<PAGE> 1
File Nos. 2-98772
811-4347
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON AUGUST 3, 1999
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 52 [ X ]
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
Amendment No. 59 [ X ]
GMO TRUST
(Exact Name of Registrant as Specified in Charter)
40 Rowes Wharf, Boston, Massachusetts 02110
(Address of principal executive offices)
617-330-7500
(Registrant's telephone number, including area code)
with a copy to:
R. Jeremy Grantham J.B. Kittredge, Esq.
GMO Trust Ropes & Gray
40 Rowes Wharf One International Place
Boston, Massachusetts 02110 Boston, Massachusetts 02110
(Name and address of agents for service)
It is proposed that this filing will become effective:
[ ] Immediately upon filing pursuant to paragraph (b), or
[ ] 60 days after filing pursuant to paragraph (a)(1), or
[ ] On _________________, pursuant to paragraph (b), or
[ X ] 75 days after filing pursuant to paragraph (a)(2), of Rule 485.
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This filing relates solely to the GMO Tax-Managed U.S. Small Cap
Fund; it is intended that no information relating to any other series of GMO
Trust is amended or superseded hereby.
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GMO TAX-MANAGED U.S. SMALL CAP FUND
40 Rowes Wharf, Boston, Massachusetts 02110
The GMO TAX-MANAGED U.S. SMALL CAP FUND (the "FUND") is one of
thirty-eight 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 the Fund.
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 OCTOBER 18, 1999
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TABLE OF CONTENTS
SUMMARY OF FUND OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES.................1
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES.................................2
SUMMARY OF PRINCIPAL RISKS....................................................3
FEES AND EXPENSES.............................................................6
FUND BENCHMARKS...............................................................7
HOW TO BUY SHARES.............................................................7
HOW TO REDEEM SHARES..........................................................9
CLASSES OF SHARES............................................................10
DISTRIBUTIONS................................................................11
DETERMINATION OF NET ASSET VALUE.............................................11
SPECIAL INFORMATION ON REDEMPTIONS IN KIND...................................12
TAXES........................................................................12
MANAGEMENT OF THE TRUST......................................................13
ADDITIONAL INFORMATION...............................................Back Cover
SHAREHOLDER INQUIRIES................................................Back Cover
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SUMMARY OF FUND OBJECTIVE AND
PRINCIPAL INVESTMENT STRATEGIES
This summary describes the Fund's investment objective and principal
investment strategies. The 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 the 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.
In the discussion that follows, it is noted that the Fund will "invest
primarily in" the equity securities of companies included in, or with total
market capitalizations similar to those included in, the Russell 2500 Index.
Investors should understand that this Prospectus uses the word "invest" to mean
not only direct investment in such securities but also indirect investment in or
exposure to such securities through the use of derivatives and related
instruments.
The Fund is managed and/or meant to be measured relative to a specified
benchmark or index. While the Fund may be managed or measured relative to this
index, the Fund is not managed as an "index fund" or "index-plus fund," and the
actual composition of the Fund's portfolio may differ substantially from that of
the index. The benchmark or index against which the Manager measures the Fund's
performance is the Russell 2500 Index, modified by GMO to reflect after-tax
results. The Manager may change the Fund's benchmark or index from time to time.
Some general information about the Russell 2500 Index is provided under "Fund
Benchmarks" later in this Prospectus.
The 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,
the Fund's investment objective and policies may be changed by the Trustees
without shareholder approval.
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GMO TAX-MANAGED U.S. SMALL CAP FUND
FUND CODES
Fund Inception Date: 5/19/99 Ticker Symbol Cusip
Class III
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Tax-Managed U.S. Small Cap Fund seeks to maximize
after-tax total return through investment in a portfolio of common stocks of
smaller companies primarily traded in the U.S. The Fund's current benchmark is
the Russell 2500 Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities of
companies included in, or with total market capitalizations similar to those
companies included in, the Russell 2500 Index ("smaller 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 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 smaller companies 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.
No performance information is included in this section because the Fund
commenced operations in 1999.
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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, and you can lose money
by investing in the Fund. Factors that may affect the 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 principal risks because
the types of investments made by the Fund change over time. The "Investment
Guidelines" for the Fund set forth in the Statement of Additional Information
include more information about the Fund and its investments. Copies of the
Investment Guidelines and of the Statement of Additional Information are
available free of charge by contacting the Manager. 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.
- 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 securities.
EQUITY SECURITIES. A principal risk of the 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 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.
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 in managing the Fund, the Fund 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. The Fund may invest to a significant extent
in growth securities, and therefore the Fund is 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 the Fund may be prevented from selling particular
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securities at the price at which the Fund values them. Because the Fund invests
principally in securities of companies with smaller market capitalizations,
liquidity risk may be particularly pronounced for the Fund.
- SMALLER COMPANY RISK. Market risk and liquidity risk may be
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. Because the Fund invests primarily in
the securities of smaller companies, these risks may be particularly pronounced
for the Fund.
- DERIVATIVES RISK. The Fund 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 Fund may use derivatives for many purposes, including for
hedging and as a substitute for direct investment in securities or other assets.
The Fund may also use derivatives as a way to efficiently adjust the exposure of
the Fund 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 Fund, 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 the
Fund will engage in these transactions to reduce exposure to other risks when
that would be beneficial.
- 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 Fund is not "diversified" within
the meaning of the 1940 Act. This means the Fund is permitted to invest in a
relatively small number of issuers with greater concentration of risk.
- LEVERAGING RISK. The 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, the Fund may invest in derivatives and may enter into
reverse repurchase agreements. While the Fund does not intend to use derivatives
to create net exposure to securities, currencies or other assets in amounts
greater than the total assets of the Fund, the Fund 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 Fund may perform as if it were leveraged.
The Fund may also 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
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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 Fund does not expect to invest in fixed income securities,
the Fund is nonetheless exposed to credit risk because it may make substantial
use of OTC derivatives (such as swap contracts) and because it may engage in the
lending of Fund securities or use of repurchase agreements.
- 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 indicated above, however, the Fund is generally not
subject to the risk of market timing because it generally stays fully invested
in smaller capitalization domestic equity securities and related derivative
instruments.
- 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 Fund's 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
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 markets generally.
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FEES AND EXPENSES
This table describes the fees and expenses you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
PURCHASE AND REDEMPTION FEES ANNUAL FUND OPERATING EXPENSES
(fees paid directly to Fund at (expenses that are deducted from Fund assets)
purchase or redemption)
Cash
Purchase Total NET
Premium Other Annual Expense ANNUAL
(as a % of Redemption Management Shareholder Expenses(3) Operating Reimbursement(4) OPERATING
amount Fee Fee Service Fee(2) Expenses EXPENSES
invested)(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class III 0.50 None 0.55% 0.15% 0.20% 0.70%
Shares 0.20% 0.90%
</TABLE>
NOTES TO FEES AND EXPENSES
1. Purchase premiums and redemption fees generally apply only to cash
transactions. No purchase premium is charged with respect to in-kind
purchases of Fund shares. 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 purchase premium 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 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 purchase will not require a securities transaction,
or (iii) in certain other instances (not including offsetting
transactions) where it is compelling to the Manager that the purchase
or redemption will not result in transaction costs to the Fund. Any
waiver with respect to this Fund must be arranged in advance with the
Manager.
2. 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.
3. Based on estimated amounts for the Fund's first fiscal year.
4. The Manager has contractually agreed to reimburse the Fund with respect
to certain Fund expenses through 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
transaction fees, extraordinary, non-recurring and certain other
unusual expenses (including taxes), securities lending fees and
expenses and transfer taxes) would otherwise exceed 0.55% of the Fund's
daily net assets.
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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. The example is
for comparative purposes only; it does not represent past or future expenses or
performance, and your actual expenses and performance may be higher or lower.
The expenses shown apply whether or not you redeem your shares at the end of
each period.
<TABLE>
<CAPTION>
TAX-MANAGED 1 YEAR 3 YEARS
U.S. SMALL CAP FUND (AFTER REIMBURSEMENT)
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<S> <C> <C>
Class III Shares $121 $316
</TABLE>
FUND BENCHMARKS
Some general information about the benchmarks referred to in this
Prospectus is provided in the table below.
<TABLE>
<CAPTION>
NAME SPONSOR OR PUBLISHER DESCRIPTION
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Russell 2500 Index Frank Russell Company Independently maintained and published index composed
of the 2,500 smallest companies in the Russell 3000
Index (which in turn measures the performance of the
3,000 largest U.S. companies based on total market
capitalization; these 3,000 companies represent
approximately 98% of the investable U.S. equity
market), which represents approximately 22% of the
total market capitalization of the Russell 3000
Index. As of the latest reconstitution, the average
market capitalization was approximately $931.0
million; the median market capitalization was
approximately $630.0 million. The largest company in
the index had an approximate market capitalization of
$3.7 billion.
[GMO RUSSELL 2500 INDEX [GMO] [ ]
(AFTER TAX)]
</TABLE>
HOW TO BUY SHARES
Shares of the Fund are available only from the Trust and may be
purchased on any day when the New York Stock Exchange is open for business (a
"business day"). Shares may be purchased by sending a purchase order to the
Trust. See "Purchase Procedures" below.
The purchase price of a share of the 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 class to be
purchased. 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. The
purchase premium is set forth under "Fees and Expenses." 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"
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(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 that are reflected in the market price of accepted securities at the time
of valuation become the property of the Fund and must be delivered to the Trust
upon receipt by the investor from the issuer. A gain or loss for federal income
tax purposes may be realized by 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 collect 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 or
submitting a check to the transfer agent 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. 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, a check 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 collect 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 the 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 collect at (617) 346-7646. If a
Purchase Order is mailed to the Trust, it will be acted upon when received.
(d) Payment: All checks must be made payable to the Fund or the Trust and mailed
to Investors Bank & Trust Company, 200 Clarendon Street, Boston, Massachusetts
02116 - Attention: GMO Trust. All Federal funds must be transmitted to Investors
Bank & Trust Company for the account of the Fund. "Federal funds" are monies
credited to Investors Bank & Trust Company's account with the Federal Reserve
Bank of Boston.
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<PAGE> 13
NOTE: The Trust may attempt to process orders for Fund shares that are submitted
less formally than as described above, but, in such cases, the investor should
carefully review confirmations sent by the Trust to verify that the order was
properly executed. The Trust cannot be held responsible for failure to execute
orders or improperly executing orders that are not submitted in accordance with
these procedures.
HOW TO REDEEM SHARES
Shares of the Fund may be redeemed on any business day in cash or in
kind. The redemption price is the net asset value per share next determined
after receipt of the redemption request in "good order." The Fund does not
currently charge any redemption fee.
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 Fund's procedures for valuation described under "Determination of Net
Asset Value." Securities distributed by the Fund in-kind will be selected by the
Manager in light of the Fund's objective and will not generally represent a pro
rata distribution of each security held in the Fund's portfolio. Any in-kind
redemptions will be of readily marketable securities to the extent available.
Investors may incur brokerage charges on the sale of any such securities so
received in payment of redemptions.
Payment on redemption will be made as promptly as possible and in any
event within seven days after the request for redemption is received by the
Trust in "good order." A redemption request is in "good order" if it includes
the exact name in which shares are registered, the investor's account number and
the number of shares or the dollar amount of shares to be redeemed and if it is
signed exactly in accordance with the form of registration. In addition, for a
redemption request to be in "good order" on a particular day, the investor's
request must be received by the Trust by 4:15 p.m. 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.
The Fund may suspend the right of redemption and may postpone payment
for more than seven days when the New York Stock Exchange is closed for other
than weekends or holidays, or if permitted by the rules of the Securities and
Exchange Commission during periods when trading on the Exchange is restricted or
during an emergency which makes it impracticable for the Fund to dispose of its
securities or to fairly determine the value of the net assets of the Fund, or
during any other period permitted by the Securities and Exchange Commission for
the protection of investors. Because the Fund may hold portfolio securities
listed on foreign exchanges which may trade on days on which the New York Stock
Exchange is closed, the net asset value of the Fund's shares may be
significantly affected on days when shareholders have no access to
-9-
<PAGE> 14
the Fund.
CLASSES OF SHARES
The Fund has four classes of Shares, Class I, Class II, Class III, and
Class IV Shares, but currently offers Class III Shares only. 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 the Fund. The following table summarizes the
current eligibility requirements for Class III Shares (subject to the exceptions
noted below) and the Shareholder Service Fees the class will pay under the Plan,
expressed as an annual percentage of the average daily net assets attributable
to Class III Shares:
<TABLE>
<CAPTION>
SHAREHOLDER
TAX-MANAGED U.S. SMALL CAP FUND MINIMUM TOTAL INVESTMENT* SERVICE FEE ("SSF")**
- ------------------------------- ------------------------- ---------------------
<S> <C> <C>
Class III $ 1 million 0.15%
</TABLE>
* The eligibility requirement in the table above is 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 the Fund pay the same investment management
fee.
ELIGIBILITY FOR CLASSES
CLASS III SHARES:
With certain exceptions described below, for a client to be eligible
for 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
-10-
<PAGE> 15
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 the Prospectuses, assets invested in the Pelican Fund will not
be considered when determining a client's Total Investment. For purposes of 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.
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.
DISTRIBUTIONS
The policy of the Fund is to declare and pay distributions of its
dividends and interest quarterly. The 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 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.
DETERMINATION OF NET ASSET VALUE
The net asset value of a share is determined for the Fund once on each
day on which the New York Stock Exchange is open, 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. 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
-11-
<PAGE> 16
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.
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.
SPECIAL INFORMATION ON REDEMPTIONS IN KIND
Investors in the Fund should be aware that it may be more likely to
have a redemption request honored "in kind" than shareholders of other GMO
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 the Fund to make payment wholly or partly in cash, the Fund may pay the
redemption price in whole or in part by a distribution in kind of securities
held by the Fund in lieu of cash. Securities used to redeem Fund shares in kind
will be valued in accordance with the Fund's procedures for valuation described
under "Determination of Net Asset Value." Securities distributed by the Fund in
kind will be selected by the Manager in light of the Fund's objective and will
not generally represent a pro rata distribution of each security held in the
Fund's portfolio. Any in kind redemptions will be of readily marketable
securities to the extent available. Investors may incur brokerage charges on the
sale of any such securities so received in payment of redemptions.
TAXES
The following is a general summary of the principal federal income tax
consequences of investing in the Fund for shareholders who are U.S. citizens,
residents or domestic corporations. Shareholders should consult their own tax
advisors about the precise tax consequences of an investment in the Fund in
light of each shareholder's particular tax situation, including possible
foreign, state, local or other applicable tax laws (including the federal
alternative minimum tax).
- - The 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
-12-
<PAGE> 17
capital gains will be taxable as such (generally at a 20% rate for
noncorporate shareholders). Distributions by the 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.
- - The Fund's investments in foreign securities, if any, may be subject to
foreign withholding taxes on dividends or interest. In that case, the
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, the Fund's investments in foreign securities, 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 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 distribution requirements that apply to entities taxed as
regulated investment companies.
- - 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 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 a greater than 5%
interest in the Manager: R. Jeremy Grantham, Richard A. Mayo, Eyk H.A. Van
Otterloo and Kingsley Durant.
Under a Management Contract with the Fund, the Manager selects and
reviews the Fund's investments and provides executive and other personnel for
the management of the Trust. Pursuant to the Trust's Agreement and Declaration
of Trust, the Board of Trustees supervises the affairs of the Trust as conducted
by the Manager. In the event that the Manager ceases to be the manager of the
Fund, the right of the Trust to use the identifying name "GMO" may be withdrawn.
The 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,
the Manager has contractually agreed to reimburse the Fund and to bear certain
Fund expenses until at least June 30, 2000 in order to limit the Fund's annual
expenses to specified limits (with certain exclusions). These limits and the
terms applicable to them are described under "Fees and Expenses."
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Nardin Baker
have been primarily responsible for the day-to-day management of the Fund since
the Fund's inception in May 1999. 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.
Darnell joined the Manager in 1984, currently serves as a member of the Manager,
and has been engaged by the Manager in portfolio management since 1984. 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.
-13-
<PAGE> 18
Pursuant to a Servicing Agreement with the Trust on behalf of each
class of shares of the Trust's Funds, 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> 19
ADDITIONAL INFORMATION
Additional information about the Fund's investments will be 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 most recent fiscal year. The most recent annual and semi-annual reports, the
Fund's Statement of Additional Information dated October 18, 1999, as revised
from time to time, and the Fund's Investment Guidelines 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 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 Fund 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 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> 20
GMO TRUST
SUPPLEMENT TO GMO TAX-MANAGED U.S. SMALL CAP FUND
PROSPECTUS DATED OCTOBER 18, 1999
MULTIPLE CLASSES - SUPPLEMENTAL INFORMATION
CLASS DESIGNATIONS
In addition to the classes of shares identified in the Prospectus as
being currently offered by the Fund, the Fund 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 and Class IV Shares. Each class of shares of the 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 the 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
<PAGE> 21
Investment as of the previous Determination Date (less the market value of any
account managed by GMO's Domestic Active Division as of the previous
Determination Date), plus contributions made to, and less Large Withdrawals
(defined below) from, any GMO-managed product or account (other than any account
managed by GMO's Domestic Active Division) since the previous Determination Date
(plus the market value of any account managed by GMO's Domestic Active Division
as of the then current Determination Date). For these purposes, "Large
Withdrawals" means the total of all withdrawals made from any GMO-managed
product or account (other than any account managed by GMO's Domestic Active
Division) since the previous Determination Date if such total exceeds 7% of the
sum of the client's Total Investment as of the previous Determination Date and
any contributions to any GMO-managed product or account (other than any account
managed by GMO's Domestic Active Division) made since the previous Determination
Date. For clients that have accounts with GMO as of November 30, 1997, their
Initial Total Investment is the greater of the market value of assets managed by
GMO and its affiliates for the client as of the close of business on November
30, 1997 or on December 31, 1997. For clients establishing a relationship with
GMO on or after December 1, 1997, their Total Investment will be determined as
described above. Assets invested in the Pelican Fund will not be considered when
determining a client's Total Investment.
Investments by defined contribution pension plans (such as 401(k)
plans) will always be invested in the class of shares of the relevant Fund(s)
with the highest Shareholder Service Fee offered from time to time by the
relevant Fund(s) regardless of the size of the investment, and will not be
eligible to convert to other classes.
For Clients with Accounts as of May 31, 1996: Any client of GMO whose
Total Investment as of May 31, 1996 was equal to or greater than $7 million will
remain eligible for Class III Shares indefinitely, provided that such client
does not make a withdrawal or redemption that causes the client's Total
Investment to fall below $7 million. Any client whose Total Investment as of May
31, 1996 was less than $7 million, but greater than $0, will convert to Class II
Shares on July 31, 1997 or such later date as may be determined by the Manager.
For clients with GMO accounts as of May 31, 1996, their initial Total Investment
will equal the market value of all of their GMO investments as of the close of
business on May 31, 1996 and will subsequently be calculated as described in the
preceding section.
Class IV Shares:
Eligibility for Class IV Shares is dependent upon the client meeting
either (i) a minimum "TOTAL FUND INVESTMENT" requirement, which includes only a
client's total investment in the 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 Shares will be the greater of
the market value of all of their investments advised by GMO and its affiliates,
or the market
-2-
<PAGE> 22
value of their investment in the particular Fund, as the case may be, as of the
close of business on November 30, 1997 or December 31, 1997. For clients
establishing a relationship with GMO on or after December 1, 1997, their Total
Fund Investment and Total Investment will be determined as described above.
The Manager will make all determinations as to aggregation of client
accounts for purposes of determining eligibility.
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, investors in Class IV Shares can expect to pay
lower net annual fund operating expenses and earn correspondingly higher returns
than an investors 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 the Fund bear the same level of purchase
premium.
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
-3-
<PAGE> 23
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 the 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 Fund 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.
-4-
<PAGE> 24
SERVICE FEE SCHEDULE
EXHIBIT A
GMO Tax-Managed U.S. Small Cap Fund
CLASS SERVICE FEE
Class I 0.28%
Class II 0.22%
Class III 0.15%
Class IV 0.13%
-5-
<PAGE> 25
GMO TAX-MANAGED U.S. SMALL CAP FUND
STATEMENT OF ADDITIONAL INFORMATION
October 18, 1999
This Statement of Additional Information is not a prospectus. It relates to the
GMO Tax-Managed U.S. Small Cap Fund Prospectus dated October 18, 1999, as
amended from time to time (the "Prospectus"), and should be read in conjunction
therewith. Information from the Prospectus is incorporated by reference into
this Statement of Additional Information. The Prospectus 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> 26
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVE AND POLICIES ......................................... 3
DESCRIPTIONS AND RISKS OF FUND INVESTMENTS ................................ 3
INVESTMENT RESTRICTIONS ................................................... 19
MANAGEMENT OF THE TRUST ................................................... 21
INVESTMENT ADVISORY AND OTHER SERVICES .................................... 23
PORTFOLIO TRANSACTIONS .................................................... 25
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES .......................... 26
VOTING RIGHTS ............................................................. 27
SHAREHOLDER AND TRUSTEE LIABILITY ......................................... 28
BENEFICIAL OWNERS OF 5% OR MORE OF THE FUND'S SHARES ...................... 29
DISTRIBUTIONS ............................................................. 29
TAXES ..................................................................... 29
PERFORMANCE INFORMATION ................................................... 33
INVESTMENT GUIDELINES ..................................................... 36
</TABLE>
2
<PAGE> 27
INVESTMENT OBJECTIVE AND POLICIES
The principal strategies and risks of investing in the GMO Tax-Managed
U.S. Small Cap Fund (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
without shareholder approval.
DESCRIPTIONS AND RISKS OF FUND INVESTMENTS
The following is a detailed description of the various investment
practices in which the Fund may engage and the risks associated with their use.
Please refer to "Fund Objective and Principal Investment Strategies" in the
Prospectus and "Investment Guidelines" in this Statement of Additional
Information for additional information regarding the extent to which the Fund
may engage in the practices described below.
PORTFOLIO TURNOVER
The after-tax impact of portfolio turnover will be considered when making
investment decisions for the Fund.
In any particular year, market conditions may well result in greater rates
than are presently anticipated. High portfolio turnover involves correspondingly
greater brokerage commissions and other transaction costs, which will be borne
directly by the Fund, and may involve realization of capital gains that would be
taxable when distributed to shareholders of the Fund unless such shareholders
are themselves exempt. See "Taxes" in the Prospectus and "Distributions" and
"Taxes" 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.
NON-DIVERSIFIED PORTFOLIO
The Fund is a "non-diversified" fund under the 1940 Act, and as such is
not required to satisfy the "diversified" fund requirement set forth in the 1940
Act. As a non-diversified fund, the Fund is permitted to (but not required to)
invest a higher percentage of its assets in the securities of fewer issuers,
relative to diversified funds. Such concentration could increase the risk of
loss to the Fund should there be a decline in the market value of any one
portfolio security, relative to diversified funds. Investment in a
non-diversified fund may therefore entail greater risks than investment in a
diversified fund. The Fund must, however, meet certain diversification standards
to qualify as a "regulated investment company" under the Internal Revenue Code
of 1986, as amended.
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CERTAIN RISKS OF FOREIGN INVESTMENTS
Investment in foreign issuers or securities traded overseas may involve
certain special risks due to foreign economic, political and legal developments,
including favorable or unfavorable changes in currency exchange rates, exchange
control regulations (including currency blockage), expropriation or
nationalization of assets, imposition of withholding taxes on dividend or
interest payments, and possible difficulty in obtaining and enforcing judgments
against foreign entities. Furthermore, issuers of foreign securities are subject
to different, often less comprehensive, accounting, reporting and disclosure
requirements than domestic issuers. The securities of some foreign governments
and companies and foreign securities markets are less liquid and at times more
volatile than comparable U.S. securities and securities markets. Foreign
brokerage commissions and other fees are also generally higher than in the
United States. The laws of some foreign countries may limit the Fund's ability
to invest in securities of certain issuers located in these foreign countries.
There are also special tax considerations which apply to securities of foreign
issuers and securities principally traded overseas. Investors should also be
aware that under certain circumstances, markets which are perceived to have
similar characteristics to troubled markets may be adversely affected whether or
not similarities actually exist.
SECURITIES LENDING
The Fund may make secured loans of portfolio securities amounting to not
more than one-third of the Fund's total assets. The risks in lending portfolio
securities, as with other extensions of credit, consist of possible delay in
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. However, such loans will be made only to
broker-dealers that are believed by the Manager to be of relatively high credit
standing. Securities loans are made to broker-dealers pursuant to agreements
requiring that loans be continuously secured by collateral in cash or U.S.
Government Securities at least equal at all times to the market value of the
securities lent. The borrower pays to the lending Fund an amount equal to any
dividends or interest the Fund would have received had the securities not been
lent. If the loan is collateralized by U.S. Government Securities, the Fund will
receive a fee from the borrower. In the case of loans collateralized by cash,
the Fund typically invests the cash collateral for its own account in
interest-bearing, short-term securities and pays a fee to the borrower. Although
voting rights or rights to consent with respect to the loaned securities pass to
the borrower, the Fund retains the right to call the loans at any time on
reasonable notice, and it will do so in order that the securities may be voted
by the Fund if the holders of such securities are asked to vote upon or consent
to matters materially affecting the investment. The Fund may also call such
loans in order to sell the securities involved. The Manager has retained lending
agents on behalf of the Fund that are compensated based on a percentage of the
Fund's return on the securities lending activity. The Fund also pays various
fees in connection with such loans including shipping fees and reasonable
custodian fees approved by the Trustees of the Trust or persons acting pursuant
to direction of the Board.
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DEPOSITORY RECEIPTS
The Fund may invest in American Depositary Receipts (ADRs), Global
Depository Receipts (GDRs) and European Depository Receipts (EDRs)
(collectively, "Depository Receipts") if issues of such Depository Receipts are
available that are consistent with the Fund's investment objective. Depository
Receipts generally evidence an ownership interest in a corresponding foreign
security on deposit with a financial institution. Transactions in Depository
Receipts usually do not settle in the same currency in which the underlying
securities are denominated or traded. Generally, ADRs, in registered form, are
designed for use in the U.S. securities markets and EDRs, in bearer form, are
designed for use in European securities markets. GDRs may be traded in any
public or private securities markets and may represent securities held by
institutions located anywhere in the world.
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
The Fund may use futures and options for various purposes. Such
transactions may involve options, futures and related options on futures
contracts, and those instruments may relate to particular equity and fixed
income securities, equity and fixed income indexes and foreign currencies. The
Fund may also enter into a combination of long and short positions (including
spreads and straddles) for a variety of investment strategies, including
protecting against changes in certain yield relationships.
The use of futures contracts, option contracts and options on futures
contracts involves risk. Thus, while the 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
the Fund's performance.
OPTIONS. As has been indicated above, the Fund (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
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to purchase securities from third parties ("call options") or the right to sell
securities to third parties ("put options") for a fixed price at a future date.
WRITING COVERED OPTIONS. The Fund may seek to increase its return by writing
covered call or put options on optionable securities or indexes. A call option
written by the Fund on a security gives the holder the right to buy the
underlying security from the Fund at a stated exercise price; a put option gives
the holder the right to sell the underlying security to the Fund at a stated
exercise price. In the case of options on indexes, the options are usually cash
settled based on the difference between the strike price and the value of the
index.
The Fund will receive a premium for writing a put or call option, which
increases the Fund's return in the event the option expires unexercised or is
closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price and volatility of the underlying
security or securities index to the exercise price of the option, the remaining
term of the option, supply and demand and interest rates. By writing a call
option on a security, the Fund limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise price
of the option. By writing a put option on a security, the Fund assumes the risk
that it may be required to purchase the underlying security for an exercise
price higher than its then current market value, resulting in a potential
capital loss unless the security subsequently appreciates in value. In the case
of options on an index, if the Fund writes a call, any profit by the Fund in
respect of portfolio securities expected to correlate with the index will be
limited by an increase in the index above the exercise price of the option. If
the Fund writes a put on an index, the Fund may be required to make a cash
settlement greater than the premium received if the index declines.
A call option on a security is "covered" if the Fund owns the underlying
security or has an absolute and immediate right to acquire that security without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities held in its portfolio. A call option 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 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. 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.
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Likewise, an investor who is the holder of an option may liquidate its position
by effecting a "closing sale transaction." This is accomplished by selling an
option of the same series as the option previously purchased. There is no
guarantee that the Fund will be able to effect a closing purchase or a closing
sale transaction at any particular time. Also, an over-the-counter option may be
closed out only with the other party to the option transaction.
Effecting a closing transaction in the case of a written call option will
permit the Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case of
a written put option will permit the Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or high
grade debt obligations. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; the Fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security or
index of securities, any loss resulting from the repurchase of a 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.
The Fund may write options in connection with buy-and-write transactions;
that is, the Fund may purchase a security and then write a call option against
that security. The exercise price of the call the Fund determines to write will
depend upon the expected price movement of the underlying security. The exercise
price of a call option may be below ("in-the-money"), equal to ("at-the-money")
or above ("out-of-the-money") the current value of the underlying security at
the time the option is written. Buy-and-write transactions using in-the-money
call options may be used when it is expected that the price of the underlying
security will remain flat or decline moderately during the option period.
Buy-and-write transactions using at-the-money call options may be used when it
is expected that the price of the underlying security will remain fixed or
advance moderately during the option period. Buy-and-write transactions using
out-of-the-money call options may be used when it is expected that the premiums
received from writing the call option plus the appreciation in the market price
of the underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If the call options
are exercised in such transactions, the Fund's maximum gain will be the premium
received by it for writing the option, adjusted upward or downward by the
difference between the Fund's purchase price of the security and the exercise
price. If the options are not exercised and the price of the underlying security
declines, the amount of such decline will be offset in part, or entirely, by the
premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above
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the exercise price, the put option will expire worthless and the Fund's gain
will be limited to the premium received. If the market price of the underlying
security declines or otherwise is below the exercise price, the Fund may elect
to close the position or take delivery of the security at the exercise price. In
that event, the Fund's return will be the premium received from the put option
minus the cost of closing the position or, if it chooses to take delivery of the
security, the premium received from the put option minus the amount by which the
market price of the security is below the exercise price. Out-of-the-money,
at-the-money and in-the-money put options may be used by the Fund in market
environments analogous to those in which call options are used in buy-and-write
transactions.
The extent to which the Fund will be able to write and purchase call and
put options may be restricted by the Fund's intention to qualify as a regulated
investment company under the Internal Revenue Code.
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
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<PAGE> 33
had been issued by the Options Clearing Corporation as a result of trades on
that Exchange should continue to be exercisable in accordance with their terms.
The Exchanges have established limitations governing the maximum number of
options which may be written by an investor or group of investors acting in
concert. It is possible that the Fund, the Manager and other clients of the
Manager may be considered to be such a group. These position limits may restrict
the Fund's ability to purchase or sell options on a particular security.
The amount of risk the Fund assumes when it purchases an option is the
premium paid for the option plus related transaction costs. In addition to the
correlation risks discussed below, the purchase of an option also entails the
risk that changes in the value of the underlying security or futures contract
will not be fully reflected in the value of the option purchased.
FUTURES. A financial futures contract sale creates an obligation by the seller
to deliver the type of financial instrument called for in the contract in a
specified delivery month for a stated price. A financial futures contract
purchase creates an obligation by the purchaser to pay for and take delivery of
the type of financial instrument called for in the contract in a specified
delivery month, at a stated price. In some cases, the specific instruments
delivered or taken, respectively, at settlement date are not determined until on
or near that date. The determination is made in accordance with the rules of the
exchange on which the futures contract sale or purchase was made. Some futures
contracts are "cash settled" (rather than "physically settled," as described
above) which means that the purchase price is subtracted from the current market
value of the instrument and the net amount if positive is paid to the purchaser,
and if negative is paid by the purchaser. Futures contracts are traded in the
United States only on commodity exchanges or boards of trade -- known as
"contract markets" -- approved for such trading by the Commodity Futures Trading
Commission ("CFTC"), and must be executed through a futures commission merchant
or brokerage firm which is a member of the relevant contract market. Under U.S.
law, futures contracts on individual equity securities are not permitted.
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
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commodity and the same delivery date. If the price of the initial sale of the
futures contract exceeds the price of the offsetting purchase, the seller is
paid the difference and realizes a gain. Conversely, if the price of the
offsetting purchase exceeds the price of the initial sale, the seller realizes a
loss. Similarly, the closing out of a futures contract purchase is effected by
the purchaser entering into a futures contract sale. If the offsetting sale
price exceeds the purchase price, the purchaser realizes a gain, and if the
purchase price exceeds the offsetting sale price, a loss will be realized.
The ability to establish and close out positions on options on futures
will be subject to the development and maintenance of a liquid secondary market.
It is not certain that this market will develop or be maintained.
INDEX FUTURES. The Fund may purchase futures contracts on various securities
indexes ("Index Futures"). The Fund's purchase and sale of Index Futures is
limited to contracts and exchanges which have been approved by the CFTC.
An Index Future may call for "physical delivery" or be "cash settled." An
Index Future that calls for physical delivery is a contract to buy an integral
number of units of the particular securities index at a specified future date at
a price agreed upon when the contract is made. A unit is the value from time to
time of the relevant index. While the purchase of an Index Future that calls for
physical delivery obligates the Fund 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 the Fund enters into one futures contract to
buy 500 units of an index at a specified future date at a contract price of
$1,000 per unit and the index is at $1,010 on that future date, the Fund will
gain $5,000 (500 units x gain of $10).
Index Futures that are "cash settled" provide by their terms for
settlement on a net basis reflecting changes in the value of the underlying
index. Thus, the purchaser of such an Index Future is never obligated to pay the
face amount of the contract. The net payment obligation may in fact be very
small in relation to the face amount.
The Fund may close open positions on the futures exchange on which Index
Futures are then traded at any time up to and including the expiration day. All
positions which remain open at the close of the last business day of the
contract's life are required to settle on the next business day (based upon the
value of the relevant index on the expiration day).
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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.
OPTIONS ON FUTURES CONTRACTS. Options on futures contracts give the purchaser
the right in return for the premium paid to assume a position in a futures
contract at the specified option-exercise price at any time during the period of
the option. The Fund may use options on futures contracts in lieu of writing or
buying options directly on the underlying securities or purchasing and selling
the underlying futures contracts. For example, to hedge against a possible
decrease in the value of its portfolio securities, the Fund may purchase put
options or write call options on futures contracts rather than selling futures
contracts. Similarly, the Fund may purchase call options or write put options on
futures contracts as a substitute for the purchase of futures contracts to hedge
against a possible increase in the price of securities which the Fund expects to
purchase. Such options generally operate in the same manner as options purchased
or written directly on the underlying investments.
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 the Fund may be exposed to risk of
loss. In addition, it is not always possible to hedge fully or perfectly against
currency fluctuations affecting the value of the securities denominated in
foreign currencies because the value of such securities also is likely to
fluctuate as a result of independent factors not related to currency
fluctuations. The risk of imperfect correlation generally tends to diminish as
the maturity date of the futures contract approaches.
A hedge will not be fully effective where there is such imperfect
correlation. To compensate for imperfect correlations, the Fund may purchase or
sell futures contracts in a
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<PAGE> 36
greater amount than the hedged securities if the volatility of the hedged
securities is historically greater than the volatility of the futures contracts.
Conversely, the Fund may purchase or sell fewer contracts if the volatility of
the price of the hedged securities is historically less than that of the futures
contract.
The Fund may also purchase futures contracts (or options thereon) as an
anticipatory hedge against a possible increase in the price of currency in which
is denominated the securities the Fund anticipates purchasing. In such
instances, it is possible that the currency may instead decline. If the Fund
does not then invest in such securities because of concern as to possible
further market and/or currency decline or for other reasons, the Fund may
realize a loss on the futures contract that is not offset by a reduction in the
price of the securities purchased.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by commodity exchanges
which limit the amount of fluctuation in a futures contract price during a
single trading day. Once the daily limit has been reached in the contract, no
trades may be entered into at a price beyond the limit, thus preventing the
liquidation of open futures positions. Prices have in the past exceeded the
daily limit on a number of consecutive trading days. Short positions in index
futures may be closed out only by entering into a futures contract purchase on
the futures exchange on which the index futures are traded.
The successful use of transactions in futures and related options for
hedging and risk management also depends on the ability of the Manager to
forecast correctly the direction and extent of exchange rate, interest rate and
stock price movements within a given time frame. For example, to the extent
interest rates remain stable during the period in which a futures contract or
option is held by the Fund investing in fixed income securities (or such rates
move in a direction opposite to that anticipated), the Fund may realize a loss
on the futures transaction which is not fully or partially offset by an increase
in the value of its portfolio securities. As a result, the Fund's total return
for such period may be less than if it had not engaged in the hedging
transaction.
Unlike trading on domestic commodity exchanges, trading on foreign
commodity exchanges is not regulated by the CFTC and may be subject to greater
risks than trading on domestic exchanges. For example, some foreign exchanges
may be principal markets so that no common clearing facility exists and a trader
may look only to the broker for performance of the contract. In addition, unless
the Fund hedges against fluctuations in the exchange rate between the U.S.
dollar and the currencies in which trading is done on foreign exchanges, any
profits that the Fund might 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, the Fund will generally take long positions (e.g., purchase call
options, futures contracts or options thereon) in order to increase the Fund's
exposure to a particular market, market segment or foreign currency. For
example, if the Fund holds a portfolio of stocks with an average volatility
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(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, the Fund is
only required to deposit the initial and variation margin as required by
relevant CFTC regulations and the rules of the contract markets. Because the
Fund will then be obligated to purchase the security or index at a set price on
a future date, the Fund's net asset value will fluctuate with the value of the
security as if it were already included in the Fund's portfolio. Risk management
transactions have the effect of providing a degree of investment leverage,
particularly when the Fund does not segregate assets equal to the face amount of
the contract (i.e., in cash settled futures contracts) since the futures
contract (and related options) will increase or decrease in value at a rate
which is a multiple of the rate of increase or decrease in the value of the
initial and 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.
The Fund will not, however, use futures and options on futures to obtain greater
volatility than it could obtain through direct investment in securities; that
is, the Fund will not normally engage in risk management to increase the average
volatility (beta) of that Fund's portfolio above 1.00, the level of risk (as
measured by volatility) that would be present if the Fund were fully invested in
the securities comprising the relevant index. However, the Fund may invest in
futures and options on futures without regard to this limitation if the face
value of such investments, when aggregated with the Index Futures, equity swaps
and contracts for differences as described below does not exceed 10% of the
Fund's assets.
HEDGING. To the extent indicated elsewhere, the Fund may also enter into options
and futures contracts and buy and sell options on futures for hedging. For
example, the 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 Fund
may also use futures contracts in anticipatory hedge transactions by taking a
long position in a futures contract with respect to a security or index that the
Fund intends to purchase (or whose value is expected to correlate closely with
the security 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 the Fund's
portfolio is expected to decline as a result of an increase in rates, the Fund
might purchase put options or write call options on futures contracts rather
than selling futures contracts. Similarly, for anticipatory hedging, the Fund
may purchase call options or write put options as a substitute for the purchase
of futures contracts.
INVESTMENT PURPOSES. To the extent indicated elsewhere, the Fund may also enter
into futures contracts and buy and sell options thereon for investment. For
example, the Fund may invest in futures when its Manager believes that there are
not enough attractive securities available to maintain the standards of
diversity and liquidity set for the Fund pending investment in such securities
if or when they do become available. Through this use of futures and related
options, the Fund may diversify risk in its portfolio without incurring the
substantial brokerage costs which may be associated with investment in the
securities of multiple issuers. This use may also permit the Fund to avoid
potential market and liquidity problems (e.g., driving up the price of a
security by purchasing additional shares of a portfolio security or owning so
much of a particular
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<PAGE> 38
issuer's stock that the sale of such stock depresses that stock's price) which
may result from increases in positions already held by the Fund.
When the Fund purchases futures contracts for investment, it will maintain
cash, U.S. Government Securities or other liquid assets in a segregated account
with its custodian in an amount which, together with the initial and variation
margin deposited on the futures contracts, is equal to the face value of the
futures contracts at all times while the futures contracts are held.
Incidental to other transactions in fixed income securities, for
investment purposes the Fund may also combine futures contracts or options on
fixed income securities with cash, cash equivalent investments or other fixed
income securities in order to create "synthetic" bonds which approximate desired
risk and return profiles. This may be done where a "non-synthetic" security
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). When the 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 the Fund's
portfolio. For example, if the 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 Russell 2500 Index) (to synthetically "sell" the stocks in the Fund) and
long futures positions on another index (e.g., the S&P 500) (to synthetically
"buy" the larger capitalization stocks). When the expected trend has played out,
the Fund would then close out both futures contract positions. The Fund will
only enter into these combined positions if (1) the short position (adjusted for
historic volatility) operates as a hedge of existing portfolio holdings, (2) the
face amount of the long futures position is less than or equal to the value of
the portfolio securities that the Fund would like to dispose of, (3) the
contract settlement date for the short futures position is approximately the
same as that for the long futures position and (4) the Fund segregates an amount
of cash, U.S. Government Securities and other 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 the Fund uses such combined short and
long positions, in addition to possible declines in the values of its investment
securities, the Fund may also suffer losses associated with a securities index
underlying the long futures position underperforming the securities index
underlying the short futures position. However, the Manager will enter into
these combined positions only if the Manager expects that, overall, the Fund
will perform as if it had sold the securities hedged by the short position and
purchased the securities underlying the long position. The Fund may also use
swaps and options on futures to achieve the same objective.
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<PAGE> 39
LIMITATIONS ON THE USE OF OPTIONS AND FUTURES PORTFOLIO STRATEGIES. As noted
above, the Fund may use futures contracts and related options for hedging and,
in some circumstances, for risk management or investment but not for
speculation. Thus, except when used for risk management or investment, the
Fund's long futures contract positions (less its short positions) together with
the Fund's cash (i.e., equity or fixed income) positions will not exceed the
Fund's total net assets.
The Fund's ability to engage in the options and futures strategies
described above will depend on the availability of liquid markets in such
instruments. Markets in options and futures with respect to currencies are
relatively new and still developing. It is impossible to predict the amount of
trading interest that may exist in various types of options or futures.
Therefore no assurance can be given that the Fund will be able to utilize these
instruments effectively for the purposes set forth above. Furthermore, the
Fund's ability to engage in options and futures transactions may be limited by
tax considerations.
SWAP CONTRACTS AND OTHER TWO-PARTY CONTRACTS
The Fund may use swap contracts and other two-party contracts for the same
or similar purposes as it 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. The
Fund will usually enter into swaps on a net basis, i.e., the two returns are
netted out, with the Fund receiving or paying, as the case may be, only the net
amount of the two returns.
INTEREST RATE 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).
EQUITY SWAP CONTRACTS AND CONTRACTS FOR DIFFERENCES. Equity swap contracts
involve the exchange of one party's obligation to pay the loss, if any, with
respect to a notional amount of a particular equity index (e.g., the S&P 500
Index) plus interest on such notional amount at a designated rate (e.g., the
London Inter-Bank Offered Rate) in exchange for the other party's obligation to
pay the gain, if any, with respect to the notional amount of such index.
If the Fund enters into a long equity swap contract, the Fund's net asset
value will fluctuate as a result of changes in the value of the equity index on
which the equity swap is based as if it had purchased the notional amount of
securities comprising the index. The Fund will not use long equity swap
contracts to obtain greater volatility than it could obtain through direct
investment in securities; that is, the Fund will not normally enter 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, the Fund may invest in
15
<PAGE> 40
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 the Fund may
agree with a counterparty that its return (or loss) will be based on the
relative performance of two different groups or "baskets" of securities. As to
one of the baskets, the Fund's return is based on theoretical long futures
positions in the securities comprising that basket (with an aggregate face value
equal to the notional amount of the contract for differences) and as to the
other basket, the Fund's return is based on theoretical short futures positions
in the securities comprising the basket. The Fund may also use actual long and
short futures positions to achieve the same market exposure(s) as contracts for
differences. The Fund will only enter into contracts for differences where
payment obligations of the two legs of the contract are netted and thus based on
changes in the relative value of the baskets of securities rather than on the
aggregate change in the value of the two legs. The Fund will only enter into
contracts for differences (and analogous futures positions) when the Manager
believes that the basket of securities constituting the long leg will outperform
the basket constituting the short leg. However, it is possible that the short
basket will outperform the long basket resulting in a loss to the Fund, even in
circumstances where the securities in both the long and short baskets appreciate
in value.
Except for instances in which the Fund elects to obtain leverage up to the
10% limitation mentioned above, the Fund will maintain cash, U.S. Government
Securities or 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.
The Fund may enter into swaps and contracts for differences for hedging,
investment and risk management. When using swaps for hedging, the Fund may enter
into an interest rate, currency or equity swap, as the case may be, on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities. For risk management or investment purposes the Fund
may also enter into a contract for differences in which the notional amount of
the theoretical long position is greater than the notional amount of the
theoretical short position. The Fund will not normally enter into a contract for
differences to increase the volatility (beta) of the Fund's portfolio above
1.00. However, the Fund may invest in contracts for differences without regard
to this limitation if the aggregate amount by which the theoretical long
positions of such contracts exceed the theoretical short positions of such
contracts, when aggregated with the Index Futures and equity swaps contracts as
described above, does not exceed 10% of the Fund's net assets.
REPURCHASE AGREEMENTS
The 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.
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<PAGE> 41
Such transactions afford an opportunity for the Fund to earn a return on
temporarily available cash at no market risk, although there is a risk that the
seller may default in its obligation to pay the agreed-upon sum on the
redelivery date. Such a default may subject the Fund to expenses, delays and
risks of loss including: (a) possible declines in the value of the underlying
security during the period while the Fund seeks to enforce its rights thereto,
(b) possible reduced levels of income and lack of access to income during this
period and (c) inability to enforce rights and the expenses involved in
attempted enforcement.
TEMPORARY HIGH QUALITY CASH ITEMS
To the extent noted under "Investment Guidelines," the Fund may
temporarily invest a portion of its assets in cash or cash items pending other
investments or in connection with the maintenance of a segregated account. These
cash items must be of high quality and may include a number of money market
instruments such as securities issued by the United States government and
agencies thereof, bankers' acceptances, commercial paper, and bank certificates
of deposit. By investing in high quality money market securities the Fund may
seek to minimize credit risk with respect to such investments.
U.S. GOVERNMENT SECURITIES
U.S. Government Securities include securities issued or guaranteed by the
U.S. government or its authorities, agencies or instrumentalities. U.S.
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.
Like other fixed income securities, U.S. Government Securities are subject
to market risk and their market values fluctuate as interest rates change. Thus,
for example, if the Fund holds U.S. Government Securities, the value of an
investment in the Fund may fall during times of rising interest rates. Yields on
U.S. Government Securities tend to be lower than those of corporate securities
of comparable maturities.
In addition to investing directly in U.S. Government Securities, the 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. These certificates of accrual and similar instruments may
be more volatile than other government securities.
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<PAGE> 42
FIRM COMMITMENTS
A firm commitment is an agreement with a bank or broker-dealer for the
purchase of securities at an agreed-upon price on a specified future date. The
Fund may enter into firm commitment agreements with such banks and
broker-dealers with respect to any of the instruments eligible for purchase by
the Fund. The Fund will only enter into firm commitment arrangements with banks
and broker-dealers which the Manager determines present minimal credit risks.
The Fund will maintain in a segregated 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
The Fund may enter into reverse repurchase agreements and dollar roll
agreements with banks and brokers to enhance return. Reverse repurchase
agreements involve sales by the Fund of portfolio assets concurrently with an
agreement by the Fund to repurchase the same assets at a later date at a fixed
price. During the reverse repurchase agreement period, the Fund continues to
receive principal and interest payments on these securities and also has the
opportunity to earn a return on the collateral furnished by the counterparty to
secure its obligation to redeliver the securities.
Dollar rolls are transactions in which the Fund sells securities for
delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date. During the roll period, the Fund forgoes principal and interest paid on
the securities. The Fund is compensated by the difference between the current
sales price and the forward price for the future purchase (often referred to as
the "drop") as well as by the interest earned on the cash proceeds of the
initial sale.
If the Fund makes such investments, the Fund 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 the Fund may decline below the price of the securities the Fund has
sold but is obligated to repurchase under the agreement. In the event the buyer
of securities under a reverse repurchase agreement or dollar roll files for
bankruptcy or becomes insolvent, the Fund's use of the proceeds of the agreement
may be restricted pending a determination by the other party or its trustee or
receiver whether to enforce the Fund's obligation to repurchase the securities.
Reverse repurchase agreements and dollar rolls are not considered borrowings by
the Fund for purposes of the Fund's fundamental investment restriction with
respect to borrowings.
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<PAGE> 43
ILLIQUID SECURITIES
The Fund may purchase "illiquid securities," i.e., securities which may
not be sold or disposed of in the ordinary course of business within seven days
at approximately the value at which the Fund has valued the investment, which
include securities whose disposition is restricted by securities laws, so long
as no more than 15% of net assets would be invested in such illiquid securities.
The Fund currently intends to invest in accordance with the SEC staff view that
repurchase agreements maturing in more than seven days are illiquid securities.
The SEC staff has stated informally that it is of the view that over-the-counter
options and securities serving as cover for over-the-counter options are
illiquid securities. While the Trust does not agree with this view, it will
operate in accordance with any relevant formal guidelines adopted by the SEC.
In addition, the SEC staff considers equity swap contracts, caps, floors
and collars to be illiquid securities. Consequently, while the staff maintains
this position, the Fund will not enter into an equity swap contract or a reverse
equity swap contract or purchase a cap, floor or collar if, as a result of the
investment, the total value (i.e., marked-to-market value) of such investments
(without regard to their notional amount) together with that of all other
illiquid securities which the Fund owns would exceed 15% of the Fund's total
assets.
INVESTMENT RESTRICTIONS
Fundamental Restrictions:
Without a vote of the majority of the outstanding voting securities of the
Fund, the Trust will not take any of the following actions with respect to the
Fund as indicated:
(1) Borrow money except under the following circumstances: (i) The Fund
may borrow money from banks so long as after such a transaction, the total
assets (including the amount borrowed) less liabilities other than debt
obligations, represent at least 300% of outstanding debt obligations; (ii) The
Fund may also borrow amounts equal to an additional 5% of its total assets
without regard to the foregoing limitation for temporary purposes, such as for
the clearance and settlement of portfolio transactions and to meet shareholder
redemption requests; (iii) The Fund may enter into transactions that are
technically borrowings under the 1940 Act because they involve the sale of a
security coupled with an agreement to repurchase that security (e.g., reverse
repurchase agreements, dollar rolls and other similar investment techniques)
without regard to the asset coverage restriction described in (i) above, so long
as and to the extent that the Fund establishes a segregated account with its
custodian in which it maintains cash and/or liquid securities equal in value to
its obligations in respect of these transactions.
(2) Purchase securities on margin, except such short-term credits as may
be necessary for the clearance of purchases and sales of securities. (For this
purpose, the deposit or payment of initial or variation margin in connection
with futures contracts or related options transactions is not considered the
purchase of a security on margin.)
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<PAGE> 44
(3) Make short sales of securities or maintain a short position for the
Fund's account unless at all times when a short position is open the Fund owns
an equal amount of such securities or owns securities which, without payment of
any further consideration, are convertible into or exchangeable for securities
of the same issue as, and equal in amount to, the securities sold short.
(4) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under federal securities laws.
(5) Purchase or sell real estate, although it may purchase securities
of issuers which deal in real estate, including securities of real estate
investment trusts, and may purchase securities which are secured by interests in
real estate.
(6) Make loans, except by purchase of debt obligations or by entering
into repurchase agreements or through the lending of the Fund's portfolio
securities. Loans of portfolio securities may be made with respect to up to 100%
of the Fund's total assets.
(7) Concentrate more than 25% of the value of its total assets in any
one industry.
(8) Purchase or sell commodities or commodity contracts, except that
the Fund may purchase and sell financial futures contracts and options thereon.
(9) Issue senior securities, as defined in the 1940 Act and as
amplified by rules, regulations and pronouncements of the SEC. The SEC has
concluded that even though reverse repurchase agreements, firm commitment
agreements and standby commitment agreements fall within the functional meaning
of the term "evidence of indebtedness", the issue of compliance with Section 18
of the 1940 Act will not be raised with the SEC by the Division of Investment
Management if 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 Restriction (4) below; any
borrowing permitted by Fundamental Restriction (1) above; any collateral
arrangements with respect to initial and variation margin permitted by
Non-Fundamental Restriction (4) below; and the purchase or sale of options,
forward contracts, futures contracts or options on futures contracts.
Non-Fundamental Restrictions:
It is contrary to the present policies of the Fund, which policies 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.
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<PAGE> 45
(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 the Fund's total assets (taken at cost). (For the purposes
of this restriction, collateral arrangements with respect to swap agreements,
the writing of options, stock index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with respect to initial
and variation margin are not deemed to be a pledge or other encumbrance of
assets. The deposit of securities or cash or cash equivalents in escrow in
connection with the writing of covered call or put options, respectively is not
deemed to be a pledge or encumbrance.)
Except as indicated above in Fundamental Restriction (1), all
percentage limitations on investments set forth herein and in the Prospectus
will apply at the time of the making of an investment and shall not be
considered violated unless an excess or deficiency occurs or exists immediately
after and as a result of such investment.
The phrase "shareholder approval," as used in the Prospectus, and the
phrase "vote of a majority of the outstanding voting securities," as used herein
with respect to the Fund, means the affirmative vote of the lesser of (1) more
than 50% of the outstanding shares of the Fund, or (2) 67% or more of the shares
of the Fund present at a meeting if more than 50% of the outstanding shares are
represented at the meeting in person or by proxy. Except for policies that are
explicitly described as fundamental in the Prospectus or this Statement of
Additional Information, the investment policies of the 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
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
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<PAGE> 46
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.
ROBERT V. BROKAW, JR. (D.O.B. 10/7/43). Secretary of the Trust. Member,
Grantham, Mayo, Van Otterloo & Co. LLC.
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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 JULY 21, 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 THE FUND.]
Except as stated above, the principal occupations of the officers and
Trustees for the last five years have been with the employers as shown above,
although in some cases they have held different positions with such employers.
Other than as set forth in the table below, no Trustee or officer of
the Trust receives any direct compensation from the Trust or any series thereof:
<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 Contract
As disclosed in the Prospectus under the heading "Management of the
Trust," under a Management Contract between the Trust and the Manager, subject
to such policies as the
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<PAGE> 48
Trustees of the Trust may determine, the Manager will furnish continuously an
investment program for the Fund and will make investment decisions on behalf of
the Fund and place all orders for the purchase and sale of portfolio securities.
Subject to the control of the Trustees, the Manager also manages, supervises and
conducts the other affairs and business of the Trust, furnishes office space and
equipment, provides bookkeeping and certain clerical services and pays all
salaries, fees and expenses of officers and Trustees of the Trust who are
affiliated with the Manager. As indicated under "Portfolio
Transactions--Brokerage and Research Services," the Trust's portfolio
transactions may be placed with broker-dealers which furnish the Manager, at no
cost, certain research, statistical and quotation services of value to the
Manager in advising the Trust or its other clients.
As is disclosed in the Prospectus, the Manager has contractually agreed
to reimburse the Fund with respect to certain Fund expenses through 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, 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 0.55% of the Fund's
daily net assets.
The Management Contract provides that the Manager shall not be subject
to any liability in connection with the performance of its services thereunder
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
The Management Contract was approved by the Trustees of the Trust
(including a majority of the Trustees who are not "interested persons" of the
Manager) and by the Fund's sole shareholder in connection with the organization
of the Trust and the establishment of the Fund. The Management Contract will
continue in effect for a period more than two years from the date of its
execution only so long as its continuance is approved at least annually by (i)
vote, cast in person at a meeting called for that purpose, of a majority of
those Trustees who are not "interested persons" of the Manager or the Trust, and
by (ii) the majority vote of either the full Board of Trustees or the vote of a
majority of the outstanding shares of the Fund. The Management Contract
automatically terminates on assignment, and is terminable on not more than 60
days' notice by the Trust to the Manager. In addition, the Management Contract
may be terminated on not more than 60 days' written notice by the Manager to the
Trust. The Management Fee for the Fund is calculated based on a fixed percentage
of the Fund's average daily net assets.
Custodial Arrangements. Investor Bank & Trust Company ("IBT"), 200
Clarendon Street, Boston, Massachusetts 02116, serves as the Trust's custodian
on behalf of the Fund. As such, IBT 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, IBT
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. IBT 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 for which it acts as custodian on a
daily basis.
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<PAGE> 49
Shareholder Service Arrangements. As disclosed in the Prospectus,
pursuant to the terms of a single Servicing Agreement with each fund of the
Trust, entered into on May 30, 1996, GMO provides direct client service,
maintenance and reporting to shareholders of the Fund. The Servicing Agreement
was approved by the Trustees of the Trust (including a majority of the Trustees
who are not "interested persons" of the Manager or the Trust). The Servicing
Agreement will continue in effect for a period more than one year from the date
of its execution only so long as its continuance is approved at least annually
by (i) vote, cast in person at a meeting called for the purpose, of a majority
of those Trustees who are not "interested persons" of the Manager or the Trust,
and by (ii) the majority vote of the full Board of Trustees. The Servicing
Agreement automatically terminates on assignment (except as specifically
provided in the Servicing Agreement) and is terminable by either party upon not
more than 60 days' written notice to the other party.
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 the Fund's federal and state income
tax returns, consults with the Trust as to matters of accounting and federal and
state income taxation and provides assistance in connection with the preparation
of various Securities and Exchange Commission filings.
PORTFOLIO TRANSACTIONS
The purchase and sale of portfolio securities for the Fund and for the
other investment advisory clients of the Manager are made by the Manager with a
view to achieving their respective investment objectives. For example, a
particular security may be bought or sold for certain clients of the Manager
even though it could have been bought or sold for other clients 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 objective
and policies of the Fund; (b) such securities are acquired for investment and
not for resale; (c) such securities are liquid securities which are not
restricted as to transfer either by law or liquidity of market; and (d) such
securities have a value which is readily ascertainable as evidenced by a listing
on the American Stock Exchange, the New York Stock Exchange, NASDAQ or a
recognized foreign exchange.
Brokerage and Research Services. In placing orders for the portfolio
transactions of the Fund, the Manager will seek the best price and execution
available, except to the extent it may be permitted to pay higher brokerage
commissions for brokerage and research services as described below. The
determination of what may constitute best price and execution by a broker-dealer
in
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<PAGE> 50
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 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
and subject to such policies as the Trustees of the Trust may determine, the
Manager may pay an unaffiliated broker or dealer that provides "brokerage and
research services" (as defined in the Act) to the Manager an amount of
commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction.
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES
The Trust is organized as a Massachusetts business trust under the laws
of Massachusetts by an Agreement and Declaration of Trust ("Declaration of
Trust") dated June 24, 1985. A copy of the Declaration of Trust is on file with
the Secretary of The Commonwealth of Massachusetts. The fiscal year for each
fund of the Trust 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 the Fund described in this Statement of Additional
Information, and one 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; 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
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<PAGE> 51
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 July 21, 1999, MAC & Co. held greater than 25% of the outstanding
shares of the Fund. As a result, such shareholder may be deemed to "control" its
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.
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<PAGE> 52
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 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
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<PAGE> 53
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 Fund as of July 21, 1999:
<TABLE>
<CAPTION>
NAME ADDRESS % OWNERSHIP
- -------------------------------------- ------------------------------ -------------------------
<S> <C> <C>
MAC & Co. Attn: Mutual Fund Operations 30.68
P.O. Box 3198
Pittsburgh, PA 15230-3198
William Barron Hilton 9336 Civic Center Drive 23.56
Charitable Remainder Unitrust Beverly Hills, CA 90210
Francis W. Hatch, S. Parker Gilbert & Attn: Lois B. Wetzel 13.72
Robert M. Pennoyer Trust Sullivan & Cromwell
FBO John H. C. Merck 125 Broad Street
New York, NY 10004-2498
Francis W. Hatch, S. Parker Gilbert & Attn: Lois B. Wetzel 11.16
Robert M. Pennoyer Trust Sullivan & Cromwell
FBO John H. C. Merck 125 Broad Street
New York, NY 10004-2498
S. Parker Gilbert & Robert M. Pennoyer Attn: Lois B. Wetzel 6.41
Trust Sullivan & Cromwell
FBO George W. Merck 125 Broad Street
New York, NY 10004-2498
</TABLE>
DISTRIBUTIONS
The Prospectus describes the distribution policy of the Fund under the
heading "Distributions".
TAXES
TAX STATUS AND TAXATION OF THE FUND
The Fund is treated as a separate taxable entity for federal income tax
purposes. The Fund intends to qualify each year as a regulated investment
company under Subchapter M of the
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<PAGE> 54
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, the 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.
If the 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 the 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 the Fund is
permitted so to elect and so elects), plus any retained amount from the prior
year, the Fund will be subject to a 4% excise tax on the undistributed amounts.
A dividend paid to shareholders by the 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. The 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.
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<PAGE> 55
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 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 the Fund in January of a year
generally is deemed to have been received by shareholders on December 31 of the
preceding year, if the distribution was declared and payable to shareholders of
record on a date in October, November or December of that preceding year. The
Trust will provide federal tax information annually, including information about
dividends and distributions paid during the preceding year to taxable investors
and others requesting such information.
If the 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
the Fund's dividends paid from investment income to the extent derived from
dividends received from U.S. corporations. However, any distributions received
by the Fund from real estate investment trusts ("REITs") will not qualify for
the corporate dividends-received deduction. The Fund's investments in REIT
equity securities may require the Fund to accrue and distribute income not yet
received. In order to generate sufficient cash to make the requisite
distributions, the Fund may be required to sell securities in its portfolio that
it otherwise would have continued to hold (including when it is not advantageous
to do so). The Fund's investments in REIT equity securities may at other times
result in the Fund's receipt of cash in excess of the REIT's earnings; if the
Fund distributes such amounts, such distribution could constitute a return of
capital to Fund shareholders for federal income tax purposes.
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<PAGE> 56
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 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 the Fund to a foreign shareholder, and any gain realized upon the
sale of Fund shares by such a shareholder, will ordinarily not be subject to
U.S. taxation, unless the recipient or seller is a nonresident alien individual
who is present in the United States for more than 182 days during the taxable
year. However, such distributions and sale proceeds may be subject to backup
withholding, unless the foreign investor certifies his non-U.S. residency
status. 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 the Fund is "effectively
connected" with a U.S. trade or business carried on by such shareholder will in
general be subject to U.S. federal income tax on the income derived from the
Fund at the graduated rates applicable to U.S. citizens, residents or domestic
corporations, whether received in cash or reinvested in shares, and, in the case
of a foreign corporation, may also be subject to a branch profits tax. Again,
foreign shareholders who are resident in a country with an income tax treaty
with the United States may obtain different tax results, and are urged to
consult their tax advisors.
TAX IMPLICATIONS OF CERTAIN INVESTMENTS
Certain of the Fund's investments, including assets "marked to the
market" for federal income tax purposes, debt obligations issued or purchased at
a discount and potentially so-called "index securities" (including inflation
indexed bonds), will create taxable income in excess of the cash they generate.
In such cases, the Fund may be required to sell assets (including when it is not
advantageous to do so) to generate the cash necessary to distribute as dividends
to its shareholders all of its income and gains and therefore to eliminate any
tax liability at the Fund level.
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<PAGE> 57
The Fund's transactions in options, futures contracts, hedging
transactions, forward contracts and straddles may accelerate income, defer
losses, cause adjustments in the holding periods of the Fund's securities and
convert short-term capital gains or losses into long-term capital gains or
losses. 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 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 the 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 the 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 purpose 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
The Fund may experience particular difficulty qualifying as a regulated
investment company in the case of highly unusual market movements, in the case
of high redemption levels and/or during the first year of its operations. If the
Fund does not qualify for taxation as a regulated investment company for any
taxable year, the Fund's income will be taxed at the Fund level at regular
corporate rates, and all distributions from earnings and profits, including
distributions of net long-term capital gains, will be taxable to shareholders as
ordinary income and subject to withholding in the case of non-U.S. shareholders.
In addition, in order to requalify for taxation as a regulated investment
company that is accorded special tax treatment, the Fund may be required to
recognize unrealized gains, pay substantial taxes and interest on such gains,
and make certain substantial distributions.
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<PAGE> 58
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 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 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 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
the 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 the 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 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") or the Russell 2500 Index, indices
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
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<PAGE> 59
various other sources including No Load Fund X, CDA Investment Technologies,
Inc., Weisenberger Investment Companies Services, and Donoghue's Mutual Fund
Almanac.
Quotations of the 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 the 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 the 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.
35
<PAGE> 60
INVESTMENT GUIDELINES
GMO TAX-MANAGED U.S. SMALL CAP FUND
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. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
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, 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.
- - When making sales of specific securities, the Manager considers strategies,
such as selling securities with the highest cost basis, to minimize capital
gains.
- - 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 generally
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 - Under normal market
Convertible securities conditions, at least 65% of
Securities of Foreign Issuers (traded the Fund's total assets will
principally on U.S. Exchanges) be invested in or exposed
Depository Receipts to(2) the equity securities of
Investment Companies (open & closed end) smaller companies.
Illiquid Securities
144A Securities - Any short-term assets will
Restricted Securities be invested in cash or High
Futures and Related Options on Quality Money Market
securities indexes Instruments including
REITs securities issued by the U.S.
Exchange-traded and OTC options on government and agencies
securities and indexes (including thereof, bankers' acceptances,
writing covered options) commercial paper, bank
Equity Swap Contracts certificates of deposit and
Contracts for Differences repurchase agreements. The
Index Futures Fund expects that less than 5%
Repurchase Agreements of its net assets will be
Cash and Money Market Instruments exposed to cash and money
Warrants or rights market instruments. This
limitation does not include
cash and money market
instruments in margin accounts
or otherwise 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.
- ----------------
(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.
36
<PAGE> 61
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 that purchasing debt
obligations, repurchase
agreements and engaging in
securities lending will not be
considered making loans for
this purpose. Fund may loan
securities valued at up to
one-third 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 contracts,
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 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
MAKING SHORT SALES OF SECURITIES
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
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.
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.
- 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 - With respect to at least 50%
of the Fund's total assets,
the Fund will not invest more
than 5% of its assets in any
one security, except for U.S.
government securities, cash,
37
<PAGE> 62
and money market instruments.
CONCENTRATION - The Fund will not invest
more than 25% of its total
assets 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 - 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)
HEDGING - 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
SYNTHETIC SALES AND PURCHASES 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
- ----------------
(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.
38
<PAGE> 63
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.
39
<PAGE> 64
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> 65
(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> 66
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> 67
(i). Opinion and Consent of Ropes & Gray.(1) Form of Opinion and
Consent of Ropes & Gray with respect to shares of the GMO
Tax-Managed U.S. Small Cap Fund--Exhibit 1.
(j). Not applicable to this filing.
(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 (relating to each Fund of the
Trust except for the GMO Intrinsic Value Fund, GMO Tax-Managed
U.S. Small Cap Fund and GMO International Core Plus Allocation
Fund) 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> 68
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> 69
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, has duly caused this Post-Effective Amendment No. 52 to the Trust's
Registration Statement under the Securities Act and Post-Effective Amendment No.
59 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 2nd day of August, 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.
52 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.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
R. JEREMY GRANTHAM* President - Quantitative; Principal Executive August 2, 1999
- -----------------------------
R. Jeremy Grantham Officer; Trustee
SUSAN RANDALL HARBERT* Treasurer; Principal Financial and Accounting August 2, 1999
- -----------------------------
Susan Randall Harbert Officer
HARVEY R. MARGOLIS* Trustee August 2, 1999
- -----------------------------
Harvey R. Margolis
JAY O. LIGHT* Trustee August 2, 1999
- -----------------------------
Jay O. Light
* By: /S/ WILLIAM R. ROYER
William R. Royer
Attorney-in-Fact
</TABLE>
<PAGE> 70
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)
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
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
</TABLE>
<PAGE> 71
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)
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
S/ JAY O. LIGHT Trustee May 23, 1996
- --------------------
Jay O. Light
</TABLE>
<PAGE> 72
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)
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/S/ SUSAN RANDALL HARBERT Treasurer; Principal April 29, 1999
- ------------------------- Financial and Accounting
Susan Randall Harbert Officer
</TABLE>
<PAGE> 73
EXHIBIT INDEX
GMO TRUST
Exhibit No. Title of Exhibit
1 Form of Opinion and Consent of Ropes & Gray
<PAGE> 1
[ROPES & GRAY LETTERHEAD]
October _____, 1999
BY HAND DELIVERY
GMO Trust
40 Rowes Wharf
Boston, MA 02110
Gentlemen:
You have informed us that you propose to register under the Securities
Act of 1933, as amended (the "Act"), and offer and sell from time to time shares
of beneficial interest (the "Shares") of the GMO Tax-Managed U.S. Small Cap
Fund, a series (the "Series") of GMO Trust (the "Trust").
We have examined an executed copy of your Agreement and Declaration of
Trust, as amended, on file in the office of the Secretary of State of The
Commonwealth of Massachusetts. We are familiar with the actions taken by your
Trustees to authorize the issue and sale to the public from time to time of
authorized and unissued Shares of the Series. We have also examined a copy of
your By-laws and such other documents as we have deemed necessary for the
purpose of this opinion.
Based on the foregoing, we are of the opinion that the issue and sale
of the authorized but unissued Shares of the Series has been duly authorized
under Massachusetts law. Upon the original issue and sale of any such authorized
but unissued Shares and upon receipt by the Trust of the authorized
consideration therefor in an amount not less than the applicable net asset
value, the Shares so issued will be validly issued, fully paid and nonassessable
by the Trust.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Agreement and 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 its Trustees. The Agreement and Declaration of Trust provides for
indemnification out of the property of the particular series of shares for all
loss and expense of
<PAGE> 2
GMO Trust -2- October ____, 1999
any shareholder of that series held personally liable solely by reason of his
being or having been a shareholder. Thus, the risk of shareholder liability is
limited to circumstances in which that series of shares itself would be unable
to meet its obligations.
We understand that this opinion is to be used in connection with the
registration of an indefinite number of Shares for offering and sale pursuant to
the Act. We consent to the filing of this opinion with and as part of your
Registration Statement on Form N-1A relating to such offering and sale.
Very truly yours,
[DRAFT]
<PAGE> 3
GMO Trust -3- October ____, 1999
bcc: Joseph B. Kittredge, Jr., Esq.
Thomas R. Hiller, Esq.
