares Amount
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Shares sold 2,272 $ 16,500 5,670 $ 100,000
Shares issued to shareholders
in reinvestment of distributions 5,275,741 43,852,942 5,160,848 61,023,843
Shares repurchased (4,319,130) (47,520,010) (8,757,323) (153,983,717)
------------- ------------- ------------ --------------
Net increase (decrease) 958,883 $ (3,650,568) (3,590,805) $ (92,859,874)
============= ============= ============ ==============
</TABLE>
15
<PAGE>
GMO Fundamental Value Fund
(A Series of GMO Trust)
Federal Income Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1999, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 87.92% of distributions as net capital gain dividends.
16
<PAGE>
Fundamental Value Fund-III
As of 2/28/99
Date GMO Fundamental Value Fund S&P 500 Index
1/31/91
2/28/91
3/31/91
4/30/91
5/31/91
6/30/91
7/31/91
8/31/91
9/30/91
10/31/91 9,985 10,000
12/31/91 10,337 10,695
3/31/92 10,629 10,426
6/30/92 10,932 10,625
9/30/92 11,196 10,960
12/31/92 11,776 11,512
3/31/93 13,001 12,015
6/30/93 13,605 12,074
9/30/93 14,128 12,385
12/31/93 14,422 12,673
3/31/94 14,093 12,191
6/30/94 14,048 12,243
9/30/94 15,068 12,841
12/31/94 14,935 12,840
3/31/95 16,361 14,090
6/30/95 17,618 15,435
9/30/95 18,841 16,661
12/31/95 19,503 17,664
3/31/96 20,747 18,613
6/30/96 21,378 19,448
9/30/96 21,612 20,049
12/31/96 23,948 21,720
3/31/97 23,842 22,302
6/30/97 26,976 26,196
9/30/97 29,884 28,158
12/31/97 30,832 28,967
3/31/98 33,640 33,007
6/30/98 33,886 34,096
9/30/98 30,502 30,705
12/31/98 33,948 37,244
2/28/99 32,924 37,595
Average Annual Returns
Inception 10/31/91
1yr 5yr 10yr (ITD)
2.2 17.5 17.6
<PAGE>
Asian crisis and Russia's collapse; some growth favorites reported earnings
shortfalls in the second half. Investors expected Coca-Cola's earnings to grow
19% in 1998 and were shocked with a 15% decline. Proctor & Gamble had consistent
volume shortfalls and Disney finished the year with an 18% earnings decline.
These stocks started the year selling at earnings multiples of 41x, 33x, and 36x
respectively, not good potential risk-adjusted returns if earnings were not met.
That is why we avoided them.
The other group to look at is the fast growers, companies such as
Microsoft, Dell Computer, Cisco, and Lucent Technology. They all participate in
a technology revolution networking and the Internet. Yes, there is a great
future, but at what price? The stock price of some may be justified, (see
Internet Stock Price chart Appendix 3) but we are affected by historical
analysis of the ability of companies to sustain high growth rates. Some
succeed, but the vast majority can't deliver rapid growth in the longer term.
We are biased by the statistics below.
----------------------------------------------------------------------
Probability of Remaining a Growth Stock
1965-98
----------------------------------
5 Years 10 Years 20 Years
------- -------- --------
All Growth Stocks 42% 19% 5%
Health Care 33 22 10
Technology 32 11 3
Source: Sanford Bernstein
-----------------------------------------------------------------------
An examination of growth stocks historically shows only a handful of
today's companies will meet current targets. Maybe some investors can ride the
wave of enthusiasm, but failures to meet growth targets can be painful, and how
many investors will know when to get out? This will be the dilemma of the big
growth investor in the future aggravated by the fact that the very large funds
now own the same stocks.
One additional penalty, due to the correlation of performance and market
capitalization (see S&P 500 Performance chart Appendix 4) was our investment in
mid-cap and smaller companies.
This is a sector where we increasingly found value. These stocks started
the year undervalued and continued to get cheaper. This is another category
that reached unprecedented valuations on the downside. Our small stock
valuation chart (see U.S. Small Stocks chart Appendix 5) graphically
demonstrates the change. We had 20% of the portfolio invested in stocks outside
the S&P 500, and as a group they were about unchanged for the year (I have
excluded some mistakes to just measure their size effect); another 5-6
percentage point penalty.
20
<PAGE>
Summarizing this analysis suggests size and growth were our biggest
restraints on performance and could explain our shortfall compared to the S&P
500:
- --------------------------------------------------------------------------------
Large Growth 7 percentage points
Mega Cap 4 percentage points
Small 5 percentage points
----- ---------------------
Total 16 percentage points
- --------------------------------------------------------------------------------
We didn't overcome this burden with superior execution and aggravated the
situation due to risk aversion. We added to the low-risk portion of the
portfolio during the year: cash, bonds, and total return stocks - utilities and
REITS - which reduced performance by 4 percentage points.
The dramatic moves of the biggest market caps such as Microsoft, which was
up 52% from October 8 to December 31, aggravated our mistakes. If you were not
going to own the "racehorses," you had to have perfect execution and selection
in the remainder of the market. We didn't measure up to that standard, but some
of our shortfalls make us enthusiastic about the opportunities in the future.
One of our traditional investment approaches proved difficult: buying
companies where investors had low expectations, yet where we saw the opportunity
for improvement. Our largest position, Waste Management, fell into this
grouping. Unfortunately, this methodology didn't appeal to the managers that
were getting the bulk of the mutual fund inflows. There was no patience. The
market did not reward moderately growing companies until they demonstrated
profit improvement. This approach (see U.S. Small Stocks chart Appendix 5)
produced no returns last year, which was very frustrating for us since we have
had great success picking stocks with a longer time horizon. I refer to
Eastman-Kodak, Digital Equipment, Tandem, and the drug companies in 1994. It
was not that long ago that the ability of IBM to grow was in doubt. Money flows
into the market were concentrated in the largest funds. And money managers,
faced with a volatile world economy and slowing profit growth, sought safety in
a select group of companies to the exclusion of other investment possibilities.
And that is what excites us now. The divergence is too extreme (see
Relative Strength chart Appendix 6). Specifically look at Waste Management. It
delivered the profitability hoped for in the second half, but it now sells at a
45% discount to the market. It can grow 10-12% in a slow growth environment.
This should have more appeal as a few more big companies face slowing profit
growth (Latin America with Southeast Asia will be hard to overcome). Investors
want stability and growth. That is exactly what H.R. Block has delivered since
we have owned it, but now it sells at a 30% discount. In addition, both of
these companies have demonstrated their ability to raise prices, a rarity in
today's low inflation, slow-growth environment. A mid-cap stock, American
Greetings, is very similar. It is the second largest greeting card company.
Prices have been raised 1-2% annually, helping to raise their return on assets
(cost cutting is also a
21
<PAGE>
factor), but for two years no one has cared. It now sells at 13 times estimated
earnings and it has more Internet revenues than a third of the well-known
favorites. Storage Technology, which we have owned for years, gets steadily
better. It dominates the tape drive storage business. Every 5-6 quarters, the
company has difficulty with a product transition, resulting in an earnings
shortfall not tolerated by investors in this environment. Every stock price
setback has been a very good time to buy the stock. We have bought the declines
and sold the rallies, which produced good gains last year and now we have
another opportunity. I could mention other stocks such as Modis Professional
Services, an information technology staffing company with 15-20% growth, a 13x
earnings multiple, and a recently completed repurchase of 23% of its stock
without using debt. Kimberly-Clark, an improving consumer products company
valued at 60% of Proctor & Gamble; Federated Department Stores, the largest U.S.
Department store chain that is assumed to have no growth yet has sufficient
excess cash flow to produce minimum earnings gains of 5-6% just by paying down
debt and repurchasing stock.
Some turnarounds haven't succeeded yet. Toys R Us is down 60% from its
highs, but we can liquidate the company and make a gain. Acuson is the leader
in ultrasound medical imaging, a potential acquisition target for Hewlett-
Packard, and has plans to improve profitability. Browning-Ferris the attitude
of management is changing, and some managers are being changed. We hope
profitability improvement is next, and it sells at 14x depressed earnings.
All of the above companies we will own in greater size. They are some of
our highest confidence situations. We have more today. The market has given us
an opportunity, and we are encouraged by the risk-reward to make bigger, more
concentrated bets.
Speaking of bigger bets we find the valuation of REITS irresistible today.
They underperformed the market last year by 45%, yes 45%, in a group that
produced 9% earnings (cash flow) growth, better than the S&P 500. We think the
cash flow growth will be better than most companies' again in 1999. This should
catch investors' attention, and with yields of 7% and potential growth of 5-7%,
will be hard to ignore. As you can see by the comment of Barton Biggs, interest
is growing (see REIT chart Appendix 7).
We think the REITS should be at least 10% of the portfolio - - they have
the added feature that they may provide stability in turbulent markets. So far,
they have only declined marginally on down days and have actually risen a few
days when the market dropped.
Our confidence in our approach is sustained by our belief that divergences
are addressed. We have seen value reversals in 1973-74 and 1990. Small stocks
have done the same. Our frustration is being early, but after doing a
comprehensive review our conviction is higher. We outperformed the average
value fund, we avoided the potential disaster of increasing the small stock bet,
and we resisted the lure of cheap price to book valuations which would have led
us into one of the worst parts of the market cyclicals. And if I adjust for
our risk-averse bias, assuming the market was (and is) overvalued,
22
<PAGE>
adding back the 4 percentage points penalty means we were performing better than
the conventional value indices. Is that fair?
This year will prove the answer. Markets cannot stay overvalued for long
periods, and this feels like the longest. And if an adjustment is in order,
what we lost in relative performance, we should then make up in 1999. Then we
will see how we did versus other fully invested value managers. I think very
well.
Thank you for wading through this lengthy description of last year. I am
certainly concerned about the degree of our shortfall but also believe a major
portion of it was unavoidable if we are going to adhere to our style and
capabilities. I know it has been a disappointment to you, but I think we
understand the environment, have improved our "tactics," and have the
opportunity to make up the large gap of the last year and a half. I'd like to
make just one final comment. Mark McGwire's home run total broke a record held
by Roger Maris in 1961. That was 37 years ago. Roger Maris broke Babe Ruth's
record of 60 homers, which stood for 34 years. Judging from baseball, these
phenomena are not repeated often!
23
<PAGE>
Appendix 1
MARKET BREADTH
NYSE & NASDAQ Stocks
% Change From 52-Wk High to Close 10/16/98
Appendix 1 [A BAR CHART DEPICTING THE MARKET BREADTH OF NYSE & NASDAQ STOCKS
FROM 1987 TO 1998 APPEARS HERE.]
<PAGE>
Appendix 2
IMPLIED GROWTH RATE
Appendix 2 [A TABLE DEPICTING THE IMPLIED GROWTH RATE OF FORTY-SEVEN COMPANIES
WITHIN THE S&P 500 APPEARS HERE.]
<PAGE>
Appendix 3
INTERNET STOCK PRICE PERFORMANCE
Appendix 3 [A LINE GRAPH DEPICTING THE INTERNET STOCK PRICE PERFORMANCE OF THREE
INDICES FOR CALENDAR YEAR 1998 APPEARS HERE.]
<PAGE>
Appendix 4
S&P 500 PERFORMANCE
Appendix 4 [A TABLE DEPICTING THE CAP-WEIGHTED RETURN OF THE BIGGEST AND
SMALLEST STOCKS OF THE S&P 500 FOR CALENDAR YEAR 1998 APPEARS HERE.]
<PAGE>
Appendix 5
U.S. SMALL STOCKS NOW AS CHEAP AS IN 1973 TO 1974
Appendix 5 [A LINE GRAPH COMPARING THE PRICE/SALES OF SMALL STOCKS TO THAT OF
SIMILAR STOCKS IN THE S&P 500 FROM 1974 TO 1998 APPEARS HERE.]
[A LINE GRAPH COMPARING THE PRICE/FAIR VALUE OF SMALL STOCKS TO THAT
OF SIMILAR STOCKS IN THE S&P 500 FROM 1964 TO 1998 APPEARS HERE.]
[A LINE GRAPH COMPARING THE PRICE/BOOK OF SMALL STOCKS TO THAT OF
SIMILAR STOCKS IN THE S&P 500 FROM 1964 TO 1998 APPEARS HERE.]
[A LINE GRAPH COMPARING THE PRICE/EARNINGS OF SMALL STOCKS TO THAT OF
SIMILAR STOCKS IN THE S&P 500 FROM 1964 TO 1998 APPEARS HERE.]
<PAGE>
Appendix 6
RELATIVE STRENGTH
12/31/74 to 12/31/98
Appendix 6 [A LINE GRAPH DEPICTING THE RELATIVE STRENGTH OF THE S&P 500/BARRA
VALUE INDEX FROM 1975 TO 1998 APPEARS HERE.]
<PAGE>
Appendix 7
REITs
Relative Multiple Analysis:
S&P Ratios/Top Down AFFO Multiple
Appendix 7 [A LINE GRAPH DEPICTING A RELATIVE MULTIPLE ANALYSIS OF REITS FROM
1994 TO 1998 APPEARS HERE.]
"In the U.S., the only thing I really see, other than a few special
situations, are the REITs. The REITs had a terrible year in 1998, the REIT Index
I look at was down something like 18%.
...REITs - in an expensive world - do look like value to me. What you have
to look at is what's happening to the underlying asset class, which of course is
American commercial real estate. American commercial real estate is not truly
cheap, the way it was in the early 1990s. But it is not overvalued by any
stretch of the imagination, either. The recent indigestion in the capital
markets is a positive development for the REIT group, because it has made it
much more difficult for developers to get financing. So the way we look at it,
the REITs are actually selling at a slight discount to their private market NAVs
(net asset values). As recently as 1997 and late 1996, REITs sold at premiums as
high as 30% to their NAVs. So you have had a big correction.
...They do represent, I think, a unique combination - the overall REIT
index has a yield of about 6.5% and - while their estimates are probably too
high - analysts believe those dividends are going to grow somewhere in the 6% -
8% range over the next three to five years. We are actually talking about high
single-digit dividend growth in 1999. So I would really call REITs a form of
growth bond. With that yield, they look attractive."
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Fundamental Value Fund Class III Shares and the S&P 500 Index
As of February 28, 1999
--------------------------------
Average Annual Total Return
--------------------------------
Since
Inception
1 Year 5 Year 10/31/91
Class --------------------------------
III 2.2% 17.5% 17.6%
--------------------------------
[LINE GRAPH APPEARS HERE]
GMO Fundamental Value Fund
Date Class III Shares S&P 500 Index
---- -------------------------- -------------
1/31/91
2/28/91
3/31/91
4/30/91
5/31/91
6/30/91
7/31/91
8/31/91
9/30/91
10/31/91 9,985 10,000
12/31/91 10,337 10,695
3/31/92 10,629 10,426
6/30/92 10,932 10,625
9/30/92 11,196 10,960
12/31/92 11,776 11,512
3/31/93 13,001 12,015
6/30/93 13,605 12,074
9/30/93 14,128 12,385
12/31/93 14,422 12,673
3/31/94 14,093 12,191
6/30/94 14,048 12,243
9/30/94 15,068 12,841
12/31/94 14,935 12,840
3/31/95 16,361 14,090
6/30/95 17,618 15,435
9/30/95 18,841 16,661
12/31/95 19,503 17,664
3/31/96 20,747 18,613
6/30/96 21,378 19,448
9/30/96 21,612 20,049
12/31/96 23,948 21,720
3/31/97 23,842 22,302
6/30/97 26,976 26,196
9/30/97 29,884 28,158
12/31/97 30,832 28,967
3/31/98 33,640 33,007
6/30/98 33,886 34,096
9/30/98 30,502 30,705
12/31/98 33,948 37,244
2/28/99 32,924 37,595
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 15 bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Past performance is not indicative of future
performance. Information is unaudited.
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
Par Value ($)/
Shares Description Value ($)
- -------------------------------------------------------------------------------
MUTUAL FUNDS-- 100.0%
32,816 GMO Currency Hedged International Bond Fund 343,584
833,218 GMO Currency Hedged International Core Fund 7,732,268
1,812,646 GMO Domestic Bond Fund 17,492,031
605,546 GMO Emerging Country Debt Fund 4,172,214
598,588 GMO Emerging Markets Fund 3,777,093
645,443 GMO Evolving Countries Fund 3,704,842
194,666 GMO Growth Fund 805,915
341,042 GMO Inflation Indexed Bond Fund 3,369,494
440,376 GMO International Bond Fund 4,430,182
430,350 GMO International Core Fund 8,770,538
93,203 GMO International Small Companies Fund 1,027,099
723,580 GMO REIT Fund 6,606,281
327,818 GMO Small Cap Growth Fund 3,566,657
614,510 GMO Small Cap Value Fund 7,183,619
3,022,580 GMO U.S. Bond/Global Alpha A Fund 30,920,992
1,106,898 GMO U.S. Core Fund 20,577,237
300,549 GMO Value Fund 3,125,708
--------------
TOTAL MUTUAL FUNDS (COST $145,566,999) 127,605,754
--------------
SHORT-TERM INVESTMENTS -- 0.0%
Repurchase Agreements -- 0.0%
$ 9,821 Salomon Smith Barney Inc. Repurchase
Agreement, dated 2/26/99, due 3/1/99, with
a maturity value of $9,824 and an effective
yield of 4.02%, collateralized by a U.S.
Treasury Obligation with a rate of 7.00%,
maturity date of 7/15/06 and market value,
including accrued interest, of $10,017. 9,821
--------------
TOTAL SHORT-TERM INVESTMENTS (COST $9,821) 9,821
--------------
TOTAL INVESTMENTS-- 100.0%
(Cost $145,576,820) 127,615,575
Other Assets and Liabilities (net) -- 0.0% (15,151)
--------------
TOTAL NET ASSETS-- 100% $ 127,600,424
==============
See accompanying notes to the financial statements. 1
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1999
- --------------------------------------------------------------------------------
Assets:
Investments, at value (cost $145,576,820) (Note 1) $127,615,575
Receivable for expenses waived or borne by Manager (Note 2) 3,332
------------
Total assets 127,618,907
------------
Liabilities:
Accrued expenses 18,483
------------
Total liabilities 18,483
------------
Net assets $127,600,424
============
Net assets consist of:
Paid-in capital $139,772,299
Accumulated undistributed net investment income 14,964
Accumulated undistributed net realized gain 5,774,406
Net unrealized depreciation (17,961,245)
------------
$127,600,424
============
Net assets attributable to:
Class III shares $127,600,424
============
Shares outstanding:
Class III 12,144,101
============
Net asset value per share:
Class III $ 10.51
============
2 See accompanying notes to the financial statements.
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1999
- --------------------------------------------------------------------------------
Investment Income:
Dividends from investment company shares $3,053,883
Interest 824
-----------
Total income 3,054,707
-----------
Expenses:
Audit fees 16,691
Registration fees 16,670
Custodian and transfer agent fees 16,513
Legal fees 3,009
Trustees fees (Note 2) 1,185
Miscellaneous 3,079
Fees waived or borne by Manager (Note 2) (57,147)
-----------
Net expenses --
-----------
Net investment income 3,054,707
-----------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments (543,810)
Realized gain distributions from
investment company shares 11,544,223
-----------
Net realized gain 11,000,413
-----------
Change in net unrealized appreciation (depreciation)
on investments (17,495,45)
-----------
Net realized and unrealized loss (6,495,046)
-----------
Net decrease in net assets resulting from operations $(3,440,339)
===========
See accompanying notes to the financial statements. 3
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ---------------------------------------------------------------------------------------------------
Year Ended February 28,
-----------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 3,054,707 $ 2,690,899
Net realized gain 11,000,413 9,989,345
Change in net unrealized appreciation (depreciation) (17,495,459) (1,239,876)
------------ ------------
Net increase (decrease) in net assets resulting from operations (3,440,339) 11,440,368
------------ ------------
Distributions to shareholders from:
Net investment income
Class I -- (612,518)
Class II -- (1,668,937)
Class III (3,054,707) (409,444)
------------ ------------
Total distributions from net investment income (3,054,707) (2,690,899)
------------ ------------
In excess of net investment income
Class I -- (2,044)
Class II -- (5,570)
Class III (3,098,321) (1,366)
------------ ------------
Total distributions in excess of net investment income (3,098,321) (8,980)
------------ ------------
Net realized gains
Class I -- (1,560,218)
Class II -- (4,205,151)
Class III (5,840,251) (1,039,983)
------------ ------------
Total distributions from net realized gains (5,840,251) (6,805,352)
------------ ------------
(11,993,279) (9,505,231)
------------ ------------
Net share transactions: (Note 5)
Class I -- (5,680,394)
Class II -- (12,119,329)
Class III 27,754,476 109,936,573
------------ ------------
Increase in net assets resulting from net share transactions 27,754,476 92,136,850
------------ ------------
Total increase in net assets 12,320,858 94,071,987
Net assets:
Beginning of period 115,279,566 21,207,579
------------ ------------
End of period (including undistributed net investment
income of $14,964 and accumulated undistributed net
investment income of $0, respectively) $127,600,424 $115,279,566
============ ============
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class I share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from Period from July 29, 1996
March 1, 1997 (commencement of operations)
to January 9, 1998 to February 28, 1997
------------------ ----------------------------
<S> <C> <C>
Net asset value, beginning of period $11.19 $10.00
------ ------
Income from investment operations:
Net investment income (b) 0.55+ 0.22
Net realized and unrealized gain 0.65 1.35
------ ------
Total from investment operations 1.20 1.57
------ ------
Less distributions to shareholders:
From net investment income (0.32) (0.22)
In excess of net investment income --(d) --
From net realized gains (0.83) (0.16)
------ ------
Total distributions (1.15) (0.38)
------ ------
Net asset value, end of period $11.24(c) $11.19
====== ======
Total Return (a) 10.70% 15.85%
Ratios/Supplemental Data:
Net assets, end of period (000's) -- $6,848
Net expenses to average daily net assets 0.13%* 0.15%*
Net investment income to average daily net
assets (b) 5.27%* 2.75%*
Portfolio turnover rate 18% 33%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following
per share amounts: $ 0.01 $ 0.03
</TABLE>
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(b) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
(c) All Class I shares of the Fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
(d) The per share distribution in excess of net investment income was $0.001.
+ Computed using average shares outstanding throughout the period.
* Annualized.
See accompanying notes to the financial statements. 5
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class II share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from Period from December 31,1996
March 1, 1997 (commencement of operations)
to January 9, 1998 to February 28, 1997
------------------ ----------------------------
<S> <C> <C>
Net asset value, beginning of period $11.19 $ 10.86
------ -------
Income from investment operations:
Net investment income (b) 0.55+ --
Net realized and unrealized gain 0.66 0.33
------ -------
Total from investment operations 1.21 0.33
------ -------
Less distributions to shareholders:
From net investment income (0.33) --
In excess of net investment income --(d) --
From net realized gains (0.83) --
------ -------
Total distributions (1.16) --
------ -------
Net asset value, end of period $11.24(c) $ 11.19
====== =======
Total Return (a) 10.73% 3.04%
Ratios/Supplemental Data:
Net assets, end of period (000's) -- $14,359
Net expenses to average daily net assets 0.07%* 0.07%*
Net investment income to average daily net
assets (b) 5.31%* (0.07)%*
Portfolio turnover rate 18% 33%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following
per share amounts: $ 0.01 $ 0.01
</TABLE>
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(b) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
(c) All Class II shares of the fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
(d) The per share distribution in excess of net investment income was $0.001.
+ Computed using average shares outstanding throughout the period.
* Annualized.
6 See accompanying notes to the financial statements.
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Financial Highlights
(For a Class III share outstanding throughout each period)
- -----------------------------------------------------------------------------------------------------
Period from June 2, 1997
(commencement of
Year Ended operations)
February 28, 1999 to February 28, 1998
------------------- ---------------------
<S> <C> <C>
Net asset value, beginning of period $ 11.87 $ 11.56
-------- --------
Income from investment operations:
Net investment income (b) 0.31 0.17+
Net realized and unrealized gain (loss) (0.54) 1.30
-------- --------
Total from investment operations (0.23) 1.47
-------- --------
Less distributions to shareholders:
From net investment income (0.28) (0.33)
In excess of net investment income (0.29) --(c)
From net realized gains (0.56) (0.83)
-------- --------
Total distributions (1.13) (1.16)
-------- --------
Net asset value, end of period $ 10.51 $ 11.87
======== ========
Total Return (a) (2.27)% 13.31%
Ratios/Supplemental Data:
Net assets, end of period (000's) $127,600 $115,280
Net expenses to average daily net assets (d) 0.00% 0.00%*
Net investment income to average daily net
assets (b) 2.50% 1.91%*
Portfolio turnover rate 10% 18%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following
per share amounts: $ 0.01 $ 0.01
</TABLE>
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(b) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
(c) The per share distribution in excess of net investment income was $0.001.
(d) Net expenses exclude expenses incurred indirectly through investment in
underlying funds. See Note 1.
+ Computed using average shares outstanding throughout the period.
* Annualized.
See accompanying notes to the financial statements. 7
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Global Balanced Allocation Fund (the "Fund") is a series of GMO Trust
(the "Trust"). The Fund is registered under the Investment Company Act of
1940, as amended, as an open-end, diversified management investment
company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo &
Co. LLC (the "Manager" or "GMO"). The Trust was established as a
Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series of shares
into classes.
The Fund operates as a "fund-of-funds" in that, pursuant to management
provided by the Manager, it makes investments in other funds of the Trust
("underlying funds"). The Fund seeks a total return greater than that of
the GMO Global Balanced Index, a benchmark developed by the Manager. The
Fund will pursue its objective by investing in Class III shares of domestic
equity, international equity, and fixed income funds of the Trust.
Prior to January 9, 1998, the Fund offered three classes of shares: Class
I, Class II and Class III. Effective January 9, 1998, Class I shares and
Class II shares ceased operations, and all shares were exchanged for Class
III shares. The principal economic difference among the classes of shares
is the level of shareholder service fee borne by the classes. Eligibility
for and automatic conversion between the various classes of shares is
generally based on the total amount of assets invested with GMO, as more
fully outlined in the Trust's prospectus.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Shares of underlying funds are valued at their net asset value as reported
on each business day. Short-term investments with a remaining maturity of
sixty days or less are valued at amortized cost, which approximates market
value. Other assets and securities for which no quotations are readily
available are valued at fair value as determined in good faith by the
Trustees.
8
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for the classification of distributions received from
underlying funds and redemptions in-kind. Gains resulting from such in-kind
transactions amounted to $12,740.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gain under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated Accumulated
Undistributed Undistributed Net
Investment Income Realized Gain Paid-in Capital
------------------- ------------------- -----------------
$3,113,285 $(2,682,780) $(430,505)
9
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis. In determining the net gain or loss on securities sold, the
cost of securities is determined on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. In addition,
the Fund will also incur fees and expenses indirectly as a shareholder in
the underlying funds. Because the underlying funds have varied expense and
fee levels and the Fund may own different proportions of underlying funds
at different times, the amount of fees and expenses indirectly incurred by
the Fund will vary.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .35% of the amount
invested. In the case of cash redemptions, the fee is .11% of the amount
redeemed. All purchase premiums and redemption fees are paid to and
recorded by the Fund as paid-in capital. Purchase premiums are included as
part of each class' "shares sold" and redemption fees are included as part
of each class' "shares repurchased", respectively, as summarized in Note 5.
For the year ended February 28, 1999 the Fund received $64,815 in purchase
premiums and $4,766 in redemption fees. There is no premium for reinvested
distributions or in-kind transactions.
Investment risk
The Fund is subject to the investment risk associated with an investment in
the underlying funds, some of which may invest in foreign securities. There
are certain additional risks involved in investing in foreign securities
that are not inherent in investments in domestic securities. These risks
may involve adverse political and economic developments, including the
possible imposition of capital controls or other foreign governmental laws
or restrictions. In addition, the securities of some foreign companies and
securities markets are less liquid and at times more volatile than
securities of comparable U.S. companies and U.S. securities markets. The
risks described above apply to an even greater extent to investments in
emerging markets. The securities markets of emerging countries are
generally smaller, less developed, less liquid, and more volatile than the
securities markets of the U.S. and developed foreign markets.
10
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
2. Fees and other transactions with affiliates
The Manager determines the allocation of the assets of the Fund among
designated underlying funds. The Manager does not charge an advisory fee
for asset allocation advice provided to the Fund, but receives advisory and
shareholder service fees from the underlying funds in which the Fund
invests. The Fund has adopted a Shareholder Service Plan under which the
Fund pays GMO a shareholder service fee for client and shareholder service,
reporting and other support. No shareholder service fee is charged for
Class III shares.
GMO has contractually agreed to reimburse all expenses directly incurred by
the Fund until February 29, 2000 (excluding brokerage commissions, certain
other transaction costs (including transfer taxes), shareholder service
fees and extraordinary expenses).
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999 was $1,185. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1999 aggregated
$42,315,382 and $11,952,056, respectively.
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
---------------- ------------------ ------------------ ----------------
$146,318,848 $359,845 $19,063,118 $18,703,273
4. Principal shareholders
At February 28, 1999, 51.4% of the outstanding shares of the Fund were held
by four shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
11
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums and redemption
fees received by the Fund, were as follows:
<TABLE>
<CAPTION>
Period from March 1, 1997
Class I: to January 9, 1998
--------------------------------
Shares Amount
------------- ----------------
<S> <C> <C>
Shares sold 1,325,598 $ 16,081,830
Shares issued to shareholders in
reinvestment of distributions 185,366 2,100,511
Shares repurchased (2,123,092) (23,862,735)
------------- ----------------
Net decrease (612,128) $ (5,680,394)
============= ================
<CAPTION>
Period from March 1, 1997
Class II: to January 9, 1998
--------------------------------
Shares Amount
------------- ----------------
<S> <C> <C>
Shares sold 3,870,787 $ 45,813,645
Shares issued to shareholders in
reinvestment of distributions 471,399 5,347,162
Shares repurchased (5,625,582) (63,280,136)
------------- ----------------
Net decrease (1,283,396) $ (12,119,329)
============= ================
</TABLE>
<TABLE>
<CAPTION>
Period from June 2, 1997
Year Ended (commencement of operations)
Class III: February 28, 1999 to February 28, 1998
------------------------------- --------------------------------
Shares Amount Shares Amount
-------------- --------------- ------------- ----------------
<S> <C> <C> <C> <C>
Shares sold 2,130,109 $ 24,341,942 9,599,238 $ 108,707,411
Shares issued to shareholders in
reinvestment of distributions 1,001,505 11,059,081 127,806 1,450,793
Shares repurchased (695,474) (7,646,547) (19,083) (221,631)
-------------- --------------- ------------- ----------------
Net increase 2,436,140 $ 27,754,476 9,707,961 $ 109,936,573
============== =============== ============= ================
</TABLE>
12
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1999, all the Fund's distributions are
from investment company taxable income, except that the Fund has designated
48.7% of distributions as net capital gain dividends.
13
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Global Balanced Allocation Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Global Balanced Allocation Fund
at February 28, 1999 and the results of its operations, the changes in its net
assets and the financial highlights for the periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1999 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 22, 1999
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
- ------------------
Mr. R. Jeremy Grantham and Mr. Ben Inker are primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. Grantham has been a portfolio
manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years.
Mr. Inker has been with the firm for seven years.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The Class III shares of the Global Balanced Allocation Fund returned -2.3% for
the twelve months ended February 28, 1999. During that period the benchmark
(48.75% S&P 500/16.25% GMO EAFE-Lite Extended/35% Lehman Aggregate) returned
12.7%.
Our fundamental conclusion at the outset of 1998 was that the developed,
large-cap equity markets in the U.S. and abroad were markedly overvalued. Our
research indicated that better long-term returns could be achieved from
investments in other asset classes, including both REITS and small-caps in the
U.S., emerging and small-cap international equities and fixed income
instruments. By diversifying out of large-cap equities and into other asset
classes with good return potential, we believed we were exposing our clients to
a portfolio with better return potential and a reasonable level of risk. What we
did not anticipate was that in the wake of the global crisis and the ensuing
flight to quality stocks, everything other than blue chips was sold by nervous
investors. As a result, all of our bets worked against us.
During the fiscal year, the Fund was underweight in U.S. stocks by 17% relative
to the benchmark. Due to the continuing rally of U.S. equities, this allocation
hurt the Fund's overall performance. Within U.S. stocks, we tilted the portfolio
towards the most attractively valued sectors including small stocks, where we
were 8% overweight, and real estate investment trusts (REITs), where we were 5%
overweight. For the fiscal year, the allocation to REITs hurt performance, as
the GMO REIT Fund underperformed the S&P 500 Index by a staggering 44%.
Performance of the GMO Growth Fund added 3.2% relative to the S&P 500. However,
this gain was offset by underperformance of the GMO Small Cap Value, Small Cap
Growth, U.S. Core and Value Funds.
Our neutral position in international stocks was unsuccessful in adding value.
Performance of the GMO International Core and Currency Hedged International Core
Funds lagged their benchmark as the rally in expensive multinationals continued.
The GMO International Core Fund returned -0.7% while the GMO Currency Hedged
International Core Fund returned -1.8%, underperforming the GMO EAFE-Lite Index
by 6.8% and 7.9%, respectively. The Fund was 4% overweight emerging equities for
the period, hurting performance as both the GMO Emerging Markets Fund and the
GMO Evolving Countries Fund trailed the IFC Investable Composite by 6.2% and
6.8%, respectively. Collectively, the allocation to international equities cost
the Fund -3.8% relative to the benchmark.
The fund is overweight 12% in fixed income, with allocations to international
and emerging bonds along with U.S. fixed income. Due largely to the poor
performance of the GMO Emerging Country Debt Fund during the Asian-Russian
crisis, this position detracted from performance.
<PAGE>
GMO Global Balanced Allocation Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
The fundamentals of today's markets do not justify the extreme valuation
disparities that we see. The investment climate has become increasingly
speculative, exemplified by the extraordinary returns and volatility of Internet
stocks. Our conviction that these conditions cannot prevail indefinitely remains
firm. As such, we will hold our positions, which are now remarkably cheap. With
the eventual return to intrinsic value, we expect the opportunities for
value-added resulting from these extreme conditions will be extraordinary and
will vastly offset recent underperformance.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Global Balanced Allocation Fund Class III Shares and the
MSCI All Country World Index (50%)/Lehman Aggregate (50%)
As of February 28, 1999
----------------------------------
Average Annual Total Return
----------------------------------
Inception
1yr 5yr 7/29/96
----------------------------------
-2.7 N/A 11.2
----------------------------------
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Date GMO Global Balanced Allocation Fund MSCI All Country World Index (50%)/Lehman Aggregate (50%) GMO Global Balanced Index
Class III Shares
<S> <C> <C> <C>
1/31/96
7/29/96 9,965 10,000 10,000
9/30/96 10,583 10,574 10,604
12/31/96 11,204 11,175 11,206
3/31/97 11,307 11,298 11,357
6/30/97 12,255 12,476 12,672
9/30/97 13,114 13,159 13,304
12/31/97 12,979 13,548 13,462
3/31/98 13,910 14,587 14,766
6/30/98 13,638 15,001 15,116
9/30/98 12,562 14,590 14,260
12/31/98 13,548 16,122 16,174
2/28/99 13,169 16,115 16,117
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 35 bp on the purchase and 11 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Past performance
is not indicative of future performance. Information is unaudited.
*Performance is linked to Class I shares (originating share class) and is
converted to Class III shares on June 2, 1997 (commencement date of Class III
shares).
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Global Bond Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Global Bond Fund at February
28, 1999 and results of its operations, the changes in its net assets and the
financial highlights for the periods presented, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 22, 1999
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
DEBT OBLIGATIONS -- 97.7%
Argentina -- 0.5%
USD 940,000 Republic of Argentina PDI (Global Bearer),
Variable Rate, 6 mo. LIBOR + .81%, 6.19%, due 3/31/05 770,802
-----------
Australia -- 1.5%
USD 2,500,000 Westralia Airports Corp, 144A, 6.48%, due 4/1/10 2,478,502
-----------
Brazil -- 0.8%
USD 2,500,000 Brazil New Money Bond,
Variable Rate, 6 mo. LIBOR + .88%, 6.19%, due 4/15/09 1,307,815
-----------
Bulgaria -- 0.3%
USD 2,000,000 Bulgaria Discount Series B Interest 200,002
Strips, Basket 2, 0.00%, due 1/28/10 - 7/28/24
USD 500,000 Bulgaria FLIRB Series B,
Variable Rate, Step Up, 3.00%, due 7/28/12 297,502
-----------
497,504
-----------
Canada -- 0.9%
CAD 2,000,000 Government of Canada Real Return, 4.25%, due 12/1/21 1,479,737
-----------
Cayman Islands -- 6.0%
USD 8,000,000 Great Point CBO Ltd. Series 98-1A Class A1, 144A,
Variable Rate, 6 mo. LIBOR + .30%, 5.71%, due 10/15/10 7,885,002
USD 2,000,000 Pemex Finance Ltd Series 1A Class A2,
144A, 6.30%, due 5/15/10 1,945,002
-----------
9,830,004
-----------
Chile -- 1.2%
USD 2,000,000 Banco Santander, 6.50%, due 11/1/05 1,927,502
-----------
Ecuador -- 0.1%
USD 500,000 Republic of Ecuador Par Bond,
Variable Rate, Step Up, 3.50%, due 2/28/25 195,002
-----------
France -- 2.7%
FRF 23,650,000 Credit Foncier, 6.50%, due 10/13/08 4,504,239
-----------
Jordan -- 0.2%
USD 500,000 Hashemite Kingdom of Jordan Par Bond,
Variable Rate, Step Up, 144A, 5.50%, due 12/23/23 280,002
-----------
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mexico -- 4.0%
FRF 5,000,000 Mexico Par Bond, 6.63%, due 12/31/19 650,608
CHF 13,000,000 Mexico Par Bond, 3.75%, due 12/31/19 5,898,491
-----------
6,549,099
-----------
New Zealand -- 1.5%
NZD 4,500,000 New Zealand Index Linked Bond, 4.50%, due 2/15/16 2,411,517
-----------
Nigeria -- 0.5%
USD 1,206,672 Central Bank of Nigeria Par Bond,
Variable Rate, Step Up, 6.25%, due 11/15/20 766,239
-----------
Russia -- 0.0%
USD 68,763 Russia Vnesheconombank IAN,
Variable Rate, 6 mo. LIBOR + .81%, 5.97%,
due 12/15/15 6,878
-----------
Supra National -- 1.5%
AUD 4,600,000 European Bank for Reconstruction and
Development, Zero Coupon, due 2/10/28 474,769
GBP 1,000,000 International Bank for Reconstruction and
Development, 11.50%, due 11/9/03 2,026,532
-----------
2,501,301
-----------
Sweden -- 4.0%
SEK 5,000,000 Government of Sweden Index Linked Bond,
4.00%, due 12/1/20 660,194
SEK 43,300,000 Kingdom of Sweden, 6.00%, due 2/9/05 5,818,505
-----------
6,478,699
-----------
United States -- 71.8%
Asset Backed Securities -- 61.2%
USD 408,834 AFC Home Equity Loan Trust Series 97-1 Class A,
Variable Rate, 1 mo. LIBOR + .22%,
5.16%, due 3/25/27 406,536
USD 5,000,000 Augusta Funding Series 96-F2,
Variable Rate, 3 mo. LIBOR + .30%, 144A, 4,940,627
5.31%, due 4/15/06
USD 44,154 BCI Home Equity Loan 94-1 Class A1,
Variable Rate, 1 mo. LIBOR + .24%,
5.18%, due 3/29/44 44,112
USD 4,000,000 Chase Credit Card Master Trust 98-6 Class A,
Variable Rate, 1 mo. LIBOR + .26%,
5.20%, due 9/15/04 4,010,000
USD 7,000,000 Chevy Chase Master Credit Card Trust Series 98-A,
Variable Rate, 1 mo. LIBOR + .15%,
5.09%, due 10/16/06 6,979,002
USD 4,000,000 Circuit City Credit Card Master Trust 96-1 Class A, 3,980,002
Variable Rate, 1 mo. LIBOR + .17%,
5.11%, due 10/15/06
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Par Value Description Value ($)
- --------------------------------------------------------------------------------
Asset Backed Securities -- continued
USD 5,000,000 CS First Boston Mortgage Securities Corp,
Series 98-C1 Class A1B, 6.48%, due
5/17/08 4,970,002
USD 16,045,000 Discover Card Master Trust I Series 94-2
Class A,
Variable Rate, 1 mo. LIBOR + .35%,
5.29%, due 10/16/04 16,133,250
USD 3,000,000 Eagle Pier Corp BV,
Variable Rate, 6 mo. LIBOR + .25%,
5.46%, due 10/03/01 3,003,002
USD 5,000,000 First Deposit Master Trust Series 96-1
Class A,
Variable Rate, 1 mo. LIBOR +.17%,
5.11%, due 8/15/07 5,000,002
USD 2,000,000 Health Care Receivables Securitization
Program 96-1 Class A, 144A, 7.20%, due
7/01/00 2,005,002
USD 5,000,000 MBNA Master Credit Card Trust Series 95-G
Class A,
Variable Rate, 1 mo. LIBOR + .21%,
5.15%, due 10/15/02 5,007,502
USD 3,000,000 MBNA Master Credit Card Trust Series 95-J
Class A,
Variable Rate, 1 mo. LIBOR + .23%,
5.17%, due 4/15/05 3,007,802
USD 4,000,000 MBNA Master Credit Card Trust Series 96-A
Class A,
Variable Rate, 1 mo. LIBOR + .21%,
5.15%, due 7/15/05 4,008,802
USD 5,000,000 MBNA Master Credit Card Trust Series 98-A
Class A,
Variable Rate, 1 mo. LIBOR + .11%,
5.05%, due 8/15/05 4,992,190
USD 10,000,000 MBNA Master Credit Card Trust Series 98-I
Class A,
Variable Rate, 1 mo. LIBOR + .26%,
5.20%, due 10/15/03 10,035,002
USD 10,000,000 Pacific Life CBO Series 98-1A Class A2A,
Variable Rate, Step Up, 6.56%, due
2/15/10 9,639,065
USD 5,000,000 Rhyno CBO Delaware Corp Series 97-1 Class
A-2, 144A,
Variable Rate, Step Up, 6.33%, due
9/15/09 5,271,096
USD 3,528,485 SMS Student Loan Trust 94-B Class A2,
Variable Rate, 1 mo. LIBOR + .30%,
5.24%, due 4/25/16 3,523,194
USD 3,000,000 Starvest Emerging Markets CBO-I Series 1A,
Class A,
Variable Rate, 6 mo. LIBOR + .19%, 144A,
5.16%, due 7/30/11 2,884,690
-----------
99,840,882
-----------
Structured Notes -- 5.0%
USD 5,000,000 Federal Home Loan Bank,
Variable Rate, (10.00% - 6 mo. LIBOR),
4.59%, due 9/22/03(a) 4,740,002
USD 3,500,000 Polaris Funding Company,
Variable Rate, 1 mo. LIBOR + .30%,
5.24%, due 1/07/05 3,438,205
-----------
8,178,207
-----------
U.S. Government Agency -- 5.6%
USD 4,000,000 Agency for International Development
Floater (Support of India),
Variable Rate, 3 mo. LIBOR + .10%,
5.07%, due 2/01/27 3,880,002
See accompanying notes to the financial statements. 3
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Par Value Description Value ($)
- --------------------------------------------------------------------------------
U.S. Government Agency -- continued
USD 2,000,000 Federal Home Loan Bank,
Variable Rate, CPI + 3.15%, 4.75%,
due 2/15/02(a) 1,937,002
USD 1,325,000 Ship Co 668, Series A, 8.50%, due 5/11/02 1,325,002
USD 2,000,000 Small Business Administration Series 95-C,
6.88%, due 9/01/05 2,018,002
-----------
9,160,008
-----------
Total United States 117,179,097
-----------
Venezuela -- 0.2%
USD 500,000 Republic of Venezuela Discount Bond Series A,
Variable Rate, 6 mo. LIBOR + .81%,
5.81%, due 3/31/20 310,002
-----------
TOTAL DEBT OBLIGATIONS (COST
$161,062,853) 159,473,941
-----------
LOAN ASSIGNMENTS -- 0.1%
Russia -- 0.1%
USD 2,000,000 Russia Vnesh Restructured Loan Agreements* 142,502
-----------
TOTAL LOAN ASSIGNMENTS (COST $1,269,033) 142,502
-----------
Principal Amount
----------------
CALL OPTIONS PURCHASED -- 0.4%
Options on Bonds -- 0.1%
SEK 155,000,000 Sweden Government Bond, Expires 4/27/99,
Strike 110.114 223,288
-----------
Options on Currency -- 0.3%
USD 10,000,000 Euro, Expires 4/06/99, Strike 1.15 418,000
USD 3,500,000 Japanese Yen, Expires 4/16/99, Strike 122 46,900
-----------
464,900
-----------
Options on Futures -- 0.0%
USD 1,522,500 Eurodollar, Expires 3/15/99, Strike 95 15,225
-----------
TOTAL CALL OPTIONS PURCHASED (COST
$619,446) 703,413
-----------
4 See accompanying notes to the financial statements.
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Principal Amount Description Value ($)
- --------------------------------------------------------------------------------
PUT OPTIONS PURCHASED -- 0.0%
Options on Currency -- 0.0%
USD 10,000,000 Euro, Expires 4/06/99, Strike 1.20 --
USD 3,500,000 Japanese Yen, Expires 4/16/99, Strike 112 29,050
-------------
29,050
-------------
TOTAL PUT OPTIONS PURCHASED (COST
$156,250) 29,050
-------------
Shares / Par Value
------------------
RIGHTS AND WARRANTS -- 0.0%
Mexico -- 0.0%
9,542,000 United Mexican States Warrants, Expires
6/30/03** --
-------------
Nigeria -- 0.0%
1,206 Central Bank of Nigeria Payment Adjusted
Warrants, Expires 11/15/20** --
-------------
Venezuela -- 0.0%
3,570 Republic of Venezuela Recovery Warrants,
Expires 04/15/20** --
-------------
TOTAL RIGHTS AND WARRANTS (COST $0) --
-------------
SHORT-TERM INVESTMENTS -- 1.6%
Commercial Paper -- 1.6%
USD 2,564,900 Baker Hughes, 4.87%, due 3/01/99 2,564,900
-------------
TOTAL SHORT-TERM INVESTMENTS (COST
$2,564,900) 2,564,900
-------------
TOTAL INVESTMENTS -- 99.8%
(Cost $165,672,482) 162,913,806
Other Assets and Liabilities (net) -- 0.2% 296,688
-------------
TOTAL NET ASSETS -- 100% $163,210,494
=============
See accompanying notes to the financial statements. 5
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Notes to the Schedule of Investments:
FLIRB - Front Loaded Interest Reduction Bond
144A - Securities exempt from registration under Rule 144A
of the Securities Act of 1933. These securities may be
resold in transactions exempt from registration,
normally to qualified institutional buyers.
Variable and Step up rates - The rates shown on variable
and step up rate notes are the current interest rates at
February 28, 1999, which are subject to change based on
the terms of the security, including varying reset
dates.
Currency Abbreviations
AUD - Australian Dollar
GBP - British Pound
CAD - Canadian Dollar
JPY - Japanese Yen
CHF - Swiss Franc
NZD - New Zealand Dollar
EUR - Euro
SEK - Swedish Krone
FRF - French Franc
USD - United States Dollar
(a) All or a portion of this security has been segregated
to cover margin requirements on open financial futures
contracts.
* Non-performing. Borrower not currently paying
interest.
** Non-income producing security.
6 See accompanying notes to the financial statements.
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1999
- --------------------------------------------------------------------------------
Assets:
Investments, at value (cost $165,672,482) (Note 1) $162,913,806
Cash 1,854
Cash at interest on deposit at brokers (Note 1) 1,290,155
Receivable for investments sold 579,899
Interest receivable 1,011,116
Receivable for variation margin on open futures contracts 143,986
(Notes 1 and 6)
Receivable for expenses waived or borne by Manager (Note 2) 35,880
------------
Total assets 165,976,696
------------
Liabilities:
Written options outstanding, at value (premiums $482,790) 418,950
(Notes 1 and 6)
Net payable for open forward foreign currency contracts 1,491,461
(Notes 1 and 6)
Payable to affiliate for (Note 2):
Management fee 45,036
Shareholder service fee 19,268
Payable for open swap contracts (Notes 1 and 6) 727,870
Accrued expenses 63,617
------------
Total liabilities 2,766,202
------------
Net assets $163,210,494
============
Net assets consist of:
Paid-in capital $169,265,105
Distributions in excess of net investment income (504,944)
Accumulated undistributed net realized gain 198,929
Net unrealized depreciation (5,748,596)
------------
$163,210,494
============
Net assets attributable to:
Class III shares $163,210,494
============
Shares outstanding:
Class III 16,536,313
============
Net asset value per share:
Class III $ 9.87
============
See accompanying notes to the financial statements. 7
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1999
- --------------------------------------------------------------------------------
Investment Income:
Interest (including securities lending income of $18,205) 8,621,541
----------
Total income 8,621,541
----------
Expenses:
Management fee (Note 2) 486,743
Custodian and transfer agent fees 102,660
Audit fees 52,837
Registration fees 7,041
Legal fees 3,720
Trustees fees (Note 2) 2,002
Miscellaneous 1,270
Fees waived or borne by Manager (Note 2) (392,034)
----------
264,239
Shareholder service fee (Note 2)
Class III 208,607
----------
Net expenses 472,846
----------
Net investment income 8,148,695
----------
Net realized gain (loss) on:
Net realized gain (loss) on:
Investments 683,869
Closed futures contracts 2,688,601
Closed swap contracts (654,157)
Written options 1,424,030
Foreign currency, forward contracts and foreign currency
related transactions (3,779,809)
----------
Net realized gain 362,534
----------
Change in net unrealized appreciation (depreciation) on:
Investments (2,361,449)
Open futures contracts (731,123)
Open swap contracts (638,073)
Written options (106,195)
Foreign currency, forward contracts and foreign currency
related transactions (2,237,450)
----------
Net unrealized loss (6,074,290)
----------
Net realized and unrealized loss (5,711,756)
----------
Net increase in net assets resulting from operations $2,436,939
==========
8 See accompanying notes to the financial statements.
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1999 February 28, 1998
----------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 8,148,695 $ 5,273,007
Net realized gain 362,534 2,574,738
Change in net unrealized appreciation (depreciation) 6,074,290) 306,402
------------ ------------
Net increase in net assets resulting from operations 2,436,939 8,154,147
------------ ------------
Distributions to shareholders from:
Net investment income
Class I -- (308,025)
Class III (5,497,905) (4,712,549)
------------ ------------
Total distributions from net investment income (5,497,905) (5,020,574)
------------ ------------
In excess of net investment income
Class III (1,386,848) --
------------ ------------
Total distributions in excess of net investment income (1,386,848) --
------------ ------------
Net realized gains
Class I -- (157,383)
Class III (793,938) (2,433,530)
------------ ------------
Total distributions from net realized gains (793,938) (2,590,913)
------------ ------------
In excess of net realized gains
Class I -- (104,612)
Class III (907,937) (1,617,556)
------------ ------------
Total distributions in excess of net realized gains (907,937) (1,722,168)
------------ ------------
(8,586,628) (9,333,655)
------------ ------------
Net share transactions: (Note 5)
Class I -- (684,405)
Class III 64,308,107 35,501,679
------------ ------------
Increase in net assets resulting from net share transactions 64,308,107 34,817,274
------------ ------------
Total increase in net assets 58,158,418 33,637,766
Net assets:
Beginning of period 105,052,076 71,414,310
------------ ------------
End of period (including distributions in excess of net
investment income of $504,944 and $549,020, respectively) $163,210,494 $105,052,076
============ ============
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class I share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
Period from January 6, 1997
March 1, 1997 to (commencement of
January 9, operations)
1998 to February 28, 1997
---------------- ----------------------
<S> <C> <C>
Net asset value, beginning of period $10.15 $10.29
------- ------
Income from investment operations:
Net investment income 0.55 + 0.09
Net realized and unrealized gain (loss) 0.44 (0.23)
------- ------
Total from investment operations 0.99 (0.14)
------- ------
Less distributions to shareholders:
From net investment income (0.55) --
From net realized gains (0.28) --
In excess of net realized gains (0.18) --
------- ------
Total distributions (1.01) --
------- ------
Net asset value, end of period $10.13(a) $10.15
======= ======
Total Return (b) 9.98% (1.36)%
Ratios/Supplemental Data:
Net assets, end of period (000's) -- $ 646
Net expenses to average daily net assets 0.47%* 0.47%*
Net investment income to average daily net assets 6.12%* 6.05%*
Portfolio turnover rate 103% 72%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts: $ 0.03 $ 0.01
</TABLE>
* Annualized.
+ Computed using average shares outstanding throughout the period.
(a) All Class I shares of the Fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
(b) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
10 See accompanying notes to the financial statements.
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29,
----------------------------------------
1999 1998 1997 1996 *
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.15 $ 10.16 $ 9.89 $ 10.00
--------- --------- -------- --------
Income from investment operations:
Net investment income 0.55 0.65+ 0.61 0.05
Net realized and unrealized gain (loss) (0.25) 0.36 0.59 (0.16)
--------- --------- -------- --------
Total from investment operations 0.30 1.01 1.20 (0.11)
--------- --------- -------- --------
Less distributions to shareholders:
From net investment income (0.37) (0.56) (0.57) --
In excess of net investment income (0.09) -- -- --
From net realized gains (0.06) (0.28) (0.36) --
In excess of net realized gains (0.06) (0.18) -- --
--------- --------- -------- --------
Total distributions (0.58) (1.02) (0.93) --
--------- --------- -------- --------
Net asset value, end of period $ 9.87 $ 10.15 $ 10.16 $ 9.89
========= ========= ======== ========
Total Return (a) 2.69% 10.19% 12.01% (1.10)%
Ratios/Supplemental Data:
Net assets, end of period (000's) $163,210 $105,052 $70,768 $31,072
Net expenses to average daily net assets 0.34% 0.34% 0.34% 0.34%**
Net investment income to average daily net assets 5.86% 6.21% 6.31% 6.16%**
Portfolio turnover rate 75% 103% 72% 0%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share
amounts: $ 0.03 $ 0.04 $ 0.04 $ 0.01
</TABLE>
* Period from December 28, 1995 (commencement of operations) to February 29,
1996.
** Annualized.
+ Computed using average shares outstanding throughout the period.
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
See accompanying notes to the financial statements. 11
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Global Bond Fund (the "Fund") is a series of GMO Trust (the "Trust").
The Fund is registered under the Investment Company Act of 1940, as amended,
as an open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager"
or "GMO"). The Trust was established as a Massachusetts Business Trust under
the laws of the Commonwealth of Massachusetts on June 24, 1985. The
Declaration of Trust permits the Trustees to create an unlimited number of
series ("Funds"), each of which issues a separate series of shares, and to
subdivide a series into classes.
The Fund seeks high total return by investing primarily in investment grade
bonds denominated in various currencies including U.S. dollars and
multicurrency units. The Fund generally seeks to provide a total return
greater than that provided by the global fixed income securities market.
Prior to January 9, 1998, the Fund offered three classes of shares: Class I,
Class II and Class III. Effective January 9, 1998, Class I shares ceased
operations, and all shares were exchanged for Class III shares, and Class II
shares ceased to be offered. The principal economic difference among the
classes of shares is the level of shareholder service fee borne by the
classes. Eligibility for and automatic conversion between the various
classes of shares is generally based on the total amount of assets invested
with GMO, as more fully outlined in the Trust's prospectus.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price. Securities
which are primarily traded on foreign exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges,
and those values are then translated into U.S. dollars at the current
exchange rate. Short-term investments with a remaining maturity of sixty
days or less are valued at amortized cost which approximates market value.
Other assets and securities for which no quotations are readily available
are valued at fair value as determined in good faith by the Trustees or
other persons acting at their direction.
Some fixed income securities and options thereon are valued at the closing
bid for such securities as supplied by a primary pricing source chosen by
the Manager. The Manager evaluates such primary pricing sources on an
ongoing basis, and may change any pricing source at any time. The Manager is
kept informed of erratic or unusual movements (including unusual inactivity)
in the prices supplied for a security and has the power to override any
price supplied by a source (by taking a price supplied by
12
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
another source) because the Manager has other reasons to suspect that a
price supplied may not be reliable.
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from yield
data relating to investments or securities with similar characteristics.
Certain investments in securities held by the Fund were valued on the basis
of a price provided by a principal market maker. The prices provided by the
principal market makers may differ from the value that would be realized if
the securities were sold and the differences could be material to the
financial statements. At February 28, 1999, the total value of these
securities represented 26% of net assets. Included in this total are U.S.
Government backed securities and highly rated collateralized debt
obligations that represent 19% of net assets at February 28, 1999.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the prevailing exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at prevailing exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and losses
attributable to changes in exchange rates from gains and losses that arise
from changes in the market value of investments. Such fluctuations are
included with net realized and unrealized gain or loss on investments. Net
realized gains and losses on foreign currency transactions represent net
exchange gains and losses on disposition of foreign currencies, currency
gains and losses realized between the trade and settlement dates on
securities transactions, and the difference between the amount of investment
income and foreign withholding taxes recorded on the Fund's books and the
U.S. dollar equivalent amounts actually received or paid.
Futures contracts
The Fund may use futures contracts to manage its exposure to the bond and
currency markets. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments. Upon
entering into a futures contract, the Fund is required to deposit with its
custodian, in a segregated account in the name of the futures broker, an
amount of cash or U.S. government obligations in accordance with the initial
margin requirements of the broker or exchange. Futures contracts are marked
to market daily and an appropriate payable or receivable for the change in
value ("variation margin") is recorded by the Fund. Gains or losses are
recognized but not considered realized until the contracts expire or are
closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day by
the board of trade or exchange on which they are traded. See Note 6 for all
open futures contracts as of February 28, 1999.
13
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales of
securities or to hedge the currency exposure associated with some or all of
the Fund's portfolio securities. A forward currency contract is an agreement
between two parties to buy and sell a currency at a set price on a future
date. The market value of a forward currency contract fluctuates with
changes in forward currency exchange rates. Forward currency contracts are
marked to market daily and the change in value is recorded by the Fund as an
unrealized gain or loss. Realized gains or losses equal to the difference
between the value of the contract at the time it was opened and the value at
the time it was closed are recorded upon delivery or receipt of the currency
or, if a forward currency contract is offset by entering into another
forward currency contract with the same broker, upon settlement of the net
gain or loss. These contracts may involve market risk in excess of the
unrealized gain or loss reflected in the Fund's Statement of Assets and
Liabilities. In addition, the Fund could be exposed to risk if the
counterparties are unable to meet the terms of the contracts or if the value
of the currency changes unfavorably to the U.S. dollar. The U.S. dollar
value of the currencies the Fund has committed to buy or sell is shown under
Note 6 and represents the currency exposure the Fund has acquired or hedged
through currency contracts as of February 28, 1999.
Options
The Fund may write call and put options on futures, securities or currencies
it owns or in which it may invest. When the Fund writes a call or put
option, an amount equal to the premium received is recorded as a liability
and subsequently marked to market to reflect the current value of the option
written. Premiums received from writing options which expire are treated as
realized gains. Premiums received from writing options which are exercised
or closed are offset against the proceeds or amounts paid on the transaction
to determine the realized gain or loss. The Fund as a writer of an option
has no control over whether the underlying securities may be sold (call) or
purchased (put) and as a result bears the market risk of an unfavorable
change in the price of the security underlying the written option. There is
the risk the Fund may not be able to enter into a closing transaction
because of an illiquid market. See Note 6 for all open written option
contracts as of February 28, 1999.
The Fund may also purchase put and call options. The Fund pays a premium
which is included in the Fund's Statement of Assets and Liabilities as an
investment and subsequently marked to market to reflect the current value of
the option. The risk associated with purchasing put and call options is
limited to the premium paid.
Loan agreements
The Fund may invest in direct debt instruments which are interests in
amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates. The Fund's investments in loans may be in the form of
participations in loans or assignments of all or a portion of loans from
third parties. A loan is often administered by a bank or other financial
institution (the lender) that acts as agent for all holders. The agent
administers the terms of the loan, as specified in the loan agreement. When
investing in a loan participation, the Fund has the right to receive
payments of principal, interest and any fees to which it is entitled only
from the lender selling the loan agreement and only upon receipt by the
lender of payments from the borrower. The Fund generally has no right to
enforce compliance with the terms of the loan agreement with the borrower.
As a result, the Fund may be subject to the credit
14
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
risk of both the borrower and the lender that is selling the loan
agreement. When the Fund purchases assignments from lenders it acquires
direct rights against the borrower on the loan. Direct indebtedness of
emerging countries involves a risk that the governmental entities
responsible for the repayment of the debt may be unable or unwilling to pay
the principal and interest when due.
Indexed securities
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices, or
other financial indicators. The Fund uses indexed securities to increase or
decrease its exposure to different underlying instruments and to gain
exposure to markets that may be difficult to invest in through conventional
securities. Indexed securities may be more volatile than their underlying
instruments, but any loss is limited to the amount of the original
investment.
Swap agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to interest rates and credit risk. The Fund may enter into interest rate,
total return, and credit default swap agreements. Interest rate swap
agreements involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments with respect to a notional
amount of principal. Total return swap agreements involve commitments to pay
interest in exchange for a market-linked return based on a notional amount.
To the extent the total return of the security or index underlying the
transaction exceeds or falls short or the offsetting interest rate
obligation, the Fund will receive a payment from or make a payment to the
counterparty, respectively. Credit default swaps involve the payment of a
specified rate based on the notional amount. The Fund receives payment upon
a default of the underlying security. In connection with these agreements,
cash or securities may be set aside as collateral by the Fund's custodian in
accordance with the terms of the swap agreement. The Fund earns interest on
cash set aside as collateral, which is paid by the counterparty. At February
28, 1999, $1,290,155 in cash has been set aside. Swaps are marked to market
daily based upon quotations from market makers and the change, if any, is
recorded as unrealized gain or loss in the Statement of Operations. Payments
received or made at the end of the measurement period are recorded as
realized gain or loss in the Statement of Operations. Net payments of
interest on interest rate swap agreements are recorded as interest income.
Entering into these agreements involves, to varying degrees, elements of
credit and market risk in excess of the amounts recognized on the Statement
of Assets and Liabilities. Such risks involve the possibility that there
will be no liquid market for these agreements, that the counterparty to the
agreements may default on its obligation to perform and that there may be
unfavorable changes in the fluctuation of interest rates. See Note 6 for a
summary of open swap agreements as of February 28, 1999.
15
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Security lending
The Fund may lend its securities to certain qualified brokers. The loans are
collateralized at all times with cash or securities with a market value at
least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower fail financially.
The Fund receives compensation for lending its securities. At February 28,
1999, the Fund had no securities on loan.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for foreign currency transactions.
The following reclassification represents the amount necessary to report the
stated components of net assets on a tax basis, excluding certain temporary
differences, as of February 28, 1999. This reclassification has no impact on
net investment income, realized gain/loss and net asset value of the Fund
and is primarily attributable to certain differences in the computation of
distributable income and capital gains under federal tax rules versus
generally accepted accounting principles. The calculation of net investment
income per share in the financial highlights table excludes these
adjustments.
16
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Accumulated Accumulated
Undistributed Net Undistributed
Investment Income Net Realized Gain Paid-in Capital
------------------ --------------------- ----------------
$(1,219,866) $1,219,866 $--
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis, and is adjusted for the accretion of
discounts. In determining the net gain or loss on securities sold, the cost
of securities is determined on the identified cost basis. Interest income on
U.S. Treasury inflation indexed securities is accrued daily based upon an
inflation adjusted principal. Additionally, any increase in the principal or
face amount of the securities adjusted for inflation is recorded as interest
income.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated taking into consideration, among other things, the nature
and type of expense and the relative size of the Funds.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .15% of the amount invested.
The premium will be reduced by 50% with respect to any portion of a purchase
that is offset by a corresponding redemption occurring on the same day. In
addition, the purchase premium 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.
All purchase premiums are paid to and recorded by the Fund as paid-in
capital. Purchase premiums are included as part of each class' "shares
sold", as summarized in Note 5. For the year ended February 28, 1999, the
Fund received $125,972 in purchase premiums. There is no premium for cash
redemptions or reinvested distributions.
Investment risk
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments,
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may be
more volatile than securities of comparable U.S. companies and U.S.
securities markets. The risks described above apply to an even greater
extent to investments in emerging markets. The securities markets of
emerging countries are generally smaller, less developed, less liquid, and
more volatile than the securities markets of the U.S. and developed foreign
markets.
17
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .35% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based on
average daily net assets at the annual rate of .15% for Class III shares.
GMO agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding brokerage commissions, certain other transaction costs (including
transfer taxes), shareholder service fees and extraordinary expenses) exceed
.19% of average daily net assets.
Effective March 1, 1999, GMO's contractual management fee was reduced to
.19% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding brokerage commissions,
certain other transaction costs (including transfer taxes), shareholder
service fees and extraordinary expenses) exceed the management fee.
The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees
during the year ended February 28, 1999, was $2,002. No remuneration is paid
to any Trustee or officer who is affiliated with the Manager.
3. Purchases and sales of securities
For the year ended February 28, 1999, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
Purchases Sales
--------------- --------------
U.S. Government securities $ 3,973,070 $ 2,312,748
Investments (non-U.S. Government securities) 155,319,012 95,154,341
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
Gross Gross
Unrealized Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
------------------ ----------------- ----------------- ------------------
$165,672,482 $963,914 $3,722,590 $2,758,676
18
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
4. Principal shareholders
At February 28, 1999, 58.7% of the outstanding shares of the Fund were held
by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums received by the
Fund, were as follows:
Period from March 1,
1997 to January 9, 1998
--------------------------
Class I: Shares Amount
------------- -------------
Shares sold 498,433 $ 5,013,156
Shares issued to shareholders in
reinvestment of distributions 56,872 570,020
Shares repurchased (618,948) (6,267,581)
------------- -------------
Net decrease (63,643) $ (684,405)
============= =============
Year Ended Year Ended
February 28, 1999 February 28, 1998
----------------------------------------------------
Class III: Shares Amount Shares Amount
----------------------------------------------------
Shares sold 8,321,672 86,437,108 3,289,637 34,819,662
Shares issued to
shareholders in
reinvestment of
distributions 780,362 8,048,789 724,057 7,256,147
Shares repurchased (2,915,212) (30,177,790) (627,568) (6,574,130)
====================================================
Net increase 6,186,822 64,308,107 3,386,126 35,501,679
====================================================
19
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1999 is as
follows:
Forward currency contracts
Net Unrealized
Settlement Units of Appreciation
Date Deliver/Receive Currency Value (Depreciation)
----------------------------------------------------------------------------
Buys
4/20/99 AUD 5,100,000 $ 3,168,130 $ (132,136)
5/05/99 CAD 38,000,000 25,170,686 (220,131)
5/13/99 EUR 39,500,000 43,537,295 61,620
4/2799 GBP 16,700,000 26,731,189 (397,126)
4/13/99 JPY 2,330,000,000 19,765,534 (829,391)
3/02/99 NZD 4,500,000 2,358,570 (1,005)
--------------
$ (1,518,169)
==============
Sales
4/20/99 AUD 300,000 $ 186,361 $ 3,143
4/27/99 GBP 5,000,000 8,003,350 22,929
4/13/99 JPY 400,000,000 3,393,225 176,738
3/02/99 NZD 4,500,000 2,358,570 62,880
6/03/99 NZD 4,500,000 2,361,447 603
--------------
$ 266,293
==============
Forward cross currency contracts
<TABLE>
<CAPTION>
Net Unrealized
Settlement Appreciation
Date Deliver/Units of Currency Receive/In Exchange For (Depreciation)
----------- ----------------------------- --------------------------- ----------------
<S> <C> <C> <C>
3/16/99 CHF 33,754,578 EUR 21,200,000 $ (48,456)
3/09/99 EUR 19,100,000 SEK 169,894,734 (279,252)
3/16/99 EUR 13,300,000 CHF 21,218,471 59,617
3/09/99 SEK 181,869,185 EUR 20,200,000 28,506
----------------
$ (239,585)
================
</TABLE>
20
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Futures contracts
Net Unrealized
Number of Contract Appreciation
Contracts Type Expiration Date Value (Depreciation)
---------- ------------------------ --------------- -------- ---------------
Buys
25 Australian Government Bond 3 Yr. March 1999 $ 1,844,658 $ (35,311)
35 Australian Government Bond 10 Yr. March 1999 3,231,947 (96,798)
169 Canadian Government Bond June 1999 13,881,623 (175,834)
138 German Government Bond March 1999 22,167,368 (323,641)
11 Japanese Government Bond June 1999 12,047,619 (12,036)
52 U.K. Gilt June 1999 9,742,711 (175,525)
216 U.S. Long Bond June 1999 26,129,250 (61,498)
==========
$ (880,643)
==========
Sales
1 Japanese Government Bond March 1999 $ 1,106,195 $ (429)
28 Swedish Government Bond 10 Yr. March 1999 3,798,003 75,909
65 Swiss Government Bond March 1999 5,825,823 (8,733)
1 Swiss Government Bond June 1999 88,600 63
==========
$ 66,810
==========
At February 28, 1999, the Fund has cash and/or securities to cover any
margin requirements on open futures contracts.
21
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Written option transactions
<TABLE>
<CAPTION>
Puts Calls
Principal Amount Principal Amount
of Contracts of Contracts
(000's omitted) Premiums (000's omitted) Premiums
--------------- ------------ ----------------- -------------
<S> <C> <C> <C> <C>
Outstanding, beginning
of period 68,700 $ 1,526,710 38,700 $ 1,542,615
Options written 3,500 220,290 3,500 262,500
Options closed (13,600) (153,680) (13,600) (153,000)
Options exercised -- -- (25,100) (1,389,615)
Options expired (55,100) (1,373,030) -- --
--------------- ------------ -------------- --------------
Outstanding, end
of period 3,500 $ 220,290 3,500 $ 262,500
=============== ============ ============== ==============
</TABLE>
Summary of written options outstanding
<TABLE>
<CAPTION>
Principal Amount
of Contracts Expiration
(000's omitted) Exercise Price Date Value
--------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
USD Call/JPY Put 3,500 USD 112.7 JPY 11/16/99 $ 249,900
USD Put/JPY Call 3,500 USD 112.7 JPY 11/16/99 169,050
============
$ 418,950
============
</TABLE>
22
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Swap agreements
<TABLE>
<CAPTION>
Notional Amount Expiration Net Unrealized
Fund/Counterparty Date Description Depreciation
----------------- ---------- ---------------------------------------------------- ---------------
<S> <C> <C> <C>
Credit Default Swaps
108,000,000,000 ITL 3/31/03 Agreement with Morgan Guaranty Trust Company $ (62,722)
dated 3/26/98 to pay .07% per year times the
notional amount. The Fund receives payment only
upon a default event in Italy, the notional amount
times the difference between the par value and
the then-market value of Italy BTP, 6.00% due
11/01/07.
2,263,500,000 BEF 3/31/03 Agreement with Morgan Guaranty Trust Company (63,097)
dated 3/26/98 to pay .07% per year times the
year times the The Fund receives year times the
payment only upon a default event in Belgium, the
notional amount times the difference between the
par value and the then-market value of Kingdom of
Belgium, 5.75% due 3/28/08.
Interest Rate Swaps
7,100,000 CHF 6/05/05 Agreement with Morgan Guaranty Trust Company (181,077)
dated 6/03/98 to pay the notional amount
multiplied by 3.245% and to receive the
notional amount multiplied by 6 month Floating
Rate Swiss LIBOR adjusted by a specified spread.
7,400,000 CHF 6/10/05 Agreement with Credit Suisse Financial Products (186,603)
dated 6/08/98 to pay the notional amount multiplied
by 3.2625% and to receive the notional amount
multiplied by 6 month Floating Rate Swiss LIBOR
adjusted by a specified spread.
</TABLE>
23
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Swap agreements -- continued
<TABLE>
<CAPTION>
Notional Amount Expiration Net Unrealized
Fund/Counterparty Date Description Depreciation
----------------- ---------- -------------------------------------- -------------
<S> <C> <C> <C>
2,300,000 CHF 6/10/05 Agreement with Credit Suisse Financial $ (28,943)
Products dated 10/01/98 to pay the
notional amount multiplied by 3.2625%
and to receive the notional amount
multiplied by 6 month Floating Rate
Swiss LIBOR adjusted by a specified
spread.
3,900,000 CHF 6/11/05 Agreement with Morgan Guaranty Trust (107,976)
Company dated 6/09/98 to pay the
notional amount multiplied by 3.245%
and to receive the notional amount
multiplied by 6 month Floating Rate
Swiss LIBOR adjusted by a specified
spread.
6,800,000 CHF 9/16/05 Agreement with Morgan Guaranty Trust (97,452)
Company dated 9/14/98 to pay the
notional amount multiplied by 3.1175%
and to receive the notional amount
multiplied by 6 month Floating Rate
Swiss LIBOR adjusted by a specified
spread.
Total Return Swap
579,899 USD/ 4/05/99 Agreement with Morgan Guaranty Trust -
1,000,000 USD Company dated 2/26/99 to receive the
notional amount multiplied by the
change in market value (including
accrued interest) of Brazil Discount
ZL Floating Rate Note due 4/15/24 and
to pay initial market value multiplied
by 1 month LIBOR adjusted by a
specified spread.
==========
$ (727,870)
==========
</TABLE>
See Notes to the Schedule of Investments for definitions of currency
abbreviations.
24
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1999, all of the Fund's distributions are
from investment company taxable income, except that the Fund has designated
19.60% of distributions as net capital gain dividends.
The Fund has elected to defer to March 1, 1999 post-October capital losses of
$61,142 and foreign currency losses of $2,060,578.
25
<PAGE>
GMO Global Bond Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
- ------------------
Mr. William L. Nemerever and Mr. Thomas F. Cooper are primarily responsible
for the day-to-day management of the Fund's portfolio. Each of these
individuals has been a portfolio manager with Grantham, Mayo, Van Otterloo &
Co. LLC since 1993.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The Class III shares of the Global Bond Fund returned +2.7% for the fiscal year
ended February 28, 1999, compared to +8.6% for the J.P. Morgan Global Government
Bond Index. Consistent with the Fund's investment objectives and policies, the
Fund was substantially invested in investment-grade, foreign and domestic fixed
income instruments throughout the period.
The Fund underperformed the benchmark during the fiscal year by 5.9%. While bond
market selection added value to the portfolio, currency, emerging and issue
selection were negative and reduced the portfolio's return. The continued
pattern of declining short-term interest rates across the globe was beneficial
for portfolio returns, especially in the fourth quarter of 1998. The portfolio's
underweight position in Japanese bonds and overweight position in UK Gilts added
value. However, several unanticipated developments resulted in the Fund
underperforming the benchmark during the fiscal year.
. The Russian decision to default on its domestic debt and devalue its
currency reduced returns, given the Fund's exposure to emerging country
debt.
. The collapse of Long-Term Capital Management prompted hedge funds and other
investors to unwind short Japanese yen positions. The result was a 15
percent appreciation in the yen during the month of October, which
negatively affected returns, given the Fund's underweight yen position.
. The portfolio's overweight position in British pounds also negatively
affected returns while overweight positions in Canadian dollars and Swedish
krona added value.
. In addition, the panic-driven flight to liquidity during the fourth quarter
caused spreads to widen on the Fund's holdings of highly rated, but less
liquid asset-backed securities, governments and agencies.
Outlook
- -------
The Fund is structured to benefit from outperformance in the Australian,
Canadian, Swedish, U.S. and emerging bond markets. We expect the Danish, Euro,
Japanese and Swiss bond markets to underperform. Our strategy maintains a market
duration in each country. Strong relative performance is expected from the
Australian dollar, Canadian dollar, Swedish krona and U.K. pound. The Danish
krone, Euro, Japanese yen, Swiss franc and U.S. dollar are expected to
underperform.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Global Bond Fund Class III Shares and the
JP Morgan Global Government Bond Index
As of February 28, 1999
-----------------------------
Average Annual Total Return
-----------------------------
Since
Inception
1 Year 12/28/95
Class -----------------------------
III 2.5% 7.3%
-----------------------------
[LINE GRAPH APPEARS HERE]
GMO Global Bond Fund J.P. Morgan Global
Date Class III Shares Government Bond Index
---- -------------------- ---------------------
1/31/95
12/28/95 9,985 10,000
12/31/95 9,985 10,002
3/31/96 9,815 9,826
6/30/96 10,255 9,886
9/30/96 10,750 10,165
12/31/96 11,290 10,442
3/31/97 10,920 10,033
6/30/97 11,334 10,328
9/30/97 11,869 10,506
12/31/97 12,009 10,588
3/31/98 12,201 10,693
6/30/98 12,321 10,934
9/30/98 12,959 11,855
12/31/98 13,240 12,210
2/28/99 12,517 11,705
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 15 bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Past performance is not indicative of future
performance. Information is unaudited.
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of GMO Global (U.S.+)
Equity Allocation Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly in all
material respects, the financial position of GMO Global (U.S.+) Equity
Allocation Fund at February 28, 1999 and the results of its operations, the
changes in its net assets and the financial highlights for the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 1999 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 22, 1999
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value ($)/
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Mutual Funds-- 100.0%
125,429 GMO Currency Hedged International Core Fund 1,163,984
10,723 GMO Domestic Bond Fund 103,474
176,067 GMO Emerging Country Debt Fund 1,213,100
230,983 GMO Emerging Markets Fund 1,457,502
248,683 GMO Evolving Countries Fund 1,427,442
94,223 GMO Growth Fund 390,081
84,462 GMO Inflation Indexed Bond Fund 834,487
72,664 GMO International Bond Fund 730,999
229,811 GMO International Core Fund 4,683,557
32,815 GMO International Small Companies Fund 361,625
272,422 GMO REIT Fund 2,487,210
120,828 GMO Small Cap Growth Fund 1,314,613
233,632 GMO Small Cap Value Fund 2,731,156
141,073 GMO U.S. Bond/Global Alpha A Fund 1,443,179
574,219 GMO U.S. Core Fund 10,674,725
140,254 GMO Value Fund 1,458,641
------------
TOTAL MUTUAL FUNDS (COST $37,842,123) 32,475,775
------------
SHORT-TERM INVESTMENTS -- 0.0%
Repurchase Agreements -- 0.0%
$ 10,884 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/26/99, due 3/1/99, with a maturity value of $10,888 and an
effective yield of 4.02%, collateralized by a U.S. Treasury
Obligation with a rate of 7.00%, maturity date of 7/15/06
10,884 and market value, including accrued interest, of
$11,102. 10,884
------------
TOTAL SHORT-TERM INVESTMENTS (COST $10,884) 10,884
------------
TOTAL INVESTMENTS -- 100.0%
(Cost $37,853,007) 32,486,659
Other Assets and Liabilities (net) -- 0.0% (13,051)
------------
TOTAL NET ASSETS -- 100% $32,473,608
============
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Assets and Liabilities -- February 28, 1999
- ---------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (cost $37,853,007) (Note 1) $32,486,659
Receivable for expenses waived or borne by Manager (Note 2) 2,180
-----------
Total assets 32,488,839
-----------
Liabilities:
Accrued expenses 15,231
-----------
Total liabilities 15,231
-----------
Net assets $32,473,608
===========
Net assets consist of:
Paid-in capital $37,089,860
Accumulated undistributed net realized gain 750,096
Net unrealized depreciation (5,366,348)
-----------
$32,473,608
===========
Net assets attributable to:
Class III shares $32,473,608
===========
Shares outstanding:
Class III 3,670,478
===========
Net asset value per share:
Class III $ 8.85
===========
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Operations -- Year Ended February 28, 1999
- --------------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Dividends from investment company shares $ 695,920
Interest 1,577
----------
Total income 697,497
----------
Expenses:
Audit fees 16,690
Custodian and transfer agent fees 6,421
Registration fees 3,229
Legal fees 917
Trustees fees (Note 2) 455
Miscellaneous 1,807
Fees waived or borne by Manager (Note 2) (29,519)
----------
Net expenses --
----------
Net investment income 697,497
----------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments (1,216,902)
Realized gain distributions from investment company shares 5,159,137
----------
Net realized gain 3,942,235
----------
Change in net unrealized appreciation (depreciation) on investments (6,146,786)
----------
Net realized and unrealized loss (2,204,551)
----------
Net decrease in net assets resulting from operations $(1,507,054)
==========
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
Year Ended Year Ended
February 28, February 28,
1999 1998
-------------- --------------
Increase (decrease) in net assets:
Operations:
Net investment income $ 697,497 $ 935,912
Net realized gain 3,942,235 6,464,770
Change in net unrealized appreciation
(depreciation) (6,146,786) 402,806
----------- -----------
Net increase (decrease) in net assets
resulting from operations (1,507,054) 7,803,488
----------- -----------
Distributions to shareholders from:
Net investment income
Class I -- (27,511)
Class III (697,497) (908,401)
------------ -----------
Total distributions from net
investment income (697,497) (935,912)
------------ -----------
In excess of net investment income
Class I -- (92)
Class III (1,211,441) (3,044)
------------ -----------
Total distributions in excess of
net investment income (1,211,441) (3,136)
------------ -----------
Net realized gains
Class I -- (175,698)
Class III (3,274,986) (5,674,854)
------------ -----------
Total distributions from net
realized gains (3,274,986) (5,850,552)
------------ -----------
(5,183,924) (6,789,600)
------------ -----------
Net share transactions: (Note 5)
Class I -- 138,452
Class III (5,936,414) 13,162,081
------------ -----------
Increase (decrease) in net assets
resulting from net share
transactions (5,936,414) 13,300,533
------------ -----------
Total increase (decrease) in net
assets (12,627,392) 14,314,421
Net assets:
Beginning of period 45,101,000 30,786,579
------------ -----------
End of period (including accumulated
undistributed net investment
income of $0 and $0, respectively) $32,473,608 $45,101,000
=========== ===========
4 See accompanying notes to the financial statements.
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class I share outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from April 30,
1997 (commencement of
operations) to
January 9, 1998
----------------------
<S> <C>
Net asset value, beginning of period $10.24
----------
Income from investment operations:
Net investment income (b) 0.25 +
Net realized and unrealized gain 0.93
----------
Total from investment operations 1.18
----------
Less distributions to shareholders:
From net investment income (0.26)
In excess of net investment income -- (d)
From net realized gains (1.65)
----------
Total distributions (1.91)
----------
Net asset value, end of period $ 9.51 (c)
==========
Total Return (a) 11.04%
Ratios/Supplemental Data:
Net assets, end of period (000's) --
Net expenses to average daily net assets 0.13 %*
Net investment income to average daily net assets (b) 3.18 %*
Portfolio turnover rate 32 %
Fees and expenses voluntarily waived or borne by the Manager
consisted of the following per share amount: $ 0.01
</TABLE>
(a) Calculation excludes purchase premiums and redemption fees. The total
return would have been lower had certain expenses not been waived during
the period shown.
(b) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
(c) All Class I shares of the Fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
(d) The per share distribution in excess of net investment income was $0.0008.
+ Computed using average shares outstanding throughout the period.
* Annualized.
See accompanying notes to the financial statements. 5
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28,
-----------------------------------
1999 1998 1997 *
------- -------- --------
<S> <C> <C> <C>
Net asset value, beginning of period $ 10.48 $ 10.30 $ 10.00
------- -------- --------
Income from investment operations:
Net investment income (a) 0.16+ 0.26+ 0.12
Net realized and unrealized gain (loss) (0.40) 1.83 0.38
------- -------- --------
Total from investment operations (0.24) 2.09 0.50
------- -------- --------
Less distributions to shareholders:
From net investment income (0.16) (0.26) (0.12)
In excess of net investment income (0.40) --(c) --
From net realized gains (0.83) (1.65) (0.08)
------- -------- --------
Total distributions (1.39) (1.91) (0.20)
------- -------- --------
Net asset value, end of period $ 8.85 $ 10.48 $ 10.30
======= ======== ========
Total Return (b) (2.84)% 21.86% 5.09%
Ratios/Supplemental Data:
Net assets, end of period (000's) $32,474 $45,101 $ 30,787
Net expenses to average daily net assets (d) 0.00% 0.00% 0.00%**
Net investment income to average daily net assets (a) 1.64% 2.39% 3.21%**
Portfolio turnover rate 34% 32% 10%
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per share
amounts: $ 0.01 $ 0.01 $ 0.01
</TABLE>
(a) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
(b) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(c) The per share distribution in excess of net investment income was $0.0009.
(d) Net expenses exclude expenses incurred indirectly through investment in
underlying funds. See Note 1.
* Period from November 26, 1996 (commencement of operations) to February 28,
1997.
** Annualized.
+ Computed using average shares outstanding throughout the period.
6 See accompanying notes to the financial statements.
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Global (U.S.+) Equity Allocation Fund (the "Fund") is a series of GMO
Trust (the "Trust"). The Fund is registered under the Investment Company
Act of 1940, as amended, as an open-end, diversified management investment
company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo &
Co. LLC (the "Manager" or "GMO"). The Trust was established as a
Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series of shares
into classes.
The Fund operates as a "fund-of-funds" in that, pursuant to management
provided by the Manager, it makes investments in other funds of the Trust
("underlying funds"). The Fund seeks a total return greater than that of
the GMO Global (U.S.+) Equity Index, a benchmark developed by the Manager.
The Fund will pursue its objective by investing in Class III shares of
domestic equity, international equity, and fixed income funds of the Trust.
Prior to January 9, 1998, the Fund offered three classes of shares: Class
I, Class II and Class III. Effective January 9, 1998, Class I shares ceased
operations and all shares were exchanged for Class III shares, and Class II
shares ceased to be offered. The principal economic difference among the
classes of shares is the level of shareholder service fee borne by the
classes. Eligibility for and automatic conversion between the various
classes of shares is generally based on the total amount of assets invested
with GMO, as more fully outlined in the Trust's prospectus.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Shares of underlying funds are valued at their net asset value as reported
on each business day. Short-term investments with a remaining maturity of
sixty days or less are valued at amortized cost, which approximates market
value. Other assets and securities for which no quotations are readily
available are valued at fair value as determined in good faith by the
Trustees.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/ dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
7
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
default by the seller. Collateral for certain tri-party agreements is held
at the counterparty's custodian in a segregated account for the benefit of
the Fund and the counterparty. In connection with transactions in
repurchase agreements, if the seller defaults and the value of the
collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to the
classification of distributions from underlying funds and redemptions
in-kind. Gains resulting from such in-kind transactions amounted to
$144,004.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
------------------------ ------------------------ ------------------------
<S> <C> <C>
$ 1,211,441 $ (1,033,894) $ (177,547)
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
8
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis. In determining the net gain or loss on securities sold, the
cost of securities is determined on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. In addition,
the Fund will also incur fees and expenses indirectly as a shareholder in
the underlying funds. Because the underlying funds have varied expense and
fee levels and the Fund may own different proportions of underlying funds
at different times, the amount of fees and expenses indirectly incurred by
the Fund will vary.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .47% of the amount
invested. In the case of cash redemptions, the fee is .15% of the amount
redeemed. All purchase premiums and redemption fees are paid to and
recorded by the Fund as paid-in capital. Purchase premiums are included as
part of each class' "shares sold" and redemption fees are included as part
of each class' "shares repurchased", respectively, as summarized in Note 5.
For the year ended February 28, 1999, the Fund received $25,765 in purchase
premiums and $13,125 in redemption fees. There is no premium for reinvested
distributions or in-kind transactions.
Investment risk
The Fund is subject to the investment risk associated with an investment in
the underlying funds, some of which may invest in foreign securities. There
are certain additional risks involved in investing in foreign securities
that are not inherent in investments in domestic securities. These risks
may involve adverse political and economic developments, including the
possible imposition of capital controls or other foreign governmental laws
or restrictions. In addition, the securities of some foreign companies and
securities markets are less liquid and at times more volatile than
securities of comparable U.S. companies and U.S. securities markets. The
risks described above apply to an even greater extent to investments in
emerging markets. The securities markets of emerging countries are
generally smaller, less developed, less liquid, and more volatile than the
securities markets of the U.S. and developed foreign markets.
9
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
2. Fees and other transactions with affiliates
The Manager determines the allocation of the assets of the Fund among
designated underlying funds. The Manager does not charge an advisory fee
for asset allocation advice provided to the Fund, but receives advisory and
shareholder service fees from the underlying funds in which the Fund
invests. The Fund has adopted a Shareholder Service Plan under which the
Fund pays GMO a shareholder service fee for client and shareholder service,
reporting and other support. No shareholder service fee is charged for
Class III shares.
GMO has contractually agreed to reimburse all expenses directly incurred by
the Fund until February 29, 2000 (excluding brokerage commissions, certain
other transaction costs (including transfer taxes), shareholder service
fees and extraordinary expenses).
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999 was $455. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1999, aggregated
$14,092,875 and $19,356,094, respectively.
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
---------------------- -------------------- ------------------- ------------------
<S> <C> <C> <C>
$ 38,992,191 $ 149,852 $ 6,655,384 $ 6,505,532
</TABLE>
4. Principal shareholders
At February 28, 1999, 37.5% of the outstanding shares of the Fund were held
by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
10
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums and redemption
fees received by the Fund, were as follows:
<TABLE>
<CAPTION>
Period from April 30, 1997
(commencement of operations)
Class I: to January 9, 1998
--------------------------------
Shares Amount
-------------- -----------------
<S> <C> <C>
Shares sold 107,248 $ 1,151,341
Shares issued to shareholders in
reinvestment of distributions 20,607 203,301
Shares repurchased (127,855) (1,216,190)
============== =================
Net increase -- $ 138,452
============== =================
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
Class III: February 28, 1999 February 28, 1998
-------------------------------- --------------------------------
Shares Amount Shares Amount
--------------- ---------------- -------------- -----------------
<S> <C> <C> <C> <C>
Shares sold 531,374 $ 5,481,883 1,472,906 $ 15,143,599
Shares issued to shareholders in
reinvestment of distributions 136,208 1,323,898 192,315 1,900,758
Shares repurchased (1,298,592) (12,742,195) (352,601) (3,882,276)
=============== ================ ============== =================
Net increase (decrease) (631,010) $ (5,936,414) 1,312,620 $ 13,162,081
=============== ================ ============== =================
</TABLE>
11
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1999, all of the Fund's distributions are
from investment company taxable income, except that the Fund has designated
63.2% of distributions as net capital gain dividends.
12
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
- ------------------
Mr. R. Jeremy Grantham and Mr. Ben Inker are primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. Grantham has been a portfolio
manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years.
Mr. Inker has been with the firm for seven years.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The Class III shares of the Global (U.S.+) Equity Allocation Fund returned -2.8%
for the fiscal year ended February 28, 1999. During that period the Fund's
benchmark (75% S&P 500/25% GMO EAFE-Lite Extended) returned 15.4%.
Our fundamental conclusion at the outset of 1998 was that the developed,
large-cap equity markets in the U.S. and abroad were markedly overvalued. Our
research indicated that better long-term returns could be achieved from
investments in other asset classes, including both REITS and small-caps in the
U.S., emerging and small-cap international equities and fixed income
instruments. By diversifying out of large-cap equities and into other asset
classes with good return potential, we believed we were exposing our clients to
a portfolio with better return potential and a reasonable level of risk. What we
did not anticipate was that in the wake of the global crisis and the ensuing
flight to quality stocks, everything other than blue chips was sold by nervous
investors. As a result, all of our bets worked against us.
During the fiscal year, the Fund was underweight in U.S. stocks by 16% relative
to the benchmark. Due to the continuing rally of U.S. equities, this allocation
hurt the Fund's overall performance. Within U.S. stocks, we tilted the portfolio
towards the most attractively valued sectors including small stocks, where we
were 12% overweight, and real estate investment trusts (REITs), where we were 5%
overweight. For the fiscal year, the allocation to REITs hurt performance, as
the GMO REIT Fund underperformed the S&P 500 Index by a staggering 44%.
Performance of the GMO Growth Fund added 3.2% relative to the S&P 500. However,
this gain was offset by underperformance of the GMO Small Cap Value, Small Cap
Growth, U.S. Core and Value Funds.
Our modest underweight of international stocks was unsuccessful in adding value.
Performance of the International Core Fund lagged the benchmark as the rally in
expensive multinationals continued. The GMO International Core Fund returned
- -0.7%, underperforming the GMO EAFE-Lite Index by 6.8%. The Fund was 6%
overweight in emerging equities for the period, hurting performance as both the
GMO Emerging Markets Fund and the GMO Evolving Countries Fund trailed the IFC
Investable Composite by 6.2% and 6.8%, respectively. Collectively, the
allocation to international equities cost the Fund -4.8% relative to the
benchmark.
The Fund was overweight 12% in fixed income, with allocations to international
and emerging bonds along with U.S. fixed income. Due largely to the poor
performance of the GMO Emerging Country Debt Fund during the Asian-Russian
crisis, this position detracted from performance.
<PAGE>
GMO Global (U.S.+) Equity Allocation Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
The fundamentals of today's markets do not justify the extreme valuation
disparities that we see. The investment climate has become increasingly
speculative, exemplified by the extraordinary returns and volatility of Internet
stocks. Our conviction that these conditions cannot prevail indefinitely remains
firm. As such, we will hold our positions, which are now remarkably cheap. With
the eventual return to intrinsic value, we expect the opportunities for
value-added resulting from these extreme conditions will be extraordinary and
will vastly offset recent underperformance.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Global (U.S.+) Equity Allocation Fund Class III Shares and the
S&P 500 Index (50%)/MSCI All Country World Index (50%)
As of February 28, 1999
--------------------------------
Average Annual Total Return
--------------------------------
Since
Inception
1 Year 11/26/96
Class --------------------------------
III -3.4% 9.9%
--------------------------------
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GMO Global (U.S.+) Equity Allocation Fund S&P 500 Index (50%)/MSCI All GMO Global (U.S.+)
Date Class III Shares Country World Index (50%) Equity Index
---- ---------------------------------------- ---------------------------- ------------------
<S> <C> <C> <C>
1/31/96
11/26/96 9,953 10,000 10,000
12/31/96 10,023 9,823 9,848
3/31/97 10,185 10,011 10,079
6/30/97 11,394 11,634 11,693
9/30/97 12,412 12,201 12,374
12/31/97 12,017 12,157 12,395
3/31/98 13,317 13,848 14,154
6/30/98 12,892 14,121 14,488
9/30/98 11,149 12,553 12,882
12/31/98 12,734 15,214 15,574
2/28/99 12,366 15,251 15,576
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 47 bp on the purchase and 15 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Past performance
is not indicative of future performance. Information is unaudited.
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of GMO Growth Fund (A Series
of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Growth Fund at February 28,
1999 and the results of its operations, the changes in its net assets and the
financial highlights for the periods presented, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 12, 1999
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
Shares Description Value($)
- --------------------------------------------------------------------------------
Common Stocks -- 95.8%
Aerospace -- 1.0%
30,100 Allied Signal Inc 1,245,387
5,500 Cordant Technologies Inc 214,156
900 Northrop Grumman Corp 56,081
1,000 Teleflex Inc 35,563
-----------
1,551,187
-----------
Automotive -- 0.5%
6,100 General Motors Corp, Class H * 287,844
5,850 Genuine Parts Co 175,134
800 Goodyear Tire & Rubber Co 37,000
4,900 Lear Corp * 173,031
3,300 Meritor Automotive Inc 52,388
-----------
725,397
-----------
Banking and Financial Services -- 4.8%
13,000 American Express Co 1,410,499
1,800 Amsouth Bancorp 84,600
1,000 Bank One Corp 53,750
5,036 Bear Stearns Inc 215,595
2,400 Capital One Financial Corp 306,300
6,500 Charles Schwab & Co Inc 484,656
18,245 Citigroup Inc 1,071,893
1,000 City National Corp 32,250
7,200 Comdisco Inc 86,400
8,400 Countrywide Credit Industry Inc 318,150
8,700 Dime Bancorp Inc 215,325
13,000 Donaldson Lufkin & Jenrette 741,000
7,900 Edwards (AG) Inc 257,244
1,500 Federated Investors Inc 28,781
800 Golden State Bancorp * 14,250
200 Golden West Financial Corp 18,788
9,100 Hibernia Corporation, Class A 147,306
16,500 Household International Inc 670,313
3,400 Lehman Brothers Holding Inc 180,200
450 Liberty Financial Cos 10,097
5,100 Morgan Stanley Dean Witter & Co 461,550
2,800 National City Corp 195,650
6,450 Northfork Bancorp 141,900
600 Old Kent Financial Corp 26,325
1,950 Paine Webber Group Inc 72,881
See accompanying notes to the financial statements. 1
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value($)
- --------------------------------------------------------------------------------
Banking and Financial Services -- (Continued)
1,100 Peoples Heritage Finance Group Inc 18,700
3,000 PMI Group Inc 129,375
1,150 Raymond James Financial Corp 20,988
1,800 SEI Investments Co 178,200
2,400 Unionbancal Corp 75,450
-----------
7,668,416
-----------
Chemicals -- 1.2%
1,300 Arch Chemicals Inc * 24,700
900 Cabot Corporation 22,669
3,100 Eastman Chemical Co 146,281
7,300 Engelhard Corp 130,031
1,900 Millenium Chemicals Inc 34,319
5,000 Monsanto Co 227,813
10,400 Morton International Inc 375,700
2,600 Olin Corp 32,988
2,600 PPG Industries Inc 135,363
14,100 Praxair Inc 492,619
5,100 Rohm & Haas Co 159,375
900 Sherwin Williams Co 21,656
500 Union Carbide Corp 22,000
1,900 W.R. Grace & Co * 25,531
2,600 Wellman Inc 24,213
-----------
1,875,258
-----------
Communications -- 0.1%
1,100 NTL Inc * 85,456
-----------
Computer and Office Equipment -- 5.1%
5,100 Apple Computer Inc * 177,544
200 Comverse Technology Inc * 14,350
3,700 Concord EFS Inc * 118,169
28,700 Electronic Data Systems Corp 1,334,549
25,600 EMC Corp * 2,620,799
7,200 Gateway 2000 Inc * 523,350
18,500 Hewlett Packard Co 1,229,093
2,800 Lexmark International Group Inc * 288,925
7,400 Micron Electronics Inc * 106,375
16,600 Micron Technology Inc * 956,574
6,100 Rational Software Corp * 181,094
2 See accompanying notes to the financial statements.
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value($)
- --------------------------------------------------------------------------------
Computer and Office Equipment -- continued
4,400 Reynolds & Reynolds Inc, Class A 83,050
7,900 Sterling Software Inc * 201,450
4,200 Symbol Technologies Inc 222,600
2,300 Western Digital Corp * 22,138
-----------
8,080,060
-----------
Construction -- 3.6%
85,800 Home Depot Inc 5,121,187
100 Kaufman & Broad Home Corp 2,250
8,800 Lowes Co Inc 521,950
900 McDermott International Inc 17,944
-----------
5,663,331
-----------
Consumer Goods -- 2.3%
4,700 Black and Decker Corp 229,125
1,800 Department 56 Inc * 59,738
5,200 Eastman Kodak Co 344,175
2,200 Fisher Scientific International Inc * 38,225
6,100 Furniture Brands International Inc * 130,388
4,300 Hasbro Inc 159,100
5,400 Johnson Controls 332,100
3,000 Jones Apparel Group Inc * 83,813
3,600 Knoll Inc * 68,850
2,500 Kohls Corp * 172,500
4,500 Lancaster Colony Corp 123,750
3,900 Liz Claiborne Inc 131,381
1,000 Mattel Co 26,375
11,300 Newell Co 480,250
9,100 Nike Inc, Class B 487,988
600 Nine West Group Inc * 13,463
1,600 Patterson Dental Company * 64,800
1,800 Polo Ralph Lauren Corp * 35,888
2,500 PSS World Medical Inc * 28,438
3,400 Reebok International Ltd * 54,825
1,300 Russell Corp 25,350
2,700 Steelcase Inc 41,175
2,100 Sunbeam Corp * 12,206
3,700 Terra Industries Inc 18,269
3,200 US Industries Inc 52,000
7,400 VF Corp 356,125
See accompanying notes to the financial statements. 3
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value($)
- --------------------------------------------------------------------------------
Consumer Goods -- continued
500 Wallace Computer Services 11,313
2,600 Warnaco Group Inc, Class A 58,500
600 Whirlpool Corp 26,100
-----------
3,666,210
-----------
Electronic Equipment -- 3.1%
6,900 3 Com Corp * 216,919
1,900 ADC Telecommunications Inc * 76,950
700 Altera Corp * 34,038
3,200 American Power Conversion Corp * 114,800
3,969 Amp Inc 211,101
300 Amphenol Corp, Class A * 10,744
9,700 Ascend Communications Inc * 746,293
2,600 Aspect Telecommunications Corp * 19,988
4,600 Atmel Corp * 79,063
3,100 Ciena Corp * 86,413
8,700 Emerson Electric Co 499,706
16,900 General Instrument Corp * 494,325
3,500 Hubbell Inc, Class B 130,375
800 Jabil Circuit Inc * 26,100
3,000 Litton Industries * 168,375
900 Microchip Technology Inc * 24,525
6,150 Molex Inc 164,513
10,700 Motorola Inc 751,674
500 Perkin Elmer Corp 47,375
11,600 Raytheon Co, Class B 619,875
200 Read Rite Corp * 1,700
200 Sanmina Corp * 10,450
1,100 SCI Systems Inc * 34,031
3,300 Scientific Atlanta Inc 107,044
3,100 Thomas & Betts Corp 129,231
995 Vishay Intertechnology Inc * 12,873
1,300 Xilinx Inc * 90,675
-----------
4,909,156
-----------
Food and Beverage -- 2.7%
27,600 Coca Cola Co 1,764,674
3,600 Coca Cola Enterprises Inc 111,600
5,900 IBP Inc 132,750
15,000 McDonald's Corp 1,274,999
4 See accompanying notes to the financial statements.
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value($)
- --------------------------------------------------------------------------------
Food and Beverage -- continued
4,100 Pepsico Inc 154,263
19,800 RJR Nabisco Holdings Corp 540,788
900 Sysco Corp 25,425
2,600 Universal Corp 70,688
6,900 Wendy's International Inc 165,169
-----------
4,240,356
-----------
Health Care -- 5.9%
3,500 Bard (CR) 197,313
4,600 Becton Dickinson & Co 154,100
6,700 BioMet Inc 245,806
16,300 Boston Scientific Corp * 431,950
7,355 Cardinal Health Inc 530,939
45,600 Columbia HCA Healthcare Corp 815,099
6,100 Dentsply International Inc 155,550
5,100 Express Scripts Inc, Class A * 329,269
6,100 Forest Laboratories Inc * 301,569
1,400 HCR Manor Care Inc * 31,325
7,200 Health Management Associates Inc * 93,150
1,700 Hillenbrand Industries Inc 71,188
8,600 Integrated Health Services Inc * 51,063
33,000 Johnson & Johnson 2,817,374
8,700 Lincare Holdings Inc * 309,938
4,400 Mallinckrodt Inc 136,125
6,500 Mariner Post-Acute Network Inc * 14,219
16,590 Medtronic Inc 1,171,668
5,300 Novacare Corp * 11,263
4,400 Perrigo Co * 36,850
1,000 Pharmacia & Upjohn Inc 54,438
6,100 Quorum Health Group Inc * 56,425
4,800 Steris Corp * 157,800
10,400 Tenet Healthcare Corp * 204,750
5,100 United Healthcare Corp 251,494
2,200 Universal Health Services, Class B * 89,375
8,100 Wellpoint Health Network * 638,888
-----------
9,358,928
-----------
Insurance -- 2.2%
7,000 Aetna Life and Casualty Co 518,438
200 AFLAC Corp 8,825
See accompanying notes to the financial statements. 5
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value($)
- --------------------------------------------------------------------------------
Insurance -- continued
2,200 AMBAC Inc 123,200
600 American International Group Inc 68,363
1,100 American National Insurance Co 82,775
2,300 CNA Financial Corp * 78,056
600 Commerce Group Inc 16,050
3,373 Conseco Inc 100,979
6,900 Foundation Health Systems Inc, Class A * 55,200
500 Fremont General Corp 9,875
600 Hartford Financial Services Group Inc 32,438
5,800 Loews Corp 453,488
3,400 MBIA Inc 209,313
1,100 Ohio Casualty Corp 44,413
2,000 Old Republic International Corp 37,625
300 Orion Capital Corp 9,919
5,000 Pacificare Health Systems, Class B * 361,250
800 ReliaStar Financial Corp 36,300
2,100 Safeco Corp 84,394
15,000 Saint Paul Cos Inc 485,625
6,500 Torchmark Corp 216,125
2,600 Transamerica Corp 188,663
2,400 Transatlantic Holding Inc 179,250
3,400 Trigon Healthcare Inc * 119,213
-----------
3,519,777
-----------
Machinery -- 0.3%
10,200 Brunswick Corp 217,388
3,800 Mohawk Industries Inc * 123,500
600 Novellus System Inc * 35,438
2,900 Pall Corp 61,444
300 Tecumseh Products Co, Class B 13,575
800 York International Corp 29,000
-----------
480,345
-----------
Manufacturing -- 1.1%
4,400 American Greetings Corp 104,225
200 Armstrong World Industries Inc 9,838
2,700 Blyth Industries Inc * 72,900
4,400 Champion Enterprises Inc * 86,625
1,375 Clayton Homes Inc 17,016
3,300 Crane Co 90,544
1,900 Danaher Corp 91,675
6 See accompanying notes to the financial statements.
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value($)
- --------------------------------------------------------------------------------
Manufacturing -- continued
12,700 International Game Technology 241,300
4,300 Leggett & Platt Inc 90,031
1,500 Owens Corning 47,719
9,200 Owens Illinois Inc * 220,225
1,900 Rockwell International Corp 84,431
700 Trinity Industries Inc 23,056
7,657 Tyco International Ltd 569,968
-----------
1,749,553
-----------
Metals and Mining -- 0.0%
200 Nacco Industries Inc, Class A 17,600
-----------
Oil and Gas -- 1.9%
10,800 Atlantic Richfield Co 589,950
7,500 Columbia Energy Group 378,750
4,300 Enron Corp 279,500
4,200 Kerr-McGee Corp 119,963
14,200 Occidental Petroleum Corp 213,888
1,600 Pennzenergy Co 15,000
18,300 Phillips Petroleum Co 707,981
7,500 Questar Corp 134,063
4,700 Santa Fe Energy Resources Inc * 24,675
24,600 Union Pacific Resources Group 219,863
11,500 USX - Marathon Group 237,906
1,800 Vastar Resources Inc 69,300
-----------
2,990,839
-----------
Paper and Allied Products -- 0.2%
7,100 Ikon Office Solutions Inc 100,288
10,050 Sonoco Products Co 246,225
-----------
346,513
-----------
Pharmaceuticals -- 8.1%
62,008 Abbott Laboratories 2,879,496
900 Alza Corp * 47,194
16,600 Amgen Inc * 2,072,924
2,050 Bergen Brunswig Corp, Class A 50,097
2,400 Biogen Inc * 230,700
3,150 ICN Pharmaceuticals Inc 68,906
2,730 Mark IV Industries Inc 41,121
9,600 Merck & Co Inc 784,799
See accompanying notes to the financial statements. 7
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value($)
- --------------------------------------------------------------------------------
Pharmaceuticals -- continued
5,800 Mylan Laboratories Inc 158,413
5,100 Nu Skin Enterprises Inc * 106,463
37,512 Pfizer Inc 4,949,239
14,300 Schering Plough Corp 799,905
1,200 Sepracor Inc * 149,700
3,800 Sigma-Aldrich Corp 100,225
6,500 Watson Pharmaceutical Inc * 314,031
-----------
12,753,213
-----------
Primary Materials -- 0.4%
7,300 Crown Cork & Seal Inc 202,575
8,000 Rubbermaid Inc 264,500
1,600 Tupperware Corp 28,000
900 Vulcan Materials Co 121,275
-----------
616,350
-----------
Primary Processing -- 0.2%
1,400 Howmet International Inc. * 22,575
3,600 Mueller Industries Inc * 76,050
3,500 Nucor Corp 155,969
-----------
254,594
-----------
Printing and Publishing -- 0.1%
1,100 Houghton Mifflin Co 47,300
1,400 John Wiley and Sons Inc, Class A 62,388
-----------
109,688
-----------
Real Estate -- 0.0%
2,800 Lennar Corp 64,925
-----------
Refining -- 0.1%
1,900 Ashland Inc 84,550
1,300 Tosco Corp 26,894
600 Ultramar Diamond Shamrock Corp 11,850
-----------
123,294
-----------
Retail Trade -- 9.5%
16,300 Albertsons Inc 929,099
3,400 American Stores Co 114,750
11,200 Autozone Inc * 392,000
1,400 Barnes & Noble Inc * 41,388
8 See accompanying notes to the financial statements.
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value($)
- --------------------------------------------------------------------------------
Retail Trade -- continued
12,500 Bed, Bath & Beyond Inc * 367,969
2,500 Best Buy Co Inc * 231,875
500 Blair Corp 9,594
1,300 Circuit City Stores Inc 70,525
1,600 Costco Cos Inc * 128,500
900 Dayton Hudson Corp 56,306
8,100 Dillards Department Stores Inc 201,488
2,400 Federated Department Stores Inc * 91,350
13,600 Food Products Lion Inc 132,600
1,700 Fruit of the Loom Inc * 21,569
38,500 Gap Inc 2,490,468
1,200 Hannaford Brothers Co 56,400
7,100 Kmart Corp * 124,250
10,000 Kroger Co * 646,875
1,000 Lands End Inc * 30,313
2,400 Limited Inc 85,200
4,800 Neiman Marcus Group Inc * 124,200
15,000 Office Depot Inc * 535,313
4,400 Outback Steakhouse Inc * 193,050
400 Papa Johns International Inc * 17,300
3,200 Payless ShoeSource Inc * 175,600
2,100 Pier 1 Imports Inc 18,113
3,200 Ross Stores Inc 146,400
18,326 Safeway Inc * 1,058,326
3,500 Sears Roebuck & Co 142,188
12,900 Staples Inc * 379,341
23,900 Toys R Us Inc * 337,588
1,100 Value City Department Stores Inc * 12,925
65,200 Wal Mart Stores Inc 5,631,649
1,200 Whole Foods Market Inc * 37,050
1,700 Williams-Sonoma Inc * 58,119
-----------
15,089,681
-----------
Services -- 2.6%
600 Catalina Marketing Corp * 38,625
2,600 Cintas Corp 183,950
2,000 Circus Circus Enterprises Inc * 34,250
700 Devry Inc * 17,588
52,900 Disney Walt Co 1,861,418
See accompanying notes to the financial statements. 9
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value($)
- --------------------------------------------------------------------------------
Services -- continued
2,100 Fleming Cos Inc 15,488
6,100 Fluor Corp 214,644
3,200 Hertz Corp 127,400
6,700 Marriott International Inc, Class A 241,200
10,350 Paychex Inc 438,581
11,300 Supervalu Inc 271,906
3,300 Total System Services Inc 75,075
3,700 United Video Satellite Group Inc * 106,606
10,160 Waste Management Inc 496,570
-----------
4,123,301
-----------
Technology -- 28.5%
4,000 Acxiom Corp * 95,750
6,600 Adobe Systems Inc 265,650
7,900 Advanced Micro Devices Inc * 141,213
1,400 Affiliated Computer Services Inc * 64,750
51,400 America Online Inc 4,571,387
1,800 American Management Systems Inc * 60,075
26,700 Automatic Data Processing Inc 1,061,324
2,900 Avnet Inc 115,094
500 Beckman Coulter Inc 24,156
700 Bisys Group Inc * 37,363
14,800 BMC Software Inc * 604,950
5,100 Ceridian Corp * 365,288
70,050 Cisco Systems Inc * 6,851,765
50,061 Compaq Computer Corp 1,764,649
14,000 Computer Sciences Corp 932,749
41,900 Dell Computer Corp * 3,357,237
3,100 Electronic Arts Inc * 123,613
1,900 Electronics For Imaging Inc * 66,381
13,800 First Data Corp 527,850
6,700 Fiserv Inc * 314,900
4,600 Fore Systems Inc * 66,700
400 G TECH Holdings Corp * 9,050
7,000 Grainger (WW) Inc 311,500
55,800 Intel Corp 6,692,512
3,000 Intuit Inc * 296,813
600 Macromedia Inc * 18,338
67,200 Microsoft Corp * 10,088,399
10 See accompanying notes to the financial statements.
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value($)
- --------------------------------------------------------------------------------
Technology -- continued
600 Networks Associates Inc * 28,200
45,300 Novell Inc * 877,687
29,300 Oracle Corp * 1,637,137
8,500 Parametric Technology Corp * 130,688
6,800 Policy Management System Corp * 248,625
14,000 Seagate Technology Corp * 405,125
400 Shared Medical Systems Corp 20,400
10,000 Solectron Corp * 446,875
13,200 Storage Technology Corp * 459,525
14,100 Sun Microsystems Inc * 1,372,105
6,000 Sungard Data Systems Inc * 237,750
4,000 Synopsys Inc * 185,000
1,500 Teradyne Inc * 71,438
1,200 Uniphase Corp * 105,750
-----------
45,055,761
-----------
Telecommunications -- 6.7%
12,500 Airtouch Communications Inc * 1,138,280
7,100 Alltel Corp 425,113
8,000 AT & T Corp 657,000
600 Bell Atlantic Corp 34,463
3,000 Cablevision Systems Corp * 195,000
4,150 Century Telephone Enterprises Inc 256,263
4,200 Comsat Corp 122,850
29,000 GTE Corp 1,881,374
50,990 MCI Worldcom Inc * 4,206,674
1,100 Paging Network Inc * 4,400
11,200 US West Inc 597,100
13,000 Viacom Inc, Class B * 1,148,874
-----------
10,667,391
-----------
Textiles -- 0.3%
11,300 Shaw Industries Inc 247,894
6,200 Westpoint Stevens Inc * 158,100
-----------
405,994
-----------
Tobacco -- 2.1%
85,984 Philip Morris Cos Inc 3,364,123
-----------
See accompanying notes to the financial statements. 11
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares/
Par Value($) Description Value($)
- --------------------------------------------------------------------------------
Transportation -- 1.0%
24,200 Burlington Northern Santa Fe Railroad Co 801,624
2,000 Comair Holdings Inc 75,250
12,700 CSX Corp 498,475
800 Gatx Corp 27,650
5,300 Ryder System Inc 143,100
-----------
1,546,099
-----------
Utilities -- 0.2%
7,800 Coastal Corp 249,600
1,700 El Paso Energy Corp 61,944
1,300 Oneok Inc 35,019
-----------
346,563
-----------
TOTAL COMMON STOCKS (COST $107,139,217) 151,449,359
-----------
SHORT-TERM INVESTMENTS -- 14.7%
Cash Equivalents -- 7.3%
$ 358,205 BankBoston Eurodollar Time Deposit, 5.005% due
4/30/99(a) 358,205
3,127,631 Merrimac Cash Fund Premium Class(a) 3,127,631
$8,000,000 Prudential Securities Group Inc, Master Note,
5.075% due 6/14/99(a) 8,000,000
-----------
11,485,836
-----------
U.S. Government -- 0.4%
$720,000 U.S. Treasury Bill, 4.53%, due 4/29/99(b) 714,560
-----------
Repurchase Agreements -- 7.0%
$8,307,845 Salomon Smith Barney Inc. Repurchase Agreement,
dated 2/26/99, due 3/1/99, with a maturity value
of $8,310,628 and an effective yield of 4.02%,
collateralized by a U.S. Treasury Obligation
with a rate of 7.00%, maturity date of
7/15/06 and market value, including accrued
interest, of $8,474,002. 8,307,845
$2,721,996 Prudential Securities Inc. Repurchase
Agreement, dated 2/26/99, due 3/1/99, with a
maturity value of $2,722,917 and an effective
yield of 4.06%, collateralized by a U.S.
Government Agency Obligation with a rate of
7.30%, maturity date of 8/01/24 and market
value, including accrued interest, of
$2,776,438. 2,721,996
-----------
11,029,841
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $23,230,345) 23,230,237
-----------
12 See accompanying notes to the financial statements.
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Value ($)
-----------
TOTAL INVESTMENTS -- 110.5%
(COST $130,369,562) 174,679,596
Other Assets and Liabilities (net) -- (10.5)% (16,595,355)
------------
TOTAL NET ASSETS -- 100% $158,084,241
============
Notes to the Schedule of Investments:
* Non-income producing security.
(a) Represents investments of security lending collateral (Note
1).
(b) Security has been segregated to cover margin requirements on
open financial futures contracts.
See accompanying notes to the financial statements. 13
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1999
- ------------------------------------------------------------------------------
Assets:
Investments, at value (cost $130,369,562) (Note 1) $174,679,596
Dividends and interest receivable 116,714
Receivable for Fund shares sold 115
Receivable for open swap contracts (Notes 1 and 6) 39,789
Receivable for expenses waived or borne by Manager (Note 2) 25,502
------------
Total assets 174,861,716
------------
Liabilities:
Payable upon return of securities loaned (Note 1) 11,485,836
Payable for Fund shares repurchased 5,127,000
Payable to affiliate for (Note 2):
Management fee 64,295
Shareholder service fee 18,874
Payable for variation margin on open futures contracts
(Notes 1 and 6) 43,605
Accrued expenses 37,865
------------
Total liabilities 16,777,475
------------
Net assets $158,084,241
============
Net assets consist of:
Paid-in capital $103,284,568
Accumulated undistributed net investment income 93,200
Accumulated undistributed net realized gain 10,470,205
Net unrealized appreciation 44,236,268
------------
$158,084,241
============
Net assets attributable to:
Class III shares $158,084,241
============
Shares outstanding:
Class III 38,161,658
============
Net asset value per share:
Class III $ 4.14
============
14 See accompanying notes to the financial statements.
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1999
- ------------------------------------------------------------------------------
Investment Income:
Dividends $ 1,255,352
Interest (including securities lending income of $31,134) 669,253
-----------
Total income 1,924,605
-----------
Expenses:
Management fee (Note 2) 857,030
Custodian and transfer agent fees 60,988
Audit fees 35,588
Legal fees 3,050
Trustees fees (Note 2) 1,554
Registration fees 288
Miscellaneous 3,266
Fees waived or borne by Manager (Note 2) (396,124)
-----------
565,640
Shareholder service fee (Note 2)
Class III 257,109
-----------
Net expenses 822,749
-----------
Net investment income 1,101,856
-----------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 41,093,629
Closed futures contracts 2,684,595
Closed swap contracts (7,930,568)
-----------
Net realized gain 35,847,656
-----------
Change in net unrealized appreciation (depreciation) on:
Investments (2,350,657)
Open futures contracts (445,596)
Open swap contracts 1,256,288
-----------
Net unrealized loss (1,539,965)
-----------
Net realized and unrealized gain 34,307,691
-----------
Net increase in net assets resulting from operations $35,409,547
===========
See accompanying notes to the financial statements. 15
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1999 February 28, 1998
----------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 1,101,856 $ 1,601,374
Net realized gain 35,847,656 40,361,429
Change in net unrealized appreciation (depreciation) (1,539,965) 20,120,094
------------ ------------
Net increase in net assets resulting from operations 35,409,547 62,082,897
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (1,131,539) (2,146,620)
------------ ------------
Total distributions from net investment income (1,131,539) (2,146,620)
------------ ------------
Net realized gains
Class III (37,976,729) (80,215,172)
------------ ------------
Total distributions from net realized gains (37,976,729) (80,215,172)
------------ ------------
(39,108,268) (82,361,792)
------------ ------------
Net share transactions: (Note 5)
Class III (41,140,532) (20,981,043)
------------ ------------
Decrease in net assets resulting from net share (41,140,532) (20,981,043)
transactions
------------ ------------
Total decrease in net assets (44,839,253) (41,259,938)
Net assets:
Beginning of period 202,923,494 244,183,432
------------ ------------
End of period (including accumulated undistributed net
investment income of $93,200 and $122,883, respectively) $158,084,241 $202,923,494
============ ============
</TABLE>
16 See accompanying notes to the financial statements.
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Financial Highlights
(For a Class III share outstanding throughout each period)
- -----------------------------------------------------------------------------------------------------------------
Year Ended February 28/29,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 4.38 $ 5.18 $ 5.65 $ 4.45 $ 4.14
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.03 0.04 0.07 0.08 0.06
Net realized and unrealized gain 0.89 1.41 1.03 1.54 0.38
-------- -------- -------- -------- --------
Total from investment operations 0.92 1.45 1.10 1.62 0.44
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.03) (0.06) (0.08) (0.07) (0.06)
From net realized gains (1.13) (2.19) (1.49) (0.35) (0.07)
-------- -------- -------- -------- --------
Total distributions (1.16) (2.25) (1.57) (0.42) (0.13)
-------- -------- -------- -------- --------
Net asset value, end of period $ 4.14 $ 4.38 $ 5.18 $ 5.65 $ 4.45
======== ======== ======== ======== ========
Total Return (a) 22.90% 36.37% 21.64% 37.77% 10.86%
Ratios/Supplemental Data:
Net assets, end of period (000's) $158,084 $202,923 $244,183 $391,366 $239,006
Net expenses to average daily net
assets 0.48% 0.48% 0.48% 0.48% 0.48%
Net investment income to average daily
net assets 0.64% 0.79% 1.21% 1.54% 1.50%
Portfolio turnover rate 50% 60% 100% 76% 139%
Fees and expenses voluntarily waived or
borne by the Manager consisted of the
following per share amounts: $ 0.01 $ 0.01 $ 0.01 (b) (b)
</TABLE>
(a)Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(b)Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
See accompanying notes to the financial statements. 17
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Growth Fund (the "Fund") is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended, as
an open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series into classes.
The Fund seeks long-term growth of capital through investment of
substantially all of its assets in common stocks chosen from the Wilshire
5000 Index and primarily in the equity securities of companies chosen from
among the 1,200 companies with the largest equity capitalization whose
securities are listed on a United States national securities exchange.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Other assets and
securities for which no quotations are readily available are valued at fair
value as determined in good faith by the Trustees.
Futures contracts
The Fund may purchase and sell futures contracts on the domestic stock
indices. Stock index futures contracts represent commitments for future
delivery of cash based upon the level of a specified index of equity
securities at a specified price at a given date. The Fund may use futures
contracts to manage its exposure to the stock markets. Buying futures tends
to increase the Fund's exposure to the underlying instrument. Selling
futures tends to decrease the Fund's exposure to the underlying instrument
or hedge other Fund instruments. Upon entering into a futures contract, the
Fund is required to deposit with its custodian, in a segregated account in
the name of the futures broker, an amount of cash or U.S. government
obligations in accordance with the initial margin requirements of the
broker or exchange. Futures contracts are marked to market daily and an
appropriate payable or receivable for the change in value ("variation
margin") is recorded by the Fund. The payable or receivable is liquidated
on the following business day. Gains or losses are recognized but not
considered realized until the contracts expire or are closed. Futures
contracts involve, to varying degrees, risk of loss in excess of the
variation margin disclosed in the Statement of Assets and Liabilities.
Losses may arise from changes in the value
18
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
of the underlying instrument, if there is an illiquid secondary market for
the contracts, or if counterparties do not perform under the contract
terms. Futures contracts are valued at the settlement price established
each day by the board of trade or exchange on which they are traded. See
Note 6 for all open futures contracts as of February 28, 1999.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Security lending
The Fund may lend its securities to qualified brokers. The loans are
collateralized at all times with cash or securities with a market value at
least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1999, the Fund loaned securities having a
market value of $11,001,321, collateralized by cash in the amount of
$11,485,836, which was invested in short-term instruments.
Swap agreements
The Fund may enter into swap agreements to manage its exposure to the
equity markets. A swap is an agreement to exchange the return generated by
one instrument for the return generated by another instrument. The Fund
enters into equity swap agreements which involve a commitment by one party
in the agreement to pay interest in exchange for a market linked return
based on a notional amount. To the extent that the total return of the
security or index underlying the transaction exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make a payment to the counterparty, respectively. The Fund also enters
into contracts for differences in which the Fund agrees with the
counterparty that its return will be based on the relative performance of
two different groups or "baskets" of securities, adjusted by an interest
rate payment. Swaps are marked to market daily based upon quotations from
market makers and the change, if any, is recorded as unrealized gain or
loss in the Statement of Operations. Payments received or made at the end
of the measurement period are recorded as realized gain or loss in the
Statement of Operations. Entering into these agreements involves, to
varying degrees, elements of credit and market risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform, or that there may be unfavorable changes in the
price of the security or index underlying these transactions. See Note 6
for a summary of all open swap agreements as of February 28, 1999.
19
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary. Taxes on foreign dividend income are withheld in accordance with
the applicable country's tax treaty with the United States.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles.
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis and is adjusted for the accretion of discounts. In
determining the net gain or loss on securities sold, the cost of securities
is determined on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .14 % of the amount
invested. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. Purchase premiums are included as part of "shares sold",
as summarized in Note 5. For the year ended February 28, 1999, the Fund
received $4,486 in purchase premiums. There is no premium for cash
redemptions, reinvested distributions or in-kind transactions.
20
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .50% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding brokerage commissions, certain other transaction costs (including
transfer taxes), shareholder service fees and extraordinary expenses)
exceed .33% of average daily net assets.
Effective March 1, 1999, GMO's contractual management fee was reduced to
.33% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding brokerage
commissions, certain other transaction costs (including transfer taxes),
shareholder service fees and extraordinary expenses) exceed the management
fee.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999 was $1,554. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1999, aggregated
$81,338,946 and $162,669,216, respectively.
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
-------------------- ------------------- ------------------ ------------------
<S> <C> <C> <C>
$130,610,542 $51,740,612 $7,671,558 $44,069,054
</TABLE>
4. Principal shareholders
At February 28, 1999, 79% of the outstanding shares of the Fund were held
by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
21
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including the purchase premiums received by the Fund, were as
follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
Class III: February 28, 1999 February 28, 1998
----------------------------- ------------------------------
Shares Amount Shares Amount
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Shares sold 735,556 $ 3,204,280 273,096 $ 1,305,596
Shares issued to shareholders
in reinvestment of 9,514,574 39,000,762 19,976,847 82,093,391
distributions
Shares repurchased (18,430,431) (83,345,574) (21,043,724) (104,380,030)
------------- -------------- ------------- --------------
Net decrease (8,180,301) $ (41,140,532) (793,781) $ (20,981,043)
============= ============== ============= ==============
</TABLE>
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1999 is as
follows:
Long futures contracts
<TABLE>
<CAPTION>
Number of Net Unrealized
Contracts Type Expiration Date Contract Value Depreciation
--------------- --------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
14 S&P 500 March 1999 $ 4,324,250 $ (113,555)
=================
</TABLE>
At February 28, 1999, the Fund has sufficient cash and/or securities to
cover any commitments or margin on open futures contracts.
22
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Swap agreement
<TABLE>
<CAPTION>
Notional Amount Expiration Net Unrealized
Fund/Counterparty Date Description Appreciation
------------------ ---------- ------------------------------------------------ ---------------
<C> <C> <S> <C>
$ 12,252,031/ 2/18/00 Agreement with Morgan Stanley Capital $ 39,789
12,252,039 Services, Inc. dated 2/18/99 to pay (receive)
the notional amount multiplied by the return
on the Standard & Poor's 500 Index
(including dividends) less the notional
amount multiplied by 3 month LIBOR adjusted
by a specified spread and to receive (pay)
the counterparty's notional amount
multiplied by the return on the Russell 2000
Index (including dividends) less the
counterparty's notional amount multiplied by
3 month LIBOR adjusted by a specified
spread.
===============
$ 39,789
===============
</TABLE>
23
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1999, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 91.29% of distributions as net capital gain dividends.
24
<PAGE>
GMO Growth Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
- ------------------
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Robert Soucy are
primarily responsible for the day-to-day management of the Fund's portfolio.
Mssrs. Grantham and Darnell have each been portfolio managers at Grantham, Mayo,
Van Otterloo & Co. LLC for more than fifteen years; Mr. Soucy for more than ten
years.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The Class III shares of the GMO Growth Fund returned 22.9% for the fiscal year
ended February 28, 1999, as compared to 19.7% for the S&P 500 and 26.6% for the
Russell 1000 Growth Index. Consistent with the Fund's investment objectives and
policies, the Fund was invested substantially in common stocks throughout the
period.
The Fund is underweight in large-cap issues and overweight in small-cap stocks.
These positions detracted from performance for the fiscal year because of the
significant outperformance of large-cap stocks.
Excluding the impact of the swap, which is designed to give the portfolio
exposure to small-cap stocks, sector selection was positive for the year.
Contributing to relative performance was the Fund's overweight position in such
strong performing sectors as consumer discretionary (particularly retail
stocks), telephone utilities and technology stocks. Underweight positions in
underperforming sectors, including consumer staples (particularly the beverage
and food industries), energy, producer durables and multi-industry stocks also
added to relative performance. Overweighting auto/transportation, integrated
oils and financial services stocks detracted from performance as these sectors
underperformed the benchmark.
Stock selection detracted modestly from performance for the fiscal year. The
underperformance was primarily due to weak stock selection among healthcare,
financial services and technology stocks. Also detracting from performance,
albeit to a lesser extent, was weak selection in utilities, producer durables
and multi-industry stocks. Weak stock selection in these areas more than offset
strong stock selection in consumer discretionary and consumer staple stocks.
For the fiscal year, the momentum and fair value strategies were successful in
adding value. The momentum strategy was especially powerful in the fourth
quarter of 1998. The cash flow and neglect strategies, on the other hand, did
not add value. We would expect these strategies to perform better in more
difficult market conditions.
Outlook
- -------
We are currently maintaining overweight positions in the technology, consumer
discretionary and financial sectors. Healthcare stocks are underweight in the
portfolio relative to the benchmark as these stocks appear overvalued by most of
our measures. We are also emphasizing medium-sized companies within the
portfolio, as we believe the largest stocks are overvalued. The Fund is well
diversified and conservatively positioned relative to the benchmark, as
demonstrated by its lower price to book and price to earnings ratios. We believe
that these characteristics will enable the Fund to do well in a more difficult
market environment.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Growth Fund Class III Shares and the Russell 1000 Growth Index
As of February 28, 1999
-----------------------------------
Average Annual Total Return
-----------------------------------
1yr 5yr 10yr
-----------------------------------
22.7 25.5 20.2
-----------------------------------
[LINE GRAPH APPEARS HERE]
Date GMO Growth Fund Russell 1000 Growth Index
Class III Shares
1/31/89 9,986 10,000
2/28/89 10,404 10,235
3/31/89 11,330 11,267
6/30/89 12,967 12,668
9/30/89 13,169 13,009
12/31/89 12,962 12,528
3/31/90 14,466 13,797
6/30/90 11,895 11,694
9/30/90 13,487 12,976
12/31/90 16,214 15,303
3/31/91 15,731 15,156
6/30/91 16,615 16,215
9/30/91 19,054 18,316
12/31/91 18,026 17,411
3/31/92 17,670 17,222
6/30/92 18,707 17,981
9/30/92 19,856 19,235
12/31/92 19,943 19,073
3/31/93 19,322 18,777
6/30/93 19,854 19,055
9/30/93 20,770 19,792
12/31/93 19,256 18,920
3/31/94 19,453 18,729
6/30/94 21,030 20,169
9/30/94 21,122 20,319
12/31/94 23,138 22,255
3/31/95 25,237 24,445
6/30/95 28,021 26,664
9/30/95 29,538 27,878
12/31/95 30,796 29,374
3/31/96 32,991 31,242
6/30/96 33,913 32,367
9/30/96 35,563 34,320
12/31/96 35,780 34,504
3/31/97 41,850 41,029
6/30/97 47,455 44,113
9/30/97 46,002 44,782
12/31/97 52,908 51,566
3/31/98 54,865 53,913
6/30/98 49,553 49,027
9/30/98 63,160 62,140
12/31/98 63,007 62,782
2/28/99
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 14 bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Past performance is not indicative of future
performance. Information is unaudited.
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Inflation Indexed Bond Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Inflation Indexed Bond Fund at
February 28, 1999 and the results of its operations, the changes in its net
assets and the financial highlights for the periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 16, 1999
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
Par Value Description Value ($)
- --------------------------------------------------------------------------------
Debt Obligations -- 99.6%
New Zealand -- 2.2%
NZD 1,000,000 New Zealand Index Linked Bond 4.50%, due 2/15/16 535,892
-----------
United States -- 97.4%
Corporate Debt -- 4.2%
USD 1,200,000 JP Morgan and Co. Series A,
Variable Rate, CPI + 4.00%, 5.59%, due 2/15/12 1,049,280
-----------
U.S. Government -- 60.0%
USD 2,026,700 U.S. Treasury Inflation Indexed Bond, 3.63%, due 1,969,203
4/15/28
USD 13,091,471 U.S. Treasury Inflation Indexed Note, 3.38%, due 12,625,941
1/15/07
USD 499,695 U.S. Treasury Inflation Indexed Note, 3.88%, due 500,042
1/15/09
-----------
15,095,186
-----------
U.S. Government Agency -- 33.2%
USD 8,625,000 Federal Home Loan Bank,
Variable Rate, CPI + 3.15%, 4.75%, due 2/15/02 8,353,313
-----------
Total United States 24,497,779
-----------
TOTAL DEBT OBLIGATIONS (COST $25,291,242) 25,033,671
-----------
SHORT-TERM INVESTMENTS -- 0.1%
Repurchase Agreements -- 0.1%
USD 26,306 Salomon Smith Barney Inc. Repurchase Agreement,
dated 2/26/99, due 3/1/99, with a maturity value
of $26,315 and an effective yield of 4.02%,
collateralized by U.S. Treasury Obligation with
a rate of 7.00%, maturity date of 7/15/06 and
market value, including accrued interest,
of $26,832. 26,306
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $26,306) 26,306
-----------
TOTAL INVESTMENTS-- 99.7%
(Cost $25,317,548) 25,059,977
Other Assets and Liabilities (net)-- 0.3% 87,433
-----------
TOTAL NET ASSETS-- 100% $25,147,410
===========
See accompanying notes to the financial statements. 1
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
Notes to the Schedule of Investments:
Variable rates - The rates shown on variable rate notes
are the current interest rates at February 28, 1999,
which are subject to change based on the terms of the
security.
Currency Abbreviations
NZD - New Zealand Dollar
USD - United States Dollar
2 See accompanying notes to the financial statements.
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1999
- -----------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at value (cost $25,317,548) (Note 1) $25,059,977
Interest receivable 104,529
Receivable for open forward foreign currency contracts (Notes 1 and 6) 13,884
Receivable for expenses waived or borne by Manager (Note 2) 6,404
Receivable for Fund shares sold 585
------------
Total assets 25,185,379
------------
Liabilities:
Payable to affiliate for (Note 2):
Management fee 5,317
Shareholder service fee 3,089
Due to custodian 9,000
Accrued expenses 20,563
------------
Total liabilities 37,969
------------
Net assets $25,147,410
============
Net assets consist of:
Paid-in capital $25,557,042
Accumulated undistributed net investment income 93,454
Accumulated net realized loss (259,208)
Net unrealized depreciation (243,878)
============
$25,147,410
============
Net assets attributable to:
Class III shares $25,147,410
============
Shares outstanding:
Class III 2,544,042
============
Net asset value per share:
Class III $ 9.88
===========
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment Income:
Interest $1,574,204
-----------
Total income 1,574,204
-----------
Expenses:
Management fee (Note 2) 75,976
Audit fees 28,992
Custodian and transfer agent fees 11,058
Registration fees 5,292
Legal fees 797
Trustees fees (Note 2) 183
Miscellaneous 809
Fees waived or borne by Manager (Note 2) (92,636)
-----------
30,471
Shareholder service fee (Note 2)
Class III 45,586
-----------
Net expenses 76,057
-----------
Net investment income 1,498,147
-----------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments (249,353)
Foreign currency, forward contracts and foreign currency related
transactions 41,278
-----------
Net realized loss (208,075)
-----------
Change in net unrealized appreciation (depreciation) on:
Investments (28,726)
Foreign currency, forward contracts and foreign currency related
transactions 5,220
-----------
Net unrealized loss (23,506)
-----------
Net realized and unrealized loss (231,581)
-----------
Net increase in net assets resulting from operations $1,266,566
===========
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
March 31, 1997
(commencement of
Year Ended operations)
February 28, 1999 to February 28, 1998
------------------- -------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $1,498,147 $ 648,701
Net realized gain (loss) (208,075) 33,304
Change in net unrealized appreciation
(depreciation) (23,506) (220,372)
------------ ------------
Net increase in net assets resulting
from operations 1,266,566 461,633
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (1,437,398) (648,701)
------------ ------------
Total distributions from net
investment income (1,437,398) (648,701)
------------ ------------
In excess of net investment income
Class III -- (47,606)
------------ ------------
Total distributions in excess of net
investment income -- (47,606)
------------ ------------
Net realized gains
Class III -- (4,126)
------------ ------------
Total distributions from net
realized gains -- (4,126)
------------ ------------
Return of Capital
Class III -- (46,228)
------------ ------------
Total distributions from return of
capital -- (46,228)
------------ ------------
(1,437,398) (746,661)
------------ ------------
Net share transactions: (Note 5)
Class III (341,835) 25,945,105
------------ ------------
Increase (decrease) in net assets
resulting from net share transactions (341,835) 25,945,105
------------ ------------
Total increase (decrease) in net assets (512,667) 25,660,077
Net assets:
Beginning of period 25,660,077 --
------------ ------------
End of period (including accumulated
undistributed net investment income
of $93,454 and accumulated
distributions in excess of net
investment income of $8,573,
respectively) $25,147,410 $25,660,077
============ ============
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from March 31, 1997
Year Ended (commencement of operations)
February 28, 1999 to February 28, 1998
------------------ -------------------
<S> <C> <C>
Net asset value, beginning of period $ 10.04 $ 10.00
---------- ----------
Income from investment operations:
Net investment income 0.61 0.42+
Net realized and unrealized loss (0.18) (0.04)
---------- ----------
Total from investment operations 0.43 0.38
---------- ----------
Less distributions to shareholders:
From net investment income (0.59) (0.30)
In excess of net investment income -- (0.02)
From net realized gains -- --/(a)/
From tax return of capital -- (0.02)
---------- ----------
Total distributions (0.59) (0.34)
---------- ----------
Net asset value, end of period $ 9.88 $ 10.04
========== ==========
Total Return (b) 4.28% 3.77%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 25,147 $ 25,660
Net expenses to average daily net assets 0.25% 0.25%*
Net investment income to average daily net assets 4.93% 4.48%*
Portfolio turnover rate 94% 9%
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per $ 0.04 $ 0.04
share amounts:
</TABLE>
(a) The per share distribution from net realized gains was $.002.
(b) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
+ Computed using average shares outstanding throughout the period.
* Annualized.
6 See accompanying notes to the financial statements.
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Inflation Indexed Bond Fund (the "Fund"), is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on June
24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series of shares into classes.
The Fund seeks maximum total return by investing primarily in foreign and
U.S. government bonds that are indexed or otherwise linked to general
measures of inflation in the country of issue. A bond will be deemed to be
"linked" to general measures of inflation if, by such bond's terms,
principal or interest components change with general movements of inflation
in the country of issue.
Inflation indexed securities issued by the U.S. Treasury are fixed income
securities whose principal value is periodically adjusted according to the
rate of U.S. inflation. Inflation indexed bonds issued by a foreign
government are generally adjusted to reflect a comparable local inflation
index.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Other assets and
securities for which no quotations are readily available are valued at fair
value as determined in good faith by the Trustees or other persons acting
at their direction.
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from yield
data relating to investments or securities with similar characteristics.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the prevailing exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at prevailing exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
7
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
net exchange gains and losses on disposition of foreign currencies,
currency gains and losses realized between the trade and settlement dates
on securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or all
of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency contracts
are marked to market daily and the change in value is recorded by the Fund
as an unrealized gain or loss. Realized gains or losses equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed are recorded upon delivery or receipt
of the currency or, if a forward currency contract is offset by entering
into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market risk
in excess of the unrealized gain or loss reflected in the Fund's Statement
of Assets and Liabilities. In addition, the Fund could be exposed to risk
if the counterparties are unable to meet the terms of the contracts or if
the value of the currency changes unfavorably to the U.S. dollar. The U.S.
dollar value of the currency the Fund has committed to buy or sell is shown
under Note 6 and represents the currency exposure the Fund has acquired or
hedged through a currency contract as of February 28, 1999.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1999, the Fund had no securities on loan.
8
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for foreign currency transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated Accumulated
Undistributed Net Undistributed
Investment Income NetRealized Gain Paid-in Capital
------------------------ ------------------------ ----------------------
$41,278 $(51,133) $9,855
Distributions in excess of tax basis earnings and profits are reported in
the Fund's financial statements as a return of capital. Differences in the
recognition or classification of income for financial statement and tax
purposes which result in temporary over-distributions for financial
statement purposes are classified as distributions in excess of net
investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis and is adjusted for the accretion of
discounts. In determining the net gain or loss on securities sold, the cost
of securities is determined on the identified cost basis. Interest income
on U.S. Treasury inflation indexed securities is accrued daily based upon
the inflation adjusted principal. Additionally, any increase in the
principal or face amount of the securities adjusted for inflation is
recorded as interest income.
9
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds.
Purchases and redemptions of Fund shares
The premium on cash purchases and fee on redemptions of Fund shares is .10%
of the amount invested or redeemed. These fees 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. 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. All purchase premiums and redemption fees are paid
to and recorded by the Fund as paid-in capital. Purchase premiums are
included as part of "shares sold" and redemption fees are included as part
of "shares repurchased", respectively, as summarized in Note 5. For the
year ended February 28, 1999, the Fund received $16,884 in purchase
premiums and $18,199 in redemption fees. There is no premium for reinvested
distributions or in-kind transactions.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .25% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO has agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding brokerage commissions, certain other transaction costs (including
transfer taxes), shareholder service fees and extraordinary expenses)
exceed .10% of average daily net assets.
Effective March 1, 1999, the management fee earned by GMO was reduced to
.10% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding brokerage
commissions, certain other transaction costs (including transfer taxes),
shareholder service fees and extraordinary expenses) exceed the management
fee.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999 was $183. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
10
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
3. Purchases and sales of securities
For the year ended February 28, 1999, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
Purchases Proceeds
------------ ------------
U.S. Government securities $ 26,605,832 $ 28,092,825
Investments (non-U.S. Government securities) 1,062,000 --
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
---------------- ------------------ ------------------ -----------------
$25,317,819 -- $257,842 $257,842
4. Principal shareholders
At February 28, 1999, 34.6% of the outstanding shares of the Fund were held
by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including the purchase premiums and redemption fees received by the
Fund, were as follows:
<TABLE>
<CAPTION>
Period from March 31, 1997
Year Ended (commencement of operations)
Class III: February 28, 1999 to February 28, 1998
------------------------- -------------------------
Shares Amount Shares Amount
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Shares sold 1,673,497 $ 16,929,247 2,662,887 $ 27,016,765
Shares issued to shareholders
in reinvestment of distributions 99,325 980,335 33,789 338,906
Shares repurchased (1,785,715) (18,251,417) (139,741) (1,410,566)
--------- ------------ --------- ------------
Net increase (decrease) (12,893) $ (341,835) 2,556,935 $ 25,945,105
========= ============ ========= ============
</TABLE>
11
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1999 is as
follows:
Forward currency contracts
Net Unrealized
Settlement Units of Appreciation
Date Deliver/Receive Currency Value (Depreciation)
---------- ----------------- ---------- --------------- ----------------
Buy
3/02/99 NZD 1,000,000 $ 524,127 $ (223)
================
Sales
3/02/99 NZD 1,000,000 524,127 13,973
6/03/99 NZD 1,000,000 524,766 134
================
$ 14,107
================
12
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
The Fund has elected to defer to March 1, 1999 post October capital losses of
$141,027.
At February 28, 1999, the Fund had a capital loss carryforward available to
offset future capital gains, if any, of the following amount:
Year of Expiration Amount
------------------- ---------------
2007 $ 108,055
13
<PAGE>
GMO Inflation Indexed Bond Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
- ------------------
Mr. Thomas F. Cooper and Mr. William L. Nemerever are primarily responsible for
the day-to-day management of the Fund's portfolio. Each of these individuals has
been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The Class III shares of the GMO Inflation Indexed Bond Fund returned 4.3% during
the fiscal year ended February 28, 1999, compared to 4.4% for the Lehman
Brothers Inflation Notes Index. Consistent with the Fund's investment objectives
and policies, the Fund was substantially invested throughout the period in U.S.
government and foreign bonds that are indexed or otherwise linked to general
measures of inflation in the country of issue.
The fund modestly underperformed its benchmark by 0.1% during the fiscal year.
Although interest rates fell in the United States over this period, real yields
rose. Real yields in the United States began the period at approximately 3.7%,
climbing to nearly 3.8% by the end. The fund maintains an interest rate exposure
quite similar to that of its benchmark, however it owns securities of foreign
countries that are not in the benchmark. Currently the only foreign holding is
an inflation indexed bond issued by the government of New Zealand, maturing in
2016.
Outlook
- -------
The Fund will continue to focus on attractive inflation-indexed issues of the
U.S. government, but will also attempt to broaden its foreign exposure. The Fund
may also enter into interest rate swaps as a means of outperforming its
benchmark.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Inflation Indexed Bond Fund Class III Shares and the
Lehman Brothers Treasury Inflation Notes Index
As of February 28, 1999
--------------------------------
Average Annual Total Return
--------------------------------
Since
Inception
1 Year 3/31/97
Class --------------------------------
III 4.3% 4.2%
--------------------------------
[LINE GRAPH APPEARS HERE]
GMO Inflation Indexed Bond Fund Lehman Brothers Treasury
Date Class III Shares Inflation Notes Index
---- ------------------------------- ------------------------
1/31/97
3/31/97 9,990 10,000
6/30/97 10,080 10,083
9/30/97 10,240 10,230
12/31/97 10,326 10,348
3/31/98 10,357 10,384
6/30/98 10,491 10,523
9/30/98 10,739 10,809
12/31/98 10,756 10,989
2/28/99 10,800 10,846
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 10 bp on the purchase and 10 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Past performance
is not indicative of future performance. Information is unaudited.
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of GMO International
Bond Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO International Bond Fund at
February 28, 1999 and the results of its operations, the changes in its net
assets and the financial highlights for the periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 22, 1999
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligations -- 97.9%
Argentina -- 1.6%
USD 1,000,000 Republic of Argentina Par Bond,
Variable Rate, Step Up, 5.75%, due 3/31/23 667,500
USD 2,820,000 Republic of Argentina PDI (Global Bearer),
Variable Rate, 6 mo. LIBOR + .81%, 6.19%, due
3/31/05 2,312,400
-------------
2,979,900
-------------
Australia -- 4.4%
GBP 2,000,000 Commonwealth Bank Australia Series EMTN, 8.13%, due
12/07/06 3,726,252
AUD 2,620,000 Queensland Treasury Corp, 8.00%, due 9/14/07 1,867,005
USD 2,500,000 Westralia Airports Corp, 144A, 6.48%, due 4/01/10 2,478,500
-------------
8,071,757
-------------
Brazil -- 1.0%
USD 3,500,000 Brazil New Money Bond,
Variable Rate, 6 mo. LIBOR + .88%, 6.19%, due
4/15/09 1,830,938
-------------
Bulgaria -- 1.8%
USD 1,000,000 Bulgaria Discount Bond Series B,
Variable Rate, 6 mo. LIBOR + 1.31%, 6.38%, due
7/28/24 697,500
USD 5,000,000 Bulgaria Discount Series B Interest Strips, Basket
2, 0.00%, due 1/28/10 - 7/28/24 500,000
USD 10,000,000 Bulgaria Discount Strips, 0.00%, due 7/28/24(a) 2,037,318
-------------
3,234,818
-------------
Canada -- 8.2%
CAD 750,000 Government of Canada, 10.25%, due 3/15/14 741,951
CAD 5,000,000 Government of Canada Real Return, 4.25%, due 12/01/21 3,699,338
CAD 3,000,000 Government of Canada Real Return, 4.25%, due 12/01/26 2,101,431
CAD 2,000,000 Province of British Columbia, 7.88%, due 11/30/23 1,621,067
GBP 3,500,000 Province of Quebec, 8.62%, due 11/04/11 6,806,337
-------------
14,970,124
-------------
Cayman Islands -- 4.2%
GBP 2,000,000 Chester Asset Receivables, Inc., Deal 2,
Variable Rate, 3 mo. GBP LIBOR + .10%, 6.54%, due
6/15/01 3,200,796
CAD 2,000,000 Government of Canada (Cayman), 7.25%, due 6/01/08 1,458,761
USD 3,000,000 Pemex Finance Ltd Series 1A Class A2, 144A, 6.30%,
due 5/15/10 2,917,500
-------------
7,577,057
-------------
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Chile -- 1.9%
USD 3,500,000 Banco Santander, 6.50%, due 11/01/05 3,373,125
--------------
Ecuador -- 0.4%
USD 2,000,000 Republic of Ecuador Par Bond,
Variable Rate, Step Up, 3.50%, due 2/28/25 780,000
--------------
France -- 1.5%
FRF 14,000,000 Auxiliare Credit Foncier, 10.00%, due 4/20/01 2,646,206
--------------
Germany -- 3.7%
GBP 2,000,000 KFW International Finance, 10.63%, due 9/03/01 3,585,276
GBP 3,000,000 Schweiz Bankgesellschaft, Zero Coupon, due 3/31/06 3,215,214
--------------
6,800,490
--------------
Ivory Coast -- 0.4%
FRF 10,535,000 Ivory Coast FLIRB,
Variable Rate, Step Up, 2.00%, due 3/29/18 370,256
FRF 6,823,625 Ivory Coast PDI,
Variable Rate, Step Up, 1.90%, due 3/29/18 331,178
--------------
701,434
--------------
Japan -- 8.8%
GBP 2,000,000 Export Import Bank of Japan, 10.75%, due 5/15/01 3,535,614
GBP 2,000,000 Japan Finance Corp Municipal Enterprises, 9.13%, due
2/16/05 3,769,506
USD 1,030,000 Japan Highway Public Corporation, 7.63%, due 9/22/04 1,099,525
GBP 4,000,000 Kobe City, 9.50%, due 10/20/04 7,593,480
--------------
15,998,125
--------------
Jordan -- 0.5%
USD 1,500,000 Hashemite Kingdom of Jordan Par Bond,
Variable Rate, Step Up, 144A, 5.50%, due 12/23/23 840,000
--------------
Mexico -- 4.1%
FRF 15,000,000 Mexico Par Bond, 6.63%, due 12/31/19 1,951,819
CHF 12,000,000 Mexico Par Bond, 3.75%, due 12/31/19 5,444,759
--------------
7,396,578
--------------
New Zealand -- 2.0%
NZD 6,800,000 New Zealand Index Linked Bond, 4.50%, due 2/15/16 3,644,067
--------------
Nigeria -- 0.4%
USD 1,228,385 Central Bank of Nigeria Par Bond,
Variable Rate, Step Up, 6.25%, due 11/15/20 780,024
--------------
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Norway -- 0.5%
SEK 6,300,000 A/S Eksportfinans, 7.50%, due 8/16/01 830,385
--------------
Russia -- 0.0%
USD 331,679 Russia Vnesheconombank IAN,
Variable Rate, 6 mo. LIBOR + .81%, 5.97%, due
12/15/15 33,168
--------------
Supra National -- 3.3%
AUD 14,000,000 European Bank for Reconstruction and Development,
Zero Coupon, due 2/10/28 1,444,943
CAD 700,000 European Investment Bank, 8.50%, due 8/30/05 525,869
GBP 2,000,000 International Bank for Reconstruction and
Development, 11.50%, due 11/09/03 4,053,060
--------------
6,023,872
--------------
Sweden -- 7.9%
SEK 20,000,000 Government of Sweden Index Linked Bond, 4.00%, due
12/01/20 2,640,770
SEK 87,100,000 Kingdom of Sweden, 6.00%, due 2/09/05 11,704,195
--------------
14,344,965
--------------
United States -- 41.0%
Asset Backed Securities -- 33.1%
USD 2,044,169 AFC Home Equity Loan Trust Series 97-1 Class A,
Variable Rate, 1 mo. LIBOR + .22%, 5.16%, due
3/25/27 2,032,670
USD 3,000,000 American Express Credit Account Master Trust Series
98-1A, Variable Rate, 1 mo. LIBOR + .09%, 5.03%,
due 1/17/06 2,995,500
USD 5,000,000 Augusta Funding Series 96-F2, Variable Rate, 3 mo.
LIBOR + .30%, 144A, 5.31%, due 4/15/06 4,940,625
USD 5,000,000 Big Flower Receivables Master Trust 96-2 Class A,
Variable Rate, LIBOR + .25%, 5.19%, due 4/25/03 4,930,000
USD 6,000,000 Circuit City Credit Card Master Trust 96-1 Class A,
Variable Rate, 1 mo. LIBOR + .17%, 5.11%, due
10/15/06 5,970,000
USD 5,000,000 CS First Boston Mortgage Securities Corp, Series
98-C1 Class A1B, 6.48%, due 5/17/08 4,970,000
USD 5,000,000 Dreamworks Film Trust Series 1 Class A,
Variable Rate, 3 mo. LIBOR + .22%, 5.25%, due
10/15/06 4,975,000
USD 1,000,000 Health Care Receivables Securitization Program 96-1
Class A, 144A, 7.20%, due 7/01/00 1,002,500
USD 2,000,000 MBNA Master Credit Card Trust Series 98-A Class A,
Variable Rate, 1 mo. LIBOR + .11%, 5.05%, due
8/15/05 1,996,875
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Asset Backed Securities -- continued
USD 5,000,000 Northstar CBO Ltd. Series 97-2 Class A2, 144A,
6.62%, due 7/15/09 5,405,469
USD 5,000,000 Rhyno CBO Delaware Corp Series 97-1 Class A-2, 144A,
Variable Rate, Step Up, 6.33%, due 9/15/09 5,271,094
USD 5,966,000 SMS Student Loan Trust 94-A Certificates,
Variable Rate, 1 mo. LIBOR + .70%, 5.64%, due
7/26/21 5,948,102
USD 5,000,000 Society Student Loan Trust 93-A Class B,
Variable Rate, 1 mo. LIBOR + .75%, 5.39%, due
7/25/03 4,990,000
USD 5,000,000 Starvest Emerging Markets CBO-I Series 1A, Class A,
Variable Rate, 6 mo. LIBOR + .19%, 144A, 5.16%,
due 7/30/11 4,807,813
--------------
60,235,648
--------------
Corporate Debt -- 1.0%
SEK 14,000,000 Toyota Motor Credit, 7.50%, due 8/06/01 1,827,228
--------------
U.S. Government Agency -- 6.9%
USD 2,600,792 Agency for International Development Floater (Support
of Honduras), Variable Rate, 3 mo. U.S. Treasury
Bill x 117%, 5.02%, due 10/01/11 2,483,756
USD 1,000,000 Agency for International Development Floater
(Support of India), Variable Rate, 3 mo.
LIBOR + .10%, 5.07%, due 2/01/27 970,000
USD 1,793,281 Agency for International Development Floater (Support
of Morocco), Variable Rate, 6 mo. U.S. Treasury
Bill + .45%, 5.05%, due 11/15/14 1,726,033
USD 2,503,574 Agency for International Development Floater (Support
of Peru), Series A, Variable Rate, 6 mo. U.S.
Treasury Bill +.35%, 4.95%, due 5/01/14 2,378,396
USD 882,073 Agency for International Development Floater (Support
of Peru), Series B, Variable Rate, 6 mo. U.S.
Treasury Bill + .35%, 4.95%, due 5/01/14 837,969
USD 200,000 Agency for International Development Floater
(Support of Peru), Variable Rate, 3 mo. U.S.
Treasury Bill x 114%, 5.02%, due 2/01/02 192,000
USD 4,000,000 Federal Home Loan Bank,
Variable Rate, CPI + 3.15%, 4.75%, due 2/15/02/(b)/ 3,874,000
--------------
12,462,154
--------------
Total United States 74,525,030
--------------
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Venezuela -- 0.3%
USD 1,000,000 Republic of Venezuela Discount Bond Series B,
Variable Rate, 6 mo. LIBOR + .81%, 5.88%, due
3/31/20 620,000
--------------
TOTAL DEBT OBLIGATIONS (COST $179,745,328) 178,002,063
--------------
LOAN ASSIGNMENTS -- 0.4%
Russia -- 0.4%
USD 9,646,950 Russia Vnesh Restructured Loan Agreements* 687,345
--------------
TOTAL LOAN ASSIGNMENTS (COST $4,555,520) 687,345
--------------
Shares
-------
PREFERRED STOCKS -- 2.5%
United States -- 2.5%
5,000 Bear Stearns Managed Income Securities Plus Fund,
13.27% 4,665,365
--------------
TOTAL PREFERRED STOCKS (COST $4,933,793) 4,665,365
--------------
Principal Amount
-----------------
CALL OPTIONS PURCHASED -- 0.6%
Options on Bonds -- 0.2%
SEK 207,000,000 Sweden Government Bond, Expires 4/27/99, Strike
10.114 298,198
--------------
Options on Currency -- 0.4%
USD 14,000,000 Euro, Expires 4/06/99, Strike 1.15 585,200
USD 6,300,000 Japanese Yen, Expires 4/16/99, Strike 122 84,420
--------------
669,620
--------------
Options on Futures -- 0.0%
USD 1,980,000 Eurodollar, Expires 3/15/99, Strike 95 19,800
--------------
TOTAL CALL OPTIONS PURCHASED
(COST $856,310) 987,618
--------------
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Principal Amount Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Put Options Purchased -- 0.0%
Options on Currency -- 0.0%
USD 14,000,000 Euro, Expires 4/06/99, Strike 1.20 --
USD 6,300,000 Japanese Yen, Expires 4/16/99, Strike 112 52,290
-------------
52,290
-------------
TOTAL PUT OPTIONS PURCHASED
(COST $234,850) 52,290
-------------
Shares/
Par Value RIGHTS AND WARRANTS -- 0.0%
----------
Mexico-- 0.0%
10,614,000 United Mexican States Warrants, Expires 6/30/03** --
-------------
Nigeria -- 0.0%
1,227 Central Bank of Nigeria Payment Adjusted Warrants,
Expires 11/15/20** --
-------------
Venezuela -- 0.0%
2,140 Republic of Venezuela Recovery Warrants,
Expires 04/15/20** --
-------------
TOTAL RIGHTS AND WARRANTS (COST $0) --
-------------
SHORT-TERM INVESTMENTS -- 0.0%
Cash Equivalents -- 0.0%
USD 74 BankBoston Eurodollar Time Deposit, 5.005% due 4/30/99(c) 74
25 Merrimac Cash Fund Premium Class(c) 25
-------------
99
-------------
TOTAL SHORT-TERM INVESTMENTS
(COST $99) 99
-------------
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Value ($)
--------------
Total Investments-- 101.4%
(Cost $190,325,900) 184,394,780
Other Assets and Liabilities (net)-- (1.4)% (2,565,884)
--------------
TOTAL NET ASSETS-- 100% $ 181,828,896
==============
Notes to the Schedule of Investments:
EMTN - Euromarket Medium Term Note
FLIRB - Front Loaded Interest Reduction Bond
IAN - Interest Arrears Note
PDI - Past Due Interest
144A - Securities exempt from registration under Rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
Variable and Step up rates - The rates shown on variable and step up rate
notes are the current interest rates at February 28, 1999, which are
subject to change based on the terms of the security, including varying
reset dates.
Currency Abbreviations
AUD - Australian Dollar GBP - British Pound
CAD - Canadian Dollar JPY - Japanese Yen
CHF - Swiss Franc NZD - New Zealand Dollar
EUR - Euro SEK - Swedish Krona
FRF - French Franc USD - United States Dollar
(a) Valued by management (Note 1).
(b) All or a portion of this security has been segregated to cover margin
requirements on open financial futures contracts.
(c) Represents investments of security lending collateral (Note 1).
* Non-performing. Borrower not currently paying interest.
** Non-income producing security.
See accompanying notes to the financial statements. 7
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at value (cost $190,325,900) (Note 1) $184,394,780
Cash at interest on deposit at brokers (Note 1) 2,220,458
Interest receivable 2,193,253
Receivable for variation margin on open futures contracts (Notes 1 and 6) 88,083
Receivable for expenses waived or borne by Manager (Note 2) 35,636
-------------
Total assets 188,932,210
-------------
Liabilities:
Payable upon return of securities loaned (Note 1) 99
Written options outstanding, at value (premiums $869,022) (Notes 1 and 6) 754,110
Net payable for open forward foreign currency contracts (Notes 1 and 6) 2,065,418
Payable for open swap contracts (Notes 1 and 6) 1,357,534
Due to custodian 2,759,595
Payable to affiliate for (Note 2):
Management fee 66,331
Shareholder service fee 23,721
Accrued expenses 76,506
-------------
Total liabilities 7,103,314
-------------
Net assets $181,828,896
=============
Net assets consist of:
Paid-in capital $184,011,829
Accumulated undistributed net investment income 4,362,615
Accumulated undistributed net realized gain 3,257,721
Net unrealized depreciation (9,803,269)
=============
$181,828,896
=============
Net assets attributable to:
Class III shares $181,828,896
=============
Shares outstanding:
Class III 18,065,517
=============
Net asset value per share:
Class III $ 10.06
=============
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Income:
<S> <C>
Interest (including securities lending income of $3,929) $17,512,914
Dividends 663,500
------------
Total income 18,176,414
------------
Expenses:
Management fee (Note 2) 1,061,185
Custodian and transfer agent fees 162,307
Audit fees 58,633
Registration fees 12,101
Legal fees 5,487
Trustees fees (Note 2) 2,550
Miscellaneous 3,174
Fees waived or borne by Manager (Note 2) (642,536)
------------
662,901
Shareholder service fee (Note 2)
Class III 397,948
------------
Net expenses 1,060,849
------------
Net investment income 17,115,565
------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 5,290,829
Closed futures contracts 6,838,337
Closed swap contracts (2,684,875)
Written options 5,023,395
Foreign currency, forward contracts and foreign currency related
transactions (3,359,928)
------------
Net realized gain 11,107,758
------------
Change in net unrealized appreciation (depreciation) on:
Investments (10,071,984)
Open futures contracts (419,556)
Open swap contracts (1,182,280)
Written options (442,813)
Foreign currency, forward contracts and foreign currency related
transactions (4,442,334)
------------
Net unrealized loss (16,558,967)
------------
Net realized and unrealized loss (5,451,209)
------------
Net increase in net assets resulting from operations $11,664,356
============
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
February 28,
----------------------------------
1999 1998
------------ -----------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 17,115,565 $17,003,789
Net realized gain (loss) 11,107,758 (1,512,149)
Change in net unrealized appreciation (depreciation) (16,558,967) 1,786,896
------------- ------------
Net increase in net assets resulting from operations 11,664,356 17,278,536
------------- ------------
Distributions to shareholders from:
Net investment income
Class III (8,308,647) (14,355,792)
------------- ------------
Total distributions from net investment income (8,308,647) (14,355,792)
------------- ------------
In excess of net investment income
Class III (1,994,554) --
------------- ------------
Total distributions in excess of net investment
income (1,994,554) --
------------- ------------
Net realized gains
Class III (5,508,618) (2,663,260)
------------- ------------
Total distributions from net realized gains (5,508,618) (2,663,260)
------------- ------------
In excess of net realized gains
Class III -- (9,216,709)
------------- ------------
Total distributions in excess of net realized gains -- (9,216,709)
------------- ------------
(15,811,819) (26,235,761)
------------- ------------
Net share transactions: (Note 5)
Class III (107,045,783) 66,196,244
------------- ------------
Increase (decrease) in net assets resulting from net
share transactions (107,045,783) 66,196,244
------------- ------------
Total increase (decrease) in net assets (111,193,246) 57,239,019
Net assets:
Beginning of period 293,022,142 235,783,123
------------- ------------
End of period (including accumulated undistributed
net investment income of $4,362,615 and
distributions in excess of net investment income of
$5,912,581, respectively) $181,828,896 $293,022,142
============= ============
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29,
------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.45 $ 10.78 $ 10.92 $ 9.64 $ 9.96
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.71 0.59 0.71 0.62 0.98
Net realized and unrealized gain (loss) (0.42) 0.08 0.65 1.55 (0.21)
-------- -------- -------- -------- --------
Total from investment operations 0.29 0.67 1.36 2.17 0.77
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.36) (0.54) (0.81) (0.59) (0.75)
In excess of net investment income (0.09) -- -- -- --
From net realized gains (0.23) (0.10) (0.54) (0.30) (0.34)
In excess of net realized gains -- (0.36) (0.15) -- --
-------- -------- -------- -------- --------
Total distributions (0.68) (1.00) (1.50) (0.89) (1.09)
-------- -------- -------- -------- --------
Net asset value, end of period $ 10.06 $ 10.45 $ 10.78 $ 10.92 $ 9.64
======== ======== ======== ======== ========
Total Return (a) 2.48% 6.32% 12.39% 22.72% 8.23%
Ratios/Supplemental Data:
Net assets, end of period (000's) $181,829 $293,022 $235,783 $193,920 $151,189
Net expenses to average daily net 0.40% 0.40% 0.40% 0.40% 0.40%
assets
Net investment income to average
daily net assets 6.45% 6.24% 6.93% 8.17% 7.51%
Portfolio turnover rate 106% 105% 95% 99% 141%
Fees and expenses voluntarily waived
or borne by the Manager consisted of
the following per share amounts: $ 0.03 $ 0.02 $ 0.02 $ 0.01 $ 0.02
</TABLE>
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
See accompanying notes to the financial statements. 11
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO International Bond Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on June
24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series into classes.
The Fund seeks high total return by investing primarily in investment grade
bonds denominated in various currencies including U.S. dollars and
multicurrency units. The Fund generally seeks to provide a total return
greater than that provided by the international fixed income securities
market.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost which
approximates market value. Other assets and securities for which no
quotations are readily available are valued at fair value as determined in
good faith by the Trustees or other persons acting at their direction.
Some fixed income securities and options thereon are valued at the closing
bid for such securities as supplied by a primary pricing source chosen by
the Manager. The Manager evaluates such primary pricing sources on an
ongoing basis, and may change any pricing source at any time. The Manager
is kept informed of erratic or unusual movements (including unusual
inactivity) in the prices supplied for a security and has the power to
override any price supplied by a source (by taking a price supplied by
another source) because the Manager has other reasons to suspect that a
price supplied may not be reliable.
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from yield
data relating to investments or securities with similar characteristics.
12
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Certain investments in securities held by the Fund were valued on the basis
of a price provided by a principal market maker. The prices provided by
principal market makers may differ from the value that would be realized if
the securities were sold and the differences could be material to the
financial statements. At February 28, 1999 the total value of these
securities represented 27% of net assets. Included in this total are U.S.
Government backed securities and highly rated collateralized debt
obligations that represent 22% of net assets at February 28, 1999.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the prevailing exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at prevailing exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
net exchange gains and losses on disposition of foreign currencies,
currency gains and losses realized between the trade and settlement dates
on securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid.
Futures contracts
The Fund may use futures contracts to manage its exposure to the bond and
currency markets. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments. Upon
entering into a futures contract, the Fund is required to deposit with its
custodian, in a segregated account in the name of the futures broker, an
amount of cash or U.S. government obligations in accordance with the
initial margin requirements of the broker or exchange. Futures contracts
are marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. Gains or
losses are recognized but not considered realized until the contracts
expire or are closed. Futures contracts involve, to varying degrees, risk
of loss in excess of the variation margin disclosed in the Statement of
Assets and Liabilities. Losses may arise from the changes in the value of
the underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 28, 1999.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or all
of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency contracts
are marked to market daily and the change in value is recorded by the Fund
as an unrealized gain or loss. Realized gains or losses equal to the
difference between the value of the contract at the time it was
13
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
opened and the value at the time it was closed are recorded upon delivery
or receipt of the currency or, if a forward currency contract is offset by
entering into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market risk
in excess of the unrealized gain or loss reflected in the Fund's Statement
of Assets and Liabilities. In addition, the Fund could be exposed to risk
if the counterparties are unable to meet the terms of the contracts or if
the value of the currency changes unfavorably to the U.S. dollar. The U.S.
dollar value of the currencies the Fund has committed to buy or sell is
shown under Note 6 and represents the currency exposure the Fund has
acquired or hedged through currency contracts as of February 28, 1999.
Options
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. When the Fund writes a call
or put option, an amount equal to the premium received is recorded as a
liability and subsequently marked to market to reflect the current value of
the option written. Premiums received from writing options which expire are
treated as realized gains. Premiums received from writing options which are
exercised or closed are offset against the proceeds or amounts paid on the
transaction to determine the realized gain or loss. The Fund as a writer of
an option has no control over whether the underlying securities may be sold
(call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. See Note 6 for a summary of open
written option contracts as of February 28, 1999.
The Fund may also purchase put and call options. The Fund pays a premium
which is included in the Fund's Statement of Assets and Liabilities as an
investment and subsequently marked to market to reflect the current value
of the option. The risk associated with purchasing put and call options is
limited to the premium paid.
Loan agreements
The Fund may invest in direct debt instruments which are interests in
amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates. The Fund's investments in loans may be in the form of
participations in loans or assignments of all or a portion of loans from
third parties. A loan is often administered by a bank or other financial
institution (the lender) that acts as agent for all holders. The agent
administers the terms of the loan, as specified in the loan agreement. When
investing in a loan participation, the Fund has the right to receive
payments of principal, interest and any fees to which it is entitled only
from the lender selling the loan agreement and only upon receipt by the
lender of payments from the borrower. The Fund generally has no right to
enforce compliance with the terms of the loan agreement with the borrower.
As a result, the Fund may be subject to the credit risk of both the
borrower and the lender that is selling the loan agreement. When the Fund
purchases assignments from lenders it acquires direct rights against the
borrower on the loan. Direct indebtedness of emerging countries involves a
risk that the governmental entities responsible for the repayment of the
debt may be unable or unwilling to pay the principal and interest when due.
14
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Indexed securities
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to increase
or decrease its exposure to different underlying instruments and to gain
exposure to markets that may be difficult to invest in through conventional
securities. Indexed securities may be more volatile than their underlying
instruments, but any loss is limited to the amount of the original
investment.
Swap agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to interest rates and credit risk. The Fund may enter into interest rate,
total return, and credit default swap agreements. Interest rate swap
agreements involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments with respect to a notional
amount of principal. Total return swap agreements involve commitments to
pay interest in exchange for a market linked return based on a notional
amount. To the extent the total return of the security or index underlying
the transaction exceeds or falls short of the offsetting interest rate
obligation, the Fund will receive a payment from or make a payment to the
counterparty, respectively. Credit default swaps involve the payment of a
specified rate based on the notional amount. The Fund receives payment upon
a default of the underlying security. In connection with these agreements,
cash or securities may be set aside as collateral by the Fund's custodian
in accordance with the terms of the swap agreement. The Fund earns interest
on cash set aside as collateral, which is paid by the counterparty. At
February 28, 1999, $2,220,458 in cash has been set aside. Swaps are marked
to market daily based upon quotations from market makers and the change, if
any, is recorded as unrealized gain or loss in the Statement of Operations.
Payments received or made at the end of the measurement period are recorded
as realized gain or loss in the Statement of Operations. Net payments of
interest on interest rate swap agreements are recorded as interest income.
Entering into these agreements involves, to varying degrees, elements of
credit and market risk in excess of the amounts recognized on the Statement
of Assets and Liabilities. Such risks involve the possibility that there
will be no liquid market for these agreements, that the counterparty to the
agreements may default on its obligation to perform and that there may be
unfavorable changes in the fluctuation of interest rates. See Note 6 for a
summary of open swap agreements as of February 28, 1999.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
15
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1999, the Fund loaned securities having a
market value of $82 collateralized by cash in the amount of $99, which was
invested in short-term instruments.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for foreign currency transactions and redemptions
in-kind. Gains resulting from such in-kind transactions amounted to
$497,579.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
------------------------ ------------------------ ------------------------
<S> <C> <C>
$ 3,462,832 $ (3,569,584) $ 106,752
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
16
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Security transactions and related investment income
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis, and is adjusted for the accretion of
discounts. Dividend income is recorded on the ex-dividend date. In
determining the net gain or loss on securities sold, the cost of securities
is determined on the identified cost basis. Interest income on U.S.
Treasury inflation indexed securities is accrued daily based upon an
inflation adjusted principal. Additionally, any increase in the principal
or face amount of these securities adjusted for inflation is recorded as
interest income.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .15% of the amount
invested. The premium will be reduced by 50% with respect to any portion of
a purchase that is offset by a corresponding redemption occurring on the
same day. In addition, the purchase premium 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. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. Purchase premiums are included as part of "shares sold" as
summarized in Note 5. For the year ended February 28, 1999, the Fund
received $85,377 in purchase premiums. There is no premium for cash
redemptions or reinvested distributions.
Investment risk
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments,
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets. The risks described above apply to an even greater
extent to investments in emerging markets. The securities markets of
emerging countries are generally smaller, less developed, less liquid, and
more volatile than the securities markets of the U.S. and developed foreign
markets.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .40% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
17
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
GMO agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding brokerage commissions, certain other transaction costs (including
transfer taxes), shareholder service fees and extraordinary expenses)
exceed .25% of average daily net assets.
Effective March 1, 1999, GMO's contractual management fee was reduced to
.25% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding brokerage
commissions, certain other transaction costs (including transfer taxes),
shareholder service fees and extraordinary expenses) exceed the management
fee.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999, was $2,550. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
For the year ended February 28, 1999, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Proceeds
------------------- ------------------
<S> <C> <C>
U.S. Government securities $ 3,863,013 $ 3,997,495
Investments (non-U.S. Government securities) 264,864,069 348,184,193
</TABLE>
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
---------------------- ----------------------- ---------------------- --------------------
<S> <C> <C> <C>
$ 190,326,236 $ 4,132,588 $ 10,064,044 $ 5,931,456
</TABLE>
4. Principal shareholders
At February 28, 1999, 47.0% of the outstanding shares of the Fund were held
by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
18
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Notes to Financial Statements -- (Continued)
February 28, 1999
- ----------------------------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including the purchase premiums received by the Fund, were as
follows:
Year Ended Year Ended
February 28, 1999 February 28, 1998
------------------------------ ------------------------------
Class III: Shares Amount Shares Amount
------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Shares sold 5,484,951 $ 57,695,554 9,447,927 $ 103,640,468
Shares issued to shareholders
in reinvestment of
distributions 1,255,142 13,253,099 2,082,876 21,695,786
Shares repurchased (16,723,091) (177,994,436) (5,355,799) (59,140,010)
------------- --------------- --------------- ---------------
Net increase (decrease) (9,982,998) $(107,045,783) 6,175,004 $ 66,196,244
============= =============== =============== ===============
</TABLE>
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1999 is as
follows:
<TABLE>
<CAPTION>
Forward currency contracts
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
--------------- ------------------ -------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Buys
4/20/99 AUD 3,600,000 $ 2,236,327 $ (92,465)
5/05/99 CAD 41,300,000 27,356,562 (239,046)
5/13/99 EUR 72,000,000 79,359,120 112,320
4/27/99 GBP 2,900,000 4,641,943 (68,962)
4/13/99 JPY 5,290,000,000 44,875,397 (1,938,763)
3/02/99 NZD 8,800,000 4,612,315 (47,465)
------------------
$ (2,274,381)
==================
</TABLE>
19
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Notes to Financial Statements -- (Continued)
February 28, 1999
- ---------------------------------------------------------------------------------------------------
Forward currency contracts -- continued
Settlement Net Unrealized
Date Deliver/Receive Units of Currency Value Appreciation
--------------- ------------------ -------------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Sales
4/20/99 AUD 1,800,000 $ 1,118,164 $ 18,860
5/05/99 CAD 8,500,000 5,630,285 54,459
4/27/99 GBP 10,400,000 16,646,968 108,290
4/13/99 JPY 1,250,000,000 10,603,827 240,885
3/02/99 NZD 8,800,000 4,612,315 122,965
6/03/99 NZD 6,800,000 3,568,409 911
------------------
$ 546,370
==================
<CAPTION>
Forward cross currency contracts
Net Unrealized
Settlement Appreciation
Date Deliver/Units of Currency Receive/In Exchange For (Depreciation)
------------- ------------------------------- ----------------------------- -----------------
<S> <C> <C> <C> <C> <C>
3/16/99 CHF 42,512,304 EUR 26,700,000 $ (61,471)
3/09/99 EUR 29,495,161 SEK 262,462,013 (418,782)
3/16/99 EUR 18,900,000 CHF 30,160,500 90,208
3/09/99 SEK 335,827,753 EUR 37,300,000 52,638
-----------------
$ (337,407)
=================
<CAPTION>
Futures contracts
Net Unrealized
Number of Expiration Contract Appreciation
Contracts Type Date Value (Depreciation)
----------- -------------------------------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Buys
79 Australian Government Bond 3 yr March 1999 $ 5,829,097 $ (111,617)
107 Canadian Government Bond 10 yr June 1999 8,788,957 (117,757)
321 German Government Bond 10 yr March 1999 51,563,226 (694,492)
25 Japanese Government Bond June 1999 27,380,952 (26,854)
19 Swiss Government Bond March 1999 1,702,933 9,479
18 Swiss Government Bond June 1999 1,594,797 (3,761)
-------------
$ (945,002)
=============
</TABLE>
20
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Notes to Financial Statements -- (Continued)
February 28, 1999
- ----------------------------------------------------------------------------------------------------
Futures contracts -- continued
Net
Number of Expiration Contract Unrealized
Contracts Type Date Value Appreciation
----------- -------------------------------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
Sales
33 Australian Government Bond 10 yr March 1999 $ 3,047,253 $ 53,984
80 Swedish Government Bond 10 yr March 1999 10,851,437 194,754
40 U.K. Gilt June 1999 7,494,156 94,987
93 U.S. Treasury Note 10 yr June 1999 10,671,750 116,372
-------------
$ 460,097
=============
At February 28, 1999, the Fund has sufficient cash and/or securities to
cover any margin requirements on open futures contracts.
Written option transactions
<CAPTION>
Puts Calls
Principal Principal
Amount of Amount of
Contracts Contracts
(000's omitted) Premiums (000's omitted) Premiums
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Outstanding, beginning
of period 228,700 $ 5,311,050 128,700 $ 5,440,015
Options written 6,300 396,522 6,300 472,500
Options closed (38,100) (430,530) (38,100) (428,625)
Options exercised -- -- (90,600) (5,011,390)
Options expired (190,600) (4,880,520) -- --
--------------- --------------- ---------------- ---------------
Outstanding, end
of period 6,300 $ 396,522 6,300 $ 472,500
=============== =============== ================ ===============
</TABLE>
21
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Notes to Financial Statements -- (Continued)
February 28, 1999
- ---------------------------------------------------------------------------------------------------------
Summary of written options outstanding
Principal
Amount of
Contracts Expiration
(000's omitted) Exercise Price Date Value
----------------- --------------- ------------------ ----------------
<S> <C> <C> <C> <C>
USD Call/JPY Put 6,300 USD 112.7 JPY 11/16/99 $ 449,820
USD Put/JPY Call 6,300 USD 112.7 JPY 11/16/99 304,290
----------------
$ 754,110
================
<CAPTION>
Swap agreements
Net Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
---------------------- ----------- --------------------------------------------- ----------------
<S> <C> <C> <C>
Credit Default Swaps
270,000,000,000 ITL 3/31/03 Agreement with Morgan Guaranty Trust $ (156,805)
Company dated 3/26/98 to pay .07% per year
times the notional amount. The Fund
receives payment only upon a default event
in Italy, the notional amount times the
difference between the par value and the
then-market value of Italy BTP, 6.00% due
11/01/07.
5,658,750,000 BEF 3/31/03 Agreement with Morgan Guaranty Trust (157,742)
Company dated 3/26/98 to pay .07% per year
times the notional amount. The Fund
receives payment only upon a default event
in Belgium, the notional amount times the
difference between the par value and the
then-market value of Kingdom of Belgium,
5.75% due 3/28/08.
</TABLE>
22
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Notes to Financial Statements -- (Continued)
February 28, 1999
- -------------------------------------------------------------------------------------------------
Swap agreements -- continued
Net Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
---------------------- ----------- -------------------------------------------- -----------------
<S> <C> <C> <C>
Interest Rate Swaps
16,800,000 CHF 6/05/05 Agreement with Morgan Guaranty Trust $ (318,494)
Company dated 6/03/98 to pay the notional
amount multiplied by 3.245% and to receive
the notional amount multiplied by 6 month
Floating Rate Swiss LIBOR adjusted by a
specified spread.
14,500,000 CHF 6/10/05 Agreement with Credit Suisse Financial (364,032)
Products dated 6/08/98 to pay the notional
amount multiplied by 3.2625% and to receive
the notional amount multiplied by 6 month
Floating Rate Swiss LIBOR adjusted by a
specified spread.
10,000,000 CHF 6/11/05 Agreement with Morgan Guaranty Trust (276,860)
Company dated 6/09/98 to pay the notional
amount multiplied by 3.245% and to receive
the notional amount multiplied by 6 month
Floating Rate Swiss LIBOR adjusted by a
specified spread.
4,400,000 CHF 9/16/05 Agreement with Morgan Guaranty Trust (83,601)
Company dated 9/14/98 to pay the notional
amount multiplied by 3.1175% and to receive
the notional amount multiplied by 6
month Floating Rate Swiss LIBOR adjusted
by a specified spread.
----------------
$ (1,357,534)
================
</TABLE>
See Notes to the Schedule of Investments for definitions of currency
abbreviations.
23
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1999, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 34.80% of distributions as net capital gain dividends.
24
<PAGE>
GMO International Bond Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
- ------------------
Mr. William L. Nemerever and Mr. Thomas F. Cooper are primarily responsible for
the day-to-day management of the Fund's portfolio. Each of these individuals has
been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The Class III shares of the International Bond Fund returned +2.5% for the
fiscal year ended February 28, 1999, compared to +9.9% for the J.P. Morgan
Non-U.S. Government Bond Index. Consistent with the Fund's investment objectives
and policies, the Fund was substantially invested in investment-grade, foreign
and domestic, fixed income instruments throughout the period.
The Fund underperformed the benchmark during the fiscal year by 7.4%. While bond
market selection added value to the portfolio, currency, emerging and issue
selection were negative and reduced the portfolio's return. The continued
pattern of declining short-term interest rates across the globe was beneficial
for portfolio returns, especially in the fourth quarter of 1998. The portfolio's
underweight position in Japanese bonds and overweight position in UK Gilts added
value. However, several unanticipated developments resulted in the Fund
underperforming the benchmark during the fiscal year.
. The decision by Russia to default on its domestic debt and devalue its
currency reduced returns, given the Fund's exposure to emerging country
debt.
. The collapse of Long-Term Capital Management prompted hedge funds and other
investors to unwind short Japanese yen positions. The result was a 15
percent appreciation in the yen during the month of October, which
negatively affected returns, given the Fund's underweight yen position.
. The portfolio's overweight position in British pounds also negatively
affected returns while overweight positions in Canadian dollars and Swedish
krona added value.
. In addition, the panic-driven flight to liquidity during the fourth quarter
caused spreads to widen on the Fund's holdings of highly rated, but less
liquid asset-backed securities, governments and agencies.
Outlook
- -------
The Fund is structured to benefit from outperformance in the Australian,
Canadian, Swedish, U.K., U.S. and emerging bond markets. We expect the Danish,
Euro, Japanese, Spanish and Swiss bond markets to underperform. Our strategy
maintains a market duration in each country. Strong relative performance is
expected from Australian dollars, Canadian dollars, Swedish krona and U.K.
pound. The Danish krone, Euro, Japanese yen, Swiss franc and U.S. dollar are
expected to underperform.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO International Bond Fund Class III Shares and the
JP Morgan Non-U.S. Government Bond Index
As of February 28, 1999
-------------------------------
Average Annual Total Return
-------------------------------
Since
Inception
1 Year 5 Year 12/22/93
Class -------------------------------
III 2.3% 10.2% 9.7%
-------------------------------
[LINE GRAPH APPEARS HERE]
GMO International Bond Fund J.P. Morgan Non-U.S.
Date Class III Shares Government Bond Index
---- --------------------------- ---------------------
1/31/93
12/22/93 9,985 10,000
12/31/93 9,885 9,900
3/31/94 9,945 10,017
6/30/94 10,065 10,147
9/30/94 10,560 10,320
12/31/94 10,395 10,386
3/31/95 11,490 11,846
6/30/95 12,428 12,393
9/30/95 12,579 12,240
12/31/95 13,235 12,579
3/31/96 13,247 12,368
6/30/96 13,876 12,453
9/30/96 14,653 12,893
12/31/96 15,440 13,242
3/31/97 14,655 12,472
6/30/97 15,137 12,791
9/30/97 15,687 12,864
12/31/97 15,575 12,742
3/31/98 15,726 12,826
6/30/98 15,787 13,081
9/30/98 16,675 14,384
12/31/98 17,256 15,072
2/28/99 16,178 14,299
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 15 bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Past performance is not indicative of future
performance. Information is unaudited.
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO International Equity Allocation Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO International Equity Allocation
Fund at February 28, 1999 and the results of its operations, the changes in its
net assets and the financial highlights for the periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1999 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 22, 1999
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value ($)/
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Mutual Funds -- 100.0%
37,179 GMO Domestic Bond Fund 358,782
486,845 GMO Emerging Country Debt Fund 3,354,365
1,851,645 GMO Emerging Markets Fund 11,683,881
1,114,930 GMO Evolving Countries Fund 6,399,695
116,155 GMO Inflation Indexed Bond Fund 1,147,607
258,894 GMO International Bond Fund 2,604,472
2,938,641 GMO International Core Fund 59,889,506
307,342 GMO International Small Companies Fund 3,386,905
131,015 GMO U.S. Bond/Global Alpha A Fund 1,340,280
-----------
Total Mutual Funds (Cost $107,196,250) 90,165,493
-----------
Short-Term Investments -- 0.0%
Repurchase Agreements -- 0.0%
$ 9,693 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/26/99, due 3/1/99, with a maturity value of $9,697
and an effective yield of 4.02%, collateralized by a
U.S. Treasury Obligation with a rate of 7.00%, maturity
date of 7/15/06 and market value, including accrued
interest, of $9,887. 9,693
-----------
Total Short-Term Investments (Cost $9,693) 9,693
-----------
Total Investments -- 100.0%
(Cost $107,205,943) 90,175,186
Other Assets and Liabilities (net) -- 0.00% (14,018)
-----------
TOTAL NET ASSETS -- 100% $90,161,168
===========
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1999
- --------------------------------------------------------------------------------
Assets:
Investments, at value (cost $107,205,943) (Note 1) $ 90,175,186
Receivable for investments sold 60,000
Receivable for expenses waived or borne by Manager (Note 2) 2,771
-------------
Total assets 90,237,957
-------------
Liabilities:
Payable for Fund shares repurchased 60,000
Accrued expenses 16,789
-------------
Total liabilities 76,789
-------------
Net assets $ 90,161,168
=============
Net assets consist of:
Paid-in capital $ 106,481,573
Accumulated undistributed net realized gain 710,352
Net unrealized depreciation (17,030,757)
=============
$ 90,161,168
=============
Net assets attributable to:
Class III shares $ 90,161,168
=============
Shares outstanding:
Class III 10,891,670
=============
Net asset value per share:
Class III $ 8.28
=============
2 See accompanying notes to the financial statements.
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Investment Income:
Dividends from investment company shares $ 1,655,342
Interest 807
------------
Total income 1,656,149
------------
Expenses:
Audit fees 16,739
Registration fees 9,202
Custodian and transfer agent fees 9,078
Legal fees 1,734
Trustees fees (Note 2) 728
Miscellaneous 2,353
Fees waived or borne by Manager (Note 2) (39,834)
------------
Net expenses --
------------
Net investment income 1,656,149
------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments (4,182,729)
Realized gain distributions from investment company shares 5,402,172
------------
Net realized gain 1,219,443
------------
Change in net unrealized appreciation (depreciation) on investments (10,858,440)
------------
Net realized and unrealized loss (9,638,997)
------------
Net decrease in net assets resulting from operations $ (7,982,848)
============
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended Year ended
February 28, 1999 February 28, 1998
----------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 1,656,149 $ 2,241,625
Net realized gain 1,219,443 8,051,936
Change in net unrealized appreciation (depreciation) (10,858,440) (6,728,168)
------------ ------------
Net increase (decrease) in net assets resulting from
operations (7,982,848) 3,565,393
------------ ------------
Distributions to shareholders from:
Net investment income
Class I -- (195,254)
Class II -- (430,549)
Class III (1,656,149) (1,615,822)
------------ ------------
Total distributions from net investment income (1,656,149) (2,241,625)
------------ ------------
In excess of net investment income
Class I -- (355)
Class II -- (783)
Class III (2,114,210) (2,939)
------------ ------------
Total distributions in excess of net investment
income (2,114,210) (4,077)
------------ ------------
Net realized gains
Class I -- (338,565)
Class II -- (872,870)
Class III (4,795,515) (3,087,812)
------------ ------------
Total distributions from net realized gains (4,795,515) (4,299,247)
------------ ------------
(8,565,874) (6,544,949)
------------ ------------
Net share transactions: (Note 5)
Class I -- 1,138,414
Class II -- (13,394,265)
Class III 20,834,383 55,162,012
------------ ------------
Increase in net assets resulting from net share
transactions 20,834,383 42,906,161
------------ ------------
Total increase in net assets 4,285,661 39,926,605
Net assets:
Beginning of period 85,875,507 45,948,902
------------ ------------
End of period (including accumulated undistributed
net investment income of $0 and $0 respectively) $ 90,161,168 $ 85,875,507
============ ============
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class I share outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from April 1, 1997
(commencement of operations)
to January 9, 1998
------------------------------
<S> <C>
Net asset value, beginning of period $10.17
------
Income from investment operations:
Net investment income (b) 0.45+
Net realized and unrealized loss (0.65)
------
Total from investment operations (0.20)
------
Less distributions to shareholders:
From net investment income (0.29)
In excess of net investment income --(d)
From net realized gains (0.58)
------
Total distributions (0.87)
------
Net asset value, end of period $ 9.10(c)
======
Total Return (a) (2.40)%
Ratios/Supplemental Data:
Net assets, end of period (000's) --
Net expenses to average daily net assets 0.13%*
Net investment income to average daily net assets (b) 5.49%*
Portfolio turnover rate 16%
Fees and expenses voluntarily waived or borne by the Manager consisted
of the following per share amount: $ 0.01
</TABLE>
(a) Calculation excludes purchase premiums and redemption fees. The total return
would have been lower had certain expenses not been waived during the period
shown.
(b) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
(c) All Class I shares of the Fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
(d) The per share distribution in excess of net investment income was $0.001.
+ Computed using average shares outstanding throughout the period.
* Annualized.
See accompanying notes to the financial statements. 5
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class II share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from Period from December 23, 1996
March 1, 1997 (commencement of operations)
to January 9, 1998 to February 28, 1997
------------------ ------------------------------
<S> <C> <C>
Net asset value, beginning of period $ 10.41 $ 10.10
------- -------
Income from investment operations:
Net investment income (b) 0.30+ --
Net realized and unrealized gain (loss) (0.74) 0.41
------- -------
Total from investment operations (0.44) 0.41
------- -------
Less distributions to shareholders:
From net investment income (0.29) (0.07)
In excess of net investment income --(e) --
From net realized gains (0.58) (0.03)
------- -------
Total distributions (0.87) (0.10)
------- -------
Net asset value, end of period $ 9.10(c) $ 10.41
======= =======
Total Return (a) (4.65)% 4.07%
Ratios/Supplemental Data:
Net assets, end of period (000's) -- $15,490
Net expenses to average daily net assets 0.07%* 0.07%*
Net investment income to average daily net assets (b) 3.23%* (0.07)%*
Portfolio turnover rate 16% 0%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share $ 0.01 (d)
amounts:
</TABLE>
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(b) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
(c) All Class II shares of the fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
(d) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
(e) The per share distribution in excess of net investment income was
$0.001.
+ Computed using average shares outstanding throughout the period.
* Annualized.
6 See accompanying notes to the financial statements.
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28,
-----------------------------------------
1999 1998 1997 *
--------- --------- ---------
<S> <C> <C> <C>
Net asset value, beginning of period $ 10.18 $ 10.41 $ 10.00
--------- --------- ---------
Income from investment operations:
Net investment income (b) 0.19+ 0.33+ 0.10
Net realized and unrealized gain (loss) (1.01) 0.31 0.41
--------- --------- ---------
Total from investment operations (0.82) 0.64 0.51
--------- --------- ---------
Less distributions to shareholders:
From net investment income (0.19) (0.29) (0.07)
In excess of net investment income (0.31) --(c) --
From net realized gains (0.58) (0.58) (0.03)
--------- --------- ---------
Total distributions (1.08) (0.87) (0.10)
--------- --------- ---------
Net asset value, end of period $ 8.28 $ 10.18 $ 10.41
========= ========= =========
Total Return (a) (8.77)% 6.73% 5.11%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 90,161 $ 85,876 $ 30,459
Net expenses to average daily net assets (d) 0.00% 0.00% 0.01%**
Net investment income to average daily net assets (b) 2.06% 3.13% 3.60%**
Portfolio turnover rate 36% 16% 0%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts: $ 0.01 $ 0.01 $ 0.01
</TABLE>
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(b) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
(c) The per share distribution in excess of net investment income was $0.001.
(d) Net expenses exclude expenses incurred indirectly through investment in
underlying funds. See Note 1. * Period from October 11, 1996 (commencement
of operations) to February 28, 1997.
** Annualized.
+ Computed using average shares outstanding throughout the period.
See accompanying notes to the financial statements. 7
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO International Equity Allocation Fund (the "Fund"), is a series of GMO
Trust (the "Trust"). The Fund is registered under the Investment Company
Act of 1940, as amended, as an open-end, diversified management investment
company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo &
Co. LLC (the "Manager" or "GMO"). The Trust was established as a
Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series of shares
into classes.
The Fund operates as a "fund-of-funds" in that, pursuant to management
provided by the Manager, it makes investments in other funds of the Trust
("underlying funds"). The Fund seeks a total return greater than that of
the GMO EAFE-Lite Extended Index, a benchmark developed by the Manager. The
Fund will pursue its objective by investing in Class III shares of
international equity and fixed income funds of the Trust.
Prior to January 9, 1998, the Fund offered three classes of shares: Class
I, Class II and Class III. Effective January 9, 1998, Class I shares and
Class II shares ceased operations and all shares were exchanged for Class
III shares. The principal economic difference among the classes of shares
is the level of shareholder service fee borne by the classes. Eligibility
for and automatic conversion between the various classes of shares is
generally based on the total amount of assets invested with GMO, as more
fully outlined in the Trust's prospectus.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Shares of underlying funds are valued at their net asset value as reported
on each business day. Short-term investments with a remaining maturity of
sixty days or less are valued at amortized cost, which approximates market
value. Other assets and securities for which no quotations are readily
available are valued at fair value as determined in good faith by the
Trustees.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
8
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for the classification of distributions received from
underlying funds and redemptions in-kind. Gains resulting from such in-kind
transactions amounted to $9,947.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated
Undistributed Net Accumulated Undistributed
Investment Income Net Realized Gain Paid-in Capital
---------------------- -------------------------- --------------------
$2,114,210 $68,511 $(2,182,721)
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
9
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis. In determining the net gain or loss on securities sold, the
cost of securities is determined on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. In addition,
the Fund will also incur fees and expenses indirectly as a shareholder in
the underlying funds. Because the underlying funds have varied expense and
fee levels and the Fund may own different proportions of underlying funds
at different times, the amount of fees and expenses indirectly incurred by
the Fund will vary.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .80% of the amount
invested. In the case of cash redemptions, the fee is .11% of the amount
redeemed. All purchase premiums and redemption fees are paid to and
recorded by the Fund as paid-in capital. Purchase premiums are included as
part of each class' "shares sold" and redemption fees are included as part
of each class' "shares repurchased", respectively, as summarized in Note 5.
For the year ended February 28, 1999, the Fund received $72,686 in purchase
premiums and $15,741 in redemption fees. There is no premium for reinvested
distributions or in-kind transactions.
Investment risk
The Fund is subject to the investment risk associated with an investment in
the underlying funds, some of which may invest in foreign securities. There
are certain additional risks involved in investing in foreign securities
that are not inherent in investments in domestic securities. These risks
may involve adverse political and economic developments, including the
possible imposition of capital controls or other foreign governmental laws
or restrictions. In addition, the securities of some foreign companies and
securities markets are less liquid and at times more volatile than
securities of comparable U.S. companies and U.S. securities markets. The
risks described above apply to an even greater extent to investments in
emerging markets. The securities markets of emerging countries are
generally smaller, less developed, less liquid, and more volatile than the
securities markets of the U.S. and developed foreign markets.
10
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
2. Fees and other transactions with affiliates
The Manager determines the allocation of the assets of the Fund among
designated underlying funds. The Manager does not charge an advisory fee
for asset allocation advice provided to the Fund, but receives advisory and
shareholder service fees from the underlying funds in which the Fund
invests. The Fund has adopted a Shareholder Service Plan under which the
Fund pays GMO a shareholder service fee for client and shareholder service,
reporting and other support. No shareholder service fee is charged for
Class III shares.
GMO has contractually agreed to reimburse all expenses directly incurred by
the Fund until February 29, 2000 (excluding brokerage commissions, certain
other transaction costs (including transfer taxes), shareholder service
fees and extraordinary expenses).
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999 was $728. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1999, aggregated
$48,250,147 and $28,912,542, respectively.
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
- ---------------------------------------------------------------------------
$109,360,081 $97,245 $19,282,140 $19,184,895
4. Principal shareholders
At February 28, 1999, 42.3% of the outstanding shares of the Fund were held
by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
11
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums and redemption
fees received by the Fund, were as follows:
<TABLE>
<CAPTION>
Period from April 1, 1997
Class I: (commencement of operations)
to January 9, 1998
----------------------------------
Shares Amount
------------- ----------------
<S> <C> <C>
Shares sold 679,610 $7,302,827
Shares issued to shareholders in
reinvestment of distributions 56,235 534,174
Shares repurchased (735,845) (6,698,587)
============= ================
Net increase -- $1,138,414
============= ================
Period from March 1, 1997
Class II: to January 9, 1998
---------------------------------
Shares Amount
-------------- ----------------
Shares sold -- $ 64,521
Shares issued to shareholders in
reinvestment of distributions 135,087 1,304,202
Shares repurchased (1,622,588) (14,762,988)
============== ----------------
Net decrease (1,487,501) $(13,394,265)
============== ================
<CAPTION>
Year Ended Year Ended
Class III: February 28, 1999 February 28, 1998
------------------------------ ---------------------------------
Shares Amount Shares Amount
------------- --------------- ------------- ----------------
<S> <C> <C> <C> <C>
Shares sold 4,350,530 $37,996,130 5,640,062 $ 56,708,756
Shares issued to shareholders in
reinvestment of distributions 770,742 7,138,503 388,075 3,750,538
Shares repurchased (2,665,394) (24,300,250) (517,553) (5,297,282)
============= =============== ============= ================
Net increase 2,455,878 $20,834,383 5,510,584 $ 55,162,012
============= =============== ============= ================
</TABLE>
12
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1999, all of the Fund's distributions are
from investment company taxable income, except that the Fund has designated
57.3% of distributions as net capital gain dividends
13
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Manager
- -----------------
Mr. R. Jeremy Grantham and Mr. Ben Inker are primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. Grantham has been a portfolio
manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years.
Mr. Inker has been with the firm for seven years.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The Class III shares of the International Equity Allocation Fund returned -8.8%
for the twelve months ended February 28, 1999. The Fund's benchmark, the GMO
EAFE-Lite Extended Index, returned 2.9%.
During fiscal 1999, the Fund's performance lagged the benchmark by a significant
margin. The Fund's exposure to emerging equities significantly detracted from
performance, as emerging equities declined sharply in the financial crisis of
the late summer. The emerging markets as measured by the IFC Investable Index
performed poorly, declining by 24.8%. On average, the Fund had 19.9% of its
assets invested in emerging equities during the year, a 10.9% overweight
relative to the EAFE-Lite Extended benchmark. Our implementation of emerging
equities also detracted from performance as the GMO Emerging Markets Fund lagged
the performance of the IFC Investable Index by 6.4%.
Performance of the International Equity Allocation Fund was also negatively
affected by GMO's implementation within the developed international markets. In
a strong bull market environment in Europe, the GMO International Core Fund
lagged the EAFE-Lite benchmark during the fiscal year. In the period of
historically narrow performance within the EAFE markets, a small group of
expensive multinational companies (26 stocks) accounted for over 50% of the
index's 1998 return. In this environment, underweight positions in the strongest
performing stocks, particularly in the telecommunications and pharmaceutical
sectors, resulted in underperformance relative to the benchmark. The Fund's
underperformance was concentrated in Europe, where the Fund's strategy of
emphasizing value and mid-cap stocks faltered in an environment favoring large,
multinational stocks. The GMO International Core Fund returned -0.7% for the
fiscal year, underperforming the GMO EAFE-Lite Index by -6.8%.
The Fund's 8.4% allocation to fixed income did not provide as much of a cushion
as intended, primarily due to the severe underperformance of emerging market
debt in the crisis afflicting the emerging markets.
Portfolio Structure and Outlook
- -------------------------------
The events of the past several years (the bull market in the U.S. and Europe,
the collapse of Southeast Asian markets and the poor performance of the Japanese
stock market and economy) have driven valuations significantly away from fair
value. Today value is exceptionally well positioned for picking countries and
companies. Spreads between the cheapest and most expensive countries (even after
excluding Southeast Asia) have reached their most attractive levels in fourteen
years. European value stocks are exceptionally attractive, having reached their
cheapest levels in fifteen years. Small international stocks have fallen to
levels that represent a once in forty-year opportunity (i.e. a three- to
four-standard deviation move away from their fair value). Emerging equities,
following the crisis events of the past two years, are attractively
<PAGE>
GMO International Equity Allocation Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
priced on both an absolute basis and relative to developed international
equities. The Fund's strategy of emphasizing stocks and countries with
attractive valuations will continue to capitalize on these misvaluations.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO International Equity Allocation Fund Class III Shares and the
MSCI All Country World Ex U.S. Index
As of February 28, 1999
-----------------------------------------------
Average Annual Total Return
-----------------------------------------------
Inception
1yr 5yr 10/11/96
-----------------------------------------------
-9.6 N/A 0.6
-----------------------------------------------
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Date GMO Int'l. Equity Allocation Fund MSCI All Country World ex U.S. Index GMO EAFE-Lite Extended Index
Class III Shares
<S> <C> <C> <C>
1/31/96
10/11/96 9,920 10,000 10,000
12/31/96 10,186 10,254 10,317
3/31/97 10,306 10,246 10,435
6/30/97 11,198 11,575 11,627
9/30/97 11,486 11,461 11,719
12/31/97 10,363 10,430 10,853
3/31/98 11,774 11,858 12,470
6/30/98 10,932 11,648 12,412
9/30/98 9,192 9,890 10,590
12/31/98 10,570 11,901 12,672
2/28/99 10,141 11,637 12,315
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 80 bp on the purchase and 11 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Past performance
is not indicative of future performance. Information is unaudited.
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO REIT Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of GMO
REIT Fund at February 28, 1999 and the results of its operations, the
changes in its net assets and the financial highlights for the periods
presented, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to
as "financial statements") are the responsibility of the Trust's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe
that our audits, which included confirmation of securities at February 28,
1999 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 12, 1999
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS -- 0.5%
Lodging -- 0.4%
48,330 Crestline Capital Corp* 616,208
-----------
Services -- 0.1%
14,930 Vornado Operating Inc* 102,644
-----------
TOTAL COMMON STOCKS (cOST $833,666) 718,852
-----------
REAL ESTATE INVESTMENTS -- 98.1%
Apartments -- 9.0%
96,800 Apartment Investment & Management Co, Class A 3,787,299
26,900 BRE Properties Inc 652,325
84,300 Cornerstone Realty Income Trust 806,119
48,725 Equity Residential Properties Trust 1,997,705
30,200 Gables Residential Trust 698,375
44,700 Mid America Apartment Community 994,575
29,500 Smith (Charles E) Residential 866,563
51,500 Summit Properties Inc 852,969
156,500 United Dominion Realty Trust Inc 1,545,438
39,100 Walden Residential Properties Inc 652,481
-----------
12,853,849
-----------
Diversified -- 19.6%
108,700 Catellus Development Corp* 1,569,356
93,000 Colonial Properties Trust 2,284,313
481,800 Crescent Real Estate Equities 10,057,574
160,600 First Union Real Estate 662,475
90,900 Glenborough Realty Trust Inc 1,641,881
55,200 Meditrust Corp 676,200
133,400 The Rouse Company 3,118,225
232,116 Vornado Realty Trust 7,978,987
-----------
27,989,011
-----------
Factory Outlet -- 0.9%
21,900 Chelsea GCA Realty Inc 669,319
74,700 Prime Retail Inc 597,600
-----------
1,266,919
-----------
</TABLE>
See accompanying notes to financial statements. 1
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Industrial -- 13.2%
72,500 Bedford Property Investors 1,150,938
215,000 Duke Realty Investments 4,689,687
60,350 Eastgroup Properties Inc 1,056,125
97,900 First Industrial Realty Trust 2,533,163
69,600 Liberty Property Trust 1,522,500
37,200 Meridian Industrial Trust Inc 892,800
123,390 Prologis Trust 2,560,343
96,100 Spieker Properties Inc 3,435,574
41,300 Weeks Corp 1,115,100
-----------
18,956,230
-----------
Lodging -- 19.1%
71,400 Equity Inns Inc 673,838
103,200 Felcor Lodging Trust Inc 2,438,100
34,900 Hospitalities Properties Trust 898,675
511,709 Host Marriott Corp 5,532,854
60,300 Innkeepers USA Trust 625,613
390,379 Patriot America Hospitality Inc* 2,256,514
460,500 Starwood Hotels and Resorts Worldwide Inc 14,275,499
89,000 Sunstone Hotel Investors Inc 712,000
-----------
27,413,093
-----------
Manufactured Housing -- 1.2%
29,600 Chateau Communities Inc 834,350
35,400 Manufactured Home Communities 823,050
-----------
1,657,400
-----------
Office -- 22.7%
29,100 Alexandria Real Estate Equities Inc 851,175
43,800 Arden Realty Group Inc 1,023,825
33,400 Boston Properties Inc 1,079,238
167,500 Brandywine Realty Trust 2,753,281
53,100 Carramerica Realty Corp 1,141,650
60,800 Cornerstone Properties Inc 919,600
137,300 Equity Office Properties 3,535,474
129,200 Highwood Properties Inc 3,092,725
56,900 Kilroy Realty Corp 1,226,906
64,200 Koger Equity Inc 878,738
165,000 Mack-Cali Realty Corp 4,774,687
73,000 Parkway Properties Inc 1,925,375
110,800 Prentiss Properties Trust 2,216,000
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
<TABLE>
<CAPTION>
GMO REIT Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares
Par Value ($) Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Office -- continued
23,600 Prime Group Realty Trust 324,500
39,700 Reckson Associates Realty Corp 843,625
44,900 SL Green Realty Corp 867,131
45,300 Tower Realty Trust Inc 883,350
37,600 Trinet Corporate Realty Trust Inc 947,050
164,300 Trizec Hahn Corporation 3,193,580
-----------
32,477,910
-----------
Regional Malls -- 8.1%
30,500 CBL & Associates Properties Inc 760,594
78,500 General Growth Properties 2,649,375
22,900 JP Realty Inc 423,650
72,700 Macerich Co 1,762,975
76,100 Mills Corp 1,384,069
40,600 Simon Property Group Inc 1,032,763
56,800 Urban Shopping Centers Inc 1,704,000
105,900 Westfield America Inc 1,866,488
-----------
11,583,914
-----------
Self Storage -- 0.4%
200 Public Storage Inc 5,100
24,800 Shurgard Storage Centers Inc 613,800
-----------
618,900
-----------
Shopping/Power Center -- 3.9%
97,300 Developers Diversified Realty Corp 1,544,638
46,900 Federal Realty Investment Trust 1,034,731
50,500 JDN Realty Corp 1,060,500
93,780 New Plan Excel Realty Trust 1,945,935
-----------
5,585,804
-----------
TOTAL REAL ESTATE INVESTMENTS
(COST $181,558,040) 140,403,030
-----------
SHORT-TERM INVESTMENTS -- 4.4%
Cash Equivalents -- 2.9%
$154,100 BankBoston Eurodollar Time Deposit, 5.005% due
4/30/99(a) 154,100
$4,000,000 Prudential Securities Group Inc, Master Note, 5.075% due
6/14/99(a) 4,000,000
-----------
4,154,100
-----------
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
<TABLE>
<CAPTION>
GMO REIT Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Par Value($) Description Value($)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Government -- 0.2%
$ 300,000 U.S. Treasury Bill, 4.53%, due 4/29/99(b) 297,734
------------
Repurchase Agreements -- 1.3%
Salomon Smith Barney Inc. Repurchase Agreement, dated
$1,823,553 2/26/99, due 3/1/99, with a maturity value of $1,824,164
and an effective yield of 4.02%, collateralized by a U.S.
Treasury Obligation with a rate of 7.00%, maturity date of
7/15/06 and market value, including accrued interest, of
$1,860,024. 1,823,553
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $6,275,477) 6,275,387
------------
TOTAL INVESTMENTS -- 103.0%
(COST $188,667,183) 147,397,269
Other Assets and Liabilities (net) -- (3.0)% (4,268,208)
------------
TOTAL NET ASSETS -- 100% $143,129,061
============
</TABLE>
Notes to the Schedule of Investments:
* Non-income producing security.
(a) Represents investments of security lending collateral
(Note 1).
(b) All or a portion of this security has been segregated to
cover margin requirements on open financial futures
contracts.
4 See accompanying notes to the financial statements.
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Assets and Liabilities -- February 28, 1999
- -------------------------------------------------------------------------------------------------
Assets:
<S> <C>
Investments, at value (cost $188,667,183) (Note 1) $ 147,397,269
Dividends and interest receivable 207,030
Receivable for expenses waived or borne by Manager (Note 2) 27,612
Receivable for Fund shares sold 19
-------------
Total assets 147,631,930
-------------
Liabilities:
Payable for investments purchased 195,600
Payable upon return of securities loaned (Note 1) 4,154,100
Payable to affiliate for (Note 2):
Management fee 85,531
Shareholder service fee 15,517
Payable for variation margin on open futures contracts (Notes 1 and 5) 12,000
Accrued expenses 40,121
-------------
Total liabilities 4,502,869
-------------
Net assets $ 143,129,061
=============
Net assets consist of:
Paid-in capital $ 193,440,788
Accumulated undistributed net investment income 7,233,108
Accumulated undistributed net realized loss (16,260,865)
Net unrealized depreciation (41,283,970)
-------------
$ 143,129,061
=============
Net assets attributable to:
Class III shares $ 143,129,061
=============
Shares outstanding:
Class III 15,679,339
=============
Net asset value per share:
Class III $ 9.13
=============
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Operations -- Year Ended February 28, 1999
- --------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Dividends (net of withholding taxes of $8,557) $ 11,898,294
Interest (including securities lending income of $18,133) 431,291
------------
Total income 12,329,585
------------
Expenses:
Management fee (Note 2) 1,748,325
Custodian and transfer agent fees 57,515
Audit fees 37,242
Registration fees 20,469
Legal fees 4,266
Trustees fees (Note 2) 2,196
Miscellaneous 2,828
Fees waived or borne by Manager (Note 2) (614,047)
------------
1,258,794
Shareholder service fee (Note 2)
Class III 349,665
------------
Net expenses 1,608,459
------------
Net investment income 10,721,126
------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments (13,216,491)
Closed futures contracts 715,654
------------
Net realized loss (12,500,837)
------------
Change in net unrealized appreciation (depreciation) on:
Investments (59,699,756)
Open futures contracts (336,531)
------------
Net unrealized loss (60,036,287)
------------
Net realized and unrealized loss (72,537,124)
------------
Net decrease in net assets resulting from operations $(61,815,998)
============
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1999 February 28, 1998
----------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 10,721,126 $ 15,107,861
Net realized gain (loss) (12,500,837) 35,767,659
Change in net unrealized
appreciation (depreciation) (60,036,287) (3,580,972)
------------ ------------
Net increase (decrease) in net
assets resulting from operations (61,815,998) 47,294,548
------------ ------------
Distributions to shareholders from:
Net investment income
Class I -- (4,860)
Class II -- (8,347)
Class III (3,197,384) (15,852,407)
------------ ------------
Total distributions from net
investment income (3,197,384) (15,865,614)
------------ ------------
In excess of net investment income
Class I -- (223)
Class II -- (382)
Class III -- (726,208)
------------ ------------
Total distributions in excess of
net investment income -- (726,813)
------------ ------------
Net realized gains
Class I -- (7,273)
Class II -- (26,734)
Class III (15,126,689) (24,529,349)
------------ ------------
Total distributions from net
realized gains (15,126,689) (24,563,356)
------------ ------------
(18,324,073) (41,155,783)
------------ ------------
Net share transactions: (Note 4)
Class I -- (42,863)
Class II -- (218,750)
Class III (151,505,021) 107,926,697
------------ ------------
Increase (decrease) in net assets
resulting from net share
transactions (151,505,021) 107,665,084
------------ ------------
Total increase (decrease) in net
assets (231,645,092) 113,803,849
Net assets:
Beginning of period 374,774,153 260,970,304
------------ ------------
End of period (including
accumulated undistributed net
investment income of $7,233,108
and $0, respectively) $143,129,061 $374,774,153
============ ============
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class I share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
Period from December 31, 1996
March 1, 1997 (commencement of operations)
to January 9, 1998 to February 28, 1997
------------------ ----------------------------
<S> <C> <C>
Net asset value, beginning of period $12.62 $12.58
------- -------
Income from investment operations:
Net investment income 0.47+ 0.03
Net realized and unrealized gain 1.57 0.01
------- -------
Total from investment operations 2.04 0.04
------- -------
Less distributions to shareholders:
From net investment income (0.56) --
In excess of net investment income (0.03) --
From net realized gains (0.89) --
------- -------
Total distributions (1.48) --
------- -------
Net asset value, end of period $13.18(c) $12.62
======= =======
Total Return (a) 16.55% 0.32%
Ratios/Supplemental Data:
Net assets, end of period (000's) -- $ 41
Net expenses to average daily net assets 0.82%* 0.82%*
Net investment income to average daily net 3.99%* 3.17%*
assets
Portfolio turnover rate 86% 21%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following $ 0.03 (b)
per share amounts:
</TABLE>
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(b) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
(c) All Class I shares of the Fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
+ Computed using average shares outstanding throughout the period.
* Annualized.
8 See accompanying notes to the financial statements.
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class II share outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from April 30, 1997
(commencement of operations)
to August 4, 1997
---------------------------
<S> <C>
Net asset value, beginning of period $12.31
-------
Income from investment operations:
Net investment income 0.14+
Net realized and unrealized gain 1.27
-------
Total from investment operations 1.41
-------
Less distributions to shareholders:
From net investment income (0.05)
In excess of net investment income -- (a)
From net realized gains (0.15)
-------
Total distributions (0.20)
-------
Net asset value, end of period $13.52(b)
=======
Total Return (c) 11.46%
Ratios/Supplemental Data:
Net expenses to average daily net assets 0.76%*
Net investment income to average daily net assets 3.96%*
Portfolio turnover rate 86%
Fees and expenses voluntarily waived or borne by the Manager
consisted of the following per share amount: $ 0.01
</TABLE>
(a) The per share distribution in excess of net investment income was $0.002.
(b) All Class II shares of the Fund were exchanged for Class III shares on
August 4, 1997. Amount represents ending net asset value per share on
August 4, 1997.
(c) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
+ Computed using average shares outstanding throughout the period.
* Annualized.
See accompanying notes to the financial statements. 9
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28,
-------------------------------------------
1999 1998 1997*
--------- ---------- ---------
<S> <C> <C> <C>
Net asset value, beginning of period $ 12.92 $ 12.62 $ 10.00
--------- ---------- ---------
Income from investment operations:
Net investment income 0.51+ 0.53 0.24
Net realized and unrealized gain (loss) (3.36) 1.26 2.60
--------- ---------- ---------
Total from investment operations (2.85) 1.79 2.84
--------- ---------- ---------
Less distributions to shareholders:
From net investment income (0.19) (0.57) (0.17)
In excess of net investment income -- (0.03) --
From net realized gains (0.75) (0.89) (0.05)
--------- ---------- ---------
Total distributions (0.94) (1.49) (0.22)
--------- ---------- ---------
Net asset value, end of period $ 9.13 $ 12.92 $ 12.62
========= ========== =========
Total Return (a) (23.27)% 14.29% 28.49%
Ratios/Supplemental Data:
Net assets, end of period (000's) $143,129 $ 374,774 $260,929
Net expenses to average daily net 0.69% 0.69% 0.69%**
assets
Net investment income to average
daily net assets 4.60% 4.10% 4.72%**
Portfolio turnover rate 59% 86% 21%
Fees and expenses voluntarily
waived or borne by the Manager
consisted of the following per $ 0.03 $ 0.03 $ 0.02
share amounts:
</TABLE>
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
+ Computed using average shares outstanding throughout the period.
* Period from May 31, 1996 (commencement of operations) to February 28, 1997.
** Annualized.
10 See accompanying notes to the financial statements.
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO REIT Fund (the "Fund"), is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended, as
an open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series into classes.
The Fund seeks maximum total return through investment primarily in real
estate investment trusts ("REITs").
Prior to January 9, 1998, the Fund offered three classes of shares: Class
I, Class II, and Class III. Class I and Class II shares ceased operations
on January 9, 1998 and August 4, 1997, respectively, and all shares were
exchanged for Class III shares. The principal economic difference among the
classes of shares is the level of shareholder service fee borne by the
classes. Eligibility for and automatic conversion between the various
classes of shares is generally based on the total amount of assets invested
with GMO, as more fully outlined in the Trust's prospectus.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Other assets and
securities for which no quotations are readily available are valued at fair
value as determined in good faith by the Trustees.
Futures contracts
The Fund may purchase and sell futures contracts on the domestic stock
indices. Stock index futures contracts represent commitments for future
delivery of cash based upon the level of a specified index of equity
securities at a given date. The Fund may use futures contracts to manage
its exposure to the stock markets. Buying futures tends to increase the
Fund's exposure to the underlying instrument. Selling futures tends to
decrease the Fund's exposure to the underlying instrument or hedge other
Fund instruments. Upon entering into a futures contract, the Fund is
required to deposit with its custodian, in a segregated account in the name
of the futures broker, an amount of cash or U.S. government obligations in
accordance with the initial margin requirements of the broker or exchange.
Futures contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation
11
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
margin") is recorded by the Fund. The payable or receivable is liquidated
on the following business day. Gains or losses are recognized but not
considered realized until the contracts expire or are closed. Futures
contracts involve, to varying degrees, risk of loss in excess of the
variation margin disclosed in the Statement of Assets and Liabilities.
Losses may arise from changes in the value of the underlying instrument, if
there is an illiquid secondary market for the contracts, or if
counterparties do not perform under the contract terms. Futures contracts
are valued at the settlement price established each day by the board of
trade or exchange on which they are traded. See Note 5 for all open futures
contracts as of February 28, 1999.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Security lending
The Fund may lend its securities to qualified brokers. The loans are
collateralized at all times with cash or securities with a market value at
least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1999, the Fund loaned securities having a
market value of $3,891,531, collateralized by cash in the amount of
$4,154,100, which was invested in short-term instruments.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are
12
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
primarily due to differing treatments for redemptions in-kind. Gains
resulting from such in-kind transactions amounted to $4,637,938.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------------- ------------------------ ------------------
$(290,634) $(3,113,798) $3,404,432
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
The Fund's investments in REIT equity securities may at times result in the
Fund's receipt of cash in excess of its interest in the REIT's earnings.
The excess amount cannot be determined by the Fund at the time of receipt.
If the Fund distributes amounts which are subsequently determined to exceed
REIT earnings, such amounts would constitute a return of capital to Fund
shareholders for federal income tax purposes.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis and is adjusted for the accretion of discounts. In
determining the net gain or loss on securities sold, the cost of securities
is determined on the identified cost basis. Dividends representing a return
of capital are reflected as a reduction of cost, when the amount of return
of capital is conclusively determined.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds.
Purchases and redemptions of Fund shares
The premium on cash purchases and fee on redemptions of Fund shares is .50%
of the amount invested or redeemed. All purchase premiums and redemption
fees are paid to and recorded by the Fund as paid-in capital. Purchase
premiums are included as part of each class' "shares sold" and redemption
fees are included as part of each class' "shares repurchased",
respectively, as summarized in Note 4. For the year
13
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
ended February 28, 1999, the Fund received $133,867 in purchase premiums
and $750,882 in redemption fees. There is no premium for reinvested
distributions or in-kind transactions.
Investment risk
There are certain additional risks involved in investing in REITs rather
than a more diversified portfolio of investments. Since the Fund's
investments are concentrated in real-estate related securities, the value
of its shares can be expected to change in light of factors affecting the
real estate industry, including local or regional economic conditions,
changes in zoning laws, changes in real estate value and property taxes,
and changes in interest rates. The value of the Fund's shares may fluctuate
more widely than the value of shares of a portfolio that invests in a
broader range of industries.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .75% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding brokerage commissions, certain other transaction costs (including
transfer taxes), shareholder service fees and extraordinary expenses)
exceed .54% of average daily net assets.
Effective March 1, 1999, GMO's contractual management fee was reduced to
.54% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding brokerage
commissions, certain other transaction costs (including transfer taxes),
shareholder service fees and extraordinary expenses) exceed the management
fee.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999 was $2,196. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
14
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1999, aggregated
$135,906,715 and $272,904,843, respectively.
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<TABLE>
<S> <C> <C> <C>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
--------------------- --------------------- -------------------- ---------------------
$189,334,386 $1,225,006 $43,162,123 $41,937,117
</TABLE>
4. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums and redemption
fees received by the Fund, were as follows:
Period from
Class I: March 1, 1997
to January 9, 1998
------------------------------
Shares Amount
--------------- --------------
Shares sold 6,339 $ 84,207
Shares issued to shareholders in
reinvestment of distributions 953 12,356
Shares repurchased (10,576) (139,426)
=============== ==============
Net decrease (3,284) $ (42,863)
=============== ==============
Period from April 30, 1997
Class II: (commencement of operations)
to August 4, 1997
-----------------------------
Shares Amount
-------------- --------------
Shares sold 181,864 $ 2,240,225
Shares issued to shareholders in
reinvestment of distributions 2,703 35,463
Shares repurchased (184,567) (2,494,438)
============== ==============
Net decrease -- $ (218,750)
============== ==============
15
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Share transactions -- continued
<TABLE>
<CAPTION>
Year Ended Year Ended
Class III: February 28, 1999 February 28, 1998
------------------------------ --------------------------
Shares Amount Shares Amount
------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares sold 2,311,420 $ 26,773,478 12,232,100 $161,677,900
Shares issued to shareholders in
reinvestment of distributions 1,482,780 16,781,879 2,754,721 35,760,499
Shares repurchased (17,130,461) (195,060,378) (6,643,834) (89,511,702)
------------- -------------- ----------- -------------
Net increase (decrease) (13,336,261) $(151,505,021) 8,342,987 $107,926,697
============= ============== =========== =============
</TABLE>
5. Financial instruments
A summary of outstanding futures contracts at February 28, 1999 is as
follows:
Long futures contracts
<TABLE>
<CAPTION>
Number of Net Unrealized
Contracts Type Expiration Date Contract Value Depreciation
--------------- ---------------- ---------------- ----------------- -------------------
<S> <C> <C> <C> <C>
8 S & P 500 March 1999 $2,471,000 $ (14,056)
==================
</TABLE>
At February 28, 1999, the Fund has sufficient cash and/or securities to
cover any commitments or margin on open futures contracts.
16
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
The Fund has elected to defer to March 1, 1999 post-October losses of
$7,238,791.
At February 28, 1999, the Fund had a capital loss carryforward available to
offset future capital gains, if any, of the following amounts:
Year of Expiration Amount
------------------ ----------
2007 $8,368,927
17
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
- ------------------
Mr. R. Jeremy Grantham, Mr. Richard McQuaid and Mr. Robert Brokaw are primarily
responsible for the day-to-day management of the Fund's portfolio. Mr. Grantham
co-founded Grantham, Mayo, Van Otterloo & Co. LLC in 1977. Mr. McQuaid has been
with GMO for five years and Mr. Brokaw for eleven years.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The Class III shares of the GMO REIT Fund returned -23.3% during the twelve
months ended February 28, 1999. The Morgan Stanley REIT Index (MSRI) returned
- -18.0% and the S&P 500 returned 19.7% during the same period.
REIT Industry Review
- --------------------
REIT performance during 1998 was the worst in over twenty years, including 1990
when property markets reacted to inflated asset values, overbuilding and a
pending economic downturn. All property sectors produced negative returns, with
price declines overwhelming relatively high dividend yields. Among major
sectors, shopping centers, apartments, industrial, office and regional malls
outperformed the benchmark, while diversified property holdings performed at the
industry average. Hotels underperformed the benchmark by more than two times as
investor concerns over increases in lodging construction spending and management
strains at several rapidly expanding companies caused broad selling. The REIT
industry delivered good cash earnings, or funds from operations, growth of over
11%. Although external growth slowed, unleveraged same property cash flow growth
significantly beat inflation. Still, worried that growth was slowing and
leverage was increasing, investors repriced the stocks from their prior heady
net asset value premiums to discounts.
Stock Selection
- ---------------
The Fund completed a transition to reduce the number of stocks in the portfolio
and replaced a short-term momentum model with a factor model based on more
traditional stock and real estate valuation methods during the year. The factor
model supplemented the cash earnings discount model and long-term momentum model
that the Fund had been using. Stock selection for 90% of the portfolio relied on
fundamental value models and long-term momentum measures. Manager judgment was
used to select securities in up to 10% of the Fund. None of the stock selection
methods used added value primarily due to mid-year overweights in larger lodging
REITs and liquidity-driven market selling that affected most of the Fund's
largest holdings.
Implementation
- --------------
Implementation negatively affected the Fund's performance relative to the MSRI
during the year. Direct expenses and cash levels were tightly controlled, but
repositioning the portfolio caused abnormally high turnover and increased
indirect trading costs. We trade with minimal market impact, but this often adds
to timing risk. Since the portfolio rebalancing was completed, Fund turnover has
been exceptionally low. When the Fund holds cash, it uses S&P 500 futures to
gain temporary equity market exposure until it invests those funds. This
strategy helped Fund results during the year.
<PAGE>
GMO REIT Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Outlook
- -------
REIT valuations are very attractive because of last year's multiple compression
coupled with good prospects for cash earnings growth. REIT dividends of over
7.0% mean spreads to stocks, utilities and Treasuries are at or above historical
highs and REIT stock prices imply asset values that are below private market
property valuations and replacement costs. Commercial construction spending
seems reasonable in most markets, diminishing the likelihood of overbuilding in
1999 and 2000. This sets the stage for equity investors to recognize the
attractive valuations along with the earnings and dividend growth opportunities
in the group.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO REIT Fund Class III Shares and the Morgan Stanley REIT Index
As of February 28, 1999
----------------------------------------
Average Annual Total Return
----------------------------------------
Inception
1yr 5yr 5/31/96
----------------------------------------
-24.0 N/A 4.1
----------------------------------------
[LINE GRAPH APPEARS HERE]
GMO REIT Fund
Date Class III Shares Morgan Stanley REIT Index
- ---- ---------------- -------------------------
1/31/96
3/31/96
5/31/96 9,950 10,000
6/30/96 10,089 10,187
9/30/96 10,786 10,849
12/31/96 12,744 13,015
3/31/97 12,876 13,044
6/30/97 13,483 13,687
9/30/97 15,037 15,283
12/31/97 15,210 15,433
3/31/98 14,939 15,322
6/30/98 14,113 14,649
9/30/98 11,817 13,099
12/31/98 11,505 12,824
2/28/99 11,154 12,275
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 50 bp on the purchase and 50 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Past performance
is not indicative of future performance. Information is unaudited.
<PAGE>
GMO Short-Term Income Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of GMO Short-Term Income
Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of GMO
Short-Term Income Fund at February 28, 1999 and the results of its
operations, the changes in its net assets and the financial highlights for
the periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities at February 28, 1999 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 16, 1999
<PAGE>
GMO Short-Term Income Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
DEBT OBLIGATIONS -- 88.9%
Asset Backed Securities -- 61.1%
$ 189,957 Americredit Automobile Receivables Trust Series 96-B Class
A, 6.50%, due 1/12/02 190,640
1,855,000 Brazos Student Loan Finance Corp Series 96-B Class A4,
Variable Rate, 3 mo. U.S. Treasury Bill + .50%, 5.06%, 1,846,884
due 12/01/02
13,000,000 Chevy Chase Master Credit Card Trust Series 96-A,
Variable Rate, 1 mo. LIBOR + .15%, 5.09%, due 2/15/05 12,995,938
136,618 Dilmun Capital Corp,
Variable Rate, 6 mo. LIBOR + .88%, 6.07%, due 11/15/03 136,618
1,000,000 Dreamworks Film Trust Series 1 Class A,
Variable Rate, 3 mo. LIBOR + .22%, 5.25%, due 10/15/06 995,000
9,500,000 Health Care Receivables Securitization Program 96-1 Class
A, 144A, 7.20%, due 7/01/00 9,523,750
5,000,000 MBNA Master Credit Card Trust Series 98-I Class A,
Variable Rate, 1 mo. LIBOR + .26%, 5.20%, due 10/15/03 5,017,500
2,000,000 Starvest Emerging Markets CBO-I Series 1A, Class A,
Variable Rate, 6 mo. LIBOR + .19%, 144A, 5.16%, due
7/30/11 1,923,125
-----------
32,629,455
-----------
Structured Notes -- 0.9%
500,000 Polaris Funding Company,
Variable Rate, 1 mo. LIBOR + .30%, 5.24%, due 1/07/05 491,172
-----------
U.S. Government -- 9.6%
5,000,000 U.S. Treasury Inflation Indexed Note, 3.71%, due 7/15/02 5,086,869
-----------
U.S. Government Agency -- 17.3%
326,667 Agency for International Development Floater (Support of
Botswana),
Variable Rate, 6 mo. U.S. Treasury Bill + .40%, 5.00%,
due 10/01/12 313,600
2,100,150 Agency for International Development Floater (Support of
C.A.B.E.I.),
Variable Rate, 6 mo. U.S. Treasury Bill + .40%, 5.00%,
due 10/01/12 2,016,144
2,167,327 Agency for International Development Floater (Support of
Honduras),
Variable Rate, 3 mo. U.S. Treasury Bill x 117%, 5.02%,
due 10/01/11 2,069,797
92,849 Agency for International Development Floater (Support of
Peru), Series B,
Variable Rate, 6 mo. U.S. Treasury Bill + .35%, 4.95%,
due 5/01/14 88,206
1,000,000 Federal Farm Credit Bank,
Variable Rate, CPI + 3.00%, 4.34%, due 2/14/02 968,000
3,758,673 Small Business Administration Pool #502320,
Variable Rate, Prime - 2.18%, 5.56%, due 8/25/18 3,779,346
-----------
9,235,093
-----------
TOTAL DEBT OBLIGATIONS (COST $47,745,485) 47,442,589
-----------
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Short-Term Income Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 10.0%
Commercial Paper -- 10.0%
$ 5,370,000 Baker Hughes, 4.87%, due 3/01/99 5,370,000
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $5,370,000) 5,370,000
-----------
TOTAL INVESTMENTS -- 98.9%
(Cost $53,115,485) 52,812,589
Other Assets and Liabilities (net) -- 1.1% 574,808
-----------
TOTAL NET ASSETS -- 100% $53,387,397
===========
</TABLE>
Notes to the Schedule of Investments:
Variable rates - The rates shown on variable rate notes are
the current interest rates at February 28, 1999, which are
subject to change based on the terms of the security.
144A - Securities exempt from registration under Rule 144A of
the Securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to qualified
institutional buyers.
2 See accompanying notes to the financial statements.
<PAGE>
GMO Short-Term Income Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Assets and Liabilities -- February 28, 1999
- ---------------------------------------------------------------------------------------------------
Assets:
<S> <C>
Investments, at value (cost $53,115,485) (Note 1) $52,812,589
Cash 9,539,964
Receivable for investments sold 156,992
Interest receivable 328,301
Receivable for expenses waived or borne by Manager (Note 2) 11,752
-----------
Total assets 62,849,598
-----------
Liabilities:
Payable for investments purchased 9,124,024
Payable for Fund shares repurchased 300,000
Payable to affiliate for (Note 2):
Management fee 10,272
Shareholder service fee 6,163
Accrued expenses 21,742
-----------
Total liabilities 9,462,201
-----------
Net assets $53,387,397
===========
Net assets consist of:
Paid-in capital $53,377,378
Accumulated undistributed net investment income 339,138
Accumulated net realized loss (26,223)
Net unrealized depreciation (302,896)
===========
$53,387,397
===========
Shares outstanding 5,543,812
===========
Net asset value per share $ 9.63
===========
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
GMO Short-Term Income Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Income:
<S> <C>
Interest $1,883,637
----------
Total income 1,883,637
----------
Expenses:
Management fee (Note 2) 82,642
Audit fees 27,272
Custodian and transfer agent fees 8,606
Registration fees 1,838
Legal fees 555
Trustees fees (Note 2) 224
Miscellaneous 2,527
Fees waived or borne by Manager (Note 2) (107,112)
----------
16,552
Shareholder service fee (Note 2) 49,567
----------
Net expenses 66,119
----------
Net investment income 1,817,518
----------
Realized and unrealized loss:
Net realized loss on investments (22,156)
----------
Change in net unrealized appreciation (depreciation) on investments (360,921)
----------
Net realized and unrealized loss (383,077)
----------
Net increase in net assets resulting from operations $1,434,441
==========
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO Short-Term Income Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, February 28,
1999 1998
--------------- ---------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 1,817,518 $ 2,685,861
Net realized gain (loss) (22,156) 13,827
Change in net unrealized appreciation (depreciation) (360,921) 110,882
------------ ------------
Net increase in net assets resulting from operations 1,434,441 2,810,570
------------ ------------
Distributions to shareholders from:
Net investment income (1,788,988) (2,703,434)
------------ ------------
(1,788,988) (2,703,434)
------------ ------------
Fund share transactions: (Note 5)
Proceeds from sale of shares 77,435,093 40,588,732
Net asset value of shares issued to shareholders in
payment of distributions declared 1,459,945 1,868,584
Cost of shares repurchased (62,529,846) (46,124,637)
------------ ------------
Net increase (decrease) in net assets resulting from
Fund share transactions 16,365,192 (3,667,321)
------------ ------------
Total increase (decrease) in net assets 16,010,645 (3,560,185)
Net assets:
Beginning of period 37,376,752 40,936,937
------------ ------------
End of period (including accumulated undistributed net
investment income of $339,138 and $310,608,
respectively) $53,387,397 $37,376,752
============ ============
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO Short-Term Income Fund
(A Series of GMO Trust)
Financial Highlights
(For a share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29,
--------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.81 $ 9.78 $ 9.77 $ 9.56 $9.79
------- ------- ------- ------- ------
Income from investment operations:
Net investment income 0.57 0.55 0.47 0.57 0.63
Net realized and unrealized gain (0.16) 0.03 0.06 0.20 (0.28)
(loss)
------- ------- ------- ------- ------
Total from investment operations 0.41 0.58 0.53 0.77 0.35
------- ------- ------- ------- ------
Less distributions to shareholders:
From net investment income (0.59) (0.55) (0.52) (0.56) (0.58)
------- ------- ------- ------- ------
Total distributions (0.59) (0.55) (0.52) (0.56) (0.58)
------- ------- ------- ------- ------
Net asset value, end of period $ 9.63 $ 9.81 $ 9.78 $ 9.77 $9.56
======= ======= ======= ======= ======
Total Return (a) 4.29% 6.10% 5.62% 8.32% 3.78%
Ratios/Supplemental Data:
Net assets, end of period (000's) $53,387 $37,377 $40,937 $11,066 $8,193
Net expenses to average daily net 0.20% 0.20% 0.20% 0.25% 0.25%
assets
Net investment income to average
daily net assets 5.50% 5.73% 5.88% 6.49% 5.02%
Portfolio turnover rate 76% 50% 287% 139% 335%
Fees and expenses voluntarily
waived or borne by the Manager
consisted of the following per
share amounts: $ 0.03 $ 0.03 $ 0.03 $ 0.03 $0.02
</TABLE>
(a) The total returns would have been lower had certain expenses not been waived
during the periods shown.
6 See accompanying notes to the financial statements.
<PAGE>
GMO Short-Term Income Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Short Term Income Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on June
24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares.
The Fund seeks current income to the extent consistent with the
preservation of capital and liquidity through investment in a portfolio of
high quality short-term instruments.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Other assets and
securities for which no quotations are readily available are valued at fair
value as determined in good faith by the Trustees or other persons acting
at their direction.
Some fixed income securities and options thereon are valued at the closing
bid for such securities as supplied by a primary pricing source chosen by
the Manager. The Manager evaluates such primary pricing sources on an
ongoing basis, and may change any pricing source at any time. The Manager
is kept informed of erratic or unusual movements (including unusual
inactivity) in the prices supplied for a security and has the power to
override any price supplied by a source (by taking a price supplied by
another source) because the Manager has other reasons to suspect that a
price supplied may not be reliable.
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from yield
data relating to investments or securities with similar characteristics.
Certain investments in securities held by the Fund were valued on the basis
of a price provided by a principal market maker. The prices provided by
principal market makers may differ from the value that would be realized if
the securities were sold and the differences could be material to the
financial statements. At February 28, 1999 the total value of these
securities represented 11% of net assets.
7
<PAGE>
GMO Short-Term Income Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Included in this total are U.S. Government backed securities and highly
rated collateralized debt obligations that represent 10% of net assets at
February 28, 1999.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults, the value of
the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Indexed securities
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to increase
or decrease its exposure to different underlying instruments and to gain
exposure to markets that may be difficult to invest in through conventional
securities. Indexed securities may be more volatile than their underlying
instruments, but any loss is limited to the amount of the original
investment.
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1999, the Fund had no securities on loan.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. Distributions in excess of tax basis
earnings and profits, if any, are reported in the Fund's financial
statements as a return of
8
<PAGE>
GMO Short-Term Income Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
capital. Differences in the recognition or classification of income for
financial statement and tax purposes which result in temporary
over-distributions for financial statement purposes are classified as
distributions in excess of net investment income or accumulated net
realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis and is adjusted for the accretion of
discounts and amortization of premiums. In determining the net gain or loss
on securities sold, the cost of securities is determined on the identified
cost basis. Interest income on U.S. Treasury inflation indexed securities
is accrued daily based upon the inflation adjusted principal. Additionally,
any increase in the principal or face amount of the securities adjusted for
inflation is recorded as interest income.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .25% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of the Fund at the annual rate of .15%.
GMO has agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding brokerage commissions, certain other transaction costs (including
transfer taxes), shareholder service fees and extraordinary expenses)
exceed .05% of average daily net assets.
Effective March 1, 1999, the management fee earned by GMO was reduced to
.05% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding brokerage
commissions, certain other transaction costs (including transfer taxes),
shareholder service fees and extraordinary expenses) exceed the management
fees.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999 was $224. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
9
<PAGE>
GMO Short-Term Income Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
3. Purchases and sales of securities
For the year ended February 28, 1999, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Sales
--------------------- ---------------------
<S> <C> <C>
U.S. Government securities $ 9,259,827 $ 7,803,479
Investments (non-U.S. Government securities) 31,536,174 15,461,358
</TABLE>
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
------------------------ ---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
$ 53,115,485 $ 5,340 $ 308,236 $ 302,896
</TABLE>
4. Principal shareholder
At February 28, 1999, 77.2% of the outstanding shares of the Fund were held
by one shareholder.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1999 February 28, 1998
------------------- -------------------
<S> <C> <C>
Shares sold 8,045,249 4,145,609
Shares issued to shareholders in
reinvestment of distributions 150,962 192,315
Shares repurchased (6,463,182) (4,714,947)
------------------- -------------------
Net increase (decrease) 1,733,029 (377,023)
Fund shares:
Beginning of period 3,810,783 4,187,806
------------------- -------------------
End of period 5,543,812 3,810,783
=================== ===================
</TABLE>
10
<PAGE>
GMO Short-Term Income Fund
(A Series of GMO Trust)
Federal Income Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
At February 28, 1999 the Fund had capital loss carryforwards available to
offset future capital gains, if any, of the following amounts:
Year of Expiration Amount
------------------ ------
2002 $ 4,067
2007 $ 22,157
11
<PAGE>
GMO Short-Term Income Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
- ------------------
Mr. Thomas F. Cooper and Mr. William L. Nemerever are primarily responsible for
the day-to-day management of the Fund's portfolio. Each of these individuals has
been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The GMO Short-Term Income Fund returned 4.3% for the fiscal year ended February
28, 1999, as compared with 4.9% for the Salomon Smith Barney 3-Month Treasury
Bill Index. Consistent with the Fund's investment objectives and policies, the
Fund was substantially invested in high-quality, fixed income instruments
throughout the period.
Short-term interest rates continued to decline in the U.S., helping Fund
performance. This was more than offset, however, by the widening in spreads on
the portfolio's less liquid, but highly rated asset-backed securities and higher
yielding government agency issues. Although spreads widened on these issues in
response to the panic-driven flight to liquidity which followed the collapse of
Long-Term Capital Management, GMO expects the portfolio to recoup these losses
either because spreads narrow or through the higher yields offered on these high
quality instruments.
At the fiscal year end approximately 61% of the Fund was invested in
highly-rated, floating rate, asset-backed securities, 22% in U.S. Treasury notes
and cash, and 17% in U.S. Government-backed bonds. The asset-backed issues
included issues backed by auto, truck, credit card and health care receivables.
The additional yield provided by these holdings plus the capital gains due to
its longer-than-benchmark maturity accounted for the Fund's performance.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Short-Term Income Fund Class III Shares and the
Salomon Smith Barney 3 Month T-Bill Index
As of February 28, 1999
--------------------------------
Average Annual Total Return
--------------------------------
Since
Inception
1 Year 5 Year 4/18/90
Class --------------------------------
III 4.3% 5.6% 6.1%
--------------------------------
[LINE GRAPH APPEARS HERE]
Salomon Smith Barney 3
Date GMO Short-Term Income Fund Month T-Bill Index
---- -------------------------- ----------------------
1/31/90
4/18/90 10,000 10,000
6/30/90 10,164 10,160
9/30/90 10,366 10,357
12/31/90 10,570 10,545
3/31/91 10,753 10,712
6/30/91 10,901 10,866
9/30/91 11,052 11,018
12/31/91 11,439 11,152
3/31/92 11,412 11,264
6/30/92 11,719 11,372
9/30/92 12,098 11,467
12/31/92 12,101 11,556
3/31/93 12,422 11,643
6/30/93 12,546 11,730
9/30/93 12,685 11,821
12/31/93 12,785 11,912
3/31/94 12,850 12,006
6/30/94 12,877 12,123
9/30/94 12,984 12,258
12/31/94 12,990 12,418
3/31/95 13,379 12,592
6/30/95 13,733 12,775
9/30/95 13,978 12,955
12/31/95 14,285 13,132
3/31/96 14,417 13,301
6/30/96 14,567 13,470
9/30/96 14,812 13,645
12/31/96 15,056 13,822
3/31/97 15,243 13,997
6/30/97 15,495 14,178
9/30/97 15,748 14,361
12/31/97 15,976 14,548
3/31/98 16,206 14,735
6/30/98 16,403 14,922
9/30/98 16,667 15,107
12/31/98 16,692 15,280
2/28/99 16,832 15,390
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period. The Fund operated as a
money market fund from April 18, 1990 to June 30, 1991. Subsequently, the Fund
became a short-term income fund. Past performance is not indicative of future
performance. Information is unaudited.
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Small Cap Growth Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of GMO
Small Cap Growth Fund at February 28, 1999 and the results of its
operations, the changes in its net assets and the financial highlights for
the periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities at February 28, 1999 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 12, 1999
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks -- 93.8%
Advertising -- 0.5%
6,400 Snyder Communications Inc * 219,200
6,500 TMP Worldwide Inc * 365,625
--------------
584,825
--------------
Aerospace -- 0.3%
10,100 BE Aerospace Inc * 148,975
7,100 Orbital Sciences Corp * 196,138
--------------
345,113
--------------
Automotive -- 0.9%
1,400 Hayes Lemmerz International Inc * 36,400
29,300 Meritor Automotive Inc 465,138
8,300 Monaco Coach Corp * 258,338
4,200 National R.V. Holdings Inc * 92,663
25,400 United Automotive Group Inc * 187,325
10,700 Wabash National Corp 131,744
--------------
1,171,608
--------------
Banking and Financial Services -- 4.6%
23,300 Americredit * 259,213
4,600 Bank United Corp 181,700
11,000 Carolina First Corp 226,875
5,940 Commerce Bancorp Inc 264,330
29,100 Credit Acceptance Corp * 174,600
14,700 Dime Community Bancshares 324,319
10,600 Doral Financial Corp 200,738
9,500 Downey Financial Corp 192,969
11,600 Eaton Vance Corp 228,375
6,800 Everen Capital Corp 146,200
11,900 Federated Investors Inc 228,331
18,700 First Bancorp Puerto Rico 468,669
7,100 First Federal Financial Corp * 120,256
2,300 Fund American Enterprises Holdings 302,450
8,083 Metris Companies Inc 347,569
10,100 National Bancorp of Alaska Inc 295,425
14,800 National Commerce Bancorp 307,100
8,450 Queens County Bancorp Inc 245,578
5,800 Raymond James Financial Corp 105,850
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Banking and Financial Services -- continued
5,000 Resource Bancshares Mortgage Group Inc 70,000
3,700 Roslyn Bancorp Inc 60,356
11,200 Ryland Group Inc 285,600
10,000 SEI Investments Co 989,999
--------------
6,026,502
--------------
Chemicals -- 0.4%
32,900 NL Industries Inc 318,719
17,700 Wellman Inc 164,831
--------------
483,550
--------------
Communications -- 0.8%
13,900 NTL Inc * 1,079,855
--------------
Computer and Office Equipment -- 4.1%
2,800 Apex PC Solutions Inc * 68,600
3,800 CDW Computer Centers Inc * 264,575
9,000 Comverse Technology Inc * 645,749
9,450 Concord EFS Inc * 301,809
36,500 Iomega Corp * 221,281
31,800 Micron Electronics Inc * 457,125
13,400 Neomagic Corp * 145,725
35,000 Rational Software Corp * 1,039,062
4,100 SCM Microsystems Inc * 340,300
14,800 SMART Modular Technologies Inc * 237,725
33,400 Sterling Software Inc * 851,699
4,700 Symbol Technologies Inc 249,100
15,200 Xircom Inc * 516,799
--------------
5,339,549
--------------
Construction -- 2.5%
11,100 Centex Corp 408,619
16,100 Granite Construction Inc 395,456
22,400 Horton (DR) Inc 357,000
8,700 Insituform Technologies Inc, Class A * 129,413
48,500 Johns Manville Corp 851,780
20,000 Kaufman & Broad Home Corp 450,000
2,400 NVR Inc * 103,200
16,300 Pulte Corp 392,219
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Construction -- continued
11,000 Standard Pacific Corp 136,125
--------------
3,223,812
--------------
Consumer Goods -- 2.9%
5,100 Chattem Inc * 153,638
18,500 CHS Electronics Inc * 129,500
10,900 Columbia Sportswear Co * 130,800
10,500 Fossil Inc * 330,750
8,900 Furniture Brands International Inc * 190,238
22,250 HA-LO Industries Inc * 237,797
7,650 Insight Enterprises Inc * 177,863
23,400 Knoll Inc * 447,525
19,100 La-Z-Boy Chair Co 355,738
27,800 O'Sullivan Industries Holdings Inc * 291,900
6,600 Osh Kosh B Gosh, Class A 125,400
7,900 Patterson Dental Company * 319,950
6,300 Pinnacle Systems Inc * 225,619
12,400 Quiksilver Inc * 420,825
3,800 Scholastic Corp * 187,150
3,300 Standard Register Co 95,494
--------------
3,820,187
--------------
Electronic Equipment -- 3.8%
15,200 Adaptec Inc * 303,050
13,800 Antec Corp * 384,675
6,800 Applied Micro Circuits Corp * 266,900
12,000 Atmel Corp * 206,250
21,800 Cypress Semiconductor Corp * 208,463
5,600 EchoStar Communications Corp * 274,400
14,400 Genlyte Group Inc * 260,551
11,100 GeoTel Communications Corp * 477,993
4,600 Hutchinson Technology Inc * 143,175
3,400 Inter-Tel Inc 59,925
1,600 Intervoice Inc * 17,400
19,200 Komag Inc * 134,400
9,600 Level One Communications Inc * 321,600
10,100 Maxwell Technologies Inc * 259,444
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Electronic Equipment -- continued
22,100 Picturetel Corp * 180,599
5,000 PMC-Sierra Inc * 354,375
6,900 Polycom Inc * 139,725
5,600 QLogic Corp * 325,500
8,300 Read Rite Corp * 70,550
5,950 SLI Inc * 133,131
22,700 Valence Technology Inc * 167,413
10,600 Xylan Corp * 280,900
--------------
4,970,419
--------------
Food and Beverage -- 2.8%
6,700 Agribrands International Inc * 207,700
7,200 Coors (Adolph) Co, Class B 428,850
5,700 Darden Restaurants Inc 125,400
17,700 Earthgrains Co 434,756
19,800 Pilgrims Pride Corp 377,438
16,400 Ralcorp Holdings Inc * 292,125
22,700 Ryan's Family Steak Houses Inc * 258,213
200 Seaboard Corp 73,000
20,070 Tootsie Roll Industries Inc 923,219
9,900 U.S. Foodservice * 459,731
5,400 Whitman Corp 102,600
--------------
3,683,032
--------------
Health Care -- 5.7%
5,700 Alternative Living Services Inc * 116,850
8,500 Bindley Western Industries Inc 223,656
10,100 Carematrix Corp * 222,200
10,600 Express Scripts Inc, Class A * 684,362
13,000 Haemonetics Corp * 216,938
11,000 Hanger Orthopedic Group Inc * 167,063
15,200 Idexx Laboratories Inc * 340,100
11,400 Lincare Holdings Inc * 406,125
20,400 Medimmune Inc * 1,121,999
9,500 Medquist Inc * 324,781
3,800 MiniMed Inc * 323,950
4,500 Ocular Sciences Inc * 110,250
6,400 Pediatrix Medical Group Inc * 197,600
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Health Care -- continued
3,700 Perclose Inc * 156,325
16,300 Renal Care Group Inc * 322,944
6,100 ResMed Inc * 189,100
15,900 Safeskin Corp * 369,675
4,800 Sunrise Assisted Living Inc * 185,400
22,500 Sunrise Technologies International Inc * 241,875
19,300 Theragenics Corp * 131,481
21,925 Total Renal Care Holdings * 194,584
17,700 Visx Inc * 1,092,974
--------------
7,340,232
--------------
Insurance -- 2.8%
3,500 Alleghany Corp * 633,499
15,400 Century Business Services Inc * 179,988
3,700 Commerce Group Inc 98,975
16,220 Fidelity National Financial Inc 324,400
38,100 First American Financial Corp 892,968
5,100 FPIC Insurance Group Inc * 221,213
8,500 Landamerica Financial Group 305,469
22,000 Oxford Health Plans Inc * 416,625
2,800 Reinsurance Group of America Inc 180,425
10,600 Trigon Healthcare Inc * 371,663
--------------
3,625,225
--------------
Machinery -- 2.8%
19,100 Astec Industries * 525,249
12,350 Dycom Industries Inc * 490,140
3,500 Federal Mogul Corp 172,156
6,000 Gleason Corp 98,625
9,050 Graco Inc 196,838
28,800 JLG Industries Inc 405,000
31,100 Mohawk Industries Inc * 1,010,749
5,100 SPS Technologies Inc * 210,375
800 Tecumseh Products Co 39,400
7,900 Terex Corp * 202,438
9,900 Tractor Supply Company * 273,488
--------------
3,624,458
--------------
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Manufacturing -- 3.1%
8,600 Ball Corp 360,125
15,800 Blyth Industries Inc * 426,600
18,700 Champion Enterprises Inc * 368,156
13,200 General Cable Corp 248,325
11,700 Gentex Corp * 253,744
1,725 Manitowoc Co Inc 63,609
9,300 Mine Safety Appliances 602,174
7,500 NCI Building Systems Inc * 172,500
24,600 Owens Corning 782,587
5,000 Sequa Corp, Class A * 235,313
8,800 Tower Automotive Inc * 163,900
7,100 Tredegar Industries 181,494
11,000 Zapata Corp * 105,875
--------------
3,964,402
--------------
Metals and Mining -- 0.8%
10,700 Reliance Steel and Aluminum Co 273,519
18,300 Stillwater Mining Co * 419,756
539,800 Sunshine Mining & Refining Co * 337,375
--------------
1,030,650
--------------
Oil and Gas -- 0.3%
13,000 AGL Resources Inc 247,813
5,300 Cal Dive International Inc * 76,188
13,300 National-Oilwell Inc * 118,038
--------------
442,039
--------------
Paper and Allied Products -- 0.9%
10,900 Mail-Well Inc * 153,963
7,600 Media General Inc, Class A 380,000
18,800 Playtex Products Inc * 265,550
16,900 United Stationers Inc * 309,481
--------------
1,108,994
--------------
Pharmaceuticals -- 4.2%
8,300 Agouron Pharmaceuticals Inc * 473,618
9,400 Alpharma Inc 356,025
5,100 Amerisource Health Corp * 380,588
3,900 Barr Laboratories Inc * 144,300
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments (continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Pharmaceuticals -- continued
6,500 Biomatrix Inc * 451,750
13,900 Fuisz Technologies Ltd * 100,775
21,900 Gensia Sicor Inc * 101,288
3,100 IDEC Pharmaceuticals Corp * 134,269
24,600 Immune Response Corp * 206,025
47,900 Ivax Corp * 706,524
18,300 Liposome Company Inc * 250,481
18,350 Medicis Pharmaceutical Corp, Class A * 692,712
21,100 NBTY Inc * 126,600
10,500 Nexstar Pharmaceuticals Inc * 145,031
9,200 Protein Design Labs Inc * 151,800
20,900 Roberts Pharmaceutical Corp * 472,863
18,200 SEQUUS Pharmaceuticals Inc * 371,963
6,100 Serologicals Corp * 109,038
12,900 Twinlab Corp * 110,054
--------------
5,485,704
--------------
Primary Materials -- 0.5%
7,300 A. Schulman Inc 120,450
9,200 Centex Construction Products Inc 328,325
5,950 Elcor Corp 187,425
--------------
636,200
--------------
Primary Processing -- 0.3%
31,700 Armco Inc * 158,500
14,400 RTI International Metals Inc * 153,000
2,750 Superior Telecom Inc 77,859
--------------
389,359
--------------
Printing and Publishing -- 2.0%
6,200 Big Flower Holdings Inc * 149,575
7,400 Consolidated Graphics Inc * 449,550
10,400 Harte Hanks Communications 269,100
12,100 Hollinger International Inc 149,738
5,500 Houghton Mifflin Co 236,500
11,800 John Wiley and Sons Inc, Class A 525,837
10,200 McClatchy Newspapers Inc 326,400
12,800 Merrill Corp 214,400
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments (continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Sjares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Printing and Publishing -- continued
12,300 World Color Press Inc * 305,194
--------------
2,626,294
--------------
Real Estate -- 0.7%
13,500 Brandywine Realty Trust 221,906
22,700 Lennar Corp 526,355
7,900 Trammell Crow Co * 122,450
--------------
870,711
--------------
Retail Trade -- 8.6%
6,625 99 Cents Only Stores * 313,445
8,100 Abercrombie & Fitch Co * 615,599
7,400 Action Performance Cos Inc * 265,475
14,050 American Eagle Outfitters * 966,815
17,500 AnnTaylor Stores Corp * 661,718
5,200 BJs Wholesale Club Inc * 226,525
22,900 Brinker International Inc * 662,668
6,250 Buckle Inc * 152,734
8,580 Burlington Coat Factory Warehouse 110,468
36,200 Charming Shoppes Inc * 122,175
8,300 Children's Place Retail Stores Inc * 238,625
5,000 CKE Restaurants Inc 132,813
5,125 Dollar Tree Stores Inc * 205,000
11,600 Fingerhut Cos Inc * 284,925
6,400 Foodmaker Inc * 147,200
231,400 Hanover Direct Inc * 723,124
19,400 Just For Feet Inc * 198,245
17,300 Linens N Things Inc * 622,799
10,600 Longs Drug Stores Corp 383,588
7,200 Michaels Stores Inc * 123,300
8,700 Micro Warehouse Inc * 171,825
11,400 Microage Inc * 96,544
22,000 Musicland Stores Corp * 259,875
6,600 O'Reilly Automotive Inc * 289,988
10,200 Outback Steakhouse Inc * 447,525
10,800 Pacific Sunwear of California * 307,800
43,100 Petsmart Inc * 339,413
6,600 Ruby Tuesday Inc 122,925
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Retail Trade -- continued
14,400 Talbots Inc 348,300
14,200 Transportation World Entertainment Corp * 196,138
94,000 Valhi Inc 1,080,999
7,500 Williams-Sonoma Inc * 256,406
3,500 Zale Corp * 115,938
--------------
11,190,917
--------------
Services -- 8.8%
5,200 Abacus Direct Corp * 352,300
30,200 Acnielson Corp * 785,199
10,900 Advo Inc * 218,000
15,300 Amerco * 340,425
9,200 Avis Rental Car Inc * 211,025
8,300 Bally Total Fitness Holdings Corp * 186,750
4,300 Borg-Warner Security Corp * 78,206
25,100 Buffets Inc * 252,569
8,000 Building One Services Corp * 132,000
3,750 Central Parking Corp 127,969
9,300 Devry Inc * 233,663
34,700 Electro Rental Corp * 351,338
29,900 Extended Stay America Inc * 261,625
4,100 G And K Services Inc 204,488
28,900 Handleman Co * 373,894
10,000 Hollywood Entertainment Corp * 274,375
14,600 Icos Corp * 357,700
7,700 Iron Mountain Inc * 235,813
9,500 Labor Ready Inc * 267,781
6,500 Meta Group Inc * 145,438
11,900 Metamor Worldwide Inc * 224,613
23,800 Metromedia International Group Inc * 138,338
9,500 Metzler Group Inc * 403,750
9,100 Midas Inc 287,788
5,300 NCO Group Inc * 165,625
10,245 Nova Corp Georgia * 256,125
18,000 Personnel Group of America Inc * 237,375
8,500 Profit Recovery Group International Inc * 280,500
24,700 Protection One Inc * 200,688
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Services -- continued
5,300 Rental Service Corp * 117,925
6,600 Rental Way Inc * 149,325
7,900 Res-Care Inc * 187,625
10,700 Romac International Inc * 128,400
13,200 Safety-Kleen Corp * 183,975
4,500 SFX Entertainment Inc * 275,063
3,700 Speedway Motorsports Inc * 132,044
10,000 Staffmark Inc * 133,750
9,000 Sylvan Learning Systems Inc * 299,250
17,400 United International Holdings Inc * 800,399
9,300 United Rentals Inc * 299,344
9,200 United Video Satellite Group Inc * 265,075
7,900 Veterinary Centers of America Inc * 118,500
20,100 Whittman-Hart Inc * 629,380
2,900 XTRA Corp 115,638
--------------
11,421,053
--------------
Technology -- 18.1%
38,100 Acclaim Entertainment Inc * 297,656
2,000 Activision Inc * 21,750
22,000 Acxiom Corp * 526,624
3,700 Advantage Learning Systems Inc * 278,425
11,800 Affiliated Computer Services Inc * 545,749
17,000 American Management Systems Inc * 567,374
9,800 Analysts International Corp 139,650
6,700 Aspect Development Inc * 204,350
6,700 Avanti Corporation * 115,575
9,000 Beckman Coulter Inc 434,813
7,300 Bisys Group Inc * 389,638
12,000 Boole and Babbage Inc * 322,500
6,500 Checkfree Holdings Corp * 222,625
14,900 Ciber Inc * 374,363
4,600 Citrix Systems Inc * 354,775
10,600 Clarify Inc * 287,525
10,100 CMG Information Services Inc * 1,238,512
2,400 CNET Inc * 275,100
11,300 Complete Business Solutions Inc * 319,225
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments (continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Technology -- continued
11,200 Computer Horizons Corp * 167,300
8,300 Computer Task Group Inc 168,075
15,100 CSG Systems International Inc * 1,075,874
12,000 Dendrite International Inc * 337,500
4,254 DST Systems Inc * 230,780
9,500 EG & G Inc 251,750
16,200 Electronics For Imaging Inc * 565,987
6,700 Excite Inc * 686,749
15,100 FileNet Corp * 121,273
16,400 Fore Systems Inc * 237,800
12,400 HNC Software Inc * 333,250
8,600 Hyperion Solutions Corp * 122,013
5,800 IMR Global Corp * 105,125
84,500 Informix Corp * 739,374
4,300 Inso Corporation * 29,966
4,300 International Network Services * 219,838
7,500 International Telecomm Data Systems Inc * 103,125
10,300 Jack Henry and Associates Inc 370,800
5,400 Lason Inc * 292,613
12,000 Learning Company Inc * 348,750
13,700 Legato Systems Inc * 674,724
27,300 Macromedia Inc * 834,355
17,400 Mastech Corp * 433,913
6,300 Mercury Interactive Corp * 408,319
10,500 Metro Informaton Services Inc * 233,625
9,600 Mettler-Toledo International Inc * 245,400
11,200 National Computer System Inc 358,751
2,100 Network Solutions Inc * 381,150
6,200 New Era of Networks Inc * 386,725
8,600 Peregrine Systems Inc * 220,375
4,700 Pixar Inc * 193,288
15,000 Platinum Technology Inc * 198,750
12,000 Policy Management System Corp * 438,750
6,000 Probusiness Services Inc * 199,500
10,400 Progress Software Corp * 319,800
3,300 Realnetworks Inc * 231,413
</TABLE>
See accompanying notes to the financial statements. 11
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments (continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Technology -- continued
6,500 Sapient Corp * 434,688
11,300 Siebel Systems Inc * 497,199
5,350 SPR Inc * 80,250
15,300 Sybase Inc * 124,313
10,600 Sykes Enterprises Inc * 302,100
5,900 Synopsys Inc * 272,875
7,800 Transaction Systems Archit, Class A * 306,638
6,300 Uniphase Corp * 555,187
13,600 USWeb Corp * 458,150
10,300 Veritas Software Corp * 731,299
6,800 Waters Corp * 632,824
--------------
23,578,532
--------------
Telecommunications -- 4.8%
14,300 Adelphia Communications Corp, Class A * 806,162
21,000 Brightpoint Inc * 312,375
24,400 Centennial Cellular Corp, Class A * 841,799
20,600 Century Communications Corp * 714,562
26,200 Commnet Cellular Inc * 402,825
6,700 Commonwealth Telephone Enterprises Inc * 216,913
17,400 Comsat Corp 508,949
13,600 Jones Intercable Inc * 555,049
9,200 Jones Intercable Inc, Class A * 372,600
30,100 Paging Network Inc * 120,400
16,300 Skytel Communications Inc * 293,400
12,900 Transaction Network Services Inc * 253,163
20,200 Vanguard Cellular Systems Inc * 563,074
9,500 Winstar Communications Inc * 299,250
4,800 World Access Inc * 37,800
--------------
6,298,321
--------------
Textiles -- 1.0%
7,200 Pillowtex Corp 174,600
32,800 Shaw Industries Inc 719,549
15,300 Westpoint Stevens Inc * 390,150
--------------
1,284,299
--------------
</TABLE>
12 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares/
Par Value ($) Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Transportation -- 3.3%
4,800 Alaska Airline Group Inc * 243,300
7,800 American West Holdings Corp, Class B * 132,600
8,550 Atlas Air Inc * 257,569
3,800 Avondale Industries Inc * 117,325
7,100 Coach USA Inc * 166,850
25,900 Comair Holdings Inc 974,487
14,100 Fritz Companies Inc * 104,869
2,400 Greyhound Lines Inc * 15,300
6,400 Hunt (JB) Transportation Services Inc 150,400
4,900 Landstar System Inc * 184,822
3,500 M.S. Carriers Inc * 94,500
13,600 Mesaba Holdings Inc * 207,400
4,200 Midwest Express Holdings Inc * 112,875
12,900 MotivePower Industries Inc * 355,556
6,500 Navistar International Corp * 279,500
13,300 Skywest Inc 418,119
3,900 Travel Services Inc * 59,475
7,225 Varlen Corp 151,725
12,900 Westinghouse Air Brake Co 255,581
--------------
4,282,253
--------------
Utilities -- 1.5%
32,200 El Paso Electric Co * 231,438
2,700 Empire District Electric Co 62,606
14,000 Illinova Corp 332,500
13,200 MDU Resources Group Inc 310,200
47,200 Northeast Utilities * 705,049
2,400 Orange and Rockland Utilities Inc 134,700
5,000 Southwest Natural Gas Corp 143,750
2,400 TNP Enterprises Inc 70,200
--------------
1,990,443
--------------
Total Common Stocks (Cost $117,066,024) 121,918,538
--------------
Short-Term Investments -- 16.1%
Cash Equivalents -- 9.9%
$1,889,274 BankBoston Eurodollar Time Deposit, 5.005% due 4/30/99(a) 1,889,274
3,900,000 Merrimac Cash Fund Premium Class(a) 3,900,000
</TABLE>
See accompanying notes to the financial statements. 13
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value($) Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Equivalents -- continued
$7,000,000 Prudential Securities Group Inc, Master Note, 5.075% due 7,000,000
6/14/99(a)
--------------
12,789,274
--------------
U.S. Government -- 2.0%
$ 100,000 U.S. Treasury Bill, 4.24%, due 3/18/99(b) 99,796
$2,535,000 U.S. Treasury Bill, 4.53%, due 4/29/99(b) 2,515,848
--------------
2,615,644
--------------
Repurchase Agreements -- 4.2%
$5,486,164 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/26/99, due 3/1/99, with a maturity value of $5,488,002
and an effective yield of 4.02%, collateralized by a U.S.
Treasury Obligation with a rate of 7.00%, maturity date of
7/15/06 and market value, including accrued interest, of 5,486,164
$5,595,887. --------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $20,891,527) 20,891,082
--------------
Total Investments -- 109.9%
(COST $137,957,551) 142,809,620
Other Assets and Liabilities (net) -- (9.9)% (12,826,249)
--------------
TOTAL NET ASSETS -- 100% $ 129,983,371
==============
Notes to the Schedule of Investments:
* Non-income producing security.
(a) Represents investments of security lending collateral (Note 1).
(b) All or a portion of this security has been segregated to cover margin
requirements on open financial futures contracts.
</TABLE>
14 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Assets and Liabilities -- February 28, 1999
- ------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (cost $137,957,551) (Note 1) $142,809,620
Dividends and interest receivable 45,839
Receivable for variation margin on open futures contracts (Notes 1 and 6) 1,675
Receivable for expenses waived or borne by Manager (Note 2) 32,324
------------
Total assets 142,889,458
------------
Liabilities:
Payable upon return of securities loaned (Note 1) 12,789,274
Payable to affiliate for (Note 2):
Management fee 55,199
Shareholder service fee 14,926
Accrued expenses 46,688
------------
Total liabilities 12,906,087
------------
Net assets $129,983,371
============
Net assets consist of:
Paid-in capital $126,369,671
Accumulated undistributed net investment income 109,236
Accumulated undistributed net realized loss (1,332,745)
Net unrealized appreciation 4,837,209
============
$129,983,371
============
Net assets attributable to:
Class III shares $129,983,371
============
Shares outstanding:
Class III 11,941,849
============
Net asset value per share:
Class III $ 10.88
============
</TABLE>
See accompanying notes to the financial statements. 15
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Operations -- Year Ended February 28, 1999
- -------------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Dividends $ 1,304,254
Interest (including securities lending income of $271,737) 806,803
------------
Total income 2,111,057
------------
Expenses:
Management fee (Note 2) 1,527,491
Custodian and transfer agent fees 99,746
Registration fees 34,393
Audit fees 32,206
Legal fees 6,460
Trustees fees (Note 2) 3,012
Miscellaneous 4,728
Fees waived or borne by Manager (Note 2) (699,892)
------------
1,008,144
Shareholder service fee (Note 2)
Class III 458,247
------------
Net expenses 1,466,391
------------
Net investment income 644,666
------------
Realized and unrealized gain (loss):
Net realized gain on:
Investments 10,066,375
Closed futures contracts 344,830
------------
Net realized gain 10,411,205
------------
Change in net unrealized appreciation (depreciation) on:
Investments (29,512,536)
Open futures contracts (20,230)
------------
Net unrealized loss (29,532,766)
------------
Net realized and unrealized loss (19,121,561)
------------
Net decrease in net assets resulting from operations $(18,476,895)
============
</TABLE>
16 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Year Ended February 28,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 644,666 $ 1,444,235
Net realized gain 10,411,205 39,817,641
Change in net unrealized appreciation (depreciation) (29,532,766) 37,771,985
------------ ------------
Net increase (decrease) in net assets resulting from
operations (18,476,895) 79,033,861
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (535,430) (1,617,385)
------------ ------------
Total distributions from net investment income (535,430) (1,617,385)
------------ ------------
In excess of net investment income
Class III -- (159,172)
------------ ------------
Total distributions in excess of net investment
income -- (159,172)
------------ ------------
Net realized gains
Class III (10,987,255) (29,775,910)
------------ ------------
Total distributions from net realized gains (10,987,255) (29,775,910)
------------ ------------
(11,522,685) (31,552,467)
------------ ------------
Net share transactions: (Note 5)
Class III (239,630,042) 192,233,498
------------ ------------
Increase (decrease) in net assets resulting from net
share transactions (239,630,042) 192,233,498
------------ ------------
Total increase (decrease) in net assets (269,629,622) 239,714,892
Net assets:
Beginning of period 399,612,993 159,898,101
------------ ------------
End of period (including accumulated undistributed net
investment income of $109,236 and $0, respectively) $129,983,371 $399,612,993
============= ============
</TABLE>
See accompanying notes to the financial statements. 19
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Year Ended February 28,
-------------------------------------------------
1999 1998 1997 *
-------- ------- -------
<S> <C> <C> <C>
Net asset value, beginning of period $ 12.28 $ 9.82 $ 10.00
-------- ------- -------
Income from investment operations:
Net investment income 0.03 0.05 0.01
Net realized and unrealized gain (loss) (0.98) 3.43 (0.19)
-------- ------- --------
Total from investment operations (0.95) 3.48 (0.18)
-------- ------- -------
Less distributions to shareholders:
From net investment income (0.02) (0.06) --
In excess of net investment income -- (0.01) --
From net realized gains (0.43) (0.95) --
-------- ------- -------
Total distributions (0.45) (1.02) --
-------- ------- -------
Net asset value, end of period $ 10.88 $ 12.28 $ 9.82
======== ======= =======
Total Return (a) (8.20)% 36.66% (1.80)%
Ratios/Supplemental Data:
Net assets, end of period (000's) $129,983 $399,613 $159,898
Net expenses to average daily net
assets 0.48% 0.48% 0.48%**
Net investment income to average
daily net assets 0.21% 0.47% 0.70%**
Portfolio turnover rate 113% 132% 13%
Fees and expenses voluntarily
waived or borne by the Manager
consisted of the following per
share amounts: $ 0.03 $ 0.03 $ 0.01
</TABLE>
(a)Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during the
periods shown.
* Period from December 31, 1996 (commencement of operations) to February 28,
1997.
** Annualized.
18 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Small Cap Growth Fund (the "Fund"), is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on June
24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series into classes.
The Fund seeks long-term growth of capital through investment primarily in
companies whose equity capitalization ranks in the lower two-thirds of the
1,800 companies with the largest equity capitalization whose securities are
listed on a United States national securities exchange.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price. Short-
term investments with a remaining maturity of sixty days or less are valued
at amortized cost which approximates market value. Other assets and
securities for which no quotations are readily available are valued at fair
value as determined in good faith by the Trustees.
Futures contracts
The Fund may purchase and sell futures contracts on the domestic stock
indices. Stock index futures contracts represent commitments for future
delivery of cash based upon the level of a specified index of equity
securities at a specified price at a given date. The Fund may use futures
contracts to manage its exposure to the stock markets. Buying futures tends
to increase the Fund's exposure to the underlying instrument. Selling
futures tends to decrease the Fund's exposure to the underlying instrument
or hedge other Fund instruments. Upon entering into a futures contract, the
Fund is required to deposit with its custodian, in a segregated account in
the name of the futures broker, an amount of cash or U.S. government
obligations in accordance with the initial margin requirements of the
broker or exchange. Futures contracts are marked to market daily and an
appropriate payable or receivable for the change in value ("variation
margin") is recorded by the Fund. The payable or receivable is liquidated
on the following business day. Gains or losses are recognized but not
considered realized until the contracts expire or are closed. Futures
contracts involve, to varying degrees, risk of loss in excess of the
variation margin disclosed in the Statement of Assets and Liabilities.
Losses may arise from changes in the value of the underlying instrument, if
there is an illiquid secondary market for the contracts, or if
counterparties do not perform under the contract terms. Futures contracts
are valued at the settlement
19
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
price established each day by the board of trade or exchange on which they
are traded. See Note 6 for all open futures contracts as of February 28,
1999.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Security lending
The Fund may lend its securities to qualified brokers. The loans are
collateralized at all times with cash or securities with a market value at
least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1999, the Fund loaned securities having a
market value of $12,295,118, collateralized by cash in the amount of
$12,789,274, which was invested in short-term instruments.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary. Taxes on foreign dividend income are withheld in accordance with
the applicable country's tax treaty with the United States.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for redemptions in-kind. Gains resulting from such
in-kind transactions amounted to $16,106,340.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This
20
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
reclassification has no impact on net investment income, realized gain/loss
or net asset value of the Fund and is primarily attributable to certain
differences in the computation of distributable income and capital gains
under federal tax rules versus generally accepted accounting principles.
The calculation of net investment income per share in the financial
highlights table excludes these adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
------------------------ ------------------------ ------------------------
<S> <C> <C>
-- $(10,657,669) $10,657,669
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis and is adjusted for the accretion of discounts. In
determining the net gain or loss on securities sold, the cost of securities
is determined on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds.
Purchases and redemptions of Fund shares
The premium on cash purchases and fee on redemptions of Fund shares is .50%
of the amount invested or redeemed. All purchase premiums and redemption
fees are paid to and recorded by the Fund as paid-in capital. Purchase
premiums are included as part of "shares sold" and redemption fees are
included as part of "shares repurchased", respectively, as summarized in
Note 5. For the year ended February 28, 1999, the Fund received $198,998 in
purchase premiums and $1,004,903 in redemption fees. There is no premium
for reinvested distributions or in-kind transactions.
21
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .50% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding brokerage commissions, certain other transaction costs (including
transfer taxes), shareholder service fees and extraordinary expenses)
exceed .33% of average daily net assets.
Effective March 1, 1999, GMO's contractual management fee was reduced to
.33% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding brokerage
commissions, certain other transaction costs (including transfer taxes),
shareholder service fees and extraordinary expenses) exceed the management
fee.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999 was $3,012. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1999, aggregated
$335,130,199 and $581,250,045, respectively.
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
-------------------- ------------------- ------------------ ---------------------
<S> <C> <C> <C>
$140,098,385 $18,859,326 $16,148,091 $2,711,235
</TABLE>
4. Principal shareholder
At February 28, 1999, 19.6% of the outstanding shares of the Fund were held
by one shareholder.
22
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including the purchase premiums and redemption fees received by the
Fund, were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
Class III: February 28, 1999 February 28, 1998
----------------------------- -----------------------------
Shares Amount Shares Amount
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Shares sold 3,439,182 $ 39,799,712 17,993,943 $ 216,188,799
Shares issued to shareholders
in reinvestment of distributions 907,024 11,146,358 2,786,345 30,554,838
Shares repurchased (24,951,990) (290,576,112) (4,511,400) (54,510,139)
============= ============== ============= ==============
Net increase (decrease) (20,605,784) $(239,630,042) 16,268,888 $ 192,233,498
============= ============== ============= ==============
</TABLE>
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1999 is as
follows:
Long futures contracts
<TABLE>
<CAPTION>
Net Unrealized
Number of Appreciation/
Contracts Type Expiration Date Contract Value (Depreciation)
--------------- ------------------ ------------------ --------------------- -------------------
<S> <C> <C> <C> <C>
2 S & P Midcap 400 March 1999 $356,800 $ (41,422)
5 S & P 500 March 1999 1,544,375 (15,651)
15 Russell 2000 March 1999 2,950,125 42,213
-------------------
$ (14,860)
===================
</TABLE>
At February 28, 1999 the Fund had sufficient cash and/or securities to
cover any commitments or margin on open futures contracts.
23
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28,1999, all of the Fund's distributions
are from investment company taxable income, except that the Fund has
designated 5.96% of distributions as net capital gain dividends.
24
<PAGE>
GMO Small Cap Growth Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
- ------------------
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Robert Soucy are
primarily responsible for the day-to-day management of the Fund's portfolio.
Mssrs. Grantham and Darnell have each been portfolio managers at Grantham, Mayo,
Van Otterloo & Co. LLC for more than fifteen years; Mr. Soucy for more than ten
years.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The Class III shares of the GMO Small Cap Growth Fund returned -8.2% for the
fiscal year ended February 28, 1999 as compared to 19.7% for the S&P 500. The
Russell 2500 Growth Index returned -9.0% for the same period. Consistent with
the Fund's investment objectives and policies, the Fund was primarily invested
in common stocks throughout the period.
In the fiscal year that just ended, small-capitalization stocks struggled to
keep pace with the larger capitalization stocks that posted record valuations
with lofty multiples. The period was one in which sound investment principles
and small-cap stocks took a backseat to a fixation on large, well-known names.
The performance of the GMO Small Cap Growth Fund, while down for the fiscal year
ended February 28, 1999, was in line with that of the Russell 2500 Growth Index.
Strong performing sectors in the Russell 2500 Growth Index included consumer
discretionary, which benefited from the strong economy and low unemployment, as
well as financial services and utilities which performed well in an environment
of declining interest rates. Both technology and healthcare had extremely strong
performance during this period as well. On the other hand, the integrated oils
and material processing sectors posted negative returns due in part to declining
commodity prices.
The GMO Small Cap Growth Fund selects stocks based on three strategies: the
trend in consensus analyst estimates, price momentum and earnings surprises.
Using these strategies, we favor the stocks of companies that have had upward
revisions in earnings expectations, strong price momentum, and positive earnings
surprises. These strategies allowed us to realize positive returns in our
portfolio from holdings in utilities and auto/transportation during this
difficult year for small stocks.
Our sector allocation had a minimal impact on performance during this period.
Our underweight position in the strong technology sector partially offset gains
in financial services and utilities.
Outlook
- -------
Since 1983, small-capitalization stocks have lagged their larger counterparts.
At the current time, they look increasingly attractive relative to large
capitalization stocks on a number of measures -- price-to-book, price-to-cash
flow, price-to-sales and price-to-fair value. Today, small-cap stocks are at
their cheapest relative price since the late 1970's when institutions began to
treat small-cap stocks as a separate asset class. We believe that this bodes
well for the relative returns of small-cap stocks over the next few years. The
Small Cap Growth Fund is a broadly diversified portfolio of stocks that is
likely to perform well when small stocks rebound.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Small Cap Growth Fund Class III Shares and the Russell 2500 Growth Index
As of February 28, 1999
-----------------------------------
Average Annual Total Return
-----------------------------------
1 Year 5 Year Since Inception
12/31/96
Class -----------------------------------
III -9.1% N/A 9.6%
-----------------------------------
[LINE GRAPH APPEARS HERE]
GMO Small Cap Growth Fund
Date Class III Shares Russell 2500 Growth Index
---- ------------------------- -------------------------
1/31/96
3/31/96
6/30/96
9/30/96
12/31/96 9,950 10,000
3/31/97 9,502 9,200
6/30/97 11,207 10,696
9/30/97 13,388 12,475
12/31/97 12,407 11,477
3/31/98 13,983 12,755
6/30/98 13,756 12,133
9/30/98 10,718 9,438
12/31/98 13,125 11,831
2/28/99 12,196 11,186
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 50 bp on the purchase and 50 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Past performance
is not indicative of future performance. Information is unaudited.
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Small Cap Value Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Small Cap Value Fund at
February 28, 1999 and the results of its operations, the changes in its net
assets and the financial highlights for the periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 12, 1999
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
COMMON STOCKS -- 97.7%
Advertising -- 0.1%
1,100 Grey Advertising Inc 407,000
-----------
Aerospace -- 0.6%
24,800 Cordant Technologies Inc 965,649
12,800 Curtiss Wright Corp 480,800
16,500 Gencorp Inc 331,031
25,700 Kaman Corp, Class A 346,950
-----------
2,124,430
-----------
Automotive -- 1.6%
14,700 Bandag Inc 465,806
21,200 Borg Warner Automotive Inc 923,524
55,100 Cooper Tire & Rubber Co 1,088,224
30,500 Meritor Automotive Inc 484,188
26,200 Modine Manufacturing Co 733,600
19,100 Monaco Coach Corp* 594,488
20,950 Smith (AO) Corp, Class B 446,497
20,600 Superior Industries International Inc 509,850
25,900 Wabash National Corp 318,894
-----------
5,565,071
-----------
Banking and Financial Services -- 5.4%
59,600 Amresco Inc* 564,340
9,800 Astoria Financial Corp 444,063
25,200 Baldwin and Lyons Inc, Class B 527,625
19,500 Bancwest Corp 764,156
25,632 BOK Financial Corporation* 589,536
11,500 Citizens Banking Corp Michigan 379,500
49,901 Comdisco Inc 598,824
15,850 Compass Bankshares Inc 580,506
10,000 Corus Bancshares Inc 328,750
13,200 Dain Rauscher Corp 417,450
17,416 Downey Financial Corp 353,763
20,300 Eaton Vance Corp 399,656
13,000 Financial Security Assurance Holdings Ltd 686,563
18,700 First Bancorp Puerto Rico 468,669
6,900 First Citizens Bancshares, Class A 551,138
19,300 First Federal Financial Corp* 326,894
41,600 Imperial Credit Industries Inc* 358,800
11,400 Jefferies Group Inc 449,588
6,100 JSB Financial 340,838
See accompanying notes to the financial statements. 1
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Banking and Financial Services -- continued
18,800 Leucadia National Corp* 560,475
33,800 Liberty Financial Cos 758,388
1,200 M & T Bank Corp 570,900
10,373 Metris Companies Inc 446,039
29,125 Morgan Keegan Inc 480,563
18,000 National Bancorp of Alaska Inc 526,500
53,100 Pacific Century Financial Corp 1,164,880
18,500 PMI Group Inc 797,813
39,775 Raymond James Financial Corp 725,894
41,700 Resource America Inc 450,881
59,596 Sovereign Bancorp Inc 730,051
11,600 Student Loan Group 521,275
10,210 UMB Financial Corp 447,964
64,900 United Cos Financial Corp* 28,394
12,400 Value Line Inc 472,750
35,564 Washington Federal Inc 800,192
-----------
18,613,618
-----------
Chemicals -- 2.0%
17,200 Albemarle Corp 406,350
9,800 Arch Chemicals Inc* 186,200
23,900 Cytec Industries Inc* 640,819
30,900 Engelhard Corp 550,406
17,050 Ferro Corp 364,444
23,000 Geon Co 524,688
40,300 Hanna (MA) Co 443,300
60,900 Kaiser Aluminum Corp* 304,500
26,000 Lubrizol Corp 495,625
37,600 Millenium Chemicals Inc 679,150
30,100 Mississippi Chemical Corp 308,525
16,100 Nalco Chemical Co 452,813
19,600 Olin Corp 248,675
23,300 Stepan Co 550,463
37,800 W.R. Grace & Co* 507,938
40,100 Wellman Inc 373,431
-----------
7,037,327
-----------
Computer and Office Equipment -- 3.0%
18,600 Apple Computer Inc* 647,513
21,700 BancTec Inc* 305,156
6,500 CDW Computer Centers Inc* 452,563
9,900 Everex Systems Inc(a) --
2 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Computer and Office Equipment -- continued
61,300 Exabyte Corp* 306,500
11,700 Lexmark International Group Inc* 1,207,293
29,300 Micron Electronics Inc* 421,188
23,100 Neomagic Corp* 251,213
25,800 Quantum Corp* 424,088
57,400 Reynolds & Reynolds Inc, Class A 1,083,424
64,700 Sandisk Corp* 1,811,599
68,100 Silicon Graphics Inc* 1,085,343
20,900 SMART Modular Technologies Inc* 335,706
46,000 Sterling Software Inc* 1,172,999
43,800 Western Digital Corp* 421,575
23,300 Zebra Technologies Corp* 601,431
-----------
10,527,591
-----------
Construction -- 1.4%
29,200 Bridge & Toll Road Brothers Inc* 573,050
18,800 Centex Corp 692,075
45,000 Foster Wheeler Corp 562,500
12,700 Granite Construction Inc 311,944
46,400 Horton (DR) Inc 739,500
14,800 Kaufman & Broad Home Corp 333,000
17,100 McDermott International Inc 340,931
34,100 Pulte Corp 820,531
21,700 Texas Industries Inc 534,363
-----------
4,907,894
-----------
Consumer Goods -- 6.4%
16,400 Bassett Furniture Industries Inc 352,600
10,834 Block Drug Co Inc, Class A 422,526
60,000 Burlington Industries Inc* 371,250
56,400 Callaway Golf Co 613,350
36,000 CHS Electronics Inc* 252,000
5,793 Clorox Co 685,384
21,900 Coleman Co Inc* 205,313
84,100 Compucom Systems Inc* 365,314
17,300 Department 56 Inc* 574,144
15,000 Enesco Group Inc 248,438
27,400 Fastenal Co 1,041,199
24,100 Footstar Inc* 614,550
20,400 Fossil Inc* 642,600
See accompanying notes to the financial statements. 3
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Consumer Goods -- continued
17,300 Furniture Brands International Inc* 369,788
28,200 Hon Industries Inc 669,750
33,300 Jones Apparel Group Inc* 930,318
34,400 Justin Industries 367,650
29,000 Kimball International, Class B 471,250
19,400 Knoll Inc* 371,025
31,400 La-Z-Boy Chair Co 584,825
31,715 Lancaster Colony Corp 872,163
22,100 Liz Claiborne Inc 744,494
57,500 Moore Corp Ltd 603,750
34,800 Nautica Enterprises Inc* 522,000
40,400 Nine West Group Inc* 906,474
29,650 Oneida LTD 415,100
29,300 Osh Kosh B Gosh, Class A 556,700
21,600 Readers Digest Association Inc 734,400
45,600 Reebok International Ltd* 735,300
27,300 Russell Corp 532,350
12,700 Scholastic Corp* 625,475
82,500 Sunbeam Corp* 479,531
16,000 Technology Data Corp* 272,000
79,200 Terra Industries Inc 391,050
12,100 Timberland Co* 730,538
40,500 Unifi Inc* 488,531
61,620 US Industries Inc 1,001,324
31,600 Wallace Computer Services 714,950
28,500 Warnaco Group Inc, Class A 641,250
-----------
22,120,654
-----------
Electronic Equipment -- 7.1%
29,400 3DFX Interactive Inc* 319,725
45,900 Adaptec Inc* 915,130
22,100 American Power Conversion Corp* 792,838
56,800 Andrew Corp* 859,100
48,200 Arrow Electronics Inc* 683,838
54,400 Atmel Corp* 934,999
32,000 AVX Corp 438,000
31,700 C-Cube Microsystems Inc* 594,375
65,900 Cellstar Corp* 749,613
24,300 Ciena Corp* 677,363
11,000 CTS Corp 538,313
4 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Electronic Equipment -- continued
43,400 Cypress Semiconductor Corp* 415,013
18,900 Dallas Semiconductor Corp 668,588
20,900 Diebold Inc 610,019
31,800 DII Group Inc* 743,325
26,600 DSP Communications Inc* 399,000
24,000 Federal Signal Corp 562,500
5,500 Franklin Electric Inc 341,000
45,200 General Instrument Corp* 1,322,099
10,700 Hadco Corp* 341,063
52,500 International Rectifier Corp* 360,938
46,700 Kemet Corp* 513,700
48,900 Komag Inc* 342,300
13,300 Lattice Semiconductor Corp* 530,338
21,100 Litton Industries* 1,184,237
25,900 LSI Logic Corp* 671,781
16,000 Marshall Industries* 228,000
42,500 MEMC Electronic Materials Inc* 308,125
42,000 Methode Electronics, Class A 441,000
20,100 Microchip Technology Inc* 547,725
65,900 National Semiconductor Corp* 691,950
79,900 Oak Technology Inc* 262,176
16,300 Pittway Corp, Class A 404,444
43,300 Read Rite Corp* 368,050
23,200 SCI Systems Inc* 717,750
39,600 Silicon Valley Group Inc* 527,175
10,800 Thomas & Betts Corp 450,225
27,000 Valmont Industries Inc 318,095
38,070 Vishay Intertechnology Inc* 492,531
54,200 VLSI Technology Inc* 840,100
16,900 Watkins Johnson 382,363
12,900 Xilinx Inc* 899,774
54,728 Zilog Inc(b)* 136,393
-----------
24,525,071
-----------
Food and Beverage -- 3.4%
12,600 Coors (Adolph) Co, Class B 750,488
37,200 Darden Restaurants Inc 818,400
13,200 Dean Foods Co 480,975
4,000 Farmer Brothers Co 716,000
21,600 Great Atlantic & Pacific Tea Co 681,750
See accompanying notes to the financial statements. 5
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Food and Beverage -- continued
12,900 Hormel (Geo A) and Co 464,400
74,700 IBP Inc 1,680,749
15,000 International Multifoods Corp 324,375
20,300 Interstate Bakeries Corp 487,200
17,000 Luby's Cafeteria Inc 241,188
16,800 Michael Foods Inc 310,800
16,200 Pilgrims Pride Corp 308,813
49,900 Ryan's Family Steak Houses Inc* 567,613
1,100 Seaboard Corp 401,500
21,700 Smithfield Foods Inc* 570,304
23,900 Universal Corp 649,781
30,050 Universal Foods Corp 681,759
39,400 Wendy's International Inc 943,137
27,300 Whitman Corp 518,700
-----------
11,597,932
-----------
Health Care -- 5.1%
32,100 ADAC Laboratories* 573,788
58,400 Apria Healthcare Group* 521,950
18,400 Arrow International Inc 451,950
24,700 Ballard Medical Products 591,256
21,200 Bard (CR) 1,195,149
8,100 Bausch & Lomb Inc 488,531
74,200 Beverly Enterprises Inc* 384,913
20,800 Bindley Western Industries Inc 547,300
18,100 BioMet Inc 664,044
52,000 Coventry Health Care Inc* 557,378
18,000 Dentsply International Inc 459,000
15,200 Express Scripts Inc, Class A* 981,349
50,900 First Health Group Corp* 814,400
19,000 Haemonetics Corp* 317,063
15,800 HCR Manor Care Inc* 353,525
35,800 Integrated Health Services Inc* 212,563
23,600 Invacare Corp 560,500
263,800 Laboratory Corporation of America Holdings* 478,138
27,900 Lincare Holdings Inc* 993,937
29,800 Mallinckrodt Inc 921,937
93,900 Mariner Post-Acute Network Inc* 205,406
7,212 Medtronic Inc 509,348
25,300 Mentor Corp 388,988
55,200 Mid Atlantic Medical Services Inc* 431,250
6 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Health Care -- continued
23,200 Ocular Sciences Inc* 568,400
51,200 Perrigo Co* 428,800
77,600 Phycor Inc* 421,950
32,200 Quorum Health Group Inc* 297,850
29,500 RightCHOICE Managed Care, Class A* 350,313
22,850 Sierra Health Services Inc* 328,469
28,100 Sola International Inc* 302,075
21,500 Spacelabs Medical Inc* 381,625
34,300 Sunrise Medical Inc* 248,675
7,300 Universal Health Services, Class B* 296,563
18,700 Varian Associates Inc 598,400
-----------
17,826,783
-----------
Insurance -- 7.0%
2,257 Alleghany Corp* 408,517
13,900 American Bankers Insurance Group 667,200
21,900 American Financial Group Inc 808,931
20,298 American Heritage Life Investments 446,556
10,700 American National Insurance Co 805,175
24,400 Argonaut Group Inc 605,425
21,900 Berkley (WR) Corp 626,888
26,000 Capital Re Corp 435,500
12,900 CMAC Investment Corp 532,931
20,400 Commerce Group Inc 545,700
18,226 Delphi Financial Group Inc* 873,709
33,900 Everest Re Holdings Inc 1,125,055
20,070 Fidelity National Financial Inc 401,400
27,450 First American Financial Corp 643,359
57,110 Foundation Health Systems Inc, Class A* 456,880
42,430 Fremont General Corp 837,993
36,400 Frontier Insurance Group Inc 477,750
15,100 Gallagher (Arthur J) and Co 721,025
26,200 Harleysville Group Inc 537,100
19,500 Horace Mann Educators Corp 457,031
12,200 Kansas City Life Insurance Co 1,009,549
10,800 Liberty Corp 544,725
26,000 Life USA Holdings Inc 297,375
13,300 Mercury General Corp 463,838
15,900 NAC Re Corp 859,594
25,100 Ohio Casualty Corp 1,013,412
20,900 Orion Capital Corp 691,006
See accompanying notes to the financial statements. 7
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Insurance -- continued
39,100 Oxford Health Plans Inc* 740,456
12,200 Pacificare Health Systems, Class B* 881,449
30,000 Presidential Life Corp 534,375
17,600 Protective Life Corp 607,200
50,300 Reliance Group Holdings Inc 518,719
13,243 RLI Corp 389,841
31,901 Selective Insurance Group 581,212
40,600 TIG Holdings Inc 649,600
10,900 Transatlantic Holding Inc 814,094
13,850 Trenwick Group Inc 401,650
36,900 UICI* 848,700
29,300 Vesta Insurance Group 155,656
-----------
24,416,576
-----------
Machinery -- 4.8%
54,200 Agco Corp 355,688
40,900 Brunswick Corp 871,681
20,800 Case Corp 405,600
24,500 Cooper Cameron Corp* 566,563
29,900 Cummins Engine Inc 1,225,899
26,000 Detroit Diesel Corp* 560,625
31,800 Donaldson Co Inc 574,388
8,500 Federal Mogul Corp 418,094
26,700 Flowserve Corp 442,219
15,700 FMC Corp* 803,644
36,000 Harnischfeger Industries Inc 276,750
20,900 Kaydon Corp 637,450
31,000 Kennametal Inc 645,188
23,700 Kulicke & Soffa Industries* 601,388
22,600 Milacron Inc 402,563
23,900 Mohawk Industries Inc* 776,750
10,600 Nordson Corp 630,700
12,100 Novellus System Inc* 714,656
38,500 Oakley Inc* 320,031
18,600 Smith International Inc* 452,213
13,900 Starrett (LS) Co, Class A 414,394
12,500 Tecumseh Products Co 615,625
27,500 Tecumseh Products Co, Class B 1,244,374
13,800 Toro Co 412,275
21,200 Ultratech Stepper Inc* 334,564
19,900 US Filter Corp* 488,794
8 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- --------------------------------------------------------------------------------
Machinery -- continued
57,600 Varco International Inc* 446,400
28,500 York International Corp 1,033,124
-----------
16,671,640
-----------
Manufacturing -- 4.5%
39,200 ACX Technologies Inc* 487,550
21,600 Aeroquip-Vickers Inc 1,223,099
49,900 Amcast Industrial Corp 944,980
15,400 Applied Power Inc, Class A 371,525
16,000 Ball Corp 670,000
18,500 Barnes Group Inc 352,656
33,600 Champion Enterprises Inc* 661,500
88,712 Clayton Homes Inc 1,097,810
40,650 Crane Co 1,115,333
7,100 CSS Industries Inc* 181,050
23,800 General Cable Corp 447,738
30,000 Gibson Greetings Inc* 248,439
19,700 Global Industrial Technologies Inc* 176,069
7,400 Greif Brothers Corp 208,125
46,300 Griffon Corp* 416,700
24,700 Harsco Corp 693,144
29,400 International Game Technology 558,600
12,800 Lafarge Corp 408,000
17,300 Lydall Inc* 164,350
7,300 Mine Safety Appliances 472,675
16,400 NCI Building Systems Inc* 377,200
22,300 Owens Corning 709,419
8,200 Sequa Corp, Class A* 385,913
14,400 Snap-On Inc 406,800
19,500 Standex International Corp 461,906
19,100 Tower Automotive Inc* 355,738
16,750 Tredegar Industries 428,172
31,600 Trinity Industries Inc 1,040,824
21,800 Watts Industries Inc, Class A 303,838
46,900 Wyman-Gordon Co* 378,131
-----------
15,747,284
-----------
Metals and Mining -- 1.1%
42,300 Arch Coal Inc 462,656
33,300 Asarco Inc 470,363
11,000 Cleveland Cliffs Inc 407,688
See accompanying notes to the financial statements. 9
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
Metals and Mining -- continued
<S> <C> <C>
15,600 Commercial Metals Co 355,875
93,100 Cyprus Amax Minerals Co 1,047,374
4,600 Nacco Industries Inc, Class A 404,800
41,000 Timken Co 725,188
--------------
3,873,944
--------------
Oil and Gas -- 1.6%
44,300 BJ Services Co* 622,969
17,600 Equitable Resources Inc 455,400
33,200 Friede Goldman International Inc* 354,825
68,600 Global Industries Limited* 347,288
18,000 K N Energy Inc 376,875
43,800 KCS Energy Inc 57,488
28,500 Mitchell Energy, Class B 349,125
57,200 Nabors Industries Inc* 657,800
53,300 National-Oilwell Inc* 473,038
81,800 Newpark Resources Inc* 429,450
13,000 Peoples Energy Corp 441,188
37,300 Pogo Producing Co 345,025
65,100 Pride International Inc* 325,500
28,700 Veritas DGC Inc* 270,856
--------------
5,506,827
--------------
Paper and Allied Products -- 2.3%
26,300 Boise Cascade Corp 816,944
23,100 Caraustar Industries Inc 591,938
52,600 Ikon Office Solutions Inc 742,975
24,700 Louisiana Pacific Corp 453,863
8,500 Media General Inc, Class A 425,000
14,600 Pentair Inc 552,975
12,800 Potlatch Corp 444,000
36,600 Rock-Tenn Co, Class A 631,350
34,800 Shorewood Packaging Corp* 632,925
40,821 Smurfit-Stone Container Corp* 737,329
18,800 TJ International Inc 406,550
54,000 Unisource Worldwide Inc 378,000
38,400 Wausau-Mosinee Paper Corp 609,600
22,000 Westvaco Corp 492,250
--------------
7,915,699
--------------
Pharmaceuticals -- 1.6%
7,500 Allergan Inc 611,250
</TABLE>
See accompanying notes to the financial statements.
10
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Pharmaceuticals -- continued
7,800 Amerisource Health Corp* 582,075
29,350 Bergen Brunswig Corp, Class A 717,241
38,600 ICN Pharmaceuticals Inc 844,375
50,175 Mark IV Industries Inc 755,761
80,100 NBTY Inc* 480,600
28,200 Nu Skin Enterprises Inc* 588,675
35,201 Rexall Sundown Inc* 503,839
9,800 Watson Pharmaceutical Inc* 473,463
--------------
5,557,279
--------------
Primary Materials -- 1.4%
11,500 Ameron Inc 451,375
17,800 Carpenter Technology Corp 461,688
13,100 Centex Construction Products Inc 467,506
21,300 Florida Rock Industries 596,400
33,000 Premark International Inc 1,053,937
30,000 Tupperware Corp 525,000
11,900 USG Corp 596,488
24,400 Weatherford International Inc* 414,800
10,600 West Pharmaceutical Services Inc 350,463
--------------
4,917,657
--------------
Primary Processing -- 2.4%
27,000 AK Steel Holding Corp 588,938
98,300 Bethlehem Steel Corp* 866,269
31,200 Citation Corp* 317,850
19,900 Essex International Inc* 582,075
38,200 Lone Star Technologies Inc* 494,213
61,200 LTV Corp 336,600
6,200 Maxxam Inc* 362,700
22,100 Mueller Industries Inc* 466,863
57,600 National Steel Corp, Class B 475,200
11,500 NCH Corp 580,750
21,700 Oregon Steel Mills Inc 207,506
14,000 Precision Castparts Corp 519,750
13,600 Quanex Corp 238,000
24,200 Rouge Industries Inc, Class A 240,488
24,300 Ryerson Tull Inc 443,475
38,000 Titanium Metals Corp 268,375
31,000 USX-US Steel Group Inc 784,688
21,100 Valspar Corp 685,750
--------------
8,459,490
--------------
</TABLE>
See accompanying notes to the financial statements.
11
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Printing and Publishing -- 0.5%
15,200 American Business Products Inc 274,550
37,100 Hollinger International Inc 459,113
7,399 Pulitzer Publishing Co 590,995
17,500 World Color Press Inc* 434,219
--------------
1,758,877
--------------
Real Estate -- 0.7%
35,600 Lennar Corp 825,475
34,300 Meditrust Corp 420,175
16,700 Parkway Properties Inc 440,463
34,800 Price Enterprises Inc* 174,000
17,100 Webb (D) Corp 384,750
--------------
2,244,863
--------------
Refining -- 0.6%
12,500 Holly Corp 157,031
24,000 Lyondell Petro Chemical Co 321,000
12,800 Murphy Oil Corp 437,600
29,592 Ultramar Diamond Shamrock Corp 584,442
30,100 Valero Energy Corp 528,631
--------------
2,028,704
--------------
Retail Trade -- 7.8%
19,700 Ames Department Stores Inc* 591,000
14,100 AnnTaylor Stores Corp* 533,156
12,200 Barnes & Noble Inc* 360,663
34,100 Bed, Bath & Beyond Inc* 1,003,818
24,600 Brinker International Inc* 711,863
16,200 Brown Group Inc 253,125
34,940 Burlington Coat Factory Warehouse 449,853
30,100 Cash American Investments Inc 380,013
34,800 Central Garden and Pet Co* 591,600
35,300 Claire's Stores Inc 778,806
37,200 CompUSA Inc* 390,600
58,100 Cone Mills Corp* 283,238
16,200 CPI Corp 354,375
27,800 Dress Barn Inc* 361,400
27,400 Fingerhut Cos Inc* 673,013
31,200 Fruit of the Loom Inc* 395,850
</TABLE>
See accompanying notes to the financial statements.
12
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Retail Trade -- continued
29,600 Global Directmail Corp* 486,550
32,900 Goodys Family Clothing Inc* 332,086
13,200 Hannaford Brothers Co 620,400
80,900 Heilig Meyers Co 525,850
40,000 Ingles Markets Inc 477,500
28,700 Lands End Inc* 869,969
16,700 Longs Drug Stores Corp 604,331
24,800 Michaels Stores Inc* 424,700
32,700 Micro Warehouse Inc* 645,825
36,600 Neiman Marcus Group Inc* 947,024
35,800 NPC International Inc* 514,625
45,500 OfficeMax Inc* 352,625
34,600 Outback Steakhouse Inc* 1,518,074
11,800 Payless ShoeSource Inc* 647,525
38,900 Phillips Van Heusen 235,831
111,400 Rainforest Cafe Inc* 605,738
32,400 Richfood Holdings Inc 769,500
29,000 Ross Stores Inc 1,326,749
21,700 Ruby Tuesday Inc 404,163
21,300 Ruddick Corp 392,719
24,225 Saks Inc* 870,586
204,700 Service Merchandise Co* 127,938
14,300 Shopko Stores Inc* 450,450
186,400 Southland Corp* 308,734
59,600 Spiegel Inc, Class A* 424,650
16,400 St. John Knits Inc 437,675
54,000 Stein Mart Inc* 492,750
70,800 Stride Rite Corp 730,125
49,400 The Pep Boys 901,549
37,200 Value City Department Stores Inc* 437,100
15,600 Weismarkets Inc 567,450
11,700 Zale Corp* 387,563
--------------
26,950,727
--------------
Services -- 7.2%
34,300 Alternative Resources Corp* 368,725
13,800 Amerco* 307,050
7,400 Anchor Gaming* 296,463
33,325 Arctic Cat Inc 258,269
19,900 Avis Rental Car Inc* 456,456
</TABLE>
See accompanying notes to the financial statements.
13
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Services -- continued
75,000 Aztar Corp* 365,625
26,950 Banta Corp 574,372
20,500 Berlitz International Inc* 508,656
39,100 Bowne and Co Inc 544,956
16,500 Carmike Cinemas Inc, Class A* 259,875
12,000 Catalina Marketing Corp* 772,500
11,000 Chemed Corp 325,188
81,300 Circus Circus Enterprises Inc* 1,392,262
87,800 Dames and Moore Inc 867,025
38,400 Dollar Thrifty Automotive Group Inc* 456,000
44,900 Electro Rental Corp* 454,613
46,500 Fleming Cos Inc 342,938
25,000 Franklin Covey Co* 298,438
64,700 Harrahs Entertainment Inc* 1,079,680
27,000 Hollywood Entertainment Corp* 740,813
39,300 Interpool Inc 560,025
21,700 Jacobs Engineering Group* 858,506
17,400 Kellwood Co 444,788
31,100 Kelly Services 793,050
34,300 KingWorld Productions Inc* 906,805
26,400 Manpower Inc 631,950
14,250 Marcus Corp 185,250
33,700 Modis Professional Services Inc* 461,269
36,500 Nash Finch Co 301,125
32,700 Norrell Corp 519,113
39,400 Oakwood Homes Corp 635,325
17,200 Ogden Corp 420,325
96,400 Olsten Corp 596,475
54,100 Prime Hospitality Corp* 554,525
19,600 Promus Hotel Corp* 689,675
16,000 Rent-A-Center Inc* 406,000
36,600 Rollins Truck Leasing Corp 388,875
25,900 Sbarro Inc* 653,975
41,700 Spelling Entertainment Group Inc* 299,719
44,800 Station Casinos Inc* 448,000
9,600 Stone & Webster Inc 256,800
44,700 Supervalu Inc 1,075,593
47,600 United Video Satellite Group Inc* 1,371,474
17,048 United Water Resources Inc 328,174
48,200 Wolverine World Wide Inc 478,988
--------------
24,935,708
--------------
</TABLE>
See accompanying notes to the financial statements.
14
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Technology -- 3.6%
11,300 Adobe Systems Inc 454,825
33,600 Advanced Micro Devices Inc* 600,600
32,700 Aspen Technologies Inc* 418,969
14,700 Autodesk Inc 589,838
23,500 Avnet Inc 932,655
9,600 Beckman Coulter Inc 463,800
64,900 Cabletron Systems Inc* 527,313
33,800 Cirrus Logic Corp* 274,625
23,300 Cognex Corp* 582,500
10,600 Cohu Inc 250,425
48,800 Datastream Systems Inc* 454,450
13,900 Deluxe Corp 470,863
17,800 Dionex Corp* 656,375
18,800 Electronics For Imaging Inc* 656,825
19,500 Esterline Corp* 333,938
32,800 G TECH Holdings Corp* 742,100
10,700 KLA Instruments Corp* 554,394
40,300 MTS Systems Inc 506,269
63,300 Renaissance Worldwide Inc* 395,625
25,800 Synopsys Inc* 1,193,249
46,100 System Software Associates Inc* 152,706
25,550 Tektronix Inc 498,225
12,600 Teradyne Inc* 600,075
6,900 Veeco Intruments Inc* 263,925
--------------
12,574,569
--------------
Telecommunications -- 1.0%
23,200 Adtran Inc* 475,600
32,300 Brightpoint Inc* 480,463
17,700 Century Communications Corp* 613,969
12,500 Century Telephone Enterprises Inc 771,875
69,600 Premiere Technologies Inc* 635,100
15,300 USA Networks Inc* 608,175
--------------
3,585,182
--------------
Textiles -- 0.6%
4,200 Crystal Brands Inc(a) --
</TABLE>
See accompanying notes to the financial statements.
15
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Textiles -- continued
26,750 Guilford Mills 331,031
48,300 Shaw Industries Inc 1,059,580
14,300 Springs Industries Inc, Class A 475,475
12,900 Westpoint Stevens Inc* 328,950
--------------
2,195,036
--------------
Transportation -- 4.3%
21,500 Airborne Freight Corp 838,500
23,550 Airline Express International Corp 413,597
148,500 Airtran Holdings Inc* 501,188
10,800 Alaska Airline Group Inc* 547,425
28,100 American West Holdings Corp, Class B* 477,700
22,800 ASA Holdings Inc 765,225
18,700 Atlantic Coast Airlines Holdings* 598,400
11,700 CNF Transportation Inc 494,325
41,200 Comair Holdings Inc 1,550,149
17,100 Continental Airlines Inc, Class B* 592,088
18,800 Expeditors International Washington Inc 875,375
23,100 Fleetwood Enterprises Inc 749,306
21,700 Gatx Corp 750,006
91,600 Halter Marine Group Inc* 366,400
33,900 Heartland Express Inc* 546,638
10,400 Landstar System Inc* 392,276
17,600 Navistar International Corp* 756,800
31,800 Ryder System Inc 858,600
21,600 Swift Transportation Co* 646,650
23,700 Tidewater Inc 445,856
22,100 US Freightways Corp 704,438
19,100 Viad Corp 504,956
39,900 Wisconsin Central Transport* 548,625
--------------
14,924,523
--------------
Utilities -- 8.6%
32,100 Avista Corp 525,638
17,200 BEC Energy 626,725
23,800 Calenergy Inc* 667,888
12,200 Central Hudson Gas & Electric 442,250
5,700 Cilcorp Inc 338,794
89,400 Citizens Utilities, Class B* 681,675
13,400 Cleco Corp 393,625
22,800 CMP Group Inc 384,750
</TABLE>
See accompanying notes to the financial statements.
16
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Utilities -- continued
14,300 Commonwealth Energy Systems 516,588
72,650 Conectiv Inc 1,539,271
26,900 DQE Inc 1,027,243
37,300 Dynegy Inc 447,600
24,900 Eastern Utilities Associates 708,094
60,600 El Paso Electric Co* 435,563
21,600 Energen Corp 302,400
28,800 Energy East Corp 1,544,399
13,200 Hawaiian Electric Industry Inc 460,350
41,700 Illinova Corp 990,374
19,700 Interstate Energy Corp 542,981
52,000 Keyspan Energy Corp 1,377,999
34,900 LG&E Energy Corp 796,156
28,000 MCN Corp 498,750
39,482 Midamerican Energy Holding Co 1,066,013
12,600 Montana Power Co 767,025
16,900 Nevada Power Co 404,544
21,100 New England Electric System 1,027,305
134,200 Niagara Mohawk Power Corp* 1,962,674
98,700 Northeast Utilities* 1,474,330
15,700 Nui Corporation 360,119
18,800 Oneok Inc 506,425
7,400 Orange and Rockland Utilities Inc 415,325
26,300 Potomac Electric Power Co 641,063
41,900 Public Services Co of New Mexico 644,213
18,900 Puget Sound Power and Light Co 455,963
23,500 Rochester Gas and Electric Corp 613,938
22,400 Sempra Energy 470,400
11,900 Sierra Pacific Resources 408,319
15,700 Southwest Natural Gas Corp 451,375
13,600 TNP Enterprises Inc 397,800
29,340 UniSource Energy Corp Holding Co* 339,244
9,200 United Illuminating Co 408,250
23,600 Utilicorp United Inc 811,250
44,500 Western Gas Resources Inc 219,719
30,500 Western Resources Inc 859,719
--------------
29,954,126
--------------
Total Common Stocks (Cost $383,042,190) 339,472,082
--------------
</TABLE>
See accompanying notes to the financial statements.
17
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares/
Par Value ($) Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Rights And Warrants -- 0.0%
Electronic Equipment -- 0.0%
42,500 MEMC Electronic Materials Inc Rights* --
--------------
Total Rights And Warrants (Cost $0) --
--------------
Short-Term Investments -- 6.2%
Cash Equivalents -- 3.5%
$ 303,558 BankBoston Eurodollar Time Deposit, 5.005% due 4/30/99(c) 303,558
$12,000,000 Prudential Securities Group Inc, Master Note, 5.075% due
6/14/99(c) 12,000,000
--------------
12,303,558
--------------
U.S. Government -- 1.0%
$ 3,570,000 U.S. Treasury Bill, 4.53%, due 4/29/99(d) 3,543,029
--------------
Repurchase Agreements -- 1.7%
$ 5,834,041 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/26/99, due 3/1/99, with a maturity value of $5,835,995
and an effective yield of 4.02%, collateralized by a U.S.
Treasury Obligation with a rate of 7.00%, maturity date
of 7/15/06 and market value, including accrued interest,
of $5,950,721. 5,834,041
--------------
Total Short-Term Investments
(Cost $21,681,086) 21,680,628
--------------
Total Investments -- 103.9%
(Cost $404,723,276) 361,152,710
Other Assets and Liabilities (net) -- (3.9)% (13,469,043)
--------------
TOTAL NET ASSETS -- 100% $ 347,683,667
==============
Notes to the Schedule of Investments:
* Non-income producing security.
(a) Bankrupt issuer.
(b) Valued by management (Note 1).
(c) Represents investments of security lending collateral (Note 1).
(d) All or a portion of this security has been segregated to
cover margin requirements on open financial futures
contracts.
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1999
- --------------------------------------------------------------------------------
Assets:
Investments, at value (cost $404,723,276) (Note 1) $361,152,710
Dividends and interest receivable 404,298
Receivable for variation margin on open futures contracts 13,500
(Notes 1 and 6)
Receivable for expenses waived or borne by Manager (Note 2) 54,489
------------
Total assets 361,624,997
------------
Liabilities:
Payable upon return of securities loaned (Note 1) 12,303,558
Payable for open swap contracts (Note 1 and 6) 1,405,127
Payable to affiliate for (Note 2):
Management fee 137,988
Shareholder service fee 37,819
Accrued expenses 56,838
------------
Total liabilities 13,941,330
------------
Net assets $347,683,667
============
Net assets consist of:
Paid-in capital $389,817,026
Accumulated undistributed net investment income 552,066
Accumulated undistributed net realized gain 2,515,234
Net unrealized depreciation (45,200,659)
------------
$347,683,667
============
Net assets attributable to:
Class III shares $347,683,667
============
Shares outstanding:
Class III 29,733,908
============
Net asset value per share:
Class III $ 11.69
============
See accompanying notes to the financial statements. 19
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1999
- --------------------------------------------------------------------------------
Investment Income:
Dividends (net of withholding taxes of $7,417) $ 6,577,086
Interest (including securities lending income of $188,781) 880,844
-------------
Total income 7,457,930
-------------
Expenses:
Management fee (Note 2) 2,529,395
Custodian and transfer agent fees 140,543
Audit fees 40,514
Legal fees 8,567
Trustees fees (Note 2) 4,846
Registration fees 1,439
Miscellaneous 4,753
Fees waived or borne by Manager (Note 2) (1,060,654)
-------------
1,669,403
Shareholder service fee (Note 2)
Class III 758,820
-------------
Net expenses 2,428,223
-------------
Net investment income 5,029,707
-------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 93,678,029
Closed futures contracts (2,406,486)
Closed swap contracts (7,574,681)
-------------
Net realized gain 83,696,862
-------------
Change in net unrealized appreciation (depreciation) on:
Investments (160,633,965)
Open futures contracts (340,394)
Open swap contracts (1,405,127)
-------------
Net unrealized loss (162,379,486)
-------------
Net realized and unrealized loss (78,682,624)
-------------
Net decrease in net assets resulting from operations $ (73,652,917)
=============
20 See accompanying notes to the financial statements.
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
Year Ended
February 28,
------------------------------
1999 1998
------------- -------------
Increase (decrease) in net assets:
Operations:
Net investment income $ 5,029,707 $ 11,043,966
Net realized gain 83,696,862 117,624,535
Change in net unrealized appreciation
(depreciation) (162,379,486) 89,479,085
------------- -------------
Net increase (decrease) in net assets
resulting from operations (73,652,917) 218,147,586
------------- -------------
Distributions to shareholders from:
Net investment income
Class I -- (26,599)
Class III (5,866,332) (11,940,475)
------------- -------------
Total distributions from net investment
income (5,866,332) (11,967,074)
------------- -------------
Net realized gains
Class I -- (323,423)
Class III (102,038,674) (97,888,562)
------------- -------------
Total distributions from net realized
gains (102,038,674) (98,211,985)
------------- -------------
(107,905,006) (110,179,059)
------------- -------------
Net share transactions: (Note 5)
Class I -- (1,301,006)
Class III (240,370,696) 6,180,752
------------- -------------
Increase (decrease) in net assets resulting
from net share transactions (240,370,696) 4,879,746
------------- -------------
Total increase (decrease) in net assets (421,928,619) 112,848,273
Net assets:
Beginning of period 769,612,286 656,764,013
------------- -------------
End of period (including accumulated
undistributed net investment income of
$552,066 and $1,408,321, respectively) $ 347,683,667 $ 769,612,286
============= =============
See accompanying notes to the financial statements. 21
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Financial Highlights
(For a Class I share outstanding throughout each period)
- ----------------------------------------------------------------------------------------
Period from Period from January 2, 1997
March 1, 1997 (commencement of operations)
to January 9, 1998 to February 28, 1997
------------------- -----------------------------
<S> <C> <C>
Net asset value, beginning of period $15.89 $15.34
------ ------
Income from investment operations:
Net investment income 0.22+ 0.05
Net realized and unrealized gain 3.00 0.50
------ ------
Total from investment operations 3.22 0.55
------ ------
Less distributions to shareholders:
From net investment income (0.27) --
From net realized gains (2.44) --
------ ------
Total distributions (2.71) --
------ ------
Net asset value, end of period $16.40(c) $15.89
====== ======
Total Return (a) 20.55% 3.52%
Ratios/Supplemental Data:
Net assets, end of period (000's) -- $1,391
Net expenses to average daily net assets 0.61%* 0.61%*
Net investment income to average
daily net assets 1.45%* 1.87%*
Portfolio turnover rate 56% 58%
Fees and expenses voluntarily waived
or borne by the Manager consisted
of the following per share amounts: $0.03 (b)
</TABLE>
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(b) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
(c) All Class I shares of the Fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
+ Computed using average shares outstanding throughout the period.
* Annualized.
See accompanying notes to the financial statements.
22
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
Year Ended February 28/29,
---------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 18.28 $ 15.89 $ 13.89 $ 13.61 $ 14.31
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.18 0.27 0.28 0.23 0.20
Net realized and unrealized gain (loss) (2.50) 4.85 2.32 3.20 0.34
-------- -------- -------- -------- --------
Total from investment operations (2.32) 5.12 2.60 3.43 0.54
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.19) (0.29) (0.27) (0.23) (0.20)
From net realized gains (4.08) (2.44) (0.33) (2.92) (1.04)
-------- -------- -------- -------- --------
Total distributions (4.27) (2.73) (0.60) (3.15) (1.24)
-------- -------- -------- -------- --------
Net asset value, end of period $ 11.69 $ 18.28 $ 15.89 $ 13.89 $ 13.61
======== ======== ======== ======== ========
Total Return (a) (14.74)% 34.43% 19.12% 27.18% 4.48%
Ratios/Supplemental Data:
Net assets, end of period (000's) $347,684 $769,612 $655,373 $231,533 $235,781
Net expenses to average
daily net assets 0.48% 0.48% 0.48% 0.48% 0.48%
Net investment income to
average daily net assets 0.99% 1.51% 2.15% 1.67% 1.55%
Portfolio turnover rate 49% 56% 58% 135% 54%
Fees and expenses voluntarily waived or
borne by the Manager consisted of the
following per share amounts: $ 0.04 $ 0.04 $ 0.03 $ 0.02 $ 0.01
</TABLE>
(a)Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during the
periods shown.
See accompanying notes to the financial statements.
23
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- -------------------------------------------------------------------------------
1. Significant accounting policies
GMO Small Cap Value Fund (the "Fund"), is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, diversified management investment company. The
Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series into classes.
The Fund seeks long-term growth of capital through investment primarily in
companies whose equity capitalization ranks in the lower two-thirds of the
1,800 companies with the largest equity capitalization whose securities are
listed on a United States national securities exchange.
Prior to January 9, 1998, the Fund offered three classes of shares: Class
I, Class II and Class III. Effective January 9, 1998, Class I shares ceased
operations and all shares were exchanged for Class III shares, and Class II
shares ceased to be offered. The principal economic difference among the
classes of shares is the level of shareholder service fee borne by the
classes. Eligibility for and automatic conversion between the various
classes of shares is generally based on the total amount of assets invested
with GMO, as more fully outlined in the Trust's prospectus.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Other assets and
securities for which no quotations are readily available are valued at fair
value as determined in good faith by the Trustees.
Futures contracts
The Fund may purchase and sell futures contracts on the domestic stock
indices. Stock index futures contracts represent commitments for future
delivery of cash based upon the level of a specified index of equity
securities at a specified price at a given date. The Fund may use futures
contracts to manage its exposure to the stock markets. Buying futures tends
to increase the Fund's exposure to the underlying instrument. Selling
futures tends to decrease the Fund's exposure to the underlying instrument
or hedge other fund instruments. Upon entering into a futures contract, the
Fund is required to deposit
24
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- -------------------------------------------------------------------------------
with its custodian, in a segregated account in the name of the futures
broker, an amount of cash or U.S. government obligations in accordance with
the initial margin requirements of the broker or exchange. Futures
contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. The payable or receivable is liquidated on the following business
day. Gains or losses are recognized but not considered realized until the
contracts expire or are closed. Futures contracts involve, to varying
degrees, risk of loss in excess of the variation margin disclosed in the
Statement of Assets and Liabilities. Losses may arise from changes in the
value of the underlying instrument, if there is an illiquid secondary
market for the contracts, or if counterparties do not perform under the
contract terms. Futures contracts are valued at the settlement price
established each day by the board of trade or exchange on which they are
traded. See Note 6 for all open futures contracts as of February 28, 1999.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Security lending
The Fund may lend its securities to qualified brokers. The loans are
collateralized at all times with cash or securities with a market value at
least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1999, the Fund loaned securities having a
market value of $11,595,327, collateralized by cash in the amount of
$12,303,558, which was invested in short-term instruments.
Swap agreements
The Fund may enter into swap agreements to manage its exposure to the
equity markets. A swap is an agreement to exchange the return generated by
one instrument for the return generated by another instrument. The Fund
enters into equity swap agreements which involve a commitment by one party
in the agreement to pay interest in exchange for a market linked return
based on a notional amount. To the extent that the total return of the
security or index underlying the transaction exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make a payment to the counterparty, respectively. The Fund also enters
into contracts for differences in which the Fund agrees with the
counterparty that its return will be based on the relative performance of
two different groups or "baskets" of securities, adjusted by an interest
rate payment. Swaps are marked to market daily based upon quotations from
market makers and the change, if any, is recorded as unrealized gain or
loss in the
25
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Statement of Operations. Payments received or made at the end of the
measurement period are recorded as realized gain or loss in the Statement
of Operations. Entering into these agreements involves, to varying degrees,
elements of credit and market risk in excess of the amounts recognized on
the Statement of Assets and Liabilities. Such risks involve the possibility
that there will be no liquid market for these agreements, that the
counterparty to the agreements may default on its obligation to perform, or
that there may be unfavorable changes in the price of the security or index
underlying these transactions. See Note 6 for a summary of the open swap
agreement as of February 28, 1999.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary. Taxes on foreign dividend income have been withheld in
accordance with the applicable country's tax treaty with the United States.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatment for redemptions in-kind. Gains resulting from such
in-kind transactions amounted to $20,574,528. The Fund also utilized
earnings and profits distributed to shareholders on redemption of shares as
a part of the dividends paid deduction for income tax purposes.
The following reclassification represents the cumulative amount necessary
to report the stated components of net assets on a tax basis, excluding
certain temporary differences, as of February 28, 1999. This
reclassification has no impact on net investment income, realized gain/loss
and net asset value of the Fund and is primarily attributable to certain
differences in the computation of distributable income and capital gains
under federal tax rules versus generally accepted accounting principles.
The calculation of net investment income per share in the financial
highlights table excludes these adjustments.
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
- ---------------------- ------------------------ ------------------------
$ (19,630) $ (25,255,631) $ 25,275,261
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
26
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis and is adjusted for the accretion of discounts. In
determining the net gain or loss on securities sold, the cost of securities
is determined on the identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds.
Purchases and redemptions of Fund shares
The premium on cash purchases and fee on redemptions of Fund shares is .50%
of the amount invested or redeemed. All purchase premiums and redemption
fees are paid to and recorded by the Fund as paid-in capital. Purchase
premiums are included as part of each class' "shares sold" and redemption
fees are included as part of each class' "shares repurchased",
respectively, as summarized in Note 5. For the year ended February 28,
1999, the Fund received $336,045 in purchase premiums and $1,678,317 in
redemption fees. There is no premium for reinvested distributions or
in-kind transactions.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .50% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding brokerage commissions, certain other transaction costs (including
transfer taxes), shareholder service fees and extraordinary expenses)
exceed .33% of average daily net assets.
Effective March 1, 1999, GMO's contractual management fee was reduced to
.33% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding brokerage
commissions, certain other transaction costs (including transfer taxes),
shareholder service fees and extraordinary expenses) exceed the management
fee.
27
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- -------------------------------------------------------------------------------
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999 was $4,846. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1999, aggregated
$257,276,335 and $589,800,257, respectively.
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments were as
follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
----------------------- ----------------------- ---------------------- ---------------------
<S> <C> <C> <C>
$ 408,453,734 $ 32,669,618 $ 79,970,642 $ 47,301,024
</TABLE>
4. Principal shareholder
At February 28, 1999, 10.5% of the outstanding shares of the Fund were held
by one shareholder.
28
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums and redemption
fees received by the Fund, were as follows:
<TABLE>
<CAPTION>
Period from
Class I: March 1, 1997
to January 9, 1998
------------------------------
Shares Amount
-------------- ---------------
<S> <C> <C>
Shares sold 55,930 $ 1,050,044
Shares issued to shareholders
in reinvestment of distributions 20,915 350,022
Shares repurchased (164,410) (2,701,072)
-------------- ---------------
Net decrease (87,565) $ (1,301,006)
============== ===============
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
Class III: February 28, 1999 February 28, 1998
--------------------------- -----------------------------
Shares Amount Shares Amount
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Shares sold 6,086,481 $ 84,771,299 8,025,013 $ 137,024,478
Shares issued to shareholders
in reinvestment of distributions 7,418,240 103,948,872 6,187,157 103,690,318
Shares repurchased (25,867,398) (429,090,867) (13,350,357) (234,534,044)
------------- ------------- ------------- --------------
Net increase (decrease) (12,362,677) $ (240,370,696) 861,813 $ 6,180,752
============= ============= ============= ===============
</TABLE>
29
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1999 is as
follows:
Long futures contracts
<TABLE>
<CAPTION>
Number of Net Unrealized
Contracts Type Expiration Date Contract Value Depreciation
--------------- --------------- --------------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C>
20 Russell 2000 March 1999 $3,933,500 $ (224,966)
===============
</TABLE>
At February 28, 1999, the Fund has sufficient cash and/or securities to
cover any commitments or margin on open futures contracts.
<TABLE>
<CAPTION>
Swap agreements
Net
Notional Amount Expiration Unrealized
Fund/Counterparty Date Description Depreciation
------------------- ------------ --------------------------------------------- ---------------
<S> <C> <C> <C>
$ 16,784,010/ 7/16/99 Agreement with Lehman Brothers Finance S.A. $ (500,332)
13,405,735 dated 7/16/98 to pay (receive) the
notional amount multiplied by the return
on the Standard & Poor's 500 Index
(including dividends) less the notional
amount multiplied by 3 month LIBOR
adjusted by a specified spread and to
receive (pay) the change in market value
of a basket of selected securities
(including dividends) less the
counterparty's notional amount multiplied
by 3 month LIBOR adjusted by a specified
spread.
29,482,854/ 9/17/99 Agreement with Deutsche Bank AG dated (904,795)
24,677,038 9/18/98 to pay (receive) the notional amount
multiplied by the return on the Standard
& Poor's 500 Index (including dividends)
less the notional amount multiplied by 3
month LIBOR adjusted by a specified
spread and to receive (pay) the change in
market value of a basket of selected
securities (including dividends) less the
counterparty's notional amount multiplied
by 3 month LIBOR adjusted by a specified
spread.
---------------
$ (1,405,127)
===============
</TABLE>
30
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1999, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 78% of distributions as net capital gain dividends.
31
<PAGE>
GMO Small Cap Value Fund
(A Series of GMO Trust)
------------------------------------------------------------------------------
Portfolio Managers
- ------------------
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Robert Soucy are
primarily responsible for the day-to-day management of the Fund's portfolio.
Mssrs. Grantham and Darnell have each been portfolio managers at Grantham, Mayo,
Van Otterloo & Co. LLC for more than fifteen years; Mr. Soucy for more than ten
years.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The Class III shares of the GMO Small Cap Value Fund returned -14.7% for the
fiscal year ended February 28, 1999, as compared to 19.7% for the S&P 500. The
Russell 2500 Value Index returned -13.4% for the same period. Consistent with
the Fund's investment objectives and policies, the Fund was primarily invested
in common stocks throughout the period.
In the fiscal year that just ended, small-capitalization stocks struggled to
keep pace with the larger capitalization stocks that posted record valuations
despite lofty multiples. The period was one in which sound investment principles
and value investing took a backseat to a fixation on large, well-known names.
The GMO Small Cap Value Fund underperformed the Russell 2500 Value Index by 1.3%
for the period.
Strong performing sectors in the Russell 2500 Value Index included consumer
staples, which benefited from the strong economy and low unemployment, as well
as utilities which performed well in an environment of declining interest rates.
Both technology and healthcare had extremely strong performance during this
period as well. On the other hand, the integrated oils and energy sectors posted
negative returns due in part to declining commodity prices.
The GMO Small Cap Value Fund selects stocks based on four strategies: price to
fair value, price to book, price to sales and price to cash flow. Using these
strategies, our stock selection was positive from our holdings in the utilities,
consumer discretionary and producer durable sectors. This was offset by weak
stock selection in healthcare, technology and financial services.
Our sector emphasis had a marginal impact on overall performance. Our overweight
position in healthcare, which added to performance, was partially offset by our
underweight position in utilities, which detracted from returns as this sector
outperformed during the period.
Outlook
- -------
Since 1983, small-capitalization stocks have lagged their larger counterparts.
At the current time, they look increasingly attractive relative to large
capitalization stocks on a number of measures--price to book, price to cash
flow, price to sales and price to fair value. Today, small-cap stocks are at
their cheapest relative price since the late 1970's when institutions began to
treat small-cap stocks as a separate asset class. Small-cap value stocks are, in
our view, particularly undervalued. We believe that this bodes well for the
relative returns of small-cap stocks over the next few years. The Small Cap
Value Fund is a broadly diversified portfolio of stocks that is likely to
perform well when the sector rebounds.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Small Cap Value Fund Class III Shares and the Russell 2500 Value Index
As of February 28, 1999
---------------------------------------
Average Annual Total Return
---------------------------------------
Inception
1yr 5yr 12/31/91
---------------------------------------
-15.6 12.4 15.3
---------------------------------------
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Date GMO Small Cap Value Fund Russell 2500 Value Index GMO Russell 2500 Value +
Class III Shares
<S> <C> <C> <C>
1/31/91
12/31/91 9,950 10,000 10,000
3/31/92 10,965 10,844 10,427
6/30/92 10,975 10,827 9,954
9/30/92 11,215 11,151 10,226
12/31/92 12,360 12,490 11,617
3/31/93 13,396 13,619 12,168
6/30/93 13,580 13,873 12,423
9/30/93 14,355 14,739 13,303
12/31/93 14,851 14,899 13,540
3/31/94 14,701 14,665 13,240
6/30/94 14,229 14,525 12,772
9/30/94 15,491 15,225 13,700
12/31/94 15,422 14,706 13,409
3/31/95 16,364 15,627 14,400
6/30/95 17,499 17,016 15,683
9/30/95 19,190 18,378 17,190
12/31/95 19,628 19,082 17,660
3/31/96 20,802 19,944 18,694
6/30/96 21,509 20,555 19,472
9/30/96 22,074 21,192 19,911
12/31/96 23,585 23,317 21,019
3/31/97 23,402 23,505 21,188
6/30/97 27,021 26,836 24,190
9/30/97 30,956 30,175 27,200
12/31/97 30,595 31,033 27,974
3/31/98 34,005 33,994 30,643
6/30/98 32,855 32,775 29,543
9/30/98 26,839 27,375 24,676
12/31/98 30,605 30,434 27,434
2/28/99 27,682 28,041 25,277
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 50 bp on the purchase and 50 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Past performance
is not indicative of future performance. Information is unaudited.
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Tobacco-Free Core Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Tobacco Free Core Fund at
February 28, 1999 and the results of its operations, the changes in its net
assets and the financial highlights for the periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 12, 1999
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments (continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- ----------------------------------------------------------------------------
COMMON STOCKS -- 81.0%
Advertising -- 0.2%
4,400 Interpublic Group Inc 329,175
--------------
Aerospace -- 0.5%
14,200 Allied Signal Inc 587,525
3,500 General Dynamics Corp 211,531
2,700 Lockheed Martin Corp 101,756
4,100 Northrop Grumman Corp 255,481
--------------
1,156,293
--------------
Automotive -- 3.4%
900 Dana Corp 33,975
2,800 Eaton Corp 194,250
50,000 Ford Motor Co 2,965,624
43,400 General Motors Corp 3,583,212
7,700 Genuine Parts Co 230,519
10,500 Goodyear Tire & Rubber Co 485,625
3,400 Lear Corp * 120,063
--------------
7,613,268
--------------
Banking and Financial Services -- 8.4%
1,400 American Express Co 151,900
9,375 Amsouth Bancorp 440,625
15,390 Bank One Corp 827,213
36,064 BankAmerica Corp 2,355,429
5,300 Bankers Trust New York Corp 461,100
14,002 Bear Stearns Inc 599,450
14,215 Citigroup Inc 835,131
16,300 Countrywide Credit Industry Inc 617,363
16,700 Dime Bancorp Inc 413,325
6,700 Donaldson Lufkin & Jenrette 381,900
11,950 Edwards (AG) Inc 389,122
5,900 Federal Home Loan Mortgage Corp 347,363
16,400 Federal National Mortgage Association 1,148,000
3,800 Fifth Third Bancorp 251,038
1,000 First American Corp 40,563
18,700 First Union Corp 996,944
7,700 Firstar Corp 644,875
12,900 Franklin Resources Inc 410,381
400 Golden West Financial Corp 37,575
5,300 Greenpoint Financial Corp 162,644
See accompanying notes to the financial statements. 1
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- ----------------------------------------------------------------------------
Banking and Financial Services -- continued
3,500 Huntington Bancshares Inc 111,125
16,600 Lehman Brothers Holding Inc 879,800
100 M & T Bank Corp 47,575
26,900 MBNA Corp 652,325
9,400 Merrill Lynch 721,450
1,800 MGIC Investment Corp 61,313
12,345 Morgan Stanley Dean Witter & Co 1,117,223
6,000 National City Corp 419,250
4,200 Old Kent Financial Corp 184,275
13,800 Paine Webber Group Inc 515,775
11,050 Providian Financial Corp 1,128,481
3,500 Republic New York Corp 158,594
2,800 Suntrust Banks Inc 190,225
13,800 U.S. Bancorp 445,913
2,900 UnionBanCal Corp 91,169
7,252 Washington Mutual Inc 290,080
11,600 Wells Fargo & Co 426,300
--------------
18,952,814
--------------
Chemicals -- 1.0%
6,800 Eastman Chemical Co 320,875
4,200 Great Lakes Chemical Corp 163,538
4,200 PPG Industries Inc 218,663
14,500 Praxair Inc 506,594
7,600 Rohm & Haas Co 237,500
17,300 Union Carbide Corp 761,200
--------------
2,208,370
--------------
Computer and Office Equipment -- 3.0%
8,200 Apple Computer Inc * 285,463
9,800 Electronic Data Systems Corp 455,700
23,700 EMC Corp * 2,426,287
11,900 Gateway 2000 Inc * 864,981
7,400 IBM Corp 1,258,000
4,300 Lexmark International Group Inc * 443,706
1,700 Micron Technology Inc * 97,963
2,400 Symbol Technologies Inc 127,200
27,400 Unisys Corp * 816,863
--------------
6,776,163
--------------
2 See accompanying notes to the financial statements.
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- ----------------------------------------------------------------------------
Construction -- 2.5%
10,600 Georgia-Pacific Corp 776,450
60,700 Home Depot Inc 3,623,030
22,500 Lowes Co Inc 1,334,531
--------------
5,734,011
--------------
Consumer Goods -- 1.7%
6,200 Eastman Kodak Co 410,363
12,300 Fortune Brands Inc 370,538
6,250 Hasbro Inc 231,250
4,400 Johnson Controls 270,600
7,400 Mattel Co 195,175
16,300 Maytag Corp 913,819
11,500 Newell Co 488,750
3,000 Nike Inc, Class B 160,875
11,200 VF Corp 539,000
8,600 Whirlpool Corp 374,100
--------------
3,954,470
--------------
Electronic Equipment -- 1.1%
8,100 Cooper Industries Inc 354,375
26,800 General Instrument Corp * 783,900
6,700 Harris Corp 208,538
2,900 Litton Industries * 162,763
19,300 Raytheon Co, Class B 1,031,344
--------------
2,540,920
--------------
Food and Beverage -- 1.9%
20,400 Anheuser Busch Cos Inc 1,564,424
4,739 Archer Daniels Midland Co 71,677
5,100 Bestfoods 239,381
2,600 Heinz (HJ) Co 141,538
12,300 McDonald's Corp 1,045,500
18,300 Seagrams Co Ltd 848,663
5,400 Unilever NV ADR 391,163
--------------
4,302,346
--------------
Health Care -- 3.8%
1,800 Becton Dickinson & Co 60,300
51,200 Columbia HCA Healthcare Corp 915,200
24,300 Healthsouth Corp * 282,488
5,500 Hillenbrand Industries Inc 230,313
61,100 Johnson & Johnson 5,216,412
See accompanying notes to the financial statements. 3
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- ----------------------------------------------------------------------------
Health Care -- continued
11,600 Pharmacia & Upjohn Inc 631,475
11,100 Tenet Healthcare Corp * 218,531
10,700 United Healthcare Corp 527,644
7,900 Wellpoint Health Network * 623,113
--------------
8,705,476
--------------
Insurance -- 2.8%
14,800 Aetna Life and Casualty Co 1,096,125
3,100 AMBAC Inc 173,600
10,600 Cigna Corp 832,100
4,600 Cincinnati Financial Corp 161,288
5,900 CNA Financial Corp * 200,231
31,466 Conseco Inc 942,013
2,400 Equitable Companies Inc 162,150
3,400 Hartford Financial Services Group Inc 183,813
5,500 Humana Inc * 96,250
9,150 Old Republic International Corp 172,134
1,800 Pacificare Health Systems, Class B * 130,050
9,300 Safeco Corp 373,744
16,300 Saint Paul Cos Inc 527,713
18,300 Torchmark Corp 608,475
10,000 Transamerica Corp 725,625
--------------
6,385,311
--------------
Machinery -- 0.0%
3,100 Case Corp 60,450
--------------
Manufacturing -- 1.5%
6,800 American Greetings Corp 161,075
7,100 Leggett & Platt Inc 148,656
14,800 Minnesota Mining and Manufacturing Co 1,096,125
18,100 Owens Illinois Inc * 433,269
7,500 Rockwell International Corp 333,281
6,600 Temple Inland Inc 395,588
7,000 United Technologies Corp 867,125
--------------
3,435,119
--------------
Metals and Mining -- 0.2%
10,900 Phelps Dodge Corp 528,650
--------------
Oil and Gas -- 3.6%
6,300 Amerada Hess Corp 285,863
4 See accompanying notes to the financial statements.
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- ----------------------------------------------------------------------------
Oil and Gas -- continued
23,700 Atlantic Richfield Co 1,294,613
10,400 Burlington Resources Inc 336,700
6,100 Chevron Corp 468,938
4,600 Columbia Energy Group 232,300
6,900 Consolidated Natural Gas Co 379,069
4,700 Diamond Offshore Drilling Inc 97,231
11,800 Enron Oil & Gas 194,700
100 Exxon Corp 6,656
11,300 Mobil Corp 940,019
34,700 Occidental Petroleum Corp 522,669
17,100 Phillips Petroleum Co 661,556
5,700 Sonat Inc 144,281
20,500 Texaco Inc 954,531
24,300 Union Pacific Resources Group 217,181
22,600 Unocal Corp 637,038
30,000 USX - Marathon Group 620,625
7,100 Vastar Resources Inc 273,350
--------------
8,267,320
--------------
Paper and Allied Products -- 0.1%
2,000 Mead Corp 60,875
6,030 Sonoco Products Co 147,735
3,700 Westvaco Corp 82,788
--------------
291,398
--------------
Pharmaceuticals -- 5.8%
105,800 Abbott Laboratories 4,913,087
4,600 Allergan Inc 374,900
23,800 American Home Products Corp 1,416,100
23,600 Amgen Inc * 2,947,049
2,854 McKesson HBOC Inc 194,072
10,400 Pfizer Inc 1,372,150
28,700 Schering Plough Corp 1,605,405
200 Warner Lambert Co 13,813
8,000 Watson Pharmaceutical Inc * 386,500
--------------
13,223,076
--------------
Primary Materials -- 0.4%
11,400 Crown Cork & Seal Inc 316,350
8,400 Rubbermaid Inc 277,725
1,700 Vulcan Materials Co 229,075
--------------
823,150
--------------
See accompanying notes to the financial statements. 5
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- ----------------------------------------------------------------------------
Primary Processing -- 0.3%
2,700 Dow Chemical Co 265,613
8,600 Nucor Corp 383,238
300 USX-US Steel Group Inc 7,594
--------------
656,445
--------------
Printing and Publishing -- 0.2%
4,800 Dow Jones and Co Inc 225,600
1,400 Gannett Co Inc 88,900
1,400 New York Times Co, Class A 43,400
300 Washington Post Co, Class B 164,963
--------------
522,863
--------------
Refining -- 0.1%
3,800 Royal Dutch Petroleum Co 166,725
5,900 Tosco Corp 122,056
--------------
288,781
--------------
Retail Trade -- 7.2%
15,400 Albertsons Inc 877,800
7,000 American Stores Co 236,250
14,000 Autozone Inc * 490,000
15,700 Best Buy Co Inc * 1,456,175
11,400 Dillards Department Stores Inc 283,575
4,700 Food Products Lion Inc 45,825
45,825 Gap Inc 2,964,304
32,900 Kmart Corp * 575,750
9,100 Kroger Co * 588,656
3,900 Limited Inc 138,450
200 Penney (JC) Co Inc 7,225
900 Rite Aid Corp 37,238
19,800 Staples Inc * 582,245
15,200 TJX Cos Inc 434,150
32,200 Toys R Us Inc * 454,825
73,700 Wal Mart Stores Inc 6,365,837
21,400 Walgreen Co 684,800
4,800 Winn-Dixie Stores Inc 210,300
--------------
16,433,405
--------------
Services -- 1.4%
700 BHC Communications Inc, Class A 80,150
2,600 Cendant Corp * 43,063
6 See accompanying notes to the financial statements.
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- ----------------------------------------------------------------------------
Services -- continued
11,200 Fluor Corp 394,100
2,500 Hertz Corp 99,531
8,900 Marriott International Inc, Class A 320,400
33,500 Time Warner Inc 2,160,749
--------------
3,097,993
--------------
Technology -- 12.3%
3,800 Adobe Systems Inc 152,950
26,000 BMC Software Inc * 1,062,750
5,200 Ceridian Corp * 372,450
71,850 Cisco Systems Inc * 7,027,827
11,200 Computer Sciences Corp 746,200
16,100 Dell Computer Corp * 1,290,013
11,300 First Data Corp 432,225
9,300 Grainger (WW) Inc 413,850
48,800 Intel Corp 5,852,949
51,000 Microsoft Corp * 7,656,374
53,600 Novell Inc * 1,038,500
19,800 Oracle Corp * 1,106,325
23,700 Seagate Technology Corp * 685,819
400 Xerox Corp 22,075
--------------
27,860,307
--------------
Telecommunications -- 10.8%
8,000 Airtouch Communications Inc * 728,500
5,000 Alltel Corp 299,375
22,700 Ameritech Corp 1,484,012
63,300 AT & T Corp 5,198,512
37,186 Bell Atlantic Corp 2,135,870
26,900 Bellsouth Corp 1,244,125
10,500 Cablevision Systems Corp * 682,500
11,500 Century Telephone Enterprises Inc 710,125
7,800 Comcast Corp 553,313
40,600 GTE Corp 2,633,924
17,292 MCI Worldcom Inc * 1,426,590
43,332 SBC Communications 2,291,179
13,400 Sprint Corp 1,149,888
10,900 Tele-Communications, Class A * 684,656
30,300 US West Inc 1,615,368
19,100 Viacom Inc, Class B * 1,687,962
--------------
24,525,899
--------------
See accompanying notes to the financial statements. 7
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Shares Description Value ($)
- ----------------------------------------------------------------------------
Transportation -- 1.7%
6,900 AMR Corp * 382,519
56,700 Burlington Northern Santa Fe Railroad Co 1,878,187
13,700 CSX Corp 537,725
8,800 Norfolk Southern Corp 246,950
9,400 UAL Corp * 561,650
3,400 USAir Group Inc * 161,075
--------------
3,768,106
--------------
Utilities -- 5.1%
16,600 Baltimore Gas and Electric Co 425,375
25,500 Central & South West Corp 632,719
22,800 Coastal Corp 729,600
8,400 Consolidated Edison Inc 392,700
5,100 Dominion Resources Inc 196,988
24,500 DTE Energy Co 967,750
5,800 El Paso Energy Corp 211,338
51,600 Entergy Corp 1,457,700
14,900 Firstenergy Corp 435,825
20,200 General Public Utilities Inc 805,475
6,500 Keyspan Energy Corp 172,250
20,800 Niagara Mohawk Power Corp * 304,200
16,800 Peco Energy Co 595,350
21,000 PG & E Corp 661,500
6,200 Potomac Electric Power Co 151,125
17,000 PP & L Resources Inc 433,500
25,800 Public Service Enterprise Group Inc 980,400
10,100 Reliant Energy Inc 270,806
3,000 Scana Corp 70,500
3,100 Teco Energy Inc 67,038
25,500 Texas Utilities Co 1,082,156
16,300 Unicom Corp 579,669
--------------
11,623,964
--------------
TOTAL COMMON STOCKS (COST $164,201,593) 184,065,543
--------------
8 See accompanying notes to the financial statements.
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares/
Par Value ($) Description Value ($)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 17.5%
Cash Equivalents -- 6.5%
$ 707,950 BankBoston Eurodollar Time Deposit, 5.005% due 4/30/99(a) 707,950
2,004,050 Merrimac Cash Fund Premium Class(a) 2,004,050
$12,000,000 Prudential Securities Group Inc, Master Note, 5.075% due
6/14/99(a) 12,000,000
-------------
14,712,000
-------------
Repurchase Agreements -- 10.0%
$11,415,248 Prudential Securities Inc. Repurchase Agreement, dated
2/26/99, due 3/1/99, with a maturity value of $11,419,110
and an effective yield of 4.06%, collateralized by a U.S.
Government Agency Obligation with a rate of 7.30%, maturity
date of 8/01/24 and market value, including accrued
interest, of $11,643,563. 11,415,248
$11,415,248 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/26/99, due 3/1/99, with a maturity value of $11,419,072
and an effective yield of 4.02%, collateralized by a U.S.
Treasury Obligation with a rate of 7.00%, maturity date
of 7/15/06 and market value, including accrued interest,
of $11,643,553. 11,415,248
-------------
22,830,496
-------------
U.S. Government -- 1.0%
$ 2,180,000 U.S. Treasury Bill, 4.53%, due 4/29/99(b) 2,163,530
-------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $39,706,343) 39,706,026
-------------
TOTAL INVESTMENTS -- 98.5%
(COST $203,907,936) 223,771,569
Other Assets and Liabilities (net) -- 1.5% 3,386,916
-------------
TOTAL NET ASSETS -- 100% $ 227,158,485
=============
Notes to the Schedule of Investments:
ADR - American Depositary Receipt
* Non-income producing security.
(a) Represents investments of security lending collateral (Note 1).
(b) Security has been segregated to cover margin requirements
on open financial futures contracts.
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1999
- --------------------------------------------------------------------------------
Assets:
Investments, at value (cost $203,907,936) (Note 1) $223,771,569
Cash 18,317,031
Receivable for Fund shares sold 115
Dividends and interest receivable 351,615
Receivable for expenses waived or borne by Manager (Note 2) 35,887
-------------
Total assets 242,476,217
-------------
Liabilities:
Payable upon return of securities loaned (Note 1) 14,712,000
Payable for Fund shares repurchased 113,750
Payable for open swap contracts (Note 1 and 6) 173,044
Payable for variation margin on open futures
contracts (Notes 1 and 6) 175,500
Payable to affiliate for (Note 2):
Management fee 81,544
Shareholder service fee 24,102
Accrued expenses 37,792
-------------
Total liabilities 15,317,732
-------------
Net assets $227,158,485
=============
Net assets consist of:
Paid-in capital $203,418,672
Accumulated undistributed net investment income 430,212
Accumulated undistributed net realized gain 3,839,300
Net unrealized appreciation 19,470,301
-------------
$227,158,485
=============
Net assets attributable to:
Class III shares $227,158,485
=============
Shares outstanding:
Class III 15,926,141
=============
Net asset value per share:
Class III $ 14.26
=============
10 See accompanying notes to the financial statements.
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1999
- --------------------------------------------------------------------------------
Investment Income:
Dividends (net of withholding taxes of $5,836) $ 1,874,455
Interest (including securities lending income
of $23,755) 564,545
------------
Total income 2,439,000
------------
Expenses:
Management fee (Note 2) 666,206
Custodian and transfer agent fees 59,568
Audit fees 30,931
Registration fees 5,574
Legal fees 2,922
Trustees fees (Note 2) 1,185
Miscellaneous 3,890
Fees waived or borne by Manager (Note 2) (330,580)
------------
439,696
Shareholder service fee (Note 2)
Class III 199,862
------------
Net expenses 639,558
------------
Net investment income 1,799,442
------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 15,215,515
Closed futures contracts 861,032
Closed swap contracts (3,790,635)
------------
Net realized gain 12,285,912
------------
Change in net unrealized appreciation
(depreciation) on:
Investments 2,420,788
Open futures contracts (321,418)
Open swap contracts 232,500
------------
Net unrealized gain 2,331,870
------------
Net realized and unrealized gain 14,617,782
------------
Net increase in net assets resulting from
operations $16,417,224
============
See accompanying notes to the financial statements. 11
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1999 February 28, 1998
----------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 1,799,442 $ 1,309,184
Net realized gain 12,285,912 12,207,291
Change in net unrealized appreciation (depreciation) 2,331,870 11,550,985
------------ ------------
Net increase in net assets resulting from operations 16,417,224 25,067,460
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (1,592,308) (1,251,164)
------------ ------------
Total distributions from net investment income (1,592,308) (1,251,164)
------------ ------------
Net realized gains
Class III (15,222,676) (16,435,486)
------------ ------------
Total distributions from net realized gains (15,222,676) (16,435,486)
------------ ------------
(16,814,984) (17,686,650)
------------ ------------
Net share transactions: (Note 5)
Class III 127,633,807 26,281,193
------------ ------------
Increase in net assets resulting from net share
transactions 127,633,807 26,281,193
------------ ------------
Total increase in net assets 127,236,047 33,662,003
Net assets:
Beginning of period 99,922,438 66,260,435
------------ ------------
End of period (including accumulated undistributed net
investment income of $430,212 and $223,078,
respectively) $227,158,485 $99,922,438
============ ===========
</TABLE>
12 See accompanying notes to the financial statements.
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29,
-------------------------------------------------------
1999 1998 1997 1996 1995
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 14.05 $12.98 $12.93 $10.65 $11.07
------- ------ ------ ------ ------
Income from investment operations:
Net investment income 0.18 0.22 0.24 0.28 0.23
Net realized and unrealized gain 1.99 4.07 2.41 3.71 0.50
------- ------ ------ ------ ------
Total from investment
operations 2.17 4.29 2.65 3.99 0.73
------- ------ ------ ------ ------
Less distributions to shareholders:
From net investment income (0.19) (0.22) (0.24) (0.25) (0.28)
From net realized gains (1.77) (3.00) (2.36) (1.46) (0.87)
------- ------ ------ ------ ------
Total distributions (1.96) (3.22) (2.60) (1.71) (1.15)
------- ------ ------ ------ ------
Net asset value, end of period $ 14.26 $14.05 $12.98 $12.93 $10.65
======= ====== ====== ====== ======
Total Return /(a)/ 16.29% 37.82% 22.76% 38.64% 7.36%
Ratios/Supplemental Data:
Net assets, end of period (000's) $227,158 $99,922 $66,260 $57,485 $47,969
Net expenses to average daily net
assets 0.48% 0.48% 0.48% 0.48% 0.48%
Net investment income to average
daily net assets 1.35% 1.66% 1.83% 2.25% 2.52%
Portfolio turnover rate 77% 70% 131% 81% 112%
Fees and expenses voluntarily
waived or borne by the Manager
consisted of the following per
share amounts: $ 0.03 $ 0.04 $ 0.04 $ 0.03 $ 0.03
</TABLE>
/(a)/ Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
See accompanying notes to the financial statements. 13
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
- ------------------------------------
GMO Tobacco-Free Core Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, diversified management investment company. The
Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series into classes.
The Fund seeks a total return greater than that of the Standard & Poor's
500 Stock Index through investment of substantially all of its assets in
common stocks chosen from the Wilshire 5000 Index and primarily in common
stocks chosen from among the 1,200 companies with the largest equity
capitalization whose securities are listed on a United States national
securities exchange which are not tobacco producing issuers, as defined in
the Fund's prospectus.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Other assets and
securities for which no quotations are readily available are valued at fair
value as determined in good faith by the Trustees.
Futures contracts
-----------------
The Fund may purchase and sell futures contracts on the domestic stock
indices. Stock index futures contracts represent commitments for future
delivery of cash based upon the level of a specified index of equity
securities at a specified price at a given date. The Fund may use futures
contracts to manage its exposure to the stock markets. Buying futures tends
to increase the Fund's exposure to the underlying instrument. Selling
futures tends to decrease the Fund's exposure to the underlying instrument
or hedge other Fund instruments. Upon entering into a futures contract, the
Fund is required to deposit with its custodian, in a segregated account in
the name of the futures broker, an amount of cash or U.S. government
obligations in accordance with the initial margin requirements of the
broker or exchange. Futures contracts are marked to market daily and an
appropriate payable or receivable for the change in value ("variation
margin") is recorded by the Fund. The payable or receivable is liquidated
on the following business day. Gains or losses are recognized but not
considered realized until the contracts expire or are closed. Futures
contracts involve, to varying degrees, risk of loss in excess of the
variation margin disclosed in the Statement of Assets and Liabilities.
Losses may arise from changes in the value of the underlying instrument, if
there is an illiquid secondary market for the contracts, or if
14
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
counterparties do not perform under the contract terms. Futures contracts
are valued at the settlement price established each day by the board of
trade or exchange on which they are traded. See Note 6 for all open futures
contracts as of February 28, 1999.
Repurchase agreements
---------------------
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Security lending
----------------
The Fund may lend its securities to qualified brokers. The loans are
collateralized at all times with cash or securities with a market value at
least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1999, the Fund loaned securities having a
market value of $14,122,906, collateralized by cash in the amount of
$14,712,000, which was invested in short-term instruments.
Swap agreements
---------------
The Fund may enter into swap agreements to manage its exposure to the
equity markets. A swap is an agreement to exchange the return generated by
one instrument for the return generated by another instrument. The Fund
enters into equity swap agreements which involve a commitment by one party
in the agreement to pay interest in exchange for a market linked return
based on a notional amount. To the extent that the total return of the
security or index underlying the transaction exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make a payment to the counterparty, respectively. The Fund also enters
into contracts for differences in which the Fund agrees with the
counterparty that its return will be based on the relative performance of
two different groups or "baskets" of securities, adjusted by an interest
rate payment. Swaps are marked to market daily based upon quotations from
market makers and the change, if any, is recorded as unrealized gain or
loss in the Statement of Operations. Payments received or made at the end
of the measurement period are recorded as realized gain or loss in the
Statement of Operations. Entering into these agreements involves, to
varying degrees, elements of credit and market risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform, or that there may be unfavorable changes in the
price of the security or index underlying these transactions. See Note 6
for a summary of all open swap agreements as of February 28, 1999.
15
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Taxes
-----
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary. Taxes on foreign dividend income are withheld in accordance with
the applicable country's tax treaty with the United States.
Distributions to shareholders
-----------------------------
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles.
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
---------------------------------------------------
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis and is adjusted for the accretion of discounts. In
determining the net gain or loss on securities sold, the cost of securities
is determined on the identified cost basis.
Expenses
--------
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds.
Purchases and redemptions of Fund shares
----------------------------------------
The premium on cash purchases of Fund shares is .14% of the amount
invested. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. Purchase premiums are included as part of "shares sold" as
summarized in Note 5. For the year ended February 28, 1999, the Fund
received $58,008 in purchase premiums. There is no premium for cash
redemptions, reinvested distributions or in-kind transactions.
16
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
2. Fees and other transactions with affiliates
- ------------------------------------------------
GMO earns a management fee paid monthly at the annual rate of .50% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding brokerage commissions, certain other transaction costs (including
transfer taxes), shareholder service fees and extraordinary expenses)
exceed .33% of average daily net assets.
Effective March 1, 1999, GMO's contractual management fee was reduced to
.33% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total operating expenses (excluding brokerage commissions,
certain other transaction costs (including transfer taxes), shareholder
service fees and extraordinary expenses) exceed the management fee.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999 was $1,185. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
- --------------------------------------
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1999, aggregated
$164,619,581 and $93,772,026, respectively.
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
--------------------- ----------------------- ----------------------- ----------------------
<S> <C> <C> <C>
$204,179,234 $28,911,840 $9,319,505 $19,592,335
</TABLE>
4. Principal shareholders
- ---------------------------
At February 28, 1999, 67.3% of the outstanding shares of the Fund were held
by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
17
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
5. Share transactions
- -----------------------
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including the purchase premiums received by the Fund, were as
follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
Class III: February 28, 1999 February 28, 1998
---------------------------- ---------------------------
Shares Amount Shares Amount
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Shares sold 8,174,912 $ 118,663,463 1,705,285 $ 23,536,920
Shares issued to shareholders
in reinvestment of
distributions 1,181,509 16,525,109 1,411,739 17,655,036
Shares repurchased (544,280) (7,554,765) (1,109,228) (14,910,763)
------------ ------------- ------------ ------------
Net increase 8,812,141 $ 127,633,807 2,007,796 $ 26,281,193
============ ============= ============ ============
</TABLE>
6. Financial instruments
- --------------------------
A summary of outstanding financial instruments at February 28, 1999 is as
follows:
Long futures contracts
<TABLE>
<CAPTION>
Number of Net Unrealized
Contracts Type Expiration Date Contract Value Depreciation
------------- ------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
117 S&P 500 March 1999 $36,138,375 $ (220,288)
=================
</TABLE>
At February 28, 1999, the Fund has sufficient cash and/or securities to
cover any commitments or margin on open futures contracts.
18
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Swap agreements
<TABLE>
<CAPTION>
Net
Notional Amount Expiration Unrealized
Fund/Counterparty Date Description Depreciation
----------------------- ------------ -------------------------------------- ---------------
<S> <C> <C> <C>
$ 8,105,056/ 2/18/00 Agreement with Morgan Stanley $ (87,052)
8,102,761 Capital Services, Inc. dated 2/18/99
to pay (receive) the notional
amount multiplied by the return on
the Standard & Poor's 500 Index
(including dividends) less the
notional amount multiplied by 3
month LIBOR adjusted by a
specified spread and to receive
(pay) the change in market value
of a basket of selected securities
(including dividends) less the
counterparty's notional amount
multiplied by 3 month LIBOR
adjusted by a specified spread.
6,479,470/ 2/18/00 Agreement with Morgan Stanley (85,992)
6,472,066 Capital Services, Inc. dated 2/18/99
to pay (receive) the notional
amount multiplied by the return on
the Standard & Poor's 500 Index
(including dividends) less the
notional amount multiplied by 3
month LIBOR adjusted by a
specified spread and to receive
(pay) the change in market value
of a basket of selected securities
(including dividends) less the
counterparty's notional amount
multiplied by 3 month LIBOR
adjusted by a specified spread.
----------------
$ (173,044)
================
</TABLE>
19
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Federal Tax Information (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1999, all of the Fund's distributions are
from investment company taxable income, except that the Fund has designated
84.02% of distributions as net capital gain dividends.
20
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
- ------------------
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Robert Soucy are
primarily responsible for the day-to-day management of the Fund's portfolio.
Mssrs. Grantham and Darnell have each been portfolio managers at Grantham, Mayo,
Van Otterloo & Co. LLC for more than fifteen years; Mr. Soucy for more than ten
years.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The Class III shares of the GMO Tobacco-Free Core Fund returned 16.3% for the
fiscal year ended February 28, 1999, as compared to 19.7% for the S&P 500.
Consistent with the Fund's investment objectives and policies, the Fund was
invested substantially in common stocks throughout the period.
The Fund's underperformance for the period is attributed to its overweight in
small-cap stocks, as well as its bias in favor of value stocks in the portfolio.
Most of the relative performance shortfall came in the fourth quarter of 1998,
when concerns over a global financial crisis evaporated and the U.S. market
staged a remarkable rally. The Fund's value was counter-productive during this
period.
Excluding the impact of swaps, return from sector selection was positive,
exceeding the benchmark by 250 basis points. However, the swaps, most of which
are designed to give the portfolio exposure to small and small value stocks,
more than offset positive sector selection. The Fund was also overweight in
electric utilities during the year, which appeared significantly undervalued
relative to their historic levels. This positioning worked against the Fund
during the year as electric utilities underperformed the S&P 500. These losses
were partially offset by gains from the Fund's strategy of overweighting long
distance telephone companies, including AT&T and MCI, which outperformed during
the period.
The Fund's small underweight position in technology, the strongest performing
S&P 500 sector during the period, detracted from performance. Also detracting
from performance were the overweight positions in poor-performing industrial
sectors, including auto/transportation and other energy stocks. Positive
contributors to performance included an overweight position in retail stocks,
which added over 100 basis points. Underweight positions in consumer staple
stocks, particularly the beverage and soft drink industry, also added to
performance as did the underweights in such industrial sectors as
materials/processing and producer durable stocks. Finally, the exclusion of
tobacco stocks, which underperformed the benchmark by 25.8% during the period,
also contributed positively to performance.
Stock selection was disappointing for the fiscal year, detracting 175 basis
points. Stock selection was strong in certain industries, including retail and
healthcare stocks. However, this was more than offset by weak selection among
utility, financial and integrated oil stocks.
For the fiscal year, the momentum and fair value strategies were successful in
adding value. The momentum strategy was especially powerful in the fourth
quarter of 1998. The cash flow and neglect strategies, on the other hand, did
not add value. We would expect these strategies to perform better in more
difficult market conditions.
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Outlook
- -------
Although the Fund's emphasis away from the largest capitalization stocks and
overweight in small-cap issues was detrimental to performance in fiscal 1999,
small-cap stocks appear on our valuation measures to be trading at extremely
cheap levels relative to large-cap stocks. Therefore, we are maintaining the
current positioning in the Fund with respect to market capitalization. Including
the impact of swaps, the portfolio currently is underweight in the largest 50
stocks by 18%, and overweight in the smallest stocks by about 10%.
The Fund's focus on value stocks, which was also not productive in fiscal 1999,
is also being maintained in the portfolio. The strength of the S&P 500, and
especially of the largest capitalization stocks in the Index, has exceeded our
expectations. However, in our view, should the bull market falter, the portfolio
is well-positioned to add value relative to the benchmark. With a resumption of
more normal market conditions, the portfolio is positioned to continue its
pattern of long-term outperformance relative to the S&P 500.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Tobacco-Free Core Fund Class III Shares and the S&P 500 Index
As of February 28, 1999
-------------------------------
Average Annual Total Return
-------------------------------
Since
Inception
1 Year 5 Year 10/31/91
-------------------------------
Class
III 16.1% 23.9% 20.5%
-------------------------------
[LINE GRAPH APPEARS HERE]
GMO Tobacco-Free Core Fund
Date Class III Shares S&P 500 Index
---- -------------------------- -------------
1/31/91
10/31/91 9,986 10,000
12/31/91 10,648 10,695
3/31/92 10,327 10,426
6/30/92 10,639 10,625
9/30/92 10,771 10,960
12/31/92 11,254 11,512
3/31/93 12,039 12,015
6/30/93 12,340 12,074
9/30/93 12,997 12,385
12/31/93 13,214 12,673
3/31/94 12,852 12,191
6/30/94 12,889 12,243
9/30/94 13,379 12,841
12/31/94 13,530 12,840
3/31/95 14,785 14,090
6/30/95 16,386 15,435
9/30/95 18,132 16,661
12/31/95 19,349 17,664
3/31/96 20,057 18,613
6/30/96 20,744 19,448
9/30/96 21,351 20,049
12/31/96 22,889 21,720
3/31/97 23,473 22,302
6/30/97 27,315 26,196
9/30/97 30,640 28,158
12/31/97 31,038 28,967
3/31/98 35,284 33,007
6/30/98 36,144 34,096
9/30/98 32,527 30,705
12/31/98 38,859 37,244
2/28/99 39,189 37,595
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 14 bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Past performance is not indicative of future
performance. Information is unaudited.
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO U.S. Bond/Global Alpha A Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO U.S. Bond/Global Alpha A Fund
at February 28, 1999 and the results of its operations, the changes in its net
assets and the financial highlights for the periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 16, 1999
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEBT OBLIGATIONS -- 95.1%
Albania -- 2.3%
USD 15,681,227 Republic of Albania Par Bond, Zero Coupon, due 8/31/25 3,253,846
--------------
Brazil -- 1.5%
USD 4,000,000 Brazil New Money Bond,
Variable Rate, 6 mo. LIBOR + .88%, 6.19%, due 4/15/09 2,092,491
--------------
Bulgaria -- 0.1%
USD 2,000,000 Bulgaria Discount Series B Interest Strips, Basket
2, 0.00%, due 1/28/10-7/28/24 199,991
--------------
Cayman Islands -- 1.3%
USD 2,000,000 Pemex Finance Ltd Series 1A Class A2, 144A, 6.30%, due
5/15/10 1,944,991
--------------
Germany -- 1.5%
GBP 2,000,000 Schweiz Bankgesellschaft, Zero Coupon, due 3/31/06 2,143,467
--------------
Italy -- 1.1%
GBP 660,000 Republic of Italy, 10.50%, due 4/28/14 1,590,623
--------------
Jordan -- 0.1%
USD 250,000 Hashemite Kingdom of Jordan Par Bond,
Variable Rate, Step Up, 144A, 5.50%, due 12/23/23 139,991
--------------
Mexico -- 8.8%
FRF 44,500,000 Mexico Par Bond, 6.63%, due 12/31/19 5,790,387
CHF 15,000,000 Mexico Par Bond, 3.75%, due 12/31/19 6,805,940
--------------
12,596,327
--------------
Nigeria -- 0.4%
USD 987,181 Central Bank of Nigeria Par Bond,
Variable Rate, Step Up, 6.25%, due 11/15/20 626,851
--------------
Russia -- 0.0%
USD 189,099 Russia Vnesheconombank IAN,
Variable Rate, 6 mo. LIBOR + .81%, 5.97%, due 12/15/15 18,883
--------------
Supra National -- 0.8%
AUD 11,800,000 European Bank for Reconstruction and Development,
Zero Coupon, due 2/10/28 1,217,871
--------------
Sweden -- 0.8%
SEK 8,200,000 Kingdom of Sweden, 6.00%, due 2/09/05 1,101,878
--------------
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States -- 76.4%
Asset Backed Securities -- 61.3%
USD 2,453,002 AFC Home Equity Loan Trust Series 97-1 Class A, Variable
Rate, 1 mo. LIBOR + .22%, 5.16%, due 3/25/27 2,439,195
USD 1,139,744 Americredit Automobile Receivables Trust Series 96-B Class A,
6.50%, due 1/12/02 1,143,830
USD 1,000,000 BEA CBO Series 98-1A Class A2A, 6.72%, due 6/15/10 964,522
USD 20,500,000 Big Flower Receivables Master Trust 96-2 Class A,
Variable Rate, LIBOR + .25%, 5.19%, due 4/25/03 20,212,991
USD 15,445,000 Brazos Student Loan Finance Corp Series 96-B Class A4,
Variable Rate, 3 mo. U.S. Treasury Bill + .50%, 5.06%, due
12/01/02 15,377,419
USD 2,800,000 Cigna CBO Ltd Series 96-1 Class A2, 144A, 6.46%, due 11/15/08 3,015,241
USD 5,000,000 CS First Boston Mortgage Securities Corp, Series 98-C1 Class
A1B, 6.48%, due 5/17/08 4,969,991
USD 6,000,000 Dreamworks Film Trust Series 1 Class A,
Variable Rate, 3 mo. LIBOR + .22%, 5.25%, due 10/15/06 5,969,991
USD 3,000,000 MBNA Master Credit Card Trust Series 96-A Class A,
Variable Rate, 1 mo. LIBOR + .21%, 5.15%, due 7/15/05 3,006,591
USD 5,000,000 Northstar CBO Ltd. Series 97-2 Class A2, 144A, 6.62%, due
7/15/09 5,405,460
USD 3,000,000 Rhyno CBO Delaware Corp Series 97-1 Class A-2, 144A,
Variable Rate, Step Up, 6.33%, due 9/15/09 3,162,647
USD 10,000,000 SHYPPCO Finance Company Series B Class A-2B, 6.64%, due
6/15/10 9,789,991
USD 5,048,155 Signet Student Loan Trust Series 96-A Class A-1,
Variable Rate, 1 mo. LIBOR + .09%, 5.03%, due 1/25/05 5,045,622
USD 4,699,583 Society Student Loan Trust 94-A Class A2,
Variable Rate, 1 mo. LIBOR +.33%, 5.95%, due 12/29/03 4,699,574
USD 3,000,000 Starvest Emerging Markets CBO-I Series 1A, Class A,
Variable Rate, 6 mo. LIBOR + .19%, 144A, 5.16%, due 7/30/11 2,884,679
--------------
88,087,744
--------------
Structured Notes -- 2.0%
USD 3,000,000 Polaris Funding Company,
Variable Rate, 1 mo. LIBOR + .30%, 5.24%, due 1/07/05 2,947,022
--------------
U.S. Government -- 9.7%
USD 10,100,000 U.S. Treasury 0.00% Receipts, due 2/15/10(a) 5,147,396
USD 10,100,000 U.S. Treasury 0.00% Receipts, due 2/15/12(a) 4,478,342
USD 10,100,000 U.S. Treasury 0.00% Receipts, due 8/15/12(a) 4,328,793
--------------
13,954,531
--------------
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Schedule of Investments--(Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States -- continued
U.S. Government Agency -- 3.4%
USD 5,000,000 Federal Home Loan Bank,
Variable Rate, CPI + 3.15%, 4.75%, due 2/15/02(b) 4,842,491
--------------
Total United States 109,831,788
--------------
TOTAL DEBT OBLIGATIONS (COST $137,171,999) 136,758,998
--------------
LOAN ASSIGNMENTS -- 0.3%
Russia -- 0.3%
USD 5,500,000 Russia Vnesh Restructured Loan Agreements* 391,866
--------------
TOTAL LOAN ASSIGNMENTS (COST $3,514,248) 391,866
--------------
<CAPTION>
Shares
------
<C> <S> <C>
PREFERRED STOCKS -- 2.6%
United States -- 2.6%
4,000 Bear Stearns Managed Income Securities Plus Fund, 13.27% 3,732,283
--------------
TOTAL PREFERRED STOCKS (COST $3,949,109) 3,732,283
--------------
<CAPTION>
Principal Amount
-----------------
<S> <C> <C> <C>
CALL OPTIONS PURCHASED -- 0.5%
Options on Bonds -- 0.1%
SEK 140,000,000 Sweden Government Bond, Expires 4/27/99, Strike 110.114 201,680
--------------
Options on Currency -- 0.4%
USD 10,000,000 Euro, Expires 4/06/99, Strike 1.15 418,000
USD 5,600,000 Japanese Yen, Expires 4/16/99, Strike 122 75,040
--------------
493,040
--------------
Options on Futures -- 0.0%
USD 1,405,000 Eurodollar, Expires 3/15/99, Strike 95 14,050
--------------
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL CALL OPTIONS PURCHASED 708,770
(COST $604,358) -------------
PUT OPTIONS PURCHASED -- 0.1%
Options on Currency -- 0.1%
USD 10,000,000 Euro, Expires 4/06/99, Strike 1.20 --
USD 5,600,000 Japanese Yen, Expires 4/16/99, Strike 112 46,480
-------------
46,480
-------------
TOTAL PUT OPTIONS PURCHASED (COST
$180,400) 46,480
-------------
<CAPTION>
Shares
-----------
<C> <S> <C>
RIGHTS AND WARRANTS -- 0.0%
Mexico-- 0.0%
17,748,000 United Mexican States Warrants, Expires 6/30/03** --
------------
Nigeria -- 0.0%
987 Central Bank of Nigeria Payment Adjusted Warrants,
Expires 11/15/20** --
------------
TOTAL RIGHTS AND WARRANTS (COST $0) --
------------
<CAPTION>
Par Value
-----------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS -- 1.7%
Commercial Paper -- 1.7%
USD 2,480,000 Baker Hughes, 4.87%, due 3/01/99 2,480,000
------------
TOTAL SHORT-TERM INVESTMENTS (COST
$2,480,000) 2,480,000
------------
TOTAL INVESTMENTS -- 100.3%
(COST $147,900,114) 144,118,397
Other Assets and Liabilities (net) -- (0.3)% (415,498)
------------
TOTAL NET ASSETS -- 100% $143,702,899
============
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Notes to the Schedule of Investments:
IAN -- Interest Arrears Note
144A -- Securities exempt from registration under
Rule 144A of the Securities Act of 1933. These
securities may be resold in transactions exempt
from registration, normally to qualified
institutional buyers.
Variable and Step up rates -- The rates shown on
variable and step up rate notes are the current
interest rates at February 28, 1999 which are
subject to change based on the terms of the
security, including varying reset dates.
Currency Abbreviations
AUD - Australian Dollar
BEF - Belgian Franc
CAD - Canadian Dollar
CHF - Swiss Franc
EUR - Euro
FRF - French Franc
GBP - British Pound
ITL - Italian Lira
JPY - Japanese Yen
SEK - Swedish Krona
USD - United States Dollar
(a) Valued by management (Note 1).
(b) All or a portion of this security has been
segregated to cover margin requirements on open
financial futures contracts.
* Non-performing. Borrower not currently paying
interest.
** Non-income producing security.
See accompanying notes to the financial statements. 5
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1999
- --------------------------------------------------------------------------------
Assets:
Investments, at value (cost $147,900,114) (Note 1) $144,118,397
Cash (Note 1) 3,491,271
Interest receivable 1,005,885
Receivable for variation margin on open
futures contracts (Notes 1 and 6) 42,803
Receivable for expenses waived or borne by
Manager (Note 2) 23,566
Receivable for Fund shares sold 338
-------------
Total assets 148,682,260
-------------
Liabilities:
Due to custodian 79,691
Written options outstanding, at value (premiums
$772,464) (Notes 1 and 6) 670,320
Net payable for open forward foreign currency
contracts (Notes 1 and 6) 456,784
Payable to affiliate for (Note 2):
Management fee 47,326
Shareholder service fee 17,033
Net payable for open swap contracts (Notes 1 and 6) 2,545,452
Interest payable for open swap contracts (Note 1) 1,102,901
Accrued expenses 59,854
-------------
Total liabilities 4,979,361
-------------
Net assets $143,702,899
=============
Net assets consist of:
Paid-in capital $144,182,200
Accumulated undistributed net investment income 3,289,449
Accumulated undistributed net realized gain 2,184,298
Net unrealized depreciation (5,953,048)
-------------
$143,702,899
=============
Net assets attributable to:
Class III shares $143,702,899
=============
Shares outstanding:
Class III 14,047,932
=============
Net asset value per share:
Class III $ 10.23
=============
6 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1999
- -------------------------------------------------------------------------------
Investment Income:
Interest $14,328,124
Dividends 530,800
------------
Total income 14,858,924
------------
Expenses:
Management fee (Note 2) 932,468
Custodian and transfer agent fees 135,782
Audit fees 50,080
Registration fees 39,766
Legal fees 5,974
Trustees fees (Note 2) 2,453
Miscellaneous 3,084
Fees waived or borne by Manager (Note 2) (588,202)
------------
581,405
Shareholder service fee (Note 2)
Class III 349,675
------------
Net expenses 931,080
------------
Net investment income 13,927,844
------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 1,052,997
Closed futures contracts 187,928
Closed swap contracts (758,380)
Written options 3,650,330
Foreign currency, forward contracts
and foreign currency related transactions (9,122,986)
------------
Net realized loss (4,990,111)
------------
Change in net unrealized appreciation (depreciation) on:
Investments (4,192,741)
Open futures contracts 2,091,863
Open swap contracts (2,543,463)
Written options (312,036)
Foreign currency, forward contracts
and foreign currency related transactions (1,043,636)
------------
Net unrealized loss (6,000,013)
------------
Net realized and unrealized loss (10,990,124)
------------
Net increase in net assets resulting from operations $ 2,937,720
============
See accompanying notes to the financial statements. 7
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
Period from
April 30, 1997
(commencement of
Year Ended operations) to
February 28, 1999 February 28, 1998
----------------- -----------------
Increase (decrease) in net assets:
Operations:
Net investment income $ 13,927,844 $ 8,633,540
Net realized gain (loss) (4,990,111) 8,962,123
Change in net unrealized appreciation
(depreciation) (6,000,013) 46,965
------------- -------------
Net increase in net assets resulting
from operations 2,937,720 17,642,628
------------- -------------
Distributions to shareholders from:
Net investment income
Class III (2,920,291) (5,715,005)
------------- -------------
Total distributions from net
investment income (2,920,291) (5,715,005)
------------- -------------
Net realized gains
Class III (5,164,180) (7,260,173)
------------- -------------
Total distributions from net
realized gains (5,164,180) (7,260,173)
------------- -------------
(8,084,471) (12,975,178)
------------- -------------
Net share transactions: (Note 5)
Class III (79,536,376) 223,718,576
------------- -------------
Increase (decrease) in net assets
resulting from net share
transactions (79,536,376) 223,718,576
------------- -------------
Total increase (decrease) in
net assets (84,683,127) 228,386,026
Net assets:
Beginning of period 228,386,026 --
------------- -------------
End of period (including accumulated
undistributed net investment income
of $3,289,449 and $2,266,216,
respectively $143,702,899 $228,386,026
============= =============
8 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from April 30, 1997
Year Ended (commencement of operations)
February 28, 1999 to February 28, 1998
----------------- -----------------------------
<S> <C> <C>
Net asset value, beginning of period $ 10.60 $ 10.00
-------- ---------
Income from investment operations:
Net investment income 0.64+ 0.55+
Net realized and unrealized gain (loss) (0.58) 0.66
-------- ---------
Total from investment operations 0.06 1.21
-------- ---------
Less distributions to shareholders:
From net investment income (0.12) (0.27)
From net realized gains (0.31) (0.34)
-------- ---------
Total distributions (0.43) (0.61)
-------- ---------
Net asset value, end of period $ 10.23 $ 10.60
======== =========
Total Return/(a)/ 0.44% 12.16%
Ratios/Supplemental Data:
Net assets, end of period (000's) 143,703 228,386
Net expenses to average daily net assets 0.40% 0.40%*
Net investment income to average daily net
assets 5.97% 6.05%*
Portfolio turnover rate 113% 58%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following
per share amounts: $ 0.03 0.02
</TABLE>
+ Computed using average shares outstanding throughout the period.
/(a)/Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
* Annualized.
See accompanying notes to the financial statements. 9
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO U.S. Bond/Global Alpha A Fund (the "Fund") is a series of GMO Trust
(the "Trust"). The Fund is registered under the Investment Company Act of
1940, as amended, as an open-end, non-diversified management investment
company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo &
Co. LLC (the "Manager" or "GMO"). The Trust was established as a
Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series of shares
into classes.
The Fund seeks a high total return primarily through investing in
investment-grade bonds.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost which
approximates market value. Other assets and securities for which no
quotations are readily available are valued at fair value as determined in
good faith by the Trustees or other persons acting at their direction.
Some fixed income securities and options thereon are valued at the closing
bid for such securities as supplied by a primary pricing source chosen by
the Manager. The Manager evaluates such primary pricing sources on an
ongoing basis, and may change any pricing source at any time. The Manager
is kept informed of erratic or unusual movements (including unusual
inactivity) in the prices supplied for a security and has the power to
override any price supplied by a source (by taking a price supplied by
another source) because the Manager has other reasons to suspect that a
price supplied may not be reliable.
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from yield
data relating to investments or securities with similar characteristics.
10
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Certain investments in securities held by the Fund were valued on the basis
of a price provided by a principal market maker. The prices provided by
principal market makers may differ from the value that would be realized if
the securities were sold and the differences could be material to the
financial statements. At February 28, 1999 the total value of these
securities represented 42% of net assets. Included in this total are U.S.
Government backed securities and highly rated collateralized debt
obligations that represent 34% of net assets at February 28, 1999.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the prevailing exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at prevailing exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
net exchange gains and losses on disposition of foreign currencies,
currency gains and losses realized between the trade and settlement dates
on securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid.
Futures contracts
The Fund may use futures contracts to manage its exposure to the bond and
currency markets. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments. Upon
entering into a futures contract, the Fund is required to deposit with its
custodian, in a segregated account in the name of the futures broker, an
amount of cash or U.S. government obligations in accordance with the
initial margin requirements of the broker or exchange. Futures contracts
are marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. Gains or
losses are recognized but not considered realized until the contracts
expire or are closed. Futures contracts involve, to varying degrees, risk
of loss in excess of the variation margin disclosed in the Statement of
Assets and Liabilities. Losses may arise from changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 28, 1999.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or all
of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency contracts
are marked to market daily and the change in value is recorded by the Fund
as an unrealized gain or loss.
11
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Realized gains or losses equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed
are recorded upon delivery or receipt of the currency or, if a forward
currency contract is offset by entering into another forward currency
contract with the same broker, upon settlement of the net gain or loss.
These contracts may involve market risk in excess of the unrealized gain or
loss reflected in the Fund's Statement of Assets and Liabilities. In
addition, the Fund could be exposed to risk if the counterparties are
unable to meet the terms of the contracts or if the value of the currency
changes unfavorably to the U.S. dollar. The U.S. dollar value of the
currencies the Fund has committed to buy or sell is shown under Note 6 and
represents the currency exposure the Fund has acquired or hedged through
currency contracts as of February 28, 1999.
Options
The Fund may write call and put options on securities or currencies it owns
or in which it may invest. When the Fund writes a call or put option, an
amount equal to the premium received is recorded as a liability and
subsequently marked to market to reflect the current value of the option
written. Premiums received from writing options which expire are treated as
realized gains. Premiums received from writing options which are exercised
or closed are offset against the proceeds or amounts paid on the
transaction to determine the realized gain or loss. The Fund as a writer of
an option has no control over whether the underlying securities may be sold
(call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. See Note 6 for a summary of open
written option contracts as of February 28, 1999.
The Fund may also purchase put and call options. The Fund pays a premium
which is included in the Fund's Statement of Assets and Liabilities as an
investment and subsequently marked to market to reflect the current value
of the option. The risk associated with purchasing put and call options is
limited to the premium paid.
Loan agreements
The Fund may invest in direct debt instruments which are interests in
amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates. The Fund's investments in loans may be in the form of
participations in loans or assignments of all or a portion of loans from
third parties. A loan is often administered by a bank or other financial
institution (the lender) that acts as agent for all holders. The agent
administers the terms of the loan, as specified in the loan agreement. When
investing in a loan participation, the Fund has the right to receive
payments of principal, interest and any fees to which it is entitled only
from the lender selling the loan agreement and only upon receipt by the
lender of payments from the borrower. The Fund generally has no right to
enforce compliance with the terms of the loan agreement with the borrower.
As a result, the Fund may be subject to the credit risk of both the
borrower and the lender that is selling the loan agreement. When the Fund
purchases assignments from lenders it acquires direct rights against the
borrower on the loan. Direct indebtedness of emerging countries involves a
risk that the governmental entities responsible for the repayment of the
debt may be unable or unwilling to pay the principal and interest when due.
12
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Indexed securities
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to increase
or decrease its exposure to different underlying instruments and to gain
exposure to markets that may be difficult to invest in through conventional
securities. Indexed securities may be more volatile than their underlying
instruments, but any loss is limited to the amount of the original
investment.
Swap agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to interest rates and credit risk. The Fund may enter into interest rate,
total return and credit default swap agreements. Interest rate swap
agreements involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments with respect to a notional
amount of principal. Total return swap agreements involve commitments to
pay interest in exchange for a market-linked return based on a notional
amount. To the extent the total return of the security or index underlying
the transaction exceeds or falls short of the offsetting interest rate
obligation, the Fund will receive a payment from or make a payment to the
counterparty, respectively. Credit default swaps involve the payment of a
specified rate based on the notional amount. The Fund receives payment upon
a default of the underlying security. In connection with these agreements,
cash or securities may be set aside as collateral by the Fund's custodian
in accordance with the terms of the swap agreement. The Fund earns interest
on cash set aside as collateral, which is paid by the counterparty. At
February 28, 1999, $3,491,271 in cash has been set aside. Swaps are marked
to market daily based upon quotations from market makers and the change, if
any, is recorded as unrealized gain or loss in the Statement of Operations.
Payments received or made at the end of the measurement period are recorded
as realized gain or loss in the Statement of Operations. Net payments of
interest on interest rate swaps agreements are recorded as interest income.
Entering into these agreements involves, to varying degrees, elements of
credit and market risk in excess of the amounts recognized on the Statement
of Assets and Liabilities. Such risks involve the possibility that there
will be no liquid market for these agreements, that the counterparty to the
agreements may default on its obligation to perform and that there may be
unfavorable changes in the fluctuation of interest rates. See Note 6 for a
summary of open swap agreements as of February 28, 1999.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
13
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower fail financially.
The Fund receives compensation for lending its securities. At February 28,
1999, the Fund had no securities on loan.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for foreign currency and swap transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated
Undistributed Net Accumulated Undistributed
Investment Income Net Realized Gain Paid-in Capital
--------------------- --------------------------- -----------------
$ (9,984,320) $ 9,984,320 --
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
14
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Security transactions and related investment income
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis and is adjusted for the accretion of
discounts. Dividend income is recorded on the ex-dividend date. In
determining the net gain or loss on securities sold, the cost of securities
is determined on the identified cost basis. Interest income on U.S.
Treasury inflation indexed securities is accrued daily based upon an
inflation adjusted principal. Additionally, any increase in principal or
face amount of the securities adjusted for inflation is recorded as
interest income.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .15% of the amount
invested. The premium will be reduced by 50% with respect to any portion of
a purchase that is offset by a corresponding redemption occurring on the
same day. In addition, the purchase premium 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. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. Purchase premiums are included as part of "shares sold",
as summarized in Note 5. For the year ended February 28, 1999, the Fund
received $122,948 in purchase premiums. There is no premium for redemptions
or reinvested distributions.
Investment risk
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments,
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets. The risks described above apply to an even greater
extent to investments in emerging markets. The securities markets of
emerging countries are generally smaller, less developed, less liquid, and
more volatile than the securities markets of the U.S. and developed foreign
markets.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .40% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
15
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
GMO agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding brokerage commissions, certain other transaction costs (including
transfer taxes), shareholder service fees and extraordinary expenses)
exceed .25% of average daily net assets.
Effective March 1, 1999, GMO's contractual management fee was reduced to
.25% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding brokerage commissions
certain other transactions costs (including transfer taxes), shareholder
service fees and extraordinary expenses) exceed the management fee.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999 was $2,453. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
For the year ended February 28, 1999, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
Purchases Proceeds
------------------ -----------------
U.S. Government securities $ 5,819,593 $ 21,940,155
Investments (non-U.S.
Government securities) 241,776,174 299,862,903
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
------------------ ------------------ ------------------- ------------------
<S> <C> <C> <C>
$147,900,114 $1,408,234 $5,189,951 $3,781,717
</TABLE>
4. Principal shareholders
At February 28, 1999, 41.5% of the outstanding shares of the Fund were held
by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
16
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including the purchase premiums received by the Fund, were as
follows:
<TABLE>
<CAPTION>
Period from April 30, 1997
Year Ended (commencement of operations)
Class III: February 28, 1999 to February 28, 1998
------------------------------- -------------------------------
Shares Amount Shares Amount
-------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Shares sold 7,957,888 $ 84,927,873 23,536,230 $ 245,381,956
Shares issued to shareholders
in reinvestment of 596,366 6,299,415 906,550 9,564,099
distributions
Shares repurchased (16,055,030) (170,763,664) (2,894,072) (31,227,479)
-------------- ---------------- --------------- ---------------
Net increase (decrease) (7,500,776) $ (79,536,376) 21,548,708 $ 223,718,576
============== ================ =============== ===============
</TABLE>
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1999 is as
follows:
Forward currency contracts
<TABLE>
<CAPTION>
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
------------- ----------------- ------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Buys
4/20/99 AUD 1,000,000 $ 621,202 $ (25,098)
5/05/99 CAD 33,100,000 21,924,993 (191,831)
4/27/99 GBP 8,700,000 13,925,829 (206,886)
4/13/99 JPY 150,000,000 1,272,459 18,656
------------------
$ (405,159)
==================
Sales
4/20/99 AUD 2,800,000 $ 1,739,366 $ 37,088
5/13/99 EUR 17,400,000 19,178,454 (27,144)
4/27/99 GBP 4,500,000 7,203,015 14,140
4/13/99 JPY 430,000,000 3,647,717 157,593
------------------
$ 181,677
==================
</TABLE>
17
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Forward cross currency contracts
<TABLE>
<CAPTION>
Net Unrealized
Settlement Appreciation
Date Deliver/Units of Currency Receive/In Exchange For (Depreciation)
------------- ---------------------------- --------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
3/16/99 CHF 32,484,426 EUR 20,400,000 $ (49,121)
3/09/99 EUR 17,600,000 SEK 156,694,110 (240,032)
3/16/99 EUR 8,700,000 CHF 13,870,859 32,848
3/09/99 SEK 146,755,828 EUR 16,300,000 23,003
--------------------
$ (233,302)
====================
</TABLE>
Futures contracts
<TABLE>
<CAPTION>
Net
Unrealized
Number of Expiration Contract Appreciation
Contracts Type Date Value (Depreciation)
----------- ---------------------------------- -------------- ------------- -----------------
<S> <C> <C> <C> <C>
Buys
48 Swiss Government Bond March 1999 $ 4,302,146 $ (8,350)
47 Swiss Government Bond June 1999 4,164,192 (9,927)
98 Canadian Government Bond June 1999 8,049,699 (99,636)
26 Australian Government Bond 3 yr. March 1999 1,918,437 (36,791)
----------------
$ (154,704)
================
Sales
10 Swedish Government Bond 10 yr. March 1999 $ 1,356,430$ 17,441
17 U.S. Treasury Note 5 yr. June 1999 1,886,469 8,124
12 U.S. Treasury Note 10 yr. June 1999 1,377,000 15,016
29 U.K. Gilt June 1999 5,433,263 68,296
11 Japanese Government Bond 10 yr. March 1999 12,144,964 412,171
6 Australian Government Bond 10 March 1999 554,046 5,532
yr.
134 German Government Bond March 1999 21,524,836 361,982
----------------
$ 888,562
================
</TABLE>
At February 28, 1999, the Fund has sufficient cash and/or securities to
cover any commitments or margin on these contracts.
18
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------------------------
Written option transactions
Puts Calls
Principal Amount Principal Amount
of Contracts of Contracts
(000's omitted) Premiums (000's omitted) Premiums
----------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Outstanding,
beginning of period 173,000 $ 3,868,525 93,000 $ 3,870,965
Options written 5,600 352,464 5,600 420,000
Options exercised -- -- (64,100) (3,545,840)
Options expired (144,100) (3,541,955) -- --
Options sold (28,900) (326,570) (28,900) (325,125)
---------------- -------------- --------------- -------------
Outstanding, end
of period 5,600 $ 352,464 5,600 $ 420,000
=============== ============= =============== =============
</TABLE>
Summary of written options outstanding
<TABLE>
<CAPTION>
Principal Amount
of Contracts Expiration
(000's omitted) Exercise Price Date Value
------------------ --------------- ------------------ ----------------
<S> <C> <C> <C> <C>
USD Put/JPY Call 5,600 USD 112.7 JPY 11/16/99 $ 270,480
USD Call/JPY Put 5,600 USD 112.7 JPY 11/16/99 399,840
----------------
$ 670,320
================
</TABLE>
19
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Swap agreements
<TABLE>
<CAPTION>
Expiration Net Unrealized
Notional Amount Date Description Depreciation
---------------------- ---------- ------------------------------------------ ---------------
<C> <C> <S> <C>
Credit Default Swaps
378,000,000,000 ITL 3/31/03 Agreement with Morgan Guaranty Trust $ (219,527)
Company dated 3/26/98 to pay .07% per
year times the notional amount. The Fund
receives payment only upon a default
event in Italy, the notional amount times
the difference between the par value and
the then-market value of Italy BTPS,
6.00% due 11/01/07.
7,922,250,000 BEF 3/31/03 Agreement with Morgan Guaranty Trust (220,839)
Company dated 3/26/98 to pay .07% per
year times the notional amount. The Fund
receives payment only upon a default
event in Belgium, the notional amount
times the difference between the par
value and the then-market value of
Kingdom of Belgium, 5.75% due 3/28/08.
Interest Rate Swaps
11,200,000 CHF 6/05/05 Agreement with Morgan Guaranty Trust (278,222)
Company dated 6/03/98 to pay the notional
amount multiplied by 3.245% and to
receive the notional amount multiplied by
6 month Floating Rate Swiss LIBOR
adjusted by a specified spread.
15,000,000 CHF 6/10/05 Agreement with Credit Suisse Financial (376,666)
Products dated 6/08/98 to pay the
notional amount multiplied by 3.2625% and
to receive the notional amount multiplied
by 6 month Floating Rate Swiss LIBOR
adjusted by a specified spread.
</TABLE>
20
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Notes to Financial Statements -- (Continued)
February 28, 1999
- ----------------------------------------------------------------------------------------------------
Swap agreements - continued
Expiration Net Unrealized
Notional Amount Date Description Depreciation
---------------------- ---------- ------------------------------------------ ---------------
<C> <C> <S> <C>
10,600,000 CHF 6/11/05 Agreement with Morgan Guaranty Trust $ (293,472)
Company dated 6/09/98 to pay the notional
amount multiplied by 3.245% and to
receive the notional amount multiplied by
6 month Floating Rate Swiss LIBOR
adjusted by a specified spread.
3,300,000 CHF 9/16/05 Agreement with Morgan Guaranty Trust (62,701)
Company dated 9/14/98 to pay the notional
amount multiplied by 3.1175% and to
receive the notional amount multiplied by
6 month Floating Rate Swiss LIBOR
adjusted by a specified spread.
19,200,000 CHF 6/10/05 Agreement with Credit Suisse Financial (237,701)
Products dated 10/01/98 to pay the
notional amount multiplied by 3.2625% and
to receive the notional amount multiplied
by 6 month Floating Rate Swiss LIBOR
adjusted by a specified spread.
Total Return Swap
75,000,000 USD 11/12/00 Agreement with Morgan Guaranty Trust (856,324)
Company dated 11/09/98 to receive (pay)
the notional amount multiplied by the
return on the Lehman Aggregate Index and
to pay the notional amount multiplied by
3 month LIBOR adjusted by a specified
spread. +
---------------
$ (2,545,452)
===============
</TABLE>
See Notes to the Schedule of Investments for definitions of currency
abbreviations.
+ This swap agreement is valued by management (Note 1).
21
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1999, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 58.17% of distributions as net capital gain dividends.
22
<PAGE>
GMO U.S. Bond/Global Alpha A Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
- ------------------
Mr. William L. Nemerever and Mr. Thomas F. Cooper are primarily responsible for
the day-to-day management of the Fund's portfolio. Each of these individuals has
been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The Class III shares of the GMO U.S. Bond/Global Alpha A Fund returned 0.4% for
the fiscal year ended February 28, 1999, compared to 6.2% for the Lehman
Brothers Aggregate Bond Index. Consistent with the Fund's investment objectives
and policies, the Fund was substantially invested in investment-grade, foreign
and domestic, fixed income instruments throughout the period. Although the Fund
is benchmarked against a domestic bond index, the value added is derived from
global bond and currency strategies.
The fund underperformed the benchmark during the fiscal year by 5.8%. While bond
market selection added value to the portfolio, currency, emerging and issue
selection were negative and reduced the portfolio's return. The continued
pattern of declining short-term interest rates across the globe was beneficial
for portfolio returns, especially in the fourth quarter of 1998. Several
unanticipated developments contributed to the Fund's underperformance. The
decision by Russia to default on its domestic debt and devalue its currency
reduced the Fund's returns, given the portfolio's exposure to emerging country
debt. The collapse of Long-Term Capital Management prompted hedge funds and
other investors to unwind short Japanese yen positions. The result was a 15
percent appreciation in the yen during the month of October, which negatively
affected returns, given the Fund's underweight yen position. In addition, the
panic-driven flight to liquidity during the fourth quarter caused spreads to
widen on the Fund's holdings of highly rated, but less liquid asset-backed
securities, governments and agencies.
Outlook
- -------
The Fund currently is structured to benefit from outperformance in the
Australian, Canadian, Swedish, U.S. and emerging bond markets. We expect the
Euro, Japanese and British bond markets to underperform. Our strategy maintains
a market duration in each country. Strong relative performance is expected from
the Canadian dollar, Swedish krona and U.K. pound. The Euro, Japanese yen, Swiss
franc and U.S. dollar are expected to underperform. GMO also expects to recoup
losses experienced in 1998 due to widening in spreads on highly rated, but
less-liquid U.S. asset-backed securities, governments and agencies.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO U.S. Bond/Global Alpha A Fund Class III Shares and the
Lehman Brothers Aggregate Bond Index
As of February 28, 1999
-------------------------------------
Average Annual Total Return
-------------------------------------
Inception
1yr 5yr 4/30/97
-------------------------------------
0.3 N/A 6.6
-------------------------------------
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Date GMO U.S. Bond/Global Alpha A Fund Lehman Brothers Aggregate Bond Index
Class III Shares
<S> <C> <C>
1/31/97
4/30/97 9,985 10,000
6/30/97 10,235 10,214
9/30/97 10,754 10,554
12/31/97 11,178 10,864
3/31/98 11,315 11,033
6/30/98 11,453 11,285
9/30/98 11,626 11,762
12/31/98 11,611 11,802
2/28/99 11,248 11,678
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 15 bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Past performance is not indicative of future
performance. Information is unaudited.
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO U.S. Bond/Global Alpha B Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO U.S. Bond/Global Alpha B Fund
at February 28, 1999 and the results of its operations, the changes in its net
assets and the financial highlights for the periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 28, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 16, 1999
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEBT OBLIGATIONS -- 97.0%
Australia -- 3.4%
GBP 2,500,000 Commonwealth Bank Australia Series EMTN, 8.13%, due 12/07/06 4,657,815
----------------
Brazil -- 1.5%
USD 10,000,000 Brazil Discount Bond, Principal Strip due 4/15/24/(a)/ 2,037,318
----------------
Bulgaria -- 0.7%
USD 5,000,000 Bulgaria Discount Strips, 0.00%, due 7/28/24/(a)/ 1,018,659
----------------
Cayman Islands -- 4.8%
CAD 1,000,000 Government of Canada (Cayman), 7.25%, due 6/01/08 729,381
USD 3,000,000 Great Point CBO Ltd. Series 98-1A Class A1, 144A,
Variable Rate, 6 mo. LIBOR + .30%, 5.71%, due 10/15/10 2,956,875
USD 3,000,000 Pemex Finance Ltd Series 1A Class A2, 144A, 6.30%, due 5/15/10 2,917,500
----------------
6,603,756
----------------
Chile -- 0.5%
USD 750,000 Banco Santander, 6.50%, due 11/01/05 722,813
----------------
Japan -- 0.6%
USD 800,000 Japan Development Bank, 6.88%, due 12/16/99 806,800
----------------
Sweden -- 1.0%
SEK 10,700,000 Kingdom of Sweden, 6.00%, due 2/09/05 1,437,829
----------------
United States -- 84.5%
Asset Backed Securities -- 73.4%
USD 10,000,000 Anfield Road I Ltd.,
Variable Rate, 6 mo. LIBOR + .25%, 5.22%, due 11/06/06 9,814,062
USD 3,000,000 Augusta Funding VI Series 96-A3, 144A, 7.38%, due 4/15/13 3,196,406
USD 5,000,000 BEA CBO Series 98-1A Class A2A, 6.72%, due 6/15/10 4,822,656
USD 5,000,000 Big Flower Receivables Master Trust 96-2 Class A,
Variable Rate, LIBOR +.25%, 5.19%, due 4/25/03 4,930,000
USD 5,995,000 Brazos Student Loan Finance Corp Series 96-B Class A4,
Variable Rate, 3 mo. U.S. Treasury Bill + .50%, 5.06%,
due 12/01/02 5,968,772
USD 3,000,000 Chevy Chase Master Credit Card Trust Series 98-A,
Variable Rate, 1 mo. LIBOR + .15%, 5.09%, due 10/16/06 2,991,000
USD 10,000,000 Chyps CBO Series 97-1A Class A2A, 144A, 6.72%, due 1/15/10 9,746,874
USD 10,000,000 Discover Card Trust I Series 97-3 Class A,
Variable Rate, 1 mo. LIBOR + .13%, 5.07%, due 4/16/07 9,987,499
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Asset Backed Securities -- continued
USD 5,000,000 Dreamworks Film Trust Series 1 Class A,
Variable Rate, 3 mo. LIBOR + .22%, 5.25%, due 10/15/06 4,975,000
USD 6,000,000 EMAC Series 98-1 Class A2, 144A, 6.38%, due 4/15/07 5,734,688
USD 4,000,000 Health Care Receivables Securitization Program 96-1 Class A,
144A, 7.20%, due 7/01/00 4,010,000
USD 1,950,000 Keycorp Student Loan Trust 94-B Certificates,
Variable Rate, 1 mo. LIBOR + .73%, 5.67%, due 11/25/21 1,941,225
USD 3,000,000 MBNA Master Credit Card Trust Series 95-J Class A,
Variable Rate, 1 mo. LIBOR + .23%, 5.17%, due 4/15/05 3,007,800
USD 3,000,000 MBNA Master Credit Card Trust Series 96-A Class A,
Variable Rate, 1 mo. LIBOR + .21%, 5.15%, due 7/15/05 3,006,600
USD 4,000,000 MBNA Master Credit Card Trust Series 98-A Class A,
Variable Rate, 1 mo. LIBOR + .11%, 5.05%, due 8/15/05 3,993,750
USD 8,300,000 Northstar CBO Ltd. Series 97-2 Class A2, 144A, 6.62%, due
7/15/09 8,973,078
USD 1,471,024 Resolution Trust Corp 94-C1 Class A1,
Variable Rate, 1 mo. LIBOR + .45%, 5.45%, due 6/25/26 1,470,335
USD 5,000,000 Rhyno CBO Delaware Corp Series 97-1 Class A-2, 144A,
Variable Rate, Step Up, 6.33%, due 9/15/09 5,271,094
USD 5,000,000 SHYPPCO Finance Company Series B Class A-2B, 6.64%, due 6/15/10 4,895,000
USD 2,620,000 SMS Student Loan Trust 94-B Certificates,
Variable Rate, 1 mo. LIBOR + .75%, 5.67%, due 10/25/23 2,612,140
----------------
101,347,979
----------------
U.S. Government -- 4.0%
USD 10,100,000 U.S. Treasury 0.00% Receipts due 8/15/13(a) 4,030,855
USD 1,500,000 U.S. Treasury Note, 6.38%, due 8/15/02 1,551,095
----------------
5,581,950
----------------
U.S. Government Agency -- 7.1%
USD 1,500,000 Agency for International Development Floater (Support of Belize),
Variable Rate, 6 mo. U.S. Treasury Bill + .50%, 5.10%, due
1/01/14 1,455,000
USD 4,667,001 Agency for International Development Floater (Support of C.A.B.E.I.),
Variable Rate, 6 mo. U.S. Treasury Bill + .40%, 5.00%, due
10/01/12 4,480,321
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Government Agency -- continued
USD 4,000,000 Federal Home Loan Bank,
Variable Rate, CPI + 3.15%, 4.75%, due 2/15/02(b) 3,874,000
----------------
9,809,321
----------------
Total United States 116,739,250
----------------
TOTAL DEBT OBLIGATIONS (Cost $134,672,880) 134,024,240
----------------
Principal
Amount
---------
Call Options Purchased -- 0.1%
Options on Bonds -- 0.0%
SEK 28,000,000 Sweden Government Bond, Expires 4/27/99, Strike 110.114 40,336
----------------
Options on Currency -- 0.1%
USD 2,000,000 Euro, Expires 4/06/99, Strike 1.15 83,600
USD 600,000 Japanese Yen, Expires 4/16/99, Strike 122 8,040
----------------
91,640
----------------
Options on Futures -- 0.0%
USD 365,000 Eurodollar, Expires 3/15/99, Strike 95 3,650
----------------
TOTAL CALL OPTIONS PURCHASED
(Cost $114,398) 135,626
----------------
PUT OPTIONS PURCHASED -- 0.0%
Options on Currency -- 0.0%
USD 2,000,000 Euro, Expires 4/06/99, Strike 1.20 --
USD 600,000 Japanese Yen, Expires 4/16/99, Strike 112 4,980
----------------
4,980
----------------
TOTAL PUT OPTIONS PURCHASED
(Cost $30,100) 4,980
----------------
Par Value SHORT-TERM INVESTMENTS -- 2.7%
---------
Cash Equivalents -- 0.4%
USD 399,542 BankBoston Eurodollar Time Deposit, 5.005% due 4/30/99(c) 399,542
135,458 Merrimac Cash Fund Premium Class(c) 135,458
----------------
535,000
----------------
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value Description Value ($)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial Paper -- 2.3%
USD 3,202,000 Baker Hughes, 4.87%, due 3/01/99 3,202,000
----------------
Repurchase Agreements -- 0.0%
USD 1,531 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/26/99,
due 3/1/99, with a maturity value of $1,532 and an effective
yield of 4.02%, collateralized by a U.S. Treasury Obligation
with a rate of 7.00%, maturity date of 7/15/06 and market
value, including accrued interest, of $1,562. 1,531
----------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $3,738,531) 3,738,531
----------------
TOTAL INVESTMENTS-- 99.8%
(Cost $138,555,909) 137,903,377
Other Assets and Liabilities (net)-- 0.2% 242,863
----------------
TOTAL NET ASSETS-- 100% $ 138,146,240
================
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
Notes to the Schedule of Investments:
EMTN - Euromarket Medium Term Note
144A-- Securities exempt from registration under Rule
144A of the Securities Act of 1933. These
securities may be resold in transactions exempt
from registration, normally to qualified
institutional buyers.
Variable and Step up rates -- The rates shown on
variable and step up rate notes are the current
interest rates at February 28, 1999, which are
subject to change based on the terms of the
security, including varying reset dates.
Currency Abbreviations
AUD - Australian Dollar
BEF - Belgian Franc
CAD - Canadian Dollar
CHF - Swiss Franc
EUR - Euro
GBP - British Pound
ITL - Italian Lira
JPY - Japanese Yen
SEK - Swedish Krona
USD - United States Dollar
(a) Valued by management (Note 1).
(b) All or a portion of this security has been
segregated to cover margin requirements on open
financial futures contracts.
(c) Represents investments of security lending
collateral (Note 1).
See accompanying notes to the financial statements. 5
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at value (cost $138,555,909) (Note 1) $ 137,903,377
Cash (Note 1) 663,409
Interest receivable 1,015,438
Receivable for variation margin on open futures contracts (Notes 1 and 6) 47,960
Receivable for expenses waived or borne by Manager (Note 2) 19,837
-------------
Total assets 139,650,021
-------------
Liabilities:
Payable upon return of securities loaned (Note 1) 535,000
Written options outstanding, at value (premiums $82,764) (Notes 1 and 6) 71,820
Net payable for open forward foreign currency contracts (Notes 1 and 6) 113,489
Payable to affiliate for (Note 2):
Management fee 22,928
Shareholder service fee 7,107
Payable for open swap contracts (Note 1 and 6) 710,289
Accrued expenses 43,148
-------------
Total liabilities 1,503,781
-------------
Net assets $ 138,146,240
=============
Net assets consist of:
Paid-in capital $ 140,568,579
Distributions in excess of net investment income (873,945)
Distributions in excess of net realized gain (11,422)
Net unrealized depreciation (1,536,972)
=============
$ 138,146,240
=============
Net assets attributable to:
Class III shares $ 138,146,240
=============
Shares outstanding:
Class III 19,250,632
=============
Net asset value per share:
Class III $ 7.18
=============
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Operations -- Year Ended February 28, 1999
- ----------------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Interest (including securities lending income of $986) $ 10,885,661
Dividends 333,450
------------
Total income 11,219,111
------------
Expenses:
Management fee (Note 2) 711,308
Custodian and transfer agent fees 96,429
Registration fees 66,342
Audit fees 41,670
Legal fees 3,534
Trustees fees (Note 2) 1,655
Miscellaneous 2,728
Fees waived or borne by Manager (Note 2) (568,011)
------------
355,655
Shareholder service fee (Note 2)
Class III 266,738
------------
Net expenses 622,393
------------
Net investment income 10,596,718
------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments (283,386)
Closed futures contracts (286,264)
Closed swap contracts 1,705,368
Written options (1,881,875)
Foreign currency, forward contracts and foreign currency related transactions 1,260,534
------------
Net realized gain 514,377
------------
Change in net unrealized appreciation (depreciation) on:
Investments (1,132,853)
Open futures contracts 639,001
Open swap contracts (1,141,327)
Written options (345,876)
Foreign currency, forward contracts and foreign currency related transactions (458,504)
------------
Net unrealized loss (2,439,559)
------------
Net realized and unrealized loss (1,925,182)
------------
Net increase in net assets resulting from operations $ 8,671,536
============
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
July 29, 1997
(commencement of
Year Ended operations) to
February 28, 1999 February 28, 1998
-------------------- ----------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 10,596,718 $ 12,714,986
Net realized gain 514,377 1,822,174
Change in net unrealized appreciation (depreciation) (2,439,559) 902,587
------------- -------------
Net increase in net assets resulting from operations 8,671,536 15,439,747
------------- -------------
Distributions to shareholders from:
Net investment income
Class III (15,078,084) (7,602,708)
------------- -------------
Total distributions from net investment income (15,078,084) (7,602,708)
------------- -------------
In excess of net investment income
Class III (3,785,552) --
------------- -------------
Total distributions in excess of net investment
income (3,785,552) --
------------- -------------
Net realized gains
Class III (1,159,070) (2,339,295)
------------- -------------
Total distributions from net realized gains (1,159,070) (2,339,295)
------------- -------------
In excess of net realized gains
Class III (1,427,853) --
------------- -------------
Total distributions in excess of net realized
gains (1,427,853) --
------------- -------------
(21,450,559) (9,942,003)
------------- -------------
Net share transactions: (Note 5)
Class III (229,679,318) 375,106,837
------------- -------------
Increase (decrease) in net assets resulting from net
share transactions (229,679,318) 375,106,837
------------- -------------
Total increase (decrease) in net assets (242,458,341) 380,604,581
Net assets:
Beginning of period 380,604,581 --
------------- -------------
End of period (including distributions in excess of
net investment income of $873,945 and accumulated
undistributed net investment income of $1,144,792,
respectively) $ 138,146,240 $ 380,604,581
============= =============
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from July 29, 1997
Year Ended (commencement of operations)
February 28, 1999 to February 28, 1998
------------------ -----------------------------
<S> <C> <C>
Net asset value, beginning of period $ 10.14 $ 10.00
---------- ----------
Income from investment operations:
Net investment income 0.59+ 0.35+
Net realized and unrealized gain (loss) (0.19) 0.06
---------- ----------
Total from investment operations 0.40 0.41
---------- ----------
Less distributions to shareholders:
From net investment income (2.36)(a) (0.21)
In excess of net investment income (0.59)(a) --
From net realized gains (0.18) (0.06)
In excess of net realized gains (0.23) --
---------- ----------
Total distributions (3.36) (0.27)
---------- ----------
Net asset value, end of period $ 7.18 $ 10.14
========== ==========
Total Return (b) 3.42% 4.15%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 138,146 $ 380,605
Net expenses to average daily net assets 0.35% 0.35%*
Net investment income to average daily net assets 5.96% 5.88%*
Portfolio turnover rate 134% 27%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share $ 0.03 0.02
amounts:
</TABLE>
(a) The amount shown for a share outstanding does not correspond with the
aggregate distributions to shareholders for the year ended February 28, 1999
due to the timing of purchases and redemptions of Fund shares in relation to
the declaration of distributions to shareholders.
(b) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
+ Computed using average shares outstanding throughout the period.
* Annualized.
See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO U.S. Bond/Global Alpha B Fund (the "Fund") is a series of GMO Trust
(the "Trust"). The Fund is registered under the Investment Company Act of
1940, as amended, as an open-end, non-diversified management investment
company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo &
Co. LLC (the "Manager" or "GMO"). The Trust was established as a
Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series of shares
into classes.
The Fund seeks a high total return primarily through investing in
investment-grade bonds.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost which
approximates market value. Other assets and securities for which no
quotations are readily available are valued at fair value as determined in
good faith by the Trustees or other persons acting at their direction.
Some fixed income securities and options thereon are valued at the closing
bid for such securities as supplied by a primary pricing source chosen by
the Manager. The Manager evaluates such primary pricing sources on an
ongoing basis, and may change any pricing source at any time. The Manager
is kept informed of erratic or unusual movements (including unusual
inactivity) in the prices supplied for a security and has the power to
override any price supplied by a source (by taking a price supplied by
another source) because the Manager has other reasons to suspect that a
price supplied may not be reliable.
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from yield
data relating to investments or securities with similar characteristics.
10
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Certain investments in securities held by the Fund were valued on the basis
of a price provided by a principal market maker. The prices provided by
principal market makers may differ from the value that would be realized if
the securities were sold and the differences could be material to the
financial statements. At February 28, 1999 the total value of these
securities represented 49% of net assets. Included in this total are U.S.
Government backed securities and highly rated collateralized debt
obligations that represent 46% of net assets at February 28, 1999.
Foreign currency translation
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the prevailing exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at prevailing exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
net exchange gains and losses on disposition of foreign currencies,
currency gains and losses realized between the trade and settlement dates
on securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid.
Futures contracts
The Fund may use futures contracts to manage its exposure to the bond and
currency markets. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments. Upon
entering into a futures contract, the Fund is required to deposit with its
custodian, in a segregated account in the name of the futures broker, an
amount of cash or U.S. government obligations in accordance with the
initial margin requirements of the broker or exchange. Futures contracts
are marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. Gains or
losses are recognized but not considered realized until the contracts
expire or are closed. Futures contracts involve, to varying degrees, risk
of loss in excess of the variation margin disclosed in the Statement of
Assets and Liabilities. Losses may arise from changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 28, 1999.
Forward currency contracts
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or all
of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency contracts
are marked to market daily and the change in value is recorded by the Fund
as an unrealized gain or loss.
11
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Realized gains or losses equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed
are recorded upon delivery or receipt of the currency or, if a forward
currency contract is offset by entering into another forward currency
contract with the same broker, upon settlement of the net gain or loss.
These contracts may involve market risk in excess of the unrealized gain or
loss reflected in the Fund's Statement of Assets and Liabilities. In
addition, the Fund could be exposed to risk if the counterparties are
unable to meet the terms of the contracts or if the value of the currency
changes unfavorably to the U.S. dollar. The U.S. dollar value of the
currencies the Fund has committed to buy or sell is shown under Note 6 and
represents the currency exposure the Fund has acquired or hedged through
currency contracts as of February 28, 1999.
Options
The Fund may write call and put options on securities or currencies it owns
or in which it may invest. When the Fund writes a call or put option, an
amount equal to the premium received is recorded as a liability and
subsequently marked to market to reflect the current value of the option
written. Premiums received from writing options which expire are treated as
realized gains. Premiums received from writing options which are exercised
or closed are offset against the proceeds or amounts paid on the
transaction to determine the realized gain or loss. The Fund as a writer of
an option has no control over whether the underlying securities may be sold
(call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. See Note 6 for a summary of open
written option contracts as of February 28, 1999.
The Fund may also purchase put and call options. The Fund pays a premium
which is included in the Fund's Statement of Assets and Liabilities as an
investment and subsequently marked to market to reflect the current value
of the option. The risk associated with purchasing put and call options is
limited to the premium paid.
Indexed securities
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to increase
or decrease its exposure to different underlying instruments and to gain
exposure to markets that may be difficult to invest in through conventional
securities. Indexed securities may be more volatile than their underlying
instruments, but any loss is limited to the amount of the original
investment.
Swap agreements
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to interest rates and credit risk. The Fund may enter into interest rate,
total return and credit default swap agreements. Interest rate swap
agreements involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments with respect to a notional
amount of principal. Total return swap agreements involve commitments to
pay interest in exchange for a market linked return based on a notional
amount. To the extent the total return of the security or index
12
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
underlying the transaction exceeds or falls short of the offsetting
interest rate obligation, the Fund will receive a payment from or make a
payment to the counterparty, respectively. Credit default swaps involve the
payment of a specified rate based on the notional amount. The Fund receives
payment upon a default of the underlying security. In connection with these
agreements, cash or securities may be set aside as collateral by the Fund's
custodian in accordance with the terms of the swap agreement. The Fund
earns interest on cash set aside as collateral, which is paid by the
counterparty. At February 28, 1999, $663,409 in cash has been set aside.
Swaps are marked to market daily based upon quotations from market makers
and the change, if any, is recorded as unrealized gain or loss in the
Statement of Operations. Payments received or made at the end of the
measurement period are recorded as realized gain or loss in the Statement
of Operations. Net payments of interest on interest rate swaps agreements
are recorded as interest income. Entering into these agreements involves,
to varying degrees, elements of credit and market risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform and that there may be unfavorable changes in the
fluctuation of interest rates. See Note 6 for a summary of open swap
agreements as of February 28, 1999.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Security lending
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower fail financially.
The Fund receives compensation for lending its securities. At February 28,
1999, the Fund loaned securities having a market value of $517,795
collateralized by cash in the amount of $535,000 which was invested in
short-term instruments.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
13
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for foreign currency and swap transactions and
redemptions in-kind. Gains resulting from such in-kind transactions
amounted to $4,998,346.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated
Undistributed Net Accumulated Undistributed
Investment Income Net Realized Gain Paid-in Capital
---------------------- ---------------------------- -----------------
$ 6,248,181 $ (1,389,241) $ (4,858,940)
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis and is adjusted for the accretion of
discounts. Dividend income is recorded on the ex-dividend date. In
determining the net gain or loss on securities sold, the cost of securities
is determined on the identified cost basis. Interest income on U.S.
Treasury inflation indexed securities is accrued daily based upon an
inflation adjusted principal. Additionally, any increase in principal or
face amount of the securities adjusted for inflation is recorded as
interest income.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds.
14
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .15% of the amount
invested. The premium will be reduced by 50% with respect to any portion of
a purchase that is offset by a corresponding redemption occurring on the
same day. In addition, the purchase premium for this 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. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. Purchase premiums are included as part of "shares sold",
as summarized in Note 5. For the year ended February 28, 1999, the Fund
received $123,092 in purchase premiums. There is no premium for redemptions
or reinvested distributions.
Investment risk
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments,
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .40% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding brokerage commissions, certain other transaction costs (including
transfer taxes), shareholder service fees and extraordinary expenses)
exceed .20% of average daily net assets.
Effective March 1, 1999, GMO's contractual management fee was reduced to
.20% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding brokerage
commissions, certain other transaction costs (including transfer taxes),
shareholder service fees and extraordinary expenses) exceed the management
fee.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999 was $1,655. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
15
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
3. Purchases and sales of securities
For the year ended February 28, 1999, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
Purchases Sales
------------- ------------
U.S. Government securities $ 11,118,026 $ 74,730,237
Investments (non-U.S. Government securities) 251,261,245 414,663,951
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------------------------------------------------------------------
$138,555,909 $697,972 $1,350,504 $652,532
4. Principal shareholders
At February 28, 1999, 96.5% of the outstanding shares of the Fund were held
by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including the purchase premiums received by the Fund, were as
follows:
<TABLE>
<CAPTION>
Period from July 29, 1997
Year Ended (commencement of operations)
Class III: February 28, 1999 to February 28, 1998
------------------------------ ------------------------------
Shares Amount Shares Amount
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Shares sold 18,651,438 $ 158,378,340 37,287,695 $ 372,664,834
Shares issued to shareholders
in reinvestment of distributions 2,639,708 20,620,609 990,239 9,942,003
Shares repurchased (39,582,432) (408,678,267) (736,016) (7,500,000)
------------- ------------- ------------- -------------
Net increase (decrease) (18,291,286) $(229,679,318) 37,541,918 $ 375,106,837
============= ============= ============= =============
</TABLE>
16
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
6. Financial instruments
A summary of outstanding financial instruments at February 28, 1999 is as
follows:
Forward currency contracts
<TABLE>
<CAPTION>
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
---------- --------------- ----------------- ------------------ --------------------
<S> <C> <C> <C> <C>
4/20/99 AUD 200,000 $ 124,240 $ (5,196)
5/05/99 CAD 14,800,000 9,803,320 (91,419)
4/27/99 GBP 2,200,000 3,521,474 (43,647)
--------------------
$ (140,262)
====================
Sales
4/20/99 AUD 1,100,000 $ 683,322 $ 11,526
5/13/99 EUR 5,500,000 6,062,155 (8,580)
4/27/99 GBP 3,600,000 5,762,412 31,068
4/13/99 JPY 160,000,000 1,357,290 34,096
---------------------
$ 68,110
=====================
</TABLE>
Forward cross currency contracts
<TABLE>
<CAPTION>
Net Unrealized
Settlement Appreciation
Date Deliver/Units of Currency Receive/In Exchange For (Depreciation)
---------- ---------------------------- -------------------------- ------------------
<S> <C> <C> <C> <C> <C>
3/16/99 CHF 5,262,030 EUR 3,300,000 $ (12,924)
3/09/99 EUR 3,100,000 SEK 27,635,779 (37,862)
3/16/99 EUR 2,800,000 CHF 4,455,010 4,228
3/09/99 SEK 33,312,673 EUR 3,700,000 5,221
----------------
$ (41,337)
================
</TABLE>
17
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Futures contracts
<TABLE>
<CAPTION>
Net Unrealized
Number of Expiration Contract Appreciation
Contracts Type Date Value (Depreciation)
------------ ----------------------------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C>
Buys
19 Swedish Government 10 Yr. March 1999 $ 2,577,216 $ (34,047)
29 Canadian Government Bond June 1999 2,382,054 (26,463)
18 Australian Government Bond 10 Yr. March 1999 1,662,138 (23,973)
163 U.S. Treasury Note 5 Yr. June 1999 18,087,906 (141,222)
50 U.S. Treasury Note 10 Yr. June 1999 5,737,500 (63,216)
34 U.S. Long Bond June 1999 1,330,656 (8,627)
----------------
$ (297,548)
================
Sales
32 Swiss Government Bond March 1999 $ 2,868,097 $ (7,130)
1 Swiss Government Bond June 1999 88,600 63
4 Japanese Government Bond 10 Yr. March 1999 4,416,351 69,178
29 U.K.Gilt June 1999 5,433,262 67,520
42 German Government Bond March 1999 6,746,590 98,004
----------------
$ 227,635
================
</TABLE>
At February 28, 1999, the Fund has sufficient cash and/or securities to
cover any commitments or margin on these contracts.
18
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Written option transactions
<TABLE>
<CAPTION>
Puts Calls
Principal Amount of Principal Amount
Contracts of Contracts
(000's omitted) Premiums (000's omitted) Premiums
--------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Outstanding, beginning
of period 146,800 $ 3,372,860 81,800 $ 3,437,490
Options written 600 37,764 600 45,000
Options exercised -- -- (11,100) (601,065)
Options expired (76,100) (1,107,230) -- --
Options sold (70,700) (2,265,630) (70,700) (2,836,425)
--------------------- ------------------ ------------------- ------------------
Outstanding, end
of period 600 $ 37,764 600 $ 45,000
===================== ================== =================== ==================
</TABLE>
Summary of written options outstanding
<TABLE>
<CAPTION>
Principal Amount of
Contracts Expiration
(000's omitted) Exercise Price Date Value
--------------------- ------------------ -------------------- -------------------
<S> <C> <C> <C> <C>
USD Put/JPY Call 600 USD 112.7 JPY 11/16/99 $ 28,980
USD Call/JPY Put 600 USD 112.7 JPY 11/16/99 42,840
------------------
$ 71,820
==================
</TABLE>
19
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Swap agreements
<TABLE>
<CAPTION>
Expiration Net Unrealized
Notional Amount Date Description Depreciation
--------------------- ------------ ------------------------------------------------------- ----------------
<S> <C> <C> <C>
Credit Default Swaps
49,000,000,000 ITL 3/31/03 Agreement with Morgan Guaranty Trust Company dated $ (28,457)
3/26/98 to pay .07% per year times the notional
amount. The Fund receives payment only upon a
default event in Italy, the notional amount times the
difference between the par value and the then-market
value of Italy BTPS, 6.00% due 11/01/07.
1,058,750,000 BEF 3/31/03 Agreement with Morgan Guaranty Trust Company dated (29,513)
3/26/98 to pay .07% per year times the notional
amount. The Fund receives payment only upon a
default event in Belgium, the notional amount times
the difference between the par value and the
then-market value of Kingdom of Belgium, 5.75% due
3/28/08.
Interest Rate Swap
5,000,000 CHF 6/11/05 Agreement with Morgan Guaranty Trust Company dated (138,430)
6/09/98 to pay the notional amount multiplied by
3.245% and to receive the notional amount multiplied
by 6 month Floating Rate Swiss LIBOR adjusted by a
specified spread.
</TABLE>
20
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Swap agreements -- continued
<TABLE>
<CAPTION>
Expiration Net Unrealized
Notional Amount Date Description Depreciation
-------------------------- ------------- ------------------------------------------------------- -----------------
<S> <C> <C> <C>
Total Return Swap
25,000,000 USD 11/30/99 Agreement with Morgan Guaranty Trust Company dated $ (513,889)
11/24/98 to receive (pay) the notional amount
multiplied by the return on the Lehman Aggregate
Index and to pay the notional amount multiplied by 3
month LIBOR adjusted by a specified spread. +
---------------
$ (710,289)
===============
</TABLE>
See Notes to the Schedule of Investments for definitions of currency
abbreviations.
+ This swap agreement is valued by management (Note 1).
21
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1999, all of the Fund's distributions are
from investment company taxable income, except that the Fund has designated
10.14% of distributions as net capital gain dividends.
The Fund has elected to defer to March 1, 1999 post-October capital losses of
$769,108 and foreign currency losses of $1,009,088.
22
<PAGE>
GMO U.S. Bond/Global Alpha B Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
- ------------------
Mr. William L. Nemerever and Mr. Thomas F. Cooper are primarily responsible for
the day-to-day management of the Fund's portfolio. Each of these individuals has
been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The Class III shares of the GMO U.S. Bond/Global Alpha B Fund returned 3.4% for
the fiscal year ended February 28, 1999, compared to 6.2% for the Lehman
Brothers Aggregate Bond Index. Consistent with the Fund's investment objectives
and policies, the Fund was substantially invested in foreign and domestic fixed
income instruments throughout the period. Although the Fund is benchmarked
against a domestic bond index, the value added is derived from global bond and
currency strategies.
The fund underperformed the benchmark during the fiscal year by 2.8%. While bond
market selection added value to the portfolio, currency and issue selection
negatively affected performance. The continued pattern of declining short-term
interest rates across the globe added value to the portfolio, especially in the
fourth quarter of 1998. Several unanticipated developments contributed to the
Fund's underperformance. The collapse of Long-Term Capital Management prompted
hedge funds and other investors to unwind short Japanese yen positions. The
result was a 15 percent appreciation in the yen during the month of October,
which negatively affected returns, given the Fund's underweight yen position. In
addition, the panic-driven flight to liquidity during the fourth quarter caused
spreads to widen on the Fund's holdings of highly rated, but less liquid
asset-backed securities, governments and agencies. Although the portfolio does
not hold emerging country debt, the decision by Russia to default on its
domestic debt and devalue its currency together with the collapse in commodity
prices hurt returns, given the currency model's overweight position in several
high yield and commodity-linked currencies.
Outlook
- -------
The Fund currently is structured to benefit from outperformance in the
Australian, Canadian and Swedish and U.S. bond markets. We expect
underperformance from the Euro, Japanese, Swiss and British bond markets. Our
strategy maintains a market duration in each country. Strong relative
performance is expected from the Canadian dollar, Swedish Krona and U.K. pound,
while the Euro, Japanese yen, Swiss franc and U.S. dollar are expected to
underperform. GMO also expects to recoup losses experienced in 1998 due to
widening in spreads on highly rated, but less-liquid U.S. asset-backed
securities, governments and agencies.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO U.S. Bond/Global Alpha B Fund Class III Shares and the
Lehman Brothers Aggregate Bond Index
As of February 28, 1999
-------------------------------
Average Annual Total Return
-------------------------------
Since
Inception
1 Year 7/29/97
Class -------------------------------
III 3.3% 4.7%
-------------------------------
[LINE GRAPH APPEARS HERE]
GMO U.S. Bond/Global Alpha B Fund Lehman Brothers
Date Class III Shares Aggregate Bond Index
---- --------------------------------- --------------------
1/31/97
7/29/97 9,985 10,000
9/30/97 10,055 10,097
12/31/97 10,276 10,394
3/31/98 10,461 10,556
6/30/98 10,625 10,796
9/30/98 11,041 11,253
12/31/98 10,995 11,291
2/28/99 10,755 11,173
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 15 bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Past performance is not indicative of future
performance. Information is unaudited.
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO U.S. Sector Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of GMO
U.S. Sector Fund at February 28, 1999 and the results of its operations,
the changes in its net assets and the financial highlights for the periods
presented, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to
as "financial statements") are the responsibility of the Trust's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe
that our audits, which included confirmation of securities at February 28,
1999 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 12, 1999
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value
($)/
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
MUTUAL FUNDS -- 100.0%
230,428 GMO REIT Fund 2,103,811
94,361 GMO Small Cap Growth Fund 1,026,643
182,662 GMO Small Cap Value Fund 2,135,316
622,477 GMO U.S. Core Fund 11,571,846
-----------
TOTAL MUTUAL FUNDS (COST $18,178,237) 16,837,616
-----------
SHORT-TERM INVESTMENTS -- 0.1%
Repurchase Agreements -- 0.1%
$ 15,620 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/26/99, due 3/1/99, with a maturity value of $15,625 and an
effective yield of 4.02%, collateralized by a U.S. Treasury
Obligation with a rate of 7.00%, maturity date of 7/15/06
and market value, including accrued interest, of $15,932. 15,620
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $15,620) 15,620
-----------
TOTAL INVESTMENTS -- 100.1%
(COST $18,193,857) 16,853,236
Other Assets and Liabilities (net) -- (0.1)% (23,234)
-----------
TOTAL NET ASSETS -- 100% $16,830,002
===========
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at value (cost $18,193,857) (Note 1) $16,853,236
Receivable for expenses waived or borne by Manager (Note 2) 900
-----------
Total assets 16,854,136
-----------
Liabilities:
Payable to affiliate for (Note 2):
Management fee 6,422
Accrued expenses 17,712
-----------
Total liabilities 24,134
-----------
Net assets $16,830,002
===========
Net assets consist of:
Paid-in capital $18,623,221
Accumulated distributions in excess of net realized gain (452,598)
Net unrealized depreciation (1,340,621)
===========
$16,830,002
===========
Net assets attributable to:
Class III shares $16,830,002
===========
Shares outstanding:
Class III 3,636,151
===========
Net asset value per share:
Class III $ 4.63
===========
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Investment Income:
Dividends from investment company shares $ 364,411
Interest 2,319
-----------
Total income 366,730
-----------
Expenses:
Management fee (Note 2) 118,652
Audit fees 14,785
Registration fees 1,945
Legal fees 480
Trustees fees (Note 2) 186
Miscellaneous 2,522
Fees waived or borne by Manager (Note 2) (138,570)
-----------
--
Shareholder service fee (Note 2)
Class III 90
-----------
Net expenses 90
-----------
Net investment income 366,640
-----------
Realized and unrealized gain (loss):
Net realized gain on:
Investments 2,239,114
Realized gain distributions from investment company shares 2,829,190
-----------
Net realized gain 5,068,304
-----------
Change in net unrealized appreciation (depreciation) on investments (2,256,138)
Net realized and unrealized gain 2,812,166
-----------
Net increase in net assets resulting from operations $3,178,806
===========
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28,
--------------------------------
1999 1998
----------- -------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 366,640 $ 4,417,706
Net realized gain 5,068,304 53,759,388
Change in net unrealized appreciation (depreciation) (2,256,138) (14,779,902)
----------- ------------
Net increase in net assets resulting from operations 3,178,806 43,397,192
----------- ------------
Distributions to shareholders from:
Net investment income
Class I -- (46,918)
Class III (366,924) (5,767,909)
----------- ------------
Total distributions from net investment income (366,924) (5,814,827)
----------- ------------
In excess of net investment income
Class I -- (1,635)
Class III (347,888) (201,027)
----------- ------------
Total distributions in excess of net investment
income (347,888) (202,662)
----------- ------------
Net realized gains
Class I -- (878,317)
Class III (8,557,355) (95,593,791)
----------- ------------
Total distributions from net realized gains (8,557,355) (96,472,108)
----------- ------------
In excess of net realized gains
Class III (619,626) --
----------- ------------
Total distributions in excess of net realized gains (619,626) --
----------- ------------
(9,891,793) (102,489,597)
----------- ------------
Net share transactions: (Note 5)
Class I -- (661,857)
Class III (47,279,849) (97,490,425)
----------- ------------
Decrease in net assets resulting from net share
transactions (47,279,849) (98,152,282)
----------- ------------
Total decrease in net assets (53,992,836) (157,244,687)
Net assets:
Beginning of period 70,822,838 228,067,525
----------- ------------
End of period (including accumulated undistributed net
investment income of $0 and $0, respectively) $16,830,002 $ 70,822,838
=========== ============
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class I share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from Period from September 3, 1996
March 1, 1997 to (commencement of operations)
January 9, 1998 to February 28, 1997
---------------- -----------------------------
<S> <C> <C>
Net asset value, beginning of period $13.03 $ 11.78
------ -------
Income from investment operations:
Net investment income 0.27+ 0.12
Net realized and unrealized gain 1.78 2.10
------ -------
Total from investment operations 2.05 2.22
------ -------
Less distributions to shareholders:
From net investment income (0.39) (0.09)
In excess of net investment income (0.01) --
From net realized gains (6.99) (0.88)
------ -------
Total distributions (7.39) (0.97)
------ -------
Net asset value, end of period $ 7.69(a) $ 13.03
====== =======
Total Return (b) 16.80% 19.25%
Ratios/Supplemental Data:
Net assets, end of period (000's) -- $1,357
Net expenses to average daily net assets 0.38%* 0.61%*
Net investment income to average daily net
assets 2.67%* 1.97%*
Portfolio turnover rate 150% 104%
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.04 $ 0.01
</TABLE>
+ Computed using average shares outstanding throughout the period.
* Annualized.
(a) All Class I shares of the Fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
(b) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
See accompanying notes to the financial statements. 5
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28/29,
----------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 8.53 $ 13.03 $ 13.63 $ 11.06 $ 11.26
------- ------- -------- -------- --------
Income from investment operations:
Net investment income (c) 0.10+ 0.29+ 0.26 0.29 0.28
Net realized and unrealized
gain 0.27 2.61 2.20 3.90 0.49
------- ------- -------- -------- --------
Total from investment
operations 0.37 2.90 2.46 4.19 0.77
------- ------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.10) (0.40) (0.22) (0.29) (0.27)
In excess of net investment
income (0.15) (0.01) -- -- --
From net realized gains (3.75) (6.99) (2.84) (1.33) (0.70)
In excess of net realized gains (0.27) -- -- -- --
------- ------- -------- -------- --------
Total distributions (4.27) (7.40) (3.06) (1.62) (0.97)
------- ------- -------- -------- --------
Net asset value, end of period $ 4.63 $ 8.53 $ 13.03 $ 13.63 $ 11.06
======= ======= ======== ======== ========
Total Return (a) 3.13% 29.61% 20.88% 38.90% 7.56%
Ratios/Supplemental Data:
Net assets, end of period
(000's) $16,830 $70,823 $226,711 $211,319 $207,291
Net expenses to average
daily net assets (b) 0.00% 0.27% 0.48% 0.48% 0.48%
Net investment income to
average daily net assets (c) 1.51% 2.53% 1.99% 2.27% 2.61%
Portfolio turnover rate 16% 150% 104% 84% 101%
Fees and expenses voluntarily
waived or borne by the
Manager consisted of the
following per share amounts: $ 0.04 $ 0.04 $ 0.02 $ 0.01 $ 0.01
</TABLE>
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(b) On August 20, 1997, the Fund began to invest a substantial portion of its
assets in other funds of GMO Trust and revised its voluntary expense
waiver. Net expenses exclude expenses incurred indirectly through
investment in underlying funds. See Note 2.
(c) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
+ Computed using average shares outstanding throughout the period.
6 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO U.S. Sector Fund (the "Fund") is a series of GMO Trust (the "Trust").
The Fund is registered under the Investment Company Act of 1940, as
amended, as an open-end, non-diversified management investment company. The
Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series into classes.
The Fund seeks a total return greater than that of the Standard & Poor's
500 Stock Index through investment in common stocks either directly or
through investments in other Funds of the Trust. Its assets will be
primarily invested in or exposed to equity securities chosen from the
Wilshire 5000 Index and primarily in common stocks chosen from among the
1,800 companies with the largest equity capitalization whose securities are
listed on a United States national securities exchange, and/or shares of
other domestic equity funds of the Trust. On August 20, 1997, the Fund
began to invest a substantial portion of its assets in other Funds of the
Trust.
Prior to January 9, 1998, the Fund offered three classes of shares: Class
I, Class II and Class III. Effective January 9, 1998, Class I shares ceased
operations and all shares were exchanged for Class III shares, and Class II
shares ceased to be offered. The principal economic difference among the
classes of shares is the level of shareholder service fee borne by the
classes. Eligibility for and automatic conversion between the various
classes of shares is generally based on the total amount of assets invested
with GMO, as more fully outlined in the Trust's prospectus.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Shares of underlying Funds are valued at their net asset value as reported
on each business day. Portfolio securities listed on a securities exchange
for which market quotations are available are valued at the last quoted
sale price on each business day, or if there is no such reported sale, at
the most recent quoted bid price. Unlisted securities for which market
quotations are readily available are valued at the most recent quoted bid
price. Short-term investments with a remaining maturity of sixty days or
less are valued at amortized cost which approximates market value. Other
assets and securities for which no quotations are readily available are
valued at fair value as determined in good faith by the Trustees.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure
7
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
that the market value of the underlying assets remains sufficient to
protect the Fund in the event of default by the seller. Collateral for
certain tri-party repurchase agreements is held at the counterparty's
custodian in a segregated account for the benefit of the Fund and the
counterparty. In connection with transactions in repurchase agreements, if
the seller defaults and the value of the collateral declines or if the
seller enters insolvency proceedings, realization of collateral by the Fund
may be delayed or limited.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary. Taxes on foreign dividend income are withheld in accordance with
the applicable country's tax treaty with the United States.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for redemptions in-kind. Gains resulting from such
in-kind transactions amounted to $2,192,961.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
------------------------ ------------------------ ------------------------
<S> <C> <C>
$ 348,172 $ (1,921,507) $ 1,573,335
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
8
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis. In determining the net gain or loss on securities sold, the
cost of securities is determined on the identified cost basis. Dividends
representing a return of capital are reflected as a reduction of cost.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds. In addition,
the Fund will also incur fees and expenses indirectly as a shareholder in
the underlying Funds. Because the underlying Funds have varied expense and
fee levels and the Fund may own different proportions of underlying funds
at different times, the amount of fees and expenses indirectly incurred by
the Fund will vary. (See Note 2).
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .27% of the amount
invested. In the case of cash redemptions, the fee is .18% of the amount
redeemed. All purchase premiums and redemption fees are paid to and
recorded by the Fund as paid-in capital. Purchase premiums are included as
part of each class' "shares sold" and redemption fees are included as part
of each class' "shares repurchased", respectively, as summarized in Note 5.
For the year ended February 28, 1999, the Fund received $2,383 in
redemption fees and no purchase premiums. There is no premium for
reinvested distributions or in-kind transactions.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .49% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on average daily net assets at the annual rate of .15% for Class III
shares. The Fund will invest in Class III shares of each underlying Fund
being offered. Like the management fee (as described below), the
shareholder service fee will be waived (but not below zero) to the extent
of the indirect shareholder service fees paid in connection with the Fund's
investment in shares of underlying Funds.
On August 20, 1997 the Fund revised its voluntary expense waiver to include
certain expenses incurred indirectly by the Fund through investment in
underlying Funds. GMO agreed to waive a portion of its fee (but not below
zero) and bear other expenses to the extent that the Fund's annual expenses
(including the management fee but excluding brokerage commissions, certain
other transaction costs (including transfer taxes), shareholder service
fees and extraordinary expenses ("fund expenses") plus the amount of fees
and expenses, excluding shareholder service fee and fund expenses (as
defined above) incurred indirectly by the Fund through investment in
underlying Funds exceed .33% of average daily net assets. Because GMO will
not waive the management fees below zero, and because the amount of fees
and expenses incurred indirectly by the Fund will vary, the operating
expenses
9
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
(excluding shareholder service fees and fund expenses) incurred indirectly
by the Fund through investment in underlying Funds may exceed 0.33% of the
Fund's average daily net assets. For the year ended February 28, 1999,
operating expenses (excluding shareholder service fees and fund expenses)
incurred indirectly by the Fund were 0.36% of the Fund's average daily net
assets.
Effective March 1, 1999, GMO's contractual management fee was reduced to
0.33% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding brokerage
commissions, certain other transaction costs (including transfer taxes),
shareholder service fees and extraordinary expenses ("fund expenses") plus
the amount of fees and expenses, excluding shareholder service fee and fund
expenses (as defined above) incurred indirectly by the Fund through
investment in underlying Funds exceed the management fee.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999 was $186. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1999, aggregated
$4,002,033 and $57,975,093, respectively.
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
----------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
$18,646,455 $273,912 $2,067,131 $1,793,219
</TABLE>
4. Principal shareholder
At February 28, 1999, 80.7% of the outstanding shares of the Fund were held
by one shareholder.
10
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums received by the
Fund, were as follows:
<TABLE>
<CAPTION>
Period from March 1, 1997
Class I: to January 9, 1998
------------------------------
Shares Amount
-------------- ---------------
<S> <C> <C>
Shares sold 9,272 $ 102,631
Shares issued to shareholders in
reinvestment of distributions 104,677 926,870
Shares repurchased (218,098) (1,691,358)
-------------- ---------------
Net decrease (104,149) $ (661,857)
============== ===============
<CAPTION>
Year Ended Year Ended
Class III: February 28, 1999 February 28, 1998
-----------------------------------------------------------------
Shares Amount Shares Amount
---------------- ----------------- ---------------- -------------
<S> <C> <C> <C> <C>
Shares sold -- $ -- 1,374,373 $ 15,598,383
Shares issued to shareholders in
reinvestment of distributions 1,801,919 9,891,793 10,762,767 97,835,045
Shares repurchased (6,465,314) (57,171,642) (21,232,535) (210,923,853)
---------------- ----------------- ---------------- -------------
Net decrease (4,663,395) $ (47,279,849) (9,095,395) $ (97,490,425)
================ ================= ================ =============
</TABLE>
11
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1999, all of the Fund's distributions are
from investment company taxable income, except that the Fund has designated
85.32% of distributions as net capital gain dividends.
12
<PAGE>
GMO U.S. Sector Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
- ------------------
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Robert Soucy are
primarily responsible for the day-to-day management of the Fund's portfolio.
Mssrs. Grantham and Darnell have each been portfolio managers at Grantham, Mayo,
Van Otterloo & Co. LLC for more than fifteen years; Mr. Soucy for more than ten
years.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The Class III shares of the GMO U.S. Sector Fund returned 3.1% for the fiscal
year ended February 28, 1999, as compared to 19.7% for the S&P 500. The GMO U.S.
Sector Fund currently invests in the GMO U.S. Core Fund, GMO REIT Fund, GMO
Small Cap Growth Fund and GMO Small Cap Value Fund. Consistent with the Fund's
investment objectives and policies, the Fund was invested substantially in
common stocks throughout the period.
The Fund's performance shortfall was due primarily to underweighting large
equities and overweighting small-cap stocks and REITs. Throughout the year, the
fund maintained a 19% weight in small stocks. This strategy was based on our
view that these stocks are more attractive relative to large capitalization
stocks when valued using price to sales, price to fair value, price to book and
price to cash flow measures. Although this strategy was not successful during
the past fiscal year, small stocks are currently at their least expensive level
in the past twenty years. We continue to believe that these stocks are
positioned to provide exceptionally strong returns relative to large cap stocks
over the long term.
The Fund's strategy of maintaining a 13% weight in Real Estate Investment Trusts
("REITs") also detracted from performance. As with small capitalization stocks,
this position is based upon the attractive valuations of the sector relative to
large capitalization U.S. equities. While real estate is trading at
approximately its replacement cost, U.S. large cap equities continue to trade at
extremely high levels. REITs, as represented by the Morgan Stanley REIT Index,
returned -16.9% for the fiscal year, underperforming the S&P 500 by 36.6%.
The Fund's 68% weight in the U.S. Core Fund also detracted from performance, as
the U.S. Core Fund underperformed the S&P 500 by 4.7% for the fiscal year. The
Fund's underweight in the largest stocks in the S&P 500 and its value bias both
detracted from performance during the year.
Outlook
- -------
The Fund emphasizes both small and value stocks which we believe are the most
attractive sectors in the U.S. market today. The high disparities in valuation
levels between small- and large-capitalization stocks that we have witnessed
over the past year are unprecedented. However, we believe these valuation levels
will converge to more normal levels, setting the stage for strong outperformance
from the small-cap and REIT sectors. The portfolio is positioned to perform well
when these sectors rebound.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO U.S. Sector Fund Class III Shares and the S&P 500 Index
As of February 28, 1999
----------------------------------------
Average Annual Total Return
----------------------------------------
Inception
1yr 5yr 12/31/92
----------------------------------------
2.7 19.2 18.6
----------------------------------------
[LINE GRAPH APPEARS HERE]
Date GMO U.S. Sector Fund S&P 500 Index
Class III Shares
1/31/92
12/31/92 9,973 10,000
3/31/93 10,621 10,437
6/30/93 10,871 10,488
9/30/93 11,439 10,758
12/31/93 11,657 11,008
3/31/94 11,424 10,590
6/30/94 11,405 10,634
9/30/94 11,911 11,154
12/31/94 12,038 11,153
3/31/95 13,134 12,239
6/30/95 14,580 13,407
9/30/95 16,160 14,472
12/31/95 17,236 15,344
3/31/96 17,835 16,167
6/30/96 18,443 16,893
9/30/96 18,955 17,415
12/31/96 20,379 18,867
3/31/97 20,840 19,373
6/30/97 23,384 22,755
9/30/97 26,126 24,459
12/31/97 26,215 25,161
3/31/98 28,951 28,670
6/30/98 28,821 29,617
9/30/98 25,212 26,671
12/31/98 29,267 32,351
2/28/99 28,597 32,656
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 27 bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Past performance is not indicative of future
performance. Information is unaudited.
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Value Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of GMO
Value Fund at February 28, 1999 and the results of its operations, the
changes in its net assets and the financial highlights for the periods
presented, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to
as "financial statements") are the responsibility of the Trust's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe
that our audits, which included confirmation of securities at February 28,
1999 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 12, 1999
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS -- 93.4%
Aerospace -- 0.2%
12,500 Lockheed Martin Corp 471,094
-------------
Automotive -- 2.0%
5,000 Ford Motor Co 296,563
37,000 General Motors Corp 3,054,812
50,000 Mascotech Industries Inc 756,250
-------------
4,107,625
-------------
Banking and Financial Services -- 9.9%
17,500 American Express Co 1,898,750
10,000 BankAmerica Corp 653,125
75,000 Block (HR) Inc 3,403,124
67,500 Chase Manhattan Corp 5,374,687
102,496 Citigroup Inc 6,021,639
10,000 First Union Corp 533,125
25,001 PNC Bank Corp 1,301,575
25,000 Wells Fargo & Co 918,750
-------------
20,104,775
-------------
Chemicals -- 0.6%
17,500 Crompton & Knowles Corp 323,750
5,000 Du Pont (EI) De Nemours & Co 256,563
17,500 Engelhard Corp 311,719
1,000 PPG Industries Inc 52,063
37,500 Wellman Inc 349,219
-------------
1,293,314
-------------
Computer and Office Equipment -- 3.4%
50,000 Electronic Data Systems Corp 2,324,999
5,000 Hewlett Packard Co 332,188
22,300 IBM Corp 3,790,999
75,000 Intergraph Corp* 414,848
-------------
6,863,034
-------------
Consumer Goods -- 2.6%
50,000 Eastman Kodak Co 3,309,374
20,001 Jostens Inc 468,776
35,000 Mattel Co 923,125
10,000 Maytag Corp 560,625
-------------
5,261,900
-------------
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Electronic Equipment -- 1.5%
100,000 International Rectifier Corp* 687,500
75,000 National Semiconductor Corp* 787,500
25,000 Raytheon Co, Class B 1,335,938
32,500 Stewart & Stevenson Services Corp 272,188
-------------
3,083,126
-------------
Food and Beverage -- 3.7%
40,000 Anheuser Busch Cos Inc 3,067,499
20,000 Bestfoods 938,750
7,500 General Mills Co 605,156
5,000 Hercules Inc 138,438
70,000 RJR Nabisco Holdings Corp 1,911,875
20,000 Sara Lee Corp 543,750
15,000 Wendy's International Inc 359,063
-------------
7,564,531
-------------
Health Care -- 1.3%
2,500 Acuson Corp* 37,500
50,000 Becton Dickinson & Co 1,675,000
50,000 Beverly Enterprises Inc* 259,375
5,000 Johnson & Johnson 426,875
25,000 Phycor Inc* 135,938
-------------
2,534,688
-------------
Insurance -- 2.2%
25,366 Allstate Corp 951,225
10,000 CNA Financial Corp* 339,375
75,000 Reliance Group Holdings Inc 773,438
145,000 TIG Holdings Inc 2,319,999
-------------
4,384,037
-------------
Machinery -- 2.3%
15,000 Baker Hughes Inc 270,000
15,000 Caterpillar Inc 683,438
7,500 Cummins Engine Inc 307,500
12,500 FMC Corp* 639,844
75,000 Milacron Inc 1,335,938
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Machinery -- continued
50,000 Pall Corp 1,059,375
15,000 Stanley Works 364,688
-------------
4,660,783
-------------
Manufacturing -- 7.5%
50,000 American Greetings Corp 1,184,375
62,500 Clayton Homes Inc 773,438
87,500 Corning Inc 4,681,249
17,500 General Electric Co 1,755,469
10,000 Griffon Corp* 90,000
7,500 Minnesota Mining and Manufacturing Co 555,469
87,500 Owens Corning 2,783,593
5,000 Owens Illinois Inc* 119,688
35,000 Tenneco Inc 1,047,813
17,500 United Technologies Corp 2,167,812
-------------
15,158,906
-------------
Metals and Mining -- 1.0%
25,000 Alcan Aluminum Ltd 607,813
7,500 Allegheny Teledyne Inc 154,688
45,000 Inco Ltd 568,125
5,000 Newmont Mining Corp 86,250
5,000 Pegasus Gold* 100
15,000 Reynolds Metals Co 641,250
-------------
2,058,226
-------------
Oil and Gas -- 6.9%
12,500 Amerada Hess Corp 567,188
7,500 Atlantic Richfield Co 409,688
7,500 Burlington Resources Inc 242,813
15,000 Cabot Oil & Gas Corp, Class A 164,063
21,100 EEX Corp* 127,919
50,000 Enron Oil & Gas 825,000
7,500 Exxon Corp 499,219
100,000 Gulf Canada Resources Ltd 231,250
22,500 Kerr-McGee Corp 642,656
37,500 Mitchell Energy, Class B 459,375
12,500 Mobil Corp 1,039,844
125,000 Occidental Petroleum Corp 1,882,813
12,306 Pennzoil Quaker State Co* 153,056
</TABLE>
See accompanying notes to financial statements. 3
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Oil and Gas -- continued
25,000 Questar Corp 446,875
20,000 Texaco Inc 931,250
12,500 Triton Energy Limited* 68,750
125,000 Union Pacific Resources Group 1,117,188
77,500 Unocal Corp 2,184,530
62,500 USX - Marathon Group 1,292,969
39,900 Westcoast Energy Inc 780,544
-------------
14,066,990
-------------
Paper and Allied Products -- 3.6%
71,500 Abitibi-Consolidated Inc 572,000
12,500 Boise Cascade Corp 388,281
15,000 Champion International Corp 555,000
50,000 Fort James Corp 1,493,750
32,500 International Paper Co 1,365,000
40,000 Kimberly Clark Corp 1,890,000
17,500 Weyerhaeuser Co 975,625
-------------
7,239,656
-------------
Pharmaceuticals -- 1.0%
16,500 Lilly (Eli) & Co 1,562,344
25,001 PharMerica Inc* 140,631
5,000 Smithkline Beecham PLC ADR 355,625
-------------
2,058,600
-------------
Primary Materials -- 0.4%
32,500 Crown Cork & Seal Inc 901,875
-------------
Primary Processing -- 0.3%
2,500 Dow Chemical Co 245,938
10,000 USX-US Steel Group Inc 253,125
-------------
499,063
-------------
Real Estate -- 6.6%
10,000 Amli Residential Properties Trust 199,375
25,000 Brandywine Realty Trust 410,938
22,500 Duke Realty Investments 490,781
125,000 Equity Office Properties 3,218,749
50,000 Equity Residential Properties Trust 2,050,000
100,000 JP Realty Inc 1,850,000
12,500 Liberty Property Trust 273,438
</TABLE>
4 See accompanying notes to financial statements.
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Real Estate -- continued
12,500 Mack-Cali Realty Corp 361,719
15,000 Spieker Properties Inc 536,250
125,000 Summit Properties Inc 2,070,313
112,500 United Dominion Realty Trust Inc 1,110,938
50,000 Walden Residential Properties Inc 834,375
-------------
13,406,876
-------------
Refining -- 0.6%
25,000 Royal Dutch Petroleum Co 1,096,875
10,000 Ultramar Diamond Shamrock Corp 197,500
-------------
1,294,375
-------------
Retail Trade -- 5.2%
25,000 Cone Mills Corp* 121,875
10,000 Dillards Department Stores Inc 248,750
72,500 Federated Department Stores Inc* 2,759,530
7,500 Saks Inc* 269,531
52,500 Sears Roebuck & Co 2,132,813
165,000 Toys R Us Inc* 2,330,624
30,000 Wal Mart Stores Inc 2,591,249
-------------
10,454,372
-------------
Services -- 6.8%
75,000 Browning Ferris Industries Inc 2,362,499
60,000 Hilton Hotels Corp 948,750
50,000 Manpower Inc 1,196,875
2,000 Meredith Corp 67,500
187,501 Waste Management Inc 9,164,093
-------------
13,739,717
-------------
Technology -- 3.5%
25,000 Advanced Micro Devices Inc* 446,875
65,002 Compaq Computer Corp 2,291,320
32,500 G TECH Holdings Corp* 735,313
25,000 Information Resources Inc* 209,375
100,000 Storage Technology Corp* 3,481,249
-------------
7,164,132
-------------
Telecommunications -- 6.1%
5,000 Bell Atlantic Corp 287,188
</TABLE>
See accompanying notes to financial statements. 5
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Telecommunications -- continued
22,500 CBS Corp 829,688
20,000 Comsat Corp 585,000
47,500 GTE Corp 3,081,562
47,500 MediaOne Group Inc* 2,588,749
32,501 SBC Communications 1,718,490
60,002 US West Inc 3,198,804
-------------
12,289,481
-------------
Tobacco -- 0.6%
50,000 Imperial Tobacco Group PLC ADR 1,162,500
-------------
Transportation -- 3.3%
15,000 AMR Corp* 831,563
75,000 Canadian Pacific 1,392,188
7,500 KLM Royal Dutch Airlines 210,000
100,000 Ryder System Inc 2,699,999
3,500 UAL Corp* 209,125
30,000 USAir Group Inc* 1,421,250
-------------
6,764,125
-------------
Utilities -- 10.3%
15,000 Calenergy Inc* 420,938
55,000 Cinergy Corp 1,605,313
40,000 Dominion Resources Inc 1,545,000
50,000 DPL Inc 890,625
10,000 Duke Power Co 568,750
35,000 Entergy Corp 988,750
25,000 Firstenergy Corp 731,250
47,500 Illinova Corp 1,128,125
150,000 Niagara Mohawk Power Corp* 2,193,749
25,000 Pacificorp 448,438
50,000 PG & E Corp 1,575,000
30,000 Public Service Enterprise Group Inc 1,140,000
20,000 Reliant Energy Inc 536,250
25,000 Southern Co 626,563
92,500 Texas Utilities Co 3,925,468
35,000 TransCanada Pipeline Ltd 483,438
57,500 Unicom Corp 2,044,844
-------------
20,852,501
-------------
</TABLE>
6 See accompanying notes to financial statements.
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares/ Description Value ($)
Par Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Common Stocks (Cost $172,874,995) 189,440,302
-------------
Preferred Stocks -- 2.5%
Insurance -- 0.1%
5,000 Aetna Inc 6.25% Convertible 354,063
-------------
Metals and Mining -- 0.1%
12,500 Freeport McMoran Corp 212,500
-------------
Oil and Gas -- 0.7%
30,000 Unocal Corp Convertible 6.25% 144A 1,413,750
-------------
Real Estate -- 0.4%
32,500 Crescent Real Estate 6.75% 515,938
12,500 Reckson Associates Realty Corp 7.625% 255,469
-------------
771,407
-------------
Transportation -- 1.2%
50,000 Union Pacific Capital Trust 6.25% 144A* 2,387,499
-------------
Total Preferred Stocks (Cost $5,679,860) 5,139,219
-------------
Debt Obligations -- 1.0%
Electronic Equipment -- 1.0%
2,600,000 Advanced Micro Devices Inc, 6.00% due 5/15/05 2,028,000
-------------
TOTAL Debt Obligations (Cost $2,155,858) 2,028,000
-------------
Short-Term Investments -- 9.4%
Cash Equivalents -- 6.7%
$ 157,510 BankBoston Eurodollar Time Deposit, 5.005% due
4/30/99(a) 157,510
3,459,400 Merrimac Cash Fund Premium Class(a) 3,459,400
$10,000,000 Prudential Securities Group Inc, Master Note, 5.075% due
6/14/99(a) 10,000,000
-------------
13,616,910
-------------
</TABLE>
See accompanying notes to financial statements. 7
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Schedule of Investments (continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value ($) Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreements -- 2.7%
$5,379,733 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/26/99, due 3/1/99, with a maturity value of $5,381,536
and an effective yield of 4.02%, collateralized by a U.S.
Treasury Obligation with a rate of 7.00%, maturity date
of 7/15/06 and market value, including accrued interest,
of $5,487,328. 5,379,733
-------------
Total Short-Term Investments (Cost $18,996,643) 18,996,643
-------------
Total Investments -- 106.3%
(COST $199,707,356) 215,604,164
Other Assets and Liabilities (net) -- (6.3)% (12,762,416)
-------------
TOTAL NET ASSETS -- 100% $ 202,841,748
=============
</TABLE>
Notes to the Schedule of Investments:
ADR - American Depositary Receipt
144A - Securities exempt from registration under rule 144A
of the Securities Act of 1933. These securities may be
resold in transactions exempt from registration, normally to
qualified institutional investors.
* Non-income producing security.
(a) Represents investments of security lending collateral
(Note 1).
8 See accompanying notes to financial statements.
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at value (cost $199,707,356) (Note 1) $ 215,604,164
Receivable for investments sold 782,561
Dividends and interest receivable 478,235
Receivable for expenses waived or borne by Manager (Note 2) 46,604
-------------
Total assets 216,911,564
-------------
Liabilities:
Payable for investments purchased 223,119
Payable upon return of securities loaned (Note 1) 13,616,910
Payable for Fund shares repurchased 49,000
Payable to affiliate for (Note 2):
Management fee 111,656
Shareholder service fee 22,351
Accrued expenses 46,780
-------------
Total liabilities 14,069,816
-------------
Net assets $ 202,841,748
=============
Net assets consist of:
Paid-in capital $ 172,971,165
Accumulated undistributed net investment income 6,056
Accumulated undistributed net realized gain 13,967,719
Net unrealized appreciation 15,896,808
=============
$ 202,841,748
=============
Net assets attributable to:
Class III shares $ 202,841,748
=============
Shares outstanding:
Class III 19,509,551
=============
Net asset value per share:
Class III $ 10.40
=============
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment Income:
Dividends (net of withholding taxes of $37,605) $ 5,640,205
Interest (including securities lending income of $37,330) 756,970
------------
Total income 6,397,175
------------
Expenses:
Management fee (Note 2) 1,839,261
Custodian and transfer agent fees 99,209
Audit fees 38,041
Legal fees 4,169
Trustees fees (Note 2) 2,465
Registration fees 726
Miscellaneous 3,730
Fees waived or borne by Manager (Note 2) (778,954)
------------
1,208,647
Shareholder service fee (Note 2)
Class III 394,127
------------
Net expenses 1,602,774
------------
Net investment income 4,794,401
------------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments 58,125,637
Closed futures contracts 1,307,331
Closed swap contracts (3,181,679)
------------
Net realized gain 56,251,289
------------
Change in net unrealized appreciation (depreciation) on:
Investments (51,598,546)
Open futures contracts (104,209)
Open swap contracts 699,419
------------
Net unrealized loss (51,003,336)
------------
Net realized and unrealized gain 5,247,953
------------
Net increase in net assets resulting from operations $ 10,042,354
============
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------------------------
Year Ended Year Ended
February 28, February 28,
1999 1998
-------------- --------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 4,794,401 $ 7,420,546
Net realized gain 56,251,289 91,343,278
Change in net unrealized appreciation (depreciation) (51,003,336) 8,029,177
------------ ------------
Net increase in net assets resulting from operations 10,042,354 106,793,001
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (5,045,206) (8,678,684)
------------ ------------
Total distributions from net investment income (5,045,206) (8,678,684)
------------ ------------
Net realized gains
Class III (71,266,327) (95,748,520)
------------ ------------
Total distributions from net realized gains (71,266,327) (95,748,520)
------------ ------------
(76,311,533) (104,427,204)
------------ ------------
Net share transactions: (Note 5)
Class III (62,992,395) (139,853,837)
------------ ------------
Decrease in net assets resulting from net share
transactions (62,992,395) (139,853,837)
------------ ------------
Total decrease in net assets (129,261,574) (137,488,040)
Net assets:
Beginning of period 332,103,322 469,591,362
------------ ------------
End of period (including accumulated undistributed net
investment income of $6,056 and $73,634, respectively) $202,841,748 $332,103,322
============ ============
</TABLE>
11 See accompanying notes to the financial statements.
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Financial Highlights
(For a Class III share outstanding throughout each period)
- -------------------------------------------------------------------------------------------------
Year Ended February 28/29,
-----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 14.33 $ 14.85 $ 14.25 $ 12.05 $ 13.48
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.26 0.31 0.31 0.39 0.41
Net realized and unrealized gain 0.13 3.81 2.47 3.71 0.32
-------- -------- -------- -------- --------
Total from investment operations 0.39 4.12 2.78 4.10 0.73
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.27) (0.35) (0.32) (0.39) (0.45)
From net realized gains (4.05) (4.29) (1.86) (1.51) (1.71)
-------- -------- -------- -------- --------
Total distributions (4.32) (4.64) (2.18) (1.90) (2.16)
-------- -------- -------- -------- --------
Net asset value, end of period $ 10.40 $ 14.33 $ 14.85 $ 14.25 $ 12.05
======== ======== ======== ======== ========
Total Return (a) 2.24% 31.54% 21.26% 35.54% 6.85%
Ratios/Supplemental Data:
Net assets, end of period (000's) $202,842 $332,103 $469,591 $317,612 $350,694
Net expenses to average daily net
assets 0.61% 0.61% 0.61% 0.61% 0.61%
Net investment income to average
daily net assets 1.82% 1.89% 2.17% 2.66% 2.86%
Portfolio turnover rate 37% 40% 84% 65% 77%
Fees and expenses voluntarily
waived or borne by the Manager
consisted of the following per
share amounts: $ 0.04 $ 0.05 $ 0.04 $ 0.02 $ 0.02
</TABLE>
(a)Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
12 See accompanying notes to the financial statements.
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Value Fund (the "Fund") is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended, as
an open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series into classes.
The Fund seeks a total return greater than that of the Standard & Poor's
500 Stock Index through investment of substantially all of its assets in
common stocks chosen from the Wilshire 5000 Index and primarily in common
stocks chosen from among the 1,200 companies with the largest equity
capitalization whose securities are listed on a United States national
securities exchange.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Other assets and
securities for which no quotations are readily available are valued at fair
value as determined in good faith by the Trustees.
Futures contracts
The Fund may purchase and sell futures contracts on the domestic stock
indices. Stock index futures contracts represent commitments for future
delivery of cash based upon the level of a specified index of equity
securities at a specified price at a given date. The Fund may use futures
contracts to manage its exposure to the stock markets. Buying futures tends
to increase the Fund's exposure to the underlying instrument. Selling
futures tends to decrease the Fund's exposure to the underlying instrument
or hedge other Fund instruments. Upon entering into a futures contract, the
Fund is required to deposit with its custodian, in a segregated account in
the name of the futures broker, an amount of cash or U.S. government
obligations in accordance with the initial margin requirements of the
broker or exchange. Futures contracts are marked to market daily and an
appropriate payable or receivable for the change in value ("variation
margin") is recorded by the Fund. The payable or receivable is liquidated
on the following business day. Gains or losses are recognized but not
considered realized until the contracts expire or are closed. Futures
contracts involve, to varying degrees, risk of loss in excess of the
variation margin disclosed in the Statement of Assets and Liabilities.
Losses may arise from changes in the value of the underlying instrument, if
there is an illiquid secondary market for the contracts, or if
13
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
counterparties do not perform under the contract terms. Futures contracts
are valued at the settlement price established each day by the board of
trade or exchange on which they are traded. As of February 28, 1999 the
Fund held no open futures contracts.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Security lending
The Fund may lend its securities to qualified brokers. The loans are
collateralized at all times with cash or securities with a market value at
least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 28, 1999, the Fund loaned securities having a
market value of $13,137,619, collateralized by cash in the amount of
$13,616,910, which was invested in short-term instruments.
Swap agreements
The Fund may enter into swap agreements to manage its exposure to the
equity markets. A swap is an agreement to exchange the return generated by
one instrument for the return generated by another instrument. The Fund
enters into equity swap agreements which involve a commitment by one party
in the agreement to pay interest in exchange for a market linked return
based on a notional amount. To the extent that the total return of the
security or index underlying the transaction exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make a payment to the counterparty, respectively. The Fund also enters
into contracts for differences in which the Fund agrees with the
counterparty that its return will be based on the relative performance of
two different groups or "baskets" of securities, adjusted by an interest
rate payment. Equity swaps are marked to market daily based upon quotations
from market makers and the change, if any, is recorded as unrealized gain
or loss in the Statement of Operations. Payments received or made at the
end of the measurement period are recorded as realized gain or loss in the
Statement of Operations. Entering into these agreements involves, to
varying degrees, elements of credit and market risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform, or that there may be unfavorable changes in the
price of the security or index underlying these transactions. As of
February 28, 1999 the Fund held no open swap agreements.
14
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary. Taxes on foreign dividend income are withheld in accordance with
the applicable country's tax treaty with the United States.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for partnership interests and REIT securities.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated
Undistributed Net Accumulated Undistributed
Investment Income Net Realized Gain Paid-in Capital
---------------------- -------------------------- -------------------
$183,227 $(252,770) $69,543
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis and is adjusted for the accretion of discounts. In
determining the net gain or loss on securities sold, the cost of securities
is determined on the identified cost basis. Dividends representing a return
of capital are reflected as a reduction of cost.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds.
15
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .14% of the amount
invested. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. Purchase premiums are included as part of "shares sold",
as summarized in Note 5. For the year ended February 28, 1999, the Fund
received $4,632 in purchase premiums. There is no premium for cash
redemptions, reinvested distributions or in-kind transactions.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .70% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding brokerage commissions, certain other transaction costs (including
transfer taxes), shareholder service fees and extraordinary expenses)
exceed .46% of average daily net assets.
Effective March 1, 1999, GMO's contractual management fee was reduced to
.46% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding brokerage
commissions, certain other transaction costs (including transfer taxes),
shareholder service fees and extraordinary expenses) exceed the management
fee.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999 was $2,465. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1999, aggregated
$104,699,095 and $222,875,152, respectively.
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
---------------- ------------------ ------------------ ----------------
$201,574,665 $36,009,031 $21,979,532 $14,029,499
16
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
4. Principal shareholder
At February 28, 1999, 45.4% of the outstanding shares of the Fund were held
by one shareholder.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including the purchase premiums received by the Fund, were as
follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
Class III: February 28, 1999 February 28, 1998
------------------------------ -----------------------------
Shares Amount Shares Amount
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Shares sold 254,879 $ 3,308,655 681,641 $ 10,600,108
Shares issued to shareholders
in reinvestment of
distributions 5,904,295 68,359,733 7,181,148 99,150,661
Shares repurchased (9,828,113) (134,660,783) (16,313,781) (249,604,606)
============== ============== ============= ==============
Net decrease (3,668,939) $ (62,992,395) (8,450,992) $ (139,853,837)
============== ============== ============= ==============
17
</TABLE>
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1999, all of the Fund's distributions are
from investment company taxable income, except that the Fund has designated
77.5% of distributions as net capital gain dividends.
18
<PAGE>
GMO Value Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
- ------------------
Mr. Richard A. Mayo, Mr. R. Jeremy Grantham and Mr. Christopher Darnell are
primarily responsible for the day-to-day management of the Fund's portfolio.
Each of these individuals has been a portfolio manager at Grantham, Mayo, Van
Otterloo & Co. LLC for more than fifteen years.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The Class III shares of the GMO Value Fund returned 2.2% for the fiscal year
ended February 28, 1999, as compared to 19.7% for the S&P 500 and 9.2% for the
Russell 1000 Value Index. Consistent with the Fund's investment objectives and
policies, the Fund was invested substantially in common stocks throughout the
period.
Sector selection was moderately negative for the year. The Fund's significant
underweight in financial services stocks and overweight in technology stocks
added to relative performance. Also contributing positively to performance was
the underweight in oil stocks. Because of falling energy prices, oil stocks
underperformed the Russell 1000 Value Index. These contributions to performance
were more than offset by the overweight in other energy stocks, which
underperformed the benchmark by 37.6%, as well as the overweight in materials
processing stocks, which underperformed by 20.9%. The underweight in telephone
stocks also detracted from performance as this sector outperformed the benchmark
by 37.4%.
Stock selection detracted significantly from performance for the period. The
underperformance was due to weak stock selection among telephone, financial
services, technology and integrated oil stocks. Weak stock selection more than
offset good selection in consumer staples, materials processing and producer
durable stocks.
Outlook
- -------
We continue to believe that large-cap value stocks are undervalued relative to
large-cap growth stocks. We also believe large cap value stocks are positioned
to perform well in the near to mid term. Additionally, we are maintaining our
overweights in utility and consumer discretionary stocks, which appear to be
undervalued. We are also emphasizing medium-sized companies, as the largest
stocks continue to look significantly overpriced. These characteristics should
enable the Fund to perform well in a more difficult market environment.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Value Fund Class III Shares and the Russell 1000 Value Index
As of February 28, 1999
-------------------------------------
Average Annual Total Return
-------------------------------------
Inception
1yr 5yr 11/13/90
-------------------------------------
2.1 18.7 18.6
-------------------------------------
[LINE GRAPH APPEARS HERE]
Date GMO Value Fund Russell 1000 Value Index
Class III Shares
1/31/90
11/13/90 9,986 10,000
12/31/90 10,585 10,394
3/31/91 12,508 11,755
6/30/91 12,630 11,767
9/30/91 12,903 12,392
12/31/91 13,310 12,953
3/31/92 13,641 13,099
6/30/92 14,138 13,647
9/30/92 14,146 13,929
12/31/92 14,554 14,742
3/31/93 15,636 16,166
6/30/93 16,152 16,640
9/30/93 16,710 17,462
12/31/93 17,272 17,415
3/31/94 16,602 16,806
6/30/94 16,525 16,910
9/30/94 17,333 17,340
12/31/94 17,378 17,065
3/31/95 19,119 18,686
6/30/95 20,919 20,361
9/30/95 22,683 22,140
12/31/95 24,014 23,610
3/31/96 25,462 24,946
6/30/96 26,177 25,375
9/30/96 26,328 26,114
12/31/96 28,991 28,719
3/31/97 29,176 29,454
6/30/97 33,473 33,797
9/30/97 37,193 37,161
12/31/97 37,810 38,823
3/31/98 42,040 43,345
6/30/98 42,016 43,540
9/30/98 37,439 38,491
12/31/98 42,218 44,883
2/28/99 41,034 44,604
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 14 bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Past performance is not indicative of future
performance. Information is unaudited.
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO World Equity Allocation Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of GMO
World Equity Allocation Fund at February 28, 1999 and the results of its
operations, the changes in its net assets and the financial highlights for
the periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities at February 28, 1999 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 22, 1999
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Par Value ($)/
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
MUTUAL FUNDS -- 100.0%
53,039 GMO Currency Hedged International Core Fund 492,206
217,000 GMO Emerging Country Debt Fund 1,495,133
390,293 GMO Emerging Markets Fund 2,462,748
310,522 GMO Evolving Countries Fund 1,782,395
47,333 GMO Growth Fund 195,961
91,851 GMO Inflation Indexed Bond Fund 907,487
39,709 GMO International Bond Fund 399,470
513,701 GMO International Core Fund 10,469,226
124,313 GMO International Small Companies Fund 1,369,930
172,374 GMO REIT Fund 1,573,776
72,672 GMO Small Cap Growth Fund 790,674
135,199 GMO Small Cap Value Fund 1,580,481
81,808 GMO U.S. Bond/Global Alpha A Fund 836,896
232,659 GMO U.S. Core Fund 4,325,124
86,827 GMO Value Fund 902,997
-----------
TOTAL MUTUAL FUNDS (COST $36,946,196) 29,584,504
-----------
SHORT-TERM INVESTMENTS -- 0.0%
Repurchase Agreements -- 0.0%
$ 11,260 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/26/99, due 3/1/99, with a maturity value of $11,264 and an
effective yield of 4.02%, collateralized by a U.S. Treasury
Obligation with a rate of 7.00%, maturity date of 7/15/06
and market value, including accrued interest, of
$11,485. 11,260
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $11,260) 11,260
-----------
TOTAL INVESTMENTS -- 100.0%
(Cost $36,957,456) 29,595,764
Other Assets and Liabilities (net) -- 0.0% (13,958)
-----------
TOTAL NET ASSETS -- 100% $29,581,806
===========
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at value (cost $36,957,456) (Note 1) $29,595,764
Receivable for expenses waived or borne by Manager (Note 2) 1,822
-----------
Total assets 29,597,586
-----------
Liabilities:
Accrued expenses 15,780
-----------
Total liabilities 15,780
-----------
Net assets $29,581,806
===========
Net assets consist of:
Paid-in capital $35,974,114
Accumulated undistributed net realized gain 969,384
Net unrealized depreciation (7,361,692)
-----------
$29,581,806
===========
Net assets attributable to:
Class III shares $29,581,806
===========
Shares outstanding:
Class III 3,472,311
===========
Net asset value per share:
Class III $ 8.52
===========
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
Statement of Operations -- Year Ended February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment Income:
Dividends from investment company shares $ 885,115
Interest 584
-----------
Total income 885,699
-----------
Expenses:
Audit fees 17,148
Custodian and transfer agent fees 4,847
Registration fees 1,932
Legal fees 917
Trustees fees (Note 2) 456
Miscellaneous 1,900
Fees waived or borne by Manager (Note 2) (27,200)
-----------
Net expenses --
-----------
Net investment income 885,699
-----------
Realized and unrealized gain (loss):
Net realized gain (loss) on:
Investments (2,945,589)
Realized gain distributions from investment company shares 4,682,644
-----------
Net realized gain 1,737,055
-----------
Change in net unrealized appreciation (depreciation) on investments (5,741,678)
-----------
Net realized and unrealized loss (4,004,623)
-----------
Net decrease in net assets resulting from operations $(3,118,924)
===========
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28,
---------------------------------
1999 1998
------------ -------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 885,699 $1,334,630
Net realized gain 1,737,055 7,633,159
Change in net unrealized appreciation (depreciation) (5,741,678) (2,989,836)
------------ -----------
Net increase (decrease) in net assets
resulting from operations (3,118,924) 5,977,953
------------ -----------
Distributions to shareholders from:
Net investment income
Class I -- (239,456)
Class III (885,699) (1,095,174)
------------ -----------
Total distributions from net investment income (885,699) (1,334,630)
------------ -----------
In excess of net investment income
Class I -- (318)
Class III (1,377,961) (1,455)
------------ -----------
Total distributions in excess of net
investment income (1,377,961) (1,773)
------------ -----------
Net realized gains
Class I -- (1,057,705)
Class III (3,441,070) (4,579,052)
------------ -----------
Total distributions from net realized gains (3,441,070) (5,636,757)
------------ -----------
(5,704,730) (6,973,160)
------------ -----------
Net share transactions: (Note 5)
Class I -- (8,356,794)
Class III (12,546,195) 14,133,364
------------ -----------
Increase (decrease) in net assets resulting from net
share transactions (12,546,195) 5,776,570
------------ -----------
Total increase (decrease) in net assets (21,369,849) 4,781,363
Net assets:
Beginning of period 50,951,655 46,170,292
------------ -----------
End of period (including accumulated undistributed net
investment income of $0 and $0, respectively) $29,581,806 $50,951,655
============ ===========
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class I share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from Period from June 28, 1996
March 1, 1997 (commencement of operations)
to January 9, 1998 to February 28, 1997
------------------ ----------------------------
<S> <C> <C>
Net asset value, beginning of period $10.52 $10.00
------ ------
Income from investment operations:
Net investment income (b) 0.28+ 0.09
Net realized and unrealized gain 0.02 0.72
------ ------
Total from investment operations 0.30 0.81
------ ------
Less distributions to shareholders:
From net investment income (0.27) (0.11)
In excess of net investment income --(d) 0.00
From net realized gains (1.17) (0.18)
------ ------
Total distributions (1.44) (0.29)
------ ------
Net asset value, end of period $ 9.38(c) $10.52
====== ======
Total Return (a) 2.41% 8.23%
Ratios/Supplemental Data:
Net assets, end of period (000's) -- $9,424
Net expenses to average daily net assets 0.13%* 0.16%*
Net investment income to average daily net assets (b) 2.88%* 1.80%*
Portfolio turnover rate 49% 31%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts: $ 0.01 $ 0.01
</TABLE>
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(b) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
(c) All Class I shares of the Fund were exchanged for Class III shares on
January 9, 1998. Amount represents ending net asset value per share on
January 9, 1998.
(d) The per share distribution in excess of net investment income was $0.0003.
+ Computed using average shares outstanding throughout the period.
* Annualized.
See accompanying notes to the financial statements. 5
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
*
Year Ended February 28,
-------------------------------------
1999 1998 1997 *
------- -------- --------
<S> <C> <C> <C>
Net asset value, beginning of period $10.39 $ 10.52 $ 10.07
------- -------- --------
Income from investment operations:
Net investment income (b) 0.18+ 0.29+ 0.11
Net realized and unrealized gain (loss) (0.82) 1.03 0.63
------- -------- --------
Total from investment operations (0.64) 1.32 0.74
------- -------- --------
Less distributions to shareholders:
From net investment income (0.18) (0.28) (0.11)
In excess of net investment income (0.33) --(c) --
From net realized gains (0.72) (1.17) (0.18)
------- -------- --------
Total distributions (1.23) (1.45) (0.29)
------- -------- --------
Net asset value, end of period $ 8.52 $ 10.39 $ 10.52
======= ======== ========
Total Return (a) (6.67)% 13.56% 7.51%
Ratios/Supplemental Data:
Net assets, end of period (000's) $29,582 $50,952 $36,746
Net expenses to average daily net assets (d) 0.00% 0.00% 0.00%**
Net investment income to average daily net assets (b) 1.91% 2.65% 0.91%**
Portfolio turnover rate 17% 49% 31%
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per share
amounts: $ 0.01 $ 0.01 $ 0.03
</TABLE>
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(b) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund
invests.
(c) The per share distribution in excess of net investment income was $0.0004.
(d) Net expenses exclude expenses incurred indirectly through investment in
underlying funds. See Note 1.
* Period from October 22, 1996 (commencement of operations) to February 28,
1997.
** Annualized.
+ Computed using average shares outstanding throughout the period.
6 See accompanying notes to the financial statements.
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO World Equity Allocation Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, diversified management investment company. The
Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series of shares into classes.
The Fund operates as a "fund-of-funds" in that, pursuant to management
provided by the Manager, it makes investments in other funds of the Trust
("underlying funds"). The Fund seeks a total return greater than that of
the GMO World-Lite Extended Index, a benchmark developed by the Manager.
The Fund will pursue its objective by investing primarily in Class III
shares of equity funds of the Trust.
Prior to January 9, 1998, the Fund offered three classes of shares: Class
I, Class II and Class III. Effective January 9, 1998, Class I shares ceased
operations and all shares were exchanged for Class III shares, and Class II
shares ceased to be offered. The principal economic difference among the
classes of shares is the level of shareholder service fee borne by the
classes. Eligibility for and automatic conversion between the various
classes of shares is generally based on the total amount of assets invested
with GMO, as more fully outlined in the Trust's prospectus.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Shares of underlying funds are valued at their net asset value as reported
on each business day. Short-term investments with a remaining maturity of
sixty days or less are valued at amortized cost, which approximates market
value. Other assets and securities for which no quotations are readily
available are valued at fair value as determined in good faith by the
Trustees.
7
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to the
classification of distribution from underlying funds and redemptions
in-kind. Gains resulting from such in-kind transactions amounted to
$15,962.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
---------------------- ---------------------- ----------------------
$ 1,377,961 $ 410,516 $ (1,788,477)
8
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income and
capital gains distributions are recorded on the ex-dividend date. Interest
income is recorded on the accrual basis. In determining the net gain or
loss on securities sold, the cost of securities is determined on the
identified cost basis.
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. In addition,
the Fund will also incur fees and expenses indirectly as a shareholder in
the underlying funds. Because the underlying funds have varied expense and
fee levels and the Fund may own different proportions of underlying funds
at different times, the amount of fees and expenses indirectly incurred by
the Fund will vary.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .66% of the amount
invested. In the case of cash redemptions, the fee is .15% of the amount
redeemed. All purchase premiums and redemption fees are paid to and
recorded by the Fund as paid-in capital. Purchase premiums are included as
part of each class' "shares sold" and redemption fees are included as part
of each class' "shares repurchased", respectively, as summarized in Note 5.
For the year ended February 28, 1999, the Fund received $17 in purchase
premiums and $16,383 in redemption fees. There is no premium for reinvested
distributions or in-kind transactions.
Investment risk
The Fund is subject to the investment risk associated with an investment in
the underlying funds, some of which may invest in foreign securities. There
are certain additional risks involved in investing in foreign securities
that are not inherent in investments in domestic securities. These risks
may involve adverse political and economic developments, including the
possible imposition of capital controls or other foreign governmental laws
or restrictions. In addition, the securities of some foreign companies and
securities markets are less liquid and at times more volatile than
securities of comparable U.S. companies and U.S. securities markets. The
risks described above apply to an even greater extent to investments in
emerging markets. The securities markets of emerging countries are
generally smaller, less developed, less liquid, and more volatile than the
securities markets of the U.S. and developed foreign markets.
9
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
2. Fees and other transactions with affiliates
The Manager determines the allocation of the assets of the Fund among
designated underlying funds. The Manager does not charge an advisory fee
for asset allocation advice provided to the Fund, but receives advisory and
shareholder service fees from the underlying funds in which the Fund
invests. The Fund has adopted a Shareholder Service Plan under which the
Fund pays GMO a shareholder service fee for client and shareholder service,
reporting and other support. No shareholder service fee is charged for
Class III shares.
GMO has contractually agreed to reimburse all expenses directly incurred by
the Fund until February 29, 2000 (excluding brokerage commissions, certain
other transaction costs (including transfer taxes), shareholder service
fees and extraordinary expenses).
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 28, 1999 was $456. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 28, 1999, aggregated
$7,512,267 and $20,189,998, respectively.
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
----------------- ------------------ ---------------- ----------------
$ 37,493,332 $ 86,036 $ 7,983,604 $ 7,897,568
4. Principal shareholders
At February 28, 1999, 91.5% of the outstanding shares of the Fund were held
by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
10
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including a class' portion of the purchase premiums and redemption
fees received by the Fund, were as follows:
<TABLE>
<CAPTION>
Period from March 1, 1997
Class I: to January 9, 1998
-----------------------------
Shares Amount
------------ ------------
<S> <C> <C>
Shares sold 204 $ 11,513
Shares issued to shareholders in
reinvestment of distributions 88,972 869,785
Shares repurchased (985,264) (9,238,092)
------------ ------------
Net decrease (896,088) $ (8,356,794)
============ ============
<CAPTION>
Year Ended Year Ended
Class III: February 28, 1999 February 28, 1998
------------------------------ -------------------------------
Shares Amount Shares Amount
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Shares sold 497 $ 4,496 2,510,385 $ 26,539,533
Shares issued to shareholders
in reinvestment of distributions 535,862 4,995,646 564,648 5,513,999
Shares repurchased (1,968,349) (17,546,337) (1,664,735) (17,920,168)
------------- ------------- ------------ -------------
Net increase (decrease) (1,431,990) $ (12,546,195) 1,410,298 $ 14,133,364
============= ============= ============ =============
</TABLE>
11
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
- --------------------------------------------------------------------------------
For the fiscal year ended February 28, 1999, all of the Fund's distributions are
from investment company taxable income, except that the Fund has designated
61.2% of distributions as net capital gain dividends.
12
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
- ------------------
Mr. R. Jeremy Grantham and Mr. Ben Inker are primarily responsible for the day-
to-day management of the Fund's portfolio. Mr. Grantham has been a portfolio
manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years.
Mr. Inker has been with the firm for seven years.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The Class III shares of the GMO World Equity Allocation Fund returned -6.7% for
the twelve months ended February 28, 1999. During that period the Fund's
benchmark (GMO World-Lite Extended Index) returned 11.0%.
Our fundamental conclusion at the outset of 1998 was that the developed,
large-cap equity markets in the U.S. and abroad were markedly overvalued. Our
research indicated that better long-term returns could be achieved from
investments in other asset classes, including both REITS and small-caps in the
U.S., emerging and small-cap international equities and fixed income
instruments. By diversifying out of large-cap equities and into other asset
classes with good return potential, we believed we were exposing our clients to
a portfolio with better return potential and a reasonable level of risk. What we
did not anticipate was that in the wake of the global crisis and the ensuing
flight to quality stocks, everything other than blue chips was sold by nervous
investors. As a result, all of our bets worked against us.
During the fiscal year, the Fund was underweight in U.S. stocks by 19% relative
to the benchmark. Due to the continuing rally of U.S. equities, this allocation
hurt the Fund's overall performance. Within U.S. stocks, we tilted the portfolio
towards the most attractively valued sectors including small stocks, where we
were 8% overweight, and real estate investment trusts (REITs), where we were 5%
overweight. For the fiscal year, the allocation to REITs hurt performance, as
the GMO REIT Fund underperformed the S&P 500 Index by a staggering 44%.
Performance of the GMO Growth Fund added 3.2% relative to the S&P 500. However,
this gain was offset by underperformance of the GMO Small Cap Value, Small Cap
Growth, U.S. Core and Value Funds.
The slight underweight of international stocks was unsuccessful in adding value.
The GMO International Core Fund lagged the benchmark by -6.8%. Smaller positions
in the GMO Currency Hedged International Core and GMO International Small
Companies Funds also hurt performance relative to the benchmark. The Fund was
10% overweight emerging equities for the period, hurting performance as both the
GMO Emerging Markets Fund and the GMO Evolving Countries Fund trailed the IFC
Investable Composite by 6.2% and 6.8%, respectively. Collectively, the
allocation to international equities cost the Fund -7.6% relative to the
benchmark.
The Fund had a 10% weight in fixed income, with allocations of 8% to
international and emerging bonds and a 2% allocation to U.S. fixed income. These
positions hurt overall Fund performance by -2.7%, with most of the
underperformance attributed to international bonds.
<PAGE>
GMO World Equity Allocation Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
The fundamentals of today's markets do not justify the extreme valuation
disparities that we see. The investment climate has become increasingly
speculative, exemplified by the extraordinary returns and volatility of Internet
stocks. Our conviction that these conditions cannot prevail indefinitely remains
firm. As such, we will hold our positions, which are now remarkably cheap. With
the eventual return to intrinsic value, we expect the opportunities for
value-added resulting from these extreme conditions will be extraordinary and
will vastly offset recent underperformance.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO World Equity Allocation Fund Class III Shares and the
MSCI All Country World Index
As of February 28, 1999
---------------------------------------
Average Annual Total Return
---------------------------------------
Inception
1yr 5yr 6/28/96
---------------------------------------
-7.4 N/A 4.5
---------------------------------------
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Date GMO World Equity Allocation Fund MSCI All Country World Index GMO World-Lite Extended Index
Class III Shares
<S> <C> <C> <C>
1/31/96
6/28/96 9,934 10,000 10,000
9/30/96 9,884 10,094 10,171
12/31/96 10,283 10,510 10,749
3/31/97 10,435 10,625 10,935
6/30/97 11,475 12,212 12,479
9/30/97 12,137 12,493 12,981
12/31/97 11,335 12,051 12,664
3/31/98 12,683 13,723 14,490
6/30/98 11,997 13,810 14,676
9/30/98 10,188 12,114 12,834
12/31/98 11,645 14,669 15,470
2/28/99 11,245 14,601 15,362
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 66 bp on the purchase and 15 bp on the redemption.
Transaction fees are paid to the Fund to cover trading costs. Past performance
is not indicative of future performance. Information is unaudited.
* Performance is linked to Class I shares (originating share class) and is
converted to Class III shares on October 22, 1996 (commencement date of Class
III shares).
<PAGE>
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of
GMO Tax Managed U.S. Equities Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of GMO
Tax Managed U.S. Equities Fund at February 28, 1999 and the results of its
operations, the changes in its net assets and the financial highlights for
the period from July 23, 1998 (commencement of operations) through
February 28, 1999, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit, which included
confirmation of securities at February 28, 1999 by correspondence with the
custodian, provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 12, 1999
<PAGE>
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS -- 96.3%
Advertising -- 0.2%
200 Interpublic Group Inc 14,963
------------
Aerospace -- 2.9%
5,500 Allied Signal Inc 227,562
200 Cordant Technologies Inc 7,788
------------
235,350
------------
Automotive -- 1.4%
200 Bandag Inc 6,338
100 Borg Warner Automotive Inc 4,356
300 Eaton Corp 20,813
200 General Motors Corp 16,513
1,300 Genuine Parts Co 38,919
500 Goodyear Tire & Rubber Co 23,125
200 Lear Corp * 7,063
------------
117,127
------------
Banking and Financial Services -- 14.3%
2,500 American Express Co 271,249
810 Bank One Corp 43,538
565 BankAmerica Corp 36,902
200 Bankers Trust New York Corp 17,400
21 Berkshire Hathaway Inc * 49,959
700 Countrywide Credit Industry Inc 26,513
400 First Union Corp 21,325
1,200 Franklin Resources Inc 38,175
1,600 Key Corp 51,600
14,800 MBNA Corp 358,899
400 Mercantile Bank Corp 18,250
1,000 MGIC Investment Corp 34,063
1,100 Regions Financial Corp 41,800
200 Republic New York Corp 9,063
200 Student Loan Group 8,988
22 Waddell and Reed Financial Inc, Class A 415
97 Waddell and Reed Financial Inc, Class B 1,801
3,500 Wells Fargo & Co 128,624
------------
1,158,564
------------
Chemicals -- 1.8%
1,100 Engelhard Corp 19,594
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments (continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Chemicals -- continued
400 Ferro Corp 8,550
600 Great Lakes Chemical Corp 23,363
200 Minerals Technologies Inc 8,588
1,200 Morton International Inc 43,350
150 Octel Corp * 2,016
600 PPG Industries Inc 31,238
300 Rohm & Haas Co 9,375
------------
146,074
------------
Computer and Office Equipment -- 0.2%
400 Electronic Data Systems Corp 18,600
------------
Consumer Goods -- 2.1%
1,200 Fortune Brands Inc 36,150
300 Hasbro Inc 11,100
400 Jones Apparel Group Inc * 11,175
400 Lancaster Colony Corp 11,000
400 Mattel Co 10,550
400 Nautica Enterprises Inc * 6,000
300 Newell Co 12,750
600 Nike Inc, Class B 32,175
300 Standard Register Co 8,681
300 Unifi Inc * 3,619
600 VF Corp 28,875
------------
172,075
------------
Electronic Equipment -- 2.4%
600 AVX Corp 8,213
800 Emerson Electric Co 45,950
300 Harris Corp 9,338
2,400 Raytheon Co, Class B 128,249
------------
191,750
------------
Food and Beverage -- 12.4%
1,000 Anheuser Busch Cos Inc 76,687
4,800 Archer Daniels Midland Co 72,600
2,000 McDonald's Corp 169,999
9,800 Pepsico Inc 368,724
1,600 Seagrams Co Ltd 74,199
2,200 Unilever NV ADR 159,362
800 Universal Foods Corp 18,150
1,200 Wendy's International Inc 28,725
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments (continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Food and Beverage -- continued
200 Whitman Corp 3,800
400 Wrigley (William Jr) Co 37,200
------------
1,009,446
------------
Health Care -- 9.3%
300 Arrow International Inc 7,369
8,100 Columbia HCA Healthcare Corp 144,787
400 First Health Group Corp * 6,400
200 Hillenbrand Industries Inc 8,375
400 Invacare Corp 9,500
4,900 Johnson & Johnson 418,337
400 Lincare Holdings Inc * 14,250
300 Mallinckrodt Inc 9,281
1,000 Perrigo Co * 8,375
700 Stryker Corp 33,075
1,500 United Healthcare Corp 73,968
300 Wellpoint Health Network * 23,663
------------
757,380
------------
Insurance -- 5.2%
700 Aetna Life and Casualty Co 51,844
200 AMBAC Inc 11,200
400 Hartford Financial Services Group Inc 21,625
500 Loews Corp 39,094
400 MBIA Inc 24,625
1,600 Old Republic International Corp 30,100
200 Orion Capital Corp 6,613
100 Progressive Corp 12,850
200 Safeco Corp 8,038
400 Saint Paul Cos Inc 12,950
800 Torchmark Corp 26,600
600 Transamerica Corp 43,538
500 Transatlantic Holding Inc 37,344
2,600 Travelers Property Casualty Corp, Class A 98,637
------------
425,058
------------
Machinery -- 0.4%
500 Case Corp 9,750
600 Donaldson Co Inc 10,838
200 FMC Corp * 10,238
------------
30,826
------------
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments (continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Manufacturing -- 0.3%
400 American Greetings Corp 9,475
600 International Game Technology 11,400
------------
20,875
------------
Metals and Mining -- 0.4%
600 Phelps Dodge Corp 29,100
------------
Oil and Gas -- 2.4%
1,700 Atlantic Richfield Co 92,862
595 BP Amoco PLC ADR 50,575
200 Consolidated Natural Gas Co 10,988
800 Phillips Petroleum Co 30,950
200 Texaco Inc 9,313
100 Veritas DGC Inc * 944
------------
195,632
------------
Paper and Allied Products -- 0.1%
400 Sonoco Products Co 9,800
------------
Pharmaceuticals -- 10.0%
8,400 Abbott Laboratories 390,074
3,300 Amgen Inc * 412,087
600 Mark IV Industries Inc 9,038
------------
811,199
------------
Primary Materials -- 0.3%
500 A. Schulman Inc 8,250
100 Vulcan Materials Co 13,475
------------
21,725
------------
Primary Processing -- 0.6%
600 Nucor Corp 26,738
400 USX-US Steel Group Inc 10,125
300 Valspar Corp 9,750
------------
46,613
------------
Printing and Publishing -- 0.4%
400 Central Newspapers, Class A 14,000
200 Pulitzer Publishing Co 15,975
------------
29,975
------------
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Retail Trade -- 3.8%
2,100 Albertsons Inc 119,699
500 Autozone Inc * 17,500
500 Dillards Department Stores Inc 12,438
1,400 Federated Department Stores Inc * 53,288
200 Hannaford Brothers Co 9,400
300 Lands End Inc * 9,094
600 Office Depot Inc * 21,413
300 Outback Steakhouse Inc * 13,163
400 Richfood Holdings Inc 9,500
300 Ross Stores Inc 13,725
2,000 Toys R Us Inc * 28,250
------------
307,470
------------
Services -- 2.4%
400 Banta Corp 8,525
200 Catalina Marketing Corp * 12,875
200 Chris Craft Industries Inc * 8,475
600 Hertz Corp 23,888
300 KingWorld Productions Inc * 7,931
400 Lee Enterprises Inc 11,050
2,900 Marriott International Inc, Class A 104,399
600 United Video Satellite Group Inc * 17,288
------------
194,431
------------
Technology -- 7.3%
2,200 BMC Software Inc * 89,924
200 Cisco Systems Inc * 19,563
4,400 First Data Corp 168,299
400 Grainger (WW) Inc 17,800
5,300 Oracle Corp * 296,137
------------
591,723
------------
Telecommunications -- 5.8%
400 Ameritech Corp 26,150
5,400 AT & T Corp 443,474
------------
469,624
------------
Tobacco -- 3.5%
7,300 Philip Morris Cos Inc 285,612
------------
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments -- (Continued)
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares Description Value($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Transportation -- 2.6%
5,700 Burlington Northern Santa Fe Railroad Co 188,812
500 Galileo International Inc 25,250
------------
214,062
------------
Utilities -- 3.8%
600 Baltimore Gas and Electric Co 15,375
1,600 Citizens Utilities, Class B * 12,200
700 DTE Energy Co 27,650
2,400 Entergy Corp 67,800
600 General Public Utilities Inc 23,925
692 Keyspan Energy Corp 18,338
1,900 Niagara Mohawk Power Corp * 27,788
1,900 Northeast Utilities * 28,381
1,500 PG & E Corp 47,250
300 Pinnacle West Capital Corp 10,838
600 Potomac Electric Power Co 14,625
400 Scana Corp 9,400
300 Western Resources Inc 8,456
------------
312,026
------------
TOTAL COMMON STOCKS (COST $7,886,517) 7,817,080
------------
SHORT-TERM INVESTMENTS -- 4.0%
Repurchase Agreements -- 4.0%
$323,277 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/26/99, due 3/1/99, with a maturity value of $323,385 and an
effective yield of 4.02%, collateralized by a U.S. Treasury
Obligation with a rate of 7.00%, maturity date of 7/15/06 and 323,277
market value, including accrued interest, of $329,742.
------------
TOTAL SHORT-TERM INVESTMENTS (COST $323,277) 323,277
------------
TOTAL INVESTMENTS -- 100.3%
(COST $8,209,794) 8,140,357
Other Assets and Liabilities (net) -- (0.3)% (24,840 )
------------
TOTAL NET ASSETS -- 100% $8,115,517
============
Notes to the Schedule of Investments:
ADR - American Depositary Receipt
* Non-income producing security.
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (cost $8,209,794) (Note 1) $8,140,357
Dividends and interest receivable 9,967
----------
Total assets 8,150,324
----------
Liabilities:
Payable to affiliate for (Note 2):
Management fee 3,287
Shareholder service fee 939
Accrued expenses and other liabilities 30,581
----------
Total liabilities 34,807
----------
Net assets $8,115,517
==========
Net assets consist of:
Paid-in capital $8,173,436
Accumulated undistributed net investment income 11,518
Net unrealized depreciation (69,437)
==========
$8,115,517
==========
Net assets attributable to:
Class III shares $8,115,517
==========
Shares outstanding:
Class III 760,573
==========
Net asset value per share:
Class III $ 10.67
==========
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Statement of Operations --
For the Period From July 23, 1998 (commencement of operations) through February
28, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Dividends (net of withholding taxes of $197) $ 50,561
Interest 6,921
--------
Total income 57,482
--------
Expenses:
Audit fees 34,322
Management fee (Note 2) 16,961
Custodian and transfer agent fees 3,885
Legal fees 1,290
Trustees fees (Note 2) 31
Miscellaneous 1,996
Fees waived or borne by Manager (Note 2) (47,823)
--------
10,662
Shareholder service fee (Note 2)
Class III 4,846
--------
Net expenses 15,508
--------
Net investment income 41,974
--------
Realized and unrealized gain (loss):
Net realized gain on investments 274,006
--------
Change in net unrealized appreciation (depreciation) on investments (151,997)
--------
Net realized and unrealized gain 122,009
--------
Net increase in net assets resulting from operations $163,983
========
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Period from July 23,
1998 (commencement of
operations) through
February 28, 1999
-----------------------
<S> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 41,974
Net realized gain 274,006
Change in net unrealized appreciation (depreciation) (151,997)
----------
Net increase in net assets resulting from operations 163,983
----------
Distributions to shareholders from:
Net investment income
Class III (30,456)
----------
Total distributions from net investment income (30,456)
----------
Net share transactions: (Note 5)
Class III 7,981,990
----------
Increase in net assets resulting from net share transactions 7,981,990
----------
Total increase in net assets 8,115,517
Net assets:
Beginning of period --
----------
End of period (including accumulated undistributed net investment
income of $11,518) $8,115,517
==========
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout the period)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Period from
July 23, 1998
(commencement of
operations)
through February 28, 1999
--------------------------
<S> <C>
Net asset value, beginning of period $10.00
------
Income from investment operations:
Net investment income 0.09
Net realized and unrealized gain 0.65
------
Total from investment operations 0.74
------
Less distributions to shareholders:
From net investment income (0.07)
------
Total distributions (0.07)
------
Net asset value, end of period $10.67
======
Total Return (a) 7.48%
Ratios/Supplemental Data:
Net assets, end of period (000's) $8,116
Net expenses to average daily net assets 0.48%*
Net investment income to average daily net assets 1.30%*
Portfolio turnover rate 33%
Fees and expenses voluntarily waived or borne by the Manager
consisted of the following per share amount: $ 0.10
</TABLE>
* Annualized.
(a) Calculation excludes purchase premiums. The total return would have been
lower had certain expenses not been waived during the period shown.
10 See accompanying notes to the financial statements.
<PAGE>
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Tax-Managed U.S. Equities Fund (the "Fund"), which commenced operations
on July 23, 1998, is a series of GMO Trust (the "Trust"). The Fund is
registered under the Investment Company Act of 1940, as amended, as an
open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series into classes.
The Fund seeks to maximize after-tax total return through investment in a
portfolio of common stocks traded in the U.S.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Other assets and
securities for which no quotations are readily available are valued at fair
value as determined in good faith by the Trustees.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
11
<PAGE>
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements - (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary. Taxes on foreign dividend income are withheld in accordance with
the applicable country's tax treaty with the United States.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for redemptions in-kind. Gains resulting from such
in-kind transactions amounted to $292,738.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated Undistributed
Undistributed Net Net Realized
Investment Income Gain Paid-in Capital
----------------------- --------------------------- --------------------
<S> <C> <C>
-- $ (274,006) $ 274,006
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis and is adjusted for the accretion of discounts. In
determining the net gain or loss on securities sold, the cost of securities
is determined on the identified cost basis.
12
<PAGE>
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements - (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds.
Purchases and redemptions of Fund shares
The premium on cash purchases of Fund shares is .14% of the amount
invested. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. Purchase premiums are included as part of "shares sold",
as summarized in Note 5. For the period ended February 28, 1999, the Fund
received $6,453 in purchase premiums. There is no premium for cash
redemptions, reinvested distributions or in-kind transactions.
2. Fees and other transactions with affiliates
GMO earns a management fee paid monthly at the annual rate of .525% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on average daily net assets at the annual rate of .15% for Class III
shares.
GMO agreed to waive a portion of its fee and bear other expenses to the
extent that the Fund's annual expenses (including the management fee but
excluding brokerage commissions, certain other transaction costs (including
transfer taxes), shareholder service fees and extraordinary expenses)
exceed .33% of average daily net assets.
Effective March 1, 1999, GMO's contractual management fee was reduced to
.33% of average daily net assets. GMO entered into a binding agreement
effective until February 29, 2000 to reimburse the Fund to the extent that
the Fund's total annual operating expenses (excluding brokerage
commissions, certain other transaction costs (including transfer taxes),
shareholder service fees and extraordinary expenses) exceeds the management
fee.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the period ended February 28, 1999 was $31. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the period ended February 28, 1999, aggregated
$9,350,888 and $1,738,377, respectively.
13
<PAGE>
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements - (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
---------------------- -------------------- -------------------- -------------------
<S> <C> <C> <C>
$8,209,794 $567,841 $637,278 $69,437
</TABLE>
4. Principal shareholder
At February 28, 1999, 100.0% of the outstanding shares of the Fund were
held by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including the purchase premiums received by the Fund, were as
follows:
Period from July 23, 1998
Class III: (commencement of operations)
through February 28, 1999
-----------------------------------------
Shares Amount
------------------ -------------------
Shares sold 928,320 $ 9,723,200
Shares issued to shareholders
in reinvestment of distributions -- --
Shares repurchased (167,747) (1,741,210)
------------------ -------------------
Net increase 760,573 $ 7,981,990
================== ===================
The Fund was formed with a $100,000 purchase and an initial tax-free
contribution of securities in-kind, which had a historical cost of
$4,931,640 and unrealized appreciation of $82,560 on the date of
contribution.
14
<PAGE>
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
- ------------------
Mr. R. Jeremy Grantham, Mr. Jon Lal and Mr. Nardin Baker are primarily
responsible for the management of the Fund's portfolio. Mr. Grantham, who
oversees the Fund's overall strategy, has been a portfolio manager at Grantham,
Mayo, Van Otterloo & Co. LLC for more than fifteen years.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The Class III shares of the GMO Tax-Managed U.S. Equities Fund returned 7.5%
since its inception on July 23, 1998 to February 28, 1999. The Fund's benchmark,
the S&P 500 Index, returned 9.6% during the same period. Consistent with the
Fund's investment objectives and policies, the Fund was invested substantially
in U.S. equity securities throughout the period.
The 7-month life of the Fund can be divided into two distinct regimes. The
first, stretching from inception to October 16th, was marked by a flight to
quality, low beta and defensive stocks. The second regime was initiated by an
aggressive response from the U.S. Federal Reserve (the discount rate was cut
from 5% to 4.75% on October 17th) to address the tight liquidity and credit
conditions in the financial markets. The U.S. Federal Reserve cut interest rates
one more time before the year was over. As a result, the second regime was
dominated by strong outperformance of low quality, high beta stocks.
The Fund's defensive orientation served it well in the first regime but caused
it to under-perform in the second. Superior stock selection partially offset the
seesaw effects of the regime shifts.
In the first regime, the Fund outperformed the benchmark by 8%. The long-term
orientation of this fund means that it is usually positioned defensively and is
underweight stocks that are especially vulnerable to difficult economic and
market conditions (a multi-factor model that includes bankruptcy risk, leverage
and ROE volatility is used). Overweights in utilities, healthcare and food
stocks, combined with an underweight in technology stocks, were the main
contributors to the 8% outperformance in the first regime.
The aggressive response by the policy makers (the ISI Group counted 64 interest
rate cuts around the world in the 4th quarter of 1998 alone) was unprecedented.
The long-term value orientation of the Fund emphasizes value over timing. As a
result, the Fund lost its advantage over the S&P 500 during the second regime as
low quality, high beta stocks (especially technology) rode the wave of liquidity
to reach all-time highs.
Superior stock selection, especially in oil, healthcare and food stocks, helped
but was not sufficient to overcome the underperformance caused by the defensive
orientation of the Fund.
Outlook
- -------
Unusually favorable economic conditions during the last five years have resulted
in strong upside surprises on corporate profits, especially for growth stocks.
Although growth stocks have delivered high earnings growth, every company's
long-term profit potential is limited by revenue or sales growth (this is
tautological as profits cannot exceed sales). Current valuations for growth
stocks imply continued earnings growth at a rate similar to the unusually
favorable one during the last five years, which is a rate far higher than
long-term historical norms, and far higher than revenue growth.
<PAGE>
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Although profits have been unusually strong in recent years, we believe that
U.S. corporate profits have been overstated in recent years due to two major
distortions. Stock options and recurring write-offs are not properly charged
against earnings, and both have become bigger fractions of earnings in recent
years. According to Andrew Smithers, a market analyst, the two distortions mean
that U.S. corporate earnings are overstated by approximately 20%.
According to our models, the valuation differential between value and growth
stocks is the widest it has been in the last 50 years as a result of what we
believe are very optimistic growth forecasts. The Fund has a 30% overweight
position on value stocks (against growth), and is well positioned for relative
performance.
Technology stocks are perhaps the leaders in terms of overestimation of growth
potential and overstatement of profits (especially due to stock options not
being charged against earnings). Technology valuations are high (unadjusted
figures are 7x book and 42x earnings versus 4.6x book and 28x earnings for the
market) even though long-term profitability growth is only slightly higher than
that of the market.
As has been the case in the past (with biotech, railroads and tulips), market
participants tend to confuse the excellent potential for an exciting emerging
sector (technology in this case) with that for the individual companies.
Individual technology stocks may do well enough to justify their valuations, but
every single technology stock in the sector is not likely to outperform. The
Fund therefore emphasizes stock selection over an allocation to the technology
sector. The Fund is 12% underweight technology stocks.
Our proprietary dividend discount model estimates that small stocks are trading
at about 1.3x fair value and large stocks are at 2.4x fair value. A discrepancy
of a similar magnitude occurred during the oil shock of 1973-74 when small
stocks were at 0.5x fair value and large at 1.2x fair value. Over the long term,
large stocks should arguably trade at a slight premium to small stocks due to
their better liquidity. However, even after adjusting for a fair liquidity
premium, small stocks would have to experience a 60% positive return relative to
large stocks for valuations to revert to our estimated fair value. The Fund
holds a 14% underweight in the largest 100 stocks. This 14% has been reallocated
to mid- and small-capitalization stocks.
Historically, our proprietary dividend discount model has added 2% of value per
year after taxes. The power of this model (the original version was developed by
GMO founder Jeremy Grantham) remains undiminished today as enhancements to the
model have kept pace with the increasing sophistication in the financial
markets. The Fund is about 37% cheaper than the S&P 500 on the dividend discount
model. So the portfolio will have to experience 37% of positive performance
relative to the S&P 500 for valuations to be at parity.
The long-term value and defensive positioning of the GMO Tax-Managed U.S.
Equities Fund means that it is expected to be less vulnerable to crisis
conditions in financial markets than other U.S. equity funds.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo &
Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Tax-Managed U.S Equities Fund Class III Shares and the S&P 500 Index
As of February 28, 1999
--------------------------------------
Average Annual Total Return
--------------------------------------
Inception
1yr 5yr 7/23/98
--------------------------------------
N/A N/A 7.3
--------------------------------------
[LINE GRAPH APPEARS HERE]
GMO Tax-Managed U.S. Equities Fund
Date Class III Shares S&P 500 Index
---- ---------------- -------------
1/31/98
7/23/98 9,986 10,000
9/30/98 9,497 8,952
12/31/98 10,944 10,859
2/28/99 10,733 10,961
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Each performance figure assumes purchase at the
beginning and redemption at the end of the stated period and reflects a
transaction fee of 14 bp on the purchase. Transaction fees are paid to the Fund
to cover trading costs. Past performance is not indicative of future
performance. Information is unaudited.
<PAGE>
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Annual Report
February 28, 1999
<PAGE>
Report of Independent Accountants
To the Trustees of GMO Trust and the Shareholders of GMO Emerging Country Debt
Share Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Emerging Country Debt Share
Fund at February 28, 1999 and the results of its operations, the changes in its
net assets and the financial highlights for the period from July 20, 1998
(commencement of operations) through February 28, 1999, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at February 28, 1999 by
correspondence with the custodian, provides a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 22, 1999
<PAGE>
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 1999
<TABLE>
<CAPTION>
Shares/
Par Value ($) Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
MUTUAL FUND -- 100.0%
5,981,032 GMO Emerging Country Debt Fund (Cost $60,160,868) 41,209,312
-----------
SHORT-TERM INVESTMENTS -- 0.0%
Repurchase Agreements -- 0.0%
$ 11,475 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/26/99, due 3/1/99, with a maturity value of $11,478 and
an effective yield of 4.02%, collateralized by a U.S.
Treasury Obligation with a rate of 7.00%, maturity date of
7/15/06 and an aggregate market value, including accrued
interest, of $11,704. 11,475
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $11,475) 11,475
-----------
TOTAL INVESTMENTS -- 100.0%
(Cost $60,172,343) 41,220,787
Other Assets and Liabilities (net) -- 0.0% (5,070)
-----------
TOTAL NET ASSETS -- 100% $41,215,717
===========
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities -- February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at value (cost $60,172,343) (Note 1) $ 41,220,787
Receivable for expenses waived or borne by Manager (Note 2) 4,798
------------
Total assets 41,225,585
------------
Liabilities:
Accrued expenses 9,868
------------
Total liabilities 9,868
------------
Net assets $ 41,215,717
============
Net assets consist of:
Paid-in capital $ 60,167,273
Net unrealized depreciation (18,951,556)
============
$ 41,215,717
============
Shares outstanding 6,024,383
============
Net asset value per share $ 6.84
============
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Statement of Operations -- Period from July 20, 1998 through February 28, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Income:
<S> <C>
Dividends from investment company shares $ 160,868
Interest 6,405
-------------
Total income 167,273
-------------
Expenses:
Audit fees 10,735
Custodian and transfer agent fees 3,582
Legal fees 978
Trustees fees (Note 2) 222
Registration fees 12
Miscellaneous 7,515
Fees waived or borne by Manager (Note 2) (23,044)
-------------
Net expenses --
-------------
Net investment income 167,273
-------------
Realized and unrealized gain (loss):
Net realized gain (loss) on investments --
-------------
Change in net unrealized appreciation (depreciation) on investments (18,951,556)
-------------
Net realized and unrealized loss (18,951,556)
-------------
Net decrease in net assets resulting from operations $ (18,784,283)
=============
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
July 20, 1998
(commencement of
operations)
through February 28,
1999
---------------------
<S> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 167,273
Net realized gain --
Change in net unrealized appreciation (depreciation) (18,951,556)
-----------
Net decrease in net assets resulting from operations (18,784,283)
-----------
Distributions to shareholders from:
Net investment income (168,000)
-----------
(168,000)
-----------
Net share transactions: (Note 5) 60,168,000
-----------
Increase in net assets resulting from net share transactions 60,168,000
-----------
Total increase in net assets 41,215,717
Net assets:
Beginning of period --
-----------
End of period (including accumulated undistributed net investment
income of $0) $41,215,717
===========
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from July 20,
1998
(commencement of
operations)
through February 28,
1999
------------------------
<S> <C>
Net asset value, beginning of period $ 10.00
--------
Income from investment operations:
Net investment income (a) 0.03
Net realized and unrealized loss (3.16)
--------
Total from investment operations (3.13)
--------
Less distributions to shareholders:
From net investment income (0.03)
--------
Total distributions (0.03)
--------
Net asset value, end of period $ 6.84
========
Total Return (b) (31.32)%
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 41,216
Net expenses to average daily net assets (c) 0.00%*
Net investment income to average daily net assets (a) 0.64%*
Portfolio turnover rate 0%
Fees and expenses voluntarily waived or borne by the Manager consisted
of the following per share amount: --(d)
</TABLE>
* Annualized.
(a) Recognition of net investment income is affected by the timing of the
declaration of dividends by GMO Emerging Country Debt Fund.
(b) The total return would have been lower had certain expenses not been waived
during the period shown.
(c) Net expenses exclude expenses incurred indirectly through investment in GMO
Emerging Country Debt Fund. See Note 1.
(d) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
See accompanying notes to the financial statements. 5
<PAGE>
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Notes to Financial Statements
February 28, 1999
- --------------------------------------------------------------------------------
1. Significant accounting policies
GMO Emerging Country Debt Share Fund (the "Fund"), which commenced
operations on July 20, 1998, is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended, as
an open-end, diversified management investment company. The Fund is advised
and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or
"GMO"). The Trust was established as a Massachusetts Business Trust under
the laws of the Commonwealth of Massachusetts on June 24, 1985. The
Declaration of Trust permits the Trustees to create an unlimited number of
series ("Funds"), each of which issues a separate series of shares, and to
subdivide a series of shares into classes.
The Fund's objective is to maximize total return through investment of
substantially all of its assets in Class III shares of the GMO Emerging
Country Debt Fund, a portfolio of the Trust ("ECDF"). GMO also serves as
investment manager to ECDF. ECDF pursues its objectives by investing
primarily in sovereign debt of countries in Asia, Latin America, the Middle
East and Africa.
The financial statements of ECDF should be read in conjunction with the
Fund's financial statements.
The following is a summary of significant accounting policies which are in
conformity with generally accepted accounting principles and which are
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
Portfolio valuation
Shares of ECDF are valued at their net asset value as reported on each
business day. Short-term investments with a remaining maturity of sixty
days or less are valued at amortized cost, which approximates market value.
Other assets and securities for which no quotations are readily available
are valued at fair value as determined in good faith by the Trustees.
Repurchase agreements
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the value
of the collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
6
<PAGE>
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Taxes
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for federal income
tax purposes. Therefore, no provision for federal income or excise tax is
necessary.
Distributions to shareholders
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains, if any, at least annually. All distributions will be paid in
shares of the Fund, at net asset value, unless the shareholder elects to
receive cash distributions.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 28, 1999. This reclassification has
no impact on net investment income, realized gain/loss and net asset value
of the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles. The calculation of
net investment income per share in the financial highlights table excludes
these adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated Undistributed
Undistributed Net Net Realized
Investment Income Gain Paid-in Capital
---------------------- -------------------------- -------------------
<S> <C> <C>
$727 $-- $(727)
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
Security transactions and related investment income
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date of ECDF. Interest income is recorded on
the accrual basis. In determining the net gain or loss on securities sold,
the cost of securities is determined on the identified cost basis.
7
<PAGE>
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
Expenses
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds. In addition,
the Fund will also incur fees and expenses indirectly as a shareholder in
ECDF (See Note 2).
Purchases and redemptions of Fund shares
The Fund does not charge any purchase premium or redemption fee in
connection with the purchase and sale of Fund shares. As a shareholder in
ECDF, the Fund will indirectly bear ECDF's purchase premium and redemption
fees which are .50% and .25%, respectively. These fees are paid to and
retained by ECDF.
Investment risk
The Fund is subject to the investment risk associated with an investment in
ECDF. Investments in emerging country debt present certain risks that are
not inherent in many other securities. Many emerging countries present
elements of political and/or economic instability, which may result in the
Fund's inability to collect on a timely basis, or in full, principal and
interest payments. Further, countries may impose various types of foreign
currency regulations or controls which may impede the Fund's ability to
repatriate amounts it receives. ECDF may acquire interests in securities or
bank loans which are in default at the time of acquisition in anticipation
of improving conditions in the related countries. These factors may result
in significant volatility in the values of its holdings. The markets for
emerging country debt are relatively illiquid. Accordingly, ECDF may not be
able to realize in an actual sale amounts approximating those used to value
its holdings.
2. Fees and other transactions with affiliates
The Manager does not charge an advisory fee or shareholder service fee. As
a shareholder in ECDF, the Fund will indirectly bear all fees and expenses
associated with an investment in ECDF. GMO, in its capacity as Manager of
ECDF, has agreed to waive a portion of its fee and bear other expenses to
the extent that ECDF's annual expenses (including the management fee but
excluding custody fees, brokerage commissions, certain other transaction
costs (including transfer taxes), shareholder service fees and
extraordinary expenses) exceed .35% of average daily net assets. Class III
shares of ECDF also bear an annual shareholder service fee of .15% of
ECDF's average daily net assets. Effective March 1, 1999, the management
fee earned by GMO in its capacity as Manager of ECDF was reduced to .35% of
average daily net assets. GMO entered into a binding agreement effective
until February 29, 2000 to reimburse ECDF to the extent that ECDF's total
annual operating expense (excluding custody fees, brokerage commissions,
certain other transaction costs (including transfer taxes), shareholder
service fees and extraordinary expenses) exceeds the management fee.
GMO has contractually agreed to reimburse all expenses directly incurred by
the Fund until February 29, 2000 (excluding brokerage commissions, certain
other transaction costs (including transfer taxes), and extraordinary
expenses).
8
<PAGE>
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
Notes to Financial Statements -- (Continued)
February 28, 1999
- --------------------------------------------------------------------------------
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the period ended February 28, 1999 was $222. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the period ended February 28, 1999, aggregated
$60,160,868 and $0, respectively.
At February 28, 1999, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
--------------------- ------------------ -------------------- --------------------
<S> <C> <C> <C>
$60,172,343 $0 $18,951,556 $18,951,556
</TABLE>
4. Principal shareholder
At February 28, 1999, 100% of the outstanding shares of the Fund were held
by one shareholder.
5. Share transactions
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Period from July 20, 1998
(commencement of operations)
Class III: through February 28, 1999
------------------------------
Shares Amount
------------ --------------
<S> <C> <C>
Shares sold 6,000,000 $ 60,000,000
Shares issued to shareholders in reinvestment
of distributions 24,383 168,000
------------ --------------
Net increase 6,024,383 $ 60,168,000
============ ==============
</TABLE>
9
<PAGE>
GMO Emerging Country Debt Share Fund
(A Series of GMO Trust)
- --------------------------------------------------------------------------------
Portfolio Managers
- ------------------
Mr. Thomas F. Cooper and Mr. William L. Nemerever are primarily responsible for
the day-to-day management of the Fund's portfolio. Each of these individuals has
been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993.
Management Discussion and Analysis of Fund Performance
- ------------------------------------------------------
The Class III shares of the Emerging Country Debt Share Fund returned -31.3%
from its inception on July 20, 1998 to February 28, 1999, which compared
unfavorably with the -18.6% return on the J.P. Morgan Emerging Market Bond Index
Plus. Consistent with the Fund's investment objectives and policies, the Fund
was substantially invested in sovereign debt instruments of emerging countries
throughout the period.
Performance for emerging country debt was extraordinarily volatile. Sovereign
spreads increased sharply from 650 basis points in July 1998 to more than 1700
basis points in September, as Russia defaulted on its domestic debt and devalued
the ruble. Other factors also hurt performance between July 20 and September 30,
including the collapse in commodity prices, liquidations of speculative
positions by hedge funds and growing concerns about Venezuela and Brazil. The
Fund lost 38.4% in absolute terms, while underperforming the Index by 14.3%
during this brief period. The Fund recovered some of the loss in the fourth
quarter in response to several factors, including the Fed's decision to ease
monetary policy, agreement to an IMF package for Brazil and diminishing concerns
about the election results in Venezuela. Sovereign spreads declined to about
1100 basis points by year-end.
Our exposure to longer-dated, less marketable instruments and our overweight
exposure to Russia hurt performance from July 1998 to December 1998. In 1999,
sovereign spreads have remained relatively stable between 1100 and 1200 basis
points, despite problems in Ecuador and the decision by Brazil to devalue the
real. The Fund's holdings of less liquid, less marketable, higher yielding
issues performed poorly throughout the period. The best performance during this
period was recorded by the more liquid and lower yielding debt issued by South
Korea, Panama, Poland and Peru. The worst performing countries were Russia,
Ecuador, Brazil and Venezuela. The Fund remained fully invested throughout the
period.
Outlook
- -------
Volatility in the emerging markets has created new opportunities for risk
tolerant investors with sufficiently long investment horizons. Issues with
limited marketability currently offer sizable spreads. The Fund is overweight in
Bulgaria, Ecuador, Morocco and Nigeria and holds a modest overweight position in
Russia. It holds issues of many countries not in the benchmark including:
Algeria, Colombia, Costa Rica, Dominican Republic, Jamaica, Jordan, Macedonia,
South Africa, Tunisia and Turkey. Spreads are significantly above historic
levels, providing opportunities to acquire undervalued securities.
The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo
& Co. LLC Management. They are not meant as investment advice.
<PAGE>
Comparison of Change in Value of a $10,000 Investment in
GMO Emerging Country Debt Share Fund Class III Shares and the
JP Morgan Emerging Markets Bond Index Plus
As of February 28, 1999
---------------------------------------
Average Annual Total Return
---------------------------------------
Inception
1yr 5yr 7/20/98
---------------------------------------
N/A N/A -31.3
---------------------------------------
[LINE GRAPH APPEARS HERE]
GMO Emerging Country
Debt Share Fund J.P. Morgan Emerging Markets
Date Class III Shares Bond Index Plus
---- ------------------ ---------------
1/31/98
7/20/98 10,000 10,000
9/30/98 6,160 7,586
12/31/98 6,968 8,338
2/28/99 6,868 8,144
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes on
reinvested distributions. Past performance is not indicative of future
performance. Information is unaudited.
