<PAGE> 1
File Nos. 2-98772
811-4347
As filed with the Securities and Exchange Commission
On June 29, 1999
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. [ ]
----
Post-Effective Amendment No. 50 [ X ]
----
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
Amendment No. 57 [ X ]
----
GMO Trust
----------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
40 Rowes Wharf, Boston, Massachusetts 02110
----------------------------------------------------------------------
(Address of principal executive offices)
617-330-7500
----------------------------------------------------------------------
(Registrant's telephone number, including area code)
with a copy to:
R. Jeremy Grantham J.B. Kittredge, Esq.
GMO Trust Ropes & Gray
40 Rowes Wharf One International Place
Boston, Massachusetts 02110 Boston, Massachusetts 02110
- --------------------------------------------------------------------------------
(Name and address of agents for service)
It is proposed that this filing will become effective:
[ ] Immediately upon filing pursuant to paragraph (b), or
[ ] 60 days after filing pursuant to paragraph (a) (1), or
[ X ] On June 29, 1999, pursuant to paragraph (b), or
[ ] 75 days after filing pursuant to paragraph (a) (2), of Rule 485.
================================================================================
<PAGE> 2
GMO TRUST
GMO TRUST (the "Trust"), 40 Rowes Wharf, Boston, Massachusetts 02110, is an
open-end management investment company currently offering thirty-three (33)
separate portfolios with this Prospectus (collectively, the "FUNDS"). The Trust
currently offers three additional portfolios pursuant to separate prospectuses.
Each Fund has its own investment objective and strategies. GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC (the "MANAGER" or "GMO") is the investment manager for each
of the Funds. The Manager has entered into separate Consulting Agreements with
Dancing Elephant, Ltd. (the "Consultant") with respect to management of the
Emerging Markets Fund, Evolving Countries Fund and Asia Fund.
GMO FUNDS
U.S. EQUITY FUNDS
U.S. Core Fund
Tobacco-Free Core Fund
Value Fund
Fundamental Value Fund
Growth Fund
Small Cap Value Fund
Small Cap Growth Fund
REIT Fund
INTERNATIONAL EQUITY FUNDS
International Core Fund
Currency Hedged
International Core Fund
Foreign Fund
International Small
Companies Fund
Japan Fund
Emerging Markets Fund
Evolving Countries Fund
Asia Fund
Global Properties Fund
FIXED INCOME FUNDS
Domestic Bond Fund
U.S. Bond/Global Alpha A
Fund
U.S. Bond/Global Alpha B
Fund
International Bond Fund
Currency Hedged
International Bond Fund
Global Bond Fund
Emerging Country Debt
Fund
Short-Term Income Fund
Global Hedged Equity Fund
Inflation Indexed Bond
Fund
Emerging Country Debt Share Fund
ASSET ALLOCATION FUNDS
International Equity
Allocation Fund
World Equity Allocation
Fund
Global (U.S.+) Equity
Allocation Fund
Global Balanced Allocation
Fund
U.S. Sector Fund
INVESTMENT MANAGER & CLIENT SERVICE PROVIDER
GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC
Tel: (617) 346-7646 (call collect)
Fax: (617) 439-4192
Each Fund offers up to three CLASSES of shares. All Funds offer CLASS III
SHARES, and certain Funds also offer CLASS II and/or CLASS IV SHARES.
Eligibility for the classes is generally based on the total amount of assets
that a client has invested with GMO (with Class II requiring the least total
assets and Class IV the most), with certain special eligibility requirements for
Class IV Shares, as more fully described in the GMO Trust Shareholder's Manual.
The classes differ solely with regard to the level of SHAREHOLDER SERVICE FEE
borne by the class. ALL CLASSES OF A FUND HAVE AN INTEREST IN THE SAME
UNDERLYING ASSETS, ARE MANAGED BY GMO, AND PAY THE SAME INVESTMENT MANAGEMENT
FEE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PROSPECTUS JUNE 30, 1999
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES......... 3
U.S. Equity Funds......................................... 4
U.S. Core Fund......................................... 4
Tobacco-Free Core Fund................................. 5
Value Fund............................................. 6
Fundamental Value Fund................................. 7
Growth Fund............................................ 8
Small Cap Value Fund................................... 9
Small Cap Growth Fund.................................. 10
REIT Fund.............................................. 11
International Equity Funds................................ 12
International Core Fund................................ 12
Currency Hedged International Core Fund................ 14
Foreign Fund........................................... 15
International Small Companies Fund..................... 16
Japan Fund............................................. 17
Emerging Markets Fund.................................. 18
Evolving Countries Fund................................ 19
Asia Fund.............................................. 20
Global Properties Fund................................. 21
Fixed Income Funds........................................ 22
Domestic Bond Fund..................................... 22
U.S. Bond/Global Alpha A Fund.......................... 23
U.S. Bond/Global Alpha B Fund.......................... 24
International Bond Fund................................ 25
Currency Hedged International Bond Fund................ 26
Global Bond Fund....................................... 27
Emerging Country Debt Fund............................. 28
Short-Term Income Fund................................. 29
Global Hedged Equity Fund.............................. 30
Inflation Indexed Bond Fund............................ 31
Emerging Country Debt Share Fund....................... 32
Asset Allocation Funds.................................... 33
International Equity Allocation Fund................... 33
World Equity Allocation Fund........................... 34
Global (U.S.+) Equity Allocation Fund.................. 35
Global Balanced Allocation Fund........................ 36
U.S. Sector Fund....................................... 37
SUMMARY OF PRINCIPAL RISKS.................................. 38
FEES AND EXPENSES........................................... 44
MULTIPLE CLASSES............................................ 53
BENCHMARKS AND INDEXES...................................... 53
DETERMINATION OF NET ASSET VALUE............................ 57
TAXES....................................................... 57
MANAGEMENT OF THE TRUST..................................... 58
FINANCIAL HIGHLIGHTS........................................ 62
ADDITIONAL INFORMATION..................................back cover
PURCHASE AND SALE INFORMATION...........................back cover
SHAREHOLDER INQUIRIES...................................back cover
</TABLE>
2
<PAGE> 4
SUMMARY OF
FUND OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES
GMO Trust provides a broad range of investment choices to investors and
each Fund has its own objective, strategies and policies. This Summary describes
each Fund's investment objective and principal investment strategies. Each Fund
may make other investments and engage in other investment strategies that are
not specifically described in the Summary. The INVESTMENT GUIDELINES contain a
more complete description of each Fund's possible investments and strategies.
These Guidelines are in the Statement of Additional Information or are available
separately. See the back cover of the Prospectus for information about how to
receive the Statement of Additional Information or the Investment Guidelines.
PRINCIPAL RISKS. Investing in mutual funds involves risk and it is
possible to lose money on an investment in a Fund. Each Fund is subject to
certain risks based on the types of investments in the Fund's portfolio and on
the investment strategies the Fund employs. Because each Fund has different
investments and employs different strategies, each Fund's risk profile is
different. Investors should refer to the SUMMARY OF PRINCIPAL RISKS in the
Prospectus at page 38 for a discussion of the principal risks of investing in
the Funds. See the Statement of Additional Information for additional
information about the risks of specific Fund investments and strategies.
An investment in the Funds is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
In many of the Fund summaries that follow, it is noted that a particular
Fund will "invest primarily in" a particular type of securities or other assets.
Investors should understand that this Prospectus uses the word "invest" to mean
not only direct investment in a particular asset but also indirect investment in
or exposure to the asset through the use of derivatives and related instruments.
For example, the Global Bond Fund's summary states that it will "invest
primarily in investment grade bonds denominated in various currencies." This
means that the Fund may invest directly in investment grade bonds and/or use
various exchange-traded and over-the-counter derivative instruments to "invest
primarily in" investment grade bonds.
Many of the Funds are managed and/or meant to be measured relative to a
specified benchmark or index. The index that GMO uses to manage the Fund or to
measure the Fund's performance (the "GMO Benchmark") is identified under the
heading "investment objective" in the following summaries. In some cases, the
GMO Benchmark differs from the broad-based index that the SEC requires each Fund
to use in the average annual total return table. While a Fund may be managed or
measured relative to a benchmark or index, none of the Funds is managed as an
"index fund" or "index-plus fund," and the actual composition of a Fund's
portfolio may differ substantially from that of its benchmark. Some general
information about the Funds' benchmarks and indexes is provided under
"Benchmarks and Indexes" later in this Prospectus. The Manager may change each
Fund's benchmark or index from time to time.
Except for certain policies that are explicitly described as fundamental in
this Prospectus or in the Statement of Additional Information, each Fund's
investment objective (except as noted) and policies may be changed by the
Trustees without shareholder approval. The investment objectives of the U.S.
Core Fund, Value Fund, Growth Fund, Short-Term Income Fund, International Core
Fund and the Japan Fund are fundamental.
3
<PAGE> 5
U.S. EQUITY FUNDS
GMO U.S. CORE FUND
Fund Inception Date: 9/18/85
<TABLE>
<CAPTION>
FUND CODES
--------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III GMCTX USCore 362007 88 2
Class II GMTWX USCore 362007 80 9
Class IV GMRFX USCore 362008 84 9
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO U.S. Core Fund seeks high total return
through investment in U.S. equity securities. The Fund's current benchmark is
the S&P 500 Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of at least 125 companies chosen from among the 600 companies with the largest
equity capitalization and whose securities are listed on a United States
national securities exchange. The Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivative instruments and related investment techniques to:
(i) hedge equity exposure; (ii) replace direct investing; and (iii) implement
shifts in investment exposure as a substitute for buying and selling securities.
The Fund will not use derivative instruments to expose on a net basis more than
100% of its assets to equity securities or markets.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to provide broad U.S. equity exposure. Using
these principles, the Manager employs a bottom-up approach to select stocks
based on factors such as fair value, earnings and price momentum, cash flow,
book value and neglect (a measure of low analyst coverage and low price
volatility). The Manager then uses a top-down approach to favor sectors that it
believes represent the best long-term values within the U.S. stock market. The
Manager then uses a final optimization process to help control portfolio risk.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk, Leverage Risk and Credit and Counterparty Risk. For more
information about these risks and other principal risks of an investment in the
Fund, see "Summary of Principal Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
U.S. CORE FUND(%)
-----------------
<S> <C>
'1989' 32.10
'1990' -1.34
'1991' 29.89
'1992' 5.94
'1993' 16.28
'1994' 2.36
'1995' 43.25
'1996' 17.61
'1997' 35.10
'1998' 24.69
</TABLE>
Highest Quarter: 19.49% (4Q1998)
Lowest Quarter: -13.53% (3Q1990)
Year-to-Date (as of 3/31/99): 3.65%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
9/18/85
- --------------------------------------------------------------------------------------------------------
CLASS III 24.52% 23.73% 19.71% 19.05%
- --------------------------------------------------------------------------------------------------------
S&P 500 28.57% 24.05% 19.20% 18.84%
- --------------------------------------------------------------------------------------------------------
6/7/96
- --------------------------------------------------------------------------------------------------------
CLASS II* 24.35% N/A N/A 26.94%
- --------------------------------------------------------------------------------------------------------
S&P 500 28.57% N/A N/A 28.66%
- --------------------------------------------------------------------------------------------------------
</TABLE>
* For the period from November 17, 1997 to January 9, 1998, no Class II shares
were outstanding. Performance for that period is that of Class III shares. If
Class II shares had been outstanding, performance would be lower because Class
II expenses are higher.
4
<PAGE> 6
GMO TOBACCO-FREE CORE FUND
Fund Inception Date: 10/31/91
<TABLE>
<CAPTION>
FUND CODES
-----------------------------------------
Ticker Symbol Cusip
------ --------- -----------
<S> <C> <C> <C> <C>
Class III GMTCX TobaccoFr 362007 85 8
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Tobacco-Free Core Fund seeks high total
return through investment in U.S. equity securities. The Fund's current
benchmark is the S&P 500 Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of at least 125 companies chosen from among the 600 companies with the largest
equity capitalization and whose securities are listed on a United States
national securities exchange, and which are not Tobacco Producing Issuers.
Tobacco Producing Issuers are defined as those issuers that are within the
Tobacco Producing Issuer industry classification maintained by Ford Investor
Services. The Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivative instruments and related investment techniques to:
(i) hedge equity exposure; (ii) replace direct investing; and (iii) implement
shifts in investment exposure as a substitute for buying and selling securities.
The Fund will not use derivative instruments to expose on a net basis more than
100% of its assets to equity securities or markets.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to provide broad exposure to equity
securities of non-Tobacco Producing Issuers. Using these principles, the Manager
employs a bottom-up approach to select stocks based on strategies such as fair
value, earnings and price momentum, cash flow, book value and neglect (a measure
of low analyst coverage and low price volatility). The Manager then uses a
top-down approach to favor sectors that it believes represent the best long-term
values within the U.S. stock market. The Manager then uses a final optimization
process to help control portfolio risk.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk, Leverage Risk and Credit and Counterparty Risk. For more
information about these risks and other principal risks of an investment in the
Fund, see "Summary of Principal Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
TOBACCO FREE CORE FUND %
------------------------
<S> <C>
'1992' 5.69
'1993' 17.42
'1994' 2.4
'1995' 43
'1996' 18.3
'1997' 35.6
'1998' 25.2
</TABLE>
Highest Quarter: 19.47% (4Q1998)
Lowest Quarter: -10.01% (3Q1998)
Year-to-Date (as of 3/31/99): 5.16%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
10/31/91
- --------------------------------------------------------------------------------------------------------
CLASS III 25.02% 24.03% N/A 20.83%
- --------------------------------------------------------------------------------------------------------
S&P 500 28.57% 24.05% N/A 20.12%
- --------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 7
GMO VALUE FUND
Fund Inception Date: 11/13/90
<TABLE>
<CAPTION>
FUND CODES
--------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III GMOVX Value 362007 82 5
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Value Fund seeks long-term capital growth
primarily through investment in equity securities. The Fund's current benchmark
is the Russell 1000 Value Index.
INVESTMENT UNIVERSE: The Fund invests primarily in equity securities of
companies chosen from the Russell 1000 Value Index, emphasizing large
capitalization equity securities. The Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund invests primarily in U.S. equity
securities of companies that in the opinion of the Manager represent favorable
values relative to their market prices. The Fund intends to be fully invested,
and will not generally take temporary defensive positions through investment in
cash and high quality money market instruments. The Fund may also invest in
equity securities of foreign issuers.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental investment
principles and traditional portfolio analysis to provide broad U.S. equity
market exposure. Using these principles, the Manager focuses on stock selection,
and primarily selects issuers which it believes represent favorable values
relative to their market prices. The Manager employs a bottom-up approach to
select stocks, and uses various techniques in seeking companies which trade
below fair value, as determined by the value of the earnings stream (using a
proprietary dividend discount model), the asset value or the franchise value.
RISKS: The most significant risks of an investment in the Fund are Market
Risk (including Value Securities Risk) and Derivatives Risk. For more
information about these risks and other principal risks of an investment in the
Fund, see "Summary of Principal Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
VALUE FUND %
------------
<S> <C>
'1991' 25.75
'1992' 9.35
'1993' 18.67
'1994' 0.61
'1995' 38.18
'1996' 20.73
'1997' 30.42
'1998' 11.66
</TABLE>
Highest Quarter: 18.17% (1Q1991)
Lowest Quarter: -10.89% (3Q1998)
Year to Date (as of 3/31/99): -0.47%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11/13/90
- --------------------------------------------------------------------------------------------------------
CLASS III 11.50% 19.53% N/A 19.36%
- --------------------------------------------------------------------------------------------------------
RUSSELL 1000 VALUE INDEX 15.61% 20.83% N/A 20.26%
- --------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 8
GMO FUNDAMENTAL VALUE FUND
Fund Inception Date: 10/31/91
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III N/A N/A 362007 65 0
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Fundamental Value Fund seeks long term
capital growth primarily through investment in equity securities. The Fund's
current benchmark is the S&P 500 Index.
INVESTMENT UNIVERSE: The Fund invests primarily in equity securities of
companies chosen from the Russell 1000 Index. The Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund invests primarily in U.S. equity
securities of companies that in the opinion of the Manager represent favorable
values relative to their market prices. The Fund intends to be fully invested,
and will not generally take temporary defensive positions through investment in
cash and high quality money market instruments. The Fund may also invest in
equity securities of foreign issuers.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental investment
principles and traditional portfolio analysis to provide broad U.S. equity
market exposure. Using these principles, the Manager focuses on stock selection,
and primarily selects issuers which it believes represent favorable values
relative to their market prices. The Manager employs a bottom-up approach to
select stocks, and uses various techniques in seeking companies which trade
below fair value, as determined by the value of the earnings stream (using a
proprietary dividend discount model), the asset value or the franchise value.
RISKS: The most significant risks of an investment in the Fund are Market
Risk (including Value Securities Risk), Derivatives Risk, Foreign Investment
Risk and Currency Risk. For more information about these risks and other
principal risks of an investment in the Fund, see "Summary of Principal Risks"
on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
FUNDAMENTAL VALUE FUND (%)
--------------------------
<S> <C>
'1992' 13.92
'1993' 22.46
'1994' 3.56
'1995' 30.58
'1996' 22.79
'1997' 28.75
'1998' 10.11
</TABLE>
Highest Quarter: 13.14% (2Q1997)
Lowest Quarter: -9.99% (3Q1998)
Year-to-Date (as of 3/31/99): -1.78%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
10/31/91
- --------------------------------------------------------------------------------------------------------
CLASS III 9.94% 18.63% N/A 18.58%
- --------------------------------------------------------------------------------------------------------
S&P 500 28.57% 24.05% N/A 20.12%
- --------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 9
GMO GROWTH FUND
Fund Inception Date: 12/30/88
<TABLE>
<CAPTION>
FUND CODES
--------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III GMOGX Growth 362007 78 3
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Growth Fund seeks long-term growth of
capital. The Fund's current benchmark is the Russell 1000 Growth Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of at least 125 companies chosen from among the 1000 companies with the largest
equity capitalization and whose securities are listed on a United States
national securities exchange. The Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivative instruments and related investment techniques to:
(i) hedge equity exposure; (ii) replace direct investing; and (iii) implement
shifts in investment exposure as a substitute for buying and selling securities.
The Fund will not use derivative instruments to expose on a net basis more than
100% of its assets to equity securities or markets.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to provide broad exposure to the large
capitalization growth sector of the U.S. equity market. Using these principles,
the Manager employs a bottom-up approach to select stocks based on factors such
as fair value, earnings and price momentum, cash flow and neglect (a measure of
low analyst coverage and low price volatility). The Manager then uses a top-down
approach to favor sectors that it believes represent the best long-term values
within the U.S. stock market. The Manager then uses a final optimization process
to help control portfolio risk.
RISKS: The most significant risks of an investment in the Fund are Market
Risk (including Growth Securities Risk), Derivatives Risk, Leveraging Risk and
Credit and Counterparty Risk. For more information about these risks and other
principal risks of an investment in the Fund, see "Summary of Principal Risks"
on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
GROWTH FUND (%)
---------------
<S> <C>
'1989' 38.34
'1990' 2.42
'1991' 41.27
'1992' 4.21
'1993' 4.60
'1994' 1.70
'1995' 39.85
'1996' 20.39
'1997' 29.35
'1998' 37.30
</TABLE>
Highest Quarter: 27.46% (4Q1998)
Lowest Quarter: -17.77% (3Q1990)
Year-to-Date (as of 3/31/99): 5.78%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/30/88
- --------------------------------------------------------------------------------------------------------
CLASS III 37.11% 24.86% 20.80% 20.80%
- --------------------------------------------------------------------------------------------------------
RUSSELL 1000 GROWTH INDEX 38.76% 25.70% 20.56% 20.55%
- --------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 10
GMO SMALL CAP VALUE FUND
Fund Inception Date: 12/31/91
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ -------- -----------
<S> <C> <C> <C> <C>
Class III GMSVX SmCapVal 362007 72 6
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Small Cap Value Fund seeks long-term growth
of capital. The Fund's current benchmark is the GMO Russell 2500 Value+ Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of companies chosen from the Russell 2500 Value Index. The Fund may also use
derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivative instruments and related investment techniques to:
(i) hedge equity exposure; (ii) replace direct investing; and (iii) implement
shifts in investment exposure as a substitute for buying and selling securities.
The Fund will not use derivative instruments to expose on a net basis more than
100% of its assets to equity securities or markets.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses quantitative investment
principles to evaluate small capitalization stocks. Using these principles, the
Manager employs a bottom-up approach to select stocks based on factors such as
price to fair value, price to sales ratio, price to book ratio and cash flow
yield. Stocks that are inexpensive based on these factors are ranked highly. The
Manager then purchases stocks ranked highly in each of the four factors,
emphasizing stocks that appear attractive in more than one strategy. The Manager
then uses a final optimization process to help control portfolio risk.
RISKS: The most significant risks of an investment in the Fund are Market
Risk (including Value Securities Risk), Smaller Company Risk, Derivatives Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
SMALL CAP VALUE FUND (%)
------------------------
<S> <C>
'1992' 24.22
'1993' 20.15
'1994' 3.84
'1995' 27.28
'1996' 20.16
'1997' 29.72
'1998' 0.03
</TABLE>
Highest Quarter: 15.46% (2Q1997)
Lowest Quarter: -18.31% (3Q1998)
Year-to-Date (as of 3/31/99): -9.72%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/31/91
- --------------------------------------------------------------------------------------------------------
CLASS III -0.97% 15.32% N/A 17.23%
- --------------------------------------------------------------------------------------------------------
RUSSELL 2500 VALUE INDEX -1.93% 15.35% N/A 17.22%
- --------------------------------------------------------------------------------------------------------
GMO RUSSELL 2500 VALUE + INDEX -1.93% 15.16% N/A 15.50%
- --------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 11
GMO SMALL CAP GROWTH FUND
Fund Inception Date: 12/31/96
<TABLE>
<CAPTION>
FUND CODES
---------------------------------------
Ticker Symbol Cusip
------ ------- -----------
<S> <C> <C> <C> <C>
Class III GMSGX SmCapGr 362007 68 4
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Small Cap Growth Fund seeks long-term growth
of capital. The Fund's current benchmark is the Russell 2500 Growth Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of companies chosen from the Russell 2500 Growth Index. The Fund may also use
derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivative instruments and related investment techniques to:
(i) hedge equity exposure; (ii) replace direct investing; and (iii) implement
shifts in investment exposure as a substitute for buying and selling securities.
The Fund will not use derivative instruments to expose on a net basis more than
100% of its assets to equity securities or markets.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses quantitative investment
principles to evaluate small capitalization stocks. Using these principles, the
Manager employs a bottom-up approach to select stocks based on factors such as
the trend in consensus analyst estimates, price momentum and an earnings
surprise component. Stocks that demonstrate strong momentum based on these
factors are ranked highly. The Manager then purchases stocks ranked highly in
each of the three factors, emphasizing stocks that appear attractive in more
than one factor. The Manager then uses a final optimization process to help
control risk.
RISKS: The most significant risks of an investment in the Fund are Market
Risk (including Growth Securities Risk) Smaller Company Risk, Derivatives Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
SMALL CAP GROWTH FUND(%)
------------------------
<S> <C>
'1997' 24.69
'1998' 5.79
</TABLE>
Highest Quarter: 22.45% (4Q1998)
Lowest Quarter: -22.08% (3Q1998)
Year-to-Date (as of 3/31/99): -5.67%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/31/96
- --------------------------------------------------------------------------------------------------------
CLASS III 4.73% N/A N/A 14.28%
- --------------------------------------------------------------------------------------------------------
RUSSELL 2500 GROWTH INDEX 3.09% N/A N/A 8.77%
- --------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 12
GMO REIT FUND
Fund Inception Date: 5/31/96
<TABLE>
<CAPTION>
FUND CODES
---------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III GMORX REIT 362007 62 7
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO REIT Fund seeks high total return through
investment in or exposure to real estate investment trusts ("REITs"), which are
managed vehicles that invest in real estate or real estate-related assets. The
Fund's current benchmark is the Morgan Stanley REIT Index.
INVESTMENT UNIVERSE: The Fund invests primarily in equity REITs, which own
real estate directly; mortgage REITs, which make construction, development or
long-term mortgage loans; and hybrid REITs, which share characteristics of
equity REITs and mortgage REITs. The Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivatives and related instruments to: (1) hedge equity
exposure; (2) replace direct investing; and (3) implement shifts in investment
exposure as a substitute for buying and selling securities. The Fund will not
use derivative instruments to expose on a net basis more than 100% of its assets
to equity securities or markets.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to evaluate REITs. Using these principles,
the Manager employs a bottom-up approach to select REITs based on such factors
as valuation, prospects for growth, quality of the balance sheet and management.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivative Risk, Concentration Risk, Leveraging Risk and Credit and
Counterparty Risk. For more information about these risks and other principal
risks of an investment in the Fund, see "Summary of Principal Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left show changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
SMALL CAP GROWTH FUND(%)
------------------------
<S> <C>
'1997' 19.35
'1998' -24.36
</TABLE>
Highest Quarter: 11.52% (3Q1997)
Lowest Quarter: -16.27% (3Q1998)
Year-to-Date (as of 3/31/99): -3.74%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
5/31/96
- --------------------------------------------------------------------------------------------------------
CLASS III -25.11% N/A N/A 5.37%
- --------------------------------------------------------------------------------------------------------
MORGAN STANLEY REIT INDEX -16.90% N/A N/A 10.10%
- --------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 13
INTERNATIONAL EQUITY FUNDS
The International Equity Funds include Funds that invest only or primarily
in relatively developed foreign markets as well as Funds that invest all or a
portion of their assets in securities traded in the securities markets of less
developed countries, often referred to as "emerging markets." Emerging markets
include the markets of developing countries in Asia, Latin America, Southern and
Eastern Europe, the Middle East and Africa. The Evolving Countries Fund invests
primarily in certain types of emerging market securities referred to in this
Prospectus as "evolving country securities." Evolving country securities are
emerging market securities that, in the Manager's view, are more liquid than
emerging market securities generally. The Emerging Markets Fund, Evolving
Countries Fund and Asia Fund are sometimes referred to in this Prospectus as the
"Emerging Markets Funds" because they invest primarily in emerging market
securities.
GMO INTERNATIONAL CORE FUND
Fund Inception Date: 3/31/87
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ -------- -----------
<S> <C> <C> <C> <C>
Class II GMICX IntlCore 362007 20 5
Class III GMOIX IntlCore 362007 30 4
Class IV GMCFX IntlCore 362008 83 1
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The International Core Fund seeks high total return
through investment in equity securities of non-U.S. issuers. The Fund's current
benchmark is the MSCI EAFE Index.
INVESTMENT UNIVERSE: The Fund invests primarily in equity securities of
non-U.S. issuers chosen from among the 3500 companies in developed markets that
are listed in the MSCI Perspective publication, which includes issuers in the
MSCI EAFE index, smaller companies and Canadian companies. The Fund may also use
derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund will generally not invest in
securities of emerging markets issuers. The Fund may use exchange-traded and
over-the-counter derivatives and related instruments to (i) hedge equity
exposure; (ii) replace direct investing; (iii) implement shifts in investment
exposure as a substitute for selling and buying securities; and (iv) adjust its
foreign currency exposure. The Fund will not use derivative instruments to
expose on a net basis more than 100% of its net assets to equity securities or
markets, or to hold net aggregate foreign currency exposure in excess of the net
assets of the Fund. However, the Fund's foreign currency exposure may differ
significantly from the currency exposure represented by its equity investments.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to build an international equity portfolio.
Using these principles, the Manager creates forecasted returns for countries,
sectors, currencies and individual stocks. To forecast returns for countries,
the Manager examines factors such as trends in gross domestic products, market
sentiment and industrial competitiveness. For sectors, the Manager examines
factors such as economic sensitivity, profitability and size. For currencies,
the Manager examines factors such as export and producer price parity, balance
of payments and interest rates. For securities, the Manager examines factors
such as earnings, fair value, book value, price momentum, cash flow and neglect
(a measure of low analyst coverage and low price volatility). The Manager uses
an optimization process to weigh the trade-off between a stock's return forecast
and how much risk the stock adds to the portfolio, the risk and forecasted
return of all active currency positions and the risk of the entire portfolio
relative to the Fund's benchmark. In addition, expected transaction costs are
explicitly considered in the optimization process.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk, Leveraging Risk
and Credit and Counterparty Risk. For more information about these risks and
other principal risks of an investment in the Fund, see "Summary of Principal
Risks" on page 38.
12
<PAGE> 14
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
INTERNATIONAL CORE FUND(%)
--------------------------
<S> <C>
'1989' 22.61
'1990' -8.12
'1991' 14.46
'1992' -1.15
'1993' 39.96
'1994' 4.14
'1995' 10.32
'1996' 9.55
'1997' 0.92
'1998' 13.60
</TABLE>
Highest Quarter: 16.70% (1Q1998)
Lowest Quarter: -15.92% (3Q1990)
Year-to-Date (as of 3/31/99): -1.50%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3/31/87
- --------------------------------------------------------------------------------------------------------
CLASS III 12.92% 7.48% 9.85% 10.17%
- --------------------------------------------------------------------------------------------------------
MSCI EAFE 19.98% 9.18% 5.54% 7.03%
- --------------------------------------------------------------------------------------------------------
GMO EAFE-LITE 21.65% 11.10% 7.71% 8.52%
- --------------------------------------------------------------------------------------------------------
9/26/96
- --------------------------------------------------------------------------------------------------------
CLASS II 12.80% N/A N/A 8.52%
- --------------------------------------------------------------------------------------------------------
MSCI EAFE 19.98% N/A N/A 10.24%
- --------------------------------------------------------------------------------------------------------
GMO EAFE-LITE 21.65% N/A N/A 13.91%
- --------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 15
GMO CURRENCY HEDGED
INTERNATIONAL CORE FUND
Fund Inception Date: 6/30/95
<TABLE>
<CAPTION>
FUND CODES
------------------------------------------
Ticker Symbol Cusip
------ ---------- -----------
<S> <C> <C> <C> <C>
Class III GMOCX CurHgIntCr 362007 58 5
Class IV GMHFX CurHgIntCr 362008 81 5
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Currency Hedged International Core Fund seeks
high total return through investment in equity securities of non-U.S. issuers
and through management of the Fund's foreign currency positions. The Fund's
current benchmark is the MSCI EAFE Index (Hedged).
INVESTMENT UNIVERSE: The Fund invests primarily in equity securities of
non-U.S. issuers chosen from among the 3500 companies in developed markets that
are listed in the MSCI Perspective publication, which includes issuers in the
MSCI EAFE index, smaller companies and Canadian companies. The Fund will also
use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund will generally not invest in
securities of emerging markets issuers. The Fund may use exchange-traded and
over-the-counter derivatives and related instruments to (i) hedge equity
exposure; (ii) replace direct investing; (iii) implement shifts in investment
exposure as a substitute for selling and buying securities; and (iv) adjust its
foreign currency exposure. The Fund will generally attempt to hedge at least 70%
of the foreign currency exposure represented by the securities in the benchmark
back to the U.S. dollar. The Fund may also use derivatives to adjust its foreign
currency exposure independently of its exposure to international equity markets.
Consequently, the Fund's actual foreign currency exposure may differ
significantly from the currency exposure represented by its equity investments.
The Fund will not use derivative instruments to expose on a net basis more than
100% of its net assets to equity securities or markets, nor to hold net
aggregate foreign currency exposure in excess of the net assets of the Fund.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to build an international equity portfolio.
Using these principles, the Manager creates forecasted returns for countries,
sectors, currencies and individual stocks. To forecast returns for countries,
the Manager examines factors such as trends in gross domestic products, market
sentiment and industrial competitiveness. For sectors, the Manager examines
factors such as economic sensitivity, profitability and size. For currencies,
the Manager examines factors such as export and producer price parity, balance
of payments and interest rates. For securities, the Manager examines factors
such as earnings, fair value, book value, price momentum, cash flow and neglect
(a measure of low analyst coverage and low price volatility). The Manager uses
an optimization process to weigh the trade-off between a stock's return forecast
and how much risk the stock adds to the portfolio, the risk and forecasted
return of all active currency positions and the risk of the entire portfolio
relative to the Fund's benchmark. In addition, expected transaction costs are
explicitly considered in the optimization process.
RISKS. The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk, Leveraging Risk
and Credit and Counterparty Risk. For more information about these risks, and
other principal risks of an investment in the Fund, see "Summary of Principal
Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
CURRENCY HEDGED INTERNATIONAL CORE FUND(%)
------------------------------------------
<S> <C>
'1996' 15.28
'1997' 12.90
'1998' 7.29
</TABLE>
Highest Quarter: 17.38% (1Q1998)
Lowest Quarter: -19.29% (3Q1998)
Year-to-Date (as of 3/31/99): 2.80%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6/30/95
- --------------------------------------------------------------------------------------------------------
CLASS III 6.64% N/A N/A 13.70%
- --------------------------------------------------------------------------------------------------------
MSCI EAFE (HEDGED) 13.69% N/A N/A 18.09%
- --------------------------------------------------------------------------------------------------------
GMO EAFE-LITE (HEDGED) 15.69% N/A N/A 19.03%
- --------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 16
GMO FOREIGN FUND
Fund Inception Date: 6/28/96
<TABLE>
<CAPTION>
FUND CODES
--------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class II GMFRX Foreign 362007 56 9
Class III GMOFX Foreign 362007 55 1
Class IV GMFFX Foreign 362008 82 3
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Foreign Fund seeks high total return through
investment in equity securities of non-U.S. issuers. The Fund's current
benchmark is the MSCI EAFE Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of companies chosen from companies listed outside the U.S., including any of the
4000 companies in developed and emerging markets listed in the MSCI database.
The Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund may also use exchange-traded and
over-the-counter derivatives to adjust its foreign currency exposure.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental analysis of
issuers and country economics to build an international equity portfolio. The
Manager evaluates stocks by examining value factors such as price to earnings,
price to book, price to cash flow and yield. The Manager then focuses on the
companies that rank attractively in these four categories and makes selections
based on research including a review of the sector/industry, publicly available
company information, fundamental analysis and discussions with company
management.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk and Credit and
Counterparty Risk. For more information about these risks and other principal
risks of an investment in the Fund, see "Summary of Principal Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. The table to the right shows
how the Fund's average annual total returns for different calendar periods
compare with those of a broad-based index. See "Benchmarks and Indexes" for a
description of the index. Performance results in the table reflect payment of
Fund expenses; returns for the comparative index do not reflect payment of any
expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE PERFORMANCE.
The Fund commenced operations on June 28, 1996. Prior to that date, the
Fund operated as a private investment pool with investment objectives, policies
and guidelines that were substantially the same as those of the Fund.
Performance of Class III Shares prior to June 28, 1996 is that of the private
investment pool and reflects the pool's higher annual operating expenses. The
pool was not registered as an investment company and was not subject to certain
restrictions imposed on the Fund under the Investment Company Act of 1940. Had
the pool been subject to these restrictions, its performance may have been
adversely affected.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
FOREIGN FUND(%)
---------------
<S> <C>
'1989' 27.27
'1990' -9.81
'1991' 12.34
'1992' -4.61
'1993' 41.16
'1994' 6.52
'1995' 13.85
'1996' 14.31
'1997' 6.86
'1998' 13.95
</TABLE>
Highest Quarter: 16.90% (4Q1998)
Lowest Quarter: -18.90% (3Q1990)
Year-to-Date (as of 3/31/99): 0.32%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
8/31/84
- --------------------------------------------------------------------------------------------------------
CLASS III 13.95% 11.03% 11.35% 17.99%
- --------------------------------------------------------------------------------------------------------
MSCI EAFE 19.98% 9.18% 5.54% 15.13%
- --------------------------------------------------------------------------------------------------------
9/30/96
- --------------------------------------------------------------------------------------------------------
CLASS II 13.92% N/A N/A 12.39%
- --------------------------------------------------------------------------------------------------------
MSCI EAFE 19.98% N/A N/A 10.04%
- --------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 17
GMO INTERNATIONAL
SMALL COMPANIES FUND
Fund Inception Date: 10/14/91
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ -------- -----------
<S> <C> <C> <C> <C>
Class III GMISX IntSmCos 362007 52 8
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The International Small Companies Fund seeks high
total return through investment in equity securities of non-U.S. issuers. The
Fund's current benchmark is the SSB EMI World ex-U.S. Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of companies chosen from among the 3500 companies in developed markets,
including issuers in the MSCI EAFE index, smaller companies and Canadian
companies, and that are among the smallest 50% in terms of market capitalization
for each country. The Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund will generally not invest in
securities of emerging markets issuers. The Fund may use exchange-traded and
over-the-counter derivatives to (i) hedge equity exposure; (ii) replace direct
investing; (iii) implement shifts in investment exposure as a substitute for
selling and buying securities; and (iv) adjust its foreign currency exposure.
The Fund will not use derivative instruments to expose on a net basis more than
100% of its net assets to equity securities or markets, nor to hold net
aggregate foreign currency exposure in excess of the net assets of the Fund.
However, the Fund's foreign currency exposure may differ significantly from the
currency exposure represented by its equity investments.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to build an international equity portfolio.
Using these principles, the Manager creates forecasted returns for countries,
sectors, currencies and individual stocks. To forecast returns for countries,
the Manager examines factors such as trends in gross domestic products, market
sentiment and industrial competitiveness. For sectors, the Manager examines
factors such as economic sensitivity, profitability and size. For currencies,
the Manager examines factors such as export and producer price parity, balance
of payments and interest rates. For securities, the Manager examines factors
such as earnings, fair value, book value, price momentum, cash flow and neglect
(a measure of low analyst coverage and low price volatility). The Manager uses
an optimization process to weigh the trade-off between a stock's return forecast
and how much risk the stock adds to the portfolio, the risk and forecasted
return of all active currency positions and the risk of the entire portfolio
relative to the Fund's benchmark. In addition, expected transaction costs are
explicitly considered in the optimization process.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Smaller Company Risk, Derivatives Risk, Foreign Investment Risk, Currency
Risk, Leveraging Risk, Credit and Counterparty Risk and Liquidity Risk. For more
information about these risks and other principal risks of an investment in the
Fund, see "Summary of Principal Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
INTERNATIONAL SMALL COMPANIES FUND (%)
--------------------------------------
<S> <C>
'1992' -7.39
'1993' 54.97
'1994' 4.74
'1995' 4.91
'1996' 9.84
'1997' -3.54
'1998' 8.50
</TABLE>
Highest Quarter: 17.13% (1Q1998)
Lowest Quarter: -14.71% (3Q1998)
Year-to-Date (as of 3/31/99): -0.44%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
10/14/91
- --------------------------------------------------------------------------------------------------------
CLASS III 6.77% 4.45% N/A 7.58%
- --------------------------------------------------------------------------------------------------------
SSB EMI WORLD EX-US 12.15% 4.46% N/A 4.53%
- --------------------------------------------------------------------------------------------------------
GMO EAFE-LITE 21.65% 11.10% N/A 10.82%
- --------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 18
GMO JAPAN FUND
Fund Inception Date: 6/8/90
<TABLE>
<CAPTION>
FUND CODES
--------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III GMOJX Japan 362007 48 6
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Japan Fund seeks high total return through
investment in equity securities of Japanese companies. The Fund's current
benchmark is the MSCI Japan Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of companies chosen from the MSCI Japan universe. The Fund may also use
derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund will generally not invest in
securities of emerging markets issuers. The Fund may use exchange-traded and
over-the-counter derivatives to (i) hedge equity exposure; (ii) replace direct
investing; (iii) implement shifts in investment exposure as a substitute for
selling and buying securities; and (iv) adjust its foreign currency exposure.
The Fund will not use derivative instruments to expose on a net basis more than
100% of its net assets to equity securities or markets, nor to hold net
aggregate foreign currency exposure in excess of the net assets of the Fund.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to provide Japanese equity exposure. Using
these principles, the Manager employs a bottom-up approach to select stocks
based on several proprietary valuation factors such as earnings and price
momentum and measures of neglect (a measure of low analyst coverage and low
price volatility). The Manager uses a top-down approach to favor sectors that it
believes represent the best long-term values within the Japanese market. The
Manager then uses an optimization process to weigh the trade-off of a stock's
return forecast and how much risk it adds to the portfolio, and to weigh the
risk of the entire portfolio relative to the Fund's benchmark. In addition,
expected transaction costs are explicitly considered in the optimization
process.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk, Concentration
Risk, Leveraging Risk and Credit and Counterparty Risk. For more information
about these risks and other principal risks of an investment in the Fund, see
"Summary of Principal Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
JAPAN FUND (%)
--------------
<S> <C>
'1991' 4.99
'1992' -13.99
'1993' 26.55
'1994' 25.82
'1995' -3.85
'1996' -12.8
'1997' -23.44
'1998' 12.11
</TABLE>
Highest Quarter: 26.32% (4Q1998)
Lowest Quarter: -20.28% (4Q1997)
Year-to-Date (as of 3/31/99): 7.87%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6/8/90
- -------------------------------------------------------------------------------------------------------
CLASS III 10.98% -2.16% N/A -2.00%
- -------------------------------------------------------------------------------------------------------
MSCI JAPAN INDEX 5.03% -3.69% N/A -3.48%
- -------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 19
GMO EMERGING MARKETS FUND
Fund Inception Date: 12/9/93
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ -------- -----------
<S> <C> <C> <C> <C>
Class III GMOEX EmergMkt 362007 60 1
Class IV GMEFX EmergMkt 362008 79 9
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Emerging Markets Fund seeks high total return
through investment in equity securities traded in the securities markets of
developing countries in Asia, Latin America, the Middle East, Africa and Europe
("Emerging Markets"). The Fund's current benchmark is the IFC Investable Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of companies that make up the IFC and MSCI emerging markets databases, and that
are deemed to be emerging or frontier markets by the World Bank. The Fund may
also use derivatives.
PRINCIPAL INVESTMENTS: The Manager has appointed Dancing Elephant, Ltd. to
serve as Consultant to the Fund. The Fund intends to be fully invested, and will
not generally take temporary defensive positions through investment in cash and
high quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivatives and related instruments where available to (i)
hedge equity exposure; (ii) replace direct investing; (iii) implement shifts in
investment exposure as a substitute for selling and buying securities; and (iv)
adjust its foreign currency exposure. The Fund will not use derivative
instruments to expose on a net basis more than 100% of its net assets to equity
securities or markets, nor to hold net aggregate foreign currency exposure in
excess of the net assets of the Fund. However, the Fund's foreign currency
exposure may differ significantly from the currency exposure represented by its
equity investments.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to build a value-biased emerging market
equity portfolio. Using these principles, the Consultant creates forecasted
returns for countries, securities and sectors. To forecast returns for
countries, the Consultant examines factors such as price to earnings ratios,
market momentum, trends in gross domestic products, market conditions, long-term
trends and paradigm shifts, and values currencies based on real effective
exchange rates. For securities, the Consultant examines factors such as fair
value, earnings and price momentum, price to cash flow and measures of neglect
(a measure of low analyst coverage and low price volatility). For sectors, the
Consultant examines factors similar to those used for securities, and also
evaluates economic sensitivity and industrial trends. The Consultant also
monitors the economic and political conditions in these markets and adjusts its
strategies as markets develop or encounter setbacks. The Consultant then uses an
optimization process to weigh the trade-off among a stock's return forecast, how
much risk the stock adds relative to the Fund's benchmark and transaction costs.
RISKS. The most significant risks of an investment in the Fund are Market
Risk, Liquidity Risk, Derivatives, Foreign Investment Risk, Currency Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
EMERGING MARKETS FUND (%)
-------------------------
<S> <C>
'1994' 6.29
'1995' -12.57
'1996' 11.64
'1997' -0.1
'1998' -28.88
</TABLE>
Highest Quarter: 21.11% (3Q1994)
Lowest Quarter: -28.24% (2Q1998)
Year-to-Date (as of 3/31/99): 10.80%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/9/93
- ---------------------------------------------------------------------------------------------------------
CLASS III -30.30% -6.30% N/A -4.42%
- ---------------------------------------------------------------------------------------------------------
IFC INVESTABLE -22.02% -10.13% N/A -8.10%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 20
GMO EVOLVING COUNTRIES FUND
Fund Inception Date: 8/29/97
<TABLE>
<CAPTION>
FUND CODES
------------------------------------------
Ticker Symbol Cusip
--------- --------- -----------
<S> <C> <C> <C> <C>
Class
III GMCEX EvolvCntr 362008 85 6
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Evolving Countries Fund seeks high total return
through investment in equity securities traded in the securities markets of
developing countries in Asia, Latin America, the Middle East, Africa and Europe
("Emerging Markets"). The Fund's current benchmark is the IFC Investable Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of companies that make up the IFC and MSCI emerging markets databases, and that
are deemed to be emerging or frontier markets by the World Bank. The Fund may
also use derivatives.
PRINCIPAL INVESTMENTS: The Manager has appointed Dancing Elephant, Ltd. to
serve as Consultant to the Fund. The Fund attempts to achieve its objective by
focusing its investments in evolving country securities that are more liquid
than emerging market securities generally. The Fund intends to be fully
invested, and will not generally take temporary defensive positions through
investment in cash and high quality money market instruments. The Fund may use
exchange-traded and over-the-counter derivatives and related instruments where
available to (i) hedge equity exposure; (ii) replace direct investing; (iii)
implement shifts in investment exposure as a substitute for selling and buying
securities; and (iv) adjust its foreign currency exposure. The Fund will not use
derivative instruments to expose on a net basis more than 100% of its net assets
to equity securities or markets, nor to hold net aggregate foreign currency
exposure in excess of the net assets of the Fund. However, the Fund's foreign
currency exposure may differ significantly from the currency exposure
represented by its equity investments.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to build a value-biased, relatively liquid
and earnings momentum-biased emerging market equity portfolio. Using these
principles, the Consultant creates forecasted returns for countries, securities
and sectors. To forecast returns for countries, the Consultant examines factors
such as price to earnings ratios, market momentum, trends in gross domestic
products, market conditions, long-term trends and paradigm shifts, and values
currencies based on real effective exchange rates. For securities, the
Consultant examines factors such as fair value, earnings and price momentum,
price to cash flow and measures of neglect (a measure of low analyst coverage
and low price volatility). For sectors, the Consultant examines factors similar
to those used for securities, and also evaluates economic sensitivity and
industrial trends. The Consultant also monitors the economic and political
conditions in these markets and adjusts its strategies as markets develop or
encounter setbacks. The Consultant then uses an optimization process to weigh
the trade-off among a stock's return forecast, how much risk the stock adds
relative to the Fund's benchmark and transaction costs.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Liquidity Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in the
Fund. The bar chart to the left shows changes in the Fund's annual total returns
from year to year for the periods shown. Purchase premiums and redemption fees
are not reflected in the bar chart; if reflected, the returns would be lower.
The table to the right shows how the Fund's average annual total returns for
different calendar periods compare with those of a broad-based index. See
"Benchmarks and Indexes" for a description of the index. Performance results in
the table reflect payment of Fund expenses; returns for the comparative index do
not reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF
FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Year Ending December 31
[Graph]
<TABLE>
<CAPTION>
EVOLVING COUNTRIES FUND (%)
---------------------------
<S> <C>
'1998' -24.03
</TABLE>
Highest Quarter: 24.13% (4Q1998)
Lowest Quarter: -28.87% (2Q1998)
Year-to-Date (as of 3/31/99): 7.64%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
8/29/97
- ---------------------------------------------------------------------------------------------------------
CLASS III -25.55% N/A N/A -31.25%
- ---------------------------------------------------------------------------------------------------------
IFC INVESTABLE -22.02% N/A N/A -27.52%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 21
GMO ASIA FUND
Fund Inception Date: 2/18/98
<TABLE>
<CAPTION>
FUND CODES
---------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III GMASX Asia 362008 75 7
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Asia Fund seeks high total return through
investment in equity securities traded in the Asian securities markets. The
Fund's current benchmark is the GMO Asia 7 Index.
INVESTMENT UNIVERSE: The Fund invests primarily in equity securities of
companies traded in Asian countries other than Japan. The Fund may also use
derivatives.
PRINCIPAL INVESTMENTS: The Manager has appointed Dancing Elephant, Ltd. to
serve as Consultant to the Fund. The Fund intends to be fully invested, and will
not generally take temporary defensive positions through investment in cash and
high quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivative instruments and related investment techniques to (i)
hedge equity exposure; (ii) replace direct investing; (iii) implement shifts in
investment exposure as a substitute for selling and buying securities; and (iv)
adjust its foreign currency exposure. The Fund will not use derivative
instruments to expose on a net basis more than 100% of its net assets to equity
securities or markets, nor to hold net aggregate foreign currency exposure in
excess of the net assets of the Fund. However, the Fund's foreign currency
exposure may differ significantly from the currency exposure represented by its
equity investments.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to provide Asian equity exposure. Using these
principles, the Consultant creates forecasted returns for countries, securities
and sectors. To forecast returns for countries, the Manager examines factors
such as price to earnings ratios, market momentum, trends in gross domestic
products, market conditions, long-term trends and paradigm shifts. For
securities, the Consultant examines factors such as fair value, earnings and
price momentum, price to cash flow and measures of neglect (a measure of low
analyst coverage and low price volatility). For sectors, the Consultant examines
factors similar to those used for securities, and also evaluates economic
sensitivity and industrial trends. The Consultant also monitors the economic and
political conditions in these markets and adjusts its strategies as markets
develop or encounter setbacks. The Consultant then uses an optimization process
to weigh the trade-off among a stock's return forecast, how much risk it adds
relative to the Fund's benchmark and transaction costs.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Liquidity Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk,
Concentration Risk, Leveraging Risk and Credit and Counterparty Risk. For more
information about these risks and other principal risks of an investment in the
Fund, see "Summary of Principal Risks" on page 38.
No performance information is included in this section because the Fund
commenced operations in 1998.
20
<PAGE> 22
GMO GLOBAL PROPERTIES FUND
Fund Inception Date: 12/20/96
<TABLE>
<CAPTION>
FUND CODES
---------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III GMGPX N/A 362008 30 2
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Global Properties Fund seeks high total return
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 ("real estate companies"). The Fund's current benchmark is the SSB
BMI World Property Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of publicly traded real estate companies with market capitalizations exceeding
$30 million. The Fund will typically make investments in approximately 30
countries. The Fund may also use derivatives to adjust its foreign currency
exposure.
PRINCIPAL INVESTMENTS: The Fund invests primarily in the equity securities
of companies that have at least 50% of their assets, gross income or net profits
attributable to ownership, construction, management or sale of residential,
commercial or industrial real estate, or to products or services that are
related to the real estate industry. The Fund intends to be fully invested, and
will not generally take temporary defensive positions through investment in cash
and high quality money market instruments.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental principles
to provide exposure to global real estate companies. The Manager uses a four
step process to build the portfolio. First, the Manager analyzes relative
macroeconomic trends and evaluates currency exchange risks in a country. Second,
the Manager analyzes local property markets, examining such factors as supply
and demand, rental rate and capital value trends, all segmented by property
types. Third, the Manager values individual stocks based on current price to a
target value adjusted for return volatility, composition and cost of capital,
property quality, management quality and earnings growth. Finally, the Manager
selects stocks, assuming holding periods ranging from 12 to 36 months. The
portfolio is constructed by first deciding country allocations, then currency
hedges, property type preferences and finally stock selection.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Liquidity Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk,
Non-Diversification Risk, Concentration Risk, Leveraging Risk and Credit and
Counterparty Risk. For more information about these risks and other principal
risks of an investment in the Fund, see "Summary of Principal Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
GLOBAL PROPERTIES FUND (%)
--------------------------
<S> <C>
'1997' 1.81
'1998' -9.34
</TABLE>
Highest Quarter: 6.50% (3Q1997)
Lowest Quarter: -10.99% (3Q1998)
Year-to-Date (as of 3/31/99): -4.29%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/20/96
- ---------------------------------------------------------------------------------------------------------
CLASS III -10.16% N/A N/A -3.97%
- ---------------------------------------------------------------------------------------------------------
SSB BMI WORLD PROPERTY INDEX -13.24% N/A N/A -10.45%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 23
FIXED INCOME FUNDS
The Funds in this category invest to a substantial extent in fixed income
securities. These are obligations of the issuer to make payments of principal
and/or interest on future dates, and include bonds, notes and asset backed
securities. For these purposes, a bond refers to any fixed income obligation
with an original maturity of two years or more, but the Manager may also create
"synthetic" bonds by combining a futures contract or option on a fixed income
security with cash, a cash equivalent or another fixed income security. If the
issuer or guarantor of a fixed income security is a foreign government or an
agency or political subdivision, the obligation is often referred to as
sovereign debt. The Manager will employ a variety of techniques to adjust the
sensitivity of a Fund's value to changes in interest rates. This sensitivity is
often measured by, and correlates strongly to, the portfolio's duration. The
duration of a fixed income security is the weighted average maturity, expressed
in years, of the present value of all expected future cash flows, including
interest payments and principal repayments. For example, for a bond with a 6%
coupon that matures in five years with a 6% yield, duration would be 4.39 years.
The Emerging Countries referred to below include less developed countries in
Asia, Latin America, the Middle East, Africa and Europe.
GMO DOMESTIC BOND FUND
Fund Inception Date: 8/18/94
<TABLE>
<CAPTION>
FUND CODES
------------------------------------------
Ticker Symbol Cusip
------ ---------- -----------
<S> <C> <C> <C> <C>
Class III GMDBX DomestBd 362007 41 1
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Domestic Bond Fund seeks high total return
through investment in U.S. investment grade securities. The Fund's current
benchmark is the Lehman Brothers Government Bond Index.
PRINCIPAL INVESTMENTS: The Fund invests primarily in U.S. government
securities, including asset-backed securities issued by U.S. government
agencies, but may also invest in other U.S. dollar denominated fixed income
investments, including investment-grade bonds, convertible bonds and
asset-backed securities of private issuers. The Fund may expose a portion of its
assets to foreign credit, and may invest some of its assets in lower-rated
securities. The Fund may make use of a wide variety of exchange-traded and
over-the-counter derivative instruments to implement its strategy.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager employs fundamental
research techniques to identify bonds which have high relative yield spreads and
which the Manager believes are undervalued. The Manager also considers issue-
specific risk in the selection process. The Manager employs competitive trading
practices to help ensure that the Fund receives the best available prices and
monitors credit risk in the portfolio. The Fund's portfolio will generally have
a duration of four (4) to six (6) years.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk and Leveraging Risk. For more information about these
risks and other principal risks of an investment in the Fund, see "Summary of
Principal Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. The table to the right shows
how the Fund's average annual total returns for different calendar periods
compare with those of a broad-based index. See "Benchmarks and Indexes" for a
description of the index. Performance results in the table reflect payment of
Fund expenses; returns for the comparative index do not reflect payment of any
expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
DOMESTIC BOND FUND (%)
----------------------
<S> <C>
'1995' 18.57
'1996' 3.04
'1997' 9.96
'1998' 8.05
</TABLE>
Highest Quarter: 6.35% (2Q1995)
Lowest Quarter: -2.37% (1Q1996)
Year-to-Date (as of 3/31/99): -1.63%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
8/18/94
- --------------------------------------------------------------------------------------------------------
CLASS III 8.05% N/A N/A 8.74%
- --------------------------------------------------------------------------------------------------------
LEHMAN BROTHERS GOVERNMENT BOND INDEX 9.85% N/A N/A 9.02%
- --------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 24
GMO U.S. BOND/GLOBAL
ALPHA A FUND
Fund Inception Date: 4/30/97
<TABLE>
<CAPTION>
FUND CODES
-----------------------------------------
Ticker Symbol Cusip
------ --------- -----------
<S> <C> <C> <C> <C>
Class III GUGAX USBdAlfaA 362008 60 9
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO U.S. Bond/Global Alpha A Fund seeks high
total return relative to its performance benchmark through investment in U.S.
investment grade securities. The Fund achieves exposure to international bond
and currency markets by investing in a combination of foreign bond and currency
derivatives, effectively adding to or subtracting from the U.S. bond return the
performance of the Fund's international bond and currency investments. The
Fund's current benchmark is the Lehman Brothers Aggregate Bond Index.
PRINCIPAL INVESTMENTS: The Fund invests primarily in U.S. government
securities, including asset-backed securities issued by U.S. government
agencies, but may also invest in other U.S. dollar denominated fixed income
investments, including investment-grade bonds, convertible bonds and
asset-backed securities of private issuers. The Fund may expose a portion of its
assets to lower-rated securities (also known as "junk bonds"), which may include
the sovereign debt of Emerging Countries. The Fund will generally attempt to
hedge at least 75% of its foreign currency exposure back to the U.S. dollar, and
may use derivatives to adjust its foreign currency exposure independently of its
exposure to bonds and bond markets. The Fund may make use of a wide variety of
exchange-traded and over-the-counter derivative instruments to implement its
strategy.
The Fund's return will depend primarily on 1) the performance of U.S. bond
markets, 2) the Manager's success at outperforming the U.S. bond market, and 3)
the Manager's success in selecting global bond and currency markets to over-and
underweight. A portion of the Fund's net assets may be invested in or exposed to
foreign bonds, bond markets and foreign currencies on an unhedged basis. The
total of the absolute values of all deviations from the benchmark (that is,
without regard to sign and allowing for no netting of positions) will often
exceed 100% of the value of the Fund for both bonds and currencies, which are
generally considered separately.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager employs fundamental
research techniques and quantitative applications to transfer valuation
inefficiencies from the international bond and currency markets to a core U.S.
bond portfolio. The core portfolio seeks to match the duration of, and produce
returns similar to, the Fund's benchmark. The Manager uses these applications to
determine currency and country allocations. Issues are selected by analyzing
such factors as term structures, sector and issuer yield spreads, tracking error
and embedded option features of the security universe. The Manager implements
these allocations by identifying undervalued securities and currencies within
the relevant bond and currency markets.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk, Liquidity Risk, Foreign Investment Risk, Currency Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Year Ending December 31
[Graph]
<TABLE>
<CAPTION>
U.S. BOND/GLOBAL ALPHA A FUND (%)
---------------------------------
<S> <C>
'1998' 3.87
</TABLE>
Highest Quarter: 1.51% (3Q1998)
Lowest Quarter: -0.13% (4Q1998)
Year-to-Date (as of 3/31/99): -2.37%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
4/30/97
- --------------------------------------------------------------------------------------------------------
CLASS III 3.72% N/A N/A 9.35%
- --------------------------------------------------------------------------------------------------------
LEHMAN BROTHERS AGGREGATE BOND INDEX 8.63% N/A N/A 10.42%
- --------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 25
GMO U.S. BOND/GLOBAL
ALPHA B FUND
Fund Inception Date: 7/29/97
<TABLE>
<CAPTION>
FUND CODES
-----------------------------------------
Ticker Symbol Cusip
------ --------- -----------
<S> <C> <C> <C> <C>
Class III GUGBX USBdAlfaB 362008 88 0
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO U.S. Bond/Global Alpha B Fund seeks high
total return relative to its performance benchmark through investment in U.S.
investment grade securities. The Fund achieves exposure to international bond
and currency markets by investing in a combination of foreign bond and currency
derivatives, effectively adding to or subtracting from the U.S. bond return the
performance of the Fund's international bond and currency investments. The
Fund's current benchmark is the Lehman Brothers Aggregate Bond Index.
PRINCIPAL INVESTMENTS: The Fund invests primarily in U.S. government
securities, including asset-backed securities issued by U.S. government
agencies, but may also invest in other U.S. dollar denominated fixed income
investments, including investment-grade bonds, convertible bonds and
asset-backed securities of private issuers. The Fund may expose a portion of its
assets to lower-rated securities (also known as "junk bonds"). The Fund will
generally attempt to hedge at least 75% of its foreign currency exposure back to
the U.S. dollar, and may use derivatives to adjust its foreign currency exposure
independently of its exposure to bonds and bond markets. The Fund may make use
of a wide variety of exchange-traded and over-the-counter derivative instruments
to implement its strategy.
The Fund's return will depend primarily on 1) the performance of U.S. bond
markets, 2) the Manager's success at outperforming the U.S. bond market, and 3)
the Manager's success in selecting global bond and currency markets to over-and
underweight. A portion of the Fund's net assets may be invested in or exposed to
foreign bonds, bond markets and foreign currencies on an unhedged basis. The
total of the absolute values of all deviations from the benchmark (that is,
without regard to sign and allowing for no netting of positions) will often
exceed 100% of the value of the Fund for both bonds and currencies, which are
generally considered separately.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager employs fundamental
research techniques and quantitative applications to transfer valuation
inefficiencies from the international bond and currency markets to a core U.S.
bond portfolio. The core portfolio seeks to match the duration of, and produce
returns similar to, the Fund's benchmark. The Manager uses these applications to
determine currency and country allocations. Issues are selected by analyzing
such factors as term structures, sector and issuer yield spreads, tracking error
and embedded option features of the security universe. The Manager implements
these allocations by identifying undervalued securities and currencies within
the relevant bond and currency markets.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk, Leveraging Risk
and Credit and Counterparty Risk. For more information about these risks and
other principal risks of an investment in the Fund, see "Summary of Principal
Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Year Ending December 31
[Graph]
<TABLE>
<CAPTION>
U.S. BOND/GLOBAL ALPHA B FUND (%)
---------------------------------
<S> <C>
'1998' 7.00
</TABLE>
Highest Quarter: 3.91% (3Q1998)
Lowest Quarter: -0.41% (4Q1998)
Year-to-Date (as of 3/31/99): -1.77%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
7/29/97
- --------------------------------------------------------------------------------------------------------
CLASS III 6.84% N/A N/A 6.88%
- --------------------------------------------------------------------------------------------------------
LEHMAN BROTHERS AGGREGATE BOND INDEX 8.63% N/A N/A 8.89%
- --------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 26
GMO INTERNATIONAL BOND FUND
Fund Inception Date: 12/22/93
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ -------- -----------
<S> <C> <C> <C> <C>
Class III GMIBX IntlBond 362007 37 9
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO International Bond Fund seeks high total
return through investment in foreign bond and currency markets. The Fund's
current benchmark is the J.P. Morgan Non-U.S. Government Bond Index.
PRINCIPAL INVESTMENTS: The Fund invests primarily in investment-grade
bonds denominated in various currencies (including U.S. dollars and
multi-currency units), including asset-backed securities issued by foreign
governments, U.S. government agencies and private issuers. By coupling such
investments with various exchange-traded and over-the-counter bond and currency
derivative instruments, the Fund seeks to obtain the return of those primarily
investment-grade international bonds, bond markets and currencies selected by
the Manager. The Fund may use derivatives to adjust its foreign currency
exposure independently of its exposure to bonds and bond markets. The Fund may
invest a portion of its net assets in lower-rated securities (also known as
"junk bonds"), which may include sovereign debt of Emerging Countries. The total
of the absolute values of all deviations from the benchmark (that is, without
regard to sign and allowing for no netting of positions) will often exceed 100%
of the value of the Fund for both bonds and currencies, which are generally
considered separately.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager employs fundamental
research techniques in quantitative applications to measure the value of the
bond and currency markets. The Manager uses these applications to determine
currency and country allocations. Issues are selected by analyzing such factors
as term structures, sector and issuer yield spreads, tracking error and embedded
option features of the security universe. The Manager implements these
allocations by identifying undervalued securities and currencies within the
relevant bond and currency markets.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Liquidity Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
INTERNATIONAL BOND FUND (%)
---------------------------
<S> <C>
'1994' 5.16
'1995' 27.31
'1996' 16.66
'1997' 0.88
'1998' 10.79
</TABLE>
Highest Quarter: 10.53% (1Q1995)
Lowest Quarter: -5.08% (1Q1997)
Year-to-Date (as of 3/31/99): -5.78%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/22/93
- ---------------------------------------------------------------------------------------------------------
CLASS III 10.62% 11.75% N/A 11.46%
- ---------------------------------------------------------------------------------------------------------
J.P. MORGAN NON-U.S. GOVERNMENT BOND INDEX 18.28% 8.76% N/A 8.50%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 27
GMO CURRENCY HEDGED
INTERNATIONAL BOND FUND
Fund Inception Date: 9/30/94
<TABLE>
<CAPTION>
FUND CODES
------------------------------------------
Ticker Symbol Cusip
------ ---------- -----------
<S> <C> <C> <C> <C>
Class III GMHBX CurHgIntBd 362007 34 6
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: GMO Currency Hedged International Bond Fund seeks
high total return through investment in foreign bond and currency markets. The
Fund's current benchmark is the J.P. Morgan Non-U.S. Government Bond Index
(Hedged).
PRINCIPAL INVESTMENTS: The Fund invests primarily in investment-grade
bonds denominated in various currencies (including U.S. dollars and
multi-currency units), including asset-backed securities issued by foreign
governments, U.S. government agencies and private issuers. By coupling such
investments with various exchange-traded and over-the-counter bond and currency
derivative instruments, the Fund seeks to obtain the return of those primarily
investment-grade international bonds, bond markets and currencies selected by
the Manager. The Fund will retain no more than 25% of its net currency exposure
in the U.S. dollar (allowing for netting of long and short currency positions),
and may use derivatives to adjust its foreign currency exposure independently of
its exposure to bonds and bond markets. The Fund may invest a portion of its net
assets in lower-rated securities (also known as "junk bonds"), which may include
sovereign debt of Emerging Countries. The total of the absolute values of all
deviations from the benchmark (that is, without regard to sign and allowing for
no netting of positions) will often exceed 100% of the value of the Fund for
both bonds and currencies, which are generally considered separately.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager employs fundamental
research techniques in quantitative applications to measure the value of the
bond and currency markets. The Manager uses these applications to determine
currency and country allocations. Issues are selected by analyzing such factors
as term structures, sector and issuer yield spreads, tracking error and embedded
option features of the security universe. The Manager implements these
allocations by identifying undervalued securities and currencies within the
relevant bond and currency markets. The Manager will make extensive use of a
wide variety of exchange-traded and over-the-counter derivative instruments to
implement the Fund's strategy.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Liquidity Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
CURRENCY HEDGED INTERNATIONAL BOND FUND(%)
------------------------------------------
<S> <C>
'1995' 27.78
'1996' 23.86
'1997' 15.76
'1998' 5.67
</TABLE>
Highest Quarter: 8.50% (2Q1995)
Lowest Quarter: 0.01% (4Q1998)
Year-to-Date (as of 3/31/99): 1.04%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
9/30/94
- --------------------------------------------------------------------------------------------------------
CLASS III 5.52% N/A N/A 16.69%
- --------------------------------------------------------------------------------------------------------
J.P. MORGAN NON-U.S. GOVERNMENT BOND INDEX (HEDGED) 12.14% N/A N/A 13.08%
- --------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE> 28
GMO GLOBAL BOND FUND
Fund Inception Date: 12/28/95
<TABLE>
<CAPTION>
FUND CODES
-----------------------------------------
Ticker Symbol Cusip
------ --------- -----------
<S> <C> <C> <C> <C>
Class III GMGBX GlobalBd 362007 31 2
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Global Bond Fund seeks high total return
through investment in global bond and currency markets. The Fund's current
benchmark is the J.P. Morgan Global Government Bond Index.
PRINCIPAL INVESTMENTS: The Fund invests primarily in investment-grade
bonds denominated in various currencies (including U.S. dollars and
multi-currency units), including asset-backed securities issued by foreign
governments, U.S. government agencies and private issuers. By coupling such
investments with various exchange-traded and over-the-counter bond and currency
derivative instruments, the Fund seeks to obtain the return of those primarily
investment-grade international bonds, bond markets and currencies selected by
the Manager. The Fund may use derivatives to adjust its foreign currency
exposure independently of its exposure to bonds and bond markets. The Fund may
invest a portion of its net assets in lower-rated securities (also known as
"junk bonds"), which may include sovereign debt of Emerging Countries. The total
of the absolute values of all deviations from the benchmark (that is, without
regard to sign and allowing for no netting of positions) will often exceed 100%
of the value of the Fund for both bonds and currencies, which are generally
considered separately.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager employs fundamental
research techniques in quantitative applications to measure the value of the
bond and currency markets. The Manager uses these applications to determine
currency and country allocations. Issues are selected by analyzing such factors
as term structures, sector and issuer yield spreads, tracking error and embedded
option features of the security universe. The Manager implements these
allocations by identifying undervalued securities and currencies within the
relevant bond and currency markets.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Liquidity Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
GLOBAL BOND FUND %
------------------
<S> <C>
'1996' 13.07
'1997' 6.36
'1998' 10.25
</TABLE>
Highest Quarter: 5.18% (3Q1998)
Lowest Quarter: -3.28% (1Q1997)
Year-to-Date (as of 3/31/99): -4.98%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/28/95
- ---------------------------------------------------------------------------------------------------------
CLASS III 10.09% N/A N/A 9.77%
- ---------------------------------------------------------------------------------------------------------
J.P. MORGAN GLOBAL GOVERNMENT BOND INDEX 15.31% N/A N/A 6.86%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 29
GMO EMERGING COUNTRY
DEBT FUND
Fund Inception Date: 4/19/94
<TABLE>
<CAPTION>
FUND CODES
-----------------------------------------
Ticker Symbol Cusip
------ --------- -----------
<S> <C> <C> <C> <C>
Class III GMCDX EmgCntrDt 362007 27 0
Class IV GMDFX EmgCntrDt 362008 78 1
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Emerging Country Debt Fund seeks to earn high
total return through investment in sovereign debt of developing countries in
Asia, Latin America, the Middle East, Africa and Europe ("Emerging Countries").
The Fund's current benchmark is the J.P. Morgan Emerging Markets Bond Index+.
PRINCIPAL INVESTMENTS: The Fund invests primarily in sovereign debt of
Emerging Countries. The Fund will generally have at least 50% of its assets
denominated in, or hedged into, U.S. dollars. The Fund may make use of a wide
variety of exchange-traded and over-the-counter derivative instruments to
implement its strategy, and may seek to provide some protection against defaults
of sovereign issuers in certain countries through the use of certain derivative
instruments.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager employs a bottom-up
approach to examining Emerging Country debt issues, and uses quantitative
applications to take advantage of valuation inefficiencies in Emerging Country
debt markets. In addition to considerations relating to investment restrictions
and tax barriers, allocation of the Fund's investments among selected Emerging
Countries will be based on certain other relevant factors including specific
security valuations, as well as the outlook for economic growth, currency
exchange rates, interest rates and political factors.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Liquidity Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
EMERGING COUNTRY DEPT FUND %
----------------------------
<S> <C>
'1995' 45.10
'1996' 65.71
'1997' 31.01
'1998' -30.53
</TABLE>
Highest Quarter: 26.17% (2Q1995)
Lowest Quarter: -34.91% (3Q1998)
Year-to-Date (as of 3/31/99): 4.29%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
4/19/94
- --------------------------------------------------------------------------------------------------------
CLASS III -31.05% N/A N/A 16.86%
- --------------------------------------------------------------------------------------------------------
J.P. MORGAN EMERGING MARKETS BOND INDEX+ -14.35% N/A N/A 12.30%
- --------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 30
GMO SHORT-TERM INCOME FUND
Fund Inception Date: 4/18/90
<TABLE>
<CAPTION>
FUND CODES
---------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III GMSIX STIF 362007 47 8
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Short-Term Income Fund seeks to provide
current income to the extent consistent with the preservation of capital and
liquidity through investment in a portfolio of high-quality fixed income
instruments. The Fund's current benchmark is the SSB 3 Month T-Bill Index.
PRINCIPAL INVESTMENTS: The Fund invests primarily in issues of
AAA-quality. The Fund may invest in repurchase agreements, high-quality prime
commercial paper and master demand notes, high-quality corporate debt securities
and high-quality debt securities backed by pools of commercial or consumer
finance loans and certificates of deposit, bankers' acceptances and other bank
obligations and repurchase agreements. While the Fund intends to invest
primarily in short-term securities, it is NOT a money market fund.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager uses fundamental
investment techniques to purchase bonds with a high relative yield spread. The
Fund seeks to maintain a duration of not greater than two years. While the Fund
invests in high-quality instruments, the Manager may or may not dispose of a
security whose rating is lowered after purchase.
RISKS: The most significant risk of an investment in the Fund is Market
Risk. For more information about this risk, and other principal risks of an
investment in the Fund, see "Summary of Principal Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. The table to the right shows
how the Fund's average annual total returns for different calendar periods
compare with those of a broad-based index. See "Benchmarks and Indexes" for a
description of the index. Performance results in the table reflect payment of
Fund expenses; returns for the comparative index do not reflect payment of any
expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
SHORT-TERM INCOME FUND(%)
-------------------------
<S> <C>
'1991' 8.23
'1992' 5.78
'1993' 5.65
'1994' 1.60
'1995' 9.97
'1996' 5.40
'1997' 6.11
'1998' 4.48
</TABLE>
Highest Quarter: 3.51% (4Q1991)
Lowest Quarter: -0.24% (1Q1992)
Year-to-Date (as of 3/31/99): 1.26%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
4/18/90*
- --------------------------------------------------------------------------------------------------------
CLASS III 4.48% 5.47% N/A 6.06%
- --------------------------------------------------------------------------------------------------------
SSB 3 MONTH T-BILL INDEX 5.04% 5.10% N/A 4.99%
- --------------------------------------------------------------------------------------------------------
</TABLE>
* For the period from April 18, 1990 until June 30, 1991, the Fund operated as a
money market fund.
29
<PAGE> 31
GMO GLOBAL HEDGED EQUITY FUND
Fund Inception Date: 7/29/94
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III N/A N/A 362007 44 5
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Global Hedged Equity Fund seeks high total
return consistent with minimal exposure to general equity market risk. The
Fund's current benchmark is the SSB 3 Month T-Bill Index.
INVESTMENT UNIVERSE: The Fund invests primarily in shares of the GMO U.S.
Equity Funds and GMO International Equity Funds (including the GMO Emerging
Markets Funds) (the "underlying Funds"), or directly in equity securities of the
type invested in by these Funds. The Fund may also use derivatives, including
the equity hedging investments described below.
PRINCIPAL INVESTMENTS: The Fund invests primarily in a combination of (i)
global equity securities, generally held through the underlying Funds; (ii)
derivative instruments intended to hedge the value of the Fund's equity
positions against general movements in the relevant equity market(s) and against
changes in the value of the foreign currencies represented in the Fund's
non-U.S. positions relative to the U.S. dollar; and (iii) long interest rate
futures contracts intended to extend the duration of the Fund. The Fund expects
to make substantial use of exchange-traded and over-the-counter derivatives and
related instruments.
Investors should understand that, as opposed to conventional portfolios
composed of equity securities, to the extent that the Fund's hedging positions
are effective, the performance of the Fund is not expected to correlate with the
movements of equity markets generally. Rather, the Fund will perform more like a
short-term fixed income fund adjusted by the Manager's outperformance or
underperformance of equity markets generally.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund will implement its strategy
globally with a combination of U.S. equities and international equities. For the
U.S. equity portion of the portfolio, the Fund will invest in a U.S. equity
strategy that will be hedged using exchange-traded S&P 500 futures contracts.
For the international equity portion of the portfolio, the Fund will invest in
an international strategy that will be hedged using foreign exchange-traded
futures contracts and swap contracts in which the Fund is obligated to pay the
return of foreign markets in return for a U.S. dollar-based interest rate.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk and Foreign Investment Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
GLOBAL HEDGED EQUITY FUND (%)
-----------------------------
<S> <C>
'1995' 8.04
'1996' 4.09
'1997' -1.6
'1998' -7.08
</TABLE>
Highest Quarter: 3.28% (2Q1995)
Lowest Quarter: -4.10% (2Q1998)
Year-to-Date (as of 3/31/99): -1.42%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
7/29/94
- --------------------------------------------------------------------------------------------------------
CLASS III -8.72% N/A N/A 0.32%
- --------------------------------------------------------------------------------------------------------
SSB 3 MONTH T-BILL INDEX 5.04% N/A N/A 5.28%
- --------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 32
GMO INFLATION INDEXED BOND FUND
Fund Inception Date: 3/31/97
<TABLE>
<CAPTION>
FUND CODES
-----------------------------------------
Ticker Symbol Cusip
------ --------- -----------
<S> <C> <C> <C> <C>
Class III GMIIX InfltInBd 362007 247
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Inflation Indexed Bond Fund seeks high total
return through investment in government bonds that are indexed or otherwise
"linked" to general measures of inflation in the country of issue ("inflation
indexed bonds"). The Fund's current benchmark is the Lehman Brothers Treasury
Inflation Notes Index.
PRINCIPAL INVESTMENTS: The Fund invests primarily in inflation indexed (as
defined above) and other fixed income securities of both the United States and
foreign issuers. Inflation indexed securities issued by the U.S. Treasury are
fixed income securities whose principal value is periodically adjusted according
to the rate of inflation. 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. The Fund may
also invest a portion of its assets in lower-rated securities (also known as
"junk bonds"). The Fund may also invest in derivatives.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager uses fundamental
investment techniques to select issues by matching the Fund's duration to that
of its benchmark. The Manager may use exchange-traded and over-the-counter
derivative instruments to implement the Fund's strategy.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk, Leveraging Risk
and Credit and Counterparty Risk. For more information about these risks and
other principal risks of an investment in the Fund, see "Summary of Principal
Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Year Ending December 31
[Graph]
<TABLE>
<CAPTION>
INFLATION INDEXED BOND FUND(%)
------------------------------
<S> <C>
'1998' 4.17
</TABLE>
Highest Quarter: 2.36% (3Q1998)
Lowest Quarter: 0.16% (4Q1998)
Year-to-Date (as of 3/31/99): 0.81%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3/31/97
- --------------------------------------------------------------------------------------------------------
CLASS III 3.96% N/A N/A 4.18%
- --------------------------------------------------------------------------------------------------------
LEHMAN BROTHERS TREASURY INFLATION NOTES INDEX 3.94% N/A N/A 4.25%
- --------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 33
GMO EMERGING COUNTRY DEBT
SHARE FUND
Fund Inception Date: 7/20/98
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III N/A N/A 362008 64 1
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Emerging Country Debt Share Fund seeks high
total return through investment in the GMO Emerging Country Debt Fund ("ECDF"),
a portfolio of the Trust. The Fund's current benchmark is the J.P. Morgan
Emerging Markets Bond Index+.
PRINCIPAL INVESTMENTS: The Fund invests primarily in ECDF, and will
therefore indirectly employ ECDF's principal strategies. The Fund may also
invest in cash and high quality money market instruments.
For a discussion of the objective, principal investments and strategies and
portfolio construction process for ECDF, please see "Summary of Fund Objectives
and Principal Investment Strategies -- Emerging Country Debt Fund" above.
RISKS: The most significant risks of an investment in the Fund are the
risks the Fund is exposed to through ECDF, which include Market Risk, Liquidity
Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk, Leveraging Risk
and Credit and Counterparty Risk. For more information about these risks and
other principal risks of an investment in the Fund, see "Summary of Principal
Risks" on page 38.
No performance information is included in this section because the Fund
commenced operations in 1998.
32
<PAGE> 34
ASSET ALLOCATION FUNDS ("FUNDS OF FUNDS")
The Asset Allocation Funds invest primarily in other Funds of the Trust
and, as a result, provide an investor with exposure to the investments -- and
attendant risks -- of the underlying Funds in which each Asset Allocation Fund
invests.
PORTFOLIO CONSTRUCTION
The Manager uses fundamental and quantitative investment principles to
provide broad exposure to asset classes or sectors ("Asset Classes") and to make
optimal allocations among these Asset Classes. The Manager uses top-down
valuation methodologies to allocate Fund assets away from underlying Funds
investing primarily in overvalued Asset Classes and into those underlying Funds
whose Asset Classes the Manager believes are undervalued. The Manager considers
forecasted risk, return, transaction costs and expected value-added for each of
the underlying Funds when implementing the allocation strategy. Each Fund will
consider whether to rebalance when cash flows occur, the investment outlook
changes, or there has been a significant change in market valuation levels.
GMO INTERNATIONAL EQUITY
ALLOCATION FUND
Fund Inception Date: 10/11/96
<TABLE>
<CAPTION>
FUND CODES
---------------------------------------
Ticker Symbol Cusip
------ ------- -----------
<S> <C> <C> <C> <C>
Class III GIEAX IntEqAl 362007 21 3
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The International Equity Allocation Fund seeks total
return greater than the return of the GMO EAFE Extended benchmark through
investment to varying extents in other Funds of the Trust.
INVESTMENT UNIVERSE: The Fund invests primarily in the GMO International
Equity Funds (including the GMO Emerging Markets Funds) and the GMO Fixed Income
Funds (collectively, "underlying Funds").
PRINCIPAL INVESTMENTS: The Fund seeks a total return greater than the GMO
EAFE Extended benchmark. This benchmark modifies the MSCI EAFE index by
including a market capitalization weighting for emerging markets. The Fund will
typically be nearly fully exposed to equity and fixed income securities through
investment in the underlying Funds.
RISKS: The most significant risk of an investment in the Fund is the risk
that one or more underlying Funds will not perform as expected. In addition, the
Fund will indirectly be exposed to all of the risks of an investment in the
underlying Funds. For more information about these risks and other principal
risks of an investment in the Fund, see "Summary of Principal Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years ending December 31
[Graph]
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY ALLOCATION FUND(%)
---------------------------------------
<S> <C>
'1997' 1.74
'1998' 1.99
</TABLE>
Highest Quarter: 14.99% (4Q1998)
Lowest Quarter: -15.91% (3Q1998)
Year-to-Date (as of 3/31/99): 0.93%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
10/11/96
- --------------------------------------------------------------------------------------------------------
CLASS III 1.06% N/A N/A 2.47%
- --------------------------------------------------------------------------------------------------------
MSCI AC WORLD EX US 14.11% N/A N/A 8.15%
- --------------------------------------------------------------------------------------------------------
GMO EAFE-LITE EXTENDED 16.76% N/A N/A 11.25%
- --------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE> 35
GMO WORLD EQUITY
ALLOCATION FUND
Fund Inception Date: 6/28/96
<TABLE>
<CAPTION>
FUND CODES
-----------------------------------------
Ticker Symbol Cusip
------ --------- -----------
<S> <C> <C> <C> <C>
Class III GMWAX WrldEqAl 362007 17 1
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The World Equity Allocation Fund seeks total return
greater than the return of the GMO World Extended benchmark through investment
to varying extents in other Funds of the Trust.
INVESTMENT UNIVERSE: The Fund invests primarily in the GMO International
Equity Funds (including the GMO Emerging Markets Funds), GMO U.S. Equity Funds,
and the GMO Fixed Income Funds (collectively, "underlying Funds").
PRINCIPAL INVESTMENTS: The Fund seeks a total return greater than the GMO
World Extended benchmark. This benchmark modifies the MSCI World Index including
a market capitalization weighting for emerging markets. The Fund will typically
be nearly fully exposed to equity and fixed income securities through investment
in the underlying Funds.
RISKS: The most significant risk of an investment in the Fund is the risk
that one or more underlying Funds will not perform as expected. In addition, the
Fund will indirectly be exposed to all of the risks of an investment in the
underlying Funds. For more information about these risks and other principal
risks of an investment in the Fund, see "Summary of Principal Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
WORLD EQUITY ALLOCATION FUND (%)
--------------------------------
<S> <C>
'1997' 10.23
'1998' 2.73
</TABLE>
Highest Quarter: 14.30% (4Q1998)
Lowest Quarter: -15.08% (3Q1998)
Year-to-Date (as of 3/31/99): 0.68%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
10/22/96*
- --------------------------------------------------------------------------------------------------------
CLASS III 1.90% N/A N/A 7.37%
- --------------------------------------------------------------------------------------------------------
MSCI AC WORLD INDEX 21.72% N/A N/A 17.90%
- --------------------------------------------------------------------------------------------------------
GMO WORLD-LITE EXTENDED INDEX 22.16% N/A N/A 20.04%
- --------------------------------------------------------------------------------------------------------
</TABLE>
* Class III inception date. The Fund commenced operations on June 28, 1996 with
a single class of shares -- Class I shares. Class I shares converted to Class
III shares on March 1, 1997.
34
<PAGE> 36
GMO GLOBAL (U.S.+) EQUITY
ALLOCATION FUND
Fund Inception Date: 6/28/96
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ -------- -----------
<S> <C> <C> <C> <C>
Class III GMGEX GlEqtyAl 362007 14 8
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Global (U.S.+) Equity Allocation Fund seeks
total return greater than the return of the GMO Global (U.S.+) Equity Index
through investment to varying extents in other Funds of the Trust.
INVESTMENT UNIVERSE: The Fund invests primarily in the GMO U.S. Equity
Funds, GMO International Equity Funds (including the GMO Emerging Markets Funds)
and the GMO Fixed Income Funds (collectively, "underlying Funds").
PRINCIPAL INVESTMENTS: The Fund seeks a total return greater than the GMO
Global (U.S.+) Equity Index benchmark, which is comprised 75% of the S&P 500
Index and 25% of GMO EAFE Extended. GMO EAFE Extended modifies the MSCI EAFE
Index by including a market capitalization weighting for emerging markets. The
Fund will typically be nearly fully exposed to equity and fixed income
securities through investment in the underlying Funds.
RISKS: The most significant risk of an investment in the Fund is the risk
that one or more underlying Funds will not perform as expected. In addition, the
Fund will indirectly be exposed to all of the risks of an investment in the
underlying Funds. For more information about these risks, and other principal
risks of an investment in the Fund, see "Summary of Principal Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
GLOBAL (U.S.+) EQUITY ALLOCATION FUND (%)
-----------------------------------------
<S> <C>
'1997' 19.90
'1998' 5.97
</TABLE>
Highest Quarter: 14.22% (4Q1998)
Lowest Quarter: -13.52% (3Q1998)
Year-to-Date (as of 3/31/99): 0.55%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11/26/96
- --------------------------------------------------------------------------------------------------------
CLASS III 5.31% N/A N/A 12.14%
- --------------------------------------------------------------------------------------------------------
75% S&P 500; 25% MSCI ALL COUNTRY WORLD EX U.S. 24.92% N/A N/A 22.56%
- --------------------------------------------------------------------------------------------------------
GMO GLOBAL (U.S.+) EQUITY INDEX 25.65% N/A N/A 23.54%
- --------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE> 37
GMO GLOBAL BALANCED
ALLOCATION FUND
Fund Inception Date: 7/29/96
<TABLE>
<CAPTION>
FUND CODES
---------------------------------------
Ticker Symbol Cusip
------ ------- -----------
<S> <C> <C> <C> <C>
Class III GMGAX GlBalAl 362007 11 4
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Global Balanced Allocation Fund seeks total
return greater than the return of the GMO Global Balanced Index through
investment to varying extents in other Funds of the Trust.
INVESTMENT UNIVERSE: The Fund invests primarily in the GMO International
Equity Funds (including the GMO Emerging Markets Funds), the GMO Fixed Income
Funds and the GMO U.S. Equity Funds.
PRINCIPAL INVESTMENTS: The Fund seeks a total return greater than the GMO
Global Balanced benchmark, which is comprised 48.75% of the S&P 500 Index,
16.25% of GMO EAFE Extended and 35% of the Lehman Brothers Aggregate Bond Index.
GMO EAFE Extended modifies the MSCI EAFE Index by including a market
capitalization weighting for emerging markets. The Fund will typically be nearly
fully exposed to equity and fixed income securities through investment in the
underlying Funds.
RISKS: The most significant risk of an investment in the Fund is the risk
that one or more underlying Funds will not perform as expected. In addition, the
Fund will indirectly be exposed to all of the risks of an investment in the
underlying Funds. For more information about these risks, and other principal
risks of an investment in the Fund, see "Summary of Principal Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
GLOBAL BALANCED ALLOCATION FUND (%)
-----------------------------------
<S> <C>
'1998' 4.38
</TABLE>
Highest Quarter: 7.85% (4Q1998)
Lowest Quarter: -7.89% (3Q1998)
Year-to-Date (as of 3/31/99): -0.46%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6/2/97*
- --------------------------------------------------------------------------------------------------------
CLASS III 3.90% N/A N/A 8.20%
- --------------------------------------------------------------------------------------------------------
50% S&P 500; 50% LEHMAN AGGREGATE BOND FUND 19.00% N/A N/A 19.76%
- --------------------------------------------------------------------------------------------------------
GMO GLOBAL BALANCED INDEX 20.14% N/A N/A 19.28%
- --------------------------------------------------------------------------------------------------------
</TABLE>
* Class III inception date. The Fund commenced operations on July 29, 1996 with
a single class of shares -- Class I Shares. Class I Shares converted to Class
III Shares on September 1, 1997.
36
<PAGE> 38
GMO U.S. SECTOR FUND
Fund Inception Date: 12/31/92
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ -------- -----------
<S> <C> <C> <C> <C>
Class III GMUSX USSector 362007 75 9
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The U.S. Sector Fund seeks total return greater than
that of the S&P 500 through investment in common stocks, either directly or
through investment in other Funds of the Trust ("underlying Funds").
INVESTMENT UNIVERSE: The Fund invests primarily in the U.S. Core Fund,
Growth Fund, Value Fund, Small Cap Growth Fund, Small Cap Value Fund and REIT
Fund, and/or directly in equity securities of the type invested in by these
Funds.
PRINCIPAL INVESTMENTS: The Fund will typically be nearly fully exposed to
equity securities through investment in the underlying Funds.
RISKS: The most significant risk of an investment in the Fund is the risk
that one or more underlying Funds will not perform as expected. In addition, the
Fund will indirectly be exposed to all of the risks of an investment in the
underlying Funds. For more information about these risks and other principal
risks of an investment in the Fund, see "Summary of Principal Risks" on page 38.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
'1993' 16.88
- ------ -----
<S> <C>
'1994' 3.27
'1995' 43.18
'1996' 18.24
'1997' 28.64
'1998' 11.64
</TABLE>
Highest Quarter: 16.09% (4Q1998)
Lowest Quarter: -12.52% (3Q1998)
Year to Date (as of 3/31/99): 0.21%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/31/92
- --------------------------------------------------------------------------------------------------------
CLASS III 11.14% 20.10% N/A 19.55%
- --------------------------------------------------------------------------------------------------------
S&P 500 28.57% 24.05% N/A 21.60%
- --------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 39
SUMMARY OF PRINCIPAL RISKS
The following chart identifies the Principal Risks associated with each
Fund. Risks not marked for a particular Fund may, however, still apply to some
extent to that Fund at various times.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SMALLER FOREIGN NON-
MARKET LIQUIDITY COMPANY DERIVATIVES INVESTMENT CURRENCY DIVERSIFICATION CONCENTRATION
RISK RISK RISK RISK RISK RISK RISK RISK
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DOMESTIC EQUITY FUNDS
- -------------------------------------------------------------------------------------------------------------------------------
U.S. Core Fund -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Tobacco-Free Core Fund -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Value Fund -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Fundamental Value Fund -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Growth Fund -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
REIT Fund -- -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUNDS
- -------------------------------------------------------------------------------------------------------------------------------
International Core Fund -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Currency Hedged International
Core Fund -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Foreign Fund -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
International Small Companies
Fund -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Japan Fund -- -- -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund -- -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Evolving Countries Fund -- -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Global Properties Fund -- -- -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Asia Fund -- -- -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
FIXED INCOME FUNDS
- -------------------------------------------------------------------------------------------------------------------------------
Domestic Bond Fund -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
U.S. Bond/Global Alpha A
Fund -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
U.S. Bond/Global Alpha B
Fund -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
International Bond Fund -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Currency Hedged International
Bond Fund -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Global Bond Fund -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Emerging Country Debt Fund -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Short-Term Income Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Global Hedged Equity Fund -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Inflation Indexed Bond Fund -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Emerging Country Debt Share Fund -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
ASSET ALLOCATION FUNDS
- -------------------------------------------------------------------------------------------------------------------------------
International Equity Allocation
Fund -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
World Equity Allocation Fund -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Global (U.S.+) Equity Allocation
Fund -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Global Balanced Allocation
Fund -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
U.S. Sector Fund -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------- --------------------------------------
CREDIT AND
LEVERAGING COUNTERPARTY MANAGEMENT
RISK RISK RISK
- ---------------------------------- --------------------------------------
<S> <C> <C> <C>
DOMESTIC EQUITY FUNDS
- ----------------------------------------------------------------------------------------
U.S. Core Fund -- -- --
- -------------------------------------------------------------------------------------------------------
Tobacco-Free Core Fund -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Value Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Fundamental Value Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Growth Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
REIT Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUNDS
- -------------------------------------------------------------------------------------------------------------------------------
International Core Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Currency Hedged International
Core Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Foreign Fund -- --
- -------------------------------------------------------------------------------------------------------------------------------
International Small Companies
Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Japan Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Evolving Countries Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Global Properties Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Asia Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
FIXED INCOME FUNDS
- -------------------------------------------------------------------------------------------------------------------------------
Domestic Bond Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
U.S. Bond/Global Alpha A
Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
U.S. Bond/Global Alpha B
Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
International Bond Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Currency Hedged International
Bond Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Global Bond Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Emerging Country Debt Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Short-Term Income Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Global Hedged Equity Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Inflation Indexed Bond Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Emerging Country Debt Share Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
ASSET ALLOCATION FUNDS
- -------------------------------------------------------------------------------------------------------------------------------
International Equity Allocation
Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
World Equity Allocation Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Global (U.S.+) Equity Allocation
Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Global Balanced Allocation
Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
U.S. Sector Fund -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The value of your investment in a Fund changes with the values of that
Fund's investments. Many factors can affect those values, and you can lose money
by investing in the Funds. Factors that may affect a particular Fund's portfolio
as a whole are called "principal risks" and are summarized in this section. The
chart at the beginning of this section identifies the principal risks associated
with each Fund. This summary describes the nature of these risks but is not
intended to include every potential risk. All Funds could be subject to
additional risks because the types of investments made by each Fund change over
time. The Investment Guidelines for each Fund set forth in the Statement of
Additional Information include more information about the Funds and their
investments. The Statement of Additional Information is available free of charge
by contacting the Manager.
38
<PAGE> 40
-- MARKET RISK. All of the Funds are subject to market risk, which is
the risk of unfavorable market-induced changes in the value of the securities
owned by a Fund. The following summarizes certain general market risks
associated with investments in equity and fixed income securities.
EQUITY SECURITIES. A principal risk of each Fund that invests a
substantial portion of its assets in equity securities is that those equity
securities will decline in value due to factors affecting the issuing companies,
their industries, or the economy and equity markets generally. The values of
equity securities may decline for a number of reasons which directly relate to
the issuing company, such as management performance, financial leverage and
reduced demand for the issuer's goods or services. They may also decline due to
factors which affect a particular industry or industries, such as labor
shortages or increased production costs and competitive conditions within an
industry. In addition, they may decline due to general market conditions which
are not specifically related to a company or industry, such as real or perceived
adverse economic conditions, changes in the general outlook for corporate
earnings, changes in interest or currency rates or adverse investor sentiment
generally.
The U.S. Equity Funds and the International Equity Funds maintain
substantial exposure to equities and generally do not attempt to time the
market. Because of this exposure, the possibility that stock market prices in
general will decline over short or even extended periods subjects these Funds to
unpredictable declines in the value of their shares, as well as periods of poor
performance.
Value Securities Risk. Some equity securities (generally referred to as
"value securities") are purchased primarily because they are selling at a price
lower than what is believed to be their true value and not necessarily because
the issuing companies are expected to experience significant earnings growth.
Such companies may have experienced adverse business developments or may be
subject to special risks. Other factors may also have caused their securities to
be out of favor. However, these securities bear the risk that the companies may
not overcome the adversity or that the market does not recognize the value of
the company, such that the price of its securities may decline or may not
approach the value that the Manager anticipates. Since value criteria are used
extensively by the Manager across the Funds, these risks apply to all of the
equity funds described in this Prospectus. The risks are particularly pronounced
for the Value Fund, Small Cap Value Fund and Fundamental Value Fund, which
invest primarily in value securities.
Growth Securities Risk. Certain equity securities (generally known as
"growth securities") are purchased primarily because it is believed that they
will experience relatively rapid earnings growth. Growth securities typically
trade at higher multiples of current earnings than other types of stocks. As a
general rule, growth securities often are more sensitive to general market
movements than other types of stocks because their market prices tend to place
greater emphasis on future earnings expectations. At times when it appears that
these expectations may not be met, growth stock prices typically fall. All of
the Funds that invest in equity securities are subject to these risks, but these
risks are particularly pronounced for the Growth Fund and the Small Cap Growth
Fund, which invest primarily in growth securities.
FIXED INCOME SECURITIES. The value of the Funds' investments in fixed
income securities (including bonds, notes and asset-backed securities) will
typically change as interest rates fluctuate. During periods of rising interest
rates, the values of fixed income securities generally decline. Conversely,
during periods of falling interest rates, the values of fixed income security
generally rise.
This kind of market risk, also called interest rate risk, is generally
greater for Funds investing in fixed income securities with longer maturities
and portfolios with longer durations (a measure of the expected cash flows of a
fixed income security). Thus, this risk is greatest for Funds with longer
durations (i.e., that invest in fixed income securities with longer maturities)
and is even present, but to a somewhat lesser extent, in the Short-Term Income
Fund.
While interest rate risk is attendant with all fixed income securities and
tends to depend mostly on the duration of the security, interest rate risk is
generally more pronounced with lower-rated securities and so may be more
significant for the Emerging Country Debt Fund, Emerging Country Debt Share
Fund, Global Bond Fund, International Bond Fund, Inflation Indexed Bond Fund,
Currency Hedged International Bond Fund, U.S. Bond/Global Alpha A Fund, U.S.
Bond/ Global Alpha B Fund, Global Properties Fund, Domestic Bond Fund, REIT
Fund, Currency Hedged International Core Fund and Foreign Fund, each of which
may invest a significant portion of their assets in lower-rated securities (also
called "junk bonds") or comparable unrated securities.
In addition, a related market risk exists for the Domestic Bond Fund,
Global Bond Fund, International Bond Fund, Currency Hedged International Bond
Fund, U.S. Bond/Global Alpha A Fund, U.S. Bond/Global Alpha B Fund, Global
Properties Fund and Short-Term Income Fund, which invest to a material extent in
mortgage-related or other asset-backed securities that may be prepaid. Because
prepayments generally increase when interest rates fall, these Funds are subject
to the risk that cash flows from securities will have to be reinvested at lower
rates. Likewise, since prepayments decrease when interest rates rise, these
securities have maturities that tend to be longer when that is least
desirable -- when interest rates are rising. Most of the Fixed Income Funds may
also invest to a material extent in debt securities paying no interest, such
39
<PAGE> 41
as zero coupon, principal-only and interest-only securities and, to the extent
they make such investments, such Funds will be exposed to additional market
risk.
- LIQUIDITY RISK. Liquidity risk exists when particular investments are
difficult to purchase or sell due to a limited market or to legal restrictions,
such that a Fund may be prevented from selling particular securities at the
price at which the Fund values them. All of the Funds are subject to liquidity
risk. Funds with principal investment strategies that involve securities of
companies with smaller market capitalizations, foreign securities, derivatives,
or securities with substantial market and/or credit risk tend to have the
greatest exposure to liquidity risk.
This risk may be particularly pronounced for Funds such as the Emerging
Country Debt Fund, Emerging Country Debt Share Fund, Emerging Markets Fund,
Evolving Countries Fund Asia Fund, International Bond Fund, Currency Hedged
International Bond Fund and U.S. Bond/Global Alpha A Fund, all of which may
invest primarily in emerging market securities and related derivatives that are
not widely traded and that may be subject to purchase and sale restrictions.
- SMALLER COMPANY RISK. Market risk and liquidity risk are particularly
pronounced for securities of companies with smaller market capitalizations.
These companies may have limited product lines, markets or financial resources
or they may depend on a few key employees. Securities of smaller companies may
trade less frequently and in lesser volume than more widely held securities and
their values may fluctuate more sharply than other securities. They may also
trade in the over-the-counter market or on a regional exchange, or may otherwise
have limited liquidity. Investments in smaller, less seasoned companies may
present greater opportunities for growth and capital appreciation, but also
involve greater risks than customarily are associated with larger, more
established companies. These risks apply to all Funds that invest in the
securities of smaller companies, but are particularly pronounced for the Small
Cap Value Fund, Small Cap Growth Fund, International Small Companies Fund,
Emerging Markets Fund and Global Properties Fund, all of which invest primarily
in companies with small or medium-sized market capitalizations.
- DERIVATIVES RISK. All of the Funds may use derivatives, which are
financial contracts whose value depends upon, or is derived from, the value of
an underlying asset, reference rate or index. Derivatives may relate to stocks,
bonds, interest rates, currencies or currency exchange rates, commodities, and
related indexes. The Funds can use derivatives for many purposes, including for
hedging, and as a substitute for direct investment in securities or other
assets. The Funds may also use derivatives as a way to efficiently adjust the
exposure of the Funds to various securities, markets and currencies without the
Funds having to actually sell current assets and purchase different ones. This
is generally done either because the adjustment is expected to be relatively
temporary or in anticipation of effecting the sale and purchase of Fund assets
over time. For a description of the various derivative instruments that may be
utilized by the Funds, please see "Investment Objectives and Policies" and
"Investment Guidelines" in the Statement of Additional Information.
The use of derivative instruments involves risks different from, or greater
than, the risks associated with investing directly in securities and other more
traditional investments. Derivatives are subject to a number of risks described
elsewhere in this section, including market risk, liquidity risk and the credit
risk of the counterparty to the derivatives contract. Since their value is
calculated and derived from the value of other assets, instruments or
references, there is greater risk that derivatives will be improperly valued.
Derivatives also involve the risk that changes in the value of the derivative
may not correlate perfectly with relevant assets, rates or indexes they are
designed to hedge or to closely track. Also, suitable derivative transactions
may not be available in all circumstances and there can be no assurance that a
Fund will engage in these transactions to reduce exposure to other risks when
that would be beneficial.
While all the Funds are subject to these risks, the risks of derivatives
are particularly pronounced for the International Bond Fund, Currency Hedged
International Bond Fund, Global Bond Fund, Emerging Country Debt Fund, Emerging
Country Debt Share Fund, Global Hedged Equity Fund, U. S. Bond/Global Alpha A
Fund, U.S. Bond/Global Alpha B Fund, and Inflation Indexed Bond Fund, which use
derivatives as a basic component of their investment strategy to gain exposure
to foreign fixed income securities and currencies.
In addition, the Emerging Country Debt Fund's (and thus indirectly, the
Emerging Country Debt Share Fund's) significant use of credit default swap
contracts also presents derivatives risk. In a credit default swap, a Fund makes
a stream of payments to another party in exchange for the right to receive a
specified return in the event of a default by a third party, typically an
emerging country, on its obligation. However, if the third party does not
default, the Fund loses its investment and recovers nothing. Credit default
swaps involve risk because they are difficult to value, are highly susceptible
to liquidity and credit risk, and generally only generate income in the event of
an actual default by the issuer of the underlying obligation (as opposed to a
credit downgrade or other indication of financial difficulty).
- FOREIGN INVESTMENT RISK. Funds that invest in securities traded
principally in securities markets outside the United States are subject to
additional and more varied risks, and may experience more rapid and extreme
changes in value. The securities markets of many foreign countries are
relatively small, with a limited number of companies representing a small number
of industries. Additionally, issuers of foreign securities may not be subject to
the same degree
40
<PAGE> 42
of regulation as U.S. issuers. Reporting, accounting and auditing standards of
foreign countries differ, in some cases significantly, from U.S. standards.
There are generally higher commission rates on foreign portfolio transactions,
transfer taxes, higher custodial costs and the possibility that foreign taxes
will be charged on dividends and interest payable on foreign securities. Also,
for lesser developed countries, nationalization, expropriation or confiscatory
taxation, adverse changes in investment or exchange control regulations (which
may include suspension of the ability to transfer currency from a country),
political changes or diplomatic developments could adversely affect a Fund's
investments. In the event of nationalization, expropriation or other
confiscation, a Fund could lose its entire investment in foreign securities.
All Funds that invest in foreign securities are subject to these risks.
These risks will be particularly pronounced for the International Equity Funds,
International Bond Fund, Currency Hedged International Bond Fund, Global Bond
Fund, Emerging Country Debt Fund, Emerging Country Debt Share Fund, Global
Hedged Equity Fund and Inflation Indexed Bond Fund which may invest a
significant portion of their assets in foreign securities. Some of the foreign
risks are also relevant for the Domestic Equity Funds because they may invest a
material portion of their assets in securities of foreign issuers traded in the
U.S.
In addition, Funds such as the Emerging Markets Fund, Evolving Countries
Fund, Asia Fund, International Bond Fund, Currency Hedged International Bond
Fund, Global Bond Fund, U.S. Bond/Global Alpha A Fund, Emerging Country Debt
Fund and Emerging Country Debt Share Fund that invest a significant portion of
their assets in the securities of issuers based in countries with developing or
"emerging market" economies are subject to greater levels of foreign investment
risk than Funds investing primarily in more developed foreign markets, since
emerging market securities may present market, credit, currency, liquidity,
legal, political and other risks greater than, or in addition to, risks of
investing in developed foreign countries. These risks include: high currency
exchange rate fluctuations; greater social, economic and political uncertainty
and instability (including the risk of war); more substantial governmental
involvement in the economy; less governmental supervision and regulation of the
securities markets and participants in those markets; unavailability of currency
hedging techniques in certain emerging market countries; the fact that companies
in emerging market countries may be newly organized and may be smaller and less
seasoned companies; the difference in, or lack of, auditing and financial
reporting standards, which may result in unavailability of material information
about issuers; different clearance and settlement procedures, which may be
unable to keep pace with the volume of securities transactions or otherwise make
it difficult to engage in such transactions; the risk that it may be more
difficult to obtain and/or enforce legal judgments in foreign jurisdictions; and
significantly smaller market capitalizations of emerging market issuers.
- CURRENCY RISK. Currency risk is the risk that fluctuations in the
exchange rates may negatively affect the value of a Fund's investments. Currency
risk includes both the risk that currencies in which a Fund's investments are
traded in or currencies in which a Fund has taken on an active investment
position will decline in value relative to the U.S. Dollar and, in the case of
hedging positions, that the U.S. Dollar will decline in value relative to the
currency being hedged. Currency rates in foreign countries may fluctuate
significantly for a number of reasons, including the forces of supply and demand
in the foreign exchange markets, actual or perceived changes in interest rates,
and intervention (or the failure to intervene) by U.S. or foreign governments or
central banks, or by currency controls or political developments in the U.S. or
abroad.
Many of the Funds may engage in proxy hedging of currencies by entering
into derivative transactions with respect to a currency whose value is expected
to correlate to the value of a currency the Fund owns or wants to own. This
presents the risk that the two currencies may not move in relation to one
another as expected. In that case, the Fund could lose money on its investment
and also lose money on the position designed to act as a proxy hedge. Many of
the Funds may also take active currency positions and may cross-hedge currency
exposure represented by its securities into another foreign currency. This may
result in a Fund's currency exposure being substantially different than that
suggested by its securities investments.
All Funds that invest or trade in foreign currencies, securities
denominated in foreign currencies, or related derivative instruments may be
adversely affected by changes in foreign currency exchange rates. Currency risk
is particularly pronounced for the International Equity Funds, International
Bond Fund, Currency Hedged International Bond Fund, Global Bond Fund, Emerging
Country Debt Fund, U.S. Bond/Global Alpha A Fund, U.S. Bond/Global Alpha B Fund
and REIT Fund, which regularly enter into derivative foreign currency
transactions and may take active long and short currency positions through
exchange traded and over-the-counter ("OTC") foreign currency transactions for
investment purposes. Derivative foreign currency transactions (such as futures,
forwards and swaps) may also involve leveraging risk in addition to currency
risk as described below under "Leveraging Risk."
- NON-DIVERSIFICATION RISK. Most analysts believe that overall risk can be
reduced through diversification, while concentration of investments in a small
number of securities increases risk. The Value Fund, Growth Fund, Small Cap
Growth Fund, REIT Fund, U.S. Sector Fund, Currency Hedged International Core
Fund, Foreign Fund , Japan Fund, Emerging Markets Fund, Evolving Countries Fund
, Global Properties Fund and all of the Fixed Income Funds are not "diversified"
within the meaning of the 1940 Act. This means they are allowed to invest in a
relatively small number of
41
<PAGE> 43
issuers and/or foreign currencies with greater concentration of risk. As a
result, credit, market and other risks associated with a Fund's investment
strategies or techniques may be more pronounced for these Funds.
- CONCENTRATION RISK. Most analysts believe that overall risk is reduced
by industry or geographic diversification, and increased by concentrating
investments in a small number of industries or countries. Therefore, Funds that
are concentrated geographically or with respect to industries or sectors should
only be considered as a part of diversified portfolio including other assets.
This section describes the Funds that present the most significant concentration
risk. Such risks may also exist in other Funds.
The REIT Fund and the Global Properties Fund invest primarily in real
estate securities. Thus, the value of these Funds' shares can be expected to
change in light of factors affecting the real estate industry, and may fluctuate
more widely than the value of shares of a portfolio that invests in a broader
range of industries. Factors affecting the performance of real estate may
include excess supply of real property in certain markets, changes in zoning
laws, completion of construction, changes in real estate value and property
taxes, sufficient level of occupancy, adequate rent to cover operating expenses,
and local and regional markets for competing assets. The performance of real
estate may also be affected by changes in interest rates, prudent management of
insurance risks and social and economic trends. REITs are also subject to
substantial cash flow dependency, defaults by borrowers, self-liquidation and
the risk of failing to qualify for tax-free pass-through of income under the
Internal Revenue Code and/or to maintain exempt status under the 1940 Act.
Similarly, Funds that invest significant portions of their assets in
concentrated geographic areas, such as the Japan Fund and the Asia Fund, have
more exposure to regional economic risks than Funds making foreign investments
throughout the world's economies.
The Japan Fund invests almost exclusively in Japanese securities, and no
effort will be made by the Manager to assess the Japanese economic, political or
regulatory developments or changes in currency exchange rates for purposes of
varying the portion of the Fund's assets invested in Japanese securities. This
means that the Fund's performance will be directly affected by political,
economic, market and exchange rate conditions in Japan. Also, since the Japanese
economy is dependent to a significant extent on foreign trade, the relationships
between Japan and its trading partners and between the yen and other currencies
are expected to have a significant impact on particular Japanese companies and
on the Japanese economy generally.
The Asia Fund invests almost exclusively in Asian securities. This regional
concentration makes Asia Fund more susceptible to investment factors affecting
the region than a more geographically diverse fund. The region encompasses
countries at varying levels of economic development -- ranging from emerging
market to more developed economies. Each country provides unique investment
risks, yet the political and economic prospects of one country or group of
countries may impact other countries in the region. For example, some Asian
economies are directly affected by Japanese capital investment in the region and
by Japanese consumer demands. In addition, a recession, a debt-crisis or a
decline in currency valuation in one country can spread to other countries.
- LEVERAGING RISK. Each Fund's portfolio may at times be economically
leveraged when the Fund temporarily borrows money to meet redemption requests
and/or to settle investment transactions. Additionally, all of the Funds may
invest in derivatives and may enter into reverse repurchase agreements. While
none of the Funds intends to use derivatives to create net exposure to
securities, currencies or other assets in amounts greater than the total assets
of the Fund, the Funds will often consider derivative instruments as offsetting
one another or other assets such that only the net difference in value of the
derivatives and/or assets that are offsetting will be considered for these
purposes. While this practice is significant in many of the Funds, it is used
most extensively by the Fixed Income Funds, many of which use derivatives and
offsetting derivatives as their principal means of achieving desired economic
exposure. In these cases, to the extent that the offsetting positions do not
behave in relation to one another as expected, the Funds may perform as if they
were leveraged.
This same compounding of risk can occur in International Equity Funds,
International Bond Fund, Currency Hedged International Bond Fund, Global Bond
Fund, Emerging Country Debt Fund, Emerging Country Debt Share Fund, U.S.
Bond/Global Alpha A Fund, U.S. Bond/Global Alpha B Fund, REIT Fund and Inflation
Indexed Bond Fund, which may take on simultaneous long and short positions in
different currencies. While these long and short positions are managed such that
these Funds' net investment in foreign currency does not exceed the Fund's net
assets, a lack of correlation between currencies (which may or may not be
anticipated by the Manager) may expose more than one hundred percent of the
Fund's assets to currency risk. Similarly, the U.S. Equity and International
Equity Funds may take long and short positions on equity securities and/or
"baskets" of equity securities, including simultaneous positions through the use
of a single derivative instrument such as a swap contract or other
over-the-counter derivative instrument. A lack of correlation between the equity
securities that are the subject of these instruments (which may or may not be
anticipated by the Manager) could expose more than one hundred percent of the
Fund's portfolio to equity securities risk.
42
<PAGE> 44
- CREDIT AND COUNTERPARTY RISK. This is the risk that the issuer or
guarantor of a fixed income security, the counterparty to an OTC derivatives
contract, or a borrower of the Fund's securities, will be unable or unwilling to
make timely principal, interest or settlement payments, or to otherwise honor
its obligations.
Credit risk associated with investments in fixed income securities relates
to the ability of the issuer to make scheduled payments of principal and
interest on an obligation. The Funds that invest in fixed income securities are
subject to varying degrees of risk that the issuers of the securities will have
their credit ratings downgraded or will default, potentially reducing the Fund's
share price and income level. Nearly all fixed income securities are subject to
some credit risk, which may vary depending upon whether the issuers of the
securities are corporations, domestic or foreign governments, or their sub-
divisions or instrumentalities. Even certain U.S. Government securities are
subject to credit risk. Additional risk exists where there is no rating for the
fixed income security and the Manager has to assess the risk subjectively.
Credit risk is particularly acute for Funds which invest in lower-rated
securities (also called junk bonds), which are fixed income securities rated
lower than Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by Standard
& Poor's Ratings Services ("S&P"), or are determined by the Manager to be of
comparable quality to securities so rated. The sovereign debt of many foreign
governments, including their sub-divisions and instrumentalities, falls into
this category. Lower-rated securities offer the potential for higher investment
returns than higher-rated securities, but they carry a high degree of credit
risk and are considered predominantly speculative with respect to the issuer's
continuing ability to meet principal and interest payments. Lower-rated
securities may also be more susceptible to real or perceived adverse economic
and competitive industry conditions and may be less liquid than higher-rated
securities. Accordingly, Funds which may invest a significant portion of their
assets in lower-rated securities (such as those listed in "Market Risk -- Fixed
Income Securities" above) may be subject to substantial credit risk.
In addition, all of the Funds are also exposed to credit risk because they
may generally make use of OTC derivatives (such as forward foreign currency
contracts and/or swap contracts) and because they may engage to a significant
extent in the lending of Fund securities or use of repurchase agreements.
- MANAGEMENT RISK. Each Fund is subject to management risk because it
relies on the Manager's ability to pursue its objective. The Manager (and, in
the case of the Emerging Markets Funds, Evolving Countries Fund and Asia Fund,
the Consultant) will apply investment techniques and risk analyses in making
investment decisions for the Funds, but there can be no guarantee that these
will produce the desired results. As noted above, the Manager or the Consultant
may also fail to use derivatives effectively, for example, choosing to hedge or
not to hedge positions precisely when it is least advantageous to do so. As
indicated above, however, the Funds are generally not subject to the risk of
market timing because they generally stay fully invested in the relevant asset
class, such as domestic equities, foreign equities, or emerging country debt.
- SPECIAL ASSET ALLOCATION FUND CONSIDERATIONS. The Manager does not
charge an investment management fee for asset allocation advice provided to the
Asset Allocation Funds (with the exception of the U.S. Sector Fund, which bears
an investment management fee subject to reduction to the extent investment
management fees are earned by underlying Funds, as described in this Prospectus
under "Fees and Expenses"), but certain other expenses such as custody, transfer
agency and audit fees will be borne directly by the Asset Allocation Funds,
subject to the Manager's agreement to reimburse the Funds (see "Fees and
Expenses"). The Asset Allocation Funds will also indirectly bear a proportionate
share of the Total Operating Expenses (including investment management,
shareholder servicing, custody, transfer agency, audit and other Fund expenses)
of the underlying Funds in which the Asset Allocation Funds invest, as well as
any purchase premiums or redemption fees charged by such underlying Funds. Since
the Manager will receive fees from the underlying Funds, the Manager has a
financial incentive to invest the assets of the Asset Allocation Funds in
underlying Funds with higher fees, despite the investment interests of the Asset
Allocation Funds. The Manager is legally obligated to disregard that incentive
in selecting shares of the underlying Funds.
- SPECIAL YEAR 2000 RISK CONSIDERATIONS. Many of the services provided to
the Funds depend on the proper functioning of computer systems. Many systems in
use today cannot distinguish between the year 1900 and the year 2000. Should any
of the Funds' service systems fail to process information properly, that could
have an adverse impact on the Funds' operations and services provided to
shareholders. GMO, as well as the Trust's administrator, transfer agent,
custodians and other service providers, have reported that each is working
toward mitigating the risks associated with the so-called "Year 2000 problem."
However, there can be no assurance that the problem will be corrected in all
respects and that the Funds' operations and services provided to shareholders
will not be adversely affected, nor can there be any assurance that the Year
2000 problem will not have an adverse effect on the entities whose securities
are held by the Fund or on U.S. or global equity markets or economies generally.
43
<PAGE> 45
FEES AND EXPENSES
The following tables describe the fees and expenses you may pay if you buy
and hold shares of the Funds. Footnotes to the tables begin on page 47 and are
important to understanding this table.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PURCHASE AND
REDEMPTION FEES
(FEES PAID DIRECTLY TO FUND AT ANNUAL FUND OPERATING EXPENSES
GMO FUND NAME PURCHASE OR REDEMPTION) (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
- ----------------------------------------------------------------------------------------------------------
Cash Purchase Redemption Total
Premium (as a Fees (as a Shareholder Annual
% of amount % of amount Management Service Other Operating
invested)(1) redeemed)(1) Fee Fee Expenses Expenses
<S> <C> <C> <C> <C> <C> <C>
U.S. Equity Funds
U.S. CORE FUND
Class II 0.14%(2) None 0.33% 0.22%(3) 0.02% 0.57%
Class III 0.14%(2) None 0.33% 0.15%(3) 0.02% 0.50%
Class IV 0.14%(2) None 0.33% 0.105%(3) 0.02% 0.455%
- ----------------------------------------------------------------------------------------------------------
TOBACCO-FREE
CORE FUND
Class III 0.14%(2) None 0.33% 0.15%(3) 0.08% 0.56%
- ----------------------------------------------------------------------------------------------------------
VALUE FUND
Class III 0.14%(2) None 0.46% 0.15%(3) 0.06% 0.67%
- ----------------------------------------------------------------------------------------------------------
FUNDAMENTAL VALUE
FUND
Class III 0.15%(2) None 0.60% 0.15%(3) 0.06% 0.81%
- ----------------------------------------------------------------------------------------------------------
GROWTH FUND
Class III 0.14%(2) None 0.33% 0.15%(3) 0.06% 0.54%
- ----------------------------------------------------------------------------------------------------------
SMALL CAP VALUE FUND
Class III 0.50%(2) 0.50%(2) 0.33% 0.15%(3) 0.04% 0.52%
- ----------------------------------------------------------------------------------------------------------
SMALL CAP GROWTH FUND
Class III 0.50%(2) 0.50%(2) 0.33% 0.15%(3) 0.06% 0.54%
- ----------------------------------------------------------------------------------------------------------
REIT FUND
Class III 0.50%(2) 0.50%(2) 0.54% 0.15%(3) 0.05% 0.74%
- ----------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY
FUNDS
INTERNATIONAL CORE
FUND
Class II 0.60%(2) None 0.54% 0.22%(3) 0.07% 0.83%
Class III 0.60%(2) None 0.54% 0.15%(3) 0.07% 0.76%
Class IV 0.60%(2) None 0.54% 0.09%(3) 0.07% 0.70%
- ----------------------------------------------------------------------------------------------------------
CURRENCY HEDGED
INTERNATIONAL CORE
FUND
Class III 0.60%(2) None 0.54% 0.15%(3) 0.21% 0.90%
Class IV 0.60%(2) None 0.54% 0.09%(3) 0.21% 0.84%
- ----------------------------------------------------------------------------------------------------------
FOREIGN FUND
Class II None None 0.60% 0.22%(3) 0.10% 0.92%
Class III None None 0.60% 0.15%(3) 0.10% 0.85%
Class IV None None 0.60% 0.09%(3) 0.10% 0.79%
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------- -------------------------------
ANNUAL FUND OPERATING EXPENSES
GMO FUND NAME (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
- ----------------------- -------------------------------
NET
Expense ANNUAL
Reimbursement(4) EXPENSES
<S> <C> <C>
U.S. Equity Funds
U.S. CORE FUND
Class II 0.02% 0.55%
Class III 0.02% 0.48%
Class IV 0.02% 0.435%
- ----------------------------------------------------------------------------------------------------------
TOBACCO-FREE
CORE FUND
Class III 0.08% 0.48%
- ----------------------------------------------------------------------------------------------------------
VALUE FUND
Class III 0.06% 0.61%
- ----------------------------------------------------------------------------------------------------------
FUNDAMENTAL VALUE
FUND
Class III 0.06% 0.75%
- ----------------------------------------------------------------------------------------------------------
GROWTH FUND
Class III 0.06% 0.48%
- ----------------------------------------------------------------------------------------------------------
SMALL CAP VALUE FUND
Class III 0.04% 0.48%
- ----------------------------------------------------------------------------------------------------------
SMALL CAP GROWTH FUND
Class III 0.06% 0.48%
- ----------------------------------------------------------------------------------------------------------
REIT FUND
Class III 0.05% 0.69%
- ----------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY
FUNDS
INTERNATIONAL CORE
FUND
Class II 0.07% 0.76%
Class III 0.07% 0.69%
Class IV 0.07% 0.63%
- ----------------------------------------------------------------------------------------------------------
CURRENCY HEDGED
INTERNATIONAL CORE
FUND
Class III 0.21% 0.69%
Class IV 0.21% 0.63%
- ----------------------------------------------------------------------------------------------------------
FOREIGN FUND
Class II 0.10% 0.82%
Class III 0.10% 0.75%
Class IV 0.10% 0.69%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE> 46
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PURCHASE AND
REDEMPTION FEES
(FEES PAID DIRECTLY TO FUND AT ANNUAL FUND OPERATING EXPENSES
GMO FUND NAME PURCHASE OR REDEMPTION) (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
- ----------------------------------------------------------------------------------------------------------
Cash Purchase Redemption Total
Premium (as a Fees (as a Shareholder Annual
% of amount % of amount Management Service Other Operating
invested)(1) redeemed)(1) Fee Fee Expenses Expenses
<S> <C> <C> <C> <C> <C> <C>
INTERNATIONAL SMALL
COMPANIES FUND
Class III 1.00%(2) 0.60%(2) 0.60% 0.15%(3) 0.16% 0.91%
- ----------------------------------------------------------------------------------------------------------
JAPAN FUND
Class III 0.20%(2) 0.20%(2) 0.54% 0.15%(3) 0.18% 0.87%
- ----------------------------------------------------------------------------------------------------------
EMERGING MARKETS FUND
Class III 1.60%(5) 0.40%(5,6) 0.81% 0.15%(3) 0.22% 1.18%
Class IV 1.60%(5) 0.40%(5,6) 0.81% 0.105%(3) 0.22% 1.135%
- ----------------------------------------------------------------------------------------------------------
EVOLVING COUNTRIES
FUND
Class III 1.60%(5) 0.40%(5) 0.65% 0.15%(3) 0.66% 1.46%
- ----------------------------------------------------------------------------------------------------------
ASIA FUND
Class III 1.20%(5) 0.40%(5) 0.81% 0.15%(3) 0.41% 1.37%
- ----------------------------------------------------------------------------------------------------------
GLOBAL PROPERTIES
FUND
Class III 0.60%(2.7) 0.30%(2.7) 0.60% 0.15%(3) 1.36% 2.11%
- ----------------------------------------------------------------------------------------------------------
FIXED INCOME FUNDS
DOMESTIC BOND FUND
Class III None None 0.10% 0.15%(3) 0.06% 0.31%
- ----------------------------------------------------------------------------------------------------------
U.S. BOND/GLOBAL
ALPHA A FUND
Class III 0.15%(5) None 0.25% 0.15%(3) 0.10% 0.50%
- ----------------------------------------------------------------------------------------------------------
U.S. BOND/GLOBAL
ALPHA B FUND
Class III 0.15%(5) None 0.20% 0.15%(3) 0.12% 0.47%
- ----------------------------------------------------------------------------------------------------------
INTERNATIONAL BOND
FUND
Class III 0.15%(5) None 0.25% 0.15%(3) 0.09% 0.49%
- ----------------------------------------------------------------------------------------------------------
CURRENCY HEDGED
INTERNATIONAL BOND
FUND
Class III 0.15%(5) None 0.25% 0.15%(3) 0.08% 0.48%
- ----------------------------------------------------------------------------------------------------------
GLOBAL BOND FUND
Class III 0.15%(5) None 0.19% 0.15%(3) 0.12% 0.46%
- ----------------------------------------------------------------------------------------------------------
EMERGING COUNTRY DEBT
FUND
Class III 0.50%(5) 0.25%(5,13) 0.35% 0.15%(3) 0.09% 0.59%
Class IV 0.50%(5) 0.25%(5,13) 0.35% 0.10%(3) 0.09% 0.54%
- ----------------------------------------------------------------------------------------------------------
SHORT-TERM INCOME
FUND
Class III None None 0.05% 0.15%(3) 0.12% 0.32%
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------- -------------------------------
ANNUAL FUND OPERATING EXPENSES
GMO FUND NAME (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
- ----------------------- -------------------------------
NET
Expense ANNUAL
Reimbursement(4) EXPENSES
<S> <C> <C>
INTERNATIONAL SMALL
COMPANIES FUND
Class III 0.16% 0.75%
- ----------------------------------------------------------------------------------------------------------
JAPAN FUND
Class III 0.18% 0.69%
- ----------------------------------------------------------------------------------------------------------
EMERGING MARKETS FUND
Class III 0.02% 1.16%
Class IV 0.02% 1.115%
- ----------------------------------------------------------------------------------------------------------
EVOLVING COUNTRIES
FUND
Class III 0.19% 1.27%
- ----------------------------------------------------------------------------------------------------------
ASIA FUND
Class III 0.11% 1.26%
- ----------------------------------------------------------------------------------------------------------
GLOBAL PROPERTIES
FUND
Class III 0.68% 1.43%
- ----------------------------------------------------------------------------------------------------------
FIXED INCOME FUNDS
DOMESTIC BOND FUND
Class III 0.04% 0.27%(20)
- ----------------------------------------------------------------------------------------------------------
U.S. BOND/GLOBAL
ALPHA A FUND
Class III 0.10% 0.40%
- ----------------------------------------------------------------------------------------------------------
U.S. BOND/GLOBAL
ALPHA B FUND
Class III 0.12% 0.35%
- ----------------------------------------------------------------------------------------------------------
INTERNATIONAL BOND
FUND
Class III 0.09% 0.40%
- ----------------------------------------------------------------------------------------------------------
CURRENCY HEDGED
INTERNATIONAL BOND
FUND
Class III 0.08% 0.40%
- ----------------------------------------------------------------------------------------------------------
GLOBAL BOND FUND
Class III 0.12% 0.34%
- ----------------------------------------------------------------------------------------------------------
EMERGING COUNTRY DEBT
FUND
Class III 0.03% 0.56%
Class IV 0.03% 0.51%
- ----------------------------------------------------------------------------------------------------------
SHORT-TERM INCOME
FUND
Class III 0.12% 0.20%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE> 47
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
PURCHASE AND
REDEMPTION FEES
(FEES PAID DIRECTLY TO FUND AT ANNUAL FUND OPERATING EXPENSES
GMO FUND NAME PURCHASE OR REDEMPTION) (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
- ------------------------------------------------------------------------------------------------------------
Cash Purchase Redemption Total
Premium (as a Fees (as a Shareholder Annual
% of amount % of amount Management Service Other Operating
invested)(1) redeemed)(1) Fee Fee Expenses Expenses
<S> <C> <C> <C> <C> <C> <C>
GLOBAL HEDGED
EQUITY FUND
Class III 0.51%(2,8) 1.40%(8,12) 0.50%(16) 0.15%(3,10) 0.11%(16) 0.76%(16)
- ------------------------------------------------------------------------------------------------------------
INFLATION INDEXED
BOND FUND
Class III 0.10%(5) 0.10%(5) 0.10% 0.15%(3) 0.16% 0.41%
- ------------------------------------------------------------------------------------------------------------
EMERGING COUNTRY
DEBT SHARE FUND
Class III *(17) *(17) 0.35%(18) 0.15%(3,19) 0.15%(18) 0.65%(18)
- ------------------------------------------------------------------------------------------------------------
ASSET ALLOCATION
FUNDS
INTERNATIONAL
EQUITY
ALLOCATION FUND
Class III 0.80%(2,14) 0.11%(2,14) 0.00%(15) 0.00%(15) 0.05%(15) 0.05%(15)
- ------------------------------------------------------------------------------------------------------------
WORLD EQUITY
ALLOCATION FUND
Class III 0.66%(2,14) 0.15%(2,14) 0.00%(15) 0.00%(15) 0.06%(15) 0.06%(15)
- ------------------------------------------------------------------------------------------------------------
GLOBAL (U.S. +)
EQUITY
ALLOCATION FUND
Class III 0.47%(2,14) 0.15%(2,14) 0.00%(15) 0.00%(15) 0.07%(15) 0.07%(15)
- ------------------------------------------------------------------------------------------------------------
GLOBAL BALANCED
ALLOCATION FUND
Class III 0.35%(2,14) 0.11%(2,14) 0.00%(15) 0.00%(15) 0.05%(15) 0.05%(15)
- ------------------------------------------------------------------------------------------------------------
U.S. SECTOR FUND
Class III 0.27%(2,8) 0.18%(2,8,11) 0.33%(9) 0.15%(3,10) 0.08%(9) 0.56%(9)
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------- -------------------------------
ANNUAL FUND OPERATING EXPENSES
GMO FUND NAME (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
- --------------------- -------------------------------
Net
Expense Annual
Reimbursement(4) Expenses
<S> <C> <C>
GLOBAL HEDGED
EQUITY FUND
Class III 0.59%(16) 0.17%(16)
- ------------------------------------------------------------------------------------------------------------
INFLATION INDEXED
BOND FUND
Class III 0.16% 0.25%
- ------------------------------------------------------------------------------------------------------------
EMERGING COUNTRY
DEBT SHARE FUND
Class III 0.09%(18) 0.56%(18)
- ------------------------------------------------------------------------------------------------------------
ASSET ALLOCATION
FUNDS
INTERNATIONAL
EQUITY
ALLOCATION FUND
Class III 0.05% 0.00%
- ------------------------------------------------------------------------------------------------------------
WORLD EQUITY
ALLOCATION FUND
Class III 0.06% 0.00%
- ------------------------------------------------------------------------------------------------------------
GLOBAL (U.S. +)
EQUITY
ALLOCATION FUND
Class III 0.07% 0.00%
- ------------------------------------------------------------------------------------------------------------
GLOBAL BALANCED
ALLOCATION FUND
Class III 0.05% 0.00%
- ------------------------------------------------------------------------------------------------------------
U.S. SECTOR FUND
Class III 0.56%(9) 0.00%(9)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
46
<PAGE> 48
NOTES TO FEES AND EXPENSES
1. Purchase premiums and redemption fees generally apply only to cash
transactions. These fees are paid to and retained by the Fund itself and
are designed to allocate transaction costs caused by shareholder activity
to the shareholder generating the activity, rather than to the Fund as a
whole. The Manager may reduce these fees in certain limited circumstances
described below.
Normally, no purchase premium is charged with respect to in-kind purchases
of Fund shares. However, the International Core Fund, Currency Hedged
International Core Fund, International Small Companies Fund, Japan Fund and
Global Hedged Equity Fund may each charge a purchase premium of up to
0.10%, and the Emerging Markets Fund, Evolving Countries Fund and Asia Fund
may each charge a premium of up to 0.20%, for in-kind purchases involving
transfers of large positions in markets where re-registration and transfer
costs are high. Special rules also apply with respect to in-kind
transactions in certain Fixed Income Funds as described in footnote 5
below.
2. The purchase premium and/or redemption fee for this Fund may generally not
be waived due to offsetting transactions, and may be waived in only rare
circumstances. The premium or fee will only be waived for this Fund (i) if
the purchase or redemption is part of a transfer from or to another Fund
where the Manager is able to transfer securities among the Funds as part of
effecting the transaction, (ii) during periods (expected to exist only
rarely) when the Manager determines that the Fund is either substantially
overweighted or underweighted with respect to its cash position so that a
redemption or purchase will not require a securities transaction, or (iii)
in certain other instances (not including offsetting transactions) where it
is compelling to the Manager that the purchase or redemption will not
result in transaction costs to the Fund. Any waiver with respect to this
Fund must be arranged in advance with the Manager.
3. The Shareholder Service Fee ("SSF") is paid to GMO for providing client
services and reporting services, and is the sole economic distinction
between the various classes of Fund shares. A lower SSF for larger
investments reflects that the cost of servicing a client account is lower
for larger accounts when expressed as a percentage of the account.
4. The Manager has contractually agreed to reimburse each Fund with respect to
certain Fund expenses through at least June 30, 2000 to the extent that a
Fund's total annual operating expenses (excluding Shareholder Service Fees,
brokerage commissions and other investment-related costs, hedging
transaction fees, extraordinary, non-recurring and certain other unusual
expenses (including taxes), securities lending fees and expenses, interest
expense and transfer taxes; and, in the case of the Emerging Markets Fund,
Evolving Countries Fund, Asia Fund, Emerging Country Debt Fund, Global
Hedged Equity Fund and Global Properties Fund, also excluding custodial
fees; and, in the case of the Asset Allocation Funds, U.S. Sector Fund,
Global Hedged Equity Fund and Emerging Country Debt Share Fund, also
excluding expenses indirectly incurred by the investment in other Funds of
the Trust (collectively, "Excluded Fund Fees and Expenses")) would
otherwise exceed the percentage of that Fund's daily net assets (the "Post-
Reimbursement Expense Limitation") set below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
POST-REIMBURSEMENT
FUND EXPENSE LIMITATION
- ----------------------------------------------------------------------------------
<S> <C>
U.S. Core Fund 0.33%
- ----------------------------------------------------------------------------------
Tobacco-Free Core Fund 0.33%
- ----------------------------------------------------------------------------------
Value Fund 0.46%
- ----------------------------------------------------------------------------------
Growth Fund 0.33%
- ----------------------------------------------------------------------------------
U.S. Sector Fund 0.33%
- ----------------------------------------------------------------------------------
Small Cap Value Fund 0.33%
- ----------------------------------------------------------------------------------
Small Cap Growth Fund 0.33%
- ----------------------------------------------------------------------------------
Fundamental Value Fund 0.60%
- ----------------------------------------------------------------------------------
REIT Fund 0.54%
- ----------------------------------------------------------------------------------
International Core Fund 0.54%
- ----------------------------------------------------------------------------------
Currency Hedged International Core Fund 0.54%
- ----------------------------------------------------------------------------------
Foreign Fund 0.60%
- ----------------------------------------------------------------------------------
International Small Companies Fund 0.60%
- ----------------------------------------------------------------------------------
Japan Fund 0.54%
- ----------------------------------------------------------------------------------
Emerging Markets Fund 0.81%
- ----------------------------------------------------------------------------------
Evolving Countries Fund 0.65%
- ----------------------------------------------------------------------------------
Global Properties Fund 0.60%
- ----------------------------------------------------------------------------------
Domestic Bond Fund 0.10%
- ----------------------------------------------------------------------------------
U.S. Bond/Global Alpha A Fund 0.25%
- ----------------------------------------------------------------------------------
</TABLE>
47
<PAGE> 49
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
POST-REIMBURSEMENT
FUND EXPENSE LIMITATION
- ----------------------------------------------------------------------------------
<S> <C>
U.S. Bond/Global Alpha B Fund 0.20%
- ----------------------------------------------------------------------------------
International Bond Fund 0.25%
- ----------------------------------------------------------------------------------
Currency Hedged International Bond Fund 0.25%
- ----------------------------------------------------------------------------------
Global Bond Fund 0.19%
- ----------------------------------------------------------------------------------
Emerging Country Debt Fund 0.35%
- ----------------------------------------------------------------------------------
Short-Term Income Fund 0.05%
- ----------------------------------------------------------------------------------
Global Hedged Equity Fund 0.50%
- ----------------------------------------------------------------------------------
Inflation Indexed Bond Fund 0.10%
- ----------------------------------------------------------------------------------
Emerging Country Debt Share Fund 0.00%
- ----------------------------------------------------------------------------------
International Equity Allocation Fund 0.00%
- ----------------------------------------------------------------------------------
World Equity Allocation Fund 0.00%
- ----------------------------------------------------------------------------------
Global (U.S.+) Equity Allocation Fund 0.00%
- ----------------------------------------------------------------------------------
Global Balanced Allocation Fund 0.00%
- ----------------------------------------------------------------------------------
Asia Fund 0.81%
- ----------------------------------------------------------------------------------
</TABLE>
In addition, with respect to each of the U.S. Sector Fund and the Global
Hedged Equity Fund only, the Advisor proposes to reimburse each such Fund to
the extent that the sum of (i) such Fund's total annual operating expenses
(excluding Excluded Fund Fees and Expenses), plus (ii) the amount of fees
and expenses (excluding Excluded Fund Fees and Expenses) incurred indirectly
by the Fund through its investment in other GMO Funds, exceeds the Fund's
Post-Reimbursement Expense Limitation, subject to a maximum total
reimbursement to either Fund equal to the Fund's Post-Reimbursement Expense
Limitation.
5. The stated purchase premium and/or redemption fee for this Fund will always
be charged in full except that the relevant purchase premium or redemption
fee will be reduced by 50% with respect to any portion of a purchase or
redemption that is offset by a corresponding redemption or purchase,
respectively, occurring on the same day. The Manager examines each purchase
and redemption of shares eligible for such treatment to determine if
circumstances warrant waiving a portion of the purchase premium or
redemption fee. Absent a clear determination that transaction costs will be
reduced or absent for the purchase or redemption, the full premium or fee
will be charged. In addition, except for the Emerging Markets Fund,
Evolving Countries Fund and Asia Fund, the purchase premium or redemption
fee 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 as part of effecting the transaction.
6. Applies only to shares acquired on or after June 1, 1995 (including shares
acquired by reinvestment of dividends or other distribution on or after
such date).
7. It is expected that the purchase premiums and redemption fees for this Fund
will be eliminated once the net assets of the Fund exceed $100 million.
However, even thereafter, the Fund will reserve the right to charge a
purchase premium of up to 0.60% and a redemption fee of up to 0.30% on
purchases or redemptions of amounts that are equal to or greater than 5% of
the Fund's net assets.
8. The Fund invests in various other Funds with different levels of purchase
premiums and/or redemption fees which reflect the trading costs of
different asset classes. Therefore, the Fund's purchase premium and/or
redemption fee has been computed as the weighted average of the purchase
premiums and/or redemption fees of other GMO Funds in which the Fund is
invested and/or which hold securities of the same asset class and/or sector
as securities owned directly by the Fund. The amount of purchase premium
and/or redemption fee for the Fund will be adjusted approximately annually
based on underlying Funds owned by the Fund during the prior year. The
Manager may, but is not obligated to, adjust the purchase premium and/or
redemption fee for the Fund more frequently if the Manager believes in its
discretion that circumstances warrant.
9. Commencing August 20, 1997, the Fund began investing both in other Funds of
the Trust ("underlying Funds") and directly in other instruments.
Therefore, the Fund will incur fees and expenses indirectly as a
shareholder of the underlying Funds. Because the underlying Funds have
varied expense and fee levels and because the Fund may invest to varied
extents and in varied proportions in underlying Funds, the amount of fees
and expenses incurred indirectly by the Fund will also vary. However, the
Manager has contractually agreed to reimburse the Fund's expenses until at
least June 30, 2000 to the extent that the sum of (i) the Fund's total
annual operating expenses (excluding Shareholder Service Fees and the
following expenses: brokerage commissions and other investment-related
costs, hedging transaction fees, extraordinary, non-recurring and certain
other unusual expenses (including taxes), securities lending fees and
expenses and transfer taxes ("Fund Expenses")), plus (ii) the amount of
fees and expenses
48
<PAGE> 50
(excluding Shareholder Service Fees and Fund Expenses (as defined above))
incurred indirectly by the Fund through investment in underlying Funds,
would otherwise exceed 0.33% of the Fund's daily net assets. Because the
Manager will not reimburse expenses to the extent they exceed 0.33%, and
because the amount of fees and expenses incurred indirectly by the Fund
will vary, the total annual operating expenses (excluding Shareholder
Service Fees and Fund Expenses) incurred indirectly by the Fund through
investment in underlying Funds may exceed 0.33% of the Fund's average daily
net assets. For the period from March 1, 1998 through February 28, 1999 the
indirect total operating expenses borne by the Fund were 0.51% of the
Fund's average daily net assets. The Manager believes that, under normal
market conditions, the total amount of annual fees and expenses that will
be indirectly incurred by the Fund because of investment in underlying
Funds will fall within the ranges set forth below (based on average daily
net assets):
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
FUND LOW TYPICAL HIGH
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Sector Fund 0.48% 0.51% 0.53%
---------------------------------------------------------------------------------------------------
</TABLE>
10. The Fund will invest in Class III Shares of each underlying Fund. Like the
Fund's expenses, the Shareholder Service Fee of each class of the Fund's
shares will be reimbursed to the extent of the indirect Shareholder Service
Fees paid in connection with the Fund's investment in shares of underlying
Funds. Investors should refer to the GMO Trust Shareholder's Manual for
greater detail concerning the eligibility requirements and other
differences among the classes.
11. Applies only to shares acquired on or after June 30, 1998 (including shares
acquired by reinvestment of dividends or other distributions on or after
such date).
12. If it is not necessary to incur costs relating to the early termination of
hedging transactions to meet redemption requests, the redemption fee will
be reduced to 0.13%.
13. Applies only to shares acquired on or after July 1, 1995 (including shares
acquired by reinvestment of dividends or other distributions on or after
such date).
14. Each of the Asset Allocation Funds invests in various other Funds with
different levels of purchase premiums and redemption fees, which reflect
the trading costs of different asset classes. Therefore, the purchase
premium and redemption fee of each Asset Allocation Fund has been set as
the weighted average of the premiums and fees, respectively, of the
underlying Funds in which the Asset Allocation Fund is invested, based on
actual investments by each Asset Allocation Fund. The amount of purchase
premium and redemption fee for each Asset Allocation Fund is adjusted
approximately annually based on underlying Funds owned by each Asset
Allocation Fund during the prior year. The Manager may, but is not
obligated to, adjust the purchase premium and/or redemption fee for an
Asset Allocation Fund more frequently if the Manager believes in its
discretion that circumstances warrant.
15. Asset Allocation Funds invest primarily in underlying Funds. Therefore, in
addition to the fees and expenses directly incurred by the Asset Allocation
Funds (which are shown in the Schedule of Fees and Expenses), the Asset
Allocation Funds will also incur fees and expenses indirectly as
shareholders of the underlying Funds. Because the underlying Funds have
varied expense and fee levels and the Asset Allocation Funds may own
different proportions of underlying Funds at different times, the amount of
fees and expenses indirectly incurred by the Asset Allocation Funds will
vary.
For the fiscal year ended February 28, 1999, the total amount of fees and
expenses indirectly incurred by the Asset Allocation Funds because of
investment in underlying Funds were as follows (based on average daily net
assets):
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
TOTAL ANNUAL
FUND OPERATING EXPENSES
-------------------------------------------------------------------------------------
<S> <C>
International Equity Allocation Fund 0.77%
World Equity Allocation Fund 0.68%
Global U.S.+) Equity Allocation Fund 0.59%
Global Balanced Allocation Fund 0.51%
-------------------------------------------------------------------------------------
</TABLE>
The Manager believes that, under normal market conditions, the total amount
of annual fees and expenses that will be indirectly incurred by the Asset
Allocation Funds because of investment in underlying Funds will fall within
the ranges set forth below (based on average daily net assets):
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
FUND LOW TYPICAL HIGH
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Equity Allocation Fund 0.72% 0.77% 0.89%
World Equity Allocation Fund 0.64% 0.68% 0.85%
Global U.S.+) Equity Allocation Fund 0.53% 0.59% 0.74%
Global Balanced Allocation Fund 0.46% 0.51% 0.72%
---------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE> 51
16. Commencing August 20, 1997, the Fund began investing both in other Funds of
the Trust ("underlying Funds") and directly in other instruments.
Therefore, the Fund will incur fees and expenses indirectly as a
shareholder of the underlying Funds. Because the underlying Funds have
varied expense and fee levels and because the Fund may invest to varied
extents and in varied proportions in underlying Funds, the amount of fees
and expenses incurred indirectly by the Fund will also vary. However, the
Manager has contractually agreed to reimburse the Fund's expenses until at
least June 30, 2000 to the extent that the sum of (i) the Fund's total
annual operating expenses (excluding SSF's, custodial fees, and the
following expenses: brokerage commissions and other investment-related
costs, hedging transaction fees, extraordinary, non-recurring and certain
other unusual expenses (including taxes), securities lending fees and
expenses and transfer taxes ("Fund Expenses")), plus (ii) the amount of
fees and expenses (excluding SSF's and Fund Expenses (as defined above))
incurred indirectly by the Fund through investment in underlying Funds,
would otherwise exceed 0.50% of the Fund's average daily net assets.
Because the Manager will not reimburse indirect expenses to the extent they
exceed 0.50%, and because the amount of fees and expenses incurred
indirectly by the Fund will vary, the total annual operating expenses
(excluding SSF's and Fund Expenses) incurred directly and indirectly by the
Fund through investment in underlying Funds may exceed 0.50% of the Fund's
average daily net assets. For the period from March 1, 1998 through
February 28, 1999, the indirect total annual operating expenses borne by
the Fund were 0.57% of the Fund's average daily net assets. The Manager
believes that, under normal market conditions, the total amount of annual
fees and expenses that will be indirectly incurred by the Fund because of
investment in underlying Funds will fall within the ranges set forth below
(based on average daily net assets):
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
FUND LOW TYPICAL HIGH
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Hedged Equity Fund 0.50% 0.60% 0.72%
---------------------------------------------------------------------------------------------------
</TABLE>
17. No purchase premium or redemption fee is charged directly by the Fund. By
virtue of the Fund's investment in the Emerging Country Debt Fund, Fund
shareholders will, however, indirectly bear the Emerging Country Debt
Fund's purchase premium and redemption fee, which are presently up to 0.50%
and 0.25%, respectively.
18. The stated fee and expense amounts represent the combined fees and expenses
for the Fund and the Emerging Country Debt Fund, in which substantially all
of the Fund's assets are invested.
19. Although no SSF is charged directly by the Fund, by virtue of the Fund's
investment in the Emerging Country Debt Fund, Fund shareholders will
indirectly bear the SSF set forth in the table.
20. Includes 0.02% of interest expense.
50
<PAGE> 52
EXAMPLES
The examples below illustrate the expenses you would incur on a $10,000
investment over the stated periods, assuming your investment had a 5% return
each year and the Fund's operating expenses remained the same. The examples are
for comparative purposes only; they do not represent past or future expenses or
performance, and your actual expenses and performance may be higher or lower.
Except as otherwise noted, the expenses shown assume no reimbursement of
expenses by the Manager.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
EXAMPLE 1:
ASSUMING YOU REDEEM YOUR SHARES AT THE END OF EXAMPLE 2:
GMO FUND NAME EACH PERIOD ASSUMING YOU DO NOT REDEEM YOUR SHARES
- ---------------------------------------------------------------------------------------------------------------------------------
1 YEAR 1 YEAR
(AFTER (AFTER
REIMBURSEMENT) 3 YEAR 5 YEAR 10 YEAR REIMBURSEMENT) 3 YEAR 5 YEAR 10 YEAR
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. EQUITY FUNDS
U.S. CORE FUND
Class II $ 70 $194 $ 330 $ 725 $ 70 $194 $ 330 $ 725
Class III $ 63 $172 $ 291 $ 639 $ 63 $172 $ 291 $ 639
Class IV $ 58 $158 $ 266 $ 584 $ 58 $158 $ 266 $ 584
- ---------------------------------------------------------------------------------------------------------------------------------
TOBACCO-FREE CORE FUND
Class III $ 63 $185 $ 318 $ 707 $ 63 $185 $ 318 $ 707
- ---------------------------------------------------------------------------------------------------------------------------------
VALUE FUND
Class III $ 76 $222 $ 381 $ 842 $ 76 $222 $ 381 $ 842
- ---------------------------------------------------------------------------------------------------------------------------------
FUNDAMENTAL VALUE FUND
Class III $ 91 $267 $ 458 $1,010 $ 91 $267 $ 458 $1,010
- ---------------------------------------------------------------------------------------------------------------------------------
GROWTH FUND
Class III $ 63 $181 $ 309 $ 684 $ 63 $181 $ 309 $ 684
- ---------------------------------------------------------------------------------------------------------------------------------
SMALL CAP VALUE FUND
Class III $151 $269 $ 397 $ 773 $ 99 $212 $ 335 $ 696
- ---------------------------------------------------------------------------------------------------------------------------------
SMALL CAP GROWTH FUND
Class III $151 $273 $ 406 $ 795 $ 99 $216 $ 344 $ 718
- ---------------------------------------------------------------------------------------------------------------------------------
REIT FUND
Class III $172 $337 $ 516 $1,035 $120 $280 $ 455 $ 959
- ---------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUNDS
INTERNATIONAL CORE FUND
Class II $137 $316 $ 511 $1,073 $137 $316 $ 511 $1,073
Class III $130 $294 $ 473 $ 990 $130 $294 $ 473 $ 990
Class IV $124 $276 $ 441 $ 919 $124 $276 $ 441 $ 919
- ---------------------------------------------------------------------------------------------------------------------------------
CURRENCY HEDGED INTERNATIONAL
CORE FUND
Class III $130 $324 $ 535 $1,142 $130 $324 $ 535 $1,142
Class IV $124 $306 $ 503 $1,072 $124 $306 $ 503 $1,072
- ---------------------------------------------------------------------------------------------------------------------------------
FOREIGN FUND
Class II $ 84 $283 $ 500 $1,122 $ 84 $283 $ 500 $1,122
Class III $ 77 $261 $ 462 $1,040 $ 77 $261 $ 462 $1,040
Class IV $ 70 $242 $ 429 $ 969 $ 70 $242 $ 429 $ 969
- ---------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL SMALL COMPANIES
FUND
Class III $238 $439 $ 656 $1,283 $176 $372 $ 584 $1,194
- ---------------------------------------------------------------------------------------------------------------------------------
JAPAN FUND
Class III $174 $367 $ 577 $1,183 $110 $299 $ 503 $1,092
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE> 53
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
EXAMPLE 1:
ASSUMING YOU REDEEM YOUR SHARES AT THE END OF EXAMPLE 2:
GMO FUND NAME EACH PERIOD ASSUMING YOU DO NOT REDEEM YOUR SHARES
- ---------------------------------------------------------------------------------------------------------------------------------
1 YEAR 1 YEAR
(AFTER (AFTER
REIMBURSEMENT) 3 YEAR 5 YEAR 10 YEAR REIMBURSEMENT) 3 YEAR 5 YEAR 10 YEAR
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EMERGING MARKETS FUND
Class III $317 $571 $ 845 $1,625 $276 $527 $ 797 $1,568
Class IV $313 $557 $ 821 $1,575 $272 $513 $ 773 $1,517
- ---------------------------------------------------------------------------------------------------------------------------------
EVOLVING COUNTRIES FUND
Class III $328 $640 $ 974 $1,919 $287 $596 $ 927 $1,863
- ---------------------------------------------------------------------------------------------------------------------------------
ASIA FUND
Class III $288 $582 $ 898 $1,794 $247 $538 $ 851 $1,738
- ---------------------------------------------------------------------------------------------------------------------------------
GLOBAL PROPERTIES FUND
Class III $236 $685 $1,160 $2,474 $205 $652 $1,125 $2,434
- ---------------------------------------------------------------------------------------------------------------------------------
FIXED INCOME FUNDS
DOMESTIC BOND FUND
Class III $ 28 $ 96 $ 170 $ 389 $ 28 $ 96 $ 170 $ 389
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. BOND/GLOBAL ALPHA A FUND
Class III $ 56 $165 $ 284 $ 633 $ 56 $165 $ 284 $ 633
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. BOND/GLOBAL ALPHA B FUND
Class III $ 51 $153 $ 266 $ 594 $ 51 $153 $ 266 $ 594
- ---------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL BOND FUND
Class III $ 56 $163 $ 280 $ 621 $ 56 $163 $ 280 $ 621
- ---------------------------------------------------------------------------------------------------------------------------------
CURRENCY HEDGED INTERNATIONAL
BOND FUND
Class III $ 56 $161 $ 275 $ 610 $ 56 $161 $ 275 $ 610
- ---------------------------------------------------------------------------------------------------------------------------------
GLOBAL BOND FUND
Class III $ 50 $150 $ 260 $ 582 $ 50 $150 $ 260 $ 582
- ---------------------------------------------------------------------------------------------------------------------------------
EMERGING COUNTRY DEBT FUND
Class III $133 $263 $ 406 $ 820 $107 $235 $ 375 $ 782
Class IV $128 $248 $ 378 $ 759 $102 $219 $ 347 $ 721
- ---------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INCOME FUND
Class III $ 20 $ 91 $ 168 $ 394 $ 20 $ 91 $ 168 $ 394
- ---------------------------------------------------------------------------------------------------------------------------------
GLOBAL HEDGED EQUITY FUND
Class III $201 $379 $ 573 $1,133 $ 54 $220 $ 400 $ 921
- ---------------------------------------------------------------------------------------------------------------------------------
INFLATION INDEXED BOND FUND
Class III $ 46 $137 $ 236 $ 527 $ 36 $125 $ 224 $ 511
- ---------------------------------------------------------------------------------------------------------------------------------
EMERGING COUNTRY DEBT SHARE
FUND
Class III $133 $276 $ 434 $ 891 $107 $248 $ 403 $ 853
- ---------------------------------------------------------------------------------------------------------------------------------
ASSET ALLOCATION FUNDS
INTERNATIONAL EQUITY
ALLOCATION FUND
Class III $ 91 $104 $ 117 $ 156 $ 80 $ 91 $ 103 $ 139
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE> 54
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
EXAMPLE 1:
ASSUMING YOU REDEEM YOUR SHARES AT THE END OF EXAMPLE 2:
GMO FUND NAME EACH PERIOD ASSUMING YOU DO NOT REDEEM YOUR SHARES
- ---------------------------------------------------------------------------------------------------------------------------------
1 YEAR 1 YEAR
(AFTER (AFTER
REIMBURSEMENT) 3 YEAR 5 YEAR 10 YEAR REIMBURSEMENT) 3 YEAR 5 YEAR 10 YEAR
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WORLD EQUITY ALLOCATION FUND
Class III $ 82 $ 96 $ 113 $ 161 $ 66 $ 79 $ 94 $ 137
- ---------------------------------------------------------------------------------------------------------------------------------
GLOBAL (U.S. +) EQUITY
ALLOCATION FUND
Class III $ 63 $ 80 $ 98 $ 154 $ 47 $ 62 $ 79 $ 129
- ---------------------------------------------------------------------------------------------------------------------------------
GLOBAL BALANCED ALLOCATION
FUND
Class III $ 63 $ 75 $ 89 $ 130 $ 47 $ 58 $ 70 $ 106
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. SECTOR FUND
Class III $ 46 $170 $ 306 $ 701 $ 27 $150 $ 283 $ 673
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MULTIPLE CLASSES
Each Fund offers up to three classes of shares. All Funds offer Class III
Shares and certain Funds also offer Class II and/or Class IV Shares. The sole
economic difference among the various classes of shares is the level of
Shareholder Service Fee that the classes bear for client and shareholder
service, reporting and other support. The existence of multiple classes reflects
the fact that, as the size of a client relationship increases, the cost to
service that client decreases as a percentage of the assets in that account.
Thus, the Shareholder Service Fee is lower for classes where eligibility
criteria require greater total assets under GMO's management.
Eligibility for classes is generally dependent upon the aggregate of an
investor's total assets under GMO's management or, in the case of Class IV
Shares only, the investor's total assets in a particular Fund. More detailed
information regarding: (1) which classes each Fund currently offers; (2)
eligibility requirements for each class of each Fund; and (3) conversions
between classes of shares, is contained in a separate document, the GMO TRUST
SHAREHOLDER'S MANUAL. As described in greater detail in the Manual, the Manager
periodically evaluates whether, in accordance with class conversion rules, a
shareholder's shares should be automatically converted from one class of shares
to another class. It is possible, under circumstances described in the Manual,
for a shareholder's shares of a class of shares with a lower Shareholder Service
Fee to be converted to a class of shares with a higher Shareholder Service Fee.
The Shareholder's Manual accompanies this Prospectus, has been filed with
the SEC, and is incorporated by reference into this Prospectus. Additional
copies of the Manual are available free of charge by contacting the Manager.
BENCHMARKS AND INDEXES
The benchmark or index against which the Manager measures each Fund's
performance is stated under "Fund Objectives and Principal Investment
Strategies -- Investment Objective" for each Fund. In some cases, the GMO
benchmark differs from the broad-based index that the SEC requires each Fund to
use in the average annual return table. Some general information about each
benchmark and index referred to in this Prospectus is provided in the table
below. The Manager may change each Fund's index or benchmark from time to time.
Effective June 30, 1999, the Manager implemented changes in the GMO benchmarks
for the following Funds: International Core Fund (from GMO EAFE-Lite to MSCI
EAFE); Currency Hedged International Core Fund (from GMO EAFE-Lite (Hedged) to
MSCI EAFE (Hedged)); International Small Companies Fund (from GMO EAFE-Lite to
SSB EMI World ex-U.S.); International Equity Allocation Fund (from GMO EAFE-Lite
Extended to GMO EAFE Extended); World Equity Allocation Fund (from GMO
World-Lite Extended to GMO World Extended); Global (U.S.+) Equity Allocation
Fund (this Fund previously used a weighted index comprised in part of GMO
EAFE-Lite Extended -- this portion is now GMO EAFE Extended); and Global
Balanced Index (this Fund previously used a weighted index comprised in part by
GMO EAFE-Lite Extended -- this portion is now GMO EAFE Extended).
Some Funds are managed against "currency hedged" versions of certain of the
indexes listed below. In these cases, the benchmark vendor calculates the
benchmark with the assumption that any gains or losses incurred due to changes
in the value of the foreign currencies in which the securities comprising the
index are denominated relative to the U.S. dollar are offset by gains and losses
on fully effective currency hedging transactions. While the Manager believes
that these "currency hedged" indexes are an appropriate performance benchmark,
investors should be aware that these Funds (including those identified as
"currency hedged") will take active currency positions relative to the hedged
benchmark. See "Principal
53
<PAGE> 55
Risks -- Leverage." These positions may be created directly, through currency or
forward currency positions, or indirectly, by overweighting the investment in
securities denominated in that currency without a corresponding increase in the
level of currency hedging.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ABBREVIATION FULL NAME SPONSOR OR PUBLISHER DESCRIPTION
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
S&P 500 Standard & Poor's 500 Standard & Poor's Well-known, independently maintained
Stock Index Corporation and published U.S. large capitalization
stock index
- --------------------------------------------------------------------------------------------------------------------
Lehman Brothers Lehman Brothers Lehman Brothers Well-known, independently maintained
Government Government Bond Index and published U.S. government bond
index, regularly used as a comparative
fixed income benchmark
- --------------------------------------------------------------------------------------------------------------------
MSCI EAFE Morgan Stanley Capital Morgan Stanley Capital Well-known, independently maintained
International Europe, International and published large capitalization
Australia and Far international stock index
East Index
- --------------------------------------------------------------------------------------------------------------------
GMO EAFE-Lite GMO EAFE-Lite Index GMO A modification of EAFE where GMO
reduces the market capitalization of
Japan by 40% relative to EAFE
- --------------------------------------------------------------------------------------------------------------------
GMO EAFE-Lite GMO EAFE-Lite Extended GMO A modification of EAFE-Lite where GMO
Extended Index adds those additional countries
represented in the IFC Investable Index
- --------------------------------------------------------------------------------------------------------------------
GMO EAFE-Extended GMO EAFE Extended GMO A modification of EAFE where GMO adds
those additional countries represented
in the IFC Investable Index
- --------------------------------------------------------------------------------------------------------------------
MSCI World Morgan Stanley Capital Morgan Stanley Capital An independently maintained and
International World International published global (including U.S.)
Index equity index
- --------------------------------------------------------------------------------------------------------------------
GMO World Extended GMO World Extended GMO A modification of MSCI World where GMO
Index adds those additional countries
represented in the IFC Investable Index
- --------------------------------------------------------------------------------------------------------------------
GMO Global (U.S.+) GMO Global (U.S.+) GMO A composite benchmark computed by GMO
Equity Index Equity Index and comprised 75% by S&P 500 and 25% by
EAFE Extended
- --------------------------------------------------------------------------------------------------------------------
GMO Global Balanced GMO Global Balanced GMO A composite benchmark computed by GMO
Index Index and comprised 48.75% by S&P 500, 16.25%
by EAFE Extended and 35% by Lehman
Brothers Aggregate Bond Index
- --------------------------------------------------------------------------------------------------------------------
MSCI EAFE (Hedged) Morgan Stanley Capital Morgan Stanley Capital Well-known, independently maintained
International Europe, International and published large capitalization
Australia and Far international stock index that is
East Index (Hedged) currency-hedged into U.S. dollars
- --------------------------------------------------------------------------------------------------------------------
MSRI Morgan Stanley REIT Morgan Stanley & Co., Well-known, independently maintained
Index Inc. and published equity real estate index
- --------------------------------------------------------------------------------------------------------------------
SSB 3 Month T-Bill Salomon Smith Barney 3 Salomon Smith Barney Independently maintained and published
Index Month Treasury-Bill short-term bill index
Index
- --------------------------------------------------------------------------------------------------------------------
J.P. Morgan Non-U.S. J.P. Morgan Non-U.S. J.P. Morgan Independently maintained and published
Government Bond Government Bond index composed of non-U.S. government
Index Index bonds with maturities of one year or
more
- --------------------------------------------------------------------------------------------------------------------
J.P. Morgan Non-U.S. J.P. Morgan Non-U.S. J.P. Morgan Independently maintained and published
Government Bond Government Bond Index index composed of non-U.S. government
Index (Hedged) (Hedged) bonds with maturities of one year or
more that are currency-hedged into U.S.
dollars
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
54
<PAGE> 56
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ABBREVIATION FULL NAME SPONSOR OR PUBLISHER DESCRIPTION
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
J.P. Morgan Global J.P. Morgan Global J.P. Morgan Independently maintained and published
Government Bond Government Bond index composed of government bonds of
Index Index 14 developed countries, including the
U.S., with maturities of one year or
more
- --------------------------------------------------------------------------------------------------------------------
J.P. Morgan Emerging J.P. Morgan Emerging J.P. Morgan Independently maintained and published
Markets Bond Market Bond Index index composed of debt securities of 14
Index+ Plus countries, which includes Brady bonds,
sovereign debt, local debt and
Eurodollar debt, all of which are
dollar denominated
- --------------------------------------------------------------------------------------------------------------------
Lehman Brothers Lehman Brothers Lehman Brothers Well-known, independently maintained
Aggregate Bond Aggregate Bond Index and published index comprised of U.S.
Index fixed rate debt issues, having a
maturity of at least one year, rated
investment grade or higher by Moody's
Investors Service, Standard & Poor's
Corporation, or Fitch Investors Service
- --------------------------------------------------------------------------------------------------------------------
Russell 1000 Growth Russell 1000 Growth Frank Russell Company Independently maintained and published
Index Index index composed of the 1,000 largest
U.S. companies based on total market
capitalization with higher
price-to-book ratios and higher
forecasted growth values
- --------------------------------------------------------------------------------------------------------------------
Russell 1000 Value Russell 1000 Value Frank Russell Company Independently maintained and published
Index Index index composed of the 1,000 largest
U.S. companies based on total market
capitalization with lower price-to-book
ratios and lower forecasted growth
values
- --------------------------------------------------------------------------------------------------------------------
Russell 2500 Growth Russell 2500 Growth Frank Russell Company Independently maintained and published
Index Index index composed of the bottom 2,500 of
the 3,000 largest U.S. companies based
on total market capitalization with
higher price-to-book ratios and higher
forecasted growth values
- --------------------------------------------------------------------------------------------------------------------
Russell 2500 Value Russell 2500 Value Frank Russell Company Independently maintained and published
Index Index index composed of the bottom 2,500 of
the 3,000 largest U.S. companies based
on total market capitalization with
lower price-to-book ratios and lower
forecasted growth values
- --------------------------------------------------------------------------------------------------------------------
GMO Russell 2500 GMO Russell 2500 Value GMO Index is comprised of the Russell 2500
Value+ Plus Index from 12/31/91 to 12/31/96, and
the Russell 2500 Value Index from
12/31/96 to present
- --------------------------------------------------------------------------------------------------------------------
IFC Investable IFC Investable International Finance Independently maintained and published
Composite Index Corporation emerging market stock index
- --------------------------------------------------------------------------------------------------------------------
MSCI Japan MSCI Japan Index Morgan Stanley Capital Independently maintained and published
International equity index that attempts to capture
60% of the market capitalization in
Japan
- --------------------------------------------------------------------------------------------------------------------
Lehman Brothers Lehman Brothers Lehman Brothers Independently maintained and published
Treasury Inflation Treasury Inflation index of inflation-indexed linked U.S.
Notes Index Notes Index Treasury securities
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
55
<PAGE> 57
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ABBREVIATION FULL NAME SPONSOR OR PUBLISHER DESCRIPTION
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SSB EMI World ex U.S. SSB Emerging Market Salomon Smith Barney The SSB EMI World ex-U.S. is the small
Index World ex-U.S. capitalization stock component of the
Index SSB Broad Market Index (BMI). The BMI
is a float-weighted index that spans 22
countries and includes the listed
shares of all companies with an
available market capitalization (float)
of at least $100 million at the end of
May each year. Companies are deleted if
their float falls below $75 million.
Changes are effective before the open
of the first business day of July. The
EMI ex-U.S. is defined as those stocks
falling in the bottom 20% of the
cumulative available capital in each
country.
- --------------------------------------------------------------------------------------------------------------------
SSB BMI World SSB Broad Market Index Salomon Smith Barney The SSB World Equity Property Index is
Property Index World Equity Property an independently maintained and
Index published real estate securities index.
The Index is broadly populated,
including over 382 companies each with
a minimum equity market capitalization
of US$50 million. Companies in the
Index represent 19 countries.
- --------------------------------------------------------------------------------------------------------------------
MSCI AC World ex U.S. MSCI All Country World Morgan Stanley Capital An independently maintained and
Ex. U.S. Index International published international (excluding U.S.
and including emerging) equity index.
- --------------------------------------------------------------------------------------------------------------------
GMO Asia 7 Index GMO Asia 7 Index GMO The GMO Asia 7 is composed of the IFC
Investable Country Indexes, equally
weighted, for seven Asian countries
(China, Indonesia, Korea, Malaysia, the
Philippines, Taiwan and Thailand).
- --------------------------------------------------------------------------------------------------------------------
MSCI All Country MSCI All Country World Morgan Stanley Capital An independently maintained and
World Index Index International published global (including U.S. and
emerging) equity index.
- --------------------------------------------------------------------------------------------------------------------
GMO World-Lite GMO World-Lite Extended GMO A modification of World-Lite where GMO
Extended Index adds those additional countries
represented in the IFC Investable
Index.
- --------------------------------------------------------------------------------------------------------------------
GMO EAFE-Lite GMO EAFE-Lite (Hedged) GMO A modification of GMO EAFE-Lite that is
(Hedged) Index currency hedged into U.S. dollars.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
56
<PAGE> 58
DETERMINATION OF NET ASSET VALUE
The net asset value of a share is determined for each Fund once on each day
on which the New York Stock Exchange is open, except that a Fund may not
determine its net asset value on days during which no security is tendered for
redemption and no order to purchase or sell such security is received by the
relevant Fund. Net asset value is determined as of 4:15 p.m., New York City
Time. A Fund's net asset value is determined by dividing the total market value
of the Fund's portfolio investments and other assets, less any liabilities, by
the total outstanding shares of the Fund. Portfolio securities listed on a
securities exchange for which market quotations are available are valued at the
last quoted sale price on each business day or, if there is no such reported
sale, at the most recent quoted bid price. However, for those securities that
are listed on an exchange where the exchange is less relevant in determining the
market value of such securities than is the private market, a broker bid will be
used. Criteria for relevance include where the securities are principally traded
and what their intended market for disposition is. Price information on listed
securities is generally taken from the closing price on the exchange where the
security is primarily traded. Unlisted securities for which market quotations
are readily available are valued at the most recent quoted bid price, except
that debt obligations with sixty days or less remaining until maturity may be
valued at their amortized cost, unless circumstances dictate otherwise.
Circumstances may dictate otherwise, among other times, when the issuer's
creditworthiness has become impaired.
All other fixed income securities (which include bonds, loans and
structured notes) and options thereon are valued at the closing bid for such
securities as supplied by a primary pricing source chosen by the Manager. While
the Manager evaluates such primary pricing sources on an ongoing basis, and may
change any pricing source at any time, the Manager will not normally evaluate
the prices supplied by the pricing sources on a day-to-day basis. However, the
Manager is kept informed of erratic or unusual movements (including unusual
inactivity) in the prices supplied for a security and has the power to override
any price supplied by a source (by taking a price supplied from another) because
of such price activity or because the Manager has other reasons to suspect that
a price supplied may not be reliable. Certain securities may be valued on the
basis of a price provided by a principal market maker. Prices provided by
principal market makers may vary from the value that would be realized if the
securities were sold.
Other assets and securities for which no quotations are readily available
are valued at fair value as determined in good faith by the Trustees or persons
acting at their direction. The values of foreign securities quoted in foreign
currencies are translated into U.S. dollars at current exchange rates or at such
other rates as the Trustees may determine in computing net asset value.
Because of time zone differences, foreign exchanges and securities markets
will usually be closed prior to the time of the closing of the New York Stock
Exchange and values of foreign options and foreign securities will be determined
as of the earlier closing of such exchanges and securities markets. However,
events affecting the values of such foreign securities may occasionally occur
between the earlier closings of such exchanges and securities markets and the
closing of the New York Stock Exchange which will not be reflected in the
computation of the Funds' net asset value. If an event materially affecting the
value of such foreign securities occurs during such period, then such securities
may be valued at fair value as determined in good faith by the Trustees or
persons acting at their direction.
Because foreign securities, options on foreign securities and foreign
futures are generally quoted in foreign currencies, fluctuations in the value of
such currencies in relation to the U.S. dollar will affect the net asset value
of shares of the Funds even though there has not been any change in the values
of such securities and options measured in terms of the foreign currencies in
which they are denominated.
TAXES
The following is a general summary of the principal federal income tax
consequences of investing in a Fund for shareholders who are U.S. citizens,
residents or domestic corporations. Shareholders should consult their own tax
advisors about the precise tax consequences of an investment in a Fund in light
of each shareholder's particular tax situation, including possible foreign,
state, local or other applicable tax laws (including the federal alternative
minimum tax).
- Each Fund is treated as a separate taxable entity for federal income tax
purposes and intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as
amended.
- Fund distributions derived from interest, dividends and certain other
income, including in general short-term capital gains, will be taxable as
ordinary income to shareholders subject to federal income tax whether
received in cash or reinvested shares. Properly designated Fund
distributions derived from net long-term capital gains will be taxable as
such (generally at a 20% rate for noncorporate shareholders).
Distributions by a Fund result in a reduction in the net asset value of
the Fund's shares. Should a distribution reduce the net asset value below
a shareholder's cost basis, such distribution nevertheless may be taxable
to the shareholder as described above, even though, from an investment
standpoint, it may constitute a partial return of capital. In particular,
shareholders should be careful to consider the tax implications of buying
shares just prior to a taxable distribution. The price of shares
purchased at
57
<PAGE> 59
that time includes the amount of any forthcoming distribution.
Shareholders purchasing shares just prior to a taxable distribution will
receive a return of investment upon distribution that nevertheless will
be taxable to them.
- A Fund's investments in foreign securities may be subject to foreign
withholding taxes on dividends, interest or capital gains. In that case,
such Fund's yield on those securities would be decreased. In certain
instances, shareholders may be entitled to claim a credit or deduction
with respect to foreign taxes.
- In addition, a Fund's investments in foreign securities, foreign
currencies, debt obligations issued or purchased at a discount, assets
"marked to the market" for federal income tax purposes and, potentially,
so-called "indexed securities" (including inflation indexed bonds) may
increase or accelerate such Fund's recognition of income, including the
recognition of taxable income in excess of the cash generated by such
investments. These investments may, therefore, affect the timing or
amount of such Fund's distributions and may cause such Fund to liquidate
other investments to satisfy the distribution requirements that apply to
entities taxed as regulated investment companies.
- Any gain resulting from the sale or exchange of your shares will
generally also be subject to tax.
MANAGEMENT OF THE TRUST
Each Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC,
40 Rowes Wharf, Boston, Massachusetts 02110 (the "Manager" or "GMO"), which
provides investment advisory services to a substantial number of institutional
and other investors. Each of the following four members holds greater than a 5%
interest in the Manager: R. Jeremy Grantham, Richard A. Mayo, Eyk H.A. Van
Otterloo and Kingsley Durant.
Under separate Management Contracts with the Trust, the Manager selects and
reviews each Fund's investments and provides executive and other personnel for
the management of the Trust. Pursuant to the Trust's Agreement and Declaration
of Trust, the Board of Trustees supervises the affairs of the Trust as conducted
by the Manager. In the event that the Manager ceases to be the manager of any
Fund, the right of the Trust to use the identifying name "GMO" may be withdrawn.
The Manager has entered into separate Consulting Agreements with Dancing
Elephant, Ltd., 1936 University Avenue, Berkeley, California 94704 (the
"Consultant"), with respect to the management of the portfolios of the Emerging
Markets Fund, Evolving Countries Fund and Asia Fund. The Consultant is wholly
owned by Mr. Arjun Divecha, who is also a member of GMO's Management Committee.
Under each Consulting Agreement, the Manager separately pays the Consultant a
monthly fee at an annual rate equal to the lesser of 0.50% of the Fund's average
daily net assets or $250,000. The Consultant may from time to time waive all or
a portion of its fee. Payments made by the Manager to the Consultant will not
affect the amounts payable by the Fund to the Manager or the Fund's expense
ratio.
Each Management Contract provides for payment to the Manager of a
management fee at the stated annual rates set forth under "Fees and Expenses."
The management fee is computed and accrued daily, and paid monthly. The Manager
has contractually agreed to reimburse each Fund and to bear certain Fund
expenses through at least June 30, 2000 in order to limit each Fund's annual
expenses to specified limits (with certain exclusions). These limits are
described in footnote 4 in "Fees and Expenses."
58
<PAGE> 60
During the fiscal year ended February 28, 1999, the Manager received as
compensation for management services rendered in such year (after any applicable
waivers or reimbursements), the percentages of each Fund's average daily net
assets as set forth below.
<TABLE>
<CAPTION>
% OF AVERAGE
FUND NET ASSETS
- ---- ------------
<S> <C>
U.S. Core Fund 0.31%
Tobacco-Free Core Fund 0.25%
Value Fund 0.40%
Growth Fund 0.27%
Small Cap Value Fund 0.29%
Small Cap Growth Fund 0.27%
Fundamental Value Fund 0.54%
REIT Fund 0.49%
International Core Fund 0.47%
Currency Hedged International Core
Fund 0.34%
Foreign Fund 0.50%
International Small Companies Fund 0.44%
Japan Fund 0.36%
Emerging Markets Fund 0.79%
Evolving Countries Fund 0.46%
Global Properties Fund 0.00%
Emerging Country Debt Share Fund 0.00%
</TABLE>
<TABLE>
<CAPTION>
% OF AVERAGE
FUND NET ASSETS
- ---- ------------
<S> <C>
Asia Fund 0.70%
Domestic Bond Fund 0.06%
U.S. Bond/Global Alpha A Fund 0.15%
U.S. Bond/Global Alpha B Fund 0.08%
International Bond Fund 0.16%
Currency Hedged International Bond
Fund 0.17%
Global Bond Fund 0.07%
Emerging Country Debt Fund 0.32%
Short-Term Income Fund 0.00%
Global Hedged Equity Fund 0.04%
Inflation Indexed Bond Fund 0.00%
International Equity Allocation Fund 0.00%
World Equity Allocation Fund 0.00%
Global (U.S.+) Equity Allocation Fund 0.00%
Global Balanced Allocation Fund 0.00%
U.S. Sector Fund 0.00%
</TABLE>
Pursuant to a Servicing Agreement with the Trust on behalf of each class of
shares of each Fund, Grantham, Mayo, Van Otterloo & Co. LLC, in its capacity as
the Trust's shareholder servicer (the "Shareholder Servicer") provides direct
client service, maintenance and reporting to shareholders of each class of
shares. Such servicing and reporting services include, without limitation,
professional and informative reporting, client account information, personal and
electronic access to Fund information, access to analysis and explanations of
Fund reports, and assistance in the correction and maintenance of client-related
information.
59
<PAGE> 61
The table below identifies the persons at GMO who are primarily responsible
for the day-to-day management of one or more Funds. More than one individual is
responsible for the day-to-day management of certain Funds. Day-to-day
management of the Asset Allocation Funds is the responsibility of a committee,
and no person or persons is primarily responsible for making recommendations to
that committee.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
MANAGER PRIMARY RESPONSIBILITY SINCE PROFESSIONAL EXPERIENCE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
R. Jeremy Grantham U.S. Sector Fund and U.S. Equity Funds >5 years President-Quantitative and
except Value Fund, Fundamental Value Fund Partner/Member, GMO since 1979.
and REIT Fund
--------------------------------------------------------
Currency Hedged International Core Fund, Inception
International Small Companies Fund, Japan
Fund, Global Hedged Equity Fund and
International Core Fund
- -----------------------------------------------------------------------------------------------------------------------
Christopher Darnell U.S. Sector Fund, International Core Fund >5 years Partner/Member, GMO since 1984.
and U.S. Equity Funds except Value Fund,
Fundamental Value Fund and REIT Fund
--------------------------------------------------------
Currency Hedged International Core Fund, Inception
International Small Companies Fund, Japan
Fund, Global Hedged Equity Fund
--------------------------------------------------------
REIT Fund and Value Fund Inception
through
June 1999
- -----------------------------------------------------------------------------------------------------------------------
Richard A. Mayo Fundamental Value Fund and Value Fund >5 years President-U.S. Active and
Partner/Member, GMO since 1979.
--------------------------------------------------------
REIT Fund 1999
- -----------------------------------------------------------------------------------------------------------------------
Forrest Berkley Currency Hedged International Core Fund, Inception Partner/Member, GMO since 1990.
International Small Companies Fund, Japan
Fund and Global Hedged Equity Fund
--------------------------------------------------------
International Core Fund >5 years
- -----------------------------------------------------------------------------------------------------------------------
Arjun Bhagwan Emerging Markets Fund, Evolving Countries Inception President, Dancing Elephant, Ltd.
Divecha Fund and Asia Fund (Consultant to GMO) since 1993.
- -----------------------------------------------------------------------------------------------------------------------
Jui L. Lai Foreign Fund Inception Investment Director since 1988 and
Member since 1996, GMO.
- -----------------------------------------------------------------------------------------------------------------------
Ann M. Spruill Foreign Fund Inception Investment Director since 1990 and
Member since 1996, GMO.
- -----------------------------------------------------------------------------------------------------------------------
Eyk H. A. Van Global Properties Fund Inception President-International and
Otterloo Partner/Member, GMO since 1979.
- -----------------------------------------------------------------------------------------------------------------------
Wilson Magee Global Properties Fund and REIT Fund Inception Employee of GMO since 1997. 1994-
1997, principal for Penobscot Group.
- -----------------------------------------------------------------------------------------------------------------------
William L. Fixed Income Funds except Short-Term Income Inception Investment Director since 1993 and
Nemerever Fund and Global Hedged Equity Fund Member since 1996, GMO.
--------------------------------------------------------
Short-Term Income Fund 1994
- -----------------------------------------------------------------------------------------------------------------------
Thomas F. Cooper Fixed Income Funds except Short-Term Income Inception Investment Director since 1993 and
Fund and Global Hedged Equity Fund Member since 1996, GMO.
--------------------------------------------------------
Short-Term Income Fund 1994
- -----------------------------------------------------------------------------------------------------------------------
Steven Edelstein Fixed Income Funds except Global Hedged 1995 Employee of GMO since 1995. 1990 to
Equity Fund 1995, Vice President in the Fixed
Income Futures and Options Group at
Morgan Stanley & Company.
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
60
<PAGE> 62
[THIS PAGE IS INTENTIONALLY LEFT BLANK.]
61
<PAGE> 63
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
DOMESTIC EQUITY FUNDS
- ----------------------------------
U.S. CORE FUND*
<TABLE>
<CAPTION>
CLASS II SHARES
---------------------------------------------------------------------------------
PERIOD FROM
JUNE 7, 1996
YEAR ENDED PERIOD FROM PERIOD FROM (COMMENCEMENT
FEBRUARY 28, JANUARY 9, 1998 MARCH 1, 1997 OF OPERATIONS) TO
1999 TO FEBRUARY 28, 1998 TO NOVEMBER 17, 1997 FEBRUARY 28, 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(3) 0.04(3) 0.24(3) 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) -- (0.22) (0.30)
From net realized gains...................... (3.92) -- (3.90) (2.89)
------- ------- ------- -------
Total distributions........................ (4.21) -- (4.12) (3.19)
------- ------- ------- -------
Net asset value, end of period................ $ 18.57 $ 19.98 $ 20.21 $ 20.10
======= ======= ======= =======
Total Return(1)............................... 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%(2) 0.55%(2) 0.55%(2)
Net investment income to average daily net
assets..................................... 1.29% 1.53%(2) 1.66%(2) 1.63%(2)
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>
(1) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(2) Annualized.
(3) Computed using average shares outstanding throughout the period.
* Effective June 30, 1998, the "GMO Core Fund" was renamed the "GMO U.S. Core
Fund."
TOBACCO-FREE CORE FUND
<TABLE>
<CAPTION>
CLASS III SHARES
--------------------------------------------------------
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(1)............... 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>
(1) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
62
<PAGE> 64
<TABLE>
<CAPTION>
CLASS III SHARES CLASS IV SHARES
-------------------------------------------------------------- -------------------------------------
PERIOD FROM
JANUARY 9, 1998
YEAR ENDED FEBRUARY 28/29, (COMMENCEMENT OF
-------------------------------------------------------------- YEAR ENDED OPERATIONS) TO
1999 1998 1997 1996 1995 FEBRUARY 28, 1999 FEBRUARY 28, 1998
---------- ---------- ---------- ---------- ---------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 19.99 $ 20.12 $ 19.46 $ 15.45 $ 15.78 $ 19.99 $ 17.65
---------- ---------- ---------- ---------- ---------- ---------- ----------
0.26(3) 0.35 0.36 0.41 0.41 0.27(3) 0.04(3)
2.55 5.89 3.58 5.49 0.66 2.55 2.30
---------- ---------- ---------- ---------- ---------- ---------- ----------
2.81 6.24 3.94 5.90 1.07 2.82 2.34
---------- ---------- ---------- ---------- ---------- ---------- ----------
(0.29) (0.32) (0.39) (0.42) (0.39) (0.31) --
(3.92) (6.05) (2.89) (1.47) (1.01) (3.92) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
(4.21) (6.37) (3.28) (1.89) (1.40) (4.23) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 18.59 $ 19.99 $ 20.12 $ 19.46 $ 15.45 $ 18.58 $ 19.99
========== ========== ========== ========== ========== ========== ==========
15.02% 36.69% 22.05% 39.08% 7.45% 15.07% 13.26%
$1,780,011 $2,317,103 $3,051,344 $3,179,314 $2,309,248 $1,543,655 $1,370,535
0.48% 0.48% 0.48% 0.48% 0.48% 0.435% 0.435%(2)
1.36% 1.67% 1.78% 2.25% 2.63% 1.41% 1.67%(2)
71% 60% 107% 77% 99% 71% 60%
$ 0.04 $ 0.05 $ 0.04 $ 0.01 $ 0.01 $ 0.04 $ 0.01
</TABLE>
63
<PAGE> 65
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
VALUE FUND
<TABLE>
<CAPTION>
CLASS III SHARES
----------------------------------------------------
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(1)........................ 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>
(1) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
FUNDAMENTAL VALUE FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-------------------------------------------------------
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(1)................................... 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>
(1) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
64
<PAGE> 66
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
GROWTH FUND
<TABLE>
<CAPTION>
CLASS III SHARES
------------------------------------------------------------
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(1)............................................. 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 --(2) --(2)
</TABLE>
(1) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(2) Fees and expenses waived or borne by the Manager were less than $.01 per
share.
SMALL CAP VALUE FUND*
<TABLE>
<CAPTION>
CLASS III SHARES
------------------------------------------------------------
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(1)............................. (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>
(1) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
* Effective December 1, 1996, the "GMO Core II Secondaries Fund" was renamed the
"GMO Small Cap Value Fund."
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
65
<PAGE> 67
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
SMALL CAP GROWTH FUND
<TABLE>
<CAPTION>
CLASS III SHARES
--------------------------------------------------------
YEAR ENDED FEBRUARY 28, PERIOD FROM DECEMBER 31, 1996
------------------------ (COMMENCEMENT OF OPERATIONS)
1999 1998 TO FEBRUARY 28, 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(1)............................................. (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%(2)
Net investment income to average daily net assets......... 0.21% 0.47% 0.70%(2)
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>
(1) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(2) Annualized.
REIT FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-------------------------------------------------------
YEAR ENDED FEBRUARY 28, PERIOD FROM MAY 31, 1996
------------------------ (COMMENCEMENT OF OPERATIONS)
1999 1998 TO FEBRUARY 28, 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(2) 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(1)............................................. (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 assets.................. 0.69% 0.69% 0.69%(3)
Net investment income to average daily net assets......... 4.60% 4.10% 4.72%(3)
Portfolio turnover rate................................... 59% 86% 21%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts.... $ 0.03 $ 0.03 $ 0.02
</TABLE>
(1) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(2) Computed using average shares outstanding throughout the period.
(3) Annualized.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
66
<PAGE> 68
[THIS PAGE IS INTENTIONALLY LEFT BLANK.]
67
<PAGE> 69
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
INTERNATIONAL EQUITY FUNDS
INTERNATIONAL CORE FUND
<TABLE>
<CAPTION>
CLASS II SHARES
------------------------------------------------
PERIOD FROM
SEPTEMBER 26, 1996
YEAR ENDED YEAR ENDED (COMMENCEMENT OF
FEBRUARY 28, FEBRUARY 28, OPERATIONS) TO
1999 1998 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(5) 0.52(5) 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(1).................... (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%(3,4)
Net investment income to average
daily net assets................ 1.71% 2.14% 0.98%(4)
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
<CAPTION>
CLASS III SHARES
--------------------------------------------------------------
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(5) 0.54(5) 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(1).................... (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%(2) 0.71%(2) 0.70%
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>
(1) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(2) Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .02% of average daily net assets.
(3) Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .04% of average daily net assets.
(4) Annualized.
(5) Computed using average shares outstanding throughout the period.
CURRENCY HEDGED INTERNATIONAL CORE FUND
<TABLE>
<CAPTION>
CLASS III SHARES CLASS IV SHARES
--------------------------------------------------------- --------------------------------
PERIOD FROM
PERIOD JANUARY 9, 1998
YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED (COMMENCEMENT OF
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, OPERATIONS) TO
1999 1998 1997 1996(1) 1999 FEBRUARY 28, 1998
------------ ------------ ------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................... $ 11.92 $ 12.68 $ 11.54 $ 10.00 $ 11.92 $ 10.87
------- -------- -------- -------- -------- --------
Income from investment operations:
Net investment income............ 0.23(5) 0.27(5) 0.22 0.23 0.24(5) 0.01(5)
Net realized and unrealized gain
(loss)......................... (0.36)(6) 1.72 1.63 1.44 (0.36)(6) 1.04
------- -------- -------- -------- -------- --------
Total from investment
operations.................... (0.13) 1.99 1.85 1.67 (0.12) 1.05
------- -------- -------- -------- -------- --------
Less distributions to
shareholders:
From net investment income....... (0.08) (0.27) (0.28) (0.06) (0.09) --
In excess of net investment
income......................... (0.21) -- -- -- (0.22) --
From net realized gains.......... (2.22) (2.48) (0.43) (0.07) (2.22) --
------- -------- -------- -------- -------- --------
Total distributions............ (2.51) (2.75) (0.71) (0.13) (2.53) --
------- -------- -------- -------- -------- --------
Net asset value, end of period.... $ 9.28 $ 11.92 $ 12.68 $ 11.54 $ 9.27 $ 11.92
======= ======== ======== ======== ======== ========
Total Return(2)................... (1.84)% 17.98% 16.55% 16.66% (1.79)% 9.66%
Ratios/Supplemental Data:
Net assets, end of period
(000's)........................ $97,450 $207,653 $581,099 $407,227 $108,956 $362,829
Net expenses to average daily net
assets......................... 0.69% 0.69% 0.72%(3) 0.69%(4) 0.63% 0.63%(4)
Net investment income to average
daily net assets............... 2.07% 2.15% 2.25% 1.89%(4) 2.17% 0.72%(4)
Portfolio turnover rate.......... 68% 96% 84% 7% 68% 96%
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 $ 0.05 $ 0.01
</TABLE>
(1) Period from June 30, 1995 (commencement of operations) to February 29, 1996.
(2) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(3) Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .03% of average daily net assets.
(4) Annualized.
(5) Computed using average shares outstanding throughout the period.
(6) 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.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
68
<PAGE> 70
<TABLE>
<CAPTION>
CLASS IV SHARES
----------------------------------------
PERIOD FROM
JANUARY 9, 1998
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) TO
FEBRUARY 28, 1999 FEBRUARY 28, 1998
----------------- -----------------
<S> <C> <C>
$ 23.19 $ 20.61
-------- --------
0.42(5) 0.02(5)
(0.46) 2.56
-------- --------
(0.04) 2.58
-------- --------
(0.25) --
(0.25) --
(2.28) --
-------- --------
(2.78) --
-------- --------
$ 20.37 $ 23.19
======== ========
(0.60)% 12.52%
$567,219 $682,952
0.63% 0.63%(4)
1.85% 0.68%(4)
60% 68%
$ 0.06 $ 0.01
</TABLE>
69
<PAGE> 71
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
FOREIGN FUND*
<TABLE>
<CAPTION>
CLASS II SHARES CLASS III SHARES
---------------------------------------------------------- -----------------
PERIOD FROM
SEPTEMBER 30, 1996
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS) TO YEAR ENDED
FEBRUARY 28, 1999 FEBRUARY 28, 1998 FEBRUARY 28, 1997 FEBRUARY 28, 1999
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period........................ $ 12.09 $ 10.65 $ 10.02 $ 12.10
------- ------- ------- --------
Income from investment
operations:
Net investment income......... 0.20(5) 0.18(5) 0.06 0.20(5)
Net realized and unrealized
gain (loss)................. (0.14) 1.48 0.65 (0.12)
------- ------- ------- --------
Total from investment
operations................ 0.06 1.66 0.71 0.08
------- ------- ------- --------
Less distributions to
shareholders:
From net investment income.... (0.25) (0.22) (0.08) (0.26)
From net realized gains....... (0.11) (0.00)(6) -- (0.11)
------- ------- ------- --------
Total distributions......... (0.36) (0.22) (0.08) (0.37)
------- ------- ------- --------
Net asset value, end of
period........................ $ 11.79 $ 12.09 $ 10.65 $ 11.81
======= ======= ======= ========
Total Return(1)................. 0.36% 15.94% 7.08% 0.48%
Ratios/Supplemental Data:
Net assets, end of period
(000's)..................... $33,780 $53,949 $21,957 $927,108
Net expenses to average daily
net assets.................. 0.82% 0.82% 0.84%(2,4) 0.75%
Net investment income to
average daily net assets.... 1.64% 1.60% 0.83%(2) 1.60%
Portfolio turnover rate....... 27% 19% 13% 27%
Fees and expenses voluntarily
waived or borne by the
Manager consisted of the
following per share
amounts..................... $ 0.03 $ 0.03 $ 0.02 $ 0.03
<CAPTION>
CLASS III SHARES
-------------------------------------
PERIOD FROM
JUNE 28, 1996
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) TO
FEBRUARY 28, 1998 FEBRUARY 28, 1997
----------------- -----------------
<S> <C> <C>
Net asset value, beginning of
period........................ $ 10.66 $ 10.00
-------- --------
Income from investment
operations:
Net investment income......... 0.21(5) 0.08
Net realized and unrealized
gain (loss)................. 1.45 0.66
-------- --------
Total from investment
operations................ 1.66 0.74
-------- --------
Less distributions to
shareholders:
From net investment income.... (0.22) (0.08)
From net realized gains....... (0.00)(6) --
-------- --------
Total distributions......... (0.22) (0.08)
-------- --------
Net asset value, end of
period........................ $ 12.10 $ 10.66
======== ========
Total Return(1)................. 15.95% 7.37%
Ratios/Supplemental Data:
Net assets, end of period
(000's)..................... $847,427 $671,829
Net expenses to average daily
net assets.................. 0.75% 0.76%(2,3)
Net investment income to
average daily net assets.... 1.80% 1.24%(2)
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>
<TABLE>
<C> <S>
(1) The total returns would have been lower had certain expenses
not been waived during the periods shown.
(2) Annualized.
(3) 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.
(4) Includes stamp duties and transfer taxes not waived or borne
by the Manager, which approximate .02% of average daily net
assets for the period ended February 28, 1997.
(5) Computed using average shares outstanding throughout the
period.
(6) The per share realized gain distribution was $0.004
(7) Net investment income earned was less than $0.01 per share.
Computed using average shares outstanding throughout the
period.
(8) Fees or expenses voluntarily waived or borne by the Manager
were less than $0.01 per share.
(a) The fiscal year end of the GMO Pool was June 30.
(b) Expenses for the GMO Pool were paid directly by its
unitholders.
(c) Net of annual total GMO Pool expenses of 0.83% paid directly
by unitholders.
* The GMO Foreign Fund (the "Foreign 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 Nonprofit
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. Total return figures are
based on historical earnings but past performance data is
not necessarily indicative of future performance of the
Foreign Fund. The per unit information for the GMO Pool has
been restated to conform to the Foreign Fund's initial net
asset value of $10.00 per share on such date. The GMO Pool
was not a registered investment company as it was exempt
from registration under the 1940 Act and therefore was not
subject to certain investment restrictions imposed by the
1940 Act. If the GMO Pool had been registered under the 1940
Act, its performance may have been adversely affected. The
GMO Pool's performance information is also presented as the
performance of the Foreign Fund for periods prior to June
28, 1996 by including the total return of the GMO Pool; such
information does not constitute the financial highlights of
the Foreign Fund.
</TABLE>
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions).
Except as otherwise noted, the above information has been audited by
PricewaterhouseCoopers LLP, independent accountants. The information relating to
the periods ended February 28, 1997, 1998 and 1999 should be read in conjunction
with the financial statements and related notes which are included in the
Foreign Fund's Annual Report, and which are incorporated by reference in the
Trust's Statement of Additional Information. The GMO Pool had only one class of
outstanding units. Expenses charged to GMO Pool unitholders were fixed at a
level above that of the Foreign Fund's Class II and Class III Shares.
70
<PAGE> 72
<TABLE>
<CAPTION>
GMO POOL
PERFORMANCE INFORMATION**
CLASS IV SHARES (UNAUDITED)
-------------------------------------- --------------------------
PERIOD FROM
JANUARY 9, 1998
(COMMENCEMENT OF Year Ended June 30,(a)
YEAR ENDED OPERATIONS) TO --------------------------
FEBRUARY 28, 1999 FEBRUARY 28, 1998 1996 1995
----------------- ----------------- --------- ---------
<S> <C> <C> <C> <C>
$ 12.11 $ 10.90 $ 8.90 $ 8.52
-------- -------- ------ ------
0.22(5) -- (7) 0.27(b) 0.27(b)
(0.15) 1.21 1.07 0.37
-------- -------- ------ ------
0.07 1.21 1.34 0.64
-------- -------- ------ ------
(0.26) -- (0.24) (0.26)
(0.11) --
-------- -------- ------ ------
(0.37) --
-------- -------- ------ ------
$ 11.81 $ 12.11 $10.00 $ 8.90
======== ======== ====== ======
0.53% 11.10% 14.25%(c) 6.82%(c)
$130,760 $219,785 N/A N/A
0.69% 0.69%(2) N/A N/A
1.81% 0.26%(2) N/A N/A
27% 19% N/A N/A
$ 0.03 $-- (8) N/A N/A
</TABLE>
71
<PAGE> 73
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
INTERNATIONAL SMALL COMPANIES FUND
<TABLE>
<CAPTION>
CLASS III SHARES
--------------------------------------------------------
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) --
From net realized gains................................... (0.39) (1.67) (0.20) (0.15) (0.96)
In excess of net realized gains........................... -- -- -- -- --
-------- -------- -------- -------- --------
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(1)............................................. (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%(2) 0.76%(2) 0.76%(2)
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>
(1) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(2) Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .01% of average daily net assets.
JAPAN FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-------------------------------------------------------
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 --(1) (0.01)(1) --(1)
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(3)............................................. (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%(2) 0.92% 0.83%
Net investment income 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 $ --(4)
</TABLE>
(1) Based on average month-end shares outstanding.
(2) Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .01% of average daily net assets.
(3) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(4) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
72
<PAGE> 74
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
CLASS III SHARES CLASS IV SHARES
------------------------------------------------------ --------------------------------
PERIOD FROM
JANUARY 9, 1998
YEAR ENDED FEBRUARY 28/29, YEAR ENDED (COMMENCEMENT OF
------------------------------------------------------ FEBRUARY 28, OPERATIONS) TO
1999 1998 1997 1996 1995 1999 FEBRUARY 28, 1998
-------- -------- ---------- -------- -------- ------------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................... $ 9.56 $ 12.49 $ 10.54 $ 9.52 $ 12.13 $ 9.56 $ 8.62
-------- -------- ---------- -------- -------- -------- --------
Income (loss) from investment
operations:
Net investment income................ 0.25 0.16(5) 0.13 0.10 0.05 0.28 0.01(5)
Net realized and unrealized gain
(loss)............................. (3.19) (1.76) 1.96 1.06 (2.37) (3.21) 0.93
-------- -------- ---------- -------- -------- -------- --------
Total from investment operations... (2.94) (1.60) 2.09 1.16 (2.32) (2.93) 0.94
-------- -------- ---------- -------- -------- -------- --------
Less distributions to shareholders
from:
Net investment income................ (0.19) (0.25) (0.14) (0.01) (0.07) (0.20) --
Net realized gains................... (0.12) (0.71) -- (0.13) (0.22) (0.12) --
In excess of net realized gains...... (0.00)(7) (0.37) -- -- -- (0.00)(7) --
-------- -------- ---------- -------- -------- -------- --------
Total distributions................ (0.31) (1.33) (0.14) (0.14) (0.29) (0.32) --
-------- -------- ---------- -------- -------- -------- --------
Net asset value, end of period........ $ 6.31 $ 9.56 $ 12.49 $ 10.54 $ 9.52 $ 6.31 $ 9.56
======== ======== ========== ======== ======== ======== ========
Total Return(1)....................... (30.96)% (12.94)% 19.98% 12.24% (19.51)% (31.01)% 10.90%
Ratios/Supplemental Data:
Net assets, end of period (000's).... $524,741 $913,615 $1,725,651 $907,180 $384,259 $261,187 $672,020
Net expenses to average daily net
assets............................. 1.16% 1.24%(4) 1.24%(4) 1.35% 1.58% 1.12% 1.22%(3,6)
Net investment income to average
daily net assets................... 2.75% 1.30% 1.40% 1.31% 0.85% 2.87% 0.65%(3)
Portfolio turnover rate.............. 76% 88% 41% 35% 50% 76% 88%
Fees and expenses voluntarily waived
or borne by the Manager consisted of
the following per share amounts...... $ 0.02 $ 0.03 $ 0.02 $ --(2) $ -- $ 0.02 $-- (2)
</TABLE>
(1) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(2) Fees and expenses voluntarily waived or borne by the Manager were less than
$0.01 per share.
(3) Annualized.
(4) 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.
(5) Computed using average shares outstanding throughout the period.
(6) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .04% of average daily net assets.
(7) The distribution in excess of net realized gains was $0.0005.
EVOLVING COUNTRIES FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-------------------------------------------------
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(4)
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(2)............................................. (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%(1,3)
Net investment income to average daily net assets.......... 3.65% 0.78%(1)
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>
(1) Annualized.
(2) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(3) Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .16% of average daily net assets.
(4) Computed using average shares outstanding throughout the period.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
73
<PAGE> 75
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
ASIA FUND
<TABLE>
<CAPTION>
CLASS III SHARES
--------------------------------------------------
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(2) 0.01(2)
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(1)............................................. (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%(3)
Net investment income to average daily net assets......... 1.04% 2.86%(3)
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>
(1) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(2) Computed using average shares outstanding throughout the period.
(3) Annualized.
GLOBAL PROPERTIES FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-----------------------------------------------------------
PERIOD FROM
DECEMBER 20, 1996
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS) TO
FEBRUARY 28, 1999 FEBRUARY 28, 1998 FEBRUARY 28, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period........................ $ 10.14 $ 10.06 $ 10.00
------- ------- -------
Income (loss) from investment operations:
Net investment income..................................... 0.40 0.30 0.04
Net realized and unrealized gain (loss)................... (1.97) 0.10 0.02(2)
------- ------- -------
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) -- --
From 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(1)............................................. (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%(3)
Net investment income to average daily net assets......... 3.44% 2.89% 2.39%(3)
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>
(1) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(2) 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.
(3) Annualized.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
74
<PAGE> 76
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
FIXED INCOME FUNDS
- -----------------------------
DOMESTIC BOND FUND
<TABLE>
<CAPTION>
CLASS III SHARES
----------------------------------------------------------------
PERIOD FROM
AUGUST 18, 1994
YEAR ENDED FEBRUARY 28/29, (COMMENCEMENT OF
-------------------------------------------- OPERATIONS) TO
1999 1998 1997 1996 FEBRUARY 28, 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(1)............................................. 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%(2)
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%(2)
Net investment income to average daily net assets......... 6.21% 6.14% 6.15% 6.52% 6.96%(2)
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>
(1) The total returns would have been lower had certain expenses not been waived
during the periods shown.
(2) Annualized.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
75
<PAGE> 77
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
U.S. BOND/GLOBAL ALPHA A FUND
<TABLE>
<CAPTION>
CLASS III SHARES
------------------------------------------------
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(2) 0.55(2)
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(1)............................................. 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%(3)
Net investment income to average daily net assets......... 5.97% 6.05%(3)
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>
(1) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(2) Computed using average shares outstanding throughout the period.
(3) Annualized.
U.S. BOND/GLOBAL ALPHA B FUND
<TABLE>
<CAPTION>
CLASS III SHARES
------------------------------------------------
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(2) 0.35(2)
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)(4) (0.21)
In excess of net investment income........................ (0.59)(4) --
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(1)............................................. 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%(3)
Net investment income to average daily net assets......... 5.96% 5.88%(3)
Portfolio turnover rate................................... 134% 27%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts.... $ 0.03 $ 0.02
</TABLE>
(1) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(2) Computed using average shares outstanding throughout the period.
(3) Annualized.
(4) 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.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
76
<PAGE> 78
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
INTERNATIONAL BOND FUND
<TABLE>
<CAPTION>
CLASS III SHARES
----------------------------------------------------------------
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(1)............................................. 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 assets.................. 0.40% 0.40% 0.40% 0.40% 0.40%
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>
(1) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
CURRENCY HEDGED INTERNATIONAL BOND FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-----------------------------------------------------------------
PERIOD FROM
SEPTEMBER 30, 1994
YEAR ENDED FEBRUARY 28/29, (COMMENCEMENT OF
------------------------------------------- OPERATIONS) TO
1999 1998 1997 1996 FEBRUARY 28, 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(1)............................................. 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%(2)
Net investment income to average daily net assets......... 6.30% 6.50% 6.86% 8.54% 8.46%(2)
Portfolio turnover rate................................... 116% 135% 90% 85% 64%
Fees and expenses voluntarily waived or borne by the
Manager consisted
of the following per share amounts...................... $ 0.04 $ 0.05 $ 0.03 $ 0.03 $ 0.01
</TABLE>
(1) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(2) Annualized.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
77
<PAGE> 79
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
GLOBAL BOND FUND
<TABLE>
<CAPTION>
CLASS III SHARES
---------------------------------------------------
PERIOD FROM
DECEMBER 28, 1995
YEAR ENDED FEBRUARY 28, (COMMENCEMENT OF
------------------------------ OPERATIONS) TO
1999 1998 1997 FEBRUARY 29, 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(3) 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(1)............................................. 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%(2)
Net investment income to average daily net assets......... 5.86% 6.21% 6.31% 6.16%(2)
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>
(1) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(2) Annualized.
(3) Computed using average shares outstanding throughout the period.
EMERGING COUNTRY DEBT FUND
<TABLE>
<CAPTION>
CLASS III SHARES
----------------------------------------------------------------
PERIOD FROM
APRIL 19, 1994
YEAR ENDED FEBRUARY 28/29, (COMMENCEMENT OF
-------------------------------------------- OPERATIONS) TO
1999 1998 1997 1996 FEBRUARY 28, 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(3) 1.13(3) 1.48 1.35 0.48
Net realized and unrealized gain (loss)...... (4.41) 1.51 6.40 3.84 (1.59)
-------- -------- -------- -------- --------
Total from investment operations......... (3.49) 2.64 7.88 5.19 (1.11)
-------- -------- -------- -------- --------
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.............. --(5) -- -- -- (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(1)................................. (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 assets..... 0.56% 0.53% 0.57% 0.50% 0.50%(2)
Net investment income to average daily net
assets..................................... 10.99% 8.62% 8.35% 12.97% 10.57%(2)
Portfolio turnover rate...................... 272% 255% 152% 158% 104%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following
per share amounts.......................... $ 0.02 $ 0.03 $ 0.03 $ 0.02 $ 0.01
<CAPTION>
CLASS IV SHARES
-------------------------------------
PERIOD FROM
JANUARY 9, 1998
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) TO
FEBRUARY 28, 1999 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(3) 0.10(3)
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.............. --(5) --
-------- --------
Total distributions...................... (1.27) --
-------- --------
Net asset value, end of period.................. $ 6.90 $ 11.63
======== ========
Total Return(1)................................. (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%(2)
Net investment income to average daily net
assets..................................... 10.87% 7.17%(2)
Portfolio turnover rate...................... 272% 255%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following
per share amounts.......................... $ 0.02 --(4)
</TABLE>
(1) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(2) Annualized.
(3) Computed using average shares outstanding throughout the period.
(4) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
(5) The distribution in excess of net realized gains was $0.002.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
78
<PAGE> 80
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
SHORT-TERM INCOME FUND
<TABLE>
<CAPTION>
CLASS III SHARES
----------------------------------------------------------
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 (loss).................. (0.16) 0.03 0.06 0.20 (0.28)
------- ------- ------- ------- ------
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(1)............................................. 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 assets................. 0.20% 0.20% 0.20% 0.25% 0.25%
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>
(1) The total returns would have been lower had certain expenses not been waived
during the periods shown.
GLOBAL HEDGED EQUITY FUND
<TABLE>
<CAPTION>
CLASS III SHARES
------------------------------------------------------------------------
PERIOD FROM
JULY 29, 1994
YEAR ENDED FEBRUARY 28/29 (COMMENCEMENT OF
------------------------------------------------- OPERATIONS) TO
1999 1998 1997 1996 FEBRUARY 28, 1995
------- -------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period................... $ 8.72 $ 10.69 $ 10.64 $ 10.12 $ 10.00
------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income(6)............................. 0.17(4) 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(1)........................................ (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(5).......... 0.17% 0.58% 0.91%(2) 0.78% 0.92%(3)
Net investment income to average daily net
assets(6).......................................... 1.99% 2.93% 1.99% 2.44% 2.85%(3)
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>
(1) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(2) Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .02% of average daily net assets.
(3) Annualized.
(4) Computed using average shares outstanding throughout the period.
(5) 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.
(6) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
79
<PAGE> 81
INFLATION INDEXED BOND FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-------------------------------------------------
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(4)
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................................... -- --(1)
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(2)............................................. 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%(3)
Net investment income to average daily net assets......... 4.93% 4.48%(3)
Portfolio turnover rate................................... 94% 9%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts.... $ 0.04 $ 0.04
</TABLE>
(1) The per share distribution in excess of net investment income was $0.002.
(2) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(3) Annualized.
(4) Computed using average shares outstanding throughout the period.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
80
<PAGE> 82
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
EMERGING COUNTRY DEBT SHARE FUND
<TABLE>
<CAPTION>
CLASS III SHARES
----------------------------
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(1).................................. 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(2)............................................. (31.32)%
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $41,216
Net expenses to average daily net assets(3)............... 0.00%(5)
Net investment income to average daily net assets(1)...... 0.64%(5)
Portfolio turnover rate................................... 0%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amount:.... --(4)
</TABLE>
(1) Recognition of net investment income is affected by the timing of the
declaration of dividends by GMO Emerging Country Debt Fund.
(2) The total return would have been lower had certain expenses not been waived
during the period shown.
(3) Net expenses exclude expenses incurred indirectly through investment in GMO
Emerging Country Debt Fund.
(4) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
(5) Annualized.
ASSET ALLOCATION FUNDS
INTERNATIONAL EQUITY ALLOCATION FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-----------------------------------------------------------
PERIOD FROM
OCTOBER 11, 1996
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS) TO
FEBRUARY 28, 1999 FEBRUARY 28, 1998 FEBRUARY 28, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period........................ $ 10.18 $ 10.41 $ 10.00
------- ------- -------
Income from investment operations:
Net investment income(2).................................. 0.19(4) 0.33(4) 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) --(5) --
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(1)............................................. (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(6)............... 0.00% 0.00% 0.01%(3)
Net investment income to average daily net assets(2)...... 2.06% 3.13% 3.60%(3)
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>
(1) Calculation excludes purchase premiums and redemption fees. The total return
would have been lower had certain expenses not been waived during the period
shown.
(2) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
(3) Annualized.
(4) Computed using average shares outstanding throughout the period.
(5) The per share distribution in excess of net investment income was $0.001.
(6) Net expenses exclude expenses incurred indirectly through investment in
underlying funds.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
81
<PAGE> 83
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
WORLD EQUITY ALLOCATION FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-----------------------------------------------------------
PERIOD FROM
OCTOBER 22, 1996
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS) TO
FEBRUARY 28, 1999 FEBRUARY 28, 1998 FEBRUARY 28, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period........................ $ 10.39 $ 10.52 $ 10.07
------- ------- -------
Income from investment operations:
Net investment income(2).................................. 0.18(5) 0.29(5) 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) --(6) --
From net realized gains................................... (0.72) (0.17) (0.18)
------- ------- -------
Total distributions..................................... (1.23) (1.45) (0.29)
------- ------- -------
Net asset value, end of period.............................. $ 8.52 $ 10.39 $ 10.52
======= ======= =======
Total Return(1)............................................. (6.67)% 13.56% 7.51%(4)
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $29,582 $50,952 $36,746
Net expenses to average daily net assets(7)............... 0.00% 0.00% 0.00%(3)
Net investment income to average daily net assets(2)...... 1.91% 2.65% 0.91%(3)
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>
(1) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(2) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
(3) Annualized.
(4) The earliest class of shares of this Fund, Class I Shares, commenced
operations on June 28, 1996. For the period from June 28, 1996 to February
28, 1997, Class I Shares of this Fund had a Total Return equal to 8.23%.
Total operating expenses for Class I shares were 0.13% higher than expected
total operating expenses for Class III Shares.
(5) Computed using average shares outstanding throughout the period.
(6) The per share distribution in excess of net investment income was $0.0004.
(7) Net expenses exclude expenses incurred indirectly through investment in the
underlying funds.
GLOBAL (U.S.+) EQUITY ALLOCATION FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-----------------------------------------------------------
PERIOD FROM
NOVEMBER 26, 1996
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS) TO
FEBRUARY 28, 1999 FEBRUARY 28, 1998 FEBRUARY 28, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period........................ $ 10.48 $ 10.30 $ 10.00
------- ------- -------
Income from investment operations:
Net investment income(3).................................. 0.16(4) 0.26(4) 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) --(5) --
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(1)............................................. (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(6)............... 0.00% 0.00% 0.00%(2)
Net investment income to average daily net assets(3)...... 1.64% 2.39% 3.21%(2)
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>
(1) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(2) Annualized.
(3) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
(4) Computed using average shares outstanding throughout the period.
(5) The per share distribution in excess of net investment income was $0.0009.
(6) Net expenses exclude expenses incurred indirectly through investment in
underlying funds.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
82
<PAGE> 84
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
GLOBAL BALANCED ALLOCATION FUND
<TABLE>
<CAPTION>
CLASS III SHARES
--------------------------------------
PERIOD FROM
JUNE 2, 1997
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) TO
FEBRUARY 28, 1999 FEBRUARY 28, 1998
----------------- -----------------
<S> <C> <C>
Net asset value, beginning of period........................ $ 11.87 $ 11.56
-------- --------
Income from investment operations:
Net investment income(2).................................. 0.31 0.17(5)
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) --(6)
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(1)............................................. (2.27)% 13.31%(4)
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $127,600 $115,280
Net expenses to average daily net assets(7)............... 0.00% 0.00%(3)
Net investment income to average daily net assets(2)...... 2.50% 1.91%(3)
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>
(1) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(2) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
(3) Annualized.
(4) The earliest class of shares of this Fund, Class I Shares, commenced
operations on July 29, 1996. For the period from July 29, 1996 to February
28, 1997, Class I Shares of this Fund had a Total Return equal to 15.85%.
For the period from March 1, 1997 to August 31, 1997, Class I Shares of this
Fund had a Total Return equal to 8.86%. Total operating expenses for Class I
shares were 0.13% higher than expected total operating expenses for Class
III Shares.
(5) Computed using average shares outstanding throughout the period.
(6) The per share distribution in excess of net investment income was $0.001.
(7) Net expenses exclude expenses incurred indirectly through investment in
underlying Funds.
U.S. SECTOR FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-----------------------------------------------------------
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(4).................................. 0.10(2) 0.29(2) 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(1)............................................. 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(3)............... 0.00% 0.27% 0.48% 0.48% 0.48%
Net investment income to average daily net assets(4)...... 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>
(1) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(2) Computed using average shares outstanding throughout the period.
(3) 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.
(4) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
83
<PAGE> 85
NOTE TO FINANCIAL HIGHLIGHTS TABLES: Investors in Class II Shares should be
aware that, except as otherwise noted, the above financial highlight tables
reflect performance based on Class III expense ratios. In the future, investors
in Class II Shares will experience slightly lower total returns than investors
in Class III Shares of the same Fund as a result of higher overall expense
ratios for Class II Shares. Similarly, investors in Class IV Shares will
experience slightly higher returns than investors in Class III Shares of the
same Fund as a result of lower overall expense ratios for Class IV Shares.
The Manager's discussion of the performance of each Fund in fiscal 1999, as well
as a comparison of each Fund's performance over the life of the Fund with that
of a benchmark securities index selected by the Manager, is included in each
Fund's Annual Report for the fiscal year ended February 28, 1999. Copies of such
Annual Reports are available upon request without charge.
84
<PAGE> 86
GMO TRUST
ADDITIONAL INFORMATION
Additional information about each Fund's investments is available in the
Fund's annual and semi-annual reports to shareholders. In each Fund's annual
report, you will find a discussion of the market conditions and investment
strategies that significantly affected the Fund's performance during its last
fiscal year. The Fund's annual and semi-annual reports, and the Fund's Statement
of Additional Information dated June 30, 1999, as revised from time to time, are
available free of charge by writing to GMO, 40 Rowes Wharf, Boston,
Massachusetts 02110 or by calling collect (617) 346-7646. The Statement, which
contains more detailed information about each Fund, has been filed with the
Securities and Exchange Commission ("SEC") and is incorporated by reference into
this Prospectus.
Information about each Fund (including the Statement) can be reviewed and
copied at the SEC's Public Reference Room in Washington, D.C. Information
regarding the operation of the Public Reference Room may be obtained by calling
the SEC at 1-800-SEC-0330. Reports and other information about the Funds are
available on the Commission's Internet site at http://www.sec.gov. Copies of
this information may be obtained, upon payment of a duplicating fee, by writing
the Public Reference Section of the SEC, Washington, D.C. 20549-6009.
PURCHASE AND SALE INFORMATION
Information regarding the purchase and sale of Fund shares is contained in
a separate document, the GMO Trust Shareholder's Manual. The Manual accompanies
this Prospectus, has been filed with the SEC and is incorporated by reference
into this Prospectus. Additional copies of the Manual are available free of
charge by contacting the Manager.
SHAREHOLDER INQUIRIES
Shareholders may request additional
information from and direct inquiries to
Grantham, Mayo, Van Otterloo & Co. LLC,
40 Rowes Wharf, Boston, MA 02110
1-617-346-7646 (CALL COLLECT)
INVESTMENT COMPANY ACT FILE NO. 811-4347
<PAGE> 87
GMO TRUST
STATEMENT OF ADDITIONAL INFORMATION
June 30, 1999
This Statement of Additional Information is not a prospectus. It relates to the
GMO Trust Prospectus dated June 30, 1999, as amended from time to time, and
should be read in conjunction therewith. Information from the Prospectus
(including the GMO Trust Shareholder's Manual dated June 30, 1999) is
incorporated by reference into this Statement of Additional Information. The
Prospectus and Shareholder's Manual may be obtained free of charge from GMO
Trust, 40 Rowes Wharf, Boston, Massachusetts 02110, or by calling the Trust
collect at (617) 346-7646.
<PAGE> 88
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES.......................................................................... 3
DESCRIPTIONS AND RISKS OF FUND INVESTMENTS.................................................................. 3
INVESTMENT RESTRICTIONS..................................................................................... 30
MANAGEMENT OF THE TRUST..................................................................................... 33
INVESTMENT ADVISORY AND OTHER SERVICES...................................................................... 36
PORTFOLIO TRANSACTIONS...................................................................................... 44
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES............................................................ 46
VOTING RIGHTS............................................................................................... 48
SHAREHOLDER AND TRUSTEE LIABILITY........................................................................... 49
BENEFICIAL OWNERS OF 5% OR MORE OF THE FUND'S SHARES........................................................ 49
DISTRIBUTIONS............................................................................................... 69
TAXES....................................................................................................... 69
PERFORMANCE INFORMATION..................................................................................... 73
INVESTMENT GUIDELINES....................................................................................... 77
U. S. EQUITY FUNDS....................................................................................... 77
INTERNATIONAL EQUITY FUNDS............................................................................... 100
FIXED INCOME FUNDS....................................................................................... 133
ASSET ALLOCATION FUNDS................................................................................... 160
COMMERCIAL PAPER AND CORPORATE DEBT RATINGS................................................................. 165
FINANCIAL STATEMENTS........................................................................................ 167
SPECIMEN PRICE-MAKE-UP SHEETS............................................................................... 168
</TABLE>
2
<PAGE> 89
INVESTMENT OBJECTIVES AND POLICIES
The principal strategies and risks of investing in each Fund are
described in the Prospectus. Unless otherwise indicated in the Prospectus or
this Statement of Additional Information, the investment objective and policies
of the Funds may be changed without shareholder approval.
DESCRIPTIONS AND RISKS OF FUND INVESTMENTS
The following is a detailed description of the various investment
practices in which the Funds may engage and the risks associated with their use.
Not all Funds may engage in all practices described below. Please refer to "Fund
Objectives and Principal Investment Strategies" in the Prospectus and
"Investment Guidelines" in this Statement of Additional Information for
determination of which practices a particular Fund may engage in. Investors in
Asset Allocation Funds should be aware that the Asset Allocation Funds will
indirectly participate in the practices engaged in by the underlying Funds in
which the Asset Allocation Funds invest, and will therefore be indirectly
subject to all risks associated with those practices.
PORTFOLIO TURNOVER
Portfolio turnover is not a limiting factor with respect to investment decisions
for the Funds. The historical portfolio turnover rate for each Fund is shown
under the heading "Financial Highlights" in the Prospectus.
In any particular year, market conditions may well result in greater rates of
portfolio turnover than are presently anticipated. High portfolio turnover
involves correspondingly greater brokerage commissions and other transaction
costs, which will be borne directly by the relevant Fund, and may involve
realization of capital gains that would be taxable when distributed to
shareholders of the relevant Fund unless such shareholders are themselves
exempt. See "Taxes" in the Prospectus and "Distributions" and "Taxation" in this
Statement of Additional Information.
DIVERSIFIED AND NON-DIVERSIFIED PORTFOLIOS
It is a fundamental policy of each of the U.S. Core Fund, the Tobacco-Free Core
Fund, the Small Cap Value Fund, the Fundamental Value Fund, the International
Core Fund, the International Small Companies Fund, the International Equity
Allocation Fund, the World Equity Allocation Fund, the Global (U.S.+) Equity
Allocation Fund, and the Global Balanced Allocation Fund, which may not be
changed without shareholder approval, that at least 75% of the value of each
such Fund's total assets are represented by cash and cash items (including
receivables), Government securities, securities of other investment companies,
and other securities for the purposes of this calculation limited in respect of
any one issuer to an amount not greater than 5% of the value of the relevant
Fund's total assets and to not more than 10% of the outstanding voting
securities of any single issuer. Each such Fund is referred to herein as a
"diversified" fund.
All other Funds are "non-diversified" funds under the Investment Company Act of
1940, as amended (the "1940 Act"), and as such are not required to satisfy the
"diversified" requirements stated above. As non-diversified funds, each of these
Funds is permitted to (but is not required to) invest a higher
3
<PAGE> 90
percentage of its assets in the securities of fewer issuers. Such concentration
could increase the risk of loss to such Funds should there be a decline in the
market value of any one portfolio security. Investment in a non-diversified fund
may therefore entail greater risks than investment in a diversified fund. All
Funds, however, must meet certain diversification standards to qualify as a
"regulated investment company" under the Internal Revenue Code of 1986.
CERTAIN RISKS OF FOREIGN INVESTMENTS
GENERAL. Investment in foreign issuers or securities principally traded overseas
may involve certain special risks due to foreign economic, political and legal
developments, including favorable or unfavorable changes in currency exchange
rates, exchange control regulations (including currency blockage), expropriation
or nationalization of assets, imposition of withholding taxes on dividend or
interest payments, and possible difficulty in obtaining and enforcing judgments
against foreign entities. Furthermore, issuers of foreign securities are subject
to different, often less comprehensive, accounting, reporting and disclosure
requirements than domestic issuers. The securities of some foreign governments
and companies and foreign securities markets are less liquid and at times more
volatile than comparable U.S. securities and securities markets. Foreign
brokerage commissions and other fees are also generally higher than in the
United States. The laws of some foreign countries may limit a Fund's ability to
invest in securities of certain issuers located in these foreign countries.
There are also special tax considerations which apply to securities of foreign
issuers and securities principally traded overseas. Investors should also be
aware that under certain circumstances, markets which are perceived to have
similar characteristics to troubled markets may be adversely affected whether or
not similarities actually exist.
EMERGING MARKETS. The risks described above apply to an even greater extent to
investments in emerging markets. The securities markets of emerging countries
are generally smaller, less developed, less liquid, and more volatile than the
securities markets of the U.S. and developed foreign markets. Disclosure and
regulatory standards in many respects are less stringent than in the U.S. and
developed foreign markets. There also may be a lower level of monitoring and
regulation of securities markets in emerging market countries and the activities
of investors in such markets, and enforcement of existing regulations has been
extremely limited. Many emerging countries have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have very
negative effects on the economies and securities markets of certain emerging
countries. Economies in emerging markets generally are heavily dependent upon
international trade and, accordingly, have been and may continue to be affected
adversely by trade barriers, exchange controls, managed adjustments in relative
currency values, and other protectionist measures imposed or negotiated by the
countries with which they trade. These economies also have been and may continue
to be adversely affected by economic conditions in the countries in which they
trade. The economies of countries with emerging markets may also be
predominantly based on only a few industries or dependent on revenues from
particular commodities. In addition, custodial services and other costs relating
to investment in foreign markets may be more expensive in emerging markets than
in many developed foreign markets, which could reduce a Fund's income from such
securities. Finally, because publicly traded debt instruments of emerging
markets represent a relatively recent innovation in the world debt markets,
there is little historical data or related market experience concerning the
attributes of such instruments under all economic, market and political
conditions.
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In many cases, governments of emerging countries continue to exercise
significant control over their economies, and government actions relative to the
economy, as well as economic developments generally, may affect the capacity of
issuers of emerging country debt instruments to make payments on their debt
obligations, regardless of their financial condition. In addition, there is a
heightened possibility of expropriation or confiscatory taxation, imposition of
withholding taxes on interest payments, or other similar developments that could
affect investments in those countries. There can be no assurance that adverse
political changes will not cause a Fund to suffer a loss of any or all of its
investments or, in the case of fixed-income securities, interest thereon.
INVESTMENTS IN ASIA. In addition to the foregoing risks of foreign investments
and risks specific to emerging markets, investments by the Trust's International
Funds in Asia involve additional risks specific to investment in the region. The
region encompasses countries at varying levels of economic development ranging
from emerging markets to more developed economies. Each country provides unique
investment risks, yet the political and economic prospects of one country or
group of countries may impact other countries in the region. For example, some
Asian economies are directly affected by Japanese capital investment in the
region and by Japanese consumer demands. In addition, a recession, a debt crisis
or a decline in currency valuation in one country can spread to other countries.
Investments in Asia are susceptible to political and social factors affecting
issuers in Asian countries. Some countries have authoritarian or relatively
unstable governments. Certain governments in the region provide less supervision
and regulation of financial markets than is typical of other emerging markets,
and less financial information is available. Restrictions on direct foreign
investments in securities markets also exist in some countries. For example,
Taiwan permits foreign investment only through authorized qualified foreign
institutional investors. The recent return of Hong Kong to China will continue
to affect the region.
Some countries in the region are heavily dependent upon foreign trade. The
economies of some Asian countries are not diversified and are based upon only a
few commodities or industries. Markets in some of these countries are in the
early stages of development, exhibit a high concentration of market
capitalization, have less trading volume, lower liquidity and more volatility
than more developed markets.
In the latter half of 1997, the region began experiencing increased market
volatility and declines in foreign currency exchange rates. Fluctuation in
currency exchange rates can affect a country's ability to service its debt.
Currency fluctuation will affect the value of the securities in the Fund's
portfolio because the prices of these securities are generally denominated or
quoted in currencies other than the U.S. dollar.
While the foregoing risks are applicable to any Fund investing in Asia, they
will be particularly acute for the Asia Fund and the Japan Fund, which invest
primarily in this region.
DIRECT INVESTMENT IN RUSSIAN SECURITIES. Each of the Emerging Markets Fund,
Evolving Countries Fund, Foreign Fund, Global Bond Fund, International Bond
Fund, Currency Hedged International Bond Fund, International Core Fund, Currency
Hedged International Core Fund, Global Properties
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Fund, Emerging Country Debt Fund and U.S. Bond/Global Alpha A Fund may invest
directly in securities of Russian issuers. Investment in securities of such
issuers presents many of the same risks as investing in securities of issuers in
other emerging market economies, as described in the immediately preceding
section. However, the political, legal and operational risks of investing in
Russian issuers, and of having assets custodied within Russia, may be
particularly acute.
A risk of particular note with respect to direct investment in Russian
securities is the way in which ownership of shares of private companies is
recorded. When a Fund invests in a Russian issuer, it will receive a "share
extract," but that extract is not legally determinative of ownership. The
official record of ownership of a company's share is maintained by the company's
share registrar. Such share registrars are completely under the control of the
issuer, and investors are provided with few legal rights against such
registrars.
SECURITIES LENDING
All of the Funds (except for the Asset Allocation Funds) may make secured loans
of portfolio securities amounting to not more than one-third of the relevant
Fund's total assets, except for the International Core and Currency Hedged
International Core Funds, each of which may make loans of portfolio securities
amounting to not more than 25% of their respective total assets. The risks in
lending portfolio securities, as with other extensions of credit, consist of
possible delay in recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. However, such loans will be
made only to broker-dealers that are believed by the Manager to be of relatively
high credit standing. Securities loans are made to broker-dealers pursuant to
agreements requiring that loans be continuously secured by collateral in cash or
liquid securities at least equal at all times to the market value of the
securities lent. Collateral may be held in shares of other investment companies.
The borrower pays to the lending Fund an amount equal to any dividends or
interest the Fund would have received had the securities not been lent. If the
loan is collateralized by U.S. Government Securities, the Fund will receive a
fee from the borrower. In the case of loans collateralized by cash, the Fund
typically invests the cash collateral for its own account in interest-bearing,
short-term securities and pays a fee to the borrower. Although voting rights or
rights to consent with respect to the loaned securities pass to the borrower,
the Fund retains the right to call the loans at any time on reasonable notice,
and it will do so in order that the securities may be voted by the Fund if the
holders of such securities are asked to vote upon or consent to matters
materially affecting the investment. The Fund may also call such loans in order
to sell the securities involved. The Manager has retained lending agents on
behalf of several of the Funds that are compensated based on a percentage of a
Fund's return on the securities lending activity. The Fund also pays various
fees in connection with such loans including shipping fees and reasonable
custodian fees approved by the Trustees of the Trust or persons acting pursuant
to direction of the Board.
DEPOSITORY RECEIPTS
Many of the Funds may invest in American Depositary Receipts (ADRs), Global
Depository Receipts (GDRs) and European Depository Receipts (EDRs)
(collectively, "Depository Receipts") if issues of such Depository Receipts are
available that are consistent with a Fund's investment objective. Depository
Receipts generally evidence an ownership interest in a corresponding foreign
security on deposit with a financial institution. Transactions in Depository
Receipts usually do not
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settle in the same currency in which the underlying securities are denominated
or traded. Generally, ADRs, in registered form, are designed for use in the U.S.
securities markets and EDRs, in bearer form, are designed for use in European
securities markets. GDRs may be traded in any public or private securities
markets and may represent securities held by institutions located anywhere in
the world.
CONVERTIBLE SECURITIES
A convertible security is a fixed income security (a bond or preferred stock)
which may be converted at a stated price within a specified period of time into
a certain quantity of the common stock of the same or a different issuer.
Convertible securities are senior to common stock in a corporation's capital
structure, but are usually subordinated to similar non-convertible securities.
Convertible securities provide, through their conversion feature, an opportunity
to participate in capital appreciation resulting from a market price advance in
a convertible security's underlying common stock. The price of a convertible
security is influenced by the market value of the underlying common stock and
tends to increase as the market value of the underlying stock rises, whereas it
tends to decrease as the market value of the underlying stock declines. The
Manager regards convertible securities as a form of equity security.
FUTURES AND OPTIONS
Many of the Funds may use futures and options for various purposes. Such
transactions may involve options, futures and related options on futures
contracts, and those instruments may relate to particular equity and fixed
income securities, equity and fixed income indexes, and foreign currencies. The
Funds may also enter into a combination of long and short positions (including
spreads and straddles) for a variety of investment strategies, including
protecting against changes in certain yield relationships.
The use of futures contracts, options contracts and options on futures contracts
involves risk. Thus, while a Fund may benefit from the use of futures, options
and options on futures, unanticipated changes in interest rates, securities
prices, or currency exchange rates may result in poorer overall performance for
the Fund than if it had not entered into any futures contracts or options
transactions. Losses incurred in transactions in futures, options and options on
futures and the costs of these transactions will affect a Fund's performance.
OPTIONS. As noted above, many Funds which may use options (1) may enter into
contracts giving third parties the right to buy the Fund's portfolio securities
for a fixed price at a future date (writing "covered call options"); (2) may
enter into contracts giving third parties the right to sell securities to the
Fund for a fixed price at a future date (writing "covered put options"); and (3)
may buy the right to purchase securities from third parties ("call options") or
the right to sell securities to third parties ("put options") for a fixed price
at a future date.
WRITING COVERED OPTIONS. Each Fund (except for the Short-Term Income Fund and
the Asset Allocation Funds) may seek to increase its return by writing covered
call or put options on optionable securities or indexes. A call option written
by a Fund on a security gives the holder the right to buy the underlying
security from the Fund at a stated exercise price; a put option gives the
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holder the right to sell the underlying security to the Fund at a stated
exercise price. In the case of options on indexes, the options are usually cash
settled based on the difference between the strike price and the value of the
index.
Each such Fund will receive a premium for writing a put or call option, which
increases the Fund's return in the event the option expires unexercised or is
closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price and volatility of the underlying
security or securities index to the exercise price of the option, the remaining
term of the option, supply and demand and interest rates. By writing a call
option on a security, the Fund limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise price
of the option. By writing a put option on a security, the Fund assumes the risk
that it may be required to purchase the underlying security for an exercise
price higher than its then current market value, resulting in a potential
capital loss unless the security subsequently appreciates in value. In the case
of options on an index, if a Fund writes a call, any profit by the Fund in
respect of portfolio securities expected to correlate with the index will be
limited by an increase in the index above the exercise price of the option. If
the Fund writes a put on an index, the Fund may be required to make a cash
settlement greater than the premium received if the index declines.
A call option on a security is "covered" if a Fund owns the underlying security
or has an absolute and immediate right to acquire that security without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities held in its portfolio. A call option on a security is also covered if
the Fund holds on a share-for-share basis a call on the same security as the
call written where the exercise price of the call held is equal to or less than
the exercise price of the call written or greater than the exercise price of the
call written if the difference is maintained by the Fund in cash, U.S.
Government Securities or other high grade debt obligations in a segregated
account with its custodian. A call option on an index is "covered" if a Fund
maintains cash, U.S. Government Securities or other high grade debt obligations
with a value equal to the exercise price in a segregated account with its
custodian. A put option is "covered" if the Fund maintains cash, U.S. Government
Securities or other high grade debt obligations with a value equal to the
exercise price in a segregated account with its custodian, or else holds on a
share-for-share basis a put on the same security as the put written where the
exercise price of the put held is equal to or greater than the exercise price of
the put written.
If the writer of an option wishes to terminate its obligation, it may effect a
"closing purchase transaction." This is accomplished, in the case of exchange
traded options, by buying an option of the same series as the option previously
written. The effect of the purchase is that the writer's position will be
canceled by the clearing corporation. The writer of an option may not effect a
closing purchase transaction after it has been notified of the exercise of an
option. Likewise, an investor who is the holder of an option may liquidate its
position by effecting a "closing sale transaction." This is accomplished by
selling an option of the same series as the option previously purchased. There
is no guarantee that a Fund will be able to effect a closing purchase or a
closing sale transaction at any particular time. Also, an over-the-counter
option may be closed out only with the other party to the option transaction.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date
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or both, or in the case of a written put option will permit the Fund to write
another put option to the extent that the exercise price thereof is secured by
deposited cash or high grade debt obligations. Also, effecting a closing
transaction will permit the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other Fund investments. If the
Fund desires to sell a particular security from its portfolio on which it has
written a call option, it will effect a closing transaction prior to or
concurrent with the sale of the security.
A Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to purchase the option; the Fund will realize a loss from
a closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to purchase
the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security or
index of securities, any loss resulting from the repurchase of a written call
option is likely to be offset in whole or in part by appreciation of the
underlying security or securities owned by the Fund.
A Fund may write options in connection with buy-and-write transactions; that is,
a Fund may purchase a security and then write a call option against that
security. The exercise price of the call the Fund determines to write will
depend upon the expected price movement of the underlying security. The exercise
price of a call option may be below ("in-the-money"), equal to ("at-the-money")
or above ("out-of-the-money") the current value of the underlying security at
the time the option is written. Buy-and-write transactions using in-the-money
call options may be used when it is expected that the price of the underlying
security will remain flat or decline moderately during the option period.
Buy-and-write transactions using at-the-money call options may be used when it
is expected that the price of the underlying security will remain fixed or
advance moderately during the option period. Buy-and-write transactions using
out-of-the-money call options may be used when it is expected that the premiums
received from writing the call option plus the appreciation in the market price
of the underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If the call options
are exercised in such transactions, the Fund's maximum gain will be the premium
received by it for writing the option, adjusted upward or downward by the
difference between the Fund's purchase price of the security and the exercise
price. If the options are not exercised and the price of the underlying security
declines, the amount of such decline will be offset in part, or entirely, by the
premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund may elect to close the position or take
delivery of the security at the exercise price. In that event, the Fund's return
will be the premium received from the put option minus the cost of closing the
position or, if it chooses to take delivery of the security, the premium
received from the put option minus the amount by which the market price of the
security is below the exercise price. Out-of-the-money, at-the-money and
in-the-money put options may be used by the Fund in market environments
analogous to those in which call options are used in buy-and-write transactions.
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The extent to which a Fund will be able to write and purchase call and put
options may be restricted by the Fund's intention to qualify as a regulated
investment company under the Internal Revenue Code.
RISK FACTORS IN OPTIONS TRANSACTIONS. The option writer has no control over when
the underlying securities or futures contract must be sold, in the case of a
call option, or purchased, in the case of a put option, since the writer may be
assigned an exercise notice at any time prior to the termination of the
obligation. If an option expires unexercised, the writer realizes a gain in the
amount of the premium. Such a gain, of course, may, in the case of a covered
call option, be offset by a decline in the market value of the underlying
security or futures contract during the option period. If a call option is
exercised, the writer realizes a gain or loss from the sale of the underlying
security or futures contract. If a put option is exercised, the writer must
fulfill the obligation to purchase the underlying security or futures contract
at the exercise price, which will usually exceed the then market value of the
underlying security or futures contract.
An exchange-traded option may be closed out only on a national securities
exchange ("Exchange") which generally provides a liquid secondary market for an
option of the same series. An over-the-counter option may be closed out only
with the other party to the option transaction. If a liquid secondary market for
an exchange-traded option does not exist, it might not be possible to effect a
closing transaction with respect to a particular option with the result that the
Fund holding the option would have to exercise the option in order to realize
any profit. For example, in the case of a written call option, if the Fund is
unable to effect a closing purchase transaction in a secondary market (in the
case of a listed option) or with the purchaser of the option (in the case of an
over-the-counter option), the Fund will not be able to sell the underlying
security (or futures contract) until the option expires or it delivers the
underlying security (or futures contract) upon exercise. Reasons for the absence
of a liquid secondary market on an Exchange include the following: (i) there may
be insufficient trading interest in certain options; (ii) restrictions may be
imposed by an Exchange on opening transactions or closing transactions or both;
(iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options or underlying securities;
(iv) unusual or unforeseen circumstances may interrupt normal operations on an
Exchange; (v) the facilities of an Exchange or the Options Clearing Corporation
may not at all times be adequate to handle current trading volume; or (vi) one
or more Exchanges could, for economic or other reasons, decide or be compelled
at some future date to discontinue the trading of options (or a particular class
or series of options), in which event the secondary market on that Exchange (or
in that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange should continue to be
exercisable in accordance with their terms.
The Exchanges have established limitations governing the maximum number of
options which may be written by an investor or group of investors acting in
concert. It is possible that the Funds, the Manager and other clients of the
Manager may be considered to be such a group. These position limits may restrict
a Fund's ability to purchase or sell options on a particular security.
The amount of risk a Fund assumes when it purchases an option is the premium
paid for the option plus related transaction costs. In addition to the
correlation risks discussed below, the purchase of an
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option also entails the risk that changes in the value of the underlying
security or futures contract will not be fully reflected in the value of the
option purchased.
FUTURES. A financial futures contract sale creates an obligation by the seller
to deliver the type of financial instrument called for in the contract in a
specified delivery month for a stated price. A financial futures contract
purchase creates an obligation by the purchaser to pay for and take delivery of
the type of financial instrument called for in the contract in a specified
delivery month, at a stated price. In some cases, the specific instruments
delivered or taken, respectively, at settlement date are not determined until on
or near that date. The determination is made in accordance with the rules of the
exchange on which the futures contract sale or purchase was made. Some futures
contracts are "cash settled" (rather than "physically settled," as described
above) which means that the purchase price is subtracted from the current market
value of the instrument and the net amount if positive is paid to the purchaser,
and if negative is paid by the purchaser. Futures contracts are traded in the
United States only on commodity exchanges or boards of trade -- known as
"contract markets" -- approved for such trading by the Commodity Futures Trading
Commission ("CFTC"), and must be executed through a futures commission merchant
or brokerage firm that is a member of the relevant contract market. Under U.S.
law, futures contracts on individual equity securities are not permitted.
The purchase or sale of a futures contract differs from the purchase or sale of
a security or option in that no price or premium is paid or received. Instead,
an amount of cash or U.S. Government Securities generally not exceeding 5% of
the face amount of the futures contract must be deposited with the broker. This
amount is known as initial margin. Subsequent payments to and from the broker,
known as variation margin, are made on a daily basis as the price of the
underlying futures contract fluctuates making the long and short positions in
the futures contract more or less valuable, a process known as "marking to
market." Prior to the settlement date of the futures contract, the position may
be closed out by taking an opposite position which will operate to terminate the
position in the futures contract. A final determination of variation margin is
then made, additional cash is required to be paid to or released by the broker,
and the purchaser realizes a loss or gain. In addition, a commission is paid on
each completed purchase and sale transaction.
In most cases futures contracts are closed out before the settlement date
without the making or taking of delivery. Closing out a futures contract sale is
effected by purchasing a futures contract for the same aggregate amount of the
specific type of financial instrument or commodity and the same delivery date.
If the price of the initial sale of the futures contract exceeds the price of
the offsetting purchase, the seller is paid the difference and realizes a gain.
Conversely, if the price of the offsetting purchase exceeds the price of the
initial sale, the seller realizes a loss. Similarly, the closing out of a
futures contract purchase is effected by the purchaser entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the
purchaser realizes a gain, and if the purchase price exceeds the offsetting sale
price, a loss will be realized.
The ability to establish and close out positions on options on futures will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop or be maintained.
INDEX FUTURES. Each of the Funds (except the Short-Term Income Fund) may
purchase futures contracts on various securities indexes ("Index Futures"). For
example, each of the U.S. Equity
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Funds may purchase Index Futures on the S&P 500 ("S&P 500 Index Futures") and on
such other domestic stock indexes as the Manager may deem appropriate. The Japan
Fund may purchase Index Futures on the Nikkei 225 Stock Average and on the Tokyo
Stock Price Index ("TOPIX") (together with the Nikkei 225 futures contracts,
"Japanese Index Futures"). The International Core Fund, Currency Hedged
International Core Fund, Evolving Countries Fund, Foreign Fund, International
Small Companies Fund, Asia Fund and Emerging Markets Fund, among others, may
each purchase Index Futures on foreign stock indexes, including those which may
trade outside the United States. The Domestic Bond Fund, International Bond
Fund, Currency Hedged International Bond Fund, Global Bond Fund, Emerging
Country Debt Fund, U.S. Bond/Global Alpha A Fund, U.S. Bond/Global Alpha B Fund
and Inflation Indexed Bond Fund, among others, may each purchase Index Futures
on domestic and (except for the Domestic Bond Fund) foreign fixed income
securities indexes, including those which may trade outside the United States. A
Fund's purchase and sale of Index Futures is limited to contracts and exchanges
approved by the CFTC.
An Index Future may call for "physical delivery" or be "cash settled." An Index
Future that calls for physical delivery is a contract to buy an integral number
of units of the particular securities index at a specified future date at a
price agreed upon when the contract is made. A unit is the value from time to
time of the relevant index. While a Fund that purchases an Index Future that
calls for physical delivery is obligated to pay the face amount on the stated
date, such an Index Future may be closed out on that date or any earlier date by
selling an Index Future with the same face amount and contract date. This will
terminate the Fund's position and the Fund will realize a profit or a loss based
on the difference between the cost of purchasing the original Index Future and
the price obtained from selling the closing Index Future. The amount of the
profit or loss is determined by the change in the value of the relevant index
while the Index Future was held.
For example, if the value of a unit of a particular index were $1,000, a
contract to purchase 500 units would be worth $500,000 (500 units x $1,000). The
Index Futures contract specifies that no delivery of the actual stocks making up
the index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the relevant index at the expiration
of the contract. For example, if a Fund enters into one futures contract to buy
500 units of an index at a specified future date at a contract price of $1,000
per unit and the index is at $1,010 on that future date, the Fund will gain
$5,000 (500 units x gain of $10).
Index Futures that are "cash settled" provide by their terms for settlement on a
net basis reflecting changes in the value of the underlying index. Thus, the
purchaser of such an Index Future is never obligated to pay the face amount of
the contract. The net payment obligation may in fact be very small in relation
to the face amount.
A Fund may close open positions on the futures exchange on which Index Futures
are then traded at any time up to and including the expiration day. All
positions which remain open at the close of the last business day of the
contract's life are required to settle on the next business day (based upon the
value of the relevant index on the expiration day) with settlement made, in the
case of S&P 500 Index Futures, with the Commodities Clearing House. Additional
or different margin requirements as well as settlement procedures may be
applicable to foreign stock Index Futures at the time a Fund purchases foreign
stock Index Futures.
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The price of Index Futures may not correlate perfectly with movement in the
relevant index due to certain market distortions. First, all participants in the
futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions which could distort the normal
relationship between the Index and futures markets. Secondly, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities market, and as a result the futures market may attract more
speculators than does the securities market. Increased participation by
speculators in the futures market may also cause temporary price distortions. In
addition, trading hours for foreign stock Index Futures may not correspond
perfectly to hours of trading on the foreign exchange to which a particular
foreign stock Index Futures relates. This may result in a disparity between the
price of Index Futures and the value of the relevant index due to the lack of
continuous arbitrage between the Index Futures price and the value of the
underlying index.
INTEREST RATE FUTURES. For the purposes previously described, the Fixed Income
Funds (other than the Short-Term Income Fund) may engage in a variety of
transactions involving the use of futures with respect to U.S. Government
Securities and other fixed income securities.
OPTIONS ON FUTURES CONTRACTS. Options on futures contracts give the purchaser
the right in return for the premium paid to assume a position in a futures
contract at the specified option-exercise price at any time during the period of
the option. Funds may use options on futures contracts in lieu of writing or
buying options directly on the underlying securities or purchasing and selling
the underlying futures contracts. For example, to hedge against a possible
decrease in the value of its portfolio securities, a Fund may purchase put
options or write call options on futures contracts rather than selling futures
contracts. Similarly, a Fund may purchase call options or write put options on
futures contracts as a substitute for the purchase of futures contracts to hedge
against a possible increase in the price of securities the Fund expects to
purchase. Such options generally operate in the same manner as options purchased
or written directly on the underlying investments. See "Foreign Currency
Transactions" below for a description of the Funds' use of options on currency
futures.
RISK FACTORS IN FUTURES TRANSACTIONS. Investment in futures contracts involves
risk. If the futures are used for hedging, some of that risk may be caused by an
imperfect correlation between movements in the price of the futures contract and
the price of the security or currency being hedged. The correlation is higher
between price movements of futures contracts and the instrument underlying that
futures contract. The correlation is lower when futures are used to hedge
securities other than such underlying instrument, such as when a futures
contract on an index of securities is used to hedge a single security, a futures
contract on one security (e.g., U.S. Treasury bonds) is used to hedge a
different security (e.g., a mortgage-backed security) or when a futures contract
in one currency is used to hedge a security denominated in another currency. In
the event of an imperfect correlation between a futures position and a portfolio
position (or anticipated position) which is intended to be protected, the
desired protection may not be obtained and a Fund may be exposed to risk of
loss. In addition, it is not always possible to hedge fully or perfectly against
currency fluctuations affecting the value of the securities denominated in
foreign currencies because the value of such securities also is likely to
fluctuate as a result of independent factors not related to currency
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fluctuations. The risk of imperfect correlation generally tends to diminish as
the maturity date of the futures contract approaches.
A hedge will not be fully effective where there is such imperfect correlation.
To compensate for imperfect correlations, a Fund may purchase or sell futures
contracts in a greater amount than the hedged securities if the volatility of
the hedged securities is historically greater than the volatility of the futures
contracts. Conversely, a Fund may purchase or sell fewer contracts if the
volatility of the price of the hedged securities is historically less than that
of the futures contract.
A Fund may also purchase futures contracts (or options thereon) as an
anticipatory hedge against a possible increase in the price of currency in which
is denominated the securities the Fund anticipates purchasing. In such
instances, it is possible that the currency may instead decline. If the Fund
does not then invest in such securities because of concern as to possible
further market and/or currency decline or for other reasons, the Fund may
realize a loss on the futures contract that is not offset by a reduction in the
price of the securities purchased.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by commodity exchanges
which limit the amount of fluctuation in a futures contract price during a
single trading day. Once the daily limit has been reached in the contract, no
trades may be entered into at a price beyond the limit, thus preventing the
liquidation of open futures positions. Prices have in the past exceeded the
daily limit on a number of consecutive trading days. Short positions in index
futures may be closed out only by entering into a futures contract purchase on
the futures exchange on which the index futures are traded.
The successful use of transactions in futures and related options for hedging
and risk management also depends on the ability of the Manager to forecast
correctly the direction and extent of exchange rate, interest rate and stock
price movements within a given time frame. For example, to the extent interest
rates remain stable during the period in which a futures contract or option is
held by a Fund investing in fixed income securities (or such rates move in a
direction opposite to that anticipated), the Fund may realize a loss on the
futures transaction which is not fully or partially offset by an increase in the
value of its portfolio securities. As a result, the Fund's total return for such
period may be less than if it had not engaged in the hedging transaction.
Unlike trading on domestic commodity exchanges, trading on foreign commodity
exchanges is not regulated by the CFTC and may be subject to greater risks than
trading on domestic exchanges. For example, some foreign exchanges may be
principal markets so that no common clearing facility exists and a trader may
look only to the broker for performance of the contract. In addition, unless a
Fund hedges against fluctuations in the exchange rate between the U.S. dollar
and the currencies in which trading is done on foreign exchanges, any profits
that a Fund might realize in trading could be eliminated by adverse changes in
the exchange rate, or the Fund could incur losses as a result of those changes.
USES OF OPTIONS, FUTURES AND OPTIONS ON FUTURES
RISK MANAGEMENT. When futures and options on futures are used for risk
management, a Fund will generally take long positions (e.g., purchase call
options, futures contracts or options thereon) in
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order to increase the Fund's exposure to a particular market, market segment or
foreign currency. For example, if a Fixed Income Fund wants to increase its
exposure to a particular fixed income security, the Fund may take long positions
in futures contracts on that security. Likewise, if an Equity Fund holds a
portfolio of stocks with an average volatility (beta) lower than that of the
Fund's benchmark securities index as a whole (deemed to be 1.00), the Fund may
purchase Index Futures to increase its average volatility to 1.00. In the case
of futures and options on futures, a Fund is only required to deposit the
initial and variation margin as required by relevant CFTC regulations and the
rules of the contract markets. Because the Fund will then be obligated to
purchase the security or index at a set price on a future date, the Fund's net
asset value will fluctuate with the value of the security as if it were already
included in the Fund's portfolio. Risk management transactions have the effect
of providing a degree of investment leverage, particularly when the Fund does
not segregate assets equal to the face amount of the contract (i.e., in cash
settled futures contracts) since the futures contract (and related options) will
increase or decrease in value at a rate which is a multiple of the rate of
increase or decrease in the value of the initial and variation margin that the
Fund is required to deposit. As a result, the value of the Fund's portfolio will
generally be more volatile than the value of comparable portfolios which do not
engage in risk management transactions. A Fund will not, however, use futures
and options on futures to obtain greater volatility than it could obtain through
direct investment in securities; that is, a Fund will not normally engage in
risk management to increase the average volatility (beta) of that Fund's
portfolio above 1.00, the level of risk (as measured by volatility) that would
be present if the Fund were fully invested in the securities comprising the
relevant index. However, a Fund may invest in futures and options on futures
without regard to this limitation if the face value of such investments, when
aggregated with the Index Futures, equity swaps and contracts for differences as
described below does not exceed 10% of a Fund's assets.
HEDGING. To the extent indicated elsewhere, a Fund may also enter into options
and futures contracts and buy and sell options on futures for hedging. For
example, if a Fund wants to hedge certain of its fixed income securities against
a decline in value resulting from a general increase in market rates of
interest, it might sell futures contracts with respect to fixed income
securities or indexes of fixed income securities. If the hedge is effective,
then should the anticipated change in market rates cause a decline in the value
of the Fund's fixed income security, the value of the futures contract should
increase. Likewise, a Fund may sell equity index futures if the Fund wants to
hedge its equity securities against a general decline in the relevant equity
market(s). The Funds may also use futures contracts in anticipatory hedge
transactions by taking a long position in a futures contract with respect to a
security, index or foreign currency that a Fund intends to purchase (or whose
value is expected to correlate closely with the security or currency to be
purchased) pending receipt of cash from other transactions to be used for the
actual purchase. Then if the cost of the security or foreign currency to be
purchased by the Fund increases and if the anticipatory hedge is effective, that
increased cost should be offset, at least in part, by the value of the futures
contract. Options on futures contracts may be used for hedging as well. For
example, if the value of a fixed-income security in a Fund's portfolio is
expected to decline as a result of an increase in rates, the Fund might purchase
put options or write call options on futures contracts rather than selling
futures contracts. Similarly, for anticipatory hedging, the Fund may purchase
call options or write put options as a substitute for the purchase of futures
contracts. See "Foreign Currency Transactions" below for more information
regarding the currency hedging practices of certain Funds.
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INVESTMENT PURPOSES. To the extent indicated elsewhere, a Fund may also enter
into futures contracts and buy and sell options thereon for investment. For
example, a Fund may invest in futures when its Manager believes that there are
not enough attractive securities available to maintain the standards of
diversity and liquidity set for a Fund pending investment in such securities if
or when they do become available. Through this use of futures and related
options, a Fund may diversify risk in its portfolio without incurring the
substantial brokerage costs which may be associated with investment in the
securities of multiple issuers. This use may also permit a Fund to avoid
potential market and liquidity problems (e.g., driving up the price of a
security by purchasing additional shares of a portfolio security or owning so
much of a particular issuer's stock that the sale of such stock depresses that
stock's price) which may result from increases in positions already held by the
Fund.
When any Fund purchases futures contracts for investment, it will maintain cash,
U.S. Government Securities or other high grade debt obligations in a segregated
account with its custodian in an amount which, together with the initial and
variation margin deposited on the futures contracts, is equal to the face value
of the futures contracts at all times while the futures contracts are held.
Incidental to other transactions in fixed income securities, for investment
purposes a Fund may also combine futures contracts or options on fixed income
securities with cash, cash equivalent investments or other fixed income
securities in order to create "synthetic" bonds which approximate desired risk
and return profiles. This may be done where a "non-synthetic" security having
the desired risk/return profile either is unavailable (e.g., short-term
securities of certain foreign governments) or possesses undesirable
characteristics (e.g., interest payments on the security would be subject to
foreign withholding taxes). A Fund may also purchase forward foreign exchange
contracts in conjunction with U.S. dollar-denominated securities in order to
create a synthetic foreign currency denominated security which approximates
desired risk and return characteristics where the non-synthetic securities
either are not available in foreign markets or possess undesirable
characteristics. For greater detail, see "Foreign Currency Transactions" below.
When a Fund creates a "synthetic" bond with a futures contract, it will maintain
cash, U.S. Government securities or other high grade debt obligations in a
segregated account with its custodian with a value at least equal to the face
amount of the futures contract (less the amount of any initial or variation
margin on deposit).
SYNTHETIC SALES AND PURCHASES. Futures contracts may also be used to reduce
transaction costs associated with short-term restructuring of a Fund's
portfolio. For example, if a Fund's portfolio includes stocks of companies with
medium-sized equity capitalization and, in the opinion of the Manager, such
stocks are likely to underperform larger capitalization stocks, the Fund might
sell some or all of its mid-capitalization stocks, buy large capitalization
stocks with the proceeds and then, when the expected trend had played out, sell
the large capitalization stocks and repurchase the mid-capitalization stocks
with the proceeds. In the alternative, the Fund may use futures to achieve a
similar result with reduced transaction costs. In that case, the Fund might
simultaneously enter into short futures positions on an appropriate index (e.g.,
the S&P Mid Cap 400 Index) (to synthetically "sell" the stocks in the Fund) and
long futures positions on another index (e.g., the S&P 500) (to synthetically
"buy" the larger capitalization stocks). When the expected trend has played out,
the Fund would then close out both futures contract positions. A Fund will only
enter into these combined positions if (1) the short position (adjusted for
historic volatility) operates as a hedge of
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existing portfolio holdings, (2) the face amount of the long futures position is
less than or equal to the value of the portfolio securities that the Fund would
like to dispose of, (3) the contract settlement date for the short futures
position is approximately the same as that for the long futures position and (4)
the Fund segregates an amount of cash, U.S. Government Securities and other
high-quality debt obligations whose value, marked-to-market daily, is equal to
the Fund's current obligations in respect of the long futures contract
positions. If a Fund uses such combined short and long positions, in addition to
possible declines in the values of its investment securities, the Fund may also
suffer losses associated with a securities index underlying the long futures
position underperforming the securities index underlying the short futures
position. However, the Manager will enter into these combined positions only if
the Manager expects that, overall, the Fund will perform as if it had sold the
securities hedged by the short position and purchased the securities underlying
the long position. A Fund may also use swaps and options on futures to achieve
the same objective.
Limitations on the Use of Options and Futures Portfolio Strategies. As noted
above, the Funds may use futures contracts and related options for hedging and,
in some circumstances, for risk management or investment but not for
speculation. Thus, except when used for risk management or investment, each such
Fund's long futures contract positions (less its short positions) together with
the Fund's cash (i.e., equity or fixed income) positions will not exceed the
Fund's total net assets.
The Funds' ability to engage in the options and futures strategies described
above will depend on the availability of liquid markets in such instruments.
Markets in options and futures with respect to currencies are relatively new and
still developing. It is impossible to predict the amount of trading interest
that may exist in various types of options or futures. Therefore no assurance
can be given that a Fund will be able to utilize these instruments effectively
for the purposes set forth above. Furthermore, each Fund's ability to engage in
options and futures transactions may be limited by tax considerations.
SWAP CONTRACTS AND OTHER TWO-PARTY CONTRACTS
Many of the Funds may use swap contracts and other two-party contracts for the
same or similar purposes as they may use options, futures and related options.
SWAP CONTRACTS. Swap agreements are two-party contracts entered into primarily
by institutional investors for periods ranging from a few weeks to more than one
year. In a standard "swap" transaction, two parties agree to exchange returns
(or differentials in rates of return) calculated with respect to a "notional
amount," e.g., the return on or increase in value of a particular dollar amount
invested at a particular interest rate, in a particular foreign currency, or in
a "basket" of securities representing a particular index. A Fund will usually
enter into swaps on a net basis, i.e., the two returns are netted out, with the
Fund receiving or paying, as the case may be, only the net amount of the two
returns.
INTEREST RATE AND CURRENCY SWAP CONTRACTS. Interest rate swaps involve the
exchange of the two parties' respective commitments to pay or receive interest
on a notional principal amount (e.g. an exchange of floating rate payments for
fixed rate payments). Currency swaps involve the exchange of the two parties'
respective commitments to pay or receive fluctuations with respect to a notional
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amount of two different currencies (e.g., an exchange of payments with respect
to fluctuations in the value of the U.S. dollar relative to the Japanese yen).
EQUITY SWAP CONTRACTS AND CONTRACTS FOR DIFFERENCES. Equity swap contracts
involve the exchange of one party's obligation to pay the loss, if any, with
respect to a notional amount of a particular equity index (e.g., the S&P 500
Index) plus interest on such notional amount at a designated rate (e.g., the
London Inter-Bank Offered Rate) in exchange for the other party's obligation to
pay the gain, if any, with respect to the notional amount of such index.
If a Fund enters into a long equity swap contract, the Fund's net asset value
will fluctuate as a result of changes in the value of the equity index on which
the equity swap is based as if it had purchased the notional amount of
securities comprising the index. The Funds will not use long equity swap
contracts to obtain greater volatility than it could obtain through direct
investment in securities; that is, a Fund will not normally enter into an equity
swap contract to increase the volatility (beta) of the Fund's portfolio above
1.00, the volatility that would be present in the stocks comprising the Fund's
benchmark index. However, a Fund may invest in long equity swap contracts
without regard to this limitation if the notional amount of such equity swap
contracts, when aggregated with the Index Futures as described above and the
contracts for differences as described below, does not exceed 10% of a Fund's
net assets.
Contracts for differences are swap arrangements in which a Fund may agree with a
counterparty that its return (or loss) will be based on the relative performance
of two different groups or "baskets" of securities. As to one of the baskets,
the Fund's return is based on theoretical, long futures positions in the
securities comprising that basket (with an aggregate face value equal to the
notional amount of the contract for differences) and as to the other basket, the
Fund's return is based on theoretical short futures positions in the securities
comprising the basket. The Fund may also use actual long and short futures
positions to achieve the same market exposure(s) as contracts for differences
where payment obligations of the two legs of the contract are netted and thus
based on changes in the relative value of the baskets of securities rather than
on the aggregate change in the value of the two legs. The Funds will only enter
into contracts for differences (and analogous futures positions) when the
Manager believes that the basket of securities constituting the long leg will
outperform the basket constituting the short leg. However, it is possible that
the short basket will outperform the long basket -- resulting in a loss to the
Fund, even in circumstances when the securities in both the long and short
baskets appreciate in value.
Except for instances in which a Fund elects to obtain leverage up to the 10%
limitation mentioned above, a Fund will maintain cash, U.S. Government
Securities or other high grade debt obligations in a segregated account with its
custodian in an amount equal to the aggregate of net payment obligations on its
swap contracts and contracts for differences, marked to market daily.
A Fund may enter into swaps and contracts for differences for hedging,
investment and risk management. When using swaps for hedging, a Fund may enter
into an interest rate, currency or equity swap, as the case may be, on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities. For risk management or investment purposes a Fund may
also enter into a contract for differences in which the notional amount of the
theoretical long position is greater than the notional amount of the theoretical
short position. A Fund will not
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normally enter into a contract for differences to increase the volatility (beta)
of the Fund's portfolio above 1.00. However, a Fund may invest in contracts for
differences without regard to this limitation if the aggregate amount by which
the theoretical long positions of such contracts exceed the theoretical short
positions of such contracts, when aggregated with the Index Futures and equity
swap contracts as described above, does not exceed 10% of a Fund's net assets.
INTEREST RATE CAPS, FLOORS AND COLLARS. The Funds may use interest rate caps,
floors and collars for the same purposes or similar purposes as they use
interest rate futures contracts and related options. Interest rate caps, floors
and collars are similar to interest rate swap contracts because the payment
obligations are measured by changes in interest rates as applied to a notional
amount and because they are individually negotiated with a specific
counterparty. The purchase of an interest rate cap entitles the purchaser, to
the extent that a specific index exceeds a specified interest rate, to receive
payments of interest on a notional principal amount from the party selling the
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below specified interest
rates, to receive payments of interest on a notional principal amount from the
party selling the interest rate floor. The purchase of an interest rate collar
entitles the purchaser, to the extent that a specified index exceeds or falls
below two specified interest rates, to receive payments of interest on a
notional principal amount from the party selling the interest rate collar.
Except when using such contracts for risk management, each Fund will maintain
cash, U.S. Government Securities or other high grade debt obligations in a
segregated account with its custodian in an amount at least equal to its
obligations, if any, under interest rate cap, floor and collar arrangements. As
with futures contracts, when a Fund uses notional amount contracts for risk
management it is only required to segregate assets equal to its net payment
obligation, not the notional amount of the contract. In those cases, the
notional amount contract will have the effect of providing a degree of
investment leverage similar to the leverage associated with nonsegregated
futures contracts. The Funds' use of interest rate caps, floors and collars for
the same or similar purposes as those for which they use futures contracts and
related options presents the same risks and similar opportunities as those
associated with futures and related options. Because caps, floors and collars
are recent innovations for which standardized documentation has not yet been
developed they are deemed by the SEC to be relatively illiquid investments which
are subject to a Fund's limitation on investment in illiquid securities. See
"Illiquid Securities" below.
RISK FACTORS IN SWAP CONTRACTS, OTC OPTIONS AND OTHER TWO-PARTY CONTRACTS. A
Fund may only close out a swap, contract for differences, cap, floor or collar
or OTC option with the particular counterparty. Also, if the counterparty
defaults, a Fund will have contractual remedies pursuant to the agreement
related to the transaction, but there is no assurance that contract
counterparties will be able to meet their obligations pursuant to such contracts
or that, in the event of default, a Fund will succeed in pursuing contractual
remedies. The Fund thus assumes the risk that it may be delayed or prevented
from obtaining payments owed to it pursuant to swap contracts. The Manager will
closely monitor, subject to the oversight of the Trustees, the creditworthiness
of contract counterparties, and a Fund will not enter into any swaps, caps,
floors or collars, unless the unsecured senior debt or the claims-paying ability
of the other party thereto is rated at least A by Moody's Investors Service or
Standard & Poor's Corporation at the time of entering into such transaction or
if the counterparty has comparable credit as determined by the Manager. However,
the credit of the counterparty may be adversely affected by larger-than-average
volatility in the markets, even if the counterparty's net market exposure is
small relative to its capital. The management of caps, floors, collars and swaps
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may involve certain difficulties because the characteristics of many derivatives
have not been observed under all market conditions or through a full market
cycle.
ADDITIONAL REGULATORY LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS,
INTEREST RATE FLOORS, CAPS AND COLLARS AND INTEREST RATE AND CURRENCY SWAP
CONTRACTS. In accordance with CFTC regulations, investments by any Fund in
futures contracts and related options for purposes other than bona fide hedging
are limited such that the aggregate amount that a Fund may commit to initial
margin on such contracts or time premiums on such options may not exceed 5% of
that Fund's net assets.
The Manager and the Trust do not believe that the Fund's respective obligations
under equity swap contracts, reverse equity swap contracts or Index Futures are
senior securities and, accordingly, the Fund will not treat them as being
subject to its borrowing restrictions. However, the net amount of the excess, if
any, of the Fund's obligations over its entitlements with respect to each equity
swap contract will be accrued on a daily basis and an amount of cash, U.S.
government securities or other liquid obligations having an aggregate market
value at least equal to the accrued excess will be maintained in a segregated
account by the Fund's custodian. Likewise, when a Fund takes a short position
with respect to an Index Futures contract the position must be covered or the
Fund must maintain at all times while that position is held, cash, U.S.
government securities or other liquid obligations in a segregated account with
its custodian, in an amount which, together with the initial margin deposit on
the futures contract, is equal to the current delivery or cash settlement value.
The use of unsegregated futures contracts, related written options, interest
rate floors, caps and collars and interest rate and currency swap contracts for
risk management by a Fund permitted to engage in any or all of such practices is
limited to no more than 10% of a Fund's total net assets when aggregated with
such Fund's traditional borrowings in accordance with SEC pronouncements. This
10% limitation applies to the face amount of unsegregated futures contracts and
related options and to the amount of a Fund's net payment obligation that is not
segregated against in the case of interest rate floors, caps and collars and
interest rate and currency swap contracts.
FOREIGN CURRENCY TRANSACTIONS
Foreign currency exchange rates may fluctuate significantly over short periods
of time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or perceived changes in interest rates and other complex
factors. Currency exchange rates also can be affected unpredictably by
intervention (or the failure to intervene) by U.S. or foreign governments or
central banks, or by currency controls or political developments in the U.S. or
abroad. For example, uncertainty surrounds the introduction of the "euro" (a
common currency unit for the European Union) which occurred in January 1999.
These and other currencies in which the Funds' assets are denominated may be
devalued against the U.S. dollar, resulting in a loss to the Funds.
Funds that are permitted to invest in securities denominated in foreign
currencies may buy or sell foreign currencies, deal in forward foreign currency
contracts, currency futures contracts and related options and options on
currencies. These Funds may use such currency instruments for hedging,
investment or currency risk management. Currency risk management may include
taking active
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currency positions relative to both the securities portfolio of the Fund and the
Fund's performance benchmark.
Forward foreign currency contracts are contracts between two parties to purchase
and sell a specific quantity of a particular currency at a specified price, with
delivery and settlement to take place on a specified future date. Currency
futures contracts are contracts to buy or sell a standard quantity of a
particular currency at a specified future date and price. Options on currency
futures contracts give their owner the right, but not the obligation, to buy (in
the case of a call option) or sell (in the case of a put option) a specified
currency futures contract at a fixed price during a specified period. Options on
currencies give their owner the right, but not the obligation, to buy (in the
case of a call option) or sell (in the case of a put option) a specified
quantity of a particular currency at a fixed price during a specified period.
These Funds may enter into forward contracts for hedging under three
circumstances. First, when a Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transaction, the Fund will be able
to protect itself against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and the subject foreign currency during
the period between the date on which the security is purchased or sold and the
date on which payment is made or received.
Second, when the manager of a Fund believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell, for a fixed amount of dollars, the amount
of foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. Maintaining a match
between the forward contract amounts and the value of the securities involved
will not generally be possible since the future value of such securities in
foreign currencies will change as a consequence of market movements in the value
of those securities between the date the forward contract is entered into and
the date it matures.
Third, the Funds may engage in currency "cross hedging" when, in the opinion of
the Manager, the historical relationship among foreign currencies suggests that
the Funds may achieve the same protection for a foreign security at reduced cost
through the use of a forward foreign currency contract relating to a currency
other than the U.S. dollar or the foreign currency in which the security is
denominated. By engaging in cross hedging transactions, the Funds assume the
risk of imperfect correlation between the subject currencies. These practices
may present risks different from or in addition to the risks associated with
investments in foreign currencies.
A Fund is not required to enter into hedging transactions with regard to its
foreign currency-denominated securities and will not do so unless deemed
appropriate by the Manager. By entering into the above hedging transactions, the
Funds may be required to forego the benefits of advantageous changes in the
exchange rates.
Each of these Funds may also enter into foreign currency forward contracts for
investment and currency risk management. When a Fund uses currency instruments
for such purposes, the foreign
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currency exposure of the Fund may differ substantially from the currencies in
which the Fund's investment securities are denominated. However, a Fund's
aggregate foreign currency exposure will not normally exceed 100% of the value
of the Fund's securities, except that a Fund may use currency instruments
without regard to this limitation if the amount of such excess, when aggregated
with futures contracts, equity swap contracts and contracts for differences used
in similar ways, does not exceed 10% of a Fund's net assets. The U.S.
Bond/Global Alpha A Fund, U.S. Bond/Global Alpha B Fund, International Bond
Fund, the Currency Hedged International Bond Fund, the Global Bond Fund and the
Emerging Country Debt Fund, among others, may each also enter into foreign
currency forward contracts to give fixed income securities denominated in one
currency (generally the U.S. dollar) the risk characteristics of similar
securities denominated in another currency as described above under "Uses of
Options, Futures and Options on Futures -- Investment Purposes" or for risk
management in a manner similar to such Funds' use of futures contracts and
related options.
Except to the extent that the Funds may use such contracts for risk management,
whenever a Fund enters into a foreign currency forward contract, other than a
forward contract entered into for hedging, it will maintain cash, U.S.
Government securities or other high grade debt obligations in a segregated
account with its custodian with a value, marked to market daily, equal to the
amount of the currency required to be delivered. A Fund's ability to engage in
forward contracts may be limited by tax considerations.
A Fund may use currency futures contracts and related options and options on
currencies for the same reasons for which it uses currency forwards. Except to
the extent that the Funds may use futures contracts and related options for risk
management, a Fund will, so long as it is obligated as the writer of a call
option on currency futures, own on a contract-for-contract basis an equal long
position in currency futures with the same delivery date or a call option on
currency futures with the difference, if any, between the market value of the
call written and the market value of the call or long currency futures purchased
maintained by the Fund in cash, U.S. Government securities or other high grade
debt obligations in a segregated account with its custodian. If at the close of
business on any day the market value of the call purchased by a Fund falls below
100% of the market value of the call written by the Fund, the Fund will maintain
an amount of cash, U.S. Government securities or other high grade debt
obligations in a segregated account with its custodian equal in value to the
difference. Alternatively, the Fund may cover the call option by owning
securities denominated in the currency with a value equal to the face amount of
the contract(s) or through segregating with the custodian an amount of the
particular foreign currency equal to the amount of foreign currency per futures
contract option times the number of options written by the Fund.
REPURCHASE AGREEMENTS
A Fund may enter into repurchase agreements with banks and broker-dealers by
which the Fund acquires a security (usually an obligation of the Government
where the transaction is initiated or in whose currency the agreement is
denominated) for a relatively short period (usually not more than a week) for
cash and obtains a simultaneous commitment from the seller to repurchase the
security at an agreed-on price and date. The resale price is in excess of the
acquisition price and reflects an agreed-upon market rate unrelated to the
coupon rate on the purchased security. Such transactions afford an opportunity
for the Fund to earn a return on temporarily available cash at no market risk,
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although there is a risk that the seller may default in its obligation to pay
the agreed-upon sum on the redelivery date. Such a default may subject the
relevant Fund to expenses, delays and risks of loss including: (a) possible
declines in the value of the underlying security during the period while the
Fund seeks to enforce its rights thereto, (b) possible reduced levels of income
and lack of access to income during this period and (c) inability to enforce
rights and the expenses involved in attempted enforcement.
DEBT AND OTHER FIXED INCOME SECURITIES GENERALLY
Debt and Other Fixed Income Securities include fixed income securities of any
maturity, although, under normal circumstances, a Fixed Income Fund (other than
the Short-Term Income Fund) will only invest in a security if, at the time of
such investment, at least 65% of its total assets will be comprised of bonds, as
defined in the Prospectus. Fixed income securities pay a specified rate of
interest or dividends, or a rate that is adjusted periodically by reference to
some specified index or market rate. Fixed income securities include securities
issued by federal, state, local and foreign governments and related agencies,
and by a wide range of private issuers.
Fixed income securities are subject to market and credit risk. Market risk
relates to changes in a security's value as a result of changes in interest
rates generally. In general, the values of fixed income securities increase when
prevailing interest rates fall and decrease when interest rates rise. Credit
risk relates to the ability of the issuer to make payments of principal and
interest. Obligations of issuers are subject to the provisions of bankruptcy,
insolvency and other laws, such as the Federal Bankruptcy Reform Act of 1978,
affecting the rights and remedies of creditors. Fixed income securities
denominated in foreign currencies are also subject to the risk of a decline in
the value of the denominating currency.
Because interest rates vary, it is impossible to predict the future income of a
Fund investing in such securities. The net asset value of each Fund's shares
will vary as a result of changes in the value of the securities in its portfolio
and will be affected by the absence and/or success of hedging strategies.
TEMPORARY HIGH QUALITY CASH ITEMS
Many of the Funds may temporarily invest a portion of their assets in cash or
cash items pending other investments or in connection with the maintenance of a
segregated account. These cash items must be of high quality and may include a
number of money market instruments such as securities issued by the United
States government and agencies thereof, bankers' acceptances, commercial paper,
and bank certificates of deposit. By investing only in high quality money market
securities a Fund may seek to minimize credit risk with respect to such
investments. The Short-Term Income Fund may invest a substantial portion of its
assets in these instruments, but is not subject to the quality, duration and
other requirements of money market funds.
U.S. GOVERNMENT SECURITIES AND FOREIGN GOVERNMENT SECURITIES
U.S. Government Securities include securities issued or guaranteed by the U.S.
government or its authorities, agencies or instrumentalities. Foreign Government
Securities include securities issued or guaranteed by foreign governments
(including political subdivisions) or their authorities, agencies
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or instrumentalities or by supra-national agencies. U.S. Government Securities
and Foreign Government Securities have different kinds of government support.
For example, some U.S. Government Securities, such as U.S. Treasury bonds, are
supported by the full faith and credit of the United States, whereas certain
other U.S. Government Securities issued or guaranteed by federal agencies or
government-sponsored enterprises are not supported by the full faith and credit
of the United States. Similarly, some Foreign Government Securities are
supported by the full faith and credit of a foreign national government or
political subdivision and some are not. In the case of certain countries,
Foreign Government Securities may involve varying degrees of credit risk as a
result of financial or political inability of a Fund to enforce its rights
against the foreign government issuer.
Supra-national agencies are agencies whose member nations make capital
contributions to support the agencies' activities, and include such entities as
the International Bank for Reconstruction and Development (the World Bank), the
Asian Development Bank, the European Coal and Steel Community and the
Inter-American Development Bank.
Like other fixed income securities, U.S. Government Securities and Foreign
Government Securities are subject to market risk and their market values
fluctuate as interest rates change. Thus, for example, the value of an
investment in a Fund which holds U.S. Government Securities or Foreign
Government Securities may fall during times of rising interest rates. Yields on
U.S. Government Securities and Foreign Government Securities tend to be lower
than those of corporate securities of comparable maturities.
In addition to investing directly in U.S. Government Securities and Foreign
Government Securities, a Fund may purchase certificates of accrual or similar
instruments evidencing undivided ownership interests in interest payments or
principal payments, or both, in U.S. Government Securities and Foreign
Government Securities. These certificates of accrual and similar instruments may
be more volatile than other government securities.
MORTGAGE-BACKED AND OTHER ASSET-BACKED SECURITIES
Mortgage-backed and other asset-backed securities may be issued by the U.S.
government, its agencies or instrumentalities, or by non-governmental issuers.
Interest and principal payments (including prepayments) on the mortgages
underlying mortgage-backed securities are passed through to the holders of the
mortgage-backed securities. Prepayments occur when the mortgagor on an
individual mortgage prepays the remaining principal before the mortgage's
scheduled maturity date. As a result of the pass-through of prepayments of
principal on the underlying mortgages, mortgage-backed securities are often
subject to more rapid prepayment of principal than their stated maturity would
indicate. Because the prepayment characteristics of the underlying mortgages
vary, there can be no certainty as to the predicted yield or average life of a
particular issue of pass-through certificates. Prepayments are important because
of their effect on the yield and price of the securities. During periods of
declining interest rates, such prepayments can be expected to accelerate and a
Fund would be required to reinvest the proceeds at the lower interest rates then
available. In addition, prepayments of mortgages which underlie securities
purchased at a premium could result in capital loss because the premium may not
have been fully amortized at the time the obligation was prepaid. As a result of
these principal prepayment features, the values of mortgage-
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backed securities generally fall when interest rates rise, but their potential
for capital appreciation in periods of falling interest rates is limited because
of the prepayment feature. The mortgage-backed securities purchased by a Fund
may include Adjustable Rate Securities as such term is defined in "Adjustable
Rate Securities" below.
Other "asset-backed securities" include securities backed by pools of automobile
loans, educational loans and credit card receivables. Mortgage-backed and
asset-backed securities of non-governmental issuers involve prepayment risks
similar to those of U.S. government guaranteed mortgage-backed securities and
also involve risk of loss of principal if the obligors of the underlying
obligations default in payment of the obligations.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOs"): STRIPS AND RESIDUALS. A CMO is a
security backed by a portfolio of mortgages or mortgage-backed securities held
under an indenture. The issuer's obligation to make interest and principal
payments is secured by the underlying portfolio of mortgages or mortgage-backed
securities. CMOs are issued in multiple classes or series which have different
maturities representing interests in some or all of the interest or principal on
the underlying collateral or a combination thereof. CMOs of different classes
are generally retired in sequence as the underlying mortgage loans in the
mortgage pool are repaid. In the event of sufficient early prepayments on such
mortgages, the class or series of CMO first to mature generally will be retired
prior to its stated maturity. Thus, the early retirement of a particular class
or series of CMO held by a Fund would have the same effect as the prepayment of
mortgages underlying a mortgage-backed pass-through security.
CMOs include securities ("Residuals") representing the interest in any excess
cash flow and/or the value of any collateral remaining on mortgages or
mortgage-backed securities from the payment of principal of and interest on all
other CMOs and the administrative expenses of the issuer. Residuals have value
only to the extent income from such underlying mortgages or mortgage-backed
securities exceeds the amount necessary to satisfy the issuer's debt obligations
represented by all other outstanding CMOs.
CMOs also include certificates representing undivided interests in payments of
interest-only or principal-only ("IO/PO Strips") on the underlying mortgages.
IO/PO Strips and Residuals tend to be more volatile than other types of
securities. IO Strips and Residuals also involve the additional risk of loss of
a substantial portion of or the entire value of the investment if the underlying
securities are prepaid. In addition, if a CMO bears interest at an adjustable
rate, the cash flows on the related Residual will also be extremely sensitive to
the level of the index upon which the rate adjustments are based.
ADJUSTABLE RATE SECURITIES
Adjustable rate securities are securities that have interest rates that are
reset at periodic intervals, usually by reference to some interest rate index or
market interest rate. They may be U.S. Government Securities or securities of
other issuers. Some adjustable rate securities are backed by pools of mortgage
loans. Although the rate adjustment feature may act as a buffer to reduce sharp
changes in the value of adjustable rate securities, these securities are still
subject to changes in value based on changes in market interest rates or changes
in the issuer's creditworthiness. Because the
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interest rate is reset only periodically, changes in the interest rates on
adjustable rate securities may lag changes in prevailing market interest rates.
Also, some adjustable rate securities (or, in the case of securities backed by
mortgage loans, the underlying mortgages) are subject to caps or floors that
limit the maximum change in interest rate during a specified period or over the
life of the security. Because of the resetting of interest rates, adjustable
rate securities are less likely than non-adjustable rate securities of
comparable quality and maturity to increase significantly in value when market
interest rates fall.
LOWER RATED SECURITIES
Certain Funds may invest some or all of their assets in securities rated below
investment grade (that is, rated below BBB by Standard & Poor's or below Baa by
Moody's) at the time of purchase, including securities in the lowest rating
categories, and comparable unrated securities ("Lower Rated Securities"). A Fund
will not necessarily dispose of a security when its rating is reduced below its
rating at the time of purchase, although the Manager will monitor the investment
to determine whether continued investment in the security will assist in meeting
the Fund's investment objective.
Lower Rated Securities generally provide higher yields, but are subject to
greater credit and market risk, than higher quality fixed income securities.
Lower Rated Securities are considered predominantly speculative with respect to
the ability of the issuer to meet principal and interest payments. Achievement
of the investment objective of a Fund investing in Lower Rated Securities may be
more dependent on the Manager's own credit analysis than is the case with higher
quality bonds. The market for Lower Rated Securities may be more severely
affected than some other financial markets by economic recession or substantial
interest rate increases, by changing public perceptions of this market or by
legislation that limits the ability of certain categories of financial
institutions to invest in these securities. In addition, the secondary market
may be less liquid for Lower Rated Securities. This reduced liquidity at certain
times may affect the values of these securities and may make the valuation and
sale or these securities more difficult. Securities of below investment grade
quality are commonly referred to as "junk bonds." Securities in the lowest
rating categories may be in poor standing or in default. Securities in the
lowest investment grade category (BBB or Baa) have some speculative
characteristics. See "Commercial Paper and Corporate Debt Ratings" below for
more information concerning commercial paper and corporate debt ratings.
BRADY BONDS
Brady Bonds are securities created through the exchange of existing commercial
bank loans to public and private entities in certain emerging markets for new
bonds in connection with debt restructuring under a debt restructuring plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the
"Brady Plan"). Brady Plan debt restructurings have been implemented in Mexico,
Uruguay, Venezuela, Costa Rica, Argentina, Nigeria, the Philippines and other
countries.
Brady Bonds have been issued only recently, and for that reason do not have a
long payment history. Brady Bonds may be collateralized, are issued in various
currencies (but primarily the dollar) and are actively traded in
over-the-counter secondary markets. Dollar-denominated, collateralized Brady
Bonds, which may be fixed-rate bonds or floating-rate bonds, are generally
collateralized in full as to principal by U.S. Treasury zero coupon bonds having
the same maturity as the bonds.
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Brady Bonds are often viewed as having three or four valuation components: any
collateralized repayment of principal at final maturity; any collateralized
interest payments; the uncollateralized interest payments; and any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
ZERO COUPON SECURITIES
A Fund investing in "zero coupon" fixed income securities is required to accrue
interest income on these securities at a fixed rate based on the initial
purchase price and the length to maturity, but these securities do not pay
interest in cash on a current basis. Each Fund is required to distribute the
income on these securities to its shareholders as the income accrues, even
though that Fund is not receiving the income in cash on a current basis. Thus,
each Fund may have to sell other investments to obtain cash to make income
distributions. The market value of zero coupon securities is often more volatile
than that of non-zero coupon fixed income securities of comparable quality and
maturity. Zero coupon securities include IO and PO strips.
INDEXED SECURITIES
Indexed Securities are securities the redemption values and/or the coupons of
which are indexed to the prices of a specific instrument or statistic. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity or coupon rate is determined by reference to other securities,
securities indexes, currencies, precious metals or other commodities, or other
financial indicators. Gold-indexed securities, for example, typically provide
for a maturity value that depends on the price of gold, resulting in a security
whose price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
Indexed securities in which each Fund may invest include so-called "inverse
floating obligations" or "residual interest bonds" on which the interest rates
typically decline as short-term market interest
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rates increase and increase as short-term market rates decline. Such securities
have the effect of providing a degree of investment leverage, since they will
generally increase or decrease in value in response to changes in market
interest rates at a rate which is a multiple of the rate at which fixed-rate
long-term securities increase or decrease in response to such changes. As a
result, the market values of such securities will generally be more volatile
than the market values of fixed rate securities.
A Fund's investment in indexed securities may also create taxable income in
excess of the cash such investments generate. See "Taxes" in the Prospectus.
FIRM COMMITMENTS
A firm commitment agreement is an agreement with a bank or broker-dealer for the
purchase of securities at an agreed-upon price on a specified future date. A
fund may enter into firm commitment agreements with such banks and
broker-dealers with respect to any of the instruments eligible for purchase by
the Fund. A Fund will only enter into firm commitment arrangements with banks
and broker-dealers which the Manager determines present minimal credit risks.
Each such Fund will maintain in a segregated account with its custodian cash,
U.S. Government Securities or other liquid high grade debt obligations in an
amount equal to the Fund's obligations under firm commitment agreements.
LOANS, LOAN PARTICIPATIONS AND ASSIGNMENTS
Certain Funds may invest in direct debt instruments which are interests in
amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates (loans and loan participations), to suppliers of goods or
services (trade claims or other receivables), or to other parties. Direct debt
instruments are subject to a Fund's policies regarding the quality of debt
securities.
Purchasers of loans and other forms of direct indebtedness depend primarily upon
the creditworthiness of the borrower for payment of principal and interest.
Direct debt instruments may not be rated by any nationally recognized rating
agency and yield could be adversely affected. Loans that are fully secured offer
the Fund more protections than an unsecured loan in the event of non-payment of
scheduled interest or principal. However, there is no assurance that the
liquidation of collateral from a secured loan would satisfy the borrower's
obligation or that the collateral can be liquidated. Indebtedness of borrowers
whose creditworthiness is poor involves substantially greater risks, and may be
highly speculative. Borrowers that are in bankruptcy or restructuring may never
pay off their indebtedness, or may pay only a small fraction of the amount owed.
Direct indebtedness of emerging countries will also involve a risk that the
governmental entities responsible for repayment of the debt may be unable, or
unwilling, to pay interest and repay principal when due.
When investing in a loan participation, a Fund will typically have the right to
receive payments only from the lender to the extent the lender receives payments
from the borrower, and not from the borrower itself. Likewise, a Fund typically
will be able to enforce its rights only through the lender, and not directly
against the borrower. As a result, a Fund will assume the credit risk of both
the borrower and the lender that is selling the participation.
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Investments in loans through direct assignment of a financial institution's
interests with respect to a loan may involve additional risks to the Fund. For
example, if a loan is foreclosed, a Fund could become part owner of any
collateral, and would bear the costs and liabilities associated with owning and
disposing of the collateral. In addition, it is conceivable that under emerging
legal theories of lender liability, a Fund could be held liable as a co-lender.
In the case of a loan participation, direct debt instruments may also involve a
risk of insolvency of the lending bank or other intermediary. Direct debt
instruments that are not in the form of securities may offer less legal
protection to a Fund in the event of fraud or misrepresentation. In the absence
of definitive regulatory guidance, a Fund may rely on the Manager's research to
attempt to avoid situations where fraud or misrepresentation could adversely
affect the Fund.
A loan is often administered by a bank or other financial institution that acts
as agent for all holders. The agent administers the terms of the loan, as
specified in the loan agreement. Unless, under the terms of the loan or other
indebtedness, a Fund has direct recourse against the borrower, it may have to
rely on the agent to apply appropriate credit remedies against a borrower.
Direct indebtedness purchased by a Fund may include letters of credit, revolving
credit facilities, or other standby financing commitments obligating the Fund to
pay additional cash on demand. These commitments may have the effect of
requiring the Fund to increase its investment in a borrower at a time when it
would not otherwise have done so. A Fund will set aside appropriate liquid
assets in a segregated custodial account to cover its potential obligations
under standby financing commitments.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS
Certain Funds may enter into reverse repurchase agreements and dollar roll
agreements with banks and brokers to enhance return. Reverse repurchase
agreements involve sales by a Fund of portfolio assets concurrently with an
agreement by the Fund to repurchase the same assets at a later date at a fixed
price. During the reverse repurchase agreement period, the Fund continues to
receive principal and interest payments on these securities and also has the
opportunity to earn a return on the collateral furnished by the counterparty to
secure its obligation to redeliver the securities.
Dollar rolls are transactions in which a Fund sells securities for delivery in
the current month and simultaneously contracts to repurchase substantially
similar (same type and coupon) securities on a specified future date. During the
roll period, the Fund forgoes principal and interest paid on the securities. The
Fund is compensated by the difference between the current sales price and the
forward price for the future purchase (often referred to as the "drop") as well
as by the interest earned on the cash proceeds of the initial sale.
A Fund which makes such investments will establish segregated accounts with its
custodian in which the Fund will maintain cash, U.S. Government Securities or
other liquid assets equal in value to its obligations in respect of reverse
repurchase agreements and dollar rolls. Reverse repurchase agreements and dollar
rolls involve the risk that the market value of the securities retained by a
Fund may decline below the price of the securities the Fund has sold but is
obligated to repurchase under the agreement. In the event the buyer of
securities under a reverse repurchase agreement or dollar roll files for
bankruptcy or becomes insolvent, a Fund's use of the proceeds of the agreement
may be
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restricted pending a determination by the other party or its trustee or receiver
whether to enforce the Fund's obligation to repurchase the securities. Reverse
repurchase agreements and dollar rolls are not considered borrowings by a Fund
for purposes of a Fund's fundamental investment restriction with respect to
borrowings.
ILLIQUID SECURITIES
Each Fund may purchase (or in the case of the Asset Allocation Funds, gain
exposure through investment in underlying Funds) "illiquid securities," i.e.,
securities which may not be sold or disposed of in the ordinary course of
business within seven days at approximately the value at which the Fund has
valued the investment, which include securities whose disposition is restricted
by securities laws, so long as no more than 15% (or, in the case of the Foreign
Fund only, 10%) of net assets would be invested in such illiquid securities.
Each Fund currently intends to invest in accordance with the SEC staff view that
repurchase agreements maturing in more than seven days are illiquid securities.
The SEC staff has stated informally that it is of the view that over-the-counter
options and securities serving as cover for over-the-counter options are
illiquid securities. While the Trust does not agree with this view, it will
operate in accordance with any relevant formal guidelines adopted by the SEC.
In addition, the SEC staff considers equity swap contracts, caps, floors and
collars to be illiquid securities. Consequently, while the staff maintains this
position, the Fund will not enter into an equity swap contract or a reverse
equity swap contract or purchase a cap, floor or collar if, as a result of the
investment, the total value (i.e., marked-to-market value) of such investments
(without regard to their notional amount) together with that of all other
illiquid securities which the Fund owns would exceed 15% (or, in the case of the
Foreign Fund only, 10%) of the Fund's net assets.
INVESTMENT RESTRICTIONS
Fundamental Restrictions:
Without a vote of the majority of the outstanding voting securities of the
relevant Fund, the Trust will not take any of the following actions with respect
to any Fund as indicated:
(1) Borrow money except under the following circumstances: (i) Each Fund may
borrow money from banks so long as after such a transaction, the total assets
(including the amount borrowed) less liabilities other than debt obligations,
represent at least 300% of outstanding debt obligations; (ii) Each Fund may also
borrow amounts equal to an additional 5% of its total assets without regard to
the foregoing limitation for temporary purposes, such as for the clearance and
settlement of portfolio transactions and to meet shareholder redemption
requests; (iii) Each Fund may enter into transactions that are technically
borrowings under the 1940 Act because they involve the sale of a security
coupled with an agreement to repurchase that security (e.g., reverse repurchase
agreements, dollar rolls and other similar investment techniques) without regard
to the asset coverage restriction described in (i) above, so long as and to the
extent that a Fund establishes a segregated account with its custodian in which
it maintains cash and/or high grade debt securities equal in value to its
obligations in respect of these transactions. Under current pronouncements of
the SEC staff, such transactions are not treated as senior securities so long as
and to the extent that the Fund establishes a
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segregated account with its custodian in which it maintains liquid assets, such
as cash, U.S. Government securities or other appropriate assets equal in value
to its obligations in respect of these transactions; notwithstanding the
foregoing, the Japan Fund may not borrow money in excess of 10% of the value
(taken at the lower of cost or current value) of the Fund's total assets (not
including the amount borrowed) at the time the borrowing is made, and then only
from banks as a temporary measure to facilitate the meeting of redemption
requests (not for leverage) which might otherwise require the untimely
disposition of portfolio investments or for extraordinary or emergency purposes,
and which borrowings will be repaid before any additional investments are
purchased.
(2) Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of purchases and sales of securities. (For this
purpose, the deposit or payment of initial or variation margin in connection
with futures contracts or related options transactions is not considered the
purchase of a security on margin.)
(3) Make short sales of securities or maintain a short position for the Fund's
account unless at all times when a short position is open the Fund owns an equal
amount of such securities or owns securities which, without payment of any
further consideration, are convertible into or exchangeable for securities of
the same issue as, and equal in amount to, the securities sold short.
(4) Underwrite securities issued by other persons except to the extent that, in
connection with the disposition of its portfolio investments, it may be deemed
to be an underwriter under federal securities laws.
(5) Purchase or sell real estate, although it may purchase securities of issuers
which deal in real estate, including securities of real estate investment
trusts, and may purchase securities which are secured by interests in real
estate.
(6) Make loans, except by purchase of debt obligations or by entering into
repurchase agreements or through the lending of the Fund's portfolio securities.
Loans of portfolio securities may be made with respect to up to 100% of a Fund's
total assets in the case of each Fund (except the International Core and
Currency Hedged International Core Funds), and with respect to not more than 25%
of total assets in the case of each of the International Core and Currency
Hedged International Core Funds.
(7) Invest in securities of any issuer if, to the knowledge of the Trust,
officers and Trustees of the Trust and officers and members of Grantham, Mayo,
Van Otterloo & Co. LLC (the "Manager") who beneficially own more than 1/2 of 1%
of the securities of that issuer together beneficially own more than 5%.
(8) Concentrate more than 25% of the value of its total assets in any one
industry (except that the Short-Term Income Fund may invest up to 100% of its
assets in obligations issued by banks, and the REIT and Global Properties Funds
may invest more than 25% of their assets in real estate-related securities).
(9) Purchase or sell commodities or commodity contracts, except that the Funds
(other than the Short-Term Income Fund) may purchase and sell financial futures
contracts and options thereon.
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(10) Issue senior securities, as defined in the 1940 Act and as amplified by
rules, regulations and pronouncements of the SEC. The SEC has concluded that
even though reverse repurchase agreements, firm commitment agreements and
standby commitment agreements fall within the functional meaning of the term
"evidence of indebtedness," the issue of compliance with Section 18 of the 1940
Act will not be raised with the SEC by the Division of Investment Management if
a Fund covers such securities by maintaining certain "segregated accounts."
Similarly, so long as such segregated accounts are maintained, the issue of
compliance with Section 18 will not be raised with respect to any of the
following: any swap contract or contract for differences; any pledge or
encumbrance of assets permitted by non-fundamental policy (5) below; any
borrowing permitted by Fundamental Restriction (1) above; any collateral
arrangements with respect to initial and variation margin permitted by
non-fundamental policy (5) below; and the purchase or sale of options, forward
contracts, futures contracts or options on futures contracts.
(11) With respect to the Tobacco-Free Core Fund only, invest in (a) securities
which at the time of such investment are not readily marketable, (b) securities
the disposition of which is restricted under federal securities laws, and (c)
repurchase agreements maturing in more than seven days if, as a result, more
than 10% of the Fund's total assets (taken at current value) would then be
invested in securities described in (a), (b) and (c) above.
(12) With respect to the Japan Fund only, (i) own greater than 10% of the
outstanding voting securities of any single issuer; or (ii) pledge, hypothecate,
mortgage or otherwise encumber its assets in excess of 10% of the Fund's total
assets (taken at cost) and then only to secure permitted borrowings (for
purposes of this restriction, collateral arrangements with respect to the
writing of options, stock index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with respect to initial
and variation margin are not deemed to be a pledge or other encumbrance of
assets).
Non-Fundamental Restrictions:
It is contrary to the present policy of all the Funds, which may be changed by
the Trustee without shareholder approval, to:
(1) Buy or sell oil, gas or other mineral leases, rights or royalty contracts.
(2) Make investments for the purpose of gaining control of a company's
management.
(3) Invest more than 15% of net assets in illiquid securities. The securities
currently thought to be included as "illiquid securities" are restricted
securities under the Federal securities laws (including illiquid securities
traded under Rule 144A), repurchase agreements and securities that are not
readily marketable. To the extent the Trustees determine that restricted
securities traded under Section 4(2) or Rule 144A under the Securities Act of
1933 are in fact liquid, they will not be included in the 15% limit on
investment in illiquid securities.
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(4) Pledge, hypothecate, mortgage or otherwise encumber its assets in excess of
33 1/3% of the Fund's total assets (taken at cost). (For the purposes of this
restriction, collateral arrangements with respect to swap agreements, the
writing of options, stock index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with respect to initial
and variation margin are not deemed to be a pledge or other encumbrance of
assets. The deposit of securities or cash or cash equivalents in escrow in
connection with the writing of covered call or put options, respectively, is not
deemed to be a pledge or encumbrance.)
(5) With respect to the Foreign Fund only, to (i) invest in interests of any
general partnership, (ii) utilize margin or other borrowings to increase market
exposure (such prohibition shall extend to the use of cash collateral obtained
in exchange for loaned securities but does not prohibit the use of margin
accounts for permissible futures trading; further, the Fund may borrow an amount
equal to cash receivable from sales of stocks or securities the settlement of
which is deferred under standard practice in the country of sale), (iii) pledge
or otherwise encumber its assets, and (iv) invest more than 5% of its assets in
any one issuer (except Government securities and bank certificates of deposit).
Except as indicated above in Fundamental Restriction (1), all percentage
limitations on investments set forth herein and in the Prospectus will apply at
the time of the making of an investment and shall not be considered violated
unless an excess or deficiency occurs or exists immediately after and as a
result of such investment.
The phrase "shareholder approval," as used in the Prospectus and in this
Statement of Additional Information, and the phrase "vote of a majority of the
outstanding voting securities," as used herein with respect to a Fund, means the
affirmative vote of the lesser of (1) more than 50% of the outstanding shares of
that Fund, or (2) 67% or more of the shares of that Fund present at a meeting if
more than 50% of the outstanding shares are represented at the meeting in person
or by proxy. Except for policies that are explicitly described as fundamental in
the Prospectus or this Statement of Additional Information, the investment
policies of each Fund (including all policies, restrictions and limitations set
forth in the "Investment Guidelines") may be changed by the Trust's Trustees
without the approval of shareholders.
MANAGEMENT OF THE TRUST
Subject to the provisions of the GMO Declaration of Trust, the business
of the GMO Trust (the "Trust") shall be managed by the Trustees, and they shall
have all powers necessary or convenient to carry out that responsibility
including the power to engage in securities transactions of all kinds on behalf
of the Trust. Without limiting the foregoing, the Trustees may adopt By-Laws not
inconsistent with the Declaration of Trust providing for the regulation and
management of the affairs of the Trust and may amend and repeal them to the
extent that such By-Laws do not reserve that right to the Shareholders; they may
fill vacancies in or remove from their number (including any vacancies created
by an increase in the number of Trustees); they may remove from their number
with or without cause; they may elect and remove such officers and appoint and
terminate such agents as they consider appropriate; they may appoint from their
own number and terminate one or more committees consisting of two or more
Trustees which may exercise the powers and authority
33
<PAGE> 120
of the Trustees to the extent that the Trustees determine; they may employ one
or more custodians of the assets of the Trust and may authorize such custodians
to employ subcustodians and to deposit all or any part of such assets in a
system or systems for the central handling of securities or with a Federal
Reserve Bank, retain a transfer agent or a shareholder servicing agent, or both,
provide for the distribution of Shares by the Trust, through one or more
principal underwriters or otherwise, set record dates for the determination of
Shareholders with respect to various matters, and in general delegate such
authority as they consider desirable to any officer of the Trust, to any
committee of the Trustees and to any agent or employee of the Trust or to any
such custodian or underwriter.
The Trustees and officers of the Trust and their principal occupations
during the past five years are as follows:
R. JEREMY GRANTHAM* (D.O.B. 10/6/38). President-Quantitative and
Chairman of the Trustees of the Trust. Member, Grantham, Mayo, Van
Otterloo & Co. LLC.
HARVEY R. MARGOLIS (D.O.B. 12/12/42). Trustee of the Trust. Mathematics
Professor, Boston College.
JAY O. LIGHT (D.O.B. 10/3/41). Trustee of the Trust. Professor of
Business Administration, Harvard University; Senior Associate Dean,
Harvard University (1988-1992).
EYK DEL MOL VAN OTTERLOO (D.O.B. 2/27/37). President-International of
the Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC.
RICHARD MAYO (D.O.B. 6/18/42). President-U.S. Active of the Trust.
Member, Grantham, Mayo, Van Otterloo & Co. LLC.
KINGSLEY DURANT (D.O.B. 1/19/32). Vice President and Secretary of the
Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC.
SUSAN RANDALL HARBERT (D.O.B. 4/25/57). Secretary and Treasurer of the
Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC.
WILLIAM R. ROYER, ESQ. (D.O.B. 7/20/65). Vice President and Assistant
Treasurer of the Trust. General Counsel, Grantham, Mayo, Van Otterloo &
Co. LLC (January 1995 - Present). Associate, Ropes & Gray, Boston,
Massachusetts (September 1992 - January 1995).
JUI LAI (D.O.B. 1/21/49). Secretary of the Trust. Member, Grantham,
Mayo, Van Otterloo & Co. LLC.
ANN SPRUILL (D.O.B. 8/30/54). Secretary of the Trust. Member, Grantham,
Mayo, Van Otterloo & Co. LLC.
34
<PAGE> 121
ROBERT V. BROKAW, JR. (D.O.B. 10/7/43). Secretary of the Trust. Member,
Grantham, Mayo, Van Otterloo & Co. LLC.
FORREST BERKLEY (D.O.B. 4/25/54). Vice President of the Trust. Member,
Grantham, Mayo, Van Otterloo & Co. LLC.
SCOTT ESTON (D.O.B. 1/20/56). Vice President of the Trust. Chief
Financial Officer, Member, Grantham, Mayo, Van Otterloo & Co. LLC
(September 1997 - present). Senior Partner, Coopers & Lybrand (1987 -
1997).
BRENT ARVIDSON (D.O.B. 6/26/69). Assistant Treasurer of the Trust.
Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC
(September 1997 - present). Senior Financial Reporting Analyst, John
Hancock Funds (August 1996 - September 1997). Account Supervisor/Senior
Account Specialist, Investors Bank and Company (June 1993 - August
1996).
*Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo,
Van Otterloo & Co. LLC ("GMO" or the "Manager"), as defined by the 1940 Act.
The mailing address of each of the officers and Trustees is c/o GMO
Trust, 40 Rowes Wharf, Boston, Massachusetts 02110. Except as set forth below,
as of June 1, 1999, the Trustees and officers of the Trust as a group owned less
than 1% of the outstanding shares of each class of shares of each Fund of the
Trust.
<TABLE>
<CAPTION>
AGGREGATE
FUND CLASS OWNERSHIP INTEREST
---- ----- ------------------
<S> <C> <C>
REIT Fund III 5.42%
Global Properties III 86.13%
Fund
Short-Term Income III 6.30%
Fund
Global Hedged III 5.66 %
Equity Fund
Evolving Countries Fund III 3.58%
Asia Fund III 4.01%
Small Cap Value Fund III 1.10%
Small Cap Growth Fund III 1.72%
U.S. Bond/Global Alpha A III 1.47%
</TABLE>
35
<PAGE> 122
Except as stated above, the principal occupations of the officers and
Trustees for the last five years have been with the employers as shown above,
although in some cases they have held different positions with such employers.
Eyk Van Otterloo is an officer of the Trust as well as the beneficial holder of
69.60% of the outstanding shares of the Global Properties Fund. Mr. Van Otterloo
shares responsibility for the day-to-day management of the Global Properties
Fund.
Other than as set forth in the table below, no Trustee or officer of
the Trust receives any direct compensation from the Trust or any series thereof:
<TABLE>
<CAPTION>
NAME OF PERSON, TOTAL ANNUAL COMPENSATION
POSITION FROM THE TRUST
--------------- -------------------------
<S> <C>
Harvey R. Margolis, Trustee $70,000
Jay O. Light, Trustee $70,000
</TABLE>
Messrs. Grantham, Mayo, Van Otterloo, Durant, Lai, Brokaw, Eston and
Berkley, and Mses. Harbert and Spruill, as members of the Manager, will benefit
from the management fees paid by each Fund of the Trust.
INVESTMENT ADVISORY AND OTHER SERVICES
Management Contracts
As disclosed in the Prospectus under the heading "Management of the
Trust," under separate Management Contracts (each a "Management Contract")
between the Trust and the Manager, subject to such policies as the Trustees of
the Trust may determine, the Manager will furnish continuously an investment
program for each Fund and will make investment decisions on behalf of the Fund
and place all orders for the purchase and sale of portfolio securities. Subject
to the control of the Trustees, the Manager also manages, supervises and
conducts the other affairs and business of the Trust, furnishes office space and
equipment, provides bookkeeping and certain clerical services and pays all
salaries, fees and expenses of officers and Trustees of the Trust who are
affiliated with the Manager. As indicated under "Portfolio
Transactions--Brokerage and Research Services," the Trust's portfolio
transactions may be placed with broker-dealers who furnish the Manager, at no
cost, certain research, statistical and quotation services of value to the
Manager in advising the Trust or its other clients.
As is disclosed in the Prospectus, the Manager has contractually agreed
to reimburse each Fund with respect to certain Fund expenses through June 30,
2000 to the extent that a Fund's total annual operating expenses (excluding
Shareholder Service Fees, brokerage commissions and other investment-related
costs, hedging transaction fees, extraordinary, non-recurring and certain other
unusual expenses (including taxes), securities lending fees and expenses and
transfer taxes; and, in the case of the Emerging Markets Fund, Evolving
Countries Fund, Asia Fund, Emerging Country Debt Fund, Global Hedged Equity Fund
and
36
<PAGE> 123
Global Properties Fund, also excluding custodial fees; and, in the case of the
Asset Allocation Funds, U.S. Sector Fund, Global Hedged Equity Fund and Emerging
Country Debt Share Fund, also excluding expenses indirectly incurred by the
investment in other Funds of the Trust), would otherwise exceed a specified
percentage of that Fund's daily net assets.
Each Management Contract provides that the Manager shall not be subject
to any liability in connection with the performance of its services thereunder
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
Each Management Contract was approved by the Trustees of the Trust
(including a majority of the Trustees who were not "interested persons" of the
Manager) and by the relevant Fund's sole shareholder in connection with the
organization of the Trust and the establishment of the Funds. Each Management
Contract will continue in effect for a period more than two years from the date
of its execution only so long as its continuance is approved at least annually
by (i) the vote, cast in person at a meeting called for that purpose, of a
majority of those Trustees who are not "interested persons" of the Manager or
the Trust, and by (ii) the majority vote of either the full Board of Trustees or
the vote of a majority of the outstanding shares of the relevant Fund. Each
Management Contract automatically terminates on assignment, and is terminable on
not more than 60 days' notice by the Trust to the Manager. In addition, each
Management Contract may be terminated on not more than 60 days' written notice
by the Manager to the Trust.
For each Fund, the Management Fee is calculated based on a fixed
percentage of the Fund's average daily net assets. In the last three fiscal
years the Funds have paid the following amounts as Management Fees to the
Manager pursuant to the relevant Management Contract:
<TABLE>
<CAPTION>
Gross Reduction Net
----- --------- ---
<S> <C> <C> <C>
U.S. CORE FUND
Year ended 2/28/99 $18,661,431 $ 7,700,727 $10,960,704
Year ended 2/28/98 $17,753,329 $ 7,220,779 $10,532,550
Year ended 2/28/97 $16,712,773 $ 5,742,268 $10,970,505
TOBACCO-FREE CORE FUND
Year ended 2/28/99 $ 666,206 $ 330,580 $ 335,626
Year ended 2/28/98 $ 394,815 $ 218,695 $ 176,120
Year ended 2/28/97 $ 291,746 $ 183,825 $ 107,921
VALUE FUND
Year ended 2/28/99 $ 1,839,261 $ 778,954 $ 1,060,307
Year ended 2/28/98 $ 2,742,196 $ 1,134,088 $ 1,608,108
Year ended 2/28/97 $ 2,462,093 $ 871,498 $ 1,590,595
FUNDAMENTAL VALUE FUND
</TABLE>
37
<PAGE> 124
<TABLE>
<S> <C> <C> <C>
Year ended 2/28/99 $ 742,814 $ 207,233 $ 535,581
Year ended 2/28/98 $ 1,425,989 $ 381,705 $ 1,044,284
Year ended 2/28/97 $ 1,627,950 $ 347,372 $ 1,280,578
GROWTH FUND
Year ended 2/28/99 $ 857,030 $ 396,124 $ 460,906
Year ended 2/28/98 $ 1,008,998 $ 463,468 $ 545,530
Year ended 2/28/97 $ 1,637,804 $ 561,765 $ 1,076,039
SMALL CAP VALUE FUND
Year ended 2/28/99 $ 2,529,395 $ 1,060,654 $ 1,468,741
Year ended 2/28/98 $ 3,650,580 $ 1,603,440 $ 2,047,140
Year ended 2/28/97 $ 1,948,526 $ 761,954 $ 1,186,572
SMALL CAP GROWTH FUND
Year ended 2/28/99 $ 1,527,491 $ 699,892 $ 827,599
Year ended 2/28/98 $ 1,537,995 $ 725,457 $ 812,538
Commencement of
Operations
(12/31/96) - 2/28/97 $ 124,256 $ 105,410 $ 18,846
REIT FUND
Year ended 2/28/99 $ 1,748,325 $ 614,047 $ 1,134,278
Year ended 2/28/98 $ 2,765,300 $ 961,297 $ 1,804,003
Commencement of
Operations
(5/31/96) - 2/28/97 $ 666,973 $ 286,384 $ 380,589
INTERNATIONAL CORE FUND
Year ended 2/28/99 $25,130,562 $ 9,237,518 $15,893,044
Year ended 2/28/98 $30,572,502 $12,093,211 $18,479,291
Year ended 2/28/97 $33,112,051 $11,195,222 $21,916,829
CURRENCY HEDGED INTERNATIONAL CORE FUND
Year ended 2/28/99 $ 2,606,569 $ 1,442,434 $ 1,164,135
Year ended 2/28/98 $ 4,457,931 $ 2,255,760 $ 2,202,171
Year ended 2/28/97 $ 3,841,815 $ 2,218,152 $ 1,623,663
FOREIGN FUND
</TABLE>
38
<PAGE> 125
<TABLE>
<S> <C> <C> <C>
Year ended 2/28/99 $ 8,363,703 $ 2,741,305 $ 5,622,398
Year ended 2/28/98 $ 7,035,104 $ 2,369,507 $ 4,665,597
Commencement of
Operations
(6/28/96) - 2/28/97 $ 3,034,381 $ 1,267,971 $ 1,766,410
INTERNATIONAL SMALL COMPANIES FUND
Year ended 2/28/99 $ 2,608,681 $ 1,686,651 $ 922,030
Year ended 2/28/98 $ 2,912,080 $ 2,004,718 $ 907,362
Year ended 2/28/97 $ 2,889,159 $ 1,833,495 $ 1,055,664
JAPAN FUND
Year ended 2/28/99 $ 1,071,652 $ 558,538 $ 513,114
Year ended 2/28/98 $ 1,540,113 $ 803,953 $ 736,160
Year ended 2/28/97 $ 1,566,406 $ 742,507 $ 823,899
EMERGING MARKETS FUND
Year ended 2/28/99 $11,112,844 $ 2,342,168 $ 8,770,676
Year ended 2/28/98 $17,396,168 $ 3,619,369 $13,776,799
Year ended 2/28/97 $12,541,622 $ 2,222,584 $10,319,038
EVOLVING COUNTRIES FUND
Year ended 2/28/99 $ 343,836 $ 145,463 $ 198,373
Commencement of
Operations
(8/29/97) - 2/28/98 $ 94,952 $ 77,826 $ 17,126
ASIA FUND
Year ended 2/28/99 $ 740,141 $ 221,148 $ 518,993
Commencement of Operations $ 3,209 $ 3,209 $ 0
(2/18/98) - 2/28/98
GLOBAL PROPERTIES FUND
Year ended 2/28/99 $ 67,365 $ 67,365 $ 0
Year ended 2/28/98 $ 74,657 $ 74,657 $ 0
Commencement of
Operations
(12/20/96) - 2/28/97 $ 13,266 $ 13,266 $ 0
</TABLE>
39
<PAGE> 126
<TABLE>
<S> <C> <C> <C>
GLOBAL HEDGED EQUITY FUND
Year ended 2/28/99 $ 892,689 $ 837,881 $ 54,808
Year ended 2/28/98 $1,509,937 $ 850,401 $ 659,536
Year ended 2/28/97 $2,168,233 $ 531,673 $1,636,560
DOMESTIC BOND FUND
Year ended 2/28/99 $ 678,052 $ 516,760 $ 161,292
Year ended 2/28/98 $1,311,252 $ 932,631 $ 378,621
Year ended 2/28/97 $1,112,368 $ 744,230 $ 368,138
U.S. BOND/GLOBAL ALPHA A FUND
Year ended 2/28/99 $ 932,468 $ 588,202 $ 344,266
Commencement of
Operations
(4/30/97) - 2/28/98 $ 571,318 $ 361,139 $ 210,179
U.S. BOND/GLOBAL ALPHA B FUND
Year ended 2/28/99 $ 711,308 $ 568,011 $ 143,297
Commencement of
Operations
(7/29/97) - 2/28/98 $ 865,631 $ 609,605 $ 256,026
INTERNATIONAL BOND FUND
Year ended 2/28/99 $1,061,185 $ 642,536 $ 418,649
Year ended 2/28/98 $1,090,298 $ 692,754 $ 397,544
Year ended 2/28/97 $ 849,645 $ 493,567 $ 356,078
CURRENCY HEDGED INTERNATIONAL BOND FUND
Year ended 2/28/99 $1,920,646 $1,273,399 $ 647,247
Year ended 2/28/98 $1,895,291 $1,316,764 $ 578,527
Year ended 2/28/97 $1,782,864 $1,149,683 $ 633,181
GLOBAL BOND FUND
Year ended 2/28/99 $ 486,743 $ 392,034 $ 94,709
Year ended 2/28/98 $ 297,447 $ 297,447 $ 0
Year ended 2/28/97 $ 220,921 $ 220,921 $ 0
EMERGING COUNTRY DEBT FUND
</TABLE>
40
<PAGE> 127
<TABLE>
<S> <C> <C> <C>
Year ended 2/28/99 $3,666,332 1,314,674 $2,351,658
Year ended 2/28/98 $2,823,080 $1,087,585 $1,735,495
Year ended 2/28/97 $3,190,658 $ 986,384 $2,204,274
SHORT-TERM INCOME FUND
Year ended 2/28/99 $ 82,642 $ 82,642 $ 0
Year ended 2/28/98 $ 117,159 $ 117,159 $ 0
Year ended 2/28/97 $ 69,134 $ 69,134 $ 0
INFLATION INDEXED BOND FUND
Year ended 2/28/99 $ 75,976 $ 75,976 $ 0
Commencement of
Operations
(3/31/97) - 2/28/98 $ 36,237 $ 36,237 $ 0
EMERGING COUNTRY DEBT SHARE FUND
Commencement of
Operations
(7/20/98) - 2/28/99 $ 0 $ 0 $ 0
INTERNATIONAL EQUITY ALLOCATION FUND
Year ended 2/28/99 $ 0 $ 0 $ 0
Year ended 2/28/98 $ 0 $ 0 $ 0
Commencement of
Operations
(10/11/96) - 2/28/97 $ 0 $ 0 $ 0
WORLD EQUITY ALLOCATION FUND
Year ended 2/28/99 $ 0 $ 0 $ 0
Year ended 2/28/98 $ 0 $ 0 $ 0
Commencement of
Operations
(6/28/96) - 2/28/97 $ 0 $ 0 $ 0
GLOBAL (U.S.+) EQUITY ALLOCATION FUND
Year ended 2/28/99 $ 0 $ 0 $ 0
Year ended 2/28/98 $ 0 $ 0 $ 0
Commencement of
Operations
(11/26/96) - 2/28/97 $ 0 $ 0 $ 0
</TABLE>
41
<PAGE> 128
<TABLE>
<S> <C> <C> <C>
GLOBAL BALANCED ALLOCATION FUND
Year ended 2/28/99 $ 0 $ 0 $ 0
Year ended 2/28/98 $ 0 $ 0 $ 0
Commencement of
Operations
(7/29/96) - 2/28/97 $ 0 $ 0 $ 0
U.S. SECTOR FUND
Year ended 2/28/99 $ 118,652 $ 118,652 $ 0
Year ended 2/28/98 $ 853,670 $ 635,351 $ 218,319
Year ended 2/28/97 $1,138,768 $ 434,930 $ 703,838
</TABLE>
Custodial Arrangements. Investors Bank & Trust Company ("IBT"), 200
Clarendon Street, Boston, Massachusetts 02116, and Brown Brothers Harriman & Co.
("BBH"), 40 Water Street, Boston, Massachusetts 02109, serve as the Trust's
custodians on behalf of the Funds. As such, IBT or BBH holds in safekeeping
certificated securities and cash belonging to a Fund and, in such capacity, is
the registered owner of securities in book-entry form belonging to a Fund. Upon
instruction, IBT or BBH receives and delivers cash and securities of a Fund in
connection with Fund transactions and collects all dividends and other
distributions made with respect to Fund portfolio securities. Each of IBT and
BBH also maintains certain accounts and records of the Trust and calculates the
total net asset value, total net income and net asset value per share of each
Fund on a daily basis.
Shareholder Service Arrangements. As disclosed in the Prospectus,
pursuant to the terms of a single Servicing Agreement with each Fund of the
Trust, GMO provides direct client service, maintenance and reporting to
shareholders of the Funds. The Servicing Agreement was approved by the Trustees
of the Trust (including a majority of the Trustees who are not "interested
persons" of the Manager or the Trust). The Servicing Agreement will continue in
effect for a period more than one year from the date of its execution only so
long as its continuance is approved at least annually by (i) vote, cast in
person at a meeting called for the purpose, of a majority of those Trustees who
are not "interested persons" of the Manager or the Trust, and by (ii) the
majority vote of the full Board of Trustees. The Servicing Agreement
automatically terminates on assignment (except as specifically provided in the
Servicing Agreement) and is terminable by either party upon not more than 60
days' written notice to the other party.
The Trust entered into the Servicing Agreement with GMO on May 30,
1996. Pursuant to the terms of the Servicing Agreement, each Fund paid GMO the
amounts set forth in the table that follows:
42
<PAGE> 129
<TABLE>
<CAPTION>
May 30, 1996 March 1, 1997 March 1, 1998
through through through
February 28, 1997 February 28, 1998 February 28, 1999
---------------------------------------------------------
<S> <C> <C> <C>
U.S. Core Fund $3,597,900 $5,028,001 $4,754,395
Tobacco-Free Core Fund 67,968 118,083 199,862
Value Fund 406,469 586,036 394,127
Fundamental Value Fund 244,167 284,344 148,563
Growth Fund 347,907 302,285 257,109
Small Cap Value Fund 482,716 1,093,550 758,820
Small Cap Growth Fund 37,277 459,765 458,247
REIT Fund 133,395 552,026 349,665
International Core Fund 4,894,560 6,088,152 4,603,105
Currency Hedged International Core Fund 595,691 864,408 404,263
Foreign Fund 614,288 1,421,888 1,602,553
International Small Companies Fund 259,782 349,448 313,042
Japan Fund 261,357 308,029 214,330
Emerging Markets Fund 1,491,636 2,579,392 1,466,558
Evolving Countries Fund -- 17,804 64,403
Asia Fund -- -- 111,021
Global Properties Fund 2,653 14,931 13,472
Global Hedged Equity Fund 357,586 217,705 27,988
Domestic Bond Fund 549,733 790,254 406,832
U.S. Bond/Global Alpha A Fund -- 213,529 349,675
U.S. Bond/Global Alpha B Fund -- 323,124 266,738
International Bond Fund 244,354 407,680 397,948
Currency Hedged International Bond Fund 444,574 568,775 576,196
Global Bond Fund 74,374 133,633 208,607
Emerging Country Debt Fund 722,035 836,348 914,886
Short-Term Income Fund 36,264 70,313 49,567
Inflation Indexed Bond Fund -- 21,641 45,586
Emerging Country Debt Share Fund -- -- 0
International Equity Allocation Fund 1,962 13,569 0
World Equity Allocation Fund 6,619 11,172 0
Global (U.S.+) Equity Allocation Fund 0 1,099 0
Global Balanced Allocation Fund 4,623 36,399 0
U.S. Sector Fund 266,594 150,583 90
</TABLE>
Independent Accountants. The Trust's independent accountants are
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110.
PricewaterhouseCoopers LLP conducts annual audits of the Trust's financial
statements, assists in the preparation of each Fund's federal and state income
tax returns, consults with the Trust as to matters of accounting and federal and
state income taxation and provides assistance in connection with the preparation
of various Securities and Exchange Commission filings.
43
<PAGE> 130
PORTFOLIO TRANSACTIONS
The purchase and sale of portfolio securities for each Fund and for the
other investment advisory clients of the Manager are made by the Manager with a
view to achieving their respective investment objectives. For example, a
particular security may be bought or sold for certain clients of the Manager
even though it could have been bought or sold for other clients at the same
time. Likewise, a particular security may be bought for one or more clients when
one or more other clients are selling the security. In some instances,
therefore, one client may indirectly sell a particular security to another
client. It also happens that two or more clients may simultaneously buy or sell
the same security, in which event purchases or sales are effected on a pro rata,
rotating or other equitable basis so as to avoid any one account being preferred
over any other account.
Transactions involving the issuance of Fund shares for securities or
assets other than cash will be limited to a bona fide reorganization or
statutory merger and to other acquisitions of portfolio securities that meet all
of the following conditions: (a) such securities meet the investment objectives
and policies of the Fund; (b) such securities are acquired for investment and
not for resale; (c) such securities are liquid securities which are not
restricted as to transfer either by law or liquidity of market; and (d) such
securities have a value which is readily ascertainable as evidenced by a listing
on the American Stock Exchange, the New York Stock Exchange, NASDAQ or a
recognized foreign exchange.
Brokerage and Research Services. In placing orders for the portfolio
transactions of each Fund, the Manager will seek the best price and execution
available, except to the extent it may be permitted to pay higher brokerage
commissions for brokerage and research services as described below. The
determination of what may constitute best price and execution by a broker-dealer
in effecting a securities transaction involves a number of considerations,
including, without limitation, the overall net economic result to the Fund
(involving price paid or received and any commissions and other costs paid), the
efficiency with which the transaction is effected, the ability to effect the
transaction at all where a large block is involved, availability of the broker
to stand ready to execute possibly difficult transactions in the future and the
financial strength and stability of the broker. Because of such factors, a
broker-dealer effecting a transaction may be paid a commission higher than that
charged by another broker-dealer. Most of the foregoing are judgmental
considerations.
Over-the-counter transactions often involve dealers acting for their
own account. It is the Manager's policy to place over-the-counter market orders
for the U.S. Funds with primary market makers unless better prices or executions
are available elsewhere.
Although the Manager does not consider the receipt of research services
as a factor in selecting brokers to effect portfolio transactions for a Fund,
the Manager will receive such services from brokers who are expected to handle a
substantial amount of the Funds' portfolio transactions. Research services may
include a wide variety of analyses, reviews and reports on such matters as
economic and political developments, industries, companies, securities and
portfolio strategy. The Manager uses such research in servicing other clients as
well as the Funds.
As permitted by Section 28(e) of the Securities Exchange Act of 1934
and subject to such policies as the Trustees of the Trust may determine, the
Manager may pay an unaffiliated broker or
44
<PAGE> 131
dealer that provides "brokerage and research services" (as defined in the Act)
to the Manager an amount of commission for effecting a portfolio investment
transaction in excess of the amount of commission another broker or dealer would
have charged for effecting that transaction.
During the three most recent fiscal years, the Trust paid, on behalf of
the Funds, the following amounts in brokerage commissions:
<TABLE>
<CAPTION>
1997 1998 1999
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Core Fund $4,664,903 $2,561,392 $3,313,708
Tobacco-Free Core Fund 103,341 50,119 98,094
Fundamental Value Fund 295,379 441,597 205,843
Value Fund 813,100 666,871 461,481
Growth Fund 531,486 170,370 121,146
Small Cap Value Fund 879,092 903,916 848,094
Small Cap Growth Fund 36,918 880,229 886,921
REIT Fund 86,888 911,700 581,181
International Core Fund 9,469,695 7,059,863 5,725,781
Currency Hedged International
Core Fund 7,523 27,976 750,836
Foreign Fund 492,537 1,294,686 1,399,711
International Small Companies
Fund 98,496 413,290 101,284
Japan Fund 84,857 289,271 201,850
Emerging Markets Fund 5,114,325 7,790,713 6,397,437
Evolving Countries Fund -- 153,610 410,530
Asia Fund -- 154,375 758,563
Global Properties Fund 3,456 19,731 6,987
Global Hedged Equity Fund 594,924 244,119 76,040
Domestic Bond Fund 73,491 43,754 43,364
U.S. Bond/Global Alpha A Fund -- 20,476 26,967
U.S. Bond/Global Alpha B Fund -- 48,310 38,933
International Bond Fund 5,760 40,399 38,185
Currency Hedged International
Bond Fund 7,523 27,976 40,930
Global Bond Fund 9,644 4,123 19,098
Emerging Country Debt Fund 70,471 34,908 57,860
Short-Term Income Fund -- -- 702
Inflation Indexed Bond Fund -- -- --
Emerging Country Debt Share Fund -- -- --
International Equity Allocation Fund -- -- --
World Equity Allocation Fund -- -- --
Global (U.S.+) Equity Allocation
Fund -- -- --
Global Balanced Allocation Fund -- -- --
U.S. Sector Fund 356,778 278,180 74
</TABLE>
45
<PAGE> 132
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES
The Trust is organized as a Massachusetts business trust under the laws
of Massachusetts by an Agreement and Declaration of Trust ("Declaration of
Trust") dated June 24, 1985. A copy of the Declaration of Trust is on file with
the Secretary of The Commonwealth of Massachusetts. The fiscal year for each
Fund ends on February 28/29.
Pursuant to the Declaration of Trust, the Trustees have currently
authorized the issuance of an unlimited number of full and fractional shares of
thirty-nine series: U.S. Core Fund; Tobacco-Free Core Fund; Value Fund; Growth
Fund; U.S. Sector Fund; Small Cap Value Fund; Small Cap Growth Fund; Fundamental
Value Fund; REIT Fund; International Core Fund; Currency Hedged International
Core Fund; Foreign Fund; International Small Companies Fund; Japan Fund;
Emerging Markets Fund; Evolving Countries Fund; Global Properties Fund; Domestic
Bond Fund; U.S. Bond/Global Alpha A Fund; U.S. Bond/Global Alpha B Fund;
International Bond Fund; Currency Hedged International Bond Fund; Global Bond
Fund; Emerging Country Debt Fund; Short-Term Income Fund; Global Hedged Equity
Fund; Inflation Indexed Bond Fund; International Equity Allocation Fund; World
Equity Allocation Fund; Global (U.S.+) Equity Allocation Fund; Global Balanced
Allocation Fund; International Core Plus Allocation Fund; Emerging Country Debt
Share Fund; Pelican Fund; Asia Fund; Tax-Managed U.S. Equities Fund; Tax-Managed
International Equities Fund; Tax-Managed U.S. Small Cap Fund; and Intrinsic
Value Fund. Interests in each portfolio (Fund) are represented by shares of the
corresponding series. Each share of each series represents an equal
proportionate interest, together with each other share, in the corresponding
Fund. The shares of such series do not have any preemptive rights. Upon
liquidation of a Fund, shareholders of the corresponding series are entitled to
share pro rata in the net assets of the Fund available for distribution to
shareholders. The Declaration of Trust also permits the Trustees to charge
shareholders directly for custodial and transfer agency expenses, but there is
no present intention to make such charges.
The Declaration of Trust also permits the Trustees, without shareholder
approval, to subdivide any series of shares into various sub-series or classes
of shares with such dividend preferences and other rights as the Trustees may
designate. This power is intended to allow the Trustees to provide for an
equitable allocation of the impact of any future regulatory requirements which
might affect various classes of shareholders differently. The Trustees have
currently authorized the establishment and designation of up to eight classes of
shares for each series of the Trust (except for the Pelican Fund): Class I
Shares, Class II Shares, Class III Shares, Class IV Shares, Class V Shares,
Class VI Shares, Class VII Shares and Class VIII Shares.
The Trustees may also, without shareholder approval, establish one or
more additional separate portfolios for investments in the Trust or merge two or
more existing portfolios (i.e., a new fund). Shareholders' investments in such a
portfolio would be evidenced by a separate series of shares.
46
<PAGE> 133
The Declaration of Trust provides for the perpetual existence of the
Trust. The Trust, however, may be terminated at any time by vote of at least
two-thirds of the outstanding shares of the Trust. While the Declaration of
Trust further provides that the Trustees may also terminate the Trust upon
written notice to the shareholders, the 1940 Act requires that the Trust receive
the authorization of a majority of its outstanding shares in order to change the
nature of its business so as to cease to be an investment company.
On June 1, 1999 the following shareholders held greater than 25% of the
outstanding shares of a series of the Trust:
<TABLE>
<CAPTION>
FUND SHAREHOLDERS
- ---- ------------
<S> <C>
Value Fund Leland Stanford Junior University
Tobacco-Free Core Fund Dewitt Wallace - Readers' Digest Fund, Inc.
U.S. Sector Fund Regenstrief Foundation, Inc.
Growth Fund Surnda Foundation, Inc.; The Northern Trust Company, Trustee of The
Aerospace Corporation Employees Retirement Plan Trust
Fundamental Value Fund Leland Stanford Junior University II; Berea College
U.S. Bond/Global Alpha B Fund Bost & Co. FBO Bell Atlantic -- Fixed Income
Currency Hedged International Bond Fund Bost & Co. FBO Bell Atlantic -- Fixed Income; Trustees of Columbia
University in the City of New York-Global
Global Hedged Equity Fund Partners Healthcare System Pooled Investment Accounts
Global Bond Fund Fresno County Employees' Retirement Association
International Bond Fund Saturn & Co. A/C 4600712 c/o Investors Bank & Trust Company TR - FBO The
John Hancock Mutual Life Insurance Company Pension Plan
Short-Term Income Fund Bankers Trust Company as Trustee, GTE Service Corp. Pension Trust
Global Properties Fund Eyk Van Otterloo
World Equity Allocation Fund Mars & Co.; Longwood College Foundation, Inc.
</TABLE>
47
<PAGE> 134
<TABLE>
<S> <C>
Evolving Countries Fund Duke University Long-Term (Endowment) Pool -- Emerging
Japan Fund Yale University
Asia Fund Bankers Trust Company as Trustee, GTE Service Corp. Pension Trust
Emerging Country Debt Share Fund Sprint Corporate Master Trust
</TABLE>
As a result, such shareholders may be deemed to "control" their
respective series as such term is defined in the 1940 Act.
Shareholders could, under certain circumstances, be held personally
liable for the obligations of the Trust. However, the risk of a shareholder
incurring financial loss on account of that liability is considered remote since
it may arise only in very limited circumstances.
VOTING RIGHTS
Shareholders are entitled to one vote for each full share held (with
fractional votes for fractional shares held) and will vote (to the extent
provided herein) in the election of Trustees and the termination of the Trust
and on other matters submitted to the vote of shareholders. Shareholders vote by
individual Fund on all matters except (i) when required by the Investment
Company Act of 1940, shares shall be voted in the aggregate and not by
individual Fund, and (ii) when the Trustees have determined that the matter
affects only the interests of one or more Funds, then only shareholders of such
affected Funds shall be entitled to vote thereon. Shareholders of one Fund shall
not be entitled to vote on matters exclusively affecting another Fund, such
matters including, without limitation, the adoption of or change in the
investment objectives, policies or restrictions of the other Fund and the
approval of the investment advisory contracts of the other Fund. Shareholders of
a particular class of shares do not have separate class voting rights except
with respect to matters that affect only that class of shares and as otherwise
required by law.
There will normally be no meetings of shareholders for the purpose of
electing Trustees except that in accordance with the 1940 Act (i) the Trust will
hold a shareholders' meeting for the election of Trustees at such time as less
than a majority of the Trustees holding office have been elected by
shareholders, and (ii) if, as a result of a vacancy in the Board of Trustees,
less than two-thirds of the Trustees holding office have been elected by the
shareholders, that vacancy may only be filled by a vote of the shareholders. In
addition, Trustees may be removed from office by a written consent signed by the
holders of two-thirds of the outstanding shares and filed with the Trust's
custodian or by a vote of the holders of two-thirds of the outstanding shares at
a meeting duly called for the purpose, which meeting shall be held upon the
written request of the holders of not less than 10% of the outstanding shares.
Upon written request by the holders of at least 1% of the outstanding shares
stating that such shareholders wish to communicate with the other shareholders
for the purpose of obtaining the signatures necessary to demand a meeting to
consider removal of a Trustee, the Trust has undertaken to provide a list of
shareholders or to disseminate appropriate materials (at the expense of the
requesting shareholders). Except as set forth above, the Trustees shall continue
48
<PAGE> 135
to hold office and may appoint successor Trustees. Voting rights are not
cumulative.
No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the Trust except (i)
to change the Trust's name or to cure technical problems in the Declaration of
Trust and (ii) to establish, designate or modify new and existing series or
sub-series of Trust shares or other provisions relating to Trust shares in
response to applicable laws or regulations.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Declaration of Trust provides for indemnification out of
all the property of the relevant Fund for all loss and expense of any
shareholder of that Fund held personally liable for the obligations of the
Trust. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is considered remote since it is limited to circumstances
in which the disclaimer is inoperative and the Fund of which he is or was a
shareholder would be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing in
the Declaration of Trust protects a Trustee against any liability to which the
Trustee would otherwise be subject to by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office. The By-Laws of the Trust provide for indemnification by
the Trust of the Trustees and the officers of the Trust except with respect to
any matter as to which any such person did not act in good faith in the
reasonable belief that his action was in or not opposed to the best interests of
the Trust. Such person may not be indemnified against any liability to the Trust
or the Trust shareholders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
BENEFICIAL OWNERS OF 5% OR MORE OF THE FUND'S SHARES
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class II Shares of the U.S. Core Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Wheeler & Co. Attn: Mr. James T. Robinson 28.46
FBO The Hyams Foundation, Inc. 101 Federal Street
Hutchins Wheeler & Dittmar Boston, MA 02110
- --------------------------------------------------------------------------------------------------------------------
Huntington Trust Co. Attn: Michele McCallister 14.59
FBO The Jewish Community Federation of Cleveland P.O. Box 1558
Employees Ret Plan & Trust Columbus, OH 43260
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE> 136
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
First Union National Bank TTEE FBO Attn: Mutual Funds 9.03
Gibbs Wire and Steel A/C #9546000156 1525 W. Wt. Harris Blvd. CMG
Charlotte, NC 28288-1151
- --------------------------------------------------------------------------------------------------------------------
Bost & Co. A/C BHEF1402002 Mutual Fund Operations 8.69
Brockton Hospital P.O. Box 3198
Pittsburgh, PA 15230-3198
- --------------------------------------------------------------------------------------------------------------------
Saturn & Co. c/o Investors Bank & Trust 6.93
FBO Providence Washington Ins. P.O. Box 9130 FPG90
Boston, MA 02119-9130
- --------------------------------------------------------------------------------------------------------------------
Addison Illinois Police Pension Fund 131 W. Lake Street 5.12
Addison, IL 60101
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the U.S. Core Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MAC & Co. AC 540-449 P.O. Box 3198 6.49
KNIF5404492 Mutual Funds Operations
Pittsburgh, PA 152303198
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class IV Shares of the U.S. Core Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NRECA Investments Division Attn: Peter Morris 27.22
4301 Wilson Blvd.
RSI8-305
Arlington, VA 22203-1860
- --------------------------------------------------------------------------------------------------------------------
Employee Retirement Plan of 5918 Stoneridge Mall Road 15.68
Safeway Inc. Pleasanton, CA 94588-3229
- --------------------------------------------------------------------------------------------------------------------
World Bank Staff Ret Plan Dept. 10.00
Room A-12073
1818 H Street NW
Washington, DC 20433
- --------------------------------------------------------------------------------------------------------------------
Corning Retirement Master Trust Attn: Lindsay W. Brown 9.10
Director Investment Services
Corning Incorporated
One Riverfront Plaza IIQ-E2-34
Corning, NY 14831-0001
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE> 137
<TABLE>
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Univ. Of Rochester 276 Administration Bldg. 8.57
River Campus
Rochester, NY 14627
- --------------------------------------------------------------------------------------------------------------------
Boston & Co. A/C WFHF6202002 Attn: Mutual Funds Operations 8.32
FBO the Hewlett Foundation P.O. Box 3198
Pittsburgh, PA 15230-3198
- --------------------------------------------------------------------------------------------------------------------
Duke University Long Term 2200 West Main Street 6.43
Endowment PO Suite 1000
Attn: Portfolio Accounting
Durham, NC 27705
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Tobacco-Free Core Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Dewitt Wallace-Reader's Digest Attn: Rob D. Nagel 27.28
Fund, Inc. Two Park Avenue
23rd Floor
New York, NY 10016
- --------------------------------------------------------------------------------------------------------------------
Lila Wallace-Reader's Digest Fund, Inc. Attn: Rob D. Nagel 24.84
Two Park Avenue
23rd Floor
New York, NY 10016
- --------------------------------------------------------------------------------------------------------------------
The Flinn Foundation Attn: F. Lee Jacquette 21.66
3300 N. Central Avenue #2300
Phoenix, AZ 85012
- --------------------------------------------------------------------------------------------------------------------
Trustee of Columbia University in Columbia University 8.37
the City of New York--Global 475 Riverside Drive, Suite 401
New York, NY 10115
- --------------------------------------------------------------------------------------------------------------------
New York Academy of Medicine 2 East 103 Street 5.17
New York, NY 10029
- --------------------------------------------------------------------------------------------------------------------
Optima Health, Inc. Master Custody Attn: James Travers 5.11
The Chase Manhattan Bank NA
770 Broadway
New York, NY 10003
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Value Fund as of June 1, 1999:
51
<PAGE> 138
<TABLE>
<CAPTION>
Name Address % Ownership
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Leland Stanford Junior Stanford Management Company 47.53
University II 2770 Sand Hill Road
Menlo Park, CA 94025
- --------------------------------------------------------------------------------------------------------------------
Leland Stanford Junior Stanford Management Company 9.45
University I 2770 Sand Hill Road
Menlo Park, CA 94025
- --------------------------------------------------------------------------------------------------------------------
University of Connecticut Foundation I Attn: Fredrica Phillips 5.74
P.O. Box 552
Storrs, CT 06268
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Fundamental Value Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Leland Stanford Junior Stanford Management Company 41.99
University II 2770 Sand Hill Road
Menlo Park, CA 94025
- --------------------------------------------------------------------------------------------------------------------
Berea College Attn: Perry Poynter 39.60
Associate Controller
Box 2306, CPO2306
Berea, KY 40404
- --------------------------------------------------------------------------------------------------------------------
Princeton University TR Attn: John D. Sweeney 18.62
P.O. Box 35
Princeton, NJ 08544
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Growth Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Surdna Foundation, Inc. Attn: Mark De Venoge 45.02
330 Madison Avenue
30th Floor
New York, NY 10017-5001
- --------------------------------------------------------------------------------------------------------------------
The Northern Trust Company, Attn: Mutual Funds 35.39
Trustee of the Aerospace P.O. Box 92956
Corporation Employees Chicago, IL 60675
Retirement Plan Trust
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Small Cap Value Fund as of June 1, 1999:
52
<PAGE> 139
<TABLE>
<CAPTION>
Name Address % Ownership
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Bost & Co. A/C WFHF6202002 Attn: Mutual Funds Operations 11.12
FBO The Hewlett Foundation P.O. Box 3198
Pittsburgh, PA 15230-3198
- --------------------------------------------------------------------------------------------------------------------
SDI Investments LLC Attn: Judy Bible 8.45
201 W. Liberty Street
Suite 300
Reno, NV 89501-1808
- --------------------------------------------------------------------------------------------------------------------
Princeton University TR Attn: John Sweeney 7.58
P.O. Box 35
Princeton, NJ 08544
- --------------------------------------------------------------------------------------------------------------------
Berea College Attn: Parry Poynter, Associate 5.18
Controller
Box 2306
CPO 2306
Berea, KY 40404
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage ownership of
those shareholders owning beneficially 5% or more of the outstanding Class III
Shares of the Small Cap Growth Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Bost & Co. A/C WFHF6202002 Attn: Mutual Funds Operations 20.86
FBO The Hewlett Foundation P.O. Box 3198
Pittsburgh, PA 15230-3198
- --------------------------------------------------------------------------------------------------------------------
Princeton University TR Attn: John Sweeney 15.56
P.O. Box 35
Princeton, NJ 08544
- --------------------------------------------------------------------------------------------------------------------
The Duke Endowment--US AA Attn: Ms. Karen Rogers 8.84
Controller
100 North Tryon Street
Suite 3500
Charlotte, NC 28202-4012
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the REIT Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Princeton University TR Attn: John Sweeney 11.86
P.O. Box 35
Princeton, NJ 08544
- --------------------------------------------------------------------------------------------------------------------
Bost & Co. A/C WFHF6202002 Attn: Mutual Funds Operations 10.27
FBO The Hewlett Foundation P.O. Box 3198
Pittsburgh, PA 15230
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE> 140
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Schering Plough Retirement Trust Global AA Attn: Gary Karlin 7.74
One Giralda Farms
Madison, NJ 07940
- --------------------------------------------------------------------------------------------------------------------
Trustees of Columbia University in the City of Columbia University 6.88
New York-Global 475 Riverside Drive
Suite 401
New York, NY 10115
- --------------------------------------------------------------------------------------------------------------------
Conrad N. Hilton Foundation 100 West Liberty Street 5.41
Suite 840
Reno, NV 89501
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class IV Shares of the International Core Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Bost & Co. A/CNYXF1783862 Attn: Mutual Funds Operations 27.54
FBO Bell Atlantic-Intl Equities P.O. Box 3198
Pittsburgh, PA 15230-3198
- --------------------------------------------------------------------------------------------------------------------
RJR Nabisco Inc. Defined Benefit Attn: Mr. Edward G. Robertiello 22.28
Master Trust - Intl/RJR VP - Pension & Benefit Investments
1301 Avenue of the Americas
33rd Floor
New York, NY 10019-6013
- --------------------------------------------------------------------------------------------------------------------
RJR Nabisco Inc. Defined Benefit Attn: Mr. Edward G. Robertiello 14.85
Master Trust - Intl/Nabisco VP - Pension & Benefit Investments
1301 Avenue of the Americas
33rd Floor
New York, NY 10019-6013
- --------------------------------------------------------------------------------------------------------------------
The Duke Endowment--Intl AA Attn: Ms. Karen Rogers 11.49
Controller
100 North Tryon Street
Suite 3500
Charlotte, NC 28202-4012
- --------------------------------------------------------------------------------------------------------------------
The Northern Trust TR P.O. Box 92956 6.89
Mars Benefit Trust Chicago, IL 60675
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class II Shares of the International Core Fund as of June 1, 1999:
54
<PAGE> 141
<TABLE>
<CAPTION>
Name Address % Ownership
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Sisters of the Holy Cross, Inc c/o Sister Kathleen Moroney CSC 71.41
Secretary and Treasurer
Saint Mary's Lourdes Hall
Notre Dame, IN 46556
- -----------------------------------------------------------------------------------------
Bost. & Co A/C WERF1968002 Attn: Mutual Funds Operations 15.39
P.O. Box 3198
Pittsburgh, PA 15230-3198
- -----------------------------------------------------------------------------------------
Saturn & Co. c/o Investors Bank & Trust 6.97
FBO Providence Washington Ins. P.O. Box 9130 FPG 90
Boston, MA 02117-9130
- -----------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Currency Hedged International Core Fund as
of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
The Edna McConnell Clark Attn: Laura Kielczewski 25.02
Foundation Asst. Financial Officer
250 Park Avenue
New York, NY 10177-0026
- ---------------------------------------------------------------------------------------------------
Berklee College of Music AA Attn: Lois Goldstein 10.99
International Endowment 1140 Boylston Street
Boston, MA 02215
- ---------------------------------------------------------------------------------------------------
The Edna McConnel Clark Foundation Inc. Attn: Mr. Ralph Stefano 10.35
Director of Finance
250 Park Avenue
New York, NY 10177-0026
- ---------------------------------------------------------------------------------------------------
GMO Global Balanced Allocation Fund Attn: Rick Okerman 7.42
c/o GMO
40 Rowes Wharf
Boston, MA 02110
- ---------------------------------------------------------------------------------------------------
Trustees of Trinity College Treasurer's Office 7.15
300 Summit Street
Hartford, CT 06106
- ---------------------------------------------------------------------------------------------------
Vassar College Attn: Jay A. Yoder 6.50
Investment Analyst
P.O. Box 2
Poughkeepsie, NY 12601
- ---------------------------------------------------------------------------------------------------
Phillips Exeter Academy Attn: Joseph E. Fellows 5.15
20 Main Street
- ---------------------------------------------------------------------------------------------------
</TABLE>
55
<PAGE> 142
<TABLE>
- --------------------------------------------------------------------------------
<S> <C> <C>
Exeter, NH 03833-2460
- --------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class IV Shares of the Currency Hedged International Core Fund as of
June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Bost & Co. A/CNYXF1783862 Attn: Mutual Funds Operations 50.83
FBO Bell Atlantic-Intl Equities P.O. Box 3198
Pittsburgh, PA 15230-3198
Trustees of Columbia University in the Columbia University 43.29
City of New York--Global 475 Riverside Drive, Suite 401
New York, NY 10115
Princeton University TR Attn: John Sweeney 5.88
P.O. Box 35
Princeton, NJ 08544
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class II Shares of the Foreign Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Strafe & Co. for the Account of Attn: Carl E. Sealander 31.68
Owensbo Mercy Health System for P.O. Box 0160
Grantham Mayo Account 3402815000 Westerville, OH 43086-0160
American Committee for the Attn: Mr. Henry Pavony 25.94
Weizmann Institute of Science Inc. 51 Madison Ave.
New York, NY 10010
Northern Trust Custodian Attn: Special Assets CB1S 15.88
FBO Phoenix Childrens Hospital P.O. Box 92956
A/C 26 00849 Chicago, IL 60675-2956
Wentworth Institute of Technology Attn: David Gilmore 14.49
550 Huntington Ave.
Boston, MA 02115
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Foreign Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
President and Fellows of Harvard College c/o Harvard Management Company 14.89
</TABLE>
56
<PAGE> 143
<TABLE>
<S> <C> <C>
600 Atlantic Avenue
Boston, MA 02210
Trustees of the University of Pennsylvania Attn: Jon Scheinman 10.50
Office of Investments
3451 Walnut St.
714 Franklin Building
Philadelphia, PA 19104-6205
Hershey Trust Company P.O. Box 445 8.75
Trustee for Milton Hershey School 100 Mansion Road East
Hershey, PA 17033
University of Minnesota Foundation Attn: Douglas J Gorence 8.06
Chief Investment Officer
1300 S. 2nd St. Suite 200
Minneapolis, MN 55454-1029
Metropolitan Museum of Art Attn: William Magazine 7.76
1000 Fifth Ave.
New York, NY 10028-0198
Swarthmore College -- Foreign 500 College Ave. 6.25
Swarthmore, VA 19081-1397
Colonial Williamsburg Endowment Attn: Ms. Katherine Whitehead 5.18
International P.O. Box 1776
Williamsburg, VA 23187
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class IV Shares of the Foreign Fund as of June, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Princeton University TR Attn: John D. Sweeney 34.18
P.O. Box 35
Princeton, NJ 08544
The Rector and Visitors of the Office of the Treasurer 33.20
University of Virginia P.O. Box 9012
Attn: Mr. Rob Walker Freer
Charlottesville, VA 22906
Dewitt Wallace-Reader's Digest Attn: Rob D. Nagel 12.41
Fund-Intl, Inc. Two Park Avenue 23rd Floor
New York, NY 10016
Lila Wallace-Reader's Digest Attn: Rob D. Nagel 11.23
Fund-Intl, Inc. Two Park Avenue 23rd Floor
New York, NY 10016
</TABLE>
57
<PAGE> 144
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the International Small Companies Fund as of
June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Yale University Attn: Theodore D. Seides 20.95
230 Prospect Street
New Haven, CT 06511
Bankers Trust Company TR Attn: Marshall Jones 10.21
GTE Service Corp Pension Trust GTE Investment Management
One Stamford Forum
Stamford, CT 06902
Boston Safe Deposit & Trust Co. TR One Cabot Road 6.11
The Kodak Retirement Income Plan Medford, MA 02165
Bost & Co. A/CNYXF1783862 Attn: Mutual Funds Operations 5.67
FBO Bell Atlantic-Intl Equities P.O. Box 3198
Pittsburgh, PA 15230-3198
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Japan Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Yale University Attn: Theodore D. Seides 41.92
230 Prospect Street
New Haven, CT 06511
BASF Corporation Pension Master Trust Attn: Christopher P. Krauss 9.13
3000 Continental Drive North
Mount Olive, NJ 07828-1234
State Street Bank as Trustee for the Attn: Laura Mears 6.74
Electronic Data Systems Corporation State Street Bank & Trust Co.
P.O. Box 1992
Boston, MA 02105-1992
MAC & Co. A/CKREF0756022 Attn: Mutual Fund OPS 6.00
Kresge Foundation P.O. Box 3198
Pittsburgh, PA 15230-3198
ROHM & HAAS Company Pension Plan 100 Independence Mall West 5.74
Philadelphia, PA 19106-2399
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Emerging Markets Fund as of June 1, 1999:
58
<PAGE> 145
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Washington State Investment Board Attn: Kris Logan 13.97
Investment Accounting Controller
P.O. Box 40916
2424 Heritage Court SW
Olympia, WA 98504
State Street Bank as Trustee for the Attn: Laura Mears 5.70
Electronic Data Systems Corporation State P.O. Box 1992
Street Bank & Trust Co. Boston, MA 02105-1992
Bankers Trust Company Master Custody Attn: Barbara Gleason Asst. VP 5.41
FBO Mayo Foundation Pension Plan 34 Exchange Place 4th Floor
Mail Stop 3046
Jersey City, NJ 07302
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class IV Shares of the Emerging Markets Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Princeton University TR Attn: John D. Sweeney 49.65
P.O. Box 35
Princeton, NJ 08544
Leland Stanford Junior University II-AA Stanford Management Company 15.04
2770 Sand Hill Road
Menlo Park, CA 94025
Bost & Co. A/CNYXF1783862 Attn: Mutual Funds Operations 11.07
FBO Bell Atlantic-Intl Equities P.O. Box 3198
Pittsburgh, PA 15230-3198
Trustees of Columbia University in the City of Columbia University 8.70
New York-Global 475 Riverside Drive Suite 401
New York, NY 10115
The Rector and Visitors of the University of Attn: Mr. Rob Walker Freer 8.39
Virginia Office of the Treasurer
P.O. Box 9012
Charlottesville, VA 22906
</TABLE>
The following chart sets forth the names, addresses and percentage ownership
of those shareholders owning beneficially 5% or more of the outstanding Class
III Shares of the Evolving Countries Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
</TABLE>
59
<PAGE> 146
<TABLE>
<S> <C> <C>
Duke University Long-Term c/o Duke Management Company 28.06
(Endowment) Pool--Emerging 2200 W. Main St.
Suite 1000
Durham, NC 27705
GMO International Equity c/o GMO 21.90
Allocation Fund Attn: Rick Okerman
40 Rowes Wharf
Boston, MA 02110
GMO Global Balanced c/o GMO 10.37
Allocation Fund Attn: Rick Okerman
40 Rowes Wharf
Boston, MA 02110
Brown Brothers Harriman & Co. Attn: Global Settlement 7.07
Cust. FBO GMO Global Hedged Harold Robinson
Equity Fund 40 Water St.
Boston, MA 02109
First Union National Bank c/o First Union National Bank 6.05
FBO Alexander & Margaret Stewart Trust A/C 7013243085
1525 West WT Harris Blvd
NC 1151
Charlotte, NC 28262-1151
Employees' Retirement Plan of Duke c/o Duke Management Company 5.90
University - Emerging 2200 W. Main Street, Suite 1000
Durham, NC 27705
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Asia Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Bankers Trust Company TR Attn: Marshall Jones 29.26
GTE Service Corp. Pension Trust GTE Investment Management
One Stanford Forum
Stamford, CT 06902
Princeton University TR Attn: John D. Sweeney 26.09
P.O. Box 35
Princeton, NJ 08544
The Trustees of Columbia University in the Columbia University 14.25
City of New York - Dedicated Asia 475 Riverside Drive, Suite 401
New York, NY 10115
Leland Stanford Junior Stanford Management Company 10.96
University II-AA 2770 Sand Hill Road
Menlo Park, CA 94025
</TABLE>
60
<PAGE> 147
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Global Properties Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Eyk Van Otterloo 32 Foster Street 69.60
Marblehead, MA 01945
Cormorant Fund c/o Jeremy Grantham 5.56
40 Rowes Wharf
Boston, MA 02210
Investors Bank & Trust Company c/o Grantham Mayo Van Otterloo & Co. 5.29
Cust. FBO ####-##-#### SEP IRA Attn: Human Resources
40 Rowes Wharf
Boston, MA 02110
BEHE c/o Bank LEU AG 5.00
Attn: Mr. Thomas Frei
P.O. Box 5274
CH 8022
Zurich, Switzerland
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Global Hedged Equity Fund as of June 1,
1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Partners Healthcare System Pooled Partners Healthcare System Inc. 43.43
Investment Accounts 101 Merrimac Street 4th Floor
Boston, MA 02114
The Edna McConnell Clark Foundation Attn: Laura Kielczewski 10.57
Asst Financial Officer
250 Park Avenue
New York, NY 10177-0026
Phillips Exeter Academy Attn: Joseph E. Fellows 7.16
20 Main Street
Exeter, NH 038332-2460
Conrad N. Hilton Foundation 100 West Liberty Street Suite 840 5.79
Reno, NV 89501
Cormorant Fund c/o GMO 5.63
40 Rowes Wharf
Boston, MA 02110
</TABLE>
61
<PAGE> 148
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Domestic Bond Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Trust for Millipore Corporation Attn: Ms. Evon Beland 19.58
Invested Employee Plans -- DBF 80 Ashby Road M/S E4H
Bedford, MA 01730
The Edna McConnell Clark Attn: Laura Kielczewski 11.84
Foundation Asst. Financial Officer
250 Park Avenue
New York, NY 10177
Phillips Exeter Academy Attn: Joseph E. Fellows 9.17
20 Main Street
Exeter, NH 03833
GMO Global Balanced Allocation Fund Attn: Rick Okerman 9.04
c/o GMO
40 Rowes Wharf
Boston, MA 02110
Schering Plough Retirement Trust Attn: Gary Karlin 7.43
Global -- AA One Giralda Farms
Madison, NJ 07940
Emerson Hospital Endowment RT 2 Ornac 5.11
Concord, MA 07142
Trinity Church in the City of Boston-General Attn: Sarah W. Wilcox Parish 5.08
Trust Fund Administrator
Copley Square
Boston, MA 02116
</TABLE>
The following chart sets forth the names, addresses and percentage ownership
of those shareholders owning beneficially 5% or more of the outstanding Class
III Shares of the U.S. Bond/Global Alpha A Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Phillips Exeter Academy Attn: Joseph E. Fellows 24.04
20 Main Street
Exeter, NH 03833-2460
GMO Global Balanced Allocation Fund Attn: Rick Okerman 22.11
c/o GMO
40 Rowes Wharf
Boston, MA 02110
The Edna McConnell Clark Foundation Attn: Laura Kielczewski 9.52
Asst. Financial Officer
250 Park Avenue
New York, NY 10177-0026
</TABLE>
62
<PAGE> 149
<TABLE>
<S> <C> <C>
World Wildlife Fund Attn. Mr. David Rada 7.89
Financial Officer
1250 24th Street NW, Suite 500
Washington, DC 20037-1175
Schering Plough Retirement Trust Attn: Gary Karlin 7.87
Global AA One Giralda Farms
Madison, NJ 07940
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the U.S. Bond/Global Alpha B Fund as of June 1,
1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Bost & Co A/CNYXF1783842 Attn: Mutual Funds Operations 47.58
FBO Bell Atlantic-Fixed Income P. O. Box 3198
Pittsburgh, PA 15230-3198
Bankers Trust Company Master Custody Attn: Barbara Gleason Asst VP 23.90
FBO Mayo Foundation Mail 304
General Fund AA Fixed 634 Exchange Place, 4th Floor
Jersey City, NJ 07293
Bankers Trust Company Master Custody Attn: Barbara Gleason Asst. VP 23.83
FBO Mayo Foundation 34 Exchange Place, 4th Floor
Pension Fund AA Fixed Mail Stp 30
</TABLE>
The following chart sets forth the names, addresses and percentage ownership
of those shareholders owning beneficially 5% or more of the outstanding Class
III Shares of the International Bond Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Saturn & Co. A/C 4600712 P.O. Box 9130 FPG90 30.93
C/O Investors Bank & Trust Boston, MA 02117-9130
Company TR FBO
The John Hancock Mutual Life Insurance
Company Pension Plan
Princeton University TR Attn: John D. Sweeney 17.73
P.O. Box 35
Princeton, NJ 08544
Woods Hole Oceanographic Attn: Paul Clemente 6.63
Institution CFO & Assoc. Director of Finance
& Administration
Mail Stop 39
Woods Hole, MA 02543
</TABLE>
63
<PAGE> 150
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Currency Hedged International Bond Fund as
of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Bost & Co A/CNYXF 1783842 Attn: Mutual Funds Operations 62.10
FBO Bell Atlantic-Fixed Income P.O. Box 3198
Pittsburgh, PA 15230-3198
Bankers Trust Company TR Attn: Marshall Jones 21.90
GTE Service Corp Pension Trust GTE Investment Management
One Stanford Forum
Stamford, CT 06902
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Global Bond Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Fresno County Employees' Attn: Gary W. Peterson 25.44
Retirement Association P.O. Box 1247
2281 Tulare Street
Fresno, CA 93715
The University of North Carolina at Chapel Investment Office 20.04
Hill Foundation Investment Fund, Inc., 1512 E Franklin Street, Suite 106
Global Fixed Income Account Chapel Hill, NC 27599-1000
Tufts Associated Health Maintenance 353 Wyman Street 20.00
Organization, Inc. Waltham, MA 02454
Marine Midland Bank as Agent for The John R. Attn: Mutual Funds 5.64
Oishei Foundation P.O. Box 1329
Buffalo, NY 14240
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class IV Shares of the Emerging Country Debt Fund as of June 1,
1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
San Francisco County & Retirement System Attn: Richard Piket 35.50
1155 Market Street, 2nd Floor
San Francisco, CA 94103
State of Connecticut Retirement Plans and Attn: Chief Investment Officer 19.55
Trust Funds Office of the Treasurer
</TABLE>
64
<PAGE> 151
<TABLE>
<S> <C> <C>
55 Elm Street
Hartford, CT 06106
Bost & Co. A/C NYXF 1783852 Attn: Mutual Funds Operations 14.75
FBO Bell Atlantic Dedicated ECDF P.O. Box 3198
Pittsburgh, PA 15230-3198
Bankers Trust Company TR Attn: Marshall Jones 13.55
GTE Service Corp. Pension Trust GTE Investment Management
One Stanford Forum
Stamford, CT 06902
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Emerging Country Debt Fund as of June 1,
1999:
<TABLE>
<CAPTION>
Name Address % Ownership
<S> <C> <C>
Chase Manhattan Bank, TTEE for General Motors 4 Chase Metrotech Center 27.16
Employees Global Group Pension Trust 18th Floor
Brooklyn, NY 11245
GMO Emerging Country Debt Share Fund Attn: Rick Okerman 13.86
40 Rowes Wharf
Boston, MA 02110
Retirement Plan of Mobil Oil Corporation Attn: Donald Hellyer 9.53
3225 Gallows Road
Fairfax, VA 22037
Saturn & Co. A/C 4600712 P.O. Box 9130 FPG90 6.83
C/O Investors Bank & Trust Company Trust FBO Boston, MA 02117-9130
The John Hancock Mutual Life Insurance
Company Pension Plan
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Short-Term Income Fund as of Jun 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Bankers Trust Company TR Attn: Marshall Jones 76.06
GTE Service Corp. Pension Trust GTE Investment Management
One Stanford Forum
Stamford, CT 06902
Gezamelyk Mollenfonds c/o GMO 5.65
40 Rowes Wharf
Boston, MA 02110
</TABLE>
65
<PAGE> 152
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Inflation Indexed Bond Fund as of June 1,
1999:
<TABLE>
<CAPTION>
Name Address % Ownership
<S> <C> <C>
Schering Plough Retirement Trust Attn: Gary Karlin 12.87
Global AA One Giralda Farms
Madison, NJ 07940
GMO Global Balanced Allocation Fund Attn: Rick Okerman 10.98
c/o GMO
40 Rowes Wharf
Boston, MA 02110
Conrad N. Hilton Foundation 100 West Liberty Street 9.84
Suite 840
Reno, NV 89501
The Edna McConnell Clark Foundation Attn: Laura Kielczewski 9.24
Asst. Financial Officer
250 Park Avenue
New York, NY 10177-0026
Phillips Exeter Academy Attn: Joseph E. Fellows 8.87
20 Main St.
Exeter, NH 03833-2460
The Jeremy and Hannelore Grantham Charitable c/o GMO 8.59
Trust 40 Rowes Wharf
Boston, MA 02110
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Emerging Country Debt Share Fund as of June
1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
<S> <C> <C>
Sprint Corporate Master Trust Attn: William N. Searcy Jr. 100.00
2320 Shawnee Mission Pkwy
Westwood, KS 66205
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the International Equity Allocation Fund as of
June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
MD Co. FBO Memorial Drive Trust Attn: Kelly Corwin 17.22
C/O MDT Advisors, Inc. 125 Cambridge Park Dr.
Cambridge, MA 02140-2314
</TABLE>
66
<PAGE> 153
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Wenner-Gren Foundation Attn: Maugha Kenny 14.15
220 Fifth Avenue
New York, NY 10001-7780
Regenstrief Foundation, Inc. Global Equity Fund 1001 West Tenth Street 12.06
Indianapolis, IN 46202
Francis W. Hatch & S Parker Gilbert & Robert Attn: Ms. Lois B. Wetzel 9.21
M. Pennoyer TR Sullivan & Cromwell
Trust U/ART 11 F FBO John H. C. Merck 125 Broad Street
New York, NY 10004-2498
Francis W. Hatch & S Parker Gilbert & Robert Attn: Lois B. Wetzel 9.21
M. Pennoyer TR Sullivan & Cromwell
Trust U/I 12/11/39 FBO John H. C. Merck 125 Broad Street
New York, NY 10004-2498
The Raymond and Gertrude R. Saltzman Suite 105 East Cooper River Plaza 5.85
Foundation 2400 McClellan Avenue
Pennsauken, NJ 08109
Lawrence Memorial Association Attn: Peter Semenza 5.74
170 Governors Avenue
Medford, MA 02155
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the World Equity Allocation Fund as of June 1,
1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Mars & Co. C/O Invetsors Bank & Trust 66.40
P.O. Box 9130 FPG 90
Boston, MA 02117
Logwood College Foundation, Inc. Attn: L. Darlene Selz 33.54
201 High Street
Farmville, VA 23909-1895
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Global (U.S.+) Equity Allocation Fund as of
June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Yale University TR Scripps League Newspapers Attn: Linda Rockhill 13.02
Education & Research Fund State Street Global Advisors
One International Place, 28th Floor
Boston, MA 02110
Yale University TR Attn: Linda Rockhill 11.90
U/A Trustee of Thurston & Sharon State Street Global Advisors
Twigg-Smith Unitrust #2 One International Place, 28th Floor
</TABLE>
67
<PAGE> 154
<TABLE>
<S> <C> <C>
Boston, MA 02110
Helen Benedict Foundation, Inc. Attn: Jim Nikolai 11.89
330 Madison Avenue, 30th Floor
New York, NY 10017-5001
Yale University TR Attn: Linda Rockhill 8.67
Laila & Thurston Twigg Smith Unitrust State Street Global Advisors
One International Place, 28th Floor
Boston, MA 02110
Yale University TR Attn: Linda Rockhill 6.13
U/A Charles W. Palmer 5% State Street Global Advisors
One International Place, 28th Floor
Boston, MA 02110
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Global Balanced Allocation Fund as of June
1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Presbyterian Homes & Family Services, Inc. 150 Linden Avenue 17.05
Lynchburg, VA 24503
Escuela Agricola Panamericana, Inc. Attn: J. Hughes 16.37
24 Federal Street, Suite 400
Boston, MA 02110
Appalachian Mountain Club Attn: Mr. Henry Isaacson 15.39
5 Joy Street
Boston, MA 02108
Japan International Christian University Attn: Dorothy Kinney 9.49
Foundation 475 Riverside Drive
Suite 439
New York, NY 10115
New Cycle Foundation C/O Eleanor Rosenthal 8.40
Peregrine Financial Corporation
84 State Street, Suite 900
Boston, MA 02109
American Society of Hematology Unrestricted Attn: Martha Liggett 8.39
Account Executive Director
1200 19th Street NW
Suite 300
Washington, DC 20036-000
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the U.S. Sector Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
</TABLE>
68
<PAGE> 155
<TABLE>
<S> <C> <C>
Regenstrief Foundation, Inc. 1001 West Tenth St. 88.43
Global Equity Fund Indianapolis, IN 46202
The Herb Society of America, Inc. Attn: David Pauer 10.87
Executive Director
9019 Kirtland Chardon Road
Kirtland, OH 44094
</TABLE>
DISTRIBUTIONS
The Shareholder's Manual describes the distribution policies of each
Fund under the heading "Distributions". It is the policy of each Fund in all
cases to pay its shareholders, as dividends, substantially all net investment
income and to distribute annually all net realized capital gains, if any, after
offsetting any capital loss carryovers. For distribution and federal income tax
purposes, a portion of the premiums from certain expired call or put options
written by a Fund, net gains from certain closing purchase and sale transactions
with respect to such options and a portion of net gains from other options and
futures transactions are treated as short-term capital gain (i.e., gain from the
sale of securities held for 12 months or less). It is the policy of each Fund to
make distributions at least annually, sufficient to avoid the imposition of a
nondeductible 4% excise tax on certain undistributed amounts of taxable
investment income and capital gains.
TAXES
TAX STATUS AND TAXATION OF EACH FUND
Each Fund is treated as a separate taxable entity for federal income
tax purposes. Each Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). In order to qualify for the special tax treatment accorded regulated
investment companies and their shareholders, each Fund must, among other things:
(a) derive at least 90% of its gross income from dividends, interest, payments
with respect to certain securities loans, and gains from the sale of stock,
securities and foreign currencies, or other income (including but not
limited to gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities, or
currencies;
(b) distribute with respect to each taxable year at least 90% of the sum of its
taxable net investment income, its net tax-exempt income, and the excess,
if any, of net short-term capital gains over net long-term capital losses
for such year; and
(c) diversify its holdings so that at the end of each fiscal quarter, (i) at
least 50% of the market value of the Fund's assets is represented by cash
and cash items, U.S. government securities, securities of other regulated
investment companies, and other securities limited in respect of any one
issuer to a value not greater than 5% of the value of the Fund's total net
assets and to not more than 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its assets is
invested in the securities (other than those of the U.S. Government or
other
69
<PAGE> 156
regulated investment companies) of any one issuer or of two or more issuers
which the Fund controls and which are engaged in the same, similar, or
related trades or businesses.
If a Fund qualifies as a regulated investment company that is accorded
special tax treatment, the Fund will not be subject to federal income tax on
income paid to its shareholders in the form of dividends (including capital gain
dividends).
If a Fund fails to distribute in a calendar year substantially all of
its ordinary income for such year and substantially all of its capital gain net
income for the one-year period ending October 31 (or later if a Fund is
permitted so to elect and so elects), plus any retained amount from the prior
year, such Fund will be subject to a 4% excise tax on the undistributed amounts.
A dividend paid to shareholders by a Fund in January of a year generally is
deemed to have been paid by the Fund on December 31 of the preceding year, if
the dividend was declared and payable to shareholders of record on a date in
October, November or December of that preceding year. Each Fund intends
generally to make distributions sufficient to avoid imposition of the 4% excise
tax.
TAXATION OF FUND DISTRIBUTIONS AND SALES OF FUND SHARES
Fund distributions derived from interest, dividends and certain other
income, including in general short-term capital gains, will be taxable as
ordinary income to shareholders subject to federal income tax whether received
in cash or reinvested shares. Properly designated Fund distributions derived
from net long-term capital gains (i.e., net gains derived from the sale of
securities held for more than 12 months) will be taxable as such (generally at a
20% rate for noncorporate shareholders), regardless of how long a shareholder
has held the shares in the Fund.
Dividends and distributions on each Fund's shares are generally subject
to federal income tax as described herein to the extent they do not exceed the
Fund's realized income and gains, even though such dividends and distributions
may economically represent a return of a particular shareholder's investment.
Such distributions are likely to occur in respect of shares purchased at a time
when the Fund's net asset value reflects gains that are either unrealized, or
realized but not distributed.
The sale, exchange or redemption of Fund shares may give rise to a gain
or loss. In general, any gain or loss realized upon a taxable disposition of
shares will be treated as long-term capital gains if the shares have been held
for more than 12 months and as short-term capital gains if the shares have been
held for not more than 12 months.
Any loss realized upon a taxable disposition of shares held for six
months or less will be treated as long-term capital loss to the extent of any
long-term capital gain distributions received by a shareholder with respect to
those shares. All or a portion of any loss realized upon a taxable disposition
of Fund shares will be disallowed if other shares of the same Fund are purchased
within 30 days before or after the disposition. In such a case, the basis of the
newly purchased shares will be adjusted to reflect the disallowed loss.
A distribution paid to shareholders by a Fund in January of a year
generally is deemed to have been received by shareholders on December 31 of the
preceding year, if the distribution was
70
<PAGE> 157
declared and payable to shareholders of record on a date in October, November or
December of that preceding year. The Trust will provide federal tax information
annually, including information about dividends and distributions paid during
the preceding year to taxable investors and others requesting such information.
If a Fund makes a distribution to you in excess of its current and
accumulated "earnings and profits" in any taxable year, the excess distribution
will be treated as a return of capital to the extent of your tax basis in your
shares, and thereafter as capital gain. A return of capital is not taxable, but
it reduces your tax basis in your shares, thus reducing any loss or increasing
any gain on a subsequent taxable disposition by you of your shares.
For corporate shareholders, the dividends-received deduction will
generally apply (subject to a holding period requirement imposed by the Code) to
a Fund's dividends paid from investment income to the extent derived from
dividends received from U.S. corporations. However, any distributions received
by a Fund from REITs will not qualify for the corporate dividends-received
deduction. A Fund's investments in REIT equity securities may require such Fund
to accrue and distribute income not yet received. In order to generate
sufficient cash to make the requisite distributions, the Fund may be required to
sell securities in its portfolio that it otherwise would have continued to hold
(including when it is not advantageous to do so). A Fund's investments in REIT
equity securities may at other times result in the Fund's receipt of cash in
excess of the REIT's earnings; if the Fund distributes such amounts, such
distribution could constitute a return of capital to Fund shareholders for
federal income tax purposes.
The backup withholding rules do not apply to tax exempt entities so
long as each such entity furnishes the Trust with an appropriate certification.
However, other shareholders are subject to backup withholding at a rate of 31%
on all distributions of net investment income and capital gain, whether received
in cash or reinvested in shares of the relevant Fund, and on the amount of the
proceeds of any redemption of Fund shares paid or credited to any shareholder
account for which an incorrect or no taxpayer identification number has been
provided, where appropriate certification has not been provided for a foreign
shareholder, or where the Trust is notified that the shareholder has
underreported income in the past (or the shareholder fails to certify that he is
not subject to such withholding). A "taxpayer identification number" is either
the Social Security number or employer identification number of the record owner
of the account.
WITHHOLDING ON DISTRIBUTIONS TO FOREIGN INVESTORS
Dividend distributions (including distributions derived from short-term
capital gains) are in general subject to a U.S. withholding tax of 30% when paid
to a nonresident alien individual, foreign estate or trust, a foreign
corporation, or a foreign partnership ("foreign shareholder"). Persons who are
resident in a country, such as the U.K., that has an income tax treaty with the
U.S. may be eligible for a reduced withholding rate (upon filing of appropriate
forms), and are urged to consult their tax advisors regarding the applicability
and effect of such a treaty. Distributions of net realized long-term capital
gains paid by a Fund to a foreign shareholder, and any gain realized upon the
sale of Fund shares by such a shareholder, will ordinarily not be subject to
U.S. taxation, unless the recipient or seller is a nonresident alien individual
who is present in the United States for more than 182 days during the taxable
year. However, such distributions and sale proceeds may be subject to
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<PAGE> 158
backup withholding, unless the foreign investor certifies his non-U.S. residency
status. Foreign investors are subject to the backup withholding rules described
above. Any tax withheld as a result of backup withholding does not constitute an
additional tax imposed on the record owner of the account, and may be claimed as
a credit on the record owner's Federal income tax return. Also, foreign
shareholders with respect to whom income from a Fund is "effectively connected"
with a U.S. trade or business carried on by such shareholder will in general be
subject to U.S. federal income tax on the income derived from the Fund at the
graduated rates applicable to U.S. citizens, residents or domestic corporations,
whether received in cash or reinvested in shares, and, in the case of a foreign
corporation, may also be subject to a branch profits tax. Again, foreign
shareholders who are resident in a country with an income tax treaty with the
United States may obtain different tax results, and are urged to consult their
tax advisors.
FOREIGN TAX CREDITS
If, at the end of the fiscal year, more than 50% of the value of the
total assets of any Fund is represented by stock or securities of foreign
corporations, the Fund intends to make an election with respect to the relevant
Fund which allows shareholders whose income from the Fund is subject to U.S.
taxation at the graduated rates applicable to U.S. citizens, residents or
domestic corporations to claim a foreign tax credit or deduction (but not both)
on their U.S. income tax return. In such case, the amounts of foreign income
taxes paid by the Fund would be treated as additional income to Fund
shareholders from non-U.S. sources and as foreign taxes paid by Fund
shareholders. Investors should consult their tax advisors for further
information relating to the foreign tax credit and deduction, which are subject
to certain restrictions and limitations (including a holding period requirement
applied at both the Fund and shareholder level imposed by the Code).
Shareholders of any of the International Funds whose income from the Fund is not
subject to U.S. taxation at the graduated rates applicable to U.S. citizens,
residents or domestic corporations may receive substantially different tax
treatment of distributions by the relevant Fund, and may be disadvantaged as a
result of the election described in this paragraph.
TAX IMPLICATIONS OF CERTAIN INVESTMENTS
Certain of the Funds' investments, including assets "marked to the
market" for federal income tax purposes, debt obligations issued or purchased at
a discount and potentially so-called "index securities" (including inflation
indexed bonds), will create taxable income in excess of the cash they generate.
In such cases, a Fund may be required to sell assets (including when it is not
advantageous to do so) to generate the cash necessary to distribute as dividends
to its shareholders all of its income and gains and therefore to eliminate any
tax liability at the Fund level.
The Funds' transactions in options, futures contracts, hedging
transactions, forward contracts, straddles and foreign currencies may accelerate
income, defer losses, cause adjustments in the holding periods of the Funds'
securities and convert short-term capital gains or losses into long-term capital
gains or losses. These transactions may affect the amount, timing and character
of distributions to shareholders.
Investment by the Fund in certain passive foreign investment companies
("PFICs") could subject the Fund to a U.S. federal income tax (including
interest charges) on distributions received
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<PAGE> 159
from the company or on proceeds received from the disposition of shares in the
company, which tax cannot be eliminated by making distributions to Fund
shareholders. However, the Fund may elect to treat a passive foreign investment
company as a "qualified electing fund," in which case the Fund will be required
to include its share of the company's income and net capital gain annually,
regardless of whether it receives any distribution from the company. The Fund
also may make an election to mark the gains (and to a limited extent losses) in
such holdings "to the market" as though it had sold and repurchased its holdings
in those PFICs on the last day of the Fund's taxable year. Such gains and losses
are treated as ordinary income and loss. The QEF and mark-to-market elections
may have the effect of accelerating the recognition of income (without the
receipt of cash) and increase the amount required to be distributed for the Fund
to avoid taxation. Making either of these elections therefore may require a Fund
to liquidate other investments (including when it is not advantageous to do so)
to meet its distribution requirement, which also may accelerate the recognition
of gain and affect a Fund's total return.
A PFIC is any foreign corporation in which (i) 75% or more of the
income for the taxable year is passive income, or (ii) the average percentage of
the assets (generally by value, but by adjusted tax basis in certain cases) that
produce or are held for the production of passive income is at least 50%.
Generally, passive income for this purposes means dividends, interest (including
income equivalent to interest), royalties, rents, annuities, the excess of gains
over losses from certain property transactions and commodities transactions, and
foreign currency gains. Passive income for this purpose does not include rents
and royalties received by the foreign corporation from active business and
certain income received from related persons.
LOSS OF REGULATED INVESTMENT COMPANY STATUS
A Fund may experience particular difficulty qualifying as a regulated
investment company in the case of highly unusual market movements, in the case
of high redemption levels and/or during the first year of its operations. If the
Fund does not qualify for taxation as a regulated investment company for any
taxable year, the Fund's income will be taxed at the Fund level at regular
corporate rates, and all distributions from earnings and profits, including
distributions of net long-term capital gains, will be taxable to shareholders as
ordinary income and subject to withholding in the case of non-U.S. shareholders.
In addition, in order to requalify for taxation as a regulated investment
company that is accorded special tax treatment, the Fund may be required to
recognize unrealized gains, pay substantial taxes and interest on such gains,
and make certain substantial distributions.
PERFORMANCE INFORMATION
Each Fund may from time to time include its total return in
advertisements or in information furnished to present or prospective
shareholders.
Quotations of average annual total return for a Fund will be expressed
in terms of the average annual compounded rate of return of a hypothetical
investment in the Fund or class over periods of one, three, five, and ten years
(or for such shorter or longer periods as shares of the Fund have been offered),
calculated pursuant to the following formula: P (1 + T)n = ERV (where P = a
hypothetical initial payment of $10,000, T = the average annual total return, n
= the number of years, and ERV = the ending redeemable value of a hypothetical
$10,000 payment made at the beginning of the
73
<PAGE> 160
period). Except as noted below, all total return figures reflect the deduction
of a proportional share of Fund expenses on an annual basis, and assume that (i)
the maximum purchase premium is deducted from the initial $10,000 payment, (ii)
all dividends and distributions are reinvested when paid and (iii) the maximum
redemption fee is charged at the end of the relevant period. Quotations of total
return may also be shown for other periods. The Funds may also, with respect to
certain periods of less than one year, provide total return information for that
period that is unannualized. Any such information would be accompanied by
standardized total return information.
The table below sets forth the average annual total return for Class
III Shares of each Fund for the one, three, five and ten year periods ending
February 28, 1999 and for the period from the commencement of the Funds'
operations until February 28, 1999:
<TABLE>
<CAPTION>
FUND INCEPTION 1 YEAR 3 YEARS 5 YEARS 10 YEARS SINCE
DATE (%) (%) (%) (%) INCEPTION (%)
- ----------------------------------------- ---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
U.S. Core 9/18/85 14.86 24.26 23.43 19.13 18.79
Tobacco-Free Core 10/31/91 16.12 25.30 23.95 N/A 20.49
Value 11/13/90 2.10 17.69 18.73 N/A 18.56
Fundamental Value 10/31/91 2.15 16.98 17.51 N/A 17.66
Growth 12/30/88 22.72 26.79 25.49 20.21 20.42
Small Cap Value 12/31/91 (15.59) 10.59 12.44 N/A 15.28
Small Cap Growth 12/31/96 (9.12) N/A N/A N/A 9.64
REIT 5/31/96 (24.04) N/A N/A N/A 4.06
International Core 3/31/87 (1.27) 5.59 5.22 8.86 9.62
Currency Hedged International Core 6/30/95 (2.43) 10.32 N/A N/A 13.01
Foreign 8/31/84 0.48 9.24 8.58 10.41 17.44
International Small Companies 10/14/91 (6.58) 1.92 1.28 N/A 6.88
Japan 6/8/90 (3.50) (10.41) (6.96) N/A (2.46)
Emerging Markets 12/9/93 (32.34) (10.95) (8.59) N/A (4.77)
Evolving Countries 8/29/97 (32.97) N/A N/A N/A (30.75)
Asia 2/18/98 (26.23) N/A N/A N/A (22.52)
Global Properties 12/20/96 (16.63) N/A N/A N/A (6.03)
Global Hedged Equity 7/29/94 (9.76) (3.15) N/A N/A (0.09)
Domestic Bond 8/18/94 5.03 6.87 N/A N/A 7.99
U.S. Bond/Global Alpha A 4/30/97 0.29 N/A N/A N/A 6.65
U.S. Bond/Global Alpha B 7/29/97 3.27 N/A N/A N/A 4.71
International Bond 12/22/93 2.33 6.98 10.19 N/A 9.72
Currency Hedged International Bond 9/30/94 3.04 14.01 N/A N/A 15.86
Global Bond 12/28/95 2.54 8.18 N/A N/A 7.35
Emerging Country Debt 4/19/94 (33.44) 12.36 N/A N/A 15.93
Short-Term Income 4/18/90 4.29 5.34 5.61 N/A 6.05
Inflation Indexed Bond 3/31/97 4.07 N/A N/A N/A 4.11
Emerging Country Debt Share 7/20/98 N/A N/A N/A N/A (31.32)
</TABLE>
74
<PAGE> 161
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
International Equity Allocation 10/11/96 (9.60) N/A N/A N/A 0.59
World Equity Allocation 6/28/96 (7.43) N/A N/A N/A 4.50
Global (U.S.+) Equity Allocation 11/26/96 (3.44) N/A N/A N/A 9.89
Global Balanced Allocation 7/29/96 (2.72) N/A N/A N/A 11.26
U.S. Sector 12/31/92 2.67 17.20 19.18 N/A 18.60
</TABLE>
Each Fund may also from time to time advertise net return and gross
return data for each month and calendar quarter since the Fund's inception.
Monthly and quarterly return data is calculated by linking daily performance for
a Fund (current net asset value divided by prior net asset value), and assumes
reinvestment of all dividends and gains. Monthly and quarterly performance data
does not reflect payment of any applicable purchase premiums or redemption fees.
All quotations of monthly and quarterly returns would be accompanied by
standardized total return information. Information relating to a Fund's return
for a particular month or calendar quarter is provided to permit evaluation of
the Fund's performance and volatility in different market conditions, and should
not be considered in isolation.
From time to time, in advertisements, in sales literature, or in
reports to shareholders, a Fund may compare its respective performance to that
of other mutual funds with similar investment objectives and to stock or other
relevant indices. For example, the Fund may compare its total return to rankings
prepared by Lipper Analytical Services, Inc. or Morningstar, Inc., widely
recognized independent services that monitor mutual fund performance; the
Standard & Poor's 500 Stock Index ("S&P 500"), an index of unmanaged groups of
common stock; or the Dow Jones Industrial Average, a recognized unmanaged index
of common stocks of 30 industrial companies listed on the New York Stock
Exchange.
Performance rankings and listings reported in national financial
publications, such as Money Magazine, Barron's and Changing Times, may also be
cited (if the Fund is listed in any such publication) or used for comparison, as
well as performance listings and rankings from various other sources including
No Load Fund X, CDA Investment Technologies, Inc., Weisenberger Investment
Companies Service, and Donoghue's Mutual Fund Almanac.
Quotations of a Fund's gross return do not reflect any reduction for
any Fund fees or expenses unless otherwise noted; if the gross return data
reflected the estimated fees and expenses of the Fund, the returns would be
lower than those shown. Quotations of gross return for a Fund for a particular
month or quarter will be calculated in accordance with the following formula:
Gross Return =
Net Return + (Total Annual Operating Expense Ratio) (# of days in relevant
period/365)
Information relating to a Fund's return for a particular month or calendar
quarter is provided to permit evaluation of the Fund's performance and
volatility in different market conditions, and should not be considered in
isolation.
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<PAGE> 162
INVESTMENT GUIDELINES
U. S. EQUITY FUNDS
GMO U.S. CORE FUND
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
EQUITY SECURITIES: - At least 65% of the Fund's total assets will be invested in or exposed
Domestic Common Stocks to(2) domestic common stocks.
Convertible Securities - Substantially all of the Fund's total assets will be invested in or exposed
Securities of Foreign Issuers to equity securities of at least 125 companies chosen from among the
(traded on U.S. Exchanges) Wilshire 5000 Index.
- The Fund's total assets will primarily be invested in or exposed to the
"Large Cap 1200".
</TABLE>
OTHER EQUITY SECURITIES:(1)
Depository Receipts
Illiquid Securities
144A Securities
Restricted Securities
Futures and Related Options on
Securities Indexes
REITs
Exchange-traded and OTC options on
Securities and Indexes
(including writing covered options)
Equity Swap Contracts
Contracts for Differences
The Fund will normally have greater than 95% of its net assets invested in
or exposed to the securities of the two categories above.
CASH AND MONEY MARKET - The Fund will not normally have
INSTRUMENTS Any short-term greater than 5% of its net assets
assets will be invested in exposed to cash and money market
cash or High Quality Money instruments. This limitation does
Market Instruments including not include cash and money market
securities issued by the U.S. instruments in margin or other
government and agencies segregated accounts held against
thereof, bankers' acceptances, exposure achieved through
commercial paper, bank derivative instruments ("equitized
certificates of deposit and cash").
repurchase agreements
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term credits
necessary for clearance of
transactions.
SHORT SALES OF SECURITIES - Except when such sales are
"against-the-box".
BORROWING MONEY - Except that the Fund may borrow
up to 20% of its net assets from
banks temporarily for the payment
of redemptions or settlement of
securities transactions, but not
as a leveraged investment
strategy.
- ------------
(1) Investment in these instruments may be limited by restrictions
described below.
(2) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the
Fund's exposure to the relevant market or security through direct
investments and through derivative instruments will be considered.
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<PAGE> 163
UNDERWRITING SECURITIES - Except to the extent that the
Fund is deemed an underwriter for
securities law purposes in
connection with disposition of
portfolio investments.
MAKING LOANS - Except by way of purchasing of
debt obligations, repurchase
agreements and securities
lending. Fund may loan securities
valued at up to 33 1/3% of its
total assets.
PLEDGING, HYPOTHECATING OR - Except that collateral
MORTGAGING FUND ASSETS arrangements with respect to swap
agreements, the writing of
options, stock index, interest
rate, currency or other futures,
options on futures contracts and
collateral arrangements with
respect to initial and variation
margin are not deemed to be a
pledge or other encumbrance of
assets. The deposit of securities
or cash or cash equivalents in
escrow in connection with the
writing of covered call or put
options, respectively is also not
deemed to be a pledge or
encumbrance.
SELLING UNCOVERED PUT AND CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
PARTICIPATING IN SOFT DOLLAR ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES - No more than 5% of the Fund's
net assets will be invested in
time premiums on options on
particular securities (as opposed
to options on indexes).
- Put and call options written by
a Fund must be covered.
ILLIQUID SECURITIES - No more than 15% of the Fund's
net assets will be invested in
illiquid securities. This
includes restricted securities
(except that some 144A securities
may be considered liquid by GMO
if there is sufficient market
depth), repurchase agreements
maturing in greater than 7 days,
swap contracts, and other
securities determined by GMO not
to be readily marketable at their
carried value.
INVESTMENT IN INSURANCE COMPANIES - The Fund will not purchase more
than 10% of the total outstanding
voting stock of any insurance
company (including foreign
insurance companies).
INVESTMENT IN SECURITIES ISSUED BY - Equity: The Fund will not
BROKERS, DEALERS, UNDERWRITERS AND purchase more than 5% of any
INVESTMENT ADVISERS class of stock of a broker,
dealer, underwriter or investment
adviser.
- Debt: The Fund may not purchase
more than 10% of any such
company's total outstanding debt
in the aggregate.
- Investment Limits: No more than
5% of the Fund's total assets
will be invested in the
securities of a single broker,
dealer, underwriter or investment
adviser. The net payment
obligation of swap contracts
where one of these types of
companies is the counterparty
also counts for purposes of this
restriction.
- This policy does not apply to
companies that derived less than
15% of revenues from
"securities-related businesses"
during the most recent fiscal
year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - Except for U.S. government
securities, cash, and money
market instruments, the Fund will
not invest more than 5% of its
assets in the
77
<PAGE> 164
securities of a single issue.
- The Fund will not purchase more
than 10% of the outstanding
securities of any issuer.
- The Fund will be invested in the
securities of at least 125
issuers.
CONCENTRATION - No more than 25% of the Fund's
assets will be invested in
securities of issuers in any one
industry.
DERIVATIVE INSTRUMENTS
TYPES OF DERIVATIVES - Futures contracts and related
options on securities indexes.
- Long equity swap contracts:
where the Fund pays a fixed rate
plus the negative performance, if
any, and receives the positive
performance, if any, of an index
or basket of securities.
- Short equity swap contracts:
where the Fund receives a fixed
rate plus the negative
performance, if any, and pays the
positive performance of an index
or basket of securities.
- Contracts for differences:
equity swaps that contain both a
long and short equity component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short
equity futures, related options
and short equity swap contracts
used to hedge against an equity
risk already generally present in
the Fund.(3)
- Anticipatory Hedging: If the
Fund receives or anticipates
significant cash purchase
transactions, the Fund may hedge
market risk (risk of not being
invested in the market) by
purchasing long futures contracts
or entering into long equity swap
contracts to obtain market
exposure until such time as
direct investments can be made
efficiently. Conversely, if the
Fund receives or anticipates a
significant demand for cash
redemptions, the Fund may sell
futures contracts or enter into
short equity swap contracts, to
allow the Fund to dispose of
securities in a more orderly
fashion without the Fund being
exposed to leveraged loss
exposure in the interim.
INVESTMENT - The Fund may use derivative
instruments (particularly long
futures contracts, related
options and long equity swap
contracts) in place of investing
directly in securities. This will
include using equity derivatives
to "equitize" cash balances held
by the Fund. The Fund may also
use long derivatives for
investment in conjunction with
short hedging transactions to
adjust the weights of the Fund's
underlying equity portfolio to a
level the Manager believes is the
optimal exposure to individual
markets, sectors and equities.
RISK MANAGEMENT -
SYNTHETIC SALES AND PURCHASES - The Fund may use equity
futures, related options and
equity swap contracts to adjust
the weight of the Fund to a level
the manager believes is the
optimal exposure to individual
markets, sectors and equities.
Sometimes, such transactions are
used as a precursor to actual
sales and purchases. For example,
if the Fund held a large
proportion of stocks of a
particular market and the Manager
believed that stocks of another
market would outperform such
stocks, the Fund might use a
short futures contract on an
appropriate index (to
synthetically "sell" a portion of
the Fund's
- ------------
(3) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to
specific exposure existing in the Fund (the specific stocks of that
market actually owned by the Fund). The Fund may also seek to remove
specific exposure (e.g., a single stock, small basket or more focused
index of securities expected to do poorly in an otherwise promising
market) relative to general or broad market exposure that exists in the
Fund.
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<PAGE> 165
portfolio) in combination with a
long futures contract on another
index (to synthetically "buy"
exposure to that index). Long and
short equity swap contracts and
contracts for differences may
also be used for these purposes.
Equity derivatives (and
corresponding currency forwards)
used to effect synthetic sales
and purchases will generally be
unwound as actual portfolio
securities are sold and
purchased.
LIMITATIONS ON THE USE OF - There is no limit on the use of
DERIVATIVES derivatives for hedging purposes.
- The face value of derivatives
used for investment purposes will
be limited to 25% of the Fund's
assets. When a currency forward
is used in conjunction with an
equity derivative for investment
purposes, the currency forward
will not be independently counted
for this restriction.
- When long futures contracts and
long equity swaps are used for
investment, an amount of cash or
high quality debt securities
equal to the face value of all
such long derivative positions
will be segregated against such
exposure. However, for purposes
of this restriction, if an
existing long equity exposure is
reduced or eliminated by a short
derivative position, the
combination of the long and short
position will be considered as
cash available to segregate
against a new long derivative
exposure.
- The net long equity exposure of
the Fund, including direct
investment in securities and long
derivative positions, will not
exceed 100% of the Fund's net
assets.
- The aggregate absolute face
value of all futures contracts
and swap contracts (without
regard to sign and assuming no
offset of long and short
positions, and counting both
components of any contract for
differences) will not exceed 100%
of the Fund's assets.
- Except when such instruments
are used for bona fide hedging,
no more than 5% of the Fund's net
assets will be committed to
initial margin on futures
contracts and time premiums on
related options.
- Counterparties used for OTC
derivatives must have a long-term
debt rating of A or higher when
the derivative is entered into.
Occasionally, short-term
derivatives will be entered into
with counterparties that have
only high short-term debt
ratings.
GMO TOBACCO-FREE CORE FUND
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
EQUITY SECURITIES: - At least 65% of the Fund's total assets will be
Common Stocks invested in or exposed to domestic common stocks.
Convertible Securities
- Substantially all of the Fund's total assets
OTHER EQUITY SECURITIES:(4) will be invested in or exposed to equity securities
Depository Receipts (ADRs, GDRs, EDRs) chosen from among the Wilshire 5000 Index and selected
Foreign Issues Traded Principally in the U.S. primarily from Large Cap 1200 issuers which are not
Illiquid Securities Tobacco Producing Issuers (as classified by Ford
144A Securities Investor Services).
Restricted Securities
Futures and Related Options on - Substantially all of the Fund's total assets
Securities indexes will be invested in the securities of at least 125
REITs companies.
Exchange-Traded and OTC Options on securities and
indexes (including writing covered options)
Equity Swap Contracts
Contracts for Differences
</TABLE>
- --------------
(4) Investment in these instruments may be limited by restrictions
described below.
79
<PAGE> 166
The Fund will normally have greater than 95% of its total assets invested
in or exposed to the securities of the two categories above.
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have
Any short-term assets will greater than 5% of its net assets
be invested in cash or High exposed to cash and money market
Quality Money Market instruments. This limitation does
Instruments including not include cash and money market
securities issued by the instruments in margin or other
U.S. government and agencies segregated accounts held against
thereof, bankers' exposure achieved through
acceptances, commercial derivative instruments
paper, bank certificates of ("equitized cash").
deposit and repurchase
agreements.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term credits
necessary for clearance of
transactions.
SHORT SALES OF SECURITIES - Except when such sales are
"against-the-box".
BORROWING MONEY - Except that the Fund may borrow
up to 20% of its net assets from
banks temporarily for the payment
of redemptions or settlement of
securities transactions, but not
as a leveraged investment
strategy.
UNDERWRITING SECURITIES - Except to the extent that the
Fund is deemed an underwriter for
securities law purposes in
connection with disposition of
portfolio investments.
MAKING LOANS - Except by way of purchasing of
debt obligations, repurchase
agreements and securities
lending. Fund may loan securities
valued at up to 33 1/3% of its
total assets.
PLEDGING, HYPOTHECATING OR - Except that collateral
MORTGAGING FUND ASSETS arrangements with respect to swap
agreements, the writing of
options, stock index, interest
rate, currency or other futures,
options on futures contracts and
collateral arrangements with
respect to initial and variation
margin are not deemed to be a
pledge or other encumbrance of
assets. The deposit of securities
or cash or cash equivalents in
escrow in connection with the
writing of covered call or put
options, respectively is also not
deemed to be a pledge or
encumbrance.
SELLING UNCOVERED PUT AND CALL
OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
PARTICIPATING IN SOFT DOLLAR ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES - No more than 5% of the Fund's net
assets will be invested in time
premiums on options on particular
securities (as opposed to options
on indexes)
- Put and call options written by a
Fund must be covered.
ILLIQUID SECURITIES - No more than 15% of the Fund's
net assets will be invested in
illiquid securities. This
includes restricted securities
(except that some 144A securities
may be considered liquid by GMO
if there is sufficient market
depth), repurchase agreements
maturing in greater than 7 days,
swap contracts, and other
securities determined by GMO not
to be readily marketable at their
carried value. Further, the Fund
will not invest in (a) securities
which at the
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<PAGE> 167
time of such investment are not
readily marketable, (b)
securities for which the
disposition is restricted under
federal securities laws, and (c)
repurchase agreements maturing in
greater than 7 days if, as a
result, more than 10% of the
Fund's total assets (taken at
current value) would then be
invested in securities described
in (a), (b) and (c) above.
INVESTMENT IN INSURANCE COMPANIES - The Fund will not purchase more
than 10% of the total outstanding
voting stock of any insurance
company (including foreign
insurance companies).
INVESTMENT IN SECURITIES ISSUED BY - Equity: The Fund will not
BROKERS, DEALERS, UNDERWRITERS AND purchase more than 5% of any
INVESTMENT ADVISERS class of stock of a broker,
dealer, underwriter or investment
adviser.
- Debt: The Fund may not purchase
more than 10% of any such
company's total outstanding debt
in the aggregate.
- Investment Limits: No more than
5% of the Fund's total assets
will be invested in the
securities of a single broker,
dealer, underwriter or investment
adviser. The net payment
obligation of swap contracts
where one of these types of
companies is the counterparty
also counts for purposes of this
restriction.
This policy does not apply to
companies that derived less than
15% of revenues from
"securities-related businesses"
during the most recent fiscal
year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - Except for U.S. government
securities, cash, and money
market instruments, the Fund will
not invest more than 5% of its
assets in the securities of a
single issue.
- The Fund will not purchase more
than 10% of the outstanding
securities of any issuer.
- The Fund will be invested in the
securities of at least 125
issuers.
CONCENTRATION - No more than 25% of the Fund's
assets will be invested in
securities of issuers in any one
industry.
DERIVATIVE INSTRUMENTS
TYPES OF DERIVATIVES - Futures contracts and related
options on securities indexes.
- Long equity swap contracts: where
the Fund pays a fixed rate plus
the negative performance, if any,
and receives the positive
performance, if any, of an index
or basket of securities.
- Short equity swap contracts:
where the Fund receives a fixed
rate plus the negative
performance, if any, and pays the
positive performance of an index
or basket of securities.
- Contracts for differences: equity
swaps that contain both a long
and short equity component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity
futures, related options and
short equity swap contracts used
to hedge against an equity risk
already generally present in the
Fund.(5)
- Anticipatory Hedging: If the Fund
receives or anticipates
significant cash purchase
transactions, the Fund may hedge
market risk (risk of not being
invested in the market) by
purchasing long futures contracts
or entering into
- ----------------
(5) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to
specific exposure existing in the Fund (the specific stocks of that
market actually owned by the Fund). The Fund may also seek to remove
specific exposure (e.g., a single stock, small basket or more focused
index of securities expected to do poorly in an otherwise promising
market) relative to general or broad market exposure that exists in the
Fund.
81
<PAGE> 168
long equity swap contracts to
obtain market exposure until such
time as direct investments can be
made efficiently. Conversely, if
the Fund receives or anticipates
a significant demand for cash
redemptions, the Fund may sell
futures contracts or enter into
short equity swap contracts, to
allow the Fund to dispose of
securities in a more orderly
fashion without the Fund being
exposed to leveraged loss
exposure in the interim.
INVESTMENT - The Fund may use derivative
instruments (particularly long
futures contracts, related
options and long equity swap
contracts) in place of investing
directly in securities. This will
include using equity derivatives
to "equitize" cash balances held
by the Fund. The Fund may also
use long derivatives for
investment in conjunction with
short hedging transactions to
adjust the weights of the Fund's
underlying equity portfolio to a
level the Manager believes is the
optimal exposure to individual
markets, sectors and equities.
RISK MANAGEMENT - - The Fund may use equity futures,
SYNTHETIC SALES AND PURCHASES related options and equity swap
contracts to adjust the weight of
the Fund to a level the manager
believes is the optimal exposure
to individual markets, sectors
and equities. Sometimes, such
transactions are used as a
precursor to actual sales and
purchases. For example, if the
Fund held a large proportion of
stocks of a particular market and
the Manager believed that stocks
of another market would
outperform such stocks, the Fund
might use a short futures
contract on an appropriate index
(to synthetically "sell" a
portion of the Fund's portfolio)
in combination with a long
futures contract on another index
(to synthetically "buy" exposure
to that index). Long and short
equity swap contracts and
contracts for differences may
also be used for these purposes.
Equity derivatives (and
corresponding currency forwards)
used to effect synthetic sales
and purchases will generally be
unwound as actual portfolio
securities are sold and
purchased.
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of
derivatives for hedging purposes.
- The face value of derivatives
used for investment purposes will
be limited to 25% of the Fund's
assets. When a currency forward
is used in conjunction with an
equity derivative for investment
purposes, the currency forward
will not be independently counted
for this restriction.
- When long futures contracts and
long equity swaps are used for
investment, an amount of cash or
high quality debt securities
equal to the face value of all
such long derivative positions
will be segregated against such
exposure. However, for purposes
of this restriction, if an
existing long equity exposure is
reduced or eliminated by a short
derivative position, the
combination of the long and short
position will be considered as
cash available to segregate
against a new long derivative
exposure.
- The net long equity exposure of
the Fund, including direct
investment in securities and long
derivative positions, will not
exceed 100% of the Fund's net
assets.
- The aggregate absolute face
value of all futures contracts
and swap contracts (without
regard to sign and assuming no
offset of long and short
positions, and counting both
components of any contract for
differences) will not exceed 100%
of the Fund's assets.
- Except when such instruments are
used for bona fide hedging, no
more than 5% of the Fund's net
assets will be committed to
initial margin on futures
contracts and time premiums on
related options.
- Counterparties used for OTC
derivatives must have a long-term
debt rating of A or higher when
the derivative is entered into.
Occasionally, short-term
derivatives will be entered into
with counterparties that have
only high short-term debt
ratings.
GMO VALUE FUND
82
<PAGE> 169
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
EQUITY SECURITIES: - At least 65% of the Fund's total assets will be invested in or
Domestic Common Stocks exposed to(7) domestic common stocks.
Convertible Securities - Substantially all of the Fund's total assets will be invested
Securities of Foreign Issuers (traded on in or exposed to equity securities of at least 125 companies chosen
U.S. Exchanges) from among the Wilshire 5000 Index.
- The Fund's total assets will primarily be invested in or exposed
to the "Large Cap 1200".
OTHER EQUITY SECURITIES:(6)
Depository Receipts
Illiquid Securities
144A Securities
Restricted Securities
Futures and Related Options on
Securities Indexes
REITs
Exchange-Traded and OTC Options on
Securities and Indexes
(including writing covered options)
Equity Swap Contracts
Contracts for Differences
</TABLE>
The Fund will normally have greater than 95% of its net assets invested in
or exposed to the securities of the two categories above.
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have
Any short-term assets will greater than 5% of its net assets
be invested in cash or High exposed to cash and money market
Quality Money Market instruments. This limitation does
Instruments including not include cash and money market
securities issued by the instruments in margin or other
U.S. government and agencies segregated accounts held against
thereof, bankers' exposure achieved through
acceptances, commercial derivative instruments
paper, bank certificates of ("equitized cash").
deposit and repurchase
agreements
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term credits
necessary for clearance of
transactions.
SHORT SALES OF SECURITIES - Except when such sales are
"against-the-box".
BORROWING MONEY - Except that the Fund may borrow
up to 20% of its net assets from
banks temporarily for the payment
of redemptions or settlement of
securities transactions, but not
as a leveraged investment
strategy.
UNDERWRITING SECURITIES - Except to the extent that the
Fund is deemed an underwriter for
securities law purposes in
connection with disposition of
portfolio investments.
MAKING LOANS - Except by way of purchasing of
debt obligations, repurchase
agreements and securities
lending. Fund may loan securities
valued at up to 33% of its total
assets.
PLEDGING, HYPOTHECATING OR - Except that collateral
arrangements with respect to swap
agreements, the
- -----------------
(6) Investment in these instruments may be limited by restrictions
described below.
(7) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the
Fund's exposure to the relevant market or security through direct
investments and through derivative instruments will be considered.
83
<PAGE> 170
MORTGAGING FUND ASSETS writing of options, stock index,
interest rate, currency or other
futures, options on futures
contracts and collateral
arrangements with respect to
initial and variation margin are
not deemed to be a pledge or
other encumbrance of assets. The
deposit of securities or cash or
cash equivalents in escrow in
connection with the writing of
covered call or put options,
respectively, is also not deemed
to be a pledge or encumbrance.
SELLING UNCOVERED PUT AND CALL
OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
PARTICIPATING IN SOFT DOLLAR ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES - No more than 5% of the Fund's net
assets will be invested in time
premiums on options on particular
securities (as opposed to options
on indexes).
- Put and call options written by
a Fund must be covered.
ILLIQUID SECURITIES - No more than 15% of the Fund's
net assets will be invested in
illiquid securities. This
includes restricted securities
(except that some 144A securities
may be considered liquid by GMO
if there is sufficient market
depth), repurchase agreements
maturing in greater than 7 days,
swap contracts, and other
securities determined by GMO not
to be readily marketable at their
carried value.
INVESTMENT IN INSURANCE COMPANIES - The Fund will not purchase more
than 10% of the total outstanding
voting stock of any insurance
company (including foreign
insurance companies).
INVESTMENT IN SECURITIES ISSUED BY - Equity: The Fund will not
BROKERS, DEALERS, UNDERWRITERS AND purchase more than 5% of any
INVESTMENT ADVISERS class of stock of a broker,
dealer, underwriter or investment
adviser.
- Debt: The Fund may not purchase
more than 10% of any such
company's total outstanding debt
in the aggregate.
- Investment Limits: No more than
5% of the Fund's total assets
will be invested in the
securities of a single broker,
dealer, underwriter or investment
adviser. The net payment
obligation of swap contracts
where one of these types of
companies is the counterparty
also counts for purposes of this
restriction.
- This policy does not apply to
companies that derived less than
15% of revenues from
"securities-related businesses"
during the most recent fiscal
year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION
- Except for U.S. government
securities, cash, and money
market instruments, the Fund will
not invest more than 5% of its
assets in the securities of a
single issue.
- The Fund will not purchase more
than 10% of the outstanding
securities of any issuer.
- The Fund will be invested in the
securities of at least 125
issuers.
CONCENTRATION - No more than 25% of the Fund's
assets will be invested in
securities of issuers in any one
industry.
DERIVATIVE INSTRUMENTS
TYPES OF DERIVATIVES - Futures contracts and related
options on securities indexes.
84
<PAGE> 171
- Long equity swap contracts: where
the Fund pays a fixed rate plus
the negative performance, if any,
and receives the positive
performance, if any, of an index
or basket of securities.
- Short equity swap contracts:
where the Fund receives a fixed
rate plus the negative
performance, if any, and pays the
positive performance of an index
or basket of securities.
- Contracts for differences: equity
swaps that contain both a long
and short equity component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity
futures, related options and
short equity swap contracts used
to hedge against an equity risk
already generally present in the
Fund.(8)
- Anticipatory Hedging: If the
Fund receives or anticipates
significant cash purchase
transactions, the Fund may hedge
market risk (risk of not being
invested in the market) by
purchasing long futures contracts
or entering into long equity swap
contracts to obtain market
exposure until such time as
direct investments can be made
efficiently. Conversely, if the
Fund receives or anticipates a
significant demand for cash
redemptions, the Fund may sell
futures contracts or enter into
short equity swap contracts, to
allow the Fund to dispose of
securities in a more orderly
fashion without the Fund being
exposed to leveraged loss
exposure in the interim.
INVESTMENT - The Fund may use derivative
instruments (particularly long
futures contracts, related
options and long equity swap
contracts) in place of investing
directly in securities. This will
include using equity derivatives
to "equitize" cash balances held
by the Fund. The Fund may also
use long derivatives for
investment in conjunction with
short hedging transactions to
adjust the weights of the Fund's
underlying equity portfolio to a
level the Manager believes is the
optimal exposure to individual
markets, sectors and equities.
RISK MANAGEMENT - - The Fund may use equity futures,
SYNTHETIC SALES AND PURCHASES related options and equity swap
contracts to adjust the weight of
the Fund to a level the manager
believes is the optimal exposure
to individual markets, sectors
and equities. Sometimes, such
transactions are used as a
precursor to actual sales and
purchases. For example, if the
Fund held a large proportion of
stocks of a particular market and
the Manager believed that stocks
of another market would
outperform such stocks, the Fund
might use a short futures
contract on an appropriate index
(to synthetically "sell" a
portion of the Fund's portfolio)
in combination with a long
futures contract on another index
(to synthetically "buy" exposure
to that index). Long and short
equity swap contracts and
contracts for differences may
also be used for these purposes.
Equity derivatives (and
corresponding currency forwards)
used to effect synthetic sales
and purchases will generally be
unwound as actual portfolio
securities are sold and
purchased.
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of
derivatives for hedging purposes.
- The face value of derivatives
used for investment purposes will
be limited to 25% of the Fund's
assets. When a currency forward
is used in conjunction with an
equity derivative for investment
purposes, the currency forward
will not be independently counted
for this restriction.
- When long futures contracts and
long equity swaps are used for
investment, an amount of cash or
high quality debt securities
equal to the face value of all
such long derivative positions
will be segregated against such
exposure. However, for purposes
of this restriction, if an
existing long equity exposure is
reduced or eliminated by a short
derivative position, the
combination of the
- ---------------
(8) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to
specific exposure existing in the Fund (the specific stocks of that
market actually owned by the Fund). The Fund may also seek to remove
specific exposure (e.g., a single stock, small basket or more focused
index of securities expected to do poorly in an otherwise promising
market) relative to general or broad market exposure that exists in the
Fund.
85
<PAGE> 172
long and short position will be
considered as cash available to
segregate against a new long
derivative exposure.
- The net long equity exposure of
the Fund, including direct
investment in securities and long
derivative positions, will not
exceed 100% of the Fund's net
assets.
- The aggregate absolute face value
of all futures contracts and swap
contracts (without regard to sign
and assuming no offset of long
and short positions, and counting
both components of any contract
for differences) will not exceed
100% of the Fund's assets.
- Except when such instruments are
used for bona fide hedging, no
more than 5% of the Fund's net
assets will be committed to
initial margin on futures
contracts and time premiums on
related options.
- Counterparties used for OTC
derivatives must have a long-term
debt rating of A or higher when
the derivative is entered into.
Occasionally, short-term
derivatives will be entered into
with counterparties that have
only high short-term debt
ratings.
GMO GROWTH FUND
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
EQUITY SECURITIES: - At least 65% of the Fund's total assets will be invested
Domestic Common Stocks in or exposed to(10) domestic common stocks.
Convertible Securities - Substantially all of the Fund's total assets will be
Securities of Foreign Issuers (traded on invested in or exposed to equity securities of at least 125
U.S. Exchanges) companies chosen from among the Wilshire 5000 Index .
- The Fund's assets will primarily be invested in or
exposed to the "Large Cap 1200".
</TABLE>
OTHER EQUITY SECURITIES:(9)
Depository Receipts
Illiquid Securities
144A Securities
Restricted Securities
Futures and Related Options on
Securities Indexes
REITs
Exchange-Traded and OTC options on
Securities and Indexes
(including writing covered options)
Equity Swap Contracts
Contracts for Differences
The Fund will normally have greater than 95% of its net assets invested in
or exposed to the securities of the two categories above.
CASH AND MONEY MARKET INSTRUMENTS
Any short-term assets will - The Fund will not normally have
be invested in cash or High greater than 5% of its net assets
Quality Money Market exposed to cash and money market
Instruments including instruments. This limitation does
securities issued by the not include cash and money market
U.S. government and agencies instruments in margin or other
thereof, bankers' segregated accounts held against
acceptances, commercial exposure achieved through
paper, bank certificates of derivative instruments
deposit and repurchase ("equitized cash").
- ---------------
(9) Investment in these instruments may be limited by restrictions
described below.
(10) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the
Fund's exposure to the relevant market or security through direct
investments and through derivative instruments will be considered.
86
<PAGE> 173
agreements
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term credits
necessary for clearance of
transactions.
SHORT SALES OF SECURITIES - Except when such sales are
"against-the-box".
BORROWING MONEY - Except that the Fund may borrow
up to 20% of its net assets from
banks temporarily for the payment
of redemptions or settlement of
securities transactions, but not
as a leveraged investment
strategy.
UNDERWRITING SECURITIES - Except to the extent that the
Fund is deemed an underwriter for
securities law purposes in
connection with disposition of
portfolio investments.
MAKING LOANS - Except by way of purchasing of
debt obligations, repurchase
agreements and securities
lending. Fund may loan securities
valued at up to 33% of its total
assets.
PLEDGING, HYPOTHECATING OR - Except that collateral
MORTGAGING FUND ASSETS arrangements with respect to swap
agreements, the writing of
options, stock index, interest
rate, currency or other futures,
options on futures contracts and
collateral arrangements with
respect to initial and variation
margin are not deemed to be a
pledge or other encumbrance of
assets. The deposit of securities
or cash or cash equivalents in
escrow in connection with the
writing of covered call or put
options, respectively is also not
deemed to be a pledge or
encumbrance.
SELLING UNCOVERED OUT AND CALL
OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
PARTICIPATING IN SOFT DOLLAR ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES - No more than 5% of the Fund's net
assets will be invested in time
premiums on options on particular
securities (as opposed to options
on indexes).
- Put and call options written by a
Fund must be covered.
ILLIQUID SECURITIES - No more than 15% of the Fund's
net assets will be invested in
illiquid securities. This
includes restricted securities
(except that some 144A securities
may be considered liquid by GMO
if there is sufficient market
depth), repurchase agreements
maturing in greater than 7 days,
swap contracts, and other
securities determined by GMO not
to be readily marketable at their
carried value.
INVESTMENT IN INSURANCE COMPANIES - The Fund will not purchase more
than 10% of the total outstanding
voting stock of any insurance
company (including foreign
insurance companies).
INVESTMENT IN SECURITIES ISSUED BY - Equity: The Fund will not
BROKERS, DEALERS, UNDERWRITERS AND purchase more than 5% of any
INVESTMENT ADVISERS class of stock of a broker,
dealer, underwriter or investment
adviser.
- Debt: The Fund may not purchase
more than 10% of any such
company's total outstanding debt
in the aggregate.
- Investment Limits: No more than
5% of the Fund's total assets
will be invested in the
securities of a single broker,
dealer, underwriter or investment
adviser. The net payment
obligation of swap contracts
where
87
<PAGE> 174
one of these types of companies
is the counterparty also counts
for purposes of this restriction.
This policy does not apply to
companies that derived less than
15% of revenues from
"securities-related businesses"
during the most recent fiscal
year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - Except for U.S. government
securities, cash, and money
market instruments, the Fund will
not invest more than 5% of its
assets in the securities of a
single issue.
- The Fund will not purchase more
than 10% of the outstanding
securities of any issuer.
- The Fund will be invested in the
securities of at least 125
issuers.
CONCENTRATION - No more than 25% of the Fund's
assets will be invested in
securities of issuers in any one
industry.
DERIVATIVE INSTRUMENTS
TYPES OF DERIVATIVES - Futures contracts and related
options on securities indexes.
- Long equity swap contracts:
where the Fund pays a fixed rate
plus the negative performance, if
any, and receives the positive
performance, if any, of an index
or basket of securities.
- Short equity swap contracts:
where the Fund receives a fixed
rate plus the negative
performance, if any, and pays the
positive performance of an index
or basket of securities.
Contracts for differences: equity
swaps that contain both a long
and short equity component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short
equity futures, related options
and short equity swap contracts
used to hedge against an equity
risk already generally present in
the Fund.(11)
- Anticipatory Hedging: If the Fund
receives or anticipates
significant cash purchase
transactions, the Fund may hedge
market risk (risk of not being
invested in the market) by
purchasing long futures contracts
or entering into long equity swap
contracts to obtain market
exposure until such time as
direct investments can be made
efficiently. Conversely, if the
Fund receives or anticipates a
significant demand for cash
redemptions, the Fund may sell
futures contracts or enter into
short equity swap contracts, to
allow the Fund to dispose of
securities in a more orderly
fashion without the Fund being
exposed to leveraged loss
exposure in the interim.
INVESTMENT - The Fund may use derivative
instruments (particularly long
futures contracts, related
options and long equity swap
contracts) in place of investing
directly in securities. This will
include using equity derivatives
to "equitize" cash balances held
by the Fund. The Fund may also
use long derivatives for
investment in conjunction with
short hedging transactions to
adjust the weights of the Fund's
underlying equity portfolio to a
level the Manager believes is the
optimal exposure to individual
markets, sectors and equities.
- ------------------
(11) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to
specific exposure existing in the Fund (the specific stocks of that
market actually owned by the Fund). The Fund may also seek to remove
specific exposure (e.g., single stock, small basket or more focused
index of securities expected to do poorly in an otherwise promising
market) relative to general or broad market exposure that exists in the
Fund.
88
<PAGE> 175
RISK MANAGEMENT - SYNTHETIC SALES
AND PURCHASES - The Fund may use equity futures,
related options and equity swap
contracts to adjust the weight of
the Fund to a level the manager
believes is the optimal exposure
to individual markets, sectors
and equities. Sometimes, such
transactions are used as a
precursor to actual sales and
purchases. For example, if the
Fund held a large proportion of
stocks of a particular market and
the Manager believed that stocks
of another market would
outperform such stocks, the Fund
might use a short futures
contract on an appropriate index
(to synthetically "sell" a
portion of the Fund's portfolio)
in combination with a long
futures contract on another index
(to synthetically "buy" exposure
to that index). Long and short
equity swap contracts and
contracts for differences may
also be used for these purposes.
Equity derivatives (and
corresponding currency forwards)
used to effect synthetic sales
and purchases will generally be
unwound as actual portfolio
securities are sold and
purchased.
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of
derivatives for hedging purposes.
- The face value of derivatives
used for investment purposes will
be limited to 25% of the Fund's
assets. When a currency forward
is used in conjunction with an
equity derivative for investment
purposes, the currency forward
will not be independently counted
for this restriction.
- When long futures contracts and
long equity swaps are used for
investment, an amount of cash or
high quality debt securities
equal to the face value of all
such long derivative positions
will be segregated against such
exposure. However, for purposes
of this restriction, if an
existing long equity exposure is
reduced or eliminated by a short
derivative position, the
combination of the long and short
position will be considered as
cash available to segregate
against a new long derivative
exposure.
- The net long equity exposure of
the Fund, including direct
investment in securities and long
derivative positions, will not
exceed 100% of the Fund's net
assets.
- The aggregate absolute face value
of all futures contracts and swap
contracts (without regard to sign
and assuming no offset of long
and short positions, and counting
both components of any contract
for differences) will not exceed
100% of the Fund's assets.
- Except when such instruments are
used for bona fide hedging, no
more than 5% of the Fund's net
assets will be committed to
initial margin on futures
contracts and time premiums on
related options.
- Counterparties used for OTC
derivatives must have a long-term
debt rating of A or higher when
the derivative is entered into.
Occasionally, short-term
derivatives will be entered into
with counterparties that have
only high short-term debt
ratings.
GMO SMALL CAP VALUE FUND
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
EQUITY SECURITIES: - At least 65% of the Fund's total assets will be invested in or
Domestic Common Stocks exposed to (13) domestic common stocks.
Convertible Securities - Under normal market conditions, at least 65% of the Fund's
Securities of Foreign Issuers (traded on total assets will be invested in or exposed to the securities of
U.S. Exchanges) issuers with market capitalizations believed to be equal to or less
than $1.5 billion.
- The Fund's total assets will be primarily invested in domestic
OTHER EQUITY SECURITIES:(12) "second tier companies" which are companies whose equity
capitalization at the time of
</TABLE>
- --------------------
(12) Investment in these instruments may be limited by restrictions
described below.
(13) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the
Fund's exposure to the relevant market or security through direct
investments and through derivative instruments will be considered.
89
<PAGE> 176
<TABLE>
<S> <C>
Depository Receipts investment ranks in the lower two-thirds of the 1800 companies
Illiquid Securities with the largest equity capitalization whose securities are
144A Securities listed on a United States securities exchange.
Restricted Securities
Futures and Related Options on
Securities Indexes
REITs
Exchange-Traded and OTC Options on
Securities and Indexes
(including writing covered options)
Equity Swap Contracts
Contracts for Differences
Convertible Bonds
Convertible Preferred Stocks
Warrants
</TABLE>
The Fund will normally have greater than 95% of its net assets invested in
or exposed to the securities of the two categories above.
CASH AND MONEY MARKET INSTRUMENTS
Any short-term assets will be invested in cash or High Quality Money Market
Instruments including securities issued by the U.S. government and agencies
thereof, bankers' acceptances, commercial paper, bank certificates of deposit
and repurchase agreements
- The Fund will not normally have greater than 5% of its net assets exposed
to cash and money market instruments. This limitation does not include
cash and money market instruments in margin or other segregated accounts
held against exposure achieved through derivative instruments ("equitized
cash").
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN
- Except for short-term credits necessary for clearance of transactions.
SHORT SALES OF SECURITIES
- Except when such sales are "against-the-box".
BORROWING MONEY
- Except that the Fund may borrow up to 20% of its net assets from banks
temporarily for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES
- Except to the extent that the Fund is deemed an underwriter for securities
law purposes in connection with disposition of portfolio investments.
- Except by way of purchasing of debt obligations, repurchase agreements and
securities lending. Fund may loan securities valued at up to 33% of its
total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING FUND ASSETS
- Except that collateral arrangements with respect to swap agreements, the
writing of options, stock index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with respect to
initial and variation margin are not deemed to be a pledge or other
encumbrance of assets. The deposit of securities or cash or cash
equivalents in escrow in connection with the writing of covered call or
put options, respectively is also not deemed to be a pledge or
encumbrance.
SELLING UNCOVERED PUT AND CALL
OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
90
<PAGE> 177
PARTICIPATING IN SOFT DOLLAR ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES
- No more than 5% of the Fund's net assets will be invested in time premiums
on options on particular securities (as opposed to options on indexes)
- Put and call options written by a Fund must be covered.
ILLIQUID SECURITIES
- No more than 15% of the Fund's net assets will be invested in illiquid
securities. This includes restricted securities (except that some 144A
securities may be considered liquid by GMO if there is sufficient market
depth), repurchase agreements maturing in greater than 7 days, swap
contracts, and other securities determined by GMO not to be readily
marketable at their carried value.
WARRANTS
- Aggregate value can not exceed 5% of the Fund's net assets; not more than
2% of the Fund's net assets may be invested in warrants not listed on NYSE
or AMEX.
INVESTMENT IN INSURANCE COMPANIES
- The Fund will not purchase more than 10% of the total outstanding voting
stock of any insurance company (including foreign insurance companies).
INVESTMENT IN SECURITIES ISSUED BY BROKERS, DEALERS, UNDERWRITERS AND
INVESTMENT ADVISERS
- Equity: The Fund will not purchase more than 5% of any class of stock of a
broker, dealer, underwriter or investment adviser.
- Debt: The Fund may not purchase more than 10% of any such company's total
outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets will be
invested in the securities of a single broker, dealer, underwriter or
investment adviser. The net payment obligation of swap contracts where one
of these types of companies is the counterparty also counts for purposes
of this restriction.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent fiscal
year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION
- Except for U.S. government securities, cash, and money market instruments,
the Fund will not invest more than 5% of its assets in the securities of a
single issue.
- The Fund will not purchase more than 10% of the outstanding securities of
any issuer.
- The Fund will be invested in the securities of at least 125 issuers.
CONCENTRATION
- No more than 25% of the Fund's assets will be invested in securities of
issuers in any one industry.
DERIVATIVE INSTRUMENTS
TYPES OF DERIVATIVES
- Futures contracts and related options on securities indexes.
- Long equity swap contracts: where the Fund pays a fixed rate plus the
negative performance, if any, and receives the positive performance, if
any, of an index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed rate plus the
negative performance, if any, and pays the positive performance of an
index or basket of securities.
- Contracts for differences: equity swaps that contain both a long and short
equity component.
91
<PAGE> 178
USES OF DERIVATIVES
HEDGING
- Traditional Hedging: Short equity futures, related options and short
equity swap contracts used to hedge against an equity risk already
generally present in the Fund.(14)
- Anticipatory Hedging: If the Fund receives or anticipates significant cash
purchase transactions, the Fund may hedge market risk (risk of not being
invested in the market) by purchasing long futures contracts or entering
into long equity swap contracts to obtain market exposure until such time
as direct investments can be made efficiently. Conversely, if the Fund
receives or anticipates a significant demand for cash redemptions, the
Fund may sell futures contracts or enter into short equity swap contracts,
to allow the Fund to dispose of securities in a more orderly fashion
without the Fund being exposed to leveraged loss exposure in the interim.
INVESTMENT
- The Fund may use derivative instruments (particularly long futures
contracts, related options and long equity swap contracts) in place of
investing directly in securities. This will include using equity derivatives
to "equitize" cash balances held by the Fund. The Fund may also use long
derivatives for investment in conjunction with short hedging transactions to
adjust the weights of the Fund's underlying equity portfolio to a level the
Manager believes is the optimal exposure to individual markets, sectors and
equities.
RISK MANAGEMENT - SYNTHETIC SALES AND PURCHASES
- The Fund may use equity futures, related options and equity swap contracts
to adjust the weight of the Fund to a level the manager believes is the
optimal exposure to individual markets, sectors and equities. Sometimes,
such transactions are used as a precursor to actual sales and purchases.
For example, if the Fund held a large proportion of stocks of a particular
market and the Manager believed that stocks of another market would
outperform such stocks, the Fund might use a short futures contract on an
appropriate index (to synthetically "sell" a portion of the Fund's
portfolio) in combination with a long futures contract on another index
(to synthetically "buy" exposure to that index). Long and short equity
swap contracts and contracts for differences may also be used for these
purposes. Equity derivatives (and corresponding currency forwards) used to
effect synthetic sales and purchases will generally be unwound as actual
portfolio securities are sold and purchased.
LIMITATIONS ON THE USE OF DERIVATIVES
- There is no limit on the use of derivatives for hedging purposes.
- The face value of derivatives used for investment purposes will be limited
to 25% of the Fund's assets. When a currency forward is used in
conjunction with an equity derivative for investment purposes, the
currency forward will not be independently counted for this restriction.
- When long futures contracts and long equity swaps are used for investment,
an amount of cash or high quality debt securities equal to the face value
of all such long derivative positions will be segregated against such
exposure. However, for purposes of this restriction, if an existing long
equity exposure is reduced or eliminated by a short derivative position,
the combination of the long and short position will be considered as cash
available to segregate against a new long derivative exposure.
- The net long equity exposure of the Fund, including direct investment in
securities and long derivative positions, will not exceed 100% of the
Fund's net assets.
- The aggregate absolute face value of all futures contracts and swap
contracts (without regard to sign and assuming no offset of long and short
positions, and counting both components of any contract for differences)
will not exceed 100% of the Fund's assets.
- -----------------
(14) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to
specific exposure existing in the Fund (the specific stocks of that
market actually owned by the Fund). The Fund may also seek to remove
specific exposure (e.g., a single stock, small basket or more focused
index of securities expected to do poorly in an otherwise promising
market) relative to general or broad market exposure that exists in the
Fund.
92
<PAGE> 179
- Except when such instruments are used for bona fide hedging, no more than
5% of the Fund's net assets will be committed to initial margin on futures
contracts and time premiums on related options.
- Counterparties used for OTC derivatives must have a long-term debt rating
of A or higher when the derivative is entered into. Occasionally,
short-term derivatives will be entered into with counterparties that have
only high short-term debt ratings.
GMO SMALL CAP GROWTH FUND
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
EQUITY SECURITIES: - At least 65% of the Fund's total assets will be invested in or
Domestic Common Stocks exposed to (16) domestic common stocks.
Convertible Securities - Under normal market conditions, at least 65% of the Fund's
Securities of Foreign Issuers (traded on total assets will be invested in or exposed to the securities of
U.S. Exchanges) issuers with market capitalizations believed to be equal to or less
than $1.5 billion.
- The Fund's total assets will be primarily invested in domestic
OTHER EQUITY SECURITIES:(15) "second tier companies" which are companies whose equity
Depository Receipts capitalization at the time of investment ranks in the lower
Illiquid Securities two-thirds of the 1800 companies with the largest equity
144A Securities capitalization whose securities are listed on a United States
Restricted Securities securities exchange.
Futures and Related Options on
Securities Indexes
REITs
Exchange-Traded and OTC Options on
Securities and Indexes
(including writing covered options)
Equity Swap Contracts
Contracts for Differences
Convertible Bonds
Convertible Preferred Stocks
Warrants
</TABLE>
The Fund will normally have greater than 95% of its net assets invested in
or exposed to the securities of the two categories above.
CASH AND MONEY MARKET INSTRUMENTS
Any short-term assets will be invested in cash or High Quality Money Market
Instruments including securities issued by the U.S. Government and Agencies
Bankers' Acceptances, Commercial Paper, Bank Certificates of Deposit and
Repurchase Agreements
- The Fund will not normally have greater than 5% of its net assets exposed
to cash and money market instruments. This limitation does not include
cash and money market instruments in margin or other segregated accounts
held against exposure achieved through derivative thereof, instruments
("equitized cash").
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN
- Except for short-term credits necessary for clearance of transactions.
- ---------------
(15) Investment in these instruments may be limited by restrictions
described below.
(16) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the
Fund's exposure to the relevant market or security through direct
investments and through derivative instruments will be considered.
93
<PAGE> 180
SHORT SALES OF SECURITIES
- Except when such sales are "against-the-box".
BORROWING MONEY
- Except that the Fund may borrow up to 20% of its net assets from banks
temporarily for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES
- Except to the extent that the Fund is deemed an underwriter for securities
law purposes in connection with disposition of portfolio investments.
MAKING LOANS
- Except by way of purchasing of debt obligations, repurchase agreements and
securities lending. Fund may loan securities valued at up to 33 1/3% of
its total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING FUND ASSETS
- Except that collateral arrangements with respect to swap agreements, the
writing of options, stock index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with respect to
initial and variation margin are not deemed to be a pledge or other
encumbrance of assets. The deposit of securities or cash or cash
equivalents in escrow in connection with the writing of covered call or
put options, respectively is also not deemed to be a pledge or
encumbrance.
SELLING UNCOVERED PUT AND CALL
OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
PARTICIPATING IN SOFT DOLLAR ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES
- No more than 5% of the Fund's net assets will be invested in time premiums
on options on particular securities (as opposed to options on indexes).
- Put and call options written by a Fund must be covered.
ILLIQUID SECURITIES
- No more than 15% of the Fund's net assets will be invested in illiquid
securities. This includes restricted securities (except that some 144A
securities may be considered liquid by GMO if there is sufficient market
depth), repurchase agreements maturing in greater than 7 days, swap
contracts, and other securities determined by GMO not to be readily
marketable at their carried value.
WARRANTS
- Aggregate value can not exceed 5% of the Fund's net assets; not more than
2% of the Fund's net assets may be invested in warrants not listed on NYSE
or AMEX.
INVESTMENT IN INSURANCE COMPANIES
- The Fund will not purchase more than 10% of the total outstanding voting
stock of any insurance company (including foreign insurance companies).
INVESTMENT IN SECURITIES ISSUED BY BROKERS, DEALERS, UNDERWRITERS AND
INVESTMENT ADVISERS
- Equity: The Fund will not purchase more than 5% of any class of stock of a
broker, dealer, underwriter or investment adviser.
- Debt: The Fund may not purchase more than 10% of any such company's total
outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets will be
invested in the securities of a single broker, dealer, underwriter or
investment adviser. The net payment obligation of swap contracts where one
of these types of companies is the counterparty also counts for purposes
of this restriction.
This policy does not apply to companies that derived less than 15% of
revenues
94
<PAGE> 181
from "securities-related businesses" during the most recent fiscal year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION
- Except for U.S. government securities, cash, and money market instruments,
the Fund will not invest more than 5% of its assets in the securities of a
single issue.
- The Fund will not purchase more than 10% of the outstanding securities of
any issuer.
- The Fund will be invested in the securities of at least 125 issuers.
CONCENTRATION
- No more than 25% of the Fund's assets will be invested in securities of
issuers in any one industry.
DERIVATIVE INSTRUMENTS
TYPES OF DERIVATIVES
- Futures contracts and related options on securities indexes.
- Long equity swap contracts: where the Fund pays a fixed rate plus the
negative performance, if any, and receives the positive performance, if
any, of an index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed rate plus the
negative performance, if any, and pays the positive performance of an
index or basket of securities.
- Contracts for differences: equity swaps that contain both a long and short
equity component.
USES OF DERIVATIVES
HEDGING
- Traditional Hedging: Short equity futures, related options and short
equity swap contracts used to hedge against an equity risk already
generally present in the Fund. (17)
- Anticipatory Hedging: If the Fund receives or anticipates significant cash
purchase transactions, the Fund may hedge market risk (risk of not being
invested in the market) by purchasing long futures contracts or entering
into long equity swap contracts to obtain market exposure until such time
as direct investments can be made efficiently. Conversely, if the Fund
receives or anticipates a significant demand for cash redemptions, the
Fund may sell futures contracts or enter into short equity swap contracts,
to allow the Fund to dispose of securities in a more orderly fashion
without the Fund being exposed to leveraged loss exposure in the interim.
RISK MANAGEMENT - SYNTHETIC SALES AND PURCHASES
- The Fund may use equity futures, related options and equity swap contracts
to adjust the weight of the Fund to a level the manager believes is the
optimal exposure to individual markets, sectors and equities. Sometimes,
such transactions are used as a precursor to actual sales and purchases.
For example, if the Fund held a large proportion of stocks of a particular
market and the Manager believed that stocks of another market would
outperform such stocks, the Fund might use a short futures contract on an
appropriate index (to synthetically "sell" a portion of the Fund's
portfolio) in combination with a long futures contract on another index
(to synthetically "buy" exposure to that index). Long and short equity
swap contracts and contracts for differences may also be used for these
purposes. Equity derivatives (and corresponding currency forwards) used to
effect synthetic sales and purchases will generally be unwound as actual
portfolio securities are sold and purchased.
LIMITATIONS ON THE USE OF DERIVATIVES
- There is no limit on the use of derivatives for hedging purposes.
- ----------------
(17) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to
specific exposure existing in the Fund (the specific stocks of that
market actually owned by the Fund). The Fund may also seek to remove
specific exposure (e.g., a single stock, small basket or more focused
index of securities expected to do poorly in an otherwise promising
market) relative to general or broad market exposure that exists in the
Fund.
95
<PAGE> 182
- The face value of derivatives used for investment purposes will be limited
to 25% of the Fund's assets. When a currency forward is used in
conjunction with an equity derivative for investment purposes, the
currency forward will not be independently counted for this restriction.
- When long futures contracts and long equity swaps are used for investment,
an amount of cash or high quality debt securities equal to the face value
of all such long derivative positions will be segregated against such
exposure. However, for purposes of this restriction, if an existing long
equity exposure is reduced or eliminated by a short derivative position,
the combination of the long and short position will be considered as cash
available to segregate against a new long derivative exposure.
- The net long equity exposure of the Fund, including direct investment in
securities and long derivative positions, will not exceed 100% of the
Fund's net assets.
- The aggregate absolute face value of all futures contracts and swap
contracts (without regard to sign and assuming no offset of long and short
positions, and counting both components of any contract for differences)
will not exceed 100% of the Fund's assets.
- Except when such instruments are used for bona-fide hedging, no more than
5% of the Fund's net assets will be committed to initial margin on futures
contracts and time premiums on related options.
- Counterparties used for OTC derivatives must have a long-term debt rating
of A or higher when the derivative is entered into. Occasionally,
short-term derivatives will be entered into with counterparties that have
only high short-term debt ratings.
GMO REIT FUND
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
REITS (REAL ESTATE INVESTMENT TRUSTS): - At least 65% of the Fund's total assets will be
Equity REITs invested in or exposed to (19) securities of REITs,
Mortgage REITs although the Fund generally intends to invest a
Hybrid REITs greater portion of its assets in REIT securities.
EQUITY SECURITIES:(18)
Common Stock
Preferred Stock
Depository Receipts: ADRs, GDRs, EDRs
Illiquid Securities
144A Securities
Restricted Securities
Futures and Related Options on
Securities Indexes and Interest Rates
Exchange-Traded and OTC Options on
Securities and Indexes (including
writing covered options)
Interest Rate and Currency Swap Contracts
Contracts for Differences
Interest Rate Caps, Floors and Collars
</TABLE>
OTHER SECURITIES:(1)
- --------------------
(18) Investment in these instruments may be limited by restrictions
described below.
(19) The words "exposed to" as used in these guideline mean that, for
purposes of the relevant requirement or restriction, the total of the
Fund's exposure to the relevant market or security through direct
investments and through derivative instruments will be considered.
96
<PAGE> 183
Asset-Backed Securities
Mortgage Backed, CMO's, Strips and
Residuals
Adjustable Rate Securities
Lower Rated Fixed Income Securities (Junk
Bonds)
Zero Coupon Securities
Indexed Securities
Firm Commitments (with banks or broker
dealers)
Reverse Repurchase Agreements
Dollar Roll Agreements
The Fund will normally have greater than 95% of its net assets invested in
or exposed to the securities of the three categories above.
CASH AND MONEY MARKET INSTRUMENTS
- Any short-term assets will be invested in cash or High Quality Money
Market Instruments including securities issued by the U.S. government and
agencies thereof, bankers' acceptances, commercial paper, bank
certificates of deposit and repurchase agreements.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN
- Except for short-term credits necessary for clearance of transactions.
SHORT SALES OF SECURITIES
- Except when such sales are "against-the-box".
BORROWING MONEY
- Except that the Fund may borrow up to 20% of its net assets from banks
temporarily for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES
- Except to the extent that the Fund is deemed an underwriter for securities
law purposes in connection with disposition of portfolio investments.
MAKING LOANS
- Except by way of purchasing of debt obligations, repurchase agreements and
securities lending. Fund may loan securities valued at up to 33-1/3% of
its total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING FUND ASSETS
- Except that collateral arrangements with respect to swap agreements, the
writing of options, stock index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with respect to
initial and variation margin are not deemed to be a pledge or other
encumbrance of assets. The deposit of securities or cash or cash
equivalents in escrow in connection with the writing of covered call or
put options, respectively is also not deemed to be a pledge or
encumbrance.
SELLING UNCOVERED PUT AND CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
PARTICIPATING IN SOFT DOLLAR ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES
- No more than 5% of the Fund's net assets will be invested in time premiums
on options on particular securities (as opposed to options on indexes).
- Put and call options written by a Fund must be covered.
ILLIQUID SECURITIES
- No more than 15% of the Fund's net assets will be invested in illiquid
97
<PAGE> 184
securities. This includes restricted securities (except that some 144A
securities may be considered liquid by GMO if there is sufficient market
depth), repurchase agreements maturing in greater than 7 days, swap
contracts, and other securities determined by GMO not to be readily
marketable at their carried value.
INVESTMENT IN INSURANCE COMPANIES
- The Fund will not purchase more than 10% of the total outstanding voting
stock of any insurance company (including foreign insurance companies).
INVESTMENT IN SECURITIES ISSUED BY BROKERS, DEALERS, UNDERWRITERS AND
INVESTMENT ADVISERS
- Equity: The Fund will not purchase more than 5% of any class of stock of a
broker, dealer, underwriter or investment adviser.
- Debt: The Fund may not purchase more than 10% of any such company's total
outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets will be
invested in the securities of a single broker, dealer, underwriter or
investment adviser. The net payment obligation of swap contracts where one
of these types of companies is the counterparty also counts for purposes
of this restriction.
- This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
INVESTMENT IN LOWER-RATED BONDS
- The Fund will not invest more than 5% of its assets in lower-rated bonds.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION
- Except for U.S. government securities, cash, and money market instruments,
the Fund will not invest more than 5% of its assets in the securities of a
single issue.
- The Fund will not purchase more than 10% of the outstanding securities of
any issuer.
DERIVATIVE INSTRUMENTS
TYPES OF DERIVATIVES
- Futures contracts and related options on securities indexes.
- Long equity swap contracts: where the Fund pays a fixed rate plus the
negative performance, if any, and receives the positive performance, if
any, of an index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed rate plus the
negative performance, if any, and pays the positive performance of an
index or basket of securities.
- Contracts for differences: equity swaps that contain both a long and short
equity component.
USES OF DERIVATIVES
HEDGING
- Traditional Hedging: Short equity futures, related options and short
equity swap contracts used to hedge against an equity risk already
generally present in the Fund. (20)
- Anticipatory Hedging: If the Fund receives or anticipates significant cash
purchase transactions, the Fund may hedge market risk (risk of not being
invested in the market) by purchasing long futures contracts or entering
into long equity swap contracts to obtain market exposure until such time
as direct investments can be made efficiently. Conversely, if the Fund
receives or anticipates a significant demand for cash redemptions, the
Fund may sell
- -----------------
(20) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to
specific exposure existing in the Fund (the specific stocks of that
market actually owned by the Fund). The Fund may also seek to remove
specific exposure (e.g., a single stock, small basket or more focused
index of securities expected to do poorly in an otherwise promising
market) relative to general or broad market exposure that exists in the
Fund.
98
<PAGE> 185
futures contracts or enter into short equity swap contracts, to allow the
Fund to dispose of securities in a more orderly fashion without the Fund
being exposed to leveraged loss exposure in the interim.
INVESTMENT
- The Fund may use derivative instruments (particularly long futures
contracts, related options and long equity swap contracts) in place of
investing directly in securities. This will include using equity
derivatives to "equitize" cash balances held by the Fund. The Fund may
also use long derivatives for investment in conjunction with short hedging
transactions to adjust the weights of the Fund's underlying equity
portfolio to a level the Manager believes is the optimal exposure to
individual markets, sectors and equities.
RISK MANAGEMENT - SYNTHETIC SALES AND PURCHASES
- The Fund may use equity futures, related options and equity swap contracts
to adjust the weight of the Fund to a level the manager believes is the
optimal exposure to individual markets, sectors and equities. Sometimes,
such transactions are used as a precursor to actual sales and purchases.
For example, if the Fund held a large proportion of stocks of a particular
market and the Manager believed that stocks of another market would
outperform such stocks, the Fund might use a short futures contract on an
appropriate index (to synthetically "sell" a portion of the Fund's
portfolio) in combination with a long futures contract on another index
(to synthetically "buy" exposure to that index). Long and short equity
swap contracts and contracts for differences may also be used for these
purposes. Equity derivatives (and corresponding currency forwards) used to
effect synthetic sales and purchases will generally be unwound as actual
portfolio securities are sold and purchased.
LIMITATIONS ON THE USE OF DERIVATIVES
- There is no limit on the use of derivatives for hedging purposes.
- The face value of derivatives used for investment purposes will be limited
to 25% of the Fund's assets. When a currency forward is used in
conjunction with an equity derivative for investment purposes, the
currency forward will not be independently counted for this restriction.
- When long futures contracts and long equity swaps are used for investment,
an amount of cash or high quality debt securities equal to the face value
of all such long derivative positions will be segregated against such
exposure. However, for purposes of this restriction, if an existing long
equity exposure is reduced or eliminated by a short derivative position,
the combination of the long and short position will be considered as cash
available to segregate against a new long derivative exposure.
- The net long equity exposure of the Fund, including direct investment in
securities and long derivative positions, will not exceed 100% of the
Fund's net assets.
- The aggregate absolute face value of all futures contracts and swap
contracts (without regard to sign and assuming no offset of long and short
positions, and counting both components of any contract for differences)
will not exceed 100% of the Fund's assets.
- Except when such instruments are used for bona fide hedging, no more than
5% of the Fund's net assets will be committed to initial margin on futures
contracts and time premiums on related options.
- Counterparties used for OTC derivatives must have a long-term debt rating
of A or higher when the derivative is entered into. Occasionally,
short-term derivatives will be entered into with counterparties that have
only high short-term debt ratings.
INTERNATIONAL EQUITY FUNDS
GMO INTERNATIONAL CORE FUND
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PERMITTED INVESTMENTS
EQUITY SECURITIES:
Common Stocks
Convertible Bonds
Preferred Stocks
Warrants or Rights
- The Fund will have greater than 70% of its total assets invested in or
exposed to (22) Equity Securities and Other Equity Securities.
OTHER EQUITY SECURITIES:(21)
Depository Receipts: ADRs, GDRs, EDRs
Foreign Issues Traded in the U.S. and
Abroad
Investment Companies (open & closed-end)
Illiquid Securities
144A Securities
Restricted Securities
Equity Futures and Related Options
Exchange-Traded and OTC Options on
Securities and Indexes (including
writing covered options)
Equity Swap Contracts
Contracts for Differences
Repurchase Agreements
FIXED INCOME SECURITIES:
Long and Medium-Term corporate and Government Bonds
Non-Convertible Preferred Stock
- Fund will have no more than 5% of its total assets invested in or exposed
to Fixed Income Securities.
FOREIGN CURRENCY TRANSACTIONS
- Fund may invest in spot currency transactions, forward foreign currency
contracts, currency swap contracts, options on currencies, currency
futures and related options.
CASH AND MONEY MARKET INSTRUMENTS
Any short-term assets will be invested in cash or High Quality Money Market
Instruments including securities issued by the U.S. government and agencies
thereof, bankers' acceptances, commercial paper, bank certificates of
deposit, time deposits and repurchase agreements
- The Fund will not normally have greater than 5% of its net assets exposed
to cash and money market instruments. This limitation does not include
cash and money market instruments in margin or other segregated accounts
held against exposure achieved through derivative instruments ("equitized
cash").
PURCHASING SECURITIES ON MARGIN
- Except for short-term credits necessary for clearance of transactions.
SHORT SALES OF SECURITIES
- Except when such sales are "against-the-box".
BORROWING MONEY
- Except that the Fund may borrow up to 20% of its net assets from banks
temporarily for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES
- Except to the extent that the Fund is deemed an underwriter for securities
law purposes in connection with disposition of portfolio investments.
- ----------------------
(21) Investment in these instruments may be limited by restrictions
described below.
(22) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the
fund's exposure to the relevant market or security through direct
investments and through derivative instruments will be considered.
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MAKING LOANS
- Except by way of purchasing of debt obligations, repurchase agreements and
securities lending. Fund may loan securities valued at up to 25% of its
total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING FUND ASSETS
- Except that collateral arrangements with respect to swap agreements, the
writing of options, stock index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with respect to
initial and variation margin are not deemed to be a pledge or other
encumbrance of assets. The deposit of securities or cash or cash
equivalents in escrow in connection with the writing of covered call or
put options, respectively, is also not deemed to be a pledge or
encumbrance.
EMERGING MARKET ISSUERS
SELLING UNCOVERED PUT AND CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
PARTICIPATING IN SOFT DOLLAR ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES
- No more than 5% of the Fund's net assets will be invested in time premiums
on options on particular securities (as opposed to options on indexes).
- Put and call options written by a Fund must be covered.
OTHER INVESTMENT COMPANIES
- The Fund will not own more than 3% of the outstanding voting securities of
any investment company.
- No more than 5% of the Fund's net assets will be invested in any single
investment company.
- No more than 10% of the Fund's net assets will be invested in securities
of investment companies in the aggregate.
- The Fund will not own other Funds of GMO Trust.
ILLIQUID SECURITIES
- No more than 15% of the Fund's net assets will be invested in illiquid
securities. This includes restricted securities (except that some 144A
securities may be considered liquid by GMO if there is sufficient market
depth), repurchase agreements maturing in greater than 7 days, swap
contracts, and other securities determined by GMO not to be readily
marketable at their carried value.
INVESTMENT IN INSURANCE COMPANIES
- The Fund will not purchase more than 10% of the total outstanding voting
stock of any insurance company (including foreign insurance companies).
INVESTMENT IN SECURITIES ISSUED BY BROKERS, DEALERS, UNDERWRITERS AND
INVESTMENT ADVISERS
- Equity: The Fund will not purchase more than 5% of any class of stock
of a broker, dealer, underwriter or investment adviser.
- Debt: The Fund may not purchase more than 10% of any such company's
total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets will be
invested in the securities of a single broker, dealer, underwriter or
investment adviser. The net payment obligation of swap contracts where
one of these types of companies is the counterparty also counts for
purposes of this restriction.
- This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
PURCHASED WARRANTS OR RIGHTS
- Aggregate value cannot exceed 5% of the Fund's net assets; no more than
2% of the Fund's net assets may be invested in warrants not listed on
NYSE or
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AMEX.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION
- Except for U.S. government securities, cash, and money market instruments,
the Fund will not invest more than 5% of its assets in the securities of a
single issuer.
- The Fund will not purchase more than 10% of the outstanding securities of
any issuer.
- The Fund will be invested in the securities of at least 125 issuers.
CONCENTRATION
- No more than 25% of the Fund's assets will be invested in securities of
issuers in any one industry.
- The Fund will invest in securities traded in the securities markets of at
least 3 foreign countries.
DERIVATIVE INSTRUMENTS (OTHER THAN FOREIGN CURRENCY TRANSACTIONS)
TYPES OF DERIVATIVES
- Futures contracts and related options on securities indexes.
- Long equity swap contracts: where the Fund pays a fixed rate plus the
negative performance, if any, and receives the positive performance, if
any, of an index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed rate plus the
negative performance, if any, and pays the positive performance of an
index or basket of securities.
- Contracts for differences: equity swaps that contain both long and short
equity components.
USES OF DERIVATIVES
HEDGING
- Traditional Hedging: Short equity futures, related options and short
equity swap contracts used to hedge against an equity risk already
generally present in the Fund.(23)
- Anticipatory Hedging: If the Fund receives or anticipates significant cash
purchase transactions, the Fund may hedge market risk (risk of not being
invested in the market) by purchasing long futures contracts or entering
into long equity swap contracts to obtain market exposure until such time
as direct investments can be made efficiently. Conversely, if the Fund
receives or anticipates a significant demand for cash redemptions, the
Fund may sell futures contracts or enter into short equity swap contracts,
to allow the Fund to dispose of securities in a more orderly fashion
without the Fund being exposed to leveraged loss exposure in the interim.
INVESTMENT
- The Fund may use derivative instruments (particularly long futures
contracts, related options and long equity swap contracts) in place of
investing directly in securities. This will include using equity
derivatives to "equitize" cash balances held by the Fund. Because a
foreign equity derivative generally only provides the return of a foreign
market in local currency terms, the Fund will often purchase a foreign
currency forward in conjunction with using equity derivatives to give the
effect of investing directly. The Fund may also use long derivatives for
investment in conjunction with short hedging transactions to adjust the
weights of the Fund's underlying equity portfolio to a level the Manager
believes is the optimal exposure to individual countries and equities. For
example, if the Manager expects a positive return forecast for a select
group of UK companies, but a negative return for the UK market as a whole,
- ----------------
(23) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to
specific exposure existing in the Fund (the specific stocks of that
market actually owned by the Fund). The Fund may also seek to remove
specific exposure (e.g., a single stock, small basket or more focused
index of securities expected to do poorly in an otherwise promising
market) relative to general or broad market exposure that exists in the
Fund.
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then this Fund may overweight the select group of equities and reduce
exposure to the UK market by selling UK equity futures or enter into a
swap contract that is long a specific basket of securities and short the
UK market generally.
RISK MANAGEMENT - SYNTHETIC SALES AND PURCHASES
- The Fund may use equity futures, related options and equity swap contracts
to adjust the weight of the Fund to a level the manager believes is the
optimal exposure to individual countries and equities. Sometimes, such
transactions are used as a precursor to actual sales and purchases. For
example, if the Fund held a large proportion of stocks of a particular
market and the Manager believed that stocks of another market would
outperform such stocks, the Fund might use a short futures contract on an
appropriate index (to synthetically "sell" a portion of the Fund's
portfolio) in combination with a long futures contract on another index
(to synthetically "buy" exposure to that index). Long and short equity
swap contracts and contracts for differences may also be used for these
purposes. Often, a foreign currency forward will be used in conjunction
with the long derivative position to create the effect of investing
directly. Equity derivatives (and corresponding currency forwards) used to
effect synthetic sales and purchases will generally be unwound as actual
portfolio securities are sold and purchased.
LIMITATIONS ON THE USE OF DERIVATIVES
- There is no limit on the use of derivatives for hedging purposes.
- The face value of derivatives used for investment purposes will be limited
to 25% of the Fund's assets. When a currency forward is used in
conjunction with an equity derivative for investment purposes, the
currency forward will not be independently counted for this restriction.
- When long futures contracts and long equity swaps are used for investment,
an amount of cash or high quality debt securities equal to the face value
of all such long derivative positions will be segregated against such
exposure. However, for purposes of this restriction, if an existing long
equity exposure is reduced or eliminated by a short derivative position,
the combination of the long and short position will be considered as cash
available to segregate against a new long derivative exposure.
- The net long equity exposure of the Fund, including direct investment in
securities and long derivative positions, will not exceed 100% of the
Fund's net assets.
- The aggregate absolute face value of all futures contracts and swap
contracts (without regard to sign and assuming no offset of long and short
positions, and counting both components of any contract for differences)
will not exceed 100% of the Fund's assets.
- Except when such instruments are used for bona fide hedging, no more than
5% of the Fund's net assets will be committed to initial margin on futures
contracts and time premiums on related options.
- Counterparties used for OTC derivatives must have a long-term debt rating
of A or higher when the derivative is entered into. Occasionally,
short-term derivatives will be entered into with counterparties that have
only high short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS
- Buying and selling spot currencies.
- Forward foreign currency contracts.
- Currency futures contracts and related options.
- Options on currencies.
- Currency swap contracts.
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING
- Traditional Hedging: The Fund may effect foreign currency transactions -
generally short forward or futures contracts -- to hedge the risk of
foreign currencies represented by its securities investments back into the
U.S. dollar. The Fund is not required to hedge any of the currency risk
obtained by investing in securities denominated in foreign currencies.
- Anticipatory Hedging: When the Fund enters into a contract for the
purchase or
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anticipates the need to purchase a security denominated in a foreign
currency, it may "lock in" the U.S. dollar price of the security by buying
the foreign currency or through currency forwards or futures.
- Proxy Hedging: The Fund may hedge the exposure of a given foreign currency
by using an instrument relating to a different currency, which the Manager
believes is highly correlated to the currency being hedged.
INVESTMENT
- The Fund may enter into currency forwards or futures contracts in
conjunction with entering into a futures contract on a foreign index in
order to create synthetic foreign currency denominated securities.
RISK MANAGEMENT
- Subject to the limitations described below, the Fund will permit the Fund
to have foreign currency exposure that is significantly different than the
currency exposure represented by its portfolio investments. This may
include long exposure to particular currencies beyond the amount of the
Fund's investment in securities denominated in that currency.
LIMITATIONS OF FOREIGN CURRENCY TRANSACTIONS
- The Fund will typically hedge less than 30% of the foreign currency
exposure represented by its investments in foreign-currency denominated
securities.
- Written put and call options on currencies and currency futures will
always be covered.
- The Fund's aggregate net foreign currency exposure, assuming full offset
of long and short positions, will not exceed 100% of the Fund's net assets
denominated in foreign currencies, though the currency exposure of the
Fund may differ substantially from the currencies in which the Fund's
securities are denominated.
- The Fund will not be net short in any foreign currency, except that, when
the Fund is attempting to hedge all or nearly all of its exposure to a
particular currency, changes in the market value of foreign equities may
cause the Fund to be temporarily net short in the currency. Such temporary
net short positions will not exceed 1% of the Fund's assets.
GMO CURRENCY-HEDGED INTERNATIONAL CORE FUND
PERMITTED INVESTMENTS
EQUITY SECURITIES: Common Stocks Convertible Bonds Preferred Stocks Warrants
or Rights
- The Fund will have more than 70% of its total assets invested in or
exposed to(25) Equity Securities and Other Equity Securities.
OTHER EQUITY SECURITIES:(24)
Depository Receipts: ADRs, GDRs, EDRs
Foreign Issues Traded in the U.S. and Abroad
Investment Companies (including closed-end
funds)
Illiquid Securities
144A Securities
Restricted Securities
Equity Futures and Related Options
Exchange-Traded and OTC Options on
Securities and Indexes (including
writing covered options)
Equity Swap Contracts
Contracts for Differences
- ------------------
(24) Investment in these instruments may be limited by restrictions
described below.
(25) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the
fund's exposure to the relevant market or security through direct
investments and through derivative instruments will be considered.
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FIXED INCOME SECURITIES:
Long and Medium-Term Corporate and Government Bonds
Non-Convertible Preferred Stock
- Fund will have no more than 5% of its assets invested in or exposed to
Fixed Income Securities.
FOREIGN CURRENCY TRANSACTIONS
- Fund may invest in spot currency transactions, forward foreign currency
contracts, currency swap contracts, options on currencies, currency
futures and related options.
CASH AND MONEY MARKET INSTRUMENTS
Any short-term assets will be invested in cash or High Quality Money Market
Instruments including securities issued by the U.S. government and agencies
thereof, bankers' acceptances, commercial paper, bank certificates of deposit
and repurchase agreements
- The Fund will not normally have more than 5% of its net assets exposed to
cash and money market instruments. This limitation does not include cash
and money market instruments in margin or other segregated accounts held
against exposure achieved through derivative instruments ("equitized
cash").
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN
- Except for short-term credits necessary for clearance of transactions.
SHORT SALES OF SECURITIES
- Except when such sales are "against-the-box".
BORROWING MONEY
- Except that the Fund may borrow up to 20% of its net assets from banks
temporarily for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES
- Except to the extent that the Fund is deemed an underwriter for securities
law purposes in connection with disposition of portfolio investments.
MAKING LOANS
- Except by way of purchasing of debt obligations, repurchase agreements and
securities lending. Fund may loan securities valued at up to 25% of its
total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING FUND ASSETS
- Except that collateral arrangements with respect to swap agreements, the
writing of options, stock index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with respect to
initial and variation margin are not deemed to be a pledge or other
encumbrance of assets. The deposit of securities or cash or cash
equivalents in escrow in connection with the writing of covered call or
put options, respectively, is also not deemed to be a pledge or
encumbrance.
SELLING UNCOVERED PUT AND CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
PARTICIPATING IN SOFT DOLLAR ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES
- No more than 5% of the Fund's net assets will be invested in time premiums
on options on particular securities (as opposed to options on indexes).
OTHER INVESTMENT COMPANIES
- The Fund will not own more than 3% of the outstanding voting securities of
any investment company.
- No more than 5% of the Fund's net assets will be invested in any single
investment company.
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- No more than 10% of the Fund's net assets will be invested in securities
of investment companies in the aggregate.
- The Fund will not own other Funds of GMO Trust.
ILLIQUID SECURITIES
- No more than 15% of the Funds net assets will be invested in illiquid
securities. This includes restricted securities (except that some 144A
securities may be considered liquid by GMO if there is sufficient market
depth), repurchase agreements maturing in greater than 7 days, swap
contracts, and other securities determined by GMO not to be readily
marketable at their carried value.
INVESTMENT IN INSURANCE COMPANIES
- The Fund will not purchase more than 10% of the total outstanding voting
stock of any insurance company (including foreign insurance companies).
INVESTMENT IN SECURITIES ISSUED BY BROKERS, DEALERS, UNDERWRITERS AND
INVESTMENT ADVISERS
- Equity: The Fund will not purchase more than 5% of any class of stock of a
broker, dealer, underwriter or investment adviser.
- Debt: The Fund may not purchase more than 10% of any such company's total
outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets will be
invested in the securities of a single broker, dealer, underwriter or
investment adviser. The net payment obligation of swap contracts where one
of these types of companies is the counterparty also counts for purposes
of this restriction.
- This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
PURCHASED WARRANTS OR RIGHTS
- Aggregate value can not exceed 5% of the Fund's net assets; no more than
2% of the Fund's net assets may be invested in warrants not listed on NYSE
or AMEX.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION
- Except for U.S. government securities, cash, and money market instruments,
the Fund will not invest more than 5% of its assets in the securities of a
single issue.
- The Fund will not purchase more than 10% of the outstanding securities of
any issuer.
CONCENTRATION
- No more than 25% of the Fund's assets will be invested in securities of
issuers in any one industry.
DERIVATIVE INSTRUMENTS (OTHER THAN FOREIGN CURRENCY TRANSACTIONS)
TYPES OF DERIVATIVES
- Futures contracts and related options on securities indexes.
- Long equity swap contracts: where the Fund pays a fixed rate plus the
negative performance, if any, and receives the positive performance, if
any, of an index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed rate plus the
negative performance, if any, and pays the positive performance of an
index or basket of securities.
- Contracts for differences: equity swaps that contain both a long and short
equity component.
USES OF DERIVATIVES
HEDGING
- Traditional Hedging: Short equity futures, related options and short
equity swap contracts used to hedge against an equity risk already
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generally present in the Fund.(26)
- Anticipatory Hedging: If the Fund receives or anticipates significant cash
purchase transactions, the Fund may hedge market risk (risk of not being
invested in the market) by purchasing long futures contracts or entering
into long equity swap contracts to obtain market exposure until such time
as direct investments can be made efficiently. Conversely, if the Fund
receives or anticipates a significant demand for cash redemptions, the
Fund may sell futures contracts or enter into short equity swap contracts,
to allow the Fund to dispose of securities in a more orderly fashion
without the Fund being exposed to leveraged loss exposure in the interim.
INVESTMENT
- The Fund may use derivative instruments (particularly long futures
contracts, related options and long equity swap contracts) in place of
investing directly in securities. This will include using equity
derivatives to "equitize" cash balances held by the Fund. Because a
foreign equity derivative generally only provides the return of a foreign
market in local currency terms, the Fund will often purchase a foreign
currency forward in conjunction with using equity derivatives to give the
effect of investing directly. The Fund may also use long derivatives for
investment in conjunction with short hedging transactions to adjust the
weights of the Fund's underlying equity portfolio to a level the Manager
believes is the optimal exposure to individual countries and equities. For
example, if the Manager expects a positive return forecast for a select
group of UK companies, but a negative return for the UK market as a whole,
then this Fund may overweight the select group of equities and reduce
exposure to the UK market by selling UK equity futures or enter into a
swap contract that is long a specific basket of securities and short the
UK market generally.
RISK MANAGEMENT - SYNTHETIC SALES AND PURCHASES
- The Fund may use equity futures, related options and equity swap contracts
to adjust the weight of the Fund to a level the manager believes is the
optimal exposure to individual countries and equities. Sometimes, such
transactions are used as a precursor to actual sales and purchases. For
example, if the Fund held a large proportion of stocks of a particular
market and the Manager believed that stocks of another market would
outperform such stocks, the Fund might use a short futures contract on an
appropriate index (to synthetically "sell" a portion of the Fund's
portfolio) in combination with a long futures contract on another index
(to synthetically "buy" exposure to that index). Long and short equity
swap contracts and contracts for differences may also be used for these
purposes. Often, a foreign currency forward will be used in conjunction
with the long derivative position to create the effect of investing
directly. Equity derivatives (and corresponding currency forwards) used to
effect synthetic sales and purchases will generally be unwound as actual
portfolio securities are sold and purchased.
LIMITATIONS ON THE USE OF DERIVATIVES
- There is no limit on the use of derivatives for hedging purposes.
- The face value of derivatives used for investment purposes will be limited
to 25% of the Fund's assets. When a currency forward is used in
conjunction with an equity derivative for investment purposes, the
currency forward will not be independently counted for this restriction.
- When long futures contracts and long equity swaps are used for an
investment, an amount of cash or high quality debt securities equal to the
face value of all such long derivative positions will be segregated
- ------------------
(26) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to
specific exposure existing in the Fund (the specific stocks of that
market actually owned by the Fund). The Fund may also seek to remove
specific exposure (e.g., a single stock, small basket or more focused
index of securities expected to do poorly in an otherwise promising
market) relative to general or broad market exposure that exists in the
Fund.
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against such exposure. However, for purposes of this restriction, if an
existing long equity exposure is reduced or eliminated by a short
derivative position, the combination of the long and short position will
be considered as cash available to segregate against a new long derivative
exposure.
- The net long equity exposure of the Fund, including direct investment in
securities and long derivative positions, will not exceed 100% of the
Fund's net assets.
- The aggregate absolute face value of all futures contracts and swap
contracts (without regard to sign and assuming no offset of long and short
positions, and counting both components of any contract for differences)
will not exceed 100% of the Fund's assets.
- Except when such instruments are used for bona fide hedging, no more than
5% of the Fund's net assets will be committed to initial margin on futures
contracts and time premiums on related options.
- Counterparties used for OTC derivatives must have a long-term debt rating
of A or higher when the derivative is entered into. Occasionally,
short-term derivatives will be entered into with counterparties that have
only high short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
FOREIGN CURRENCY STRATEGY
- The essential currency strategy of the Fund is to replicate the stock and
currency selection of GMO International Core Fund and to layer upon that a
hedge (i.e. short positions) with respect to each currency represented in
the EAFE-lite index, at the level that such currencies are represented in
the index. This means that, if the Fund is under-weighted relative to
EAFE-lite with respect to securities denominated in a particular currency,
the index currency hedging will result in a net short position with
respect to that currency. Generally, such net short positions will be
largely offset by net long positions in other highly correlated currencies
or an over-weight in securities denominated in such correlated currencies.
As set forth under "Limitations on Foreign Currency Transactions" below,
the aggregate amount of "true" net short currency positions (i.e., those
not offset by positions in highly correlated currencies) will not exceed
10% of the Fund's assets.
- The Fund's currency hedging strategy will also mean that, despite the
Fund's name, the Fund will not generally hedge all of the foreign currency
exposure represented by the portfolio securities it owns. In a case where
the Fund is over-weighted relative to EAFE-lite with respect to securities
denominated in a particular currency - or if GMO's international core
currency strategy is utilizing an active exposure to a particular currency
beyond that represented by securities denominated in that currency - the
Fund's index currency hedge will not completely eliminate exposure to the
currency. Because of its name, the Fund is required to hedge at least 65%
of the currency exposure represented by portfolio securities it owns.
TYPES OF FOREIGN CURRENCY TRANSACTIONS
- Buying and selling spot currencies.
- Forward foreign currency contracts.
- Currency futures contracts and related options.
- Options on currencies.
- Currency swap contracts.
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING
- Traditional Hedging: The Fund may effect foreign currency transactions -
generally short forward or futures contracts - to hedge the risk of
foreign currencies represented by its securities investments back into the
U.S. dollar. The Fund is not required to hedge any of the
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currency risk obtained by investing in securities denominated in foreign
currencies.
- Anticipatory Hedging: When the Fund enters into a contract for the
purchase or anticipates the need to purchase a security denominated in a
foreign currency, it may "lock in" the U.S. dollar price of the security
by buying the foreign currency or through currency forwards or futures.
- Proxy Hedging: The Fund may hedge the exposure of a given foreign currency
by using an instrument relating to a different currency, which the Manager
believes is highly correlated to the currency being hedged.
INVESTMENT
- The Fund may enter into currency forwards or futures contracts in
conjunction with entering into a futures contract on a foreign index in
order to create synthetic foreign currency denominated securities.
RISK MANAGEMENT
- Subject to the limitations described below, the Fund may use foreign
currency transactions for risk management, which will permit the Fund to
have foreign currency exposure that is significantly different than the
currency exposure represented by its portfolio investments. This may
include long exposure to particular currencies beyond the amount of the
Fund's investment in securities denominated in that currency.
LIMITATIONS OF FOREIGN CURRENCY TRANSACTIONS
- The Fund will maintain short currency positions with respect to at least
65% of the foreign currency exposure represented by the common stocks
owned by the Fund.
- Written put and call options on currencies and currency futures will
always be covered.
- The Fund's aggregate net foreign currency exposure, assuming full offset
of long and short positions, will not exceed 100% of the Fund's net assets
denominated in foreign currencies, though the currency exposure of the
Fund may differ substantially from the currencies in which the Fund's
securities are denominated.
- The Fund will generally hedge currency based on benchmark weightings
(rather than Fund investments), and thus will sometimes have a net short
position with respect to certain foreign currencies. Such net short
positions in the aggregate will not exceed 10% of the Fund's assets.
GMO FOREIGN FUND
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
EQUITY SECURITIES: - At least 65% of total assets will be invested in common stocks
Common Stocks (including dividend paying) and securities convertible into common stocks, warrants and rights
Convertible Bonds of non-U.S. issuers.
Convertible Preferred Stocks
Warrants or Rights
OTHER EQUITY SECURITIES:
Depository Receipts: ADRs, GDRs, EDRs
Foreign Issues Traded in the U.S. and Abroad
Investment Companies (including closed-end
funds)
Illiquid Securities
144A Securities
Private Placements and Other Restricted
Securities
Equity Futures and Related Options
Exchange-Traded and OTC Options on
Securities and Indexes (including
writing covered options)
</TABLE>
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<PAGE> 196
Emerging Market Issuers
FIXED INCOME SECURITIES:
Long and Medium-Term Corporate
and Government Bonds
Preferred Stock
Lower-Rated Bonds
- Fund will have no more than 10% of its assets invested in Fixed Income
Securities.
FOREIGN CURRENCY TRANSACTIONS
- For hedging purposes, the Fund may invest in spot currency
transactions, forward foreign currency contracts, options on
currencies, currency futures and related options.
CASH AND MONEY MARKET INSTRUMENTS
- Any short-term assets will be invested in cash or High Quality Money
Market Instruments including securities issued by the U.S. government
and agencies thereof, bankers' acceptances, commercial paper, bank
certificates of deposit and repurchase agreements.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN
- Except for short-term credits necessary for clearance of transactions.
SHORT SALES OF SECURITIES
- Except when such sales are "against-the-box".
BORROWING MONEY
- Except that the Fund may borrow up to 20% of its net assets from banks
temporarily for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES
- Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of portfolio
investments.
MAKING LOANS
- Except by way of purchasing of debt obligations, repurchase agreements
and securities lending. Fund may loan securities valued at up to 33%
of its total assets.
SELLING UNCOVERED PUT AND CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING DIRECTLY IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
PARTICIPATING IN SOFT DOLLAR ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OTHER INVESTMENT COMPANIES
- The Fund will not own more than 3% of the outstanding voting
securities of any investment company.
- No more than 5% of the Fund's net assets will be invested in any
single investment company.
- No more than 10% of the Fund's net assets will be invested in
securities of investment companies in the aggregate.
- The Fund will not own other Funds of GMO Trust.
ILLIQUID SECURITIES
- No more than 10% of the Fund's net assets will be invested in illiquid
securities. This includes restricted securities (except that some 144A
securities may be considered liquid by GMO if there is sufficient
market depth), repurchase agreements maturing in greater than 7 days,
and other securities determined by GMO not to be readily marketable at
their carried value.
EMERGING MARKET ISSUERS
- The Fund will not invest more than 20% of its assets in securities of
issuers in newly industrialized countries of the type invested in by
the Emerging Markets Fund.
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LOWER-RATED SECURITIES
- The Fund will not invest more than 5% of its assets in lower-rated
securities (junk bonds).
INVESTMENT IN INSURANCE COMPANIES
- The Fund will not purchase more than 10% of the total outstanding
voting stock of any insurance company (including foreign insurance
companies).
INVESTMENT IN SECURITIES ISSUED BY BROKERS, DEALERS, UNDERWRITERS AND INVESTMENT
ADVISERS
- Equity: The Fund will not purchase more than 5% of any class of stock
of a broker, dealer, underwriter or investment adviser.
- Debt: The Fund may not purchase more than 10% of any such company's
total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets will be
invested in the securities of a single broker, dealer, underwriter or
investment adviser.
- This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION
- Except for U.S. government securities, cash, and money market
instruments, the Fund will not invest more than 5% of its assets in
the securities of a single issue.
- The Fund will not invest more than 2% of its assets in positions that
constitute more than 10% of the outstanding securities of any issuer.
- At least 65% of the Fund's total assets will be invested in securities
principally traded in the securities markets of at least three
countries other than the United States.
- The Fund will be invested in the securities of at least 125 issuers.
CONCENTRATION
- No more than 25% of the Fund's assets will be invested in securities
of issuers in any one industry.
GMO INTERNATIONAL SMALL COMPANIES FUND
PERMITTED INVESTMENTS
EQUITY SECURITIES:
Common Stocks
Convertible Securities
Preferred Stocks
Warrants or Rights
- At least 65% of the Fund's assets will be invested in or exposed to
(27) common stocks of small capitalization foreign companies.
OTHER EQUITY SECURITIES:
Depository Receipts: ADRs, GDRs, EDRs
Foreign Issues Traded in the U.S. and Abroad
Investment Companies (open & closed-end)
Illiquid Securities
144A Securities
Restricted Securities
Equity Futures and Related Options
Exchange-Traded and OTC Options on Securities and Indexes (including writing
covered options)
Equity Swap Contracts
Contracts for Differences
Repurchase Agreements
- --------------------------
(27) The words "exposed to" as used in these guidelines mean that, for purposes
of the relevant requirement or restriction, the total of the Fund's exposure to
the relevant market or security through direct investments and through
derivative instruments will be considered.
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FIXED INCOME SECURITIES:
Long and Medium-Term Corporate
and Government Bonds
Non-convertible Preferred Stock
- Fund will have no more than 5% of its total assets invested in or
exposed to Fixed Income Securities.
FOREIGN CURRENCY TRANSACTIONS
- Fund may invest in spot currency transactions, forward foreign
currency contracts, currency swap contracts, options on currencies,
currency futures and related options.
CASH AND MONEY MARKET INSTRUMENTS
Any short-term assets will be invested in cash or High Quality Money Market
Instruments including securities issued by the U.S. government and agencies
thereof, bankers' acceptances, commercial paper, bank certificates of deposit,
time deposits and repurchase agreements
- The Fund will not normally have greater than 5% of its net assets
exposed to cash and money market instruments. This limitation does not
include cash and money market instruments in margin or other
segregated accounts held against exposure achieved through derivative
instruments ("equitized cash").
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN
- Except for short-term credits necessary for clearance of transactions.
SHORT SALES OF SECURITIES
- Except when such sales are "against-the-box".
BORROWING MONEY
- Except that the Fund may borrow up to 20% of its net assets from banks
temporarily for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES
- Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of portfolio
investments.
MAKING LOANS
- Except by way of purchasing of debt obligations, repurchase agreements
and securities lending. Fund may loan securities valued at up to 25%
of its total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING FUND ASSETS
- Except that collateral arrangements with respect to swap agreements,
the writing of options, stock index, interest rate, currency or other
futures, options on futures contracts and collateral arrangements with
respect to initial and variation margin are not deemed to be a pledge
or other encumbrance of assets. The deposit of securities or cash or
cash equivalents in escrow in connection with the writing of covered
call or put options, respectively, is also not deemed to be a pledge
or encumbrance.
EMERGING MARKET ISSUERS
SELLING UNCOVERED PUT AND CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
PARTICIPATING IN SOFT DOLLAR ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES
- No more than 5% of the Fund's net assets will be invested in time
premiums on options on particular securities (as opposed to options on
indexes)
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<PAGE> 199
- Put and call options written by a Fund must be covered.
OTHER INVESTMENT COMPANIES
- - The Fund will not own more than 3% of the outstanding voting securities of
any investment company.
- - No more than 5% of the Fund's net assets will be invested in any single
investment company.
- - No more than 10% of the Fund's net assets will be invested in securities of
investment companies in the aggregate.
- - The Fund will not own other Funds of GMO Trust.
ILLIQUID SECURITIES
- - No more than 15% of the Fund's net assets will be invested in illiquid
securities. This includes restricted securities (except that some 144A
securities may be considered liquid by GMO if there is sufficient market
depth), repurchase agreements maturing in greater than 7 days, swap
contracts, and other securities determined by GMO not to be readily
marketable at their carried value.
INVESTMENT IN INSURANCE COMPANIES
- - The Fund will not purchase more than 10% of the total outstanding voting
stock of any insurance company (including foreign insurance companies).
INVESTMENT IN SECURITIES ISSUED BY BROKERS, DEALERS, UNDERWRITERS AND INVESTMENT
ADVISERS
- - Equity: The Fund will not purchase more than 5% of any class of stock of a
broker, dealer, underwriter or investment adviser.
- - Debt: The Fund may not purchase more than 10% of any such company's total
outstanding debt in the aggregate.
- - Investment Limits: No more than 5% of the Fund's total assets will be
invested in the securities of a single broker, dealer, underwriter or
investment adviser. The net payment obligation of swap contracts where one
of these types of companies is the counterparty also counts for purposes of
this restriction.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent fiscal
year.
PURCHASED WARRANTS OR RIGHTS
- - Aggregate value can not exceed 5% of the Fund's net assets; not more than
2% of the Fund's net assets may be invested in warrants not listed on NYSE
or AMEX.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION
- - Except for U.S. government securities, cash, and money market instruments,
the Fund will not invest more than 5% of its assets in the securities of a
single issue.
- - The Fund will not purchase more than 10% of the outstanding securities of
any issuer.
CONCENTRATION
- - No more than 25% of the Fund's assets will be invested in securities of
issuers in any one industry.
- - The Fund will invest in securities traded in the securities markets of at
least 3 foreign countries.
DERIVATIVE INSTRUMENTS (OTHER THAN FOREIGN CURRENCY TRANSACTIONS)
TYPES OF DERIVATIVES
- - Futures contracts and related options on securities indexes.
- - Long equity swap contracts: where the Fund pays a fixed rate plus the
negative performance, if any, and receives the positive performance, if
any, of an index or basket of securities.
- - Short equity swap contracts: where the Fund receives a fixed rate plus the
negative performance, if any, and pays the positive performance of an index
or basket of securities.
- - Contracts for differences: equity swaps that contain both a long and short
equity component.
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<PAGE> 200
USES OF DERIVATIVES
HEDGING
- - Traditional Hedging: Short equity futures, related options and short equity
swap contracts used to hedge against an equity risk already generally
present in the Fund.(28)
- - Anticipatory Hedging: If the Fund receives or anticipates significant cash
purchase transactions, the Fund may hedge market risk (risk of not being
invested in the market) by purchasing long futures contracts or entering
into long equity swap contracts to obtain market exposure until such time
as direct investments can be made efficiently. Conversely, if the Fund
receives or anticipates a significant demand for cash redemptions, the Fund
may sell futures contracts or enter into short equity swap contracts, to
allow the Fund to dispose of securities in a more orderly fashion without
the Fund being exposed to leveraged loss exposure in the interim.
INVESTMENT
- - The Fund may use derivative instruments (particularly long futures
contracts, related options and long equity swap contracts) in place of
investing directly in securities. This will include using equity
derivatives to "equitize" cash balances held by the Fund. Because a foreign
equity derivative generally only provides the return of a foreign market in
local currency terms, the Fund will often purchase a foreign currency
forward in conjunction with using equity derivatives to give the effect of
investing directly. The Fund may also use long derivatives for investment
in conjunction with short hedging transactions to adjust the weights of the
Fund's underlying equity portfolio to a level the Manager believes is the
optimal exposure to individual countries and equities. For example, if the
Manager expects a positive return forecast for a select group of UK
companies, but a negative return for the UK market as a whole, then this
Fund may overweight the select group of equities and reduce exposure to the
UK market by selling UK equity futures or enter a swap contract that is
long a specific basket of securities and short the UK market generally.
RISK MANAGEMENT -
SYNTHETIC SALES AND PURCHASES
- - The Fund may use equity futures, related options and equity swap contracts
to adjust the weight of the Fund to a level the manager believes is the
optimal exposure to individual countries and equities. Sometimes, such
transactions are used as a precursor to actual sales and purchases. For
example, if the Fund held a large proportion of stocks of a particular
market and the Manager believed that stocks of another market would
outperform such stocks, the Fund might use a short futures contract on an
appropriate index (to synthetically "sell" a portion of the Fund's
portfolio) in combination with a long futures contract on another index (to
synthetically "buy" exposure to that index). Long and short equity swap
contracts and contracts for differences may also be used for these
purposes. Often, a foreign currency forward will be used in conjunction
with the long derivative position to create the effect of investing
directly. Equity derivatives (and corresponding currency forwards) used to
effect synthetic sales and purchases will generally be unwound as actual
portfolio securities are sold and purchased.
LIMITATIONS ON THE USE OF DERIVATIVES
- - There is no limit on the use of derivatives for hedging purposes.
- - The face value of derivatives used for investment purposes will be limited
to 25% of the Fund's assets. When a currency forward is used in conjunction
with an equity derivative for investment purposes, the currency forward
will not be independently counted for this restriction.
- - When long futures contracts and long equity swaps are used for investment,
an amount of cash or high quality debt securities equal to the face value
of all such long derivative positions will be segregated against such
exposure.
- --------------------------
(28) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g., a single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund.
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<PAGE> 201
However, for purposes of this restriction, if an existing long equity
exposure is reduced or eliminated by a short derivative position, the
combination of the long and short position will be considered as cash
available to segregate against a new long derivative exposure.
- - The net long equity exposure of the Fund, including direct investment in
securities and long derivative positions, will not exceed 100% of the
Fund's net assets.
- - The aggregate absolute face value of all futures contracts and swap
contracts (without regard to sign and assuming no offset of long and short
positions, and counting both components of any contract for differences)
will not exceed 100% of the Fund's assets.
- - Except when such instruments are used for bona fide hedging, no more than
5% of the Fund's net assets will be committed to initial margin on futures
contracts and time premiums on related options.
- - Counterparties used for OTC derivatives must have a long-term debt rating
of A or higher when the derivative is entered into. Occasionally,
short-term derivatives will be entered into with counterparties that have
only high short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS
- - Buying and selling spot currencies.
- - Forward foreign currency contracts.
- - Currency futures contracts and related options.
- - Options on currencies.
- - Currency swap contracts.
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING
- - Traditional Hedging: The Fund may effect foreign currency transactions -
generally short forward or futures contracts - to hedge the risk of foreign
currencies represented by its securities investments back into the U.S.
dollar. The Fund is not required to hedge any of the currency risk obtained
by investing in securities denominated in foreign currencies.
- - Anticipatory Hedging: When the Fund enters into a contract for the purchase
or anticipates the need to purchase a security denominated in a foreign
currency, it may "lock in" the U.S. dollar price of the security by buying
the foreign currency or through currency forwards or futures.
- - Proxy Hedging: The Fund may hedge the exposure of a given foreign currency
by using an instrument relating to a different currency, which the Manager
believes is highly correlated to the currency being hedged.
INVESTMENT
- - The Fund may enter into currency forwards or futures contracts in
conjunction with entering into a futures contract on a foreign index in
order to create synthetic foreign currency denominated securities.
RISK MANAGEMENT
- - Subject to the limitations described below, the Fund may use foreign
currency transactions for risk management, which will permit the Fund to
have foreign currency exposure that is significantly different than the
currency exposure represented by its portfolio investments. This may
include long exposure to particular currencies beyond the amount of the
Fund's investment in securities denominated in that currency.
LIMITATIONS OF FOREIGN CURRENCY TRANSACTIONS
- - Written put and call options on currencies and currency futures will always
be covered.
- - The Fund's aggregate net foreign currency exposure, assuming full offset of
long and short positions, will not exceed 100% of the Fund's net assets
denominated in foreign currencies, though the currency exposure of the Fund
may differ substantially from the currencies in which the Fund's securities
are denominated.
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<PAGE> 202
- - The aggregate absolute face value of all currency forward, currency futures
and currency swap contracts (without regard to sign and assuming no offset
of long and short positions, and counting both components of any contract
for differences) will not exceed 50% of the Fund's assets.
- - The Fund will not be net short in any foreign currency, except that, when
the Fund is attempting to hedge all or nearly all of its exposure to a
particular currency, changes in the market value of foreign equities may
cause the Fund to be temporarily net short in the currency. Such temporary
net short positions will not exceed 1% of the Fund's assets.
GMO JAPAN FUND
PERMITTED INVESTMENTS
EQUITY SECURITIES:
Common Stocks
Convertible Securities
Preferred Stock
Warrants or Rights
- - At least 90% of the net assets of the Fund will be invested in or exposed
to(30) Japanese Securities.(31)
OTHER EQUITY SECURITIES:(29)
Depository Receipts: ADRs, GDRs, EDRs
Foreign Issues Traded in the U.S. and Abroad
Investment Companies (open & closed-end)
Illiquid Securities
144A Securities
Restricted Securities
Equity Futures and Related Options
Exchange-Traded and OTC Options on
Securities and Indexes (including
writing covered options)
Equity Swap Contracts
Contracts for Differences
Repurchase Agreements
FIXED INCOME SECURITIES:
Long and Medium-Term Corporate and
Government Bonds
Non-convertible Preferred Stock
Short-Term Japanese Government Debt
Securities (or other short term prime
obligations)
- - The Fund will have no more than 5% of its total assets invested in or
Exposed to Fixed Income Securities.
FOREIGN CURRENCY TRANSACTIONS
- - Fund may invest in spot currency transactions, forward foreign currency
contracts, currency swap contracts, options on currencies, currency futures
and related options.
CASH AND MONEY MARKET INSTRUMENTS
Any short-term assets will be invested in cash
- - The Fund will not normally have greater than 5% of its net assets exposed
to cash and money market instruments. This limitation does
(29) Investment in these instruments may be limited by restrictions
described below.
(30) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
(31) Japanese Securities are securities issued by entities that are
organized under the laws of Japan and that either have 50% or more of their
assets in Japan or derive 50% or more of their revenues from Japan ("Japanese
Companies").
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or High Quality Money Market Instruments including securities issued by the U.S.
government and agencies thereof, bankers' acceptances, commercial paper, Bank
certificates of deposit and repurchase agreements
not include cash and money market instruments in margin or other segregated
accounts held against exposure achieved through derivative instruments
("equitized cash").
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN
- - Except for short-term credits necessary for clearance of transactions.
SHORT SALES OF SECURITIES
- - Except when such sales are "against-the-box".
BORROWING MONEY
- - Except that the Fund may borrow up to 20% of its net assets from banks
temporarily for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES
- - Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of portfolio
investments.
MAKING LOANS
- - Except by way of purchasing of debt obligations, repurchase agreements
and securities lending. Fund may loan securities valued at up to 25% of
its total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING FUND ASSETS
- - Except that collateral arrangements with respect to swap agreements,
the writing of options, stock index, interest rate, currency or other
futures, options on futures contracts and collateral arrangements with
respect to initial and variation margin are not deemed to be a pledge
or other encumbrance of assets. The deposit of securities or cash or
cash equivalents in escrow in connection with the writing of covered
call or put options, respectively, is also not deemed to be a pledge or
encumbrance.
EMERGING MARKET ISSUERS
SELLING UNCOVERED PUT AND CALL OPTIONS ON SECURITIES OR INDEXES INVESTING IN
REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
PARTICIPATING IN SOFT DOLLAR ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES
- - No more than 5% of the Fund's net assets will be invested in time
premiums on options on particular securities (as opposed to options on
indexes).
- - Put and call options written by a Fund must be covered.
OTHER INVESTMENT COMPANIES
- - The Fund will not own more than 3% of the outstanding voting securities
of any investment company.
- - No more than 5% of the Fund's net assets will be invested in any single
investment company.
- - No more than 10% of the Fund's net assets will be invested in
securities of investment companies in the aggregate.
- - The Fund will not own other Funds of GMO Trust.
ILLIQUID SECURITIES
- - No more than 15% of the Fund's net assets will be invested in illiquid
securities. This includes restricted securities (except that some 144A
securities may be considered liquid by GMO if there is sufficient
market depth), repurchase
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agreements maturing in greater than 7 days, swap contracts, and other
securities determined by GMO not to be readily marketable at their
carried value.
INVESTMENT IN INSURANCE COMPANIES
- - The Fund will not purchase more than 10% of the total outstanding
voting stock of any insurance company (including foreign insurance
companies).
INVESTMENT IN SECURITIES ISSUED BY BROKERS, DEALERS, UNDERWRITERS AND INVESTMENT
ADVISERS
- - Equity: The Fund will not purchase more than 5% of any class of stock
of a broker, dealer, underwriter or investment adviser.
- - Debt: The Fund may not purchase more than 10% of any such company's
total outstanding debt in the aggregate.
- - Investment Limits: No more than 5% of the Fund's net assets will be
invested in the securities of a single broker, dealer, underwriter or
investment adviser. The net payment obligation of swap contracts where
one of these types of companies is the counterparty also counts for
purposes of this restriction.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
PURCHASED WARRANTS OR RIGHTS
- - Aggregate value cannot exceed 5% of the Fund's net assets; no more than
2% of the Fund's net assets may be invested in warrants not listed on
NYSE or AMEX.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION
- - Except for U.S. government securities, cash, and money market
instruments, the Fund will not invest more than 5% of its assets in the
securities of a single issuer.
- - The Fund will not purchase more than 10% of the outstanding securities
of any issuer.
CONCENTRATION
- - No more than 25% of the Fund's assets will be invested in securities of
issuers in any one industry.
DERIVATIVE INSTRUMENTS (OTHER THAN FOREIGN CURRENCY TRANSACTIONS)
TYPES OF DERIVATIVES
- - Futures contracts and related options on securities indexes.
- - Long equity swap contracts: where the Fund pays a fixed rate plus the
negative performance, if any, and receives the positive performance, if
any, of an index or basket of securities.
- - Short equity swap contracts: where the Fund receives a fixed rate plus
the negative performance, if any, and pays the positive performance of
an index or basket of securities.
- - Contracts for differences: equity swaps that contain both a long and
short equity component.
USES OF DERIVATIVES
HEDGING
- - Traditional Hedging: Short equity futures, related options and short
equity swap contracts used to hedge against an equity risk already
generally present in the Fund.(32)
- - Anticipatory Hedging: If the Fund receives or anticipates significant
cash purchase transactions, the Fund may hedge market risk (risk of not
being invested in the market) by purchasing long futures contracts or
entering into long equity swap contracts to obtain market exposure
until such time as direct investments can be made efficiently.
Conversely, if the Fund receives or anticipates a significant demand
for cash redemptions, the Fund may sell futures contracts or enter into
(32) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g., a single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund.
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short equity swap contracts, to allow the Fund to dispose of securities in a
more orderly fashion without the Fund being exposed to leveraged loss exposure
in the interim.
INVESTMENT
- - The Fund may use derivative instruments (particularly long futures
contracts, related options and long equity swap contracts) in place of
investing directly in securities. This will include using equity
derivatives to "equitize" cash balances held by the Fund. Because a
foreign equity derivative generally only provides the return of a
foreign market in local currency terms, the Fund will often purchase a
foreign currency forward in conjunction with using equity derivatives
to give the effect of investing directly.
RISK MANAGEMENT -
SYNTHETIC SALES AND PURCHASES
- - The Fund may use equity futures, related options and equity swap
contracts to adjust the weight of the Fund to a level the manager
believes is the optimal exposure to individual equities or groups of
equities. Sometimes, such transactions are used as a precursor to
actual sales and purchases. For example, if the Fund held a large
proportion of stocks of a particular type and the Manager believed that
stocks of another type would outperform such stocks, the Fund might use
a short futures contract on an appropriate index (to synthetically
"sell" a portion of the Fund's portfolio) in combination with a long
futures contract on another index (to synthetically "buy" exposure to
that index). Long and short equity swap contracts and contracts for
differences may also be used for these purposes. Often, a foreign
currency forward will be used in conjunction with the long derivative
position to create the effect of investing directly. Equity derivatives
(and corresponding currency forwards) used to effect synthetic sales
and purchases will generally be unwound as actual portfolio securities
are sold and purchased.
LIMITATIONS ON THE USE OF DERIVATIVES
- - There is no limit on the use of derivatives for hedging purposes.
- - The face value of derivatives used for investment purposes will be
limited to 25% of the Fund's assets. When a currency forward is used in
conjunction with an equity derivative for investment purposes, the
currency forward will not be independently counted for this
restriction.
- - When long futures contracts and long equity swaps are used for
investment, an amount of cash or high quality debt securities equal to
the face value of all such long derivative positions will be segregated
against such exposure. However, for purposes of this restriction, if an
existing long equity exposure is reduced or eliminated by a short
derivative position, the combination of the long and short position
will be considered as cash available to segregate against a new long
derivative exposure.
- - The net long equity exposure of the Fund, including direct investment
in securities and long derivative positions, will not exceed 100% of
the Fund's net assets.
- - The aggregate absolute face value of all futures contracts and swap
contracts (without regard to sign and assuming no offset of long and
short positions, and counting both components of any contract for
differences) will not exceed 100% of the Fund's assets.
- - Except when such instruments are used for bona fide hedging, no more
than 5% of the Fund's net assets will be committed to initial margin on
futures contracts and time premiums on related options.
- - Counterparties used for OTC derivatives must have a long-term debt
rating of A or higher when the derivative is entered into.
Occasionally, short-term derivatives will be entered into with
counterparties that have only high short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS
- - Buying and selling spot currencies.
- - Forward foreign currency contracts.
- - Currency futures contracts and related options.
- - Options on currencies.
- - Currency swap contracts.
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USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING
- Traditional Hedging: The Fund may effect foreign currency
transactions - generally short forward or futures contracts - to hedge
the risk of foreign currencies represented by its securities
investments back into the U.S. dollar. The Fund is not required to
hedge any of the currency risk obtained by investing in securities
denominated in foreign currencies.
- Anticipatory Hedging: When the Fund enters into a contract for the
purchase or anticipates the need to purchase a security denominated in
a foreign currency, it may "lock in" the U.S. dollar price of the
security by buying the foreign currency or through currency forwards or
futures.
- Proxy Hedging: The Fund may hedge the exposure of a given foreign
currency by using an instrument relating to a different currency, which
the Manager believes is highly correlated to the currency being hedged.
INVESTMENT
- The Fund may enter into currency forwards or futures contracts in
conjunction with entering into a futures contract on a foreign index in
order to create synthetic foreign currency denominated securities.
RISK MANAGEMENT
- Subject to the limitations described below, the Fund may use foreign
currency transactions for risk management, which will permit the Fund
to have foreign currency exposure that is significantly different than
the currency exposure represented by its portfolio investments. This
may include long exposure to particular currencies beyond the amount of
the Fund's investment in securities denominated in that currency.
LIMITATIONS OF FOREIGN CURRENCY TRANSACTIONS
- Written put and call options on currencies and currency futures will
always be covered.
- The Fund's aggregate net foreign currency exposure, assuming full
offset of long and short positions, will not exceed 100% of the Fund's
net assets denominated in foreign currencies, though the currency
exposure of the Fund may differ substantially from the currencies in
which the Fund's securities are denominated.
- The aggregate absolute face value of all currency forward, currency
futures and currency swap contracts (without regard to sign and
assuming no offset of long and short positions, and counting both
components of any contract for differences) will not exceed 50% of the
Fund's assets.
- The Fund will not be net short in any foreign currency, except that
when the Fund is attempting to hedge all or nearly all of its exposure
to a particular currency, changes in the market value of foreign
equities may cause the Fund to be temporarily net short in the
currency. Such temporary net short positions will not exceed 1% of the
Fund's assets.
GMO EMERGING MARKETS FUND
PERMITTED INVESTMENTS
EQUITY SECURITIES:
Securities Listed on Emerging Market Stock
Exchanges and Related Depository Receipts
Preferred Stock
Warrants or rights
- - The Fund will have greater than 65% of its total assets invested in or
exposed to (33) equity securities that are predominantly traded on Emerging
Market exchanges.
OTHER EQUITY SECURITIES:
Convertible Securities
Depository Receipts: ADRs, GDRs, EDRs
- - The Fund may invest in non-emerging markets countries that, based on
information obtained by GMO, derive at least half of their revenues from
trade with or production in developing countries.
- --------------
(33) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the Fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
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Foreign Issues Traded in the U.S. and Abroad
Investment Companies (open & closed-end)
Unlisted Securities
Illiquid Securities
144A Securities
Restricted Securities
Securities Traded in Unregulated Securities Markets
Indexed Securities
Equity Futures and Related Options
Exchange-Traded and OTC Options on Securities and Indexes (including writing
covered options)
Equity Swap Contracts
Contracts for Differences
Private Investment Funds, Vehicles or Structures
Debt-Equity Conversion Funds
Country Funds
- - The Fund may also invest through investment Funds, pooled accounts or other
investment vehicles designed to permit investments in a portfolio of stocks
listed in a particular developing country or region subject to obtaining
any necessary local regulatory approvals, particularly in the case of
countries in which such an investment vehicle is the exclusive or main
vehicle for foreign portfolio investment.
FIXED INCOME SECURITIES
Bonds and Money Market Instruments in Canada, the U.S., and other industrialized
nations and emerging securities markets.
- - The Fund will have no more than 10% of its assets invested in or exposed to
Fixed Income Securities other than cash equivalents or securities held on a
temporary basis.
- - The Fund may also invest, on a temporary basis, in debt securities issued
by companies or governments in developing countries or money market
securities of high-grade issuers in industrialized countries denominated in
various currencies.
CASH AND MONEY MARKET INSTRUMENTS
Any short-term assets will be invested in cash or High Quality Money Market
Instruments including securities issued by the U.S. government and agencies
thereof, bankers' acceptances, commercial paper, Bank certificates of deposit
and repurchase agreements.
- - The Fund will not normally have greater than 5% of its net assets exposed
to cash and money market instruments. This limitation does not include cash
and money market instruments in margin or other segregated accounts held
against exposure achieved through derivative instruments ("equitized cash")
FOREIGN CURRENCY TRANSACTIONS
- - Fund may invest in spot currency transactions, forward foreign currency
contracts, currency swap contracts, options on currencies, currency futures
and related options.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN
- - Except for short-term credits necessary for clearance of transactions.
SHORT SALES OF SECURITIES
- - Except when such sales are "against-the-box".
BORROWING MONEY
- - Except that the Fund may borrow up to 20% of its net assets from banks
temporarily for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES
- - Except to the extent that the Fund is deemed an underwriter for securities
law purposes in connection with disposition of portfolio investments.
MAKING LOANS
- - Except by way of purchasing of debt obligations, repurchase agreements and
securities lending. Fund may loan securities valued at up to 33% of its
total assets.
PLEDGING, HYPOTHECATING OR
- - Except that collateral arrangements with respect to swap agreements, the
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MORTGAGING FUND ASSETS
writing of options, stock index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with respect to
initial and variation margin are not deemed to be a pledge or other
encumbrance of assets. The deposit of securities or cash or cash
equivalents in escrow in connection with the writing of covered call or put
options, respectively is also not deemed to be a pledge or encumbrance.
SELLING UNCOVERED PUT AND CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
PARTICIPATING IN SOFT DOLLAR ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES
- - No more than 5% of the Fund's net assets will be invested in time premiums
on options on particular securities (as opposed to options on indexes).
- - Put and call options written by a Fund must be covered.
OTHER INVESTMENT COMPANIES
- - The Fund will not own more than 3% of the outstanding voting securities of
any investment company.
- - No more than 5% of the Fund's net assets will be invested in any single
investment company.
- - No more than 10% of the Fund's net assets will be invested in securities of
investment companies in the aggregate.
- - The Fund will not own other Funds of GMO Trust.
ILLIQUID SECURITIES
- - No more than 15% of the Fund's net assets will be invested in illiquid
securities. This includes restricted securities (except that some 144A
securities may be considered liquid by GMO if there is sufficient market
depth), repurchase agreements maturing in greater than 7 days, swap
contracts, and other securities determined by GMO not to be readily
marketable at their carried value.
INVESTMENT IN INSURANCE COMPANIES
- - The Fund will not purchase more than 10% of the total outstanding voting
stock of any insurance company (including foreign insurance companies).
INVESTMENT IN SECURITIES ISSUED BY BROKERS, DEALERS, UNDERWRITERS AND
INVESTMENT ADVISERS
- - Equity: The Fund will not purchase more than 5% of any class of stock of a
broker, dealer, underwriter or investment adviser.
- - Debt: The Fund may not purchase more than 10% of any such company's total
outstanding debt in the aggregate.
- - Investment Limits: No more than 5% of the Fund's total assets will be
invested in the securities of a single broker, dealer, underwriter or
investment adviser. The net payment obligation of swap contracts where one
of these types of companies is the counterparty also counts for purposes of
this restriction.
- - This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent fiscal
year.
UNLISTED SECURITIES/UNREGULATED SECURITIES MARKETS
- - No more than 25% of the Fund's total assets will be invested in shares of
companies that are traded in unregulated over-the-counter markets or other
types of unlisted securities markets.
DEBT-EQUITY CONVERSION FUNDS
- - No more than 10% of the Fund's assets will be invested through debt-equity
conversion funds.(34)
- ---------
(34) Debt-equity Conversion Funds may be established to exchange foreign
bank debt of countries whose principal
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DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION
- - Except for U.S. government securities, cash, and money market instruments,
the Fund will not invest more than 5% of its assets in the securities of a
single issuer.
- - The Fund will not purchase more than 10% of the outstanding securities of
any issuer. However, the Fund may own up to 100% of the outstanding
securities of investment funds, partnerships or special purpose entities
used as a means of obtaining exposure to an underlying security, securities
or market, so long as investment in the underlying securities represents
less than 10% of the outstanding securities of any particular issuer.
CONCENTRATION
- - No more than 25% of the Fund's assets will be invested in securities of
issuers in any one industry.
DERIVATIVE INSTRUMENTS (OTHER THAN FOREIGN CURRENCY TRANSACTIONS)
TYPES OF DERIVATIVES
- - Futures contracts and related options on securities indexes
- - Long equity swap contracts: where the Fund pays a fixed rate plus the
negative performance, if any, and receives the positive performance, if
any, of an index or basket of securities.
- - Short equity swap contracts: where the Fund receives a fixed rate plus the
negative performance, if any, and pays the positive performance of an index
or basket of securities
- - Contracts for differences: equity swaps that contain both a long and short
equity component.
USES OF DERIVATIVES
HEDGING
- - Traditional Hedging: Short equity futures, related options and short equity
swap contracts used to hedge against an equity risk already generally
present in the Fund.(35)
- - Anticipatory Hedging: If the Fund receives or anticipates significant cash
purchase transactions, the Fund may hedge market risk (risk of not being
invested in the market) by purchasing long futures contracts or entering
into long equity swap contracts to obtain market exposure until such time
as direct investments can be made efficiently. Conversely, if the Fund
receives or anticipates a significant demand for cash redemptions, the Fund
may sell futures contracts or enter into short equity swap contracts, to
allow the Fund to dispose of securities in a more orderly fashion without
the Fund being exposed to leveraged loss exposure in the interim.
INVESTMENT
- - The Fund may use derivative instruments (particularly long futures
contracts, related options and long equity swap contracts) in place of
investing directly in securities. This will include using equity
derivatives to "equitize" cash balances held by the Fund. Because a foreign
equity derivative generally only provides the return of a foreign market in
local currency terms, the Fund will often purchase a foreign currency
forward in conjunction with using equity derivatives to give the effect of
investing directly. The Fund may also use long derivatives for investment
in conjunction with short hedging transactions to adjust the weights of the
Fund's underlying equity portfolio to a level the Manager believes is the
optimal exposure to individual countries and equities. For example, if the
Manager expects a positive return forecast for a select
- ----------
repayments are in arrears, into a portfolio of listed and unlisted equities,
subject to certain repatriation restrictions.
(35) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g., a single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund.
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<PAGE> 210
group of companies in a particular market, but a negative return for that
market as a whole, then this Fund may overweight the select group of
equities and reduce exposure to the market generally by selling equity
futures or enter into a swap contract that is long a specific basket of
securities and short the market generally.
RISK MANAGEMENT - SYNTHETIC SALES AND PURCHASES
- - The Fund may use equity futures, related options and equity swap contracts
to adjust the weight of the Fund to a level the manager believes is the
optimal exposure to individual countries and equities. Sometimes, such
transactions are used as a precursor to actual sales and purchases. For
example, if the Fund held a large proportion of stocks of a particular
market and the Manager believed that stocks of another market would
outperform such stocks, the Fund might use a short futures contract on an
appropriate index (to synthetically "sell" a portion of the Fund's
portfolio) in combination with a long futures contract on another index (to
synthetically "buy" exposure to that index). Long and short equity swap
contracts and contracts for differences may also be used for these
purposes. Often, a foreign currency forward will be used in conjunction
with the long derivative position to create the effect of investing
directly. Equity derivatives (and corresponding currency forwards) used to
effect synthetic sales and purchases will generally be unwound as actual
portfolio securities are sold and purchased.
LIMITATIONS ON THE USE OF DERIVATIVES
- - There is no limit on the use of derivatives for hedging purposes.
- - The face value of derivatives used for investment purposes will be limited
to 25% of the Fund's assets. When a currency forward is used in conjunction
with an equity derivative for investment purposes, the currency forward
will not be independently counted for this restriction.
- - When long futures contracts and long equity swaps are used for investment,
an amount of cash or high quality debt securities equal to the face value
of all such long derivative positions will be segregated against such
exposure. However, for purposes of this restriction, if an existing long
equity exposure is reduced or eliminated by a short derivative position,
the combination of the long and short position will be considered as cash
available to segregate against a new long derivative exposure.
- - The net long equity exposure of the Fund, including direct investment in
securities and long derivative positions, will not exceed 100% of the
Fund's net assets.
- - The aggregate absolute face value of all futures contracts and swap
contracts (without regard to sign and assuming no offset of long and short
positions, and counting both components of any contract for differences)
will not exceed 100% of the Fund's assets.
- - Except when such instruments are used for bona fide hedging, no more than
5% of the Fund's net assets will be committed to initial margin on futures
contracts and time premiums on related options.
- - Counterparties used for OTC derivatives must have a long-term debt rating
of A or higher when the derivative is entered into. Occasionally,
short-term derivatives will be entered into with counterparties that have
only high short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS
- - Buying and selling spot currencies.
- - Forward foreign currency contracts.
- - Currency futures contracts and related options.
- - Options on currencies.
- - Currency swap contracts.
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING
- - Traditional Hedging: The Fund may effect foreign currency transactions -
generally short forward or futures contracts - to hedge the risk of foreign
currencies represented by its securities investments back into the U.S.
dollar.
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The Fund is not required to hedge any of the currency risk obtained by
investing in securities denominated in foreign currencies.
- - Anticipatory Hedging: When the Fund enters into a contract for the purchase
or anticipates the need to purchase a security denominated in a foreign
currency, it may "lock in" the U.S. dollar price of the security by buying
the foreign currency or through currency forwards or futures.
- - Proxy Hedging: The Fund may hedge the exposure of a given foreign currency
by using an instrument relating to a different currency which the Manager
believes is highly correlated to the currency being hedged.
INVESTMENT
- - The Fund may enter into currency forwards or futures contracts in
conjunction with entering into a futures contract on a foreign index in
order to create synthetic foreign currency denominated securities.
RISK MANAGEMENT
- - Subject to the limitations described below, the Fund may use foreign
currency transactions for risk management, which will permit the Fund to
have foreign currency exposure that is significantly different than the
currency exposure represented by its portfolio investments. This may
include long exposure to particular currencies beyond the amount of the
Fund's investment in securities denominated in that currency.
LIMITATIONS OF FOREIGN CURRENCY TRANSACTIONS
- - Written put and call options on currencies and currency futures will always
be covered.
- - The Fund's aggregate net foreign currency exposure, assuming full offset of
long and short positions, will not exceed 100% of the Fund's net assets
denominated in foreign currencies, though the currency exposure of the Fund
may differ substantially from the currencies in which the Fund's securities
are denominated.
- - The aggregate absolute face value of all currency forward, currency futures
and currency swap contracts (without regard to sign and assuming no offset
of long and short positions, and counting both components of any contract
for differences) will not exceed 50% of the Fund's assets.
- - The Fund will not be net short in any foreign currency, except that, when
the Fund is attempting to hedge all or nearly all of its exposure to a
particular currency, changes in the market value of foreign equities may
cause the Fund to be temporarily net short in the currency. Such temporary
net short positions will not exceed 1% of the Fund's assets.
GMO EVOLVING COUNTRIES FUND
PERMITTED INVESTMENTS
EQUITY SECURITIES:
Securities Listed on Evolving Country Stock Exchanges and Related Depository
Receipts
Preferred Stocks
Warrants or Rights
- - The Fund will have greater than 65% of its total assets invested in or
exposed to(36) equity securities that are predominantly traded on Evolving
Country exchanges.
- - The Fund may invest in non-evolving markets countries that, based on
information obtained by GMO, derive at least half of their revenues from
trade with or production in developing countries.
OTHER EQUITY SECURITIES:
Convertible Securities
Depository Receipts: ADRs, GDRs, EDRs
Foreign Issues Traded in the U.S. and Abroad
Investment Companies (open & closed-end)
Unlisted Securities
Illiquid Securities
- ----------
(36) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
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<PAGE> 212
144A Securities
Restricted Securities
Securities Traded in Unregulated Securities Markets
Indexed Securities
Equity Futures and Related Options
Exchange-traded and OTC Options on Securities and Indexes (including writing
covered options)
Equity Swap Contracts
Contracts for Differences
Private investment funds, vehicles or structures
Debt-equity conversion funds
Country Funds
- - The Fund may also invest through investments funds, pooled accounts or
other investment vehicles designed to permit investments in a portfolio of
stocks listed in a particular developing country or region subject to
obtaining any necessary local regulatory approvals, particularly in the
case of countries in which such an investment vehicle is the exclusive or
main vehicle for foreign portfolio investment.
FIXED INCOME SECURITIES
Bonds and Money Market Instruments in Canada, the U.S, and other
industrialized nations and emerging securities markets.
- - The Fund will have no more than 10% of its assets invested in or exposed to
Fixed Income Securities other than cash equivalents or securities held on a
temporary basis.
- - The Fund may also invest, on a temporary basis, in debt securities issued
by companies or governments in developing countries or money market
securities of high-grade issuers in industrialized countries denominated in
various currencies.
CASH AND MONEY MARKET INSTRUMENTS
Any short-term assets will be invested in cash or High Quality Money Market
Instruments including securities issued by the U.S. government and agencies
thereof, bankers' acceptances, commercial paper, bank certificates of deposit
and repurchase agreements.
- - The Fund will normally have no more than 5% of its net assets exposed to
cash and money market instruments. This limitation does not include cash
and money market instruments in margin or other segregated accounts held
against exposure achieved through derivative instruments ("equitized
cash").
FOREIGN CURRENCY TRANSACTIONS
- - Fund may invest in spot currency transactions, forward foreign currency
contracts, currency swap contracts, options on currencies, currency futures
and related options.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN
- - Except for short-term credits necessary for clearance of transactions.
SHORT SALES OF SECURITIES
- - Except when such sales are "against-the-box".
BORROWING MONEY
- - Except that the Fund may borrow up to 20% of its net assets from banks
temporarily for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES
- - Except to the extent that the Fund is deemed an underwriter for securities
law purposes in connection with disposition of portfolio investments.
MAKING LOANS
- - Except by way of purchasing of debt obligations, repurchase agreements and
securities lending. Fund may loan securities valued at up to 33 1/3% of its
total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING FUND ASSETS
- - Except that collateral arrangements with respect to swap agreements, the
writing of options, stock index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with respect to
initial and variation margin are not deemed to be a pledge or other
encumbrance of assets. The deposit of securities or cash or cash
equivalents in escrow in connection with the writing of covered call or put
options, respectively is also not deemed to be a pledge or encumbrance.
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<PAGE> 213
SELLING UNCOVERED PUT AND CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
PARTICIPATING IN SOFT DOLLAR ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES
- - No more than 5% of the Fund's net assets will be invested in time premiums
on options on particular securities (as opposed to options on indexes).
- - Put and call options written by a Fund must be covered.
OTHER INVESTMENT COMPANIES
- - The Fund will not own more than 3% of the outstanding voting securities of
any investment company.
- - No more than 5% of the Fund's net assets will be invested in any single
investment company.
- - No more than 10% of the Fund's net assets will be invested in securities of
investment companies in the aggregate.
- - The Fund will not own other Funds of GMO Trust.
ILLIQUID SECURITIES
- - No more than 15% of the Fund's net assets will be invested in illiquid
securities. This includes restricted securities (except that some 144A
securities may be considered liquid by GMO if there is sufficient market
depth), repurchase agreements maturing in greater than 7 days, swap
contracts, and other securities determined by GMO not to be readily
marketable at their carried value.
INVESTMENT IN INSURANCE COMPANIES
- - The Fund will not purchase more than 10% of the total outstanding voting
stock of any insurance company (including foreign insurance companies).
INVESTMENT IN SECURITIES ISSUED BY BROKERS, DEALERS, UNDERWRITERS AND
INVESTMENT ADVISERS
- - Equity: The Fund will not purchase more than 5% of any class of stock of a
broker, dealer, underwriter or investment adviser.
- - Debt: The Fund may not purchase more than 10% of any such company's total
outstanding debt in the aggregate.
- - Investment Limits: No more than 5% of the Fund's total assets will be
invested in the securities of a single broker, dealer, underwriter or
investment adviser. The net payment obligation of swap contracts where one
of these types of companies is the counterparty also counts for purposes of
this restriction.
- - This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent fiscal
year.
UNLISTED SECURITIES/UNREGULATED SECURITIES MARKETS
- - No more than 25% of the Fund's total assets will be invested in shares of
companies that are traded in unregulated over-the-counter markets or other
types of unlisted securities markets.
DEBT-EQUITY CONVERSION FUNDS
- - No more than 10% of the Fund's assets will be invested through debt-equity
conversion funds.(37)
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION
- - Except for U.S. government securities, cash, and money market instruments,
the Fund will not invest more than 5% of its assets in the securities of a
single issue.
- - The Fund will not purchase more than 10% of the outstanding securities of
any issuer. However, the Fund may own up to 100% of the outstanding
securities of
- ----------
(37) Debt-equity conversion funds may be established to exchange foreign
bank debt of countries whose principal repayments are in arrears, into a
portfolio of listed and unlisted equities, subject to certain repatriation
restrictions.
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investment funds, partnerships or special purpose entities used as a means
of obtaining exposure to an underlying security, securities or market, so
long as investment in the underlying securities represents less than 10% of
the outstanding securities of any particular issuer.
CONCENTRATION
- - No more than 25% of the Fund's assets will be invested in securities of
issuers in any one industry.
DERIVATIVE INSTRUMENTS (OTHER THAN FOREIGN CURRENCY TRANSACTIONS)
TYPES OF DERIVATIVES
- - Futures contracts and related options on securities indexes.
- - Long equity swap contracts: where the Fund pays a fixed rate plus the
negative performance, if any, and receives the positive performance, if
any, of an index or basket of securities.
- - Short equity swap contracts: where the Fund receives a fixed rate plus the
negative performance, if any, and pays the positive performance of an index
or basket of securities.
- - Contracts for differences: equity swaps that contain both a long and short
equity component.
USES OF DERIVATIVES
HEDGING
- - Traditional Hedging: Short equity futures, related options and short equity
swap contracts used to hedge against an equity risk already generally
present in the Fund.(38)
- - Anticipatory Hedging: If the Fund receives or anticipates significant cash
purchase transactions, the Fund may hedge market risk (risk of not being
invested in the market) by purchasing long futures contracts or entering
into long equity swap contracts to obtain market exposure until such time
as direct investments can be made efficiently. Conversely, if the Fund
receives or anticipates a significant demand for cash redemptions, the Fund
may sell futures contracts or enter into short equity swap contracts, to
allow the Fund to dispose of securities in a more orderly fashion without
the Fund being exposed to leveraged loss exposure in the interim.
INVESTMENT
- The Fund may use derivative instruments (particularly long futures
contracts, related options and long equity swap contracts) in place of
investing directly in securities. This will include using equity
derivatives to "equitize" cash balances held by the Fund. Because a foreign
equity derivative generally only provides the return of a foreign market in
local currency terms, the Fund will often purchase a foreign currency
forward in conjunction with using equity derivatives to give the effect of
investing directly. The Fund may also use long derivatives for investment
in conjunction with short hedging transactions to adjust the weights of the
Fund's underlying equity portfolio to a level the Manager believes is the
optimal exposure to individual countries and equities. For example, if the
Manager expects a positive return forecast for a select group of companies
in a particular market, but a negative return for that market as a whole,
then this Fund may overweight the select group of equities and reduce
exposure to the market generally by selling equity futures or enter into a
swap contract that is long a specific basket of securities and short the
market generally.
RISK MANAGEMENT - SYNTHETIC SALES AND PURCHASES
- - The Fund may use equity futures, related options and equity swap contracts
to adjust the weight of the Fund to a level the manager believes is the
optimal exposure to individual countries and equities. Sometimes, such
transactions are used as a precursor to actual sales and purchases. For
example, if the Fund held a large proportion of stocks of a particular
market and the Manager believed that
- ----------
(38) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g., a single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund.
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stocks of another market would outperform such stocks, the Fund might use a
short futures contract on an appropriate index (to synthetically "sell" a
portion of the Fund's portfolio) in combination with a long futures
contract on another index (to synthetically "buy" exposure to that index).
Long and short equity swap contracts and contracts for differences may also
be used for these purposes. Often, a foreign currency forward will be used
in conjunction with the long derivative position to create the effect of
investing directly. Equity derivatives (and corresponding currency
forwards) used to effect synthetic sales and purchases will generally be
unwound as actual portfolio securities are sold and purchased.
LIMITATIONS ON THE USE OF DERIVATIVES
- - There is no limit on the use of derivatives for hedging purposes.
- - The face value of derivatives used for investment purposes will be limited
to 25% of the Fund's assets. When a currency forward is used in conjunction
with an equity derivative for investment purposes, the currency forward
will not be independently counted for this restriction.
- - When long futures contracts and long equity swaps are used for investment,
an amount of cash or high quality debt securities equal to the face value
of all such long derivative positions will be segregated against such
exposure. However, for purposes of this restriction, if an existing long
equity exposure is reduced or eliminated by a short derivative position,
the combination of the long and short position will be considered as cash
available to segregate against a new long derivative exposure.
- - The net long equity exposure of the Fund, including direct investment in
securities and long derivative positions, will not exceed 100% of the
Fund's net assets.
- - The aggregate absolute face value of all futures contracts and swap
contracts (without regard to sign and assuming no offset of long and short
positions, and counting both components of any contract for differences)
will not exceed 100% of the Fund's assets.
- - Except when such instruments are used for bona fide hedging, no more than
5% of the Fund's net assets will be committed to initial margin on futures
contracts and time premiums on related options.
- - Counterparties used for OTC derivatives must have a long-term debt rating
of A or higher when the derivative is entered into. Occasionally,
short-term derivatives will be entered into with counterparties that have
only high short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS
- - Buying and selling spot currencies.
- - Forward foreign currency contracts.
- - Currency futures contracts and related options.
- - Options on currencies.
- - Currency swap contracts.
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING
- - Traditional Hedging: The Fund may effect foreign currency transactions -
generally short forward or futures contracts - to hedge the risk of foreign
currencies represented by its securities investments back into the U.S.
dollar. The Fund is not required to hedge any of the currency risk obtained
by investing in securities denominated in foreign currencies.
- - Anticipatory Hedging: When the Fund enters into a contract for the purchase
or anticipates the need to purchase a security denominated in a foreign
currency, it may "lock in" the U.S. dollar price of the security by buying
the foreign currency or through currency forwards or futures.
- - Proxy Hedging: The Fund may hedge the exposure of a given foreign currency
by using an instrument relating to a different currency, which the Manager
believes is highly correlated to the currency being hedged.
INVESTMENT
- - The Fund may enter into currency forwards or futures contracts in
conjunction with entering into a futures contract on a foreign index in
order to create synthetic foreign currency denominated securities.
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RISK MANAGEMENT
- - Subject to the limitations described below, the Fund may use foreign
currency transactions for risk management, which will permit the Fund to
have foreign currency exposure that is significantly different than the
currency exposure represented by its portfolio investments. This may
include long exposure to particular currencies beyond the amount of the
Fund's investment in securities denominated in that currency.
LIMITATIONS OF FOREIGN CURRENCY TRANSACTIONS
- - Written put and call options on currencies and currency futures will always
be covered.
- - The Fund's aggregate net foreign currency exposure, assuming full offset of
long and short positions, will not exceed 100% of the Fund's net assets
denominated in foreign currencies, though the currency exposure of the Fund
may differ substantially from the currencies in which the Fund's securities
are denominated.
- - The aggregate absolute face value of all currency forward, currency futures
and currency swap contracts (without regard to sign and assuming no offset
of long and short positions, and counting both components of any contract
for differences) will not exceed 50% of the Fund's assets.
- - The Fund will not be net short in any foreign currency, except that, when
the Fund is attempting to hedge all or nearly all of its exposure to a
particular currency, changes in the market value of foreign equities may
cause the Fund to be temporarily net short in the currency. Such temporary
net short positions will not exceed 1% of the Fund's assets.
GMO GLOBAL PROPERTIES FUND
PERMITTED INVESTMENTS
REAL ESTATE COMPANIES:
Equity Real Estate Investment Trusts
Mortgage Real Estate Investment Trusts
Real Estate Brokers or Developers
Issuers With Substantial Real Estate Holdings
- - Under normal market conditions, at least 65% of the Fund's total assets
will be invested in or exposed to(39) securities of Real Estate Companies
principally traded in the securities markets of at least three countries
(one of which may be the United States). Real Estate Companies are
securities of issuers through the world which are principally engaged in or
related to the real estate industry or which own significant real estate
assets. The Fund will not invest directly in real estate.
OTHER EQUITY INVESTMENTS:
Common Stock
Preferred Stock
Convertible Securities
Foreign Issues Traded in the U.S. and Abroad
Depository Receipts: ADRs, GDRs, EDRs
Investment Companies (open & closed-end)
Illiquid Securities
144A Securities
Restricted Securities
OTHER INVESTMENTS:
Asset-Backed Securities
Mortgage Backed, CMO's, Strips and Residuals
Adjustable Rate Securities
Lower Rated Fixed Income Securities
Zero Coupon Securities
Indexed Securities
Firm Commitments (with banks or broker-dealers)
Foreign Currency Exchange Transactions
Exchange Traded Options
- ----------
(39) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the Fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
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PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
DIRECT INVESTMENTS IN REAL ESTATE
- - The Fund will not invest directly in real estate. However, under certain
circumstances, the Fund may acquire direct real estate holdings because of
the nature of its security holdings. As a mutual fund, the Fund must derive
at least 90% of its gross income each year from investment in securities
and other assets not including real estate.
PURCHASING SECURITIES ON MARGIN
- - Except for short-term credits necessary for clearance of transactions.
BORROWING MONEY
- - Except that the Fund may borrow up to 20% of its net assets from banks
temporarily for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES
- - Except to the extent that the Fund is deemed an underwriter for securities
law purposes in connection with disposition of portfolio investments.
MAKING LOANS
- - Except by way of purchasing of debt obligations, repurchase agreements and
securities lending. Fund may loan securities valued at up to 33% of its
total assets.
SHORT SALES OF SECURITIES
PLEDGING, HYPOTHECATING OR MORTGAGING FUND ASSETS
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
PARTICIPATING IN SOFT DOLLAR ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
ILLIQUID SECURITIES
- - No more than 15% of the Fund's net assets will be invested in illiquid
securities. This includes restricted securities (except that some 144A
securities may be considered liquid by GMO if there is sufficient market
depth), repurchase agreements maturing in greater than 7 days, and other
securities determined by GMO not to be readily marketable at their carried
value.
INVESTMENT IN INSURANCE COMPANIES
- - The Fund will not purchase more than 10% of the total outstanding voting
stock of any insurance company (including foreign insurance companies).
OTHER INVESTMENT COMPANIES
- - The Fund will not own more than 3% of the outstanding voting securities of
any investment company.
- - No more than 5% of the Fund's net assets will be invested in any single
investment company.
- - No more than 10% of the Fund's net assets will be invested in securities of
investment companies in the aggregate.
- - The Fund will not own other Funds of GMO Trust.
INVESTMENT IN SECURITIES ISSUED BY BROKERS, DEALERS, UNDERWRITERS AND
INVESTMENT ADVISERS
- - Equity: The Fund will not purchase more than 5% of any class of stock of a
broker, dealer, underwriter or investment adviser.
- - Debt: The Fund may not purchase more than 10% of any such company's total
outstanding debt in the aggregate.
- - Investment Limits: No more than 5% of the Fund's total assets will be
invested in the securities of a single broker, dealer, underwriter or
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investment adviser. The net payment obligation of swap contracts where one
of these types of companies is the counterparty also counts for purposes of
this restriction.
- - This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent fiscal
year.
INVESTMENT IN LOWER-RATED BONDS
- - The Fund will not invest greater than 5% of its assets in lower-rated
bonds.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION
- - At least 50% of the Fund's total assets will be invested in U.S. government
securities, cash, and money market instruments, or other securities where
investment in such other securities is limited such that no more than 5% of
the Fund's total assets is invested in the securities of a single issuer
and the Fund owns not more than 10% of the outstanding securities of any
issuer.
- - No more than 25% of the Fund's total assets will be invested in the
securities of a single issuer.
FIXED INCOME FUNDS
GMO DOMESTIC BOND FUND
PERMITTED INVESTMENTS
At least 65% of the Fund's total assets will be invested in or exposed to(40)
"bonds" of U.S. issuers. "Bonds" mean any fixed income obligations with an
original maturity of two years or more, as well as "synthetic" bonds created by
combining a futures contract or option on a fixed income security with cash, a
cash equivalent investment or another fixed income security.
Securities Issued by Federal, State, Local and Foreign Governments (traded in
U.S. and abroad)
Convertible Bonds
Fixed Income Securities of Private Issuers
Depository Receipts: ADRs, GDRs, EDRs
Foreign Issues Traded in the U.S. and Abroad
Investment Companies (including closed-end funds)
Preferred Stock
Illiquid Securities
144A Securities
Restricted Securities
Repurchase Agreements
Reverse Repurchase Agreements
Securities Purchased and Sold on a When-Issued or Delayed Delivery Basis
Indexed Securities
Firm Commitments (with banks or broker-dealers)
Interest Rate/Bond Futures and Related Options
Exchange-Traded and OTC Options on Securities and Indexes (including writing
covered options)
Interest Rate Swap Contracts
Total Return Swap Contracts
Contracts for Differences
Interest Rate Caps, Floors and Collars
Asset-Backed Securities Including Mortgage-backed, CMOs, Strips and Residuals
Loan Participations (and other direct debt)
Adjustable Rate Securities
Zero Coupon Securities
Dollar Roll Transactions
PROHIBITED INVESTMENTS AND PRACTICES
- ----------
(40) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the
Fund's exposure to the relevant market or security through direct
investments and through derivative instruments will be considered.
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The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN
- - Except for short-term credits necessary for clearance of transactions.
SHORT SALES OF SECURITIES
- - Except when such sales are "against-the-box."
BORROWING MONEY
- - Except that the Fund may borrow up to 20% of its net assets from banks
temporarily for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES
- - Except to the extent that the Fund is deemed an underwriter for securities
law purposes in connection with disposition of portfolio investments.
MAKING LOANS
- - Except by way of purchasing of debt obligations, repurchase agreements and
securities lending. Fund may loan securities valued at up to 33 1/3% of its
total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING FUND ASSETS
- - Except that collateral arrangements with respect to swap agreements, the
writing of options, index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with respect to
initial and variation margin are not deemed to be a pledge or other
encumbrance of assets. The deposit of securities or cash or cash
equivalents in escrow in connection with the writing of covered call or put
options, respectively, is also not deemed to be a pledge or encumbrance.
INVESTMENT IN BANKRUPT CORPORATE SECURITIES
SELLING UNCOVERED PUT AND CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
PARTICIPATING IN SOFT DOLLAR ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES
- - No more than 5% of the Fund's net assets will be invested in time premiums
on options on particular securities (as opposed to options on indexes).
OTHER INVESTMENT COMPANIES
- - The Fund will not own more than 3% of the outstanding voting securities of
any investment company.
- - No more than 5% of the Fund's net assets will be invested in any single
investment company.
- - No more than 10% of the Fund's net assets will be invested in securities of
investment companies in the aggregate.
- - The Fund will not own other Funds of GMO Trust.
ILLIQUID SECURITIES
- - No more than 15% of the Fund's net assets will be invested in illiquid
securities. This includes restricted securities (except that some 144A
securities may be considered liquid by GMO if there is sufficient market
depth), repurchase agreements maturing in greater than 7 days, swap
contracts, and other securities determined by GMO not to be readily
marketable at their carried value.
INVESTMENT IN LOWER RATED SECURITIES
- - The average rating of securities in the portfolio will not be less than
A+/A1 with non-rated securities excluded from the calculation of the
average. The Fund will invest less than 5% of its assets in securities
rated BBB-/Baa3 or less.
DIVERSIFICATION/CONCENTRATION
- - The Fund will not purchase more than 10% of the outstanding securities of
any
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DIVERSIFICATION
issuer.
- - The Fund will not invest more than 25% of its total assets in securities
issued by issuers in any one country (except U.S.).
DERIVATIVE INSTRUMENTS
DERIVATIVE INSTRUMENTS (OTHER THAN FOREIGN CURRENCY TRANSACTIONS)
TYPES OF DERIVATIVES
- - Futures contracts and related options on bonds or baskets or indexes of
securities.
- - Options on bonds and other securities.
- - Swap contracts, including interest rate swaps, total return swaps, credit
default swaps and contracts for differences.
- - Structured notes.
USES OF DERIVATIVES
HEDGING
- - Traditional Hedging: Bond futures, related options, Bond options and swap
contracts used to hedge against a market or credit risk already generally
present in the Fund.
- - Anticipatory Hedging: If the Fund receives or anticipates significant cash
purchase transactions, the fund may hedge market risk (risk of not being
invested in the market) by purchasing long futures contracts or entering
into long swap contracts to obtain market exposure until such time as
direct investments can be made efficiently. Conversely, if the Fund
receives or anticipates a significant demand for cash redemptions, the Fund
may sell futures contracts or enter into short swap contracts while the
Fund disposes of securities in an orderly fashion.
INVESTMENT
- - The Fund may use derivative instruments (particularly long futures
contracts, related options and long swap contracts) in place of investing
directly in securities.
RISK MANAGEMENT
- - The Fund may use options, futures, related options and swap contracts to
adjust the weight of the Fund to a level the manager believes is the
optimal exposure to individual countries and issuers. Sometimes, such
transactions are used as a precursor to actual sales and purchases.
LIMITATIONS ON THE USE OF DERIVATIVES
- - The net long exposure of the Fund, including direct investment in
securities and long derivative positions, will not exceed 100% of the
Fund's net assets.
- - Counterparties used for OTC derivatives must have a long-term debt rating
of A or higher when the derivative is entered into. Occasionally,
short-term derivatives will be entered into with counterparties that have
only high short-term debt ratings.
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GMO U.S. BOND/GLOBAL ALPHA A FUND
While the Fund seeks to outperform a U.S. fixed income benchmark, the
Fund will also invest in foreign bond markets and foreign currencies and may
hedge some or all of its exposure to domestic or foreign markets and currencies.
The Fund will also invest up to 10% in debt securities (bonds, including
convertible bonds and loans) of Emerging Countries. The Fund generally will be
managed to have no more than 25% of the Fund's net asset value exposed to
foreign bond markets and no more than 25% of the Fund's net asset value exposed
to foreign currencies. However, aggregate long and short positions in foreign
bond markets and foreign currencies may equal up to 100% of the Fund's net asset
value in each case.
PERMITTED INVESTMENTS
At least 65% of the Fund's total assets will be invested in or exposed to(41)
"bonds." "Bonds" mean any fixed income obligations with an original maturity of
two years or more, as well as "synthetic" bonds created by combining a futures
contract or option on a fixed income security with cash, a cash equivalent
investment or another fixed income security.
Securities Issued By Federal, State, Local and Foreign Governments
Convertible Bonds
Fixed Income Securities of Private Issuers
Depository Receipts: ADRs, GDRs, EDRs
Foreign Issues Traded in the U.S. and Abroad
Investment Companies (including closed-end funds)
Preferred Stock
Illiquid Securities
144A Securities
Restricted Securities
Reverse Repurchase Agreements
Zero Coupon Securities
Securities Purchased And Sold on a When-Issued or Delayed Delivery Basis
Indexed Securities
Firm Commitments (with banks or broker-dealers)
Interest Rate/Bond Futures and Related Options
Exchange-Traded and OTC Options on Securities and Indexes (including writing
covered options)
Interest Rate Swap Contracts
Total Return Swap Contracts
Contracts for Differences
Interest Rate Caps, Floors and Collars
Asset-Backed Securities Including Mortgage-Backed, CMOs, Strips and Residuals
Loan Participations (and other direct debt)
Sovereign Debt of Emerging Countries
FOREIGN CURRENCY TRANSACTIONS
- - The Fund may invest in spot currency transactions, forward currency
contracts, currency swap contracts, options on currencies, currency futures
and related options.
- - The Fund may also use synthetic bonds and synthetic foreign currency
denominated securities(42) to approximate desired risk/return profiles.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN
- - Except for short-term credits necessary for clearance of transactions.
BORROWING MONEY
- - Except that the Fund may borrow up to 20% of its net assets from banks
temporarily for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES
- - Except to the extent that the Fund is deemed an underwriter for securities
law purposes in connection with disposition of portfolio investments.
- ----------
(41) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the
Fund's exposure to the relevant market or security through direct
investments and through derivative instruments will be considered.
(42) The Fund may purchase forward foreign exchange contracts in
conjunction with U.S. dollar-denominated securities in order to create a
synthetic foreign currency denominated security.
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MAKING LOANS
- - Except by way of purchasing of debt obligations, repurchase agreements and
securities lending. Fund may loan securities valued at up to 33"% of its
total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING FUND ASSETS
- - Except that collateral arrangements with respect to swap agreements, the
writing of options, index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with respect to
initial and variation margin are not deemed to be a pledge or other
encumbrance of assets. The deposit of securities or cash or cash
equivalents in escrow in connection with the writing of covered call or put
options, respectively is also not deemed to be a pledge or encumbrance.
SHORT SALES OF SECURITIES
INVESTMENT IN BANKRUPT CORPORATE SECURITIES
SELLING UNCOVERED PUT AND CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
PARTICIPATING IN SOFT DOLLAR ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES
- - No more than 10% of the Fund's net assets will be invested in time premiums
on options on particular securities (as opposed to options on indexes).
- - Put and call options written by a Fund must be covered.
OTHER INVESTMENT COMPANIES
- - The Fund will not own more than 3% of the outstanding voting securities of
any investment company.
- - No more than 5% of the Fund's net assets will be invested in any single
investment company.
- - No more than 10% of the Fund's net assets will be invested in securities of
investment companies in the aggregate.
- - The Fund will not own other Funds of GMO Trust.
ILLIQUID SECURITIES
- - No more than 15% of the Fund's net assets will be invested in illiquid
securities. This includes restricted securities (except that some 144A
securities may be considered liquid by GMO if there is sufficient market
depth), repurchase agreements maturing in greater than 7 days, swap
contracts, and other securities determined by GMO not to be readily
marketable at their carried value.
INVESTMENT IN LOWER RATED SECURITIES
- - The average rating of securities in the portfolio will not be less than
A+/A1 with non-rated securities excluded from the calculation of the
average. The Fund will invest less than 25% of its assets in securities
rated BBB-/Baa3 or less.
SOVEREIGN DEBT
- - The Fund will not invest greater than 10% of its total assets in sovereign
debt of Emerging Countries. These include bonds, convertible bonds and
Brady bonds, and loans of countries in Asia, Latin America, the Middle
East, Southern Europe, Eastern Europe and Africa of the type invested in by
the GMO Emerging Country Debt Fund.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION
- - The Fund will not purchase more than 10% of the outstanding securities of
any issuer.
- - The Fund will not invest more than 25% of its total assets in securities
issued by issuers in any one country (except U.S.).
DERIVATIVE INSTRUMENTS
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DERIVATIVES AND GMO'S GLOBAL BOND STRATEGY
- - The fundamental strategy of the Fund requires that the Fund take active
over-weighted and under-weighted positions with respect to particular bond
markets and currencies relative to the Fund's performance benchmark. Often
these active positions will be achieved using long and short derivative
positions and combinations of such positions to create synthetic
securities. The aggregate net exposure (assuming complete offset of
over-weighted and under-weighted positions across all markets) created by
such active positions will generally be small relative to the Fund's
benchmark - less than 25% for example. However, the total of the exposures
may be quite large. The total of the absolute values of all deviations from
the benchmark (that is, without regard to sign and allowing no netting of
positions) may exceed 100% of the value of the Fund for both bonds and
currencies, which are generally considered separately. The risk of the Fund
relative to its benchmark, however, is expected to be significantly less
than this since many markets are correlated, so that over-weighted and
under-weighted positions will often offset each other. This means that
losses relative to the benchmark from a declining bond or currency market
that is over-weighted will often be offset by losses from a correlated bond
or currency market that is under-weighted.
TYPES OF DERIVATIVES
- - Futures contracts and related options on bonds or baskets or indexes of
securities.
- - Options on bonds and other securities.
- - Swap contracts, including interest rate swaps, total return swaps, credit
default swaps and contracts for differences.
- - Structured notes.
USES OF DERIVATIVES (OTHER THAN FOREIGN CURRENCY)
HEDGING
- - Traditional Hedging: Bond futures, related options, Bond options and swap
contracts used to hedge against a market or credit risk already generally
present in the Fund.
- - Anticipatory Hedging: If the Fund receives or anticipates significant cash
purchase transactions, the fund may hedge market risk (risk of not being
invested in the market) by purchasing long futures contracts or entering
into long swap contracts to obtain market exposure until such time as
direct investments can be made efficiently. Conversely, if the Fund
receives or anticipates a significant demand for cash redemptions, the Fund
may sell futures contracts or enter into short swap contracts while the
Fund disposes of securities in an orderly fashion.
INVESTMENT
- - The Fund may use derivative instruments (particularly long futures
contracts, related options and long swap contracts) in place of investing
directly in securities. Because a foreign derivative generally only
provides the return of a foreign market in local currency terms, the Fund
will often purchase a foreign currency forward in conjunction with using
derivatives to give the effect of investing directly.
RISK MANAGEMENT
- - The Fund may use options, futures, related options and swap contracts to
adjust the weight of the Fund to a level the manager believes is the
optimal exposure to individual countries and issuers. Sometimes, such
transactions are used as a precursor to actual sales and purchases.
LIMITATIONS ON THE USE OF DERIVATIVES
- - The net long exposure of the Fund, including direct investment in
securities and long derivative positions, will not exceed 100% of the
Fund's net assets.
- - Counterparties used for OTC derivatives must have a long-term debt rating
of A or higher when the derivative is entered into. Occasionally,
short-term derivatives will be entered into with counterparties that have
only high short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
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TYPES OF FOREIGN CURRENCY TRANSACTIONS
- - Buying and selling spot currencies.
- - Forward foreign currency contracts.
- - Currency futures contracts and related options.
- - Options on currencies.
- - Currency swap contracts.
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING
- - Traditional Hedging: The Fund may effect foreign currency transactions -
generally short forward or futures contracts - to hedge the risk of foreign
currencies represented by its securities investments back into the U.S.
dollar. The Fund is not required to hedge any of the currency risk obtained
by investing in securities denominated in foreign currencies.
- - Anticipatory Hedging: When the Fund enters into a contract for the purchase
or anticipates the need to purchase a security denominated in a foreign
currency, it may "lock in" the U.S. dollar price of the security by buying
the foreign currency or through currency forwards or futures.
- - Proxy Hedging: The Fund may hedge the exposure of a given foreign currency
by using an instrument relating to a different currency which the Manager
believes is highly correlated to the currency being hedged.
INVESTMENT
- - The Fund may enter into currency forwards or futures contracts in
conjunction with entering into a futures contract on a foreign index in
order to create synthetic foreign currency denominated securities.
RISK MANAGEMENT
- - Subject to the limitations described below, the Fund may use foreign
currency transactions for risk management, which will permit the Fund to
have foreign currency exposure that is significantly different than the
currency exposure represented by its portfolio investments. This may
include long and short exposure to particular currencies beyond the amount
of the Fund's investment in securities denominated in that currency.
LIMITATIONS OF FOREIGN CURRENCY TRANSACTIONS
- - Written put and call options on currencies and currency futures will always
be covered.
GMO U.S. BOND/GLOBAL ALPHA B FUND
While the Fund seeks to outperform a U.S. fixed income benchmark, the
Fund will also invest in foreign bond markets and foreign currencies and may
hedge some or all of its exposure to domestic or foreign markets and currencies.
The Fund generally will be managed to have no more than 25% of the Fund's net
asset value exposed to foreign bond markets and no more than 25% of the Fund's
net asset value exposed to foreign currencies. However, aggregate long and short
positions in foreign bond markets and foreign currencies may equal up to 100% of
the Fund's net asset value in each case.
PERMITTED INVESTMENTS
At least 65% of the Fund's total assets will be invested in or exposed to(43)
"bonds." "Bonds" mean any fixed income obligations with an original maturity of
two years or more, as well as "synthetic" bonds created by combining a futures
contract or option on a fixed income security with cash, a cash equivalent
investment or another fixed income security.
Securities Issued by Federal, State, Local And Foreign Governments
Convertible Bonds
Fixed Income Securities of Private Issuers
Depository Receipts: ADRs, GDRs, EDRs
Securities Purchased and Sold on a When-Issued or Delayed Delivery Basis
Indexed Securities
Firm Commitments (with banks or broker-dealers)
Interest Rate/Bond Futures and Related Options
Exchange-Traded and OTC Options on Securities and Indexes (including
- ----------
(43) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the Fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
138
<PAGE> 225
Foreign Issues Traded in the U.S. and Abroad
Investment Companies (open & closed-end)
Preferred Stock
Illiquid Securities
144A Securities
Restricted Securities
Reverse Repurchase Agreements
Zero Coupon Securities
writing covered options)
Interest Rate Swap Contracts
Total Return Swap Contracts
Contracts for Differences
Interest Rate Caps, Floors and Collars
Asset-Backed Securities Including Mortgage-Backed, CMOs, Strips and Residuals
FOREIGN CURRENCY TRANSACTIONS
- - The Fund may invest in spot currency transactions, forward currency
contracts, currency swap contracts, options on currencies, currency futures
and related options.
- - The Fund may also use synthetic bonds and synthetic foreign currency
denominated securities(44) to approximate desired risk/return profiles.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN
- - Except for short-term credits necessary for clearance of transactions.
BORROWING MONEY
- - Except that the Fund may borrow up to 20% of its net assets from banks
temporarily for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES
- - Except to the extent that the Fund is deemed an underwriter for securities
law purposes in connection with disposition of portfolio investments.
MAKING LOANS
- - Except by way of purchasing of debt obligations, repurchase agreements and
securities lending. Fund may loan securities valued at up to 33"% of its
total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING FUND ASSETS
- - Except that collateral arrangements with respect to swap agreements, the
writing of options, index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with respect to
initial and variation margin are not deemed to be a pledge or other
encumbrance of assets. The deposit of securities or cash or cash
equivalents in escrow in connection with the writing of covered call or put
options, respectively, is also not deemed to be a pledge or encumbrance.
SHORT SALES OF SECURITIES
DEBT SECURITIES OF EMERGING COUNTRIES
INVESTMENT IN BANKRUPT CORPORATE SECURITIES
SELLING UNCOVERED PUT AND CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
PARTICIPATING IN SOFT DOLLAR ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES
- - No more than 10% of the Fund's net assets will be invested in time premiums
on options on particular securities (as opposed to options on indexes).
- - Put and call options written by a Fund must be covered.
- ----------
(44) The Fund may purchase forward foreign exchange contracts in
conjunction with U.S. dollar-denominated securities in order to create a
synthetic foreign currency denominated security.
139
<PAGE> 226
OTHER INVESTMENT COMPANIES
- - The Fund will not own more than 3% of the outstanding voting securities of
any investment company.
- - No more than 5% of the Fund's net assets will be invested in any single
investment company.
- - No more than 10% of the Fund's net assets will be invested in securities of
investment companies in the aggregate.
- - The Fund will not own other Funds of GMO Trust.
ILLIQUID SECURITIES
- - No more than 15% of the Fund's net assets will be invested in illiquid
securities. This includes restricted securities (except that some 144A
securities may be considered liquid by GMO if there is sufficient market
depth), repurchase agreements maturing in greater than 7 days, swap
contracts, and other securities determined by GMO not to be readily
marketable at their carried value.
INVESTMENT IN LOWER-RATED SECURITIES
- - The average rating of securities in the portfolio will not be less than
A+/A1 with non-rated securities excluded from the calculation of the
average. The Fund will invest less than 25% of its assets in securities
rated BBB-/Baa3 or less.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION
- - The Fund will not purchase more than 10% of the outstanding securities of
any issuer.
- - The Fund will not invest more than 25% of its total assets in securities
issued by issuers in any one country (except U.S.).
DERIVATIVE INSTRUMENTS
Derivatives and GMO's Global Bond Strategy
- - The fundamental strategy of the Fund requires that the Fund take active
over-weighted and under-weighted positions with respect to particular bond
markets and currencies relative to the Fund's performance benchmark. Often
these active positions will be achieved using long and short derivative
positions and combinations of such positions to create synthetic
securities. The aggregate net exposure (assuming complete offset of
over-weighted and under-weighted positions across all markets) created by
such active positions will generally be small relative to the Fund's
benchmark - less than 25% for example. However, the total of the exposures
may be quite large. The total of the absolute values of all deviations from
the benchmark (that is, without regard to sign and allowing no netting of
positions) may exceed 100% of the value of the Fund for both bonds and
currencies, which are generally considered separately. The risk of the Fund
relative to its benchmark, however, is expected to be significantly less
than this since many markets are correlated, so that over-weighted and
under-weighted positions will often offset each other. This means that
losses relative to the benchmark from a declining bond or currency market
that is over-weighted will often be offset by losses from a correlated bond
or currency market that is under-weighted.
USES OF DERIVATIVES (OTHER THAN FOREIGN CURRENCY)
TYPES OF DERIVATIVES
- - Futures contracts and related options on bonds or baskets or indexes of
securities
- - Options on bonds and other securities.
- - Swap contracts, including interest rate swaps, total return swaps, credit
default swaps and contracts for differences.
- - Structured notes.
HEDGING
- - Traditional Hedging: Bond futures, related options, Bond options and swap
contracts used to hedge against a market or credit risk already generally
present in
140
<PAGE> 227
the Fund.
- - Anticipatory Hedging: If the Fund receives or anticipates significant cash
purchase transactions, the fund may hedge market risk (risk of not being
invested in the market) by purchasing long futures contracts or entering
into long swap contracts to obtain market exposure until such time as
direct investments can be made efficiently. Conversely, if the Fund
receives or anticipates a significant demand for cash redemptions, the Fund
may sell futures contracts or enter into short swap contracts while the
Fund disposes of securities in an orderly fashion.
INVESTMENT
- - The Fund may use derivative instruments (particularly long futures
contracts, related options and long swap contracts) in place of investing
directly in securities. Because a foreign derivative generally only
provides the return of a foreign market in local currency terms, the Fund
will often purchase a foreign currency forward in conjunction with using
derivatives to give the effect of investing directly.
RISK MANAGEMENT
- - The Fund may use options, futures, related options and swap contracts to
adjust the weight of the Fund to a level the manager believes is the
optimal exposure to individual countries and issuers. Sometimes, such
transactions are used as a precursor to actual sales and purchases.
LIMITATIONS ON THE USE OF DERIVATIVES
- - The net long exposure of the Fund, including direct investment in
securities and long derivative positions, will not exceed 100% of the
Fund's net assets.
- - Counterparties used for OTC derivatives must have a long-term debt rating
of A or higher when the derivative is entered into. Occasionally,
short-term derivatives will be entered into with counterparties that have
only high short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS
- - Buying and selling spot currencies.
- - Forward foreign currency contracts.
- - Currency futures contracts and related options.
- - Options on currencies.
- - Currency swap contracts.
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING
- - Traditional Hedging: The Fund may effect foreign currency transactions -
generally short forward or futures contracts - to hedge the risk of foreign
currencies represented by its securities investments back into the U.S.
dollar. The Fund is not required to hedge any of the currency risk obtained
by investing in securities denominated in foreign currencies.
- - Anticipatory Hedging: When the Fund enters into a contract for the purchase
or anticipates the need to purchase a security denominated in a foreign
currency, it may "lock in" the U.S. dollar price of the security by buying
the foreign currency or through currency forwards or futures.
- - Proxy Hedging: The Fund may hedge the exposure of a given foreign currency
by using an instrument relating to a different currency, which the Manager
believes is highly correlated to the currency being hedged.
INVESTMENT
- - The Fund may enter into currency forwards or futures contracts in
conjunction with entering into a futures contract on a foreign index in
order to create synthetic foreign currency denominated securities.
RISK MANAGEMENT
- - Subject to the limitations described below, the Fund may use foreign
currency transactions for risk management, which will permit the Fund to
have foreign currency exposure that is significantly different than the
currency exposure represented by its portfolio investments. This may
include long and short exposure to particular currencies beyond the amount
of the Fund's investment in securities denominated in that currency.
LIMITATIONS OF FOREIGN CURRENCY
- - Written put and call options on currencies and currency futures will always
be covered.
141
<PAGE> 228
TRANSACTIONS
GMO INTERNATIONAL BOND FUND
PERMITTED INVESTMENTS
At least 65% of the Fund's total assets will be invested in or exposed to(45)
"bonds." "Bonds" mean any fixed income obligations with an original maturity of
two years or more, as well as "synthetic" bonds created by combining a futures
contract or option on a fixed income security with cash, a cash equivalent
investment or another fixed income security.
Securities Issued by Federal, State, Local and Foreign Governments
Convertible Bonds
Fixed Income Securities of Private Issuers
Depository Receipts: ADRs, GDRs, EDRs
Foreign Issues Traded in the U.S. and Abroad
Investment Companies (including closed-end funds)
Preferred Stock
Illiquid Securities
144A Securities
Restricted Securities
Repurchase Agreements
Reverse Repurchase Agreements
Zero Coupon Securities
Securities Purchased and Sold on a When-Issued or Delayed Delivery Basis
Indexed Securities
Firm Commitments (with banks or broker-dealers)
Interest Rate/Bond Futures and Related Options
Exchange-Traded and OTC Options on Securities and Indexes (including writing
covered options)
Interest Rate Swap Contracts
Total Return Swap Contracts
Contracts for Differences
Interest Rate Caps, Floors and Collars
Asset-Backed Securities Including Mortgage-Backed, CMOs, Strips and Residuals
Loan Participations (and other direct debt)
Sovereign Debt of Emerging Countries
FOREIGN CURRENCY TRANSACTIONS
- - The Fund may invest in spot currency transactions, forward currency
contracts, currency swap contracts, options on currencies, currency futures
and related options.
- - The Fund may also use synthetic bonds and synthetic foreign currency
denominated securities(46) to approximate desired risk/return profiles.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN
- - Except for short-term credits necessary for clearance of transactions.
BORROWING MONEY
- - Except that the Fund may borrow up to 20% of its net assets from banks
temporarily for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES
- - Except to the extent that the Fund is deemed an underwriter for securities
law purposes in connection with disposition of portfolio investments.
MAKING LOANS
- - Except by way of purchasing of debt obligations, repurchase agreements and
securities lending. Fund may loan securities valued at up to 33"% of its
total assets.
PLEDGING, HYPOTHECATING OR
- - Except that collateral arrangements with respect to swap agreements, the
writing of options, index, interest rate, currency or other futures,
options on
- ----------
(45) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the
Fund's exposure to the relevant market or security through direct
investments and through derivative instruments will be considered.
(46) The Fund may purchase forward foreign exchange contracts in
conjunction with U.S. dollar-denominated securities in order to create a
synthetic foreign currency denominated security.
142
<PAGE> 229
MORTGAGING FUND ASSETS
futures contracts and collateral arrangements with respect to initial and
variation margin are not deemed to be a pledge or other encumbrance of
assets. The deposit of securities or cash or cash equivalents in escrow in
connection with the writing of covered call or put options, respectively,
is also not deemed to be a pledge or encumbrance.
SHORT SALES OF SECURITIES
INVESTMENT IN BANKRUPT CORPORATE SECURITIES
SELLING UNCOVERED PUT AND CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
PARTICIPATING IN SOFT DOLLAR ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES
- - No more than 10% of the Fund's net assets will be invested in time premiums
on options on particular securities (as opposed to options on indexes).
- - Put and call options written by a Fund must be covered.
OTHER INVESTMENT COMPANIES
- - The Fund will not own more than 3% of the outstanding voting securities of
any investment company.
- - No more than 5% of the Fund's net assets will be invested in any single
investment company.
- - No more than 10% of the Fund's net assets will be invested in securities of
investment companies in the aggregate.
- - The Fund will not own other Funds of GMO Trust.
ILLIQUID SECURITIES
- - No more than 15% of the Fund's net assets will be invested in illiquid
securities. This includes restricted securities (except that some 144A
securities may be considered liquid by GMO if there is sufficient market
depth), repurchase agreements maturing in greater than 7 days, swap
contracts, and other securities determined by GMO not to be readily
marketable at their carried value.
INVESTMENT IN LOWER-RATED SECURITIES
- - The average rating of securities in the portfolio will not be less than
A+/A1 with non-rated securities excluded from the calculation of the
average. The Fund will invest less than 25% of its assets in securities
rated BBB-/Baa3 or less.
SOVEREIGN DEBT
- - The Fund will not invest greater than 10% of its total assets in sovereign
debt of Emerging Countries. These include bonds, convertible bonds and
Brady bonds, and loans of countries in Asia, Latin America, the Middle
East, Southern Europe, Eastern Europe and Africa of the type invested in by
the GMO Emerging Country Debt Fund.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION
- - The Fund will not purchase more than 10% of the outstanding securities of
any issuer.
- - The Fund will not invest more than 25% of its total assets in securities
issued by issuers in any one country (except U.S.).
DERIVATIVE INSTRUMENTS
DERIVATIVES AND GMO'S GLOBAL BOND STRATEGY
- - The fundamental strategy of the Fund requires that the Fund take active
over-weighted and under-weighted positions with respect to particular bond
markets and currencies relative to the Fund's performance benchmark. Often
these active positions will be achieved using long and short derivative
positions and
143
<PAGE> 230
combinations of such positions to create synthetic securities. The
aggregate net exposure (assuming complete offset of over-weighted and
under-weighted positions across all markets) created by such active
positions will generally be small relative to the Fund's benchmark - less
than 25%, for example. However, the total of the exposures may be quite
large. The total of the absolute values of all deviations from the
benchmark (that is, without regard to sign and allowing no netting of
positions) may exceed 100% of the value of the Fund for both bonds and
currencies, which are generally considered separately. The risk of the Fund
relative to its benchmark, however, is expected to be significantly less
than this since many markets are correlated, so that over-weighted and
under-weighted positions will often offset each other. This means that
losses relative to the benchmark from a declining bond or currency market
that is over-weighted will often be offset by losses from a correlated bond
or currency market that is under-weighted.
USES OF DERIVATIVES (OTHER THAN FOREIGN CURRENCY)
TYPES OF DERIVATIVES
- - Futures contracts and related options on bonds or baskets or indexes of
securities.
- - Options on bonds and other securities.
- - Swap contracts, including interest rate swaps, total return swaps, credit
default swaps and contracts for differences.
- - Structured notes.
HEDGING
- - Traditional Hedging: Bond futures, related options, bond options and swap
contracts used to hedge against a market or credit risk already generally
present in the Fund.
- - Anticipatory Hedging: If the Fund receives or anticipates significant cash
purchase transactions, the fund may hedge market risk (risk of not being
invested in the market) by purchasing long futures contracts or entering
into long swap contracts to obtain market exposure until such time as
direct investments can be made efficiently. Conversely, if the Fund
receives or anticipates a significant demand for cash redemptions, the Fund
may sell futures contracts or enter into short swap contracts while the
Fund disposes of securities in an orderly fashion.
INVESTMENT
- - The Fund may use derivative instruments (particularly long futures
contracts, related options and long swap contracts) in place of investing
directly in securities. Because a foreign derivative generally only
provides the return of a foreign market in local currency terms, the Fund
will often purchase a foreign currency forward in conjunction with using
derivatives to give the effect of investing directly.
RISK MANAGEMENT
- - The Fund may use options, futures, related options and swap contracts to
adjust the weight of the Fund to a level the manager believes is the
optimal exposure to individual countries and issuers. Sometimes, such
transactions are used as a precursor to actual sales and purchases.
LIMITATIONS ON THE USE OF DERIVATIVES
- - The net long exposure of the Fund, including direct investment in
securities and long derivative positions, will not exceed 100% of the
Fund's net assets.
- - Counterparties used for OTC derivatives must have a long-term debt rating
of A or higher when the derivative is entered into. Occasionally,
short-term derivatives will be entered into with counterparties that have
only high short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS
- - Buying and selling spot currencies.
- - Forward foreign currency contracts.
- - Currency futures contracts and related options.
- - Options on currencies.
- - Currency swap contracts.
USES OF FOREIGN CURRENCY
144
<PAGE> 231
TRANSACTIONS
HEDGING
- - Traditional Hedging: The Fund may effect foreign currency transactions -
generally short forward or futures contracts - to hedge the risk of foreign
currencies represented by its securities investments back into the U.S.
dollar. The Fund is not required to hedge any of the currency risk obtained
by investing in securities denominated in foreign currencies.
- - Anticipatory Hedging: When the Fund enters into a contract for the purchase
or anticipates the need to purchase a security denominated in a foreign
currency, it may "lock in" the U.S. dollar price of the security by buying
the foreign currency or through currency forwards or futures.
- - Proxy Hedging: The Fund may hedge the exposure of a given foreign currency
by using an instrument relating to a different currency, which the Manager
believes is highly correlated to the currency being hedged.
INVESTMENT
- - The Fund may enter into currency forwards or futures contracts in
conjunction with entering into a futures contract on a foreign index in
order to create synthetic foreign currency denominated securities.
RISK MANAGEMENT
- - Subject to the limitations described below, the Fund may use foreign
currency transactions for risk management, which will permit the Fund to
have foreign currency exposure that is significantly different than the
currency exposure represented by its portfolio investments. This may
include long and short exposure to particular currencies beyond the amount
of the Fund's investment in securities denominated in that currency.
LIMITATIONS OF FOREIGN CURRENCY TRANSACTIONS
- - Written put and call options on currencies and currency futures will always
be covered.
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
PERMITTED INVESTMENTS
At least 65% of the Fund's total assets will be invested in or exposed to(47)
"bonds." "Bonds" mean any fixed income obligations with an original maturity of
two years or more, as well as "synthetic" bonds created by combining a futures
contract or option on a fixed income security with cash, a cash equivalent
investment or another fixed income security.
Securities Issued by Federal, State, Local and Foreign Governments
Convertible Bonds
Fixed Income Securities of Private Issuers
Depository Receipts: ADRs, GDRs, EDRs
Foreign Issues Traded in the U.S. and Abroad
Investment Companies (including closed-end funds)
Preferred Stock
Illiquid Securities
144A Securities
Restricted Securities
Reverse Repurchase Agreements
Zero Coupon Securities
Securities Purchased and Sold on a When-Issued or Delayed Delivery Basis
Indexed Securities
Firm Commitments (with banks or broker-dealers)
Interest Rate/Bond Futures and Related Options
Exchange-traded and OTC Options on Securities and Indexes (including writing
covered options)
Interest Rate Swap Contracts
Total Return Swap Contracts
Contracts for Differences
Interest Rate Caps, Floors and Collars
Asset-Backed Securities including Mortgage-backed, CMOs, Strips and Residuals
Loan Participations (and other direct debt)
Sovereign Debt of Emerging Countries
FOREIGN CURRENCY TRANSACTIONS
- - The Fund may invest in spot currency transactions, forward currency
contracts, currency swap contracts, options on currencies, currency futures
- ----------
(47) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the
Fund's exposure to the relevant market or security through direct
investments and through derivative instruments will be considered.
145
<PAGE> 232
and related options.
- - The Fund may also use synthetic bonds and synthetic foreign currency
denominated securities(48) to approximate desired risk/return profiles.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN
- - Except for short-term credits necessary for clearance of transactions.
BORROWING MONEY
- - Except that the Fund may borrow up to 20% of its net assets from banks
temporarily for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES
- - Except to the extent that the Fund is deemed an underwriter for securities
law purposes in connection with disposition of portfolio investments.
MAKING LOANS
- - Except by way of purchasing of debt obligations, repurchase agreements and
securities lending. Fund may loan securities valued at up to 33"% of its
total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING FUND ASSETS
- - Except that collateral arrangements with respect to swap agreements, the
writing of options, index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with respect to
initial and variation margin are not deemed to be a pledge or other
encumbrance of assets. The deposit of securities or cash or cash
equivalents in escrow in connection with the writing of covered call or put
options, respectively is also not deemed to be a pledge or encumbrance.
SHORT SALES OF SECURITIES
INVESTMENT IN BANKRUPT CORPORATE SECURITIES
SELLING UNCOVERED PUT AND CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
PARTICIPATING IN SOFT DOLLAR ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES
- - No more than 10% of the Fund's net assets will be invested in time premiums
on options on particular securities (as opposed to options on indexes).
- - Put and call options written by a Fund must be covered.
OTHER INVESTMENT COMPANIES
- - The Fund will not own more than 3% of the outstanding voting securities of
any investment company.
- - No more than 5% of the Fund's net assets will be invested in any single
investment company.
- - No more than 10% of the Fund's net assets will be invested in securities of
investment companies in the aggregate.
- - The Fund will not own other Funds of GMO Trust.
ILLIQUID SECURITIES
- - No more than 15% of the Fund's net assets will be invested in illiquid
securities. This includes restricted securities (except that some 144A
securities may be considered liquid by GMO if there is sufficient market
depth), repurchase agreements maturing in greater than 7 days, swap
contracts, and other securities determined by GMO not to be readily
marketable at their
- ----------
(48) The Fund may purchase forward foreign exchange contracts in
conjunction with U.S. dollar-denominated securities in order to create a
synthetic foreign currency denominated security.
146
<PAGE> 233
carried value.
INVESTMENT IN LOWER-RATED SECURITIES
- - The average rating of securities in the portfolio will not be less than
A+/A1 with non-rated securities excluded from the calculation of the
average. The Fund will invest less than 25% of its assets in securities
rated BBB-/Baa3 or less.
SOVEREIGN DEBT
- - The Fund will not invest more than 10% of its total assets in sovereign
debt of Emerging Countries. These include bonds, convertible bonds and
Brady bonds, and loans of countries in Asia, Latin America, the Middle
East, Southern Europe, Eastern Europe and Africa of the type invested in by
the GMO Emerging Country Debt Fund.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION
- - The Fund will not purchase more than 10% of the outstanding securities of
any issuer.
- - The Fund will not invest more than 25% of its total assets in securities
issued by issuers in any one country (except U.S.).
DERIVATIVE INSTRUMENTS
DERIVATIVES AND GMO'S GLOBAL BOND STRATEGY
- - The fundamental strategy of the Fund requires that the Fund take active
over-weighted and under-weighted positions with respect to particular bond
markets and currencies relative to the Fund's performance benchmark. Often
these active positions will be achieved using long and short derivative
positions and combinations of such positions to create synthetic
securities. The aggregate net exposure (assuming complete offset of
over-weighted and under-weighted positions across all markets) created by
such active positions will generally be small relative to the Fund's
benchmark - less than 25% for example. However, the total of the exposures
may be quite large. The total of the absolute values of all deviations from
the benchmark (that is, without regard to sign and allowing no netting of
positions) may exceed 100% of the value of the Fund for both bonds and
currencies, which are generally considered separately. The risk of the Fund
relative to its benchmark, however, is expected to be significantly less
than this since many markets are correlated, so that over-weighted and
under-weighted positions will often offset each other. This means that
losses relative to the benchmark from a declining bond or currency market
that is over-weighted will often be offset by losses from a correlated bond
or currency market that is under-weighted.
Note: The Fund is a currency-hedged fund in that it will seek to limit its
aggregate net exposure to foreign currencies (assuming complete offset of
overweighted and underweighted positions across all currency markets) of
not more than 25% of the Fund's net asset value. However, the Fund will not
specifically hedge the currency exposure represented by the Fund's
investments in foreign bonds and synthetic foreign currency denominated
fixed income securities.
TYPES OF DERIVATIVES
- - Futures contracts and related options on bonds or baskets or indexes of
securities.
- - Options on bonds and other securities.
- - Swap contracts, including interest rate swaps, total return swaps, credit
default swaps and contracts for differences.
- - Structured notes.
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USES OF DERIVATIVES (OTHER THAN FOREIGN CURRENCY)
HEDGING
- - Traditional Hedging: Bond futures, related options, bond options and swap
contracts used to hedge against a market or credit risk already generally
present in the Fund.
- - Anticipatory Hedging: If the Fund receives or anticipates significant cash
purchase transactions, the fund may hedge market risk (risk of not being
invested in the market) by purchasing long futures contracts or entering
into long swap contracts to obtain market exposure until such time as
direct investments can be made efficiently. Conversely, if the Fund
receives or anticipates a significant demand for cash redemptions, the Fund
may sell futures contracts or enter into short swap contracts while the
Fund disposes of securities in an orderly fashion.
INVESTMENT
- - The Fund may use derivative instruments (particularly long futures
contracts, related options and long swap contracts) in place of investing
directly in securities. Because a foreign derivative generally only
provides the return of a foreign market in local currency terms, the Fund
will often purchase a foreign currency forward in conjunction with using
derivatives to give the effect of investing directly.
RISK MANAGEMENT
- - The Fund may use options, futures, related options and swap contracts to
adjust the weight of the Fund to a level the manager believes is the
optimal exposure to individual countries and issuers. Sometimes, such
transactions are used as a precursor to actual sales and purchases.
LIMITATIONS ON THE USE OF DERIVATIVES
- - The net long exposure of the Fund, including direct investment in
securities and long derivative positions, will not exceed 100% of the
Fund's net assets.
- - Counterparties used for OTC derivatives must have a long-term debt rating
of A or higher when the derivative is entered into. Occasionally,
short-term derivatives will be entered into with counterparties that have
only high short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS
- - Buying and selling spot currencies.
- - Forward foreign currency contracts.
- - Currency futures contracts and related options.
- - Options on currencies.
- - Currency swap contracts.
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING
- - Traditional Hedging: The Fund may effect foreign currency transactions -
generally short forward or futures contracts - to hedge the risk of foreign
currencies represented by its securities investments back into the U.S.
dollar. The Fund is not required to hedge any of the currency risk obtained
by investing in securities denominated in foreign currencies.
- - Anticipatory Hedging: When the Fund enters into a contract for the purchase
or anticipates the need to purchase a security denominated in a foreign
currency, it may "lock in" the U.S. dollar price of the security by buying
the foreign currency or through currency forwards or futures.
- - Proxy Hedging: The Fund may hedge the exposure of a given foreign currency
by using an instrument relating to a different currency, which the Manager
believes is highly correlated to the currency being hedged.
INVESTMENT
- - The Fund may enter into currency forwards or futures contracts in
conjunction with entering into a futures contract on a foreign index in
order to create synthetic foreign currency denominated securities.
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RISK MANAGEMENT
- - Subject to the limitations described below, the Fund may use foreign
currency transactions for risk management, which will permit the Fund to
have foreign currency exposure that is significantly different than the
currency exposure represented by its portfolio investments. This may
include long and short exposure to particular currencies beyond the amount
of the Fund's investment in securities denominated in that currency.
LIMITATIONS OF FOREIGN CURRENCY TRANSACTIONS
- - Written put and call options on currencies and currency futures will always
be covered.
GMO GLOBAL BOND FUND
PERMITTED INVESTMENTS
At least 65% of the Fund's total assets will be invested in or exposed to(49)
"bonds." "Bonds" mean any fixed income obligations with an original maturity of
two years or more, as well as "synthetic" bonds created by combining a futures
contract or option on a fixed income security with cash, a cash equivalent
investment or another fixed income security.
Securities issued by Federal, State, Local and Foreign Governments
Convertible bonds
Fixed Income Securities of Private Issuers
Depository Receipts: ADRs, GDRs, EDRs
Foreign Issues Traded in the U.S. and Abroad
Investment Companies (including closed-end funds)
Preferred Stock
Illiquid Securities
144A Securities
Restricted Securities
Repurchase Agreements
Reverse Repurchase Agreements
[Dollar Roll Transactions]
Adjustable Rate Securities
Zero Coupon Securities
Securities Purchased and Sold on a When-Issued or Delayed Delivery Basis
Indexed Securities
Firm Commitments (with banks or broker-dealers)
Interest Rate/Bond Futures and Related Options
Exchange-Traded and OTC Options on Securities and Indexes (including writing
covered options)
Interest Rate Swap Contracts
Total Return Swap Contracts
Contracts for Differences
Interest Rate Caps, Floors and Collars
Asset-Backed Securities including Mortgage-backed, CMOs, Strips and Residuals
Loan Participations (and other direct debt)
Sovereign Debt of Emerging Countries
FOREIGN CURRENCY TRANSACTIONS
- - The Fund may invest in spot currency transactions, forward currency
contracts, currency swap contracts, options on currencies, currency futures
and related options.
- - The Fund may also use synthetic bonds and synthetic foreign currency
denominated securities(50) to approximate desired risk/return profiles.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN
- - Except for short-term credits necessary for clearance of transactions.
BORROWING MONEY
- - Except that the Fund may borrow up to 20% of its net assets from banks
temporarily for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy.
- ----------
(49) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the
Fund's exposure to the relevant market or security through direct
investments and through derivative instruments will be considered.
(50) The Fund may purchase forward foreign exchange contracts in
conjunction with U.S. dollar-denominated securities in order to create a
synthetic foreign currency denominated security.
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UNDERWRITING SECURITIES
- - Except to the extent that the Fund is deemed an underwriter for securities
law purposes in connection with disposition of portfolio investments.
MAKING LOANS
- - Except by way of purchasing of debt obligations, repurchase agreements and
securities lending. Fund may loan securities valued at up to 33 1/3% of its
total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING FUND ASSETS
- - Except that collateral arrangements with respect to swap agreements, the
writing of options, index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with respect to
initial and variation margin are not deemed to be a pledge or other
encumbrance of assets. The deposit of securities or cash or cash
equivalents in escrow in connection with the writing of covered call or put
options, respectively, is also not deemed to be a pledge or encumbrance.
SHORT SALES OF SECURITIES
INVESTMENT IN BANKRUPT CORPORATE SECURITIES
SELLING UNCOVERED PUT AND CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
PARTICIPATING IN SOFT DOLLAR ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES
- - No more than 10% of the Fund's net assets will be invested in time premiums
on options on particular securities (as opposed to options on indexes).
OTHER INVESTMENT COMPANIES
- - The Fund will not own more than 3% of the outstanding voting securities of
any investment company.
- - No more than 5% of the Fund's net assets will be invested in any single
investment company.
- - No more than 10% of the Fund's net assets will be invested in securities of
investment companies in the aggregate.
- - The Fund will not own other Funds of GMO Trust.
ILLIQUID SECURITIES
- - No more than 15% of the Fund's net assets will be invested in illiquid
securities. This includes restricted securities (except that some 144A
securities may be considered liquid by GMO if there is sufficient market
depth), repurchase agreements maturing in greater than 7 days, swap
contracts, and other securities determined by GMO not to be readily
marketable at their carried value.
INVESTMENT IN LOWER-RATED SECURITIES
- - The average rating of securities in the portfolio will not be less than
A+/A1 with non-rated securities excluded from the calculation of the
average. The Fund will invest less than 25% of its assets in securities
rated BBB-/Baa3 or less.
SOVEREIGN DEBT
- - The Fund will not invest greater than 10% of its total assets in sovereign
debt of Emerging Countries. These include bonds, convertible bonds and
Brady bonds, and loans of countries in Asia, Latin America, the Middle
East, Southern Europe, Eastern Europe and Africa of the type invested in by
the GMO Emerging Country Debt Fund.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION
- - The Fund will not purchase more than 10% of the outstanding securities of
any issuer.
- - The Fund will not invest more than 25% of its total assets in securities
issued by
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issuers in any one country (except U.S.).
DERIVATIVE INSTRUMENTS
DERIVATIVES AND GMO'S GLOBAL BOND STRATEGY
- - The fundamental strategy of the Fund requires that the Fund take active
over-weighted and under-weighted positions with respect to particular bond
markets and currencies relative to the Fund's performance benchmark. Often
these active positions will be achieved using long and short derivative
positions and combinations of such positions to create synthetic
securities. The aggregate net exposure (assuming complete offset of
over-weighted and under-weighted positions across all markets) created by
such active positions will generally be small relative to the Fund's
benchmark - less than 25%, for example. However, the total of the exposures
may be quite large. The total of the absolute values of all deviations from
the benchmark (that is, without regard to sign and allowing no netting of
positions) may exceed 100% of the value of the Fund for both bonds and
currencies, which are generally considered separately. The risk of the Fund
relative to its benchmark, however, is expected to be significantly less
than this since many markets are correlated, so that over-weighted and
under-weighted positions will often offset each other. This means that
losses relative to the benchmark from a declining bond or currency market
that is over-weighted will often be offset by losses from a correlated bond
or currency market that is under-weighted.
TYPES OF DERIVATIVES
- - Futures contracts and related options on bonds or baskets or indexes of
securities.
- - Options on bonds and other securities.
- - Swap contracts, including interest rate swaps, total return swaps, credit
default swaps and contracts for differences.
- - Structured notes.
USES OF DERIVATIVES (OTHER THAN FOREIGN CURRENCY)
HEDGING
- - Traditional Hedging: Bond futures, related options, bond options and swap
contracts used to hedge against a market or credit risk already generally
present in the Fund.
- - Anticipatory Hedging: If the Fund receives or anticipates significant cash
purchase transactions, the fund may hedge market risk (risk of not being
invested in the market) by purchasing long futures contracts or entering
into long swap contracts to obtain market exposure until such time as
direct investments can be made efficiently. Conversely, if the Fund
receives or anticipates a significant demand for cash redemptions, the Fund
may sell futures contracts or enter into short swap contracts while the
Fund disposes of securities in an orderly fashion.
INVESTMENT
- - The Fund may use derivative instruments (particularly long futures
contracts, related options and long swap contracts) in place of investing
directly in securities. Because a foreign derivative generally only
provides the return of a foreign market in local currency terms, the Fund
will often purchase a foreign currency forward in conjunction with using
derivatives to give the effect of investing directly.
RISK MANAGEMENT
- - The Fund may use options, futures, related options and swap contracts to
adjust the weight of the Fund to a level the manager believes is the
optimal exposure to individual countries and issuers. Sometimes, such
transactions are used as a precursor to actual sales and purchases.
LIMITATIONS ON THE USE OF DERIVATIVES
- - The net long exposure of the Fund, including direct investment in
securities and long derivative positions, will not exceed 100% of the
Fund's net assets.
- - Counterparties used for OTC derivatives must have a long-term debt rating
of A or higher when the derivative is entered into. Occasionally,
short-term derivatives
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<PAGE> 238
will be entered into with counterparties that have only high short-term
debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS
- - Buying and selling spot currencies.
- - Forward foreign currency contracts.
- - Currency futures contracts and related options.
- - Options on currencies.
- - Currency swap contracts.
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING
- - Traditional Hedging: The Fund may effect foreign currency transactions -
generally short forward or futures contracts - to hedge the risk of foreign
currencies represented by its securities investments back into the U.S.
dollar. The Fund is not required to hedge any of the currency risk obtained
by investing in securities denominated in foreign currencies.
- - Anticipatory Hedging: When the Fund enters into a contract for the purchase
or anticipates the need to purchase a security denominated in a foreign
currency, it may "lock in" the U.S. dollar price of the security by buying
the foreign currency or through currency forwards or futures.
- - Proxy Hedging: The Fund may hedge the exposure of a given foreign currency
by using an instrument relating to a different currency, which the Manager
believes is highly correlated to the currency being hedged.
INVESTMENT
- - The Fund may enter into currency forwards or futures contracts in
conjunction with entering into a futures contract on a foreign index in
order to create synthetic foreign currency denominated securities.
RISK MANAGEMENT
- - Subject to the limitations described below, the Fund may use foreign
currency transactions for risk management, which will permit the Fund to
have foreign currency exposure that is significantly different than the
currency exposure represented by its portfolio investments. This may
include long and short exposure to particular currencies beyond the amount
of the Fund's investment in securities denominated in that currency.
LIMITATIONS OF FOREIGN CURRENCY TRANSACTIONS
- - Written put and call options on currencies and currency futures will always
be covered.
GMO EMERGING COUNTRY DEBT FUND
PERMITTED INVESTMENTS
FIXED INCOME SECURITIES:
Securities Issued by Federal, State, Local and Foreign Governments
Convertible Bonds, Brady Bonds
Sovereign Debt
Private Issues
Loan Participations (and other direct debt)
- - At least 65% of the Fund's total assets will be invested in or exposed
to(51) bonds.
- - At least 50% of the Fund's total assets will be denominated in "hard"
currencies such as the U.S. dollar, Japanese yen, British pound, Deutsch
mark, French franc and Canadian dollar.
- - At least 65% of the Fund's total assets will be invested in debt securities
of
- ----------
(51) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the
Fund's exposure to the relevant market or security through direct
investments and through derivative instruments will be considered.
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Emerging Countries.(52)
OTHER INVESTMENTS:
Foreign Issues Traded in the U.S. and Abroad
Investment Companies (open and closed-end)
Preferred Stock
Illiquid Securities
144A Securities
Restricted Securities
Reverse Repurchase Agreements
Securities Purchased and Sold on a When-issued or Delayed Delivery Basis
Indexed Securities
Firm Commitments (with banks or broker-dealers)
Exchange-traded and OTC Options on Securities and Indexes (including writing
covered options)
Interest Rate Swap Contracts
Total Return Swap Contracts
Contracts for Differences
Interest Rate Caps, Floors and Collars
Asset-Backed Securities Including Mortgage-Backed, CMOs, Strips and Residuals
FOREIGN CURRENCY TRANSACTIONS
- - The Fund may invest in spot currency transactions, forward currency
contracts, currency swap contracts, options on currencies, currency futures
and related options.
- - The Fund may also use synthetic bonds(53) and synthetic foreign currency
denominated securities(54) to approximate desired risk/return profiles.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN
- - Except for short-term credits necessary for clearance of transactions.
SHORT SALES OF SECURITIES
- - Except when such sales are "against-the-box."
BORROWING MONEY
- - Except that the Fund may borrow up to 20% of its net assets from banks
temporarily for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES
- - Except to the extent that the Fund is deemed an underwriter for securities
law purposes in connection with disposition of portfolio investments.
MAKING LOANS
- - Except by way of purchasing of debt obligations, repurchase agreements and
securities lending. The Fund may loan securities valued at up to 33 1/3% of
its total assets.
- ----------
(52) Emerging Countries include countries in Asia, Latin America, the
Middle East and Africa, as well as any country located in Europe that is
not in the European Community.
(53) For investment purposes, the Fund may combine futures contracts
or options on fixed income securities with cash, cash equivalent
investments or other fixed income securities to create "synthetic" bonds.
(54) The Fund may purchase forward foreign exchange contracts in
conjunction with U.S. dollar-denominated securities in order to create a
synthetic foreign currency-denominated security.
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<PAGE> 240
PLEDGING, HYPOTHECATING OR MORTGAGING FUND ASSETS
- - Except that collateral arrangements with respect to swap agreements, the
writing of options, index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with respect to
initial and variation margin are not deemed to be a pledge or other
encumbrance of assets. The deposit of securities or cash or cash
equivalents in escrow in connection with the writing of covered call or put
options, respectively, is also not deemed to be a pledge or encumbrance.
INVESTING IN SECURITIES ISSUED BY NORTHERN IRELAND COMPANIES
INVESTING IN SECURITIES ISSUED BY IRANIAN COMPANIES
INVESTING IN BANKRUPT CORPORATE SECURITIES
SELLING UNCOVERED PUT AND CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
PARTICIPATING IN SOFT DOLLAR ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES
- - No more than 10% of the Fund's net assets will be invested in time premiums
on options on particular securities (as opposed to options on indexes).
- - Put and call options written by the Fund must be covered.
OTHER INVESTMENT COMPANIES
- - The Fund will not own more than 3% of the outstanding voting securities of
any investment company.
- - No more than 5% of the Fund's net assets will be invested in any single
investment company.
- - No more than 10% of the Fund's net assets will be invested in securities of
investment companies in the aggregate.
ILLIQUID SECURITIES
- - No more than 15% of the Fund's net assets will be invested in illiquid
securities. This includes restricted securities (except that some 144A
securities may be considered liquid by GMO if there is sufficient market
depth), repurchase agreements maturing in greater than 7 days, swap
contracts, and other securities determined by GMO not to be readily
marketable at their carried value.
INVESTMENT IN LOWER-RATED SECURITIES
- - The Fund will not invest greater than 20% of its assets in securities rated
below B-/B3. Non-rated securities are not subject to this policy.
- - The average rating of securities in the portfolio will not be less than
B+/B1, with non-rated securities excluded from the calculation of the
average.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION
- - Except for U.S. government securities, cash, and money market instruments,
the Fund will not invest more than 25% of its assets in the securities of a
single issuer.
CONCENTRATION
- - The Fund will not purchase more than 10% of the outstanding securities of
any issuer.
- - The Fund will not invest more than 25% of its total assets in securities
issued by issuers in any one country (except U.S.).
DERIVATIVE INSTRUMENTS (OTHER THAN FOREIGN CURRENCY)
TYPES OF DERIVATIVES
- - Futures contracts and related options on bonds or baskets or indexes of
securities.
- - Options on bonds and other securities.
- - Swap contracts, including interest rate swaps, total return swaps, credit
default swaps and contracts for differences.
- - Structured notes.
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USES OF DERIVATIVES
HEDGING
- - Traditional Hedging: Bond futures, related options, Bond options and swap
contracts used to hedge against a market or credit risk already generally
present in the Fund.
- - Anticipatory Hedging: If the Fund receives or anticipates significant cash
purchase transactions, the fund may hedge market risk (risk of not being
invested in the market) by purchasing long futures contracts or entering
into long swap contracts to obtain market exposure until such time as
direct investments can be made efficiently. Conversely, if the Fund
receives or anticipates a significant demand for cash redemptions, the Fund
may sell futures contracts or enter into short swap contracts while the
Fund disposes of securities in an orderly fashion.
INVESTMENT
- - The Fund may use derivative instruments (particularly long futures
contracts, related options and long swap contracts) in place of investing
directly in securities. Because a foreign derivative generally only
provides the return of a foreign market in local currency terms, the Fund
will often purchase a foreign currency forward in conjunction with using
derivatives to give the effect of investing directly.
RISK MANAGEMENT - SYNTHETIC SALES AND PURCHASES
- - The Fund may use options, futures, related options and swap contracts to
adjust the weight of the Fund to a level the manager believes is the
optimal exposure to individual countries and issuers. Sometimes, such
transactions are used as a precursor to actual sales and purchases.
LIMITATIONS ON THE USE OF DERIVATIVES
- - There is no limit on the use of derivatives for hedging purposes.
- - The face value of derivatives used for investment purposes will be limited
to 25% of the Fund's assets. When a currency forward is used in conjunction
with a derivative for investment purposes, the currency forward will not be
independently counted for this restriction.
- - When long futures contracts and long swaps are used for investment, an
amount of cash or high quality debt securities equal to the face value of
all such long derivative positions will be segregated against such
exposure. However, for purposes of this restriction, if an existing long
exposure is reduced or eliminated by a short derivative position, the
combination of the long and short position will be considered as cash
available to segregate against a new long derivative exposure.
- - The net long exposure of the Fund, including direct investment in
securities and long derivative positions, will not exceed 100% of the
Fund's net assets.
- - The aggregate absolute face value of all futures contracts and swap
contracts (without regard to sign and assuming no offset of long and short
positions, and counting both components of any contract for differences)
will not exceed 100% of the Fund's assets.
- - Except when such instruments are used for bona fide hedging, no more than
5% of the Fund's net assets will be committed to initial margin on futures
contracts and time premiums on related options.
- - Counterparties used for OTC derivatives must have a long-term debt rating
of A or higher when the derivative is entered into. Occasionally,
short-term derivatives will be entered into with counterparties that have
only high short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS
- - Buying and selling spot currencies.
- - Forward foreign currency contracts.
- - Currency futures contracts and related options.
- - Options on currencies.
- - Currency swap contracts.
USES OF FOREIGN CURRENCY
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<PAGE> 242
TRANSACTIONS
HEDGING
- - Traditional Hedging: The Fund may effect foreign currency transactions -
generally short forward or futures contracts - to hedge the risk of foreign
currencies represented by its securities investments back into the U.S.
dollar. The Fund is not required to hedge any of the currency risk obtained
by investing in securities denominated in foreign currencies.
- - Anticipatory Hedging: When the Fund enters into a contract for the purchase
or anticipates the need to purchase a security denominated in a foreign
currency, it may "lock in" the U.S. dollar price of the security by buying
the foreign currency or through currency forwards or futures.
- - Proxy Hedging: The Fund may hedge the exposure of a given foreign currency
by using an instrument relating to a different currency, which the Manager
believes is highly correlated to the currency being hedged.
INVESTMENT
- - The Fund may enter into currency forwards or futures contracts in
conjunction with entering into a futures contract on a foreign index in
order to create synthetic foreign currency-denominated securities.
RISK MANAGEMENT
- - Subject to the limitations described below, the Fund may use foreign
currency transactions for risk management, which will permit the Fund to
have foreign currency exposure that is significantly different than the
currency exposure represented by its portfolio investments. This may
include long and short exposure to particular currencies beyond the amount
of the Fund's investment in securities denominated in that currency.
LIMITATIONS OF FOREIGN CURRENCY TRANSACTIONS
- - Written put and call options on currencies and currency futures will always
be covered.
- - The aggregate absolute face value of all currency forward, currency futures
and currency swap contracts (without regard to sign and assuming no offset
of long and short positions, and counting both components of any contract
for differences) will not exceed 50% of the Fund's assets.
GMO SHORT-TERM INCOME FUND
PERMITTED INVESTMENTS
U.S. Government Securities
Prime Commercial Paper
Master Demand Notes
Certificates of Deposit
Bankers' Acceptances
Other Bank Obligations (including foreign branches of domestic banks)
Foreign Securities
Repurchase Agreements
Adjustable Rate Securities
High Quality Corporate Debt Securities (including those backed by pools of
commercial or consumer finance loans)
- - The dollar-weighted average portfolio maturity of the Fund will not exceed
three years.
The Fund may purchase any of the above instruments through firm commitment
arrangements with domestic commercial banks and registered broker-dealers. The
Fund may enter into repurchase agreements with such banks and broker-dealers
with respect to any of the above instruments and with respect to longer term
U.S. Government Securities or corporate debt securities rated at least "AA" by
S&P or at least "AA" by Moody's. When the Fund has purchased a security subject
to a repurchase agreement, the amount and maturity of the Fund's investment will
be determined by reference to the amount and term of the repurchase agreement,
not by reference to the underlying security.
PROHIBITED INVESTMENTS AND PRACTICES
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<PAGE> 243
The Fund will not engage in the following practices except as indicated:
DERIVATIVE INSTRUMENTS
- - The Fund will not invest in options, futures, options on futures, forward
foreign currency contracts or swap contracts.
PURCHASING SECURITIES ON MARGIN
- - Except for short-term credits necessary for clearance of transactions.
SHORT SALES OF SECURITIES
- - Except when such sales are "against-the-box."
BORROWING MONEY
- - Except that the Fund may borrow up to 5% of its net assets from banks
temporarily for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES
- - Except to the extent that the Fund is deemed an underwriter for securities
law purposes in connection with disposition of portfolio investments.
MAKING LOANS
- - Except by way of purchasing of debt obligations, repurchase agreements and
securities lending. The Fund may loan securities valued at up to 33"% of
its total assets.
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
PARTICIPATING IN SOFT DOLLAR ARRANGEMENTS
RESTRICTIONS AND LIMITATIONS
DEBT SECURITIES/CORPORATE DEBT SECURITIES
- - At the time of investment, corporate debt securities and debt securities
backed by pools of commercial or consumer finance loans must be rated at
least "AA" by S&P or least "AA" by Moody's.
CDS, BANKERS' ACCEPTANCES/OTHER BANK DEBT OBLIGATIONS
- - At the time of investment, must be issued by banks having total assets of
at least $2 billion as of the date of the bank's most recently published
financial statements.
- - The Fund may invest in CD's of $100,000 or less of domestic banks and
savings and loan associations, regardless of total assets, if they are
insured as to the principal by the FDIC or the Federal Savings and Loan
Insurance Corporation.
PRIME COMMERCIAL PAPER/MASTER
- - At the time of investment, prime commercial paper and master Demand Notes
demand notes must be rated "A-1" by S&P or "Prime-1" by Moody's or, if
unrated, issued by companies having an outstanding debt issue rated at
least "AA" by S&P or at least "AA" by Moody's.
INVESTMENT IN SECURITIES ISSUED BY BROKERS, DEALERS, UNDERWRITERS AND
INVESTMENT ADVISERS
- - Debt: The Fund may not purchase more than 10% of any such company's total
outstanding debt in the aggregate.
- - Investment Limits: No more than 5% of the Fund's total assets will be
invested in the securities of a single broker, dealer, underwriter or
investment adviser.
- - This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent fiscal
year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION
- - Except for U.S. government securities, cash, and money market instruments,
the Fund will not invest more than 5% of its assets in the securities of a
single issue.
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CONCENTRATION
- - No more than 25% of the Fund's assets will be invested in securities of
issuers in any one industry, except that up to 100% of the Fund's assets
may be invested in obligations issued by banks, and up to 15% of its assets
in obligations issued by any one bank.
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ASSET ALLOCATION FUNDS
<TABLE>
<CAPTION>
ASSET ALLOCATION FUND: PERFORMANCE BENCHMARK:
---------------------- ----------------------
<S> <C>
WORLD EQUITY ALLOCATION FUND WORLD-LITE EXTENDED INDEX
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND GMO GLOBAL (U.S.+) EQUITY INDEX
GMO GLOBAL BALANCED ALLOCATION FUND LEHMAN BROTHERS AGGREGATE BOND
INDEX
GMO INTERNATIONAL EQUITY ALLOCATION FUND EAFE-LITE EXTENDED INDEX
</TABLE>
General Objective: Invest in other series of GMO Trust to outperform a specified
benchmark.
THE GMO ASSET ALLOCATION FUNDS (THE "FUNDS") ARE FUNDS-OF-FUNDS.
PERMITTED INVESTMENTS
The Funds will invest primarily in Class III shares of other Funds of GMO Trust
as listed below.(55) In addition, the Funds may also hold cash and invest in
short-term fixed income securities and high quality money market instruments
such as securities issued by the U.S. Government and agencies thereof, bankers'
acceptances, commercial paper and bank certificates of deposit.
Each of the Allocation Funds may invest in the other Funds of GMO Trust
indicated below and within the limits specified below:
WORLD EQUITY ALLOCATION FUND
AND
GLOBAL (U.S. +) EQUITY ALLOCATION FUND:
- - THE WORLD EQUITY ALLOCATION AND THE GLOBAL (U.S.+) EQUITY FUNDS WILL INVEST
TO VARYING EXTENTS IN THE FOLLOWING FUNDS: U. S. Core Fund, Value Fund,
Growth Fund, Fundamental Value Fund, Small Cap Value Fund, Small Cap Growth
Fund, REIT Fund, International Core Fund, Currency-Hedged International
Core Fund, Foreign Fund, International Small Companies Fund, Japan Fund,
Emerging Markets Fund and Evolving Countries Fund.
- - THE WORLD EQUITY ALLOCATION AND THE GLOBAL (U.S.+) EQUITY ALLOCATION
FUNDS MAY INVEST UP TO 15% OF THEIR RESPECTIVE NET ASSETS IN ANY
COMBINATION OF THE FOLLOWING FUNDS: Domestic Bond Fund, International
Bond Fund, Currency Hedged International Bond Fund, Global Bond Fund,
Emerging Country Debt Fund, Inflation-Indexed Bond Fund, U.S.
Bond/Global Alpha A Fund and U.S. Bond/Global Alpha B Fund.
- --------
(55) Investors in Asset Allocations Funds should be aware that the Asset
Allocation Funds will indirectly engage in the practices which the
underlying Funds in which they are invested engage.
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INTERNATIONAL EQUITY ALLOCATION FUND:
- - THE INTERNATIONAL EQUITY ALLOCATION FUND WILL INVEST TO VARYING EXTENTS
IN THE FOLLOWING FUNDS: International Core Fund, Currency Hedged
International Core Fund, Foreign Fund, International Small Companies
Fund, Japan Fund, Emerging Markets Fund and Evolving Countries Fund.
- - THE INTERNATIONAL EQUITY ALLOCATION FUND MAY INVEST UP TO 15% OF ITS
NET ASSETS IN ANY COMBINATION OF THESE FUNDS: Domestic Bond Fund,
International Bond Fund, Currency Hedged International Bond Fund,
Global Bond Fund, Emerging Country Debt Fund, Inflation Indexed Bond
Fund, U.S. Bond/Global Alpha A Fund and U.S. Bond/Global Alpha B Fund.
GLOBAL BALANCED ALLOCATION FUND:
- - THE GLOBAL BALANCED ALLOCATION FUND WILL INVEST TO VARYING EXTENTS IN
THE FOLLOWING FUNDS: U. S. Core Fund, Value Fund, Growth Fund,
Fundamental Value Fund, Small Cap Value Fund, Small Cap Growth Fund,
REIT Fund, International Core Fund, Currency Hedged International Core
Fund, Foreign Fund, International Small Companies Fund, Japan Fund,
Emerging Markets Fund and Evolving Countries Fund, Domestic Bond Fund,
International Bond Fund, Currency Hedged International Bond Fund,
Global Bond Fund, Emerging Country Debt Fund, Inflation-Indexed Bond
Fund, U.S. Bond/Global Alpha A Fund and U.S. Bond/Global Alpha B Fund.
FIXED INCOME SECURITIES
- - Global Balanced Allocation Fund has a fundamental policy that, under
normal market conditions, it will invest in equity securities of
underlying Funds such that at least 25% of its total assets will
indirectly be invested in fixed income securities.
GMO U.S. SECTOR FUND
PERMITTED INVESTMENTS
<TABLE>
<S> <C> <C>
EQUITY SECURITIES: - At least 65% of the Fund's total assets will be invested
Domestic Common Stocks in or exposed to(56) domestic common stocks.
Convertible Securities - Substantially all of the Fund's total assets will be
Securities of Foreign Issuers (traded on U.S. invested in or exposed to equity securities of at least 125
Exchanges) companies chosen from among the Wilshire 5000 Index .
- The Fund's total assets will primarily be invested in or
exposed to the "Large Cap 1200".
</TABLE>
OTHER EQUITY SECURITIES:
- ----------
(56) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the Fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
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<PAGE> 247
<TABLE>
<S> <C> <C>
Depository Receipts - The U.S. Sector Fund may invest in the securities
Illiquid Securities identified in this Summary directly or through investment in
144A Securities other Funds of GMO Trust ("Underlying Funds"). Thus, the Fund
Restricted Securities may operate as a Fund-of-Funds. The Fund may invest in any of
Futures and Related Options on the following underlying Funds:
Securities and Indexes
GMO U. S. Core Fund.
REITs GMO U. S. Growth Fund.
Exchange-Traded and OTC Options on GMO U. S. Value Fund.
Securities and Indexes GMO U. S. Small Cap Growth Fund.
(including writing covered options) GMO U. S. Small Cap Value Fund.
Equity Swap Contracts GMO U. S. REIT Fund.
Contracts for Differences
- Investors should review the Summary of Investment
Guidelines for each of these underlying Funds in
considering investment in the U.S. Sector Fund.
</TABLE>
The Fund will normally have greater than 95% of its total assets invested
in or exposed to the securities of the two categories above.
<TABLE>
<S> <C> <C>
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have greater than 5% of its net
Any short-term assets will be invested in assets exposed to cash and money market instruments. This limitation
cash or High Quality Money Market does not include cash and money market instruments in margin or other
Instruments including securities issued by segregated accounts held against exposure achieved through derivative
the U.S. government and agencies thereof, instruments ("equitized cash").
bankers" acceptances, commercial paper,
bank certificates of deposit and repurchase
agreements
</TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN
- - Except for short-term credits necessary for clearance of transactions
SHORT SALES OF SECURITIES
- - Except when such sales are "against-the-box".
BORROWING MONEY
- - Except that the Fund may borrow up to 20% of its net assets from banks
temporarily for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES
- - Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of portfolio
investments.
MAKING LOANS
- - Except by way of purchasing of debt obligations, repurchase agreements
and securities lending. Fund may loan securities valued at up to
33 1/3% of its total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING FUND ASSETS
- - Except that collateral arrangements with respect to swap agreements,
the writing of options, stock index, interest rate, currency or other
futures, options on futures contracts and collateral arrangements with
respect to initial and variation margin are not deemed to be a pledge
or other encumbrance of assets. The deposit of securities or cash or
cash equivalents in escrow in connection with the writing of covered
call or put options, respectively is also not deemed to be a pledge or
encumbrance.
SELLING UNCOVERED PUT AND CALL
OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
PARTICIPATING IN SOFT DOLLAR ARRANGEMENTS
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<PAGE> 248
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES
- - No more than 5% of the Fund's net assets will be invested in time
premiums on options on particular securities (as opposed to options on
indexes).
- - Put and call options written by a Fund must be covered.
ILLIQUID SECURITIES
- - No more than 15% of the Fund's net assets will be invested in illiquid
securities. This includes restricted securities (except that some 144A
securities may be considered liquid by GMO if there is sufficient
market depth), repurchase agreements maturing in greater than 7 days,
swap contracts, and other securities determined by GMO not to be
readily marketable at their carried value.
INVESTMENT IN INSURANCE COMPANIES
- - The Fund will not purchase more than 10% of the total outstanding
voting stock of any insurance company (including foreign insurance
companies).
INVESTMENT IN SECURITIES ISSUED BY BROKERS, DEALERS, UNDERWRITERS AND INVESTMENT
ADVISERS
- - Equity: The Fund will not purchase more than 5% of any class of stock
of a broker, dealer, underwriter or investment adviser.
- - Debt: The Fund may not purchase more than 10% of any such company's
total outstanding debt in the aggregate.
- - Investment Limits: No more than 5% of the Fund's total assets will be
invested in the securities of a single broker, dealer, underwriter or
investment adviser. The net payment obligation of swap contracts where
one of these types of companies is the counterparty also counts for
purposes of this restriction.
- - This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION
- - Except for U.S. government securities, cash, and money market
instruments, the Fund will not invest more than 5% of its assets in the
securities of a single issue.
- - The Fund will not purchase more than 10% of the outstanding securities
of any issuer.
- - The Fund will be invested in the securities of at least 125 issuers.
CONCENTRATION
- - No more than 25% of the Fund's assets will be invested in securities of
issuers in any one industry.
DERIVATIVE INSTRUMENTS
TYPES OF DERIVATIVES
- - Futures contracts and related options on securities indexes.
- - Long equity swap contracts: where the Fund pays a fixed rate plus the
negative performance, if any, and receives the positive performance, if
any, of an index or basket of securities.
- - Short equity swap contracts: where the Fund receives a fixed rate plus
the negative performance, if any, and pays the positive performance of
an index or basket of securities.
- - Contracts for differences: equity swaps that contain both a long and
short equity component.
USES OF DERIVATIVES
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<PAGE> 249
HEDGING
- - Traditional Hedging: Short equity futures, related options and short
equity swap contracts used to hedge against an equity risk already
generally present in the Fund.(57)
- - Anticipatory Hedging: If the Fund receives or anticipates significant
cash purchase transactions, the Fund may hedge market risk (risk of not
being invested in the market) by purchasing long futures contracts or
entering long equity swap contracts to obtain market exposure until
such time as direct investments can be made efficiently. Conversely, if
the Fund receives or anticipates a significant demand for cash
redemptions, the Fund may sell futures contracts or enter into short
equity swap contracts, to allow the Fund to dispose of securities in a
more orderly fashion without the Fund being exposed to leveraged loss
exposure in the interim.
INVESTMENT
- - The Fund may use derivative instruments (particularly long futures
contracts, related options and long equity swap contracts) in place of
investing directly in securities. This will include using equity
derivatives to "equitize" cash balances held by the Fund. The Fund may
also use long derivatives for investment in conjunction with short
hedging transactions to adjust the weights of the Fund's underlying
equity portfolio to a level the Manager believes is the optimal
exposure to individual markets, sectors and equities.
RISK MANAGEMENT - SYNTHETIC SALES AND PURCHASES
- - The Fund may use equity futures, related options and equity swap
contracts to adjust the weight of the Fund to a level the manager
believes is the optimal exposure to individual markets, sectors and
equities. Sometimes, such transactions are used as a precursor to
actual sales and purchases. For example, if the Fund held a large
proportion of stocks of a particular market and the Manager believed
that stocks of another market would outperform such stocks, the Fund
might use a short futures contract on an appropriate index (to
synthetically "sell" a portion of the Fund's portfolio) in combination
with a long futures contract on another index (to synthetically "buy"
exposure to that index). Long and short equity swap contracts and
contracts for differences may also be used for these purposes. Equity
derivatives (and corresponding currency forwards) used to effect
synthetic sales and purchases will generally be unwound as actual
portfolio securities are sold and purchased.
LIMITATIONS ON THE USE OF DERIVATIVES
- - There is no limit on the use of derivatives for hedging purposes.
- - The face value of derivatives used for investment purposes will be
limited to 25% of the Fund's assets. When a currency forward is used in
conjunction with an equity derivative for investment purposes, the
currency forward will not be independently counted for this
restriction.
- - When long futures contracts and long equity swaps are used for
investment, an amount of cash or high quality debt securities equal to
the face value of all such long derivative positions will be segregated
against such exposure. However, for purposes of this restriction, if an
existing long equity exposure is reduced or eliminated by a short
derivative position, the combination of the long and short position
will be considered as cash available to segregate against a new long
derivative exposure.
- - The net long equity exposure of the Fund, including direct investment
in securities and long derivative positions, will not exceed 100% of
the Fund's net assets.
- - The aggregate absolute face value of all futures contracts and swap
contracts (without regard to sign and assuming no offset of long and
short positions, and counting both components of any contract for
differences) will not exceed 100% of the Fund's assets.
- - Except when such instruments are used for bona fide hedging, no more
than 5% of the Fund's net assets will be committed to initial margin on
futures
- ----------
(57) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g., a single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund.
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<PAGE> 250
contracts and time premiums on related options.
- - Counterparties used for OTC derivatives must have a long-term debt
rating of A or higher when the derivative is entered into.
Occasionally, short-term derivatives will be entered into with
counterparties that have only high short-term debt ratings.
COMMERCIAL PAPER AND CORPORATE DEBT RATINGS
COMMERCIAL PAPER RATINGS
Commercial paper ratings of Standard & Poor's Corporation ("Standard & Poor's")
are current assessments of the likelihood of timely payment of debts having
original maturities of no more than 365 days. Commercial paper rated A-1 by
Standard & Poor's indicates that the degree of safety regarding timely payment
is either overwhelming or very strong. Those issues determined to possess
overwhelming safety characteristics are denoted A-1+. Commercial paper rated A-2
by Standard & Poor's indicates that capacity for timely payment on issues is
strong. However, the relative degree of safety is not as high as for issues
designated A-1. Commercial paper rated A-3 indicates capacity for timely
payment. It is, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
The rating Prime-1 is the highest commercial paper rating assigned by Moody's
Investors Service, Inc. ("Moody's"). Issuers rated Prime-1 (or related
supporting institutions) are considered to have a superior capacity for
repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) have a strong capacity for repayment of
short-term promissory obligations. This will normally be evidenced by many of
the characteristics of Prime-1 rated issuers, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variations.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternative liquidity is maintained. Issuers rated
Prime-3 have an acceptable capacity for repayment of short-term promissory
obligations. The effect of industry characteristics and market composition may
be more pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and the requirement of
relatively high financial leverage. Adequate alternative liquidity is
maintained.
CORPORATE DEBT RATINGS
Standard & Poor's Corporation. A Standard & Poor's corporate debt rating is a
current assessment of the creditworthiness of an obligor with respect to a
specific obligation. The following is a summary of the ratings used by Standard
& Poor's for corporate debt:
AAA -- This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA -- Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay interest and repay principal is very strong, and in the maturity of
instances they differ from AAA issues only in small degree.
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<PAGE> 251
A -- Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC -- Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C -- The rating C is reserved for income bonds on which no interest is being
paid.
D -- Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Moody's Investors Services, Inc. The following is a summary of the ratings used
by Moody's Investor Services, Inc. for corporate debt:
Aaa -- Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large, or by an exceptionally
stable, margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds that are rated Aa are judged to be high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds that are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable
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<PAGE> 252
over any great length of time. Such bonds lack outstanding investment
characteristics and, in fact, have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often, the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Should no rating be assigned by Moody's, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are
not rated as a matter of policy.
3. There is lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1 and B1.
FINANCIAL STATEMENTS
The Trust's audited financial statements for the fiscal year ended
February 28, 1999 included in the Trust's Annual Reports filed with the
Securities and Exchange Commission on May 10, 1999 pursuant to Section 30(d) of
the Investment Company Act of 1940, as amended, and the rules promulgated
thereunder, are (with the exception of the financial statements relating to the
Pelican
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<PAGE> 253
Fund, the GMO Tax-Managed U.S. Equities Fund and the GMO Tax-Managed
International Equities Fund) hereby incorporated in this Statement of Additional
Information by reference.
GMO TRUST
SPECIMEN PRICE-MAKE-UP SHEETS
Following are computations of the total offering price per share for
each class of shares of each Fund of the Trust (except for the Pelican Fund and
the Tax-Managed Funds) offering shares of beneficial interest as of February 28,
1999, in each case based upon their respective net asset values and shares of
beneficial interest outstanding at the close of business on February 28, 1999.
<TABLE>
<S> <C>
U.S. Core Fund-Class II
Net Assets at Value (Equivalent to $18.57 per share based on 2,244,091 shares of
beneficial interest outstanding) $41,683,734
Offering Price ($18.57 x 100/99.86) * $18.60
Core Fund-Class III
Net Assets at Value (Equivalent to $18.59 per share based on 95,765,511 shares of $1,780,010,556
beneficial interest outstanding)
Offering Price ($18.59 x 100/99.86)* $18.62
Core Fund-Class IV
Net Assets at Value (Equivalent to $18.58 per share based on 83,082,861 shares of $1,543,655,409
beneficial interest outstanding)
Offering Price ($18.58 x 100/99.86)* $18.61
Tobacco-Free Core Fund-Class III
Net Assets at Value (Equivalent to $14.26 per share based on 15,926,141 shares of
beneficial interest outstanding) $227,158,485
Offering Price ($14.26 x 100/99.86)* $14.28
Value Fund-Class III
Net Assets at Value (Equivalent to $10.40 per share based on 19,509,551 shares of $202,841,748
beneficial interest outstanding)
Offering Price ($10.40 x 100/99.86) * $10.41
Fundamental Value Fund-Class III
Net Assets at Value (Equivalent to $7.07 per share based on 11,614,256 shares of
beneficial interest outstanding) $82,061,827
Offering Price ($7.07 x 100/99.85)* $7.08
Growth Fund-Class III
Net Assets at Value (Equivalent to $4.14 per share based on 38,161,658 shares of $158,084,241
beneficial interest outstanding)
Offering Price ($4.14 x 100/99.86)* $4.15
Small Cap Value Fund-Class III
Net Assets at Value (Equivalent to $11.69 per share based on 29,733,908 shares of
beneficial interest outstanding) $347,683,667
Offering Price ($11.69 x 100/99.50)* $11.75
Small Cap Growth Fund-Class III
</TABLE>
*Represents maximum offering price charged on certain cash purchases. See
"Purchase of Shares" in the Shareholder's Manual.
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<TABLE>
<S> <C>
Net Assets at Value (Equivalent to $10.88 per share based on 11,941,849 shares of
beneficial interest outstanding) $129,983,371
Offering Price ($10.88 x 100/99.50) * $10.93
REIT Fund-Class III
Net Assets at Value (Equivalent to $9.13 per share based on 15,679,339 shares of
beneficial interest outstanding) $143,129,061
Offering Price ($9.13 x 100/99.50) * $9.18
International Core Fund-Class II
Net Assets at Value (Equivalent to $20.33 per share based on 900,016 shares of $18,295,165
beneficial interest outstanding)
Offering Price ($20.33 x 100/99.40)* $20.45
International Core Fund-Class III
Net Assets at Value (Equivalent to $20.38 per share based on 98,063,484 shares of $1,998,447,051
beneficial interest outstanding)
Offering Price ($20.38 x 100/99.40)* $20.50
International Core Fund-Class IV
Net Assets at Value (Equivalent to $20.37 per share based on 27,849,815 shares of $567,219,366
beneficial interest outstanding)
Offering Price ($20.37 x 100/99.40)* $20.49
Currency Hedged International Core Fund-Class III
Net Assets at Value (Equivalent to $9.28 per share based on 10,505,539 shares of
beneficial interest outstanding) $97,450,066
Offering Price ($9.28 x 100/99.40)* $9.34
Currency Hedged International Core Fund-Class IV
Net Assets at Value (Equivalent to $9.27 per share based on 11,752,364 shares of
beneficial interest outstanding) $108,955,994
Offering Price ($9.27 x 100/99.40)* $9.33
Foreign Fund-Class II
Net Assets at Value (Equivalent to $11.79 per share based on 2,864,266 shares of $33,779,775
beneficial interest outstanding)
Offering Price $11.79
Foreign Fund-Class III
Net Assets at Value (Equivalent to $11.81 per share based on 78,531,599 shares of
beneficial interest outstanding) $927,108,342
Offering Price $11.81
Foreign Fund-Class IV
Net Assets at Value (Equivalent to $11.81 per share based on 11,072,392 shares of
beneficial interest outstanding) $130,759,656
Offering Price $11.81
International Small Companies Fund-Class III
Net Assets at Value (Equivalent to $11.02 per share based on 14,345,328 shares of
beneficial interest outstanding) $158,141,534
Offering Price ($11.02 x 100/99.00)* $11.13
Japan Fund-Class III
</TABLE>
*Represents maximum offering price charged on certain cash purchases. See
"Purchase of Shares" in the Shareholder's Manual.
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<TABLE>
<S> <C>
Net Assets at Value (Equivalent to $6.20 per share based on 20,716,627 shares of $128,389,472
beneficial interest outstanding)
Offering Price ($6.20 x 100/99.60)* $6.22
Emerging Markets Fund-Class III
Net Assets at Value (Equivalent to $6.31 per share based on 83,107,843 shares of $524,741,263
beneficial interest outstanding
Offering Price ($6.31 x 100/98.40) * $6.41
Emerging Markets Fund-Class IV
Net Assets at Value (Equivalent to $6.31 per share based on 41,401,009 shares of $261,186,930
beneficial interest outstanding)
Offering Price ($6.31 x 100/98.40)* $6.41
Evolving Countries Fund-Class III
Net Assets at Value (Equivalent to $5.74 per share based on 5,527,608 shares of
beneficial interest outstanding) $31,718,289
Offering Price ($5.74 x 100/98.4) * $5.83
Asia Fund-Class III
Net Assets at Value (Equivalent to $7.67 per share based on 10,094,391 shares of
beneficial interest outstanding) $77,404,021
Offering Price ($7.67 x 100/98.80) * $7.76
Global Properties Fund-Class III
Net Assets at Value (Equivalent to $7.96 per share based on 984,265 shares of
beneficial interest outstanding) $7,831,831
Offering Price ($7.96 x 100/99.40) * $8.01
Global Hedged Equity Fund-Class III
Net Assets at Value (Equivalent to $7.59 per share based on 6,678,751 shares of
beneficial interest outstanding) $50,670,702
Offering Price ($7.59 x 100/99.63) * $7.62
Domestic Bond Fund-Class III
Net Assets at Value (Equivalent to $9.65 per share based on 18,150,835 shares of $175,070,670
beneficial interest outstanding)
Offering Price $9.65
U.S. Bond/Global Alpha A Fund-Class III
Net Assets at Value (Equivalent to $10.23 per share based on 14,047,932 shares of
beneficial interest outstanding) $143,702,899
Offering Price ($10.23 x 100/99.85) * $10.25
U.S. Bond/Global Alpha B Fund-Class III
Net Assets at Value (Equivalent to $7.18 per share based on 19,250,632 shares of
beneficial interest outstanding) $138,146,240
Offering Price ($7.18 x 100/99.85) * $7.19
International Bond Fund-Class III
Net Assets at Value (Equivalent to $10.06 per share based on 18,065,517 shares of
beneficial interest outstanding) $181,828,896
Offering Price ($10.06 x 100/99.85)* $10.08
</TABLE>
*Represents maximum offering price charged on certain cash purchases. See
"Purchase of Shares" in the Shareholder's Manual.
*Represents maximum offering price charged on certain cash purchases. See
"Purchase of Shares" in the Shareholder's Manual.
169
<PAGE> 256
<TABLE>
<S> <C>
Currency Hedged International Bond Fund-Class III
Net Assets at Value (Equivalent to $10.47 per share based on 30,919,079 shares of
beneficial interest outstanding) $323,711,300
Offering Price ($10.47 x 100/99.85) * $10.49
Global Bond Fund-Class III
Net Assets at Value (Equivalent to $9.87 per share based on 16,536,313 shares of
beneficial interest outstanding) $163,210,494
Offering Price ($9.87 x 100/99.85)* $9.88
Emerging Country Debt Fund-Class III
Net Assets at Value (Equivalent to $6.89 per share based on 65,316,585 shares of
beneficial interest outstanding) $450,336,336
Offering Price ($6.89 x 100/99.50)* $6.92
Emerging Country Debt Fund-Class IV
Net Assets at Value (Equivalent to $6.90 per share based on 46,885,196 shares of
beneficial interest outstanding) $323,284,624
Offering Price ($6.90 x 100/99.50)* $6.93
Short-Term Income Fund-Class III
Net Assets at Value (Equivalent to $9.63 per share based on 5,543,812 shares of
beneficial interest outstanding) $53,387,397
Offering Price $9.63
Inflation Indexed Bond Fund-Class III
Net Assets at Value (Equivalent to $9.88 per share based on 2,544,042 shares of
beneficial interest outstanding) $25,147,410
Offering Price ($9.88 x 100/99.90) * $9.89
Emerging Country Debt Share Fund
Net Assets at Value (Equivalent to $6.84 per share based on 6,024,383 shares of
beneficial interest outstanding) * $41,215,717
Offering Price $6.84
International Equity Allocation Fund-Class III
Net Assets at Value (Equivalent to $8.28 per share based on 10,891,670 shares of
beneficial interest outstanding) $90,161,168
Offering Price ($8.28 x 100/99.20) * $8.35
World Equity Allocation Fund-Class III
Net Assets at Value (Equivalent to $8.52 per share based on 3,472,311 shares of
beneficial interest outstanding) $29,581,806
Offering Price ($8.52 x 100/99.34)* $8.58
Global (U.S.+) Equity Allocation Fund-Class III
Net Assets at Value (Equivalent to $8.85 per share based on 3,670,478 shares of
beneficial interest outstanding) $32,473,608
Offering Price ($8.85 x 100/99.53) * $8.89
Global Balanced Allocation Fund-Class III
Net Assets at Value (Equivalent to $10.51 per share based on 12,144,101 shares of $127,600,424
beneficial interest outstanding)
Offering Price ($10.51 x 100/99.65)* $10.55
</TABLE>
*Represents maximum offering price charged on certain cash purchases. See
"Purchase of Shares" in the Shareholder's Manual.
170
<PAGE> 257
<TABLE>
<S> <C>
U.S. Sector Fund-Class III
Net Assets at Value (Equivalent to $4.63 per share based on 3,636,151 shares of $16,830,002
beneficial interest outstanding)
Offering Price ($4.63 x 100/99.73)* $4.64
</TABLE>
171
<PAGE> 258
GMO TAX-MANAGED U.S. EQUITIES FUND
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
40 Rowes Wharf, Boston, Massachusetts 02110
The GMO TAX-MANAGED U.S. EQUITIES FUND (the "TAX-MANAGED U.S. EQUITIES
FUND") and the GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (the "TAX-MANAGED
INTERNATIONAL EQUITIES FUND") (each a "FUND" and collectively the "FUNDS") are
two of thirty-six separate investment portfolios currently offered by GMO TRUST
(the "TRUST"), an open-end management investment company. The other portfolios
are offered pursuant to separate prospectuses. GRANTHAM, MAYO, VAN OTTERLOO &
CO. LLC (the "MANAGER" or "GMO") is the investment manager for each of the
Funds.
INVESTMENT MANAGER &
CLIENT SERVICE PROVIDER
GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC
Tel: (617) 346-7646 (call collect)
Fax: (617) 439-4192
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PROSPECTUS JUNE 30, 1999
<PAGE> 259
-TABLE OF CONTENTS
FUND OBJECTIVES AND SUMMARY OF PRINCIPAL INVESTMENT STRATEGIES................5
GMO TAX-MANAGED U.S. EQUITIES FUND.........................................6
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND................................7
SUMMARY OF PRINCIPAL RISKS....................................................8
FEES AND EXPENSES............................................................12
BENCHMARKS AND INDEXES.......................................................13
DETERMINATION OF NET ASSET VALUE.............................................14
SPECIAL INFORMATION ON REDEMPTIONS IN KIND...................................15
TAXES........................................................................15
MANAGEMENT OF THE TRUST......................................................16
FINANCIAL HIGHLIGHTS.........................................................17
ADDITIONAL INFORMATION.......................................................18
PURCHASE AND SALE INFORMATION................................................18
SHAREHOLDER INQUIRIES........................................................18
2
<PAGE> 260
SUMMARY OF FUND OBJECTIVES AND
PRINCIPAL INVESTMENT STRATEGIES
This summary describes each Fund's investment objective and principal
investment strategies. Each Fund may make other investments and engage in other
investment strategies that are not specifically described in the Summary. The
INVESTMENT GUIDELINES contain a more complete description of each Fund's
possible investments and strategies. These Guidelines are in the Statement of
Additional Information or are available separately. See the back cover of the
Prospectus for information about how to receive the Statement of Additional
Information or the Investment Guidelines.
PRINCIPAL RISKS. Investing in mutual funds involves risk and it is
possible to lose money on an investment in a Fund. Each Fund is subject to
certain risks based on the types of investments in the Fund's portfolio and on
the investment strategies the Fund employs. Because each of the Funds has
different investments and employs different strategies, each Fund's risk profile
is different. Investors should refer to the SUMMARY OF PRINCIPAL Risks in the
Prospectus at page 6 for a discussion of the principal risks of investing in a
Fund. See the Statement of Additional Information for more complete information
about the risks of specific Fund investments and strategies.
An investment in the Funds is not a deposit of a bank and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
In many of the Fund summaries that follow, it is noted that a
particular Fund will "invest primarily in" a particular type of securities or
other assets. Investors should understand that this Prospectus uses the word
"invest" to mean not only direct investment in a particular asset but also
indirect investment in or exposure to the asset through the use of derivatives
and related instruments.
The Funds are managed and/or meant to be measured relative to a
specified benchmark or index. While the Funds may be managed or measured
relative to these benchmarks or indexes, neither of the Funds is managed as an
"index fund" or "index-plus fund," and the actual composition of a Fund's
portfolio may differ substantially from that of its benchmark or index. The
benchmark or index against which the Manager measures its performance (the "GMO
Benchmark") is listed immediately below the relevant Fund's name under "Fund
Objectives and Principal Investment Strategies" and may be changed from time to
time. Some general information about the benchmarks and indexes is provided
under "Benchmarks and Indexes" later in this Prospectus.
Each Fund may employ various strategies designed to minimize the impact
of taxes on investors' returns. The Manager will seek to control portfolio
turnover in order to defer the realization and minimize the distributions of
capital gains. The Manager may, when appropriate, sell securities in order to
realize capital losses. Losses may be used at various times to offset realized
capital gains, thus reducing net capital gains distributions. In addition, when
making sales of specific securities, the Manager considers strategies, such as
selling securities with the highest cost basis, to minimize capital gains. The
Manager also plans to meet redemption requests through in-kind redemptions, that
is, to pay the redemption price in whole or in part by a distribution of
appreciated securities held by the Fund in lieu of cash. By redeeming a
shareholder in-kind with appreciated securities, the Fund will generally not be
required to distribute the capital gains in those securities to the shareholders
in the Fund. The effect to the redeeming shareholder is the same for federal
income tax purposes as a redemption in cash.
Except for certain policies that are explicitly described as
fundamental in this Prospectus or in the Statement of Additional Information,
each Fund's investment objective and policies may be changed by the Trustee
without shareholder approval.
3
<PAGE> 261
GMO TAX-MANAGED U.S. EQUITIES FUND
<TABLE>
<CAPTION>
FUND CODES
FUND INCEPTION DATE: 7/23/98 Ticker Symbol Cusip
-----------------------------------------------
<S> <C> <C> <C>
Class III n/a n/a 362008 71 6
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Tax-Managed U.S. Equities Fund seeks high
after-tax total return primarily through investment in U.S. equity securities.
The Fund's current benchmark is the GMO S&P 500 (After Tax).
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities of
companies chosen from among the 1000 companies with the largest equity
capitalization and whose securities are listed on a United States national
securities exchange. The Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivatives and related instruments to: (i) hedge equity
exposure; (ii) replace direct investing; and (iii) implement shifts in
investment exposure as a substitute for buying and selling securities. The Fund
will not use derivative instruments to expose on a net basis more than 100% of
its net assets to equity securities or markets.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund pursues a disciplined long-term
value approach that emphasizes high quality companies (those less affected by
adverse economic conditions) and undervalued sectors. The Manager uses a
macroeconomic approach to analyze and allocate to sectors that represent the
best long-term value. The Manager selects individual stocks based, in part, on a
proprietary dividend discount model. The Manager then uses a tax-sensitive
optimization process to evaluate a stock's return forecast and how much risk the
stock adds to the portfolio, and to weigh the risk of the entire portfolio
relative to the Fund's benchmark. In addition, the Manager explicitly considers
expected transaction costs in the tax-sensitive portfolio optimization.
RISKS: The most significant risks of an investment in the Fund are Market Risk,
Derivatives Risk, Leveraging Risk and Credit and Counterparty Risk. For more
information about these risks and other principal risks of an investment in the
Fund, see "Summary of Principal Risks" on page 6.
No performance information is included in this section because the Fund
commenced operations in 1998.
4
<PAGE> 262
GMO TAX-MANAGED INTERNATIONAL
EQUITIES FUND
<TABLE>
<CAPTION>
FUND CODES
FUND INCEPTION DATE: 7/29/98 Ticker Symbol Cusip
--------------------------------------------------
<S> <C> <C> <C> <C>
Class III GTMIX n/a 362008 66 6
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Tax-Managed International Equities Fund seeks high
after-tax total return primarily through investment in non-U.S. equity
securities. The Fund's current benchmark is the GMO EAFE (After Tax).
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities of
companies in developed markets in the MSCI Perspectives universe, which includes
issuers in the MSCI EAFE index, small companies and Canadian companies.
The Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund may invest a portion of its assets in
securities of emerging markets issuers chosen from the IFC Global Emerging
Markets database. The Fund may use exchange-traded and over-the-counter
derivatives and related instruments to: (i) hedge equity exposure; (ii) replace
direct investing; (iii) implement shifts in investment exposure as a substitute
for selling and buying securities; and (iv) adjust its foreign currency
exposure. The Fund will not use derivative instruments to expose on a net basis
more than 100% of its net assets to equity securities or markets, or to hold net
aggregate foreign currency exposure in excess of the net assets of the Fund.
However, the Fund's foreign currency exposure may differ significantly from the
currency exposure represented by its equity investments.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund pursues a disciplined long-term
value approach that emphasizes high quality companies (those less affected by
adverse economic conditions). The Manager uses a macroeconomic approach to
analyze and allocate to countries, sectors and currencies that represent the
best long-term value. The Manager selects individual stocks based, in part, on a
proprietary dividend discount model. The Manager then uses a tax-sensitive
optimization process to weigh the trade off between a stock's return forecast
and how much risk the stock adds to the portfolio, the risk and forecasted
return of all active currency positions and the risk of the entire portfolio
relative to the Fund's benchmark. In addition, the Manager explicitly considers
expected transaction costs in the tax-sensitive portfolio optimization.
RISKS: The most significant risks of an investment in GMO Tax-Managed
International Equities Fund are Market Risk, Derivatives Risk, Foreign
Investment Risk, Currency Risk, Leveraging Risk and Credit and Counterparty
Risk. For more information about these risks and other principal risks of an
investment in the Fund, see "Summary of Principal Risks" on page 6.
No performance information is included in this section because the Fund
commenced operations in 1998.
5
<PAGE> 263
SUMMARY OF PRINCIPAL RISKS
The value of your investment in a Fund changes with the values of that
Fund's investments. Many factors can affect those values, and you can lose money
by investing in the Funds. Factors that may affect a particular Fund's portfolio
as a whole are called "principal risks" and are summarized in this section. This
summary describes the nature of these risks but is not intended to include every
potential risk. The Funds could be subject to additional principal risks because
the types of investments made by each Fund change over time. The "Investment
Guidelines" for each Fund set forth in the Statement of Additional Information
include more information about the Funds and their investments. Copies of the
Investment Guidelines and copies of the complete Statement of Additional
Information are available free of charge by contacting the Manager.
- MARKET RISK. Both of the Funds are subject to market risk, which is
the risk of unfavorable market-induced changes in the value of the securities
owned by a Fund. The following summarizes certain general market risks
associated with investments in equity securities.
EQUITY SECURITIES. A principal risk of each Fund is that the equity
securities held by the Fund will decline in value due to factors affecting the
issuing companies, their industries, or the economy and equity markets
generally. The values of equity securities may decline for a number of reasons
that directly relate to the issuing company, such as management performance,
financial leverage and reduced demand for the issuer's goods or services. They
may also decline due to factors that affect a particular industry or industries,
such as labor shortages or increased production costs and competitive conditions
within an industry. In addition, they may decline due to general market
conditions which are not specifically related to a company or industry, such as
real or perceived adverse economic conditions, changes in the general outlook
for corporate earnings, changes in interest or currency rates or adverse
investor sentiment generally.
The Funds maintain substantial exposure to equities and generally do
not attempt to time the market. Because of this exposure, the possibility that
stock market prices in general will decline over short or even extended periods
subjects the Funds to unpredictable declines in the value of their shares, as
well as periods of poor performance.
Value Securities Risk. Some equity securities (generally referred to as
"value securities") are purchased primarily because they are selling at a price
lower than what is believed to be their true value and not necessarily because
the issuing companies are expected to experience significant earnings growth.
Such companies may have experienced adverse business developments or may be
subject to special risks. Other factors may also have caused their securities to
be out of favor. However, these securities bear the risk that the companies may
not overcome the adversity or that the market does not recognize the value of
the company, such that the price of the securities may decline or may not
approach the value that the Manager anticipates. Since value criteria are used
extensively by the Manager with both Funds, both Funds will be exposed to these
risks.
Growth Securities Risk. Some equity securities (generally known as
"growth securities") are purchased primarily because it is believed that the
companies issuing the securities will experience relatively rapid earnings
growth. Growth securities typically trade at higher multiples of current
earnings than other types of stocks. As a general rule, growth securities often
are more sensitive to general market movements than other types of stocks
because their market prices tend to place greater emphasis on future earnings
expectations. At times when it appears that these expectations may not be met,
growth stock prices typically fall. Both of the Funds may invest to a
significant extent in growth securities, and therefore both Funds are subject to
these risks.
- LIQUIDITY RISK. Liquidity risk exists when particular investments
are difficult to purchase or sell due to a limited market or to legal
restrictions, such that a Fund may be prevented from selling particular
securities at the price at which the Fund values them. Both Funds are subject to
liquidity risk. Funds with principal investment strategies that involve
securities of companies with smaller market capitalizations, foreign securities,
derivatives or securities with substantial market and/or credit risk tend to
have the greatest exposure
6
<PAGE> 264
to liquidity risk.
- SMALLER COMPANY RISK. Market risk and liquidity risk are particularly
pronounced for securities of companies with smaller market capitalizations.
These companies may have limited product lines, markets or financial resources
or they may depend on a few key employees. Securities of smaller companies may
trade less frequently and in lesser volume than more widely held securities and
their values may fluctuate more sharply than other securities. They may also
trade in the over-the-counter market or on a regional exchange, or may otherwise
have limited liquidity. Investments in smaller, less seasoned companies may
present greater opportunities for growth and capital appreciation, but also
involve greater risks than customarily are associated with larger, more
established companies. Each Fund may invest to a significant extent in the
securities of smaller companies.
- DERIVATIVES RISK. Both of the Funds may use derivatives, which are
financial contracts whose value depends upon, or is derived from, the value of
an underlying asset, reference rate or index. Derivatives may relate to stocks,
bonds, interest rates, currencies or currency exchange rates, commodities, and
related indexes. The Funds may use derivatives for many purposes, including for
hedging and as a substitute for direct investment in securities or other assets.
The Funds may also use derivatives as a way to efficiently adjust the exposure
of the Funds to various securities, indexes and currencies without actually
selling current assets and purchasing different assets. This is generally done
either because the adjustment is expected to be relatively temporary or in
anticipation of effecting the sales and purchases of Fund assets over time. For
a description of the various derivative instruments that may be utilized by the
Funds, please see "Description and Risks of Fund Investments" and "Investment
Guidelines" in the Statement of Additional Information.
The use of derivative instruments involves risks different from, or
greater than, the risks associated with investing directly in securities and
other more traditional investments. Derivatives are subject to a number of risks
described elsewhere in this section, including market risk, liquidity risk and
the credit risk of the counterparty to the derivatives contract. Since their
value is calculated and derived from the value of other assets, instruments or
references, there is greater risk that derivatives will be improperly valued.
Derivatives also involve the risk that changes in the value of the derivative
may not correlate perfectly with relevant assets, rates or indexes they are
designed to hedge or to closely track. Also, suitable derivative transactions
may not be available in all circumstances and there can be no assurance that a
Fund will engage in these transactions to reduce exposure to other risks when
that would be beneficial.
- FOREIGN INVESTMENT RISK Funds that invest in securities traded
principally in securities markets outside the United States are subject to
additional and more varied risks, and may experience more rapid and extreme
changes in value. The securities markets of many foreign countries are
relatively small, with a limited number of companies representing a small number
of industries. Additionally, issuers of foreign securities may not be subject to
the same degree of regulation as U.S. issuers. Reporting, accounting and
auditing standards of foreign countries differ, in some cases significantly,
from U.S. standards. There are generally higher commission rates on foreign
portfolio transactions, transfer taxes, higher custodial costs and the
possibility that foreign taxes will be charged on dividends and interest payable
on foreign securities. Also, for lesser developed countries, nationalization,
expropriation or confiscatory taxation, adverse changes in investment or
exchange control regulations (which may include suspension of the ability to
transfer currency from a country), political changes or diplomatic developments
could adversely affect a Fund's investments. In the event of nationalization,
expropriation or other confiscation, a Fund could lose its entire investment in
foreign securities.
7
<PAGE> 265
While both Funds are exposed to these risks to some extent, these risks
will be particularly pronounced for the Tax-Managed International Equities Fund,
which expects to invest a significant portion of its assets in foreign
securities.
- CURRENCY RISK. Currency risk is the risk that fluctuations in the
exchange rates may negatively affect the value of a Fund's investments. Currency
risk includes both the risk that currencies in which a Fund's investments are
denominated or currencies in which a Fund has taken an active investment
position will decline in value relative to the U.S. Dollar and, in the case of
hedging positions, that the U.S. Dollar will decline in value relative to the
currency being hedged. Currency rates in foreign countries may fluctuate
significantly for a number of reasons, including the forces of supply and demand
in the foreign exchange markets, actual or perceived changes in interest rates,
and intervention (or the failure to intervene) by U.S. or foreign governments or
central banks, or by currency controls or political developments in the U.S. or
abroad.
The Tax-Managed International Equity Fund may engage in proxy hedging
of currencies by entering into derivative transactions with respect to a
currency whose value is expected to correlate to the value of a currency the
Fund owns or wants to own. In the case of cross-hedging positions, currency risk
also includes the risk that the two currencies may not move in relation to one
another as expected. In that case, the Fund could lose money on its investment
and also lose money on the position designed to act as a proxy-hedge. This Fund
may also take active currency positions and may cross-hedge currency exposure
represented by its securities exposure into another foreign currency. This may
result in the Fund's currency exposure being substantially different than that
suggested by its securities investments.
All Funds that invest or trade in foreign currencies or in securities
denominated in foreign currencies or related derivative instruments may be
adversely affected by changes in foreign currency exchange rates. Currency risk
is particularly pronounced for the Tax-Managed International Equities Fund,
which regularly enters into derivative foreign currency transactions and may
take active long and short currency positions through exchange traded and
over-the-counter ("OTC") foreign currency transactions for investment purposes.
Derivative foreign currency transactions (such as futures, forwards and swaps)
may also involve leveraging risk in addition to currency risk as described below
under "Leveraging Risk."
- NON-DIVERSIFICATION RISK. Most analysts believe that overall risk can
be reduced through diversification, while concentration of investments in a
small number of securities increases risk. Neither Fund is "diversified" within
the meaning of the 1940 Act. This means they are permitted to invest in a
relatively small number of issuers and/or foreign currencies with greater
concentration of risk.
- LEVERAGING RISK. Each Fund's portfolio may at times be economically
leveraged when the Fund temporarily borrows money to meet redemption requests
and/or to settle investment transactions.
Additionally, both Funds may invest in derivatives and may enter into
reverse repurchase agreements. While neither Fund intends to use derivatives to
create net exposure to securities, currencies or other assets in amounts greater
than the total assets of the Fund, the Funds will often consider derivative
instruments as offsetting one another or other assets such that only the net
difference in the value of the derivatives and/or assets that are offsetting
will be considered for these purposes. In these cases, to the extent that the
offsetting positions do not behave in relation to one another as expected, the
Funds may perform as if they were leveraged.
This same compounding of risks can occur in the Tax-Managed
International Equities Fund, which may take on simultaneous long and short
positions in different currencies. While these long and short positions are
managed such that the Fund's net investment in foreign currency does not exceed
the Fund's net assets, a lack of correlation between currencies (which may or
may not be anticipated by the Manager) may expose more than one hundred percent
of the Fund's assets to currency risk. Similarly, the Funds may take long and
short positions on equity securities and/or "baskets" of equity securities,
including simultaneous positions through the use of a single derivative
instrument such as a swap contract or other over-the-counter derivative
instrument. A lack of
8
<PAGE> 266
correlation between the equity securities that are the subject of these
instruments (which may or may not be anticipated by the Manager) could expose
more than 100% of the Fund's portfolio to equity securities risk.
- CREDIT AND COUNTERPARTY RISK. This is the risk that the issuer or
guarantor of a fixed income security, the counterparty to an OTC derivatives
contract, or a borrower of the Fund's securities, will be unable or unwilling to
make timely principal, interest or settlement payments, or to otherwise honor
its obligations.
Although the Funds do not expect to have a significant portion of their
portfolios invested in fixed income securities, the Funds are nonetheless
exposed to credit risk because they may make substantial use of OTC derivatives
(such as forward foreign currency contracts and swap contracts) and because they
may engage to a significant extent in the lending of Fund securities or use of
repurchase agreements.
- MANAGEMENT RISK. Each Fund is subject to management risk because it
relies on the Manager's ability to pursue its objective. The Manager will apply
investment techniques and risk analyses in making investment decisions for the
Funds, but there can be no guarantee that these will produce the desired
results. As noted above, the Manager may also fail to use derivatives
effectively, for example, choosing to hedge or not to hedge positions precisely
when it is least advantageous to do so. As indicated above, however, the Funds
are generally not subject to the risk of market timing because they generally
stay fully invested in the relevant asset class, such as domestic equities and
foreign equities.
- SPECIAL YEAR 2000 RISK CONSIDERATIONS. Many of the services provided
to the Funds depend on the proper functioning of computer systems. Many systems
in use today cannot distinguish between the year 1900 and the year 2000. Should
any of the Funds' service systems fail to process information properly, that
could have an adverse impact on the Funds' operations and services provided to
shareholders. GMO, as well as the Funds' administrator, transfer agent,
custodian and other service providers, have reported that each is working toward
mitigating the risks associated with the "Year 2000 problem." However, there can
be no assurance that the problems will be corrected in all respects and that the
Funds' operations and services provided to shareholders will not be adversely
affected, nor can there be any assurance that the Year 2000 problem will not
have an adverse effect on the entities whose securities are held by the Fund or
on U.S or global markets generally.
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<PAGE> 267
FEES AND EXPENSES
This table describes the fees and expenses you may pay if you buy and hold
shares of a Fund.
<TABLE>
<CAPTION>
GMO FUND NAME PURCHASE AND REDEMPTION ANNUAL FUND OPERATING EXPENSES
FEES (expenses that are deducted from Fund assets)
(fees paid directly to
Fund at purchase or
redemption)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Redemption Investment Shareholder Other TOTAL Expense NET
Purchase Fees Management Service Fee(3) Expenses OPERATING Reimbursement(4) EXPENSES
Premium (as a % of Fee EXPENSES
(as a % amount
of amount redeemed)(1)
invested)(1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax-Managed U.S. 0.14%(2) None 0.33% 0.15% 1.29% 1.77% 1.29% 0.48%
Equities Fund -
Class III
Tax-Managed 0.60%(2) None 0.54% 0.15% 2.16% 2.85% 2.16% 0.69%
International
Equities Fund -
Class III
</TABLE>
NOTES TO FEES AND EXPENSES
1. Purchase premiums and redemption fees generally apply only to cash
transactions. These fees are paid to and retained by the Fund itself
and are designed to allocate transaction costs caused by shareholder
activity to the shareholder generating the activity, rather than to the
Fund as a whole. The Manager may reduce these fees in certain limited
circumstances described below.
Normally, no purchase premium is charged with respect to in-kind
purchases of Fund shares. However, in the case of in-kind purchases
involving transfers of large positions in markets where the cost of
re-registration and/or other transfer expenses are high, the
Tax-Managed International Equities Fund may charge a premium of up to
0.10% on in-kind purchases.
2. The purchase premium and/or redemption fee for this Fund may generally
not be waived due to offsetting transactions, and may be waived in only
rare circumstances. The premium or fee will only be waived for this
Fund (i) if the purchase or redemption is part of a transfer from or to
another Fund where the Manager is able to transfer securities among the
Funds as part of effecting the transaction, (ii) during periods
(expected to exist only rarely) when the Manager determines that the
Fund is either substantially overweighted or underweighted with respect
to its cash position so that a redemption or purchase will not require
a securities transaction, or (iii) in certain other instances (not
including offsetting transactions) where it is compelling to the
Manager that the purchase or redemption will not result in transaction
costs to the Fund. Any waiver with respect to this Fund must be
arranged in advance with the Manager.
3. Shareholder Service Fee ("SSF") paid to GMO for providing client
services and reporting services. The level of SSF is the sole economic
distinction between the various classes of Fund shares. A lower SSF for
larger investments reflects that the cost of servicing client accounts
is lower for larger accounts when expressed as a percentage of the
account.
4. The Manager has contractually agreed to reimburse each Fund with
respect to certain Fund expenses through at least June 30, 2000 to the
extent that the Fund's total annual operating expenses (excluding
Shareholder Service Fees, brokerage commissions and other
investment-related costs, hedging
10
<PAGE> 268
transaction fees, extraordinary, non-recurring and certain other
unusual expenses (including taxes), securities lending fees and
expenses and transfer taxes) would otherwise exceed the percentage of
that Fund's daily net assets set forth under the heading "Investment
Management Fee" for each Fund.
EXAMPLES
The examples below illustrate the expenses you would incur on a $10,000
investment over the stated periods, assuming your investment had a 5% return
each year and the Fund's operating expenses remained the same. The examples are
for comparative purposes only; they do not represent past or future expenses or
performance, and your actual expenses and performance may be higher or lower.
Except as otherwise noted, the expenses shown assume no reimbursement of
expenses by the Manager.
<TABLE>
<CAPTION>
EXAMPLE 1:
Assuming you redeem your shares EXAMPLE 2:
at the end of each period Assuming you do not redeem your shares
GMO FUND NAME 1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years
- -----------------------------------------------------------------------------------------------------------------------------------
(after reimbursement) (after reimbursement)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax-Managed U.S Equities Fund - Class III $63 $445 $851 $1,988 $63 $445 $851 $1,988
Tax-Managed International Equities Fund -
Class III $130 $734 $1,364 $3,062 $130 $734 $1,364 $3,062
</TABLE>
BENCHMARKS AND INDEXES
For each of the Funds, the GMO benchmark differs from the broad-based
index that the SEC requires each Fund to use in the average annual return table
in that it is measured on an "after tax" basis. This means that the Manager
measures the relevant Fund's after tax performance against the Manager's
calculation of the after tax performance of the relevant benchmark. Some general
information about each benchmark and index referred to in this Prospectus is
provided in the table below.
<TABLE>
<CAPTION>
ABBREVIATION FULL NAME SPONSOR OR PUBLISHER DESCRIPTION
<S> <C> <C> <C>
GMO S&P 500 (after tax) GMO S&P 500 Index (after GMO GMO calculates this index by
tax) applying a 40% tax (credit) on
short-term realized capital gains
(losses), a 40% tax on income, and a
20% tax (credit) on long-term
realized capital gains (losses) on
the securities comprising the S&P
500 Index
GMO EAFE (after tax) GMO EAFE Index (after tax) GMO GMO calculates this index by
applying a 40% tax (credit) on
short-term realized capital gains
(losses), a 40% tax on income, and a
20% tax (credit) on long-term
realized capital gains (losses) on
the securities comprising the MSCI
EAFE Index
</TABLE>
11
<PAGE> 269
DETERMINATION OF NET ASSET VALUE
The net asset value of a share is determined for each Fund once on each
day on which the New York Stock Exchange is open, except that a Fund may not
determine its net asset value on days during which no security is tendered for
redemption and no order to purchase or sell such security is received by the
relevant Fund. Net asset value is determined as of 4:15 p.m., New York City
Time. A Fund's net asset value is determined by dividing the total market value
of the Fund's portfolio investments and other assets, less any liabilities, by
the total outstanding shares of the Fund. Portfolio securities listed on a
securities exchange for which market quotations are available are valued at the
last quoted sale price on each business day or, if there is no such reported
sale, at the most recent quoted bid price. However, for those securities that
are listed on an exchange but that exchange is less relevant in determining the
market value of such securities than is the private market, a broker bid will be
used. Criteria for relevance include where the securities are principally traded
and what their intended market for disposition is. Price information on listed
securities is generally taken from the closing price on the exchange where the
security is primarily traded. Unlisted securities for which market quotations
are readily available are valued at the most recent quoted bid price, except
that debt obligations with sixty days or less remaining until maturity may be
valued at their amortized cost, unless circumstances dictate otherwise.
Circumstances may dictate otherwise, among other times, when the issuer's
creditworthiness has become impaired.
All other fixed income securities (which include bonds, loans and
structured notes) and options thereon are valued at the closing bid for such
securities as supplied by a primary pricing source chosen by the Manager. While
the Manager evaluates such primary pricing sources on an ongoing basis, and may
change any pricing source at any time, the Manager will not normally evaluate
the prices supplied by the pricing sources on a day-to-day basis. However, the
Manager is kept informed of erratic or unusual movements (including unusual
inactivity) in the prices supplied for a security and has the power to override
any price supplied by a source (by taking a price supplied from another) because
of such price activity or because the Manager has other reasons to suspect that
a price supplied may not be reliable.
Other assets and securities for which no quotations are readily
available are valued at fair value as determined in good faith by the Trustees
or persons acting at their direction. The values of foreign securities quoted in
foreign currencies are translated into U.S. dollars at current exchange rates or
at such other rates as the Trustees may determine in computing net asset value.
Because of time zone differences, foreign exchanges and securities
markets will usually be closed prior to the time of the closing of the New York
Stock Exchange and values of foreign options and foreign securities will be
determined as of the earlier closing of such exchanges and securities markets.
However, events affecting the values of such foreign securities may occasionally
occur between the earlier closings of such exchanges and securities markets and
the closing of the New York Stock Exchange which will not be reflected in the
computation of the Funds' net asset value. If an event materially affecting the
value of such foreign securities occurs during such period, then such securities
may be valued at fair value as determined in good faith by the Trustees or
persons acting at their direction.
Because foreign securities, options on foreign securities and foreign
futures are quoted in foreign currencies, fluctuations in the value of such
currencies in relation to the U.S. dollar will affect the net asset value of
shares of the Funds even though there has not been any change in the values of
such securities and options measured in terms of the foreign currencies in which
they are denominated.
12
<PAGE> 270
SPECIAL INFORMATION ON REDEMPTIONS IN KIND
General information relating to the purchase and redemption of Fund
shares is contained in the GMO Trust Shareholder's Manual. In addition,
investors in the Tax-Managed Funds should be aware that they may be more likely
to have a redemption request honored "in kind" than shareholders of other funds.
More specifically, if the Manager determines, in its sole discretion, that it
would be detrimental to the best interests of the remaining shareholders of a
Fund to make payment wholly or partly in cash, the Fund may pay the redemption
price in whole or in part by a distribution in kind of securities held by the
Fund in lieu of cash. Securities used to redeem Fund shares in kind will be
valued in accordance with the Fund's procedures for valuation described under
"Determination of Net Asset Value." Securities distributed by a Fund in kind
will be selected by the Manager in light of the Fund's objective and will not
generally represent a pro rata distribution of each security held in the Fund's
portfolio. Any in kind redemptions will be of readily marketable securities to
the extent available. Investors may incur brokerage charges on the sale of any
such securities so received in payment of redemptions.
TAXES
The following is a general summary of the principal federal income tax
consequences of investing in a Fund for shareholders who are U.S. citizens,
residents or domestic corporations. Shareholders should consult their own tax
advisors about the precise tax consequences of an investment in a Fund in light
of each shareholder's particular tax situation, including possible foreign,
state, local or other applicable tax laws (including the federal alternative
minimum tax).
- - Each Fund is treated as a separate taxable entity for federal income
tax purposes and intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as
amended.
- - Fund distributions derived from interest, dividends and certain other
income, including in general short-term capital gains, will be taxable
as ordinary income to shareholders subject to federal income tax
whether received in cash or reinvested shares. Properly designated Fund
distributions derived from net long-term capital gains will be taxable
as such (generally at a 20% rate for noncorporate shareholders).
Distributions by a Fund result in a reduction in the net asset value of
the Fund's shares. Should a distribution reduce the net asset value
below a shareholder's cost basis, such distribution nevertheless may be
taxable to the shareholder as described above, even though, from an
investment standpoint, it may constitute a partial return of capital.
In particular, shareholders should be careful to consider the tax
implications of buying shares just prior to a taxable distribution. The
price of shares purchased at that time includes the amount of any
forthcoming distribution. Shareholders purchasing shares just prior to
a taxable distribution will receive a return of investment upon
distribution that nevertheless will be taxable to them.
- - A Fund's investments in foreign securities may be subject to foreign
withholding taxes on dividends or interest. In that case, such Fund's
yield on those securities would be decreased. In certain instances,
shareholders may be entitled to claim a credit or deduction with
respect to foreign taxes.
- - In addition, a Fund's investments in foreign securities, foreign
currencies, debt obligations issued or purchased at a discount, assets
"marked to the market" for federal income tax purposes and,
potentially, so-called "indexed securities" (including inflation
indexed bonds) may increase or accelerate such Fund's recognition of
income, including the recognition of taxable income in excess of the
cash generated by such investments. These investments may, therefore,
affect the timing or amount of such Fund's distributions and may cause
such Fund to liquidate other investments to satisfy the distribution
requirements that apply to entities taxed as regulated investment
companies.
13
<PAGE> 271
- - Any gain resulting from the sale or exchange of your shares, including
a redemption in kind, will generally also be subject to tax.
MANAGEMENT OF THE TRUST
The Funds are advised and managed by Grantham, Mayo, Van Otterloo & Co.
LLC, 40 Rowes Wharf, Boston, Massachusetts 02110 (the "Manager" or "GMO") which
provides investment advisory services to a substantial number of institutional
and other investors. Each of the following four members holds a greater than 5%
interest in the Manager: R. Jeremy Grantham, Richard A. Mayo, Eyk H.A. Van
Otterloo and Kingsley Durant.
Under separate Management Contracts with each Fund, the Manager selects
and reviews each Fund's investments and provides executive and other personnel
for the management of the Trust. Pursuant to the Trust's Agreement and
Declaration of Trust, the Board of Trustees supervises the affairs of the Trust
as conducted by the Manager. In the event that the Manager ceases to be the
manager of the Fund, the right of the Trust to use the identifying name "GMO"
may be withdrawn.
Each Management Contract provides for payment to the Manager of a
management fee at the stated annual rates set forth under "Fees and Expenses."
The management fee is computed and accrued daily, and paid monthly. In addition,
with respect to each Fund, the Manager has contractually agreed to reimburse
each Fund and to bear certain Fund expenses until at least June 30, 2000 in
order to limit each Fund's annual expenses to specified limits (with certain
exclusions). These limits and the terms applicable to them are described under
"Fees and Expenses."
Mr. R. Jeremy Grantham and Mr. Nardin Baker have been primarily
responsible for the day-to-day management of the Tax-Managed U.S. Equities Fund
and the Tax-Managed International Equities Fund since the Funds' inception in
1998. Mr. Grantham is a founding partner of the Manager, currently serves as a
member of the Manager, and has been engaged by the Manager in portfolio
management since the Manager's inception in 1977. Mr. Baker has been engaged by
the Manager in portfolio management since 1995. Before that, Mr. Baker was the
Director of the Quantitative Equity group at National Investment Services.
Pursuant to a Servicing Agreement with the Trust on behalf of each
class of shares of each Fund of the Trust, GMO, in its capacity as the Trust's
shareholder servicer (the "Shareholder Servicer"), provides direct client
service, maintenance and reporting to shareholders of each class of shares. Such
servicing and reporting services include, without limitation, professional and
informative reporting, client account information, personal and electronic
access to Fund information, access to analysis and explanations of Fund reports,
and assistance in the correction and maintenance of client-related information.
14
<PAGE> 272
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period shown)
<TABLE>
<CAPTION>
Class III Shares
----------------
TAX-MANAGED U.S. EQUITIES FUND 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.
<TABLE>
<CAPTION>
TAX-MANAGED INTERNATIONAL EQUITIES FUND Class III Shares
----------------
Period from July 29, 1998
(commencement of operations)
through February 28, 1999
-------------------------
<S> <C>
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
</TABLE>
* Annualized.
(a) Calculation excludes purchase premiums. The total return would have
been lower had certain expenses not been waived during the period
shown.
The financial highlight tables are intended to help you understand each Fund's
financial performance since inception. Certain information reflects financial
results for a single Fund share. The total returns in the tables represent the
rate that an investor would have earned (or lost) on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information has
been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request.
<PAGE> 273
ADDITIONAL INFORMATION
Additional information about each Fund's investments is available in
the relevant Fund's annual and semi-annual reports to shareholders. In each
Fund's annual report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance during
its last fiscal year. The annual and semi-annual reports, and the Funds'
Statement of Additional Information dated June 30, 1999, as revised from time to
time, are available free of charge by writing to GMO, 40 Rowes Wharf, Boston,
Massachusetts 02110 or by calling collect (617) 346-7646. The Statement, which
contains more detailed information about each Fund, has been filed with the
Securities and Exchange Commission ("SEC") and is incorporated by reference into
this Prospectus.
Information about each Fund (including the Statement) can be reviewed
and copied at the SEC's Public Reference Room in Washington, D.C. Information
regarding the operation of the Public Reference Room may be obtained by calling
the SEC at 1-800-SEC-0330. Reports and other information about the Funds are
available on the Commission's Internet site at http://www.sec.gov. Copies of
this information may be obtained, upon payment of a duplicating fee, by writing
the Public Reference Section of the SEC, Washington, D.C. 20549-6009.
PURCHASE AND SALE INFORMATION
Information regarding the purchase and sale of Fund shares and
eligibility requirements for other classes of shares is contained in a separate
document, the GMO Trust Shareholder's Manual. The Manual accompanies this
Prospectus, has been filed with the SEC and is incorporated by reference into
this Prospectus. Additional copies of the Manual are available free of charge by
contacting the Manager.
SHAREHOLDER INQUIRIES
Shareholders may request additional
information from and direct inquiries to:
GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC,
40 ROWES WHARF, BOSTON, MA 02110
(617) 346-7646 (CALL COLLECT)
INVESTMENT COMPANY ACT FILE NO. 811-4347
<PAGE> 274
GMO TAX-MANAGED U.S. EQUITIES FUND
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
STATEMENT OF ADDITIONAL INFORMATION
June 30, 1999
This Statement of Additional Information is not a prospectus. It relates to the
combined GMO Tax-Managed U.S. Equities Fund and GMO Tax-Managed International
Equities Fund Prospectus dated June 30, 1999, as amended from time to time (the
"Prospectus"), and should be read in conjunction therewith. Information from the
Prospectus (including the GMO Trust Shareholder's Manual dated June 30, 1999) is
incorporated by reference into this Statement of Additional Information. The
Prospectus and Shareholder's Manual may be obtained free of charge from GMO
Trust, 40 Rowes Wharf, Boston, Massachusetts 02110, or by calling the Trust
collect at (617) 346-7646.
<PAGE> 275
TABLE OF CONTENTS
Page
INVESTMENT OBJECTIVES AND POLICIES........................................3
DESCRIPTIONS AND RISKS OF FUND INVESTMENTS................................3
INVESTMENT RESTRICTIONS..................................................26
MANAGEMENT OF THE TRUST..................................................28
INVESTMENT ADVISORY AND OTHER SERVICES...................................31
PORTFOLIO TRANSACTIONS...................................................33
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES.........................34
VOTING RIGHTS............................................................36
SHAREHOLDER AND TRUSTEE LIABILITY........................................36
BENEFICIAL OWNERS OF 5% OR MORE OF THE FUND'S SHARES.....................37
DISTRIBUTIONS............................................................38
TAXES....................................................................38
PERFORMANCE INFORMATION..................................................42
INVESTMENT GUIDELINES....................................................45
FINANCIAL STATEMENTS.....................................................53
SPECIMEN PRICE-MAKE-UP SHEET.............................................53
2
<PAGE> 276
INVESTMENT OBJECTIVES AND POLICIES
The principal strategies and risks of investing in the GMO Tax-Managed
U.S. Equities Fund and GMO Tax-Managed International Equities Fund (each a
"Fund" and together the "Funds") are described in the Prospectus. Unless
otherwise indicated in the Prospectus or this Statement of Additional
Information, the investment objective and policies of the Funds may be changed
without shareholder approval.
DESCRIPTIONS AND RISKS OF FUND INVESTMENTS
The following is a detailed description of the various investment
practices in which the Funds may engage and the risks associated with their use.
Each Fund may not necessarily engage in all practices described below. Please
refer to "Fund Objectives and Principal Strategies" in the Prospectus and
"Investment Guidelines" in this Statement of Additional Information for
additional information regarding which practices a particular Fund may engage
in.
PORTFOLIO TURNOVER
The after-tax impact of portfolio turnover will be considered when
making investment decisions for the Funds. The historical portfolio turnover
rates for each Fund are shown under the heading "Financial Highlights" in the
Prospectus.
In any particular year, market conditions may well result in greater
rates than are presently anticipated. High portfolio turnover involves
correspondingly greater brokerage commissions and other transaction costs, which
will be borne directly by the relevant Fund, and may involve realization of
capital gains that would be taxable when distributed to shareholders of the
relevant Fund unless such shareholders are themselves exempt. See "Taxes" in the
Prospectus and "Distributions" and "Taxation" in this Statement of Additional
Information. To the extent that portfolio turnover results in the recognition of
short-term capital gains, such gains are typically taxed to shareholders at
ordinary income tax rates.
DIVERSIFIED AND NON-DIVERSIFIED PORTFOLIOS
The Funds are both "non-diversified" funds under the 1940 Act, and as
such are not required to satisfy the "diversified" fund requirement set forth in
the 1940 Act. As non-diversified funds, each of the Funds is permitted to (but
not required to) invest a higher percentage of its assets in the securities of
fewer issuers, relative to diversified funds. Such concentration could increase
the risk of loss to each Fund should there be a decline in the market value of
any one portfolio security, relative to diversified funds. Investment in a
non-diversified fund may therefore entail greater risks than investment in a
diversified fund. Each Fund, however, must meet certain diversification
standards to qualify as a "regulated investment company" under the Internal
Revenue Code of 1986, as amended.
3
<PAGE> 277
CERTAIN RISKS OF FOREIGN INVESTMENTS
GENERAL. Investment in foreign issuers or securities principally traded
overseas may involve certain special risks due to foreign economic, political
and legal developments, including favorable or unfavorable changes in currency
exchange rates, exchange control regulations (including currency blockage),
expropriation or nationalization of assets, imposition of withholding taxes on
dividend or interest payments, and possible difficulty in obtaining and
enforcing judgments against foreign entities. Furthermore, issuers of foreign
securities are subject to different, often less comprehensive, accounting,
reporting and disclosure requirements than domestic issuers. The securities of
some foreign governments and companies and foreign securities markets are less
liquid and at times more volatile than comparable U.S. securities and securities
markets. Foreign brokerage commissions and other fees are also generally higher
than in the United States. The laws of some foreign countries may limit a Fund's
ability to invest in securities of certain issuers located in these foreign
countries. There are also special tax considerations which apply to securities
of foreign issuers and securities principally traded overseas. Investors should
also be aware that under certain circumstances, markets which are perceived to
have similar characteristics to troubled markets may be adversely affected
whether or not similarities actually exist.
EMERGING MARKETS. The risks described above apply to an even greater
extent to investments in emerging markets. The securities markets of emerging
countries are generally smaller, less developed, less liquid, and more volatile
than the U.S. and developed foreign securities markets. Disclosure and
regulatory standards in many respects are less stringent than in the U.S. and
developed foreign securities markets. There also may be a lower level of
monitoring and regulation of securities markets in emerging market countries and
the activities of investors in such markets, and enforcement of existing
regulations has been extremely limited. Many emerging countries have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have very negative effects on the economies and securities markets
of certain emerging countries. Economies in emerging markets generally are
heavily dependent upon international trade and, accordingly, have been and may
continue to be affected adversely by trade barriers, exchange controls, managed
adjustments in relative currency values, and other protectionist measures
imposed or negotiated by the countries with which they trade. These economies
also have been and may continue to be adversely affected by economic conditions
in the countries in which they trade. The economies of countries with emerging
markets may also be predominantly based on only a few industries or dependent on
revenues from particular commodities. In addition, custodial services and other
costs relating to investment in foreign markets may be more expensive in
emerging markets than in many developed foreign markets, which could reduce a
Fund's income from such securities. Finally, because publicly traded debt
instruments of emerging markets represent a relatively recent innovation in the
world debt markets, there is little historical data or related market experience
concerning the attributes of such instruments under all economic, market and
political conditions.
In many cases, governments of emerging countries continue to exercise
significant control over their economies, and government actions relative to the
economy, as well as economic developments generally, may affect the capacity of
issuers of emerging country debt
4
<PAGE> 278
instruments to make payments on their debt obligations, regardless of their
financial condition. In addition, there is a heightened possibility of
expropriation or confiscatory taxation, imposition of withholding taxes on
interest payments, or other similar developments that could affect investments
in those countries. There can be no assurance that adverse political changes
will not cause a Fund to suffer a loss of any or all of its investments or, in
the case of fixed-income securities, interest thereon.
INVESTMENTS IN ASIA. In addition to the foregoing risks of foreign
investments and risks specific to emerging markets, investments by the
Tax-Managed International Equities Fund in Asia involve additional risks
specific to investment in the region. The region encompasses countries at
varying levels of economic development ranging from emerging market to more
developed economies. Each country provides unique investment risks, yet the
political and economic prospects of one country or group of countries may impact
other countries in the region. For example, some Asian economies are directly
affected by Japanese capital investment in the region and by Japanese consumer
demands. In addition, a recession, a debt-crisis or a decline in currency
valuation in one country can spread to other countries.
Investments in Asia are susceptible to political and social factors
affecting issuers in Asian countries. Some countries have authoritarian or
relatively unstable governments. Certain governments in the region provide less
supervision and regulation of financial markets than is typical of other
emerging markets, and less financial information is available. Restrictions on
direct foreign investments in securities markets also exist in some countries.
For example, Taiwan permits foreign investment only through authorized qualified
foreign institutional investors. The recent return of Hong Kong to China will
continue to affect the region.
Some countries in the region are heavily dependent upon foreign trade.
The economies of some Asian countries are not diversified and are based upon
only a few commodities or industries. Markets in some of these countries are in
the early stages of development, exhibit a high concentration of market
capitalization, have less trading volume, lower liquidity and more volatility
than more developed markets.
In the latter half of 1997, the region began experiencing increased
market volatility and declines in foreign currency exchange rates. Fluctuation
in currency exchange rates can affect a country's ability to service its debt.
Currency fluctuation will affect the value of the securities in the Fund's
portfolio because the prices of these securities are generally denominated or
quoted in currencies other than the U.S. dollar.
DIRECT INVESTMENT IN RUSSIAN SECURITIES. The Tax-Managed International
Equities Fund may invest directly in securities of Russian issuers. Investment
in securities of such issuers presents many of the same risks as investing in
securities of issuers in other emerging market economies, as described in the
immediately preceding section. However, the political, legal and operational
risks of investing in Russian issuers, and of having assets custodied within
Russia, may be particularly acute.
A risk of particular note with respect to direct investment in Russian
securities is the way in which ownership of shares of private companies is
recorded. When the Fund invests in a
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Russian issuer, it will receive a "share extract," but that extract is not
legally determinative of ownership. The official record of ownership of a
company's share is maintained by the company's share registrar. Such share
registrars are completely under the control of the issuer, and investors are
provided with few legal rights against such registrars.
SECURITIES LENDING
A Fund may make secured loans of portfolio securities amounting to not
more than one-third of the Fund's total assets. The risks in lending portfolio
securities, as with other extensions of credit, consist of possible delay in
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. However, such loans will be made only to
broker-dealers that are believed by the Manager to be of relatively high credit
standing. Securities loans are made to broker-dealers pursuant to agreements
requiring that loans be continuously secured by collateral in cash or liquid
securities at least equal at all times to the market value of the securities
lent. The borrower pays to the lending Fund an amount equal to any dividends or
interest the Fund would have received had the securities not been lent. If the
loan is collateralized by liquid securities, the Fund will receive a fee from
the borrower. In the case of loans collateralized by cash, the Fund typically
invests the cash collateral for its own account in interest-bearing, short-term
securities and pays a fee to the borrower. Although voting rights or rights to
consent with respect to the loaned securities pass to the borrower, the Fund
retains the right to call the loans at any time on reasonable notice, and it
will do so in order that the securities may be voted by the Fund if the holders
of such securities are asked to vote upon or consent to matters materially
affecting the investment. A Fund may also call such loans in order to sell the
securities involved. The Manager has retained lending agents on behalf of the
Funds that are compensated based on a percentage of each Fund's return on the
securities lending activity. The Funds also pay various fees in connection with
such loans including shipping fees and reasonable custodian fees approved by the
Trustees of the Trust or persons acting pursuant to direction of the Board.
DEPOSITORY RECEIPTS
A Fund may invest in American Depositary Receipts (ADRs), Global
Depository Receipts (GDRs) and European Depository Receipts (EDRs)
(collectively, "Depository Receipts") if issues of such Depository Receipts are
available that are consistent with the Fund's investment objective. Depository
Receipts generally evidence an ownership interest in a corresponding foreign
security on deposit with a financial institution. Transactions in Depository
Receipts usually do not settle in the same currency in which the underlying
securities are denominated or traded. Generally, ADRs, in registered form, are
designed for use in the U.S. securities markets and EDRs, in bearer form, are
designed for use in European securities markets. GDRs may be traded in any
public or private securities markets and may represent securities held by
institutions located anywhere in the world.
CONVERTIBLE SECURITIES
A convertible security is a fixed-income security (a bond or preferred
stock) which may be converted at a stated price within a specified period of
time into a certain quantity of the
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common stock of the same or a different issuer. Convertible securities are
senior to common stock in a corporation's capital structure, but are usually
subordinated to similar non-convertible securities. Convertible securities
provide, through their conversion feature, an opportunity to participate in
capital appreciation resulting from a market price advance in a convertible
security's underlying common stock. The price of a convertible security is
influenced by the market value of the underlying common stock and tends to
increase as the market value of the underlying stock rises, whereas it tends to
decrease as the market value of the underlying stock declines. The Manager
regards convertible securities as a form of equity security.
FUTURES AND OPTIONS
The Funds may use futures and options for various purposes. Such
transactions may involve options, futures and related options on futures
contracts, and those instruments may relate to particular equity and fixed
income securities, equity and fixed income indexes, and foreign currencies. The
Funds may also enter into a combination of long and short positions (including
spreads and straddles) for a variety of investment strategies, including
protecting against changes in certain yield relationships.
The use of futures contracts, option contracts and options on futures
contracts involves risk. Thus, while a Fund may benefit from the use of futures,
options and options on futures, unanticipated changes in interest rates,
securities prices, or currency exchange rates may result in poorer overall
performance for the Fund than if it had not entered into any futures contracts
or options transactions. Losses incurred in transactions in futures, options and
options on futures and the costs of these transactions will affect a Fund's
performance.
OPTIONS. As has been noted above, a Fund which may use options (1) may enter
into contracts giving third parties the right to buy the Fund's portfolio
securities for a fixed price at a future date (writing "covered call options");
(2) may enter into contracts giving third parties the right to sell securities
to the Fund for a fixed price at a future date (writing "covered put options");
and (3) may buy the right to purchase securities from third parties ("call
options") or the right to sell securities to third parties ("put options") for a
fixed price at a future date.
WRITING COVERED OPTIONS. A Fund may seek to increase its return by writing
covered call or put options on optionable securities or indexes. A call option
written by a Fund on a security gives the holder the right to buy the underlying
security from the Fund at a stated exercise price; a put option gives the holder
the right to sell the underlying security to the Fund at a stated exercise
price. In the case of options on indexes, the options are usually cash settled
based on the difference between the strike price and the value of the index.
Each such Fund will receive a premium for writing a put or call option,
which increases the Fund's return in the event the option expires unexercised or
is closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price and volatility of the underlying
security or securities index to the exercise price of the option, the remaining
term of the option, supply and demand and interest rates. By writing a call
option on a security, the Fund limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise price
of the option. By writing a put option on a security,
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the Fund assumes the risk that it may be required to purchase the underlying
security for an exercise price higher than its then current market value,
resulting in a potential capital loss unless the security subsequently
appreciates in value. In the case of options on an index, if a Fund writes a
call, any profit by the Fund in respect of portfolio securities expected to
correlate with the index will be limited by an increase in the index above the
exercise price of the option. If the Fund writes a put on an index, the Fund may
be required to make a cash settlement greater than the premium received if the
index declines.
A call option on a security is "covered" if the relevant Fund owns the
underlying security or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option on a security
is also covered if the Fund holds on a share-for-share basis a call on the same
security as the call written where the exercise price of the call held is equal
to or less than the exercise price of the call written or greater than the
exercise price of the call written if the difference is maintained by the Fund
in cash, U.S. Government Securities or other high grade debt obligations in a
segregated account with its custodian. A call option on an index is "covered" if
a Fund maintains cash, U.S. Government Securities or other liquid assets with a
value equal to the exercise price in a segregated account with its custodian. A
put option is "covered" if the Fund maintains cash, U.S. Government Securities
or other liquid assets with a value equal to the exercise price in a segregated
account with its custodian, or else holds on a share-for-share basis a put on
the same security as the put written where the exercise price of the put held is
equal to or greater than the exercise price of the put written.
If the writer of an option wishes to terminate its obligation, it may
effect a "closing purchase transaction." This is accomplished, in the case of
exchange traded options, by buying an option of the same series as the option
previously written. The effect of the purchase is that the writer's position
will be canceled by the clearing corporation. The writer of an option may not
effect a closing purchase transaction after it has been notified of the exercise
of an option. Likewise, an investor who is the holder of an option may liquidate
its position by effecting a "closing sale transaction." This is accomplished by
selling an option of the same series as the option previously purchased. There
is no guarantee that a Fund will be able to effect a closing purchase or a
closing sale transaction at any particular time. Also, an over-the-counter
option may be closed out only with the other party to the option transaction.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price or expiration date or both, or in the
case of a written put option will permit the Fund to write another put option to
the extent that the exercise price thereof is secured by deposited cash or high
grade debt obligations. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
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A Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; the Fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security or
index of securities, any loss resulting from the repurchase of a written call
option is likely to be offset in whole or in part by appreciation of the
underlying security or securities owned by the Fund.
A Fund may write options in connection with buy-and-write transactions;
that is, a Fund may purchase a security and then write a call option against
that security. The exercise price of the call the Fund determines to write will
depend upon the expected price movement of the underlying security. The exercise
price of a call option may be below ("in-the-money"), equal to ("at-the-money")
or above ("out-of-the-money") the current value of the underlying security at
the time the option is written. Buy-and-write transactions using in-the-money
call options may be used when it is expected that the price of the underlying
security will remain flat or decline moderately during the option period.
Buy-and-write transactions using at-the-money call options may be used when it
is expected that the price of the underlying security will remain fixed or
advance moderately during the option period. Buy-and-write transactions using
out-of-the-money call options may be used when it is expected that the premiums
received from writing the call option plus the appreciation in the market price
of the underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If the call options
are exercised in such transactions, the Fund's maximum gain will be the premium
received by it for writing the option, adjusted upward or downward by the
difference between the Fund's purchase price of the security and the exercise
price. If the options are not exercised and the price of the underlying security
declines, the amount of such decline will be offset in part, or entirely, by the
premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund may elect to close the position or take
delivery of the security at the exercise price. In that event, the Fund's return
will be the premium received from the put option minus the cost of closing the
position or, if it chooses to take delivery of the security, the premium
received from the put option minus the amount by which the market price of the
security is below the exercise price. Out-of-the-money, at-the-money and
in-the-money put options may be used by the Fund in market environments
analogous to those in which call options are used in buy-and-write transactions.
The extent to which a Fund will be able to write and purchase call and
put options may be restricted by the Fund's intention to qualify as a regulated
investment company under the Internal Revenue Code.
RISK FACTORS IN OPTIONS TRANSACTIONS. The option writer has no control over when
the underlying securities or futures contract must be sold, in the case of a
call option, or purchased,
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in the case of a put option, since the writer may be assigned an exercise notice
at any time prior to the termination of the obligation. If an option expires
unexercised, the writer realizes a gain in the amount of the premium. Such a
gain, of course, may, in the case of a covered call option, be offset by a
decline in the market value of the underlying security or futures contract
during the option period. If a call option is exercised, the writer realizes a
gain or loss from the sale of the underlying security or futures contract. If a
put option is exercised, the writer must fulfill the obligation to purchase the
underlying security or futures contract at the exercise price, which will
usually exceed the then market value of the underlying security or futures
contract.
An exchange-traded option may be closed out only on a national
securities exchange ("Exchange") which generally provides a liquid secondary
market for an option of the same series. An over-the-counter option may be
closed out only with the other party to the option transaction. If a liquid
secondary market for an exchange-traded option does not exist, it might not be
possible to effect a closing transaction with respect to a particular option
with the result that the Fund holding the option would have to exercise the
option in order to realize any profit. For example, in the case of a written
call option, if the Fund is unable to effect a closing purchase transaction in a
secondary market (in the case of a listed option) or with the purchaser of the
option (in the case of an over-the-counter option), the Fund will not be able to
sell the underlying security (or futures contract) until the option expires or
it delivers the underlying security (or futures contract) upon exercise. Reasons
for the absence of a liquid secondary market on an Exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an Exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an Exchange; (v) the facilities of an Exchange or
the Options Clearing Corporation may not at all times be adequate to handle
current trading volume; or (vi) one or more Exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that Exchange (or in that class or series of options)
would cease to exist, although outstanding options on that Exchange that had
been issued by the Options Clearing Corporation as a result of trades on that
Exchange should continue to be exercisable in accordance with their terms.
The Exchanges have established limitations governing the maximum number
of options which may be written by an investor or group of investors acting in
concert. It is possible that the Funds, the Manager and other clients of the
Manager may be considered to be such a group. These position limits may restrict
a Fund's ability to purchase or sell options on a particular security.
The amount of risk a Fund assumes when it purchases an option is the
premium paid for the option plus related transaction costs. In addition to the
correlation risks discussed below, the purchase of an option also entails the
risk that changes in the value of the underlying security or futures contract
will not be fully reflected in the value of the option purchased.
FUTURES. A financial futures contract sale creates an obligation by the seller
to deliver the type of financial instrument called for in the contract in a
specified delivery month for a stated price.
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A financial futures contract purchase creates an obligation by the purchaser to
pay for and take delivery of the type of financial instrument called for in the
contract in a specified delivery month, at a stated price. In some cases, the
specific instruments delivered or taken, respectively, at settlement date are
not determined until on or near that date. The determination is made in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made. Some futures contracts are "cash settled" (rather than
"physically settled," as described above) which means that the purchase price is
subtracted from the current market value of the instrument and the net amount if
positive is paid to the purchaser, and if negative is paid by the purchaser.
Futures contracts are traded in the United States only on commodity exchanges or
boards of trade -- known as "contract markets" -- approved for such trading by
the Commodity Futures Trading Commission ("CFTC"), and must be executed through
a futures commission merchant or brokerage firm which is a member of the
relevant contract market. Under U.S. law, futures contracts on individual equity
securities are not permitted.
The purchase or sale of a futures contract differs from the purchase or
sale of a security or option in that no price or premium is paid or received.
Instead, an amount of cash or U.S. Government Securities generally not exceeding
5% of the face amount of the futures contract must be deposited with the broker.
This amount is known as initial margin. Subsequent payments to and from the
broker, known as variation margin, are made on a daily basis as the price of the
underlying futures contract fluctuates making the long and short positions in
the futures contract more or less valuable, a process known as "marking to
market." Prior to the settlement date of the futures contract, the position may
be closed out by taking an opposite position which will operate to terminate the
position in the futures contract. A final determination of variation margin is
then made, additional cash is required to be paid to or released by the broker,
and the purchaser realizes a loss or gain. In addition, a commission is paid on
each completed purchase and sale transaction.
In most cases futures contracts are closed out before the settlement
date without the making or taking of delivery. Closing out a futures contract
sale is effected by purchasing a futures contract for the same aggregate amount
of the specific type of financial instrument or commodity and the same delivery
date. If the price of the initial sale of the futures contract exceeds the price
of the offsetting purchase, the seller is paid the difference and realizes a
gain. Conversely, if the price of the offsetting purchase exceeds the price of
the initial sale, the seller realizes a loss. Similarly, the closing out of a
futures contract purchase is effected by the purchaser entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the
purchaser realizes a gain, and if the purchase price exceeds the offsetting sale
price, a loss will be realized.
The ability to establish and close out positions on options on futures
will be subject to the development and maintenance of a liquid secondary market.
It is not certain that this market will develop or be maintained.
INDEX FUTURES. Each of the Funds may purchase futures contracts on various
securities indexes ("Index Futures"). For example, the Tax-Managed U.S. Equities
Fund may purchase Index Futures on the S&P 500 ("S&P 500 Index Futures") and on
such other domestic stock indexes as the Manager may deem appropriate, and the
Tax-Managed International Equities Fund may
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purchase Index Futures on such foreign stock indexes as the Manager may deem
appropriate, including those which trade outside the United States. A Fund's
purchase and sale of Index Futures is limited to contracts and exchanges which
have been approved by the CFTC.
An Index Future may call for "physical delivery" or be "cash settled."
An Index Future that calls for physical delivery is a contract to buy an
integral number of units of the particular securities index at a specified
future date at a price agreed upon when the contract is made. A unit is the
value from time to time of the relevant index. While a Fund that purchases an
Index Future that calls for physical delivery is obligated to pay the face
amount on the stated date, such an Index Future may be closed out on that date
or any earlier date by selling an Index Future with the same face amount and
contract date. This will terminate the Fund's position and the Fund will realize
a profit or a loss based on the difference between the cost of purchasing the
original Index Future and the price obtained from selling the closing Index
Future. The amount of the profit or loss is determined by the change in the
value of the relevant index while the Index Future was held.
For example, if the value of a unit of a particular index were $1,000,
a contract to purchase 500 units would be worth $500,000 (500 units x $1,000).
The Index Futures contract specifies that no delivery of the actual stocks
making up the index will take place. Instead, settlement in cash must occur upon
the termination of the contract, with the settlement being the difference
between the contract price and the actual level of the relevant index at the
expiration of the contract. For example, if a Fund enters into one futures
contract to buy 500 units of an index at a specified future date at a contract
price of $1,000 per unit and the index is at $1,010 on that future date, the
Fund will gain $5,000 (500 units x gain of $10).
Index Futures that are "cash settled" provide by their terms for
settlement on a net basis reflecting changes in the value of the underlying
index. Thus, the purchaser of such an Index Future is never obligated to pay the
face amount of the contract. The net payment obligation may in fact be very
small in relation to the face amount.
A Fund may close open positions on the futures exchange on which Index
Futures are then traded at any time up to and including the expiration day. All
positions which remain open at the close of the last business day of the
contract's life are required to settle on the next business day (based upon the
value of the relevant index on the expiration day) with settlement made, in the
case of S&P 500 Index Futures, with the Commodities Clearing House. Additional
or different margin requirements as well as settlement procedures may be
applicable to foreign stock Index Futures at the time a Fund purchases foreign
stock Index Futures.
The price of Index Futures may not correlate perfectly with movement in
the relevant index due to certain market distortions. First, all participants in
the futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions which could distort the normal
relationship between the Index and futures markets. Secondly, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities market, and as a result the futures market may attract more
speculators than does the securities market. Increased participation by
speculators in the futures market may also cause temporary
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price distortions. In addition, trading hours for foreign stock Index Futures
may not correspond perfectly to hours of trading on the foreign exchange to
which a particular foreign stock Index Futures relates. This may result in a
disparity between the price of Index Futures and the value of the relevant index
due to the lack of continuous arbitrage between the Index Futures price and the
value of the underlying index.
OPTIONS ON FUTURES CONTRACTS. Options on futures contracts give the purchaser
the right in return for the premium paid to assume a position in a futures
contract at the specified option-exercise price at any time during the period of
the option. Funds may use options on futures contracts in lieu of writing or
buying options directly on the underlying securities or purchasing and selling
the underlying futures contracts. For example, to hedge against a possible
decrease in the value of its portfolio securities, a Fund may purchase put
options or write call options on futures contracts rather than selling futures
contracts. Similarly, a Fund may purchase call options or write put options on
futures contracts as a substitute for the purchase of futures contracts to hedge
against a possible increase in the price of securities which the Fund expects to
purchase. Such options generally operate in the same manner as options purchased
or written directly on the underlying investments. See "Foreign Currency
Transactions" below for a description of the Funds' use of options on currency
futures.
RISK FACTORS IN FUTURES TRANSACTIONS. Investment in futures contracts involves
risk. If the futures are used for hedging, some of that risk may be caused by an
imperfect correlation between movements in the price of the futures contract and
the price of the security or currency being hedged. The correlation is higher
between price movements of futures contracts and the instrument underlying that
futures contract. The correlation is lower when futures are used to hedge
securities other than such underlying instrument, such as when a futures
contract on an index of securities is used to hedge a single security, a futures
contract on one security (e.g., U.S. Treasury bonds) is used to hedge a
different security (e.g., a mortgage-backed security) or when a futures contract
in one currency is used to hedge a security denominated in another currency. In
the event of an imperfect correlation between a futures position and a portfolio
position (or anticipated position) which is intended to be protected, the
desired protection may not be obtained and a Fund may be exposed to risk of
loss. In addition, it is not always possible to hedge fully or perfectly against
currency fluctuations affecting the value of the securities denominated in
foreign currencies because the value of such securities also is likely to
fluctuate as a result of independent factors not related to currency
fluctuations. The risk of imperfect correlation generally tends to diminish as
the maturity date of the futures contract approaches.
A hedge will not be fully effective where there is such imperfect
correlation. To compensate for imperfect correlations, a Fund may purchase or
sell futures contracts in a greater amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the futures contracts. Conversely, a Fund may purchase or sell fewer
contracts if the volatility of the price of the hedged securities is
historically less than that of the futures contract.
A Fund may also purchase futures contracts (or options thereon) as an
anticipatory hedge against a possible increase in the price of currency in which
is denominated the securities the Fund anticipates purchasing. In such
instances, it is possible that the currency may instead
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decline. If the Fund does not then invest in such securities because of concern
as to possible further market and/or currency decline or for other reasons, the
Fund may realize a loss on the futures contract that is not offset by a
reduction in the price of the securities purchased.
The liquidity of a secondary market in a futures contract may be
adversely affected by "daily price fluctuation limits" established by commodity
exchanges which limit the amount of fluctuation in a futures contract price
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions. Prices have in the past
exceeded the daily limit on a number of consecutive trading days. Short
positions in index futures may be closed out only by entering into a futures
contract purchase on the futures exchange on which the index futures are traded.
The successful use of transactions in futures and related options for
hedging and risk management also depends on the ability of the Manager to
forecast correctly the direction and extent of exchange rate, interest rate and
stock price movements within a given time frame. For example, to the extent
interest rates remain stable during the period in which a futures contract or
option is held by a Fund investing in fixed income securities (or such rates
move in a direction opposite to that anticipated), the Fund may realize a loss
on the futures transaction which is not fully or partially offset by an increase
in the value of its portfolio securities. As a result, the Fund's total return
for such period may be less than if it had not engaged in the hedging
transaction.
Unlike trading on domestic commodity exchanges, trading on foreign
commodity exchanges is not regulated by the CFTC and may be subject to greater
risks than trading on domestic exchanges. For example, some foreign exchanges
may be principal markets so that no common clearing facility exists and a trader
may look only to the broker for performance of the contract. In addition, unless
a Fund hedges against fluctuations in the exchange rate between the U.S. dollar
and the currencies in which trading is done on foreign exchanges, any profits
that a Fund might realize in trading could be eliminated by adverse changes in
the exchange rate, or the Fund could incur losses as a result of those changes.
USES OF OPTIONS, FUTURES AND OPTIONS ON FUTURES
RISK MANAGEMENT. When futures and options on futures are used for risk
management, a Fund will generally take long positions (e.g., purchase call
options, futures contracts or options thereon) in order to increase the Fund's
exposure to a particular market, market segment or foreign currency. For
example, if an Equity Fund holds a portfolio of stocks with an average
volatility (beta) lower than that of the Fund's benchmark securities index as a
whole (deemed to be 1.00), the Fund may purchase Index Futures to increase its
average volatility to 1.00. In the case of futures and options on futures, a
Fund is only required to deposit the initial and variation margin as required by
relevant CFTC regulations and the rules of the contract markets. Because the
Fund will then be obligated to purchase the security or index at a set price on
a future date, the Fund's net asset value will fluctuate with the value of the
security as if it were already included in the Fund's portfolio. Risk management
transactions have the effect of providing a degree of investment leverage,
particularly when the Fund does not segregate assets equal to the
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face amount of the contract (i.e., in cash settled futures contracts) since the
futures contract (and related options) will increase or decrease in value at a
rate which is a multiple of the rate of increase or decrease in the value of the
initial and variation margin that the Fund is required to deposit. As a result,
the value of the Fund's portfolio will generally be more volatile than the value
of comparable portfolios which do not engage in risk management transactions. A
Fund will not, however, use futures and options on futures to obtain greater
volatility than it could obtain through direct investment in securities; that
is, a Fund will not normally engage in risk management to increase the average
volatility (beta) of that Fund's portfolio above 1.00, the level of risk (as
measured by volatility) that would be present if the Fund were fully invested in
the securities comprising the relevant index. However, a Fund may invest in
futures and options on futures without regard to this limitation if the face
value of such investments, when aggregated with the Index Futures, equity swaps
and contracts for differences as described below does not exceed 10% of a Fund's
assets.
HEDGING. To the extent indicated elsewhere, a Fund may also enter into options
and futures contracts and buy and sell options on futures for hedging. For
example, a Fund may sell equity index futures if it wants to hedge its equity
securities against a general decline in the relevant equity market(s). The Funds
may also use futures contracts in anticipatory hedge transactions by taking a
long position in a futures contract with respect to a security, index or foreign
currency that a Fund intends to purchase (or whose value is expected to
correlate closely with the security or currency to be purchased) pending receipt
of cash from other transactions to be used for the actual purchase. Then if the
cost of the security or foreign currency to be purchased by the Fund increases
and if the anticipatory hedge is effective, that increased cost should be
offset, at least in part, by the value of the futures contract. Options on
futures contracts may be used for hedging as well. For example, if the value of
a fixed-income security in a Fund's portfolio is expected to decline as a result
of an increase in rates, the Fund might purchase put options or write call
options on futures contracts rather than selling futures contracts. Similarly,
for anticipatory hedging, the Fund may purchase call options or write put
options as a substitute for the purchase of futures contracts. See "Foreign
Currency Transactions" below for more information regarding the currency hedging
practices of certain Funds.
INVESTMENT PURPOSES. To the extent indicated elsewhere, a Fund may also enter
into futures contracts and buy and sell options thereon for investment. For
example, a Fund may invest in futures when its Manager believes that there are
not enough attractive securities available to maintain the standards of
diversity and liquidity set for a Fund pending investment in such securities if
or when they do become available. Through this use of futures and related
options, a Fund may diversify risk in its portfolio without incurring the
substantial brokerage costs which may be associated with investment in the
securities of multiple issuers. This use may also permit a Fund to avoid
potential market and liquidity problems (e.g., driving up the price of a
security by purchasing additional shares of a portfolio security or owning so
much of a particular issuer's stock that the sale of such stock depresses that
stock's price) which may result from increases in positions already held by the
Fund.
When any Fund purchases futures contracts for investment, it will
maintain cash, U.S. Government Securities or other liquid assets in a segregated
account with its custodian in an
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amount which, together with the initial and variation margin deposited on the
futures contracts, is equal to the face value of the futures contracts at all
times while the futures contracts are held.
Incidental to other transactions in fixed income securities, for
investment purposes a Fund may also combine futures contracts or options on
fixed income securities with cash, cash equivalent investments or other fixed
income securities in order to create "synthetic" bonds which approximate desired
risk and return profiles. This may be done where a "non-synthetic" security
having the desired risk/return profile either is unavailable (e.g., short-term
securities of certain foreign governments) or possesses undesirable
characteristics (e.g., interest payments on the security would be subject to
foreign withholding taxes). A Fund may also purchase forward foreign exchange
contracts in conjunction with U.S. dollar-denominated securities in order to
create a synthetic foreign currency denominated security which approximates
desired risk and return characteristics where the non-synthetic securities
either are not available in foreign markets or possess undesirable
characteristics. For greater detail, see "Foreign Currency Transactions" below.
When a Fund creates a "synthetic" bond with a futures contract, it will maintain
cash, U.S. Government Securities or other liquid assets in a segregated account
with its custodian with a value at least equal to the face amount of the futures
contract (less the amount of any initial or variation margin on deposit).
SYNTHETIC SALES AND PURCHASES. Futures contracts may also be used to reduce
transaction costs associated with short-term restructuring of a Fund's
portfolio. For example, if a Fund's portfolio includes stocks of companies with
medium-sized equity capitalization and, in the opinion of the Manager, such
stocks are likely to underperform larger capitalization stocks, the Fund might
sell some or all of its mid-capitalization stocks, buy large capitalization
stocks with the proceeds and then, when the expected trend had played out, sell
the large capitalization stocks and repurchase the mid-capitalization stocks
with the proceeds. In the alternative, the Fund may use futures to achieve a
similar result with reduced transaction costs. In that case, the Fund might
simultaneously enter into short futures positions on an appropriate index (e.g.,
the S&P Mid Cap 400 Index) (to synthetically "sell" the stocks in the Fund) and
long futures positions on another index (e.g., the S&P 500) (to synthetically
"buy" the larger capitalization stocks). When the expected trend has played out,
the Fund would then close out both futures contract positions. A Fund will only
enter into these combined positions if (1) the short position (adjusted for
historic volatility) operates as a hedge of existing portfolio holdings, (2) the
face amount of the long futures position is less than or equal to the value of
the portfolio securities that the Fund would like to dispose of, (3) the
contract settlement date for the short futures position is approximately the
same as that for the long futures position and (4) the Fund segregates an amount
of cash, U.S. Government Securities and other liquid assets whose value,
marked-to-market daily, is equal to the Fund's current obligations in respect of
the long futures contract positions. If a Fund uses such combined short and long
positions, in addition to possible declines in the values of its investment
securities, the Fund may also suffer losses associated with a securities index
underlying the long futures position underperforming the securities index
underlying the short futures position. However, the Manager will enter into
these combined positions only if the Manager expects that, overall, the Fund
will perform as if it had sold the securities hedged by the short position and
purchased the securities underlying the long position. A Fund may also use swaps
and options on futures to achieve the same objective.
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Limitations on the Use of Options and Futures Portfolio Strategies. As noted
above, the Funds may use futures contracts and related options for hedging and,
in some circumstances, for risk management or investment but not for
speculation. Thus, except when used for risk management or investment, each such
Fund's long futures contract positions (less its short positions) together with
the Fund's cash (i.e., equity or fixed income) positions will not exceed the
Fund's total net assets.
The Funds' ability to engage in the options and futures strategies
described above will depend on the availability of liquid markets in such
instruments. Markets in options and futures with respect to currencies are
relatively new and still developing. It is impossible to predict the amount of
trading interest that may exist in various types of options or futures.
Therefore no assurance can be given that a Fund will be able to utilize these
instruments effectively for the purposes set forth above. Furthermore, each
Fund's ability to engage in options and futures transactions may be limited by
tax considerations.
SWAP CONTRACTS AND OTHER TWO-PARTY CONTRACTS
A Fund may use swap contracts and other two-party contracts for the
same or similar purposes as they may use options, futures and related options.
The use of swap contracts and other two-party contracts involves risk.
SWAP CONTRACTS. Swap agreements are two-party contracts entered into
primarily by institutional investors for periods ranging from a few weeks to
more than one year. In a standard "swap" transaction, two parties agree to
exchange returns (or differentials in rates of return) calculated with respect
to a "notional amount," e.g., the return on or increase in value of a particular
dollar amount invested at a particular interest rate, in a particular foreign
currency, or in a "basket" of securities representing a particular index. A Fund
will usually enter into swaps on a net basis, i.e., the two returns are netted
out, with the Fund receiving or paying, as the case may be, only the net amount
of the two returns.
INTEREST RATE AND CURRENCY SWAPS. Interest rate swaps involve the
exchange of the two parties' respective commitments to pay or receive interest
on a notional principal amount (e.g., an exchange of floating rate payments for
fixed rate payments). Currency swaps involve the exchange of the two parties'
respective commitments to pay or receive fluctuations with respect to a notional
amount of two different currencies (e.g., an exchange of payments with respect
to fluctuations in the value of the U.S. dollar relative to the Japanese yen).
EQUITY SWAP CONTRACTS AND CONTRACTS FOR DIFFERENCES. Equity swap
contracts involve the exchange of one party's obligation to pay the loss, if
any, with respect to a notional amount of a particular equity index (e.g., the
S&P 500 Index) plus interest on such notional amount at a designated rate (e.g.,
the London Inter-Bank Offered Rate) in exchange for the other party's obligation
to pay the gain, if any, with respect to the notional amount of such index.
If a Fund enters into a long equity swap contract, the Fund's net asset
value will fluctuate as a result of changes in the value of the equity index on
which the equity swap is based as if it had purchased the notional amount of
securities comprising the index. A Fund will not use long
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equity swap contracts to obtain greater volatility than it could obtain through
direct investment in securities; that is, a Fund will not normally enter into an
equity swap contract to increase the volatility (beta) of the Fund's portfolio
above 1.00, the volatility that would be present in the stocks comprising the
Fund's benchmark index. However, a Fund may invest in long equity swap contracts
without regard to this limitation if the notional amount of such equity swap
contracts, when aggregated with the Index Futures as described above and the
contracts for differences as described below, does not exceed 10% of the Fund's
net assets.
Contracts for differences are swap arrangements in which a Fund may
agree with a counterparty that its return (or loss) will be based on the
relative performance of two different groups or "baskets" of securities. As to
one of the baskets, the Fund's return is based on theoretical long futures
positions in the securities comprising that basket (with an aggregate face value
equal to the notional amount of the contract for differences) and as to the
other basket, the Fund's return is based on theoretical short futures positions
in the securities comprising the basket. A Fund may also use actual long and
short futures positions to achieve the same market exposure(s) as contracts for
differences. A Fund will only enter into contracts for differences where payment
obligations of the two legs of the contract are netted and thus based on changes
in the relative value of the baskets of securities rather than on the aggregate
change in the value of the two legs. A Fund will only enter into contracts for
differences (and analogous futures positions) when the Manager believes that the
basket of securities constituting the long leg will outperform the basket
constituting the short leg. However, it is possible that the short basket will
outperform the long basket resulting in a loss to a Fund, even in circumstances
where the securities in both the long and short baskets appreciate in value.
Except for instances in which a Fund elects to obtain leverage up to
the 10% limitation mentioned above, the Funds will maintain cash, U.S.
Government Securities or liquid assets in a segregated account with its
custodian in an amount equal to the aggregate of net payment obligations on its
swap contracts and contracts for differences, marked to market daily.
A Fund may enter into swaps and contracts for differences for hedging,
investment and risk management. When using swaps for hedging, a Fund may enter
into an interest rate, currency or equity swap, as the case may be, on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities. For risk management or investment purposes a Fund may
also enter into a contract for differences in which the notional amount of the
theoretical long position is greater than the notional amount of the theoretical
short position. A Fund will not normally enter into a contract for differences
to increase the volatility (beta) of the Fund's portfolio above 1.00. However, a
Fund may invest in contracts for differences without regard to this limitation
if the aggregate amount by which the theoretical long positions of such
contracts exceed the theoretical short positions of such contracts, when
aggregated with the Index Futures and equity swaps contracts as described above,
does not exceed 10% of the Fund's net assets.
INTEREST RATE CAPS, FLOORS AND COLLARS. A Fund may use interest rate
caps, floors and collars for the same purposes or similar purposes as they use
interest rate futures contracts and related options. Interest rate caps, floors
and collars are similar to interest rate swap contracts because the payment
obligations are measured by changes in interest rates as applied to a
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notional amount and because they are individually negotiated with a specific
counterparty. The purchase of an interest rate cap entitles the purchaser, to
the extent that a specific index exceeds a specified interest rate, to receive
payments of interest on a notional principal amount from the party selling the
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below specified interest
rates, to receive payments of interest on a notional principal amount from the
party selling the interest rate floor. The purchase of an interest rate collar
entitles the purchaser, to the extent that a specified index exceeds or falls
below two specified interest rates, to receive payments of interest on a
notional principal amount from the party selling the interest rate collar.
Except when using such contracts for risk management, a Fund will maintain cash,
U.S. Government Securities or other liquid assets in a segregated account with
its custodian in an amount at least equal to its obligations, if any, under
interest rate cap, floor and collar arrangements. As with futures contracts,
when a Fund uses notional amount contracts for risk management it is only
required to segregate assets equal to its net payment obligation, not the
notional amount of the contract. In those cases, the notional amount contract
will have the effect of providing a degree of investment leverage similar to the
leverage associated with non-segregated futures contracts. A Fund's use of
interest rate caps, floors and collars for the same or similar purposes as those
for which they use futures contracts and related options presents the same risks
and similar opportunities as those associated with futures and related options.
Because caps, floors and collars are recent innovations for which standardized
documentation has not yet been developed they are deemed by the SEC to be
relatively illiquid investments which are subject to each Fund's limitation on
investment in illiquid securities.
FOREIGN CURRENCY TRANSACTIONS
Foreign currency exchange rates may fluctuate significantly over short
periods of time. They generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries, actual or perceived changes in interest rates and other
complex factors. Currency exchange rates also can be affected unpredictably by
intervention (or the failure to intervene) by U.S. or foreign governments or
central banks, or by currency controls or political developments in the U.S. or
abroad. For example, uncertainty surrounds the recent introduction of the "euro"
(a common currency unit for the European Union) in January 1999. These and other
currencies in which a Fund's assets are denominated may be devalued against the
U.S. dollar, resulting in a loss to the Fund.
A Fund may be permitted to invest in securities denominated in foreign
currencies and may buy or sell foreign currencies, deal in forward foreign
currency contracts, currency futures contracts and related options and options
on currencies. A Fund may use such currency instruments for hedging, investment
or currency risk management. Currency risk management may include taking active
currency positions relative to both the securities portfolio of a Fund and a
Fund's performance benchmark.
Forward foreign currency contracts are contracts between two parties to
purchase and sell a specific quality of a particular currency at a specified
price, with delivery and settlement to take place on a specified future date.
Currency futures contracts are contracts to buy or sell a standard quantity of a
particular currency at a specified future date and price. Options on
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currency futures contracts give their owner the right, but not the obligation,
to buy (in the case of a call option) or sell (in the case of a put option) a
specified currency futures contract at a fixed price during a specified period.
Options on currencies give their owner the right, but not the obligation, to buy
(in the case of a call option) or sell (in the case of a put option) a specified
quantity of a particular currency at a fixed price during a specified period.
A Fund may enter into forward contracts for hedging under three
circumstances. First, when a Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transaction, a Fund will be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date on which the security is purchased or sold and the date
on which payment is made or received.
Second, when the Manager of a Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of the Fund's portfolio securities denominated in such foreign currency.
Maintaining a match between the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures.
Third, a Fund may engage in currency "cross hedging" when, in the
opinion of the Manager, the historical relationship among foreign currencies
suggests that the Fund may achieve the same protection for a foreign security at
reduced cost through the use of a forward foreign currency contract relating to
a currency other than the U.S. dollar or the foreign currency in which the
security is denominated. By engaging in cross hedging transactions, a Fund
assumes the risk of imperfect correlation between the subject currencies. These
practices may present risks different from or in addition to the risks
associated with investments in foreign currencies.
A Fund is not required to enter into hedging transactions with regard
to its foreign currency-denominated securities and will not do so unless deemed
appropriate by the Manager. By entering into the above hedging transactions, a
Fund may be required to forego the benefits of advantageous changes in the
exchange rates.
A Fund may also enter foreign currency forward contracts for investment
and currency risk management. When a Fund uses currency instruments for such
purposes, the foreign currency exposure of the Fund may differ substantially
from the currencies in which the Fund's investment securities are denominated.
However, a Fund's aggregate foreign currency exposure will not normally exceed
100% of the value of the Fund's securities, except that a Fund may use currency
instruments without regard to this limitation if the amount of such excess, when
aggregated with futures contracts, equity swap contracts and contracts for
differences used in similar ways, does not exceed 10% of the Fund's net assets.
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Except to the extent that a Fund may use such contracts for risk
management, whenever a Fund enters into a foreign currency forward contract,
other than a forward contract entered into for hedging, it will maintain cash,
U.S. Government Securities or other liquid assets in a segregated account with
its custodian with a value, marked to market daily, equal to the amount of the
currency required to be delivered. A Fund's ability to engage in forward
contracts may be limited by tax considerations.
A Fund may use currency futures contracts and related options and
options on currencies for the same reasons for which it uses currency forwards.
Except to the extent that a Fund may use futures contracts and related options
for risk management, a Fund will, so long as it is obligated as the writer of a
call option on currency futures, own on a contract-for-contract basis an equal
long position in currency futures with the same delivery date or a call option
on currency futures with the difference, if any, between the market value of the
call written and the market value of the call or long currency futures purchased
maintained by the Fund in cash, U.S. Government Securities or other liquid
assets in a segregated account with its custodian. If at the close of business
on any day the market value of the call purchased by a Fund falls below 100% of
the market value of the call written by the Fund, such Fund will maintain an
amount of cash, U.S. Government Securities or other high grade debt obligations
in a segregated account with its custodian equal in value to the difference.
Alternatively, a Fund may cover the call option by owning securities denominated
in the currency with a value equal to the face amount of the contract(s) or
through segregating with the custodian an amount of the particular foreign
currency equal to the amount of foreign currency per futures contract option
times the number of options written by the Fund.
REPURCHASE AGREEMENTS
A Fund may enter into repurchase agreements with banks and
broker-dealers by which it acquires a security (usually an obligation of the
Government where the transaction is initiated or in whose currency the agreement
is denominated) for a relatively short period (usually not more than a week) for
cash and obtains a simultaneous commitment from the seller to repurchase the
security at an agreed-on price and date. The resale price is in excess of the
acquisition price and reflects an agreed-upon market rate unrelated to the
coupon rate on the purchased security. Such transactions afford an opportunity
for a Fund to earn a return on temporarily available cash at no market risk,
although there is a risk that the seller may default in its obligation to pay
the agreed-upon sum on the redelivery date. Such a default may subject a Fund to
expenses, delays and risks of loss including: (a) possible declines in the value
of the underlying security during the period while the Fund seeks to enforce its
rights thereto, (b) possible reduced levels of income and lack of access to
income during this period and (c) inability to enforce rights and the expenses
involved in attempted enforcement.
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DEBT AND OTHER FIXED INCOME SECURITIES GENERALLY
Debt and Other Fixed Income Securities include fixed income securities
of any maturity. Fixed income securities pay a specified rate of interest or
dividends, or a rate that is adjusted periodically by reference to some
specified index or market rate. Fixed income securities include securities
issued by federal, state, local and foreign governments and related agencies,
and by a wide range of private issuers.
Fixed income securities are subject to market and credit risk. Market
risk relates to changes in a security's value as a result of changes in interest
rates generally. In general, the values of fixed income securities increase when
prevailing interest rates fall and decrease when interest rates rise. Credit
risk relates to the ability of the issuer to make payments of principal and
interest. Obligations of issuers are subject to the provisions of bankruptcy,
insolvency and other laws, such as the Federal Bankruptcy Reform Act of 1978,
affecting the rights and remedies of creditors. Fixed income securities
denominated in foreign currencies are also subject to the risk of a decline in
the value of the denominating currency.
Because interest rates vary, it is impossible to predict the future
income of a Fund investing in such securities. The net asset value of a Fund's
shares will vary as a result of changes in the value of the securities in its
portfolio and will be affected by the absence and/or success of hedging
strategies.
TEMPORARY HIGH QUALITY CASH ITEMS
As described under "Investment Objectives and Policies" above, a Fund
may temporarily invest a portion of its assets in cash or cash items pending
other investments or in connection with the maintenance of a segregated account.
These cash items must be of high quality and may include a number of money
market instruments such as securities issued by the United States government and
agencies thereof, bankers' acceptances, commercial paper, and bank certificates
of deposit. By investing in high quality money market securities a Fund may seek
to minimize credit risk with respect to such investments.
U.S. GOVERNMENT SECURITIES AND FOREIGN GOVERNMENT SECURITIES
U.S. Government Securities include securities issued or guaranteed by
the U.S. government or its authorities, agencies or instrumentalities. Foreign
Government Securities include securities issued or guaranteed by foreign
governments (including political subdivisions) or their authorities, agencies or
instrumentalities or by supra-national agencies. U.S. Government Securities and
Foreign Government Securities have different kinds of government support. For
example, some U.S. Government Securities, such as U.S. Treasury bonds, are
supported by the full faith and credit of the United States, whereas certain
other U.S. Government Securities issued or guaranteed by federal agencies or
government-sponsored enterprises are not supported by the full faith and credit
of the United States. Similarly, some Foreign Government Securities are
supported by the full faith and credit of a foreign national government or
political subdivision and some are not. In the case of certain countries,
Foreign Government Securities may involve varying degrees of credit risk as a
result of financial or
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political instability in such countries and the possible inability of a Fund to
enforce its rights against the foreign government issuer.
Supra-national agencies are agencies whose member nations make capital
contributions to support the agencies' activities, and include such entities as
the International Bank for Reconstruction and Development (the World Bank), the
Asian Development Bank, the European Coal and Steel Community and the
Inter-American Development Bank.
Like other fixed income securities, U.S. Government Securities and
Foreign Government Securities are subject to market risk and their market values
fluctuate as interest rates change. Thus, for example, the value of an
investment in a Fund which holds U.S. Government Securities or Foreign
Government Securities may fall during times of rising interest rates. Yields on
U.S. Government Securities and Foreign Government Securities tend to be lower
than those of corporate securities of comparable maturities.
In addition to investing directly in U.S. Government Securities and
Foreign Government Securities, a Fund may purchase certificates of accrual or
similar instruments evidencing undivided ownership interests in interest
payments or principal payments, or both, in U.S. Government Securities and
Foreign Government Securities. These certificates of accrual and similar
instruments may be more volatile than other government securities.
ADJUSTABLE RATE SECURITIES
Adjustable rate securities are securities that have interest rates that
are reset at periodic intervals, usually by reference to some interest rate
index or market interest rate. They may be U.S. Government Securities or
securities of other issuers. Some adjustable rate securities are backed by pools
of mortgage loans. Although the rate adjustment feature may act as a buffer to
reduce sharp changes in the value of adjustable rate securities, these
securities are still subject to changes in value based on changes in market
interest rates or changes in the issuer's creditworthiness. Because the interest
rate is reset only periodically, changes in the interest rates on adjustable
rate securities may lag changes in prevailing market interest rates. Also, some
adjustable rate securities (or, in the case of securities backed by mortgage
loans, the underlying mortgages) are subject to caps or floors that limit the
maximum change in interest rate during a specified period or over the life of
the security. Because of the resetting of interest rates, adjustable rate
securities are less likely than non-adjustable rate securities of comparable
quality and maturity to increase significantly in value when market interest
rates fall.
LOWER RATED SECURITIES
A Fund may invest some or all of its assets in securities rated below
investment grade (that is, rated below BBB by Standard & Poor's or below Baa by
Moody's) at the time of purchase, including securities in the lowest rating
categories, and comparable unrated securities ("Lower Rated Securities"). A Fund
will not necessarily dispose of a security when its rating is reduced below its
rating at the time of purchase, although the Manager will monitor the investment
to determine whether continued investment in the security will assist in meeting
the Fund's investment objective.
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Lower Rated Securities generally provide higher yields, but are subject
to greater credit and market risk, than higher quality fixed income securities.
Lower Rated Securities are considered predominantly speculative with respect to
the ability of the issuer to meet principal and interest payments. Achievement
of the investment objective of a Fund investing in Lower Rated Securities may be
more dependent on the Manager's own credit analysis than is the case with higher
quality bonds. The market for Lower Rated Securities may be more severely
affected than some other financial markets by economic recession or substantial
interest rate increases, by changing public perceptions of this market or by
legislation that limits the ability of certain categories of financial
institutions to invest in these securities. In addition, the secondary market
may be less liquid for Lower Rated Securities. This reduced liquidity at certain
times may affect the values of these securities and may make the valuation and
sale of these securities more difficult. Securities of below investment grade
quality are commonly referred to as "junk bonds." Securities in the lowest
rating categories may be in poor standing or in default. Securities in the
lowest investment grade category (BBB or Baa) have some speculative
characteristics.
INDEXED SECURITIES
Indexed securities are securities the redemption values and/or the
coupons of which are indexed to the prices of a specific instrument or
statistic. Indexed securities typically, but not always, are debt securities or
deposits whose value at maturity or coupon rate is determined by reference to
other securities, securities indexes, currencies, precious metals or other
commodities, or other financial indicators. Gold-indexed securities, for
example, typically provide for a maturity value that depends on the price of
gold, resulting in a security whose price tends to rise and fall together with
gold prices. Currency-indexed securities typically are short-term to
intermediate-term debt securities whose maturity values or interest rates are
determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated securities
of equivalent issuers. Currency-indexed securities may be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
Indexed securities in which a Fund may invest include so-called
"inverse floating obligations" or "residual interest bonds" on which the
interest rates typically decline as short-term market interest rates increase
and increase as short-term market rates decline. Such
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securities have the effect of providing a degree of investment leverage, since
they will generally increase or decrease in value in response to changes in
market interest rates at a rate which is a multiple of the rate at which
fixed-rate long-term securities increase or decrease in response to such
changes. As a result, the market values of such securities will generally be
more volatile than the market values of fixed rate securities.
A Fund's investment in indexed securities may also create taxable
income in excess of the cash such investments generate. See "Taxes" in the
Prospectus.
FIRM COMMITMENTS
A firm commitment agreement is an agreement with a bank or
broker-dealer for the purchase of securities at an agreed-upon price on a
specified future date. A Fund may enter into firm commitment agreements with
such banks and broker-dealers with respect to any of the instruments eligible
for purchase by the Fund. A Fund will only enter into firm commitment
arrangements with banks and broker-dealers which the Manager determines present
minimal credit risks. A Fund will maintain in a segregated account with its
custodian cash, U.S. Government Securities or other liquid assets in an amount
equal to the Fund's obligations under firm commitment agreements.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS
A Fund may enter into reverse repurchase agreements and dollar roll
agreements with banks and brokers to enhance return. Reverse repurchase
agreements involve sales by a Fund of portfolio assets concurrently with an
agreement by the Fund to repurchase the same assets at a later date at a fixed
price. During the reverse repurchase agreement period, the Fund continues to
receive principal and interest payments on these securities and also has the
opportunity to earn a return on the collateral furnished by the counterparty to
secure its obligation to redeliver the securities.
Dollar rolls are transactions in which a Fund sells securities for
delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date. During the roll period, the Fund forgoes principal and interest paid on
the securities. The Fund is compensated by the difference between the current
sales price and the forward price for the future purchase (often referred to as
the "drop") as well as by the interest earned on the cash proceeds of the
initial sale.
A Fund which makes such investments will establish segregated accounts
with its custodian in which it will maintain cash, U.S. Government Securities or
other liquid assets equal in value to its obligations in respect of reverse
repurchase agreements and dollar rolls. Reverse repurchase agreements and dollar
rolls involve the risk that the market value of the securities retained by a
Fund may decline below the price of the securities the Fund has sold but is
obligated to repurchase under the agreement. In the event the buyer of
securities under a reverse repurchase agreement or dollar roll files for
bankruptcy or becomes insolvent, the Fund's use of the proceeds of the agreement
may be restricted pending a determination by the other party or its trustee or
receiver whether to enforce the Fund's obligation to repurchase the securities.
Reverse
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repurchase agreements and dollar rolls are not considered borrowings by a Fund
for purposes of a Fund's fundamental investment restriction with respect to
borrowings.
ILLIQUID SECURITIES
A Fund may purchase "illiquid securities," i.e., securities which may
not be sold or disposed of in the ordinary course of business within seven days
at approximately the value at which the Fund has valued the investment, which
include securities whose disposition is restricted by securities laws, so long
as no more than 15% of net assets would be invested in such illiquid securities.
The Funds currently intend to invest in accordance with the SEC staff view that
repurchase agreements maturing in more than seven days are illiquid securities.
The SEC staff has stated informally that it is of the view that over-the-counter
options and securities serving as cover for over-the-counter options are
illiquid securities. While the Trust does not agree with this view, it will
operate in accordance with any relevant formal guidelines adopted by the SEC.
In addition, the SEC staff considers equity swap contracts, caps,
floors and collars to be illiquid securities. Consequently, while the staff
maintains this position, a Fund will not enter into an equity swap contract or a
reverse equity swap contract or purchase a cap, floor or collar if, as a result
of the investment, the total value (i.e., marked-to-market value) of such
investments (without regard to their notional amount) together with that of all
other illiquid securities which the Fund owns would exceed 15% of the Fund's
total assets.
INVESTMENT RESTRICTIONS
Fundamental Restrictions:
Without a vote of the majority of the outstanding voting securities of
the relevant Fund, the Trust will not take any of the following actions with
respect to such Fund as indicated:
(1) Borrow money except under the following circumstances: (i) A Fund
may borrow money from banks so long as after such a transaction, the total
assets (including the amount borrowed) less liabilities other than debt
obligations, represent at least 300% of outstanding debt obligations; (ii) A
Fund may also borrow amounts equal to an additional 5% of its total assets
without regard to the foregoing limitation for temporary purposes, such as for
the clearance and settlement of portfolio transactions and to meet shareholder
redemption requests; (iii) A Fund may enter into transactions that are
technically borrowings under the 1940 Act because they involve the sale of a
security coupled with an agreement to repurchase that security (e.g., reverse
repurchase agreements, dollar rolls and other similar investment techniques)
without regard to the asset coverage restriction described in (i) above, so long
as and to the extent that the Fund establishes a segregated account with its
custodian in which it maintains cash and/or high grade debt securities equal in
value to its obligations in respect of these transactions. Under current
pronouncements of the SEC staff, such transactions are not treated as senior
securities so long as and to the extent that the Fund establishes a segregated
account with its custodian in which it
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<PAGE> 300
maintains liquid assets, such as cash, U.S. Government Securities or other
appropriate assets equal in value to its obligations in respect of these
transactions.
(2) Purchase securities on margin, except such short-term credits as
may be necessary for the clearance of purchases and sales of securities. (For
this purpose, the deposit or payment of initial or variation margin in
connection with futures contracts or related options transactions is not
considered the purchase of a security on margin.)
(3) Make short sales of securities or maintain a short position for a
Fund's account unless at all times when a short position is open the Fund owns
an equal amount of such securities or owns securities which, without payment of
any further consideration, are convertible into or exchangeable for securities
of the same issue as, and equal in amount to, the securities sold short.
(4) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under federal securities laws.
(5) Purchase or sell real estate, although it may purchase securities
of issuers which deal in real estate, including securities of real estate
investment trusts, and may purchase securities which are secured by interests in
real estate.
(6) Make loans, except by purchase of debt obligations or by entering
into repurchase agreements or through the lending of a Fund's portfolio
securities. Loans of portfolio securities may be made with respect to up to 100%
of a Fund's total assets.
(7) Concentrate more than 25% of the value of its total assets in any
one industry.
(8) Purchase or sell commodities or commodity contracts, except that a
Fund may purchase and sell financial futures contracts and options thereon.
(9) Issue senior securities, as defined in the 1940 Act and as
amplified by rules, regulations and pronouncements of the SEC. The SEC has
concluded that even though reverse repurchase agreements, firm commitment
agreements and standby commitment agreements fall within the functional meaning
of the term "evidence of indebtedness", the issue of compliance with Section 18
of the 1940 Act will not be raised with the SEC by the Division of Investment
Management if a Fund covers such securities by maintaining certain "segregated
accounts." Similarly, so long as such segregated accounts are maintained, the
issue of compliance with Section 18 will not be raised with respect to any of
the following: any swap contract or contract for differences; any pledge or
encumbrance of assets permitted by non-fundamental policy (4) below; any
borrowing permitted by restriction 1 above; any collateral arrangements with
respect to initial and variation margin permitted by non-fundamental policy (4)
below; and the purchase or sale of options, forward contracts, futures contracts
or options on futures contracts.
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<PAGE> 301
Non-Fundamental Restrictions:
It is contrary to the present policies of each Fund which may be
changed by the Trustees without shareholder approval, to:
(1) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts.
(2) Make investments for the purpose of gaining control of a company's
management.
(3) Invest more than 15% of net assets in illiquid securities. The
securities currently thought to be included as "illiquid securities" are
restricted securities under the Federal securities laws (including illiquid
securities traded under Rule 144A), repurchase agreements and securities that
are not readily marketable. To the extent the Trustees determine that restricted
securities traded under Section 4(2) or Rule 144A under the Securities Act of
1933 are in fact liquid, they will not be included in the 15% limit on
investment in illiquid securities.
(4) Pledge, hypothecate, mortgage or otherwise encumber its assets in
excess of 33 1/3% of a Fund's total assets (taken at cost). (For the purposes of
this restriction, collateral arrangements with respect to swap agreements, the
writing of options, stock index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with respect to initial
and variation margin are not deemed to be a pledge or other encumbrance of
assets. The deposit of securities or cash or cash equivalents in escrow in
connection with the writing of covered call or put options, respectively is not
deemed to be a pledge or encumbrance.)
Except as indicated above in Fundamental Restriction No. 1, all
percentage limitations on investments set forth herein and in the Prospectus
will apply at the time of the making of an investment and shall not be
considered violated unless an excess or deficiency occurs or exists immediately
after and as a result of such investment.
The phrase "shareholder approval," as used in the Prospectus, and the
phrase "vote of a majority of the outstanding voting securities," as used herein
with respect to a Fund, means the affirmative vote of the lesser of (1) more
than 50% of the outstanding shares of the Fund, or (2) 67% or more of the shares
of the Fund present at a meeting if more than 50% of the outstanding shares are
represented at the meeting in person or by proxy. Except for policies that are
explicitly described as fundamental in the Prospectus or this Statement of
Additional Information, the investment policies of each Fund (including all
policies, restrictions and limitations set forth under "Investment Guidelines")
may be changed by the Trust's Trustees without the approval of shareholders.
MANAGEMENT OF THE TRUST
Subject to the provisions of the GMO Declaration of Trust, the business
of the GMO Trust (the "Trust") shall be managed by the Trustees, and they shall
have all powers necessary or convenient to carry out that responsibility
including the power to engage in securities transactions of all kinds on behalf
of the Trust. Without limiting the foregoing, the Trustees may adopt By-Laws not
inconsistent with the Declaration of Trust providing for the regulation and
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<PAGE> 302
management of the affairs of the Trust and may amend and repeal them to the
extent that such By-Laws do not reserve that right to the Shareholders; they may
fill vacancies in or remove from their number (including any vacancies created
by an increase in the number of Trustees); they may remove from their number
with or without cause; they may elect and remove such officers and appoint and
terminate such agents as they consider appropriate; they may appoint from their
own number and terminate one or more committees consisting of two or more
Trustees which may exercise the powers and authority of the Trustees to the
extent that the Trustees determine; they may employ one or more custodians of
the assets of the Trust and may authorize such custodians to employ
subcustodians and to deposit all or any part of such assets in a system or
systems for the central handling of securities or with a Federal Reserve Bank,
retain a transfer agent or a shareholder servicing agent, or both, provide for
the distribution of Shares by the Trust, through one or more principal
underwriters or otherwise, set record dates for the determination of
Shareholders with respect to various matters, and in general delegate such
authority as they consider desirable to any officer of the Trust, to any
committee of the Trustees and to any agent or employee of the Trust or to any
such custodian or underwriter.
The Trustees and officers of the Trust and their principal occupations
during the past five years are as follows:
R. JEREMY GRANTHAM* (D.O.B. 10/6/38). President-Quantitative and
Chairman of the Trustees of the Trust. Member, Grantham, Mayo, Van
Otterloo & Co. LLC.
HARVEY R. MARGOLIS (D.O.B. 12/12/42). Trustee of the Trust. Mathematics
Professor, Boston College.
JAY O. LIGHT (D.O.B. 10/3/41). Trustee of the Trust. Professor of
Business Administration, Harvard University; Senior Associate Dean,
Harvard University (1988-1992).
EYK DEL MOL VAN OTTERLOO (D.O.B. 2/27/37). President-International of
the Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC.
RICHARD MAYO (D.O.B. 6/18/42). President-U.S. Active of the Trust.
Member, Grantham, Mayo, Van Otterloo & Co. LLC.
KINGSLEY DURANT (D.O.B. 1/19/32). Vice President and Secretary of the
Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC.
SUSAN RANDALL HARBERT (D.O.B. 4/25/57). Secretary and Treasurer of the
Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC.
WILLIAM R. ROYER, ESQ. (D.O.B. 7/20/65). Vice President and Assistant
Treasurer of the Trust. General Counsel, Grantham, Mayo, Van Otterloo &
Co. LLC (January 1995 - Present). Associate, Ropes & Gray, Boston,
Massachusetts (September 1992 - January 1995).
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<PAGE> 303
JUI LAI (D.O.B. 1/21/49). Secretary of the Trust. Member, Grantham,
Mayo, Van Otterloo & Co. LLC.
ANN SPRUILL (D.O.B. 8/30/54). Secretary of the Trust. Member, Grantham,
Mayo, Van Otterloo & Co. LLC.
ROBERT V. BROKAW, JR. (D.O.B. 10/7/43). Secretary of the Trust. Member,
Grantham, Mayo, Van Otterloo & Co. LLC.
FORREST BERKLEY (D.O.B. 4/25/54). Vice President of the Trust. Member,
Grantham, Mayo, Van Otterloo & Co. LLC.
SCOTT ESTON (D.O.B. 1/20/56). Vice President of the Trust. Chief
Financial Officer and Member, Grantham, Mayo, Van Otterloo & Co. LLC
(September 1997 - present). Senior Partner, Coopers & Lybrand (1987 -
1997).
BRENT ARVIDSON (D.O.B. 6/26/69). Assistant Treasurer. Senior Fund
Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 1997 -
present). Senior Financial Reporting Analyst, John Hancock Funds
(August 1996 - September 1997). Account Supervisor/Senior Account
Specialist, Investors Bank and Company (June 1993 - August 1996).
*Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo,
Van Otterloo & Co. LLC ("GMO" or the "Manager"), as defined by the 1940 Act.
The mailing address of each of the officers and Trustees is c/o GMO
Trust, 40 Rowes Wharf, Boston, Massachusetts 02110. As of June 1, 1999, the
Trustees and officers of the Trust as a group owned less than 1% of the
outstanding shares of each class of shares of each Fund.
Except as stated above, the principal occupations of the officers and
Trustees for the last five years have been with the employers as shown above,
although in some cases they have held different positions with such employers.
Other than as set forth in the table below, no Trustee or officer of
the Trust receives any direct compensation from the Trust or any series thereof:
<TABLE>
<CAPTION>
NAME OF PERSON, TOTAL ANNUAL COMPENSATION
POSITION FROM THE TRUST
--------------- -------------------------
<S> <C>
Harvey R. Margolis, Trustee $70,000
Jay O. Light, Trustee $70,000
</TABLE>
Messrs. Grantham, Mayo, Van Otterloo, Durant, Lai, Brokaw, Eston and
Berkley, and Mses. Harbert and Spruill, as members of the Manager, will benefit
from the management fees paid by each Fund of the Trust.
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<PAGE> 304
INVESTMENT ADVISORY AND OTHER SERVICES
Management Contracts
As disclosed in the Prospectus under the heading "Management of the
Trust," under separate Management Contracts (each a "Management Contract")
between the Trust and the Manager, subject to such policies as the Trustees of
the Trust may determine, the Manager will furnish continuously an investment
program for each Fund and will make investment decisions on behalf of the Fund
and place all orders for the purchase and sale of portfolio securities. Subject
to the control of the Trustees, the Manager also manages, supervises and
conducts the other affairs and business of the Trust, furnishes office space and
equipment, provides bookkeeping and certain clerical services and pays all
salaries, fees and expenses of officers and Trustees of the Trust who are
affiliated with the Manager. As indicated under "Portfolio
Transactions--Brokerage and Research Services," the Trust's portfolio
transactions may be placed with broker-dealers which furnish the Manager, at no
cost, certain research, statistical and quotation services of value to the
Manager in advising the Trust or its other clients.
As is disclosed in the Prospectus, the Manager has contractually agreed
to reimburse each Fund with respect to certain Fund expenses through June 30,
2000 to the extent that a Fund's total annual operating expenses (excluding
Shareholder Service Fees, brokerage commissions and other investment-related
costs, interest expenses, hedging transaction fees, extraordinary, non-recurring
and certain other unusual expenses (including taxes), securities lending fees
and expenses and transfer taxes) would otherwise exceed a specified percentage
of that Fund's daily net assets.
Each Management Contract provides that the Manager shall not be subject
to any liability in connection with the performance of its services thereunder
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
Each Management Contract was approved by the Trustees of the Trust
(including a majority of the Trustees who are not "interested persons" of the
Manager) and by the relevant Fund's sole shareholder in connection with the
organization of the Trust and the establishment of the Funds. Each Management
Contract will continue in effect for a period more than two years from the date
of its execution only so long as its continuance is approved at least annually
by (i) vote, cast in person at a meeting called for that purpose, of a majority
of those Trustees who are not "interested persons" of the Manager or the Trust,
and by (ii) the majority vote of either the full Board of Trustees or the vote
of a majority of the outstanding shares of the relevant Fund. Each Management
Contract automatically terminates on assignment, and is terminable on not more
than 60 days' notice by the Trust to the Manager. In addition, each Management
Contract may be terminated on not more than 60 days' written notice by the
Manager to the Trust.
For each Fund, the Management Fee is calculated based on a fixed
percentage of the Fund's average daily net assets. In the last year the Funds
have paid the following amounts as Management Fees to the Manager pursuant to
the relevant Management Contract:
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<PAGE> 305
<TABLE>
<CAPTION>
Gross Reduction Net
----- --------- ---
<S> <C> <C> <C>
TAX-MANAGED
U.S. EQUITIES FUND
Commencement of Operations
(7/23/98) through 2/28/99 $16,961 $16,961 $0
TAX-MANAGED INTERNATIONAL
EQUITIES FUND
Commencement of Operations
(7/29/98) through 2/28/99 $50,861 $50,861 $0
</TABLE>
Custodial Arrangements. Investors Bank & Trust Company ("IBT"), 200
Clarendon Street, Boston, Massachusetts 02116, serves as the Trust's custodian
on behalf of the Tax-Managed U.S. Equities Fund. Brown Brothers Harriman & Co.
("BBH"), 40 Water Street, Boston, Massachusetts 02109, serves as the Trust's
custodian on behalf of the Tax-Managed International Equities Fund. As such, IBT
or BBH holds in safekeeping certificated securities and cash belonging to a Fund
and, in such capacity, is the registered owner of securities in book-entry form
belonging to a Fund. Upon instruction, IBT or BBH receives and delivers cash and
securities of a Fund in connection with Fund transactions and collects all
dividends and other distributions made with respect to Fund portfolio
securities. Each of IBT and BBH also maintains certain accounts and records of
the Trust and calculates the total net asset value, total net income and net
asset value per share of each Fund for which it acts as custodian on a daily
basis.
Shareholder Service Arrangements. As disclosed in the Prospectus,
pursuant to the terms of a single Servicing Agreement with each Fund of the
Trust, GMO provides direct client service, maintenance and reporting to
shareholders of the Funds. The Servicing Agreement was approved by the Trustees
of the Trust (including a majority of the Trustees who are not "interested
persons" of the Manager or the Trust). The Servicing Agreement will continue in
effect for a period more than one year from the date of its execution only so
long as its continuance is approved at least annually by (i) vote, cast in
person at a meeting called for the purpose, of a majority of those Trustees who
are not "interested persons" of the Manager or the Trust, and by (ii) the
majority vote of the full Board of Trustees. The Servicing Agreement
automatically terminates on assignment (except as specifically provided in the
Servicing Agreement) and is terminable by either party upon not more than 60
days' written notice to the other party.
The Trust entered into the Servicing Agreement with GMO on May 30,
1996. Pursuant to the terms of the Servicing Agreement, each Fund paid GMO the
amounts set forth in the table below:
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<PAGE> 306
<TABLE>
<CAPTION>
Fiscal Year Ended 2/28/99
-------------------------
<S> <C>
Tax-Managed U.S. Equities Fund $ 4,846
Tax-Managed International Equities Fund $10,172
</TABLE>
Independent Accountants. The Trust's independent accountants are
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110.
PricewaterhouseCoopers LLP conducts annual audits of the Trust's financial
statements, assists in the preparation of each Fund's federal and state income
tax returns, consults with the Trust as to matters of accounting and federal and
state income taxation and provides assistance in connection with the preparation
of various Securities and Exchange Commission filings.
PORTFOLIO TRANSACTIONS
The purchase and sale of portfolio securities for each Fund and for the
other investment advisory clients of the Manager are made by the Manager with a
view to achieving their respective investment objectives. For example, a
particular security may be bought or sold for certain clients of the Manager
even though it could have been bought or sold for other clients at the same
time. Likewise, a particular security may be bought for one or more clients when
one or more other clients are selling the security. In some instances,
therefore, one client may sell indirectly a particular security to another
client. It also happens that two or more clients may simultaneously buy or sell
the same security, in which event purchases or sales are effected on a pro rata,
rotating or other equitable basis so as to avoid any one account being preferred
over any other account.
Transactions involving the issuance of Fund shares for securities or
assets other than cash will be limited to a bona fide reorganization or
statutory merger and to other acquisitions of portfolio securities that meet all
of the following conditions: (a) such securities meet the investment objectives
and policies of the Fund; (b) such securities are acquired for investment and
not for resale; (c) such securities are liquid securities which are not
restricted as to transfer either by law or liquidity of market; and (d) such
securities have a value which is readily ascertainable as evidenced by a listing
on the American Stock Exchange, the New York Stock Exchange, NASDAQ or a
recognized foreign exchange.
Brokerage and Research Services. In placing orders for the portfolio
transactions of each Fund, the Manager will seek the best price and execution
available, except to the extent it may be permitted to pay higher brokerage
commissions for brokerage and research services as described below. The
determination of what may constitute best price and execution by a broker-dealer
in effecting a securities transaction involves a number of considerations,
including, without limitation, the overall net economic result to the Fund
(involving price paid or received and any commissions and other costs paid), the
efficiency with which the transaction is effected, the ability to effect the
transaction at all where a large block is involved, availability of the broker
to stand ready to execute possibly difficult transactions in the future and the
financial strength and stability of the broker. Because of such factors, a
broker-dealer effecting a transaction may be paid a commission higher than that
charged by another broker-dealer. Most of the foregoing are judgmental
considerations.
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<PAGE> 307
Over-the-counter transactions often involve dealers acting for their
own account. It is the Manager's policy to place over-the-counter market orders
for the Tax-Managed U.S. Equity Fund with primary market makers unless better
prices or executions are available elsewhere.
Although the Manager does not consider the receipt of research services
as a factor in selecting brokers to effect portfolio transactions for a Fund,
the Manager will receive such services from brokers who are expected to handle a
substantial amount of the Funds' portfolio transactions. Research services may
include a wide variety of analyses, reviews and reports on such matters as
economic and political developments, industries, companies, securities and
portfolio strategy. The Manager uses such research in servicing other clients as
well as the Funds.
As permitted by Section 28(e) of the Securities Exchange Act of 1934
and subject to such policies as the Trustees of the Trust may determine, the
Manager may pay an unaffiliated broker or dealer that provides "brokerage and
research services" (as defined in the Act) to the Manager an amount of
commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction.
During the fiscal year ended February 28, 1999, the Trust paid, on
behalf of the Funds, the following amounts in brokerage commissions:
<TABLE>
<CAPTION>
Fund 1999
- --------------------------------------------------------------------------------
<S> <C>
Tax-Managed U.S. Equities Fund $ 5,964
Tax-Managed International Equities Fund $ 27,729
</TABLE>
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES
The Trust is organized as a Massachusetts business trust under the laws
of Massachusetts by an Agreement and Declaration of Trust ("Declaration of
Trust") dated June 24, 1985. A copy of the Declaration of Trust is on file with
the Secretary of The Commonwealth of Massachusetts. The fiscal year for each
Fund ends on February 28/29.
Pursuant to the Declaration of Trust, the Trustees have currently
authorized the issuance of an unlimited number of full and fractional shares of
thirty-nine series, one for each of the Funds described in this Statement of
Additional Information, and for each of U.S. Core Fund; Tobacco-Free Core Fund;
Value Fund; Growth Fund; U.S. Sector Fund; Small Cap Value Fund; Small Cap
Growth Fund; Fundamental Value Fund; REIT Fund; International Core Fund;
Currency Hedged International Core Fund; Foreign Fund; International Small
Companies Fund; Japan Fund; Emerging Markets Fund; Evolving Countries Fund;
Global Properties Fund; Domestic Bond Fund; U.S. Bond/Global Alpha A Fund; U.S.
Bond/Global Alpha B Fund; International Bond Fund; Currency Hedged International
Bond Fund; Global Bond Fund; Emerging Country Debt Fund; Short-Term Income Fund;
Global Hedged Equity Fund; Inflation Indexed Bond Fund; International Equity
Allocation Fund; World Equity Allocation Fund;
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<PAGE> 308
Global (U.S.+) Equity Allocation Fund; Global Balanced Allocation Fund;
International Core Plus Allocation Fund; Emerging Country Debt Share Fund;
Pelican Fund; Asia Fund; Tax Managed U.S. Small Cap Fund; and Intrinsic Value
Fund. Interests in each portfolio (Fund) are represented by shares of the
corresponding series. Each share of each series represents an equal
proportionate interest, together with each other share, in the corresponding
Fund. The shares of such series do not have any preemptive rights. Upon
liquidation of a Fund, shareholders of the corresponding series are entitled to
share pro rata in the net assets of the Fund available for distribution to
shareholders. The Declaration of Trust also permits the Trustees to charge
shareholders directly for custodial and transfer agency expenses, but there is
no present intention to make such charges.
The Declaration of Trust also permits the Trustees, without shareholder
approval, to subdivide any series of shares into various sub-series or classes
of shares with such dividend preferences and other rights as the Trustees may
designate. This power is intended to allow the Trustees to provide for an
equitable allocation of the impact of any future regulatory requirements which
might affect various classes of shareholders differently. The Trustees have
currently authorized the establishment and designation of up to eight classes of
shares for each series of the Trust (except for the Pelican Fund): Class I
Shares, Class II Shares, Class III Shares, Class IV Shares, Class V Shares,
Class VI Shares, Class VII Shares and Class VIII Shares.
The Trustees may also, without shareholder approval, establish one or
more additional separate portfolios for investments in the Trust or merge two or
more existing portfolios (i.e., a new fund). Shareholders' investments in such a
portfolio would be evidenced by a separate series of shares.
The Declaration of Trust provides for the perpetual existence of the
Trust. The Trust, however, may be terminated at any time by vote of at least
two-thirds of the outstanding shares of the Trust. While the Declaration of
Trust further provides that the Trustees may also terminate the Trust upon
written notice to the shareholders, the 1940 Act requires that the Trust receive
the authorization of a majority of its outstanding shares in order to change the
nature of its business so as to cease to be an investment company.
On June 1, 1999 the following shareholders held greater than 25% of the
outstanding shares of a series of the Trust:
FUND SHAREHOLDERS
Tax-Managed U.S. Equities Fund Dovecote Fund LLC; Bob & Co. FBO Metcalf
As a result, such shareholders may be deemed to "control" their
respective series as such term is defined in the 1940 Act.
Shareholders could, under certain circumstances, be held personally
liable for the obligations of the Trust. However, the risk of a shareholder
incurring financial loss on account of that liability is considered remote since
it may arise only in very limited circumstances.
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<PAGE> 309
VOTING RIGHTS
As summarized in the Shareholder Manual, shareholders are entitled to
one vote for each full share held (with fractional votes for fractional shares
held) and will vote (to the extent provided herein) in the election of Trustees
and the termination of the Trust and on other matters submitted to the vote of
shareholders. Shareholders vote by individual Fund on all matters except (i)
when required by the Investment Company Act of 1940, shares shall be voted in
the aggregate and not by individual Fund, and (ii) when the Trustees have
determined that the matter affects only the interests of one or more Funds, then
only shareholders of such affected Funds shall be entitled to vote thereon.
Shareholders of one Fund shall not be entitled to vote on matters exclusively
affecting another Fund, such matters including, without limitation, the adoption
of or change in the investment objectives, policies or restrictions of the other
Fund and the approval of the investment advisory contracts of the other Fund.
Shareholders of a particular class of shares do not have separate class voting
rights except with respect to matters that affect only that class of shares and
as otherwise required by law.
There will normally be no meetings of shareholders for the purpose of
electing Trustees except that in accordance with the 1940 Act (i) the Trust will
hold a shareholders' meeting for the election of Trustees at such time as less
than a majority of the Trustees holding office have been elected by
shareholders, and (ii) if, as a result of a vacancy in the Board of Trustees,
less than two-thirds of the Trustees holding office have been elected by the
shareholders, that vacancy may only be filled by a vote of the shareholders. In
addition, Trustees may be removed from office by a written consent signed by the
holders of two-thirds of the outstanding shares and filed with the Trust's
custodian or by a vote of the holders of two-thirds of the outstanding shares at
a meeting duly called for the purpose, which meeting shall be held upon the
written request of the holders of not less than 10% of the outstanding shares.
Upon written request by the holders of at least 1% of the outstanding shares
stating that such shareholders wish to communicate with the other shareholders
for the purpose of obtaining the signatures necessary to demand a meeting to
consider removal of a Trustee, the Trust has undertaken to provide a list of
shareholders or to disseminate appropriate materials (at the expense of the
requesting shareholders). Except as set forth above, the Trustees shall continue
to hold office and may appoint successor Trustees. Voting rights are not
cumulative.
No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the Trust except (i)
to change the Trust's name or to cure technical problems in the Declaration of
Trust and (ii) to establish, designate or modify new and existing series or
sub-series of Trust shares or other provisions relating to Trust shares in
response to applicable laws or regulations.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Declaration of Trust provides for indemnification out of
all the
36
<PAGE> 310
property of the relevant Fund for all loss and expense of any shareholder of
that Fund held personally liable for the obligations of the Trust. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is considered remote since it is limited to circumstances in which the
disclaimer is inoperative and the Fund of which he is or was a shareholder would
be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing in
the Declaration of Trust protects a Trustee against any liability to which the
Trustee would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office. The By-laws of the Trust provide for indemnification by the Trust of
the Trustees and the officers of the Trust except with respect to any matter as
to which any such person did not act in good faith in the reasonable belief that
his action was in or not opposed to the best interests of the Trust. Such person
may not be indemnified against any liability to the Trust or the Trust
shareholders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
BENEFICIAL OWNERS OF 5% OR MORE OF THE FUND'S SHARES
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Tax-Managed U.S. Equities Fund as of June 1,
1999:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
NAME ADDRESS % OWNERSHIP
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Dovecote Fund LLC 37 Spencer Hill Road 44.34
Corning, NY 14830
- ---------------------------------------------------------------------------------------------------------------------------
Bob & Co. c/o Bank Boston 36.45
FBO Metcalf Attn: Mutual Fund Department 45-02-93
P.O. Box 1809
Boston, MA 02105-1809
- ---------------------------------------------------------------------------------------------------------------------------
Janet H. Geary 1211 SW 5th Avenue, Suite 2980 18.31
Portland, OR 97204
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Tax-Managed International Equities Fund as
of June 1, 1999:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
NAME ADDRESS % OWNERSHIP
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Dumaines Trust C/O Gerard Sarnie, CPA 23.22
201 Devonshire St., 4th Floor
Boston, MA 02110
- ---------------------------------------------------------------------------------------------------------------------------
Dovecote Fund LLC 37 Spencer Hill Road 18.11
Corning, NY 14830
- ---------------------------------------------------------------------------------------------------------------------------
Melvin B. and Joan F. Lane Trust 3000 Sand Hill Road 17.57
Building 2, Suite 215
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 311
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U/A DTD 09/14/93 Menlo Park, CA 94025
Melvin and Joan Lane
Revocable Trust I
- ---------------------------------------------------------------------------------------------------------------------------
Bob & Co. C/O Bank Boston 16.53
FBO Metcalf Attn: Mutual Fund Department 45-02-93
P.O. Box 1809
Boston, MA 02105-1809
- ---------------------------------------------------------------------------------------------------------------------------
Richard Geary 1211 SW 5th Avenue 12.85
Suite 2980
Portland, OR 97024
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
DISTRIBUTIONS
The Shareholder's Manual describes the distribution policies of each
Fund under the heading "Distributions".
TAXES
TAX STATUS AND TAXATION OF EACH FUND
Each Fund is treated as a separate taxable entity for federal income
tax purposes. Each Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). In order to qualify for the special tax treatment accorded regulated
investment companies and their shareholders, each Fund must, among other things:
(a) derive at least 90% of its gross income from dividends, interest, payments
with respect to certain securities loans, and gains from the sale of stock,
securities and foreign currencies, or other income (including but not
limited to gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities, or
currencies;
(b) distribute with respect to each taxable year at least 90% of the sum of its
taxable net investment income, its net tax-exempt income, and the excess,
if any, of net short-term capital gains over net long-term capital losses
for such year; and
(c) diversify its holdings so that at the end of each fiscal quarter, (i)
at least 50% of the market value of the Fund's assets is represented by
cash and cash items, U.S. Government Securities, securities of other
regulated investment companies, and other securities limited in respect
of any one issuer to a value not greater than 5% of the value of the
Fund's total net assets and to not more than 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities (other than those of
the U.S. Government or other regulated investment companies) of any one
issuer or of two or more issuers which the Fund controls and which are
engaged in the same, similar, or related trades or businesses.
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<PAGE> 312
If a Fund qualifies as a regulated investment company that is accorded
special tax treatment, the Fund will not be subject to federal income tax on
income paid to its shareholders in the form of dividends (including capital gain
dividends).
If a Fund fails to distribute in a calendar year substantially all of
its ordinary income for such year and substantially all of its capital gain net
income for the one-year period ending October 31 (or later if a Fund is
permitted so to elect and so elects), plus any retained amount from the prior
year, such Fund will be subject to a 4% excise tax on the undistributed amounts.
A dividend paid to shareholders by a Fund in January of a year generally is
deemed to have been paid by the Fund on December 31 of the preceding year, if
the dividend was declared and payable to shareholders of record on a date in
October, November or December of that preceding year. Each Fund intends
generally to make distributions sufficient to avoid imposition of the 4% excise
tax.
TAXATION OF FUND DISTRIBUTIONS AND SALES OF FUND SHARES
Fund distributions derived from interest, dividends and certain other
income, including in general short-term capital gains, will be taxable as
ordinary income to shareholders subject to federal income tax whether received
in cash or reinvested shares. Properly designated Fund distributions derived
from net long-term capital gains (i.e., net gains derived from the sale of
securities held for more than 12 months) will be taxable as such (generally at a
20% rate for noncorporate shareholders), regardless of how long a shareholder
has held the shares in the Fund.
Dividends and distributions on each Fund's shares are generally subject
to federal income tax as described herein to the extent they do not exceed the
Fund's realized income and gains, even though such dividends and distributions
may economically represent a return of a particular shareholder's investment.
Such distributions are likely to occur in respect of shares purchased at a time
when the Fund's net asset value reflects gains that are either unrealized, or
realized but not distributed.
The sale, exchange or redemption of Fund shares may give rise to a gain
or loss. In general, any gain or loss realized upon a taxable disposition of
shares will be treated as long-term capital gains if the shares have been held
for more than 12 months and as short-term capital gains if the shares have been
held for not more than 12 months.
Any loss realized upon a taxable disposition of shares held for six
months or less will be treated as long-term capital loss to the extent of any
long-term capital gain distributions received by a shareholder with respect to
those shares. All or a portion of any loss realized upon a taxable disposition
of Fund shares will be disallowed if other shares of the same Fund are purchased
within 30 days before or after the disposition. In such a case, the basis of the
newly purchased shares will be adjusted to reflect the disallowed loss.
A distribution paid to shareholders by a Fund in January of a year
generally is deemed to have been received by shareholders on December 31 of the
preceding year, if the distribution was declared and payable to shareholders of
record on a date in October, November or December of that preceding year. The
Trust will provide federal tax information annually, including
39
<PAGE> 313
information about dividends and distributions paid during the preceding year to
taxable investors and others requesting such information.
If a Fund makes a distribution to you in excess of its current and
accumulated "earnings and profits" in any taxable year, the excess distribution
will be treated as a return of capital to the extent of your tax basis in your
shares, and thereafter as capital gain. A return of capital is not taxable, but
it reduces your tax basis in your shares, thus reducing any loss or increasing
any gain on a subsequent taxable disposition by you of your shares.
For corporate shareholders, the dividends-received deduction will
generally apply (subject to a holding period requirement imposed by the Code) to
a Fund's dividends paid from investment income to the extent derived from
dividends received from U.S. corporations. However, any distributions received
by a Fund from REITs will not qualify for the corporate dividends-received
deduction. A Fund's investments in REIT equity securities may require such Fund
to accrue and distribute income not yet received. In order to generate
sufficient cash to make the requisite distributions, the Fund may be required to
sell securities in its portfolio that it otherwise would have continued to hold
(including when it is not advantageous to do so). A Fund's investments in REIT
equity securities may at other times result in the Fund's receipt of cash in
excess of the REIT's earnings; if the Fund distributes such amounts, such
distribution could constitute a return of capital to Fund shareholders for
federal income tax purposes.
The backup withholding rules do not apply to tax exempt entities so
long as each such entity furnishes the Trust with an appropriate certification.
However, other shareholders are subject to backup withholding at a rate of 31%
on all distributions of net investment income and capital gain, whether received
in cash or reinvested in shares of the relevant Fund, and on the amount of the
proceeds of any redemption of Fund shares paid or credited to any shareholder
account for which an incorrect or no taxpayer identification number has been
provided, where appropriate certification has not been provided for a foreign
shareholder, or where the Trust is notified that the shareholder has
underreported income in the past (or the shareholder fails to certify that he is
not subject to such withholding). A "taxpayer identification number" is either
the Social Security number of employer identification number of the record owner
of the account.
WITHHOLDING ON DISTRIBUTIONS TO FOREIGN INVESTORS
Dividend distributions (including distributions derived from short-term
capital gains) are in general subject to a U.S. withholding tax of 30% when paid
to a nonresident alien individual, foreign estate or trust, a foreign
corporation, or a foreign partnership ("foreign shareholder"). Persons who are
resident in a country, such as the U.K., that has an income tax treaty with the
U.S. may be eligible for a reduced withholding rate (upon filing of appropriate
forms), and are urged to consult their tax advisors regarding the applicability
and effect of such a treaty. Distributions of net realized long-term capital
gains paid by a Fund to a foreign shareholder, and any gain realized upon the
sale of Fund shares by such a shareholder, will ordinarily not be subject to
U.S. taxation, unless the recipient or seller is a nonresident alien individual
who is present in the United States for more than 182 days during the taxable
year. However, such distributions and sale proceeds may be subject to backup
withholding, unless the foreign investor
40
<PAGE> 314
certifies his non-U.S. residency status. Foreign investors are subject to the
backup withholding rules described above. Any tax withheld as a result of backup
withholding does not constitute an additional tax imposed on the record owner of
the account, and may be claimed as a credit on the record owner's Federal income
tax return. Also, foreign shareholders with respect to whom income from a Fund
is "effectively connected" with a U.S. trade or business carried on by such
shareholder will in general be subject to U.S. federal income tax on the income
derived from the Fund at the graduated rates applicable to U.S. citizens,
residents or domestic corporations, whether received in cash or reinvested in
shares, and, in the case of a foreign corporation, may also be subject to a
branch profits tax. Again, foreign shareholders who are resident in a country
with an income tax treaty with the United States may obtain different tax
results, and are urged to consult their tax advisors.
FOREIGN TAX CREDITS
If, at the end of the fiscal year, more than 50% of the value of the
total assets of any Fund is represented by stock or securities of foreign
corporations, the Fund intends to make an election with respect to the relevant
Fund which allows shareholders whose income from the Fund is subject to U.S.
taxation at the graduated rates applicable to U.S. citizens, residents or
domestic corporations to claim a foreign tax credit or deduction (but not both)
on their U.S. income tax return. In such case, the amounts of foreign income
taxes paid by the Fund would be treated as additional income to Fund
shareholders from non-U.S. sources and as foreign taxes paid by Fund
shareholders. Investors should consult their tax advisors for further
information relating to the foreign tax credit and deduction, which are subject
to certain restrictions and limitations (including a holding period requirement
applied at both the Fund and shareholder level imposed by the Code).
Shareholders of any of the International Funds whose income from the Fund is not
subject to U.S. taxation at the graduated rates applicable to U.S. citizens,
residents or domestic corporations may receive substantially different tax
treatment of distributions by the relevant Fund, and may be disadvantaged as a
result of the election described in this paragraph.
TAX IMPLICATIONS OF CERTAIN INVESTMENTS
Certain of the Funds' investments, including assets "marked to the
market" for federal income tax purposes, debt obligations issued or purchased at
a discount and potentially so-called "index securities" (including inflation
indexed bonds), will create taxable income in excess of the cash they generate.
In such cases, a Fund may be required to sell assets (including when it is not
advantageous to do so) to generate the cash necessary to distribute as dividends
to its shareholders all of its income and gains and therefore to eliminate any
tax liability at the Fund level.
The Funds' transactions in options, futures contracts, hedging
transactions, forward contracts, straddles and foreign currencies may accelerate
income, defer losses, cause adjustments in the holding periods of the Funds'
securities and convert short-term capital gains or losses into long-term capital
gains or losses. These transactions may affect the amount, timing and character
of distributions to shareholders.
41
<PAGE> 315
Investment by the Fund in certain passive foreign investment companies
("PFICs") could subject the Fund to a U.S. federal income tax (including
interest charges) on distributions received from the company or on proceeds
received from the disposition of shares in the company, which tax cannot be
eliminated by making distributions to Fund shareholders. However, the Fund may
elect to treat a passive foreign investment company as a "qualified electing
fund," in which case the Fund will be required to include its share of the
company's income and net capital gain annually, regardless of whether it
receives any distribution form the company. The Fund also may make an election
to mark the gains (and to a limited extent losses) in such holdings "to the
market" as though it had sold and repurchased its holdings in those PFICs on the
last day of the Fund's taxable year. Such gains and losses are treated as
ordinary income and loss. The QEF and mark-to-market elections may have the
effect of accelerating the recognition of income (without the receipt of cash)
and increase the amount required to be distributed for the Fund to avoid
taxation. Making either of these elections therefore may require a Fund to
liquidate other investments (including when it is not advantageous to do so) to
meet its distribution requirement, which also may accelerate the recognition of
gain and affect a Fund's total return.
A PFIC is any foreign corporation (i) 75% or more of the income of
which for the taxable year is passive income, or (ii) the average percentage of
the assets of which (generally by value, but by adjusted tax basis in certain
cases) that produce or are held for the production of passive income is at least
50%. Generally, passive income for this purposes means dividends, interest
(including income equivalent to interest), royalties, rents, annuities, the
excess of gains over losses from certain property transactions and commodities
transactions, and foreign currency gains. Passive income for this purpose does
not include rents and royalties received by the foreign corporation from active
business and certain income received from related persons.
LOSS OF REGULATED INVESTMENT COMPANY STATUS
A Fund may experience particular difficulty qualifying as a regulated
investment company in the case of highly unusual market movements, in the case
of high redemption levels and/or during the first year of its operations. If the
Fund does not qualify for taxation as a regulated investment company for any
taxable year, the Fund's income will be taxed at the Fund level at regular
corporate rates, and all distributions from earnings and profits, including
distributions of net long-term capital gains, will be taxable to shareholders as
ordinary income and subject to withholding in the case of non-U.S. shareholders.
In addition, in order to requalify for taxation as a regulated investment
company that is accorded special tax treatment, the Fund may be required to
recognize unrealized gains, pay substantial taxes and interest on such gains,
and make certain substantial distributions.
PERFORMANCE INFORMATION
Each Fund may from time to time include its total return in
advertisements or in information furnished to present or prospective
shareholders.
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<PAGE> 316
Quotations of average annual total return for a Fund will be expressed
in terms of the average annual compounded rate of return of a hypothetical
investment in the Fund or class over periods of one, three, five, and ten years
(or for such shorter or longer periods as shares of the Fund have been offered),
calculated pursuant to the following formula: P (1 + T)(n) = ERV (where P = a
hypothetical initial payment of $10,000, T = the average annual total return, n
= the number of years, and ERV = the ending redeemable value of a hypothetical
$10,000 payment made at the beginning of the period). Except as noted below, all
total return figures reflect the deduction of a proportional share of Fund
expenses on an annual basis, and assume that (i) the maximum purchase premium is
deducted from the initial $10,000 payment, (ii) all dividends and distributions
are reinvested when paid and (iii) the maximum redemption fee is charged at the
end of the relevant period. Quotations of total return may also be shown for
other periods. The Funds may also, with respect to certain periods of less than
one year, provide total return information for that period that is unannualized.
Any such information would be accompanied by standardized total return
information.
The table below sets forth the average annual total return for Class
III Shares of each Fund for the period from the commencement of the Funds'
operations until February 28, 1999:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
FUND INCEPTION DATE SINCE
INCEPTION (%)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Tax-Managed U.S. Equities Fund 7/23/98 7.33%
- -------------------------------------------------------------------------------------------------------
Tax-Managed International Equities Fund 7/29/98 (3.02)%
- -------------------------------------------------------------------------------------------------------
</TABLE>
Each Fund may also from time to time advertise net return and gross
return data for each month and calendar quarter since the Fund's inception.
Monthly and quarterly return data is calculated by linking daily performance for
a Fund (current net asset value divided by prior net asset value), and assumes
reinvestment of all dividends and gains. Monthly and quarterly performance data
does not reflect payment of any applicable purchase premiums or redemption fees.
All quotations of monthly and quarterly returns would be accompanied by
standardized total return information.
Information relating to a Fund's return for a particular month or
calendar quarter is provided to permit evaluation of the Fund's performance and
volatility in different market conditions, and should not be considered in
isolation.
From time to time, in advertisements, in sales literature, or in
reports to shareholders, a Fund may compare its respective performance to that
of other mutual funds with similar investment objectives and to stock or other
relevant indices. For example, the Funds may compare its total return to
rankings prepared by Lipper Analytical Services, Inc. or Morningstar, Inc.,
widely recognized independent services, that monitor mutual fund performance;
the Standard & Poor's 500 Stock Index ("S&P 500"), an index of unmanaged groups
of common stock; or the Dow Jones Industrial Average, a recognized unmanaged
index of common stocks of 30 industrial companies listed on the New York Stock
Exchange.
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<PAGE> 317
Performance rankings and listings reported in national financial
publications, such as Money Magazine, Barron's and Changing Times, may also be
cited (if the Fund is listed in any such publication) or used for comparison, as
well as performance listings and rankings from various other sources including
No Load Fund X, CDA Investment Technologies, Inc., Weisenberger Investment
Companies Services, and Donoghue's Mutual Fund Almanac.
Quotations of a Fund's gross return do not reflect any reduction for
any Fund fees or expenses unless otherwise noted; if the gross return data
reflected the estimated fees and expenses of the Fund, the returns would be
lower than those shown. Quotations of gross return for a Fund for a particular
month or quarter will be calculated in accordance with the following formula:
Gross Return =
Net Return + (Total Annual Operating Expense Ratio) (# of days in relevant
period/365)
Information relating to a Fund's return for a particular month or calendar
quarter is provided to permit evaluation of the Fund's performance and
volatility in different market conditions, and should not be considered in
isolation.
44
<PAGE> 318
INVESTMENT GUIDELINES
GMO TAX-MANAGED U.S. EQUITIES FUND
TAX-SENSITIVE STRATEGIES THAT MAY BE EMPLOYED(1)
- - Manager may control portfolio turnover in order to defer the
realization and minimize the distributions of capital gains
- - Manager may sell securities in order to realize capital losses. Losses
may be used at various times to offset realized capital gains, thus
reducing net capital gains distributions
- - Manager considers strategies, such as selling securities with the
highest cost basis, to minimize capital gains distributions (when
making sales of specific securities)
- - In lieu of redeeming in cash, the Manager may meet redemption requests
through in-kind redemptions in whole or in part by a distribution of
appreciated securities held by the Fund, so that the Fund will not be
required to distribute the capital gains in those securities to the
remaining shareholders in the Fund. The effect to the redeeming
shareholder is the same for federal income tax purposes as a redemption
in cash. Shareholders receiving the redemption in kind would pay tax on
the capital gains realized, if any, on the Fund shares redeemed.
- --------------------------------------------------------------------------------
PERMITTED INVESTMENTS
SECURITIES/INSTRUMENTS:
Domestic common stocks
Convertible securities
- - At least 65% of the Fund's total assets will be invested in or exposed
to(2) domestic common stocks
Securities of Foreign Issuers (traded
principally on U.S. Exchanges)
Depository Receipts
Illiquid Securities
144A Securities
Restricted Securities
Futures and Related Options on
securities indexes
REITs
Exchange-traded and OTC options on
securities and indexes (including
writing covered options)
Equity Swap Contracts
Contracts for Differences
Index Futures
Repurchase Agreements
- - Substantially all of the Fund's assets will be invested in or exposed
to equity securities of at least 125 companies chosen from among the
Wilshire 5000 Index and will be invested primarily in the approximately
1,200 companies with the largest equity capitalization at the time of
investment which are also listed on a United States national securities
exchange (the "Large Cap 1200"). The Fund may invest in fewer issuers
if, in the opinion of the Manager, there are not at least 125
attractive investment opportunities from among such companies.
CASH AND MONEY MARKET INSTRUMENTS
Any short-term assets will be invested in cash or High Quality Money
Market Instruments including securities issued by the U.S. government
and agencies thereof, bankers' acceptances, commercial paper, bank
certificates of deposit and repurchase agreements
- - The Fund expects that less than 5% of its net assets will be exposed to
cash and money market instruments. This limitation does not include
cash and money market instruments in margin or other segregated
accounts held against exposure achieved through derivative instruments
("equitized cash").
(1) There can be no assurance that the Manager will be successful in
employing these strategies.
(2) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the Fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
45
<PAGE> 319
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as
indicated:
PURCHASING SECURITIES ON MARGIN
- - Except for short-term credits necessary for clearance of transactions.
BORROWING MONEY
- - Except that the Fund may borrow up to 20% of its net assets from banks
temporarily for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES
- - Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of portfolio
investments.
MAKING LOANS
- - Except by way of purchasing of debt obligations, repurchase agreements
and securities lending. Fund may loan securities valued at up to
33 1/3% of its total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING FUND ASSETS
- - Except that collateral arrangements with respect to swap agreements,
the writing of options, stock index, interest rate, currency or other
futures, options on futures contracts and collateral arrangements with
respect to initial and variation margin are not deemed to be a pledge
or other encumbrance of assets.
- - The deposit of securities or cash or cash equivalents in escrow in
connection with the writing of covered call or put options,
respectively is also not deemed to be a pledge or encumbrance.
SELLING UNCOVERED PUT AND CALL OPTIONS ON SECURITIES OR INDEXES
SHORT SALES OF SECURITIES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
PARTICIPATING IN SOFT DOLLAR ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES
- - No more than 5% of the Fund's net assets will be invested in time
premiums on options on particular securities (as opposed to options on
indexes).
- - Put and call options written by a Fund must be covered.
ILLIQUID SECURITIES
- - No more than 15% of the Fund's net assets will be invested in illiquid
securities. This includes restricted securities (except that some 144A
securities may be considered liquid by GMO if there is sufficient
market depth), repurchase agreements maturing in greater than 7 days,
swap contracts, and other securities determined by GMO not to be
readily marketable at their carried value.
INVESTMENT IN INSURANCE COMPANIES
- - The Fund will not purchase more than 10% of the total outstanding
voting stock of any insurance company (including foreign insurance
companies).
INVESTMENT IN SECURITIES ISSUED BY BROKERS, DEALERS, UNDERWRITERS AND
INVESTMENT ADVISERS
- - Equity: The Fund will not purchase more than 5% of any class of stock
of a broker, dealer, underwriter or investment adviser.
- - Debt: The Fund may not purchase more than 10% of any such company's
total outstanding debt in the aggregate.
- - Investment Limits: No more than 5% of the Fund's total assets will be
invested in the securities of a single broker, dealer, underwriter or
investment adviser. the net payment obligation of swap contracts where
one of these types of companies is the counterparty also counts for
purposes of this restriction.
This policy does not apply to companies that derived less than 15% of revenues
from "securities-related businesses" during the most recent fiscal year.
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<PAGE> 320
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION
- - Except for U.S. Government Securities, cash, and money market
instruments, the Fund will not invest more than 5% of its assets in the
securities of a single issue.
- - The Fund will not purchase more than 10% of the outstanding securities
of any issuer.
CONCENTRATION
- - No more than 25% of the Fund's assets will be invested in securities of
issuers in any one industry.
DERIVATIVE INSTRUMENTS
TYPES OF DERIVATIVES
- - Futures contracts and related options on securities indexes
- - Long equity swap contracts: where the Fund pays a fixed rate plus the
negative performance, if any, and receives the positive performance, if
any, of an index or basket of securities.
- - Short equity swap contracts: where the Fund receives a fixed rate plus
the negative performance, if any, and pays the positive performance of
an index or basket of securities
- - Contracts for differences: equity swaps that contain both a long and
short equity component.
USES OF DERIVATIVES
HEDGING
- - Traditional Hedging: Short equity futures, related options and short
equity swap contracts used to hedge against an equity risk already
generally present in the Fund.(3)
- - Anticipatory Hedging: If the Fund receives or anticipates significant
cash purchase transactions, the Fund may hedge market risk (risk of not
being invested in the market) by purchasing long futures contracts or
entering long equity swap contracts to obtain market exposure until
such time as direct investments can be made efficiently. Conversely, if
the Fund receives or anticipates a significant demand for cash
redemptions, the Fund may sell futures contracts or enter into short
equity swap contracts, to allow the Fund to dispose of securities in a
more orderly fashion without the Fund being exposed to leveraged loss
exposure in the interim.
INVESTMENT
- - The Fund may use derivative instruments (particularly long futures
contracts, related options and long equity swap contracts) in place of
investing directly in securities. This will include using equity
derivatives to "equitize" cash balances held by the Fund. The Fund may
also use long derivatives for investment in conjunction with short
hedging transactions to adjust the weights of the Fund's underlying
equity portfolio to a level the Manager believes is the optimal
exposure to individual markets, sectors and equities.
RISK MANAGEMENT - SYNTHETIC SALES AND PURCHASES
- - The Fund may use equity futures, related options and equity swap
contracts to adjust the weight of the Fund to a level the manager
believes is the optimal exposure to individual markets, sectors and
equities. Sometimes, such transactions are used as a precursor to
actual sales and purchases. For example, if the Fund held a large
proportion of stocks of a particular market and the Manager believed
that stocks of another market would outperform such stocks, the Fund
might use a short futures contract on an appropriate index (to
synthetically "sell" a portion of the Fund's
(3) The Fund may use such hedging to remove or reduce general market
exposure (e.g. an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g. a single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund.
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<PAGE> 321
portfolio) in combination with a long futures contract on another index (to
synthetically "buy" exposure to that index). Long and short equity swap
contracts and contracts for differences may also be used for these purposes.
Equity derivatives (and corresponding currency forwards) used to effect
synthetic sales and purchases will generally be unwound as actual portfolio
securities are sold and purchased.
LIMITATIONS ON THE USE OF DERIVATIVES
- - There is no limit on the use of derivatives for hedging purposes.
- - The face value of derivatives used for investment purposes will be
limited to 25% of the Fund's assets. When a currency forward is used in
conjunction with an equity derivative for investment purposes, the
currency forward will not be independently counted for this
restriction.
- - When long futures contracts and long equity swaps are used for
investment, an amount of cash or high quality debt securities equal to
the face value of all such long derivative positions will be segregated
against such exposure. However, for purposes of this restriction, if an
existing long equity exposure is reduced or eliminated by a short
derivative position, the combination of the long and short position
will be considered as cash available to segregate against a new long
derivative exposure.
- - The net long equity exposure of the Fund, including direct investment
in securities and long derivative positions, will not exceed 100% of
the Fund's net assets.
- - The aggregate absolute face value of all futures contracts and swap
contracts (without regard to sign and assuming no offset of long and
short positions, and counting both components of any contract for
differences) will not exceed 100% of the Fund's assets.
- - Except when such instruments are used for bona-fide hedging, no more
than 5% of the Fund's net assets will be committed to initial margin on
futures contracts and time premiums on related options.
- - Counterparties used for OTC derivatives must have a long-term debt
rating of A or higher when the derivative is entered into.
Occasionally, short-term derivatives will be entered into with
counterparties that have only high short-term debt ratings.
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
GMO Tax-Managed International Equities Fund (the "Fund") is a series of
GMO Trust, a registered open-end investment company. The complete policies of
the Fund are set forth in and governed by the Fund's Prospectus as amended from
time to time. GMO has also undertaken to generally manage Fund in accordance
with this Summary of Guidelines.
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED.
PERMITTED INVESTMENTS
EQUITY SECURITIES:
common stocks (non-US issuers)
convertible bonds
convertible preferred stocks
The Fund will have greater than 65% of its total assets invested in or exposed
to(4) securities principally traded in the securities market of at least three
countries.
[Normally, at least 90% of the developed market equity securities held by the
Fund will be selected from the universe of issuers included in the MSCI
Perspectives publication.]
OTHER EQUITY SECURITIES:
Depository Receipts: ADRs, GDRs, EDRs
Foreign issues traded in the U.S. and
abroad
(4) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
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Investment Companies (open & closed-end)
Illiquid Securities
144A Securities
Restricted Securities
Equity Futures and Related Options
Exchange-traded and OTC Options on
Securities and Indexes (including
writing covered options)
Equity Swap Contracts
Contracts for Differences
Repurchase Agreements
Securities of Emerging Market Countries
Warrants or rights
FIXED INCOME SECURITIES:
Long and Medium-term corporate
and Non-convertible preferred stock
- - Fund will have no more than 5% of its total assets invested in or
exposed to Fixed Income Securities.
FOREIGN CURRENCY TRANSACTIONS
- - Fund may invest in spot currency transactions, forward foreign currency
contracts, currency swap contracts, options on currencies, currency
futures and related options.
CASH AND MONEY MARKET INSTRUMENTS
Any short-term assets will be invested in cash or High Quality Money Market
Instruments including securities issued by the U.S. government and agencies
thereof, bankers' acceptances, commercial paper, Bank certificates of deposit
and repurchase agreements
- - The Fund expects that less than 5% of its total assets will be invested
in or exposed to cash and money market instruments. This limitation
does not include cash and money market instruments in margin or other
segregated accounts held against exposure achieved through derivative
instruments ("equitized cash").
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN
Except for short-term credits necessary for clearance of transactions
BORROWING MONEY
Except that the Fund may borrow up to 20% of its net assets from banks
temporarily for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy
UNDERWRITING SECURITIES
Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of portfolio
investments
MAKING LOANS
Except by way of purchasing of debt obligations, repurchase agreements
and securities lending. Fund may loan securities valued at up to 25% of
its total assets
PLEDGING, HYPOTHECATING OR MORTGAGING FUND ASSETS
Except that collateral arrangements with respect to swap agreements, the writing
of options, stock index, interest rate, currency or other futures, options on
futures contracts and collateral arrangements with respect to initial and
variation margin are not deemed to be a pledge or other encumbrance of assets.
The deposit of securities or cash or cash equivalents in escrow in connection
with the writing of covered call or put options, respectively is also not deemed
to be a pledge or encumbrance.
INVESTING DIRECTLY IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S MANAGEMENT
49
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RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES
- - No more than 5% of the Fund's net assets will be invested in time
premiums on options on particular securities (as opposed to options on
indexes)
OTHER INVESTMENT COMPANIES
- - The Fund will not own more than 3% of the outstanding voting securities
of any investment company
- - No more than 5% of the Fund's net assets will be invested in any single
investment company
- - No more than 10% of the Fund's net assets will be invested in
securities of investment companies in the aggregate
- - The Fund will not own other Funds of GMO Trust
ILLIQUID SECURITIES
- - No more than 15% of the Fund's net assets will be invested in illiquid
securities. This includes restricted securities (except that some 144A
securities may be considered liquid by GMO if there is sufficient
market depth), repurchase agreements maturing in greater than 7 days,
swap contracts, and other securities determined by GMO not to be
readily marketable at their carried value.
INVESTMENT IN INSURANCE COMPANIES
- - The Fund will not purchase more than the extent limited by the 1940 Act
of the total outstanding voting stock of any insurance company
(including foreign insurance companies).
INVESTMENT IN SECURITIES ISSUED BY BROKERS, DEALERS, UNDERWRITERS AND
INVESTMENT ADVISERS
- - Equity: The Fund will not purchase more than 5% of any class of stock
of a broker, dealer, underwriter or investment adviser.
- - Debt: The Fund may not purchase more than 10% of any such company's
total outstanding debt in the aggregate.
- - Investment Limits: No more than 5% of the Fund's total assets will be
invested in the securities of a single broker, dealer, underwriter or
investment adviser. The net payment obligation of swap contracts where
one of these types of companies is the counterparty also counts for
purposes of this restriction.
- - This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
PURCHASED WARRANTS OR RIGHTS
- - Aggregate value can not exceed 5% of the Fund's net assets; not more
than 2% of the Fund's net assets may be invested in warrants not listed
on NYSE or AMEX.
INVESTMENT IN "EMERGING COUNTRIES"
The Fund may invest up to 15% of its net assets in securities of issuers in
newly industrializing countries in Asia, Latin America, the Middle East,
Southern Europe, Eastern Europe and Africa.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION
- - Except for U.S. government securities, cash, and money market
instruments, the Fund will not invest more than 5% of its assets in the
securities of a single issuer.
- - The Fund will not purchase more than 10% of the outstanding securities
of any issuer.
CONCENTRATION
- - No more than 25% of the Fund's assets will be invested in securities of
issuers in any one industry.
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DERIVATIVE INSTRUMENTS (OTHER THAN FOREIGN CURRENCY TRANSACTIONS)
TYPES OF DERIVATIVES
- - Futures contracts and related options on securities indexes
- - Long equity swap contracts: where the Fund pays a fixed rate plus the
negative performance, if any, and receives the positive performance, if
any, of an index or basket of securities.
- - Short equity swap contracts: where the Fund receives a fixed rate plus
the negative performance, if any, and pays the positive performance of
an index or basket of securities
- - Contracts for differences: equity swaps that contain both long and
short equity components.
USES OF DERIVATIVES
HEDGING
- - Traditional Hedging: Short equity futures, related options and short
equity swap contracts used to hedge against an equity risk already
generally present in the Fund.(5)
- - Anticipatory Hedging: If the Fund receives or anticipates significant
cash purchase transactions, the Fund may hedge market risk (risk of not
being invested in the market) by purchasing long futures contracts or
entering long equity swap contracts to obtain market exposure until
such time as direct investments can be made efficiently. Conversely, if
the Fund receives or anticipates a significant demand for cash
redemptions, the Fund may sell futures contracts or enter into short
equity swap contracts, to allow the Fund to dispose of securities in a
more orderly fashion without the Fund being exposed to leveraged loss
exposure in the interim.
INVESTMENT
- - The Fund may use derivative instruments (particularly long futures
contracts, related options and long equity swap contracts) in place of
investing directly in securities. This will include using equity
derivatives to "equitize" cash balances held by the Fund. Because a
foreign equity derivative generally only provides the return of a
foreign market in local currency terms, the Fund will often purchase a
foreign currency forward in conjunction with using equity derivatives
to give the effect of investing directly. The Fund may also use long
derivatives for investment in conjunction with short hedging
transactions to adjust the weights of the Fund's underlying equity
portfolio to a level the Manager believes is the optimal exposure to
individual countries and equities. For example, if the Manager expects
a positive return forecast for a select group of UK companies, but a
negative return for the UK market as a whole, then this Fund may
overweight the select group of equities and reduce exposure to the UK
market by selling UK equity futures or enter a swap contract that is
long a specific basket of securities and short the UK market generally.
RISK MANAGEMENT - SYNTHETIC SALES AND PURCHASES
- - The Fund may use equity futures, related options and equity swap
contracts to adjust the weight of the Fund to a level the manager
believes is the optimal exposure to individual countries and equities.
Sometimes, such transactions are used as a precursor to actual sales
and purchases. For example, if the Fund held a large proportion of
stocks of a particular market and the Manager believed that stocks of
another market would outperform such stocks, the Fund might use a short
futures contract on an appropriate index (to synthetically "sell" a
portion of the Fund's portfolio) in combination with a long futures
contract on another index (to synthetically "buy" exposure to that
index). Long and short equity swap contracts and contracts for
differences may also be used for these purposes. Often, a foreign
currency forward will be used in conjunction with the long derivative
position to create the effect of investing directly. Equity derivatives
(and corresponding currency forwards) used to effect synthetic sales
and
(5) The Fund may use such hedging to remove or reduce general market
exposure (e.g. an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g. a single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund
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purchases will generally be unwound as actual portfolio securities are
sold and purchased.
LIMITATIONS ON THE USE OF DERIVATIVES
- - There is no limit on the use of derivatives for hedging purposes.
- - The face value of derivatives used for investment purposes will be
limited to 25% of the Fund's assets. When a currency forward is used in
conjunction with an equity derivative for investment purposes, the
currency forward will not be independently counted for this
restriction.
- - When long futures contracts and long equity swaps are used for
investment, an amount of cash or high quality debt securities equal to
the face value of all such long derivative positions will be segregated
against such exposure. However, for purposes of this restriction, if an
existing long equity exposure is reduced or eliminated by a short
derivative position, the combination of the long and short position
will be considered as cash available to segregate against a new long
derivative exposure.
- - The net long equity exposure of the Fund, including direct investment
in securities and long derivative positions, will not exceed 100% of
the Fund's net assets.
- - The aggregate absolute face value of all futures contracts and swap
contracts (without regard to sign and assuming no offset of long and
short positions, and counting both components of any contract for
differences) will not exceed 100% of the Fund's assets.
- - Except when such instruments are used for bona-fide hedging, no more
than 5% of the Fund's net assets will be committed to initial margin on
futures contracts and time premiums on related options.
- - Counterparties used for OTC derivatives must have a long-term debt
rating of A or higher when the derivative is entered into.
Occasionally, short-term derivatives will be entered into with
counterparties that have only high short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS
- - Buying and selling spot currencies
- - Forward foreign currency contracts
- - Currency futures contracts and related options
- - Options on currencies
- - Currency swap contracts
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING
- - Traditional Hedging: The Fund may effect foreign currency transactions
- generally short forward or futures contracts -- to hedge the risk of
foreign currencies represented by its securities investments back into
the U.S. dollar. The Fund is not required to hedge any of the currency
risk obtained by investing in securities denominated in foreign
currencies.
- - Anticipatory Hedging: When the Fund enters into a contract for the
purchase or anticipates the need to purchase a security denominated in
a foreign currency, it may "lock in" the U.S. dollar price of the
security by buying the foreign currency or through currency forwards or
futures.
- - Proxy Hedging: The Fund may hedge the exposure of a given foreign
currency by using an instrument relating to a different currency which
the Manager believes is highly correlated to the currency being hedged.
INVESTMENT
- - The Fund may enter into currency forwards or futures contracts in
conjunction with entering into a futures contract on a foreign index in
order to create synthetic foreign currency denominated securities
RISK MANAGEMENT
- - Subject to the limitations described below, the Fund will permit the
Fund to have foreign currency exposure that is significantly different
than the currency exposure represented by its portfolio investments.
This may include long exposure to
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<PAGE> 326
particular currencies beyond the amount of the Fund's investment in
securities denominated in that currency.
LIMITATIONS OF FOREIGN CURRENCY TRANSACTIONS
- - The Fund will typically hedge less than 30% of the foreign currency
exposure represented by its investments in foreign-currency denominated
securities.
- - [Foreign currency exposure will not generally vary by more than 30%
from the foreign currency exposure of the index.]
- - Written put and call options on currencies and currency futures will
always be covered.
- - The Fund's aggregate net foreign currency exposure, assuming full
offset of long and short positions, will not exceed 100% of the Fund's
net assets denominated in foreign currencies, though the currency
exposure of the Fund may differ substantially from the currencies in
which the Fund's securities are denominated.
- - The aggregate absolute face value of all currency forward, currency
futures and currency swap contracts (without regard to sign and
assuming no offset of long and short positions, and counting both
components of any contract for differences) will not exceed 50% of the
Fund's assets.
- - The Fund will not be net short in any foreign currency, except that,
when the Fund is attempting to hedge all or nearly all of its exposure
to a particular currency, changes in the market value of foreign
equities may cause the Fund to be temporarily net short in the
currency. Such temporary net short positions will not exceed 1% of the
Fund's assets.
FINANCIAL STATEMENTS
The Funds' audited financial statements for the fiscal year ended
February 28, 1999 included in the Trust's Annual Reports filed with the
Securities and Exchange Commission on May 10, 1999, 1999 pursuant to Section
30(d) of the Investment Company Act of 1940, as amended, and the rules
promulgated thereunder, are hereby incorporated in this Statement of Additional
Information by reference.
GMO TRUST
SPECIMEN PRICE-MAKE-UP SHEET
Following are computations of the total offering price per share for
each class of shares of each Fund, in each case based upon their respective net
asset values and shares of beneficial interest outstanding at the close of
business on February 28, 1999.
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
Tax-Managed U.S. Equities Fund - Class III
- ---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $10.67 per share based on 760,573 shares of
beneficial interest outstanding) $ 8,115,517
- ---------------------------------------------------------------------------------------------------------------------
Offering Price ($10.67 x 100/99.86) * $ 10.68
- ---------------------------------------------------------------------------------------------------------------------
Tax-Managed International Equities Fund-Class III
- ---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $9.71 per share based on 1,907,929 shares of $18,529,073
beneficial interest outstanding)
- ---------------------------------------------------------------------------------------------------------------------
Offering Price ($9.71 x 100/99.40)* $ 9.77
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Represents maximum offering price charged on certain cash purchases. See
"Purchase of Shares" in the Shareholder's Manual.
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GMO TRUST
SHAREHOLDER'S MANUAL
SHAREHOLDER'S MANUAL FOR ALL CLASSES OF FUND SHARES
GMO FUNDS
U.S. FUNDS
U.S. Core Fund
Tobacco-Free Core Fund
Value Fund
Fundamental Value Fund
Growth Fund
Small Cap Value Fund
Small Cap Growth Fund
REIT Fund
Tax-Managed U.S.
Equities Fund*
INTERNATIONAL EQUITY FUNDS
International Core Fund
Currency Hedged
International Core Fund
Foreign Fund
International Small
Companies Fund
Japan Fund
Emerging Markets Fund
Evolving Countries Fund
Asia Fund
Global Properties Fund
Tax-Managed International
Equities Fund*
FIXED INCOME FUNDS
Domestic Bond Fund
U.S. Bond/Global Alpha A
Fund
U.S. Bond/Global Alpha B
Fund
International Bond Fund
Currency Hedged
International Bond Fund
Global Bond Fund
Emerging Country Debt
Fund
Short-Term Income Fund
Global Hedged Equity Fund
Inflation Indexed Bond
Fund
Emerging Country Debt Share
Fund
ASSET ALLOCATION FUNDS
International Equity
Allocation Fund
World Equity Allocation
Fund
Global (U.S.+) Equity
Allocation Fund
Global Balanced Allocation
Fund
U.S. Sector Fund
*Information about these Funds is in the GMO Tax-Managed Funds' prospectus.
This GMO Trust Shareholder's Manual (the "Manual") contains detailed
information about purchase and redemption options and procedures for each of the
funds listed above (the "Funds"). This Manual also includes information
regarding the different classes of shares available for each Fund, including the
eligibility requirements for each class and the circumstances under which a
shareholder's shares of one class of a Fund will be automatically converted to a
different class of shares of that Fund. This Manual is not a prospectus, and
should be used in conjunction with the GMO Trust prospectuses, as amended from
time to time (the "Prospectuses"). This Manual, and the information disclosed
herein, is incorporated by reference into the Prospectuses, and is considered
part of the Prospectuses.
You can call GMO Trust (the "Trust") collect at 1-617-346-7646 to find out
more about the Funds.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
How to Buy Shares........................................... 2
Purchase Procedures....................................... 2
How to Redeem Shares........................................ 3
Purchase Premiums and Redemption Fees....................... 4
Multiple Classes............................................ 6
Eligibility for Classes................................... 7
Conversions between Classes............................... 7
Distributions............................................... 8
</TABLE>
SHAREHOLDER'S MANUAL JUNE 30, 1999
<PAGE> 328
HOW TO BUY SHARES
Shares of each Fund are available only from the Trust and may be purchased
on any day when the New York Stock Exchange is open for business (a "business
day"). Shares may be purchased by sending a purchase order to the Trust. See
"Purchase Procedures" below.
The purchase price of a share of each Fund is (i) the net asset value next
determined after a purchase order is received in good order plus (ii) a premium,
if any, established from time to time by the Trust for the particular Fund and
class to be purchased. All purchase premiums are paid to and retained by the
Fund and are intended to cover the brokerage and other costs associated with
putting the investment to work in the relevant markets. Purchase premiums
generally apply only to cash purchases, subject to certain exceptions described
below. Each class of shares of a Fund has the same rate of purchase premium, if
any. The purchase premiums currently in effect for each Fund are set forth under
"Purchase Premiums and Redemption Fees" on page 4. Purchase premiums are not
sales loads.
Shares may be purchased (i) in cash, (ii) in exchange for securities on
deposit at the Depository Trust Company ("DTC") (or such other depository
acceptable to the Manager), subject to the determination by the Manager that the
securities to be exchanged are acceptable, or (iii) by a combination of such
securities and cash. In all cases, the Manager reserves the right to reject any
purchase order. Securities acceptable to the Manager as consideration for Fund
shares will be valued as set forth under "Determination of Net Asset Value"
(generally the last quoted sale price) as of the time of the next determination
of net asset value after such acceptance. All dividends, subscription or other
rights which are reflected in the market price of accepted securities at the
time of valuation become the property of the relevant Fund and must be delivered
to the Trust upon receipt by the investor from the issuer. A gain or loss for
federal income tax purposes may be realized by the investor subject to federal
income taxation upon the exchange, depending upon the investor's basis in the
securities tendered.
The Manager will not approve securities as acceptable consideration for
Fund shares unless (1) the Manager, in its sole discretion, believes the
securities are appropriate investments for the Fund; (2) the investor represents
and agrees that all securities offered to the Fund are not subject to any
restrictions upon their sale by the Fund under the Securities Act of 1933, or
otherwise; and (3) the securities may be acquired under the investment
restrictions applicable to the relevant Fund. Investors interested in making
in-kind purchases should telephone the Trust at (617) 346-7646.
For purposes of calculating the purchase price of Trust shares, a purchase
order is received by the Trust on the day that it is in "good order." For a
purchase order to be in "good order" on a particular day, the investor's
consideration must be received before the relevant deadline on that day. If the
investor makes a cash investment, the deadline for wiring Federal funds to the
Trust is 2:00 p.m. Boston time. If the investor makes an investment in-kind, the
investor's securities must be placed on deposit at DTC (or such other depository
as is acceptable to the Manager) and 2:00 p.m. Boston time is the deadline for
transferring those securities to the account designated by the Trust's transfer
agent, Investors Bank & Trust Company, 200 Clarendon Street, Boston,
Massachusetts 02116. Investors should be aware that approval of the securities
to be used for purchase must be obtained from the Manager prior to this time.
When the consideration is received by the Trust after the relevant deadline, the
purchase order is not considered to be in good order and is required to be
resubmitted on the following business day. With the prior consent of the
Manager, in certain circumstances the Manager may, in its discretion, permit
purchases based on receiving adequate written assurances that Federal funds or
securities, as the case may be, will be delivered to the Trust by 2:00 p.m.
Boston time on or prior to the fourth business day after such assurances are
received.
PURCHASE PROCEDURES:
(a) General: Investors should call the Trust at (617) 346-7646 to obtain a
Purchase Order Form, which contains wire transfer and mailing instructions. The
Trust reserves the right to reject any order for Trust Shares. DO NOT SEND CASH,
CHECKS OR SECURITIES DIRECTLY TO THE TRUST.
Purchases will be made in full and fractional shares of each Fund
calculated to three decimal places. The Trust's Transfer Agent will send a
written confirmation (including a statement of shares owned) to shareholders at
the time of each transaction.
(b) Purchase Order Form: Investors must submit an application to the Trust and
it must be accepted by the Trust before it will be considered in "good order."
The Purchase Order Form may be submitted to the Trust (i) By Mail to GMO Trust
c/o Grantham, Mayo, Van Otterloo & Co. LLC, 40 Rowes Wharf, Boston, MA 02110,
Attention: Shareholder Services, or (ii) By Facsimile to (617) 439-4192,
Attention: Shareholder Services.
(c) Acceptance of Order: A shareholder may confirm acceptance of a mailed or
faxed purchase order by calling the Trust at (617) 346-7646. If a Purchase Order
is mailed to the Trust, it will be acted upon when received.
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<PAGE> 329
(d) Payment: All Federal funds must be transmitted to Investors Bank & Trust
Company for the account of the specific Fund of GMO Trust. "Federal funds" are
monies credited to Investors Bank & Trust Company's account with the Federal
Reserve Bank of Boston.
NOTE: The Trust may attempt to process orders for Trust shares that are
submitted less formally than as described above, but, in such cases, the
investor should carefully review confirmations set by the Trust to verify that
the order was properly executed. The Trust cannot be held responsible for
failure to execute orders or improperly executing orders that are not submitted
in accordance with these procedures.
HOW TO REDEEM SHARES
Shares of each Fund may be redeemed on any business day in cash or in kind.
The redemption price is the net asset value per share next determined after
receipt of the redemption request in "good order" less any applicable redemption
fee. All redemption fees are paid to and retained by the Fund and are intended
to cover the brokerage and other Fund costs associated with redemptions. All
classes of a particular Fund bear the same redemption fee rate, if any. The
redemption fees currently in effect for each Fund are set forth under "Purchase
Premiums and Redemption Fees" on page 4. Redemption fees are not sales loads or
contingent deferred sales charges.
If the Manager determines, in its sole discretion, that it would be
detrimental to the best interest of the remaining shareholders of a Fund to make
payment wholly or partly in cash, the Fund may pay the redemption price in whole
or in part by a distribution in-kind of securities held by the Fund in lieu of
cash. Securities used to redeem Fund shares in-kind will be valued in accordance
with the relevant Fund's procedures for valuation described under "Determination
of Net Asset Value." Securities distributed by a Fund in-kind will be selected
by the Manager in light of the Fund's objective and will not generally represent
a pro rata distribution of each security held in the Fund's portfolio. Any
in-kind redemptions will be of readily marketable securities to the extent
available. Investors may incur brokerage charges on the sale of any such
securities so received in payment of redemptions.
Payment on redemption will be made as promptly as possible and in any event
within seven days after the request for redemption is received by the Trust in
"good order." A redemption request is in "good order" if it includes the exact
name in which shares are registered, the investor's account number and the
number of shares or the dollar amount of shares to be redeemed and if it is
signed exactly in accordance with the form of registration. In addition, for a
redemption request to be in "good order" on a particular day, the investor's
request must be received by the Trust by 4:15 p.m. Boston time on a business
day. When a redemption request is received after 4:15 p.m. Boston time, the
redemption request will not be considered to be in "good order" and is required
to be resubmitted on the following business day. Persons acting in a fiduciary
capacity, or on behalf of a corporation, partnership or trust, must specify, in
full, the capacity in which they are acting. The redemption request will be
considered "received" by the Trust only after (i) it is mailed to, and received
by, the Trust at the appropriate address set forth above for purchase orders, or
(ii) it is faxed to the Trust at the appropriate facsimile number set forth
above for purchase orders, and the investor has confirmed receipt of the faxed
request by calling the Trust at (617) 346-7646. In-kind distributions will be
transferred and delivered as directed by the investor. Cash payments will be
made by transfer of Federal funds for payment into the investor's account or,
upon request, a check can be mailed to the registration address.
When opening an account with the Trust, shareholders will be required to
designate the account(s) to which funds or securities may be transferred upon
redemption. Designation of additional accounts and any change in the accounts
originally designated must be made in writing.
Each Fund may suspend the right of redemption and may postpone payment for
more than seven days when the New York Stock Exchange is closed for other than
weekends or holidays, or if permitted by the rules of the Securities and
Exchange Commission during periods when trading on the Exchange is restricted or
during an emergency which makes it impracticable for the Fund to dispose of its
securities or to fairly determine the value of the net assets of the Fund, or
during any other period permitted by the Securities and Exchange Commission for
the protection of investors. Because certain Funds hold portfolio securities
listed on foreign exchanges which may trade on days on which the New York Stock
Exchange is closed, the net asset value of such Funds' shares may be
significantly affected on days when shareholders have no access to such Funds.
3
<PAGE> 330
PURCHASE PREMIUMS AND REDEMPTION FEES
The following table sets forth the purchase premiums and redemption fees,
if any, for each of the Funds. Purchase premiums and redemption fees are not
sales loads or contingent deferred sales charges, and are paid directly to the
relevant Fund at purchase or redemption of Fund shares. Notes to the table begin
on page 5.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
CASH PURCHASE PREMIUM REDEMPTION FEES
GMO FUND NAME (AS A % OF AMOUNT REDEEMED)(1) (AS A % OF AMOUNT REDEEMED)(1)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. EQUITY FUNDS
U.S. Core Fund 0.14%(2) None
- ------------------------------------------------------------------------------------------------------------------------------
Tobacco-Free Core Fund 0.14%(2) None
- ------------------------------------------------------------------------------------------------------------------------------
Value Fund 0.14%(2) None
- ------------------------------------------------------------------------------------------------------------------------------
Fundamental Value Fund 0.15%(2) None
- ------------------------------------------------------------------------------------------------------------------------------
Growth Fund 0.14%(2) None
- ------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund 0.50%(2) 0.50%(2)
- ------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund 0.50%(2) 0.50%(2)
- ------------------------------------------------------------------------------------------------------------------------------
REIT Fund 0.50%(2) 0.50%(2)
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Managed U.S. Equities Fund 0.14%(2) None
- ------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUNDS
International Core Fund 0.60%(2) None
- ------------------------------------------------------------------------------------------------------------------------------
Currency Hedged International Core Fund 0.60%(2) None
- ------------------------------------------------------------------------------------------------------------------------------
Foreign Fund None None
- ------------------------------------------------------------------------------------------------------------------------------
International Small Companies Fund 1.00%(2) 0.60%(2)
- ------------------------------------------------------------------------------------------------------------------------------
Japan Fund 0.20%(2) 0.20%(2)
- ------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund 1.60%(3) 0.40%(3,4)
- ------------------------------------------------------------------------------------------------------------------------------
Evolving Countries Fund 1.60%(3) 0.40%(3)
- ------------------------------------------------------------------------------------------------------------------------------
Asia Fund 1.20%(3) 0.40%(3)
- ------------------------------------------------------------------------------------------------------------------------------
Global Properties Fund 0.60%(2,5) 0.30%(2,5)
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Managed International Equities Fund 0.60%(2) None
- ------------------------------------------------------------------------------------------------------------------------------
FIXED INCOME FUNDS
Domestic Bond Fund None None
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Bond/Global Alpha A Fund 0.15%(3) None
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Bond/Global Alpha B Fund 0.15%(3) None
- ------------------------------------------------------------------------------------------------------------------------------
International Bond Fund 0.15%(3) None
- ------------------------------------------------------------------------------------------------------------------------------
Currency Hedged International Bond Fund 0.15%(3) None
- ------------------------------------------------------------------------------------------------------------------------------
Global Bond Fund 0.15%(3) None
- ------------------------------------------------------------------------------------------------------------------------------
Emerging Country Debt Fund 0.50%(3) 0.25%(3,9)
- ------------------------------------------------------------------------------------------------------------------------------
Short-Term Income Fund None None
- ------------------------------------------------------------------------------------------------------------------------------
Global Hedged Equity Fund 0.51%(2,6) 1.40%(6,8)
- ------------------------------------------------------------------------------------------------------------------------------
Inflation Indexed Bond Fund 0.10%(3) 0.10%(3)
- ------------------------------------------------------------------------------------------------------------------------------
Emerging Country Debt Share Fund *(11) *(11)
- ------------------------------------------------------------------------------------------------------------------------------
ASSET ALLOCATION FUNDS
International Equity Allocation Fund 0.80%(2,10) 0.11%(2,10)
- ------------------------------------------------------------------------------------------------------------------------------
World Equity Allocation Fund 0.66%(2,10) 0.15%(2,10)
- ------------------------------------------------------------------------------------------------------------------------------
Global (U.S.+) Equity Allocation Fund 0.47%(2,10) 0.15%(2,10)
- ------------------------------------------------------------------------------------------------------------------------------
Global Balanced Allocation Fund 0.35%(2,10) 0.11%(2,10)
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Sector Fund 0.27%(2,6) 0.18%(2,6,7)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 331
1. Purchase premiums and redemption fees generally apply only to cash
transactions. These fees are paid to and retained by the Fund itself and
are designed to allocate transaction costs caused by shareholder activity
to the shareholder generating the activity, rather than to the Fund as a
whole. The Manager may reduce these fees in certain limited circumstances
described below.
Normally, no purchase premium is charged with respect to in-kind purchases
of Fund shares. However, the International Core Fund, Currency Hedged
International Core Fund, International Small Companies Fund, Japan Fund,
Tax-Managed International Equities Fund and Global Hedged Equity Fund may
each charge a purchase premium of up to 0.10%, and the Emerging Markets
Fund, Evolving Countries Fund and Asia Fund may each charge a premium of up
to 0.20%, for in-kind purchases involving transfers of large positions in
markets where re-registration and transfer costs are high. Special rules
also apply with respect to in-kind transactions in certain Fixed Income
Funds as described in footnote 3 below.
2. The purchase premium and/or redemption fee for this Fund may generally not
be waived due to offsetting transactions, and may be waived in only rare
circumstances. The premium or fee will only be waived for this Fund (i) if
the purchase or redemption is part of a transfer from or to another Fund
where the Manager is able to transfer securities among the Funds as part of
effecting the transaction, (ii) during periods (expected to exist only
rarely) when the Manager determines that the Fund is either substantially
overweighted or underweighted with respect to its cash position so that a
redemption or purchase will not require a securities transaction, or (iii)
in certain other instances (not including offsetting transactions) where it
is compelling to the Manager that the purchase or redemption will not
result in transaction costs to the Fund. Any waiver with respect to this
Fund must be arranged in advance with the Manager.
3. The stated purchase premium and/or redemption fee for this Fund will always
be charged in full except that the relevant purchase premium or redemption
fee will be reduced by 50% with respect to any portion of a purchase or
redemption that is offset by a corresponding redemption or purchase,
respectively, occurring on the same day. The Manager examines each purchase
and redemption of shares eligible for such treatment to determine if
circumstances warrant waiving a portion of the purchase premium or
redemption fee. Absent a clear determination that transaction costs will be
reduced or absent for the purchase or redemption, the full premium or fee
will be charged. In addition, except for the Emerging Markets Fund,
Evolving Countries Fund and Asia Fund, the purchase premium or redemption
fee 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 as part of effecting the transaction.
4. Applies only to shares acquired on or after June 1, 1995 (including shares
acquired by reinvestment of dividends or other distribution on or after
such date).
5. It is expected that the purchase premiums and redemption fees for this Fund
will be eliminated once the net assets of the Fund exceed $100 million.
However, even thereafter, the Fund will reserve the right to charge a
purchase premium of up to 0.60% and a redemption fee of up to 0.30% on
purchases or redemptions of amounts that are equal to or greater than 5% of
the Fund's net assets.
6. The Fund invests in various other Funds with different levels of purchase
premiums and/or redemption fees which reflect the trading costs of
different asset classes. Therefore, the Fund's purchase premium and/or
redemption fee has been computed as the weighted average of the purchase
premiums and/or redemption fees of other GMO Funds in which the Fund is
invested and/or which hold securities of the same asset class and/or sector
as securities owned directly by the Fund. The amount of purchase premium
and/or redemption fee for the Fund will be adjusted approximately annually
based on underlying Funds owned by the Fund during the prior year. The
Manager may, but is not obligated to, adjust the purchase premium and/or
redemption fee for the Fund more frequently if the Manager believes in its
discretion that circumstances warrant.
7. Applies only to shares acquired on or after June 30, 1998 (including shares
acquired by reinvestment of dividends or other distributions on or after
such date).
8. If it is not necessary to incur costs relating to the early termination of
hedging transactions to meet redemption requests, the redemption fee will
be reduced to 0.13%.
9. Applies only to shares acquired on or after July 1, 1995 (including shares
acquired by reinvestment of dividends or other distributions on or after
such date).
10. Each of the Asset Allocation Funds invests in various other Funds with
different levels of purchase premiums and redemption fees, which reflect
the trading costs of different asset classes. Therefore, the purchase
premium and redemption fee of each Asset Allocation Fund has been set as
the weighted average of the premiums and fees, respectively, of the
underlying Funds in which the Asset Allocation Fund is invested, based on
actual investments by
5
<PAGE> 332
each Asset Allocation Fund. The amount of purchase premium and redemption
fee for each Asset Allocation Fund is adjusted approximately annually based
on underlying Funds owned by each Asset Allocation Fund during the prior
year. The Manager may, but is not obligated to, adjust the purchase premium
and/or redemption fee for an Asset Allocation Fund more frequently if the
Manager believes in its discretion that circumstances warrant.
11. No purchase premium or redemption fee is charged directly by the Fund. By
virtue of the Fund's investment in the Emerging Country Debt Fund, Fund
shareholders will, however, indirectly bear the Emerging Country Debt
Fund's purchase premium and redemption fee, which are presently up to 0.50%
and 0.25%, respectively.
MULTIPLE CLASSES
Each Fund offers up to three classes of shares. All Funds offer Class III
Shares and, as described below, certain Funds also offer Class II and/or Class
IV Shares. The sole economic difference among the various classes of shares is
the level of Shareholder Service Fee that the classes bear for client and
shareholder service, reporting and other support. The existence of multiple
classes reflects the fact that, as the size of a client relationship increases,
the cost to service that client decreases as a percentage of the assets in that
account. Thus, the Shareholder Service Fee is lower for classes where
eligibility criteria require greater total assets under GMO's management.
The Trust has adopted a Shareholder Servicing Plan (the "Plan") covering
each class of shares of each Fund. The following table summarizes the current
eligibility requirements for each class (subject to the exceptions noted below)
and the Shareholder Service Fees each class will pay under the Plan, expressed
as an annual percentage of the average daily net assets attributable to that
class of shares:
<TABLE>
CLASS II AND CLASS III SHARES:
- ------------------------------
<CAPTION>
U.S. CORE FUND, INTERNATIONAL CORE FUND
AND FOREIGN FUND (COLLECTIVELY, MINIMUM TOTAL INVESTMENT/ SHAREHOLDER
THE "CLASS II FUNDS") TOTAL FUND INVESTMENT* SERVICE FEE ("SSF")**
- --------------------------------------- ------------------------- -----------------------
<S> <C> <C>
Class II................................................ $1 million/N/A 0.22%
Class III............................................... $35 million/N/A 0.15%
ASSET ALLOCATION FUNDS (EXCEPT U.S. SECTOR
FUND) AND EMERGING COUNTRY DEBT
SHARE FUND
- ------------------------------------------
Class III............................................... $1 million/N/A 0.00%***
U.S. SECTOR FUND AND GLOBAL
HEDGED EQUITY FUND
- ---------------------------
Class III............................................... $1 million/N/A 0.15%****
ALL OTHER FUNDS (EXCEPT
CLASS II FUNDS AND
ASSET ALLOCATION FUNDS)
- -----------------------
Class III............................................... $1 million/N/A 0.15%
CLASS IV SHARES:
- ----------------
U.S. CORE FUND............................................ $250 million/$125 million 0.105%
INTERNATIONAL CORE FUND................................... $250 million/$125 million 0.09%
FOREIGN FUND.............................................. $250 million/N/A 0.09%
CURRENCY HEDGED INTERNATIONAL CORE FUND................... $250 million/$125 million 0.09%
EMERGING MARKETS FUND..................................... $250 million/$125 million 0.105%
EMERGING COUNTRY DEBT FUND................................ $250 million/$125 million 0.10%
</TABLE>
* The eligibility requirements in the table above are subject to certain
exceptions and special rules for certain plan investors and for certain
clients with continuous client relationships with GMO since May 31, 1996.
These exceptions and special rules are explained under "Eligibility for
Classes" below.
** All classes of shares of a Fund pay the same investment management fee.
*** These Funds will indirectly bear an additional SSF of 0.15% by virtue of
their investments in other Funds of the Trust. Thus, the total SSF borne by
Class III Shares of these Funds is the same as that borne by Class III
Shares of the other Funds. See "Fees and Expenses" in the Prospectuses.
**** The SSF charged to these Funds will be reduced by a corresponding amount
for all SSF's indirectly borne by the relevant Fund by reason of its
investments in Class III Shares of other Funds of the Trust. Thus, the
total SSF borne by Class III Shares of these Funds is the same as that
borne by Class III Shares of the other Funds of the Trust.
6
<PAGE> 333
ELIGIBILITY FOR CLASSES
CLASS II AND CLASS III SHARES:
Class II Shares are currently being offered only for the "Class II Funds"
listed in the table above. Class III Shares are currently being offered for all
Funds. With certain exceptions described below, for a client to be eligible for
Class II or Class III Shares, the client must satisfy the minimum "Total
Investment" (as defined below) requirement set forth in the table.
For clients establishing a relationship with GMO on or after June 1,
1996: A client's Total Investment will be determined by GMO at the time of a
new client's initial investment with GMO, at least annually as of December 31 of
each year and on such other dates as may be determined by GMO (each a
"Determination Date"). Subject to as provided below, a client's Total Investment
as of any Determination Date will equal the greater of (a) the market value of
assets managed by GMO and its affiliates for the client (whether in a pooled
vehicle or otherwise) as of such Determination Date, and (b) the client's Total
Investment as of the previous Determination Date (less the market value of any
account managed by GMO's U.S. Active Division as of the previous Determination
Date), plus contributions made to, and less Large Withdrawals (defined below)
from, any GMO-managed product or account (other than any account managed by
GMO's U.S. Active Division) since the previous Determination Date (plus the
market value of any account managed by GMO's U.S. Active Division as of the then
current Determination Date). For these purposes, "Large Withdrawals" means the
total of all withdrawals made from any GMO-managed product or account (other
than any account managed by GMO's U.S. Active Division) since the previous
Determination Date if such total exceeds 7% of the sum of the client's Total
Investment as of the previous Determination Date and any contributions to any
GMO-managed product or account (other than any account managed by GMO's Active
U.S. Division) made since the previous Determination Date. For clients with GMO
accounts as of November 30, 1997, their initial Total Investment is the greater
of the market value of assets managed by GMO and its affiliates for the client
as of the close of business on November 30, 1997 or on December 31, 1997. For
clients establishing a relationship with GMO on or after December 31, 1997,
their Total Investment will be determined as described above. Notwithstanding
anything to the contrary in this Manual or the Prospectuses, assets invested in
the Pelican Fund will not be considered when determining a client's Total
Investment. For purposes of this Manual and the Prospectuses, accounts managed
by GMO's U.S. Active Division include certain separate accounts managed by GMO.
Clients with any questions regarding whether certain of their assets are deemed
to be managed by GMO's U.S. Active Division should call GMO at (617) 346-7646.
For Clients with Accounts as of May 31, 1996: Any client of GMO whose
Total Investment as of May 31, 1996 was equal to or greater than $7 million will
remain eligible for Class III Shares indefinitely, provided that such client
does not make a withdrawal or redemption that causes the client's Total
Investment to fall below $7 million.
CLASS IV SHARES:
Class IV Shares are currently being offered only for the Funds listed in
the table on the previous page. Eligibility for Class IV Shares of a Fund is
dependent upon the client meeting either (i) the minimum "Total Fund Investment"
set forth in the table, which includes only a client's total investment in the
particular Fund, or (ii) the minimum "Total Investment" set forth in the table,
calculated as described above for Class II and Class III Shares. For clients
that have accounts with GMO as of November 30, 1997, their initial Total
Investment or initial Total Fund Investment for purposes of determining
eligibility for Class IV Shares will be the greater of the market value of all
of their investments advised by GMO and its affiliates, or the market value of
their investment in the particular Fund, as the case may be, as of the close of
business on November 30, 1997 or December 31, 1997. For clients establishing a
relationship with GMO on or after December 1, 1997, their Total Fund Investment
and Total Investment will be determined as described above.
ALL CLASSES:
- - Investments by defined contribution plans (such as 401(k) plans) will always
be invested in the class of shares of the relevant Fund(s) with the highest
Shareholder Service Fee offered from time to time by the relevant Fund(s)
regardless of the size of the investment, and will not be eligible to convert
to other classes with lower Shareholder Service Fees.
- - There is no minimum additional investment required to purchase additional
shares of a Fund for any class of shares.
- - The Manager will make all determinations as to the aggregation of client
accounts for purposes of determining eligibility.
- - Eligibility requirements for each class of shares are subject to change upon
notice to shareholders.
CONVERSIONS BETWEEN CLASSES
On December 31 of each year and on such other dates as may be determined by
GMO (each a "Determination Date") the value of each client's Total Investment
and Total Fund Investment with GMO, as defined above, will be
7
<PAGE> 334
determined. Based on that determination, each client's shares of each Fund will
be automatically converted to the class of shares of such Fund which is then
being offered with the lowest Shareholder Service Fee for which the client is
eligible based on the amount of their Total Investment or Total Fund Investment,
as the case may be, on the Determination Date. The conversion will occur within
15 business days following the Determination Date on a date selected by the
Manager. Also, if a client makes an investment in any Fund of the Trust (except
for the Pelican Fund) or puts additional assets under GMO's management (except
for accounts managed by GMO's U.S. Active Division) so as to cause the client to
be eligible for a new class of shares, such determination will be made as of the
close of business on the last day of the calendar quarter in which the
investment was made, and the conversion will be effected within 15 business days
of that quarter end, on a date selected by the Manager.
The Trust has been advised by counsel that the conversion of a client's
investment from one class of shares to another class of shares in the same Fund
should not result in the recognition of gain or loss in the converted Fund's
shares. The client's tax basis in the new class of shares immediately after the
conversion should equal the client's basis in the converted shares immediately
before conversion, and the holding period of the new class of shares should
include the holding period of the converted shares.
Certain special rules will be applied by the Manager with respect to
clients for whom GMO managed assets prior to the creation of multiple classes on
May 31, 1996. Clients whose Total Investment as of May 31, 1996 was equal to $7
million or more will be eligible to remain invested in Class III Shares
indefinitely (irrespective of whether the Fund has a higher investment minimum),
provided that such client does not make a withdrawal or redemption that causes
the client's Total Investment to fall below $7 million. Clients whose Total
Investment as of May 31, 1996 was less than $7 million but greater than $0 will
be eligible to invest in or convert to Class II Shares indefinitely
(irrespective of whether the Fund has a higher investment minimum).
Notwithstanding the foregoing special rules, clients shall always remain
eligible to remain in and/or be converted to any class of shares of the relevant
Fund which the client would be eligible to purchase pursuant to the eligibility
requirements set forth herein.
Investors should be aware that not all classes of shares of all Funds are
available in all jurisdictions.
DISTRIBUTIONS
The policy of each U.S. Equity Fund (except for the REIT Fund), the
Short-Term Income Fund and the Domestic Bond Fund is to declare and pay
distributions of its dividends and interest quarterly. The policy of each other
Fund is to declare and pay distributions of its dividends, interest and foreign
currency gains semi-annually. Each Fund also intends to distribute net gains
from the sale of securities held for not more than one year ("net short-term
capital gains") and net gains from the sale of securities held for more than one
year ("net long-term capital gains") at least annually.
All dividends and/or distributions will be paid in shares of the relevant Fund,
at net asset value, unless the shareholder elects to receive cash. There is no
purchase premium on reinvested dividends or distributions. Shareholders may make
this election by marking the appropriate box on the application or by writing to
the Trust.
8
<PAGE> 335
GMO TRUST
SUPPLEMENT TO GMO TRUST PROSPECTUS DATED JUNE 30, 1999 AND
GMO TAX-MANAGED PROSPECTUS DATED JUNE 30, 1999
GMO INTERNATIONAL CORE PLUS ALLOCATION FUND
In addition to those Funds identified in the Trust's Prospectus dated
June 30, 1999, the Trust is also authorized to issue shares of an additional
series, the GMO International Core Plus Allocation Fund ("ICPA"). A
Post-Effective Amendment to the Trust's registration statement relating to the
creation of ICPA was initially filed with the Securities and Exchange Commission
on December 5, 1997, and became effective on February 18, 1998. The ICPA has not
yet commenced operations.
ICPA is a "fund of funds" that will invest primarily in other Funds of
the Trust ("underlying Funds"). ICPA will be managed by Grantham, Mayo, Van
Otterloo & Co. LLC ("GMO"). Although GMO will not receive any fees for providing
investment management services to ICPA, it will receive investment management
fees from the underlying GMO Trust Funds in which ICPA invests. The fees and
expenses associated with an investment in ICPA are as follows:
<TABLE>
<CAPTION>
- ------------ ------------------------------ ------------------------------------------------------------ ---------------------------
GMO Purchase and Redemption Fees
Fund Name (fees paid directly to Fund at Annual Operating Expenses Examples
purchase or redemption) (expenses that are deducted from Fund assets)
- ------------ ------------------------------ ------------------------------------------------------------ ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash Purchase Redemption Inv. Share- Other Total Expense Net You would You would
Premium (as a Fees (as a Mgmt. holder Ex- Operat- Reim- Expen- pay the pay the
percentage of percentage of Fees Service penses(3) ing burs- ses following following
amount amount after Fee(2) Expen- ment(3) expenses on expenses on
invested(1)) redeemed(1)) Fee ses(3) a $10,000 the same
Waiver(3) investment investment
assuming assuming no
5% annual redemption:
return with
redemption
at the end
of each time
period:
- ------------ -------------- --------------- ---------- --------- ---------- --------- --------- -------- ------------- -------------
ICPA FUND(6) 1 3 1 3
--- --- --- ---
YR. YR. YR. YR.
- ------------ -------------- --------------- ---------- --------- ---------- --------- --------- -------- ------ ------ ------ ------
Class I .65%(7) .11%(5) .00%(6) .13%(6) .05%(4,6) .18%(6) .05% 0.13% $90 $120 $80 $110
- ------------ -------------- --------------- ---------- --------- ---------- --------- --------- -------- ------ ------ ------ ------
Class II .65%(7) .11%(5) .00%(6) .07%(6) .05%(4,6) .12%(6) .05% 0.07% $80 $100 $70 $90
- ------------ -------------- --------------- ---------- --------- ---------- --------- --------- -------- ------ ------ ------ ------
Class III .65%(7) .11%(5) .00%(6) .00%(6) .05%(4,6) .05%(6) .05% 0.00% $80 $80 $70 $70
- ------------ -------------- --------------- ---------- --------- ---------- --------- --------- -------- ------ ------ ------ ------
</TABLE>
NOTES TO SCHEDULE OF FEES AND EXPENSES
1. Purchase premiums and redemption fees apply only to cash transactions
as set forth under "Purchase of Shares" and "Redemption of Shares"
respectively. These fees are paid to and retained by the Fund itself
and are designed to allocate transaction costs caused by shareholder
activity to the shareholder generating the activity, rather than to the
Fund as a whole.
<PAGE> 336
2. Shareholder Service Fee ("SSF") paid to GMO for providing client
services and reporting services.
The level of SSF is the sole economic distinction between the various
classes of Fund shares. A lower SSF for larger investments reflects
that the cost of servicing client accounts is lower for larger accounts
when expressed as a percentage of the account.
3. The Manager has contractually agreed to reimburse ICPA for certain Fund
expenses through June 30, 2000 to the extent that ICPA's total annual
operating expenses (excluding Shareholder Service Fees, brokerage
commissions and other investment-related costs, hedging transaction
fees, extraordinary, non-recurring and certain other unusual expenses
(including taxes), securities lending fees and expenses, transfer
taxes, and expenses indirectly incurred by investment in other Funds of
the Trust) would otherwise exceed 0.00% of ICPA's average daily net
assets.
4. Based on estimated amounts for the Fund's first fiscal year.
5. ICPA invests in various other Funds with different levels of purchase
premiums and redemption fees, which reflect the trading costs of
different asset classes. Therefore, ICPA's purchase premium and
redemption fee has been set as the weighted average of the premiums and
fees, respectively, of the underlying Funds in which ICPA expects to
invest. The amount of purchase premium and redemption fee for ICPA will
be adjusted approximately annually based on underlying Funds owned by
ICPA during the prior year. The Manager may, but is not obligated to,
adjust the purchase premium and/or redemption fee for ICPA more
frequently if the Manager believes in its discretion that circumstances
warrant.
6. ICPA invests primarily in other Funds of the Trust (referred to here as
"underlying Funds"). Therefore, in addition to the fees and expenses
directly incurred by ICPA (which are shown in the Schedule of Fees and
Expenses), ICPA will also incur fees and expenses indirectly as a
shareholder of the underlying Funds. Because the underlying Funds have
varied expense and fee levels and ICPA may own different proportions of
underlying Funds at different times, the amount of fees and expenses
indirectly incurred by ICPA will vary. The Manager believes that, under
normal market conditions, the total amount of fees and expenses that
will be indirectly incurred by ICPA because of investment in underlying
Funds will fall within the ranges set forth below:
- ----------------------------------- -------------- -------------- --------------
FUND LOW TYPICAL HIGH
- ----------------------------------- -------------- -------------- --------------
ICPA .71% .74% .77%
- ----------------------------------- -------------- -------------- --------------
ICPA is a diversified portfolio that seeks high total return. The
principal strategy ICPA will employ in pursuit of its objective will be to
invest in Class III Shares of other Funds of the Trust, particularly the GMO
International Core Fund and the GMO Evolving Countries Fund. The principal risks
of an investment in ICPA include all of the principal risks of a direct
investment in each underlying Fund in which ICPA invests. For a discussion of
the principal risks of each underlying Fund, please see "Principal Risks" in the
Trust's Prospectus.
-2-
<PAGE> 337
MULTIPLE CLASSES - SUPPLEMENTAL INFORMATION
CLASS DESIGNATIONS
In addition to the classes of shares identified in the Prospectus as
being currently offered by each Fund of the Trust, each Fund of the Trust may
also from time to time issue one or more of the following classes of shares:
Class I Shares, Class II Shares, Class III Shares, Class IV Shares, Class V
Shares, Class VI Shares, Class VII Shares and Class VIII Shares. Exhibit A to
this Prospectus Supplement identifies the classes each Fund may offer. Each
class of shares of a Fund will represent interests in the same portfolio of
investments and, except as described herein, shall have the same rights and
obligations as each other class of shares of such Fund. The sole economic
difference among the various classes of shares is the level of Shareholder
Service Fee that the classes bear for client and shareholder service, reporting
and other support. The existence of multiple classes reflects the fact that, as
the size of a client relationship increases, the cost to service that client
decreases as a percentage of the assets in that account. Thus, the Shareholder
Service Fee is lower for classes where eligibility criteria require greater
total assets under GMO's management.
Each class of shares that is not presently being offered shall be
subject to such investment minimums and other eligibility requirements as shall
be set forth in the Trust's prospectus or statement of additional information
prior to the commencement of sale of such shares (the "Prospectus").
CLASS ELIGIBILITY
Class eligibility is generally dependent on the size of the client's
total account under the management of Grantham, Mayo, Van Otterloo & Co. LLC,
the Trust's investment adviser (referred to herein as "GMO" or the "Adviser"),
as described from time to time in the Prospectus.
CLASS I, CLASS II AND CLASS III SHARES:
With certain exceptions described below, eligibility for Class I, Class II and
Class III Shares depends on a client's "TOTAL INVESTMENT" with GMO.
For clients establishing a relationship with GMO on or after June 1,
1996: A client's Total Investment will be determined by GMO as of December 31 of
each year and on such other dates as may be determined by GMO (each a
"Determination Date"). Subject to as provided below, a client's Total Investment
as of any Determination Date will equal the greater of (a) the market value of
assets managed by GMO and its affiliates for the client (whether in a pooled
vehicle or otherwise) as of such Determination Date, and (b) the client's Total
Investment as of the previous Determination Date (less the market value of any
account managed by GMO's Domestic Active Division as of the previous
Determination Date), plus
-3-
<PAGE> 338
contributions made to, and less Large Withdrawals (defined below) from, any
GMO-managed product or account (other than any account managed by GMO's Domestic
Active Division) since the previous Determination Date (plus the market value of
any account managed by GMO's Domestic Active Division as of the then current
Determination Date). For these purposes, "Large Withdrawals" means the total of
all withdrawals made from any GMO-managed product or account (other than any
account managed by GMO's Domestic Active Division) since the previous
Determination Date if such total exceeds 7% of the sum of the client's Total
Investment as of the previous Determination Date and any contributions to any
GMO-managed product or account (other than any account managed by GMO's Domestic
Active Division) made since the previous Determination Date. For clients that
have accounts with GMO as of November 30, 1997, their Initial Total Investment
is the greater of the market value of assets managed by GMO and its affiliates
for the client as of the close of business on November 30, 1997 or on December
31, 1997. For clients establishing a relationship with GMO on or after December
1, 1997, their Total Investment will be determined as described above. Assets
invested in the Pelican Fund will not be considered when determining a client's
Total Investment.
Investments by defined contribution pension plans (such as 401(k)
plans) will always be invested in the class of shares of the relevant Fund(s)
with the highest Shareholder Service Fee offered from time to time by the
relevant Fund(s) regardless of the size of the investment, and will not be
eligible to convert to other classes.
For Clients with Accounts as of May 31, 1996: Any client of GMO whose
Total Investment as of May 31, 1996 was equal to or greater than $7 million will
remain eligible for Class III Shares indefinitely, provided that such client
does not make a withdrawal or redemption that causes the client's Total
Investment to fall below $7 million. Any client whose Total Investment as of May
31, 1996 was less than $7 million, but greater than $0, will convert to Class II
Shares on July 31, 1997 or such later date as may be determined by the Manager.
For clients with GMO accounts as of May 31, 1996, their initial Total Investment
will equal the market value of all of their GMO investments as of the close of
business on May 31, 1996 and will subsequently be calculated as described in the
preceding section.
CLASS IV, CLASS V, CLASS VI, CLASS VII AND CLASS VIII SHARES:
Eligibility for Class IV, Class V, Class VI, Class VII and Class VIII
Shares is dependent upon the client meeting either (i) a minimum "TOTAL FUND
INVESTMENT" requirement, which includes only a client's total investment in the
particular Fund, or (ii) a minimum "Total Investment" requirement, calculated as
described above for Class I, Class II and Class III Shares. For clients that
have accounts with GMO as of November 30, 1997, their initial Total Investment
or initial Total Fund Investment for purposes of determining eligibility for
Class IV, Class V, Class VI, Class VII and Class VIII Shares will be the greater
of the market value of all of their investments advised by GMO and its
affiliates, or the market value of their investment in the particular Fund, as
the case may be, as of the close of business
-4-
<PAGE> 339
on November 30, 1997 or December 31, 1997. For clients establishing a
relationship with GMO on or after December 1, 1997, their Total Fund Investment
and Total Investment will be determined as described above.
The Manager will make all determinations as to aggregation of client
accounts for purposes of determining eligibility.
Eligibility requirements for classes of shares currently offered by the
Trust are set forth in the Prospectus and the Shareholder's Manual. Eligibility
requirements for classes of shares not currently being offered will be
established and disclosed in the Prospectus prior to the offering of such
shares.
CLASS CHARACTERISTICS
The sole difference among the various classes of shares is the level of
shareholder service fee ("Shareholder Service Fee") borne by the class for
client and shareholder service, reporting and other support provided to such
class by GMO. The Shareholder Service Fee borne by each class of shares of each
Fund is set forth in Exhibit A hereto. The expenses associated with an
investment in any of the classes currently being offered by a Fund are described
in detail in the Prospectus under "Fees and Expenses."
Investors should be aware that, because of the different Shareholder
Service Fee borne by each class of shares of a particular Fund, the net annual
fund operating expenses associated with an investment in Class I Shares or Class
II Shares of a Fund will typically be 0.13% higher and 0.07% higher,
respectively, than an investment in Class III Shares of the same Fund. As a
result, the total return earned by an investment in Class I or Class II Shares
of a Fund will always be lower than the total return earned by Class III Shares
of the same Fund. Similarly, an investor in Class IV, Class V, Class VI, Class
VII and Class VIII Shares can expect to pay lower net annual fund operating
expenses and earn correspondingly higher returns than an investor in Class III
Shares of the same Fund over the same period.
The multiple class structure reflects the fact that, as the size of the
client relationship increases, the cost to service that relationship is expected
to decrease as a percentage of the account. Thus, the Shareholder Service Fee is
lower for classes for which eligibility criteria generally require greater
assets under GMO's management.
All classes of shares of a Fund bear the same level of purchase premium
and/or redemption fee, if any.
CONVERSION AND EXCHANGE FEATURES
On December 31 of each year and on such other dates as may be
determined by GMO (each a "DETERMINATION DATE") the value of each client's Total
Investment and Total Fund
-5-
<PAGE> 340
Investment with GMO will be determined. Based on that determination, each
client's shares of each Fund will be automatically converted to the class of
shares of such Fund which is then being offered with the lowest Shareholder
Service Fee for which the client is eligible based on the amount of their Total
Investment or Total Fund Investment, as the case may be, on the Determination
Date. The conversion will occur within 15 business days following the
Determination Date on a date selected by GMO. Also, if a client makes an
investment in a GMO Fund (except for the Pelican Fund) or puts additional assets
under GMO's management (except for accounts managed by GMO's Domestic Active
Division) so as to cause the client to be eligible for a new class of shares,
such determination will be made as of the close of business on the last day of
the calendar quarter in which the investment was made, and the conversion will
be effected within 15 business days of that quarter. Notwithstanding the
foregoing, there will be no automatic conversion from a class of shares with a
lower Shareholder Service Fee to a class of shares with a higher Shareholder
Service Fee unless appropriate disclosure regarding the higher Shareholder
Service Fee has been given to the affected client(s) in the Prospectus or
otherwise.
Shares of one class will always convert into shares of another class on
the basis of the relative net asset value of the two classes, without the
imposition of any sales load, fee or other charge. The conversion of a client's
investment from one class of shares to another is not a taxable event, and will
not result in the realization of gain or loss that may exist in Fund shares held
by the client. The client's tax basis in the new class of shares will equal
their basis in the old class before conversion. The conversion of shares from
one class to another class of shares may be suspended if the opinion of counsel
obtained by the Trust that the conversion does not constitute a taxable event
under current federal income tax law is no longer available.
Certain special rules will be applied by the Manager with respect to
clients for whom GMO managed assets prior to the creation of multiple classes on
May 31, 1996. Clients whose Total Investment as of May 31, 1996 is equal to $7
million or more will be eligible to remain invested in Class III Shares
indefinitely (irrespective of whether the Fund has a higher investment minimum),
provided that such client does not make a withdrawal or redemption that causes
the client's Total Investment to fall below $7 million. Clients whose Total
Investment as of May 31, 1996 is less than $7 million but greater than $0 will
be eligible to invest in or convert to Class II Shares indefinitely
(irrespective of whether the Fund has a higher investment minimum), and such
conversion will not occur until on or after July 31, 1997. Notwithstanding the
foregoing special rules applicable to clients owning shares of the Funds on May
31, 1996, such clients shall always be eligible to remain in and/or be converted
to any class of shares of the relevant Fund with a lower Shareholder Service Fee
which the client would be eligible to purchase pursuant to the eligibility
requirements set forth elsewhere in this Plan or in the Prospectus.
-6-
<PAGE> 341
SERVICE FEE SCHEDULE EXHIBIT A
- -------------------- ---------
CLASS I SHARES
FUND SERVICE FEE
- -------------------------------------------------------- -----------------------
GMO U.S. Core Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO Tobacco-Free Core Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO Value Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO Growth Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO U.S. Sector Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO Small Cap Value Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO Fundamental Value Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO Small Cap Growth Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO REIT Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO International Core Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO Currency Hedged International Core Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO Foreign Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO U.S. Bond/Global Alpha B Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO U.S. Bond/Global Alpha A Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO International Small Companies Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO Japan Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO Emerging Markets Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO Global Properties Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO Domestic Bond Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO Global Hedged Equity Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO International Bond Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO Currency Hedged International Bond Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO Global Bond Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO Emerging Country Debt Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO Inflation Indexed Bond Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO Evolving Countries Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO Asia Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO Tax-Managed U.S. Equities Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO Tax-Managed International Equities Fund 0.28%
- -------------------------------------------------------- -----------------------
GMO International Equity Allocation Fund 0.13%
- -------------------------------------------------------- -----------------------
-7-
<PAGE> 342
- -------------------------------------------------------- -----------------------
GMO Global (U.S.+) Equity Allocation Fund 0.13%
- -------------------------------------------------------- -----------------------
GMO World Equity Allocation Fund 0.13%
- -------------------------------------------------------- -----------------------
GMO Global Balanced Allocation Fund 0.13%
- -------------------------------------------------------- -----------------------
GMO International Core Plus Allocation Fund 0.13%
- -------------------------------------------------------- -----------------------
-8-
<PAGE> 343
SERVICE FEE SCHEDULE EXHIBIT A (cont'd)
- -------------------- ---------
CLASS II SHARES
FUND SERVICE FEE
- -------------------------------------------------------- -----------------------
GMO U.S. Core Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO Tobacco-Free Core Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO Value Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO Growth Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO U.S. Sector Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO Small Cap Value Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO Fundamental Value Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO Small Cap Growth Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO REIT Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO International Core Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO Currency Hedged International Core Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO Foreign Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO U.S. Bond/Global Alpha B Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO U.S. Bond/Global Alpha A Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO International Small Companies Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO Japan Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO Emerging Markets Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO Global Properties Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO Domestic Bond Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO Global Hedged Equity Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO International Bond Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO Currency Hedged International Bond Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO Global Bond Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO Emerging Country Debt Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO Inflation Indexed Bond Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO Evolving Countries Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO Asia Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO Tax-Managed U.S. Equities Fund 0.22%
- -------------------------------------------------------- -----------------------
GMO Tax-Managed International Equities Fund 0.22%
- -------------------------------------------------------- -----------------------
-9-
<PAGE> 344
- -------------------------------------------------------- -----------------------
GMO International Equity Allocation Fund 0.07%
- -------------------------------------------------------- -----------------------
GMO Global (U.S.+) Equity Allocation Fund 0.07%
- -------------------------------------------------------- -----------------------
GMO World Equity Allocation Fund 0.07%
- -------------------------------------------------------- -----------------------
GMO Global Balanced Allocation Fund 0.07%
- -------------------------------------------------------- -----------------------
GMO International Core Plus Allocation Fund 0.07%
- -------------------------------------------------------- -----------------------
SERVICE FEE SCHEDULE EXHIBIT A (cont'd)
- -------------------- ---------
CLASS III SHARES
FUND SERVICE FEE
- -------------------------------------------------------- -----------------------
GMO U.S. Core Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO Tobacco-Free Core Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO Value Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO Growth Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO U.S. Sector Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO Small Cap Value Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO Fundamental Value Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO Small Cap Growth Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO REIT Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO International Core Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO Currency Hedged International Core Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO Foreign Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO U.S. Bond/Global Alpha B Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO U.S. Bond/Global Alpha A Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO International Small Companies Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO Japan Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO Emerging Markets Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO Global Properties Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO Domestic Bond Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO Short-Term Income Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO Global Hedged Equity Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO International Bond Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO Currency Hedged International Bond Fund 0.15%
- -------------------------------------------------------- -----------------------
-10-
<PAGE> 345
- -------------------------------------------------------- -----------------------
GMO Global Bond Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO Emerging Country Debt Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO Evolving Countries Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO Inflation Indexed Bond Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO Asia Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO Tax-Managed U.S. Equities Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO Tax-Managed International Equities Fund 0.15%
- -------------------------------------------------------- -----------------------
GMO International Equity Allocation Fund 0.00%
- -------------------------------------------------------- -----------------------
GMO Global (U.S.+) Equity Allocation Fund 0.00%
- -------------------------------------------------------- -----------------------
GMO World Equity Allocation Fund 0.00%
- -------------------------------------------------------- -----------------------
GMO Global Balanced Allocation Fund 0.00%
- -------------------------------------------------------- -----------------------
GMO International Core Plus Allocation Fund 0.00%
- -------------------------------------------------------- -----------------------
GMO Emerging Country Debt Share Fund 0.00%
- -------------------------------------------------------- -----------------------
-11-
<PAGE> 346
SERVICE FEE SCHEDULE EXHIBIT A (cont'd)
- -------------------- ---------
CLASS IV SHARES
FUND SERVICE FEE
- -------------------------------------------------------- -----------------------
GMO U.S. Core Fund 0.105%
- -------------------------------------------------------- -----------------------
GMO Tax-Managed U.S. Equities Fund 0.105%
- -------------------------------------------------------- -----------------------
GMO Tobacco-Free Core Fund 0.12%
- -------------------------------------------------------- -----------------------
GMO Value Fund 0.095%
- -------------------------------------------------------- -----------------------
GMO Growth Fund 0.12%
- -------------------------------------------------------- -----------------------
GMO U.S. Sector Fund 0.12%
- -------------------------------------------------------- -----------------------
GMO Small Cap Value Fund 0.12%
- -------------------------------------------------------- -----------------------
GMO Small Cap Growth Fund 0.12%
- -------------------------------------------------------- -----------------------
GMO REIT Fund 0.12%
- -------------------------------------------------------- -----------------------
GMO International Core Fund 0.09%
- -------------------------------------------------------- -----------------------
GMO Tax-Managed International Equities Fund 0.09%
- -------------------------------------------------------- -----------------------
GMO Currency Hedged International Core Fund 0.09%
- -------------------------------------------------------- -----------------------
GMO Foreign Fund 0.09%
- -------------------------------------------------------- -----------------------
GMO International Small Companies Fund 0.11%
- -------------------------------------------------------- -----------------------
GMO Japan Fund 0.11%
- -------------------------------------------------------- -----------------------
GMO Emerging Markets Fund 0.105%
- -------------------------------------------------------- -----------------------
GMO Global Properties Fund 0.11%
- -------------------------------------------------------- -----------------------
GMO Domestic Bond Fund 0.13%
- -------------------------------------------------------- -----------------------
GMO U.S. Bond/Global Alpha A Fund 0.13%
- -------------------------------------------------------- -----------------------
GMO International Bond Fund 0.13%
- -------------------------------------------------------- -----------------------
GMO Currency Hedged International Bond Fund 0.13%
- -------------------------------------------------------- -----------------------
GMO Global Bond Fund 0.13%
- -------------------------------------------------------- -----------------------
GMO Emerging Country Debt Fund 0.10%
- -------------------------------------------------------- -----------------------
GMO Global Hedged Equity Fund 0.13%
- -------------------------------------------------------- -----------------------
GMO Inflation Indexed Bond Fund 0.13%
- -------------------------------------------------------- -----------------------
GMO Evolving Countries Fund 0.10%
- -------------------------------------------------------- -----------------------
GMO Fundamental Value Fund 0.13%
- -------------------------------------------------------- -----------------------
GMO Asia Fund 0.105%
- -------------------------------------------------------- -----------------------
-12-
<PAGE> 347
SERVICE FEE SCHEDULE EXHIBIT A (cont'd)
- -------------------- ---------
CLASS V SHARES
FUND SERVICE FEE
- -------------------------------------------------------- -----------------------
GMO U.S. Core Fund 0.09%
- -------------------------------------------------------- -----------------------
GMO Tobacco-Free Core Fund 0.09%
- -------------------------------------------------------- -----------------------
GMO Value Fund 0.09%
- -------------------------------------------------------- -----------------------
GMO Growth Fund 0.09%
- -------------------------------------------------------- -----------------------
GMO U.S. Sector Fund 0.09%
- -------------------------------------------------------- -----------------------
GMO Small Cap Value Fund 0.09%
- -------------------------------------------------------- -----------------------
GMO Small Cap Growth Fund 0.09%
- -------------------------------------------------------- -----------------------
GMO REIT Fund 0.09%
- -------------------------------------------------------- -----------------------
GMO International Core Fund 0.07%
- -------------------------------------------------------- -----------------------
GMO Currency Hedged International Core Fund 0.07%
- -------------------------------------------------------- -----------------------
GMO Foreign Fund 0.10%
- -------------------------------------------------------- -----------------------
GMO International Small Companies Fund 0.07%
- -------------------------------------------------------- -----------------------
GMO Japan Fund 0.07%
- -------------------------------------------------------- -----------------------
GMO Emerging Markets Fund 0.05%
- -------------------------------------------------------- -----------------------
GMO Global Properties Fund 0.07%
- -------------------------------------------------------- -----------------------
GMO Domestic Bond Fund 0.12%
- -------------------------------------------------------- -----------------------
GMO U.S. Bond/Global Alpha A Fund 0.12%
- -------------------------------------------------------- -----------------------
GMO International Bond Fund 0.12%
- -------------------------------------------------------- -----------------------
GMO Currency Hedged International Bond Fund 0.12%
- -------------------------------------------------------- -----------------------
GMO Global Bond Fund 0.12%
- -------------------------------------------------------- -----------------------
GMO Emerging Country Debt Fund 0.12%
- -------------------------------------------------------- -----------------------
GMO Global Hedged Equity Fund 0.12%
- -------------------------------------------------------- -----------------------
GMO Inflation Indexed Bond Fund 0.12%
- -------------------------------------------------------- -----------------------
GMO Evolving Countries Fund 0.05%
- -------------------------------------------------------- -----------------------
-13-
<PAGE> 348
SERVICE FEE SCHEDULE EXHIBIT A (cont'd)
- -------------------- ---------
CLASS VI SHARES
FUND SERVICE FEE
- -------------------------------------------------------- -----------------------
GMO U.S. Core Fund 0.07%
- -------------------------------------------------------- -----------------------
GMO Tobacco-Free Core Fund 0.07%
- -------------------------------------------------------- -----------------------
GMO Value Fund 0.07%
- -------------------------------------------------------- -----------------------
GMO Growth Fund 0.07%
- -------------------------------------------------------- -----------------------
GMO U.S. Sector Fund 0.07%
- -------------------------------------------------------- -----------------------
GMO Small Cap Value Fund 0.07%
- -------------------------------------------------------- -----------------------
GMO Small Cap Growth Fund 0.07%
- -------------------------------------------------------- -----------------------
GMO REIT Fund 0.07%
- -------------------------------------------------------- -----------------------
GMO International Core Fund 0.04%
- -------------------------------------------------------- -----------------------
GMO Currency Hedged International Core Fund 0.04%
- -------------------------------------------------------- -----------------------
GMO Foreign Fund 0.08%
- -------------------------------------------------------- -----------------------
GMO International Small Companies Fund 0.04%
- -------------------------------------------------------- -----------------------
GMO Japan Fund 0.04%
- -------------------------------------------------------- -----------------------
GMO Emerging Markets Fund 0.02%
- -------------------------------------------------------- -----------------------
GMO Global Properties Fund 0.04%
- -------------------------------------------------------- -----------------------
GMO Domestic Bond Fund 0.10%
- -------------------------------------------------------- -----------------------
GMO U.S. Bond/Global Alpha A Fund 0.10%
- -------------------------------------------------------- -----------------------
GMO International Bond Fund 0.10%
- -------------------------------------------------------- -----------------------
GMO Currency Hedged International Bond Fund 0.10%
- -------------------------------------------------------- -----------------------
GMO Global Bond Fund 0.10%
- -------------------------------------------------------- -----------------------
GMO Emerging Country Debt Fund 0.10%
- -------------------------------------------------------- -----------------------
GMO Global Hedged Equity Fund 0.10%
- -------------------------------------------------------- -----------------------
GMO Inflation Indexed Bond Fund 0.10%
- -------------------------------------------------------- -----------------------
GMO Evolving Countries Fund 0.02%
- -------------------------------------------------------- -----------------------
-14-
<PAGE> 349
SERVICE FEE SCHEDULE EXHIBIT A (cont'd)
- -------------------- ---------
CLASS VII SHARES
FUND SERVICE FEE
- -------------------------------------------------------- -----------------------
GMO U.S. Bond/Global Alpha A Fund 0.06%
- -------------------------------------------------------- -----------------------
GMO International Bond Fund 0.06%
- -------------------------------------------------------- -----------------------
GMO Currency Hedged International Bond Fund 0.06%
- -------------------------------------------------------- -----------------------
GMO Global Bond Fund 0.06%
- -------------------------------------------------------- -----------------------
CLASS VIII SHARES
FUND SERVICE FEE
- -------------------------------------------------------- -----------------------
GMO U.S. Bond/Global Alpha A Fund 0.01%
- -------------------------------------------------------- -----------------------
GMO International Bond Fund 0.01%
- -------------------------------------------------------- -----------------------
GMO Currency Hedged International Bond Fund 0.01%
- -------------------------------------------------------- -----------------------
GMO Global Bond Fund 0.01%
- -------------------------------------------------------- -----------------------
-15-
<PAGE> 350
PELICAN FUND
40 ROWES WHARF, BOSTON, MASSACHUSETTS 02110
(617) 346-7600 (CALL COLLECT)
The Pelican Fund (the "Fund") is one of thirty-six separate investment
portfolios currently offered by GMO Trust (the "Trust"), an open-end management
investment company. The Fund's investment manager is Grantham, Mayo, Van
Otterloo & Co. LLC (the "Manager").
The Pelican Fund is a diversified portfolio that seeks long term
capital growth primarily through investment in equity securities.
INVESTMENT MANAGER &
CLIENT SERVICE PROVIDER
GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC
("GMO")
Tel: (617) 330-7500 (call collect)
Fax: (617) 439-4132
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PROSPECTUS JUNE 30, 1999
<PAGE> 351
TABLE OF CONTENTS
<TABLE>
<S> <C>
FUND OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES....................................................... 3
SUMMARY OF PRINCIPAL RISKS............................................................................... 5
FEES AND EXPENSES........................................................................................ 7
MANAGEMENT............................................................................................... 8
DISTRIBUTIONS, REINVESTMENT AND TAXES.................................................................... 8
HOW TO PURCHASE SHARES................................................................................... 10
HOW TO REDEEM SHARES..................................................................................... 11
HOW SHARES ARE PRICED.................................................................................... 13
FINANCIAL HIGHLIGHTS..................................................................................... 14
ADDITIONAL INFORMATION................................................................................... back cover
SHAREHOLDER INQUIRIES.................................................................................... back cover
</TABLE>
2
<PAGE> 352
FUND OBJECTIVE AND SUMMARY OF PRINCIPAL INVESTMENT STRATEGIES
The summary below describes the Fund's investment objective and
principal investment strategies. A "Summary of Principal Risks" describing the
principal risks of investing in the Fund begins on page 5. Except for certain
policies that are explicitly described as fundamental in this Prospectus or in
the Statement of Additional Information, the investment policies of the Fund and
the Fund's investment objective may be changed by the Trustees without
shareholder approval.
Fund Codes
-----------------------------
Ticker Symbol Cusip
------ ------- -----------
Fund Inception Date: 5/31/89 PELFX Pelican 705807 10 5
INVESTMENT OBJECTIVE: The Pelican Fund seeks long-term growth of
capital primarily through investment in equity securities. The Fund's current
benchmark is the Standard & Poor's 500 Composite Stock Market Index.
INVESTMENT UNIVERSE: The Fund invests primarily in U.S. equity
securities and, to a lesser extent, in foreign equity securities and debt
securities.
PRINCIPAL INVESTMENTS: The Fund invests primarily in equity securities
traded in the United States but may invest a portion of its assets in equity
securities traded outside of the United States. The Fund may invest in equity
securities of companies of any market capitalization. The Fund may also invest
without limitation in debt securities, and may take temporary defensive
positions through investment in cash and high quality money market instruments.
The Fund seeks to maximize risk-adjusted portfolio returns by maintaining an
average historical volatility (beta) that is lower than that of the S&P 500
Index.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental
investment principles and traditional portfolio analysis to obtain broad market
exposure for the U.S. equity portion of the portfolio. Using these principles,
the Manager focuses on selecting stocks of issuers with financial, business and
valuation characteristics that it believes will produce above-average returns,
and emphasizes established, financially secure companies. The Manager employs a
bottom-up approach to select stocks, and uses various techniques in seeking
companies which trade below fair value, as determined by the value of the
issuer's earnings stream (using a proprietary dividend discount model), asset
value and/or franchise value.
3
<PAGE> 353
PERFORMANCE
The two figures below help to illustrate the risks of investing in the
Fund. The annual total return bar chart shows how the returns of the Fund's
shares have varied from year to year, and the average annual total return table
compares the Fund's performance to the Standard & Poor's 500 Composite Stock
Market Index ("S&P 500"), a broad-based index. The S&P 500 is a well-known U.S.
large capitalization stock index that is independently maintained and published
by the Standard & Poor's Corporation. PAST PERFORMANCE IS NOT NECESSARILY AN
INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN
Years ended December 31
[GRAPH]
<TABLE>
<S> <C> <C>
Highest Quarter: 15.54% (1Q1991) Lowest Quarter: -14.23% (3Q1990) Year-to-Date (as of 3/31/99): -0.44%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
Periods Ended December 31
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Since
1 Year 5 Year 10 Year Inception
5/31/89
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Pelican Fund 11.67% 17.93% N/A 14.43%
- --------------------------------------------------------------------------------------------------------------------
S&P 500 28.57% 24.05% N/A 18.13%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 354
SUMMARY OF PRINCIPAL RISKS
The value of your investment in the Fund changes with the values of the
Fund's investments. Many factors can affect those values. Factors that may
affect a particular Fund's portfolio as a whole are called "principal risks" and
are summarized in this section. This summary describes the nature of these risks
but is not intended to include every potential risk. The Fund could be subject
to additional risks because the types of investments made by the Fund change
over time. It is possible to lose money on an investment in the Fund. An
investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. For additional detailed information regarding the Fund's investment
strategies and risks, see "Description and Risks of Fund Investments" and
"Investment Guidelines" in the Statement of Additional Information. The
Statement of Additional Information is available free of charge by contacting
the Manager.
- MARKET RISK. The Fund is subject to market risk, which is the risk of
unfavorable market-induced changes in the value of the securities owned by the
Fund. The following summarizes certain general market risks associated with
investments in equity and fixed income securities.
Equity Securities. A principal risk of the Fund is that the equity
securities in which it invests will decline in value due to factors affecting
the issuing companies, their industries, or the economy and equity markets
generally. The values of equity securities may decline for a number of reasons
which directly relate to the issuing company, such as management performance,
financial leverage and reduced demand for the issuer's goods or services. They
may also decline due to factors which affect a particular industry or
industries, such as labor shortages or increased production costs and
competitive conditions within an industry. In addition, they may decline due to
general market conditions which are not specifically related to a company or
industry, such as real or perceived adverse economic conditions, changes in the
general outlook for corporate earnings, changes in interest or currency rates or
adverse investor sentiment generally.
Some equity securities, generally referred to as value securities, are
purchased primarily because they are selling at a price lower than what is
believed to be their true value and not necessarily because the issuing
companies are expected to experience significant earnings growth. Such companies
may have experienced adverse business developments or may be subject to special
risks. Other factors may also have caused their securities to be out of favor.
These securities bear the risk that the companies may not overcome the adversity
or that the market does not recognize the value of the company, such that the
price of its securities may decline or may not approach the value that the
Manager anticipates.
The Fund maintains substantial exposure to equities and generally
does not attempt to time the market. Because of this exposure, the possibility
that stock market prices in general will decline over short or even extended
periods subjects the Fund to unpredictable declines in the value of its shares,
as well as periods of poor performance.
Fixed Income Securities. The value of the Fund's investments in fixed
income securities (including bonds and notes) will typically change as interest
rates fluctuate. During periods of rising interest rates, the values of fixed
income securities generally decline. Conversely, during periods of falling
interest rates, the values of fixed income securities generally rise. This kind
of market risk, also
5
<PAGE> 355
called interest rate risk, will generally increase to the extent the Fund
invests in fixed income securities with longer durations (i.e., with longer
maturities).
- SMALLER COMPANY RISK. Market risk and liquidity risk are particularly
pronounced for securities of companies with smaller market capitalizations.
These companies may have limited product lines, markets or financial resources
or they may depend on a few key employees. Securities of smaller companies may
trade less frequently and in lesser volume than more widely held securities and
their values may fluctuate more sharply than other securities. They may also
trade in the over-the-counter market or on a regional exchange, or may otherwise
have limited liquidity. Investments in smaller, less seasoned companies may
present greater opportunities for growth and capital appreciation, but also
involve greater risks than customarily are associated with larger, more
established companies.
- FOREIGN INVESTMENT RISK.. The Fund may invest in securities traded
principally in securities markets outside the United States that are subject to
additional and more varied risks and may experience more rapid and extreme
changes in value. The securities markets of many foreign countries are
relatively small, with a limited number of companies representing a small number
of industries. Additionally, issuers of foreign securities may not be subject to
the same degree of regulation as U.S. issuers. Reporting, accounting and
auditing standards of foreign countries differ, in some cases significantly,
from U.S. standards. There are generally higher commission rates on foreign
portfolio transactions, transfer taxes, higher custodial costs and the
possibility that foreign taxes will be charged on dividends and interest payable
on foreign securities. Also, for lesser developed countries, nationalization,
expropriation or confiscatory taxation, adverse changes in investment or
exchange control regulations (which may include suspension of the ability to
transfer currency from a country), political changes or diplomatic developments
could adversely affect the Fund's investments. In the event of nationalization,
expropriation or other confiscation, the Fund could lose its entire investment
in foreign securities.
- CURRENCY RISK. Currency risk is the risk that fluctuations in the
exchange rates may negatively affect the value of the Fund's investments.
Currency risk means that currencies in which the Fund's investments are
denominated or currencies in which the Fund has taken on an active investment
position will decline in value relative to the U.S. Dollar. Currency rates in
foreign countries may fluctuate significantly for a number of reasons, including
the forces of supply and demand in the foreign exchange markets, actual or
perceived changes in interest rates, and intervention (or the failure to
intervene) by U.S. or foreign governments or central banks, or by currency
controls or political developments in the U.S. or abroad.
- CREDIT RISK. This is the risk that the issuer or guarantor of a fixed
income security, the counterparty to an OTC derivatives contract, or a borrower
of the Fund's securities, will be unable or unwilling to make timely principal,
interest or settlement payments, or to otherwise honor its obligations.
- MANAGEMENT RISK. The Fund is subject to management risk because it
relies on the Manager's ability to pursue its objective. The Manager will apply
investment techniques and risk analyses in making investment decisions for the
Fund, but there can be no guarantee that these will produce the desired results.
As noted above, the Manager may also fail to use derivatives effectively, for
example, choosing to hedge or not to hedge positions precisely when it is least
advantageous to do so. As
6
<PAGE> 356
indicated above, however, the Fund is generally not subject to the risk of
market timing because it generally stays fully invested in the relevant asset
class, such as domestic equities and foreign equities.
- SPECIAL YEAR 2000 RISK CONSIDERATIONS. Many of the services provided
to the Fund depend on the proper functioning of computer systems. Many systems
in use today cannot distinguish between the year 1900 and the year 2000. Should
any of the Fund's service systems fail to process information properly, that
could have an adverse impact on the Fund's operations and services provided to
shareholders. GMO, as well as the Trust's administrator, transfer agent,
custodians and other service providers, have reported that each is working
toward mitigating the risks associated with the "Year 2000 problem." However,
there can be no assurance that the problem will be corrected in all respects and
that the Fund's operations and services provided to shareholders will not be
adversely affected, nor can there be any assurance that the Year 2000 problem
will not have an adverse effect on the entities whose securities are held by the
Fund or on U.S. or global equity markets or economies generally.
FEES AND EXPENSES
THE FOLLOWING TABLE DESCRIBES THE FEES AND EXPENSES YOU MAY PAY IF YOU BUY AND
HOLD SHARES OF THE FUND:
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS):
(as a percentage of average net assets)
Investment Management Fee.................................................................. 0.90%
Other Operating Expenses................................................................... 0.11%
----
Total Fund Operating Expenses.............................................................. 1.01%
Expense Reimbursement(1)................................................................... 0.06%
----
NET EXPENSES............................................................................... 0.95%
</TABLE>
(1) The Manager has contractually agreed to reimburse the Fund with
respect to certain Fund expenses through at least June 30, 2000 to the
extent that the Fund's total annual operating expenses (excluding
brokerage commissions and other investment-related costs, hedging
transaction fees, extraordinary, non-recurring and certain other unusual
expenses (including taxes), and transfer taxes) would otherwise exceed
0.95% of the Fund's average daily net assets.
EXAMPLE:
The example below illustrates the expenses you would incur on a $10,000
investment over the stated periods, assuming your investment had a 5% return
each year and the Fund's operating expenses remained the same (with or without a
redemption at the end of each time period). The examples are for comparative
purposes only; they do not represent past or future expenses or performance, and
your actual expenses and performance may be higher or lower.
7
<PAGE> 357
<TABLE>
<S> <C>
One Year (after waiver)................... $ 97
Three Years............................... $ 316
Five Years................................ $ 552
Ten Years................................. $1,231
</TABLE>
MANAGEMENT
MANAGER. The Fund is advised and managed by Grantham, Mayo, Van
Otterloo & Co. LLC, 40 Rowes Wharf, Boston, Massachusetts 02110 (the "Manager"),
which provides investment advisory services to a substantial number of
institutional and other investors. The Manager also advises each of the other
Series of the Trust. Each of the following four members holds a greater than 5
percent interest in the Manager: R. Jeremy Grantham, Richard A. Mayo, Eyk H.A.
Van Otterloo, and Kingsley Durant.
Under a Management Contract with the Trust, the Manager selects and
reviews the Fund's investments and provides executive and other personnel for
the management of the Trust. Under the Management Contract, the Manager is
compensated by the Fund at the annual rate of 0.90% of the average daily net
assets of the Fund's portfolio. The Manager has contractually agreed to
reimburse the Fund with respect to certain Fund expenses through at least June
30, 2000 to the extent that the Fund's total annual operating expenses
(including the management fee but excluding brokerage commissions and other
investment-related costs, hedging transaction fees, extraordinary, non-recurring
and certain other unusual expenses (including taxes), and transfer taxes) would
otherwise exceed 0.95% of the Fund's average daily net assets. Pursuant to the
Trust's Agreement and Declaration of Trust, the Board of Trustees supervises the
affairs of the Trust as conducted by the Manager. The Manager received 0.84% of
the average net assets of the Fund during the fiscal year ended February 28,
1999 as compensation for advisory services rendered during that year.
Mr. Mayo is primarily responsible for the day-to-day management of the
Fund's portfolio. Mr. Mayo serves as President - Domestic Active of the Trust
and is a founding partner of the Manager. He has been a portfolio manager for
more than twenty-five years and has been employed by the Manager in such
capacity since its inception in 1977.
CUSTODIAN, TRANSFER, AND DIVIDEND PAYING AGENT. State Street Bank and
Trust Company ("State Street Bank"), 225 Franklin Street, Boston, Massachusetts,
serves as custodian and dividend paying agent for the Fund. Boston Financial
Data Services, Inc. (BFDS), Two Heritage Drive, Quincy, Massachusetts, serves as
transfer agent for the Fund.
DISTRIBUTIONS, REINVESTMENT AND TAXES
The Fund intends to pay dividends quarterly from net investment income
and to distribute annually any net realized capital gains. Unless a shareholder
otherwise requests, all dividends and distributions are credited to a
shareholder's account as full and fractional shares of the Fund at the net asset
value in effect as of the dividend or distribution date. Shareholders may elect
to receive in cash all of their future dividends and distributions on shares of
the Fund by so notifying the Trust in writing. Such an election may be changed
at any time by subsequent written notice to the Trust.
8
<PAGE> 358
It is the policy of the Fund each year to distribute to shareholders
substantially all of its net investment income and gains and to meet all
applicable requirements of the Internal Revenue Code of 1986, as amended (the
"Code"), for qualifying as a regulated investment company in order for the Fund
to be relieved of liability for federal income taxes.
For those shareholders subject to federal income tax, dividends and
capital gain distributions are taxable whether credited in shares or paid in
cash.
Dividends from net investment income and distributions of net
short-term gains (i.e., net gains from securities held for not more than a year)
are taxable as ordinary income to shareholders subject to tax. Distributions
designated by the Fund as deriving from net gains on securities held for more
than 12 months will be taxable for federal income tax purposes as such to
shareholders subject to tax (generally at a 20% rate for noncorporate
shareholders), regardless of how long they have held their shares. The fund will
provide federal tax information annually, including information about dividends
paid during the preceding year.
Dividends and distributions on the Fund's shares are generally subject
to federal income tax as described herein to the extent they do not exceed the
Fund's realized income and gains, even though such dividends and distributions
may economically represent a return of a particular shareholder's investment.
Such distributions are likely to occur in respect of shares purchased at a time
when the Fund's net asset value reflects gains that are either unrealized or
realized but not distributed.
The Fund's investments in foreign securities may be subject to foreign
withholding taxes. In that case, the Fund's yield on those securities would be
decreased.
In addition, the Fund's investment in foreign securities, foreign
currencies, debt obligations issued or purchased at a discount, assets "marked
to the market" for federal income tax purposes and, potentially, so-called
"indexed securities" (including inflation indexed bonds) may increase or
accelerate the Fund's recognition of taxable income, including the recognition
of taxable income in excess of the cash generated by such investments. These
investments may, therefore, affect the timing or amount of the Fund's
distributions and may cause the Fund to liquidate other investments to satisfy
the requirements to be a regulated investment company.
Any gain resulting from the sale or exchange of your shares will
generally also be subject to tax.
The foregoing is a general summary of the federal income tax
consequences for shareholders who are U.S. citizens, residents or domestic
corporations. Shareholders should consult their own tax advisers about the
precise tax consequences of an investment in the Fund in light of each
shareholder's particular tax situation. Shareholders should also consult their
own tax advisers about consequences under foreign, state, local or other
applicable tax laws (including possible liability for federal alternative
minimum tax). The Fund will report the federal income tax status of all
distributions to shareholders annually.
9
<PAGE> 359
HOW TO PURCHASE SHARES
Shares of the Fund may be purchased directly from the Trust without any
sales charge or underwriting commissions on any day when the New York Stock
Exchange is open for business.
- - To buy shares: Complete an account application and mail with your check
to the address below. Call the Fund at 1-800-447-3167 between 9:00 a.m.
and 5:00 p.m. Boston time for instructions or to request an account
application.
Pelican Fund
State Street Bank Corp.
P.O. Box 8120
Boston, MA 02266-8120
- - To buy shares by wire, call the Fund at 1-800-447-3167 for
instructions. You must complete an account application before your
initial purchase of shares. Send the wire to:
State Street Bank and Trust Company
Boston, Massachusetts
ABA# 011 000 028
Attn: Mutual Fund Division, Pelican Fund
Include your shareholder account number.
The Fund reserves the right to refuse additional investments at any
time and may limit the size of individual accounts. Shareholders of the Fund
will continue to be able to reinvest dividend and capital gain distributions
without limitation. The minimum initial investment in the Fund is $5,000; there
is no required minimum for additional purchase of Fund shares. An initial
investment of at least $1,000 must be made in connection with the establishment
of a Keogh plan; there is no minimum in connection with an individual retirement
account (IRA). The minimum initial investment amount may be changed by the
Trustees at any time.
The price at which a purchase order is filled in full and fractional
shares of the Fund is the net asset value per share of the Fund next determined
after a properly completed application and payment are received at the Fund's
office. See "How Shares Are Priced" below.
Subject to limitations described in the Statement of Additional
Information, the Fund may accept securities as payment for shares of the Fund
(in lieu of payment by check or wire). An investor should not under any
circumstances send cash to the Fund as payment for Fund shares.
Shares of the Fund are maintained under an open account arrangement,
and no share certificates are expected to be issued. After each transaction that
affects the number of shares in an open account, a confirmation will be mailed
to the address in which the account is registered that discloses the current
balance of shares owned. The Fund reserves the right to charge a fee for
providing duplicate information.
10
<PAGE> 360
Shares of the Fund may be purchased for tax-sheltered retirement plans,
including Keogh plans for self-employed individuals and partnerships, employer
defined-contribution plans, individual retirement accounts (IRAs), and
Simplified Employee Pension Plans (SEPPs). Further details and prototype plans
are available from the Fund. An investor should consult a competent tax or other
adviser as to the suitability of shares of the Fund as a vehicle for funding a
plan, in whole or in part, under the Employee Retirement Income Security Act of
1974 and as to the eligibility requirements for a specific plan and its state
tax as well as federal tax aspects.
All purchase orders are subject to acceptance by the Fund, which may
refuse any purchase order or suspend the offering of shares of the Fund at any
time.
Reminders to make regularly scheduled investments will be sent to
shareholders upon their request, with no obligation to invest at any time.
HOW TO REDEEM SHARES
Shareholders have the right to redeem their shares at the net asset
value per share next determined after receipt by State Street Bank of an
appropriate written request for redemption together with share certificates, if
any, properly endorsed with signatures guaranteed (see below). Shareholders may
also redeem shares by telephone, as further described below. The value of shares
at redemption depends upon the market value of the Fund's portfolio at the time
of redemption and may be more or less than the cost to the shareholder.
A written request for redemption should specify the shareholder's
account number and the number of shares to be redeemed and should normally be
signed by the person or persons in whose name or names the account is registered
or, in the case of the death of a shareholder, by the legal successor of the
shareholder. Written redemption requests for shares held by tax-sheltered
retirement plans must be submitted by the trustees or custodians of such plans
rather than by the plan participants. The Fund will require proof of the
authenticity of signatures and in certain cases proof of authority of the
signers.
For shareholder protection, all signatures on written requests for
redemption or transfer of ownership and endorsements of any issued share
certificates or stock powers that accompany such certificates must be guaranteed
by a national bank or trust company, a member of the Federal Reserve System, a
savings bank or savings and loan association, or a member of the National
Association of Securities Dealers, Inc. or of the New York, American, Boston,
Midwest, or Pacific Stock Exchanges. A signature "verification" by a savings
bank or savings and loan association or notarization by a notary public is not
acceptable.
A signature guaranty is required to establish telephone redemption on
any account after it has been opened. A signature guaranty will not be required
to establish the telephone redemption option so long as this option is selected
at the time of an initial account application; election of the privilege at a
later date will require completion of an appropriate form accompanied by a
signature guaranty.
11
<PAGE> 361
Shareholders who elect the telephone redemption option on their
application may redeem, without extra charge, $5,000 or more from their account
by telephone, and the proceeds will be sent by wire transfer to the
shareholder's previously designated bank account within the United States. The
account must be with a bank that is a member of the Federal Reserve System or
that has a correspondent banking relationship with a member bank. All telephone
redemption requests will be recorded.
For telephone redemptions, call 1-800-447-3167 between 9:00 a.m. and
5:00 p.m. Boston time. Please specify the Pelican Fund.
A redemption request received by telephone in proper form by the Fund
before 4:15 p.m. Boston time on any business day will become effective at 4:15
p.m. that day and the proceeds of such redemption will be wired on the next
business day, but if making immediate payment could adversely affect the Fund,
it may take up to seven days for payment to be made.
The shareholder is solely responsible for the authenticity of
redemption instructions received by telephone that the Fund reasonably believes
to be genuine. The Fund will accept such instructions from anyone able to
provide information on an account. The Fund is not responsible for losses due to
unauthorized or fraudulent telephone instructions unless it fails to employ
reasonable procedures to assure the genuine nature of the redemption request,
such as recording the redemption request.
When shares are redeemed, a check in payment will normally be mailed
within seven days. However, a redemption check will not be mailed until all
checks received by the Fund in payment for shares to be redeemed have cleared
(check clearance may take up to 15 days). A shareholder may avoid this delay by
paying for shares with a certified check or by making investments by wire as
described above.
The Fund and State Street Bank each reserve the right at any time to
terminate, suspend or change the terms of any redemption method, except
redemption by mail.
If a request for redemption would reduce a shareholder's shares in the
Fund to a value of $1,000 or less, the Fund will treat the request as a request
for redemption of all the shares of the Fund in the shareholder's account. Upon
sixty days advance written notice, the Fund also has the right to redeem shares
in a shareholder's account which is valued at less than $2,500 for sixty days or
more due to redemptions. During such sixty day period, the shareholder may avoid
such redemption by increasing his or her account to the $2,500 minimum.
SYSTEMATIC WITHDRAWAL PLAN. Eligible shareholders who wish to receive a
fixed amount periodically may elect to participate in the Systematic Withdrawal
Plan. A shareholder whose account contains shares of the Fund worth $5,000 or
more may elect to receive automatic payments of $100 or more each quarter. A
shareholder whose account contains shares of the Fund worth at least $10,000 may
elect to receive monthly payments of $100 or more. Please contact the Fund for
further information about and application materials for the Systematic
Withdrawal Plan.
12
<PAGE> 362
HOW SHARES ARE PRICED
The net asset value of a share is determined for the Fund once on each
day on which the New York Stock Exchange is open, except that the Fund may not
determine its net asset value on days during which no security is tendered for
redemption and no order to purchase or sell such security is received by the
Fund. The Fund's net asset value is determined as of 4:15 p.m., New York City
Time. The Fund's net asset value is determined by dividing the total market
value of the Fund's portfolio investments and other assets, less any
liabilities, by the total outstanding shares of the Fund. Portfolio securities
listed on a securities exchange for which market quotations are available are
valued at the last quoted sale price on each business day or, if there is no
such reported sale, at the most recent quoted bid price. However, for those
securities that are listed on an exchange but that exchange is less relevant in
determining the market value of such securities than is the private market, a
broker bid will be used. Criteria for relevance include where the securities are
principally traded and what their intended market for disposition is. Price
information on listed securities is generally taken from the closing price on
the exchange where the security is primarily traded. Unlisted securities for
which market quotations are readily available are valued at the most recent
quoted bid price, except that debt obligations with sixty days or less remaining
until maturity may be valued at their amortized cost, unless circumstances
dictate otherwise. Circumstances may dictate otherwise, among other times, when
the issuer's creditworthiness has become impaired.
All other fixed income securities (which include bonds, loans and
structured notes) and options thereon are valued at the closing bid for such
securities as supplied by a primary pricing source chosen by the Manager. While
the Manager evaluates such primary pricing sources on an ongoing basis, and may
change any pricing source at any time, the Manager will not normally evaluate
the prices supplied by the pricing sources on a day-to-day basis. However, the
Manager is kept informed of erratic or unusual movements (including unusual
inactivity) in the prices supplied for a security and has the power to override
any price supplied by a source (by taking a price supplied from another) because
of such price activity or because the Manager has other reasons to suspect that
a price supplied may not be reliable.
Other assets and securities for which no quotations are readily
available are valued at fair value as determined in good faith by the Trustees
or persons acting at their direction. The values of foreign securities quoted in
foreign currencies are translated into U.S. dollars at current exchange rates or
at such other rates as the Trustees may determine in computing net asset value.
13
<PAGE> 363
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% 18.60% 28.56% 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.
The financial highlights table is designed to help you understand the
Fund's financial performance for the past five years. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers LLP,
independent accountants, whose report, along with the Fund's financial
statements, is included in the Fund's Annual Report, which is incorporated by
reference in the Fund's Statement of Additional Information and available upon
request.
14
<PAGE> 364
ADDITIONAL INFORMATION
Additional information about the Fund's investments is available in the
Fund's annual and semi-annual reports to shareholders. In the Fund's annual
report, you will find a discussion of the market conditions and investment
strategies that significantly affected the Fund's performance during its last
fiscal year. The Fund's annual and semi-annual reports, and the Fund's Statement
of Additional Information dated June 30, 1999, as revised from time to time, are
available free of charge by writing to GMO, 40 Rowes Wharf, Boston,
Massachusetts 02110 or by calling collect (617) 346-7600. The Statement, which
contains more detailed information about the Fund, has been filed with the
Securities and Exchange Commission ("SEC") and is incorporated by reference into
this Prospectus.
Information about the Fund (including the Statement) can be reviewed
and copied at the SEC's Public Reference Room in Washington, D.C. Information
regarding the operation of the Public Reference Room may be obtained by calling
the SEC at 1-800-SEC-0330. Reports and other information about the Funds are
available on the Commission's Internet site at http://www.sec.gov. Copies of
this information may be obtained, upon payment of a duplicating fee, by writing
the Public Reference Section of the SEC, Washington, D.C. 20549-6009.
SHAREHOLDER INQUIRIES
Shareholders may direct inquiries to:
Pelican Fund
c/o Grantham, Mayo, Van Otterloo & Co. LLC
40 Rowes Wharf
Boston, Massachusetts 02110
(1-617-346-7600) (CALL COLLECT)
For price, share position, or information on account activity, please call:
1-800-447-3167
INVESTMENT COMPANY ACT FILE NO. 811-4347
<PAGE> 365
PELICAN FUND
STATEMENT OF ADDITIONAL INFORMATION
June 30, 1999
This Statement of Additional Information is not a prospectus. It relates to the
Pelican Fund Prospectus dated June 30, 1999, as amended from time to time (the
"Prospectus"), and should be read in conjunction therewith. The Pelican Fund
(the "Fund") is a series of GMO Trust (the "Trust"). Information from the
Prospectus and from the Pelican Fund Annual Report dated February 28, 1999 is
incorporated by reference into this Statement of Additional Information.
Investors may obtain a free copy of the Prospectus and the Annual Report from
the Trust, 40 Rowes Wharf, Boston, Massachusetts 02110 (call collect:
617-346-7600 - ask for Shareholder Services).
<PAGE> 366
Table of Contents
<TABLE>
<CAPTION>
Caption Page
- ------- ----
<S> <C>
DESCRIPTIONS AND RISKS OF FUND INVESTMENTS....................................................................... 3
INVESTMENT RESTRICTIONS.......................................................................................... 7
TRUSTEES AND OFFICERS............................................................................................ 9
MANAGEMENT ARRANGEMENTS.......................................................................................... 11
PORTFOLIO TRANSACTIONS........................................................................................... 12
PRICING OF SHARES................................................................................................ 13
TAX STATUS....................................................................................................... 14
REDEMPTION OF SHARES............................................................................................. 16
SYSTEMATIC WITHDRAWAL PLANS...................................................................................... 16
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES................................................................. 16
VOTING RIGHTS.................................................................................................... 18
SHAREHOLDER AND TRUSTEE LIABILITY................................................................................ 19
PERFORMANCE INFORMATION.......................................................................................... 20
INVESTMENT GUIDELINES............................................................................................ 22
FINANCIAL STATEMENTS............................................................................................. 24
SPECIMEN PRICE MAKE-UP........................................................................................... 24
</TABLE>
2
<PAGE> 367
The Pelican Fund (the "Fund") is a series of GMO Trust (the "Trust").
The Trust is a "series investment company" that consists of a separate series of
investment portfolios (the "Series"), each of which is represented by a separate
series of shares of beneficial interest. The Trust currently offers thirty-six
Series. Each Series' manager is Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager"). Shares of the other Series of the Trust are offered pursuant to
separate prospectuses and statements of additional information.
DESCRIPTIONS AND RISKS OF FUND INVESTMENTS
The principal strategies and risks of investing in the Fund are
described in the Prospectus. Unless otherwise indicated in the Prospectus or
this Statement of Additional Information, the investment objective and policies
of the Fund may be changed by the Trustees without shareholder approval.
The Fund invests primarily in common stocks of domestic corporations.
It seeks to invest in companies that represent outstanding values relative to
their market prices. Under normal conditions, the Fund generally, but not
exclusively, looks for companies with low price/earnings ratios and rising
earnings. The Fund focuses on established, financially secure firms and
generally does not buy issues of companies with less than three years of
operating history. The Fund seeks to maintain lower than average risk levels
relative to the potential for return through a portfolio with an average
volatility (beta) below 1.0. The average volatility (beta) of the Standard &
Poor's 500 Stock Market Index, which serves as a standard for measuring
volatility, is always 1.0. The Fund's beta may change with market conditions.
The Fund's Manager analyzes key economic variables to identify general
trends in the stock markets. World economic indicators, which are tracked
regularly, include U.S. industry and trade indicators, interest rates,
international stock market indices, and currency levels.
The Manager also analyzes each company considered for investment. The
analysis includes its source of earnings, competitive edge, management strength,
and level of industry dominance as measured by market share. At the same time,
the Manager analyzes the financial condition of each company. The Manager
examines current and historical measures of relative value to find corporations
that are selling at discounts relative to both underlying asset values and
market pricing. The Manager then selects those undervalued companies with
financial and business characteristics that it believes will produce
above-average growth in earnings.
The Manager generally selects equities that normally trade in
sufficient volume to provide liquidity. Domestic equities are usually traded on
the New York Stock Exchange or the American Stock Exchange or in the
over-the-counter markets. Foreign securities in the portfolio are generally
listed on principal over-seas exchanges.
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<PAGE> 368
Sell decisions are triggered when the stock price and other fundamental
considerations no longer signal further appreciation. The Manager monitors
returns on domestic and international equity securities, returns on fixed income
securities, and the performance of industry sectors.
Portfolio Turnover. The rate of portfolio turnover will not be a
limiting factor when portfolio changes are deemed appropriate. In any given
year, turnover may be greater than anticipated in response to market conditions.
The rate of the Fund's turnover may also vary significantly from time to time in
response to market volatility and economic conditions. High portfolio turnover
involves correspondingly greater brokerage commissions and other transaction
costs, which will be borne directly by the Fund.
Because the Fund is directed primarily to institutions and other
tax-exempt investors, it is expected that the tax consequences of portfolio
transactions may be of secondary consideration.
Diversification. It is a fundamental policy of the Fund, which may not
be changed without shareholder approval, that at least 75% of the value the
Fund's total assets are represented by cash and cash items (including
receivables), Government securities, securities of other investment companies,
and other securities for the purposes of this calculation limited in respect of
any one issuer to an amount not greater in value than 5% of the value of the
relevant Fund's total assets and to not more than 10% of the outstanding voting
securities of any single issuer.
Selection of Investments for the Fund. There is no single, specific
formula or technique for the successful pursuit of long-term capital growth. The
investment philosophy of the Fund is to select investments with excellent growth
and, secondarily, income potential. Under normal conditions, investments are
made in a variety of economic sectors, industry segments, and individual
securities to reduce the effects of price volatility in any one area. Shares of
the Fund are not intended to represent a complete investment program.
There can be no assurance that the Fund will attain its investment objective.
Questions of whether to be fully invested in common stocks, or of
whether to be in one type of common stock or another, cannot be answered
categorically. It is anticipated, in view of the Fund's investment objectives,
that at least 65 percent of the asset value of the Fund's portfolio will be
invested principally in common stocks and securities convertible into common
stocks. However, the Fund may invest part or all of its portfolio in debt
securities, preferred stocks, or short-term notes, or it may convert part or all
of its portfolio to cash, when economic or market conditions appear to make such
action or actions desirable. For example, a more defensive or conservative
position may seem temporarily justified by prevailing market conditions, or,
securities other than common stocks offer a better opportunity for capital
growth based upon relative values at a particular time. Debt securities
purchased by the Fund may include obligations of the U.S. Government, its
agencies and instrumentalities and other investment-grade
4
<PAGE> 369
obligations. Equity securities and debt securities, including debt securities
issued or guaranteed by the U.S. Government, are subject to significant price
variations from time to time. The Fund does not engage in aggressive market
timing techniques.
The Fund may invest up to 25 percent of its assets in foreign
securities, generally equity securities traded in principal European and Pacific
Basin markets. The Manager evaluates the economic strength of a country, which
includes its resources, markets, and growth rate. In addition, it examines the
political climate of a country as to its stability and business policies. The
Manager then assesses the strength of the country's currency and considers
foreign exchange issues in general. The Fund aims for diversification not only
among countries but also among industries in order to enable shareholders to
participate in markets that do not necessarily move in concert with U.S.
markets.
The Fund seeks to identify rapidly expanding foreign economies and then
searches out growing industries and corporations. It focuses on companies with
established records. Individual securities are selected based on value
indicators, such as low price to earnings ratio. They are reviewed for
fundamental financial strength. Selected companies will generally have at least
a $100 million market capitalization and a solid history of operations.
Additional Information Regarding Foreign Investments. Foreign
investments involve certain special risks. Securities prices in different
countries are subject to different economic, financial, political, and social
factors. Changes in currency exchange rates will affect the value of portfolio
securities to U.S. investors. With respect to certain countries, there is the
possibility of expropriation of assets, confiscatory taxation, imposition of
exchange controls, social instability, and political developments which could
affect investments in those countries. Assets of the Fund held by custodians in
foreign countries may also be subject to these risks. There may be less publicly
available information about foreign companies than U.S. companies. Foreign
companies may not be subject to accounting, auditing, and financial reporting
standards comparable to those of U.S. companies. The trading volume of foreign
securities markets is growing, but they generally have substantially smaller
trading volume than U.S. markets. Consequently, foreign securities may be less
liquid and their prices more volatile than those of comparable U.S. companies.
Brokerage commissions abroad are generally fixed, and other transaction costs on
foreign securities exchanges are generally higher than in the U.S.
In order to reduce risks of fluctuations in currency exchange rates,
the Fund may purchase and sell foreign currencies for forward deliveries. Such
transactions may be utilized in connection with the settlement of portfolio
transactions or for the purpose of hedging specific portfolio positions. Hedging
against a decline in the value of a currency does not eliminate fluctuations in
the prices of portfolio securities, and it precludes the opportunity to benefit
if the
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<PAGE> 370
value of the hedged currency should rise. The Fund will not engage in foreign
currency transactions for speculative purposes.
Writing Covered Call Options. The Fund may write call options which are
traded on national securities exchanges with respect to not more than 25% of its
assets. The Fund must at all times have in its portfolio the securities which it
may be obligated to deliver if the option is exercised. Options purchased or
written by the Fund will be limited to options traded on national exchanges or
in the over-the-counter market (such over-the-counter options shall not exceed
10 percent of the Fund's assets).
The Fund may write call options on the Fund's securities in an attempt
to realize a greater current return than would be realized on the securities
alone. The Fund may also sell (write) call options to hedge a possible stock or
bond market decline (only to the extent of the premium paid to the Fund for the
options). In view of the investment objectives of the Fund, the Fund generally
would write call options only in circumstances where the Manager to the Fund
does not anticipate significant appreciation of the underlying security in the
near future or has otherwise determined to dispose of the security.
As the writer of a call option, the Fund receives a premium for
undertaking the obligation to sell the underlying security at a fixed price
during the option period, if the option is exercised. So long as the Fund
remains obligated as a writer of a call option, it forgoes the opportunity to
profit from increases in the market price of the underlying security above the
exercise price of the option, except insofar as the premium represents such a
profit (and retains the risk of loss should the value of the underlying security
decline).
The Fund may also enter into "closing purchase transactions" in order
to terminate its obligation as a writer of a call option prior to the expiration
of the option. Although the writing of call options only on national securities
exchanges increases the likelihood of the Fund's being able to make closing
purchase transactions, there is no assurance that the Fund will be able to
effect such transactions at any particular time or at any acceptable price.
The writing of call options could result in increases in the Fund's
portfolio turnover rate, especially during periods when market prices of the
underlying securities appreciate.
Purchasing Put Options. The Fund may invest up to 5% of its total
assets at market value in the purchase of put options. As the holder of a put
option, the Fund has the right to sell the underlying security at the exercise
price at any time during the option period. The Fund may enter into closing sale
transactions with respect to such options, exercise them or permit them to
expire.
The Fund may purchase a put option on an underlying security owned by
the Fund as a defensive technique in order to protect against an anticipated
decline in the value of the security.
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<PAGE> 371
The premium paid for the put option would reduce any capital gain otherwise
available for distribution when the security is eventually sold. The purchase of
put options will not be used by the Fund for leverage purposes.
The Fund may also purchase a put option on an underlying security which
it owns and at the same time write a call option on the same security with the
same exercise price and expiration date. Depending on whether the underlying
security appreciates or depreciates in value, the Fund would sell the underlying
security for the exercise price either upon exercise of the call option written
by it or by exercising the put option held by it. The Fund would enter into such
transactions in order to profit from the difference between the premium received
by the Fund for the writing of the call option and the premium paid by the Fund
for the purchase of the put option, thereby increasing the Fund's current
return.
INVESTMENT RESTRICTIONS
Except when specifically indicated to the contrary, the investment
policies described in this Statement of Additional Information are not
fundamental, and the Trustees of the Trust may change such policies without
first obtaining shareholder approval. As used in this paragraph, "shareholder
approval" means the vote of a majority of the outstanding voting securities of
the Fund and "majority" means the lessor of (1) 67 percent or more of the
outstanding shares of the Fund present at a meeting if more than 50 percent of
the shares are represented at the meeting in person or by proxy, or (2) more
than 50 percent of the outstanding shares of the Fund.
Except as identified in the Prospectus and this Statement of Additional
Information, there are no specific limitations on the extent to which the Fund
may engage in the investment policies described in the Prospectus and this
Statement of Additional Information.
Investment Restrictions. The Fund is subject to the following
investment restrictions (A-L below) which may not be changed without shareholder
approval. The Fund may not:
A. Borrow money except for temporary purposes where investment
transactions might advantageously require it. Any such loan
may not be for a period in excess of 60 days, and the
aggregate amount of all outstanding loans may not at any time
exceed 10% of the value of the total assets of the Fund at the
time any such loan is made.
B. Purchase securities on margin.
C. Sell securities short.
D. Lend any funds or other assets (the Fund may enter into
repurchase agreements and purchase publicly distributed bonds,
debentures and other securities of a similar type, or
privately
7
<PAGE> 372
placed municipal or corporate bonds, debentures and other
securities which are of a type customarily purchased by
institutional investors or publicly traded in the securities
markets).
E. Participate in an underwriting or selling group in connection
with the public distribution of securities except for its own
capital stock.
F. Invest more than 5% of the value of its total assets in the
securities of any one issuer (except obligations of domestic
banks or the U.S. Government, its agencies, authorities and
instrumentalities).
G. Hold more than 10% of the voting securities of any one issuer
(except obligations of domestic banks or the U.S. Government,
its agencies, authorities and instrumentalities).
H. Purchase from or sell to any of its officers or trustees, or
firms of which any of them are members or which they control,
any securities (other than capital stock of the Fund), but
such persons or firms may act as brokers for the Fund for
customary commissions to the extent permitted by the
Investment Company Act of 1940.
I. Purchase and sell real estate or commodities and commodity
contracts.
J. Purchase the securities of any other open-end investment
company, except as part of a plan of merger or consolidation.
K. Make an investment in securities of companies in any one
industry (except obligations of domestic banks or the U.S.
Government, its agencies, authorities, or instrumentalities)
if such investment would cause investments in such industry to
exceed 25% of the market value of the Fund's total assets at
the time of such investment.
L. Issue senior securities, as defined in the 1940 Act and as
amplified by rules, regulations and pronouncements of the SEC.
The SEC has concluded that even though reverse repurchase
agreements, firm commitments and standby commitment agreements
fall within the functional meaning of "evidence of
indebtedness," the issue of compliance with Section 18 of the
1940 Act will not be raised with the SEC by the Division of
Investment Management if the Fund covers such securities by
maintaining "segregated accounts." Similarly, so long as such
segregated accounts are maintained, the issue of compliance
with Section 18 will not be raised with the SEC with respect
to any of the following: any swap contract or contract for
differences; any pledge or encumbrance of assets; any
borrowing permitted by restriction A above; any collateral
arrangements with respect to initial and variational margin
permitted by restriction B above; and the purchase or sale of
options, forward contracts or options on future contracts.
Under the Investment Company Act of 1940 (the "1940 Act"), the Fund is
permitted, subject to the above investment restrictions, to borrow money only
from banks. (The Trust has no current intention of borrowing amounts in excess
of 5% of the Fund's assets.)
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<PAGE> 373
It is, moreover, the expressed policy of the Fund not to engage in the
purchase and sale of puts, calls, straddles or spreads (except to the extent
described in the Prospectus and in this Statement of Additional Information),
not to invest in companies for the purpose of exercising control of management,
and not to purchase any security which it is restricted from selling to the
public without registration under the Securities Act of 1933. The Fund may not
invest in oil, gas or other mineral exploration or development programs and it
may not invest more than 5% of the value of its total assets in the securities
of unseasoned issuers, including their predecessors, which have been in
operation for less than three years, and securities of issuers which are not
readily marketable. The policies set forth in this paragraph may be changed by
vote of the Trustees of the Trust.
All percentage limitations on investments will apply at the time of the
making of an investment and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of such
investment.
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust and their principal occupations
during the past five years are as follows:
R. JEREMY GRANTHAM* (D.O.B. 10/6/38). President-Quantitative and
Chairman of the Trustees of the Trust. Member, Grantham, Mayo, Van
Otterloo & Co. LLC.
HARVEY R. MARGOLIS (D.O.B. 12/12/42). Trustee of the Trust. Mathematics
Professor, Boston College.
JAY O. LIGHT (D.O.B. 10/3/41). Trustee of the Trust. Professor of
Business Administration, Harvard University; Senior Associate Dean,
Harvard University (1988-1992).
EYK DEL MOL VAN OTTERLOO (D.O.B. 2/27/37). President-International of
the Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC.
RICHARD MAYO (D.O.B. 6/18/42). President-U.S. Active of the Trust.
Member, Grantham, Mayo, Van Otterloo & Co. LLC.
KINGSLEY DURANT (D.O.B. 1/19/32). Vice President and Secretary of the
Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC.
SUSAN RANDALL HARBERT (D.O.B. 4/25/57). Secretary and Treasurer of the
Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC.
WILLIAM R. ROYER, ESQ. (D.O.B. 7/20/65). Vice President and Assistant
Treasurer of the Trust. General Counsel, Grantham, Mayo, Van Otterloo &
Co. LLC (January 1995 - Present). Associate, Ropes & Gray, Boston,
Massachusetts (September 1992 - January 1995).
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<PAGE> 374
JUI LAI (D.O.B. 1/21/49). Secretary of the Trust. Member, Grantham,
Mayo, Van Otterloo & Co. LLC.
ANN SPRUILL (D.O.B. 8/30/54). Secretary of the Trust. Member, Grantham,
Mayo, Van Otterloo & Co. LLC.
ROBERT V. BROKAW, JR. (D.O.B. 10/7/43). Secretary of the Trust. Member,
Grantham, Mayo, Van Otterloo & Co. LLC.
FORREST BERKLEY (D.O.B. 4/25/54). Vice President of the Trust. Member,
Grantham, Mayo, Van Otterloo & Co. LLC.
SCOTT ESTON (D.O.B. 1/20/56). Vice President of the Trust. Chief
Financial Officer and Member, Grantham, Mayo, Van Otterloo & Co. LLC
(September 1997 - present). Senior Partner, Coopers & Lybrand (1987 -
1997).
BRENT ARVIDSON (D.O.B. 6/26/69). Assistant Treasurer of the Trust.
Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC
(September 1997 - present). Senior Financial Reporting Analyst, John
Hancock Funds (August 1996 - September 1997). Account Supervisor/Senior
Account Specialist, Investors Bank and Company (June 1993 - August
1996).
*Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo,
Van Otterloo & Co. LLC ("GMO" or the "Manager"), as defined by the 1940 Act.
As of June 1, 1999, the Trustees and officers of the Trust as a group
owned 1.99% of the Pelican Fund.
Except as stated above, the principal occupations of the officers and
Trustees for the last five years have been with the employers as shown above,
although in some cases they have held different positions with such employers.
The Trustees other than those who are interested persons of the Trust
receive an annual fee of $70,000 from the Trust. Mr. Margolis and Mr. Light are
currently the only Trustees who are not interested persons, and thus the only
Trustees compensated directly by the Trust. No other Trustee receives any direct
compensation from the Trust or any series thereof.
Messrs. Grantham, Mayo, Van Otterloo, Durant, Lai, Brokaw, Eston and
Berkley, and Mses. Harbert and Spruill, as Members of the Manager, will benefit
from the management fee paid by the Fund.
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MANAGEMENT ARRANGEMENTS
As disclosed in the Prospectus under the heading "MANAGEMENT," under a
Management Contract between the Trust on behalf of the Fund and Grantham, Mayo,
Van Otterloo & Co. LLC (the "Manager"), subject to such policies as the Trustees
of the Trust may determine, the Manager will furnish continuously an investment
program for the Fund and will make investment decisions on behalf of the Fund
and place all orders for the purchase and sale of portfolio securities. Each of
the following four Members of the Manager hold a greater than 5% interest in the
Manager: R. Jeremy Grantham, Richard A. Mayo, Eyk H.A. Van Otterloo and Kingsley
Durant. Subject to the control of the Trustees, the Manager also manages,
supervises and conducts the other affairs and business of the Trust, furnishes
office space and equipment, provides bookkeeping and certain clerical services
and pays all salaries, fees and expenses of officers and Trustees of the Trust
who are affiliated with the Manager. As indicated under "Portfolio Transaction -
Brokerage and Research Services," the Fund's portfolio transactions may be
placed with broker-dealers which furnish the Manager, at no cost, certain
research, statistical and quotation services of value to the Manager in advising
the Fund or its other clients.
The Management Contract provides that the Manager shall not be subject
to any liability in connection with the performance of its services thereunder
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
Under the Management Contract, the Manager is compensated by the Fund
at the annual rate of 0.90% of average daily net assets of the Fund's portfolio,
subject to the Manager's agreement to reimburse the Fund for certain expenses,
as described in the Prospectus. The Management Contract was approved by the
Trustees of the Trust (including all of the Trustees who are not "interested
persons" of the Manager) and by the relevant Fund's sole shareholder in
connection with the organization of the Trust and the establishment of the Fund.
The Management Contract will continue in effect for a period more than two years
from the date of its execution only so long as its continuance is approved at
least annually by (i) vote, cast in person at a meeting called for that purpose,
of a majority (or one, if there is only one) of those Trustees who are not
"interested persons" of the Manager or the Trust, and by (ii) the majority vote
of either the full Board of Trustees or the vote of a majority of the
outstanding shares of the Fund. The Management Contract automatically terminates
on assignment, and is terminable on not more than 60 days' notice by the Trust
to the Manager. In addition, the Management Contract may be terminated on not
more than 60 days' written notice by the Manager.
In the last three fiscal years the Fund paid the following amount as a
Management Fee to the Manager pursuant to the Management Contract:
<TABLE>
<CAPTION>
Gross Reduction Net
----- --------- ---
<S> <C> <C> <C>
Year Ended 2/28/99 $2,078,258 $ 127,155 $1,951,103
Year Ended 2/28/98 1,967,796 108,905 1,858,891
Year Ended 2/28/97 1,716,394 162,010 1,554,384
</TABLE>
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In the event that the Manager ceases to be the manager of the Fund, the
right of the Trust to use the identifying name "GMO" may be withdrawn.
Custodial Arrangements. State Street Bank and Trust Company ("State
Street Bank"), 225 Franklin Street, Boston, Massachusetts 02110, is the Trust's
custodian. As such, State Street Bank holds in safekeeping certificated
securities and cash belonging to the Fund and, in such capacity, is the
registered owner of securities in book-entry form belonging to the Fund. Upon
instruction, State Street Bank receives and delivers cash and securities of the
Fund in connection with Fund transactions and collects all dividends and other
distributions made with respect to Fund portfolio securities. State Street Bank
also maintains certain accounts and records of the Trust and calculates the
total net asset value, total net income and net asset value per share of the
Fund on a daily basis.
Independent Accountants. The Trust's independent accountants are
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110.
PricewaterhouseCoopers LLP conducts an annual audit of the Trust's financial
statements, assists in the preparation of the Trust's federal and state income
tax returns, consults with the Trust as to matters of accounting and federal and
state income taxation and provides assistance in connection with the preparation
of various Securities and Exchange Commission filings.
PORTFOLIO TRANSACTIONS
The purchase and sale of portfolio securities for the Fund and for the
other investment advisory clients of the Manager are made by the Manager with a
view to achieving their respective investment objectives. For example, a
particular security may be bought or sold for certain clients of the Manager
even though it could have been bought or sold for other clients at the same
time. Likewise, a particular security may be bought for one or more clients when
one or more other clients are selling the security. In some instances,
therefore, one client may sell indirectly a particular security to another
client. It also happens that two or more clients may simultaneously buy or sell
the same security, in which event purchases or sales are effected on a pro rata,
rotating or other equitable basis so as to avoid any one account's being
preferred over any other account.
Brokerage and Research Services. In placing orders for the portfolio
transactions of the Fund, the Manager will seek the best price and execution
available, except to the extent it may be permitted to pay higher brokerage
commissions for brokerage and research services as described below. The
determination of what may constitute best price and execution by a broker-dealer
in effecting a securities transaction involves a number of considerations,
including without limitation, the overall net economic result to the Fund
(involving price paid or received and any commissions and other costs paid), the
efficiency with which the transaction is effected, the ability to effect the
transaction at all where a large block is involved, availability of the broker
to stand ready to execute possibly difficult transactions in the future and the
financial strength and stability of the broker. Because of such factors, a
broker-dealer effecting a transaction may be paid a commission higher than that
charged by another broker-dealer. Most of the foregoing are judgmental
considerations.
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<PAGE> 377
Over-the-counter transactions often involve dealers acting for their
own account. It is the Manager's policy to place over-the-counter market orders
for the Fund with primary market makers unless better prices or executions are
available elsewhere.
Although the Manager does not consider the receipt of research services
as a factor in selecting brokers to effect portfolio transactions for the Fund,
the Manager will receive such services from brokers who are expected to handle a
substantial amount of the Fund's portfolio transactions. Research services may
include a wide variety of analyses, reviews and reports on such matters as
economic and political developments, industries, companies, securities and
portfolio strategy. The Manager uses such research in servicing other clients as
well as the Fund.
As permitted by Section 28(e) of the Securities Exchange Act of 1934
(the "1934 Act") and subject to such policies as the Trustees of the Trust may
determine, the Manager may pay an unaffiliated broker or dealer that provides
"brokerage and research services" (as defined in the 1934 Act) to the Manager an
amount of commission for effecting a portfolio investment transaction in excess
of the amount of commission another broker or dealer would have charged for
effecting that transaction.
The Fund may, under some circumstances, accept securities in lieu of
cash as payment for Fund shares. The Manager will not approve the acceptance of
securities in exchange for Fund shares unless (1) the Manager, in its sole
discretion, believes the securities are appropriate investments for the Fund;
(2) the investor represents and agrees that all securities offered to the Fund
are not subject to any restrictions upon their sale by the Fund under the
Securities Act of 1933, or otherwise; (3) the securities may be acquired under
the investment restrictions applicable to the Fund; and (4) the securities are
listed on the New York Stock Exchange, American Stock Exchange or National
Association of Securities Dealers Automated Quotation System (NASDAQ). For
federal income tax purposes, an exchange of securities for Fund shares is
treated as a sale of the exchanged securities and generally results in a capital
gain or loss. Investors interested in purchases through exchange should
telephone the Manager at (617) 346-7600 (ask for Shareholder Services).
During the last three fiscal years, the Trust paid, on behalf of the
Fund, the following amounts in brokerage commissions:
<TABLE>
<S> <C>
Year Ended 2/28/99 $254,824
Year Ended 2/28/98 $263,007
Year Ended 2/28/97 $185,762
</TABLE>
PRICING OF SHARES
The net asset value per share of the Fund is computed as of 4:15 p.m.
New York City Time on each day on which the New York Stock Exchange is open. The
Prospectus contains a description of the methods used to compute net asset
value.
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<PAGE> 378
The portfolio securities of the Fund may include equity securities
which are listed on foreign exchanges. Certain foreign exchanges may be open on
Saturdays and customary United States business holidays. As a consequence, the
portfolio securities of the Fund may be traded, and the net asset value of
shares of the Fund may be significantly affected, on days on which shares of the
Fund may not be purchased or redeemed.
TAX STATUS
It is the Fund's policy to meet the requirements to be taxed as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended from time to time (the "Code"), which requires, among other
things, that at least 90% of the Fund's gross income be derived from dividends,
interest and gains from the sale or other disposition of securities or foreign
currencies, or other income derived with respect to its business of investing in
such stock, securities or currencies. The Code also requires the Fund to
diversify its holdings so that at the end of each fiscal quarter (i) at least 50
percent of the market value of the Fund's assets is represented by cash items,
U.S. government securities, securities of other regulated investment companies,
and other securities, limited in respect of any one issuer to a value not
greater than 5 percent of the value of the Fund's total assets and 10 percent of
the outstanding voting securities of such issuer, and (ii) not more than 25
percent of the value of its assets is invested in the securities (other than
those of the U.S. government or other regulated investment companies) of any one
issuer or of two or more issuers which the Fund controls and which are engaged
in the same, similar or related trades or businesses. If the Fund meets all such
requirements and distributes to its shareholders all of its ordinary income and
capital gain net income, the Fund will not be required to pay federal income
tax. Shareholders of the Fund that are not exempt from federal income taxes will
be subject to income taxes on dividends and capital gains distributions received
from the Fund.
The Code also requires the Fund, in general, to distribute, prior to
the calendar year end, virtually all of its ordinary income for the calendar
year and virtually all of the capital gain net income realized by the Fund in
the one-year period ending October 31 in order to avoid the imposition of a 4
percent excise tax on undistributed income. Dividends declared in October,
November, or December to shareholders of record on a specified date in such a
month and paid in the following January will be treated as distributed by the
Fund and received by the Fund shareholders on December 31 of such calendar year.
A portion of the dividends paid by the Fund may be eligible (subject to
a holding period requirement imposed pursuant to the Code) for the
dividends-received deduction for the Fund's corporate shareholders.
Dividends and interest received by the Fund may be subject to income
withholding or other taxes imposed by foreign countries and the U.S. which may
reduce the yield of the Fund. Tax conventions between certain countries and the
U.S. may reduce or eliminate these foreign taxes. Foreign countries in which the
Fund invests generally do not impose taxes on capital gains in respect of
investments by foreign investors.
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<PAGE> 379
Distributions designated by the Fund as deriving from net gains on
securities held for more than 12 months, whether received in cash or additional
shares, are taxable to the Fund's shareholders that are not exempt from federal
income taxes as such (generally at a 20% rate for noncorporate shareholders) for
federal income tax purposes without regard to the length of time shares of the
Fund have been held. If a shareholder receives a dividend that is taxed as
long-term capital gain on shares held for six months or less and sells those
shares at a loss, the loss will be treated as a long-term capital loss. The
federal income tax status of all distributions will be reported to shareholders
annually.
Special rules (including mark-to-market, constructive sale, short sale,
straddle and wash-sale rules) exist for determining the timing of the
recognition of income or loss, the character of such income or loss, and the
holding periods of certain of the Fund's assets in the case of certain
transactions, including transactions involving futures contracts, forward
contracts and options. The Fund will endeavor to make any available elections
pertaining to such transactions in a manner believed to be in the best interest
of the Fund.
The Trust is required by federal law to withhold 31 percent of
reportable payments (which may include Fund dividends, capital gain
distributions and redemptions) paid to shareholders who have under-reported
dividend or interest income or who have not certified on their applications, or
on separate W-9 Forms, that their Social Security or Taxpayer Identification
Numbers are correct and that they are not currently subject to backup
withholding, or that they are exempt from backup withholding. Payments reported
to the Internal Revenue Service by the Trust that omit your social security
number or tax identification number will subject the Trust to charges and
penalties of $50 or more each year, all of which will be charged against your
account if you fail to provide the certification by the time the report is
filed. Such amounts charged against your account are not refundable.
Payees specifically exempted from backup withholding on dividends and
other distributions include: (i) a corporation; (ii) a financial institution;
(iii) an organization exempt from tax under Section 501(a) of the code or an
individual retirement plan; (iv) the United States or any agency or
instrumentality thereof; (v) a state, the District of Columbia, a possession of
the United States, or political subdivision instrumentality thereof; (vi) a
foreign government, a political subdivision of a foreign government or any
agency or instrumentality thereof; (vii) an international organization or any
agency or instrumentality thereof; (viii) a registered dealer in securities or
commodities in the U.S. or a possession of the U.S.; (ix) a real estate
investment trust; (x) a common trust fund operated by a bank under Section
584(a) of the code; (xi) an exempt charitable remainder trust or a non-exempt
trust described in Section 4947(a)(1) of the Code; (xii) an entity registered at
all times under the Investment Company Act of 1940; (xiii) a foreign central
bank of issue; and (xiv) a middleman known in the investment community as a
nominee or listed in the most recent publication of the American Society of
Corporate Secretaries, Inc. Nominee List.
The Internal Revenue Service recently revised its regulations affecting
the application to foreign investors of the back-up withholding and withholding
tax rules described above. The new regulations will generally be effective for
payments made after December 31, 2001 (although transition rules will apply). In
some circumstances, the new rules will increase the certification and filing
requirements imposed on foreign investors in order to qualify for exemption from
the 31% back-up withholding tax
15
<PAGE> 380
and for reduced withholding tax rates under income tax treaties. Foreign
investors in the Fund should consult their tax advisors with respect to the
potential application of these new regulations.
If the Fund does not qualify for taxation as a regulated investment
company for any taxable year, the Fund's income will be taxed at the Fund level
at regular corporate rates, and all distributions from earnings and profits,
including distributions of net long-term capital gains, will be taxable to
shareholders as ordinary income and subject to withholding in the case of
non-U.S. shareholders. In addition, in order to requalify for taxation as a
regulated investment company that is accorded special tax treatment, the Fund
may be required to recognize unrealized gains, pay substantial taxes and
interest on such gains, and make certain substantial distributions.
REDEMPTION OF SHARES
The right of redemption is generally described in the Prospectus. The
Trust may suspend the right of redemption during any period when (a) the New
York Stock Exchange is closed for other than weekends or holidays or trading
thereon is restricted under conditions set forth by the Securities and Exchange
Commission ("SEC"); (b) the SEC has by order permitted such suspension; or (c)
an emergency as defined by the rules of the SEC exists making disposal of
portfolio securities or valuation of the net assets of the Fund not reasonably
practicable.
SYSTEMATIC WITHDRAWAL PLANS
Eligible shareholders who wish to receive a fixed amount periodically
may elect to participate in a Systematic Withdrawal Plan. A shareholder whose
account in the Fund contains shares worth $5,000 or more may elect to receive
automatic payments of $100 or more each quarter. A shareholder whose account in
the Fund contains at least $10,000 worth of shares may elect to receive monthly
payments of $100 or more.
Amounts paid under the plan are derived from the proceeds of redemption
of shares held in the shareholder's account. Under the plan, all dividends and
capital gains distributions must be reinvested in shares of the Fund. All shares
obtained through reinvestment and all shares held under the plan must remain on
deposit with the Fund. If redemptions for these periodic payments exceed
distributions reinvested in an account, such redemptions will reduce or possibly
exhaust the number of shares in the account. The minimum withdrawal amounts have
been established for administrative convenience and should not be considered as
recommended for all investors. For tax purposes, shareholders may realize a
capital gain or loss on each payment.
The plan is administered by the Trust without separate charge to the
participating shareholders and may be terminated at any time by a shareholder or
the Trust.
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES
The Trust is organized as a Massachusetts business trust under the laws
of Massachusetts by an Agreement and Declaration of Trust ("Declaration of
Trust") dated June 24, 1985. A copy of the
16
<PAGE> 381
Declaration of Trust is on file with the Secretary of The Commonwealth of
Massachusetts. The Fund commenced operations on May 31, 1989. The fiscal year
for the Fund ends on the last day of February.
Pursuant to the Declaration of Trust, the Trustees have currently
authorized the issuance of an unlimited number of full and fractional shares of
thirty-nine series, one for the Pelican Fund, and one for each of the following
thirty-eight series, which are offered in separate prospectuses: GMO Intrinsic
Value Fund, GMO Tax-Managed U.S. Small Cap Fund, GMO Asia Fund, GMO Emerging
Country Debt Share Fund, GMO U.S. Core Fund, GMO Tobacco-Free Core Fund, GMO
Value Fund, GMO Growth Fund, GMO U.S. Sector Fund, GMO Small Cap Value Fund, GMO
Small Cap Growth Fund, GMO Fundamental Value Fund, GMO REIT Fund, GMO
Tax-Managed U.S. Equities Fund, GMO International Core Fund, GMO Currency Hedged
International Core Fund, GMO Foreign Fund, GMO International Small Companies
Fund, GMO Japan Fund, GMO Emerging Markets Fund, GMO Evolving Countries Fund,
GMO Global Properties Fund, GMO Tax-Managed International Equities Fund, GMO
Domestic Bond Fund, GMO U.S. Bond/Global Alpha A Fund, GMO U.S. Bond/Global
Alpha B Fund, GMO International Bond Fund, GMO Currency Hedged International
Bond Fund, GMO Global Bond Fund, GMO Emerging Country Debt Fund, GMO Short-Term
Income Fund, GMO Global Hedged Equity Fund, GMO Inflation Indexed Bond Fund, GMO
International Equity Allocation Fund, GMO World Equity Allocation Fund, GMO
Global (U.S.+) Equity Allocation Fund, GMO Global Balanced Allocation Fund and
GMO International Core Plus Allocation Fund. The Trustees have further
authorized the issuance of up to eight classes of shares of the foregoing
series, Class I, Class II, Class III, Class IV, Class V, Class VI, Class VII and
Class VIII Shares. Interests in each portfolio are represented by shares of the
corresponding series. Each share of each series represents an equal
proportionate interest, together with each other share, in the corresponding
series. The shares of such series do not have any preemptive rights. Upon
liquidation of a series shareholders of the corresponding series are entitled to
share pro rata in the net assets of the series available for distribution to
shareholders. The Declaration of Trust also permits the Trustees to charge
shareholders directly for custodial, transfer agency and servicing expenses, but
there is no present intention to make such charges.
The Declaration of Trust also permits the Trustees, without shareholder
approval, to subdivide any series of shares into various sub-series of shares
with such dividend preferences and other rights as the Trustees may designate.
While the Trustees have no current intention to exercise this power, it is
intended to allow them to provide for an equitable allocation of the impact of
any future regulatory requirements which might affect various classes of
shareholders differently. The Trustees may also, without shareholder approval,
establish one or more additional separate portfolios for investments in the
Trust or merge two or more existing portfolios. Shareholders' investments in
such a portfolio would be evidenced by a separate series of shares.
The Declaration of Trust provides for the perpetual existence of the
Trust. The Trust, however, may be terminated at any time by vote of at least
two-thirds of the outstanding shares of the Trust. While the Declaration of
Trust further provides that the Trustees may also terminate the Trust upon
written notice to the shareholders, the 1940 Act requires that the Trust receive
the authorization of a majority of its outstanding shares in order to change the
nature of its business so as to cease to be an investment company.
17
<PAGE> 382
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding shares of the Fund as of June 1, 1999:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Name Address % Ownership
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
The Chase Manhattan Bank, as Attn: Karen Rice 48.87
Directed Master Trustee, Corning 3 Metrotech Center, Fifth Floor
Investment Plan Trust New York, NY 11201-3800
- ------------------------------------------------------------------------------------------------------------
Nabank & Co. Attn: Trust Securities
P.O. Box 2180
Tulsa, OK 74101-2180 9.13
- ------------------------------------------------------------------------------------------------------------
Egleston Children's Hospital Attn: John Hatley 7.52
375 Dekalb Industrial Way
Decatur, GA 30030-2205
- ------------------------------------------------------------------------------------------------------------
Hartwick College Oyaron Hill
Oneonta, NY 13820 5.57
- ------------------------------------------------------------------------------------------------------------
</TABLE>
As depicted in the above chart, certain shareholder(s) may hold greater
than 25% of the outstanding shares of the Pelican Fund. As a result, such
shareholders could be deemed to "control" the Fund as such term is defined in
the 1940 Act.
VOTING RIGHTS
Shareholders are entitled to one vote for each full share held (with
fractional votes for fractional shares held) and will vote (to the extent
provided herein) in the election of Trustees and the termination of the Trust
and on other matters submitted to the vote of shareholders. Shareholders vote by
individual Fund on all matters except (i) when required by the 1940 Act, shares
shall be voted in the aggregate and not by individual Fund and (ii) when the
Trustees have determined that the matter affects only the interests of one or
more Fund, then only shareholders of such Fund shall be entitled to vote
thereon. Shareholders of one Fund shall not be entitled to vote on matters
exclusively affecting another Fund, such matters including, without limitation,
the adoption of or change in the investment objectives, policies or restrictions
of the other Fund and the approval of the investment advisory contracts of the
other Fund.
18
<PAGE> 383
There will normally be no meetings of shareholders for the purpose of
electing Trustees except that in accordance with the 1940 Act (i) the Trust will
hold a shareholders' meeting for the election of Trustees at such time as less
than a majority of the Trustees holding office have been elected by
shareholders, and (ii) if, as a result of a vacancy in the Board of Trustees,
less than two-thirds of the Trustees holding office have been elected by the
shareholders, that vacancy may only be filled by a vote of the shareholders. In
addition, Trustees may be removed from office by a written consent signed by the
holders of two-thirds of the outstanding shares and filed with the Trust's
custodian or by a vote of the holders of two-thirds of the outstanding shares at
a meeting duly called for the purpose, which meeting shall be held upon the
written request of the holders of not less than 10% of the outstanding shares.
Upon written request by the holders of at least 1% of the outstanding shares
stating that such shareholders wish to communicate with the other shareholders
for the purpose of obtaining the signatures necessary to demand a meeting to
consider removal of a Trustee, the Trust has undertaken to provide a list of
shareholders or to disseminate appropriate materials (at the expense of the
requesting shareholders). Except as set forth above, the Trustees shall continue
to hold office and may appoint successor Trustees. Voting rights are not
cumulative.
No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the Trust except (i)
to change the Trust's name or to cure technical problems in the Declaration of
Trust and (ii) to establish, designate or modify new and existing series or
sub-series of Trust shares or other provisions relating to Trust shares in
response to applicable laws or regulations.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Declaration of Trust provides for indemnification out of
all the property of the relevant Fund for all loss and expense of any
shareholder of that Fund held personally liable for the obligations of the
Trust. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is considered remote since it is limited to circumstances
in which the disclaimer is inoperative and the Fund of which he is or was a
shareholder would be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing in
the Declaration of Trust protects a Trustee against any liability to which the
Trustee would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office. The By-laws of the Trust provide for indemnification by the Trust of
the Trustees and the officers of the Trust except with respect to any matter as
to which any such person did not act in good faith in the reasonable belief that
his action was in or not opposed to the best interests of the Trust. Such person
may not be indemnified against any liability to the Trust or the Trust
shareholders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
19
<PAGE> 384
PERFORMANCE INFORMATION
The Fund may from time to time include its total return in
advertisements or in information furnished to present or prospective
shareholders.
Quotations of average annual total return for the Fund will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Fund over periods of one, three, five, and ten
years (or for such shorter period as shares of the Fund have been offered),
calculated pursuant to the following formula: P (1 + T)n = ERV (where P = a
hypothetical initial payment of $10,000, T = the average annual total return, n
= the number of years, and ERV = the ending redeemable value of a hypothetical
$10,000 payment made at the beginning of the period). All total return figures
reflect the deduction of a proportional share of Fund expenses on an annual
basis, and assume that all dividends and distributions are reinvested when paid.
Quotations of total return may also be shown for other periods. The Fund may
also, with respect to certain periods of less than one year, provide total
return information for that period that is unannualized. Any such information
would be accompanied by standardized total return information. The Fund's total
return is not fixed or guaranteed and the Fund's principal is not insured.
Investment performance quotations should not be considered to be representations
of the performance for any period in the future.
The table below sets forth the average annual total return for the
Pelican Fund for the one, three, five and ten year periods ending February 28,
1999, and for the period from the commencement of the Fund's operations until
February 28, 1999:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
INCEPTION DATE 1 YEAR 3 YEAR 5 YEAR 10 YEAR INCEPTION TO
FUND (%) (%) (%) (%) DATE (%)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Pelican Fund 5/31/89 3.89% 16.52% 17.03% N/A 13.91%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Fund may also from time to time advertise net return data for each
month and calendar quarter since the Fund's inception. Monthly and quarterly
return data is calculated by linking daily performance for the Fund (current net
asset value divided by prior net asset value), and assumes reinvestment of all
dividends and gains. All quotations of monthly and quarterly returns would be
accompanied by standardized total return information. Information relating to
the Pelican Fund's return for a particular month or calendar quarter is provided
to permit evaluation of the Fund's performance and volatility in different
market conditions, and should not be considered in isolation.
From time to time, in advertisements, in sales literature, or in
reports to shareholders, the Fund may compare its respective performance to that
of other mutual funds with similar investment objectives and to stock or other
relevant indices. For example, the Fund may compare its total return to rankings
prepared by Morningstar, Inc. , Lipper Analytical Services, Inc., widely
recognized independent services which monitor mutual fund performance; the
Standard & Poor's 500 Stock Index ("S&P 500"), an index
20
<PAGE> 385
of unmanaged groups of common stock; or the Dow Jones Industrial Average, a
recognized unmanaged index of common stocks of 30 industrial companies listed on
the New York Stock Exchange.
Performance rankings and listings reported in national financial
publications, such as Money Magazine, Barron's and Changing Times, may also be
cited (if the Fund is listed in any such publication) or used for comparison, as
well as performance listings and rankings from various other sources including
No Load Fund X, CDA Investment Technologies, Inc., Weisenberger Investment
Companies Service, and Donoghue's Mutual Fund Almanac.
21
<PAGE> 386
INVESTMENT GUIDELINES
PERMITTED INVESTMENTS
EQUITY SECURITIES:
Common stocks
Preferred stocks
Convertible securities
Warrants or rights
- - At least 65% of total assets will be invested in common stocks and
securities convertible into common stocks.
- - Up to 25% of total assets may be invested in foreign securities
(generally equity securities traded in principal European and Pacific
Basin markets).
OTHER SECURITIES:
Depository Receipts: ADRs, GDRs, EDRs
Foreign issues traded in the U.S. and abroad
Illiquid Securities
144A Securities
Equity Futures and Related Options
Exchange-traded and OTC Options on
Securities and Indexes (including writing covered options)
Debt securities
Short-term notes
Private placements
CASH AND MONEY MARKET INSTRUMENTS
- - Any short-term assets will be invested in cash or High Quality Money
Market Instruments including securities issued by the U.S. government
and agencies thereof, bankers' acceptances, commercial paper, bank
certificates of deposit and repurchase agreements.
FOREIGN CURRENCY TRANSACTIONS
- - For hedging purposes or in connection with the settlement of portfolio
transactions, the Fund may purchase and sell foreign currencies and
forward foreign currency contracts.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN
- - Except for short-term credits necessary for clearance of transactions
BORROWING MONEY
- - Except that the Fund may borrow up to 10% of its total assets from
banks temporarily for the payment of redemptions or settlement of
securities transactions, but not as a leveraged investment strategy.
The Fund may not purchase securities if borrowing exceeds 5% of total
assets.
INVESTING IN OTHER OPEN-END INVESTMENT COMPANIES
- - Except as part of a plan of merger or consolidation
UNDERWRITING SECURITIES
- - Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of portfolio
investments.
22
<PAGE> 387
Selling uncovered put and call options on securities or indexes
Selling securities short
Lending funds or other assets
Purchasing securities on margin
Engaging in foreign currency transactions for speculative purposes
Investing directly in Real Estate
Investing in Non-Financial Commodity Contracts
Participating in Directed Brokerage Arrangements
Making investments for the purpose of gaining control of a company's management
Participating in Soft Dollar Arrangements
RESTRICTIONS AND LIMITATIONS
ILLIQUID SECURITIES
- - No more than 15% of the Fund's net assets will be invested in illiquid
securities. This includes restricted securities (except that some 144A
securities may be considered liquid by GMO if there is sufficient
market depth), repurchase agreements maturing in greater than 7 days,
and other securities determined by GMO not to be readily marketable at
their carried value.
PUT AND CALL OPTIONS
- - The Fund will not invest more than 5% of its assets in put options.
- - The Fund will not write covered call options on more than 25% of total
assets.
- - Options purchased or written will be limited to options traded on
national exchanges or in the OTC market (OTC options shall not exceed
10% of the Fund's assets).
LOWER-RATED SECURITIES
- - The Fund will not invest more than 5% of its assets in lower-rated
securities (junk bonds).
INVESTMENT IN INSURANCE COMPANIES
- - The Fund will not purchase more than 10% of the total outstanding
voting stock of any insurance company (including foreign insurance
companies).
INVESTMENT IN SECURITIES ISSUED BY BROKERS, DEALERS, UNDERWRITERS AND
INVESTMENT ADVISERS
- - Equity: The Fund will not purchase more than 5% of any class of stock
of a broker, dealer, underwriter or investment adviser.
- - Debt: The Fund may not purchase more than 10% of any such company's
total outstanding debt in the aggregate.
- - Investment Limits: No more than 5% of the Fund's total assets will be
invested in the securities of a single broker, dealer, underwriter or
investment adviser.
- - This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION
- - Except for U.S. Government securities, cash obligations of domestic
banks, and money market instruments, the Fund will not invest more than
5% of its assets in the securities of a single issuer.
- - The Fund will not hold more than 10% of the voting securities of any
issuer.
CONCENTRATION
No more than 25% of the Fund's assets will be invested in securities of issuers
in any one industry.
23
<PAGE> 388
FINANCIAL STATEMENTS
The report of PricewaterhouseCoopers LLP and the Fund's audited
Financial Statements for the year ended February 28, 1999 are incorporated by
reference to the Fund's Annual Report filed with the Securities and Exchange
Commission on May 10, 1999 pursuant to Section 30(d) of the Investment Company
Act of 1940, as amended, and the rules promulgated thereunder.
SPECIMEN PRICE MAKE-UP
Following is a computation of the total offering price per share for
the Pelican Fund based upon its net asset value and shares of beneficial
interest outstanding at the close of business on February 28, 1999:
<TABLE>
<S> <C>
Net Assets at Value (Equivalent to $15.73
per share based on 14,235,537 shares) ......................... $223,936,590
Offering Price................................................... $ 15.73
</TABLE>
24
<PAGE> 389
GMO TRUST
PART C. OTHER INFORMATION
Item 23. EXHIBITS
(a). Amended and Restated Agreement and Declaration of Trust.(1)
(b). Amended and Restated By-laws of the Trust.(1)
(c). Please refer to Article 5 of the Trust's Amended and Restated
Declaration of Trust, which is hereby incorporated by reference.
(d). 1. Form of Management Contracts between the Trust, on behalf of each
of its GMO U.S. Core Fund (formerly "GMO Core Fund"), GMO Tobacco-Free
Core Fund, GMO Value Fund (formerly "GMO Value Allocation Fund"), GMO
Fundamental Value Fund, GMO Growth Fund (formerly "GMO Growth
Allocation Fund"), GMO Small Cap Value Fund (formerly "GMO Core II
Secondaries Fund"), GMO Small Cap Growth Fund, GMO REIT Fund, GMO
International Core Fund, GMO Currency Hedged International Core Fund,
GMO Foreign Fund, GMO International Small Companies Fund, GMO Japan
Fund, GMO Emerging Markets Fund, GMO Evolving Countries Fund, GMO Asia
Fund, GMO Global Properties Fund, GMO Global Hedged Equity Fund, GMO
Domestic Bond Fund, GMO U.S. Bond/Global Alpha A Fund (formerly "GMO
Global Fund"), GMO U.S. Bond/Global Alpha B Fund, GMO International
Bond Fund, GMO Currency Hedged International Bond Fund (formerly "GMO
SAF Core Fund"), GMO Global Bond Fund, GMO Emerging Country Debt Fund,
GMO Short-Term Income Fund, GMO Inflation Indexed Bond Fund, GMO
Intrinsic Value Fund; GMO Tax-Managed U.S. Small Cap Fund; GMO
International Equity Allocation Fund, GMO World Equity Allocation
Fund, GMO Global (U.S.+) Equity Allocation Fund, GMO Global Balanced
Allocation Fund, GMO U.S. Sector Fund (formerly "GMO U.S. Sector
Allocation Fund"), GMO International Core Plus Allocation Fund,
Pelican Fund, GMO Tax-Managed U.S. Equities Fund and GMO Tax-Managed
International Equities Fund, and Grantham, Mayo, Van Otterloo & Co.
("GMO");(1)
2. Form of Consulting Agreements between GMO, on behalf of each of its
GMO Emerging Markets Fund, GMO Evolving Countries Fund and GMO Asia
Fund, and Dancing Elephant, Ltd.;(1)
- -------------------
(1) = Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
<PAGE> 390
(e). None.
(f). None.
(g). 1. Custodian Agreement (the "IBT Custodian Agreement") among the
Trust, on behalf of its GMO U.S. Core Fund (formerly "GMO Core Fund"),
GMO Currency Hedged International Bond Fund (formerly "GMO SAF Core
Fund"), GMO Value Fund (formerly "GMO Value Allocation Fund"), GMO
Growth Fund (formerly "GMO Growth Allocation Fund"), and GMO
Short-Term Income Fund, GMO and Investors Bank & Trust Company
("IBT");(1)
2. Custodian Agreement (the "BBH Custodian Agreement") among the
Trust, on behalf of its GMO International Core Fund and GMO Japan
Fund, GMO and Brown Brothers Harriman & Co. ("BBH");(1)
3. Custodian Agreement (the "SSB Custodian Agreement") among the
Trust, on behalf of its Pelican Fund, GMO and State Street Bank and
Trust Company ("SSB");(1)
4. Forms of Letter Agreements with respect to the IBT Custodian
Agreement among the Trust, on behalf of its GMO U.S. Bond/Global Alpha
B Fund, GMO Tobacco-Free Core Fund, GMO Fundamental Value Fund, GMO
U.S. Sector Fund (formerly "GMO U.S. Sector Allocation Fund"), GMO
International Bond Fund, GMO Small Cap Value Fund (formerly "GMO Core
II Secondaries Fund"), GMO Emerging Country Debt Fund, GMO Domestic
Bond Fund, GMO REIT Fund, GMO Global Bond Fund, GMO International
Equity Allocation Fund, GMO Global (U.S.+) Equity Allocation Fund, GMO
World Equity Allocation Fund, GMO Global Balanced Allocation Fund, GMO
International Core Plus Allocation Fund, GMO Emerging Country Debt
Share Fund, GMO Small Cap Growth Fund, GMO U.S. Bond/Global Alpha A
Fund (formerly "GMO Global Fund"), GMO Tax-Managed U.S. Equities Fund,
GMO Inflation Indexed Bond Fund, GMO Intrinsic Value Fund and GMO
Tax-Managed U.S. Small Cap Fund, GMO and IBT;(1)
- -------------------
(1) = Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
-2-
<PAGE> 391
5. Forms of Letter Agreements with respect to the BBH Custodian
Agreement among the Trust, on behalf of its GMO Emerging Markets Fund,
GMO Currency Hedged International Core Fund, GMO Evolving Countries
Fund, GMO Global Hedged Equity Fund, GMO International Small Companies
Fund, GMO Foreign Fund, GMO Asia Fund, GMO Tax-Managed International
Equities Fund and GMO Global Properties Fund, GMO and BBH;(1)
(h). 1. Transfer Agency Agreement among the Trust, on behalf of its GMO
U.S. Core Fund (formerly "GMO Core Fund"), GMO Currency Hedged
International Bond Fund, GMO Growth Fund (formerly "GMO Growth
Allocation Fund"), GMO Value Fund (formerly "GMO Growth Allocation
Fund"), GMO Short-Term Income Fund, GMO International Core Fund and
GMO Japan Fund, GMO and IBT;(1)
2. Forms of Letter Agreements to the Transfer Agency Agreement among
the Trust, on behalf of each of its GMO Tobacco-Free Core Fund, GMO
Fundamental Value Fund, GMO Small Cap Value Fund (formerly "GMO Core
II Secondaries Fund"), GMO Small Cap Growth Fund, GMO REIT Fund, GMO
Currency Hedged International Core Fund, GMO Foreign Fund, GMO
International Small Companies Fund, GMO Emerging Markets Fund, GMO
Evolving Countries Fund, GMO Asia Fund, GMO Global Properties Fund,
GMO Global Hedged Equity Fund, GMO Domestic Bond Fund, GMO U.S.
Bond/Global Alpha A Fund (formerly "GMO Global Fund"), GMO U.S.
Bond/Global Alpha B Fund, GMO International Bond Fund, GMO Global Bond
Fund, GMO Emerging Country Debt Fund, GMO Inflation Indexed Bond Fund,
GMO Emerging Country Debt Share Fund, Pelican Fund, GMO International
Equity Allocation Fund, GMO World Equity Allocation Fund, GMO Global
(U.S.+) Equity Allocation Fund, GMO Global Balanced Allocation Fund,
GMO U.S. Sector Fund (formerly "GMO U.S. Sector Allocation Fund"), GMO
International Core Plus Allocation Fund, GMO Tax-Managed U.S. Equities
Fund, GMO Tax-Managed International Equities Fund, GMO Intrinsic Value
Fund and GMO Tax-Managed U.S. Small Cap Fund, GMO and IBT.(1)
3. Form of Notification of Obligation to Reimburse Certain Fund
Expenses by Grantham, Mayo, Van Otterloo & Co. LLC to the Trust.(1)
4. Form of Amended and Restated Servicing Agreement between the Trust,
on behalf of certain Funds, and Grantham, Mayo, Van Otterloo & Co.
LLC.(1)
- -------------------
(1) = Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
-3-
<PAGE> 392
(i). Opinion and Consent of Ropes & Gray.(1)
(j). Consent of PricewaterhouseCoopers LLP -- Exhibit 1
(k). Financial Statements: See "Financial Highlights" in each Prospectus
and "Financial Statements" in each Statement of Additional
Information. The Financial Statements required pursuant to Item 22 of
Form N-1A are hereby incorporated by reference to the Annual Reports
to shareholders previously filed with the Commission on May 10, 1999
by means of EDGAR pursuant to the requirements of Section 30(d) of the
1940 Act and the rules promulgated thereunder.
(l). None.
(m). None.
(n). Financial Data Schedules -- Not Applicable.
(o). Form of Rule 18f-3 Multiclass Plan.(1)
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
Item 25. INDEMNIFICATION
See Item 27 of Pre-Effective Amendment No. 1 which is hereby
incorporated by reference.
Item 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
See Item 28 of Pre-Effective Amendment No. 1 which is hereby
incorporated by reference.
- -------------------
(1) = Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
-4-
<PAGE> 393
Item 27. PRINCIPAL UNDERWRITERS
Not Applicable.
Item 28. LOCATION OF ACCOUNTS AND RECORDS
See Item 30 of Pre-Effective Amendment No. 1 which is hereby
incorporated by reference.
Item 29. MANAGEMENT SERVICES
Not Applicable.
Item 30. UNDERTAKINGS
None.
- -------------------
(1) = Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
-5-
<PAGE> 394
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 (the "Securities
Act") and the Investment Company Act of 1940 (the "1940 Act"), the Registrant,
GMO Trust, certifies that it meets all of the requirements for effectiveness of
this Registration Statement under Rule 485(b) under the Securities Act, has duly
caused this Post-Effective Amendment No. 50 to the Trust's Registration
Statement under the Securities Act and Post-Effective Amendment No. 57 under the
1940 Act, to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Boston and The Commonwealth of Massachusetts, on the
29th day of June, 1999.
GMO Trust
By: R. JEREMY GRANTHAM*
----------------------------------
R. Jeremy Grantham
President - Quantitative;
Principal Executive Officer;
Title: Trustee
Pursuant to the Securities Act of 1933, this Post-Effective Amendment No. 50
to the Trust's Registration Statement under the Securities Act has been signed
below by the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
- ---------- ----- ----
R. JEREMY GRANTHAM* President - Quantitative; Principal June 29, 1999
- ------------------- Executive Officer; Trustee
R. Jeremy Grantham
SUSAN RANDALL HARBERT* Treasurer; Principal Financial and June 29, 1999
- ---------------------- Accounting Officer
Susan Randall Harbert
HARVEY R. MARGOLIS* Trustee June 29, 1999
- -------------------
Harvey R. Margolis
JAY O. LIGHT* Trustee June 29, 1999
- -------------
Jay O. Light
* By: /S/ WILLIAM R. ROYER
-------------------------------
William R. Royer
Attorney-in-Fact
<PAGE> 395
POWER OF ATTORNEY
We, the undersigned officers and trustees of GMO Trust, a Massachusetts
business trust, hereby severally constitute and appoint William R. Royer our
true and lawful attorney, with full power to him to sign for us, and in our
names and in the capacities indicated below, any and all amendments to the
Registration Statement filed with the Securities and Exchange Commission for the
purpose of registering shares of beneficial interest of GMO Trust, hereby
ratifying and confirming our signatures as they may be signed by our said
attorneys on said Registration Statement.
Witness our hands and common seal on the date set forth below.
(Seal)
SIGNATURE TITLE DATE
- --------- ----- ----
President-Domestic;
Principal Executive
/S/ R. Jeremy Grantham Officer; Trustee March 12, 1996
- -------------------------
R. Jeremy Grantham
/S/ Eyk H.A. Van Otterloo President-International March 12, 1996
- -------------------------
Eyk H.A. Van Otterloo
/S/ Harvey Margolis Trustee March 12, 1996
- -------------------------
Harvey Margolis
Treasurer; Principal
Financial and
/S/ Kingsley Durant Accounting Officer March 12, 1996
- -------------------------
Kingsley Durant
<PAGE> 396
POWER OF ATTORNEY
I, the undersigned trustee of GMO Trust, a Massachusetts business trust,
hereby constitute and appoint William R. Royer my true and lawful attorney, with
full power to him to sign for me, and in my names and in the capacity indicated
below, any and all amendments to the Registration Statement filed with the
Securities and Exchange Commission for the purpose of registering shares of
beneficial interest of GMO Trust, hereby ratifying and confirming my signature
as it may be signed by my said attorney on said Registration Statement.
Witness my hand and common seal on the date set forth below.
(Seal)
SIGNATURE TITLE DATE
- --------- ----- ----
/S/ JAY O. LIGHT Trustee May 23, 1996
- -------------------------
Jay O. Light
<PAGE> 397
POWER OF ATTORNEY
I, the undersigned officer of GMO Trust, a Massachusetts business trust,
hereby constitute and appoint William R. Royer my true and lawful attorney, with
full power to him to sign for me, and in my name and in the capacity indicated
below, any and all amendments to the Registration Statement filed with the
Securities and Exchange Commission for the purpose of registering shares of
beneficial interest of GMO Trust, hereby ratifying and confirming my signature
as it may be signed by my said attorney on said Registration Statement.
Witness my hand and common seal on the date set forth below.
(Seal)
SIGNATURE TITLE DATE
- --------- ----- ----
/S/ SUSAN RANDALL HARBERT Treasurer; Principal April 29, 1999
- ------------------------- Financial and Accounting
Susan Randall Harbert Officer
<PAGE> 398
EXHIBIT INDEX
GMO TRUST
EXHIBIT NO. TITLE OF EXHIBIT
- ----------- ----------------
1 Consent of PricewaterhouseCoopers LLP
<PAGE> 1
EXHIBIT 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 50 under the Securities Act of 1933 (No. 57 under the Investment
Company Act of 1940) to the Registration Statement on Form N-1A of GMO Trust of
our reports dated April 12, April 16, and April 22, 1999 relating to the
financial statements and financial highlights appearing in the February 28, 1999
annual reports to shareholders of the 36 (thirty-six) funds then comprising the
Trust, which are also incorporated by reference in the Registration Statement.
We also consent to the references to us under the heading "Financial Highlights"
in the Prospectuses of GMO Trust, GMO Tax-Managed U.S. Equities Fund/GMO
Tax-Managed International Equities Fund and Pelican Fund, under the headings
"Investment Advisory and Other Services--Independent Accountants" and "Financial
Statements" in the Statements of Additional Information of GMO Trust and GMO
Tax-Managed U.S. Equities Fund/GMO Tax-Managed International Equities Fund and
under the headings "Management Arrangements--Independent Accountants" and
"Financial Statements" in the Statement of Additional Information for Pelican
Fund, all of which constitute parts of such Registration Statement.
PricewaterhouseCoopers LLP
Boston, Massachusetts
June 25, 1999
