<PAGE> 1
GMO TRUST
SUPPLEMENT DATED OCTOBER 5, 1999
TO
GMO TRUST PROSPECTUS DATED JUNE 30, 1999
AS REVISED OCTOBER 5, 1999
GMO FUNDAMENTAL VALUE FUND -- DIVERSIFICATION STATUS
Notwithstanding the references to the GMO Fundamental Value Fund's
classification as a "non-diversified company" for purposes of the Investment
Company Act of 1940 (the '1940 Act') on page 7 of the Prospectus, and the
discussion of the risks associated with being a "non-diversified company" on
pages 7, 39, 42 and 43 of the Prospectus, the Fund is currently a "diversified
company" within the meaning of the 1940 Act. A shareholders' meeting scheduled
to take place on or about November 3, 1999 has been called for the purpose of
considering a change in the Fund's classification from a diversified company to
a non-diversified company, but there can be no assurance that this proposal will
be approved at such time or at any time thereafter. As such, notwithstanding the
reference on page 7 of the Prospectus that "the Fund's portfolio will normally
consist of approximately 20-25 stocks" and that "occasionally, the Fund may hold
up to 30 stocks," unless and until the proposed change in the Fund's
classification to a "non-diversified company" is approved by the Fund's
shareholders, the Fund may (but is not necessarily required to) invest in the
securities of more than 30 different companies.
For a discussion of the special risks associated with non-diversified
companies, please refer to pages 42-43 of the Prospectus.
2
<PAGE> 2
GMO TRUST
GMO TRUST (the "Trust"), 40 Rowes Wharf, Boston, Massachusetts 02110, is an
open-end management investment company currently offering thirty-four (34)
separate portfolios with this Prospectus (collectively, the "FUNDS"). The Trust
currently offers three additional portfolios pursuant to separate prospectuses.
Each Fund has its own investment objective and strategies. GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC (the "MANAGER" or "GMO") is the investment manager for each
of the Funds. The Manager has entered into separate Consulting Agreements with
Dancing Elephant, Ltd. (the "Consultant") with respect to management of the
Emerging Markets Fund, Evolving Countries Fund and Asia Fund.
<TABLE>
<CAPTION>
GMO FUNDS
<S> <C> <C> <C>
U.S. EQUITY FUNDS INTERNATIONAL EQUITY FUNDS FIXED INCOME FUNDS ASSET ALLOCATION FUNDS
U.S. Core Fund International Core Fund Domestic Bond Fund International Equity
Tobacco-Free Core Fund Currency Hedged U.S. Bond/Global Alpha A Allocation Fund
Value Fund International Core Fund Fund World Equity Allocation
Fundamental Value Fund Foreign Fund U.S. Bond/Global Alpha B Fund
Intrinsic Value Fund International Small Fund Global (U.S.+) Equity
Growth Fund Companies Fund International Bond Fund Allocation Fund
Small Cap Value Fund Japan Fund Currency Hedged Global Balanced Allocation
Small Cap Growth Fund Emerging Markets Fund International Bond Fund Fund
REIT Fund Evolving Countries Fund Global Bond Fund U.S. Sector Fund
Asia Fund Emerging Country Debt
Global Properties Fund Fund
Short-Term Income Fund
Global Hedged Equity Fund
Inflation Indexed Bond
Fund
Emerging Country Debt Share
Fund
</TABLE>
INVESTMENT MANAGER & CLIENT SERVICE PROVIDER
GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC
Tel: (617) 346-7646 (call collect)
Fax: (617) 439-4192
Each Fund offers up to three CLASSES of shares in this Prospectus. All
Funds offer CLASS III SHARES, and certain Funds also offer CLASS II and/or CLASS
IV SHARES. Eligibility for the classes is generally based on the total amount of
assets that a client has invested with GMO (with Class II requiring the least
total assets and Class IV the most), with certain special eligibility
requirements for Class IV Shares, as more fully described in the GMO Trust
Shareholder's Manual. These classes differ solely with regard to the level of
SHAREHOLDER SERVICE FEE borne by the class. ALL CLASSES OF A FUND HAVE AN
INTEREST IN THE SAME UNDERLYING ASSETS, ARE MANAGED BY GMO, AND PAY THE SAME
INVESTMENT MANAGEMENT FEE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
JUNE 30, 1999
PROSPECTUS AS REVISED OCTOBER 5, 1999
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES......... 3
U.S. Equity Funds......................................... 4
U.S. Core Fund......................................... 4
Tobacco-Free Core Fund................................. 5
Value Fund............................................. 6
Fundamental Value Fund................................. 7
Intrinsic Value Fund................................... 8
Growth Fund............................................ 9
Small Cap Value Fund................................... 10
Small Cap Growth Fund.................................. 11
REIT Fund.............................................. 12
International Equity Funds................................ 13
International Core Fund................................ 13
Currency Hedged International Core Fund................ 15
Foreign Fund........................................... 16
International Small Companies Fund..................... 17
Japan Fund............................................. 18
Emerging Markets Fund.................................. 19
Evolving Countries Fund................................ 20
Asia Fund.............................................. 21
Global Properties Fund................................. 22
Fixed Income Funds........................................ 23
Domestic Bond Fund..................................... 23
U.S. Bond/Global Alpha A Fund.......................... 24
U.S. Bond/Global Alpha B Fund.......................... 25
International Bond Fund................................ 26
Currency Hedged International Bond Fund................ 27
Global Bond Fund....................................... 28
Emerging Country Debt Fund............................. 29
Short-Term Income Fund................................. 30
Global Hedged Equity Fund.............................. 31
Inflation Indexed Bond Fund............................ 32
Emerging Country Debt Share Fund....................... 33
Asset Allocation Funds.................................... 34
International Equity Allocation Fund................... 34
World Equity Allocation Fund........................... 35
Global (U.S.+) Equity Allocation Fund.................. 36
Global Balanced Allocation Fund........................ 37
U.S. Sector Fund....................................... 38
SUMMARY OF PRINCIPAL RISKS.................................. 39
FEES AND EXPENSES........................................... 45
MULTIPLE CLASSES............................................ 54
BENCHMARKS AND INDEXES...................................... 54
DETERMINATION OF NET ASSET VALUE............................ 58
TAXES....................................................... 58
MANAGEMENT OF THE TRUST..................................... 59
FINANCIAL HIGHLIGHTS........................................ 62
ADDITIONAL INFORMATION..................................back cover
PURCHASE AND SALE INFORMATION...........................back cover
SHAREHOLDER INQUIRIES...................................back cover
</TABLE>
2
<PAGE> 4
SUMMARY OF
FUND OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES
GMO Trust provides a broad range of investment choices to investors and
each Fund has its own objective, strategies and policies. This Summary describes
each Fund's investment objective and principal investment strategies. Each Fund
may make other investments and engage in other investment strategies that are
not specifically described in the Summary. The INVESTMENT GUIDELINES contain a
more complete description of each Fund's possible investments and strategies.
These Guidelines are in the Statement of Additional Information or are available
separately. See the back cover of the Prospectus for information about how to
receive the Statement of Additional Information or the Investment Guidelines.
PRINCIPAL RISKS. Investing in mutual funds involves risk and it is
possible to lose money on an investment in a Fund. Each Fund is subject to
certain risks based on the types of investments in the Fund's portfolio and on
the investment strategies the Fund employs. Because each Fund has different
investments and employs different strategies, each Fund's risk profile is
different. Investors should refer to the SUMMARY OF PRINCIPAL RISKS in the
Prospectus at page 39 for a discussion of the principal risks of investing in
the Funds. See the Statement of Additional Information for additional
information about the risks of specific Fund investments and strategies.
An investment in the Funds is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
In many of the Fund summaries that follow, it is noted that a particular
Fund will "invest primarily in" a particular type of securities or other assets.
Investors should understand that this Prospectus uses the word "invest" to mean
not only direct investment in a particular asset but also indirect investment in
or exposure to the asset through the use of derivatives and related instruments.
For example, the Global Bond Fund's summary states that it will "invest
primarily in investment grade bonds denominated in various currencies." This
means that the Fund may invest directly in investment grade bonds and/or use
various exchange-traded and over-the-counter derivative instruments to "invest
primarily in" investment grade bonds.
Many of the Funds are managed and/or meant to be measured relative to a
specified benchmark or index. The index that GMO uses to manage the Fund or to
measure the Fund's performance (the "GMO Benchmark") is identified under the
heading "investment objective" in the following summaries. In some cases, the
GMO Benchmark differs from the broad-based index that the SEC requires each Fund
to use in the average annual total return table. While a Fund may be managed or
measured relative to a benchmark or index, none of the Funds is managed as an
"index fund" or "index-plus fund," and the actual composition of a Fund's
portfolio may differ substantially from that of its benchmark. Some general
information about the Funds' benchmarks and indexes is provided under
"Benchmarks and Indexes" later in this Prospectus. The Manager may change each
Fund's benchmark or index from time to time.
Except for certain policies that are explicitly described as fundamental in
this Prospectus or in the Statement of Additional Information, each Fund's
investment objective (except as noted) and policies may be changed by the
Trustees without shareholder approval. The investment objectives of the U.S.
Core Fund, Value Fund, Growth Fund, Short-Term Income Fund, International Core
Fund and the Japan Fund are fundamental.
3
<PAGE> 5
U.S. EQUITY FUNDS
GMO U.S. CORE FUND
Fund Inception Date: 9/18/85
<TABLE>
<CAPTION>
FUND CODES
--------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III GMCTX USCore 362007 88 2
Class II GMTWX USCore 362007 80 9
Class IV GMRFX USCore 362008 84 9
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO U.S. Core Fund seeks high total return
through investment in U.S. equity securities. The Fund's current benchmark is
the S&P 500 Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of at least 125 companies chosen from among the 600 companies with the largest
equity capitalization and whose securities are listed on a United States
national securities exchange. The Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivative instruments and related investment techniques to:
(i) hedge equity exposure; (ii) replace direct investing; and (iii) implement
shifts in investment exposure as a substitute for buying and selling securities.
The Fund will not use derivative instruments to expose on a net basis more than
100% of its assets to equity securities or markets.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to provide broad U.S. equity exposure. Using
these principles, the Manager employs a bottom-up approach to select stocks
based on factors such as fair value, earnings and price momentum, cash flow,
book value and neglect (a measure of low analyst coverage and low price
volatility). The Manager then uses a top-down approach to favor sectors that it
believes represent the best long-term values within the U.S. stock market. The
Manager then uses a final optimization process to help control portfolio risk.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk, Leverage Risk and Credit and Counterparty Risk. For more
information about these risks and other principal risks of an investment in the
Fund, see "Summary of Principal Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
U.S. CORE FUND(%)
-----------------
<S> <C>
'1989' 32.10
'1990' -1.34
'1991' 29.89
'1992' 5.94
'1993' 16.28
'1994' 2.36
'1995' 43.25
'1996' 17.61
'1997' 35.10
'1998' 24.69
</TABLE>
Highest Quarter: 19.49% (4Q1998)
Lowest Quarter: -13.53% (3Q1990)
Year-to-Date (as of 3/31/99): 3.65%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
9/18/85
- --------------------------------------------------------------------------------------------------------
CLASS III 24.52% 23.73% 19.71% 19.05%
- --------------------------------------------------------------------------------------------------------
S&P 500 28.57% 24.05% 19.20% 18.84%
- --------------------------------------------------------------------------------------------------------
6/7/96
- --------------------------------------------------------------------------------------------------------
CLASS II* 24.35% N/A N/A 26.94%
- --------------------------------------------------------------------------------------------------------
S&P 500 28.57% N/A N/A 28.66%
- --------------------------------------------------------------------------------------------------------
</TABLE>
* For the period from November 17, 1997 to January 9, 1998, no Class II shares
were outstanding. Performance for that period is that of Class III shares. If
Class II shares had been outstanding, performance would be lower because Class
II expenses are higher.
4
<PAGE> 6
GMO TOBACCO-FREE CORE FUND
Fund Inception Date: 10/31/91
<TABLE>
<CAPTION>
FUND CODES
-----------------------------------------
Ticker Symbol Cusip
------ --------- -----------
<S> <C> <C> <C> <C>
Class III GMTCX TobaccoFr 362007 85 8
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Tobacco-Free Core Fund seeks high total
return through investment in U.S. equity securities. The Fund's current
benchmark is the S&P 500 Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of at least 125 companies chosen from among the 600 companies with the largest
equity capitalization and whose securities are listed on a United States
national securities exchange, and which are not Tobacco Producing Issuers.
Tobacco Producing Issuers are defined as those issuers that are within the
Tobacco Producing Issuer industry classification maintained by Ford Investor
Services. The Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivative instruments and related investment techniques to:
(i) hedge equity exposure; (ii) replace direct investing; and (iii) implement
shifts in investment exposure as a substitute for buying and selling securities.
The Fund will not use derivative instruments to expose on a net basis more than
100% of its assets to equity securities or markets.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to provide broad exposure to equity
securities of non-Tobacco Producing Issuers. Using these principles, the Manager
employs a bottom-up approach to select stocks based on strategies such as fair
value, earnings and price momentum, cash flow, book value and neglect (a measure
of low analyst coverage and low price volatility). The Manager then uses a
top-down approach to favor sectors that it believes represent the best long-term
values within the U.S. stock market. The Manager then uses a final optimization
process to help control portfolio risk.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk, Leverage Risk and Credit and Counterparty Risk. For more
information about these risks and other principal risks of an investment in the
Fund, see "Summary of Principal Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
TOBACCO FREE CORE FUND %
------------------------
<S> <C>
'1992' 5.69
'1993' 17.42
'1994' 2.4
'1995' 43
'1996' 18.3
'1997' 35.6
'1998' 25.2
</TABLE>
Highest Quarter: 19.47% (4Q1998)
Lowest Quarter: -10.01% (3Q1998)
Year-to-Date (as of 3/31/99): 5.16%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
10/31/91
- --------------------------------------------------------------------------------------------------------
CLASS III 25.02% 24.03% N/A 20.83%
- --------------------------------------------------------------------------------------------------------
S&P 500 28.57% 24.05% N/A 20.12%
- --------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 7
GMO VALUE FUND
Fund Inception Date: 11/13/90
<TABLE>
<CAPTION>
FUND CODES
--------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III GMOVX Value 362007 82 5
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Value Fund seeks long-term capital growth
primarily through investment in equity securities. The Fund's current benchmark
is the Russell 1000 Value Index.
INVESTMENT UNIVERSE: The Fund invests primarily in equity securities of
companies chosen from the Russell 1000 Value Index, emphasizing large
capitalization equity securities. The Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund invests primarily in U.S. equity
securities of companies that in the opinion of the Manager represent favorable
values relative to their market prices. The Fund intends to be fully invested,
and will not generally take temporary defensive positions through investment in
cash and high quality money market instruments. The Fund may also invest in
equity securities of foreign issuers.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental investment
principles and traditional portfolio analysis to provide broad U.S. equity
market exposure. Using these principles, the Manager focuses on stock selection,
and primarily selects issuers which it believes represent favorable values
relative to their market prices. The Manager employs a bottom-up approach to
select stocks, and uses various techniques in seeking companies which trade
below fair value, as determined by the value of the earnings stream (using a
proprietary dividend discount model), the asset value or the franchise value.
RISKS: The most significant risks of an investment in the Fund are Market
Risk (including Value Securities Risk) and Derivatives Risk. For more
information about these risks and other principal risks of an investment in the
Fund, see "Summary of Principal Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
VALUE FUND %
------------
<S> <C>
'1991' 25.75
'1992' 9.35
'1993' 18.67
'1994' 0.61
'1995' 38.18
'1996' 20.73
'1997' 30.42
'1998' 11.66
</TABLE>
Highest Quarter: 18.17% (1Q1991)
Lowest Quarter: -10.89% (3Q1998)
Year to Date (as of 3/31/99): -0.47%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11/13/90
- --------------------------------------------------------------------------------------------------------
CLASS III 11.50% 19.53% N/A 19.36%
- --------------------------------------------------------------------------------------------------------
RUSSELL 1000 VALUE INDEX 15.61% 20.83% N/A 20.26%
- --------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 8
- ---------------------------- FUND CODES
GMO FUNDAMENTAL VALUE FUND ----------------------------------------
- ---------------------------- Ticker Symbol Cusip
Fund Inception Date: 10/31/91 ------ ------ -----------
Class III N/A N/A 362007 65 0
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Fundamental Value Fund seeks long term
capital growth primarily through investment in stocks of approximately 20-30
companies. The Fund's current benchmark is the S&P 500 Index.
INVESTMENT UNIVERSE: The Fund invests primarily in companies chosen from
the Russell 3000 Index.
PRINCIPAL INVESTMENTS: The Fund normally invests in stocks of U.S.
companies the Manager believes represent favorable values relative to their
market prices. The Fund's portfolio will normally consist of approximately 20-25
stocks and the Fund generally limits investment in any one stock to 10% of the
Fund's total assets. Occasionally, the Fund may hold up to 30 stocks. Although
the Fund intends to be fully invested, transactions in stocks may require the
Fund to hold a portion of its assets in cash for short periods of time pending
reinvestment. The Fund does not take temporary defensive positions by holding
cash or investing in money market instruments.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager uses a bottom-up approach
to select stocks for the Fund. The Manager employs fundamental investment
principles and traditional portfolio analysis to analyze the companies in the
Russell 3000 Index that the Manager believes represent favorable value relative
to their price. Companies whose stocks trade below fair value are candidates for
selection for the Fund's portfolio. Fair value is determined by evaluating the
company's earnings stream, its asset value or franchise value.
RISKS: The most significant risks of an investment in the Fund are Market
Risk (including Value Securities Risk) and Non-Diversification Risk. For more
information about these risks and other principal risks of an investment in the
Fund, see "Summary of Principal Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. The Fund's operating policies were different
during the periods represented in the chart and the table. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Bar Graph]
FUNDAMENTAL VALUE FUND (%)
--------------------------
1992 13.92
1993 22.46
1994 3.56
1995 30.58
1996 22.79
1997 28.75
1998 10.11
Highest Quarter: 13.14% (2Q1997)
Lowest Quarter: -9.99% (3Q1998)
Year-to-Date (as of 3/31/99): -1.78%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
----------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
--------------- -------- -------- -------- ---------
10/31/91
--------------- -------- -------- -------- ---------
CLASS III 9.94% 18.63% N/A 18.58%
--------------- -------- -------- -------- ---------
S&P 500 28.57% 24.05% N/A 20.12%
--------------- -------- -------- -------- ---------
7
<PAGE> 9
- -------------------------- FUND CODES
GMO INTRINSIC VALUE FUND ----------------------------------------------
- -------------------------- Ticker Symbol Cusip
Fund Inception Date: 8/2/99 ------ ------------ -----------
Class III GMIVX IntrinsicVal 362008 63 3
OBJECTIVE AND PRINCIPAL STRATEGIES
INVESTMENT OBJECTIVE: The GMO Intrinsic Value Fund seeks long-term capital
growth through investment in equity securities. The Fund's current benchmark is
the Russell 1000 Value Index.
INVESTMENT UNIVERSE: The Fund invests primarily in equity securities of
companies chosen from the Russell 1000 Index, emphasizing large capitalization
equity securities. The Fund may also use derivatives.
PRINCIPAL INVESTMENTS AND STRATEGIES: The Fund invests primarily in U.S.
equity securities of companies that, in the opinion of the Manager, represent
favorable values relative to their market prices. The Fund intends to be fully
invested and will not generally take temporary defensive positions through
investment in cash and high quality money market instruments. The Fund may use
exchange-traded and over-the-counter derivative instruments 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 assets to equity securities or markets.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager uses quantitative
analytical methods, for example, computer models, to choose approximately 300
stocks from among the companies listed in the Russell 1000 Index for the Fund's
portfolio. Using a bottom-up approach that normally focuses on individual stock
selection, with less emphasis on industry and sector allocation, the Manager
researches and evaluates individual companies. Stocks of companies with price to
book ratios, price to sales ratios, price to fair values and cash flow yields
that meet the Manager's criteria as undervalued or cheap are ranked highly.
Stocks ranked highly by more than one criterion are favored for selection. The
Manager believes that a security with a low price in relation to its fair value
or intrinsic value has opportunity for appreciation. The Manager attempts to
control risk by weighing the trade-off between a stock's expected return and its
potential to contribute to the Fund's overall risk profile.
RISKS: The most significant risks of an investment in the Fund are Market
Risk (including Value Securities Risk) and Derivatives Risk. For more
information about these risks and other principal risks of an investment in the
Fund, see "Summary of Principal Risks" on page 39.
No performance is included in this section because the Fund commenced
operations in 1999.
8
<PAGE> 10
GMO GROWTH FUND
Fund Inception Date: 12/30/88
<TABLE>
<CAPTION>
FUND CODES
--------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III GMOGX Growth 362007 78 3
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Growth Fund seeks long-term growth of
capital. The Fund's current benchmark is the Russell 1000 Growth Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of at least 125 companies chosen from among the 1000 companies with the largest
equity capitalization and whose securities are listed on a United States
national securities exchange. The Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivative instruments and related investment techniques to:
(i) hedge equity exposure; (ii) replace direct investing; and (iii) implement
shifts in investment exposure as a substitute for buying and selling securities.
The Fund will not use derivative instruments to expose on a net basis more than
100% of its assets to equity securities or markets.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to provide broad exposure to the large
capitalization growth sector of the U.S. equity market. Using these principles,
the Manager employs a bottom-up approach to select stocks based on factors such
as fair value, earnings and price momentum, cash flow and neglect (a measure of
low analyst coverage and low price volatility). The Manager then uses a top-down
approach to favor sectors that it believes represent the best long-term values
within the U.S. stock market. The Manager then uses a final optimization process
to help control portfolio risk.
RISKS: The most significant risks of an investment in the Fund are Market
Risk (including Growth Securities Risk), Derivatives Risk, Leveraging Risk and
Credit and Counterparty Risk. For more information about these risks and other
principal risks of an investment in the Fund, see "Summary of Principal Risks"
on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
GROWTH FUND (%)
---------------
<S> <C>
'1989' 38.34
'1990' 2.42
'1991' 41.27
'1992' 4.21
'1993' 4.60
'1994' 1.70
'1995' 39.85
'1996' 20.39
'1997' 29.35
'1998' 37.30
</TABLE>
Highest Quarter: 27.46% (4Q1998)
Lowest Quarter: -17.77% (3Q1990)
Year-to-Date (as of 3/31/99): 5.78%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/30/88
- --------------------------------------------------------------------------------------------------------
CLASS III 37.11% 24.86% 20.80% 20.80%
- --------------------------------------------------------------------------------------------------------
RUSSELL 1000 GROWTH INDEX 38.76% 25.70% 20.56% 20.55%
- --------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 11
GMO SMALL CAP VALUE FUND
Fund Inception Date: 12/31/91
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ -------- -----------
<S> <C> <C> <C> <C>
Class III GMSVX SmCapVal 362007 72 6
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Small Cap Value Fund seeks long-term growth
of capital. The Fund's current benchmark is the GMO Russell 2500 Value+ Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of companies chosen from the Russell 2500 Value Index. The Fund may also use
derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivative instruments and related investment techniques to:
(i) hedge equity exposure; (ii) replace direct investing; and (iii) implement
shifts in investment exposure as a substitute for buying and selling securities.
The Fund will not use derivative instruments to expose on a net basis more than
100% of its assets to equity securities or markets.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses quantitative investment
principles to evaluate small capitalization stocks. Using these principles, the
Manager employs a bottom-up approach to select stocks based on factors such as
price to fair value, price to sales ratio, price to book ratio and cash flow
yield. Stocks that are inexpensive based on these factors are ranked highly. The
Manager then purchases stocks ranked highly in each of the four factors,
emphasizing stocks that appear attractive in more than one strategy. The Manager
then uses a final optimization process to help control portfolio risk.
RISKS: The most significant risks of an investment in the Fund are Market
Risk (including Value Securities Risk), Smaller Company Risk, Derivatives Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
SMALL CAP VALUE FUND (%)
------------------------
<S> <C>
'1992' 24.22
'1993' 20.15
'1994' 3.84
'1995' 27.28
'1996' 20.16
'1997' 29.72
'1998' 0.03
</TABLE>
Highest Quarter: 15.46% (2Q1997)
Lowest Quarter: -18.31% (3Q1998)
Year-to-Date (as of 3/31/99): -9.72%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/31/91
- --------------------------------------------------------------------------------------------------------
CLASS III -0.97% 15.32% N/A 17.23%
- --------------------------------------------------------------------------------------------------------
RUSSELL 2500 VALUE INDEX -1.93% 15.35% N/A 17.22%
- --------------------------------------------------------------------------------------------------------
GMO RUSSELL 2500 VALUE + INDEX -1.93% 15.16% N/A 15.50%
- --------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 12
GMO SMALL CAP GROWTH FUND
Fund Inception Date: 12/31/96
<TABLE>
<CAPTION>
FUND CODES
---------------------------------------
Ticker Symbol Cusip
------ ------- -----------
<S> <C> <C> <C> <C>
Class III GMSGX SmCapGr 362007 68 4
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Small Cap Growth Fund seeks long-term growth
of capital. The Fund's current benchmark is the Russell 2500 Growth Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of companies chosen from the Russell 2500 Growth Index. The Fund may also use
derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivative instruments and related investment techniques to:
(i) hedge equity exposure; (ii) replace direct investing; and (iii) implement
shifts in investment exposure as a substitute for buying and selling securities.
The Fund will not use derivative instruments to expose on a net basis more than
100% of its assets to equity securities or markets.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses quantitative investment
principles to evaluate small capitalization stocks. Using these principles, the
Manager employs a bottom-up approach to select stocks based on factors such as
the trend in consensus analyst estimates, price momentum and an earnings
surprise component. Stocks that demonstrate strong momentum based on these
factors are ranked highly. The Manager then purchases stocks ranked highly in
each of the three factors, emphasizing stocks that appear attractive in more
than one factor. The Manager then uses a final optimization process to help
control risk.
RISKS: The most significant risks of an investment in the Fund are Market
Risk (including Growth Securities Risk) Smaller Company Risk, Derivatives Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
SMALL CAP GROWTH FUND(%)
------------------------
<S> <C>
'1997' 24.69
'1998' 5.79
</TABLE>
Highest Quarter: 22.45% (4Q1998)
Lowest Quarter: -22.08% (3Q1998)
Year-to-Date (as of 3/31/99): -5.67%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/31/96
- --------------------------------------------------------------------------------------------------------
CLASS III 4.73% N/A N/A 14.28%
- --------------------------------------------------------------------------------------------------------
RUSSELL 2500 GROWTH INDEX 3.09% N/A N/A 8.77%
- --------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 13
GMO REIT FUND
Fund Inception Date: 5/31/96
<TABLE>
<CAPTION>
FUND CODES
---------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III GMORX REIT 362007 62 7
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO REIT Fund seeks high total return through
investment in or exposure to real estate investment trusts ("REITs"), which are
managed vehicles that invest in real estate or real estate-related assets. The
Fund's current benchmark is the Morgan Stanley REIT Index.
INVESTMENT UNIVERSE: The Fund invests primarily in equity REITs, which own
real estate directly; mortgage REITs, which make construction, development or
long-term mortgage loans; and hybrid REITs, which share characteristics of
equity REITs and mortgage REITs. The Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivatives and related instruments to: (1) hedge equity
exposure; (2) replace direct investing; and (3) implement shifts in investment
exposure as a substitute for buying and selling securities. The Fund will not
use derivative instruments to expose on a net basis more than 100% of its assets
to equity securities or markets.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to evaluate REITs. Using these principles,
the Manager employs a bottom-up approach to select REITs based on such factors
as valuation, prospects for growth, quality of the balance sheet and management.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivative Risk, Concentration Risk, Leveraging Risk and Credit and
Counterparty Risk. For more information about these risks and other principal
risks of an investment in the Fund, see "Summary of Principal Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left show changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
SMALL CAP GROWTH FUND(%)
------------------------
<S> <C>
'1997' 19.35
'1998' -24.36
</TABLE>
Highest Quarter: 11.52% (3Q1997)
Lowest Quarter: -16.27% (3Q1998)
Year-to-Date (as of 3/31/99): -3.74%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
5/31/96
- --------------------------------------------------------------------------------------------------------
CLASS III -25.11% N/A N/A 5.37%
- --------------------------------------------------------------------------------------------------------
MORGAN STANLEY REIT INDEX -16.90% N/A N/A 10.10%
- --------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 14
INTERNATIONAL EQUITY FUNDS
The International Equity Funds include Funds that invest only or primarily
in relatively developed foreign markets as well as Funds that invest all or a
portion of their assets in securities traded in the securities markets of less
developed countries, often referred to as "emerging markets." Emerging markets
include the markets of developing countries in Asia, Latin America, Southern and
Eastern Europe, the Middle East and Africa. The Evolving Countries Fund invests
primarily in certain types of emerging market securities referred to in this
Prospectus as "evolving country securities." Evolving country securities are
emerging market securities that, in the Manager's view, are more liquid than
emerging market securities generally. The Emerging Markets Fund, Evolving
Countries Fund and Asia Fund are sometimes referred to in this Prospectus as the
"Emerging Markets Funds" because they invest primarily in emerging market
securities.
GMO INTERNATIONAL CORE FUND
Fund Inception Date: 3/31/87
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ -------- -----------
<S> <C> <C> <C> <C>
Class II GMICX IntlCore 362007 20 5
Class III GMOIX IntlCore 362007 30 4
Class IV GMCFX IntlCore 362008 83 1
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The International Core Fund seeks high total return
through investment in equity securities of non-U.S. issuers. The Fund's current
benchmark is the MSCI EAFE Index.
INVESTMENT UNIVERSE: The Fund invests primarily in equity securities of
non-U.S. issuers chosen from among the 3500 companies in developed markets that
are listed in the MSCI Perspective publication, which includes issuers in the
MSCI EAFE index, smaller companies and Canadian companies. The Fund may also use
derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund will generally not invest in
securities of emerging markets issuers. The Fund may use exchange-traded and
over-the-counter derivatives and related instruments to (i) hedge equity
exposure; (ii) replace direct investing; (iii) implement shifts in investment
exposure as a substitute for selling and buying securities; and (iv) adjust its
foreign currency exposure. The Fund will not use derivative instruments to
expose on a net basis more than 100% of its net assets to equity securities or
markets, or to hold net aggregate foreign currency exposure in excess of the net
assets of the Fund. However, the Fund's foreign currency exposure may differ
significantly from the currency exposure represented by its equity investments.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to build an international equity portfolio.
Using these principles, the Manager creates forecasted returns for countries,
sectors, currencies and individual stocks. To forecast returns for countries,
the Manager examines factors such as trends in gross domestic products, market
sentiment and industrial competitiveness. For sectors, the Manager examines
factors such as economic sensitivity, profitability and size. For currencies,
the Manager examines factors such as export and producer price parity, balance
of payments and interest rates. For securities, the Manager examines factors
such as earnings, fair value, book value, price momentum, cash flow and neglect
(a measure of low analyst coverage and low price volatility). The Manager uses
an optimization process to weigh the trade-off between a stock's return forecast
and how much risk the stock adds to the portfolio, the risk and forecasted
return of all active currency positions and the risk of the entire portfolio
relative to the Fund's benchmark. In addition, expected transaction costs are
explicitly considered in the optimization process.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk, Leveraging Risk
and Credit and Counterparty Risk. For more information about these risks and
other principal risks of an investment in the Fund, see "Summary of Principal
Risks" on page 39.
13
<PAGE> 15
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
INTERNATIONAL CORE FUND(%)
--------------------------
<S> <C>
'1989' 22.61
'1990' -8.12
'1991' 14.46
'1992' -1.15
'1993' 39.96
'1994' 4.14
'1995' 10.32
'1996' 9.55
'1997' 0.92
'1998' 13.60
</TABLE>
Highest Quarter: 16.70% (1Q1998)
Lowest Quarter: -15.92% (3Q1990)
Year-to-Date (as of 3/31/99): -1.50%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3/31/87
- --------------------------------------------------------------------------------------------------------
CLASS III 12.92% 7.48% 9.85% 10.17%
- --------------------------------------------------------------------------------------------------------
MSCI EAFE 19.98% 9.18% 5.54% 7.03%
- --------------------------------------------------------------------------------------------------------
GMO EAFE-LITE 21.65% 11.10% 7.71% 8.52%
- --------------------------------------------------------------------------------------------------------
9/26/96
- --------------------------------------------------------------------------------------------------------
CLASS II 12.80% N/A N/A 8.52%
- --------------------------------------------------------------------------------------------------------
MSCI EAFE 19.98% N/A N/A 10.24%
- --------------------------------------------------------------------------------------------------------
GMO EAFE-LITE 21.65% N/A N/A 13.91%
- --------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 16
GMO CURRENCY HEDGED
INTERNATIONAL CORE FUND
Fund Inception Date: 6/30/95
<TABLE>
<CAPTION>
FUND CODES
------------------------------------------
Ticker Symbol Cusip
------ ---------- -----------
<S> <C> <C> <C> <C>
Class III GMOCX CurHgIntCr 362007 58 5
Class IV GMHFX CurHgIntCr 362008 81 5
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Currency Hedged International Core Fund seeks
high total return through investment in equity securities of non-U.S. issuers
and through management of the Fund's foreign currency positions. The Fund's
current benchmark is the MSCI EAFE Index (Hedged).
INVESTMENT UNIVERSE: The Fund invests primarily in equity securities of
non-U.S. issuers chosen from among the 3500 companies in developed markets that
are listed in the MSCI Perspective publication, which includes issuers in the
MSCI EAFE index, smaller companies and Canadian companies. The Fund will also
use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund will generally not invest in
securities of emerging markets issuers. The Fund may use exchange-traded and
over-the-counter derivatives and related instruments to (i) hedge equity
exposure; (ii) replace direct investing; (iii) implement shifts in investment
exposure as a substitute for selling and buying securities; and (iv) adjust its
foreign currency exposure. The Fund will generally attempt to hedge at least 70%
of the foreign currency exposure represented by the securities in the benchmark
back to the U.S. dollar. The Fund may also use derivatives to adjust its foreign
currency exposure independently of its exposure to international equity markets.
Consequently, the Fund's actual foreign currency exposure may differ
significantly from the currency exposure represented by its equity investments.
The Fund will not use derivative instruments to expose on a net basis more than
100% of its net assets to equity securities or markets, nor to hold net
aggregate foreign currency exposure in excess of the net assets of the Fund.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to build an international equity portfolio.
Using these principles, the Manager creates forecasted returns for countries,
sectors, currencies and individual stocks. To forecast returns for countries,
the Manager examines factors such as trends in gross domestic products, market
sentiment and industrial competitiveness. For sectors, the Manager examines
factors such as economic sensitivity, profitability and size. For currencies,
the Manager examines factors such as export and producer price parity, balance
of payments and interest rates. For securities, the Manager examines factors
such as earnings, fair value, book value, price momentum, cash flow and neglect
(a measure of low analyst coverage and low price volatility). The Manager uses
an optimization process to weigh the trade-off between a stock's return forecast
and how much risk the stock adds to the portfolio, the risk and forecasted
return of all active currency positions and the risk of the entire portfolio
relative to the Fund's benchmark. In addition, expected transaction costs are
explicitly considered in the optimization process.
RISKS. The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk, Leveraging Risk
and Credit and Counterparty Risk. For more information about these risks, and
other principal risks of an investment in the Fund, see "Summary of Principal
Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
CURRENCY HEDGED INTERNATIONAL CORE FUND(%)
------------------------------------------
<S> <C>
'1996' 15.28
'1997' 12.90
'1998' 7.29
</TABLE>
Highest Quarter: 17.38% (1Q1998)
Lowest Quarter: -19.29% (3Q1998)
Year-to-Date (as of 3/31/99): 2.80%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6/30/95
- --------------------------------------------------------------------------------------------------------
CLASS III 6.64% N/A N/A 13.70%
- --------------------------------------------------------------------------------------------------------
MSCI EAFE (HEDGED) 13.69% N/A N/A 18.09%
- --------------------------------------------------------------------------------------------------------
GMO EAFE-LITE (HEDGED) 15.69% N/A N/A 19.03%
- --------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 17
GMO FOREIGN FUND
Fund Inception Date: 6/28/96
<TABLE>
<CAPTION>
FUND CODES
--------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class II GMFRX Foreign 362007 56 9
Class III GMOFX Foreign 362007 55 1
Class IV GMFFX Foreign 362008 82 3
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Foreign Fund seeks high total return through
investment in equity securities of non-U.S. issuers. The Fund's current
benchmark is the MSCI EAFE Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of companies chosen from companies listed outside the U.S., including any of the
4000 companies in developed and emerging markets listed in the MSCI database.
The Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund may also use exchange-traded and
over-the-counter derivatives to adjust its foreign currency exposure.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental analysis of
issuers and country economics to build an international equity portfolio. The
Manager evaluates stocks by examining value factors such as price to earnings,
price to book, price to cash flow and yield. The Manager then focuses on the
companies that rank attractively in these four categories and makes selections
based on research including a review of the sector/industry, publicly available
company information, fundamental analysis and discussions with company
management.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk and Credit and
Counterparty Risk. For more information about these risks and other principal
risks of an investment in the Fund, see "Summary of Principal Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. The table to the right shows
how the Fund's average annual total returns for different calendar periods
compare with those of a broad-based index. See "Benchmarks and Indexes" for a
description of the index. Performance results in the table reflect payment of
Fund expenses; returns for the comparative index do not reflect payment of any
expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE PERFORMANCE.
The Fund commenced operations on June 28, 1996. Prior to that date, the
Fund operated as a private investment pool with investment objectives, policies
and guidelines that were substantially the same as those of the Fund.
Performance of Class III Shares prior to June 28, 1996 is that of the private
investment pool and reflects the pool's higher annual operating expenses. The
pool was not registered as an investment company and was not subject to certain
restrictions imposed on the Fund under the Investment Company Act of 1940. Had
the pool been subject to these restrictions, its performance may have been
adversely affected.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
FOREIGN FUND(%)
---------------
<S> <C>
'1989' 27.27
'1990' -9.81
'1991' 12.34
'1992' -4.61
'1993' 41.16
'1994' 6.52
'1995' 13.85
'1996' 14.31
'1997' 6.86
'1998' 13.95
</TABLE>
Highest Quarter: 16.90% (4Q1998)
Lowest Quarter: -18.90% (3Q1990)
Year-to-Date (as of 3/31/99): 0.32%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
8/31/84
- --------------------------------------------------------------------------------------------------------
CLASS III 13.95% 11.03% 11.35% 17.99%
- --------------------------------------------------------------------------------------------------------
MSCI EAFE 19.98% 9.18% 5.54% 15.13%
- --------------------------------------------------------------------------------------------------------
9/30/96
- --------------------------------------------------------------------------------------------------------
CLASS II 13.92% N/A N/A 12.39%
- --------------------------------------------------------------------------------------------------------
MSCI EAFE 19.98% N/A N/A 10.04%
- --------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 18
GMO INTERNATIONAL
SMALL COMPANIES FUND
Fund Inception Date: 10/14/91
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ -------- -----------
<S> <C> <C> <C> <C>
Class III GMISX IntSmCos 362007 52 8
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The International Small Companies Fund seeks high
total return through investment in equity securities of non-U.S. issuers. The
Fund's current benchmark is the SSB EMI World ex-U.S. Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of companies chosen from among the 3500 companies in developed markets,
including issuers in the MSCI EAFE index, smaller companies and Canadian
companies, and that are among the smallest 50% in terms of market capitalization
for each country. The Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund will generally not invest in
securities of emerging markets issuers. The Fund may use exchange-traded and
over-the-counter derivatives to (i) hedge equity exposure; (ii) replace direct
investing; (iii) implement shifts in investment exposure as a substitute for
selling and buying securities; and (iv) adjust its foreign currency exposure.
The Fund will not use derivative instruments to expose on a net basis more than
100% of its net assets to equity securities or markets, nor to hold net
aggregate foreign currency exposure in excess of the net assets of the Fund.
However, the Fund's foreign currency exposure may differ significantly from the
currency exposure represented by its equity investments.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to build an international equity portfolio.
Using these principles, the Manager creates forecasted returns for countries,
sectors, currencies and individual stocks. To forecast returns for countries,
the Manager examines factors such as trends in gross domestic products, market
sentiment and industrial competitiveness. For sectors, the Manager examines
factors such as economic sensitivity, profitability and size. For currencies,
the Manager examines factors such as export and producer price parity, balance
of payments and interest rates. For securities, the Manager examines factors
such as earnings, fair value, book value, price momentum, cash flow and neglect
(a measure of low analyst coverage and low price volatility). The Manager uses
an optimization process to weigh the trade-off between a stock's return forecast
and how much risk the stock adds to the portfolio, the risk and forecasted
return of all active currency positions and the risk of the entire portfolio
relative to the Fund's benchmark. In addition, expected transaction costs are
explicitly considered in the optimization process.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Smaller Company Risk, Derivatives Risk, Foreign Investment Risk, Currency
Risk, Leveraging Risk, Credit and Counterparty Risk and Liquidity Risk. For more
information about these risks and other principal risks of an investment in the
Fund, see "Summary of Principal Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
INTERNATIONAL SMALL COMPANIES FUND (%)
--------------------------------------
<S> <C>
'1992' -7.39
'1993' 54.97
'1994' 4.74
'1995' 4.91
'1996' 9.84
'1997' -3.54
'1998' 8.50
</TABLE>
Highest Quarter: 17.13% (1Q1998)
Lowest Quarter: -14.71% (3Q1998)
Year-to-Date (as of 3/31/99): -0.44%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
10/14/91
- --------------------------------------------------------------------------------------------------------
CLASS III 6.77% 4.45% N/A 7.58%
- --------------------------------------------------------------------------------------------------------
SSB EMI WORLD EX-US 12.15% 4.46% N/A 4.53%
- --------------------------------------------------------------------------------------------------------
GMO EAFE-LITE 21.65% 11.10% N/A 10.82%
- --------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 19
GMO JAPAN FUND
Fund Inception Date: 6/8/90
<TABLE>
<CAPTION>
FUND CODES
--------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III GMOJX Japan 362007 48 6
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Japan Fund seeks high total return through
investment in equity securities of Japanese companies. The Fund's current
benchmark is the MSCI Japan Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of companies chosen from the MSCI Japan universe. The Fund may also use
derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund will generally not invest in
securities of emerging markets issuers. The Fund may use exchange-traded and
over-the-counter derivatives to (i) hedge equity exposure; (ii) replace direct
investing; (iii) implement shifts in investment exposure as a substitute for
selling and buying securities; and (iv) adjust its foreign currency exposure.
The Fund will not use derivative instruments to expose on a net basis more than
100% of its net assets to equity securities or markets, nor to hold net
aggregate foreign currency exposure in excess of the net assets of the Fund.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to provide Japanese equity exposure. Using
these principles, the Manager employs a bottom-up approach to select stocks
based on several proprietary valuation factors such as earnings and price
momentum and measures of neglect (a measure of low analyst coverage and low
price volatility). The Manager uses a top-down approach to favor sectors that it
believes represent the best long-term values within the Japanese market. The
Manager then uses an optimization process to weigh the trade-off of a stock's
return forecast and how much risk it adds to the portfolio, and to weigh the
risk of the entire portfolio relative to the Fund's benchmark. In addition,
expected transaction costs are explicitly considered in the optimization
process.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk, Concentration
Risk, Leveraging Risk and Credit and Counterparty Risk. For more information
about these risks and other principal risks of an investment in the Fund, see
"Summary of Principal Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
JAPAN FUND (%)
--------------
<S> <C>
'1991' 4.99
'1992' -13.99
'1993' 26.55
'1994' 25.82
'1995' -3.85
'1996' -12.8
'1997' -23.44
'1998' 12.11
</TABLE>
Highest Quarter: 26.32% (4Q1998)
Lowest Quarter: -20.28% (4Q1997)
Year-to-Date (as of 3/31/99): 7.87%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6/8/90
- -------------------------------------------------------------------------------------------------------
CLASS III 10.98% -2.16% N/A -2.00%
- -------------------------------------------------------------------------------------------------------
MSCI JAPAN INDEX 5.03% -3.69% N/A -3.48%
- -------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 20
GMO EMERGING MARKETS FUND
Fund Inception Date: 12/9/93
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ -------- -----------
<S> <C> <C> <C> <C>
Class III GMOEX EmergMkt 362007 60 1
Class IV GMEFX EmergMkt 362008 79 9
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Emerging Markets Fund seeks high total return
through investment in equity securities traded in the securities markets of
developing countries in Asia, Latin America, the Middle East, Africa and Europe
("Emerging Markets"). The Fund's current benchmark is the IFC Investable Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of companies that make up the IFC and MSCI emerging markets databases, and that
are deemed to be emerging or frontier markets by the World Bank. The Fund may
also use derivatives.
PRINCIPAL INVESTMENTS: The Manager has appointed Dancing Elephant, Ltd. to
serve as Consultant to the Fund. The Fund intends to be fully invested, and will
not generally take temporary defensive positions through investment in cash and
high quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivatives and related instruments where available to (i)
hedge equity exposure; (ii) replace direct investing; (iii) implement shifts in
investment exposure as a substitute for selling and buying securities; and (iv)
adjust its foreign currency exposure. The Fund will not use derivative
instruments to expose on a net basis more than 100% of its net assets to equity
securities or markets, nor to hold net aggregate foreign currency exposure in
excess of the net assets of the Fund. However, the Fund's foreign currency
exposure may differ significantly from the currency exposure represented by its
equity investments.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to build a value-biased emerging market
equity portfolio. Using these principles, the Consultant creates forecasted
returns for countries, securities and sectors. To forecast returns for
countries, the Consultant examines factors such as price to earnings ratios,
market momentum, trends in gross domestic products, market conditions, long-term
trends and paradigm shifts, and values currencies based on real effective
exchange rates. For securities, the Consultant examines factors such as fair
value, earnings and price momentum, price to cash flow and measures of neglect
(a measure of low analyst coverage and low price volatility). For sectors, the
Consultant examines factors similar to those used for securities, and also
evaluates economic sensitivity and industrial trends. The Consultant also
monitors the economic and political conditions in these markets and adjusts its
strategies as markets develop or encounter setbacks. The Consultant then uses an
optimization process to weigh the trade-off among a stock's return forecast, how
much risk the stock adds relative to the Fund's benchmark and transaction costs.
RISKS. The most significant risks of an investment in the Fund are Market
Risk, Liquidity Risk, Derivatives, Foreign Investment Risk, Currency Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
EMERGING MARKETS FUND (%)
-------------------------
<S> <C>
'1994' 6.29
'1995' -12.57
'1996' 11.64
'1997' -0.1
'1998' -28.88
</TABLE>
Highest Quarter: 21.11% (3Q1994)
Lowest Quarter: -28.24% (2Q1998)
Year-to-Date (as of 3/31/99): 10.80%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/9/93
- ---------------------------------------------------------------------------------------------------------
CLASS III -30.30% -6.30% N/A -4.42%
- ---------------------------------------------------------------------------------------------------------
IFC INVESTABLE -22.02% -10.13% N/A -8.10%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 21
GMO EVOLVING COUNTRIES FUND
Fund Inception Date: 8/29/97
<TABLE>
<CAPTION>
FUND CODES
------------------------------------------
Ticker Symbol Cusip
--------- --------- -----------
<S> <C> <C> <C> <C>
Class
III GMCEX EvolvCntr 362008 85 6
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Evolving Countries Fund seeks high total return
through investment in equity securities traded in the securities markets of
developing countries in Asia, Latin America, the Middle East, Africa and Europe
("Emerging Markets"). The Fund's current benchmark is the IFC Investable Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of companies that make up the IFC and MSCI emerging markets databases, and that
are deemed to be emerging or frontier markets by the World Bank. The Fund may
also use derivatives.
PRINCIPAL INVESTMENTS: The Manager has appointed Dancing Elephant, Ltd. to
serve as Consultant to the Fund. The Fund attempts to achieve its objective by
focusing its investments in evolving country securities that are more liquid
than emerging market securities generally. The Fund intends to be fully
invested, and will not generally take temporary defensive positions through
investment in cash and high quality money market instruments. The Fund may use
exchange-traded and over-the-counter derivatives and related instruments where
available to (i) hedge equity exposure; (ii) replace direct investing; (iii)
implement shifts in investment exposure as a substitute for selling and buying
securities; and (iv) adjust its foreign currency exposure. The Fund will not use
derivative instruments to expose on a net basis more than 100% of its net assets
to equity securities or markets, nor to hold net aggregate foreign currency
exposure in excess of the net assets of the Fund. However, the Fund's foreign
currency exposure may differ significantly from the currency exposure
represented by its equity investments.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to build a value-biased, relatively liquid
and earnings momentum-biased emerging market equity portfolio. Using these
principles, the Consultant creates forecasted returns for countries, securities
and sectors. To forecast returns for countries, the Consultant examines factors
such as price to earnings ratios, market momentum, trends in gross domestic
products, market conditions, long-term trends and paradigm shifts, and values
currencies based on real effective exchange rates. For securities, the
Consultant examines factors such as fair value, earnings and price momentum,
price to cash flow and measures of neglect (a measure of low analyst coverage
and low price volatility). For sectors, the Consultant examines factors similar
to those used for securities, and also evaluates economic sensitivity and
industrial trends. The Consultant also monitors the economic and political
conditions in these markets and adjusts its strategies as markets develop or
encounter setbacks. The Consultant then uses an optimization process to weigh
the trade-off among a stock's return forecast, how much risk the stock adds
relative to the Fund's benchmark and transaction costs.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Liquidity Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in the
Fund. The bar chart to the left shows changes in the Fund's annual total returns
from year to year for the periods shown. Purchase premiums and redemption fees
are not reflected in the bar chart; if reflected, the returns would be lower.
The table to the right shows how the Fund's average annual total returns for
different calendar periods compare with those of a broad-based index. See
"Benchmarks and Indexes" for a description of the index. Performance results in
the table reflect payment of Fund expenses; returns for the comparative index do
not reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF
FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Year Ending December 31
[Graph]
<TABLE>
<CAPTION>
EVOLVING COUNTRIES FUND (%)
---------------------------
<S> <C>
'1998' -24.03
</TABLE>
Highest Quarter: 24.13% (4Q1998)
Lowest Quarter: -28.87% (2Q1998)
Year-to-Date (as of 3/31/99): 7.64%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
8/29/97
- ---------------------------------------------------------------------------------------------------------
CLASS III -25.55% N/A N/A -31.25%
- ---------------------------------------------------------------------------------------------------------
IFC INVESTABLE -22.02% N/A N/A -27.52%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 22
GMO ASIA FUND
Fund Inception Date: 2/18/98
<TABLE>
<CAPTION>
FUND CODES
---------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III GMASX Asia 362008 75 7
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Asia Fund seeks high total return through
investment in equity securities traded in the Asian securities markets. The
Fund's current benchmark is the GMO Asia 7 Index.
INVESTMENT UNIVERSE: The Fund invests primarily in equity securities of
companies traded in Asian countries other than Japan. The Fund may also use
derivatives.
PRINCIPAL INVESTMENTS: The Manager has appointed Dancing Elephant, Ltd. to
serve as Consultant to the Fund. The Fund intends to be fully invested, and will
not generally take temporary defensive positions through investment in cash and
high quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivative instruments and related investment techniques to (i)
hedge equity exposure; (ii) replace direct investing; (iii) implement shifts in
investment exposure as a substitute for selling and buying securities; and (iv)
adjust its foreign currency exposure. The Fund will not use derivative
instruments to expose on a net basis more than 100% of its net assets to equity
securities or markets, nor to hold net aggregate foreign currency exposure in
excess of the net assets of the Fund. However, the Fund's foreign currency
exposure may differ significantly from the currency exposure represented by its
equity investments.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to provide Asian equity exposure. Using these
principles, the Consultant creates forecasted returns for countries, securities
and sectors. To forecast returns for countries, the Manager examines factors
such as price to earnings ratios, market momentum, trends in gross domestic
products, market conditions, long-term trends and paradigm shifts. For
securities, the Consultant examines factors such as fair value, earnings and
price momentum, price to cash flow and measures of neglect (a measure of low
analyst coverage and low price volatility). For sectors, the Consultant examines
factors similar to those used for securities, and also evaluates economic
sensitivity and industrial trends. The Consultant also monitors the economic and
political conditions in these markets and adjusts its strategies as markets
develop or encounter setbacks. The Consultant then uses an optimization process
to weigh the trade-off among a stock's return forecast, how much risk it adds
relative to the Fund's benchmark and transaction costs.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Liquidity Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk,
Concentration Risk, Leveraging Risk and Credit and Counterparty Risk. For more
information about these risks and other principal risks of an investment in the
Fund, see "Summary of Principal Risks" on page 39.
No performance information is included in this section because the Fund
commenced operations in 1998.
21
<PAGE> 23
GMO GLOBAL PROPERTIES FUND
Fund Inception Date: 12/20/96
<TABLE>
<CAPTION>
FUND CODES
---------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III GMGPX N/A 362008 30 2
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Global Properties Fund seeks high total return
through investment in securities of issuers throughout the world which are
engaged in or related to the real estate industry or which own significant real
estate assets ("real estate companies"). The Fund's current benchmark is the SSB
BMI World Property Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of publicly traded real estate companies with market capitalizations exceeding
$30 million. The Fund will typically make investments in approximately 30
countries. The Fund may also use derivatives to adjust its foreign currency
exposure.
PRINCIPAL INVESTMENTS: The Fund invests primarily in the equity securities
of companies that have at least 50% of their assets, gross income or net profits
attributable to ownership, construction, management or sale of residential,
commercial or industrial real estate, or to products or services that are
related to the real estate industry. The Fund intends to be fully invested, and
will not generally take temporary defensive positions through investment in cash
and high quality money market instruments.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental principles
to provide exposure to global real estate companies. The Manager uses a four
step process to build the portfolio. First, the Manager analyzes relative
macroeconomic trends and evaluates currency exchange risks in a country. Second,
the Manager analyzes local property markets, examining such factors as supply
and demand, rental rate and capital value trends, all segmented by property
types. Third, the Manager values individual stocks based on current price to a
target value adjusted for return volatility, composition and cost of capital,
property quality, management quality and earnings growth. Finally, the Manager
selects stocks, assuming holding periods ranging from 12 to 36 months. The
portfolio is constructed by first deciding country allocations, then currency
hedges, property type preferences and finally stock selection.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Liquidity Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk,
Non-Diversification Risk, Concentration Risk, Leveraging Risk and Credit and
Counterparty Risk. For more information about these risks and other principal
risks of an investment in the Fund, see "Summary of Principal Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
GLOBAL PROPERTIES FUND (%)
--------------------------
<S> <C>
'1997' 1.81
'1998' -9.34
</TABLE>
Highest Quarter: 6.50% (3Q1997)
Lowest Quarter: -10.99% (3Q1998)
Year-to-Date (as of 3/31/99): -4.29%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/20/96
- ---------------------------------------------------------------------------------------------------------
CLASS III -10.16% N/A N/A -3.97%
- ---------------------------------------------------------------------------------------------------------
SSB BMI WORLD PROPERTY INDEX -13.24% N/A N/A -10.45%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 24
FIXED INCOME FUNDS
The Funds in this category invest to a substantial extent in fixed income
securities. These are obligations of the issuer to make payments of principal
and/or interest on future dates, and include bonds, notes and asset backed
securities. For these purposes, a bond refers to any fixed income obligation
with an original maturity of two years or more, but the Manager may also create
"synthetic" bonds by combining a futures contract or option on a fixed income
security with cash, a cash equivalent or another fixed income security. If the
issuer or guarantor of a fixed income security is a foreign government or an
agency or political subdivision, the obligation is often referred to as
sovereign debt. The Manager will employ a variety of techniques to adjust the
sensitivity of a Fund's value to changes in interest rates. This sensitivity is
often measured by, and correlates strongly to, the portfolio's duration. The
duration of a fixed income security is the weighted average maturity, expressed
in years, of the present value of all expected future cash flows, including
interest payments and principal repayments. For example, for a bond with a 6%
coupon that matures in five years with a 6% yield, duration would be 4.39 years.
The Emerging Countries referred to below include less developed countries in
Asia, Latin America, the Middle East, Africa and Europe.
GMO DOMESTIC BOND FUND
Fund Inception Date: 8/18/94
<TABLE>
<CAPTION>
FUND CODES
------------------------------------------
Ticker Symbol Cusip
------ ---------- -----------
<S> <C> <C> <C> <C>
Class III GMDBX DomestBd 362007 41 1
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Domestic Bond Fund seeks high total return
through investment in U.S. investment grade securities. The Fund's current
benchmark is the Lehman Brothers Government Bond Index.
PRINCIPAL INVESTMENTS: The Fund invests primarily in U.S. government
securities, including asset-backed securities issued by U.S. government
agencies, but may also invest in other U.S. dollar denominated fixed income
investments, including investment-grade bonds, convertible bonds and
asset-backed securities of private issuers. The Fund may expose a portion of its
assets to foreign credit, and may invest some of its assets in lower-rated
securities. The Fund may make use of a wide variety of exchange-traded and
over-the-counter derivative instruments to implement its strategy.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager employs fundamental
research techniques to identify bonds which have high relative yield spreads and
which the Manager believes are undervalued. The Manager also considers issue-
specific risk in the selection process. The Manager employs competitive trading
practices to help ensure that the Fund receives the best available prices and
monitors credit risk in the portfolio. The Fund's portfolio will generally have
a duration of four (4) to six (6) years.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk and Leveraging Risk. For more information about these
risks and other principal risks of an investment in the Fund, see "Summary of
Principal Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. The table to the right shows
how the Fund's average annual total returns for different calendar periods
compare with those of a broad-based index. See "Benchmarks and Indexes" for a
description of the index. Performance results in the table reflect payment of
Fund expenses; returns for the comparative index do not reflect payment of any
expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
DOMESTIC BOND FUND (%)
----------------------
<S> <C>
'1995' 18.57
'1996' 3.04
'1997' 9.96
'1998' 8.05
</TABLE>
Highest Quarter: 6.35% (2Q1995)
Lowest Quarter: -2.37% (1Q1996)
Year-to-Date (as of 3/31/99): -1.63%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
8/18/94
- --------------------------------------------------------------------------------------------------------
CLASS III 8.05% N/A N/A 8.74%
- --------------------------------------------------------------------------------------------------------
LEHMAN BROTHERS GOVERNMENT BOND INDEX 9.85% N/A N/A 9.02%
- --------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 25
GMO U.S. BOND/GLOBAL
ALPHA A FUND
Fund Inception Date: 4/30/97
<TABLE>
<CAPTION>
FUND CODES
-----------------------------------------
Ticker Symbol Cusip
------ --------- -----------
<S> <C> <C> <C> <C>
Class III GUGAX USBdAlfaA 362008 60 9
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO U.S. Bond/Global Alpha A Fund seeks high
total return relative to its performance benchmark through investment in U.S.
investment grade securities. The Fund achieves exposure to international bond
and currency markets by investing in a combination of foreign bond and currency
derivatives, effectively adding to or subtracting from the U.S. bond return the
performance of the Fund's international bond and currency investments. The
Fund's current benchmark is the Lehman Brothers Aggregate Bond Index.
PRINCIPAL INVESTMENTS: The Fund invests primarily in U.S. government
securities, including asset-backed securities issued by U.S. government
agencies, but may also invest in other U.S. dollar denominated fixed income
investments, including investment-grade bonds, convertible bonds and
asset-backed securities of private issuers. The Fund may expose a portion of its
assets to lower-rated securities (also known as "junk bonds"), which may include
the sovereign debt of Emerging Countries. The Fund will generally attempt to
hedge at least 75% of its foreign currency exposure back to the U.S. dollar, and
may use derivatives to adjust its foreign currency exposure independently of its
exposure to bonds and bond markets. The Fund may make use of a wide variety of
exchange-traded and over-the-counter derivative instruments to implement its
strategy.
The Fund's return will depend primarily on 1) the performance of U.S. bond
markets, 2) the Manager's success at outperforming the U.S. bond market, and 3)
the Manager's success in selecting global bond and currency markets to over-and
underweight. A portion of the Fund's net assets may be invested in or exposed to
foreign bonds, bond markets and foreign currencies on an unhedged basis. The
total of the absolute values of all deviations from the benchmark (that is,
without regard to sign and allowing for no netting of positions) will often
exceed 100% of the value of the Fund for both bonds and currencies, which are
generally considered separately.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager employs fundamental
research techniques and quantitative applications to transfer valuation
inefficiencies from the international bond and currency markets to a core U.S.
bond portfolio. The core portfolio seeks to match the duration of, and produce
returns similar to, the Fund's benchmark. The Manager uses these applications to
determine currency and country allocations. Issues are selected by analyzing
such factors as term structures, sector and issuer yield spreads, tracking error
and embedded option features of the security universe. The Manager implements
these allocations by identifying undervalued securities and currencies within
the relevant bond and currency markets.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk, Liquidity Risk, Foreign Investment Risk, Currency Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Year Ending December 31
[Graph]
<TABLE>
<CAPTION>
U.S. BOND/GLOBAL ALPHA A FUND (%)
---------------------------------
<S> <C>
'1998' 3.87
</TABLE>
Highest Quarter: 1.51% (3Q1998)
Lowest Quarter: -0.13% (4Q1998)
Year-to-Date (as of 3/31/99): -2.37%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
4/30/97
- --------------------------------------------------------------------------------------------------------
CLASS III 3.72% N/A N/A 9.35%
- --------------------------------------------------------------------------------------------------------
LEHMAN BROTHERS AGGREGATE BOND INDEX 8.63% N/A N/A 10.42%
- --------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 26
GMO U.S. BOND/GLOBAL
ALPHA B FUND
Fund Inception Date: 7/29/97
<TABLE>
<CAPTION>
FUND CODES
-----------------------------------------
Ticker Symbol Cusip
------ --------- -----------
<S> <C> <C> <C> <C>
Class III GUGBX USBdAlfaB 362008 88 0
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO U.S. Bond/Global Alpha B Fund seeks high
total return relative to its performance benchmark through investment in U.S.
investment grade securities. The Fund achieves exposure to international bond
and currency markets by investing in a combination of foreign bond and currency
derivatives, effectively adding to or subtracting from the U.S. bond return the
performance of the Fund's international bond and currency investments. The
Fund's current benchmark is the Lehman Brothers Aggregate Bond Index.
PRINCIPAL INVESTMENTS: The Fund invests primarily in U.S. government
securities, including asset-backed securities issued by U.S. government
agencies, but may also invest in other U.S. dollar denominated fixed income
investments, including investment-grade bonds, convertible bonds and
asset-backed securities of private issuers. The Fund may expose a portion of its
assets to lower-rated securities (also known as "junk bonds"). The Fund will
generally attempt to hedge at least 75% of its foreign currency exposure back to
the U.S. dollar, and may use derivatives to adjust its foreign currency exposure
independently of its exposure to bonds and bond markets. The Fund may make use
of a wide variety of exchange-traded and over-the-counter derivative instruments
to implement its strategy.
The Fund's return will depend primarily on 1) the performance of U.S. bond
markets, 2) the Manager's success at outperforming the U.S. bond market, and 3)
the Manager's success in selecting global bond and currency markets to over-and
underweight. A portion of the Fund's net assets may be invested in or exposed to
foreign bonds, bond markets and foreign currencies on an unhedged basis. The
total of the absolute values of all deviations from the benchmark (that is,
without regard to sign and allowing for no netting of positions) will often
exceed 100% of the value of the Fund for both bonds and currencies, which are
generally considered separately.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager employs fundamental
research techniques and quantitative applications to transfer valuation
inefficiencies from the international bond and currency markets to a core U.S.
bond portfolio. The core portfolio seeks to match the duration of, and produce
returns similar to, the Fund's benchmark. The Manager uses these applications to
determine currency and country allocations. Issues are selected by analyzing
such factors as term structures, sector and issuer yield spreads, tracking error
and embedded option features of the security universe. The Manager implements
these allocations by identifying undervalued securities and currencies within
the relevant bond and currency markets.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk, Leveraging Risk
and Credit and Counterparty Risk. For more information about these risks and
other principal risks of an investment in the Fund, see "Summary of Principal
Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Year Ending December 31
[Graph]
<TABLE>
<CAPTION>
U.S. BOND/GLOBAL ALPHA B FUND (%)
---------------------------------
<S> <C>
'1998' 7.00
</TABLE>
Highest Quarter: 3.91% (3Q1998)
Lowest Quarter: -0.41% (4Q1998)
Year-to-Date (as of 3/31/99): -1.77%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
7/29/97
- --------------------------------------------------------------------------------------------------------
CLASS III 6.84% N/A N/A 6.88%
- --------------------------------------------------------------------------------------------------------
LEHMAN BROTHERS AGGREGATE BOND INDEX 8.63% N/A N/A 8.89%
- --------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 27
GMO INTERNATIONAL BOND FUND
Fund Inception Date: 12/22/93
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ -------- -----------
<S> <C> <C> <C> <C>
Class III GMIBX IntlBond 362007 37 9
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO International Bond Fund seeks high total
return through investment in foreign bond and currency markets. The Fund's
current benchmark is the J.P. Morgan Non-U.S. Government Bond Index.
PRINCIPAL INVESTMENTS: The Fund invests primarily in investment-grade
bonds denominated in various currencies (including U.S. dollars and
multi-currency units), including asset-backed securities issued by foreign
governments, U.S. government agencies and private issuers. By coupling such
investments with various exchange-traded and over-the-counter bond and currency
derivative instruments, the Fund seeks to obtain the return of those primarily
investment-grade international bonds, bond markets and currencies selected by
the Manager. The Fund may use derivatives to adjust its foreign currency
exposure independently of its exposure to bonds and bond markets. The Fund may
invest a portion of its net assets in lower-rated securities (also known as
"junk bonds"), which may include sovereign debt of Emerging Countries. The total
of the absolute values of all deviations from the benchmark (that is, without
regard to sign and allowing for no netting of positions) will often exceed 100%
of the value of the Fund for both bonds and currencies, which are generally
considered separately.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager employs fundamental
research techniques in quantitative applications to measure the value of the
bond and currency markets. The Manager uses these applications to determine
currency and country allocations. Issues are selected by analyzing such factors
as term structures, sector and issuer yield spreads, tracking error and embedded
option features of the security universe. The Manager implements these
allocations by identifying undervalued securities and currencies within the
relevant bond and currency markets.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Liquidity Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
INTERNATIONAL BOND FUND (%)
---------------------------
<S> <C>
'1994' 5.16
'1995' 27.31
'1996' 16.66
'1997' 0.88
'1998' 10.79
</TABLE>
Highest Quarter: 10.53% (1Q1995)
Lowest Quarter: -5.08% (1Q1997)
Year-to-Date (as of 3/31/99): -5.78%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/22/93
- ---------------------------------------------------------------------------------------------------------
CLASS III 10.62% 11.75% N/A 11.46%
- ---------------------------------------------------------------------------------------------------------
J.P. MORGAN NON-U.S. GOVERNMENT BOND INDEX 18.28% 8.76% N/A 8.50%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE> 28
GMO CURRENCY HEDGED
INTERNATIONAL BOND FUND
Fund Inception Date: 9/30/94
<TABLE>
<CAPTION>
FUND CODES
------------------------------------------
Ticker Symbol Cusip
------ ---------- -----------
<S> <C> <C> <C> <C>
Class III GMHBX CurHgIntBd 362007 34 6
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: GMO Currency Hedged International Bond Fund seeks
high total return through investment in foreign bond and currency markets. The
Fund's current benchmark is the J.P. Morgan Non-U.S. Government Bond Index
(Hedged).
PRINCIPAL INVESTMENTS: The Fund invests primarily in investment-grade
bonds denominated in various currencies (including U.S. dollars and
multi-currency units), including asset-backed securities issued by foreign
governments, U.S. government agencies and private issuers. By coupling such
investments with various exchange-traded and over-the-counter bond and currency
derivative instruments, the Fund seeks to obtain the return of those primarily
investment-grade international bonds, bond markets and currencies selected by
the Manager. The Fund will retain no more than 25% of its net currency exposure
in the U.S. dollar (allowing for netting of long and short currency positions),
and may use derivatives to adjust its foreign currency exposure independently of
its exposure to bonds and bond markets. The Fund may invest a portion of its net
assets in lower-rated securities (also known as "junk bonds"), which may include
sovereign debt of Emerging Countries. The total of the absolute values of all
deviations from the benchmark (that is, without regard to sign and allowing for
no netting of positions) will often exceed 100% of the value of the Fund for
both bonds and currencies, which are generally considered separately.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager employs fundamental
research techniques in quantitative applications to measure the value of the
bond and currency markets. The Manager uses these applications to determine
currency and country allocations. Issues are selected by analyzing such factors
as term structures, sector and issuer yield spreads, tracking error and embedded
option features of the security universe. The Manager implements these
allocations by identifying undervalued securities and currencies within the
relevant bond and currency markets. The Manager will make extensive use of a
wide variety of exchange-traded and over-the-counter derivative instruments to
implement the Fund's strategy.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Liquidity Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
CURRENCY HEDGED INTERNATIONAL BOND FUND(%)
------------------------------------------
<S> <C>
'1995' 27.78
'1996' 23.86
'1997' 15.76
'1998' 5.67
</TABLE>
Highest Quarter: 8.50% (2Q1995)
Lowest Quarter: 0.01% (4Q1998)
Year-to-Date (as of 3/31/99): 1.04%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
9/30/94
- --------------------------------------------------------------------------------------------------------
CLASS III 5.52% N/A N/A 16.69%
- --------------------------------------------------------------------------------------------------------
J.P. MORGAN NON-U.S. GOVERNMENT BOND INDEX (HEDGED) 12.14% N/A N/A 13.08%
- --------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 29
GMO GLOBAL BOND FUND
Fund Inception Date: 12/28/95
<TABLE>
<CAPTION>
FUND CODES
-----------------------------------------
Ticker Symbol Cusip
------ --------- -----------
<S> <C> <C> <C> <C>
Class III GMGBX GlobalBd 362007 31 2
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Global Bond Fund seeks high total return
through investment in global bond and currency markets. The Fund's current
benchmark is the J.P. Morgan Global Government Bond Index.
PRINCIPAL INVESTMENTS: The Fund invests primarily in investment-grade
bonds denominated in various currencies (including U.S. dollars and
multi-currency units), including asset-backed securities issued by foreign
governments, U.S. government agencies and private issuers. By coupling such
investments with various exchange-traded and over-the-counter bond and currency
derivative instruments, the Fund seeks to obtain the return of those primarily
investment-grade international bonds, bond markets and currencies selected by
the Manager. The Fund may use derivatives to adjust its foreign currency
exposure independently of its exposure to bonds and bond markets. The Fund may
invest a portion of its net assets in lower-rated securities (also known as
"junk bonds"), which may include sovereign debt of Emerging Countries. The total
of the absolute values of all deviations from the benchmark (that is, without
regard to sign and allowing for no netting of positions) will often exceed 100%
of the value of the Fund for both bonds and currencies, which are generally
considered separately.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager employs fundamental
research techniques in quantitative applications to measure the value of the
bond and currency markets. The Manager uses these applications to determine
currency and country allocations. Issues are selected by analyzing such factors
as term structures, sector and issuer yield spreads, tracking error and embedded
option features of the security universe. The Manager implements these
allocations by identifying undervalued securities and currencies within the
relevant bond and currency markets.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Liquidity Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
GLOBAL BOND FUND %
------------------
<S> <C>
'1996' 13.07
'1997' 6.36
'1998' 10.25
</TABLE>
Highest Quarter: 5.18% (3Q1998)
Lowest Quarter: -3.28% (1Q1997)
Year-to-Date (as of 3/31/99): -4.98%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/28/95
- ---------------------------------------------------------------------------------------------------------
CLASS III 10.09% N/A N/A 9.77%
- ---------------------------------------------------------------------------------------------------------
J.P. MORGAN GLOBAL GOVERNMENT BOND INDEX 15.31% N/A N/A 6.86%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 30
GMO EMERGING COUNTRY
DEBT FUND
Fund Inception Date: 4/19/94
<TABLE>
<CAPTION>
FUND CODES
-----------------------------------------
Ticker Symbol Cusip
------ --------- -----------
<S> <C> <C> <C> <C>
Class III GMCDX EmgCntrDt 362007 27 0
Class IV GMDFX EmgCntrDt 362008 78 1
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Emerging Country Debt Fund seeks to earn high
total return through investment in sovereign debt of developing countries in
Asia, Latin America, the Middle East, Africa and Europe ("Emerging Countries").
The Fund's current benchmark is the J.P. Morgan Emerging Markets Bond Index+.
PRINCIPAL INVESTMENTS: The Fund invests primarily in sovereign debt of
Emerging Countries. The Fund will generally have at least 50% of its assets
denominated in, or hedged into, U.S. dollars. The Fund may make use of a wide
variety of exchange-traded and over-the-counter derivative instruments to
implement its strategy, and may seek to provide some protection against defaults
of sovereign issuers in certain countries through the use of certain derivative
instruments.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager employs a bottom-up
approach to examining Emerging Country debt issues, and uses quantitative
applications to take advantage of valuation inefficiencies in Emerging Country
debt markets. In addition to considerations relating to investment restrictions
and tax barriers, allocation of the Fund's investments among selected Emerging
Countries will be based on certain other relevant factors including specific
security valuations, as well as the outlook for economic growth, currency
exchange rates, interest rates and political factors.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Liquidity Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
EMERGING COUNTRY DEPT FUND %
----------------------------
<S> <C>
'1995' 45.10
'1996' 65.71
'1997' 31.01
'1998' -30.53
</TABLE>
Highest Quarter: 26.17% (2Q1995)
Lowest Quarter: -34.91% (3Q1998)
Year-to-Date (as of 3/31/99): 4.29%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
4/19/94
- --------------------------------------------------------------------------------------------------------
CLASS III -31.05% N/A N/A 16.86%
- --------------------------------------------------------------------------------------------------------
J.P. MORGAN EMERGING MARKETS BOND INDEX+ -14.35% N/A N/A 12.30%
- --------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 31
GMO SHORT-TERM INCOME FUND
Fund Inception Date: 4/18/90
<TABLE>
<CAPTION>
FUND CODES
---------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III GMSIX STIF 362007 47 8
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Short-Term Income Fund seeks to provide
current income to the extent consistent with the preservation of capital and
liquidity through investment in a portfolio of high-quality fixed income
instruments. The Fund's current benchmark is the SSB 3 Month T-Bill Index.
PRINCIPAL INVESTMENTS: The Fund invests primarily in issues of
AAA-quality. The Fund may invest in repurchase agreements, high-quality prime
commercial paper and master demand notes, high-quality corporate debt securities
and high-quality debt securities backed by pools of commercial or consumer
finance loans and certificates of deposit, bankers' acceptances and other bank
obligations and repurchase agreements. While the Fund intends to invest
primarily in short-term securities, it is NOT a money market fund.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager uses fundamental
investment techniques to purchase bonds with a high relative yield spread. The
Fund seeks to maintain a duration of not greater than two years. While the Fund
invests in high-quality instruments, the Manager may or may not dispose of a
security whose rating is lowered after purchase.
RISKS: The most significant risk of an investment in the Fund is Market
Risk. For more information about this risk, and other principal risks of an
investment in the Fund, see "Summary of Principal Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. The table to the right shows
how the Fund's average annual total returns for different calendar periods
compare with those of a broad-based index. See "Benchmarks and Indexes" for a
description of the index. Performance results in the table reflect payment of
Fund expenses; returns for the comparative index do not reflect payment of any
expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
SHORT-TERM INCOME FUND(%)
-------------------------
<S> <C>
'1991' 8.23
'1992' 5.78
'1993' 5.65
'1994' 1.60
'1995' 9.97
'1996' 5.40
'1997' 6.11
'1998' 4.48
</TABLE>
Highest Quarter: 3.51% (4Q1991)
Lowest Quarter: -0.24% (1Q1992)
Year-to-Date (as of 3/31/99): 1.26%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
4/18/90*
- --------------------------------------------------------------------------------------------------------
CLASS III 4.48% 5.47% N/A 6.06%
- --------------------------------------------------------------------------------------------------------
SSB 3 MONTH T-BILL INDEX 5.04% 5.10% N/A 4.99%
- --------------------------------------------------------------------------------------------------------
</TABLE>
* For the period from April 18, 1990 until June 30, 1991, the Fund operated as a
money market fund.
30
<PAGE> 32
GMO GLOBAL HEDGED EQUITY FUND
Fund Inception Date: 7/29/94
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III N/A N/A 362007 44 5
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Global Hedged Equity Fund seeks high total
return consistent with minimal exposure to general equity market risk. The
Fund's current benchmark is the SSB 3 Month T-Bill Index.
INVESTMENT UNIVERSE: The Fund invests primarily in shares of the GMO U.S.
Equity Funds and GMO International Equity Funds (including the GMO Emerging
Markets Funds) (the "underlying Funds"), or directly in equity securities of the
type invested in by these Funds. The Fund may also use derivatives, including
the equity hedging investments described below.
PRINCIPAL INVESTMENTS: The Fund invests primarily in a combination of (i)
global equity securities, generally held through the underlying Funds; (ii)
derivative instruments intended to hedge the value of the Fund's equity
positions against general movements in the relevant equity market(s) and against
changes in the value of the foreign currencies represented in the Fund's
non-U.S. positions relative to the U.S. dollar; and (iii) long interest rate
futures contracts intended to extend the duration of the Fund. The Fund expects
to make substantial use of exchange-traded and over-the-counter derivatives and
related instruments.
Investors should understand that, as opposed to conventional portfolios
composed of equity securities, to the extent that the Fund's hedging positions
are effective, the performance of the Fund is not expected to correlate with the
movements of equity markets generally. Rather, the Fund will perform more like a
short-term fixed income fund adjusted by the Manager's outperformance or
underperformance of equity markets generally.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund will implement its strategy
globally with a combination of U.S. equities and international equities. For the
U.S. equity portion of the portfolio, the Fund will invest in a U.S. equity
strategy that will be hedged using exchange-traded S&P 500 futures contracts.
For the international equity portion of the portfolio, the Fund will invest in
an international strategy that will be hedged using foreign exchange-traded
futures contracts and swap contracts in which the Fund is obligated to pay the
return of foreign markets in return for a U.S. dollar-based interest rate.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk and Foreign Investment Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
GLOBAL HEDGED EQUITY FUND (%)
-----------------------------
<S> <C>
'1995' 8.04
'1996' 4.09
'1997' -1.6
'1998' -7.08
</TABLE>
Highest Quarter: 3.28% (2Q1995)
Lowest Quarter: -4.10% (2Q1998)
Year-to-Date (as of 3/31/99): -1.42%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
7/29/94
- --------------------------------------------------------------------------------------------------------
CLASS III -8.72% N/A N/A 0.32%
- --------------------------------------------------------------------------------------------------------
SSB 3 MONTH T-BILL INDEX 5.04% N/A N/A 5.28%
- --------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 33
GMO INFLATION INDEXED BOND FUND
Fund Inception Date: 3/31/97
<TABLE>
<CAPTION>
FUND CODES
-----------------------------------------
Ticker Symbol Cusip
------ --------- -----------
<S> <C> <C> <C> <C>
Class III GMIIX InfltInBd 362007 247
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Inflation Indexed Bond Fund seeks high total
return through investment in government bonds that are indexed or otherwise
"linked" to general measures of inflation in the country of issue ("inflation
indexed bonds"). The Fund's current benchmark is the Lehman Brothers Treasury
Inflation Notes Index.
PRINCIPAL INVESTMENTS: The Fund invests primarily in inflation indexed (as
defined above) and other fixed income securities of both the United States and
foreign issuers. Inflation indexed securities issued by the U.S. Treasury are
fixed income securities whose principal value is periodically adjusted according
to the rate of inflation. A bond will be deemed to be "linked" to general
measures of inflation if, by such bond's terms, principal or interest components
change with general movements of inflation in the country of issue. The Fund may
also invest a portion of its assets in lower-rated securities (also known as
"junk bonds"). The Fund may also invest in derivatives.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager uses fundamental
investment techniques to select issues by matching the Fund's duration to that
of its benchmark. The Manager may use exchange-traded and over-the-counter
derivative instruments to implement the Fund's strategy.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk, Leveraging Risk
and Credit and Counterparty Risk. For more information about these risks and
other principal risks of an investment in the Fund, see "Summary of Principal
Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Year Ending December 31
[Graph]
<TABLE>
<CAPTION>
INFLATION INDEXED BOND FUND(%)
------------------------------
<S> <C>
'1998' 4.17
</TABLE>
Highest Quarter: 2.36% (3Q1998)
Lowest Quarter: 0.16% (4Q1998)
Year-to-Date (as of 3/31/99): 0.81%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3/31/97
- --------------------------------------------------------------------------------------------------------
CLASS III 3.96% N/A N/A 4.18%
- --------------------------------------------------------------------------------------------------------
LEHMAN BROTHERS TREASURY INFLATION NOTES INDEX 3.94% N/A N/A 4.25%
- --------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 34
GMO EMERGING COUNTRY DEBT
SHARE FUND
Fund Inception Date: 7/20/98
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III N/A N/A 362008 64 1
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Emerging Country Debt Share Fund seeks high
total return through investment in the GMO Emerging Country Debt Fund ("ECDF"),
a portfolio of the Trust. The Fund's current benchmark is the J.P. Morgan
Emerging Markets Bond Index+.
PRINCIPAL INVESTMENTS: The Fund invests primarily in ECDF, and will
therefore indirectly employ ECDF's principal strategies. The Fund may also
invest in cash and high quality money market instruments.
For a discussion of the objective, principal investments and strategies and
portfolio construction process for ECDF, please see "Summary of Fund Objectives
and Principal Investment Strategies -- Emerging Country Debt Fund" above.
RISKS: The most significant risks of an investment in the Fund are the
risks the Fund is exposed to through ECDF, which include Market Risk, Liquidity
Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk, Leveraging Risk
and Credit and Counterparty Risk. For more information about these risks and
other principal risks of an investment in the Fund, see "Summary of Principal
Risks" on page 39.
No performance information is included in this section because the Fund
commenced operations in 1998.
33
<PAGE> 35
ASSET ALLOCATION FUNDS ("FUNDS OF FUNDS")
The Asset Allocation Funds invest primarily in other Funds of the Trust
and, as a result, provide an investor with exposure to the investments -- and
attendant risks -- of the underlying Funds in which each Asset Allocation Fund
invests.
PORTFOLIO CONSTRUCTION
The Manager uses fundamental and quantitative investment principles to
provide broad exposure to asset classes or sectors ("Asset Classes") and to make
optimal allocations among these Asset Classes. The Manager uses top-down
valuation methodologies to allocate Fund assets away from underlying Funds
investing primarily in overvalued Asset Classes and into those underlying Funds
whose Asset Classes the Manager believes are undervalued. The Manager considers
forecasted risk, return, transaction costs and expected value-added for each of
the underlying Funds when implementing the allocation strategy. Each Fund will
consider whether to rebalance when cash flows occur, the investment outlook
changes, or there has been a significant change in market valuation levels.
GMO INTERNATIONAL EQUITY
ALLOCATION FUND
Fund Inception Date: 10/11/96
<TABLE>
<CAPTION>
FUND CODES
---------------------------------------
Ticker Symbol Cusip
------ ------- -----------
<S> <C> <C> <C> <C>
Class III GIEAX IntEqAl 362007 21 3
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The International Equity Allocation Fund seeks total
return greater than the return of the GMO EAFE Extended benchmark through
investment to varying extents in other Funds of the Trust.
INVESTMENT UNIVERSE: The Fund invests primarily in the GMO International
Equity Funds (including the GMO Emerging Markets Funds) and the GMO Fixed Income
Funds (collectively, "underlying Funds").
PRINCIPAL INVESTMENTS: The Fund seeks a total return greater than the GMO
EAFE Extended benchmark. This benchmark modifies the MSCI EAFE index by
including a market capitalization weighting for emerging markets. The Fund will
typically be nearly fully exposed to equity and fixed income securities through
investment in the underlying Funds.
RISKS: The most significant risk of an investment in the Fund is the risk
that one or more underlying Funds will not perform as expected. In addition, the
Fund will indirectly be exposed to all of the risks of an investment in the
underlying Funds. For more information about these risks and other principal
risks of an investment in the Fund, see "Summary of Principal Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years ending December 31
[Graph]
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY ALLOCATION FUND(%)
---------------------------------------
<S> <C>
'1997' 1.74
'1998' 1.99
</TABLE>
Highest Quarter: 14.99% (4Q1998)
Lowest Quarter: -15.91% (3Q1998)
Year-to-Date (as of 3/31/99): 0.93%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
10/11/96
- --------------------------------------------------------------------------------------------------------
CLASS III 1.06% N/A N/A 2.47%
- --------------------------------------------------------------------------------------------------------
MSCI AC WORLD EX US 14.11% N/A N/A 8.15%
- --------------------------------------------------------------------------------------------------------
GMO EAFE-LITE EXTENDED 16.76% N/A N/A 11.25%
- --------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 36
GMO WORLD EQUITY
ALLOCATION FUND
Fund Inception Date: 6/28/96
<TABLE>
<CAPTION>
FUND CODES
-----------------------------------------
Ticker Symbol Cusip
------ --------- -----------
<S> <C> <C> <C> <C>
Class III GMWAX WrldEqAl 362007 17 1
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The World Equity Allocation Fund seeks total return
greater than the return of the GMO World Extended benchmark through investment
to varying extents in other Funds of the Trust.
INVESTMENT UNIVERSE: The Fund invests primarily in the GMO International
Equity Funds (including the GMO Emerging Markets Funds), GMO U.S. Equity Funds,
and the GMO Fixed Income Funds (collectively, "underlying Funds").
PRINCIPAL INVESTMENTS: The Fund seeks a total return greater than the GMO
World Extended benchmark. This benchmark modifies the MSCI World Index including
a market capitalization weighting for emerging markets. The Fund will typically
be nearly fully exposed to equity and fixed income securities through investment
in the underlying Funds.
RISKS: The most significant risk of an investment in the Fund is the risk
that one or more underlying Funds will not perform as expected. In addition, the
Fund will indirectly be exposed to all of the risks of an investment in the
underlying Funds. For more information about these risks and other principal
risks of an investment in the Fund, see "Summary of Principal Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
WORLD EQUITY ALLOCATION FUND (%)
--------------------------------
<S> <C>
'1997' 10.23
'1998' 2.73
</TABLE>
Highest Quarter: 14.30% (4Q1998)
Lowest Quarter: -15.08% (3Q1998)
Year-to-Date (as of 3/31/99): 0.68%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
10/22/96*
- --------------------------------------------------------------------------------------------------------
CLASS III 1.90% N/A N/A 7.37%
- --------------------------------------------------------------------------------------------------------
MSCI AC WORLD INDEX 21.72% N/A N/A 17.90%
- --------------------------------------------------------------------------------------------------------
GMO WORLD-LITE EXTENDED INDEX 22.16% N/A N/A 20.04%
- --------------------------------------------------------------------------------------------------------
</TABLE>
* Class III inception date. The Fund commenced operations on June 28, 1996 with
a single class of shares -- Class I shares. Class I shares converted to Class
III shares on March 1, 1997.
35
<PAGE> 37
GMO GLOBAL (U.S.+) EQUITY
ALLOCATION FUND
Fund Inception Date: 6/28/96
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ -------- -----------
<S> <C> <C> <C> <C>
Class III GMGEX GlEqtyAl 362007 14 8
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Global (U.S.+) Equity Allocation Fund seeks
total return greater than the return of the GMO Global (U.S.+) Equity Index
through investment to varying extents in other Funds of the Trust.
INVESTMENT UNIVERSE: The Fund invests primarily in the GMO U.S. Equity
Funds, GMO International Equity Funds (including the GMO Emerging Markets Funds)
and the GMO Fixed Income Funds (collectively, "underlying Funds").
PRINCIPAL INVESTMENTS: The Fund seeks a total return greater than the GMO
Global (U.S.+) Equity Index benchmark, which is comprised 75% of the S&P 500
Index and 25% of GMO EAFE Extended. GMO EAFE Extended modifies the MSCI EAFE
Index by including a market capitalization weighting for emerging markets. The
Fund will typically be nearly fully exposed to equity and fixed income
securities through investment in the underlying Funds.
RISKS: The most significant risk of an investment in the Fund is the risk
that one or more underlying Funds will not perform as expected. In addition, the
Fund will indirectly be exposed to all of the risks of an investment in the
underlying Funds. For more information about these risks, and other principal
risks of an investment in the Fund, see "Summary of Principal Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
GLOBAL (U.S.+) EQUITY ALLOCATION FUND (%)
-----------------------------------------
<S> <C>
'1997' 19.90
'1998' 5.97
</TABLE>
Highest Quarter: 14.22% (4Q1998)
Lowest Quarter: -13.52% (3Q1998)
Year-to-Date (as of 3/31/99): 0.55%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11/26/96
- --------------------------------------------------------------------------------------------------------
CLASS III 5.31% N/A N/A 12.14%
- --------------------------------------------------------------------------------------------------------
75% S&P 500; 25% MSCI ALL COUNTRY WORLD EX U.S. 24.92% N/A N/A 22.56%
- --------------------------------------------------------------------------------------------------------
GMO GLOBAL (U.S.+) EQUITY INDEX 25.65% N/A N/A 23.54%
- --------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE> 38
GMO GLOBAL BALANCED
ALLOCATION FUND
Fund Inception Date: 7/29/96
<TABLE>
<CAPTION>
FUND CODES
---------------------------------------
Ticker Symbol Cusip
------ ------- -----------
<S> <C> <C> <C> <C>
Class III GMGAX GlBalAl 362007 11 4
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Global Balanced Allocation Fund seeks total
return greater than the return of the GMO Global Balanced Index through
investment to varying extents in other Funds of the Trust.
INVESTMENT UNIVERSE: The Fund invests primarily in the GMO International
Equity Funds (including the GMO Emerging Markets Funds), the GMO Fixed Income
Funds and the GMO U.S. Equity Funds.
PRINCIPAL INVESTMENTS: The Fund seeks a total return greater than the GMO
Global Balanced benchmark, which is comprised 48.75% of the S&P 500 Index,
16.25% of GMO EAFE Extended and 35% of the Lehman Brothers Aggregate Bond Index.
GMO EAFE Extended modifies the MSCI EAFE Index by including a market
capitalization weighting for emerging markets. The Fund will typically be nearly
fully exposed to equity and fixed income securities through investment in the
underlying Funds.
RISKS: The most significant risk of an investment in the Fund is the risk
that one or more underlying Funds will not perform as expected. In addition, the
Fund will indirectly be exposed to all of the risks of an investment in the
underlying Funds. For more information about these risks, and other principal
risks of an investment in the Fund, see "Summary of Principal Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
GLOBAL BALANCED ALLOCATION FUND (%)
-----------------------------------
<S> <C>
'1998' 4.38
</TABLE>
Highest Quarter: 7.85% (4Q1998)
Lowest Quarter: -7.89% (3Q1998)
Year-to-Date (as of 3/31/99): -0.46%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6/2/97*
- --------------------------------------------------------------------------------------------------------
CLASS III 3.90% N/A N/A 8.20%
- --------------------------------------------------------------------------------------------------------
50% S&P 500; 50% LEHMAN AGGREGATE BOND FUND 19.00% N/A N/A 19.76%
- --------------------------------------------------------------------------------------------------------
GMO GLOBAL BALANCED INDEX 20.14% N/A N/A 19.28%
- --------------------------------------------------------------------------------------------------------
</TABLE>
* Class III inception date. The Fund commenced operations on July 29, 1996 with
a single class of shares -- Class I Shares. Class I Shares converted to Class
III Shares on September 1, 1997.
37
<PAGE> 39
GMO U.S. SECTOR FUND
Fund Inception Date: 12/31/92
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ -------- -----------
<S> <C> <C> <C> <C>
Class III GMUSX USSector 362007 75 9
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The U.S. Sector Fund seeks total return greater than
that of the S&P 500 through investment in common stocks, either directly or
through investment in other Funds of the Trust ("underlying Funds").
INVESTMENT UNIVERSE: The Fund invests primarily in the U.S. Core Fund,
Growth Fund, Value Fund, Small Cap Growth Fund, Small Cap Value Fund, Intrinsic
Value Fund and REIT Fund, and/or directly in equity securities of the type
invested in by these Funds.
PRINCIPAL INVESTMENTS: The Fund will typically be nearly fully exposed to
equity securities through investment in the underlying Funds.
RISKS: The most significant risk of an investment in the Fund is the risk
that one or more underlying Funds will not perform as expected. In addition, the
Fund will indirectly be exposed to all of the risks of an investment in the
underlying Funds. For more information about these risks and other principal
risks of an investment in the Fund, see "Summary of Principal Risks" on page 39.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
<S> <C>
'1993' 16.88
'1994' 3.27
'1995' 43.18
'1996' 18.24
'1997' 28.64
'1998' 11.64
</TABLE>
Highest Quarter: 16.09% (4Q1998)
Lowest Quarter: -12.52% (3Q1998)
Year to Date (as of 3/31/99): 0.21%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/31/92
- --------------------------------------------------------------------------------------------------------
CLASS III 11.14% 20.10% N/A 19.55%
- --------------------------------------------------------------------------------------------------------
S&P 500 28.57% 24.05% N/A 21.60%
- --------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 40
SUMMARY OF PRINCIPAL RISKS
The following chart identifies the Principal Risks associated with each
Fund. Risks not marked for a particular Fund may, however, still apply to some
extent to that Fund at various times.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SMALLER FOREIGN NON-
MARKET LIQUIDITY COMPANY DERIVATIVES INVESTMENT CURRENCY DIVERSIFICATION CONCENTRATION
RISK RISK RISK RISK RISK RISK RISK RISK
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DOMESTIC EQUITY FUNDS
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
U.S. Core Fund X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
Tobacco-Free Core Fund X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
Value Fund X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
Fundamental Value Fund X X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
Intrinsic Value Fund X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
Growth Fund X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
Small Cap Value Fund X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
Small Cap Growth Fund X X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
REIT Fund X X X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
INTERNATIONAL EQUITY FUNDS
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
International Core Fund X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
Currency Hedged International
Core Fund X X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
Foreign Fund X X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
International Small Companies
Fund X X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
Japan Fund X X X X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
Emerging Markets Fund X X X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
Evolving Countries Fund X X X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
Global Properties Fund X X X X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
Asia Fund X X X X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
FIXED INCOME FUNDS
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
Domestic Bond Fund X X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
U.S. Bond/Global Alpha A
Fund X X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
U.S. Bond/Global Alpha B
Fund X X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
International Bond Fund X X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
Currency Hedged International
Bond Fund X X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
Global Bond Fund X X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
Emerging Country Debt Fund X X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
Short-Term Income Fund X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
Global Hedged Equity Fund X X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
Inflation Indexed Bond Fund X X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
Emerging Country Debt Share Fund X X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
ASSET ALLOCATION FUNDS
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
International Equity Allocation
Fund X X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
World Equity Allocation Fund X X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
Global (U.S.+) Equity Allocation
Fund X X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
Global Balanced Allocation
Fund X X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
U.S. Sector Fund X X X X X X
- ---------------------------------- -------- --------- ---------- ---------- ---------- ---------- --------------- -------------
<CAPTION>
- ---------------------------------- --------------------------------------
CREDIT AND
LEVERAGING COUNTERPARTY MANAGEMENT
RISK RISK RISK
- ---------------------------------- ---------- ------------- -------------
<S> <C> <C> <C>
DOMESTIC EQUITY FUNDS
- ---------------------------------- ---------- ------------- -------------
U.S. Core Fund X X X
- ---------------------------------- ---------- ------------- -------------
Tobacco-Free Core Fund X X X
- ---------------------------------- ---------- ------------- -------------
Value Fund X X X
- ---------------------------------- ---------- ------------- -------------
Fundamental Value Fund X X X
- ---------------------------------- ---------- ------------- -------------
Intrinsic Value Fund X X X
- ---------------------------------- ---------- ------------- -------------
Growth Fund X X X
- ---------------------------------- ---------- ------------- -------------
Small Cap Value Fund X X X
- ---------------------------------- ---------- ------------- -------------
Small Cap Growth Fund X X X
- ---------------------------------- ---------- ------------- -------------
REIT Fund X X X
- ---------------------------------- ---------- ------------- -------------
- ---------------------------------- ---------- ------------- -------------
INTERNATIONAL EQUITY FUNDS
- ---------------------------------- ---------- ------------- -------------
International Core Fund X X X
- ---------------------------------- ---------- ------------- -------------
Currency Hedged International
Core Fund X X X
- ---------------------------------- ---------- ------------- -------------
Foreign Fund X X
- ---------------------------------- ---------- ------------- -------------
International Small Companies
Fund X X X
- ---------------------------------- ---------- ------------- -------------
Japan Fund X X X
- ---------------------------------- ---------- ------------- -------------
Emerging Markets Fund X X X
- ---------------------------------- ---------- ------------- -------------
Evolving Countries Fund X X X
- ---------------------------------- ---------- ------------- -------------
Global Properties Fund X X X
- ---------------------------------- ---------- ------------- -------------
Asia Fund X X X
- ---------------------------------- ---------- ------------- -------------
- ---------------------------------- ---------- ------------- -------------
FIXED INCOME FUNDS
- ---------------------------------- ---------- ------------- -------------
Domestic Bond Fund X X X
- ---------------------------------- ---------- ------------- -------------
U.S. Bond/Global Alpha A
Fund X X X
- ---------------------------------- ---------- ------------- -------------
U.S. Bond/Global Alpha B
Fund X X X
- ---------------------------------- ---------- ------------- -------------
International Bond Fund X X X
- ---------------------------------- ---------- ------------- -------------
Currency Hedged International
Bond Fund X X X
- ---------------------------------- ---------- ------------- -------------
Global Bond Fund X X X
- ---------------------------------- ---------- ------------- -------------
Emerging Country Debt Fund X X X
- ---------------------------------- ---------- ------------- -------------
Short-Term Income Fund X X X
- ---------------------------------- ---------- ------------- -------------
Global Hedged Equity Fund X X X
- ---------------------------------- ---------- ------------- -------------
Inflation Indexed Bond Fund X X X
- ---------------------------------- ---------- ------------- -------------
Emerging Country Debt Share Fund X X X
- ---------------------------------- ---------- ------------- -------------
- ---------------------------------- ---------- ------------- -------------
ASSET ALLOCATION FUNDS
- ---------------------------------- ---------- ------------- -------------
International Equity Allocation
Fund X X X
- ---------------------------------- ---------- ------------- -------------
World Equity Allocation Fund X X X
- ---------------------------------- ---------- ------------- -------------
Global (U.S.+) Equity Allocation
Fund X X X
- ---------------------------------- ---------- ------------- -------------
Global Balanced Allocation
Fund X X X
- ---------------------------------- ---------- ------------- -------------
U.S. Sector Fund X X X
- ---------------------------------- ---------- ------------- -------------
</TABLE>
The value of your investment in a Fund changes with the values of that
Fund's investments. Many factors can affect those values, and you can lose money
by investing in the Funds. Factors that may affect a particular Fund's portfolio
as a whole are called "principal risks" and are summarized in this section. The
chart at the beginning of this section identifies the principal risks associated
with each Fund. This summary describes the nature of these risks but is not
intended to include every potential risk. All Funds could be subject to
additional risks because the types of investments made by each Fund change over
time. The Investment Guidelines for each Fund set forth in the Statement of
Additional Information include more information about the Funds and their
investments. The Statement of Additional Information is available free of charge
by contacting the Manager.
39
<PAGE> 41
-- MARKET RISK. All of the Funds are subject to market risk, which is
the risk of unfavorable market-induced changes in the value of the securities
owned by a Fund. The following summarizes certain general market risks
associated with investments in equity and fixed income securities.
EQUITY SECURITIES. A principal risk of each Fund that invests a
substantial portion of its assets in equity securities is that those equity
securities will decline in value due to factors affecting the issuing companies,
their industries, or the economy and equity markets generally. The values of
equity securities may decline for a number of reasons which directly relate to
the issuing company, such as management performance, financial leverage and
reduced demand for the issuer's goods or services. They may also decline due to
factors which affect a particular industry or industries, such as labor
shortages or increased production costs and competitive conditions within an
industry. In addition, they may decline due to general market conditions which
are not specifically related to a company or industry, such as real or perceived
adverse economic conditions, changes in the general outlook for corporate
earnings, changes in interest or currency rates or adverse investor sentiment
generally.
The U.S. Equity Funds and the International Equity Funds maintain
substantial exposure to equities and generally do not attempt to time the
market. Because of this exposure, the possibility that stock market prices in
general will decline over short or even extended periods subjects these Funds to
unpredictable declines in the value of their shares, as well as periods of poor
performance.
Value Securities Risk. Some equity securities (generally referred to as
"value securities") are purchased primarily because they are selling at a price
lower than what is believed to be their true value and not necessarily because
the issuing companies are expected to experience significant earnings growth.
Such companies may have experienced adverse business developments or may be
subject to special risks. Other factors may also have caused their securities to
be out of favor. However, these securities bear the risk that the companies may
not overcome the adversity or that the market does not recognize the value of
the company, such that the price of its securities may decline or may not
approach the value that the Manager anticipates. Since value criteria are used
extensively by the Manager across the Funds, these risks apply to all of the
equity funds described in this Prospectus. The risks are particularly pronounced
for the Value Fund, Small Cap Value Fund, Intrinsic Value Fund and Fundamental
Value Fund, which invest primarily in value securities.
Growth Securities Risk. Certain equity securities (generally known as
"growth securities") are purchased primarily because it is believed that they
will experience relatively rapid earnings growth. Growth securities typically
trade at higher multiples of current earnings than other types of stocks. As a
general rule, growth securities often are more sensitive to general market
movements than other types of stocks because their market prices tend to place
greater emphasis on future earnings expectations. At times when it appears that
these expectations may not be met, growth stock prices typically fall. All of
the Funds that invest in equity securities are subject to these risks, but these
risks are particularly pronounced for the Growth Fund and the Small Cap Growth
Fund, which invest primarily in growth securities.
FIXED INCOME SECURITIES. The value of the Funds' investments in fixed
income securities (including bonds, notes and asset-backed securities) will
typically change as interest rates fluctuate. During periods of rising interest
rates, the values of fixed income securities generally decline. Conversely,
during periods of falling interest rates, the values of fixed income security
generally rise.
This kind of market risk, also called interest rate risk, is generally
greater for Funds investing in fixed income securities with longer maturities
and portfolios with longer durations (a measure of the expected cash flows of a
fixed income security). Thus, this risk is greatest for Funds with longer
durations (i.e., that invest in fixed income securities with longer maturities)
and is even present, but to a somewhat lesser extent, in the Short-Term Income
Fund.
While interest rate risk is attendant with all fixed income securities and
tends to depend mostly on the duration of the security, interest rate risk is
generally more pronounced with lower-rated securities and so may be more
significant for the Emerging Country Debt Fund, Emerging Country Debt Share
Fund, Global Bond Fund, International Bond Fund, Inflation Indexed Bond Fund,
Currency Hedged International Bond Fund, U.S. Bond/Global Alpha A Fund, U.S.
Bond/ Global Alpha B Fund, Global Properties Fund, Domestic Bond Fund, REIT
Fund, Currency Hedged International Core Fund and Foreign Fund, each of which
may invest a significant portion of their assets in lower-rated securities (also
called "junk bonds") or comparable unrated securities.
In addition, a related market risk exists for the Domestic Bond Fund,
Global Bond Fund, International Bond Fund, Currency Hedged International Bond
Fund, U.S. Bond/Global Alpha A Fund, U.S. Bond/Global Alpha B Fund, Global
Properties Fund and Short-Term Income Fund, which invest to a material extent in
mortgage-related or other asset-backed securities that may be prepaid. Because
prepayments generally increase when interest rates fall, these Funds are subject
to the risk that cash flows from securities will have to be reinvested at lower
rates. Likewise, since prepayments decrease when interest rates rise, these
securities have maturities that tend to be longer when that is least
desirable -- when interest rates are rising. Most of the Fixed Income Funds may
also invest to a material extent in debt securities paying no interest, such
40
<PAGE> 42
as zero coupon, principal-only and interest-only securities and, to the extent
they make such investments, such Funds will be exposed to additional market
risk.
- LIQUIDITY RISK. Liquidity risk exists when particular investments are
difficult to purchase or sell due to a limited market or to legal restrictions,
such that a Fund may be prevented from selling particular securities at the
price at which the Fund values them. All of the Funds are subject to liquidity
risk. Funds with principal investment strategies that involve securities of
companies with smaller market capitalizations, foreign securities, derivatives,
or securities with substantial market and/or credit risk tend to have the
greatest exposure to liquidity risk.
This risk may be particularly pronounced for Funds such as the Emerging
Country Debt Fund, Emerging Country Debt Share Fund, Emerging Markets Fund,
Evolving Countries Fund Asia Fund, International Bond Fund, Currency Hedged
International Bond Fund and U.S. Bond/Global Alpha A Fund, all of which may
invest primarily in emerging market securities and related derivatives that are
not widely traded and that may be subject to purchase and sale restrictions.
- SMALLER COMPANY RISK. Market risk and liquidity risk are particularly
pronounced for securities of companies with smaller market capitalizations.
These companies may have limited product lines, markets or financial resources
or they may depend on a few key employees. Securities of smaller companies may
trade less frequently and in lesser volume than more widely held securities and
their values may fluctuate more sharply than other securities. They may also
trade in the over-the-counter market or on a regional exchange, or may otherwise
have limited liquidity. Investments in smaller, less seasoned companies may
present greater opportunities for growth and capital appreciation, but also
involve greater risks than customarily are associated with larger, more
established companies. These risks apply to all Funds that invest in the
securities of smaller companies, but are particularly pronounced for the Small
Cap Value Fund, Small Cap Growth Fund, International Small Companies Fund,
Emerging Markets Fund and Global Properties Fund, all of which invest primarily
in companies with small or medium-sized market capitalizations.
- DERIVATIVES RISK. All of the Funds may use derivatives, which are
financial contracts whose value depends upon, or is derived from, the value of
an underlying asset, reference rate or index. Derivatives may relate to stocks,
bonds, interest rates, currencies or currency exchange rates, commodities, and
related indexes. The Funds can use derivatives for many purposes, including for
hedging, and as a substitute for direct investment in securities or other
assets. The Funds may also use derivatives as a way to efficiently adjust the
exposure of the Funds to various securities, markets and currencies without the
Funds having to actually sell current assets and purchase different ones. This
is generally done either because the adjustment is expected to be relatively
temporary or in anticipation of effecting the sale and purchase of Fund assets
over time. For a description of the various derivative instruments that may be
utilized by the Funds, please see "Investment Objectives and Policies" and
"Investment Guidelines" in the Statement of Additional Information.
The use of derivative instruments involves risks different from, or greater
than, the risks associated with investing directly in securities and other more
traditional investments. Derivatives are subject to a number of risks described
elsewhere in this section, including market risk, liquidity risk and the credit
risk of the counterparty to the derivatives contract. Since their value is
calculated and derived from the value of other assets, instruments or
references, there is greater risk that derivatives will be improperly valued.
Derivatives also involve the risk that changes in the value of the derivative
may not correlate perfectly with relevant assets, rates or indexes they are
designed to hedge or to closely track. Also, suitable derivative transactions
may not be available in all circumstances and there can be no assurance that a
Fund will engage in these transactions to reduce exposure to other risks when
that would be beneficial.
While all the Funds are subject to these risks, the risks of derivatives
are particularly pronounced for the International Bond Fund, Currency Hedged
International Bond Fund, Global Bond Fund, Emerging Country Debt Fund, Emerging
Country Debt Share Fund, Global Hedged Equity Fund, U. S. Bond/Global Alpha A
Fund, U.S. Bond/Global Alpha B Fund, and Inflation Indexed Bond Fund, which use
derivatives as a basic component of their investment strategy to gain exposure
to foreign fixed income securities and currencies.
In addition, the Emerging Country Debt Fund's (and thus indirectly, the
Emerging Country Debt Share Fund's) significant use of credit default swap
contracts also presents derivatives risk. In a credit default swap, a Fund makes
a stream of payments to another party in exchange for the right to receive a
specified return in the event of a default by a third party, typically an
emerging country, on its obligation. However, if the third party does not
default, the Fund loses its investment and recovers nothing. Credit default
swaps involve risk because they are difficult to value, are highly susceptible
to liquidity and credit risk, and generally only generate income in the event of
an actual default by the issuer of the underlying obligation (as opposed to a
credit downgrade or other indication of financial difficulty).
- FOREIGN INVESTMENT RISK. Funds that invest in securities traded
principally in securities markets outside the United States are subject to
additional and more varied risks, and may experience more rapid and extreme
changes in value. The securities markets of many foreign countries are
relatively small, with a limited number of companies representing a small number
of industries. Additionally, issuers of foreign securities may not be subject to
the same degree
41
<PAGE> 43
of regulation as U.S. issuers. Reporting, accounting and auditing standards of
foreign countries differ, in some cases significantly, from U.S. standards.
There are generally higher commission rates on foreign portfolio transactions,
transfer taxes, higher custodial costs and the possibility that foreign taxes
will be charged on dividends and interest payable on foreign securities. Also,
for lesser developed countries, nationalization, expropriation or confiscatory
taxation, adverse changes in investment or exchange control regulations (which
may include suspension of the ability to transfer currency from a country),
political changes or diplomatic developments could adversely affect a Fund's
investments. In the event of nationalization, expropriation or other
confiscation, a Fund could lose its entire investment in foreign securities.
All Funds that invest in foreign securities are subject to these risks.
These risks will be particularly pronounced for the International Equity Funds,
International Bond Fund, Currency Hedged International Bond Fund, Global Bond
Fund, Emerging Country Debt Fund, Emerging Country Debt Share Fund, Global
Hedged Equity Fund and Inflation Indexed Bond Fund which may invest a
significant portion of their assets in foreign securities. Some of the foreign
risks are also relevant for the Domestic Equity Funds because they may invest a
material portion of their assets in securities of foreign issuers traded in the
U.S.
In addition, Funds such as the Emerging Markets Fund, Evolving Countries
Fund, Asia Fund, International Bond Fund, Currency Hedged International Bond
Fund, Global Bond Fund, U.S. Bond/Global Alpha A Fund, Emerging Country Debt
Fund and Emerging Country Debt Share Fund that invest a significant portion of
their assets in the securities of issuers based in countries with developing or
"emerging market" economies are subject to greater levels of foreign investment
risk than Funds investing primarily in more developed foreign markets, since
emerging market securities may present market, credit, currency, liquidity,
legal, political and other risks greater than, or in addition to, risks of
investing in developed foreign countries. These risks include: high currency
exchange rate fluctuations; greater social, economic and political uncertainty
and instability (including the risk of war); more substantial governmental
involvement in the economy; less governmental supervision and regulation of the
securities markets and participants in those markets; unavailability of currency
hedging techniques in certain emerging market countries; the fact that companies
in emerging market countries may be newly organized and may be smaller and less
seasoned companies; the difference in, or lack of, auditing and financial
reporting standards, which may result in unavailability of material information
about issuers; different clearance and settlement procedures, which may be
unable to keep pace with the volume of securities transactions or otherwise make
it difficult to engage in such transactions; the risk that it may be more
difficult to obtain and/or enforce legal judgments in foreign jurisdictions; and
significantly smaller market capitalizations of emerging market issuers.
- CURRENCY RISK. Currency risk is the risk that fluctuations in the
exchange rates may negatively affect the value of a Fund's investments. Currency
risk includes both the risk that currencies in which a Fund's investments are
traded in or currencies in which a Fund has taken on an active investment
position will decline in value relative to the U.S. Dollar and, in the case of
hedging positions, that the U.S. Dollar will decline in value relative to the
currency being hedged. Currency rates in foreign countries may fluctuate
significantly for a number of reasons, including the forces of supply and demand
in the foreign exchange markets, actual or perceived changes in interest rates,
and intervention (or the failure to intervene) by U.S. or foreign governments or
central banks, or by currency controls or political developments in the U.S. or
abroad.
Many of the Funds may engage in proxy hedging of currencies by entering
into derivative transactions with respect to a currency whose value is expected
to correlate to the value of a currency the Fund owns or wants to own. This
presents the risk that the two currencies may not move in relation to one
another as expected. In that case, the Fund could lose money on its investment
and also lose money on the position designed to act as a proxy hedge. Many of
the Funds may also take active currency positions and may cross-hedge currency
exposure represented by its securities into another foreign currency. This may
result in a Fund's currency exposure being substantially different than that
suggested by its securities investments.
All Funds that invest or trade in foreign currencies, securities
denominated in foreign currencies, or related derivative instruments may be
adversely affected by changes in foreign currency exchange rates. Currency risk
is particularly pronounced for the International Equity Funds, International
Bond Fund, Currency Hedged International Bond Fund, Global Bond Fund, Emerging
Country Debt Fund, U.S. Bond/Global Alpha A Fund, U.S. Bond/Global Alpha B Fund
and REIT Fund, which regularly enter into derivative foreign currency
transactions and may take active long and short currency positions through
exchange traded and over-the-counter ("OTC") foreign currency transactions for
investment purposes. Derivative foreign currency transactions (such as futures,
forwards and swaps) may also involve leveraging risk in addition to currency
risk as described below under "Leveraging Risk."
- NON-DIVERSIFICATION RISK. Most analysts believe that overall risk can be
reduced through diversification, while concentration of investments in a small
number of securities increases risk. The Value Fund, Growth Fund, Small Cap
Growth Fund, REIT Fund, U.S. Sector Fund, Currency Hedged International Core
Fund, Foreign Fund , Japan Fund, Emerging Markets Fund, Evolving Countries Fund,
Global Properties Fund, Intrinsic Value Fund, Fundamental Value Fund and all of
the Fixed Income Funds are not "diversified" within the meaning of the 1940 Act.
This means they are allowed to invest in a relatively small number of issuers
and/or foreign currencies with greater concentration of risk. As a
42
<PAGE> 44
result, credit, market and other risks associated with a Fund's investment
strategies or techniques may be more pronounced for these Funds.
- CONCENTRATION RISK. Most analysts believe that overall risk is reduced
by industry or geographic diversification, and increased by concentrating
investments in a small number of industries or countries. Therefore, Funds that
are concentrated geographically or with respect to industries or sectors should
only be considered as a part of diversified portfolio including other assets.
This section describes the Funds that present the most significant concentration
risk. Such risks may also exist in other Funds.
The REIT Fund and the Global Properties Fund invest primarily in real
estate securities. Thus, the value of these Funds' shares can be expected to
change in light of factors affecting the real estate industry, and may fluctuate
more widely than the value of shares of a portfolio that invests in a broader
range of industries. Factors affecting the performance of real estate may
include excess supply of real property in certain markets, changes in zoning
laws, completion of construction, changes in real estate value and property
taxes, sufficient level of occupancy, adequate rent to cover operating expenses,
and local and regional markets for competing assets. The performance of real
estate may also be affected by changes in interest rates, prudent management of
insurance risks and social and economic trends. REITs are also subject to
substantial cash flow dependency, defaults by borrowers, self-liquidation and
the risk of failing to qualify for tax-free pass-through of income under the
Internal Revenue Code and/or to maintain exempt status under the 1940 Act.
Similarly, Funds that invest significant portions of their assets in
concentrated geographic areas, such as the Japan Fund and the Asia Fund, have
more exposure to regional economic risks than Funds making foreign investments
throughout the world's economies.
The Japan Fund invests almost exclusively in Japanese securities, and no
effort will be made by the Manager to assess the Japanese economic, political or
regulatory developments or changes in currency exchange rates for purposes of
varying the portion of the Fund's assets invested in Japanese securities. This
means that the Fund's performance will be directly affected by political,
economic, market and exchange rate conditions in Japan. Also, since the Japanese
economy is dependent to a significant extent on foreign trade, the relationships
between Japan and its trading partners and between the yen and other currencies
are expected to have a significant impact on particular Japanese companies and
on the Japanese economy generally.
The Asia Fund invests almost exclusively in Asian securities. This regional
concentration makes Asia Fund more susceptible to investment factors affecting
the region than a more geographically diverse fund. The region encompasses
countries at varying levels of economic development -- ranging from emerging
market to more developed economies. Each country provides unique investment
risks, yet the political and economic prospects of one country or group of
countries may impact other countries in the region. For example, some Asian
economies are directly affected by Japanese capital investment in the region and
by Japanese consumer demands. In addition, a recession, a debt-crisis or a
decline in currency valuation in one country can spread to other countries.
- LEVERAGING RISK. Each Fund's portfolio may at times be economically
leveraged when the Fund temporarily borrows money to meet redemption requests
and/or to settle investment transactions. Additionally, all of the Funds may
invest in derivatives and may enter into reverse repurchase agreements. While
none of the Funds intends to use derivatives to create net exposure to
securities, currencies or other assets in amounts greater than the total assets
of the Fund, the Funds will often consider derivative instruments as offsetting
one another or other assets such that only the net difference in value of the
derivatives and/or assets that are offsetting will be considered for these
purposes. While this practice is significant in many of the Funds, it is used
most extensively by the Fixed Income Funds, many of which use derivatives and
offsetting derivatives as their principal means of achieving desired economic
exposure. In these cases, to the extent that the offsetting positions do not
behave in relation to one another as expected, the Funds may perform as if they
were leveraged.
This same compounding of risk can occur in International Equity Funds,
International Bond Fund, Currency Hedged International Bond Fund, Global Bond
Fund, Emerging Country Debt Fund, Emerging Country Debt Share Fund, U.S.
Bond/Global Alpha A Fund, U.S. Bond/Global Alpha B Fund, REIT Fund and Inflation
Indexed Bond Fund, which may take on simultaneous long and short positions in
different currencies. While these long and short positions are managed such that
these Funds' net investment in foreign currency does not exceed the Fund's net
assets, a lack of correlation between currencies (which may or may not be
anticipated by the Manager) may expose more than one hundred percent of the
Fund's assets to currency risk. Similarly, the U.S. Equity and International
Equity Funds may take long and short positions on equity securities and/or
"baskets" of equity securities, including simultaneous positions through the use
of a single derivative instrument such as a swap contract or other
over-the-counter derivative instrument. A lack of correlation between the equity
securities that are the subject of these instruments (which may or may not be
anticipated by the Manager) could expose more than one hundred percent of the
Fund's portfolio to equity securities risk.
43
<PAGE> 45
- CREDIT AND COUNTERPARTY RISK. This is the risk that the issuer or
guarantor of a fixed income security, the counterparty to an OTC derivatives
contract, or a borrower of the Fund's securities, will be unable or unwilling to
make timely principal, interest or settlement payments, or to otherwise honor
its obligations.
Credit risk associated with investments in fixed income securities relates
to the ability of the issuer to make scheduled payments of principal and
interest on an obligation. The Funds that invest in fixed income securities are
subject to varying degrees of risk that the issuers of the securities will have
their credit ratings downgraded or will default, potentially reducing the Fund's
share price and income level. Nearly all fixed income securities are subject to
some credit risk, which may vary depending upon whether the issuers of the
securities are corporations, domestic or foreign governments, or their sub-
divisions or instrumentalities. Even certain U.S. Government securities are
subject to credit risk. Additional risk exists where there is no rating for the
fixed income security and the Manager has to assess the risk subjectively.
Credit risk is particularly acute for Funds which invest in lower-rated
securities (also called junk bonds), which are fixed income securities rated
lower than Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by Standard
& Poor's Ratings Services ("S&P"), or are determined by the Manager to be of
comparable quality to securities so rated. The sovereign debt of many foreign
governments, including their sub-divisions and instrumentalities, falls into
this category. Lower-rated securities offer the potential for higher investment
returns than higher-rated securities, but they carry a high degree of credit
risk and are considered predominantly speculative with respect to the issuer's
continuing ability to meet principal and interest payments. Lower-rated
securities may also be more susceptible to real or perceived adverse economic
and competitive industry conditions and may be less liquid than higher-rated
securities. Accordingly, Funds which may invest a significant portion of their
assets in lower-rated securities (such as those listed in "Market Risk -- Fixed
Income Securities" above) may be subject to substantial credit risk.
In addition, all of the Funds are also exposed to credit risk because they
may generally make use of OTC derivatives (such as forward foreign currency
contracts and/or swap contracts) and because they may engage to a significant
extent in the lending of Fund securities or use of repurchase agreements.
- MANAGEMENT RISK. Each Fund is subject to management risk because it
relies on the Manager's ability to pursue its objective. The Manager (and, in
the case of the Emerging Markets Funds, Evolving Countries Fund and Asia Fund,
the Consultant) will apply investment techniques and risk analyses in making
investment decisions for the Funds, but there can be no guarantee that these
will produce the desired results. As noted above, the Manager or the Consultant
may also fail to use derivatives effectively, for example, choosing to hedge or
not to hedge positions precisely when it is least advantageous to do so. As
indicated above, however, the Funds are generally not subject to the risk of
market timing because they generally stay fully invested in the relevant asset
class, such as domestic equities, foreign equities, or emerging country debt.
- SPECIAL ASSET ALLOCATION FUND CONSIDERATIONS. The Manager does not
charge an investment management fee for asset allocation advice provided to the
Asset Allocation Funds (with the exception of the U.S. Sector Fund, which bears
an investment management fee subject to reduction to the extent investment
management fees are earned by underlying Funds, as described in this Prospectus
under "Fees and Expenses"), but certain other expenses such as custody, transfer
agency and audit fees will be borne directly by the Asset Allocation Funds,
subject to the Manager's agreement to reimburse the Funds (see "Fees and
Expenses"). The Asset Allocation Funds will also indirectly bear a proportionate
share of the Total Operating Expenses (including investment management,
shareholder servicing, custody, transfer agency, audit and other Fund expenses)
of the underlying Funds in which the Asset Allocation Funds invest, as well as
any purchase premiums or redemption fees charged by such underlying Funds. Since
the Manager will receive fees from the underlying Funds, the Manager has a
financial incentive to invest the assets of the Asset Allocation Funds in
underlying Funds with higher fees, despite the investment interests of the Asset
Allocation Funds. The Manager is legally obligated to disregard that incentive
in selecting shares of the underlying Funds.
- SPECIAL YEAR 2000 RISK CONSIDERATIONS. Many of the services provided to
the Funds depend on the proper functioning of computer systems. Many systems in
use today cannot distinguish between the year 1900 and the year 2000. Should any
of the Funds' service systems fail to process information properly, that could
have an adverse impact on the Funds' operations and services provided to
shareholders. GMO, as well as the Trust's administrator, transfer agent,
custodians and other service providers, have reported that each is working
toward mitigating the risks associated with the so-called "Year 2000 problem."
However, there can be no assurance that the problem will be corrected in all
respects and that the Funds' operations and services provided to shareholders
will not be adversely affected, nor can there be any assurance that the Year
2000 problem will not have an adverse effect on the entities whose securities
are held by the Fund or on U.S. or global equity markets or economies generally.
44
<PAGE> 46
FEES AND EXPENSES
The following tables describe the fees and expenses you may pay if you buy
and hold shares of the Funds. Footnotes to the tables begin on page 48 and are
important to understanding this table.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PURCHASE AND
REDEMPTION FEES
(FEES PAID DIRECTLY TO FUND AT ANNUAL FUND OPERATING EXPENSES
GMO FUND NAME PURCHASE OR REDEMPTION) (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
- ----------------------------------------------------------------------------------------------------------
Cash Purchase Redemption Total
Premium (as a Fees (as a Shareholder ANNUAL
% of amount % of amount Management Service Other Operating
invested)(1) redeemed)(1) Fee Fee Expenses Expenses
<S> <C> <C> <C> <C> <C> <C>
U.S. Equity Funds
U.S. CORE FUND
Class II 0.14%(2) None 0.33% 0.22%(3) 0.02% 0.57%
Class III 0.14%(2) None 0.33% 0.15%(3) 0.02% 0.50%
Class IV 0.14%(2) None 0.33% 0.105%(3) 0.02% 0.455%
- ----------------------------------------------------------------------------------------------------------
TOBACCO-FREE
CORE FUND
Class III 0.14%(2) None 0.33% 0.15%(3) 0.08% 0.56%
- ----------------------------------------------------------------------------------------------------------
VALUE FUND
Class III 0.14%(2) None 0.46% 0.15%(3) 0.06% 0.67%
- ----------------------------------------------------------------------------------------------------------
FUNDAMENTAL VALUE
FUND
Class III 0.15%(2) None 0.60% 0.15%(3) 0.06% 0.81%
- ----------------------------------------------------------------------------------------------------------
INTRINSIC VALUE FUND
Class III 0.14%(2) None 0.33% 0.15%(3) 0.10%(21) 0.58%
- ----------------------------------------------------------------------------------------------------------
GROWTH FUND
Class III 0.14%(2) None 0.33% 0.15%(3) 0.06% 0.54%
- ----------------------------------------------------------------------------------------------------------
SMALL CAP VALUE FUND
Class III 0.50%(2) 0.50%(2) 0.33% 0.15%(3) 0.04% 0.52%
- ----------------------------------------------------------------------------------------------------------
SMALL CAP GROWTH FUND
Class III 0.50%(2) 0.50%(2) 0.33% 0.15%(3) 0.06% 0.54%
- ----------------------------------------------------------------------------------------------------------
REIT FUND
Class III 0.50%(2) 0.50%(2) 0.54% 0.15%(3) 0.05% 0.74%
- ----------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY
FUNDS
INTERNATIONAL CORE
FUND
Class II 0.60%(2) None 0.54% 0.22%(3) 0.07% 0.83%
Class III 0.60%(2) None 0.54% 0.15%(3) 0.07% 0.76%
Class IV 0.60%(2) None 0.54% 0.09%(3) 0.07% 0.70%
- ----------------------------------------------------------------------------------------------------------
CURRENCY HEDGED
INTERNATIONAL CORE
FUND
Class III 0.60%(2) None 0.54% 0.15%(3) 0.21% 0.90%
Class IV 0.60%(2) None 0.54% 0.09%(3) 0.21% 0.84%
- ----------------------------------------------------------------------------------------------------------
FOREIGN FUND
Class II None None 0.60% 0.22%(3) 0.10% 0.92%
Class III None None 0.60% 0.15%(3) 0.10% 0.85%
Class IV None None 0.60% 0.09%(3) 0.10% 0.79%
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------- ---------------------------------------------
ANNUAL FUND OPERATING EXPENSES
GMO FUND NAME (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
- ----------------------- ---------------------------------------------
NET
EXPENSE ANNUAL
REIMBURSEMENT(4) EXPENSES
<S> <C> <C>
U.S. Equity Funds
U.S. CORE FUND
Class II 0.02% 0.55%
Class III 0.02% 0.48%
Class IV 0.02% 0.435%
- ---------------------------------------------------------------------
TOBACCO-FREE
CORE FUND
Class III 0.08% 0.48%
- ---------------------------------------------------------------------
VALUE FUND
Class III 0.06% 0.61%
- ---------------------------------------------------------------------
FUNDAMENTAL VALUE
FUND
Class III 0.06% 0.75%
- ---------------------------------------------------------------------
INTRINSIC VALUE FUND
Class III 0.10% 0.48%
- ---------------------------------------------------------------------
GROWTH FUND
Class III 0.06% 0.48%
- ---------------------------------------------------------------------
SMALL CAP VALUE FUND
Class III 0.04% 0.48%
- ---------------------------------------------------------------------
SMALL CAP GROWTH FUND
Class III 0.06% 0.48%
- ---------------------------------------------------------------------
REIT FUND
Class III 0.05% 0.69%
- ---------------------------------------------------------------------
INTERNATIONAL EQUITY
FUNDS
INTERNATIONAL CORE
FUND
Class II 0.07% 0.76%
Class III 0.07% 0.69%
Class IV 0.07% 0.63%
- ---------------------------------------------------------------------
CURRENCY HEDGED
INTERNATIONAL CORE
FUND
Class III 0.21% 0.69%
Class IV 0.21% 0.63%
- ---------------------------------------------------------------------
FOREIGN FUND
Class II 0.10% 0.82%
Class III 0.10% 0.75%
Class IV 0.10% 0.69%
- ---------------------------------------------------------------------
</TABLE>
45
<PAGE> 47
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PURCHASE AND
REDEMPTION FEES
(FEES PAID DIRECTLY TO FUND AT ANNUAL FUND OPERATING EXPENSES
GMO FUND NAME PURCHASE OR REDEMPTION) (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
- ----------------------------------------------------------------------------------------------------------
Cash Purchase Redemption Total
Premium (as a Fees (as a Shareholder Annual
% of amount % of amount Management Service Other Operating
invested)(1) redeemed)(1) Fee Fee Expenses Expenses
<S> <C> <C> <C> <C> <C> <C>
INTERNATIONAL SMALL
COMPANIES FUND
Class III 1.00%(2) 0.60%(2) 0.60% 0.15%(3) 0.16% 0.91%
- ----------------------------------------------------------------------------------------------------------
JAPAN FUND
Class III 0.20%(2) 0.20%(2) 0.54% 0.15%(3) 0.18% 0.87%
- ----------------------------------------------------------------------------------------------------------
EMERGING MARKETS FUND
Class III 1.60%(5) 0.40%(5,6) 0.81% 0.15%(3) 0.22% 1.18%
Class IV 1.60%(5) 0.40%(5,6) 0.81% 0.105%(3) 0.22% 1.135%
- ----------------------------------------------------------------------------------------------------------
EVOLVING COUNTRIES
FUND
Class III 1.60%(5) 0.40%(5) 0.65% 0.15%(3) 0.66% 1.46%
- ----------------------------------------------------------------------------------------------------------
ASIA FUND
Class III 1.20%(5) 0.40%(5) 0.81% 0.15%(3) 0.41% 1.37%
- ----------------------------------------------------------------------------------------------------------
GLOBAL PROPERTIES
FUND
Class III 0.60%(2.7) 0.30%(2.7) 0.60% 0.15%(3) 1.36% 2.11%
- ----------------------------------------------------------------------------------------------------------
FIXED INCOME FUNDS
DOMESTIC BOND FUND
Class III None None 0.10% 0.15%(3) 0.06% 0.31%
- ----------------------------------------------------------------------------------------------------------
U.S. BOND/GLOBAL
ALPHA A FUND
Class III 0.15%(5) None 0.25% 0.15%(3) 0.10% 0.50%
- ----------------------------------------------------------------------------------------------------------
U.S. BOND/GLOBAL
ALPHA B FUND
Class III 0.15%(5) None 0.20% 0.15%(3) 0.12% 0.47%
- ----------------------------------------------------------------------------------------------------------
INTERNATIONAL BOND
FUND
Class III 0.15%(5) None 0.25% 0.15%(3) 0.09% 0.49%
- ----------------------------------------------------------------------------------------------------------
CURRENCY HEDGED
INTERNATIONAL BOND
FUND
Class III 0.15%(5) None 0.25% 0.15%(3) 0.08% 0.48%
- ----------------------------------------------------------------------------------------------------------
GLOBAL BOND FUND
Class III 0.15%(5) None 0.19% 0.15%(3) 0.12% 0.46%
- ----------------------------------------------------------------------------------------------------------
EMERGING COUNTRY DEBT
FUND
Class III 0.50%(5) 0.25%(5,13) 0.35% 0.15%(3) 0.09% 0.59%
Class IV 0.50%(5) 0.25%(5,13) 0.35% 0.10%(3) 0.09% 0.54%
- ----------------------------------------------------------------------------------------------------------
SHORT-TERM INCOME
FUND
Class III None None 0.05% 0.15%(3) 0.12% 0.32%
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------- -------------------------------
ANNUAL FUND OPERATING EXPENSES
GMO FUND NAME (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
- ----------------------- -------------------------------
NET
Expense ANNUAL
Reimbursement(4) EXPENSES
<S> <C> <C>
INTERNATIONAL SMALL
COMPANIES FUND
Class III 0.16% 0.75%
- ----------------------------------------------------------------------------------------------------------
JAPAN FUND
Class III 0.18% 0.69%
- ----------------------------------------------------------------------------------------------------------
EMERGING MARKETS FUND
Class III 0.02% 1.16%
Class IV 0.02% 1.115%
- ----------------------------------------------------------------------------------------------------------
EVOLVING COUNTRIES
FUND
Class III 0.19% 1.27%
- ----------------------------------------------------------------------------------------------------------
ASIA FUND
Class III 0.11% 1.26%
- ----------------------------------------------------------------------------------------------------------
GLOBAL PROPERTIES
FUND
Class III 0.68% 1.43%
- ----------------------------------------------------------------------------------------------------------
FIXED INCOME FUNDS
DOMESTIC BOND FUND
Class III 0.04% 0.27%(20)
- ----------------------------------------------------------------------------------------------------------
U.S. BOND/GLOBAL
ALPHA A FUND
Class III 0.10% 0.40%
- ----------------------------------------------------------------------------------------------------------
U.S. BOND/GLOBAL
ALPHA B FUND
Class III 0.12% 0.35%
- ----------------------------------------------------------------------------------------------------------
INTERNATIONAL BOND
FUND
Class III 0.09% 0.40%
- ----------------------------------------------------------------------------------------------------------
CURRENCY HEDGED
INTERNATIONAL BOND
FUND
Class III 0.08% 0.40%
- ----------------------------------------------------------------------------------------------------------
GLOBAL BOND FUND
Class III 0.12% 0.34%
- ----------------------------------------------------------------------------------------------------------
EMERGING COUNTRY DEBT
FUND
Class III 0.03% 0.56%
Class IV 0.03% 0.51%
- ----------------------------------------------------------------------------------------------------------
SHORT-TERM INCOME
FUND
Class III 0.12% 0.20%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
46
<PAGE> 48
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
PURCHASE AND
REDEMPTION FEES
(FEES PAID DIRECTLY TO FUND AT ANNUAL FUND OPERATING EXPENSES
GMO FUND NAME PURCHASE OR REDEMPTION) (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
- ------------------------------------------------------------------------------------------------------------
Cash Purchase Redemption Total
Premium (as a Fees (as a Shareholder Annual
% of amount % of amount Management Service Other Operating
invested)(1) redeemed)(1) Fee Fee Expenses Expenses
<S> <C> <C> <C> <C> <C> <C>
GLOBAL HEDGED
EQUITY FUND
Class III 0.51%(2,8) 1.40%(8,12) 0.50%(16) 0.15%(3,10) 0.11%(16) 0.76%(16)
- ------------------------------------------------------------------------------------------------------------
INFLATION INDEXED
BOND FUND
Class III 0.10%(5) 0.10%(5) 0.10% 0.15%(3) 0.16% 0.41%
- ------------------------------------------------------------------------------------------------------------
EMERGING COUNTRY
DEBT SHARE FUND
Class III *(17) *(17) 0.35%(18) 0.15%(3,19) 0.15%(18) 0.65%(18)
- ------------------------------------------------------------------------------------------------------------
ASSET ALLOCATION
FUNDS
INTERNATIONAL
EQUITY
ALLOCATION FUND
Class III 0.80%(2,14) 0.11%(2,14) 0.00%(15) 0.00%(15) 0.05%(15) 0.05%(15)
- ------------------------------------------------------------------------------------------------------------
WORLD EQUITY
ALLOCATION FUND
Class III 0.66%(2,14) 0.15%(2,14) 0.00%(15) 0.00%(15) 0.06%(15) 0.06%(15)
- ------------------------------------------------------------------------------------------------------------
GLOBAL (U.S. +)
EQUITY
ALLOCATION FUND
Class III 0.47%(2,14) 0.15%(2,14) 0.00%(15) 0.00%(15) 0.07%(15) 0.07%(15)
- ------------------------------------------------------------------------------------------------------------
GLOBAL BALANCED
ALLOCATION FUND
Class III 0.35%(2,14) 0.11%(2,14) 0.00%(15) 0.00%(15) 0.05%(15) 0.05%(15)
- ------------------------------------------------------------------------------------------------------------
U.S. SECTOR FUND
Class III 0.27%(2,8) 0.18%(2,8,11) 0.33%(9) 0.15%(3,10) 0.08%(9) 0.56%(9)
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------- -------------------------------
ANNUAL FUND OPERATING EXPENSES
GMO FUND NAME (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
- --------------------- -------------------------------
Net
Expense Annual
Reimbursement(4) Expenses
<S> <C> <C>
GLOBAL HEDGED
EQUITY FUND
Class III 0.59%(16) 0.17%(16)
- ------------------------------------------------------------------------------------------------------------
INFLATION INDEXED
BOND FUND
Class III 0.16% 0.25%
- ------------------------------------------------------------------------------------------------------------
EMERGING COUNTRY
DEBT SHARE FUND
Class III 0.09%(18) 0.56%(18)
- ------------------------------------------------------------------------------------------------------------
ASSET ALLOCATION
FUNDS
INTERNATIONAL
EQUITY
ALLOCATION FUND
Class III 0.05% 0.00%
- ------------------------------------------------------------------------------------------------------------
WORLD EQUITY
ALLOCATION FUND
Class III 0.06% 0.00%
- ------------------------------------------------------------------------------------------------------------
GLOBAL (U.S. +)
EQUITY
ALLOCATION FUND
Class III 0.07% 0.00%
- ------------------------------------------------------------------------------------------------------------
GLOBAL BALANCED
ALLOCATION FUND
Class III 0.05% 0.00%
- ------------------------------------------------------------------------------------------------------------
U.S. SECTOR FUND
Class III 0.56%(9) 0.00%(9)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE> 49
NOTES TO FEES AND EXPENSES
1. Purchase premiums and redemption fees generally apply only to cash
transactions. These fees are paid to and retained by the Fund itself and
are designed to allocate transaction costs caused by shareholder activity
to the shareholder generating the activity, rather than to the Fund as a
whole. The Manager may reduce these fees in certain limited circumstances
described below.
Normally, no purchase premium is charged with respect to in-kind purchases
of Fund shares. However, the International Core Fund, Currency Hedged
International Core Fund, International Small Companies Fund, Japan Fund and
Global Hedged Equity Fund may each charge a purchase premium of up to
0.10%, and the Emerging Markets Fund, Evolving Countries Fund and Asia Fund
may each charge a premium of up to 0.20%, for in-kind purchases involving
transfers of large positions in markets where re-registration and transfer
costs are high. Special rules also apply with respect to in-kind
transactions in certain Fixed Income Funds as described in footnote 5
below.
2. The purchase premium and/or redemption fee for this Fund may generally not
be waived due to offsetting transactions, and may be waived in only rare
circumstances. The premium or fee will only be waived for this Fund (i) if
the purchase or redemption is part of a transfer from or to another Fund
where the Manager is able to transfer securities among the Funds as part of
effecting the transaction, (ii) during periods (expected to exist only
rarely) when the Manager determines that the Fund is either substantially
overweighted or underweighted with respect to its cash position so that a
redemption or purchase will not require a securities transaction, or (iii)
in certain other instances (not including offsetting transactions) where it
is compelling to the Manager that the purchase or redemption will not
result in transaction costs to the Fund. Any waiver with respect to this
Fund must be arranged in advance with the Manager.
3. The Shareholder Service Fee ("SSF") is paid to GMO for providing client
services and reporting services, and is the sole economic distinction
between the various classes of Fund shares. A lower SSF for larger
investments reflects that the cost of servicing a client account is lower
for larger accounts when expressed as a percentage of the account.
4. The Manager has contractually agreed to reimburse each Fund with respect to
certain Fund expenses through at least June 30, 2000 to the extent that a
Fund's total annual operating expenses (excluding Shareholder Service Fees,
brokerage commissions and other investment-related costs, hedging
transaction fees, extraordinary, non-recurring and certain other unusual
expenses (including taxes), securities lending fees and expenses, interest
expense and transfer taxes; and, in the case of the Emerging Markets Fund,
Evolving Countries Fund, Asia Fund, Emerging Country Debt Fund, Global
Hedged Equity Fund and Global Properties Fund, also excluding custodial
fees; and, in the case of the Asset Allocation Funds, U.S. Sector Fund,
Global Hedged Equity Fund and Emerging Country Debt Share Fund, also
excluding expenses indirectly incurred by the investment in other Funds of
the Trust (collectively, "Excluded Fund Fees and Expenses")) would
otherwise exceed the percentage of that Fund's daily net assets (the "Post-
Reimbursement Expense Limitation") set below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
POST-REIMBURSEMENT
FUND EXPENSE LIMITATION
- ----------------------------------------------------------------------------------
<S> <C>
U.S. Core Fund 0.33%
- ----------------------------------------------------------------------------------
Tobacco-Free Core Fund 0.33%
- ----------------------------------------------------------------------------------
Value Fund 0.46%
- ----------------------------------------------------------------------------------
Growth Fund 0.33%
- ----------------------------------------------------------------------------------
Intrinsic Value Fund 0.33%
- ----------------------------------------------------------------------------------
U.S. Sector Fund 0.33%
- ----------------------------------------------------------------------------------
Small Cap Value Fund 0.33%
- ----------------------------------------------------------------------------------
Small Cap Growth Fund 0.33%
- ----------------------------------------------------------------------------------
Fundamental Value Fund 0.60%
- ----------------------------------------------------------------------------------
REIT Fund 0.54%
- ----------------------------------------------------------------------------------
International Core Fund 0.54%
- ----------------------------------------------------------------------------------
Currency Hedged International Core Fund 0.54%
- ----------------------------------------------------------------------------------
Foreign Fund 0.60%
- ----------------------------------------------------------------------------------
International Small Companies Fund 0.60%
- ----------------------------------------------------------------------------------
Japan Fund 0.54%
- ----------------------------------------------------------------------------------
Emerging Markets Fund 0.81%
- ----------------------------------------------------------------------------------
Evolving Countries Fund 0.65%
- ----------------------------------------------------------------------------------
Global Properties Fund 0.60%
- ----------------------------------------------------------------------------------
Domestic Bond Fund 0.10%
- ----------------------------------------------------------------------------------
</TABLE>
48
<PAGE> 50
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
POST-REIMBURSEMENT
FUND EXPENSE LIMITATION
- ----------------------------------------------------------------------------------
<S> <C>
U.S. Bond/Global Alpha A Fund 0.25%
- ----------------------------------------------------------------------------------
U.S. Bond/Global Alpha B Fund 0.20%
- ----------------------------------------------------------------------------------
International Bond Fund 0.25%
- ----------------------------------------------------------------------------------
Currency Hedged International Bond Fund 0.25%
- ----------------------------------------------------------------------------------
Global Bond Fund 0.19%
- ----------------------------------------------------------------------------------
Emerging Country Debt Fund 0.35%
- ----------------------------------------------------------------------------------
Short-Term Income Fund 0.05%
- ----------------------------------------------------------------------------------
Global Hedged Equity Fund 0.50%
- ----------------------------------------------------------------------------------
Inflation Indexed Bond Fund 0.10%
- ----------------------------------------------------------------------------------
Emerging Country Debt Share Fund 0.00%
- ----------------------------------------------------------------------------------
International Equity Allocation Fund 0.00%
- ----------------------------------------------------------------------------------
World Equity Allocation Fund 0.00%
- ----------------------------------------------------------------------------------
Global (U.S.+) Equity Allocation Fund 0.00%
- ----------------------------------------------------------------------------------
Global Balanced Allocation Fund 0.00%
- ----------------------------------------------------------------------------------
Asia Fund 0.81%
- ----------------------------------------------------------------------------------
</TABLE>
In addition, with respect to each of the U.S. Sector Fund and the Global
Hedged Equity Fund only, the Advisor proposes to reimburse each such Fund to
the extent that the sum of (i) such Fund's total annual operating expenses
(excluding Excluded Fund Fees and Expenses), plus (ii) the amount of fees
and expenses (excluding Excluded Fund Fees and Expenses) incurred indirectly
by the Fund through its investment in other GMO Funds, exceeds the Fund's
Post-Reimbursement Expense Limitation, subject to a maximum total
reimbursement to either Fund equal to the Fund's Post-Reimbursement Expense
Limitation.
5. The stated purchase premium and/or redemption fee for this Fund will always
be charged in full except that the relevant purchase premium or redemption
fee will be reduced by 50% with respect to any portion of a purchase or
redemption that is offset by a corresponding redemption or purchase,
respectively, occurring on the same day. The Manager examines each purchase
and redemption of shares eligible for such treatment to determine if
circumstances warrant waiving a portion of the purchase premium or
redemption fee. Absent a clear determination that transaction costs will be
reduced or absent for the purchase or redemption, the full premium or fee
will be charged. In addition, except for the Emerging Markets Fund,
Evolving Countries Fund and Asia Fund, the purchase premium or redemption
fee for this Fund will be reduced by 50% if the purchaser makes an in-kind
purchase of Fund shares or if the purchase or redemption is part of a
transfer from or to another Fund where the Manager is able to transfer
securities among the Funds as part of effecting the transaction.
6. Applies only to shares acquired on or after June 1, 1995 (including shares
acquired by reinvestment of dividends or other distribution on or after
such date).
7. It is expected that the purchase premiums and redemption fees for this Fund
will be eliminated once the net assets of the Fund exceed $100 million.
However, even thereafter, the Fund will reserve the right to charge a
purchase premium of up to 0.60% and a redemption fee of up to 0.30% on
purchases or redemptions of amounts that are equal to or greater than 5% of
the Fund's net assets.
8. The Fund invests in various other Funds with different levels of purchase
premiums and/or redemption fees which reflect the trading costs of
different asset classes. Therefore, the Fund's purchase premium and/or
redemption fee has been computed as the weighted average of the purchase
premiums and/or redemption fees of other GMO Funds in which the Fund is
invested and/or which hold securities of the same asset class and/or sector
as securities owned directly by the Fund. The amount of purchase premium
and/or redemption fee for the Fund will be adjusted approximately annually
based on underlying Funds owned by the Fund during the prior year. The
Manager may, but is not obligated to, adjust the purchase premium and/or
redemption fee for the Fund more frequently if the Manager believes in its
discretion that circumstances warrant.
9. Commencing August 20, 1997, the Fund began investing both in other Funds of
the Trust ("underlying Funds") and directly in other instruments.
Therefore, the Fund will incur fees and expenses indirectly as a
shareholder of the underlying Funds. Because the underlying Funds have
varied expense and fee levels and because the Fund may invest to varied
extents and in varied proportions in underlying Funds, the amount of fees
and expenses incurred indirectly by the Fund will also vary. However, the
Manager has contractually agreed to reimburse the Fund's expenses until at
least June 30, 2000 to the extent that the sum of (i) the Fund's total
annual operating expenses (excluding Shareholder Service Fees and the
following expenses: brokerage commissions and other investment-related
costs, hedging transaction fees, extraordinary, non-recurring and certain
other unusual expenses (including taxes), securities
49
<PAGE> 51
lending fees and expenses and transfer taxes ("Fund Expenses")), plus (ii)
the amount of fees and expenses (excluding Shareholder Service Fees and
Fund Expenses (as defined above)) incurred indirectly by the Fund through
investment in underlying Funds, would otherwise exceed 0.33% of the Fund's
daily net assets. Because the Manager will not reimburse expenses to the
extent they exceed 0.33%, and because the amount of fees and expenses
incurred indirectly by the Fund will vary, the total annual operating
expenses (excluding Shareholder Service Fees and Fund Expenses) incurred
indirectly by the Fund through investment in underlying Funds may exceed
0.33% of the Fund's average daily net assets. For the period from March 1,
1998 through February 28, 1999 the indirect total operating expenses borne
by the Fund were 0.51% of the Fund's average daily net assets. The Manager
believes that, under normal market conditions, the total amount of annual
fees and expenses that will be indirectly incurred by the Fund because of
investment in underlying Funds will fall within the ranges set forth below
(based on average daily net assets):
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
FUND LOW TYPICAL HIGH
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Sector Fund 0.48% 0.51% 0.53%
---------------------------------------------------------------------------------------------------
</TABLE>
10. The Fund will invest in Class III Shares of each underlying Fund. Like the
Fund's expenses, the Shareholder Service Fee of each class of the Fund's
shares will be reimbursed to the extent of the indirect Shareholder Service
Fees paid in connection with the Fund's investment in shares of underlying
Funds. Investors should refer to the GMO Trust Shareholder's Manual for
greater detail concerning the eligibility requirements and other
differences among the classes.
11. Applies only to shares acquired on or after June 30, 1998 (including shares
acquired by reinvestment of dividends or other distributions on or after
such date).
12. If it is not necessary to incur costs relating to the early termination of
hedging transactions to meet redemption requests, the redemption fee will
be reduced to 0.13%.
13. Applies only to shares acquired on or after July 1, 1995 (including shares
acquired by reinvestment of dividends or other distributions on or after
such date).
14. Each of the Asset Allocation Funds invests in various other Funds with
different levels of purchase premiums and redemption fees, which reflect
the trading costs of different asset classes. Therefore, the purchase
premium and redemption fee of each Asset Allocation Fund has been set as
the weighted average of the premiums and fees, respectively, of the
underlying Funds in which the Asset Allocation Fund is invested, based on
actual investments by each Asset Allocation Fund. The amount of purchase
premium and redemption fee for each Asset Allocation Fund is adjusted
approximately annually based on underlying Funds owned by each Asset
Allocation Fund during the prior year. The Manager may, but is not
obligated to, adjust the purchase premium and/or redemption fee for an
Asset Allocation Fund more frequently if the Manager believes in its
discretion that circumstances warrant.
15. Asset Allocation Funds invest primarily in underlying Funds. Therefore, in
addition to the fees and expenses directly incurred by the Asset Allocation
Funds (which are shown in the Schedule of Fees and Expenses), the Asset
Allocation Funds will also incur fees and expenses indirectly as
shareholders of the underlying Funds. Because the underlying Funds have
varied expense and fee levels and the Asset Allocation Funds may own
different proportions of underlying Funds at different times, the amount of
fees and expenses indirectly incurred by the Asset Allocation Funds will
vary.
For the fiscal year ended February 28, 1999, the total amount of fees and
expenses indirectly incurred by the Asset Allocation Funds because of
investment in underlying Funds were as follows (based on average daily net
assets):
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
TOTAL ANNUAL
FUND OPERATING EXPENSES
-------------------------------------------------------------------------------------
<S> <C>
International Equity Allocation Fund 0.77%
World Equity Allocation Fund 0.68%
Global U.S.+) Equity Allocation Fund 0.59%
Global Balanced Allocation Fund 0.51%
-------------------------------------------------------------------------------------
</TABLE>
50
<PAGE> 52
The Manager believes that, under normal market conditions, the total amount
of annual fees and expenses that will be indirectly incurred by the Asset
Allocation Funds because of investment in underlying Funds will fall within
the ranges set forth below (based on average daily net assets):
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
FUND LOW TYPICAL HIGH
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Equity Allocation Fund 0.72% 0.77% 0.89%
World Equity Allocation Fund 0.64% 0.68% 0.85%
Global U.S.+) Equity Allocation Fund 0.53% 0.59% 0.74%
Global Balanced Allocation Fund 0.46% 0.51% 0.72%
---------------------------------------------------------------------------------------------------
</TABLE>
16. Commencing August 20, 1997, the Fund began investing both in other Funds of
the Trust ("underlying Funds") and directly in other instruments.
Therefore, the Fund will incur fees and expenses indirectly as a
shareholder of the underlying Funds. Because the underlying Funds have
varied expense and fee levels and because the Fund may invest to varied
extents and in varied proportions in underlying Funds, the amount of fees
and expenses incurred indirectly by the Fund will also vary. However, the
Manager has contractually agreed to reimburse the Fund's expenses until at
least June 30, 2000 to the extent that the sum of (i) the Fund's total
annual operating expenses (excluding SSF's, custodial fees, and the
following expenses: brokerage commissions and other investment-related
costs, hedging transaction fees, extraordinary, non-recurring and certain
other unusual expenses (including taxes), securities lending fees and
expenses and transfer taxes ("Fund Expenses")), plus (ii) the amount of
fees and expenses (excluding SSF's and Fund Expenses (as defined above))
incurred indirectly by the Fund through investment in underlying Funds,
would otherwise exceed 0.50% of the Fund's average daily net assets.
Because the Manager will not reimburse indirect expenses to the extent they
exceed 0.50%, and because the amount of fees and expenses incurred
indirectly by the Fund will vary, the total annual operating expenses
(excluding SSF's and Fund Expenses) incurred directly and indirectly by the
Fund through investment in underlying Funds may exceed 0.50% of the Fund's
average daily net assets. For the period from March 1, 1998 through
February 28, 1999, the indirect total annual operating expenses borne by
the Fund were 0.57% of the Fund's average daily net assets. The Manager
believes that, under normal market conditions, the total amount of annual
fees and expenses that will be indirectly incurred by the Fund because of
investment in underlying Funds will fall within the ranges set forth below
(based on average daily net assets):
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
FUND LOW TYPICAL HIGH
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Hedged Equity Fund 0.50% 0.60% 0.72%
---------------------------------------------------------------------------------------------------
</TABLE>
17. No purchase premium or redemption fee is charged directly by the Fund. By
virtue of the Fund's investment in the Emerging Country Debt Fund, Fund
shareholders will, however, indirectly bear the Emerging Country Debt
Fund's purchase premium and redemption fee, which are presently up to 0.50%
and 0.25%, respectively.
18. The stated fee and expense amounts represent the combined fees and expenses
for the Fund and the Emerging Country Debt Fund, in which substantially all
of the Fund's assets are invested.
19. Although no SSF is charged directly by the Fund, by virtue of the Fund's
investment in the Emerging Country Debt Fund, Fund shareholders will
indirectly bear the SSF set forth in the table.
20. Includes 0.02% of interest expense.
21. Based on estimated amounts for the Fund's first fiscal year.
51
<PAGE> 53
EXAMPLES
The examples below illustrate the expenses you would incur on a $10,000
investment over the stated periods, assuming your investment had a 5% return
each year and the Fund's operating expenses remained the same. The examples are
for comparative purposes only; they do not represent past or future expenses or
performance, and your actual expenses and performance may be higher or lower.
Except as otherwise noted, the expenses shown assume no reimbursement of
expenses by the Manager.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
EXAMPLE 1:
ASSUMING YOU REDEEM YOUR SHARES AT THE END OF EXAMPLE 2:
GMO FUND NAME EACH PERIOD ASSUMING YOU DO NOT REDEEM YOUR SHARES
- ---------------------------------------------------------------------------------------------------------------------------------
1 YEAR 1 YEAR
(AFTER (AFTER
REIMBURSEMENT) 3 YEAR 5 YEAR 10 YEAR REIMBURSEMENT) 3 YEAR 5 YEAR 10 YEAR
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. EQUITY FUNDS
U.S. CORE FUND
Class II $ 70 $194 $ 330 $ 725 $ 70 $194 $ 330 $ 725
Class III $ 63 $172 $ 291 $ 639 $ 63 $172 $ 291 $ 639
Class IV $ 58 $158 $ 266 $ 584 $ 58 $158 $ 266 $ 584
- ---------------------------------------------------------------------------------------------------------------------------------
TOBACCO-FREE CORE FUND
Class III $ 63 $185 $ 318 $ 707 $ 63 $185 $ 318 $ 707
- ---------------------------------------------------------------------------------------------------------------------------------
VALUE FUND
Class III $ 76 $222 $ 381 $ 842 $ 76 $222 $ 381 $ 842
- ---------------------------------------------------------------------------------------------------------------------------------
FUNDAMENTAL VALUE FUND
Class III $ 91 $267 $ 458 $1,010 $ 91 $267 $ 458 $1,010
- ---------------------------------------------------------------------------------------------------------------------------------
INTRINSIC VALUE FUND
Class III $ 63 $190 n/a n/a $ 63 $190 n/a n/a
- ---------------------------------------------------------------------------------------------------------------------------------
GROWTH FUND
Class III $ 63 $181 $ 309 $ 684 $ 63 $181 $ 309 $ 684
- ---------------------------------------------------------------------------------------------------------------------------------
SMALL CAP VALUE FUND
Class III $151 $269 $ 397 $ 773 $ 99 $212 $ 335 $ 696
- ---------------------------------------------------------------------------------------------------------------------------------
SMALL CAP GROWTH FUND
Class III $151 $273 $ 406 $ 795 $ 99 $216 $ 344 $ 718
- ---------------------------------------------------------------------------------------------------------------------------------
REIT FUND
Class III $172 $337 $ 516 $1,035 $120 $280 $ 455 $ 959
- ---------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUNDS
INTERNATIONAL CORE FUND
Class II $137 $316 $ 511 $1,073 $137 $316 $ 511 $1,073
Class III $130 $294 $ 473 $ 990 $130 $294 $ 473 $ 990
Class IV $124 $276 $ 441 $ 919 $124 $276 $ 441 $ 919
- ---------------------------------------------------------------------------------------------------------------------------------
CURRENCY HEDGED INTERNATIONAL
CORE FUND
Class III $130 $324 $ 535 $1,142 $130 $324 $ 535 $1,142
Class IV $124 $306 $ 503 $1,072 $124 $306 $ 503 $1,072
- ---------------------------------------------------------------------------------------------------------------------------------
FOREIGN FUND
Class II $ 84 $283 $ 500 $1,122 $ 84 $283 $ 500 $1,122
Class III $ 77 $261 $ 462 $1,040 $ 77 $261 $ 462 $1,040
Class IV $ 70 $242 $ 429 $ 969 $ 70 $242 $ 429 $ 969
- ---------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL SMALL COMPANIES
FUND
Class III $238 $439 $ 656 $1,283 $176 $372 $ 584 $1,194
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE> 54
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
EXAMPLE 1: EXAMPLE 2:
ASSUMING YOU REDEEM YOUR SHARES AT THE END OF ASSUMING YOU DO NOT REDEEM YOUR SHARES
GMO FUND NAME EACH PERIOD
- ---------------------------------------------------------------------------------------------------------------------------------
1 YEAR 1 YEAR
(AFTER (AFTER
REIMBURSEMENT) 3 YEAR 5 YEAR 10 YEAR REIMBURSEMENT) 3 YEAR 5 YEAR 10 YEAR
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JAPAN FUND
Class III $174 $367 $ 577 $1,183 $110 $299 $ 503 $1,092
- ---------------------------------------------------------------------------------------------------------------------------------
EMERGING MARKETS FUND
Class III $317 $571 $ 845 $1,625 $276 $527 $ 797 $1,568
Class IV $313 $557 $ 821 $1,575 $272 $513 $ 773 $1,517
- ---------------------------------------------------------------------------------------------------------------------------------
EVOLVING COUNTRIES FUND
Class III $328 $640 $ 974 $1,919 $287 $596 $ 927 $1,863
- ---------------------------------------------------------------------------------------------------------------------------------
ASIA FUND
Class III $288 $582 $ 898 $1,794 $247 $538 $ 851 $1,738
- ---------------------------------------------------------------------------------------------------------------------------------
GLOBAL PROPERTIES FUND
Class III $236 $685 $1,160 $2,474 $205 $652 $1,125 $2,434
- ---------------------------------------------------------------------------------------------------------------------------------
FIXED INCOME FUNDS
DOMESTIC BOND FUND
Class III $ 28 $ 96 $ 170 $ 389 $ 28 $ 96 $ 170 $ 389
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. BOND/GLOBAL ALPHA A FUND
Class III $ 56 $165 $ 284 $ 633 $ 56 $165 $ 284 $ 633
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. BOND/GLOBAL ALPHA B FUND
Class III $ 51 $153 $ 266 $ 594 $ 51 $153 $ 266 $ 594
- ---------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL BOND FUND
Class III $ 56 $163 $ 280 $ 621 $ 56 $163 $ 280 $ 621
- ---------------------------------------------------------------------------------------------------------------------------------
CURRENCY HEDGED INTERNATIONAL
BOND FUND
Class III $ 56 $161 $ 275 $ 610 $ 56 $161 $ 275 $ 610
- ---------------------------------------------------------------------------------------------------------------------------------
GLOBAL BOND FUND
Class III $ 50 $150 $ 260 $ 582 $ 50 $150 $ 260 $ 582
- ---------------------------------------------------------------------------------------------------------------------------------
EMERGING COUNTRY DEBT FUND
Class III $133 $263 $ 406 $ 820 $107 $235 $ 375 $ 782
Class IV $128 $248 $ 378 $ 759 $102 $219 $ 347 $ 721
- ---------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INCOME FUND
Class III $ 20 $ 91 $ 168 $ 394 $ 20 $ 91 $ 168 $ 394
- ---------------------------------------------------------------------------------------------------------------------------------
GLOBAL HEDGED EQUITY FUND
Class III $201 $379 $ 573 $1,133 $ 54 $220 $ 400 $ 921
- ---------------------------------------------------------------------------------------------------------------------------------
INFLATION INDEXED BOND FUND
Class III $ 46 $137 $ 236 $ 527 $ 36 $125 $ 224 $ 511
- ---------------------------------------------------------------------------------------------------------------------------------
EMERGING COUNTRY DEBT SHARE
FUND
Class III $133 $276 $ 434 $ 891 $107 $248 $ 403 $ 853
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE> 55
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
EXAMPLE 1:
ASSUMING YOU REDEEM YOUR SHARES AT THE END OF EXAMPLE 2:
GMO FUND NAME EACH PERIOD ASSUMING YOU DO NOT REDEEM YOUR SHARES
- ---------------------------------------------------------------------------------------------------------------------------------
1 YEAR 1 YEAR
(AFTER (AFTER
REIMBURSEMENT) 3 YEAR 5 YEAR 10 YEAR REIMBURSEMENT) 3 YEAR 5 YEAR 10 YEAR
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSET ALLOCATION FUNDS
INTERNATIONAL EQUITY
ALLOCATION FUND
Class III $ 91 $104 $ 117 $ 156 $ 80 $ 91 $ 103 $ 139
- ---------------------------------------------------------------------------------------------------------------------------------
WORLD EQUITY ALLOCATION FUND
Class III $ 82 $ 96 $ 113 $ 161 $ 66 $ 79 $ 94 $ 137
- ---------------------------------------------------------------------------------------------------------------------------------
GLOBAL (U.S. +) EQUITY
ALLOCATION FUND
Class III $ 63 $ 80 $ 98 $ 154 $ 47 $ 62 $ 79 $ 129
- ---------------------------------------------------------------------------------------------------------------------------------
GLOBAL BALANCED ALLOCATION
FUND
Class III $ 63 $ 75 $ 89 $ 130 $ 47 $ 58 $ 70 $ 106
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. SECTOR FUND
Class III $ 46 $170 $ 306 $ 701 $ 27 $150 $ 283 $ 673
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MULTIPLE CLASSES
Each Fund offers up to three classes of shares in this Prospectus. All
Funds offer Class III Shares and certain Funds also offer Class II and/or Class
IV Shares. The sole economic difference among the various classes of shares
offered in this Prospectus is the level of Shareholder Service Fee that the
classes bear for client and shareholder service, reporting and other support.
The existence of multiple classes reflects the fact that, as the size of a
client relationship increases, the cost to service that client decreases as a
percentage of the assets in that account. Thus, the Shareholder Service Fee is
lower for classes where eligibility criteria require greater total assets under
GMO's management.
Eligibility for classes is generally dependent upon the aggregate of an
investor's total assets under GMO's management or, in the case of Class IV
Shares only, the investor's total assets in a particular Fund. More detailed
information regarding: (1) which classes each Fund currently offers; (2)
eligibility requirements for each class of each Fund; and (3) conversions
between classes of shares, is contained in a separate document, the GMO TRUST
SHAREHOLDER'S MANUAL. As described in greater detail in the Manual, the Manager
periodically evaluates whether, in accordance with class conversion rules, a
shareholder's shares should be automatically converted from one class of shares
to another class. It is possible, under circumstances described in the Manual,
for a shareholder's shares of a class of shares with a lower Shareholder Service
Fee to be converted to a class of shares with a higher Shareholder Service Fee.
The Shareholder's Manual accompanies this Prospectus, has been filed with
the SEC, and is incorporated by reference into this Prospectus. Additional
copies of the Manual are available free of charge by contacting the Manager.
BENCHMARKS AND INDEXES
The benchmark or index against which the Manager measures each Fund's
performance is stated under "Fund Objectives and Principal Investment
Strategies -- Investment Objective" for each Fund. In some cases, the GMO
benchmark differs from the broad-based index that the SEC requires each Fund to
use in the average annual return table. Some general information about each
benchmark and index referred to in this Prospectus is provided in the table
below. The Manager may change each Fund's index or benchmark from time to time.
Effective June 30, 1999, the Manager implemented changes in the GMO benchmarks
for the following Funds: International Core Fund (from GMO EAFE-Lite to MSCI
EAFE); Currency Hedged International Core Fund (from GMO EAFE-Lite (Hedged) to
MSCI EAFE (Hedged)); International Small Companies Fund (from GMO EAFE-Lite to
SSB EMI World ex-U.S.); International Equity Allocation Fund (from GMO EAFE-Lite
Extended to GMO EAFE Extended); World Equity Allocation Fund (from GMO
World-Lite Extended to GMO World Extended); Global (U.S.+) Equity Allocation
Fund (this Fund previously used a weighted index comprised in part of GMO
EAFE-Lite Extended -- this portion is now GMO EAFE Extended); and Global
Balanced Index (this Fund previously used a weighted index comprised in part by
GMO EAFE-Lite Extended -- this portion is now GMO EAFE Extended).
Some Funds are managed against "currency hedged" versions of certain of the
indexes listed below. In these cases, the benchmark vendor calculates the
benchmark with the assumption that any gains or losses incurred due to changes
in the
54
<PAGE> 56
value of the foreign currencies in which the securities comprising the index are
denominated relative to the U.S. dollar are offset by gains and losses on fully
effective currency hedging transactions. While the Manager believes that these
"currency hedged" indexes are an appropriate performance benchmark, investors
should be aware that these Funds (including those identified as "currency
hedged") will take active currency positions relative to the hedged benchmark.
See "Principal Risks -- Leverage." These positions may be created directly,
through currency or forward currency positions, or indirectly, by overweighting
the investment in securities denominated in that currency without a
corresponding increase in the level of currency hedging.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ABBREVIATION FULL NAME SPONSOR OR PUBLISHER DESCRIPTION
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
S&P 500 Standard & Poor's 500 Standard & Poor's Well-known, independently maintained
Stock Index Corporation and published U.S. large capitalization
stock index
- --------------------------------------------------------------------------------------------------------------------
Lehman Brothers Lehman Brothers Lehman Brothers Well-known, independently maintained
Government Government Bond Index and published U.S. government bond
index, regularly used as a comparative
fixed income benchmark
- --------------------------------------------------------------------------------------------------------------------
MSCI EAFE Morgan Stanley Capital Morgan Stanley Capital Well-known, independently maintained
International Europe, International and published large capitalization
Australia and Far international stock index
East Index
- --------------------------------------------------------------------------------------------------------------------
GMO EAFE-Lite GMO EAFE-Lite Index GMO A modification of EAFE where GMO
reduces the market capitalization of
Japan by 40% relative to EAFE
- --------------------------------------------------------------------------------------------------------------------
GMO EAFE-Lite GMO EAFE-Lite Extended GMO A modification of EAFE-Lite where GMO
Extended Index adds those additional countries
represented in the IFC Investable Index
- --------------------------------------------------------------------------------------------------------------------
GMO EAFE-Extended GMO EAFE Extended GMO A modification of EAFE where GMO adds
those additional countries represented
in the IFC Investable Index
- --------------------------------------------------------------------------------------------------------------------
MSCI World Morgan Stanley Capital Morgan Stanley Capital An independently maintained and
International World International published global (including U.S.)
Index equity index
- --------------------------------------------------------------------------------------------------------------------
GMO World Extended GMO World Extended GMO A modification of MSCI World where GMO
Index adds those additional countries
represented in the IFC Investable Index
- --------------------------------------------------------------------------------------------------------------------
GMO Global (U.S.+) GMO Global (U.S.+) GMO A composite benchmark computed by GMO
Equity Index Equity Index and comprised 75% by S&P 500 and 25% by
EAFE Extended
- --------------------------------------------------------------------------------------------------------------------
GMO Global Balanced GMO Global Balanced GMO A composite benchmark computed by GMO
Index Index and comprised 48.75% by S&P 500, 16.25%
by EAFE Extended and 35% by Lehman
Brothers Aggregate Bond Index
- --------------------------------------------------------------------------------------------------------------------
MSCI EAFE (Hedged) Morgan Stanley Capital Morgan Stanley Capital Well-known, independently maintained
International Europe, International and published large capitalization
Australia and Far international stock index that is
East Index (Hedged) currency-hedged into U.S. dollars
- --------------------------------------------------------------------------------------------------------------------
MSRI Morgan Stanley REIT Morgan Stanley & Co., Well-known, independently maintained
Index Inc. and published equity real estate index
- --------------------------------------------------------------------------------------------------------------------
SSB 3 Month T-Bill Salomon Smith Barney 3 Salomon Smith Barney Independently maintained and published
Index Month Treasury-Bill short-term bill index
Index
- --------------------------------------------------------------------------------------------------------------------
J.P. Morgan Non-U.S. J.P. Morgan Non-U.S. J.P. Morgan Independently maintained and published
Government Bond Government Bond index composed of non-U.S. government
Index Index bonds with maturities of one year or
more
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
55
<PAGE> 57
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ABBREVIATION FULL NAME SPONSOR OR PUBLISHER DESCRIPTION
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
J.P. Morgan Non-U.S. J.P. Morgan Non-U.S. J.P. Morgan Independently maintained and published
Government Bond Government Bond Index index composed of non-U.S. government
Index (Hedged) (Hedged) bonds with maturities of one year or
more that are currency-hedged into U.S.
dollars
- --------------------------------------------------------------------------------------------------------------------
J.P. Morgan Global J.P. Morgan Global J.P. Morgan Independently maintained and published
Government Bond Government Bond index composed of government bonds of
Index Index 14 developed countries, including the
U.S., with maturities of one year or
more
- --------------------------------------------------------------------------------------------------------------------
J.P. Morgan Emerging J.P. Morgan Emerging J.P. Morgan Independently maintained and published
Markets Bond Market Bond Index index composed of debt securities of 14
Index+ Plus countries, which includes Brady bonds,
sovereign debt, local debt and
Eurodollar debt, all of which are
dollar denominated
- --------------------------------------------------------------------------------------------------------------------
Lehman Brothers Lehman Brothers Lehman Brothers Well-known, independently maintained
Aggregate Bond Aggregate Bond Index and published index comprised of U.S.
Index fixed rate debt issues, having a
maturity of at least one year, rated
investment grade or higher by Moody's
Investors Service, Standard & Poor's
Corporation, or Fitch Investors Service
- --------------------------------------------------------------------------------------------------------------------
Russell 1000 Growth Russell 1000 Growth Frank Russell Company Independently maintained and published
Index Index index composed of the 1,000 largest
U.S. companies based on total market
capitalization with higher
price-to-book ratios and higher
forecasted growth values
- --------------------------------------------------------------------------------------------------------------------
Russell 1000 Value Russell 1000 Value Frank Russell Company Independently maintained and published
Index Index index composed of the 1,000 largest
U.S. companies based on total market
capitalization with lower price-to-book
ratios and lower forecasted growth
values
- --------------------------------------------------------------------------------------------------------------------
Russell 2500 Growth Russell 2500 Growth Frank Russell Company Independently maintained and published
Index Index index composed of the bottom 2,500 of
the 3,000 largest U.S. companies based
on total market capitalization with
higher price-to-book ratios and higher
forecasted growth values
- --------------------------------------------------------------------------------------------------------------------
Russell 2500 Value Russell 2500 Value Frank Russell Company Independently maintained and published
Index Index index composed of the bottom 2,500 of
the 3,000 largest U.S. companies based
on total market capitalization with
lower price-to-book ratios and lower
forecasted growth values
- --------------------------------------------------------------------------------------------------------------------
GMO Russell 2500 GMO Russell 2500 Value GMO Index is comprised of the Russell 2500
Value+ Plus Index from 12/31/91 to 12/31/96, and
the Russell 2500 Value Index from
12/31/96 to present
- --------------------------------------------------------------------------------------------------------------------
IFC Investable IFC Investable International Finance Independently maintained and published
Composite Index Corporation emerging market stock index
- --------------------------------------------------------------------------------------------------------------------
MSCI Japan MSCI Japan Index Morgan Stanley Capital Independently maintained and published
International equity index that attempts to capture
60% of the market capitalization in
Japan
- --------------------------------------------------------------------------------------------------------------------
Lehman Brothers Lehman Brothers Lehman Brothers Independently maintained and published
Treasury Inflation Treasury Inflation index of inflation-indexed linked U.S.
Notes Index Notes Index Treasury securities
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
56
<PAGE> 58
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ABBREVIATION FULL NAME SPONSOR OR PUBLISHER DESCRIPTION
- ------------------------ ------------------------ ------------------------- ----------------------------------------
<S> <C> <C> <C>
SSB EMI World ex U.S. SSB Extended Market Salomon Smith Barney The SSB EMI World ex-U.S. is the small
Index World ex-U.S. capitalization stock component of the
Index SSB Broad Market Index (BMI). The BMI
is a float-weighted index that spans 22
countries and includes the listed
shares of all companies with an
available market capitalization (float)
of at least $100 million at the end of
May each year. Companies are deleted if
their float falls below $75 million.
Changes are effective before the open
of the first business day of July. The
EMI ex-U.S. is defined as those stocks
falling in the bottom 20% of the
cumulative available capital in each
country.
- ------------------------ ------------------------ ------------------------- ----------------------------------------
SSB BMI World SSB Broad Market Index Salomon Smith Barney The SSB World Equity Property Index is
Property Index World Equity Property an independently maintained and
Index published real estate securities index.
The Index is broadly populated,
including over 382 companies each with
a minimum equity market capitalization
of US$50 million. Companies in the
Index represent 19 countries.
- ------------------------ ------------------------ ------------------------- ----------------------------------------
MSCI AC World ex U.S. MSCI All Country World Morgan Stanley Capital An independently maintained and
Ex. U.S. Index International published international (excluding U.S.
and including emerging) equity index.
- ------------------------ ------------------------ ------------------------- ----------------------------------------
GMO Asia 7 Index GMO Asia 7 Index GMO The GMO Asia 7 is composed of the IFC
Investable Country Indexes, equally
weighted, for seven Asian countries
(China, Indonesia, Korea, Malaysia, the
Philippines, Taiwan and Thailand).
- ------------------------ ------------------------ ------------------------- ----------------------------------------
MSCI All Country MSCI All Country World Morgan Stanley Capital An independently maintained and
World Index Index International published global (including U.S. and
emerging) equity index.
- ------------------------ ------------------------ ------------------------- ----------------------------------------
GMO World-Lite GMO World-Lite Extended GMO A modification of World-Lite where GMO
Extended Index adds those additional countries
represented in the IFC Investable
Index.
- ------------------------ ------------------------ ------------------------- ----------------------------------------
GMO EAFE-Lite GMO EAFE-Lite (Hedged) GMO A modification of GMO EAFE-Lite that is
(Hedged) Index currency hedged into U.S. dollars.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
57
<PAGE> 59
DETERMINATION OF NET ASSET VALUE
The net asset value of a share is determined for each Fund once on each day
on which the New York Stock Exchange is open for regular business, except that a
Fund may not determine its net asset value on days during which no security is
tendered for redemption and no order to purchase or sell such security is
received by the relevant Fund. Net asset value is determined as of the close of
regular trading on the New York Stock Exchange, generally 4:00 p.m. New York
City Time. A Fund's net asset value is determined by dividing the total market
value of the Fund's portfolio investments and other assets, less any
liabilities, by the total outstanding shares of the Fund. Portfolio securities
listed on a securities exchange for which market quotations are available are
valued at the last quoted sale price on each business day or, if there is no
such reported sale, at the most recent quoted bid price. However, for those
securities that are listed on an exchange where the exchange is less relevant in
determining the market value of such securities than is the private market, a
broker bid will be used. Criteria for relevance include where the securities are
principally traded and what their intended market for disposition is. Price
information on listed securities is generally taken from the closing price on
the exchange where the security is primarily traded. Unlisted securities for
which market quotations are readily available are valued at the most recent
quoted bid price, except that debt obligations with sixty days or less remaining
until maturity may be valued at their amortized cost, unless circumstances
dictate otherwise. Circumstances may dictate otherwise, among other times, when
the issuer's creditworthiness has become impaired.
All other fixed income securities (which include bonds, loans and
structured notes) and options thereon are valued at the closing bid for such
securities as supplied by a primary pricing source chosen by the Manager. While
the Manager evaluates such primary pricing sources on an ongoing basis, and may
change any pricing source at any time, the Manager will not normally evaluate
the prices supplied by the pricing sources on a day-to-day basis. However, the
Manager is kept informed of erratic or unusual movements (including unusual
inactivity) in the prices supplied for a security and has the power to override
any price supplied by a source (by taking a price supplied from another) because
of such price activity or because the Manager has other reasons to suspect that
a price supplied may not be reliable. Certain securities may be valued on the
basis of a price provided by a principal market maker. Prices provided by
principal market makers may vary from the value that would be realized if the
securities were sold.
Other assets and securities for which no quotations are readily available
are valued at fair value as determined in good faith by the Trustees or persons
acting at their direction. The values of foreign securities quoted in foreign
currencies are translated into U.S. dollars at current exchange rates or at such
other rates as the Trustees may determine in computing net asset value.
Because of time zone differences, foreign exchanges and securities markets
will usually be closed prior to the time of the closing of the New York Stock
Exchange and values of foreign options and foreign securities will be determined
as of the earlier closing of such exchanges and securities markets. However,
events affecting the values of such foreign securities may occasionally occur
between the earlier closings of such exchanges and securities markets and the
closing of the New York Stock Exchange which will not be reflected in the
computation of the Funds' net asset value. If an event materially affecting the
value of such foreign securities occurs during such period, then such securities
may be valued at fair value as determined in good faith by the Trustees or
persons acting at their direction.
Because foreign securities, options on foreign securities and foreign
futures are generally quoted in foreign currencies, fluctuations in the value of
such currencies in relation to the U.S. dollar will affect the net asset value
of shares of the Funds even though there has not been any change in the values
of such securities and options measured in terms of the foreign currencies in
which they are denominated.
TAXES
The following is a general summary of the principal federal income tax
consequences of investing in a Fund for shareholders who are U.S. citizens,
residents or domestic corporations. Shareholders should consult their own tax
advisors about the precise tax consequences of an investment in a Fund in light
of each shareholder's particular tax situation, including possible foreign,
state, local or other applicable tax laws (including the federal alternative
minimum tax).
- Each Fund is treated as a separate taxable entity for federal income tax
purposes and intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as
amended.
- Fund distributions derived from interest, dividends and certain other
income, including in general short-term capital gains, will be taxable as
ordinary income to shareholders subject to federal income tax whether
received in cash or reinvested shares. Properly designated Fund
distributions derived from net long-term capital gains will be taxable as
such (generally at a 20% rate for noncorporate shareholders).
Distributions by a Fund result in a reduction in the net asset value of
the Fund's shares. Should a distribution reduce the net asset value below
a shareholder's cost basis, such distribution nevertheless may be taxable
to the shareholder as described above, even though, from an investment
standpoint, it may constitute a partial return of capital. In particular,
shareholders should be careful to
58
<PAGE> 60
consider the tax implications of buying shares just prior to a taxable
distribution. The price of shares purchased at that time includes the
amount of any forthcoming distribution. Shareholders purchasing shares
just prior to a taxable distribution will receive a return of investment
upon distribution that nevertheless will be taxable to them.
- A Fund's investments in foreign securities may be subject to foreign
withholding taxes on dividends, interest or capital gains. In that case,
such Fund's yield on those securities would be decreased. In certain
instances, shareholders may be entitled to claim a credit or deduction
with respect to foreign taxes.
- In addition, a Fund's investments in foreign securities, foreign
currencies, debt obligations issued or purchased at a discount, assets
"marked to the market" for federal income tax purposes and, potentially,
so-called "indexed securities" (including inflation indexed bonds) may
increase or accelerate such Fund's recognition of income, including the
recognition of taxable income in excess of the cash generated by such
investments. These investments may, therefore, affect the timing or
amount of such Fund's distributions and may cause such Fund to liquidate
other investments to satisfy the distribution requirements that apply to
entities taxed as regulated investment companies.
- Any gain resulting from the sale or exchange of your shares will
generally also be subject to tax.
MANAGEMENT OF THE TRUST
Each Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC,
40 Rowes Wharf, Boston, Massachusetts 02110 (the "Manager" or "GMO"), which
provides investment advisory services to a substantial number of institutional
and other investors. Each of the following four members holds greater than a 5%
interest in the Manager: R. Jeremy Grantham, Richard A. Mayo, Eyk H.A. Van
Otterloo and Kingsley Durant.
Under separate Management Contracts with the Trust, the Manager selects and
reviews each Fund's investments and provides executive and other personnel for
the management of the Trust. Pursuant to the Trust's Agreement and Declaration
of Trust, the Board of Trustees supervises the affairs of the Trust as conducted
by the Manager. In the event that the Manager ceases to be the manager of any
Fund, the right of the Trust to use the identifying name "GMO" may be withdrawn.
The Manager has entered into separate Consulting Agreements with Dancing
Elephant, Ltd., 1936 University Avenue, Berkeley, California 94704 (the
"Consultant"), with respect to the management of the portfolios of the Emerging
Markets Fund, Evolving Countries Fund and Asia Fund. The Consultant is wholly
owned by Mr. Arjun Divecha, who is also a member of GMO's Management Committee.
Under each Consulting Agreement, the Manager separately pays the Consultant a
monthly fee at an annual rate equal to the lesser of 0.50% of the Fund's average
daily net assets or $250,000. The Consultant may from time to time waive all or
a portion of its fee. Payments made by the Manager to the Consultant will not
affect the amounts payable by the Fund to the Manager or the Fund's expense
ratio.
Each Management Contract provides for payment to the Manager of a
management fee at the stated annual rates set forth under "Fees and Expenses."
The management fee is computed and accrued daily, and paid monthly. The Manager
has contractually agreed to reimburse each Fund and to bear certain Fund
expenses through at least June 30, 2000 in order to limit each Fund's annual
expenses to specified limits (with certain exclusions). These limits are
described in footnote 4 in "Fees and Expenses."
59
<PAGE> 61
During the fiscal year ended February 28, 1999, the Manager received as
compensation for management services rendered in such year (after any applicable
waivers or reimbursements), the percentages of each Fund's average daily net
assets as set forth below.
<TABLE>
<CAPTION>
% OF AVERAGE
FUND NET ASSETS
- ---- ------------
<S> <C>
U.S. Core Fund 0.31%
Tobacco-Free Core Fund 0.25%
Value Fund 0.40%
Growth Fund 0.27%
Small Cap Value Fund 0.29%
Small Cap Growth Fund 0.27%
Fundamental Value Fund 0.54%
REIT Fund 0.49%
International Core Fund 0.47%
Currency Hedged International Core
Fund 0.34%
Foreign Fund 0.50%
International Small Companies Fund 0.44%
Japan Fund 0.36%
Emerging Markets Fund 0.79%
Evolving Countries Fund 0.46%
Global Properties Fund 0.00%
Emerging Country Debt Share Fund 0.00%
</TABLE>
<TABLE>
<CAPTION>
% OF AVERAGE
FUND NET ASSETS
- ---- ------------
<S> <C>
Asia Fund 0.70%
Domestic Bond Fund 0.06%
U.S. Bond/Global Alpha A Fund 0.15%
U.S. Bond/Global Alpha B Fund 0.08%
International Bond Fund 0.16%
Currency Hedged International Bond
Fund 0.17%
Global Bond Fund 0.07%
Emerging Country Debt Fund 0.32%
Short-Term Income Fund 0.00%
Global Hedged Equity Fund 0.04%
Inflation Indexed Bond Fund 0.00%
International Equity Allocation Fund 0.00%
World Equity Allocation Fund 0.00%
Global (U.S.+) Equity Allocation Fund 0.00%
Global Balanced Allocation Fund 0.00%
U.S. Sector Fund 0.00%
</TABLE>
Pursuant to a Servicing Agreement with the Trust on behalf of each class of
shares of each Fund, Grantham, Mayo, Van Otterloo & Co. LLC, in its capacity as
the Trust's shareholder servicer (the "Shareholder Servicer") provides direct
client service, maintenance and reporting to shareholders of each class of
shares. Such servicing and reporting services include, without limitation,
professional and informative reporting, client account information, personal and
electronic access to Fund information, access to analysis and explanations of
Fund reports, and assistance in the correction and maintenance of client-related
information.
60
<PAGE> 62
The table below identifies the persons at GMO who are primarily responsible
for the day-to-day management of one or more Funds. More than one individual is
responsible for the day-to-day management of certain Funds. Day-to-day
management of the Asset Allocation Funds is the responsibility of a committee,
and no person or persons is primarily responsible for making recommendations to
that committee.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
MANAGER PRIMARY RESPONSIBILITY SINCE PROFESSIONAL EXPERIENCE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
R. Jeremy Grantham U.S. Sector Fund and U.S. Equity Funds >5 years President-Quantitative and
except Value Fund, Fundamental Value Fund Partner/Member, GMO since 1979.
and REIT Fund
--------------------------------------------------------
Currency Hedged International Core Fund, Inception
International Small Companies Fund, Japan
Fund, Global Hedged Equity Fund and
International Core Fund
- -----------------------------------------------------------------------------------------------------------------------
Christopher Darnell U.S. Sector Fund, International Core Fund >5 years Partner/Member, GMO since 1984.
and U.S. Equity Funds except Value Fund,
Fundamental Value Fund and REIT Fund
--------------------------------------------------------
Currency Hedged International Core Fund, Inception
International Small Companies Fund, Japan
Fund, Global Hedged Equity Fund
--------------------------------------------------------
REIT Fund and Value Fund Inception
through
June 1999
- -----------------------------------------------------------------------------------------------------------------------
Richard A. Mayo Fundamental Value Fund and Value Fund >5 years President-U.S. Active and
Partner/Member, GMO since 1979.
--------------------------------------------------------
REIT Fund 1999
- -----------------------------------------------------------------------------------------------------------------------
Forrest Berkley Currency Hedged International Core Fund, Inception Partner/Member, GMO since 1990.
International Small Companies Fund, Japan
Fund and Global Hedged Equity Fund
--------------------------------------------------------
International Core Fund >5 years
- -----------------------------------------------------------------------------------------------------------------------
Arjun Bhagwan Emerging Markets Fund, Evolving Countries Inception President, Dancing Elephant, Ltd.
Divecha Fund and Asia Fund (Consultant to GMO) since 1993.
- -----------------------------------------------------------------------------------------------------------------------
Jui L. Lai Foreign Fund Inception Investment Director since 1988 and
Member since 1996, GMO.
- -----------------------------------------------------------------------------------------------------------------------
Ann M. Spruill Foreign Fund Inception Investment Director since 1990 and
Member since 1996, GMO.
- -----------------------------------------------------------------------------------------------------------------------
Eyk H. A. Van Global Properties Fund Inception President-International and
Otterloo Partner/Member, GMO since 1979.
- -----------------------------------------------------------------------------------------------------------------------
Wilson Magee Global Properties Fund and REIT Fund Inception Employee of GMO since 1997. 1994-
1997, principal for Penobscot Group.
- -----------------------------------------------------------------------------------------------------------------------
William L. Fixed Income Funds except Short-Term Income Inception Investment Director since 1993 and
Nemerever Fund and Global Hedged Equity Fund Member since 1996, GMO.
--------------------------------------------------------
Short-Term Income Fund 1994
- -----------------------------------------------------------------------------------------------------------------------
Thomas F. Cooper Fixed Income Funds except Short-Term Income Inception Investment Director since 1993 and
Fund and Global Hedged Equity Fund Member since 1996, GMO.
--------------------------------------------------------
Short-Term Income Fund 1994
- -----------------------------------------------------------------------------------------------------------------------
Steven Edelstein Fixed Income Funds except Global Hedged 1995 Employee of GMO since 1995. 1990 to
Equity Fund 1995, Vice President in the Fixed
Income Futures and Options Group at
Morgan Stanley & Company.
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
61
<PAGE> 63
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
DOMESTIC EQUITY FUNDS
- ----------------------------------
U.S. CORE FUND*
<TABLE>
<CAPTION>
CLASS II SHARES
---------------------------------------------------------------------------------
PERIOD FROM
JUNE 7, 1996
YEAR ENDED PERIOD FROM PERIOD FROM (COMMENCEMENT
FEBRUARY 28, JANUARY 9, 1998 MARCH 1, 1997 OF OPERATIONS) TO
1999 TO FEBRUARY 28, 1998 TO NOVEMBER 17, 1997 FEBRUARY 28, 1997
--------------- -------------------- -------------------- -----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period.......... $ 19.98 $ 17.65 $ 20.10 $ 20.12
------- ------- ------- -------
Income from investment operations:
Net investment income........................ 0.25(3) 0.04(3) 0.24(3) 0.25
Net realized and unrealized gain............. 2.55 2.29 3.99 2.92
------- ------- ------- -------
Total from investment operations........... 2.80 2.33 4.23 3.17
------- ------- ------- -------
Less distributions to shareholders:
From net investment income................... (0.29) -- (0.22) (0.30)
From net realized gains...................... (3.92) -- (3.90) (2.89)
------- ------- ------- -------
Total distributions........................ (4.21) -- (4.12) (3.19)
------- ------- ------- -------
Net asset value, end of period................ $ 18.57 $ 19.98 $ 20.21 $ 20.10
======= ======= ======= =======
Total Return(1)............................... 14.99% 13.20% 23.00% 17.46%
Ratios/Supplemental Data:
Net assets, end of period (000's)............ $41,684 $16,958 $ 2,037 $64,763
Net expenses to average daily net assets..... 0.55% 0.55%(2) 0.55%(2) 0.55%(2)
Net investment income to average daily net
assets..................................... 1.29% 1.53%(2) 1.66%(2) 1.63%(2)
Portfolio turnover rate...................... 71% 60% 60% 107%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following
per share amounts.......................... $ 0.04 $ 0.01 $ 0.03 $ 0.03
</TABLE>
(1) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(2) Annualized.
(3) Computed using average shares outstanding throughout the period.
* Effective June 30, 1998, the "GMO Core Fund" was renamed the "GMO U.S. Core
Fund."
TOBACCO-FREE CORE FUND
<TABLE>
<CAPTION>
CLASS III SHARES
--------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $ 14.05 $ 12.98 $ 12.93 $ 10.65 $ 11.07
-------- ------- ------- ------- -------
Income from investment
operations:
Net investment income....... 0.18 0.22 0.24 0.28 0.23
Net realized and unrealized
gain...................... 1.99 4.07 2.41 3.71 0.50
-------- ------- ------- ------- -------
Total from investment
operations.............. 2.17 4.29 2.65 3.99 0.73
-------- ------- ------- ------- -------
Less distributions to
shareholders:
From net investment
income.................... (0.19) (0.22) (0.24) (0.25) (0.28)
From net realized gains..... (1.77) (3.00) (2.36) (1.46) (0.87)
-------- ------- ------- ------- -------
Total distributions....... (1.96) (3.22) (2.60) (1.71) (1.15)
-------- ------- ------- ------- -------
Net asset value, end of
period...................... $ 14.26 $ 14.05 $ 12.98 $ 12.93 $ 10.65
======== ======= ======= ======= =======
Total Return(1)............... 16.29% 37.82% 22.76% 38.64% 7.36%
Ratios/Supplemental Data:
Net assets, end of period
(000's)................... $227,158 $99,922 $66,260 $57,485 $47,969
Net expenses to average
daily net assets.......... 0.48% 0.48% 0.48% 0.48% 0.48%
Net investment income to
average daily net
assets.................... 1.35% 1.66% 1.83% 2.25% 2.52%
Portfolio turnover rate..... 77% 70% 131% 81% 112%
Fees and expenses
voluntarily waived or
borne by the Manager
consisted of the following
per share amounts......... $ 0.03 $ 0.04 $ 0.04 $ 0.03 $ 0.03
</TABLE>
(1) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
62
<PAGE> 64
<TABLE>
<CAPTION>
CLASS III SHARES CLASS IV SHARES
-------------------------------------------------------------- -------------------------------------
PERIOD FROM
JANUARY 9, 1998
YEAR ENDED FEBRUARY 28/29, (COMMENCEMENT OF
-------------------------------------------------------------- YEAR ENDED OPERATIONS) TO
1999 1998 1997 1996 1995 FEBRUARY 28, 1999 FEBRUARY 28, 1998
---------- ---------- ---------- ---------- ---------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 19.99 $ 20.12 $ 19.46 $ 15.45 $ 15.78 $ 19.99 $ 17.65
---------- ---------- ---------- ---------- ---------- ---------- ----------
0.26(3) 0.35 0.36 0.41 0.41 0.27(3) 0.04(3)
2.55 5.89 3.58 5.49 0.66 2.55 2.30
---------- ---------- ---------- ---------- ---------- ---------- ----------
2.81 6.24 3.94 5.90 1.07 2.82 2.34
---------- ---------- ---------- ---------- ---------- ---------- ----------
(0.29) (0.32) (0.39) (0.42) (0.39) (0.31) --
(3.92) (6.05) (2.89) (1.47) (1.01) (3.92) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
(4.21) (6.37) (3.28) (1.89) (1.40) (4.23) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 18.59 $ 19.99 $ 20.12 $ 19.46 $ 15.45 $ 18.58 $ 19.99
========== ========== ========== ========== ========== ========== ==========
15.02% 36.69% 22.05% 39.08% 7.45% 15.07% 13.26%
$1,780,011 $2,317,103 $3,051,344 $3,179,314 $2,309,248 $1,543,655 $1,370,535
0.48% 0.48% 0.48% 0.48% 0.48% 0.435% 0.435%(2)
1.36% 1.67% 1.78% 2.25% 2.63% 1.41% 1.67%(2)
71% 60% 107% 77% 99% 71% 60%
$ 0.04 $ 0.05 $ 0.04 $ 0.01 $ 0.01 $ 0.04 $ 0.01
</TABLE>
63
<PAGE> 65
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
VALUE FUND
<TABLE>
<CAPTION>
CLASS III SHARES
----------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period... $ 14.33 $ 14.85 $ 14.25 $ 12.05 $ 13.48
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income................ 0.26 0.31 0.31 0.39 0.41
Net realized and unrealized gain..... 0.13 3.81 2.47 3.71 0.32
-------- -------- -------- -------- --------
Total from investment operations... 0.39 4.12 2.78 4.10 0.73
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income........... (0.27) (0.35) (0.32) (0.39) (0.45)
From net realized gains.............. (4.05) (4.29) (1.86) (1.51) (1.71)
-------- -------- -------- -------- --------
Total distributions................ (4.32) (4.64) (2.18) (1.90) (2.16)
-------- -------- -------- -------- --------
Net asset value, end of period......... $ 10.40 $ 14.33 $ 14.85 $ 14.25 $ 12.05
======== ======== ======== ======== ========
Total Return(1)........................ 2.24% 31.54% 21.26% 35.54% 6.85%
Ratios/Supplemental Data:
Net assets, end of period (000's).... $202,842 $332,103 $469,591 $317,612 $350,694
Net expenses to average daily net
assets............................. 0.61% 0.61% 0.61% 0.61% 0.61%
Net investment income to average
daily net assets................... 1.82% 1.89% 2.17% 2.66% 2.86%
Portfolio turnover rate.............. 37% 40% 84% 65% 77%
Fees and expenses voluntarily waived
or borne by the Manager consisted
of the following per share
amounts............................ $ 0.04 $ 0.05 $ 0.04 $ 0.02 $ 0.02
</TABLE>
(1) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
FUNDAMENTAL VALUE FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
-------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.............. $ 11.92 $ 16.33 $ 15.04 $ 12.54 $ 12.49
------- -------- -------- -------- --------
Income from investment operations:
Net investment income........................... 0.18 0.35 0.33 0.37 0.34
Net realized and unrealized gain................ 0.19 3.90 2.53 3.26 0.55
------- -------- -------- -------- --------
Total from investment operations.............. 0.37 4.25 2.86 3.63 0.89
------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income...................... (0.20) (0.38) (0.32) (0.37) (0.32)
From net realized gains......................... (5.02) (8.28) (1.25) (0.76) (0.52)
------- -------- -------- -------- --------
Total distributions........................... (5.22) (8.66) (1.57) (1.13) (0.84)
------- -------- -------- -------- --------
Net asset value, end of period.................... $ 7.07 $ 11.92 $ 16.33 $ 15.04 $ 12.54
======= ======== ======== ======== ========
Total Return(1)................................... 2.30% 30.43% 20.03% 29.95% 7.75%
Ratios/Supplemental Data:
Net assets, end of period (000's)................. $82,062 $127,036 $232,583 $212,428 $182,871
Net expenses to average daily net assets........ 0.75% 0.75% 0.75% 0.75% 0.75%
Net investment income to average daily net
assets........................................ 1.67% 1.84% 2.15% 2.61% 2.84%
Portfolio turnover rate......................... 34% 21% 25% 34% 49%
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts................................. $ 0.02 $ 0.04 $ 0.02 $ 0.01 $ 0.01
</TABLE>
(1) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
64
<PAGE> 66
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
GROWTH FUND
<TABLE>
<CAPTION>
CLASS III SHARES
------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 4.38 $ 5.18 $ 5.65 $ 4.45 $ 4.14
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income..................................... 0.03 0.04 0.07 0.08 0.06
Net realized and unrealized gain.......................... 0.89 1.41 1.03 1.54 0.38
-------- -------- -------- -------- --------
Total from investment operations........................ 0.92 1.45 1.10 1.62 0.44
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income................................ (0.03) (0.06) (0.08) (0.07) (0.06)
From net realized gains................................... (1.13) (2.19) (1.49) (0.35) (0.07)
-------- -------- -------- -------- --------
Total distributions..................................... (1.16) (2.25) (1.57) (0.42) (0.13)
-------- -------- -------- -------- --------
Net asset value, end of period.............................. $ 4.14 $ 4.38 $ 5.18 $ 5.65 $ 4.45
======== ======== ======== ======== ========
Total Return(1)............................................. 22.90% 36.37% 21.64% 37.77% 10.86%
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $158,084 $202,923 $244,183 $391,366 $239,006
Net expenses to average daily net assets.................. 0.48% 0.48% 0.48% 0.48% 0.48%
Net investment income to average daily net assets......... 0.64% 0.79% 1.21% 1.54% 1.50%
Portfolio turnover rate................................... 50% 60% 100% 76% 139%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts.... $ 0.01 $ 0.01 $ 0.01 --(2) --(2)
</TABLE>
(1) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(2) Fees and expenses waived or borne by the Manager were less than $.01 per
share.
SMALL CAP VALUE FUND*
<TABLE>
<CAPTION>
CLASS III SHARES
------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........ $ 18.28 $ 15.89 $ 13.89 $ 13.61 $ 14.31
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income..................... 0.18 0.27 0.28 0.23 0.20
Net realized and unrealized gain (loss)... (2.50) 4.85 2.32 3.20 0.34
-------- -------- -------- -------- --------
Total from investment operations........ (2.32) 5.12 2.60 3.43 0.54
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income................ (0.19) (0.29) (0.27) (0.23) (0.20)
From net realized gains................... (4.08) (2.44) (0.33) (2.92) (1.04)
-------- -------- -------- -------- --------
Total distributions..................... (4.27) (2.73) (0.60) (3.15) (1.24)
-------- -------- -------- -------- --------
Net asset value, end of period.............. $ 11.69 $ 18.28 $ 15.89 $ 13.89 $ 13.61
======== ======== ======== ======== ========
Total Return(1)............................. (14.74)% 34.43% 19.12% 27.18% 4.48%
Ratios/Supplemental Data:
Net assets, end of period (000's)......... $347,684 $769,612 $655,373 $231,533 $235,781
Net expenses to average daily net
assets.................................. 0.48% 0.48% 0.48% 0.48% 0.48%
Net investment income to average daily net
assets.................................. 0.99% 1.51% 2.15% 1.67% 1.55%
Portfolio turnover rate................... 49% 56% 58% 135% 54%
Fees and expenses voluntarily waived or
borne by the Manager consisted of the
following per share amounts............. $ 0.04 $ 0.04 $ 0.03 $ 0.02 $ 0.01
</TABLE>
(1) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
* Effective December 1, 1996, the "GMO Core II Secondaries Fund" was renamed the
"GMO Small Cap Value Fund."
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
65
<PAGE> 67
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
SMALL CAP GROWTH FUND
<TABLE>
<CAPTION>
CLASS III SHARES
--------------------------------------------------------
YEAR ENDED FEBRUARY 28, PERIOD FROM DECEMBER 31, 1996
------------------------ (COMMENCEMENT OF OPERATIONS)
1999 1998 TO FEBRUARY 28, 1997
--------- --------- -----------------------------
<S> <C> <C> <C>
Net asset value, beginning of period........................ $ 12.28 $ 9.82 $ 10.00
-------- -------- --------
Income from investment operations:
Net investment income..................................... 0.03 0.05 0.01
Net realized and unrealized gain (loss)................... (0.98) 3.43 (0.19)
-------- -------- --------
Total from investment operations........................ (0.95) 3.48 (0.18)
-------- -------- --------
Less distributions to shareholders:
From net investment income................................ (0.02) (0.06) --
In excess of net investment income........................ -- (0.01) --
From net realized gains................................... (0.43) (0.95) --
-------- -------- --------
Total distributions..................................... (0.45) (1.02) --
-------- -------- --------
Net asset value, end of period.............................. $ 10.88 $ 12.28 $ 9.82
======== ======== ========
Total Return(1)............................................. (8.20)% 36.66% (1.80)%
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $129,983 $399,613 $159,898
Net expenses to average daily net assets.................. 0.48% 0.48% 0.48%(2)
Net investment income to average daily net assets......... 0.21% 0.47% 0.70%(2)
Portfolio turnover rate................................... 113% 132% 13%
Fees and expenses voluntarily waived or borne by the
Manager consisted
of the following per share amounts...................... $ 0.03 $ 0.03 $ 0.01
</TABLE>
(1) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(2) Annualized.
REIT FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-------------------------------------------------------
YEAR ENDED FEBRUARY 28, PERIOD FROM MAY 31, 1996
------------------------ (COMMENCEMENT OF OPERATIONS)
1999 1998 TO FEBRUARY 28, 1997
---- ---- ----------------------------
<S> <C> <C> <C>
Net asset value, beginning of period........................ $ 12.92 $ 12.62 $ 10.00
-------- -------- --------
Income from investment operations:
Net investment income..................................... 0.51(2) 0.53 0.24
Net realized and unrealized gain (loss)................... (3.36) 1.26 2.60
-------- -------- --------
Total from investment operations........................ (2.85) 1.79 2.84
-------- -------- --------
Less distributions to shareholders:
From net investment income................................ (0.19) (0.57) (0.17)
In excess of net investment income........................ -- (0.03) --
From net realized gains................................... (0.75) (0.89) (0.05)
-------- -------- --------
Total distributions..................................... (0.94) (1.49) (0.22)
-------- -------- --------
Net asset value, end of period.............................. $ 9.13 $ 12.92 $ 12.62
======== ======== ========
Total Return(1)............................................. (23.27)% 14.29% 28.49%
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $143,129 $374,774 $260,929
Net expenses to average daily net assets.................. 0.69% 0.69% 0.69%(3)
Net investment income to average daily net assets......... 4.60% 4.10% 4.72%(3)
Portfolio turnover rate................................... 59% 86% 21%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts.... $ 0.03 $ 0.03 $ 0.02
</TABLE>
(1) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(2) Computed using average shares outstanding throughout the period.
(3) Annualized.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
66
<PAGE> 68
[THIS PAGE IS INTENTIONALLY LEFT BLANK.]
67
<PAGE> 69
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
INTERNATIONAL EQUITY FUNDS
INTERNATIONAL CORE FUND
<TABLE>
<CAPTION>
CLASS II SHARES
------------------------------------------------
PERIOD FROM
SEPTEMBER 26, 1996
YEAR ENDED YEAR ENDED (COMMENCEMENT OF
FEBRUARY 28, FEBRUARY 28, OPERATIONS) TO
1999 1998 FEBRUARY 28, 1997
------------ ------------ ------------------
<S> <C> <C> <C>
Net asset value, beginning of
period............................ $ 23.16 $ 24.36 $ 24.60
------- ------- -------
Income (loss) from investment
operations:
Net investment income............. 0.39(5) 0.52(5) 0.14
Net realized and unrealized gain
(loss).......................... (0.46) 1.94 0.96
------- ------- -------
Total from investment
operations..................... (0.07) 2.46 1.10
------- ------- -------
Less distributions to shareholders:
From net investment income........ (0.24) (0.74) (0.27)
In excess of net investment
income.......................... (0.24) -- --
From net realized gains........... (2.28) (2.92) (1.07)
------- ------- -------
Total distributions............. (2.76) (3.66) (1.34)
------- ------- -------
Net asset value, end of period..... $ 20.33 $ 23.16 $ 24.36
======= ======= =======
Total Return(1).................... (0.76)% 11.60% 4.51%
Ratios/Supplemental Data:
Net assets, end of period
(000's)......................... $18,295 $12,500 $25,302
Net expenses to average daily net
assets.......................... 0.76% 0.76% 0.80%(3,4)
Net investment income to average
daily net assets................ 1.71% 2.14% 0.98%(4)
Portfolio turnover rate........... 60% 68% 97%
Fees and expenses voluntarily
waived or borne by the Manager
consisted of the following per
share amounts................... $ 0.06 $ 0.07 $ 0.05
<CAPTION>
CLASS III SHARES
--------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................ $ 23.20 $ 24.37 $ 24.62 $ 22.32 $ 25.56
---------- ---------- ---------- ---------- ----------
Income (loss) from investment
operations:
Net investment income............. 0.42(5) 0.54(5) 0.59 0.36 0.27
Net realized and unrealized gain
(loss).......................... (0.47) 1.96 1.02 3.09 (1.57)
---------- ---------- ---------- ---------- ----------
Total from investment
operations..................... (0.05) 2.50 1.61 3.45 (1.30)
---------- ---------- ---------- ---------- ----------
Less distributions to shareholders:
From net investment income........ (0.25) (0.75) (0.33) (0.39) (0.35)
In excess of net investment
income.......................... (0.24) -- -- -- --
From net realized gains........... (2.28) (2.92) (1.53) (0.76) (1.59)
---------- ---------- ---------- ---------- ----------
Total distributions............. (2.77) (3.67) (1.86) (1.15) (1.94)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period..... $ 20.38 $ 23.20 $ 24.37 $ 24.62 $ 22.32
========== ========== ========== ========== ==========
Total Return(1).................... (0.68)% 11.71% 6.72% 15.72% (5.31)%
Ratios/Supplemental Data:
Net assets, end of period
(000's)......................... $1,998,447 $3,046,510 $4,232,937 $4,538,036 $2,591,646
Net expenses to average daily net
assets.......................... 0.69% 0.69% 0.71%(2) 0.71%(2) 0.70%
Net investment income to average
daily net assets................ 1.84% 2.19% 2.34% 1.93% 1.48%
Portfolio turnover rate........... 60% 68% 97% 14% 53%
Fees and expenses voluntarily
waived or borne by the Manager
consisted of the following per
share amounts................... $ 0.06 $ 0.07 $ 0.06 $ 0.03 $ 0.03
</TABLE>
(1) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(2) Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .02% of average daily net assets.
(3) Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .04% of average daily net assets.
(4) Annualized.
(5) Computed using average shares outstanding throughout the period.
CURRENCY HEDGED INTERNATIONAL CORE FUND
<TABLE>
<CAPTION>
CLASS III SHARES CLASS IV SHARES
--------------------------------------------------------- --------------------------------
PERIOD FROM
PERIOD JANUARY 9, 1998
YEAR ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED (COMMENCEMENT OF
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, OPERATIONS) TO
1999 1998 1997 1996(1) 1999 FEBRUARY 28, 1998
------------ ------------ ------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................... $ 11.92 $ 12.68 $ 11.54 $ 10.00 $ 11.92 $ 10.87
------- -------- -------- -------- -------- --------
Income from investment operations:
Net investment income............ 0.23(5) 0.27(5) 0.22 0.23 0.24(5) 0.01(5)
Net realized and unrealized gain
(loss)......................... (0.36)(6) 1.72 1.63 1.44 (0.36)(6) 1.04
------- -------- -------- -------- -------- --------
Total from investment
operations.................... (0.13) 1.99 1.85 1.67 (0.12) 1.05
------- -------- -------- -------- -------- --------
Less distributions to
shareholders:
From net investment income....... (0.08) (0.27) (0.28) (0.06) (0.09) --
In excess of net investment
income......................... (0.21) -- -- -- (0.22) --
From net realized gains.......... (2.22) (2.48) (0.43) (0.07) (2.22) --
------- -------- -------- -------- -------- --------
Total distributions............ (2.51) (2.75) (0.71) (0.13) (2.53) --
------- -------- -------- -------- -------- --------
Net asset value, end of period.... $ 9.28 $ 11.92 $ 12.68 $ 11.54 $ 9.27 $ 11.92
======= ======== ======== ======== ======== ========
Total Return(2)................... (1.84)% 17.98% 16.55% 16.66% (1.79)% 9.66%
Ratios/Supplemental Data:
Net assets, end of period
(000's)........................ $97,450 $207,653 $581,099 $407,227 $108,956 $362,829
Net expenses to average daily net
assets......................... 0.69% 0.69% 0.72%(3) 0.69%(4) 0.63% 0.63%(4)
Net investment income to average
daily net assets............... 2.07% 2.15% 2.25% 1.89%(4) 2.17% 0.72%(4)
Portfolio turnover rate.......... 68% 96% 84% 7% 68% 96%
Fees and expenses voluntarily
waived or borne by the Manager
consisted of the following per
share amounts.................. $ 0.05 $ 0.05 $ 0.04 $ 0.05 $ 0.05 $ 0.01
</TABLE>
(1) Period from June 30, 1995 (commencement of operations) to February 29, 1996.
(2) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(3) Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .03% of average daily net assets.
(4) Annualized.
(5) Computed using average shares outstanding throughout the period.
(6) The amount shown for a share outstanding does not correspond with the
aggregate net realized and unrealized gain (loss) on investments for the
period ended February 28, 1999 due to the timing of purchases and
redemptions of Fund shares in relation to fluctuating market values of the
investments of the Fund.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
68
<PAGE> 70
<TABLE>
<CAPTION>
CLASS IV SHARES
----------------------------------------
PERIOD FROM
JANUARY 9, 1998
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) TO
FEBRUARY 28, 1999 FEBRUARY 28, 1998
----------------- -----------------
<S> <C> <C>
$ 23.19 $ 20.61
-------- --------
0.42(5) 0.02(5)
(0.46) 2.56
-------- --------
(0.04) 2.58
-------- --------
(0.25) --
(0.25) --
(2.28) --
-------- --------
(2.78) --
-------- --------
$ 20.37 $ 23.19
======== ========
(0.60)% 12.52%
$567,219 $682,952
0.63% 0.63%(4)
1.85% 0.68%(4)
60% 68%
$ 0.06 $ 0.01
</TABLE>
69
<PAGE> 71
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
FOREIGN FUND*
<TABLE>
<CAPTION>
CLASS II SHARES CLASS III SHARES
---------------------------------------------------------- -----------------
PERIOD FROM
SEPTEMBER 30, 1996
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS) TO YEAR ENDED
FEBRUARY 28, 1999 FEBRUARY 28, 1998 FEBRUARY 28, 1997 FEBRUARY 28, 1999
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period........................ $ 12.09 $ 10.65 $ 10.02 $ 12.10
------- ------- ------- --------
Income from investment
operations:
Net investment income......... 0.20(5) 0.18(5) 0.06 0.20(5)
Net realized and unrealized
gain (loss)................. (0.14) 1.48 0.65 (0.12)
------- ------- ------- --------
Total from investment
operations................ 0.06 1.66 0.71 0.08
------- ------- ------- --------
Less distributions to
shareholders:
From net investment income.... (0.25) (0.22) (0.08) (0.26)
From net realized gains....... (0.11) (0.00)(6) -- (0.11)
------- ------- ------- --------
Total distributions......... (0.36) (0.22) (0.08) (0.37)
------- ------- ------- --------
Net asset value, end of
period........................ $ 11.79 $ 12.09 $ 10.65 $ 11.81
======= ======= ======= ========
Total Return(1)................. 0.36% 15.94% 7.08% 0.48%
Ratios/Supplemental Data:
Net assets, end of period
(000's)..................... $33,780 $53,949 $21,957 $927,108
Net expenses to average daily
net assets.................. 0.82% 0.82% 0.84%(2,4) 0.75%
Net investment income to
average daily net assets.... 1.64% 1.60% 0.83%(2) 1.60%
Portfolio turnover rate....... 27% 19% 13% 27%
Fees and expenses voluntarily
waived or borne by the
Manager consisted of the
following per share
amounts..................... $ 0.03 $ 0.03 $ 0.02 $ 0.03
<CAPTION>
CLASS III SHARES
-------------------------------------
PERIOD FROM
JUNE 28, 1996
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) TO
FEBRUARY 28, 1998 FEBRUARY 28, 1997
----------------- -----------------
<S> <C> <C>
Net asset value, beginning of
period........................ $ 10.66 $ 10.00
-------- --------
Income from investment
operations:
Net investment income......... 0.21(5) 0.08
Net realized and unrealized
gain (loss)................. 1.45 0.66
-------- --------
Total from investment
operations................ 1.66 0.74
-------- --------
Less distributions to
shareholders:
From net investment income.... (0.22) (0.08)
From net realized gains....... (0.00)(6) --
-------- --------
Total distributions......... (0.22) (0.08)
-------- --------
Net asset value, end of
period........................ $ 12.10 $ 10.66
======== ========
Total Return(1)................. 15.95% 7.37%
Ratios/Supplemental Data:
Net assets, end of period
(000's)..................... $847,427 $671,829
Net expenses to average daily
net assets.................. 0.75% 0.76%(2,3)
Net investment income to
average daily net assets.... 1.80% 1.24%(2)
Portfolio turnover rate....... 19% 13%
Fees and expenses voluntarily
waived or borne by the
Manager consisted of the
following per share
amounts..................... $ 0.03 $ 0.02
</TABLE>
<TABLE>
<C> <S>
(1) The total returns would have been lower had certain expenses
not been waived during the periods shown.
(2) Annualized.
(3) Includes stamp duties and transfer taxes not waived or borne
by the Manager, which approximate .01% of average daily net
assets for the period ended February 28, 1997.
(4) Includes stamp duties and transfer taxes not waived or borne
by the Manager, which approximate .02% of average daily net
assets for the period ended February 28, 1997.
(5) Computed using average shares outstanding throughout the
period.
(6) The per share realized gain distribution was $0.004
(7) Net investment income earned was less than $0.01 per share.
Computed using average shares outstanding throughout the
period.
(8) Fees or expenses voluntarily waived or borne by the Manager
were less than $0.01 per share.
(a) The fiscal year end of the GMO Pool was June 30.
(b) Expenses for the GMO Pool were paid directly by its
unitholders.
(c) Net of annual total GMO Pool expenses of 0.83% paid directly
by unitholders.
* The GMO Foreign Fund (the "Foreign Fund") commenced
operations on June 28, 1996 subsequent to a transaction
involving, in essence, the reorganization of the GMO
International Equities Pool of The Common Fund for Nonprofit
Organizations (the "GMO Pool") as the Foreign Fund.
** All information relating to the time periods prior to June
28, 1996 relates to the GMO Pool. Total return figures are
based on historical earnings but past performance data is
not necessarily indicative of future performance of the
Foreign Fund. The per unit information for the GMO Pool has
been restated to conform to the Foreign Fund's initial net
asset value of $10.00 per share on such date. The GMO Pool
was not a registered investment company as it was exempt
from registration under the 1940 Act and therefore was not
subject to certain investment restrictions imposed by the
1940 Act. If the GMO Pool had been registered under the 1940
Act, its performance may have been adversely affected. The
GMO Pool's performance information is also presented as the
performance of the Foreign Fund for periods prior to June
28, 1996 by including the total return of the GMO Pool; such
information does not constitute the financial highlights of
the Foreign Fund.
</TABLE>
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions).
Except as otherwise noted, the above information has been audited by
PricewaterhouseCoopers LLP, independent accountants. The information relating to
the periods ended February 28, 1997, 1998 and 1999 should be read in conjunction
with the financial statements and related notes which are included in the
Foreign Fund's Annual Report, and which are incorporated by reference in the
Trust's Statement of Additional Information. The GMO Pool had only one class of
outstanding units. Expenses charged to GMO Pool unitholders were fixed at a
level above that of the Foreign Fund's Class II and Class III Shares.
70
<PAGE> 72
<TABLE>
<CAPTION>
GMO POOL
PERFORMANCE INFORMATION**
CLASS IV SHARES (UNAUDITED)
-------------------------------------- --------------------------
PERIOD FROM
JANUARY 9, 1998
(COMMENCEMENT OF Year Ended June 30,(a)
YEAR ENDED OPERATIONS) TO --------------------------
FEBRUARY 28, 1999 FEBRUARY 28, 1998 1996 1995
----------------- ----------------- --------- ---------
<S> <C> <C> <C> <C>
$ 12.11 $ 10.90 $ 8.90 $ 8.52
-------- -------- ------ ------
0.22(5) -- (7) 0.27(b) 0.27(b)
(0.15) 1.21 1.07 0.37
-------- -------- ------ ------
0.07 1.21 1.34 0.64
-------- -------- ------ ------
(0.26) -- (0.24) (0.26)
(0.11) --
-------- -------- ------ ------
(0.37) --
-------- -------- ------ ------
$ 11.81 $ 12.11 $10.00 $ 8.90
======== ======== ====== ======
0.53% 11.10% 14.25%(c) 6.82%(c)
$130,760 $219,785 N/A N/A
0.69% 0.69%(2) N/A N/A
1.81% 0.26%(2) N/A N/A
27% 19% N/A N/A
$ 0.03 $ -- (8) N/A N/A
</TABLE>
71
<PAGE> 73
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
INTERNATIONAL SMALL COMPANIES FUND
<TABLE>
<CAPTION>
CLASS III SHARES
--------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
--------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 12.22 $ 13.46 $ 12.95 $ 11.95 $ 14.45
-------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income..................................... 0.55 0.27 0.23 0.18 0.18
Net realized and unrealized gain (loss)................... (1.15) 0.42 0.55 1.16 (1.52)
-------- -------- -------- -------- --------
Total from investment operations........................ (0.60) 0.69 0.78 1.34 (1.34)
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income................................ (0.21) (0.26) (0.07) (0.17) (0.20)
In excess of net investment income........................ -- -- -- (0.02) --
From net realized gains................................... (0.39) (1.67) (0.20) (0.15) (0.96)
In excess of net realized gains........................... -- -- -- -- --
-------- -------- -------- -------- --------
Total distributions..................................... (0.60) (1.93) (0.27) (0.34) (1.16)
-------- -------- -------- -------- --------
Net asset value, end of period.............................. $ 11.02 $ 12.22 $ 13.46 $ 12.95 $ 11.95
======== ======== ======== ======== ========
Total Return(1)............................................. (5.06)% 6.92% 5.99% 11.43% (9.66)%
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $158,142 $234,155 $235,653 $218,964 $186,185
Net expenses to average daily net assets.................. 0.75% 0.75% 0.76%(2) 0.76%(2) 0.76%(2)
Net investment income to average daily net assets......... 1.67% 1.93% 1.75% 1.84% 1.45%
Portfolio turnover rate................................... 8% 79% 13% 13% 58%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts.... $ 0.27 $ 0.12 $ 0.10 $ 0.07 $ 0.08
</TABLE>
(1) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(2) Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .01% of average daily net assets.
JAPAN FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
-------------------------------------------------------
1999 1998 1997 1996 1995
-------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 6.36 $ 7.02 $ 8.52 $ 9.12 $ 11.13
-------- -------- -------- -------- -------
Income (loss) from investment operations:
Net investment income (loss).............................. 0.01 0.01 --(1) (0.01)(1) --(1)
Net realized and unrealized gain (loss)................... (0.17) (0.67) (1.50) 0.79 (1.08)
-------- -------- -------- -------- -------
Total from investment operations........................ (0.16) (0.66) (1.50) 0.78 (1.08)
-------- -------- -------- -------- -------
Less distributions to shareholders:
From net investment income................................ -- -- -- -- --
In excess of net investment income........................ -- -- (0.00) -- --
From net realized gains................................... -- -- -- (1.38) (0.93)
-------- -------- -------- -------- -------
Total distributions..................................... -- -- (0.00) (1.38) (0.93)
-------- -------- -------- -------- -------
Net asset value, end of period.............................. $ 6.20 $ 6.36 $ 7.02 $ 8.52 $ 9.12
======== ======== ======== ======== =======
Total Return(3)............................................. (2.52)% (9.40)% (17.69)% 8.29% (10.62)%
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $128,389 $149,152 $218,797 $126,107 $60,123
Net expenses to average daily net assets.................. 0.69% 0.69% 0.70%(2) 0.92% 0.83%
Net investment income to average daily net assets......... 0.25% 0.21% 0.01% (0.13)% (0.02)%
Portfolio turnover rate................................... 102% 128% 4% 23% 60%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts.... $ 0.02 $ 0.02 $ 0.03 $ 0.01 $ --(4)
</TABLE>
(1) Based on average month-end shares outstanding.
(2) Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .01% of average daily net assets.
(3) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(4) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
72
<PAGE> 74
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
CLASS III SHARES CLASS IV SHARES
------------------------------------------------------ --------------------------------
PERIOD FROM
JANUARY 9, 1998
YEAR ENDED FEBRUARY 28/29, YEAR ENDED (COMMENCEMENT OF
------------------------------------------------------ FEBRUARY 28, OPERATIONS) TO
1999 1998 1997 1996 1995 1999 FEBRUARY 28, 1998
-------- -------- ---------- -------- -------- ------------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................... $ 9.56 $ 12.49 $ 10.54 $ 9.52 $ 12.13 $ 9.56 $ 8.62
-------- -------- ---------- -------- -------- -------- --------
Income (loss) from investment
operations:
Net investment income................ 0.25 0.16(5) 0.13 0.10 0.05 0.28 0.01(5)
Net realized and unrealized gain
(loss)............................. (3.19) (1.76) 1.96 1.06 (2.37) (3.21) 0.93
-------- -------- ---------- -------- -------- -------- --------
Total from investment operations... (2.94) (1.60) 2.09 1.16 (2.32) (2.93) 0.94
-------- -------- ---------- -------- -------- -------- --------
Less distributions to shareholders
from:
Net investment income................ (0.19) (0.25) (0.14) (0.01) (0.07) (0.20) --
Net realized gains................... (0.12) (0.71) -- (0.13) (0.22) (0.12) --
In excess of net realized gains...... (0.00)(7) (0.37) -- -- -- (0.00)(7) --
-------- -------- ---------- -------- -------- -------- --------
Total distributions................ (0.31) (1.33) (0.14) (0.14) (0.29) (0.32) --
-------- -------- ---------- -------- -------- -------- --------
Net asset value, end of period........ $ 6.31 $ 9.56 $ 12.49 $ 10.54 $ 9.52 $ 6.31 $ 9.56
======== ======== ========== ======== ======== ======== ========
Total Return(1)....................... (30.96)% (12.94)% 19.98% 12.24% (19.51)% (31.01)% 10.90%
Ratios/Supplemental Data:
Net assets, end of period (000's).... $524,741 $913,615 $1,725,651 $907,180 $384,259 $261,187 $672,020
Net expenses to average daily net
assets............................. 1.16% 1.24%(4) 1.24%(4) 1.35% 1.58% 1.12% 1.22%(3,6)
Net investment income to average
daily net assets................... 2.75% 1.30% 1.40% 1.31% 0.85% 2.87% 0.65%(3)
Portfolio turnover rate.............. 76% 88% 41% 35% 50% 76% 88%
Fees and expenses voluntarily waived
or borne by the Manager consisted of
the following per share amounts...... $ 0.02 $ 0.03 $ 0.02 $ --(2) $ -- $ 0.02 $ -- (2)
</TABLE>
(1) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(2) Fees and expenses voluntarily waived or borne by the Manager were less than
$0.01 per share.
(3) Annualized.
(4) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .06% and .035% of average daily net assets for
the years ended February 28, 1997 and 1998, respectively.
(5) Computed using average shares outstanding throughout the period.
(6) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .04% of average daily net assets.
(7) The distribution in excess of net realized gains was $0.0005.
EVOLVING COUNTRIES FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-------------------------------------------------
PERIOD FROM AUGUST 29, 1997
YEAR ENDED (COMMENCEMENT OF OPERATIONS)
FEBRUARY 28, 1999 TO FEBRUARY 28, 1998
----------------- ----------------------------
<S> <C> <C>
Net asset value, beginning of period........................ $ 8.61 $ 10.00
------- -------
Income from investment operations:
Net investment income...................................... 0.23 0.03(4)
Net realized and unrealized loss........................... (2.94) (1.42)
------- -------
Total from investment operations......................... (2.71) (1.39)
------- -------
Less distributions to shareholders:
From net investment income................................. (0.16) --
------- -------
Total distributions...................................... (0.16) --
------- -------
Net asset value, end of period.............................. $ 5.74 $ 8.61
======= =======
Total Return(2)............................................. (31.60)% (13.90)%
Ratios/Supplemental Data:
Net assets, end of period (000's).......................... $31,718 $39,698
Net expenses to average daily net assets................... 1.27% 1.65%(1,3)
Net investment income to average daily net assets.......... 3.65% 0.78%(1)
Portfolio turnover rate.................................... 158% 56%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts..... $ 0.02 $ 0.03
</TABLE>
(1) Annualized.
(2) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(3) Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .16% of average daily net assets.
(4) Computed using average shares outstanding throughout the period.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
73
<PAGE> 75
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
ASIA FUND
<TABLE>
<CAPTION>
CLASS III SHARES
--------------------------------------------------
PERIOD FROM FEBRUARY 18, 1998
YEAR ENDED (COMMENCEMENT OF OPERATIONS)
FEBRUARY 28, 1999 TO FEBRUARY 28, 1998
----------------- -----------------------------
<S> <C> <C>
Net asset value, beginning of period........................ $ 10.44 $ 10.00
------- -------
Income (loss) from investment operations:
Net investment income..................................... 0.08(2) 0.01(2)
Net realized and unrealized gain (loss)................... (2.69) 0.43
------- -------
Total from investment operations........................ (2.61) 0.44
------- -------
Less distributions to shareholders from:
Net investment income..................................... (0.08) --
In excess of net investment income........................ (0.08) --
------- -------
(0.16) --
------- -------
Net asset value, end of period.............................. $ 7.67 $ 10.44
======= =======
Total Return(1)............................................. (25.03)% 4.40%
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $77,404 $40,161
Net expenses to average daily net assets.................. 1.26% 2.52%(3)
Net investment income to average daily net assets......... 1.04% 2.86%(3)
Portfolio turnover rate................................... 61% 1%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts.... $ 0.02 $ 0.01
</TABLE>
(1) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(2) Computed using average shares outstanding throughout the period.
(3) Annualized.
GLOBAL PROPERTIES FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-----------------------------------------------------------
PERIOD FROM
DECEMBER 20, 1996
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS) TO
FEBRUARY 28, 1999 FEBRUARY 28, 1998 FEBRUARY 28, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period........................ $ 10.14 $ 10.06 $ 10.00
------- ------- -------
Income (loss) from investment operations:
Net investment income..................................... 0.40 0.30 0.04
Net realized and unrealized gain (loss)................... (1.97) 0.10 0.02(2)
------- ------- -------
Total from investment operations........................ (1.57) 0.40 0.06
------- ------- -------
Less distributions to shareholders:
From net investment income................................ (0.33) (0.32) --
In excess of net investment income........................ (0.06) -- --
From net realized gains................................... (0.22) -- --
------- ------- -------
Total distributions..................................... (0.61) (0.32) --
------- ------- -------
Net asset value, end of period.............................. $ 7.96 $ 10.14 $ 10.06
======= ======= =======
Total Return(1)............................................. (15.87)% 4.07% 0.60%
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $ 7,870 $10,061 $ 9,464
Net expenses to average daily net assets.................. 1.43% 1.43% 1.98%(3)
Net investment income to average daily net assets......... 3.44% 2.89% 2.39%(3)
Portfolio turnover rate................................... 26% 15% 0%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts.... $ 0.10 $ 0.08 $ 0.05
</TABLE>
(1) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(2) The amount shown for a share outstanding does not correspond with the
aggregate net realized and unrealized gain (loss) on investments for the
period ended February 28, 1997 due to the timing of purchases and
redemptions of Fund shares in relation to fluctuating market values of the
investments of the Fund.
(3) Annualized.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
74
<PAGE> 76
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
FIXED INCOME FUNDS
- -----------------------------
DOMESTIC BOND FUND
<TABLE>
<CAPTION>
CLASS III SHARES
----------------------------------------------------------------
PERIOD FROM
AUGUST 18, 1994
YEAR ENDED FEBRUARY 28/29, (COMMENCEMENT OF
-------------------------------------------- OPERATIONS) TO
1999 1998 1997 1996 FEBRUARY 28, 1995
-------- -------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 10.26 $ 10.18 $ 10.40 $ 10.13 $ 10.00
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income..................................... 0.68 0.67 0.58 0.66 0.24
Net realized and unrealized gain (loss)................... (0.15) 0.38 (0.09) 0.58 0.07
-------- -------- -------- -------- --------
Total from investment operations........................ 0.53 1.05 0.49 1.24 0.31
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income................................ (0.68) (0.70) (0.60) (0.60) (0.18)
From net realized gains................................... (0.21) (0.27) (0.08) (0.37) --
In excess of net realized gains........................... (0.25) -- (0.03) -- --
-------- -------- -------- -------- --------
Total distributions..................................... (1.14) (0.97) (0.71) (0.97) (0.18)
-------- -------- -------- -------- --------
Net asset value, end of period.............................. $ 9.65 $ 10.26 $ 10.18 $ 10.40 $ 10.13
======== ======== ======== ======== ========
Total Return(1)............................................. 5.03% 10.71% 4.93% 12.50% 3.16%
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $175,071 $431,410 $570,862 $310,949 $209,377
Net operating expenses to average daily net assets........ 0.25% 0.25% 0.25% 0.25% 0.25%(2)
Interest expense to average daily net assets.............. 0.02% -- -- -- --
Total net expenses to average daily net assets............ 0.27% 0.25% 0.25% 0.25% 0.25%(2)
Net investment income to average daily net assets......... 6.21% 6.14% 6.15% 6.52% 6.96%(2)
Portfolio turnover rate................................... 17% 59% 25% 70% 65%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts.... $ 0.02 $ 0.02 $ 0.02 $ 0.01 $ 0.01
</TABLE>
(1) The total returns would have been lower had certain expenses not been waived
during the periods shown.
(2) Annualized.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
75
<PAGE> 77
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
U.S. BOND/GLOBAL ALPHA A FUND
<TABLE>
<CAPTION>
CLASS III SHARES
------------------------------------------------
PERIOD FROM APRIL 30, 1997
YEAR ENDED (COMMENCEMENT OF OPERATIONS)
FEBRUARY 28, 1999 TO FEBRUARY 28, 1998
----------------- ----------------------------
<S> <C> <C>
Net asset value, beginning of period........................ $ 10.60 $ 10.00
-------- --------
Income from investment operations:
Net investment income..................................... 0.64(2) 0.55(2)
Net realized and unrealized gain (loss)................... (0.58) 0.66
-------- --------
Total from investment operations........................ 0.06 1.21
-------- --------
Less distributions to shareholders:
From net investment income................................ (0.12) (0.27)
From net realized gains................................... (0.31) (0.34)
-------- --------
Total distributions..................................... (0.43) (0.61)
-------- --------
Net asset value, end of period.............................. $ 10.23 $ 10.60
======== ========
Total Return(1)............................................. 0.44% 12.16%
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $143,703 $228,386
Net expenses to average daily net assets.................. 0.40% 0.40%(3)
Net investment income to average daily net assets......... 5.97% 6.05%(3)
Portfolio turnover rate................................... 113% 58%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts.... $ 0.03 $ 0.02
</TABLE>
(1) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(2) Computed using average shares outstanding throughout the period.
(3) Annualized.
U.S. BOND/GLOBAL ALPHA B FUND
<TABLE>
<CAPTION>
CLASS III SHARES
------------------------------------------------
PERIOD FROM JULY 29, 1997
YEAR ENDED (COMMENCEMENT OF OPERATIONS)
FEBRUARY 28, 1999 TO FEBRUARY 28, 1998
----------------- ----------------------------
<S> <C> <C>
Net asset value, beginning of period........................ $ 10.14 $ 10.00
-------- --------
Income from investment operations:
Net investment income..................................... 0.59(2) 0.35(2)
Net realized and unrealized gain (loss)................... (0.19) 0.06
-------- --------
Total from investment operations........................ 0.40 0.41
-------- --------
Less distributions to shareholders:
From net investment income................................ (2.36)(4) (0.21)
In excess of net investment income........................ (0.59)(4) --
From net realized gains................................... (0.18) (0.06)
In excess of net realized gains........................... (0.23) --
-------- --------
Total distributions..................................... (3.36) (0.27)
-------- --------
Net asset value, end of period.............................. $ 7.18 $ 10.14
======== ========
Total Return(1)............................................. 3.42% 4.15%
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $138,146 $380,605
Net expenses to average daily net assets.................. 0.35% 0.35%(3)
Net investment income to average daily net assets......... 5.96% 5.88%(3)
Portfolio turnover rate................................... 134% 27%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts.... $ 0.03 $ 0.02
</TABLE>
(1) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(2) Computed using average shares outstanding throughout the period.
(3) Annualized.
(4) The amount shown for a share outstanding does not correspond with the
aggregate distributions to shareholders for the year ended February 28, 1999
due to the timing of purchases and redemptions of Fund shares in relation to
the declaration of distributions to shareholders.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
76
<PAGE> 78
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
INTERNATIONAL BOND FUND
<TABLE>
<CAPTION>
CLASS III SHARES
----------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
----------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 10.45 $ 10.78 $ 10.92 $ 9.64 $ 9.96
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income..................................... 0.71 0.59 0.71 0.62 0.98
Net realized and unrealized gain (loss)................... (0.42) 0.08 0.65 1.55 (0.21)
-------- -------- -------- -------- --------
Total from investment operations........................ 0.29 0.67 1.36 2.17 0.77
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income................................ (0.36) (0.54) (0.81) (0.59) (0.75)
In excess of net investment income........................ (0.09) -- -- -- --
From net realized gains................................... (0.23) (0.10) (0.54) (0.30) (0.34)
In excess of net realized gains........................... -- (0.36) (0.15) -- --
-------- -------- -------- -------- --------
Total distributions..................................... (0.68) (1.00) (1.50) (0.89) (1.09)
-------- -------- -------- -------- --------
Net asset value, end of period.............................. $ 10.06 $ 10.45 $ 10.78 $ 10.92 $ 9.64
======== ======== ======== ======== ========
Total Return(1)............................................. 2.48% 6.32% 12.39% 22.72% 8.23%
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $181,829 $293,022 $235,783 $193,920 $151,189
Net expenses to average daily net assets.................. 0.40% 0.40% 0.40% 0.40% 0.40%
Net investment income to average daily net assets......... 6.45% 6.24% 6.93% 8.17% 7.51%
Portfolio turnover rate................................... 106% 105% 95% 99% 141%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts.... $ 0.03 $ 0.02 $ 0.02 $ 0.01 $ 0.02
</TABLE>
(1) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
CURRENCY HEDGED INTERNATIONAL BOND FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-----------------------------------------------------------------
PERIOD FROM
SEPTEMBER 30, 1994
YEAR ENDED FEBRUARY 28/29, (COMMENCEMENT OF
------------------------------------------- OPERATIONS) TO
1999 1998 1997 1996 FEBRUARY 28, 1995
-------- -------- -------- -------- ------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 10.66 $ 12.16 $ 10.92 $ 9.99 $ 10.00
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income..................................... 0.74 0.88 0.66 1.05 0.24
Net realized and unrealized gain (loss)................... (0.39) 0.73 2.07 1.62 (0.09)
-------- -------- -------- -------- --------
Total from investment operations........................ 0.35 1.61 2.73 2.67 0.15
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income................................ (0.16) (0.88) (0.60) (1.04) (0.16)
From net realized gains................................... (0.38) (2.23) (0.45) (0.42) --
In excess of net realized gains........................... -- -- (0.44) (0.28) --
-------- -------- -------- -------- --------
Total distributions..................................... (0.54) (3.11) (1.49) (1.74) (0.16)
-------- -------- -------- -------- --------
Net asset value, end of period.............................. $ 10.47 $ 10.66 $ 12.16 $ 10.92 $ 9.99
======== ======== ======== ======== ========
Total Return(1)............................................. 3.20% 14.44% 25.57% 27.36% 1.49%
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $323,711 $320,905 $468,979 $236,162 $238,664
Net expenses to average daily net assets.................. 0.40% 0.40% 0.40% 0.40% 0.40%(2)
Net investment income to average daily net assets......... 6.30% 6.50% 6.86% 8.54% 8.46%(2)
Portfolio turnover rate................................... 116% 135% 90% 85% 64%
Fees and expenses voluntarily waived or borne by the
Manager consisted
of the following per share amounts...................... $ 0.04 $ 0.05 $ 0.03 $ 0.03 $ 0.01
</TABLE>
(1) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(2) Annualized.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
77
<PAGE> 79
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
GLOBAL BOND FUND
<TABLE>
<CAPTION>
CLASS III SHARES
---------------------------------------------------
PERIOD FROM
DECEMBER 28, 1995
YEAR ENDED FEBRUARY 28, (COMMENCEMENT OF
------------------------------ OPERATIONS) TO
1999 1998 1997 FEBRUARY 29, 1996
-------- -------- ------- -----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 10.15 $ 10.16 $ 9.89 $ 10.00
-------- -------- ------- -------
Income from investment operations:
Net investment income..................................... 0.55 0.65(3) 0.61 0.05
Net realized and unrealized gain (loss)................... (0.25) 0.36 0.59 (0.16)
-------- -------- ------- -------
Total from investment operations........................ 0.30 1.01 1.20 (0.11)
-------- -------- ------- -------
Less distributions to shareholders:
From net investment income................................ (0.37) (0.56) (0.57) --
In excess of net investment income........................ (0.09) -- -- --
From net realized gains................................... (0.06) (0.28) (0.36) --
In excess of net realized gains........................... (0.06) (0.18) -- --
-------- -------- ------- -------
Total distributions..................................... (0.58) (1.02) (0.93) --
-------- -------- ------- -------
Net asset value, end of period.............................. $ 9.87 $ 10.15 $ 10.16 $ 9.89
======== ======== ======= =======
Total Return(1)............................................. 2.69% 10.19% 12.01% (1.10)%
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $163,210 $105,052 $70,768 $31,072
Net expenses to average daily net assets.................. 0.34% 0.34% 0.34% 0.34%(2)
Net investment income to average daily net assets......... 5.86% 6.21% 6.31% 6.16%(2)
Portfolio turnover rate................................... 75% 103% 72% 0%
Fees and expenses voluntarily waived or borne by the
Manager consisted
of the following per share amounts...................... $ 0.03 $ 0.04 $ 0.04 $ 0.01
</TABLE>
(1) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(2) Annualized.
(3) Computed using average shares outstanding throughout the period.
EMERGING COUNTRY DEBT FUND
<TABLE>
<CAPTION>
CLASS III SHARES
----------------------------------------------------------------
PERIOD FROM
APRIL 19, 1994
YEAR ENDED FEBRUARY 28/29, (COMMENCEMENT OF
-------------------------------------------- OPERATIONS) TO
1999 1998 1997 1996 FEBRUARY 28, 1995
-------- -------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period............ $ 11.64 $ 14.09 $ 11.76 $ 8.39 $ 10.00
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income........................ 0.92(3) 1.13(3) 1.48 1.35 0.48
Net realized and unrealized gain (loss)...... (4.41) 1.51 6.40 3.84 (1.59)
-------- -------- -------- -------- --------
Total from investment operations......... (3.49) 2.64 7.88 5.19 (1.11)
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income................... (0.23) (0.84) (1.58) (1.17) (0.40)
From net realized gains...................... (1.03) (4.25) (3.97) (0.65) --
In excess of net realized gains.............. --(5) -- -- -- (0.10)
-------- -------- -------- -------- --------
Total distributions...................... (1.26) (5.09) (5.55) (1.82) (0.50)
-------- -------- -------- -------- --------
Net asset value, end of period.................. $ 6.89 $ 11.64 $ 14.09 $ 11.76 $ 8.39
======== ======== ======== ======== ========
Total Return(1)................................. (32.94)% 22.27% 74.32% 63.78% (11.65)%
Ratios/Supplemental Data:
Net assets, end of period (000's)............ $450,336 $460,387 $555,452 $615,485 $243,451
Net expenses to average daily net assets..... 0.56% 0.53% 0.57% 0.50% 0.50%(2)
Net investment income to average daily net
assets..................................... 10.99% 8.62% 8.35% 12.97% 10.57%(2)
Portfolio turnover rate...................... 272% 255% 152% 158% 104%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following
per share amounts.......................... $ 0.02 $ 0.03 $ 0.03 $ 0.02 $ 0.01
<CAPTION>
CLASS IV SHARES
-------------------------------------
PERIOD FROM
JANUARY 9, 1998
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) TO
FEBRUARY 28, 1999 FEBRUARY 28, 1998
----------------- -----------------
<S> <C> <C>
Net asset value, beginning of period............ $ 11.63 $ 10.99
-------- --------
Income from investment operations:
Net investment income........................ 0.91(3) 0.10(3)
Net realized and unrealized gain (loss)...... (4.37) 0.54
-------- --------
Total from investment operations......... (3.46) 0.64
-------- --------
Less distributions to shareholders:
From net investment income................... (0.24) --
From net realized gains...................... (1.03) --
In excess of net realized gains.............. --(5) --
-------- --------
Total distributions...................... (1.27) --
-------- --------
Net asset value, end of period.................. $ 6.90 $ 11.63
======== ========
Total Return(1)................................. (32.82)% 5.82%
Ratios/Supplemental Data:
Net assets, end of period (000's)............ $323,285 $310,580
Net expenses to average daily net assets..... 0.51% 0.50%(2)
Net investment income to average daily net
assets..................................... 10.87% 7.17%(2)
Portfolio turnover rate...................... 272% 255%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following
per share amounts.......................... $ 0.02 --(4)
</TABLE>
(1) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(2) Annualized.
(3) Computed using average shares outstanding throughout the period.
(4) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
(5) The distribution in excess of net realized gains was $0.002.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
78
<PAGE> 80
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
SHORT-TERM INCOME FUND
<TABLE>
<CAPTION>
CLASS III SHARES
----------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
----------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 9.81 $ 9.78 $ 9.77 $ 9.56 $ 9.79
------- ------- ------- ------- ------
Income from investment operations:
Net investment income.................................... 0.57 0.55 0.47 0.57 0.63
Net realized and unrealized gain (loss).................. (0.16) 0.03 0.06 0.20 (0.28)
------- ------- ------- ------- ------
Total from investment operations..................... 0.41 0.58 0.53 0.77 0.35
------- ------- ------- ------- ------
Less distributions to shareholders:
From net investment income............................... (0.59) (0.55) (0.52) (0.56) (0.58)
------- ------- ------- ------- ------
Total distributions.................................. (0.59) (0.55) (0.52) (0.56) (0.58)
------- ------- ------- ------- ------
Net asset value, end of period.............................. $ 9.63 $ 9.81 $ 9.78 $ 9.77 $ 9.56
======= ======= ======= ======= ======
Total Return(1)............................................. 4.29% 6.10% 5.62% 8.32% 3.78%
Ratios/Supplemental Data:
Net assets, end of period (000's)........................ $53,387 $37,377 $40,937 $11,066 $8,193
Net expenses to average daily net assets................. 0.20% 0.20% 0.20% 0.25% 0.25%
Net investment income to average daily net assets........ 5.50% 5.73% 5.88% 6.49% 5.02%
Portfolio turnover rate.................................. 76% 50% 287% 139% 335%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts... $ 0.03 $ 0.03 $ 0.03 $ 0.03 $ 0.02
</TABLE>
(1) The total returns would have been lower had certain expenses not been waived
during the periods shown.
GLOBAL HEDGED EQUITY FUND
<TABLE>
<CAPTION>
CLASS III SHARES
------------------------------------------------------------------------
PERIOD FROM
JULY 29, 1994
YEAR ENDED FEBRUARY 28/29 (COMMENCEMENT OF
------------------------------------------------- OPERATIONS) TO
1999 1998 1997 1996 FEBRUARY 28, 1995
------- -------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period................... $ 8.72 $ 10.69 $ 10.64 $ 10.12 $ 10.00
------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income(6)............................. 0.17(4) 0.35 0.24 0.21 0.11
Net realized and unrealized gain (loss).............. (0.88) (0.52) 0.01 0.55 0.08
------- -------- -------- -------- --------
Total from investment operations................... (0.71) (0.17) 0.25 0.76 0.19
------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income........................... (0.21) (0.35) (0.20) (0.24) (0.07)
In excess of net investment income................... (0.21) -- -- -- --
From net realized gains.............................. -- (1.05) -- -- --
In excess of net realized gains...................... -- (0.40) -- -- --
------- -------- -------- -------- --------
Total distributions................................ (0.42) (1.80) (0.20) (0.24) (0.07)
------- -------- -------- -------- --------
Net asset value, end of period......................... $ 7.59 $ 8.72 $ 10.69 $ 10.64 $ 10.12
======= ======== ======== ======== ========
Total Return(1)........................................ (8.13)% (1.63)% 2.34% 7.54% 1.92%
Ratios/Supplemental Data:
Net assets, end of period (000's).................... $50,671 $170,706 $296,702 $382,934 $214,638
Net expenses to average daily net assets(5).......... 0.17% 0.58% 0.91%(2) 0.78% 0.92%(3)
Net investment income to average daily net
assets(6).......................................... 1.99% 2.93% 1.99% 2.44% 2.85%(3)
Portfolio turnover rate.............................. 21% 277% 463% 214% 194%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share
amounts............................................ $ 0.05 $ 0.04 $ 0.02 $ 0.005 $ 0.006
</TABLE>
(1) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(2) Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .02% of average daily net assets.
(3) Annualized.
(4) Computed using average shares outstanding throughout the period.
(5) On August 20, 1997, the Fund began to invest a substantial portion of its
assets in other funds of GMO Trust and revised its voluntary waiver. Net
expenses exclude expenses incurred indirectly through investment in
underlying funds.
(6) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
79
<PAGE> 81
INFLATION INDEXED BOND FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-------------------------------------------------
PERIOD FROM MARCH 31, 1997
YEAR ENDED (COMMENCEMENT OF OPERATIONS)
FEBRUARY 28, 1999 TO FEBRUARY 28, 1998
------------------ ----------------------------
<S> <C> <C>
Net asset value, beginning of period........................ $ 10.04 $ 10.00
Income from investment operations:
Net investment income..................................... 0.61 0.42(4)
Net realized and unrealized loss.......................... (0.18) (0.04)
------- -------
Total from investment operations.................... 0.43 0.38
------- -------
Less distributions to shareholders:
From net investment income................................ (0.59) (0.30)
In excess of net investment income........................ -- (0.02)
From net realized gains................................... -- --(1)
From tax return of capital................................ -- (0.02)
------- -------
Total distributions................................. (0.59) (0.34)
------- -------
Net asset value, end of period.............................. $ 9.88 $ 10.04
======= =======
Total Return(2)............................................. 4.28% 3.77%
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $25,147 $25,660
Net expenses to average daily net assets.................. 0.25% 0.25%(3)
Net investment income to average daily net assets......... 4.93% 4.48%(3)
Portfolio turnover rate................................... 94% 9%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts.... $ 0.04 $ 0.04
</TABLE>
(1) The per share distribution in excess of net investment income was $0.002.
(2) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(3) Annualized.
(4) Computed using average shares outstanding throughout the period.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
80
<PAGE> 82
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
EMERGING COUNTRY DEBT SHARE FUND
<TABLE>
<CAPTION>
CLASS III SHARES
----------------------------
PERIOD FROM JULY 20, 1998
(COMMENCEMENT OF OPERATIONS)
THROUGH FEBRUARY 28, 1999
----------------------------
<S> <C>
Net asset value, beginning of period........................ $ 10.00
-------
Income from investment operations:
Net investment income(1).................................. 0.03
Net realized and unrealized loss.......................... (3.16)
-------
Total from investment operations.................... (3.13)
-------
Less distributions to shareholders:
From net investment income................................ (0.03)
-------
Total distributions................................. (0.03)
-------
Net asset value, end of period.............................. $ 6.84
=======
Total Return(2)............................................. (31.32)%
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $41,216
Net expenses to average daily net assets(3)............... 0.00%(5)
Net investment income to average daily net assets(1)...... 0.64%(5)
Portfolio turnover rate................................... 0%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amount:.... --(4)
</TABLE>
(1) Recognition of net investment income is affected by the timing of the
declaration of dividends by GMO Emerging Country Debt Fund.
(2) The total return would have been lower had certain expenses not been waived
during the period shown.
(3) Net expenses exclude expenses incurred indirectly through investment in GMO
Emerging Country Debt Fund.
(4) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
(5) Annualized.
ASSET ALLOCATION FUNDS
INTERNATIONAL EQUITY ALLOCATION FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-----------------------------------------------------------
PERIOD FROM
OCTOBER 11, 1996
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS) TO
FEBRUARY 28, 1999 FEBRUARY 28, 1998 FEBRUARY 28, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period........................ $ 10.18 $ 10.41 $ 10.00
------- ------- -------
Income from investment operations:
Net investment income(2).................................. 0.19(4) 0.33(4) 0.10
Net realized and unrealized gain (loss)................... (1.01) 0.31 0.41
------- ------- -------
Total from investment operations........................ (0.82) 0.64 0.51
------- ------- -------
Less distributions to shareholders:
From net investment income................................ (0.19) (0.29) (0.07)
In excess of net investment income........................ (0.31) --(5) --
From net realized gains................................... (0.58) (0.58) (0.03)
------- ------- -------
Total distributions..................................... (1.08) (0.87) (0.10)
------- ------- -------
Net asset value, end of period.............................. $ 8.28 $ 10.18 $ 10.41
======= ======= =======
Total Return(1)............................................. (8.77)% 6.73% 5.11%
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $90,161 $85,876 $30,459
Net expenses to average daily net assets(6)............... 0.00% 0.00% 0.01%(3)
Net investment income to average daily net assets(2)...... 2.06% 3.13% 3.60%(3)
Portfolio turnover rate................................... 36% 16% 0%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts.... $ 0.01 $ 0.01 $ 0.01
</TABLE>
(1) Calculation excludes purchase premiums and redemption fees. The total return
would have been lower had certain expenses not been waived during the period
shown.
(2) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
(3) Annualized.
(4) Computed using average shares outstanding throughout the period.
(5) The per share distribution in excess of net investment income was $0.001.
(6) Net expenses exclude expenses incurred indirectly through investment in
underlying funds.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
81
<PAGE> 83
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
WORLD EQUITY ALLOCATION FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-----------------------------------------------------------
PERIOD FROM
OCTOBER 22, 1996
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS) TO
FEBRUARY 28, 1999 FEBRUARY 28, 1998 FEBRUARY 28, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period........................ $ 10.39 $ 10.52 $ 10.07
------- ------- -------
Income from investment operations:
Net investment income(2).................................. 0.18(5) 0.29(5) 0.11
Net realized and unrealized gain (loss)................... (0.82) 1.03 0.63
------- ------- -------
Total from investment operations........................ (0.64) 1.32 0.74
------- ------- -------
Less distributions to shareholders:
From net investment income................................ (0.18) (0.28) (0.11)
In excess of net investment income........................ (0.33) --(6) --
From net realized gains................................... (0.72) (0.17) (0.18)
------- ------- -------
Total distributions..................................... (1.23) (1.45) (0.29)
------- ------- -------
Net asset value, end of period.............................. $ 8.52 $ 10.39 $ 10.52
======= ======= =======
Total Return(1)............................................. (6.67)% 13.56% 7.51%(4)
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $29,582 $50,952 $36,746
Net expenses to average daily net assets(7)............... 0.00% 0.00% 0.00%(3)
Net investment income to average daily net assets(2)...... 1.91% 2.65% 0.91%(3)
Portfolio turnover rate................................... 17% 49% 31%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts.... $ 0.01 $ 0.01 $ 0.03
</TABLE>
(1) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(2) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
(3) Annualized.
(4) The earliest class of shares of this Fund, Class I Shares, commenced
operations on June 28, 1996. For the period from June 28, 1996 to February
28, 1997, Class I Shares of this Fund had a Total Return equal to 8.23%.
Total operating expenses for Class I shares were 0.13% higher than expected
total operating expenses for Class III Shares.
(5) Computed using average shares outstanding throughout the period.
(6) The per share distribution in excess of net investment income was $0.0004.
(7) Net expenses exclude expenses incurred indirectly through investment in the
underlying funds.
GLOBAL (U.S.+) EQUITY ALLOCATION FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-----------------------------------------------------------
PERIOD FROM
NOVEMBER 26, 1996
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS) TO
FEBRUARY 28, 1999 FEBRUARY 28, 1998 FEBRUARY 28, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period........................ $ 10.48 $ 10.30 $ 10.00
------- ------- -------
Income from investment operations:
Net investment income(3).................................. 0.16(4) 0.26(4) 0.12
Net realized and unrealized gain (loss)................... (0.40) 1.83 0.38
------- ------- -------
Total from investment operations........................ (0.24) 2.09 0.50
------- ------- -------
Less distributions to shareholders:
From net investment income................................ (0.16) (0.26) (0.12)
In excess of net investment income........................ (0.40) --(5) --
From net realized gains................................... (0.83) (1.65) (0.08)
------- ------- -------
Total distributions..................................... (1.39) (1.91) (0.20)
------- ------- -------
Net asset value, end of period.............................. $ 8.85 $ 10.48 $ 10.30
======= ======= =======
Total Return(1)............................................. (2.84)% 21.86% 5.09%
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $32,474 $45,101 $30,787
Net expenses to average daily net assets(6)............... 0.00% 0.00% 0.00%(2)
Net investment income to average daily net assets(3)...... 1.64% 2.39% 3.21%(2)
Portfolio turnover rate................................... 34% 32% 10%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts.... $ 0.01 $ 0.01 $ 0.01
</TABLE>
(1) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(2) Annualized.
(3) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
(4) Computed using average shares outstanding throughout the period.
(5) The per share distribution in excess of net investment income was $0.0009.
(6) Net expenses exclude expenses incurred indirectly through investment in
underlying funds.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
82
<PAGE> 84
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
GLOBAL BALANCED ALLOCATION FUND
<TABLE>
<CAPTION>
CLASS III SHARES
--------------------------------------
PERIOD FROM
JUNE 2, 1997
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) TO
FEBRUARY 28, 1999 FEBRUARY 28, 1998
----------------- -----------------
<S> <C> <C>
Net asset value, beginning of period........................ $ 11.87 $ 11.56
-------- --------
Income from investment operations:
Net investment income(2).................................. 0.31 0.17(5)
Net realized and unrealized gain (loss)................... (0.54) 1.30
-------- --------
Total from investment operations........................ (0.23) 1.47
-------- --------
Less distributions to shareholders:
From net investment income................................ (0.28) (0.33)
In excess of net investment income........................ (0.29) --(6)
From net realized gains................................... (0.56) (0.83)
-------- --------
Total distributions..................................... (1.13) (1.16)
-------- --------
Net asset value, end of period.............................. $ 10.51 $ 11.87
======== ========
Total Return(1)............................................. (2.27)% 13.31%(4)
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $127,600 $115,280
Net expenses to average daily net assets(7)............... 0.00% 0.00%(3)
Net investment income to average daily net assets(2)...... 2.50% 1.91%(3)
Portfolio turnover rate................................... 10% 18%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts.... $ 0.01 $ 0.01
</TABLE>
(1) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(2) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
(3) Annualized.
(4) The earliest class of shares of this Fund, Class I Shares, commenced
operations on July 29, 1996. For the period from July 29, 1996 to February
28, 1997, Class I Shares of this Fund had a Total Return equal to 15.85%.
For the period from March 1, 1997 to August 31, 1997, Class I Shares of this
Fund had a Total Return equal to 8.86%. Total operating expenses for Class I
shares were 0.13% higher than expected total operating expenses for Class
III Shares.
(5) Computed using average shares outstanding throughout the period.
(6) The per share distribution in excess of net investment income was $0.001.
(7) Net expenses exclude expenses incurred indirectly through investment in
underlying Funds.
U.S. SECTOR FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-----------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
-----------------------------------------------------------
1999 1998 1997 1996 1995
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 8.53 $ 13.03 $ 13.63 $ 11.06 $ 11.26
------- -------- -------- -------- --------
Income from investment operations:
Net investment income(4).................................. 0.10(2) 0.29(2) 0.26 0.29 0.28
Net realized and unrealized gain.......................... 0.27 2.61 2.20 3.90 0.49
------- -------- -------- -------- --------
Total from investment operations........................ 0.37 2.90 2.46 4.19 0.77
------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income................................ (0.10) (0.40) (0.22) (0.29) (0.27)
In excess of net investment income........................ (0.15) (0.01) -- -- --
From net realized gains................................... (3.75) (6.99) (2.84) (1.33) (0.70)
In excess of net realized gains........................... (0.27) -- -- -- --
------- -------- -------- -------- --------
Total distributions..................................... (4.27) (7.40) (3.06) (1.62) (0.97)
------- -------- -------- -------- --------
Net asset value, end of period.............................. $ 4.63 $ 8.53 $ 13.03 $ 13.63 $ 11.06
======= ======== ======== ======== ========
Total Return(1)............................................. 3.13% 29.61% 20.88% 38.90% 7.56%
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $16,830 $ 70,823 $226,711 $211,319 $207,291
Net expenses to average daily net assets(3)............... 0.00% 0.27% 0.48% 0.48% 0.48%
Net investment income to average daily net assets(4)...... 1.51% 2.53% 1.99% 2.27% 2.61%
Portfolio turnover rate................................... 16% 150% 104% 84% 101%
Fees and expenses voluntarily waived or borne by the
Manager consisted
of the following per share amounts...................... $ 0.04 $ 0.04 $ 0.02 $ 0.01 $ 0.01
</TABLE>
(1) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(2) Computed using average shares outstanding throughout the period.
(3) On August 20, 1997, the Fund began to invest a substantial portion of its
assets in other funds of GMO Trust and revised its voluntary expense waiver.
Net expenses exclude expenses incurred indirectly through investment in
underlying funds.
(4) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
83
<PAGE> 85
NOTE TO FINANCIAL HIGHLIGHTS TABLES: Investors in Class II Shares should be
aware that, except as otherwise noted, the above financial highlight tables
reflect performance based on Class III expense ratios. In the future, investors
in Class II Shares will experience slightly lower total returns than investors
in Class III Shares of the same Fund as a result of higher overall expense
ratios for Class II Shares. Similarly, investors in Class IV Shares will
experience slightly higher returns than investors in Class III Shares of the
same Fund as a result of lower overall expense ratios for Class IV Shares.
The Manager's discussion of the performance of each Fund in fiscal 1999, as well
as a comparison of each Fund's performance over the life of the Fund with that
of a benchmark securities index selected by the Manager, is included in each
Fund's Annual Report for the fiscal year ended February 28, 1999. Copies of such
Annual Reports are available upon request without charge.
84
<PAGE> 86
GMO TRUST
ADDITIONAL INFORMATION
Additional information about each Fund's investments is available in the
Fund's annual and semi-annual reports to shareholders. In each Fund's annual
report, you will find a discussion of the market conditions and investment
strategies that significantly affected the Fund's performance during its last
fiscal year. The Fund's annual and semi-annual reports, and the Fund's Statement
of Additional Information dated June 30, 1999, as revised on October 5, 1999 and
from time to time thereafter, are available free of charge by writing to GMO, 40
Rowes Wharf, Boston, Massachusetts 02110 or by calling collect (617) 346-7646.
The Statement, which contains more detailed information about each Fund, has
been filed with the Securities and Exchange Commission ("SEC") and is
incorporated by reference into this Prospectus.
Information about each Fund (including the Statement) can be reviewed and
copied at the SEC's Public Reference Room in Washington, D.C. Information
regarding the operation of the Public Reference Room may be obtained by calling
the SEC at 1-800-SEC-0330. Reports and other information about the Funds are
available on the Commission's Internet site at http://www.sec.gov. Copies of
this information may be obtained, upon payment of a duplicating fee, by writing
the Public Reference Section of the SEC, Washington, D.C. 20549-6009.
PURCHASE AND SALE INFORMATION
Information regarding the purchase and sale of Fund shares is contained in
a separate document, the GMO Trust Shareholder's Manual. The Manual accompanies
this Prospectus, has been filed with the SEC and is incorporated by reference
into this Prospectus. Additional copies of the Manual are available free of
charge by contacting the Manager.
SHAREHOLDER INQUIRIES
Shareholders may request additional
information from and direct inquiries to
Grantham, Mayo, Van Otterloo & Co. LLC,
40 Rowes Wharf, Boston, MA 02110
1-617-346-7646 (CALL COLLECT)
INVESTMENT COMPANY ACT FILE NO. 811-4347
<PAGE> 87
GMO TRUST
SUPPLEMENT DATED OCTOBER 5, 1999
TO
GMO TRUST STATEMENT OF ADDITIONAL INFORMATION DATED JUNE 30, 1999
AS REVISED OCTOBER 5, 1999
GMO FUNDAMENTAL VALUE FUND - DIVERSIFICATION STATUS
Notwithstanding the omission of the GMO Fundamental Value Fund from the
list of GMO Trust Funds classified as "diversified companies" for purposes of
the Investment Company Act of 1940 (the "1940 Act") on page 3 of the Statement
of Additional Information, the Fund is currently a "diversified company" within
the meaning of the 1940 Act. A shareholders' meeting scheduled to take place on
or about November 3, 1999 has been called for the purpose of considering a
change in the Fund's classification from a diversified company to a
non-diversified company, but there can be no assurance that this proposal will
be approved at such time or at any time thereafter.
For a discussion of the special risks associated with non-diversified
companies, please refer to pages 42-43 of the Fund's Prospectus.
<PAGE> 88
GMO TRUST
STATEMENT OF ADDITIONAL INFORMATION
June 30, 1999
As Revised October 5, 1999
This Statement of Additional Information is not a prospectus. It relates to the
GMO Trust Prospectus dated June 30, 1999, as revised October 5, 1999 and as
amended from time to time thereafter (the "Prospectus"), and should be read in
conjunction therewith. Information from the Prospectus (including the GMO Trust
Shareholder's Manual dated June 30, 1999, as revised October 5, 1999) is
incorporated by reference into this Statement of Additional Information. The
Prospectus and Shareholder's Manual may be obtained free of charge from GMO
Trust, 40 Rowes Wharf, Boston, Massachusetts 02110, or by calling the Trust
collect at (617) 346-7646.
<PAGE> 89
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES................................................................................3
DESCRIPTIONS AND RISKS OF FUND INVESTMENTS........................................................................3
INVESTMENT RESTRICTIONS..........................................................................................31
MANAGEMENT OF THE TRUST..........................................................................................34
INVESTMENT ADVISORY AND OTHER SERVICES...........................................................................37
PORTFOLIO TRANSACTIONS...........................................................................................45
DETERMINATION OF NET ASSET VALUE.................................................................................47
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES.................................................................47
VOTING RIGHTS....................................................................................................49
SHAREHOLDER AND TRUSTEE LIABILITY................................................................................50
BENEFICIAL OWNERS OF 5% OR MORE OF THE FUND'S SHARES.............................................................51
DISTRIBUTIONS....................................................................................................70
TAXES............................................................................................................70
PERFORMANCE INFORMATION..........................................................................................75
INVESTMENT GUIDELINES............................................................................................78
U. S. EQUITY FUNDS............................................................................................78
INTERNATIONAL EQUITY FUNDS...................................................................................112
FIXED INCOME FUNDS...........................................................................................151
ASSET ALLOCATION FUND........................................................................................187
COMMERCIAL PAPER AND CORPORATE DEBT RATINGS.....................................................................191
FINANCIAL STATEMENTS............................................................................................193
SPECIMEN PRICE-MAKE-UP SHEETS...................................................................................194
</TABLE>
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INVESTMENT OBJECTIVES AND POLICIES
The principal strategies and risks of investing in each Fund are
described in the Prospectus. Unless otherwise indicated in the Prospectus or
this Statement of Additional Information, the investment objective and policies
of the Funds may be changed without shareholder approval.
DESCRIPTIONS AND RISKS OF FUND INVESTMENTS
The following is a detailed description of the various investment
practices in which the Funds may engage and the risks associated with their use.
Not all Funds may engage in all practices described below. Please refer to "Fund
Objectives and Principal Investment Strategies" in the Prospectus and
"Investment Guidelines" in this Statement of Additional Information for
determination of which practices a particular Fund may engage in. Investors in
Asset Allocation Funds should be aware that the Asset Allocation Funds will
indirectly participate in the practices engaged in by the underlying Funds in
which the Asset Allocation Funds invest, and will therefore be indirectly
subject to all risks associated with those practices.
PORTFOLIO TURNOVER
Portfolio turnover is not a limiting factor with respect to investment decisions
for the Funds. The historical portfolio turnover rate for each Fund is shown
under the heading "Financial Highlights" in the Prospectus.
In any particular year, market conditions may well result in greater rates of
portfolio turnover than are presently anticipated. High portfolio turnover
involves correspondingly greater brokerage commissions and other transaction
costs, which will be borne directly by the relevant Fund, and may involve
realization of capital gains that would be taxable when distributed to
shareholders of the relevant Fund unless such shareholders are themselves
exempt. See "Taxes" in the Prospectus and "Distributions" and "Taxes" in this
Statement of Additional Information.
DIVERSIFIED AND NON-DIVERSIFIED PORTFOLIOS
It is a fundamental policy of each of the U.S. Core Fund, the Tobacco-Free Core
Fund, the Small Cap Value Fund, the International Core Fund, the International
Small Companies Fund, the International Equity Allocation Fund, the World Equity
Allocation Fund, the Global (U.S.+) Equity Allocation Fund, and the Global
Balanced Allocation Fund, which may not be changed without shareholder approval,
that at least 75% of the value of each such Fund's total assets are represented
by cash and cash items (including receivables), Government securities,
securities of other investment companies, and other securities for the purposes
of this calculation limited in respect of any one issuer to an amount not
greater than 5% of the value of the relevant Fund's total assets and to not more
than 10% of the outstanding voting securities of any single issuer. Each such
Fund is referred to herein as a "diversified" fund.
All other Funds are "non-diversified" funds under the Investment Company Act of
1940, as amended (the "1940 Act"), and as such are not required to satisfy the
"diversified" requirements
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stated above. As non-diversified funds, each of these Funds is permitted to (but
is not required to) invest a higher percentage of its assets in the securities
of fewer issuers. Such concentration could increase the risk of loss to such
Funds should there be a decline in the market value of any one portfolio
security. Investment in a non-diversified fund may therefore entail greater
risks than investment in a diversified fund. All Funds, however, must meet
certain diversification standards to qualify as a "regulated investment company"
under the Internal Revenue Code of 1986.
CERTAIN RISKS OF FOREIGN INVESTMENTS
GENERAL. Investment in foreign issuers or securities principally traded overseas
may involve certain special risks due to foreign economic, political and legal
developments, including favorable or unfavorable changes in currency exchange
rates, exchange control regulations (including currency blockage), expropriation
or nationalization of assets, imposition of withholding taxes on dividend or
interest payments, and possible difficulty in obtaining and enforcing judgments
against foreign entities. Furthermore, issuers of foreign securities are subject
to different, often less comprehensive, accounting, reporting and disclosure
requirements than domestic issuers. The securities of some foreign governments
and companies and foreign securities markets are less liquid and at times more
volatile than comparable U.S. securities and securities markets. Foreign
brokerage commissions and other fees are also generally higher than in the
United States. The laws of some foreign countries may limit a Fund's ability to
invest in securities of certain issuers located in these foreign countries.
There are also special tax considerations which apply to securities of foreign
issuers and securities principally traded overseas. Investors should also be
aware that under certain circumstances, markets which are perceived to have
similar characteristics to troubled markets may be adversely affected whether or
not similarities actually exist.
EMERGING MARKETS. The risks described above apply to an even greater extent to
investments in emerging markets. The securities markets of emerging countries
are generally smaller, less developed, less liquid, and more volatile than the
securities markets of the U.S. and developed foreign markets. Disclosure and
regulatory standards in many respects are less stringent than in the U.S. and
developed foreign markets. There also may be a lower level of monitoring and
regulation of securities markets in emerging market countries and the activities
of investors in such markets, and enforcement of existing regulations has been
extremely limited. Many emerging countries have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have very
negative effects on the economies and securities markets of certain emerging
countries. Economies in emerging markets generally are heavily dependent upon
international trade and, accordingly, have been and may continue to be affected
adversely by trade barriers, exchange controls, managed adjustments in relative
currency values, and other protectionist measures imposed or negotiated by the
countries with which they trade. These economies also have been and may continue
to be adversely affected by economic conditions in the countries with which they
trade. The economies of countries with emerging markets may also be
predominantly based on only a few industries or dependent on revenues from
particular commodities. In addition, custodial services and other costs relating
to investment in foreign markets may be more expensive in emerging markets than
in many developed foreign markets,
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which could reduce a Fund's income from such securities. Finally, because
publicly traded debt instruments of emerging markets represent a relatively
recent innovation in the world debt markets, there is little historical data or
related market experience concerning the attributes of such instruments under
all economic, market and political conditions.
In many cases, governments of emerging countries continue to exercise
significant control over their economies, and government actions relative to the
economy, as well as economic developments generally, may affect the capacity of
issuers of emerging country debt instruments to make payments on their debt
obligations, regardless of their financial condition. In addition, there is a
heightened possibility of expropriation or confiscatory taxation, imposition of
withholding taxes on interest payments, or other similar developments that could
affect investments in those countries. There can be no assurance that adverse
political changes will not cause a Fund to suffer a loss of any or all of its
investments or, in the case of fixed-income securities, interest thereon.
INVESTMENTS IN ASIA. In addition to the foregoing risks of foreign investments
and risks specific to emerging markets, investments by the Trust's International
Funds in Asia involve additional risks specific to investment in the region. The
region encompasses countries at varying levels of economic development ranging
from emerging markets to more developed economies. Each country provides unique
investment risks, yet the political and economic prospects of one country or
group of countries may impact other countries in the region. For example, some
Asian economies are directly affected by Japanese capital investment in the
region and by Japanese consumer demands. In addition, a recession, a debt crisis
or a decline in currency valuation in one country can spread to other countries.
Investments in Asia are susceptible to political and social factors affecting
issuers in Asian countries. Some countries have authoritarian or relatively
unstable governments. Certain governments in the region provide less supervision
and regulation of financial markets than is typical of other emerging markets,
and less financial information is available. Restrictions on direct foreign
investments in securities markets also exist in some countries. For example,
Taiwan permits foreign investment only through authorized qualified foreign
institutional investors. The recent return of Hong Kong to China will continue
to affect the region.
Some countries in the region are heavily dependent upon foreign trade. The
economies of some Asian countries are not diversified and are based upon only a
few commodities or industries. Markets in some of these countries are in the
early stages of development, exhibit a high concentration of market
capitalization, have less trading volume, lower liquidity and more volatility
than more developed markets.
In the latter half of 1997, the region began experiencing increased market
volatility and declines in foreign currency exchange rates. Fluctuation in
currency exchange rates can affect a country's ability to service its debt.
Currency fluctuation will affect the value of the securities in the Fund's
portfolio because the prices of these securities are generally denominated or
quoted in currencies other than the U.S. dollar.
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While the foregoing risks are applicable to any Fund investing in Asia, they
will be particularly acute for the Asia Fund and the Japan Fund, which invest
primarily in this region.
DIRECT INVESTMENT IN RUSSIAN SECURITIES. Each of the Emerging Markets Fund,
Evolving Countries Fund, Foreign Fund, Global Bond Fund, International Bond
Fund, Currency Hedged International Bond Fund, International Core Fund, Currency
Hedged International Core Fund, Global Properties Fund, Emerging Country Debt
Fund and U.S. Bond/Global Alpha A Fund may invest directly in securities of
Russian issuers. Investment in securities of such issuers presents many of the
same risks as investing in securities of issuers in other emerging market
economies, as described in the immediately preceding section. However, the
political, legal and operational risks of investing in Russian issuers, and of
having assets custodied within Russia, may be particularly acute.
A risk of particular note with respect to direct investment in Russian
securities is the way in which ownership of shares of private companies is
recorded. When a Fund invests in a Russian issuer, it will receive a "share
extract," but that extract is not legally determinative of ownership. The
official record of ownership of a company's share is maintained by the company's
share registrar. Such share registrars are completely under the control of the
issuer, and investors are provided with few legal rights against such
registrars.
SECURITIES LENDING
All of the Funds (except for the Asset Allocation Funds) may make secured loans
of portfolio securities amounting to not more than one-third of the relevant
Fund's total assets, except for the International Core and Currency Hedged
International Core Funds, each of which may make loans of portfolio securities
amounting to not more than 25% of their respective total assets. The risks in
lending portfolio securities, as with other extensions of credit, consist of
possible delay in recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. However, such loans will be
made only to broker-dealers that are believed by the Manager to be of relatively
high credit standing. Securities loans are made to broker-dealers pursuant to
agreements requiring that loans be continuously secured by collateral in cash or
liquid securities at least equal at all times to the market value of the
securities lent. Collateral may be held in shares of other investment companies.
The borrower pays to the lending Fund an amount equal to any dividends or
interest the Fund would have received had the securities not been lent. If the
loan is collateralized by U.S. Government Securities, the Fund will receive a
fee from the borrower. In the case of loans collateralized by cash, the Fund
typically invests the cash collateral for its own account in interest-bearing,
short-term securities and pays a fee to the borrower. Although voting rights or
rights to consent with respect to the loaned securities pass to the borrower,
the Fund retains the right to call the loans at any time on reasonable notice,
and it will do so in order that the securities may be voted by the Fund if the
holders of such securities are asked to vote upon or consent to matters
materially affecting the investment. The Fund may also call such loans in order
to sell the securities involved. The Manager has retained lending agents on
behalf of several of the Funds that are compensated based on a percentage of a
Fund's return on the securities lending activity. The Fund also pays various
fees in connection with such loans including shipping fees and reasonable
custodian fees approved by the Trustees of the Trust or persons acting pursuant
to direction of the Board.
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DEPOSITORY RECEIPTS
Many of the Funds may invest in American Depositary Receipts (ADRs), Global
Depository Receipts (GDRs) and European Depository Receipts (EDRs)
(collectively, "Depository Receipts") if issues of such Depository Receipts are
available that are consistent with a Fund's investment objective. Depository
Receipts generally evidence an ownership interest in a corresponding foreign
security on deposit with a financial institution. Transactions in Depository
Receipts usually do not settle in the same currency in which the underlying
securities are denominated or traded. Generally, ADRs, in registered form, are
designed for use in the U.S. securities markets and EDRs, in bearer form, are
designed for use in European securities markets. GDRs may be traded in any
public or private securities markets and may represent securities held by
institutions located anywhere in the world.
CONVERTIBLE SECURITIES
A convertible security is a fixed income security (a bond or preferred stock)
which may be converted at a stated price within a specified period of time into
a certain quantity of the common stock of the same or a different issuer.
Convertible securities are senior to common stock in a corporation's capital
structure, but are usually subordinated to similar non-convertible securities.
Convertible securities provide, through their conversion feature, an opportunity
to participate in capital appreciation resulting from a market price advance in
a convertible security's underlying common stock. The price of a convertible
security is influenced by the market value of the underlying common stock and
tends to increase as the market value of the underlying stock rises, whereas it
tends to decrease as the market value of the underlying stock declines. The
Manager regards convertible securities as a form of equity security.
FUTURES AND OPTIONS
Many of the Funds may use futures and options for various purposes. Such
transactions may involve options, futures and related options on futures
contracts, and those instruments may relate to particular equity and fixed
income securities, equity and fixed income indexes, and foreign currencies. The
Funds may also enter into a combination of long and short positions (including
spreads and straddles) for a variety of investment strategies, including
protecting against changes in certain yield relationships.
The use of futures contracts, options contracts and options on futures contracts
involves risk. Thus, while a Fund may benefit from the use of futures, options
and options on futures, unanticipated changes in interest rates, securities
prices, or currency exchange rates may result in poorer overall performance for
the Fund than if it had not entered into any futures contracts or options
transactions. Losses incurred in transactions in futures, options and options on
futures and the costs of these transactions will affect a Fund's performance.
OPTIONS. Many Funds which may use options (1) may enter into contracts giving
third parties the right to buy the Fund's portfolio securities for a fixed price
at a future date (writing "covered call options"); (2) may enter into contracts
giving third parties the right to sell securities to the
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Fund for a fixed price at a future date (writing "covered put options"); and (3)
may buy the right to purchase securities from third parties ("call options") or
the right to sell securities to third parties ("put options") for a fixed price
at a future date.
WRITING COVERED OPTIONS. Each Fund (except for the Short-Term Income Fund and
the Asset Allocation Funds) may seek to increase its return by writing covered
call or put options on optionable securities or indexes. A call option written
by a Fund on a security gives the holder the right to buy the underlying
security from the Fund at a stated exercise price; a put option gives the holder
the right to sell the underlying security to the Fund at a stated exercise
price. In the case of options on indexes, the options are usually cash settled
based on the difference between the strike price and the value of the index.
Each such Fund will receive a premium for writing a put or call option, which
increases the Fund's return in the event the option expires unexercised or is
closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price and volatility of the underlying
security or securities index to the exercise price of the option, the remaining
term of the option, supply and demand and interest rates. By writing a call
option on a security, the Fund limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise price
of the option. By writing a put option on a security, the Fund assumes the risk
that it may be required to purchase the underlying security for an exercise
price higher than its then current market value, resulting in a potential
capital loss unless the security subsequently appreciates in value. In the case
of options on an index, if a Fund writes a call, any profit by the Fund in
respect of portfolio securities expected to correlate with the index will be
limited by an increase in the index above the exercise price of the option. If
the Fund writes a put on an index, the Fund may be required to make a cash
settlement greater than the premium received if the index declines.
A call option on a security is "covered" if a Fund owns the underlying security
or has an absolute and immediate right to acquire that security without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities held in its portfolio. A call option on a security is also covered if
the Fund holds on a share-for-share basis a call on the same security as the
call written where the exercise price of the call held is equal to or less than
the exercise price of the call written or greater than the exercise price of the
call written if the difference is maintained by the Fund in cash, U.S.
Government Securities or other high grade debt obligations in a segregated
account with its custodian. A call option on an index is "covered" if a Fund
maintains cash, U.S. Government Securities or other high grade debt obligations
with a value equal to the exercise price in a segregated account with its
custodian. A put option is "covered" if the Fund maintains cash, U.S. Government
Securities or other high grade debt obligations with a value equal to the
exercise price in a segregated account with its custodian, or else holds on a
share-for-share basis a put on the same security as the put written where the
exercise price of the put held is equal to or greater than the exercise price of
the put written.
If the writer of an option wishes to terminate its obligation, it may effect a
"closing purchase transaction." This is accomplished, in the case of exchange
traded options, by buying an option of the same series as the option previously
written. The effect of the purchase is that the writer's
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position will be canceled by the clearing corporation. The writer of an option
may not effect a closing purchase transaction after it has been notified of the
exercise of an option. Likewise, an investor who is the holder of an option may
liquidate its position by effecting a "closing sale transaction." This is
accomplished by selling an option of the same series as the option previously
purchased. There is no guarantee that a Fund will be able to effect a closing
purchase or a closing sale transaction at any particular time. Also, an
over-the-counter option may be closed out only with the other party to the
option transaction.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a written
put option will permit the Fund to write another put option to the extent that
the exercise price thereof is secured by deposited cash or high grade debt
obligations. Also, effecting a closing transaction will permit the cash or
proceeds from the concurrent sale of any securities subject to the option to be
used for other Fund investments. If the Fund desires to sell a particular
security from its portfolio on which it has written a call option, it will
effect a closing transaction prior to or concurrent with the sale of the
security.
A Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to purchase the option; the Fund will realize a loss from
a closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to purchase
the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security or
index of securities, any loss resulting from the repurchase of a written call
option is likely to be offset in whole or in part by appreciation of the
underlying security or securities owned by the Fund.
A Fund may write options in connection with buy-and-write transactions; that is,
a Fund may purchase a security and then write a call option against that
security. The exercise price of the call the Fund determines to write will
depend upon the expected price movement of the underlying security. The exercise
price of a call option may be below ("in-the-money"), equal to ("at-the-money")
or above ("out-of-the-money") the current value of the underlying security at
the time the option is written. Buy-and-write transactions using in-the-money
call options may be used when it is expected that the price of the underlying
security will remain flat or decline moderately during the option period.
Buy-and-write transactions using at-the-money call options may be used when it
is expected that the price of the underlying security will remain fixed or
advance moderately during the option period. Buy-and-write transactions using
out-of-the-money call options may be used when it is expected that the premiums
received from writing the call option plus the appreciation in the market price
of the underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If the call options
are exercised in such transactions, the Fund's maximum gain will be the premium
received by it for writing the option, adjusted upward or downward by the
difference between the Fund's purchase price of the security and the exercise
price. If the options are not exercised and the price of the underlying security
declines, the amount of such decline will be offset in part, or entirely, by the
premium received.
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The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund may elect to close the position or take
delivery of the security at the exercise price. In that event, the Fund's return
will be the premium received from the put option minus the cost of closing the
position or, if it chooses to take delivery of the security, the premium
received from the put option minus the amount by which the market price of the
security is below the exercise price. Out-of-the-money, at-the-money and
in-the-money put options may be used by the Fund in market environments
analogous to those in which call options are used in buy-and-write transactions.
The extent to which a Fund will be able to write and purchase call and put
options may be restricted by the Fund's intention to qualify as a regulated
investment company under the Internal Revenue Code.
RISK FACTORS IN OPTIONS TRANSACTIONS. The option writer has no control over when
the underlying securities or futures contract must be sold, in the case of a
call option, or purchased, 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
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class or series of options), in which event the secondary market on that
Exchange (or in that class or series of options) would cease to exist, although
outstanding options on that Exchange that had been issued by the Options
Clearing Corporation as a result of trades on that Exchange should continue to
be exercisable in accordance with their terms.
The Exchanges have established limitations governing the maximum number of
options which may be written by an investor or group of investors acting in
concert. It is possible that the Funds, the Manager and other clients of the
Manager may be considered to be such a group. These position limits may restrict
a Fund's ability to purchase or sell options on a particular security.
The amount of risk a Fund assumes when it purchases an option is the premium
paid for the option plus related transaction costs. In addition to the
correlation risks discussed below, the purchase of an option also entails the
risk that changes in the value of the underlying security or futures contract
will not be fully reflected in the value of the option purchased.
FUTURES. A financial futures contract sale creates an obligation by the seller
to deliver the type of financial instrument called for in the contract in a
specified delivery month for a stated price. A financial futures contract
purchase creates an obligation by the purchaser to pay for and take delivery of
the type of financial instrument called for in the contract in a specified
delivery month, at a stated price. In some cases, the specific instruments
delivered or taken, respectively, at settlement date are not determined until on
or near that date. The determination is made in accordance with the rules of the
exchange on which the futures contract sale or purchase was made. Some futures
contracts are "cash settled" (rather than "physically settled," as described
above) which means that the purchase price is subtracted from the current market
value of the instrument and the net amount if positive is paid to the purchaser,
and if negative is paid by the purchaser. Futures contracts are traded in the
United States only on commodity exchanges or boards of trade -- known as
"contract markets" -- approved for such trading by the Commodity Futures Trading
Commission ("CFTC"), and must be executed through a futures commission merchant
or brokerage firm that is a member of the relevant contract market. Under U.S.
law, futures contracts on individual equity securities are not permitted.
The purchase or sale of a futures contract differs from the purchase or sale of
a security or option in that no price or premium is paid or received. Instead,
an amount of cash or U.S. Government Securities generally not exceeding 5% of
the face amount of the futures contract must be deposited with the broker. This
amount is known as initial margin. Subsequent payments to and from the broker,
known as variation margin, are made on a daily basis as the price of the
underlying futures contract fluctuates making the long and short positions in
the futures contract more or less valuable, a process known as "marking to
market." Prior to the settlement date of the futures contract, the position may
be closed out by taking an opposite position which will operate to terminate the
position in the futures contract. A final determination of variation margin is
then made, additional cash is required to be paid to or released by the broker,
and the purchaser realizes a loss or gain. In addition, a commission is paid on
each completed purchase and sale transaction.
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In most cases futures contracts are closed out before the settlement date
without the making or taking of delivery. Closing out a futures contract sale is
effected by purchasing a futures contract for the same aggregate amount of the
specific type of financial instrument or commodity and the same delivery date.
If the price of the initial sale of the futures contract exceeds the price of
the offsetting purchase, the seller is paid the difference and realizes a gain.
Conversely, if the price of the offsetting purchase exceeds the price of the
initial sale, the seller realizes a loss. Similarly, the closing out of a
futures contract purchase is effected by the purchaser entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the
purchaser realizes a gain, and if the purchase price exceeds the offsetting sale
price, a loss will be realized.
The ability to establish and close out positions on options on futures will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop or be maintained.
INDEX FUTURES. Each of the Funds (except the Short-Term Income Fund) may
purchase futures contracts on various securities indexes ("Index Futures"). For
example, each of the U.S. Equity Funds may purchase Index Futures on the S&P 500
and on such other domestic stock indexes as the Manager may deem appropriate.
The Japan Fund may purchase Index Futures on the Nikkei 225 Stock Average and on
the Tokyo Stock Price Index. The International Core Fund, Currency Hedged
International Core Fund, Evolving Countries Fund, Foreign Fund, International
Small Companies Fund, Asia Fund and Emerging Markets Fund, among others, may
each purchase Index Futures on foreign stock indexes, including those which may
trade outside the United States. The Domestic Bond Fund, International Bond
Fund, Currency Hedged International Bond Fund, Global Bond Fund, Emerging
Country Debt Fund, U.S. Bond/Global Alpha A Fund, U.S. Bond/Global Alpha B Fund
and Inflation Indexed Bond Fund, among others, may each purchase Index Futures
on domestic and (except for the Domestic Bond Fund) foreign fixed income
securities indexes, including those which may trade outside the United States. A
Fund's purchase and sale of Index Futures is limited to contracts and exchanges
approved by the CFTC.
An Index Future may call for "physical delivery" or be "cash settled." An Index
Future that calls for physical delivery is a contract to buy an integral number
of units of the particular securities index at a specified future date at a
price agreed upon when the contract is made. A unit is the value from time to
time of the relevant index. While a Fund that purchases an Index Future that
calls for physical delivery is obligated to pay the face amount on the stated
date, such an Index Future may be closed out on that date or any earlier date by
selling an Index Future with the same face amount and contract date. This will
terminate the Fund's position and the Fund will realize a profit or a loss based
on the difference between the cost of purchasing the original Index Future and
the price obtained from selling the closing Index Future. The amount of the
profit or loss is determined by the change in the value of the relevant index
while the Index Future was held.
For example, if the value of a unit of a particular index were $1,000, a
contract to purchase 500 units would be worth $500,000 (500 units x $1,000). The
Index Futures contract specifies that no delivery of the actual stocks making up
the index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the relevant index at the expiration
of the contract. For
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example, if a Fund enters into one futures contract to buy 500 units of an index
at a specified future date at a contract price of $1,000 per unit and the index
is at $1,010 on that future date, the Fund will gain $5,000 (500 units x gain of
$10).
Index Futures that are "cash settled" provide by their terms for settlement on a
net basis reflecting changes in the value of the underlying index. Thus, the
purchaser of such an Index Future is never obligated to pay the face amount of
the contract. The net payment obligation may in fact be very small in relation
to the face amount.
A Fund may close open positions on the futures exchange on which Index Futures
are then traded at any time up to and including the expiration day. All
positions which remain open at the close of the last business day of the
contract's life are required to settle on the next business day (based upon the
value of the relevant index on the expiration day) with settlement made, in the
case of Index Futures on the S&P 500, with the Commodities Clearing House.
Additional or different margin requirements as well as settlement procedures may
be applicable to foreign stock Index Futures at the time a Fund purchases
foreign stock Index Futures.
The price of Index Futures may not correlate perfectly with movement in the
relevant index due to certain market distortions. First, all participants in the
futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions which could distort the normal
relationship between the Index and futures markets. Secondly, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities market, and as a result the futures market may attract more
speculators than does the securities market. Increased participation by
speculators in the futures market may also cause temporary price distortions. In
addition, trading hours for foreign stock Index Futures may not correspond
perfectly to hours of trading on the foreign exchange to which a particular
foreign stock Index Futures relates. This may result in a disparity between the
price of Index Futures and the value of the relevant index due to the lack of
continuous arbitrage between the Index Futures price and the value of the
underlying index.
INTEREST RATE FUTURES. For the purposes previously described, the Fixed Income
Funds (other than the Short-Term Income Fund) may engage in a variety of
transactions involving the use of futures with respect to U.S. Government
Securities and other fixed income securities.
OPTIONS ON FUTURES CONTRACTS. Options on futures contracts give the purchaser
the right in return for the premium paid to assume a position in a futures
contract at the specified option-exercise price at any time during the period of
the option. Funds may use options on futures contracts in lieu of writing or
buying options directly on the underlying securities or purchasing and selling
the underlying futures contracts. For example, to hedge against a possible
decrease in the value of its portfolio securities, a Fund may purchase put
options or write call options on futures contracts rather than selling futures
contracts. Similarly, a Fund may purchase call options or write put options on
futures contracts as a substitute for the purchase of futures contracts to hedge
against a possible increase in the price of securities the Fund expects to
purchase. Such options generally operate in the same manner as options purchased
or written
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directly on the underlying investments. See "Foreign Currency Transactions"
below for a description of the Funds' use of options on currency futures.
RISK FACTORS IN FUTURES TRANSACTIONS. Investment in futures contracts involves
risk. If the futures are used for hedging, some of that risk may be caused by an
imperfect correlation between movements in the price of the futures contract and
the price of the security or currency being hedged. The correlation is higher
between price movements of futures contracts and the instrument underlying that
futures contract. The correlation is lower when futures are used to hedge
securities other than such underlying instrument, such as when a futures
contract on an index of securities is used to hedge a single security, a futures
contract on one security (e.g., U.S. Treasury bonds) is used to hedge a
different security (e.g., a mortgage-backed security) or when a futures contract
in one currency is used to hedge a security denominated in another currency. In
the event of an imperfect correlation between a futures position and a portfolio
position (or anticipated position) which is intended to be protected, the
desired protection may not be obtained and a Fund may be exposed to risk of
loss. In addition, it is not always possible to hedge fully or perfectly against
currency fluctuations affecting the value of the securities denominated in
foreign currencies because the value of such securities also is likely to
fluctuate as a result of independent factors not related to currency
fluctuations. The risk of imperfect correlation generally tends to diminish as
the maturity date of the futures contract approaches.
A hedge will not be fully effective where there is such imperfect correlation.
To compensate for imperfect correlations, a Fund may purchase or sell futures
contracts in a greater amount than the hedged securities if the volatility of
the hedged securities is historically greater than the volatility of the futures
contracts. Conversely, a Fund may purchase or sell fewer contracts if the
volatility of the price of the hedged securities is historically less than that
of the futures contract.
A Fund may also purchase futures contracts (or options thereon) as an
anticipatory hedge against a possible increase in the price of currency in which
is denominated the securities the Fund anticipates purchasing. In such
instances, it is possible that the currency may instead 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
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option is held by a Fund investing in fixed income securities (or such rates
move in a direction opposite to that anticipated), the Fund may realize a loss
on the futures transaction which is not fully or partially offset by an increase
in the value of its portfolio securities. As a result, the Fund's total return
for such period may be less than if it had not engaged in the hedging
transaction.
Unlike trading on domestic commodity exchanges, trading on foreign commodity
exchanges is not regulated by the CFTC and may be subject to greater risks than
trading on domestic exchanges. For example, some foreign exchanges may be
principal markets so that no common clearing facility exists and a trader may
look only to the broker for performance of the contract. In addition, unless a
Fund hedges against fluctuations in the exchange rate between the U.S. dollar
and the currencies in which trading is done on foreign exchanges, any profits
that a Fund might realize in trading could be eliminated by adverse changes in
the exchange rate, or the Fund could incur losses as a result of those changes.
USES OF OPTIONS, FUTURES AND OPTIONS ON FUTURES
RISK MANAGEMENT. When futures and options on futures are used for risk
management, a Fund will generally take long positions (e.g., purchase call
options, futures contracts or options thereon) in order to increase the Fund's
exposure to a particular market, market segment or foreign currency. For
example, if a Fixed Income Fund wants to increase its exposure to a particular
fixed income security, the Fund may take long positions in futures contracts on
that security. Likewise, if an Equity Fund holds a portfolio of stocks with an
average volatility (beta) lower than that of the Fund's benchmark securities
index as a whole (deemed to be 1.00), the Fund may purchase Index Futures to
increase its average volatility to 1.00. In the case of futures and options on
futures, a Fund is only required to deposit the initial and variation margin as
required by relevant CFTC regulations and the rules of the contract markets.
Because the Fund will then be obligated to purchase the security or index at a
set price on a future date, the Fund's net asset value will fluctuate with the
value of the security as if it were already included in the Fund's portfolio.
Risk management transactions have the effect of providing a degree of investment
leverage, particularly when the Fund does not segregate assets equal to the face
amount of the contract (i.e., in cash settled futures contracts) since the
futures contract (and related options) will increase or decrease in value at a
rate which is a multiple of the rate of increase or decrease in the value of the
initial and variation margin that the Fund is required to deposit. As a result,
the value of the Fund's portfolio will generally be more volatile than the value
of comparable portfolios which do not engage in risk management transactions. A
Fund will not, however, use futures and options on futures to obtain greater
volatility than it could obtain through direct investment in securities; that
is, a Fund will not normally engage in risk management to increase the average
volatility (beta) of that Fund's portfolio above 1.00, the level of risk (as
measured by volatility) that would be present if the Fund were fully invested in
the securities comprising the relevant index. However, a Fund may invest in
futures and options on futures without regard to this limitation if the face
value of such investments, when aggregated with the Index Futures, equity swaps
and contracts for differences as described below does not exceed 10% of a Fund's
assets.
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HEDGING. To the extent indicated elsewhere, a Fund may also enter into options
and futures contracts and buy and sell options on futures for hedging. For
example, if a Fund wants to hedge certain of its fixed income securities against
a decline in value resulting from a general increase in market rates of
interest, it might sell futures contracts with respect to fixed income
securities or indexes of fixed income securities. If the hedge is effective,
then should the anticipated change in market rates cause a decline in the value
of the Fund's fixed income security, the value of the futures contract should
increase. Likewise, a Fund may sell equity index futures if the Fund wants to
hedge its equity securities against a general decline in the relevant equity
market(s). The Funds may also use futures contracts in anticipatory hedge
transactions by taking a long position in a futures contract with respect to a
security, index or foreign currency that a Fund intends to purchase (or whose
value is expected to correlate closely with the security or currency to be
purchased) pending receipt of cash from other transactions to be used for the
actual purchase. Then if the cost of the security or foreign currency to be
purchased by the Fund increases and if the anticipatory hedge is effective, that
increased cost should be offset, at least in part, by the value of the futures
contract. Options on futures contracts may be used for hedging as well. For
example, if the value of a fixed-income security in a Fund's portfolio is
expected to decline as a result of an increase in rates, the Fund might purchase
put options or write call options on futures contracts rather than selling
futures contracts. Similarly, for anticipatory hedging, the Fund may purchase
call options or write put options as a substitute for the purchase of futures
contracts. See "Foreign Currency Transactions" below for more information
regarding the currency hedging practices of certain Funds.
INVESTMENT PURPOSES. To the extent indicated elsewhere, a Fund may also enter
into futures contracts and buy and sell options thereon for investment. For
example, a Fund may invest in futures when its Manager believes that there are
not enough attractive securities available to maintain the standards of
diversity and liquidity set for a Fund pending investment in such securities if
or when they do become available. Through this use of futures and related
options, a Fund may diversify risk in its portfolio without incurring the
substantial brokerage costs which may be associated with investment in the
securities of multiple issuers. This use may also permit a Fund to avoid
potential market and liquidity problems (e.g., driving up the price of a
security by purchasing additional shares of a portfolio security or owning so
much of a particular issuer's stock that the sale of such stock depresses that
stock's price) which may result from increases in positions already held by the
Fund.
When any Fund purchases futures contracts for investment, it will maintain cash,
U.S. Government Securities or other high grade debt obligations in a segregated
account with its custodian in an amount which, together with the initial and
variation margin deposited on the futures contracts, is equal to the face value
of the futures contracts at all times while the futures contracts are held.
Incidental to other transactions in fixed income securities, for investment
purposes a Fund may also combine futures contracts or options on fixed income
securities with cash, cash equivalent investments or other fixed income
securities in order to create "synthetic" bonds which approximate desired risk
and return profiles. This may be done where a "non-synthetic" security having
the desired risk/return profile either is unavailable (e.g., short-term
securities of certain foreign governments) or possesses undesirable
characteristics (e.g., interest payments on the
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security would be subject to foreign withholding taxes). A Fund may also
purchase forward foreign exchange contracts in conjunction with U.S.
dollar-denominated securities in order to create a synthetic foreign currency
denominated security which approximates desired risk and return characteristics
where the non-synthetic securities either are not available in foreign markets
or possess undesirable characteristics. For greater detail, see "Foreign
Currency Transactions" below. When a Fund creates a "synthetic" bond with a
futures contract, it will maintain cash, U.S. Government securities or other
high grade debt obligations in a segregated account with its custodian with a
value at least equal to the face amount of the futures contract (less the amount
of any initial or variation margin on deposit).
SYNTHETIC SALES AND PURCHASES. Futures contracts may also be used to reduce
transaction costs associated with short-term restructuring of a Fund's
portfolio. For example, if a Fund's portfolio includes stocks of companies with
medium-sized equity capitalization and, in the opinion of the Manager, such
stocks are likely to underperform larger capitalization stocks, the Fund might
sell some or all of its mid-capitalization stocks, buy large capitalization
stocks with the proceeds and then, when the expected trend had played out, sell
the large capitalization stocks and repurchase the mid-capitalization stocks
with the proceeds. In the alternative, the Fund may use futures to achieve a
similar result with reduced transaction costs. In that case, the Fund might
simultaneously enter into short futures positions on an appropriate index (e.g.,
the S&P Mid Cap 400 Index) (to synthetically "sell" the stocks in the Fund) and
long futures positions on another index (e.g., the S&P 500) (to synthetically
"buy" the larger capitalization stocks). When the expected trend has played out,
the Fund would then close out both futures contract positions. A Fund will only
enter into these combined positions if (1) the short position (adjusted for
historic volatility) operates as a hedge of existing portfolio holdings, (2) the
face amount of the long futures position is less than or equal to the value of
the portfolio securities that the Fund would like to dispose of, (3) the
contract settlement date for the short futures position is approximately the
same as that for the long futures position and (4) the Fund segregates an amount
of cash, U.S. Government Securities and other high-quality debt obligations
whose value, marked-to-market daily, is equal to the Fund's current obligations
in respect of the long futures contract positions. If a Fund uses such combined
short and long positions, in addition to possible declines in the values of its
investment securities, the Fund may also suffer losses associated with a
securities index underlying the long futures position underperforming the
securities index underlying the short futures position. However, the Manager
will enter into these combined positions only if the Manager expects that,
overall, the Fund will perform as if it had sold the securities hedged by the
short position and purchased the securities underlying the long position. A Fund
may also use swaps and options on futures to achieve the same objective.
Limitations on the Use of Options and Futures Portfolio Strategies. As noted
above, the Funds may use futures contracts and related options for hedging and,
in some circumstances, for risk management or investment but not for
speculation. Thus, except when used for risk management or investment, each such
Fund's long futures contract positions (less its short positions) together with
the Fund's cash (i.e., equity or fixed income) positions will not exceed the
Fund's total net assets.
The Funds' ability to engage in the options and futures strategies described
above will depend on the availability of liquid markets in such instruments.
Markets in options and futures with
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respect to currencies are relatively new and still developing. It is impossible
to predict the amount of trading interest that may exist in various types of
options or futures. Therefore no assurance can be given that a Fund will be able
to utilize these instruments effectively for the purposes set forth above.
Furthermore, each Fund's ability to engage in options and futures transactions
may be limited by tax considerations.
SWAP CONTRACTS AND OTHER TWO-PARTY CONTRACTS
Many of the Funds may use swap contracts and other two-party contracts for the
same or similar purposes as they may use options, futures and related options.
SWAP CONTRACTS. Swap agreements are two-party contracts entered into primarily
by institutional investors for periods ranging from a few weeks to more than one
year. In a standard "swap" transaction, two parties agree to exchange returns
(or differentials in rates of return) calculated with respect to a "notional
amount," e.g., the return on or increase in value of a particular dollar amount
invested at a particular interest rate, in a particular foreign currency, or in
a "basket" of securities representing a particular index. A Fund will usually
enter into swaps on a net basis, i.e., the two returns are netted out, with the
Fund receiving or paying, as the case may be, only the net amount of the two
returns.
INTEREST RATE AND CURRENCY SWAP CONTRACTS. Interest rate swaps involve the
exchange of the two parties' respective commitments to pay or receive interest
on a notional principal amount (e.g. an exchange of floating rate payments for
fixed rate payments). Currency swaps involve the exchange of the two parties'
respective commitments to pay or receive fluctuations with respect to a notional
amount of two different currencies (e.g., an exchange of payments with respect
to fluctuations in the value of the U.S. dollar relative to the Japanese yen).
EQUITY SWAP CONTRACTS AND CONTRACTS FOR DIFFERENCES. Equity swap contracts
involve the exchange of one party's obligation to pay the loss, if any, with
respect to a notional amount of a particular equity index (e.g., the S&P 500
Index) plus interest on such notional amount at a designated rate (e.g., the
London Inter-Bank Offered Rate) in exchange for the other party's obligation to
pay the gain, if any, with respect to the notional amount of such index.
If a Fund enters into a long equity swap contract, the Fund's net asset value
will fluctuate as a result of changes in the value of the equity index on which
the equity swap is based as if it had purchased the notional amount of
securities comprising the index. The Funds will not use long equity swap
contracts to obtain greater volatility than it could obtain through direct
investment in securities; that is, a Fund will not normally enter into an equity
swap contract to increase the volatility (beta) of the Fund's portfolio above
1.00, the volatility that would be present in the stocks comprising the Fund's
benchmark index. However, a Fund may invest in long equity swap contracts
without regard to this limitation if the notional amount of such equity swap
contracts, when aggregated with the Index Futures as described above and the
contracts for differences as described below, does not exceed 10% of a Fund's
net assets.
Contracts for differences are swap arrangements in which a Fund may agree with a
counterparty that its return (or loss) will be based on the relative performance
of two different groups or "baskets" of securities. As to one of the baskets,
the Fund's return is based on theoretical, long
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futures positions in the securities comprising that basket (with an aggregate
face value equal to the notional amount of the contract for differences) and as
to the other basket, the Fund's return is based on theoretical short futures
positions in the securities comprising the basket. The Fund may also use actual
long and short futures positions to achieve the same market exposure(s) as
contracts for differences where payment obligations of the two legs of the
contract are netted and thus based on changes in the relative value of the
baskets of securities rather than on the aggregate change in the value of the
two legs. The Funds will only enter into contracts for differences (and
analogous futures positions) when the Manager believes that the basket of
securities constituting the long leg will outperform the basket constituting the
short leg. However, it is possible that the short basket will outperform the
long basket -- resulting in a loss to the Fund, even in circumstances when the
securities in both the long and short baskets appreciate in value.
Except for instances in which a Fund elects to obtain leverage up to the 10%
limitation mentioned above, a Fund will maintain cash, U.S. Government
Securities or other high grade debt obligations in a segregated account with its
custodian in an amount equal to the aggregate of net payment obligations on its
swap contracts and contracts for differences, marked to market daily.
A Fund may enter into swaps and contracts for differences for hedging,
investment and risk management. When using swaps for hedging, a Fund may enter
into an interest rate, currency or equity swap, as the case may be, on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities. For risk management or investment purposes a Fund may
also enter into a contract for differences in which the notional amount of the
theoretical long position is greater than the notional amount of the theoretical
short position. A Fund will not normally enter into a contract for differences
to increase the volatility (beta) of the Fund's portfolio above 1.00. However, a
Fund may invest in contracts for differences without regard to this limitation
if the aggregate amount by which the theoretical long positions of such
contracts exceed the theoretical short positions of such contracts, when
aggregated with the Index Futures and equity swap contracts as described above,
does not exceed 10% of a Fund's net assets.
INTEREST RATE CAPS, FLOORS AND COLLARS. The Funds may use interest rate caps,
floors and collars for the same purposes or similar purposes as they use
interest rate futures contracts and related options. Interest rate caps, floors
and collars are similar to interest rate swap contracts because the payment
obligations are measured by changes in interest rates as applied to a notional
amount and because they are individually negotiated with a specific
counterparty. The purchase of an interest rate cap entitles the purchaser, to
the extent that a specific index exceeds a specified interest rate, to receive
payments of interest on a notional principal amount from the party selling the
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below specified interest
rates, to receive payments of interest on a notional principal amount from the
party selling the interest rate floor. The purchase of an interest rate collar
entitles the purchaser, to the extent that a specified index exceeds or falls
below two specified interest rates, to receive payments of interest on a
notional principal amount from the party selling the interest rate collar.
Except when using such contracts for risk management, each Fund will maintain
cash, U.S. Government Securities or other high
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grade debt obligations in a segregated account with its custodian in an amount
at least equal to its obligations, if any, under interest rate cap, floor and
collar arrangements. As with futures contracts, when a Fund uses notional amount
contracts for risk management it is only required to segregate assets equal to
its net payment obligation, not the notional amount of the contract. In those
cases, the notional amount contract will have the effect of providing a degree
of investment leverage similar to the leverage associated with nonsegregated
futures contracts. The Funds' use of interest rate caps, floors and collars for
the same or similar purposes as those for which they use futures contracts and
related options presents the same risks and similar opportunities as those
associated with futures and related options. Because caps, floors and collars
are recent innovations for which standardized documentation has not yet been
developed they are deemed by the SEC to be relatively illiquid investments which
are subject to a Fund's limitation on investment in illiquid securities. See
"Illiquid Securities" below.
RISK FACTORS IN SWAP CONTRACTS, OTC OPTIONS AND OTHER TWO-PARTY CONTRACTS. A
Fund may only close out a swap, contract for differences, cap, floor or collar
or OTC option with the particular counterparty. Also, if the counterparty
defaults, a Fund will have contractual remedies pursuant to the agreement
related to the transaction, but there is no assurance that contract
counterparties will be able to meet their obligations pursuant to such contracts
or that, in the event of default, a Fund will succeed in pursuing contractual
remedies. The Fund thus assumes the risk that it may be delayed or prevented
from obtaining payments owed to it pursuant to swap contracts. The Manager will
closely monitor, subject to the oversight of the Trustees, the creditworthiness
of contract counterparties, and a Fund will not enter into any swaps, caps,
floors or collars, unless the unsecured senior debt or the claims-paying ability
of the other party thereto is rated at least A by Moody's Investors Service or
Standard & Poor's Corporation at the time of entering into such transaction or
if the counterparty has comparable credit as determined by the Manager. However,
the credit of the counterparty may be adversely affected by larger-than-average
volatility in the markets, even if the counterparty's net market exposure is
small relative to its capital. The management of caps, floors, collars and swaps
may involve certain difficulties because the characteristics of many derivatives
have not been observed under all market conditions or through a full market
cycle.
ADDITIONAL REGULATORY LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS,
INTEREST RATE FLOORS, CAPS AND COLLARS AND INTEREST RATE AND CURRENCY SWAP
CONTRACTS. In accordance with CFTC regulations, investments by any Fund in
futures contracts and related options for purposes other than bona fide hedging
are limited such that the aggregate amount that a Fund may commit to initial
margin on such contracts or time premiums on such options may not exceed 5% of
that Fund's net assets.
The Manager and the Trust do not believe that the Fund's respective obligations
under equity swap contracts, reverse equity swap contracts or Index Futures are
senior securities and, accordingly, the Fund will not treat them as being
subject to its borrowing restrictions. However, the net amount of the excess, if
any, of the Fund's obligations over its entitlements with respect to each equity
swap contract will be accrued on a daily basis and an amount of cash, U.S.
government securities or other liquid obligations having an aggregate market
value at least equal to the accrued excess will be maintained in a segregated
account by the Fund's custodian. Likewise, when a Fund takes a short position
with respect to an Index Futures contract the
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position must be covered or the Fund must maintain at all times while that
position is held, cash, U.S. government securities or other liquid obligations
in a segregated account with its custodian, in an amount which, together with
the initial margin deposit on the futures contract, is equal to the current
delivery or cash settlement value.
The use of unsegregated futures contracts, related written options, interest
rate floors, caps and collars and interest rate and currency swap contracts for
risk management by a Fund permitted to engage in any or all of such practices is
limited to no more than 10% of a Fund's total net assets when aggregated with
such Fund's traditional borrowings in accordance with SEC pronouncements. This
10% limitation applies to the face amount of unsegregated futures contracts and
related options and to the amount of a Fund's net payment obligation that is not
segregated against in the case of interest rate floors, caps and collars and
interest rate and currency swap contracts.
FOREIGN CURRENCY TRANSACTIONS
Foreign currency exchange rates may fluctuate significantly over short periods
of time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or perceived changes in interest rates and other complex
factors. Currency exchange rates also can be affected unpredictably by
intervention (or the failure to intervene) by U.S. or foreign governments or
central banks, or by currency controls or political developments in the U.S. or
abroad. For example, uncertainty surrounds the introduction of the "euro" (a
common currency unit for the European Union) which occurred in January 1999.
These and other currencies in which the Funds' assets are denominated may be
devalued against the U.S. dollar, resulting in a loss to the Funds.
Funds that are permitted to invest in securities denominated in foreign
currencies may buy or sell foreign currencies, deal in forward foreign currency
contracts, currency futures contracts and related options and options on
currencies. These Funds may use such currency instruments for hedging,
investment or currency risk management. Currency risk management may include
taking active currency positions relative to both the securities portfolio of
the Fund and the Fund's performance benchmark.
Forward foreign currency contracts are contracts between two parties to purchase
and sell a specific quantity of a particular currency at a specified price, with
delivery and settlement to take place on a specified future date. Currency
futures contracts are contracts to buy or sell a standard quantity of a
particular currency at a specified future date and price. Options on currency
futures contracts give their owner the right, but not the obligation, to buy (in
the case of a call option) or sell (in the case of a put option) a specified
currency futures contract at a fixed price during a specified period. Options on
currencies give their owner the right, but not the obligation, to buy (in the
case of a call option) or sell (in the case of a put option) a specified
quantity of a particular currency at a fixed price during a specified period.
These Funds may enter into forward contracts for hedging under three
circumstances. First, when a Fund enters into a contract for the purchase or
sale of a security denominated in a foreign
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currency, it may desire to "lock in" the U.S. dollar price of the security. By
entering into a forward contract for the purchase or sale, for a fixed amount of
dollars, of the amount of foreign currency involved in the underlying security
transaction, the Fund will be able to protect itself against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar and
the subject foreign currency during the period between the date on which the
security is purchased or sold and the date on which payment is made or received.
Second, when the manager of a Fund believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell, for a fixed amount of dollars, the amount
of foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. Maintaining a match
between the forward contract amounts and the value of the securities involved
will not generally be possible since the future value of such securities in
foreign currencies will change as a consequence of market movements in the value
of those securities between the date the forward contract is entered into and
the date it matures.
Third, the Funds may engage in currency "cross hedging" when, in the opinion of
the Manager, the historical relationship among foreign currencies suggests that
the Funds may achieve the same protection for a foreign security at reduced cost
through the use of a forward foreign currency contract relating to a currency
other than the U.S. dollar or the foreign currency in which the security is
denominated. By engaging in cross hedging transactions, the Funds assume the
risk of imperfect correlation between the subject currencies. These practices
may present risks different from or in addition to the risks associated with
investments in foreign currencies.
A Fund is not required to enter into hedging transactions with regard to its
foreign currency-denominated securities and will not do so unless deemed
appropriate by the Manager. By entering into the above hedging transactions, the
Funds may be required to forego the benefits of advantageous changes in the
exchange rates.
Each of these Funds may also enter into foreign currency forward contracts for
investment and currency risk management. When a Fund uses currency instruments
for such purposes, the foreign currency exposure of the Fund may differ
substantially from the currencies in which the Fund's investment securities are
denominated. However, a Fund's aggregate foreign currency exposure will not
normally exceed 100% of the value of the Fund's securities, except that a Fund
may use currency instruments without regard to this limitation if the amount of
such excess, when aggregated with futures contracts, equity swap contracts and
contracts for differences used in similar ways, does not exceed 10% of a Fund's
net assets. The U.S. Bond/Global Alpha A Fund, U.S. Bond/Global Alpha B Fund,
International Bond Fund, the Currency Hedged International Bond Fund, the Global
Bond Fund and the Emerging Country Debt Fund, among others, may each also enter
into foreign currency forward contracts to give fixed income securities
denominated in one currency (generally the U.S. dollar) the risk characteristics
of similar securities denominated in another currency as described above under
"Uses of Options, Futures and Options on Futures -- Investment Purposes" or for
risk management in a manner similar to such Funds' use of futures contracts and
related options.
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Except to the extent that the Funds may use such contracts for risk management,
whenever a Fund enters into a foreign currency forward contract, other than a
forward contract entered into for hedging, it will maintain cash, U.S.
Government securities or other high grade debt obligations in a segregated
account with its custodian with a value, marked to market daily, equal to the
amount of the currency required to be delivered. A Fund's ability to engage in
forward contracts may be limited by tax considerations.
A Fund may use currency futures contracts and related options and options on
currencies for the same reasons for which it uses currency forwards. Except to
the extent that the Funds may use futures contracts and related options for risk
management, a Fund will, so long as it is obligated as the writer of a call
option on currency futures, own on a contract-for-contract basis an equal long
position in currency futures with the same delivery date or a call option on
currency futures with the difference, if any, between the market value of the
call written and the market value of the call or long currency futures purchased
maintained by the Fund in cash or other liquid assets in a segregated account
with its custodian. If at the close of business on any day the market value of
the call purchased by a Fund falls below 100% of the market value of the call
written by the Fund, the Fund will maintain an amount of cash or other liquid
assets in a segregated account with its custodian equal in value to the
difference. Alternatively, the Fund may cover the call option by owning
securities denominated in the currency with a value equal to the face amount of
the contract(s) or through segregating with the custodian an amount of the
particular foreign currency equal to the amount of foreign currency per futures
contract option times the number of options written by the Fund.
REPURCHASE AGREEMENTS
A Fund may enter into repurchase agreements with banks and broker-dealers by
which the Fund acquires a security (usually an obligation of the Government
where the transaction is initiated or in whose currency the agreement is
denominated) for a relatively short period (usually not more than a week) for
cash and obtains a simultaneous commitment from the seller to repurchase the
security at an agreed-on price and date. The resale price is in excess of the
acquisition price and reflects an agreed-upon market rate unrelated to the
coupon rate on the purchased security. Such transactions afford an opportunity
for the Fund to earn a return on temporarily available cash at no market risk,
although there is a risk that the seller may default in its obligation to pay
the agreed-upon sum on the redelivery date. Such a default may subject the
relevant Fund to expenses, delays and risks of loss including: (a) possible
declines in the value of the underlying security during the period while the
Fund seeks to enforce its rights thereto, (b) possible reduced levels of income
and lack of access to income during this period and (c) inability to enforce
rights and the expenses involved in attempted enforcement.
DEBT AND OTHER FIXED INCOME SECURITIES GENERALLY
Debt and Other Fixed Income Securities include fixed income securities of any
maturity, although, under normal circumstances, a Fixed Income Fund (other than
the Short-Term Income Fund) will only invest in a security if, at the time of
such investment, at least 65% of its total assets will be comprised of bonds, as
defined in the Prospectus. Fixed income securities pay a specified rate of
interest or dividends, or a rate that is adjusted periodically by reference to
some
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specified index or market rate. Fixed income securities include securities
issued by federal, state, local and foreign governments and related agencies,
and by a wide range of private issuers.
Fixed income securities are subject to market and credit risk. Market risk
relates to changes in a security's value as a result of changes in interest
rates generally. In general, the values of fixed income securities increase when
prevailing interest rates fall and decrease when interest rates rise. Credit
risk relates to the ability of the issuer to make payments of principal and
interest. Obligations of issuers are subject to the provisions of bankruptcy,
insolvency and other laws, such as the Federal Bankruptcy Reform Act of 1978,
affecting the rights and remedies of creditors. Fixed income securities
denominated in foreign currencies are also subject to the risk of a decline in
the value of the denominating currency.
Because interest rates vary, it is impossible to predict the future income of a
Fund investing in such securities. The net asset value of each Fund's shares
will vary as a result of changes in the value of the securities in its portfolio
and will be affected by the absence and/or success of hedging strategies.
TEMPORARY HIGH QUALITY CASH ITEMS
Many of the Funds may temporarily invest a portion of their assets in cash or
cash items pending other investments or in connection with the maintenance of a
segregated account. These cash items must be of high quality and may include a
number of money market instruments such as securities issued by the United
States government and agencies thereof, bankers' acceptances, commercial paper,
and bank certificates of deposit. By investing only in high quality money market
securities a Fund may seek to minimize credit risk with respect to such
investments. The Short-Term Income Fund may invest a substantial portion of its
assets in these instruments, but is not subject to the quality, duration and
other requirements of money market funds.
U.S. GOVERNMENT SECURITIES AND FOREIGN GOVERNMENT SECURITIES
U.S. Government Securities include securities issued or guaranteed by the U.S.
government or its authorities, agencies or instrumentalities. Foreign Government
Securities include securities issued or guaranteed by foreign governments
(including political subdivisions) or their authorities, agencies or
instrumentalities or by supra-national agencies. U.S. Government Securities and
Foreign Government Securities have different kinds of government support. For
example, some U.S. Government Securities, such as U.S. Treasury bonds, are
supported by the full faith and credit of the United States, whereas certain
other U.S. Government Securities issued or guaranteed by federal agencies or
government-sponsored enterprises are not supported by the full faith and credit
of the United States. Similarly, some Foreign Government Securities are
supported by the full faith and credit of a foreign national government or
political subdivision and some are not. In the case of certain countries,
Foreign Government Securities may involve varying degrees of credit risk as a
result of financial or political inability of a Fund to enforce its rights
against the foreign government issuer.
Supra-national agencies are agencies whose member nations make capital
contributions to support the agencies' activities, and include such entities as
the International Bank for
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Reconstruction and Development (the World Bank), the Asian Development Bank, the
European Coal and Steel Community and the Inter-American Development Bank.
Like other fixed income securities, U.S. Government Securities and Foreign
Government Securities are subject to market risk and their market values
fluctuate as interest rates change. Thus, for example, the value of an
investment in a Fund which holds U.S. Government Securities or Foreign
Government Securities may fall during times of rising interest rates. Yields on
U.S. Government Securities and Foreign Government Securities tend to be lower
than those of corporate securities of comparable maturities.
In addition to investing directly in U.S. Government Securities and Foreign
Government Securities, a Fund may purchase certificates of accrual or similar
instruments evidencing undivided ownership interests in interest payments or
principal payments, or both, in U.S. Government Securities and Foreign
Government Securities. These certificates of accrual and similar instruments may
be more volatile than other government securities.
MORTGAGE-BACKED AND OTHER ASSET-BACKED SECURITIES
Mortgage-backed and other asset-backed securities may be issued by the U.S.
government, its agencies or instrumentalities, or by non-governmental issuers.
Interest and principal payments (including prepayments) on the mortgages
underlying mortgage-backed securities are passed through to the holders of the
mortgage-backed securities. Prepayments occur when the mortgagor on an
individual mortgage prepays the remaining principal before the mortgage's
scheduled maturity date. As a result of the pass-through of prepayments of
principal on the underlying mortgages, mortgage-backed securities are often
subject to more rapid prepayment of principal than their stated maturity would
indicate. Because the prepayment characteristics of the underlying mortgages
vary, there can be no certainty as to the predicted yield or average life of a
particular issue of pass-through certificates. Prepayments are important because
of their effect on the yield and price of the securities. During periods of
declining interest rates, such prepayments can be expected to accelerate and a
Fund would be required to reinvest the proceeds at the lower interest rates then
available. In addition, prepayments of mortgages which underlie securities
purchased at a premium could result in capital loss because the premium may not
have been fully amortized at the time the obligation was prepaid. As a result of
these principal prepayment features, the values of mortgage-backed securities
generally fall when interest rates rise, but their potential for capital
appreciation in periods of falling interest rates is limited because of the
prepayment feature. The mortgage-backed securities purchased by a Fund may
include Adjustable Rate Securities as such term is defined in "Adjustable Rate
Securities" below.
Other "asset-backed securities" include securities backed by pools of automobile
loans, educational loans and credit card receivables. Mortgage-backed and
asset-backed securities of non-governmental issuers involve prepayment risks
similar to those of U.S. government guaranteed mortgage-backed securities and
also involve risk of loss of principal if the obligors of the underlying
obligations default in payment of the obligations.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"): STRIPS AND RESIDUALS. A CMO is a
security backed by a portfolio of mortgages or mortgage-backed securities held
under an indenture. The
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issuer's obligation to make interest and principal payments is secured by the
underlying portfolio of mortgages or mortgage-backed securities. CMOs are issued
in multiple classes or series which have different maturities representing
interests in some or all of the interest or principal on the underlying
collateral or a combination thereof. CMOs of different classes are generally
retired in sequence as the underlying mortgage loans in the mortgage pool are
repaid. In the event of sufficient early prepayments on such mortgages, the
class or series of CMO first to mature generally will be retired prior to its
stated maturity. Thus, the early retirement of a particular class or series of
CMO held by a Fund would have the same effect as the prepayment of mortgages
underlying a mortgage-backed pass-through security.
CMOs include securities ("Residuals") representing the interest in any excess
cash flow and/or the value of any collateral remaining on mortgages or
mortgage-backed securities from the payment of principal of and interest on all
other CMOs and the administrative expenses of the issuer. Residuals have value
only to the extent income from such underlying mortgages or mortgage-backed
securities exceeds the amount necessary to satisfy the issuer's debt obligations
represented by all other outstanding CMOs.
CMOs also include certificates representing undivided interests in payments of
interest-only or principal-only ("IO/PO Strips") on the underlying mortgages.
IO/PO Strips and Residuals tend to be more volatile than other types of
securities. IO Strips and Residuals also involve the additional risk of loss of
a substantial portion of or the entire value of the investment if the underlying
securities are prepaid. In addition, if a CMO bears interest at an adjustable
rate, the cash flows on the related Residual will also be extremely sensitive to
the level of the index upon which the rate adjustments are based.
ADJUSTABLE RATE SECURITIES
Adjustable rate securities are securities that have interest rates that are
reset at periodic intervals, usually by reference to some interest rate index or
market interest rate. They may be U.S. Government Securities or securities of
other issuers. Some adjustable rate securities are backed by pools of mortgage
loans. Although the rate adjustment feature may act as a buffer to reduce sharp
changes in the value of adjustable rate securities, these securities are still
subject to changes in value based on changes in market interest rates or changes
in the issuer's creditworthiness. Because the interest rate is reset only
periodically, changes in the interest rates on adjustable rate securities may
lag changes in prevailing market interest rates. Also, some adjustable rate
securities (or, in the case of securities backed by mortgage loans, the
underlying mortgages) are subject to caps or floors that limit the maximum
change in interest rate during a specified period or over the life of the
security. Because of the resetting of interest rates, adjustable rate securities
are less likely than non-adjustable rate securities of comparable quality and
maturity to increase significantly in value when market interest rates fall.
LOWER RATED SECURITIES
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Certain Funds may invest some or all of their assets in securities rated below
investment grade (that is, rated below BBB by Standard & Poor's or below Baa by
Moody's) at the time of purchase, including securities in the lowest rating
categories, and comparable unrated securities ("Lower Rated Securities"). A Fund
will not necessarily dispose of a security when its rating is reduced below its
rating at the time of purchase, although the Manager will monitor the investment
to determine whether continued investment in the security will assist in meeting
the Fund's investment objective.
Lower Rated Securities generally provide higher yields, but are subject to
greater credit and market risk, than higher quality fixed income securities.
Lower Rated Securities are considered predominantly speculative with respect to
the ability of the issuer to meet principal and interest payments. Achievement
of the investment objective of a Fund investing in Lower Rated Securities may be
more dependent on the Manager's own credit analysis than is the case with higher
quality bonds. The market for Lower Rated Securities may be more severely
affected than some other financial markets by economic recession or substantial
interest rate increases, by changing public perceptions of this market or by
legislation that limits the ability of certain categories of financial
institutions to invest in these securities. In addition, the secondary market
may be less liquid for Lower Rated Securities. This reduced liquidity at certain
times may affect the values of these securities and may make the valuation and
sale or these securities more difficult. Securities of below investment grade
quality are commonly referred to as "junk bonds." Securities in the lowest
rating categories may be in poor standing or in default. Securities in the
lowest investment grade category (BBB or Baa) have some speculative
characteristics. See "Commercial Paper and Corporate Debt Ratings" below for
more information concerning commercial paper and corporate debt ratings.
BRADY BONDS
Brady Bonds are securities created through the exchange of existing commercial
bank loans to public and private entities in certain emerging markets for new
bonds in connection with debt restructuring under a debt restructuring plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the
"Brady Plan"). Brady Plan debt restructurings have been implemented in Mexico,
Uruguay, Venezuela, Costa Rica, Argentina, Nigeria, the Philippines and other
countries.
Brady Bonds have been issued only recently, and for that reason do not have a
long payment history. Brady Bonds may be collateralized, are issued in various
currencies (but primarily the dollar) and are actively traded in
over-the-counter secondary markets. Dollar-denominated, collateralized Brady
Bonds, which may be fixed-rate bonds or floating-rate bonds, are generally
collateralized in full as to principal by U.S. Treasury zero coupon bonds having
the same maturity as the bonds.
Brady Bonds are often viewed as having three or four valuation components: any
collateralized repayment of principal at final maturity; any collateralized
interest payments; the uncollateralized interest payments; and any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady bonds and the history of defaults of countries issuing Brady Bonds with
respect to
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commercial bank loans by public and private entities, investments in Brady Bonds
may be viewed as speculative.
ZERO COUPON SECURITIES
A Fund investing in "zero coupon" fixed income securities is required to accrue
interest income on these securities at a fixed rate based on the initial
purchase price and the length to maturity, but these securities do not pay
interest in cash on a current basis. Each Fund is required to distribute the
income on these securities to its shareholders as the income accrues, even
though that Fund is not receiving the income in cash on a current basis. Thus,
each Fund may have to sell other investments to obtain cash to make income
distributions. The market value of zero coupon securities is often more volatile
than that of non-zero coupon fixed income securities of comparable quality and
maturity. Zero coupon securities include IO and PO strips.
INDEXED SECURITIES
Indexed Securities are securities the redemption values and/or the coupons of
which are indexed to the prices of a specific instrument or statistic. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity or coupon rate is determined by reference to other securities,
securities indexes, currencies, precious metals or other commodities, or other
financial indicators. Gold-indexed securities, for example, typically provide
for a maturity value that depends on the price of gold, resulting in a security
whose price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
Indexed securities in which each Fund may invest include so-called "inverse
floating obligations" or "residual interest bonds" on which the interest rates
typically decline as short-term market interest rates increase and increase as
short-term market rates decline. Such securities have the effect of providing a
degree of investment leverage, since they will generally increase or decrease in
value in response to changes in market interest rates at a rate which is a
multiple of the rate at which fixed-rate long-term securities increase or
decrease in response to
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such changes. As a result, the market values of such securities will generally
be more volatile than the market values of fixed rate securities.
A Fund's investment in indexed securities may also create taxable income in
excess of the cash such investments generate. See "Taxes" in the Prospectus.
FIRM COMMITMENTS
A firm commitment agreement is an agreement with a bank or broker-dealer for the
purchase of securities at an agreed-upon price on a specified future date. A
fund may enter into firm commitment agreements with such banks and
broker-dealers with respect to any of the instruments eligible for purchase by
the Fund. A Fund will only enter into firm commitment arrangements with banks
and broker-dealers which the Manager determines present minimal credit risks.
Each such Fund will maintain in a segregated account with its custodian cash,
U.S. Government Securities or other liquid high grade debt obligations in an
amount equal to the Fund's obligations under firm commitment agreements.
LOANS, LOAN PARTICIPATIONS AND ASSIGNMENTS
Certain Funds may invest in direct debt instruments which are interests in
amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates (loans and loan participations), to suppliers of goods or
services (trade claims or other receivables), or to other parties. Direct debt
instruments are subject to a Fund's policies regarding the quality of debt
securities.
Purchasers of loans and other forms of direct indebtedness depend primarily upon
the creditworthiness of the borrower for payment of principal and interest.
Direct debt instruments may not be rated by any nationally recognized rating
agency and yield could be adversely affected. Loans that are fully secured offer
the Fund more protections than an unsecured loan in the event of non-payment of
scheduled interest or principal. However, there is no assurance that the
liquidation of collateral from a secured loan would satisfy the borrower's
obligation or that the collateral can be liquidated. Indebtedness of borrowers
whose creditworthiness is poor involves substantially greater risks, and may be
highly speculative. Borrowers that are in bankruptcy or restructuring may never
pay off their indebtedness, or may pay only a small fraction of the amount owed.
Direct indebtedness of emerging countries will also involve a risk that the
governmental entities responsible for repayment of the debt may be unable, or
unwilling, to pay interest and repay principal when due.
When investing in a loan participation, a Fund will typically have the right to
receive payments only from the lender to the extent the lender receives payments
from the borrower, and not from the borrower itself. Likewise, a Fund typically
will be able to enforce its rights only through the lender, and not directly
against the borrower. As a result, a Fund will assume the credit risk of both
the borrower and the lender that is selling the participation.
Investments in loans through direct assignment of a financial institution's
interests with respect to a loan may involve additional risks to the Fund. For
example, if a loan is foreclosed, a Fund
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could become part owner of any collateral, and would bear the costs and
liabilities associated with owning and disposing of the collateral. In addition,
it is conceivable that under emerging legal theories of lender liability, a Fund
could be held liable as a co-lender. In the case of a loan participation, direct
debt instruments may also involve a risk of insolvency of the lending bank or
other intermediary. Direct debt instruments that are not in the form of
securities may offer less legal protection to a Fund in the event of fraud or
misrepresentation. In the absence of definitive regulatory guidance, a Fund may
rely on the Manager's research to attempt to avoid situations where fraud or
misrepresentation could adversely affect the Fund.
A loan is often administered by a bank or other financial institution that acts
as agent for all holders. The agent administers the terms of the loan, as
specified in the loan agreement. Unless, under the terms of the loan or other
indebtedness, a Fund has direct recourse against the borrower, it may have to
rely on the agent to apply appropriate credit remedies against a borrower.
Direct indebtedness purchased by a Fund may include letters of credit, revolving
credit facilities, or other standby financing commitments obligating the Fund to
pay additional cash on demand. These commitments may have the effect of
requiring the Fund to increase its investment in a borrower at a time when it
would not otherwise have done so. A Fund will set aside appropriate liquid
assets in a segregated custodial account to cover its potential obligations
under standby financing commitments.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS
Certain Funds may enter into reverse repurchase agreements and dollar roll
agreements with banks and brokers to enhance return. Reverse repurchase
agreements involve sales by a Fund of portfolio assets concurrently with an
agreement by the Fund to repurchase the same assets at a later date at a fixed
price. During the reverse repurchase agreement period, the Fund continues to
receive principal and interest payments on these securities and also has the
opportunity to earn a return on the collateral furnished by the counterparty to
secure its obligation to redeliver the securities.
Dollar rolls are transactions in which a Fund sells securities for delivery in
the current month and simultaneously contracts to repurchase substantially
similar (same type and coupon) securities on a specified future date. During the
roll period, the Fund forgoes principal and interest paid on the securities. The
Fund is compensated by the difference between the current sales price and the
forward price for the future purchase (often referred to as the "drop") as well
as by the interest earned on the cash proceeds of the initial sale.
A Fund which makes such investments will establish segregated accounts with its
custodian in which the Fund will maintain cash, U.S. Government Securities or
other liquid assets equal in value to its obligations in respect of reverse
repurchase agreements and dollar rolls. Reverse repurchase agreements and dollar
rolls involve the risk that the market value of the securities retained by a
Fund may decline below the price of the securities the Fund has sold but is
obligated to repurchase under the agreement. In the event the buyer of
securities under a reverse repurchase agreement or dollar roll files for
bankruptcy or becomes insolvent, a Fund's use of the
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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 a Fund for purposes of a Fund's fundamental
investment restriction with respect to borrowings.
ILLIQUID SECURITIES
Each Fund may purchase (or in the case of the Asset Allocation Funds, gain
exposure through investment in underlying Funds) "illiquid securities," i.e.,
securities which may not be sold or disposed of in the ordinary course of
business within seven days at approximately the value at which the Fund has
valued the investment, which include securities whose disposition is restricted
by securities laws, so long as no more than 15% (or, in the case of the Foreign
Fund only, 10%) of net assets would be invested in such illiquid securities.
Each Fund currently intends to invest in accordance with the SEC staff view that
repurchase agreements maturing in more than seven days are illiquid securities.
The SEC staff has stated informally that it is of the view that over-the-counter
options and securities serving as cover for over-the-counter options are
illiquid securities. While the Trust does not agree with this view, it will
operate in accordance with any relevant formal guidelines adopted by the SEC.
In addition, the SEC staff considers equity swap contracts, caps, floors and
collars to be illiquid securities. Consequently, while the staff maintains this
position, the Fund will not enter into an equity swap contract or a reverse
equity swap contract or purchase a cap, floor or collar if, as a result of the
investment, the total value (i.e., marked-to-market value) of such investments
(without regard to their notional amount) together with that of all other
illiquid securities which the Fund owns would exceed 15% (or, in the case of the
Foreign Fund only, 10%) of the Fund's net assets.
INVESTMENT RESTRICTIONS
Fundamental Restrictions:
Without a vote of the majority of the outstanding voting securities of the
relevant Fund, the Trust will not take any of the following actions with respect
to any Fund as indicated:
(1) Borrow money except under the following circumstances: (i) Each Fund may
borrow money from banks so long as after such a transaction, the total assets
(including the amount borrowed) less liabilities other than debt obligations,
represent at least 300% of outstanding debt obligations; (ii) Each Fund may also
borrow amounts equal to an additional 5% of its total assets without regard to
the foregoing limitation for temporary purposes, such as for the clearance and
settlement of portfolio transactions and to meet shareholder redemption
requests; (iii) Each Fund may enter into transactions that are technically
borrowings under the 1940 Act because they involve the sale of a security
coupled with an agreement to repurchase that security (e.g., reverse repurchase
agreements, dollar rolls and other similar investment techniques) without regard
to the asset coverage restriction described in (i) above, so long as and to the
extent that a Fund establishes a segregated account with its custodian in which
it maintains cash and/or high grade debt securities equal in value to its
obligations in respect of these transactions. Under current
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pronouncements of the SEC staff, such transactions are not treated as senior
securities so long as and to the extent that the Fund establishes a segregated
account with its custodian in which it maintains liquid assets, such as cash,
U.S. Government securities or other appropriate assets equal in value to its
obligations in respect of these transactions; notwithstanding the foregoing, the
Japan Fund may not borrow money in excess of 10% of the value (taken at the
lower of cost or current value) of the Fund's total assets (not including the
amount borrowed) at the time the borrowing is made, and then only from banks as
a temporary measure to facilitate the meeting of redemption requests (not for
leverage) which might otherwise require the untimely disposition of portfolio
investments or for extraordinary or emergency purposes, and which borrowings
will be repaid before any additional investments are purchased.
(2) Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of purchases and sales of securities. (For this
purpose, the deposit or payment of initial or variation margin in connection
with futures contracts or related options transactions is not considered the
purchase of a security on margin.)
(3) Make short sales of securities or maintain a short position for the Fund's
account unless at all times when a short position is open the Fund owns an equal
amount of such securities or owns securities which, without payment of any
further consideration, are convertible into or exchangeable for securities of
the same issue as, and equal in amount to, the securities sold short.
(4) Underwrite securities issued by other persons except to the extent that, in
connection with the disposition of its portfolio investments, it may be deemed
to be an underwriter under federal securities laws.
(5) Purchase or sell real estate, although it may purchase securities of issuers
which deal in real estate, including securities of real estate investment
trusts, and may purchase securities which are secured by interests in real
estate.
(6) Make loans, except by purchase of debt obligations or by entering into
repurchase agreements or through the lending of the Fund's portfolio securities.
Loans of portfolio securities may be made with respect to up to 100% of a Fund's
total assets in the case of each Fund (except the International Core and
Currency Hedged International Core Funds), and with respect to not more than 25%
of total assets in the case of each of the International Core and Currency
Hedged International Core Funds.
(7) With respect to all Funds except for the Intrinsic Value Fund, invest in
securities of any issuer if, to the knowledge of the Trust, officers and
Trustees of the Trust and officers and members of Grantham, Mayo, Van Otterloo &
Co. LLC (the "Manager") who beneficially own more than -1/2 of 1% of the
securities of that issuer together beneficially own more than 5%.
(8) Concentrate more than 25% of the value of its total assets in any one
industry (except that the Short-Term Income Fund may invest up to 100% of its
assets in obligations issued by banks, and the REIT and Global Properties Funds
may invest more than 25% of their assets in real estate-related securities).
32
<PAGE> 120
(9) Purchase or sell commodities or commodity contracts, except that the Funds
(other than the Short-Term Income Fund) may purchase and sell financial futures
contracts and options thereon.
(10) Issue senior securities, as defined in the 1940 Act and as amplified by
rules, regulations and pronouncements of the SEC. The SEC has concluded that
even though reverse repurchase agreements, firm commitment agreements and
standby commitment agreements fall within the functional meaning of the term
"evidence of indebtedness," the issue of compliance with Section 18 of the 1940
Act will not be raised with the SEC by the Division of Investment Management if
a Fund covers such securities by maintaining certain "segregated accounts."
Similarly, so long as such segregated accounts are maintained, the issue of
compliance with Section 18 will not be raised with respect to any of the
following: any swap contract or contract for differences; any pledge or
encumbrance of assets permitted by non-fundamental policy (5) below; any
borrowing permitted by Fundamental Restriction (1) above; any collateral
arrangements with respect to initial and variation margin permitted by
non-fundamental policy (5) below; and the purchase or sale of options, forward
contracts, futures contracts or options on futures contracts.
(11) With respect to the Tobacco-Free Core Fund only, invest in (a) securities
which at the time of such investment are not readily marketable, (b) securities
the disposition of which is restricted under federal securities laws, and (c)
repurchase agreements maturing in more than seven days if, as a result, more
than 10% of the Fund's total assets (taken at current value) would then be
invested in securities described in (a), (b) and (c) above.
(12) With respect to the Japan Fund only, (i) own greater than 10% of the
outstanding voting securities of any single issuer; or (ii) pledge, hypothecate,
mortgage or otherwise encumber its assets in excess of 10% of the Fund's total
assets (taken at cost) and then only to secure permitted borrowings (for
purposes of this restriction, collateral arrangements with respect to the
writing of options, stock index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with respect to initial
and variation margin are not deemed to be a pledge or other encumbrance of
assets).
Non-Fundamental Restrictions:
It is contrary to the present policy of all the Funds, which may be changed by
the Trustee without shareholder approval, to:
(1) Buy or sell oil, gas or other mineral leases, rights or royalty contracts.
(2) Make investments for the purpose of gaining control of a company's
management.
(3) Invest more than 15% of net assets in illiquid securities. The securities
currently thought to be included as "illiquid securities" are restricted
securities under the Federal securities laws (including illiquid securities
traded under Rule 144A), repurchase agreements and securities that are not
readily marketable. To the extent the Trustees determine that restricted
securities traded under Section 4(2) or Rule 144A under the Securities Act of
1933 are in fact liquid, they will not be included in the 15% limit on
investment in illiquid securities.
33
<PAGE> 121
(4) Pledge, hypothecate, mortgage or otherwise encumber its assets in excess of
33-1/3% of the Fund's total assets (taken at cost). (For the purposes of this
restriction, collateral arrangements with respect to swap agreements, the
writing of options, stock index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with respect to initial
and variation margin are not deemed to be a pledge or other encumbrance of
assets. The deposit of securities or cash or cash equivalents in escrow in
connection with the writing of covered call or put options, respectively, is not
deemed to be a pledge or encumbrance.)
(5) With respect to the Foreign Fund only, to (i) invest in interests of any
general partnership, (ii) utilize margin or other borrowings to increase market
exposure (such prohibition shall extend to the use of cash collateral obtained
in exchange for loaned securities but does not prohibit the use of margin
accounts for permissible futures trading; further, the Fund may borrow an amount
equal to cash receivable from sales of stocks or securities the settlement of
which is deferred under standard practice in the country of sale), (iii) pledge
or otherwise encumber its assets, and (iv) invest more than 5% of its assets in
any one issuer (except Government securities and bank certificates of deposit).
Except as indicated above in Fundamental Restriction (1), all percentage
limitations on investments set forth herein and in the Prospectus will apply at
the time of the making of an investment and shall not be considered violated
unless an excess or deficiency occurs or exists immediately after and as a
result of such investment.
The phrase "shareholder approval," as used in the Prospectus and in this
Statement of Additional Information, and the phrase "vote of a majority of the
outstanding voting securities," as used herein with respect to a Fund, means the
affirmative vote of the lesser of (1) more than 50% of the outstanding shares of
that Fund, or (2) 67% or more of the shares of that Fund present at a meeting if
more than 50% of the outstanding shares are represented at the meeting in person
or by proxy. Except for policies that are explicitly described as fundamental in
the Prospectus or this Statement of Additional Information, the investment
policies of each Fund (including all policies, restrictions and limitations set
forth in the "Investment Guidelines") may be changed by the Trust's Trustees
without the approval of shareholders.
MANAGEMENT OF THE TRUST
Subject to the provisions of the GMO Declaration of Trust, the business
of the GMO Trust (the "Trust") shall be managed by the Trustees, and they shall
have all powers necessary or convenient to carry out that responsibility
including the power to engage in securities transactions of all kinds on behalf
of the Trust. Without limiting the foregoing, the Trustees may adopt By-Laws not
inconsistent with the Declaration of Trust providing for the regulation and
management of the affairs of the Trust and may amend and repeal them to the
extent that such By-Laws do not reserve that right to the Shareholders; they may
fill vacancies in or remove from their number (including any vacancies created
by an increase in the number of Trustees); they may remove from their number
with or without cause; they may elect and remove such officers and appoint and
terminate such agents as they consider appropriate; they may appoint from their
34
<PAGE> 122
own number and terminate one or more committees consisting of two or more
Trustees which may exercise the powers and authority of the Trustees to the
extent that the Trustees determine; they may employ one or more custodians of
the assets of the Trust and may authorize such custodians to employ
subcustodians and to deposit all or any part of such assets in a system or
systems for the central handling of securities or with a Federal Reserve Bank,
retain a transfer agent or a shareholder servicing agent, or both, provide for
the distribution of Shares by the Trust, through one or more principal
underwriters or otherwise, set record dates for the determination of
Shareholders with respect to various matters, and in general delegate such
authority as they consider desirable to any officer of the Trust, to any
committee of the Trustees and to any agent or employee of the Trust or to any
such custodian or underwriter.
The Trustees and officers of the Trust and their principal occupations
during the past five years are as follows:
R. JEREMY GRANTHAM* (D.O.B. 10/6/38). President-Quantitative and
Chairman of the Trustees of the Trust. Member, Grantham, Mayo, Van
Otterloo & Co. LLC.
HARVEY R. MARGOLIS (D.O.B. 12/12/42). Trustee of the Trust. Mathematics
Professor, Boston College.
JAY O. LIGHT (D.O.B. 10/3/41). Trustee of the Trust. Professor of
Business Administration, Harvard University; Senior Associate Dean,
Harvard University (1988-1992).
EYK DEL MOL VAN OTTERLOO (D.O.B. 2/27/37). President-International of
the Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC.
RICHARD MAYO (D.O.B. 6/18/42). President-U.S. Active of the Trust.
Member, Grantham, Mayo, Van Otterloo & Co. LLC.
KINGSLEY DURANT (D.O.B. 1/19/32). Vice President and Secretary of the
Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC.
SUSAN RANDALL HARBERT (D.O.B. 4/25/57). Secretary and Treasurer of the
Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC.
WILLIAM R. ROYER, ESQ. (D.O.B. 7/20/65). Vice President and Assistant
Treasurer of the Trust. General Counsel, Grantham, Mayo, Van Otterloo &
Co. LLC (January 1995 - Present). Associate, Ropes & Gray, Boston,
Massachusetts (September 1992 - January 1995).
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.
35
<PAGE> 123
ROBERT V. BROKAW, JR. (D.O.B. 10/7/43). Secretary of the Trust. Member,
Grantham, Mayo, Van Otterloo & Co. LLC.
FORREST BERKLEY (D.O.B. 4/25/54). Vice President of the Trust. Member,
Grantham, Mayo, Van Otterloo & Co. LLC.
SCOTT ESTON (D.O.B. 1/20/56). Vice President of the Trust. Chief
Financial Officer, Member, Grantham, Mayo, Van Otterloo & Co. LLC
(September 1997 - present). Senior Partner, Coopers & Lybrand (1987 -
1997).
ELAINE M. HARTNETT, ESQ. (D.O.B. 2/18/45). Vice President and Clerk of
the Trust. Associate General Counsel, Grantham, Mayo, Van Otterloo &
Co. LLC (June 1999 - present). Associate/Junior Partner, Hale and Dorr
LLP, Boston, Massachusetts (1991 - 1999).
BRENT ARVIDSON (D.O.B. 6/26/69). Assistant Treasurer of the Trust.
Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC
(September 1997 - present). Senior Financial Reporting Analyst, John
Hancock Funds (August 1996 - September 1997). Account Supervisor/Senior
Account Specialist, Investors Bank and Company (June 1993 - August
1996).
*Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo,
Van Otterloo & Co. LLC ("GMO" or the "Manager"), as defined by the 1940 Act.
The mailing address of each of the officers and Trustees is c/o GMO
Trust, 40 Rowes Wharf, Boston, Massachusetts 02110. Except as set forth below,
as of June 1, 1999, the Trustees and officers of the Trust as a group owned less
than 1% of the outstanding shares of each class of shares of each Fund of the
Trust.
<TABLE>
<CAPTION>
AGGREGATE
FUND CLASS OWNERSHIP INTEREST
---- ----- ------------------
<S> <C> <C>
REIT Fund III 5.42%
Global Properties Fund III 86.13%
Short-Term Income Fund III 6.30%
Global Hedged Equity Fund III 5.66%
Evolving Countries Fund III 3.58%
Asia Fund III 4.01%
Small Cap Value Fund III 1.10%
</TABLE>
36
<PAGE> 124
<TABLE>
<CAPTION>
<S> <C> <C>
Small Cap Growth Fund III 1.72%
U.S. Bond/Global Alpha A Fund III 1.47%
</TABLE>
Except as stated above, the principal occupations of the officers and
Trustees for the last five years have been with the employers as shown above,
although in some cases they have held different positions with such employers.
Eyk Van Otterloo is an officer of the Trust as well as the beneficial holder of
69.60% of the outstanding shares of the Global Properties Fund. Mr. Van Otterloo
shares responsibility for the day-to-day management of the Global Properties
Fund.
Other than as set forth in the table below, no Trustee or officer of
the Trust receives any direct compensation from the Trust or any series thereof:
<TABLE>
<CAPTION>
NAME OF PERSON, TOTAL ANNUAL COMPENSATION
POSITION FROM THE TRUST
-------- --------------
<S> <C>
Harvey R. Margolis, Trustee $70,000
Jay O. Light, Trustee $70,000
</TABLE>
Messrs. Grantham, Mayo, Van Otterloo, Durant, Lai, Brokaw, Eston and
Berkley, and Mses. Harbert and Spruill, as members of the Manager, will benefit
from the management fees paid by each Fund of the Trust.
INVESTMENT ADVISORY AND OTHER SERVICES
Management Contracts
As disclosed in the Prospectus under the heading "Management of the
Trust," under separate Management Contracts (each a "Management Contract")
between the Trust and the Manager, subject to such policies as the Trustees of
the Trust may determine, the Manager will furnish continuously an investment
program for each Fund and will make investment decisions on behalf of the Fund
and place all orders for the purchase and sale of portfolio securities. Subject
to the control of the Trustees, the Manager also manages, supervises and
conducts the other affairs and business of the Trust, furnishes office space and
equipment, provides bookkeeping and certain clerical services and pays all
salaries, fees and expenses of officers and Trustees of the Trust who are
affiliated with the Manager. As indicated under "Portfolio
Transactions--Brokerage and Research Services," the Trust's portfolio
transactions may be placed with broker-dealers who furnish the Manager, at no
cost, certain research, statistical and quotation services of value to the
Manager in advising the Trust or its other clients.
As is disclosed in the Prospectus, the Manager has contractually agreed
to reimburse each Fund with respect to certain Fund expenses through June 30,
2000 to the extent that a Fund's total annual operating expenses (excluding
Shareholder Service Fees, brokerage commissions and other investment-related
costs, hedging transaction fees, extraordinary, non-recurring and certain other
unusual expenses (including taxes), securities lending fees and expenses and
37
<PAGE> 125
transfer taxes; and, in the case of the Emerging Markets Fund, Evolving
Countries Fund, Asia Fund, Emerging Country Debt Fund, Global Hedged Equity Fund
and Global Properties Fund, also excluding custodial fees; and, in the case of
the Asset Allocation Funds, U.S. Sector Fund, Global Hedged Equity Fund and
Emerging Country Debt Share Fund, also excluding expenses indirectly incurred by
the investment in other Funds of the Trust), would otherwise exceed a specified
percentage of that Fund's daily net assets.
Each Management Contract provides that the Manager shall not be subject
to any liability in connection with the performance of its services thereunder
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
Each Management Contract was approved by the Trustees of the Trust
(including a majority of the Trustees who were not "interested persons" of the
Manager) and by the relevant Fund's sole shareholder in connection with the
organization of the Trust and the establishment of the Funds. Each Management
Contract will continue in effect for a period more than two years from the date
of its execution only so long as its continuance is approved at least annually
by (i) the vote, cast in person at a meeting called for that purpose, of a
majority of those Trustees who are not "interested persons" of the Manager or
the Trust, and by (ii) the majority vote of either the full Board of Trustees or
the vote of a majority of the outstanding shares of the relevant Fund. Each
Management Contract automatically terminates on assignment, and is terminable on
not more than 60 days' notice by the Trust to the Manager. In addition, each
Management Contract may be terminated on not more than 60 days' written notice
by the Manager to the Trust.
For each Fund, the Management Fee is calculated based on a fixed
percentage of the Fund's average daily net assets. In the last three fiscal
years the Funds have paid the following amounts as Management Fees to the
Manager pursuant to the relevant Management Contract:
<TABLE>
<CAPTION>
Gross Reduction Net
----- --------- ---
<S> <C> <C> <C>
U.S. CORE FUND
Year ended 2/28/99 $18,661,431 $ 7,700,727 $10,960,704
Year ended 2/28/98 $17,753,329 $ 7,220,779 $10,532,550
Year ended 2/28/97 $16,712,773 $ 5,742,268 $10,970,505
TOBACCO-FREE CORE FUND
Year ended 2/28/99 $ 666,206 $ 330,580 $ 335,626
Year ended 2/28/98 $ 394,815 $ 218,695 $ 176,120
Year ended 2/28/97 $ 291,746 $ 183,825 $ 107,921
VALUE FUND
Year ended 2/28/99 $ 1,839,261 $ 778,954 $ 1,060,307
</TABLE>
38
<PAGE> 126
<TABLE>
<S> <C> <C> <C>
Year ended 2/28/98 $ 2,742,196 $ 1,134,088 $ 1,608,108
Year ended 2/28/97 $ 2,462,093 $ 871,498 $ 1,590,595
FUNDAMENTAL VALUE FUND
Year ended 2/28/99 $ 742,814 $ 207,233 $ 535,581
Year ended 2/28/98 $ 1,425,989 $ 381,705 $ 1,044,284
Year ended 2/28/97 $ 1,627,950 $ 347,372 $ 1,280,578
GROWTH FUND
Year ended 2/28/99 $ 857,030 $ 396,124 $ 460,906
Year ended 2/28/98 $ 1,008,998 $ 463,468 $ 545,530
Year ended 2/28/97 $ 1,637,804 $ 561,765 $ 1,076,039
SMALL CAP VALUE FUND
Year ended 2/28/99 $ 2,529,395 $ 1,060,654 $ 1,468,741
Year ended 2/28/98 $ 3,650,580 $ 1,603,440 $ 2,047,140
Year ended 2/28/97 $ 1,948,526 $ 761,954 $ 1,186,572
SMALL CAP GROWTH FUND
Year ended 2/28/99 $ 1,527,491 $ 699,892 $ 827,599
Year ended 2/28/98 $ 1,537,995 $ 725,457 $ 812,538
Commencement of
Operations
(12/31/96) - 2/28/97 $ 124,256 $ 105,410 $ 18,846
REIT FUND
Year ended 2/28/99 $ 1,748,325 $ 614,047 $ 1,134,278
Year ended 2/28/98 $ 2,765,300 $ 961,297 $ 1,804,003
Commencement of
Operations
(5/31/96) - 2/28/97 $ 666,973 $ 286,384 $ 380,589
INTERNATIONAL CORE FUND
Year ended 2/28/99 $25,130,562 $ 9,237,518 $15,893,044
Year ended 2/28/98 $30,572,502 $12,093,211 $18,479,291
Year ended 2/28/97 $33,112,051 $11,195,222 $21,916,829
CURRENCY HEDGED INTERNATIONAL CORE FUND
</TABLE>
39
<PAGE> 127
<TABLE>
<S> <C> <C> <C>
Year ended 2/28/99 $ 2,606,569 $ 1,442,434 $ 1,164,135
Year ended 2/28/98 $ 4,457,931 $ 2,255,760 $ 2,202,171
Year ended 2/28/97 $ 3,841,815 $ 2,218,152 $ 1,623,663
FOREIGN FUND
Year ended 2/28/99 $ 8,363,703 $ 2,741,305 $ 5,622,398
Year ended 2/28/98 $ 7,035,104 $ 2,369,507 $ 4,665,597
Commencement of
Operations
(6/28/96) - 2/28/97 $ 3,034,381 $ 1,267,971 $ 1,766,410
INTERNATIONAL SMALL COMPANIES FUND
Year ended 2/28/99 $ 2,608,681 $ 1,686,651 $ 922,030
Year ended 2/28/98 $ 2,912,080 $ 2,004,718 $ 907,362
Year ended 2/28/97 $ 2,889,159 $ 1,833,495 $ 1,055,664
JAPAN FUND
Year ended 2/28/99 $ 1,071,652 $ 558,538 $ 513,114
Year ended 2/28/98 $ 1,540,113 $ 803,953 $ 736,160
Year ended 2/28/97 $ 1,566,406 $ 742,507 $ 823,899
EMERGING MARKETS FUND
Year ended 2/28/99 $11,112,844 $ 2,342,168 $ 8,770,676
Year ended 2/28/98 $17,396,168 $ 3,619,369 $13,776,799
Year ended 2/28/97 $12,541,622 $ 2,222,584 $10,319,038
EVOLVING COUNTRIES FUND
Year ended 2/28/99 $ 343,836 $ 145,463 $ 198,373
Commencement of
Operations
(8/29/97) - 2/28/98 $ 94,952 $ 77,826 $ 17,126
ASIA FUND
Year ended 2/28/99 $ 740,141 $ 221,148 $ 518,993
Commencement of Operations $ 3,209 $ 3,209 $ 0
(2/18/98) - 2/28/98
GLOBAL PROPERTIES FUND
Year ended 2/28/99 $ 67,365 $ 67,365 $ 0
</TABLE>
40
<PAGE> 128
<TABLE>
<S> <C> <C> <C>
Year ended 2/28/98 $ 74,657 $ 74,657 $ 0
Commencement of
Operations
(12/20/96) - 2/28/97 $ 13,266 $ 13,266 $ 0
GLOBAL HEDGED EQUITY FUND
Year ended 2/28/99 $ 892,689 $ 837,881 $ 54,808
Year ended 2/28/98 $ 1,509,937 $ 850,401 $ 659,536
Year ended 2/28/97 $ 2,168,233 $ 531,673 $ 1,636,560
DOMESTIC BOND FUND
Year ended 2/28/99 $ 678,052 $ 516,760 $ 161,292
Year ended 2/28/98 $ 1,311,252 $ 932,631 $ 378,621
Year ended 2/28/97 $ 1,112,368 $ 744,230 $ 368,138
U.S. BOND/GLOBAL ALPHA A FUND
Year ended 2/28/99 $ 932,468 $ 588,202 $ 344,266
Commencement of
Operations
(4/30/97) - 2/28/98 $ 571,318 $ 361,139 $ 210,179
U.S. BOND/GLOBAL ALPHA B FUND
Year ended 2/28/99 $ 711,308 $ 568,011 $ 143,297
Commencement of
Operations
(7/29/97) - 2/28/98 $ 865,631 $ 609,605 $ 256,026
INTERNATIONAL BOND FUND
Year ended 2/28/99 $ 1,061,185 $ 642,536 $ 418,649
Year ended 2/28/98 $ 1,090,298 $ 692,754 $ 397,544
Year ended 2/28/97 $ 849,645 $ 493,567 $ 356,078
CURRENCY HEDGED INTERNATIONAL BOND FUND
Year ended 2/28/99 $ 1,920,646 $ 1,273,399 $ 647,247
Year ended 2/28/98 $ 1,895,291 $ 1,316,764 $ 578,527
Year ended 2/28/97 $ 1,782,864 $ 1,149,683 $ 633,181
GLOBAL BOND FUND
Year ended 2/28/99 $ 486,743 $ 392,034 $ 94,709
</TABLE>
41
<PAGE> 129
<TABLE>
<S> <C> <C> <C>
Year ended 2/28/98 $ 297,447 $ 297,447 $ 0
Year ended 2/28/97 $ 220,921 $ 220,921 $ 0
EMERGING COUNTRY DEBT FUND
Year ended 2/28/99 $ 3,666,332 1,314,674 $ 2,351,658
Year ended 2/28/98 $ 2,823,080 $ 1,087,585 $ 1,735,495
Year ended 2/28/97 $ 3,190,658 $ 986,384 $ 2,204,274
SHORT-TERM INCOME FUND
Year ended 2/28/99 $ 82,642 $ 82,642 $ 0
Year ended 2/28/98 $ 117,159 $ 117,159 $ 0
Year ended 2/28/97 $ 69,134 $ 69,134 $ 0
INFLATION INDEXED BOND FUND
Year ended 2/28/99 $ 75,976 $ 75,976 $ 0
Commencement of
Operations
(3/31/97) - 2/28/98 $ 36,237 $ 36,237 $ 0
EMERGING COUNTRY DEBT SHARE FUND
Commencement of
Operations
(7/20/98) - 2/28/99 $ 0 $ 0 $ 0
INTERNATIONAL EQUITY ALLOCATION FUND
Year ended 2/28/99 $ 0 $ 0 $ 0
Year ended 2/28/98 $ 0 $ 0 $ 0
Commencement of
Operations
(10/11/96) - 2/28/97 $ 0 $ 0 $ 0
WORLD EQUITY ALLOCATION FUND
Year ended 2/28/99 $ 0 $ 0 $ 0
Year ended 2/28/98 $ 0 $ 0 $ 0
Commencement of
Operations
(6/28/96) - 2/28/97 $ 0 $ 0 $ 0
</TABLE>
42
<PAGE> 130
<TABLE>
<S> <C> <C> <C>
GLOBAL (U.S.+) EQUITY ALLOCATION FUND
Year ended 2/28/99 $ 0 $ 0 $ 0
Year ended 2/28/98 $ 0 $ 0 $ 0
Commencement of
Operations
(11/26/96) - 2/28/97 $ 0 $ 0 $ 0
GLOBAL BALANCED ALLOCATION FUND
Year ended 2/28/99 $ 0 $ 0 $ 0
Year ended 2/28/98 $ 0 $ 0 $ 0
Commencement of
Operations
(7/29/96) - 2/28/97 $ 0 $ 0 $ 0
U.S. SECTOR FUND
Year ended 2/28/99 $ 118,652 $ 118,652 $ 0
Year ended 2/28/98 $ 853,670 $ 635,351 $ 218,319
Year ended 2/28/97 $ 1,138,768 $ 434,930 $ 703,838
</TABLE>
Custodial Arrangements. Investors Bank & Trust Company ("IBT"), 200
Clarendon Street, Boston, Massachusetts 02116, and Brown Brothers Harriman & Co.
("BBH"), 40 Water Street, Boston, Massachusetts 02109, serve as the Trust's
custodians on behalf of the Funds. As such, IBT or BBH holds in safekeeping
certificated securities and cash belonging to a Fund and, in such capacity, is
the registered owner of securities in book-entry form belonging to a Fund. Upon
instruction, IBT or BBH receives and delivers cash and securities of a Fund in
connection with Fund transactions and collects all dividends and other
distributions made with respect to Fund portfolio securities. Each of IBT and
BBH also maintains certain accounts and records of the Trust and calculates the
total net asset value, total net income and net asset value per share of each
Fund on a daily basis.
Shareholder Service Arrangements. As disclosed in the Prospectus, pursuant
to the terms of a single Servicing Agreement with each Fund of the Trust, GMO
provides direct client service, maintenance and reporting to shareholders of the
Funds. The Servicing Agreement was approved by the Trustees of the Trust
(including a majority of the Trustees who are not "interested persons" of the
Manager or the Trust). The Servicing Agreement will continue in effect for a
period more than one year from the date of its execution only so long as its
continuance is approved at least annually by (i) vote, cast in person at a
meeting called for the purpose, of a majority of those Trustees who are not
"interested persons" of the Manager or the Trust, and by (ii) the majority vote
of the full Board of Trustees. The Servicing Agreement
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<PAGE> 131
automatically terminates on assignment (except as specifically provided in the
Servicing Agreement) and is terminable by either party upon not more than 60
days' written notice to the other party.
The Trust entered into the Servicing Agreement with GMO on May 30, 1996.
Pursuant to the terms of the Servicing Agreement, each Fund paid GMO the amounts
set forth in the table that follows:
<TABLE>
<CAPTION>
May 30, 1996 March 1, 1997 March 1, 1998
through through through
February 28, 1997 February 28, 1998 February 28, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
U.S. Core Fund $3,597,900 $5,028,001 $4,754,395
Tobacco-Free Core Fund 67,968 118,083 199,862
Value Fund 406,469 586,036 394,127
Fundamental Value Fund 244,167 284,344 148,563
Growth Fund 347,907 302,285 257,109
Small Cap Value Fund 482,716 1,093,550 758,820
Small Cap Growth Fund 37,277 459,765 458,247
REIT Fund 133,395 552,026 349,665
International Core Fund 4,894,560 6,088,152 4,603,105
Currency Hedged International Core Fund 595,691 864,408 404,263
Foreign Fund 614,288 1,421,888 1,602,553
International Small Companies Fund 259,782 349,448 313,042
Japan Fund 261,357 308,029 214,330
Emerging Markets Fund 1,491,636 2,579,392 1,466,558
Evolving Countries Fund -- 17,804 64,403
Asia Fund -- -- 111,021
Global Properties Fund 2,653 14,931 13,472
Global Hedged Equity Fund 357,586 217,705 27,988
Domestic Bond Fund 549,733 790,254 406,832
U.S. Bond/Global Alpha A Fund -- 213,529 349,675
U.S. Bond/Global Alpha B Fund -- 323,124 266,738
International Bond Fund 244,354 407,680 397,948
Currency Hedged International Bond Fund 444,574 568,775 576,196
Global Bond Fund 74,374 133,633 208,607
Emerging Country Debt Fund 722,035 836,348 914,886
Short-Term Income Fund 36,264 70,313 49,567
Inflation Indexed Bond Fund -- 21,641 45,586
Emerging Country Debt Share Fund -- -- 0
International Equity Allocation Fund 1,962 13,569 0
World Equity Allocation Fund 6,619 11,172 0
Global (U.S.+) Equity Allocation Fund 0 1,099 0
Global Balanced Allocation Fund 4,623 36,399 0
U.S. Sector Fund 266,594 150,583 90
</TABLE>
44
<PAGE> 132
Independent Accountants. The Trust's independent accountants are
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110.
PricewaterhouseCoopers LLP conducts annual audits of the Trust's financial
statements, assists in the preparation of each Fund's federal and state income
tax returns, consults with the Trust as to matters of accounting and federal and
state income taxation and provides assistance in connection with the preparation
of various Securities and Exchange Commission filings.
PORTFOLIO TRANSACTIONS
The purchase and sale of portfolio securities for each Fund and for the
other investment advisory clients of the Manager are made by the Manager with a
view to achieving their respective investment objectives. For example, a
particular security may be bought or sold for certain clients of the Manager
even though it could have been bought or sold for other clients at the same
time. Likewise, a particular security may be bought for one or more clients when
one or more other clients are selling the security. In some instances,
therefore, one client may indirectly sell a particular security to another
client. It also happens that two or more clients may simultaneously buy or sell
the same security, in which event purchases or sales are effected on a pro rata,
rotating or other equitable basis so as to avoid any one account being preferred
over any other account.
Transactions involving the issuance of Fund shares for securities or
assets other than cash will be limited to a bona fide reorganization or
statutory merger and to other acquisitions of portfolio securities that meet all
of the following conditions: (a) such securities meet the investment objectives
and policies of the Fund; (b) such securities are acquired for investment and
not for resale; (c) such securities are liquid securities which are not
restricted as to transfer either by law or liquidity of market; and (d) such
securities have a value which is readily ascertainable as evidenced by a listing
on the American Stock Exchange, the New York Stock Exchange, NASDAQ or a
recognized foreign exchange.
Brokerage and Research Services. In placing orders for the portfolio
transactions of each Fund, the Manager will seek the best price and execution
available, except to the extent it may be permitted to pay higher brokerage
commissions for brokerage and research services as described below. The
determination of what may constitute best price and execution by a broker-dealer
in effecting a securities transaction involves a number of considerations,
including, without limitation, the overall net economic result to the Fund
(involving price paid or received and any commissions and other costs paid), the
efficiency with which the transaction is effected, the ability to effect the
transaction at all where a large block is involved, availability of the broker
to stand ready to execute possibly difficult transactions in the future and the
financial strength and stability of the broker. Because of such factors, a
broker-dealer effecting a transaction may be paid a commission higher than that
charged by another broker-dealer. Most of the foregoing are judgmental
considerations.
Over-the-counter transactions often involve dealers acting for their own
account. It is the Manager's policy to place over-the-counter market orders for
the U.S. Funds with primary market makers unless better prices or executions are
available elsewhere.
45
<PAGE> 133
Although the Manager does not consider the receipt of research services as
a factor in selecting brokers to effect portfolio transactions for a Fund, the
Manager will receive such services from brokers who are expected to handle a
substantial amount of the Funds' portfolio transactions. Research services may
include a wide variety of analyses, reviews and reports on such matters as
economic and political developments, industries, companies, securities and
portfolio strategy. The Manager uses such research in servicing other clients as
well as the Funds.
As permitted by Section 28(e) of the Securities Exchange Act of 1934 and
subject to such policies as the Trustees of the Trust may determine, the Manager
may pay an unaffiliated broker or dealer that provides "brokerage and research
services" (as defined in the Act) to the Manager an amount of commission for
effecting a portfolio investment transaction in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction.
During the three most recent fiscal years, the Trust paid, on behalf of
the Funds, the following amounts in brokerage commissions:
<TABLE>
<CAPTION>
1997 1998 1999
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Core Fund $4,664,903 $2,561,392 $3,313,708
Tobacco-Free Core Fund 103,341 50,119 98,094
Fundamental Value Fund 295,379 441,597 205,843
Value Fund 813,100 666,871 461,481
Growth Fund 531,486 170,370 121,146
Small Cap Value Fund 879,092 903,916 848,094
Small Cap Growth Fund 36,918 880,229 886,921
REIT Fund 86,888 911,700 581,181
International Core Fund 9,469,695 7,059,863 5,725,781
Currency Hedged International
Core Fund 7,523 27,976 750,836
Foreign Fund 492,537 1,294,686 1,399,711
International Small Companies
Fund 98,496 413,290 101,284
Japan Fund 84,857 289,271 201,850
Emerging Markets Fund 5,114,325 7,790,713 6,397,437
Evolving Countries Fund -- 153,610 410,530
Asia Fund -- 154,375 758,563
Global Properties Fund 3,456 19,731 6,987
Global Hedged Equity Fund 594,924 244,119 76,040
Domestic Bond Fund 73,491 43,754 43,364
U.S. Bond/Global Alpha A Fund -- 20,476 26,967
U.S. Bond/Global Alpha B Fund -- 48,310 38,933
International Bond Fund 5,760 40,399 38,185
Currency Hedged International
Bond Fund 7,523 27,976 40,930
</TABLE>
46
<PAGE> 134
<TABLE>
<S> <C> <C> <C>
Global Bond Fund 9,644 4,123 19,098
Emerging Country Debt Fund 70,471 34,908 57,860
Short-Term Income Fund -- -- 702
Inflation Indexed Bond Fund -- -- --
Emerging Country Debt Share Fund -- -- --
International Equity Allocation Fund -- -- --
World Equity Allocation Fund -- -- --
Global (U.S.+) Equity Allocation
Fund -- -- --
Global Balanced Allocation Fund -- -- --
U.S. Sector Fund 356,778 278,180 74
</TABLE>
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund of GMO Trust will be determined
on each day the New York Stock Exchange (the "Exchange") is open for regular
business as of the close of regular trading on the Exchange, generally 4:00 p.m.
New York City Time. However, equity options held by the Funds are priced as of
the close of trading at 4:10 p.m., and futures contracts on U.S. government and
other fixed-income securities and index options held by the Funds are priced as
of their close of trading at 4:15 p.m. Please refer to "Determination of Net
Asset Value" in the Prospectus for additional information.
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES
The Trust is organized as a Massachusetts business trust under the laws of
Massachusetts by an Agreement and Declaration of Trust ("Declaration of Trust")
dated June 24, 1985. A copy of the Declaration of Trust is on file with the
Secretary of The Commonwealth of Massachusetts. The fiscal year for each Fund
ends on February 28/29.
Pursuant to the Declaration of Trust, the Trustees have currently
authorized the issuance of an unlimited number of full and fractional shares of
thirty-nine series: U.S. Core Fund; Tobacco-Free Core Fund; Value Fund; Growth
Fund; U.S. Sector Fund; Small Cap Value Fund; Small Cap Growth Fund; Fundamental
Value Fund; REIT Fund; International Core Fund; Currency Hedged International
Core Fund; Foreign Fund; International Small Companies Fund; Japan Fund;
Emerging Markets Fund; Evolving Countries Fund; Global Properties Fund; Domestic
Bond Fund; U.S. Bond/Global Alpha A Fund; U.S. Bond/Global Alpha B Fund;
International Bond Fund; Currency Hedged International Bond Fund; Global Bond
Fund; Emerging Country Debt Fund; Short-Term Income Fund; Global Hedged Equity
Fund; Inflation Indexed Bond Fund; International Equity Allocation Fund; World
Equity Allocation Fund; Global (U.S.+) Equity Allocation Fund; Global Balanced
Allocation Fund; International Core Plus Allocation Fund; Emerging Country Debt
Share Fund; Pelican Fund; Asia Fund; Tax-Managed U.S. Equities Fund; Tax-Managed
International Equities Fund; Tax-Managed U.S. Small Cap Fund; and Intrinsic
Value Fund. Interests in each portfolio (Fund) are represented by shares of the
corresponding series. Each share of each series represents an equal
proportionate interest, together with each other share, in the corresponding
Fund. The shares of such series do not have any preemptive rights. Upon
liquidation of a Fund, shareholders of the corresponding series are entitled to
share pro rata in the net assets of the Fund available for distribution to
shareholders. The Declaration of Trust also permits the Trustees to charge
shareholders directly for custodial and transfer agency expenses, but there is
no present intention to make such charges.
The Declaration of Trust also permits the Trustees, without shareholder
approval, to subdivide any series of shares into various sub-series or classes
of shares with such dividend preferences and other rights as the Trustees may
designate. This power is intended to allow the Trustees to provide for an
equitable allocation of the impact of any future regulatory
47
<PAGE> 135
requirements which might affect various classes of shareholders differently. The
Trustees have currently authorized the establishment and designation of up to
eight classes of shares for each series of the Trust (except for the Pelican
Fund): Class I Shares, Class II Shares, Class III Shares, Class IV Shares, Class
V Shares, Class VI Shares, Class VII Shares and Class VIII Shares.
The Trustees may also, without shareholder approval, establish one or more
additional separate portfolios for investments in the Trust or merge two or more
existing portfolios (i.e., a new fund). Shareholders' investments in such a
portfolio would be evidenced by a separate series of shares.
The Declaration of Trust provides for the perpetual existence of the
Trust. The Trust, however, may be terminated at any time by vote of at least
two-thirds of the outstanding shares of the Trust. While the Declaration of
Trust further provides that the Trustees may also terminate the Trust upon
written notice to the shareholders, the 1940 Act requires that the Trust receive
the authorization of a majority of its outstanding shares in order to change the
nature of its business so as to cease to be an investment company.
On June 1, 1999 the following shareholders held greater than 25% of the
outstanding shares of a series of the Trust:
<TABLE>
<CAPTION>
FUND SHAREHOLDERS
- ---- ------------
<S> <C>
Value Fund Leland Stanford Junior University
Tobacco-Free Core Fund Dewitt Wallace - Readers' Digest Fund, Inc.
U.S. Sector Fund Regenstrief Foundation, Inc.
Growth Fund Surnda Foundation, Inc.; The Northern Trust
Company, Trustee of The Aerospace Corporation
Employees Retirement Plan Trust
Fundamental Value Fund Leland Stanford Junior University II; Berea
College
U.S. Bond/Global Alpha B Fund Bost & Co. FBO Bell Atlantic -- Fixed Income
Currency Hedged International Bond Bost & Co. FBO Bell Atlantic -- Fixed Income;
Fund Trustees of Columbia University in the City of
New York-Global
Global Hedged Equity Fund Partners Healthcare System Pooled Investment
Accounts
Global Bond Fund Fresno County Employees' Retirement Association
International Bond Fund Saturn & Co. A/C 4600712 c/o Investors Bank &
Trust Company TR - FBO The John Hancock Mutual
Life
</TABLE>
48
<PAGE> 136
<TABLE>
<S> <C>
Insurance Company Pension Plan
Short - Term Income Fund Bankers Trust Company as Trustee, GTE Service
Corp. Pension Trust
Global Properties Fund Eyk Van Otterloo
World Equity Allocation Fund Mars & Co.; Longwood College Foundation, Inc.
Evolving Countries Fund Duke University Long-Term (Endowment) Pool --
Emerging
Japan Fund Yale University
Asia Fund Bankers Trust Company as Trustee, GTE Service
Corp. Pension Trust
Emerging Country Debt Share Fund Sprint Corporate Master Trust
</TABLE>
As a result, such shareholders may be deemed to "control" their respective
series as such term is defined in the 1940 Act.
Shareholders could, under certain circumstances, be held personally liable
for the obligations of the Trust. However, the risk of a shareholder incurring
financial loss on account of that liability is considered remote since it may
arise only in very limited circumstances.
VOTING RIGHTS
Shareholders are entitled to one vote for each full share held (with
fractional votes for fractional shares held) and will vote (to the extent
provided herein) in the election of Trustees and the termination of the Trust
and on other matters submitted to the vote of shareholders. Shareholders vote by
individual Fund on all matters except (i) when required by the Investment
Company Act of 1940, shares shall be voted in the aggregate and not by
individual Fund, and (ii) when the Trustees have determined that the matter
affects only the interests of one or more Funds, then only shareholders of such
affected Funds shall be entitled to vote thereon. Shareholders of one Fund shall
not be entitled to vote on matters exclusively affecting another Fund, such
matters including, without limitation, the adoption of or change in the
investment objectives, policies or restrictions of the other Fund and the
approval of the investment advisory contracts of the other Fund. Shareholders of
a particular class of shares do not have separate class voting rights except
with respect to matters that affect only that class of shares and as otherwise
required by law.
There will normally be no meetings of shareholders for the purpose of
electing Trustees except that in accordance with the 1940 Act (i) the Trust will
hold a shareholders' meeting for the election of Trustees at such time as less
than a majority of the Trustees holding office have been elected by
shareholders, and (ii) if, as a result of a vacancy in the Board of Trustees,
less than two-thirds of the Trustees holding office have been elected by the
shareholders, that vacancy
49
<PAGE> 137
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 to by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office. The By-Laws of the Trust provide for indemnification by
the Trust of the Trustees and the officers of the Trust except with respect to
any matter as to which any such person did not act in good faith in the
reasonable belief that his action was in or not opposed to the best interests of
the Trust. Such person may not be indemnified against any liability to the Trust
or the Trust shareholders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
50
<PAGE> 138
BENEFICIAL OWNERS OF 5% OR MORE OF THE FUND'S SHARES
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class II Shares of the U.S. Core Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Wheeler & Co. Attn: Mr. James T. Robinson 28.46
FBO The Hyams Foundation, Inc. 101 Federal Street
Hutchins Wheeler & Dittmar Boston, MA 02110
- -----------------------------------------------------------------------------------------------
Huntington Trust Co. Attn: Michele McCallister 14.59
FBO The Jewish Community Federation of P.O. Box 1558
Cleveland Employees Ret Plan & Trust Columbus, OH 43260
- -----------------------------------------------------------------------------------------------
First Union National Bank TTEE FBO Attn: Mutual Funds 9.03
Gibbs Wire and Steel A/C #9546000156 1525 W. Wt. Harris Blvd. CMG
Charlotte, NC 28288-1151
- -----------------------------------------------------------------------------------------------
Bost & Co. A/C BHEF1402002 Mutual Fund Operations 8.69
Brockton Hospital P.O. Box 3198
Pittsburgh, PA 15230-3198
- -----------------------------------------------------------------------------------------------
Saturn & Co. c/o Investors Bank & Trust 6.93
FBO Providence Washington Ins. P.O. Box 9130 FPG90
Boston, MA 02119-9130
- -----------------------------------------------------------------------------------------------
Addison Illinois Police Pension Fund 131 W. Lake Street 5.12
Addison, IL 60101
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the U.S. Core Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
MAC & Co. AC 540-449 P.O. Box 3198 6.49
KNIF5404492 Mutual Funds Operations
Pittsburgh, PA 152303198
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class IV Shares of the U.S. Core Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
NRECA Investments Division Attn: Peter Morris 27.22
4301 Wilson Blvd.
RSI8-305
Arlington, VA 22203-1860
- -----------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE> 139
<TABLE>
<S> <C> <C>
Employee Retirement Plan 5918 Stoneridge Mall Road 15.68
of Safeway Inc. Pleasanton, CA 94588-3229
- -----------------------------------------------------------------------------------------------
World Bank Staff Ret Plan Dept. 10.00
Room A-12073
1818 H Street NW
Washington, DC 20433
- -----------------------------------------------------------------------------------------------
Corning Retirement Master Trust Attn: Lindsay W. Brown 9.10
Director Investment Services
Corning Incorporated
One Riverfront Plaza IIQ-E2-34
Corning, NY 14831-0001
- -----------------------------------------------------------------------------------------------
Univ. Of Rochester 276 Administration Bldg. 8.57
River Campus
Rochester, NY 14627
- -----------------------------------------------------------------------------------------------
Boston & Co. A/C WFHF6202002 Attn: Mutual Funds Operations 8.32
FBO the Hewlett Foundation P.O. Box 3198
Pittsburgh, PA 15230-3198
- -----------------------------------------------------------------------------------------------
Duke University Long 2200 West Main Street 6.43
Term Endowment PO Suite 1000
Attn: Portfolio Accounting
Durham, NC 27705
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Tobacco-Free Core Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Dewitt Wallace-Reader's Digest Attn: Rob D. Nagel 27.28
Fund, Inc. Two Park Avenue
23rd Floor
New York, NY 10016
- -----------------------------------------------------------------------------------------------
Lila Wallace-Reader's Digest Fund, Attn: Rob D. Nagel 24.84
Inc. Two Park Avenue
23rd Floor
New York, NY 10016
- -----------------------------------------------------------------------------------------------
The Flinn Foundation Attn: F. Lee Jacquette 21.66
3300 N. Central Avenue
#2300
Phoenix, AZ 85012
- -----------------------------------------------------------------------------------------------
Trustee of Columbia University Columbia University 8.37
in the City of New York--Global 475 Riverside Drive, Suite 401
New York, NY 10115
- -----------------------------------------------------------------------------------------------
New York Academy of Medicine 2 East 103 Street 5.17
New York, NY 10029
- -----------------------------------------------------------------------------------------------
Optima Health, Inc. Master Custody Attn: James Travers 5.11
</TABLE>
52
<PAGE> 140
<TABLE>
<S> <C> <C>
The Chase Manhattan Bank NA
770 Broadway
New York, NY 10003
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Value Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Leland Stanford Junior Stanford Management Company 47.53
University II 2770 Sand Hill Road
Menlo Park, CA 94025
- -----------------------------------------------------------------------------------------------
Leland Stanford Junior Stanford Management Company 9.45
University I 2770 Sand Hill Road
Menlo Park, CA 94025
- -----------------------------------------------------------------------------------------------
University of Connecticut Foundation I Attn: Fredrica Phillips 5.74
P.O. Box 552
Storrs, CT 06268
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Fundamental Value Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Leland Stanford Junior Stanford Management Company 41.99
University II 2770 Sand Hill Road
Menlo Park, CA 94025
- -----------------------------------------------------------------------------------------------
Berea College Attn: Perry Poynter 39.60
Associate Controller
Box 2306, CPO2306
Berea, KY 40404
- -----------------------------------------------------------------------------------------------
Princeton University TR Attn: John D. Sweeney 18.62
P.O. Box 35
Princeton, NJ 08544
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Growth Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Surdna Foundation, Inc. Attn: Mark De Venoge 45.02
330 Madison Avenue
30th Floor
</TABLE>
53
<PAGE> 141
<TABLE>
<S> <C> <C>
New York, NY 10017-5001
- -----------------------------------------------------------------------------------------------
The Northern Trust Company, Attn: Mutual Funds 35.39
Trustee of the Aerospace P.O. Box 92956
Corporation Employees Chicago, IL 60675
Retirement Plan Trust
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Small Cap Value Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Bost & Co. A/C WFHF6202002 Attn: Mutual Funds Operations 11.12
FBO The Hewlett Foundation P.O. Box 3198
Pittsburgh, PA 15230-3198
- -----------------------------------------------------------------------------------------------
SDI Investments LLC Attn: Judy Bible 8.45
201 W. Liberty Street
Suite 300
Reno, NV 89501-1808
- -----------------------------------------------------------------------------------------------
Princeton University TR Attn: John Sweeney 7.58
P.O. Box 35
Princeton, NJ 08544
- -----------------------------------------------------------------------------------------------
Berea College Attn: Parry Poynter, Associate 5.18
Controller
Box 2306
CPO 2306
Berea, KY 40404
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Small Cap Growth Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Bost & Co. A/C WFHF6202002 Attn: Mutual Funds Operations 20.86
FBO The Hewlett Foundation P.O. Box 3198
Pittsburgh, PA 15230-3198
- -----------------------------------------------------------------------------------------------
Princeton University TR Attn: John Sweeney 15.56
P.O. Box 35
Princeton, NJ 08544
- -----------------------------------------------------------------------------------------------
The Duke Endowment--US Attn: Ms. Karen Rogers 8.84
AA Controller
100 North Tryon Street
Suite 3500
Charlotte, NC 28202-4012
- -----------------------------------------------------------------------------------------------
</TABLE>
54
<PAGE> 142
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the REIT Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Princeton University TR Attn: John Sweeney 11.86
P.O. Box 35
Princeton, NJ 08544
- -----------------------------------------------------------------------------------------------
Bost & Co. A/C WFHF6202002 Attn: Mutual Funds Operations 10.27
FBO The Hewlett Foundation P.O. Box 3198
Pittsburgh, PA 15230
- -----------------------------------------------------------------------------------------------
Schering Plough Retirement Trust Attn: Gary Karlin 7.74
Global AA One Giralda Farms
Madison, NJ 07940
- -----------------------------------------------------------------------------------------------
Trustees of Columbia University in Columbia University 6.88
the City of New York-Global 475 Riverside Drive
Suite 401
New York, NY 10115
- -----------------------------------------------------------------------------------------------
Conrad N. Hilton Foundation 100 West Liberty Street 5.41
Suite 840
Reno, NV 89501
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class IV Shares of the International Core Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Bost & Co. A/CNYXF1783862 Attn: Mutual Funds Operations 27.54
FBO Bell Atlantic-Intl Equities P.O. Box 3198
Pittsburgh, PA 15230-3198
- -----------------------------------------------------------------------------------------------
RJR Nabisco Inc. Defined Benefit Attn: Mr. Edward G. Robertiello 22.28
Master Trust - Intl/RJR VP - Pension & Benefit Investments
1301 Avenue of the Americas
33rd Floor
New York, NY 10019-6013
- -----------------------------------------------------------------------------------------------
RJR Nabisco Inc. Defined Benefit Attn: Mr. Edward G. Robertiello 14.85
Master Trust - Intl/Nabisco VP - Pension & Benefit Investments
1301 Avenue of the Americas
33rd Floor
New York, NY 10019-6013
- -----------------------------------------------------------------------------------------------
The Duke Endowment -- Intl Attn: Ms. Karen Rogers 11.49
AA Controller
</TABLE>
55
<PAGE> 143
<TABLE>
<S> <C> <C>
100 North Tryon Street
Suite 3500
Charlotte, NC 28202-4012
- -----------------------------------------------------------------------------------------------
The Northern Trust TR P.O. Box 92956 6.89
Mars Benefit Trust Chicago, IL 60675
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class II Shares of the International Core Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Sisters of the Holy Cross, Inc c/o Sister Kathleen Moroney CSC 71.41
Secretary and Treasurer
Saint Mary's Lourdes Hall
Notre Dame, IN 46556
- -----------------------------------------------------------------------------------------------
Bost. & Co A/C WERF1968002 Attn: Mutual Funds Operations 15.39
P.O. Box 3198
Pittsburgh, PA 15230-3198
- -----------------------------------------------------------------------------------------------
Saturn & Co. c/o Investors Bank & Trust 6.97
FBO Providence Washington Ins. P.O. Box 9130 FPG 90
Boston, MA 02117-9130
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Currency Hedged International Core Fund as
of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
The Edna McConnell Clark Attn: Laura Kielczewski 25.02
Foundation Asst. Financial Officer
250 Park Avenue
New York, NY 10177-0026
- -----------------------------------------------------------------------------------------------
Berklee College of Music AA Attn: Lois Goldstein 10.99
International Endowment 1140 Boylston Street
Boston, MA 02215
- -----------------------------------------------------------------------------------------------
The Edna McConnel Clark Foundation Attn: Mr. Ralph Stefano 10.35
Inc. Director of Finance
250 Park Avenue
New York, NY 10177-0026
- -----------------------------------------------------------------------------------------------
GMO Global Balanced Allocation Fund Attn: Rick Okerman 7.42
c/o GMO
40 Rowes Wharf
Boston, MA 02110
- -----------------------------------------------------------------------------------------------
Trustees of Trinity College Treasurer's Office 7.15
300 Summit Street
</TABLE>
56
<PAGE> 144
<TABLE>
<S> <C> <C>
Hartford, CT 06106
- -----------------------------------------------------------------------------------------------
Vassar College Attn: Jay A. Yoder 6.50
Investment Analyst
P.O. Box 2
Poughkeepsie, NY 12601
- -----------------------------------------------------------------------------------------------
Phillips Exeter Academy Attn: Joseph E. Fellows 5.15
20 Main Street
Exeter, NH 03833-2460
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class IV Shares of the Currency Hedged International Core Fund as of
June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Bost & Co. A/CNYXF1783862 Attn: Mutual Funds Operations 50.83
FBO Bell Atlantic-Intl Equities P.O. Box 3198
Pittsburgh, PA 15230-3198
- -----------------------------------------------------------------------------------------------
Trustees of Columbia University Columbia University 43.29
in the City of New York--Global 475 Riverside Drive, Suite 401
New York, NY 10115
- -----------------------------------------------------------------------------------------------
Princeton University TR Attn: John Sweeney 5.88
P.O. Box 35
Princeton, NJ 08544
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class II Shares of the Foreign Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Strafe & Co. for the Account Attn: Carl E. Sealander 31.68
of Owensbo Mercy Health System P.O. Box 0160
for Grantham Mayo Westerville, OH 43086-0160
Account 3402815000
- -----------------------------------------------------------------------------------------------
American Committee for Attn: Mr. Henry Pavony 25.94
the Weizmann Institute of 51 Madison Ave.
Science Inc. New York, NY 10010
- -----------------------------------------------------------------------------------------------
Northern Trust Custodian Attn: Special Assets CB1S 15.88
FBO Phoenix Childrens Hospital P.O. Box 92956
A/C 26 00849 Chicago, IL 60675-2956
- -----------------------------------------------------------------------------------------------
Wentworth Institute of Technology Attn: David Gilmore 14.49
550 Huntington Ave.
Boston, MA 02115
- -----------------------------------------------------------------------------------------------
</TABLE>
57
<PAGE> 145
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Foreign Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
President and Fellows of Harvard c/o Harvard Management Company 14.89
College 600 Atlantic Avenue
Boston, MA 02210
- -----------------------------------------------------------------------------------------------
Trustees of the University of Attn: Jon Scheinman 10.50
Pennsylvania Office of Investments
3451 Walnut St.
714 Franklin Building
Philadelphia, PA 19104-6205
- -----------------------------------------------------------------------------------------------
Hershey Trust Company P.O. Box 445 8.75
Trustee for Milton Hershey School 100 Mansion Road East
Hershey, PA 17033
- -----------------------------------------------------------------------------------------------
University of Minnesota Foundation Attn: Douglas J Gorence 8.06
Chief Investment Officer
1300 S. 2nd St. Suite 200
Minneapolis, MN 55454-1029
- -----------------------------------------------------------------------------------------------
Metropolitan Museum of Art Attn: William Magazine 7.76
1000 Fifth Ave.
New York, NY 10028-0198
- -----------------------------------------------------------------------------------------------
Swarthmore College -- Foreign 500 College Ave. 6.25
Swarthmore, VA 19081-1397
- -----------------------------------------------------------------------------------------------
Colonial Williamsburg Endowment Attn: Ms. Katherine Whitehead 5.18
International P.O. Box 1776
Williamsburg, VA 23187
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class IV Shares of the Foreign Fund as of June, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Princeton University TR Attn: John D. Sweeney 34.18
P.O. Box 35
Princeton, NJ 08544
- -----------------------------------------------------------------------------------------------
The Rector and Visitors of Office of the Treasurer 33.20
the University of Virginia P.O. Box 9012
Attn: Mr. Rob Walker Freer
Charlottesville, VA 22906
- -----------------------------------------------------------------------------------------------
Dewitt Wallace-Reader's Digest Attn: Rob D. Nagel 12.41
Fund-Intl, Inc. Two Park Avenue 23rd Floor
</TABLE>
58
<PAGE> 146
<TABLE>
<S> <C> <C>
New York, NY 10016
- -----------------------------------------------------------------------------------------------
Lila Wallace-Reader's Digest Attn: Rob D. Nagel 11.23
Fund-Intl, Inc. Two Park Avenue 23rd Floor
New York, NY 10016
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the International Small Companies Fund as of
June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Yale University Attn: Theodore D. Seides 20.95
230 Prospect Street
New Haven, CT 06511
- -----------------------------------------------------------------------------------------------
Bankers Trust Company TR Attn: Marshall Jones 10.21
GTE Service Corp Pension Trust GTE Investment Management
One Stamford Forum
Stamford, CT 06902
- -----------------------------------------------------------------------------------------------
Boston Safe Deposit & Trust Co. TR One Cabot Road 6.11
The Kodak Retirement Income Plan Medford, MA 02165
- -----------------------------------------------------------------------------------------------
Bost & Co. A/CNYXF1783862 Attn: Mutual Funds Operations 5.67
FBO Bell Atlantic-Intl Equities P.O. Box 3198
Pittsburgh, PA 15230-3198
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Japan Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Yale University Attn: Theodore D. Seides 41.92
230 Prospect Street
New Haven, CT 06511
- -----------------------------------------------------------------------------------------------
BASF Corporation Pension Master Trust Attn: Christopher P. Krauss 9.13
3000 Continental Drive North
Mount Olive, NJ 07828-1234
- -----------------------------------------------------------------------------------------------
State Street Bank as Trustee for the Attn: Laura Mears 6.74
Electronic Data Systems Corporation State Street Bank & Trust Co.
P.O. Box 1992
Boston, MA 02105-1992
- -----------------------------------------------------------------------------------------------
MAC & Co. A/CKREF0756022 Kresge Attn: Mutual Fund OPS 6.00
Foundation P.O. Box 3198
Pittsburgh, PA 15230-3198
- -----------------------------------------------------------------------------------------------
ROHM & HAAS Company Pension Plan 100 Independence Mall West 5.74
Philadelphia, PA 19106-2399
- -----------------------------------------------------------------------------------------------
</TABLE>
59
<PAGE> 147
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Emerging Markets Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Washington State Investment Board Attn: Kris Logan 13.97
Investment Accounting Controller
P.O. Box 40916
2424 Heritage Court SW
Olympia, WA 98504
- -----------------------------------------------------------------------------------------------
State Street Bank as Trustee for the Attn: Laura Mears 5.70
Electronic Data Systems Corporation P.O. Box 1992
State Street Bank & Trust Co. Boston, MA 02105-1992
- -----------------------------------------------------------------------------------------------
Bankers Trust Company Master Custody Attn: Barbara Gleason Asst. VP 5.41
FBO Mayo Foundation Pension Plan 34 Exchange Place 4th Floor
Mail Stop 3046
Jersey City, NJ 07302
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class IV Shares of the Emerging Markets Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Princeton University TR Attn: John D. Sweeney 49.65
P.O. Box 35
Princeton, NJ 08544
- -----------------------------------------------------------------------------------------------
Leland Stanford Junior University Stanford Management Company 15.04
II-AA 2770 Sand Hill Road
Menlo Park, CA 94025
- -----------------------------------------------------------------------------------------------
Bost & Co. A/CNYXF1783862 Attn: Mutual Funds Operations 11.07
FBO Bell Atlantic-Intl Equities P.O. Box 3198
Pittsburgh, PA 15230-3198
- -----------------------------------------------------------------------------------------------
Trustees of Columbia University in the Columbia University 8.70
City of New York-Global 475 Riverside Drive Suite 401
New York, NY 10115
- -----------------------------------------------------------------------------------------------
The Rector and Visitors of the Attn: Mr. Rob Walker Freer 8.39
University of Virginia Office of the Treasurer
P.O. Box 9012
Charlottesville, VA 22906
- -----------------------------------------------------------------------------------------------
</TABLE>
60
<PAGE> 148
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Evolving Countries Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Duke University c/o Duke Management Company 28.06
Long-Term (Endowment) 2200 W. Main St.
Pool--Emerging Suite 1000
Durham, NC 27705
- -----------------------------------------------------------------------------------------------
GMO International c/o GMO 21.90
Equity Allocation Fund Attn: Rick Okerman
40 Rowes Wharf
Boston, MA 02110
- -----------------------------------------------------------------------------------------------
GMO Global c/o GMO 10.37
Balanced Attn: Rick Okerman
Allocation Fund 40 Rowes Wharf
Boston, MA 02110
- -----------------------------------------------------------------------------------------------
Brown Brothers Harriman & Co. Attn: Global Settlement 7.07
Cust. FBO GMO Global Hedged Harold Robinson
Equity Fund 40 Water St.
Boston, MA 02109
- -----------------------------------------------------------------------------------------------
First Union National Bank c/o First Union National Bank 6.05
FBO Alexander & Margaret Stewart Trust A/C 7013243085
1525 West WT Harris Blvd
NC 1151
Charlotte, NC 28262-1151
- -----------------------------------------------------------------------------------------------
Employees' Retirement Plan of Duke c/o Duke Management Company 5.90
University - Emerging 2200 W. Main Street, Suite 1000
Durham, NC 27705
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Asia Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Bankers Trust Company TR Attn: Marshall Jones 29.26
GTE Service Corp. Pension Trust GTE Investment Management
One Stanford Forum
Stamford, CT 06902
- -----------------------------------------------------------------------------------------------
Princeton University TR Attn: John D. Sweeney 26.09
P.O. Box 35
Princeton, NJ 08544
- -----------------------------------------------------------------------------------------------
The Trustees of Columbia University Columbia University 14.25
in the City of New York 475 Riverside Drive, Suite 401
</TABLE>
61
<PAGE> 149
<TABLE>
<S> <C> <C>
- - Dedicated Asia New York, NY 10115
- -----------------------------------------------------------------------------------------------
Leland Stanford Junior Stanford Management Company 10.96
University II-AA 2770 Sand Hill Road
Menlo Park, CA 94025
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Global Properties Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Eyk Van Otterloo 32 Foster Street 69.60
Marblehead, MA 01945
- -----------------------------------------------------------------------------------------------
Cormorant Fund c/o Jeremy Grantham 5.56
40 Rowes Wharf
Boston, MA 02210
- -----------------------------------------------------------------------------------------------
Investors Bank & Trust Company Cust. c/o Grantham Mayo Van Otterloo & Co. 5.29
FBO ####-##-#### SEP IRA Attn: Human Resources
40 Rowes Wharf
Boston, MA 02110
- -----------------------------------------------------------------------------------------------
BEHE c/o Bank LEU AG 5.00
Attn: Mr. Thomas Frei
P.O. Box 5274
CH 8022
Zurich, Switzerland
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Global Hedged Equity Fund as of June 1,
1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Partners Healthcare System Pooled Partners Healthcare System Inc. 43.43
Investment Accounts 101 Merrimac Street 4th Floor
Boston, MA 02114
- -----------------------------------------------------------------------------------------------
The Edna McConnell Clark Foundation Attn: Laura Kielczewski 10.57
Asst Financial Officer
250 Park Avenue
New York, NY 10177-0026
- -----------------------------------------------------------------------------------------------
Phillips Exeter Academy Attn: Joseph E. Fellows 7.16
20 Main Street
Exeter, NH 038332-2460
- -----------------------------------------------------------------------------------------------
Conrad N. Hilton Foundation 100 West Liberty Street Suite 840 5.79
Reno, NV 89501
- -----------------------------------------------------------------------------------------------
Cormorant Fund c/o GMO 5.63
</TABLE>
62
<PAGE> 150
<TABLE>
<S> <C> <C>
40 Rowes Wharf
Boston, MA 02110
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Domestic Bond Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Trust for Millipore Corporation Attn: Ms. Evon Beland 19.58
Invested Employee Plans -- DBF 80 Ashby Road M/S E4H
Bedford, MA 01730
- -----------------------------------------------------------------------------------------------
The Edna McConnell Attn: Laura Kielczewski 11.84
Clark Foundation Asst. Financial Officer
250 Park Avenue
New York, NY 10177
- -----------------------------------------------------------------------------------------------
Phillips Exeter Academy Attn: Joseph E. Fellows 9.17
20 Main Street
Exeter, NH 03833
- -----------------------------------------------------------------------------------------------
GMO Global Balanced Allocation Attn: Rick Okerman 9.04
Fund c/o GMO
40 Rowes Wharf
Boston, MA 02110
- -----------------------------------------------------------------------------------------------
Schering Plough Retirement Trust Attn: Gary Karlin 7.43
Global -- AA One Giralda Farms
Madison, NJ 07940
- -----------------------------------------------------------------------------------------------
Emerson Hospital Endowment RT 2 Ornac 5.11
Concord, MA 07142
- -----------------------------------------------------------------------------------------------
Trinity Church in the City of Attn: Sarah W. Wilcox Parish 5.08
Boston-General Trust Fund Administrator
Copley Square
Boston, MA 02116
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the U.S. Bond/Global Alpha A Fund as of June 1,
1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Phillips Exeter Academy Attn: Joseph E. Fellows 24.04
20 Main Street
Exeter, NH 03833-2460
- -----------------------------------------------------------------------------------------------
GMO Global Balanced Allocation Fund Attn: Rick Okerman 22.11
c/o GMO
40 Rowes Wharf
Boston, MA 02110
- -----------------------------------------------------------------------------------------------
</TABLE>
63
<PAGE> 151
<TABLE>
<S> <C> <C>
The Edna McConnell Clark Foundation Attn: Laura Kielczewski 9.52
Asst. Financial Officer
250 Park Avenue
New York, NY 10177-0026
- -----------------------------------------------------------------------------------------------
World Wildlife Fund Attn. Mr. David Rada 7.89
Financial Officer
1250 24th Street NW, Suite 500
Washington, DC 20037-1175
- -----------------------------------------------------------------------------------------------
Schering Plough Retirement Trust Attn: Gary Karlin 7.87
Global AA One Giralda Farms
Madison, NJ 07940
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the U.S. Bond/Global Alpha B Fund as of June 1,
1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Bost & Co A/CNYXF1783842 Attn: Mutual Funds Operations 47.58
FBO Bell Atlantic-Fixed Income P. O. Box 3198
Pittsburgh, PA 15230-3198
- -----------------------------------------------------------------------------------------------
Bankers Trust Company Master Custody Attn: Barbara Gleason Asst VP 23.90
FBO Mayo Foundation Mail 3046
General Fund AA Fixed 34 Exchange Place, 4th Floor
Jersey City, NJ 07293
- -----------------------------------------------------------------------------------------------
Bankers Trust Company Master Custody Attn: Barbara Gleason Asst. VP 23.83
FBO Mayo Foundation 34 Exchange Place, 4th Floor
Pension Fund AA Fixed Mail Stp 30
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the International Bond Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Saturn & Co. A/C 4600712 P.O. Box 9130 FPG90 30.93
C/O Investors Bank & Trust Company Boston, MA 02117-9130
TR FBO The John Hancock Mutual Life
Insurance Company Pension Plan
- -----------------------------------------------------------------------------------------------
Princeton University TR Attn: John D. Sweeney 17.73
P.O. Box 35
Princeton, NJ 08544
- -----------------------------------------------------------------------------------------------
Woods Hole Oceanographic Attn: Paul Clemente 6.63
Institution CFO & Assoc. Director of Finance
</TABLE>
64
<PAGE> 152
<TABLE>
<S> <C> <C>
& Administration
Mail Stop 39
Woods Hole, MA 02543
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Currency Hedged International Bond Fund as
of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Bost & Co A/CNYXF 1783842 Attn: Mutual Funds Operations 62.10
FBO Bell Atlantic-Fixed Income P.O. Box 3198
Pittsburgh, PA 15230-3198
- -----------------------------------------------------------------------------------------------
Bankers Trust Company TR Attn: Marshall Jones 21.90
GTE Service Corp Pension Trust GTE Investment Management
One Stanford Forum
Stamford, CT 06902
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Global Bond Fund as of June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Fresno County Employees' Attn: Gary W. Peterson 25.44
Retirement Association P.O. Box 1247
2281 Tulare Street
Fresno, CA 93715
- -----------------------------------------------------------------------------------------------
The University of North Carolina at Investment Office 20.04
Chapel Hill Foundation Investment 1512 E Franklin Street, Suite 106
Fund, Inc., Global Fixed Income Chapel Hill, NC 27599-1000
Account
- -----------------------------------------------------------------------------------------------
Tufts Associated Health Maintenance 353 Wyman Street 20.00
Organization, Inc. Waltham, MA 02454
- -----------------------------------------------------------------------------------------------
Marine Midland Bank as Agent for The Attn: Mutual Funds 5.64
John R. Oishei Foundation P.O. Box 1329
Buffalo, NY 14240
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class IV Shares of the Emerging Country Debt Fund as of June 1,
1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
San Francisco County & Retirement Attn: Richard Piket 35.50
System 1155 Market Street, 2nd Floor
</TABLE>
65
<PAGE> 153
<TABLE>
<S> <C> <C>
San Francisco, CA 94103
- -----------------------------------------------------------------------------------------------
State of Connecticut Retirement Attn: Chief Investment Officer 19.55
Plans and Trust Funds Office of the Treasurer
55 Elm Street
Hartford, CT 06106
- -----------------------------------------------------------------------------------------------
Bost & Co. A/C NYXF 1783852 Attn: Mutual Funds Operations 14.75
FBO Bell Atlantic Dedicated ECDF P.O. Box 3198
Pittsburgh, PA 15230-3198
- -----------------------------------------------------------------------------------------------
Bankers Trust Company TR Attn: Marshall Jones 13.55
GTE Service Corp. Pension Trust GTE Investment Management
One Stanford Forum
Stamford, CT 06902
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Emerging Country Debt Fund as of June 1,
1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Chase Manhattan Bank, TTEE for 4 Chase Metrotech Center 27.16
General Motors Employees Global Group 18th Floor
Pension Trust Brooklyn, NY 11245
- -----------------------------------------------------------------------------------------------
GMO Emerging Country Debt Share Fund Attn: Rick Okerman 13.86
40 Rowes Wharf
Boston, MA 02110
- -----------------------------------------------------------------------------------------------
Retirement Plan of Mobil Oil Attn: Donald Hellyer 9.53
Corporation 3225 Gallows Road
Fairfax, VA 22037
- -----------------------------------------------------------------------------------------------
Saturn & Co. A/C 4600712 P.O. Box 9130 FPG90 6.83
C/O Investors Bank & Trust Company Boston, MA 02117-9130
Trust FBO The John Hancock Mutual
Life Insurance Company Pension Plan
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Short-Term Income Fund as of Jun 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Bankers Trust Company TR Attn: Marshall Jones 76.06
GTE Service Corp. Pension Trust GTE Investment Management
One Stanford Forum
Stamford, CT 06902
- -----------------------------------------------------------------------------------------------
Gezamelyk Mollenfonds c/o GMO 5.65
40 Rowes Wharf
</TABLE>
66
<PAGE> 154
<TABLE>
<S> <C> <C>
Boston, MA 02110
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Inflation Indexed Bond Fund as of June 1,
1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Schering Plough Retirement Trust Attn: Gary Karlin 12.87
Global AA One Giralda Farms
Madison, NJ 07940
- -----------------------------------------------------------------------------------------------
GMO Global Balanced Allocation Fund Attn: Rick Okerman 10.98
c/o GMO
40 Rowes Wharf
Boston, MA 02110
- -----------------------------------------------------------------------------------------------
Conrad N. Hilton Foundation 100 West Liberty Street 9.84
Suite 840
Reno, NV 89501
- -----------------------------------------------------------------------------------------------
The Edna McConnell Clark Foundation Attn: Laura Kielczewski 9.24
Asst. Financial Officer
250 Park Avenue
New York, NY 10177-0026
- -----------------------------------------------------------------------------------------------
Phillips Exeter Attn: Joseph E. Fellows 8.87
Academy 20 Main St.
Exeter, NH 03833-2460
- -----------------------------------------------------------------------------------------------
The Jeremy and Hannelore Grantham c/o GMO 8.59
Charitable Trust 40 Rowes Wharf
Boston, MA 02110
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Emerging Country Debt Share Fund as of June
1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Sprint Corporate Master Trust Attn: William N. Searcy Jr. 100.00
2320 Shawnee Mission Pkwy
Westwood, KS 66205
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the International Equity Allocation Fund as of
June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
MD Co. FBO Memorial Drive Trust Attn: Kelly Corwin 17.22
</TABLE>
67
<PAGE> 155
<TABLE>
<S> <C> <C>
C/O MDT Advisors, Inc. 125 Cambridge Park Dr.
Cambridge, MA 02140-2314
- -----------------------------------------------------------------------------------------------
Wenner-Gren Foundation Attn: Maugha Kenny 14.15
220 Fifth Avenue
New York, NY 10001-7780
- -----------------------------------------------------------------------------------------------
Regenstrief Foundation, Inc. Global 1001 West Tenth Street 12.06
Equity Fund Indianapolis, IN 46202
- -----------------------------------------------------------------------------------------------
Francis W. Hatch & S Parker Attn: Ms. Lois B. Wetzel 9.21
Gilbert & Robert M. Pennoyer TR Sullivan & Cromwell
Trust U/ART 11 F FBO John H. C. Merck 125 Broad Street
New York, NY 10004-2498
- -----------------------------------------------------------------------------------------------
Francis W. Hatch & S Parker Attn: Lois B. Wetzel 9.21
Gilbert & Robert M. Pennoyer TR Sullivan & Cromwell
Trust U/I 12/11/39 FBO John H. C. 125 Broad Street
Merck New York, NY 10004-2498
- -----------------------------------------------------------------------------------------------
The Raymond and Gertrude R. Saltzman Suite 105 East Cooper River 5.85
Foundation Plaza
2400 McClellan Avenue
Pennsauken, NJ 08109
- -----------------------------------------------------------------------------------------------
Lawrence Memorial Association Attn: Peter Semenza 5.74
170 Governors Avenue
Medford, MA 02155
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the World Equity Allocation Fund as of June 1,
1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Mars & Co. C/O Investors Bank & Trust 66.40
P.O. Box 9130 FPG 90
Boston, MA 02117
- -----------------------------------------------------------------------------------------------
Longwood College Foundation, Inc. Attn: L. Darlene Selz 33.54
201 High Street
Farmville, VA 23909-1895
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Global (U.S.+) Equity Allocation Fund as of
June 1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Yale University TR Scripps League Attn: Linda Rockhill 13.02
Newspapers Education & Research Fund State Street Global Advisors
One International Place, 28th Floor
Boston, MA 02110
- -----------------------------------------------------------------------------------------------
Yale University TR Attn: Linda Rockhill 11.90
</TABLE>
68
<PAGE> 156
<TABLE>
<S> <C> <C>
U/A Trustee of Thurston & Sharon State Street Global Advisors
Twigg-Smith Unitrust #2 One International Place, 28th Floor
Boston, MA 02110
- -----------------------------------------------------------------------------------------------
Helen Benedict Foundation, Inc. Attn: Jim Nikolai 11.89
330 Madison Avenue, 30th Floor
New York, NY 10017-5001
- -----------------------------------------------------------------------------------------------
Yale University TR Attn: Linda Rockhill 8.67
Laila & Thurston Twigg Smith Unitrust State Street Global Advisors
One International Place, 28th Floor
Boston, MA 02110
- -----------------------------------------------------------------------------------------------
Yale University TR Attn: Linda Rockhill 6.13
U/A Charles W. Palmer 5% State Street Global Advisors
One International Place, 28th Floor
Boston, MA 02110
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Global Balanced Allocation Fund as of June
1, 1999:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Presbyterian Homes & Family Services, 150 Linden Avenue 17.05
Inc. Lynchburg, VA 24503
- -----------------------------------------------------------------------------------------------
Escuela Agricola Panamericana, Inc. Attn: J. Hughes 16.37
24 Federal Street, Suite 400
Boston, MA 02110
- -----------------------------------------------------------------------------------------------
Appalachian Mountain Club Attn: Mr. Henry Isaacson 15.39
5 Joy Street
Boston, MA 02108
- -----------------------------------------------------------------------------------------------
Japan International Christian Attn: Dorothy Kinney 9.49
University Foundation 475 Riverside Drive
Suite 439
New York, NY 10115
- -----------------------------------------------------------------------------------------------
New Cycle Foundation C/O Eleanor Rosenthal 8.40
Peregrine Financial Corporation
84 State Street, Suite 900
Boston, MA 02109
- -----------------------------------------------------------------------------------------------
American Society of Hematology Attn: Martha Liggett 8.39
Unrestricted Account Executive Director
1200 19th Street NW
Suite 300
Washington, DC 20036-000
- -----------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the U.S. Sector Fund as of June 1, 1999:
69
<PAGE> 157
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Regenstrief Foundation, Inc. 1001 West Tenth St. 88.43
Global Equity Fund Indianapolis, IN 46202
- -----------------------------------------------------------------------------------------------
The Herb Society of America, Inc. Attn: David Pauer 10.87
Executive Director
9019 Kirtland Chardon Road
Kirtland, OH 44094
- -----------------------------------------------------------------------------------------------
</TABLE>
DISTRIBUTIONS
The Shareholder's Manual describes the distribution policies of each Fund
under the heading "Distributions". It is the policy of each Fund in all cases to
pay its shareholders, as dividends, substantially all net investment income and
to distribute annually all net realized capital gains, if any, after offsetting
any capital loss carryovers. For distribution and federal income tax purposes, a
portion of the premiums from certain expired call or put options written by a
Fund, net gains from certain closing purchase and sale transactions with respect
to such options and a portion of net gains from other options and futures
transactions are treated as short-term capital gain (i.e., gain from the sale of
securities held for 12 months or less). It is the policy of each Fund to make
distributions at least annually, sufficient to avoid the imposition of a
nondeductible 4% excise tax on certain undistributed amounts of taxable
investment income and capital gains.
TAXES
TAX STATUS AND TAXATION OF EACH FUND
Each Fund is treated as a separate taxable entity for federal income tax
purposes. Each Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). In order to qualify for the special tax treatment accorded regulated
investment companies and their shareholders, each Fund must, among other things:
(a)derive at least 90% of its gross income from dividends, interest, payments
with respect to certain securities loans, and gains from the sale of stock,
securities and foreign currencies, or other income (including but not limited
to gains from options, futures or forward contracts) derived with respect to
its business of investing in such stock, securities, or currencies;
(b)distribute with respect to each taxable year at least 90% of the sum of its
taxable net investment income, its net tax-exempt income, and the excess, if
any, of net short-term capital gains over net long-term capital losses for
such year; and
(c)diversify its holdings so that at the end of each fiscal quarter, (i) at
least 50% of the market value of the Fund's assets is represented by cash and
cash items, U.S. government securities, securities of other regulated
investment companies, and other securities limited in respect of
70
<PAGE> 158
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 a Fund qualifies as a regulated investment company that is accorded
special tax treatment, the Fund will not be subject to federal income tax on
income paid to its shareholders in the form of dividends (including capital gain
dividends).
If a Fund fails to distribute in a calendar year substantially all of its
ordinary income for such year and substantially all of its capital gain net
income for the one-year period ending October 31 (or later if a Fund is
permitted so to elect and so elects), plus any retained amount from the prior
year, such Fund will be subject to a 4% excise tax on the undistributed amounts.
A dividend paid to shareholders by a Fund in January of a year generally is
deemed to have been paid by the Fund on December 31 of the preceding year, if
the dividend was declared and payable to shareholders of record on a date in
October, November or December of that preceding year. Each Fund intends
generally to make distributions sufficient to avoid imposition of the 4% excise
tax.
TAXATION OF FUND DISTRIBUTIONS AND SALES OF FUND SHARES
Fund distributions derived from interest, dividends and certain other
income, including in general short-term capital gains, will be taxable as
ordinary income to shareholders subject to federal income tax whether received
in cash or reinvested shares. Properly designated Fund distributions derived
from net long-term capital gains (i.e., net gains derived from the sale of
securities held for more than 12 months) will be taxable as such (generally at a
20% rate for noncorporate shareholders), regardless of how long a shareholder
has held the shares in the Fund.
Dividends and distributions on each Fund's shares are generally subject to
federal income tax as described herein to the extent they do not exceed the
Fund's realized income and gains, even though such dividends and distributions
may economically represent a return of a particular shareholder's investment.
Such distributions are likely to occur in respect of shares purchased at a time
when the Fund's net asset value reflects gains that are either unrealized, or
realized but not distributed.
The sale, exchange or redemption of Fund shares may give rise to a gain or
loss. In general, any gain or loss realized upon a taxable disposition of shares
will be treated as long-term capital gains if the shares have been held for more
than 12 months and as short-term capital gains if the shares have been held for
not more than 12 months.
Any loss realized upon a taxable disposition of shares held for six months
or less will be treated as long-term capital loss to the extent of any long-term
capital gain distributions received by a shareholder with respect to those
shares. All or a portion of any loss realized upon a taxable disposition of Fund
shares will be disallowed if other shares of the same Fund are purchased
71
<PAGE> 159
within 30 days before or after the disposition. In such a case, the basis of the
newly purchased shares will be adjusted to reflect the disallowed loss.
A distribution paid to shareholders by a Fund in January of a year
generally is deemed to have been received by shareholders on December 31 of the
preceding year, if the distribution was declared and payable to shareholders of
record on a date in October, November or December of that preceding year. The
Trust will provide federal tax information annually, including information about
dividends and distributions paid during the preceding year to taxable investors
and others requesting such information.
If a Fund makes a distribution to you in excess of its current and
accumulated "earnings and profits" in any taxable year, the excess distribution
will be treated as a return of capital to the extent of your tax basis in your
shares, and thereafter as capital gain. A return of capital is not taxable, but
it reduces your tax basis in your shares, thus reducing any loss or increasing
any gain on a subsequent taxable disposition by you of your shares.
For corporate shareholders, the dividends-received deduction will
generally apply (subject to a holding period requirement imposed by the Code) to
a Fund's dividends paid from investment income to the extent derived from
dividends received from U.S. corporations. However, any distributions received
by a Fund from REITs will not qualify for the corporate dividends-received
deduction. A Fund's investments in REIT equity securities may require such Fund
to accrue and distribute income not yet received. In order to generate
sufficient cash to make the requisite distributions, the Fund may be required to
sell securities in its portfolio that it otherwise would have continued to hold
(including when it is not advantageous to do so). A Fund's investments in REIT
equity securities may at other times result in the Fund's receipt of cash in
excess of the REIT's earnings; if the Fund distributes such amounts, such
distribution could constitute a return of capital to Fund shareholders for
federal income tax purposes.
The backup withholding rules do not apply to tax exempt entities so long
as each such entity furnishes the Trust with an appropriate certification.
However, other shareholders are subject to backup withholding at a rate of 31%
on all distributions of net investment income and capital gain, whether received
in cash or reinvested in shares of the relevant Fund, and on the amount of the
proceeds of any redemption of Fund shares paid or credited to any shareholder
account for which an incorrect or no taxpayer identification number has been
provided, where appropriate certification has not been provided for a foreign
shareholder, or where the Trust is notified that the shareholder has
underreported income in the past (or the shareholder fails to certify that he is
not subject to such withholding). A "taxpayer identification number" is either
the Social Security number or employer identification number of the record owner
of the account.
WITHHOLDING ON DISTRIBUTIONS TO FOREIGN INVESTORS
Dividend distributions (including distributions derived from short-term
capital gains) are in general subject to a U.S. withholding tax of 30% when paid
to a nonresident alien individual, foreign estate or trust, a foreign
corporation, or a foreign partnership ("foreign shareholder"). Persons who are
resident in a country, such as the U.K., that has an income tax treaty with the
72
<PAGE> 160
U.S. may be eligible for a reduced withholding rate (upon filing of appropriate
forms), and are urged to consult their tax advisors regarding the applicability
and effect of such a treaty. Distributions of net realized long-term capital
gains paid by a Fund to a foreign shareholder, and any gain realized upon the
sale of Fund shares by such a shareholder, will ordinarily not be subject to
U.S. taxation, unless the recipient or seller is a nonresident alien individual
who is present in the United States for more than 182 days during the taxable
year. However, such distributions and sale proceeds may be subject to backup
withholding, unless the foreign investor certifies his non-U.S. residency
status. Foreign investors are subject to the backup withholding rules described
above. Any tax withheld as a result of backup withholding does not constitute an
additional tax imposed on the record owner of the account, and may be claimed as
a credit on the record owner's Federal income tax return. Also, foreign
shareholders with respect to whom income from a Fund is "effectively connected"
with a U.S. trade or business carried on by such shareholder will in general be
subject to U.S. federal income tax on the income derived from the Fund at the
graduated rates applicable to U.S. citizens, residents or domestic corporations,
whether received in cash or reinvested in shares, and, in the case of a foreign
corporation, may also be subject to a branch profits tax. Again, foreign
shareholders who are resident in a country with an income tax treaty with the
United States may obtain different tax results, and are urged to consult their
tax advisors.
FOREIGN TAX CREDITS
If, at the end of the fiscal year, more than 50% of the value of the total
assets of any Fund is represented by stock or securities of foreign
corporations, the Fund intends to make an election with respect to the relevant
Fund which allows shareholders whose income from the Fund is subject to U.S.
taxation at the graduated rates applicable to U.S. citizens, residents or
domestic corporations to claim a foreign tax credit or deduction (but not both)
on their U.S. income tax return. In such case, the amounts of foreign income
taxes paid by the Fund would be treated as additional income to Fund
shareholders from non-U.S. sources and as foreign taxes paid by Fund
shareholders. Investors should consult their tax advisors for further
information relating to the foreign tax credit and deduction, which are subject
to certain restrictions and limitations (including a holding period requirement
applied at both the Fund and shareholder level imposed by the Code).
Shareholders of any of the International Funds whose income from the Fund is not
subject to U.S. taxation at the graduated rates applicable to U.S. citizens,
residents or domestic corporations may receive substantially different tax
treatment of distributions by the relevant Fund, and may be disadvantaged as a
result of the election described in this paragraph.
TAX IMPLICATIONS OF CERTAIN INVESTMENTS
Certain of the Funds' investments, including assets "marked to the market"
for federal income tax purposes, debt obligations issued or purchased at a
discount and potentially so-called "index securities" (including inflation
indexed bonds), will create taxable income in excess of the cash they generate.
In such cases, a Fund may be required to sell assets (including when it is not
advantageous to do so) to generate the cash necessary to distribute as dividends
to its shareholders all of its income and gains and therefore to eliminate any
tax liability at the Fund level.
73
<PAGE> 161
The Funds' transactions in options, futures contracts, hedging
transactions, forward contracts, straddles and foreign currencies may accelerate
income, defer losses, cause adjustments in the holding periods of the Funds'
securities and convert long-term capital gains into short-term capital gains and
short-term capital losses into long-term capital 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 from the company. The Fund also may make an election
to mark the gains (and to a limited extent losses) in such holdings "to the
market" as though it had sold and repurchased its holdings in those PFICs on the
last day of the Fund's taxable year. Such gains and losses are treated as
ordinary income and loss. The QEF and mark-to-market elections may have the
effect of accelerating the recognition of income (without the receipt of cash)
and increase the amount required to be distributed for the Fund to avoid
taxation. Making either of these elections therefore may require a Fund to
liquidate other investments (including when it is not advantageous to do so) to
meet its distribution requirement, which also may accelerate the recognition of
gain and affect a Fund's total return.
A PFIC is any foreign corporation in which (i) 75% or more of the income
for the taxable year is passive income, or (ii) the average percentage of the
assets (generally by value, but by adjusted tax basis in certain cases) that
produce or are held for the production of passive income is at least 50%.
Generally, passive income for this purposes means dividends, interest (including
income equivalent to interest), royalties, rents, annuities, the excess of gains
over losses from certain property transactions and commodities transactions, and
foreign currency gains. Passive income for this purpose does not include rents
and royalties received by the foreign corporation from active business and
certain income received from related persons.
LOSS OF REGULATED INVESTMENT COMPANY STATUS
A Fund may experience particular difficulty qualifying as a regulated
investment company in the case of highly unusual market movements, in the case
of high redemption levels and/or during the first year of its operations. If the
Fund does not qualify for taxation as a regulated investment company for any
taxable year, the Fund's income will be taxed at the Fund level at regular
corporate rates, and all distributions from earnings and profits, including
distributions of net long-term capital gains, will be taxable to shareholders as
ordinary income and subject to withholding in the case of non-U.S. shareholders.
In addition, in order to requalify for taxation as a regulated investment
company that is accorded special tax treatment, the Fund may be required to
recognize unrealized gains, pay substantial taxes and interest on such gains,
and make certain substantial distributions.
74
<PAGE> 162
PERFORMANCE INFORMATION
Each Fund may from time to time include its total return in advertisements or
in information furnished to present or prospective shareholders.
Quotations of average annual total return for a Fund will be expressed in
terms of the average annual compounded rate of return of a hypothetical
investment in the Fund or class over periods of one, three, five, and ten years
(or for such shorter or longer periods as shares of the Fund have been offered),
calculated pursuant to the following formula: P (1 + T)n = ERV (where P = a
hypothetical initial payment of $10,000, T = the average annual total return, n
= the number of years, and ERV = the ending redeemable value of a hypothetical
$10,000 payment made at the beginning of the period). Except as noted below, all
total return figures reflect the deduction of a proportional share of Fund
expenses on an annual basis, and assume that (i) the maximum purchase premium is
deducted from the initial $10,000 payment, (ii) all dividends and distributions
are reinvested when paid and (iii) the maximum redemption fee is charged at the
end of the relevant period. Quotations of total return may also be shown for
other periods. The Funds may also, with respect to certain periods of less than
one year, provide total return information for that period that is unannualized.
Any such information would be accompanied by standardized total return
information.
The table below sets forth the average annual total return for Class III
Shares of each Fund for the one, three, five and ten year periods ending
February 28, 1999 and for the period from the commencement of the Funds'
operations until February 28, 1999:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
SINCE
FUND INCEPTION 1 YEAR 3 YEARS (%) 5 YEARS 10 YEARS INCEPTION
DATE (%) (%) (%) (%)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Core 9/18/85 14.86 24.26 23.43 19.13 18.79
- --------------------------------------------------------------------------------------------------------------
Tobacco-Free Core 10/31/91 16.12 25.30 23.95 N/A 20.49
- --------------------------------------------------------------------------------------------------------------
Value 11/13/90 2.10 17.69 18.73 N/A 18.56
- --------------------------------------------------------------------------------------------------------------
Fundamental Value 10/31/91 2.15 16.98 17.51 N/A 17.66
- --------------------------------------------------------------------------------------------------------------
Growth 12/30/88 22.72 26.79 25.49 20.21 20.42
- --------------------------------------------------------------------------------------------------------------
Small Cap Value 12/31/91 (15.59) 10.59 12.44 N/A 15.28
- --------------------------------------------------------------------------------------------------------------
Small Cap Growth 12/31/96 (9.12) N/A N/A N/A 9.64
- --------------------------------------------------------------------------------------------------------------
REIT 5/31/96 (24.04) N/A N/A N/A 4.06
- --------------------------------------------------------------------------------------------------------------
International Core 3/31/87 (1.27) 5.59 5.22 8.86 9.62
- --------------------------------------------------------------------------------------------------------------
Currency Hedged International 6/30/95 (2.43) 10.32 N/A N/A 13.01
Core
- --------------------------------------------------------------------------------------------------------------
Foreign 8/31/84 0.48 9.24 8.58 10.41 17.44
- --------------------------------------------------------------------------------------------------------------
International Small Companies 10/14/91 (6.58) 1.92 1.28 N/A 6.88
- --------------------------------------------------------------------------------------------------------------
Japan 6/8/90 (3.50) (10.41) (6.96) N/A (2.46)
- --------------------------------------------------------------------------------------------------------------
Emerging Markets 12/9/93 (32.34) (10.95) (8.59) N/A (4.77)
- --------------------------------------------------------------------------------------------------------------
Evolving Countries 8/29/97 (32.97) N/A N/A N/A (30.75)
- --------------------------------------------------------------------------------------------------------------
Asia 2/18/98 (26.23) N/A N/A N/A (22.52)
- --------------------------------------------------------------------------------------------------------------
Global Properties 12/20/96 (16.63) N/A N/A N/A (6.03)
- --------------------------------------------------------------------------------------------------------------
Global Hedged Equity 7/29/94 (9.76) (3.15) N/A N/A (0.09)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
75
<PAGE> 163
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Domestic Bond 8/18/94 5.03 6.87 N/A N/A 7.99
- --------------------------------------------------------------------------------------------------------------
U.S. Bond/Global Alpha A 4/30/97 0.29 N/A N/A N/A 6.65
- --------------------------------------------------------------------------------------------------------------
U.S. Bond/Global Alpha B 7/29/97 3.27 N/A N/A N/A 4.71
- --------------------------------------------------------------------------------------------------------------
International Bond 12/22/93 2.33 6.98 10.19 N/A 9.72
- --------------------------------------------------------------------------------------------------------------
Currency Hedged International 9/30/94 3.04 14.01 N/A N/A 15.86
Bond
- --------------------------------------------------------------------------------------------------------------
Global Bond 12/28/95 2.54 8.18 N/A N/A 7.35
- --------------------------------------------------------------------------------------------------------------
Emerging Country Debt 4/19/94 (33.44) 12.36 N/A N/A 15.93
- --------------------------------------------------------------------------------------------------------------
Short-Term Income 4/18/90 4.29 5.34 5.61 N/A 6.05
- --------------------------------------------------------------------------------------------------------------
Inflation Indexed Bond 3/31/97 4.07 N/A N/A N/A 4.11
- --------------------------------------------------------------------------------------------------------------
Emerging Country Debt Share 7/20/98 N/A N/A N/A N/A (31.32)
- --------------------------------------------------------------------------------------------------------------
International Equity Allocation 10/11/96 (9.60) N/A N/A N/A 0.59
- --------------------------------------------------------------------------------------------------------------
World Equity Allocation 6/28/96 (7.43) N/A N/A N/A 4.50
- --------------------------------------------------------------------------------------------------------------
Global (U.S.+) Equity Allocation 11/26/96 (3.44) N/A N/A N/A 9.89
- --------------------------------------------------------------------------------------------------------------
Global Balanced Allocation 7/29/96 (2.72) N/A N/A N/A 11.26
- --------------------------------------------------------------------------------------------------------------
U.S. Sector 12/31/92 2.67 17.20 19.18 N/A 18.60
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Each Fund may also from time to time advertise net return and gross return
data for each month and calendar quarter since the Fund's inception. Monthly and
quarterly return data is calculated by linking daily performance for a Fund
(current net asset value divided by prior net asset value), and assumes
reinvestment of all dividends and gains. Monthly and quarterly performance data
does not reflect payment of any applicable purchase premiums or redemption fees.
All quotations of monthly and quarterly returns would be accompanied by
standardized total return information. Information relating to a Fund's return
for a particular month or calendar quarter is provided to permit evaluation of
the Fund's performance and volatility in different market conditions, and should
not be considered in isolation.
From time to time, in advertisements, in sales literature, or in reports
to shareholders, a Fund may compare its respective performance to that of other
mutual funds with similar investment objectives and to stock or other relevant
indices. For example, the Fund may compare its total return to rankings prepared
by Lipper Analytical Services, Inc. or Morningstar, Inc., widely recognized
independent services that monitor mutual fund performance; the Standard & Poor's
500 Stock Index ("S&P 500"), an index of unmanaged groups of common stock; or
the Dow Jones Industrial Average, a recognized unmanaged index of common stocks
of 30 industrial companies listed on the New York Stock Exchange.
Performance rankings and listings reported in national financial
publications, such as Money Magazine, Barron's and Changing Times, may also be
cited (if the Fund is listed in any such publication) or used for comparison, as
well as performance listings and rankings from various other sources including
No Load Fund X, CDA Investment Technologies, Inc., Weisenberger Investment
Companies Service, and Donoghue's Mutual Fund Almanac.
Quotations of a Fund's gross return do not reflect any reduction for any
Fund fees or expenses unless otherwise noted; if the gross return data reflected
the estimated fees and
76
<PAGE> 164
expenses of the Fund, the returns would be lower than those shown. Quotations of
gross return for a Fund for a particular month or quarter will be calculated in
accordance with the following formula:
Gross Return =
Net Return + (Total Annual Operating Expense Ratio) (# of days in relevant
period/365)
Information relating to a Fund's return for a particular month or calendar
quarter is provided to permit evaluation of the Fund's performance and
volatility in different market conditions, and should not be considered in
isolation.
77
<PAGE> 165
INVESTMENT GUIDELINES
U. S. EQUITY FUNDS
GMO U.S. CORE 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.
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
EQUITY SECURITIES: - At least 65% of the Fund's total assets will be invested in or
domestic common stocks exposed to(1) domestic common stocks.
convertible securities
securities of foreign issuers (traded
on U.S. Exchanges)
OTHER EQUITY SECURITIES:
depository receipts
illiquid securities
144A securities
restricted securities
futures and related options on
securities indexes
REITs
exchange-traded and OTC options on
securities and indexes
(including writing covered options)
equity swap contracts
contracts for differences
warrants
repurchase agreements
investment companies (open & closed end)
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have greater than 5% of its net
Any short-term assets will be invested in assets exposed to cash and money market instruments. This
cash or high quality money market limitation does not include cash and money market instruments in
instruments including securities issued by margin accounts or otherwise held against exposure achieved
the U.S. government and agencies thereof, through derivative instruments ("equitized cash").
bankers' acceptances, commercial paper,
bank certificates of deposit and repurchase
agreements
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following
practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its
net assets from banks for the payment of redemptions or
settlement of securities transactions, but not as a leveraged
investment strategy.
</TABLE>
- ----------
(1) 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.
78
<PAGE> 166
<TABLE>
<S> <C>
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. The Fund may loan securities valued at
up to one-third of its total assets.
PLEDGING, HYPOTHECATING OR - Except that collateral arrangements with respect to swap
MORTGAGING FUND ASSETS 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.
</TABLE>
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
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
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
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 purchase more than 5% of any class
BROKERS, DEALERS, UNDERWRITERS AND of stock of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such
company's total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets
will be invested in the securities of a single broker, dealer,
underwriter or investment adviser. The net payment obligation of
swap contracts where one of these types of companies is the
counterparty also counts for purposes of this restriction.
This policy does not apply to companies that derived less than 15%
of revenues from "securities-related businesses" during the most
recent fiscal year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - Except for U.S. government securities, cash, and money market
instruments, the Fund will not invest in any one security to an
extent greater than 5 percentage points over that security's
weighting in the
</TABLE>
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Fund's benchmark.
- The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
- The Fund will be invested in the securities of at least 125
issuers.
CONCENTRATION - 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 - Options, futures contracts and related options on securities
indexes.
- Long equity swap contracts: where the Fund pays a fixed rate
plus the negative performance, if any, and receives the positive
performance, if any, of an index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed
rate plus the negative performance, if any, and pays the positive
performance of an index or basket of securities.
- Contracts for differences: equity swaps that contain both a
long and short equity component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity futures, related options and
short equity swap contracts used to hedge against an equity risk
already generally present in the Fund.(2)
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the Fund may hedge market
risk (risk of not being invested in the market) by purchasing
long futures contracts or entering into long equity swap
contracts to obtain market exposure until such time as direct
investments can be made efficiently. Conversely, if the Fund
receives or anticipates a significant demand for cash
redemptions, the Fund may sell futures contracts or enter into
short equity swap contracts, to allow the Fund to dispose of
securities in a more orderly fashion without the Fund being
exposed to leveraged loss exposure in the interim.
INVESTMENT - The Fund may use derivative instruments (particularly long
futures contracts, related options and long equity swap
contracts) in place of investing directly in securities. This
will include using equity derivatives to "equitize" cash balances
held by the Fund. The Fund may also use long derivatives for
investment in conjunction with short hedging transactions to
adjust the weights of the Fund's underlying equity portfolio to a
level the Manager believes is the optimal exposure to individual
markets, sectors and equities.
RISK MANAGEMENT - - The Fund may use equity futures, related options and equity
SYNTHETIC SALES AND PURCHASES 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
</TABLE>
- ----------
(2) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g., a single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund.
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<S> <C>
synthetically "buy" exposure to that index). Long and
short equity swap contracts and contracts for
differences may also be used for these purposes.
Equity derivatives (and corresponding currency
forwards) used to effect synthetic sales and
purchases will generally be unwound as actual
portfolio securities are sold and purchased.
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging
purposes.
- The face value of derivatives used for investment purposes
will be limited to 25% of the Fund's assets. When a currency
forward is used in conjunction with an equity derivative for
investment purposes, the currency forward will not be
independently counted for this restriction.
- When long futures contracts and long equity swaps are used for
investment, an amount of cash or high quality debt securities equal
to the face value of all such long derivative positions will be
segregated against such exposure. However, for purposes of this
restriction, if an existing long equity exposure is reduced or
eliminated by a short derivative position, the combination of the
long and short position will be considered as cash available to
segregate against a new long derivative exposure.
- The net long equity exposure of the Fund, including direct
investment in securities and long derivative positions, will not
exceed 100% of the Fund's net assets.
- The aggregate absolute face value of all futures contracts and
swap contracts (without regard to sign and assuming no offset of
long and short positions, and counting both components of any
contract for differences) will not exceed 100% of the Fund's
assets.
- Except when such instruments are used for bona fide hedging,
no more than 5% of the Fund's net assets will be committed to
initial margin on futures contracts and time premiums on related
options.
- Counterparties used for OTC derivatives must have a long-term
debt rating of A or higher when the derivative is entered into.
Occasionally, short-term derivatives will be entered into with
counterparties that have only high short-term debt ratings.
</TABLE>
81
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GMO TOBACCO-FREE CORE 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.
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
EQUITY SECURITIES: - At least 65% of the Fund's total assets will be invested
common stocks in or exposed to(3) domestic common stocks.
convertible securities
- The Fund invests primarily in the equity securities of at
OTHER EQUITY SECURITIES: least 125 companies chosen from among the 600 companies with the
depository receipts (ADRs, GDRs, EDRs) largest equity capitalization and whose securities are listed on
foreign issues traded principally in the U.S. a U.S. national securities exchange, and which are not Tobacco
illiquid securities Producing Issuers.
144A securities
restricted securities
futures and related options on
securities indexes
REITs
exchange-traded and OTC options on
securities and indexes
(including writing covered options)
equity swap contracts
contracts for differences
warrants
repurchase agreements
investment companies (open & closed end)
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have greater than 5% of its net
Any short-term assets will be invested in assets exposed to cash and money market instruments. This
cash or high quality money market limitation does not include cash and money market instruments in
instruments including securities issued by margin accounts or otherwise held against exposure achieved
the U.S. government and agencies thereof, through derivative instruments ("equitized cash").
bankers' acceptances, commercial paper,
bank certificates of deposit and repurchase
agreements.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of
its net assets from banks for the payment of redemptions or
settlement of securities transactions, but not as a leveraged
investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an
underwriter for securities law purposes in connection with
disposition of portfolio investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase
agreements and engaging in securities lending will not be
considered making loans for this purpose. The Fund may loan
securities valued at up to one-third of its total assets.
</TABLE>
- ----------
(3) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the Fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
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<S> <C>
PLEDGING, HYPOTHECATING OR - Except that collateral arrangements with respect to swap
MORTGAGING FUND ASSETS 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.
SELLING UNCOVERED PUT OR CALL OPTIONS
ON SECURITIES OR INDEXES
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
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 10% 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 purchase more than 5% of any class of
BROKERS, DEALERS, UNDERWRITERS AND stock of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such
company's total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets
will be invested in the securities of a single broker, dealer,
underwriter or investment adviser. The net payment obligation of
swap contracts where one of these types of companies is the
counterparty also counts for purposes of this restriction.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - Except for U.S. government securities, cash, and money market
instruments, the Fund will not invest in any one security to an
extent greater than 5 percentage points over that security's
weighting in the Fund's benchmark.
- The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
- The Fund will be invested in the securities of at least 125
issuers.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in
securities of issuers in any one industry.
DERIVATIVE INSTRUMENTS
</TABLE>
83
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<TABLE>
<S> <C>
TYPES OF DERIVATIVES - Options, futures contracts and related options on securities
indexes.
- Long equity swap contracts: where the Fund pays a fixed rate
plus the negative performance, if any, and receives the positive
performance, if any, of an index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed
rate plus the negative performance, if any, and pays the positive
performance of an index or basket of securities.
- Contracts for differences: equity swaps that contain both a
long and short equity component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity futures, related options and
short equity swap contracts used to hedge against an equity risk
already generally present in the Fund.(4)
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the Fund may hedge market
risk (risk of not being invested in the market) by purchasing long
futures contracts or entering into long equity swap contracts to
obtain market exposure until such time as direct investments can be
made efficiently. Conversely, if the Fund receives or anticipates a
significant demand for cash redemptions, the Fund may sell futures
contracts or enter into short equity swap contracts, to allow the
Fund to dispose of securities in a more orderly fashion without the
Fund being exposed to leveraged loss exposure in the interim.
INVESTMENT - The Fund may use derivative instruments (particularly long
futures contracts, related options and long equity swap contracts) in
place of investing directly in securities. This will include using
equity derivatives to "equitize" cash balances held by the Fund. The
Fund may also use long derivatives for investment in conjunction with
short hedging transactions to adjust the weights of the Fund's
underlying equity portfolio to a level the Manager believes is the
optimal exposure to individual markets, sectors and equities.
RISK MANAGEMENT - - The Fund may use equity futures, related options and equity
SYNTHETIC SALES AND PURCHASES 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.
</TABLE>
- ----------
(4) 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.
84
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<TABLE>
<S> <C>
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging
purposes.
- The face value of derivatives used for investment purposes will
be limited to 25% of the Fund's assets. When a currency forward is
used in conjunction with an equity derivative for investment
purposes, the currency forward will not be independently counted for
this restriction.
- When long futures contracts and long equity swaps are used for
investment, an amount of cash or high quality debt securities equal
to the face value of all such long derivative positions will be
segregated against such exposure. However, for purposes of this
restriction, if an existing long equity exposure is reduced or
eliminated by a short derivative position, the combination of the
long and short position will be considered as cash available to
segregate against a new long derivative exposure.
- The net long equity exposure of the Fund, including direct
investment in securities and long derivative positions, will not
exceed 100% of the Fund's net assets.
- The aggregate absolute face value of all futures contracts and
swap contracts (without regard to sign and assuming no offset of long
and short positions, and counting both components of any contract for
differences) will not exceed 100% of the Fund's assets.
- Except when such instruments are used for bona fide hedging, no
more than 5% of the Fund's net assets will be committed to initial
margin on futures contracts and time premiums on related options.
- Counterparties used for OTC derivatives must have a long-term
debt rating of A or higher when the derivative is entered into.
Occasionally, short-term derivatives will be entered into with
counterparties that have only high short-term debt ratings.
</TABLE>
85
<PAGE> 173
GMO VALUE 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.
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
EQUITY SECURITIES: - At least 65% of the Fund's total assets will be invested in or
domestic common stocks exposed to(5) domestic common stocks.
convertible securities
securities of foreign issuers
(traded on U.S.
Exchanges)
OTHER EQUITY SECURITIES:
depository receipts
illiquid securities
144A securities
restricted securities
futures and related options on
securities indexes
REITs
exchange-traded and OTC options on
securities and indexes
(including writing covered options)
equity swap contracts
contracts for differences
warrants
repurchase agreements
investment companies (open & closed end)
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have greater than 5% of its net
Any short-term assets will be invested in assets exposed to cash and money market instruments. This limitation
cash or high quality money market does not include cash and money market instruments in margin accounts
instruments including securities issued by or otherwise held against exposure achieved through derivative
the U.S. government and agencies thereof, instruments ("equitized cash").
bankers' acceptances, commercial paper,
bank certificates of deposit and repurchase
agreements
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 temporarily borrow up to 20% of its
net assets from banks for the payment of redemptions or settlement of
securities transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of portfolio
investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase agreements
and engaging in securities lending will not be considered making
loans for this purpose. The Fund may loan securities valued at up to
one-third of its total assets.
</TABLE>
- ----------
(5) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the Fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
86
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<TABLE>
<S> <C>
PLEDGING, HYPOTHECATING OR - Except that collateral arrangements with respect to swap
MORTGAGING FUND ASSETS 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.
SELLING UNCOVERED PUT OR CALL OPTIONS
ON SECURITIES OR INDEXES
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
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 purchase more than 5% of any class of
BROKERS, DEALERS, UNDERWRITERS AND stock of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such
company's total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets
will be invested in the securities of a single broker, dealer,
underwriter or investment adviser. 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 - The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
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 - Options, futures contracts and related options on securities
indexes.
USES OF DERIVATIVES - Traditional Hedging: Short equity futures and related options
contracts used to hedge against an equity risk already generally
present in the Fund.
</TABLE>
87
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<TABLE>
<S> <C>
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 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 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 and related options) in place of investing directly
in securities. This will include using equity derivatives to
"equitize" cash balances held by the Fund.
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 long futures contracts 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.
- The net long equity exposure of the Fund, including direct
investment in securities and long futures positions, will not exceed
100% of the Fund's net 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.
</TABLE>
88
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GMO FUNDAMENTAL VALUE 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.
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
EQUITY SECURITIES: - At least 65% of the Fund's total assets will be invested in
common stocks common stocks and securities convertible into common stocks.
convertible securities
- The Fund may invest up to 15% of its assets in securities of
OTHER EQUITY SECURITIES: foreign issuers and securities traded principally outside of the
depository receipts (ADRs, GDRs, EDRs) United States. The Fund's investments in foreign securities will
illiquid securities generally consist of equity securities traded in principal European
144A securities and Pacific Basin markets.
restricted securities
futures contracts and related options - The Fund's portfolio will not normally include more than 30
(including index futures on domestic issuers. Each issuer will generally be limited to 10% or less of
indexes) the Fund's total assets.
exchange-traded and OTC options on
securities and indexes
(including writing covered options)
equity swap contracts
contracts for differences
repurchase agreements
warrants
investment companies (open & closed end)
CASH AND MONEY MARKET INSTRUMENTS
Any short-term assets will be invested in
cash or high quality money market
instruments including securities issued by
the U.S. government and agencies thereof,
bankers' acceptances, commercial paper,
bank certificates of deposit and repurchase
agreements
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its
net assets from banks for the payment of redemptions or
settlement of securities transactions, but not as a leveraged
investment strategy
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of
portfolio investments
MAKING LOANS - Except that purchasing debt obligations, repurchase agreements
and engaging in securities lending will not be considered making
loans for this purpose. The Fund may loan securities valued at
up to one-third of its total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING - Except that collateral arrangements with respect to swap
FUND ASSETS 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
</TABLE>
89
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<TABLE>
<S> <C>
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
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 purchase more than 5% of any class of
BROKERS, DEALERS, UNDERWRITERS AND stock of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such
company's total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets
will be invested in the securities of a single broker, dealer,
underwriter or investment adviser. 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 - The Fund has elected to be treated as a non-diversified company
under the Investment Company Act of 1940.
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
- Options, futures contracts and related options on securities
indexes.
</TABLE>
90
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<TABLE>
USES OF DERIVATIVES
<S> <C>
HEDGING - Traditional Hedging: Short equity futures and related options
contracts used to hedge against an equity risk already generally
present in the Fund.
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the Fund may hedge market
risk (risk of not being invested in the market) by purchasing long
futures contracts 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 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 and related options) in place of investing
directly in securities. This will include using equity derivatives
to "equitize" cash balances held by the Fund.
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 long futures contracts are used for investment, the Fund
will maintain an amount of cash or high quality debt securities
equal to the face value of all such long derivative positions.
- The net long equity exposure of the Fund, including direct
investment in securities and long futures positions, will not
exceed 100% of the Fund's net 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.
</TABLE>
91
<PAGE> 179
GMO INTRINSIC VALUE 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.
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
EQUITY SECURITIES: - At least 65% of the Fund's total assets will be
domestic common stocks invested in or exposed to(6) domestic common stocks
convertible securities
OTHER EQUITY SECURITIES:
depository receipts
illiquid securities
144A securities
restricted securities
futures and related options on
securities indexes
REITs
exchange-traded and OTC options on securities and
indexes (including writing covered options)
equity swap contracts
contracts for differences
warrants or rights
securities of foreign issuers (traded on U.S.
exchanges)
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have greater than 5% of
Any short-term assets will be invested in cash or high its net assets exposed to cash and money market
quality money market instruments including securities instruments. This limitation does not include cash and
issued by the U.S. government and agencies thereof, money market instruments in margin accounts or otherwise
bankers' acceptances, commercial paper, held against exposure achieved through derivative
bank certificates of deposit and repurchase agreements. instruments ("equitized cash").
</TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
<TABLE>
<S> <C>
PURCHASING SECURITIES ON MARGIN Except for short-term credits necessary for clearance of transactions.
Except that the Fund may borrow up to 20% of its net assets from banks
BORROWING MONEY temporarily for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of portfolio
investments.
MAKING LOANS Except that purchasing of debt obligations, repurchase agreements and
engaging in securities lending will not be considered making loans for
this purpose. The Fund may loan securities valued at up to one-third
of its total assets.
PLEDGING, HYPOTHECATING OR Except that collateral arrangements with respect to swap agreements,
MORTGAGING FUND ASSETS the writing of options, stock index, interest rate, currency or other
futures contracts,
</TABLE>
- ----------
(6) 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.
92
<PAGE> 180
<TABLE>
<S> <C>
options on futures contracts and collateral arrangements with
respect to initial and variation margin are not deemed to be a
pledge or other encumbrance of assets. The deposit of
securities or cash or cash equivalents in escrow in connection
with the writing of covered call or put options, respectively
is also not deemed to be a pledge or encumbrance.
SELLING UNCOVERED PUT OR CALL OPTIONS
ON SECURITIES OR INDEXES
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
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).
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 purchase more than 5% of any class of
BROKERS, DEALERS, UNDERWRITERS AND stock of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such
company's total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets will
be invested in the securities of a single broker, dealer, underwriter or
investment adviser. 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.
CONCENTRATION
CONCENTRATION - The Fund will not invest more than 25% of its 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
HEDGING - Traditional Hedging: Short equity futures, related options and
short equity swap contracts used to hedge against an equity risk already
generally present in the
</TABLE>
93
<PAGE> 181
<TABLE>
<S> <C>
Fund.7
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the Fund may hedge market risk
(risk of not being invested in the market) by purchasing long futures
contracts or entering long equity swap contracts to obtain market
exposure until such time as direct investments can be made efficiently.
Conversely, if the Fund receives or anticipates a significant demand for
cash redemptions, the Fund may sell futures contracts or enter into short
equity swap contracts, to allow the Fund to dispose of securities in a
more orderly fashion without the Fund being exposed to leveraged loss
exposure in the interim.
INVESTMENT - The Fund may use derivative instruments (particularly long futures
contracts, related options and long equity swap contracts) in place of
investing directly in securities. This will include using equity
derivatives to "equitize" cash balances held by the Fund. The Fund may
also use long derivatives for investment in conjunction with short
hedging transactions to adjust the weights of the Fund's underlying
equity portfolio to a level the Manager believes is the optimal exposure
to individual markets, sectors and equities.
RISK MANAGEMENT - - The Fund may use equity futures, related options and equity swap
SYNTHETIC SALES AND PURCHASES 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 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
</TABLE>
- ----------
(7) 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.
94
<PAGE> 182
<TABLE>
<S> <C>
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.
</TABLE>
95
<PAGE> 183
GMO GROWTH 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.
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
EQUITY SECURITIES: - At least 65% of the Fund's total assets will be invested
domestic common stocks in or exposed to(8) domestic common stocks.
convertible securities
securities of foreign issuers
(traded on U.S.
Exchanges)
OTHER EQUITY SECURITIES:
depository receipts
illiquid securities
144A securities
restricted securities
futures and related options on
securities indexes
REITs
exchange-traded and OTC options on
securities and indexes
(including writing covered options)
equity swap contracts
contracts for differences
warrants
repurchase agreements
investment companies (open & closed end)
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have greater than 5% of its net
Any short-term assets will be invested in assets exposed to cash and money market instruments. This
cash or high quality money market limitation does not include cash and money market instruments in
instruments including securities issued by margin accounts or otherwise held against exposure achieved through
the U.S. government and agencies thereof, derivative instruments ("equitized cash").
bankers' acceptances, commercial paper,
bank certificates of deposit and repurchase
agreements
</TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
<TABLE>
<S> <C>
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its
net assets from banks for the payment of redemptions or settlement
of securities transactions, but not as a leveraged investment
strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter
for securities law purposes in connection with disposition of
portfolio investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase
agreements and engaging in securities lending will not be
considered making loans for this purpose. The Fund may loan
securities valued at up to one-third of its total assets.
</TABLE>
- ----------
(8) 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.
96
<PAGE> 184
<TABLE>
<S> <C>
PLEDGING, HYPOTHECATING OR MORTGAGING - Except that collateral arrangements with respect to swap
FUND ASSETS 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.
</TABLE>
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
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
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
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 purchase more than 5% of any class
BROKERS, DEALERS, UNDERWRITERS AND of stock of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such
company's total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets
will be invested in the securities of a single broker, dealer,
underwriter or investment adviser. The net payment obligation of
swap contracts where one of these types of companies is the
counterparty also counts for purposes of this restriction.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - Except for U.S. government securities, cash, and money market
instruments, the Fund will not invest in any one security to an
extent greater than 5 percentage points over that security's
weighting in the Fund's benchmark.
- The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
- The Fund will be invested in the securities of at least 125
issuers.
- The Fund will not invest more than 25% of its total assets in
CONCENTRATION securities of issuers in any one industry.
</TABLE>
97
<PAGE> 185
DERIVATIVE INSTRUMENTS
<TABLE>
<S> <C>
TYPES OF DERIVATIVES - Options, futures contracts and related options on securities
indexes.
- Long equity swap contracts: where the Fund pays a fixed rate
plus the negative performance, if any, and receives the positive
performance, if any, of an index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed
rate plus the negative performance, if any, and pays the positive
performance of an index or basket of securities.
Contracts for differences: equity swaps that contain both a long and
short equity component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity futures, related options
and short equity swap contracts used to hedge against an equity
risk already generally present in the Fund.(9)
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the Fund may hedge market
risk (risk of not being invested in the market) by purchasing long
futures contracts or entering into long equity swap contracts to
obtain market exposure until such time as direct investments can be
made efficiently. Conversely, if the Fund receives or anticipates
a significant demand for cash redemptions, the Fund may sell
futures contracts or enter into short equity swap contracts, to
allow the Fund to dispose of securities in a more orderly fashion
without the Fund being exposed to leveraged loss exposure in the
interim.
RISK MANAGEMENT -
SYNTHETIC SALES AND PURCHASES - The Fund may use equity futures, related options and equity
swap contracts to adjust the weight of the Fund to a level the
manager believes is the optimal exposure to individual markets,
sectors and equities. Sometimes, such transactions are used as a
precursor to actual sales and purchases. For example, if the Fund
held a large proportion of stocks of a particular market and the
Manager believed that stocks of another market would outperform
such stocks, the Fund might use a short futures contract on an
appropriate index (to synthetically "sell" a portion of the Fund's
portfolio) in combination with a long futures contract on another
index (to synthetically "buy" exposure to that index). Long and
short equity swap contracts and contracts for differences may also
be used for these purposes. Equity derivatives (and corresponding
currency forwards) used to effect synthetic sales and purchases
will generally be unwound as actual portfolio securities are sold
and purchased.
</TABLE>
- ----------
(9) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g., single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund.
98
<PAGE> 186
<TABLE>
<S> <C>
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging
purposes.
- The face value of derivatives used for investment purposes
will be limited to 25% of the Fund's assets. When a currency
forward is used in conjunction with an equity derivative for
investment purposes, the currency forward will not be independently
counted for this restriction.
- When long futures contracts and long equity swaps are used
for investment, an amount of cash or high quality debt securities
equal to the face value of all such long derivative positions will
be segregated against such exposure. However, for purposes of this
restriction, if an existing long equity exposure is reduced or
eliminated by a short derivative position, the combination of the
long and short position will be considered as cash available to
segregate against a new long derivative exposure.
- The net long equity exposure of the Fund, including direct
investment in securities and long derivative positions, will not
exceed 100% of the Fund's net assets.
- The aggregate absolute face value of all futures contracts
and swap contracts (without regard to sign and assuming no offset
of long and short positions, and counting both components of any
contract for differences) will not exceed 100% of the Fund's assets.
- Except when such instruments are used for bona fide hedging,
no more than 5% of the Fund's net assets will be committed to
initial margin on futures contracts and time premiums on related
options.
- Counterparties used for OTC derivatives must have a long-term
debt rating of A or higher when the derivative is entered into.
Occasionally, short-term derivatives will be entered into with
counterparties that have only high short-term debt ratings.
</TABLE>
99
<PAGE> 187
GMO SMALL CAP VALUE 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.
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
EQUITY SECURITIES: - At least 65% of the Fund's total assets will be invested in or
domestic common stocks exposed to (10) domestic common stocks.
convertible securities - Under normal market conditions, at least 65% of the Fund's
securities of foreign issuers total assets will be invested in or exposed to Russell 2500 Value
(traded on U.S. Exchanges) Index securities.
OTHER EQUITY SECURITIES:
depository receipts
illiquid securities
144A securities
restricted securities
futures and related options on
securities indexes
REITs
exchange-traded and OTC options on
securities and indexes
(including writing covered options)
equity swap contracts
contracts for differences
convertible bonds
convertible preferred stocks
warrants
repurchase agreements
investment companies (open & closed end)
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have greater than 5% of its net
Any short-term assets will be invested in assets exposed to cash and money market instruments. This limitation
cash or high quality money market does not include cash and money market instruments in margin accounts
instruments including securities issued by or otherwise held against exposure achieved through derivative
the U.S. government and agencies thereof, instruments ("equitized cash").
bankers' acceptances, commercial paper,
bank certificates of deposit and repurchase
agreements
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 temporarily borrow up to 20% of its
net assets from banks for the payment of redemptions or settlement of
securities transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for
securities law
</TABLE>
- ----------
(10) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the Fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
100
<PAGE> 188
<TABLE>
<S> <C>
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. The Fund may loan securities valued at up to
one-third of its total assets.
- Except that collateral arrangements with respect to swap
PLEDGING, HYPOTHECATING OR MORTGAGING agreements, the writing of options, stock index, interest rate,
FUND ASSETS 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.
</TABLE>
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
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
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
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 purchase more than 5% of any class of
BROKERS, DEALERS, UNDERWRITERS AND stock of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such
company's total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets
will be invested in the securities of a single broker, dealer,
underwriter or investment adviser. The net payment obligation of
swap contracts where one of these types of companies is the
counterparty also counts for purposes of this restriction.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - Except for U.S. government securities, cash, and money market
instruments, the Fund will not invest in any one security to an
extent greater than 5 percentage points over that security's
weighting in the Fund's benchmark.
- The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
- The Fund will be invested in the securities of at least 125
issuers.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in
securities of
</TABLE>
101
<PAGE> 189
<TABLE>
<S> <C>
issuers in any one industry.
DERIVATIVE INSTRUMENTS
TYPES OF DERIVATIVES - Options, futures contracts and related options on securities
indexes.
- Long equity swap contracts: where the Fund pays a fixed rate
plus the negative performance, if any, and receives the positive
performance, if any, of an index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed
rate plus the negative performance, if any, and pays the positive
performance of an index or basket of securities.
- Contracts for differences: equity swaps that contain both a
long and short equity component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity futures, related options and
short equity swap contracts used to hedge against an equity risk
already generally present in the Fund.(11)
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the Fund may hedge market
risk (risk of not being invested in the market) by purchasing long
futures contracts or entering into long equity swap contracts to
obtain market exposure until such time as direct investments can be
made efficiently. Conversely, if the Fund receives or anticipates a
significant demand for cash redemptions, the Fund may sell futures
contracts or enter into short equity swap contracts, to allow the
Fund to dispose of securities in a more orderly fashion without the
Fund being exposed to leveraged loss exposure in the interim.
INVESTMENT - The Fund may use derivative instruments (particularly long
futures contracts, related options and long equity swap contracts) in
place of investing directly in securities. This will include using
equity derivatives to "equitize" cash balances held by the Fund. The
Fund may also use long derivatives for investment in conjunction with
short hedging transactions to adjust the weights of the Fund's
underlying equity portfolio to a level the Manager believes is the
optimal exposure to individual markets, sectors and equities.
RISK MANAGEMENT - - The Fund may use equity futures, related options and equity
SYNTHETIC SALES AND PURCHASES swap contracts to adjust the weight of the Fund to a level the
manager believes is the optimal exposure to individual markets,
sectors and equities. Sometimes, such transactions are used as a
precursor to actual sales and purchases. For example, if the Fund
held a large proportion of stocks of a particular market and the
Manager believed that stocks of another market would outperform such
stocks, the Fund might use a short futures contract on an appropriate
index (to synthetically "sell" a portion of the Fund's portfolio) in
combination with a long futures contract on another index (to
synthetically "buy" exposure to that index). Long and short equity
swap contracts and contracts for differences may also be used for
these purposes. Equity derivatives (and corresponding currency
forwards) used to effect synthetic sales and purchases will generally
be unwound as actual portfolio securities are sold and purchased.
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging
purposes.
- The face value of derivatives used for investment purposes will
be limited to 25% of the Fund's assets. When a currency forward is
used in conjunction with an equity derivative for investment
purposes, the currency forward will not be independently counted for
this restriction.
</TABLE>
- ----------
(11) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g., a single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund.
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- 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.
</TABLE>
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GMO SMALL CAP GROWTH 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.
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
EQUITY SECURITIES:
domestic common stocks - At least 65% of the Fund's total assets will be invested in or
convertible securities exposed to (12) domestic common stocks.
securities of foreign issuers
(traded on U.S. Exchanges) - Under normal market conditions, at least 65% of the Fund's
total assets will be invested in or exposed to Russell 2500 Growth
Index securities.
OTHER EQUITY SECURITIES:
depository receipts
illiquid securities
144A securities
restricted securities
futures and related options on
securities indexes
REITs
exchange-traded and OTC options on
securities and indexes
(including writing covered options)
equity swap contracts
contracts for differences
convertible bonds
convertible preferred stocks
warrants
repurchase agreements
investment companies (open & closed end)
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have greater than 5% of its net
Any short-term assets will be invested in assets exposed to cash and money market instruments. This limitation
cash or high quality money market does not include cash and money market instruments in margin accounts
instruments including securities issued by or otherwise held against exposure achieved through derivative
the U.S. Government and agencies thereof, instruments ("equitized cash").
bankers' acceptances, commercial paper,
bank certificates of deposit and repurchase
agreements.
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 temporarily borrow up to 20% of its
net assets from banks for the payment of redemptions or settlement of
securities transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for
securities law
</TABLE>
- ----------
(12) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the Fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
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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. The Fund may loan securities valued at up to
one-third of its total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING - Except that collateral arrangements with respect to swap
FUND ASSETS 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.
</TABLE>
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
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
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
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 purchase more than 5% of any class of
BROKERS, DEALERS, UNDERWRITERS AND stock of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such
company's total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets
will be invested in the securities of a single broker, dealer,
underwriter or investment adviser. The net payment obligation of
swap contracts where one of these types of companies is the
counterparty also counts for purposes of this restriction.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - Except for U.S. government securities, cash, and money market
instruments, the Fund will not invest in any one security to an
extent greater than 5 percentage points over that security's
weighting in the Fund's benchmark.
- The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
- The Fund will be invested in the securities of at least 125
issuers.
</TABLE>
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<S> <C>
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 - Options, futures contracts and related options on securities
indexes.
- Long equity swap contracts: where the Fund pays a fixed rate
plus the negative performance, if any, and receives the positive
performance, if any, of an index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed
rate plus the negative performance, if any, and pays the positive
performance of an index or basket of securities.
- Contracts for differences: equity swaps that contain both a
long and short equity component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity futures, related options and
short equity swap contracts used to hedge against an equity risk
already generally present in the Fund.(13)
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the Fund may hedge market
risk (risk of not being invested in the market) by purchasing long
futures contracts or entering into long equity swap contracts to
obtain market exposure until such time as direct investments can be
made efficiently. Conversely, if the Fund receives or anticipates a
significant demand for cash redemptions, the Fund may sell futures
contracts or enter into short equity swap contracts, to allow the
Fund to dispose of securities in a more orderly fashion without the
Fund being exposed to leveraged loss exposure in the interim.
RISK MANAGEMENT - - The Fund may use equity futures, related options and equity
SYNTHETIC SALES AND PURCHASES swap contracts to adjust the weight of the Fund to a level the
Manager believes is the optimal exposure to individual markets,
sectors and equities. Sometimes, such transactions are used as a
precursor to actual sales and purchases. For example, if the Fund
held a large proportion of stocks of a particular market and the
Manager believed that stocks of another market would outperform such
stocks, the Fund might use a short futures contract on an appropriate
index (to synthetically "sell" a portion of the Fund's portfolio) in
combination with a long futures contract on another index (to
synthetically "buy" exposure to that index). Long and short equity
swap contracts and contracts for differences may also be used for
these purposes. Equity derivatives (and corresponding currency
forwards) used to effect synthetic sales and purchases will generally
be unwound as actual portfolio securities are sold and purchased.
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging
purposes.
- The face value of derivatives used for investment purposes will
be limited to 25% of the Fund's assets. When a currency forward is
used in conjunction with an equity derivative for investment
purposes, the currency forward will not be independently counted for
this restriction.
- When long futures contracts and long equity swaps are used for
investment, an amount of cash or high quality debt securities equal
to the face value of all such long derivative positions will be
segregated against such exposure. However, for purposes of this
restriction, if an existing long equity exposure is reduced or
eliminated by a short derivative position, the combination of the
</TABLE>
- ----------
(13) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g., a single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund.
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<S> <C>
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.
</TABLE>
107
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GMO REIT 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.
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
REITS (REAL ESTATE INVESTMENT TRUSTS): - At least 65% of the Fund's total assets will be
equity REITs invested in or exposed to (14) securities of REITs,
mortgage REITs although the Fund generally intends to invest a
hybrid REITs greater portion of its assets in REIT securities.
EQUITY SECURITIES: OTHER SECURITIES:
common stock asset-backed securities
preferred stock mortgage backed, CMO's, strips and
depository receipts: ADRs, GDRs, EDRs residuals
illiquid securities adjustable rate securities
144A securities lower rated fixed income securities (junk
restricted securities bonds)
futures and related options on zero coupon securities
securities indexes and interest rates indexed securities
exchange-traded and OTC options on firm commitments (with banks or broker
securities and indexes (including writing dealers)
covered options) reverse repurchase agreements
REIT and other equity swap contracts dollar roll agreements
interest rate and currency swap contracts
contracts for differences
interest rate caps, floors and collars
warrants
repurchase agreements
investment companies (open & closed end)
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have greater than 5% of its net
Any short-term assets will be invested in assets exposed to cash and money market instruments. This limitation
cash or high quality money market does not include cash and money market instruments in margin accounts
instruments including securities issued by or otherwise held against exposure achieved through derivative
the U.S. government and agencies thereof, instruments ("equitized cash").
bankers' acceptances, commercial paper,
bank certificates of deposit and repurchase
agreements.
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 temporarily borrow up to 20% of its
net assets from banks for the payment of redemptions or settlement of
securities transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for
securities law
</TABLE>
- ----------
(14) The words "exposed to" as used in these guideline mean that, for
purposes of the relevant requirement or restriction, the total of the Fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
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<S> <C>
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. The Fund may loan securities valued at up to
one-third of its total assets.
PLEDGING, HYPOTHECATING OR - Except that collateral arrangements with respect to swap
MORTGAGING FUND ASSETS 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.
</TABLE>
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
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
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
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 purchase more than 5% of any class of
BROKERS, DEALERS, UNDERWRITERS AND stock of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such
company's total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets
will be invested in the securities of a single broker, dealer,
underwriter or investment adviser. The net payment obligation of
swap contracts where one of these types of companies is the
counterparty also counts for purposes of this restriction.
- This policy does not apply to companies that derived less than
15% of revenues from "securities-related businesses" during the most
recent fiscal year.
INVESTMENT IN LOWER-RATED BONDS - The Fund will not invest more than 5% of its assets in
lower-rated bonds.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - Except for U.S. government securities, cash, and money market
instruments, the Fund will not invest in any one security to an extent
greater than 5 percentage points over that security's weighting in the
Fund's benchmark.
</TABLE>
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<TABLE>
<S> <C>
- The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
DERIVATIVE INSTRUMENTS
TYPES OF DERIVATIVES - Options, futures contracts and related options on securities
indexes.
- Long equity swap contracts: where the Fund pays a fixed rate
plus the negative performance, if any, and receives the positive
performance, if any, of an index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed
rate plus the negative performance, if any, and pays the positive
performance of an index or basket of securities.
- Contracts for differences: equity swaps that contain both a
long and short equity component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity futures, related options and
short equity swap contracts used to hedge against an equity risk
already generally present in the Fund.(15)
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the Fund may hedge market
risk (risk of not being invested in the market) by purchasing long
futures contracts or entering into long equity swap contracts to
obtain market exposure until such time as direct investments can be
made efficiently. Conversely, if the Fund receives or anticipates a
significant demand for cash redemptions, the Fund may sell futures
contracts or enter into short equity swap contracts, to allow the
Fund to dispose of securities in a more orderly fashion without the
Fund being exposed to leveraged loss exposure in the interim.
INVESTMENT - The Fund may use derivative instruments (particularly long
futures contracts, related options and long equity swap contracts)
in place of investing directly in securities. This will include
using equity derivatives to "equitize" cash balances held by the
Fund. The Fund may also use long derivatives for investment in
conjunction with short hedging transactions to adjust the weights of
the Fund's underlying equity portfolio to a level the Manager
believes is the optimal exposure to individual markets, sectors and
equities.
RISK MANAGEMENT - - The Fund may use equity futures, related options and equity
SYNTHETIC SALES AND PURCHASES 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
</TABLE>
- ----------
(15) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g., a single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund.
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<S> <C>
25% of the Fund's assets. When a currency forward
is used in conjunction with an equity derivative for
investment purposes, the currency forward will not be independently
counted for this restriction.
When long futures contracts and long equity swaps are used for
investment, an amount of cash or high quality debt securities equal
to the face value of all such long derivative positions will be
segregated against such exposure. However, for purposes of this
restriction, if an existing long equity exposure is reduced or
eliminated by a short derivative position, the combination of the
long and short position will be considered as cash available to
segregate against a new long derivative exposure.
- The net long equity exposure of the Fund, including direct
investment in securities and long derivative positions, will not
exceed 100% of the Fund's net assets.
- The aggregate absolute face value of all futures contracts and
swap contracts (without regard to sign and assuming no offset of
long and short positions, and counting both components of any
contract for differences) will not exceed 100% of the Fund's assets.
- Except when such instruments are used for bona fide hedging,
no more than 5% of the Fund's net assets will be committed to
initial margin on futures contracts and time premiums on related
options.
- Counterparties used for OTC derivatives must have a long-term
debt rating of A or higher when the derivative is entered into.
Occasionally, short-term derivatives will be entered into with
counterparties that have only high short-term debt ratings.
</TABLE>
111
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INTERNATIONAL EQUITY FUNDS
GMO INTERNATIONAL CORE 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.
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
EQUITY SECURITIES: - The Fund will have greater than 65% of its total assets
common stocks invested in or exposed to(16) Equity Securities and Other Equity
convertible bonds Securities.
preferred stocks
warrants or rights - The Fund invests primarily in equity securities chosen from
among the 3500 companies in developed markets that are listed in
OTHER EQUITY SECURITIES: the MSCI Perspective Publication, which includes issuers in the
depository receipts: ADRs, GDRs, EDRs MSCI EAFE Index, smaller companies and Canadian companies.
foreign issues traded in the U.S. and
abroad investment companies (open &
closed-end)
illiquid securities
144A securities
restricted securities
equity futures and related options
exchange-traded and OTC options on
securities and indexes (including
writing covered options)
equity swap contracts
contracts for differences
repurchase agreements
FIXED INCOME SECURITIES:
long and medium-term corporate and
government bonds
non-convertible preferred stock
FOREIGN CURRENCY TRANSACTIONS - Fund may invest in spot currency transactions, forward foreign
currency contracts, currency swap contracts, options on currencies,
currency futures and related options.
CASH AND MONEY MARKET INSTRUMENTS
Any short-term assets will be invested in - The Fund will not normally have greater than 5% of its net
cash or high quality money market assets exposed to cash and money market instruments. This
instruments including securities issued by limitation does not include cash and money market instruments in
the U.S. government and agencies thereof, margin accounts or otherwise held against exposure achieved
bankers' acceptances, commercial paper, through derivative instruments ("equitized cash").
bank certificates of deposit, time deposits
and repurchase agreements
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following
practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its
net assets from banks for the payment of redemptions or settlement
of securities transactions, but not as a leveraged investment
strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for
securities
</TABLE>
- ----------
(16) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
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<S> <C>
law purposes in connection with disposition of
portfolio investments.
MAKING LOANS - Except that purchasing of debt obligations, repurchase
agreements and engaging in securities lending will not be
considered making loans for this purpose. The Fund may loan
securities valued at up to 25% of its total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING - Except that collateral arrangements with respect to swap
FUND ASSETS 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.
</TABLE>
EMERGING MARKET ISSUERS
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
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
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
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
BROKERS, DEALERS, UNDERWRITERS AND - Equity: The Fund will not purchase more than 5% of any class of
INVESTMENT ADVISERS stock of a broker, dealer, underwriter or investment adviser.
- Debt: The Fund may not purchase more than 10% of any such
company's total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets
will be invested in the securities of a single broker, dealer,
underwriter or investment adviser. The net payment obligation of
swap contracts where one of these types of companies is the
counterparty also counts for purposes of this restriction.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - Except for U.S. government securities, cash, and money market
instruments, the Fund will not invest in any one security to an
extent greater than 5 percentage points over that security's
weighting in the Fund's benchmark.
- The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
- The Fund will be invested in the securities of at least 125
issuers.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in
securities of issuers in any one industry.
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DERIVATIVE INSTRUMENTS (OTHER THAN FOREIGN CURRENCY TRANSACTIONS)
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TYPES OF DERIVATIVES - Options, futures contracts and related options on securities
indexes.
- Long equity swap contracts: where the Fund pays a fixed rate
plus the negative performance, if any, and receives the positive
performance, if any, of an index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed
rate plus the negative performance, if any, and pays the positive
performance of an index or basket of securities.
- Contracts for differences: equity swaps that contain both long
and short equity components
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity futures, related options and
short equity swap contracts used to hedge against an equity risk
already generally present in the Fund.(17)
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the Fund may hedge market
risk (risk of not being invested in the market) by purchasing long
futures contracts or entering into long equity swap contracts to
obtain market exposure until such time as direct investments can be
made efficiently. Conversely, if the Fund receives or anticipates a
significant demand for cash redemptions, the Fund may sell futures
contracts or enter into short equity swap contracts, to allow the
Fund to dispose of securities in a more orderly fashion without the
Fund being exposed to leveraged loss exposure in the interim.
INVESTMENT - The Fund may use derivative instruments (particularly long
futures contracts, related options and long equity swap contracts) in
place of investing directly in securities. This will include using
equity derivatives to "equitize" cash balances held by the Fund.
Because a foreign equity derivative generally only provides the
return of a foreign market in local currency terms, the Fund will
often purchase a foreign currency forward in conjunction with using
equity derivatives to give the effect of investing directly. The
Fund may also use long derivatives for investment in conjunction with
short hedging transactions to adjust the weights of the Fund's
underlying equity portfolio to a level the Manager believes is the
optimal exposure to individual countries and equities. For example,
if the Manager expects a positive return forecast for a select group
of UK companies, but a negative return for the UK market as a whole,
then this Fund may overweight the select group of equities and reduce
exposure to the UK market by selling UK equity futures or enter into
a swap contract that is long a specific basket of securities and
short the UK market generally.
RISK MANAGEMENT - - The Fund may use equity futures, related options and equity
SYNTHETIC SALES AND PURCHASES swap contracts to adjust the weight of the Fund to a level the
manager believes is the optimal exposure to individual countries and
equities. Sometimes, such transactions are used as a precursor to
actual sales and purchases. For example, if the Fund held a large
proportion of stocks of a particular market and the Manager believed
that stocks of another market would outperform such stocks, the Fund
might use a short futures contract on an appropriate index (to
synthetically "sell" a portion of the Fund's portfolio) in
combination with a long futures contract on another index (to
synthetically "buy" exposure to that index). Long and short equity
swap contracts and contracts for differences may also be
</TABLE>
- ----------
(17) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g., a single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund.
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used for these purposes. Often, a foreign currency forward will be used
in conjunction with the long derivative position to create the effect
of investing directly. Equity derivatives (and corresponding currency
forwards) used to effect synthetic sales and purchases will generally
be unwound as actual portfolio securities are sold and purchased.
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging
purposes.
- The face value of derivatives used for investment purposes will
be limited to 25% of the Fund's assets. When a currency forward is
used in conjunction with an equity derivative for investment
purposes, the currency forward will not be independently counted for
this restriction.
- When long futures contracts and long equity swaps are used for
investment, an amount of cash or high quality debt securities equal
to the face value of all such long derivative positions will be
segregated against such exposure. However, for purposes of this
restriction, if an existing long equity exposure is reduced or
eliminated by a short derivative position, the combination of the
long and short position will be considered as cash available to
segregate against a new long derivative exposure.
- The net long equity exposure of the Fund, including direct
investment in securities and long derivative positions, will not
exceed 100% of the Fund's net assets.
- The aggregate absolute face value of all futures contracts and
swap contracts (without regard to sign and assuming no offset of long
and short positions, and counting both components of any contract for
differences) will not exceed 100% of the Fund's assets.
- Except when such instruments are used for bona fide hedging, no
more than 5% of the Fund's net assets will be committed to initial
margin on futures contracts and time premiums on related options.
- Counterparties used for OTC derivatives must have a long-term
debt rating of A or higher when the derivative is entered into.
Occasionally, short-term derivatives will be entered into with
counterparties that have only high short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS - Buying and selling spot currencies.
- Forward foreign currency contracts.
- Currency futures contracts and related options.
- Options on currencies.
- Currency swap contracts.
USES OF FOREIGN CURRENCY
TRANSACTIONS
HEDGING - Traditional Hedging: The Fund may effect foreign currency
transactions - generally short forward or futures contracts -- to
hedge the risk of foreign currencies represented by its securities
investments back into the U.S. dollar. The Fund is not required to
hedge any of the currency risk obtained by investing in securities
denominated in foreign currencies.
- Anticipatory Hedging: When the Fund enters into a contract for
the purchase or anticipates the need to purchase a security
denominated in a foreign currency, it may "lock in" the U.S. dollar
price of the security by buying the foreign currency or through
currency forwards or futures.
- Proxy Hedging: The Fund may hedge the exposure of a given
foreign currency by using an instrument relating to a different
currency, which the Manager believes is highly correlated to the
currency being hedged.
INVESTMENT - The Fund may enter into currency forwards or futures contracts
in conjunction with entering into a futures contract on a foreign
index in order to create synthetic foreign currency denominated
securities.
RISK MANAGEMENT - Subject to the limitations described below, the Fund may use
foreign currency transactions for risk management, which will permit
the Fund to have foreign
</TABLE>
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currency exposure that is significantly different than the
currency exposure represented by its portfolio investments.
This may include long exposure to particular currencies beyond
the amount of the Fund's investment in securities denominated
in that currency.
LIMITATIONS OF FOREIGN CURRENCY
TRANSACTIONS - The Fund will typically hedge less than 30% of the foreign
currency exposure represented by its investments in foreign-currency
denominated securities.
- The Fund's aggregate net foreign currency exposure, assuming
full offset of long and short positions, will not exceed 100% of the
Fund's net assets denominated in foreign currencies, though the
currency exposure of the Fund may differ substantially from the
currencies in which the Fund's securities are denominated.
- The Fund will not be net short in any foreign currency, except
that, when the Fund is attempting to hedge all or nearly all of its
exposure to a particular currency, changes in the market value of
foreign equities may cause the Fund to be temporarily net short in
the currency. Such temporary net short positions will not exceed 1%
of the Fund's assets.
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GMO CURRENCY HEDGED INTERNATIONAL CORE 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.
PERMITTED INVESTMENTS
<TABLE>
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EQUITY SECURITIES: - The Fund will have more than 65% of its total assets invested
common stocks in or exposed to(18) Equity Securities and Other Equity Securities.
convertible bonds
preferred stocks - The Fund invests primarily in equity securities chosen from
warrants or rights among the 3500 companies in developed markets that are listed in
the MSCI Perspective Publication, which includes issuers in the
MSCI EAFE Index, smaller companies and Canadian companies.
OTHER EQUITY SECURITIES:
depository receipts: ADRs, GDRs, EDRs
foreign issues traded in the U.S. and abroad
investment companies (open & closed end)
illiquid securities
144A securities
restricted securities
equity futures and related options
exchange-traded and OTC options on
equity swap contracts
contracts for differences
repurchase agreements
FIXED INCOME SECURITIES:
long and medium-term corporate
and government bonds
non-convertible preferred stock
FOREIGN CURRENCY TRANSACTIONS - Fund may invest in spot currency transactions, forward foreign
currency contracts, currency swap contracts, options on currencies,
currency futures and related options.
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have greater than 5% of its net
Any short-term assets will be invested in assets exposed to cash and money market instruments. This
cash or high quality money market limitation does not include cash and money market instruments in
instruments including securities issued by margin accounts or otherwise held against exposure achieved through
the U.S. government and agencies thereof, derivative instruments ("equitized cash").
bankers' acceptances, commercial paper,
bank certificates of deposit and repurchase
agreements
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following
practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its net
assets from banks for the payment of redemptions or settlement of
securities transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of portfolio
investments.
</TABLE>
(18) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
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MAKING LOANS - Except that purchasing of debt obligations, repurchase agreements
and engaging in securities lending will not be considered making loans
for this purpose. The Fund may loan securities valued at up to 25% of
its total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING FUND - Except that collateral arrangements with respect to swap
ASSETS MORTGAGING FUND ASSETS 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.
</TABLE>
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
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
EMERGING MARKET ISSUERS
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
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 Funds 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 purchase more than 5% of any class of
BROKERS, DEALERS, UNDERWRITERS AND stock of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such
company's total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets
will be invested in the securities of a single broker, dealer,
underwriter or investment adviser. The net payment obligation of
swap contracts where one of these types of companies is the
counterparty also counts for purposes of this restriction.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - Except for U.S. government securities, cash, and money market
instruments, the Fund will not invest in any one security to an
extent greater than 5 percentage points over that security's
weighting in the Fund's benchmark.
- The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in
securities of issuers in any one industry.
</TABLE>
DERIVATIVE INSTRUMENTS (OTHER THAN FOREIGN CURRENCY TRANSACTIONS)
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TYPES OF DERIVATIVES - Options, futures contracts and related options on
securities indexes.
- Long equity swap contracts: where the Fund pays a fixed
rate plus the negative performance, if any, and receives the
positive performance, if any, of an index or basket of
securities.
- Short equity swap contracts: where the Fund receives a
fixed rate plus the negative performance, if any, and pays the
positive performance of an index or basket of securities.
- Contracts for differences: equity swaps that contain both
a long and short equity component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity futures, related
options and short equity swap contracts used to hedge against
an equity risk already generally present in the Fund.(19)
- Anticipatory Hedging: If the Fund receives or
anticipates significant cash purchase transactions, the Fund
may hedge market risk (risk of not being invested in the
market) by purchasing long futures contracts or entering into
long equity swap contracts to obtain market exposure until such
time as direct investments can be made efficiently.
Conversely, if the Fund receives or anticipates a significant
demand for cash redemptions, the Fund may sell futures
contracts or enter into short equity swap contracts, to allow
the Fund to dispose of securities in a more orderly fashion
without the Fund being exposed to leveraged loss exposure in
the interim.
INVESTMENT - The Fund may use derivative instruments (particularly
long futures contracts, related options and long equity swap
contracts) in place of investing directly in securities. This
will include using equity derivatives to "equitize" cash
balances held by the Fund. Because a foreign equity derivative
generally only provides the return of a foreign market in local
currency terms, the Fund will often purchase a foreign currency
forward in conjunction with using equity derivatives to give
the effect of investing directly. The Fund may also use long
derivatives for investment in conjunction with short hedging
transactions to adjust the weights of the Fund's underlying
equity portfolio to a level the Manager believes is the optimal
exposure to individual countries and equities. For example, if
the Manager expects a positive return forecast for a select
group of UK companies, but a negative return for the UK market
as a whole, then this Fund may overweight the select group of
equities and reduce exposure to the UK market by selling UK
equity futures or enter into a swap contract that is long a
specific basket of securities and short the UK market generally.
RISK MANAGEMENT - - The Fund may use equity futures, related options and
SYNTHETIC SALES AND PURCHASES equity swap contracts to adjust the weight of the Fund to a
level the manager believes is the optimal exposure to
individual countries and equities. Sometimes, such
transactions are used as a precursor to actual sales and
purchases. For example, if the Fund held a large proportion of
stocks of a particular market and the Manager believed that
stocks of another market would outperform such stocks, the Fund
might use a short futures contract on an appropriate index (to
synthetically "sell" a portion of the Fund's portfolio) in
combination with a long futures contract on another index (to
synthetically "buy" exposure to that
</TABLE>
(19) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g., a single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund.
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index). Long and short equity swap contracts and contracts for
differences may also be used for these purposes. Often, a foreign
currency forward will be used in conjunction with the long derivative
position to create the effect of investing directly. Equity derivatives
(and corresponding currency forwards) used to effect synthetic
sales and purchases will generally be unwound as actual
portfolio securities are sold and purchased.
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging
purposes.
- The face value of derivatives used for investment
purposes will be limited to 25% of the Fund's assets. When a
currency forward is used in conjunction with an equity
derivative for investment purposes, the currency forward will
not be independently counted for this restriction.
- When long futures contracts and long equity swaps are
used for an investment, an amount of cash or high quality debt
securities equal to the face value of all such long derivative
positions will be segregated against such exposure. However,
for purposes of this restriction, if an existing long equity
exposure is reduced or eliminated by a short derivative
position, the combination of the long and short position will
be considered as cash available to segregate against a new long
derivative exposure.
- The net long equity exposure of the Fund, including
direct investment in securities and long derivative positions,
will not exceed 100% of the Fund's net assets.
- The aggregate absolute face value of all futures
contracts and swap contracts (without regard to sign and
assuming no offset of long and short positions, and counting
both components of any contract for differences) will not
exceed 100% of the Fund's assets.
- Except when such instruments are used for bona fide
hedging, no more than 5% of the Fund's net assets will be
committed to initial margin on futures contracts and time
premiums on related options.
Counterparties used for OTC derivatives must have a long-term debt
rating of A or higher when the derivative is entered into.
Occasionally, short-term derivatives will be entered into with
counterparties that have only high short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
FOREIGN CURRENCY STRATEGY - The essential currency strategy of the Fund is to
replicate the stock and currency selection of GMO International
Core Fund and to layer upon that a hedge (i.e. short positions)
with respect to each currency represented in the EAFE index, at
the level that such currencies are represented in the index.
This means that, if the Fund is under-weighted relative to EAFE
with respect to securities denominated in a particular
currency, the index currency hedging will result in a net short
position with respect to that currency. Generally, such net
short positions will be largely offset by net long positions in
other highly correlated currencies or an over-weight in
securities denominated in such correlated currencies. As set
forth under "Limitations on Foreign Currency Transactions"
below, the aggregate amount of "true" net short currency
positions (i.e., those not offset by positions in highly
correlated currencies) will not exceed 10% of the Fund's assets.
- The Fund's currency hedging strategy will also mean that,
despite the Fund's name, the Fund will not generally hedge all
of the foreign currency exposure represented by the portfolio
securities it owns. In a case where the Fund is over-weighted
relative to EAFE with respect to securities denominated in a
particular currency - or if GMO's international core currency
strategy is utilizing an active exposure to a particular
currency beyond that represented by securities denominated in
that currency - the Fund's index currency hedge will not
completely eliminate exposure to the currency. Because of its
name, the Fund is required to hedge at least 65% of the
currency exposure represented by
</TABLE>
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portfolio securities it owns.
TYPES OF FOREIGN CURRENCY TRANSACTIONS - Buying and selling spot currencies.
- Forward foreign currency contracts.
- Currency futures contracts and related options.
- Options on currencies.
- Currency swap contracts.
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING - Traditional Hedging: The Fund may effect foreign currency
transactions - generally short forward or futures contracts -
to hedge the risk of foreign currencies represented by its
securities investments back into the U.S. dollar. The Fund is
not required to hedge any of the currency risk obtained by
investing in securities denominated in foreign currencies.
- Anticipatory Hedging: When the Fund enters into a
contract for the purchase or anticipates the need to purchase a
security denominated in a foreign currency, it may "lock in"
the U.S. dollar price of the security by buying the foreign
currency or through currency forwards or futures.
- Proxy Hedging: The Fund may hedge the exposure of a given
foreign currency by using an instrument relating to a different
currency, which the Manager believes is highly correlated to
the currency being hedged.
INVESTMENT - The Fund may enter into currency forwards or futures
contracts in conjunction with entering into a futures contract
on a foreign index in order to create synthetic foreign
currency denominated securities.
RISK MANAGEMENT - Subject to the limitations described below, the Fund may
use foreign currency transactions for risk management, which
will permit the Fund to have foreign currency exposure that is
significantly different than the currency exposure represented
by its portfolio investments. This may include long exposure
to particular currencies beyond the amount of the Fund's
investment in securities denominated in that currency.
LIMITATIONS OF FOREIGN CURRENCY TRANSACTIONS - The Fund will maintain short currency positions with
respect to at least 65% of the foreign currency exposure
represented by the common stocks owned by the Fund.
- The Fund's aggregate net foreign currency exposure,
assuming full offset of long and short positions, will not
exceed 100% of the Fund's net assets denominated in foreign
currencies, though the currency exposure `of the Fund may
differ substantially from the currencies in which the Fund's
securities are denominated.
- The Fund will generally hedge currency based on benchmark
weightings (rather than Fund investments), and thus will
sometimes have a net short position with respect to certain
foreign currencies. Such net short positions in the aggregate
will not exceed 10% of the Fund's assets.
</TABLE>
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GMO FOREIGN 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.
<TABLE>
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PERMITTED INVESTMENTS
EQUITY SECURITIES: - At least 65% of total assets will be invested in common stocks
common stocks (including dividend paying) and securities convertible into common stocks, warrants and rights
convertible bonds of non-U.S. issuers.
convertible preferred stocks
warrants or rights
OTHER EQUITY SECURITIES:
depository receipts: ADRs, GDRs, EDRs
foreign issues traded in the U.S. and abroad
investment companies (open & closed end)
illiquid securities
144A securities
private placements and other restricted
securities
equity futures and related options
exchange-traded and OTC options on
securities and indexes (including
writing covered options)
emerging market issuers
repurchase agreements
FIXED INCOME SECURITIES: - Fund will not invest more than 10% of its assets invested in
long and medium-term corporate and Fixed Income Securities.
government bonds
preferred stock
lower-rated bonds
- For hedging purposes, the Fund may invest in spot currency
FOREIGN CURRENCY TRANSACTIONS transactions, forward foreign currency contracts, options on
currencies, currency futures and related options.
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have greater than 5% of its net
assets exposed to cash and money market instruments. This
limitation does not include cash and money market instruments in
margin 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 temporarily borrow up to 20% of its
net assets from banks for the payment of redemptions or settlement of
securities transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of portfolio
investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase agreements
and engaging in securities lending will not be considered making
loans for this purpose. The Fund may loan securities valued at up to
one-third of its total assets.
</TABLE>
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING DIRECTLY IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
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MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S MANAGEMENT
MAKING SHORT SALES OF SECURITIES
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
OTHER INVESTMENT COMPANIES - The Fund will not own more than 3% of the outstanding voting
securities of any investment company.
- No more than 5% of the Fund's net assets will be invested in any
single investment company.
- No more than 10% of the Fund's net assets will be invested in
securities of investment companies in the aggregate.
- The Fund will not own other Funds of GMO Trust.
ILLIQUID SECURITIES - No more than 10% of the Fund's net assets will be invested in
illiquid securities.
EMERGING MARKET ISSUERS - The Fund will not invest more than 20% of its assets in securities
of issuers in newly industrialized countries of the type invested in by
the Emerging Markets Fund.
LOWER-RATED SECURITIES - The Fund will not invest more than 5% of its assets in lower-rated
securities (junk bonds).
INVESTMENT IN INSURANCE COMPANIES - The Fund will not purchase more than 10% of the total outstanding
voting stock of any insurance company (including foreign insurance
companies).
INVESTMENT IN SECURITIES ISSUED BY - Equity: The Fund will not purchase more than 5% of any class of
BROKERS, DEALERS, UNDERWRITERS AND stock of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such company's
total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets will
be invested in the securities of a single broker, dealer, underwriter or
investment adviser.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - Except for U.S. government securities, cash, and money market
instruments, the Fund will not invest in any one security to an extent
greater than 5 percentage points over that security's weighting in the
Fund's benchmark.
- The Fund will not invest more than 2% of its assets in positions
that constitute more than 10% of the outstanding securities of any
issuer.
- The Fund will be invested in the securities of at least 125 issuers.
CONCENTRATION - At least 65% of the Fund's total assets will be invested in
securities principally traded in the securities markets of at least three
countries other than the United States.
- The Fund will not invest more than 25% of its total assets in
securities of issuers in any one industry.
</TABLE>
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GMO INTERNATIONAL SMALL COMPANIES 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.
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
- At least 65% of the Fund's assets will be invested in or
EQUITY SECURITIES: exposed to(20) common stocks of small capitalization foreign
common stocks companies.
convertible securities
preferred stocks
warrants or rights
OTHER EQUITY SECURITIES:
depository receipts: ADRs, GDRs, EDRs
foreign issues traded in the U.S. and abroad
investment companies (open & closed-end)
illiquid securities
144A securities
restricted securities
equity futures and related options
exchange-traded and OTC options on
securities and indexes (including
writing covered options)
equity swap contracts
contracts for differences
repurchase agreements
FIXED INCOME SECURITIES:
long and medium-term corporate
and government bonds
non-convertible preferred stock
FOREIGN CURRENCY TRANSACTIONS - Fund may invest in spot currency transactions, forward
foreign currency contracts, currency swap contracts, options on
currencies, currency futures and related options.
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have greater than 5% of its net
Any short-term assets will be invested in assets exposed to cash and money market instruments. This
cash or high quality money market instruments limitation does not include cash and money market instruments
including securities issued by the U.S. in margin accounts or otherwise held against exposure achieved
government and agencies thereof, bankers' through derivative instruments ("equitized cash").
acceptances, commercial paper, bank
certificates of deposit, time deposits and
repurchase agreements
</TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
<TABLE>
<S> <C>
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its net
assets from banks for the payment of redemptions or settlement of
securities transactions, but not as a leveraged investment strategy.
</TABLE>
(20) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the
fund's exposure to the relevant market or security through direct
investments and through derivative instruments will be considered.
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<TABLE>
<S> <C>
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. The Fund may loan securities valued at up
to one-third of its total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING - Except that collateral arrangements with respect to swap
FUND ASSETS 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.
</TABLE>
EMERGING MARKET ISSUERS
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
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
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
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
BROKERS, DEALERS, UNDERWRITERS AND - Equity: The Fund will not purchase more than 5% of any class of
INVESTMENT ADVISERS stock of a broker, dealer, underwriter or investment adviser.
- Debt: The Fund may not purchase more than 10% of any such
company's total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets
will be invested in the securities of a single broker, dealer,
underwriter or investment adviser. The net payment obligation of
swap contracts where one of these types of companies is the
counterparty also counts for purposes of this restriction.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - Except for U.S. government securities, cash, and money market
instruments, the Fund will not invest in any one security to an extent
greater than 5 percentage points over that security's weighting in the
Fund's benchmark.
- The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in
securities of issuers in any one industry.
</TABLE>
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DERIVATIVE INSTRUMENTS (OTHER THAN FOREIGN CURRENCY TRANSACTIONS)
<TABLE>
<S> <C>
TYPES OF DERIVATIVES - Options, futures contracts and related options on securities
indexes.
- Long equity swap contracts: where the Fund pays a fixed rate
plus the negative performance, if any, and receives the positive
performance, if any, of an index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed
rate plus the negative performance, if any, and pays the positive
performance of an index or basket of securities.
- Contracts for differences: equity swaps that contain both a
long and short equity component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity futures, related options and
short equity swap contracts used to hedge against an equity risk
already generally present in the Fund.(21)
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the Fund may hedge market
risk (risk of not being invested in the market) by purchasing long
futures contracts or entering into long equity swap contracts to
obtain market exposure until such time as direct investments can be
made efficiently. Conversely, if the Fund receives or anticipates a
significant demand for cash redemptions, the Fund may sell futures
contracts or enter into short equity swap contracts, to allow the
Fund to dispose of securities in a more orderly fashion without the
Fund being exposed to leveraged loss exposure in the interim.
INVESTMENT - The Fund may use derivative instruments (particularly long
futures contracts, related options and long equity swap contracts) in
place of investing directly in securities. This will include using
equity derivatives to "equitize" cash balances held by the Fund.
Because a foreign equity derivative generally only provides the
return of a foreign market in local currency terms, the Fund will
often purchase a foreign currency forward in conjunction with using
equity derivatives to give the effect of investing directly. The
Fund may also use long derivatives for investment in conjunction with
short hedging transactions to adjust the weights of the Fund's
underlying equity portfolio to a level the Manager believes is the
optimal exposure to individual countries and equities. For example,
if the Manager expects a positive return forecast for a select group
of UK companies, but a negative return for the UK market as a whole,
then this Fund may overweight the select group of equities and reduce
exposure to the UK market by selling UK equity futures or enter a
swap contract that is long a specific basket of securities and short
the UK market generally.
RISK MANAGEMENT - - The Fund may use equity futures, related options and equity
SYNTHETIC SALES AND PURCHASES swap contracts to adjust the weight of the Fund to a level the
manager believes is the optimal exposure to individual countries and
equities. Sometimes, such transactions are used as a precursor to
actual sales and purchases. For example, if the Fund held a large
proportion of stocks of a particular market and the Manager believed
that stocks of another market would outperform such stocks, the Fund
might use a short futures contract on an appropriate index (to
synthetically "sell" a portion of the Fund's portfolio) in
combination with a long futures contract on another index (to
synthetically "buy" exposure to that index). Long and short equity
swap contracts and contracts for differences may also be
</TABLE>
(21) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g., a single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund.
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<PAGE> 214
<TABLE>
<S> <C>
used for these purposes. Often, a foreign currency forward
will be used in conjunction with the long derivative
position to create the effect of investing directly. Equity
derivatives (and corresponding currency forwards) used to
effect synthetic sales and purchases will generally be
unwound as actual portfolio securities are sold and
purchased.
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging
purposes.
- The face value of derivatives used for investment purposes will
be limited to 25% of the Fund's assets. When a currency forward is
used in conjunction with an equity derivative for investment
purposes, the currency forward will not be independently counted for
this restriction.
- When long futures contracts and long equity swaps are used for
investment, an amount of cash or high quality debt securities equal
to the face value of all such long derivative positions will be
segregated against such exposure. However, for purposes of this
restriction, if an existing long equity exposure is reduced or
eliminated by a short derivative position, the combination of the
long and short position will be considered as cash available to
segregate against a new long derivative exposure.
- The net long equity exposure of the Fund, including direct
investment in securities and long derivative positions, will not
exceed 100% of the Fund's net assets.
- The aggregate absolute face value of all futures contracts and
swap contracts (without regard to sign and assuming no offset of long
and short positions, and counting both components of any contract for
differences) will not exceed 100% of the Fund's assets.
- Except when such instruments are used for bona fide hedging, no
more than 5% of the Fund's net assets will be committed to initial
margin on futures contracts and time premiums on related options.
- Counterparties used for OTC derivatives must have a long-term
debt rating of A or higher when the derivative is entered into.
Occasionally, short-term derivatives will be entered into with
counterparties that have only high short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS - Buying and selling spot currencies.
- Forward foreign currency contracts.
- Currency futures contracts and related options.
- Options on currencies.
- Currency swap contracts.
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING - Traditional Hedging: The Fund may effect foreign currency
transactions - generally short forward or futures contracts - to
hedge the risk of foreign currencies represented by its securities
investments back into the U.S. dollar. The Fund is not required to
hedge any of the currency risk obtained by investing in securities
denominated in foreign currencies.
- Anticipatory Hedging: When the Fund enters into a contract for
the purchase or anticipates the need to purchase a security
denominated in a foreign currency, it may "lock in" the U.S. dollar
price of the security by buying the foreign currency or through
currency forwards or futures.
- Proxy Hedging: The Fund may hedge the exposure of a given
foreign currency by using an instrument relating to a different
currency, which the Manager believes is highly correlated to the
currency being hedged.
INVESTMENT - The Fund may enter into currency forwards or futures contracts
in conjunction with entering into a futures contract on a foreign
index in order to create synthetic foreign currency denominated
securities.
- Subject to the limitations described below, the Fund may use
foreign currency
</TABLE>
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<PAGE> 215
<TABLE>
<S> <C>
RISK MANAGEMENT transactions for risk management, which will permit
the Fund to have foreign currency exposure that is significantly
different than the currency exposure represented by its portfolio
investments. This may include long exposure to particular currencies
beyond the amount of the Fund's investment in securities denominated
in that currency.
LIMITATIONS OF FOREIGN CURRENCY TRANSACTIONS - The Fund's aggregate net foreign currency exposure, assuming
full offset of long and short positions, will not exceed 100% of the
Fund's net assets denominated in foreign currencies, though the
currency exposure of the Fund may differ substantially from the
currencies in which the Fund's securities are denominated.
- The aggregate absolute face value of all currency forward,
currency futures and currency swap contracts (without regard to sign
and assuming no offset of long and short positions, and counting both
components of any contract for differences) will not exceed 50% of
the Fund's assets.
- The Fund will not be net short in any foreign currency, except
that, when the Fund is attempting to hedge all or nearly all of its
exposure to a particular currency, changes in the market value of
foreign equities may cause the Fund to be temporarily net short in
the currency. Such temporary net short positions will not exceed 1%
of the Fund's assets.
</TABLE>
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GMO JAPAN 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.
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
EQUITY SECURITIES: - At least 90% of the net assets of the Fund will be invested
common stocks in or exposed to(22) Japanese Securities.(23)
convertible securities
preferred stock
warrants or rights
OTHER EQUITY SECURITIES:
depository receipts: ADRs, GDRs, EDRs
foreign issues traded in the U.S. and abroad
investment companies (open & closed-end)
illiquid securities
144A securities
restricted securities
equity futures and related options
exchange-traded and OTC options on
securities and indexes (including
writing covered options)
equity swap contracts
contracts for differences
repurchase agreements
FIXED INCOME SECURITIES:
long and medium-term corporate and
government bonds
non-convertible preferred stock
short-term Japanese government debt
securities (or other short term prime
obligations)
FOREIGN CURRENCY TRANSACTIONS - Fund may invest in spot currency transactions, forward
foreign currency contracts, currency swap contracts, options on
currencies, currency futures and related options.
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have greater than 5% of its net
Any short-term assets will be invested in assets exposed to cash and money market instruments. This
cash or high quality money market limitation does not include cash and money market instruments
instruments including securities issued in margin accounts or otherwise held against exposure achieved
by the U.S. government and agencies through derivative instruments ("equitized cash").
thereof, bankers' acceptances,
commercial paper, Bank certificates of
deposit and repurchase agreements
</TABLE>
(22) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
(23) Japanese Securities are securities issued by entities that are
organized under the laws of Japan and that either have 50% or more of their
assets in Japan or derive 50% or more of their revenues from Japan ("Japanese
Companies").
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PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
<TABLE>
<S> <C>
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 10% of
its net assets from banks for the payment of redemptions or
settlement of securities transactions, but not as a leveraged
investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter
for securities law purposes in connection with disposition of
portfolio investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase
agreements and engaging in securities lending will not be
considered making loans for this purpose. The Fund may loan
securities valued at up to 25% of its total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING - Except that collateral arrangements with respect to swap
FUND ASSETS 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.
</TABLE>
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
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
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
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 purchase more than 5% of any class of
BROKERS, DEALERS, UNDERWRITERS AND stock of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such company's
total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's net assets will be
invested in the securities of a single broker, dealer, underwriter or
investment adviser. The net payment obligation of swap contracts where
one of these types of companies is the counterparty also counts for
purposes of this restriction.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
</TABLE>
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DIVERSIFICATION/CONCENTRATION
<TABLE>
<S> <C>
DIVERSIFICATION - Except for U.S. government securities, cash, and money market
instruments, the Fund will not invest in any one security to an extent
greater than 5 percentage points over that security's weighting in the
Fund's benchmark.
- The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
- The Fund will not invest more than 25% of its total assets in
CONCENTRATION securities of issuers in any one industry.
</TABLE>
DERIVATIVE INSTRUMENTS (OTHER THAN FOREIGN CURRENCY TRANSACTIONS)
<TABLE>
<S> <C>
TYPES OF DERIVATIVES - Options, 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
HEDGING short equity swap contracts used to hedge against an equity risk already
generally present in the Fund.(24)
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the Fund may hedge market risk
(risk of not being invested in the market) by purchasing long futures
contracts or entering into long equity
swap contracts to obtain market exposure until such time as direct
investments can be made efficiently. Conversely, if the Fund receives or
anticipates a significant demand for cash redemptions, the Fund may sell
futures contracts or enter into short equity swap contracts, to allow the
Fund to dispose of securities in a more orderly fashion without the Fund
being exposed to leveraged loss exposure in the interim.
INVESTMENT - The Fund may use derivative instruments (particularly long futures
contracts, related options and long equity swap contracts) in place of
investing directly in securities. This will include using equity
derivatives to "equitize" cash balances held by the Fund. Because a
foreign equity derivative generally only provides the return of a foreign
market in local currency terms, the Fund will often purchase a foreign
currency forward in conjunction with using equity derivatives to give the
effect of investing directly.
RISK MANAGEMENT - - The Fund may use equity futures, related options and equity swap
SYNTHETIC SALES AND PURCHASES contracts to adjust the weight of the Fund to a level the manager
believes is the optimal exposure to individual equities or groups of
equities. Sometimes, such transactions are used as a precursor to actual
sales and purchases. For example, if the Fund held a large proportion of
stocks of a particular type and the Manager believed that stocks of
another type would outperform such stocks, the Fund might use a short
futures contract on an appropriate index (to synthetically "sell" a
portion of the Fund's portfolio) in combination with a long futures
contract on another index (to synthetically "buy" exposure to that
index). Long and short
</TABLE>
(24) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g., a single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund.
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<TABLE>
<S> <C>
equity swap contracts and contracts for differences may also
be used for these purposes. Often, a foreign currency
forward will be used in conjunction with the long derivative
position to create the effect of investing directly. Equity
derivatives (and corresponding currency forwards) used to
effect synthetic sales and purchases will generally be
unwound as actual portfolio securities are sold and
purchased.
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging purposes.
- The face value of derivatives used for investment purposes will be
limited to 25% of the Fund's assets. When a currency forward is used in
conjunction with an equity derivative for investment purposes, the
currency forward will not be independently counted for this restriction.
- When long futures contracts and long equity swaps are used for
investment, an amount of cash or high quality debt securities equal to
the face value of all such long derivative positions will be segregated
against such exposure. However, for purposes of this restriction, if an
existing long equity exposure is reduced or eliminated by a short
derivative position, the combination of the long and short position will
be considered as cash available to segregate against a new long
derivative exposure.
- The net long equity exposure of the Fund, including direct
investment in securities and long derivative positions, will not exceed
100% of the Fund's net assets.
- The aggregate absolute face value of all futures contracts and swap
contracts (without regard to sign and assuming no offset of long and
short positions, and counting both components of any contract for
differences) will not exceed 100% of the Fund's assets.
- Except when such instruments are used for bona fide hedging, no
more than 5% of the Fund's net assets will be committed to initial margin
on futures contracts and time premiums on related options.
- Counterparties used for OTC derivatives must have a long-term debt
rating of A or higher when the derivative is entered into. Occasionally,
short-term derivatives will be entered into with counterparties that
have only high short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS - Buying and selling spot currencies.
- Forward foreign currency contracts.
- Currency futures contracts and related options.
- Options on currencies.
- Currency swap contracts.
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING - Traditional Hedging: The Fund may effect foreign currency
transactions - generally short forward or futures contracts - to hedge
the risk of foreign currencies represented by its securities investments
back into the U.S. dollar. The Fund is not required to hedge any of the
currency risk obtained by investing in securities denominated in foreign
currencies.
- Anticipatory Hedging: When the Fund enters into a contract for the
purchase or anticipates the need to purchase a security denominated in a
foreign currency, it may "lock in" the U.S. dollar price of the security
by buying the foreign currency or through currency forwards or futures.
- Proxy Hedging: The Fund may hedge the exposure of a given foreign
currency by using an instrument relating to a different currency, which
the Manager believes is highly correlated to the currency being hedged.
INVESTMENT - The Fund may enter into currency forwards or futures contracts in
conjunction with entering into a futures contract on a foreign index in
order to create synthetic foreign currency denominated securities.
RISK MANAGEMENT - Subject to the limitations described below, the Fund may use
foreign currency
</TABLE>
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<TABLE>
<S> <C>
transactions for risk management, which will permit the Fund to have
foreign currency exposure that is significantly different than the
currency exposure represented by its portfolio investments. This may
include long exposure to particular currencies beyond the amount of the
Fund's investment in securities denominated in that currency.
LIMITATIONS OF FOREIGN CURRENCY - The Fund's aggregate net foreign currency exposure, assuming full
TRANSACTIONS offset of long and short positions, will not exceed 100% of the Fund's
net assets denominated in foreign currencies, though the currency
exposure of the Fund may differ substantially from the currencies in
which the Fund's securities are denominated.
- The aggregate absolute face value of all currency forward, currency
futures and currency swap contracts (without regard to sign and assuming
no offset of long and short positions, and counting both components of
any contract for differences) will not exceed 50% of the Fund's assets.
- The Fund will not be net short in any foreign currency, except that
when the Fund is attempting to hedge all or nearly all of its exposure to
a particular currency, changes in the market value of foreign equities
may cause the Fund to be temporarily net short in the currency. Such
temporary net short positions will not exceed 1% of the Fund's assets.
</TABLE>
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GMO EMERGING MARKETS 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.
PERMITTED INVESTMENTS
EQUITY SECURITIES:
<TABLE>
<S> <C>
securities listed on emerging market stock - The Fund will have greater than 65% of its total assets
exchanges and related depository invested in or exposed to(26) equity securities that are predominantly
receipts traded on Emerging Market exchanges.
preferred stock
warrants or rights - The Fund may invest in non-emerging markets countries that,
based on information obtained by GMO, derive at least half of their
OTHER EQUITY SECURITIES: revenues from trade with or production in developing countries.
convertible securities
depository receipts: ADRs, GDRs, EDRs - The Fund may also invest through investment Funds, pooled
foreign issues traded in the U.S. and abroad accounts or other investment vehicles designed to permit
investment companies (open & closed-end) investments in a portfolio of stocks listed in a particular
funds) developing country or region subject to obtaining any necessary
unlisted securities local regulatory approvals, particularly in the case of countries
illiquid securities in which such an investment vehicle is the exclusive or main
144A securities vehicle for foreign portfolio investment.
restricted securities
securities traded in unregulated securities
markets
indexed securities
equity futures and related options
exchange-traded and OTC options on securities
and indexes (including writing covered
options)
equity swap contracts
contracts for differences
private investment funds, vehicles or
structures
debt-equity conversion funds(25)
country funds
FIXED INCOME SECURITIES
bonds and money market instruments in - The Fund may also invest, on a temporary basis, in debt
Canada, the U.S, and other industrialized securities issued by companies or governments in developing
nations and emerging securities markets. countries or money market securities of high-grade issuers in
industrialized countries denominated in various currencies.
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have greater than 5% of its net
Any short-term assets will be invested in assets exposed to cash and money market instruments. This
cash or high quality money market instruments limitation does not include cash and money market instruments in
including securities issued by the U.S. margin accounts or otherwise held against exposure achieved through
government and agencies thereof, bankers' derivative instruments ("equitized cash").
acceptances, commercial paper, Bank
certificates of deposit and repurchase
agreements.
</TABLE>
(25) Debt-equity Conversion Funds may be established to exchange foreign
bank debt of countries whose principal repayments are in arrears, into a
portfolio of listed and unlisted equities, subject to certain repatriation
restrictions.
(26) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the Fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
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FOREIGN CURRENCY TRANSACTIONS - Fund may invest in spot currency transactions, forward
foreign currency contracts, currency swap contracts, options on
currencies, currency futures and related options.
</TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
<TABLE>
<S> <C>
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its
net assets from banks for the payment of redemptions or settlement
of securities transactions, but not as a leveraged investment
strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter
for securities law purposes in connection with disposition of
portfolio investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase
agreements and engaging in securities lending will not be
considered making loans for this purpose. The Fund may loan
securities valued at up to one-third of its total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING - Except that collateral arrangements with respect to swap
FUND ASSETS 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.
</TABLE>
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
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
<TABLE>
<S> <C>
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).
</TABLE>
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<TABLE>
<S> <C>
INVESTMENT IN SECURITIES ISSUED BY - Equity: The Fund will not purchase more than 5% of any class
BROKERS, DEALERS, UNDERWRITERS AND of stock of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such
company's total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets
will be invested in the securities of a single broker, dealer,
underwriter or investment adviser. The net payment obligation of
swap contracts where one of these types of companies is the
counterparty also counts for purposes of this restriction.
- This policy does not apply to companies that derived less
than 15% of revenues from "securities-related businesses" during
the most recent fiscal year.
UNLISTED SECURITIES/UNREGULATED - No more than 25% of the Fund's total assets will be invested
SECURITIES MARKETS in shares of companies that are traded in unregulated
over-the-counter markets or other types of unlisted securities
markets.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - The Fund will not purchase more than 10% of the outstanding
securities of any issuer. However, the Fund may own up to 100% of
the outstanding securities of investment funds, partnerships or
special purpose entities used as a means of obtaining exposure to an
underlying security, securities or market, so long as investment in
the underlying securities represents less than 10% of the outstanding
securities of any particular issuer.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in
securities of issuers in any one industry.
</TABLE>
DERIVATIVE INSTRUMENTS (OTHER THAN FOREIGN CURRENCY TRANSACTIONS)
<TABLE>
<S> <C>
TYPES OF DERIVATIVES - Options, futures contracts and related options on securities
indexes
- Long equity swap contracts: where the Fund pays a fixed rate
plus the negative performance, if any, and receives the positive
performance, if any, of an index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed
rate plus the negative performance, if any, and pays the positive
performance of an index or basket of securities
- Contracts for differences: equity swaps that contain both a
long and short equity component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity futures, related options and
short equity swap contracts used to hedge against an equity risk
already generally present in the Fund.(27)
- 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
</TABLE>
(27) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g., a single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund.
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<TABLE>
<S> <C>
dispose of securities in a more orderly fashion without the
Fund being exposed to leveraged loss exposure in the interim.
INVESTMENT - The Fund may use derivative instruments (particularly long
futures contracts, related options and long equity swap contracts) in
place of investing directly in securities. This will include using
equity derivatives to "equitize" cash balances held by the Fund.
Because a foreign equity derivative generally only provides the
return of a foreign market in local currency terms, the Fund will
often purchase a foreign currency forward in conjunction with using
equity derivatives to give the effect of investing directly. The
Fund may also use long derivatives for investment in conjunction with
short hedging transactions to adjust the weights of the Fund's
underlying equity portfolio to a level the Manager believes is the
optimal exposure to individual countries and equities. For example,
if the Manager expects a positive return forecast for a select group
of companies in a particular market, but a negative return for that
market as a whole, then this Fund may overweight the select group of
equities and reduce exposure to the market generally by selling
equity futures or enter into a swap contract that is long a specific
basket of securities and short the market generally.
RISK MANAGEMENT - - The Fund may use equity futures, related options and equity
SYNTHETIC SALES AND PURCHASES swap contracts to adjust the weight of the Fund to a level the
manager believes is the optimal exposure to individual countries and
equities. Sometimes, such transactions are used as a precursor to
actual sales and purchases. For example, if the Fund held a large
proportion of stocks of a particular market and the Manager believed
that stocks of another market would outperform such stocks, the Fund
might use a short futures contract on an appropriate index (to
synthetically "sell" a portion of the Fund's portfolio) in
combination with a long futures contract on another index (to
synthetically "buy" exposure to that index). Long and short equity
swap contracts and contracts for differences may also be used for
these purposes. Often, a foreign currency forward will be used in
conjunction with the long derivative position to create the effect of
investing directly. Equity derivatives (and corresponding currency
forwards) used to effect synthetic sales and purchases will generally
be unwound as actual portfolio securities are sold and purchased.
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging
purposes.
- The face value of derivatives used for investment purposes will
be limited to 25% of the Fund's assets. When a currency forward is
used in conjunction with an equity derivative for investment
purposes, the currency forward will not be independently counted for
this restriction.
- When long futures contracts and long equity swaps are used for
investment, an amount of cash or high quality debt securities equal
to the face value of all such long derivative positions will be
segregated against such exposure. However, for purposes of this
restriction, if an existing long equity exposure is reduced or
eliminated by a short derivative position, the combination of the
long and short position will be considered as cash available to
segregate against a new long derivative exposure.
- The net long equity exposure of the Fund, including direct
investment in securities and long derivative positions, will not
exceed 100% of the Fund's net assets.
- The aggregate absolute face value of all futures contracts and
swap contracts (without regard to sign and assuming no offset of long
and short positions, and counting both components of any contract for
differences) will not exceed 100% of the Fund's assets.
- Except when such instruments are used for bona fide hedging, no
more than 5% of the Fund's net assets will be committed to initial
margin on futures contracts and time premiums on related options.
- Counterparties used for OTC derivatives must have a long-term
debt rating of A or higher when the derivative is entered into.
Occasionally, short-term derivatives will be entered into with
counterparties that have only high short-term debt ratings.
</TABLE>
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<TABLE>
<S> <C> <C>
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS - Buying and selling spot currencies.
- Forward foreign currency contracts.
- Currency futures contracts and related options.
- Options on currencies.
- Currency swap contracts.
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING - Traditional Hedging: The Fund may effect foreign currency
transactions - generally short forward or futures contracts - to
hedge the risk of foreign currencies represented by its securities
investments back into the U.S. dollar. The Fund is not required to
hedge any of the currency risk obtained by investing in securities
denominated in foreign currencies.
- Anticipatory Hedging: When the Fund enters into a contract for
the purchase or anticipates the need to purchase a security
denominated in a foreign currency, it may "lock in" the U.S. dollar
price of the security by buying the foreign currency or through
currency forwards or futures.
- Proxy Hedging: The Fund may hedge the exposure of a given
foreign currency by using an instrument relating to a different
currency which the Manager believes is highly correlated to the
currency being hedged.
INVESTMENT - The Fund may enter into currency forwards or futures contracts
in conjunction with entering into a futures contract on a foreign
index in order to create synthetic foreign currency denominated
securities.
RISK MANAGEMENT - Subject to the limitations described below, the Fund may use
foreign currency transactions for risk management, which will permit
the Fund to have foreign currency exposure that is significantly
different than the currency exposure represented by its portfolio
investments. This may include long exposure to particular currencies
beyond the amount of the Fund's investment in securities denominated
in that currency.
LIMITATIONS OF FOREIGN CURRENCY
TRANSACTIONS - The Fund's aggregate net foreign currency exposure, assuming
full offset of long and short positions, will not exceed 100% of the
Fund's net assets denominated in foreign currencies, though the
currency exposure of the Fund may differ substantially from the
currencies in which the Fund's securities are denominated.
- The aggregate absolute face value of all currency forward,
currency futures and currency swap contracts (without regard to sign
and assuming no offset of long and short positions, and counting both
components of any contract for differences) will not exceed 50% of
the Fund's assets.
- The Fund will not be net short in any foreign currency, except
that, when the Fund is attempting to hedge all or nearly all of its
exposure to a particular currency, changes in the market value of
foreign equities may cause the Fund to be temporarily net short in
the currency. Such temporary net short positions will not exceed 1%
of the Fund's assets
</TABLE>
138
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GMO EVOLVING COUNTRIES 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.
PERMITTED INVESTMENTS
<TABLE>
<S> <C> <C>
EQUITY SECURITIES:
securities listed on evolving country stock - The Fund will have greater than 65% of its total assets
exchanges and related depository receipts invested in or exposed to (29) equity securities that are
predominantly traded on Evolving Country exchanges.
preferred stocks - The Fund may invest in non-evolving markets countries that,
warrants or rights based on information obtained by GMO, derive at least half of
their revenues from trade with or production in developing
OTHER EQUITY SECURITIES: countries.
convertible securities
depository receipts: ADRs, GDRs, EDRs
foreign issues traded in the U.S. and abroad
investment companies (open & closed-end)
unlisted securities
illiquid securities
144A securities
restricted securities
securities traded in unregulated securities
markets
indexed securities
equity futures and related options - The Fund may also invest through investments funds, pooled
exchange-traded and OTC options on securities accounts or other investment vehicles designed to permit
and indexes (including writing covered investments in a portfolio of stocks listed in a particular
options) developing country or region subject to obtaining any necessary
equity swap contracts local regulatory approvals, particularly in the case of countries
contracts for differences in which such an investment vehicle is the exclusive or main
private investment funds, vehicles or vehicle for foreign portfolio investment.
structures
debt-equity conversion funds (28)
country funds
repurchase agreements
FIXED INCOME SECURITIES
Bonds and money market instruments in - The Fund may also invest, on a temporary basis, in debt
Canada, the U.S., and other industrialized securities issued by companies or governments in developing
nations and emerging securities markets. countries or money market securities of high-grade issuers in
industrialized countries denominated in various currencies.
CASH AND MONEY MARKET INSTRUMENTS
Any short-term assets will be invested in - The Fund will not normally have greater than 5% of its net
cash or high quality money market instruments assets exposed to cash and money market instruments. This
including securities issued by the U.S. limitation does not include cash and money market instruments in
government and agencies thereof, bankers' margin accounts or otherwise held against exposure achieved through
acceptances, commercial paper, derivative instruments ("equitized cash").
bank certificates of deposit and repurchase
agreements.
</TABLE>
- ------
(28) Debt-equity Conversion Funds may be established to exchange foreign
bank debt of countries whose principal repayments are in arrears, into a
portfolio of listed and unlisted equities, subject to certain repatriation
restrictions.
(29) 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.
139
<PAGE> 227
<TABLE>
<S> <C> <C>
FOREIGN CURRENCY TRANSACTIONS - Fund may invest in spot currency transactions, forward
foreign currency contracts, currency swap contracts, options on
currencies, currency futures and related options.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following
practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 10% of its
net assets from banks for the payment of redemptions or settlement
of securities transactions, but not as a leveraged investment
strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter
for securities law purposes in connection with disposition of
portfolio investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase
agreements and engaging in securities lending will not be
considered making loans for this purpose. The Fund may loan
securities valued at up to one-third of its total assets.
PLEDGING, HYPOTHECATING OR
MORTGAGING FUND ASSETS - Except that collateral arrangements with respect to swap
agreements, the writing of options, stock index, interest rate,
currency or other futures 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.
</TABLE>
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
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
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C> <C>
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).
</TABLE>
140
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<TABLE>
<S> <C> <C>
INVESTMENT IN SECURITIES ISSUED BY - Equity: The Fund will not purchase more than 5% of any class
BROKERS, DEALERS, UNDERWRITERS AND of stock of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such
company's total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets
will be invested in the securities of a single broker, dealer,
underwriter or investment adviser. The net payment obligation of
swap contracts where one of these types of companies is the
counterparty also counts for purposes of this restriction.
- This policy does not apply to companies that derived less
than 15% of revenues from "securities-related businesses" during
the most recent fiscal year.
UNLISTED SECURITIES/UNREGULATED - No more than 25% of the Fund's total assets will be invested
SECURITIES MARKETS in shares of companies that are traded in unregulated
over-the-counter markets or other types of unlisted securities
markets.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - The Fund will not purchase more than 10% of the outstanding
securities of any issuer. However, the Fund may own up to 100% of
the outstanding securities of investment funds, partnerships or
special purpose entities used as a means of obtaining exposure to
an underlying security, securities or market, so long as investment
in the underlying securities represents less than 10% of the
outstanding securities of any particular issuer.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in
securities of issuers in any one industry.
</TABLE>
DERIVATIVE INSTRUMENTS (OTHER THAN FOREIGN CURRENCY TRANSACTIONS)
<TABLE>
<S> <C> <C>
TYPES OF DERIVATIVES - Options, futures contracts and related options on securities
indexes.
- Long equity swap contracts: where the Fund pays a fixed rate
plus the negative performance, if any, and receives the positive
performance, if any, of an index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed
rate plus the negative performance, if any, and pays the positive
performance of an index or basket of securities.
- Contracts for differences: equity swaps that contain both a
long and short equity component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity futures, related options
and short equity swap contracts used to hedge against an equity
risk already generally present in the Fund (30)
- 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
</TABLE>
(30) 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.
141
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<TABLE>
<S> <C> <C>
futures contracts or enter into short equity swap contracts, to
allow the Fund to dispose of securities in a more orderly fashion
without the Fund being exposed to leveraged loss exposure in the
interim.
INVESTMENT - The Fund may use derivative instruments (particularly long
futures contracts, related options and long equity swap contracts)
in place of investing directly in securities. This will include
using equity derivatives to "equitize" cash balances held by the
Fund. Because a foreign equity derivative generally only provides
the return of a foreign market in local currency terms, the Fund
will often purchase a foreign currency forward in conjunction with
using equity derivatives to give the effect of investing directly.
The Fund may also use long derivatives for investment in
conjunction with short hedging transactions to adjust the weights
of the Fund's underlying equity portfolio to a level the Manager
believes is the optimal exposure to individual countries and
equities. For example, if the Manager expects a positive return
forecast for a select group of companies in a particular market,
but a negative return for that market as a whole, then this Fund
may overweight the select group of equities and reduce exposure to
the market generally by selling equity futures or enter into a swap
contract that is long a specific basket of securities and short the
market generally.
RISK MANAGEMENT - - The Fund may use equity futures, related options and equity
SYNTHETIC SALES AND PURCHASES swap contracts to adjust the weight of the Fund to a level the
manager believes is the optimal exposure to individual countries
and equities. Sometimes, such transactions are used as a precursor
to actual sales and purchases. For example, if the Fund held a
large proportion of stocks of a particular market and the Manager
believed that stocks of another market would outperform such
stocks, the Fund might use a short futures contract on an
appropriate index (to synthetically "sell" a portion of the Fund's
portfolio) in combination with a long futures contract on another
index (to synthetically "buy" exposure to that index). Long and
short equity swap contracts and contracts for differences may also
be used for these purposes. Often, a foreign currency forward will
be used in conjunction with the long derivative position to create
the effect of investing directly. Equity derivatives (and
corresponding currency forwards) used to effect synthetic sales and
purchases will generally be unwound as actual portfolio securities
are sold and purchased.
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging
purposes.
- The face value of derivatives used for investment purposes
will be limited to 25% of the Fund's assets. When a currency
forward is used in conjunction with an equity derivative for
investment purposes, the currency forward will not be independently
counted for this restriction.
- When long futures contracts and long equity swaps are used
for investment, an amount of cash or high quality debt securities
equal to the face value of all such long derivative positions will
be segregated against such exposure. However, for purposes of this
restriction, if an existing long equity exposure is reduced or
eliminated by a short derivative position, the combination of the
long and short position will be considered as cash available to
segregate against a new long derivative exposure.
- The net long equity exposure of the Fund, including direct
investment in securities and long derivative positions, will not
exceed 100% of the Fund's net assets.
- The aggregate absolute face value of all futures contracts
and swap contracts (without regard to sign and assuming no offset
of long and short positions, and counting both components of any
contract for differences) will not exceed 100% of the Fund's assets.
- Except when such instruments are used for bona fide hedging,
no more than 5% of the Fund's net assets will be committed to
initial margin on futures contracts and time premiums on related
options.
- Counterparties used for OTC derivatives must have a long-term
debt rating of A or higher when the derivative is entered into.
Occasionally, short-term
</TABLE>
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<TABLE>
<S> <C> <C>
derivatives will be entered into with
counterparties that have only high short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS - Buying and selling spot currencies.
- Forward foreign currency contracts.
- Currency futures contracts and related options.
- Options on currencies.
- Currency swap contracts.
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING - Traditional Hedging: The Fund may effect foreign currency
transactions - generally short forward or futures contracts - to hedge
the risk of foreign currencies represented by its securities investments
back into the U.S. dollar. The Fund is not required to hedge any of the
currency risk obtained by investing in securities denominated in foreign
currencies.
- Anticipatory Hedging: When the Fund enters into a contract for the
purchase or anticipates the need to purchase a security denominated in a
foreign currency, it may "lock in" the U.S. dollar price of the security
by buying the foreign currency or through currency forwards or futures.
- Proxy Hedging: The Fund may hedge the exposure of a given foreign
currency by using an instrument relating to a different currency, which
the Manager believes is highly correlated to the currency being hedged.
INVESTMENT - The Fund may enter into currency forwards or futures contracts in
conjunction with entering into a futures contract on a foreign index in
order to create synthetic foreign currency denominated securities.
RISK MANAGEMENT - Subject to the limitations described below, the Fund may use
foreign currency transactions for risk management, which will permit the
Fund to have foreign currency exposure that is significantly different
than the currency exposure represented by its portfolio investments.
This may include long exposure to particular currencies beyond the amount
of the Fund's investment in securities denominated in that currency.
LIMITATIONS OF FOREIGN CURRENCY - Written put or call options on currencies and currency futures will
TRANSACTIONS always be covered.
- The Fund's aggregate net foreign currency exposure, assuming full
offset of long and short positions, will not exceed 100% of the Fund's
net assets denominated in foreign currencies, though the currency
exposure of the Fund may differ substantially from the currencies in
which the Fund's securities are denominated.
- The aggregate absolute face value of all currency forward, currency
futures and currency swap contracts (without regard to sign and assuming
no offset of long and short positions, and counting both components of
any contract for differences) will not exceed 50% of the Fund's assets.
- The Fund will not be net short in any foreign currency, except
that, when the Fund is attempting to hedge all or nearly all of its
exposure to a particular currency, changes in the market value of foreign
equities may cause the Fund to be temporarily net short in the currency.
Such temporary net short positions will not exceed 1% of the Fund's
assets.
</TABLE>
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GMO ASIA 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.
PERMITTED INVESTMENTS:
<TABLE>
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securities listed on emerging market stock
exchanges and related depository - The Fund will have greater than 65% of its total assets
receipts invested in or exposed to (32) equity securities that are organized
convertible securities under the laws of an Asian country, that have a principal office
depository receipts: ADRs, GDRs, EDRs in an Asian country, or whose securities are predominantly traded
foreign issues traded in the U.S. and abroad on Asian market exchanges (excluding Japan).
investment companies (open & closed-end)
funds) - The Fund may also invest in companies listed on major markets
unlisted securities outside of the Asian markets that, based on information obtained
illiquid securities by the Consultant, derive at least half of their revenues from
144A securities trade with or production in Asian countries. This will not be
restricted securities deemed to count toward the above-mentioned 65% limitation.
securities traded in unregulated securities
markets
indexed securities
equity futures and related options
exchange-traded and OTC options on securities
and indexes (including writing covered
options)
equity swap contracts
contracts for differences
private investment funds, vehicles or
structures
debt-equity conversion funds (31)
country funds
repurchase agreements
FIXED INCOME SECURITIES
bonds and money market instruments in Canada, - The Fund may also invest, on a temporary basis, in debt
the U.S, and other industrialized nations and securities issued by companies or governments in developing
emerging securities markets. countries or money market securities of high-grade issuers in
industrialized countries denominated in various currencies.
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have greater than 5% of its net
Any short-term assets will be invested in assets exposed to cash and money market instruments. This
cash or high quality money market instruments limitation does not include cash and money market instruments in
including securities issued by the U.S. margin accounts or otherwise held against exposure achieved
government and agencies thereof, bankers' through derivative instruments ("equitized cash").
acceptances, commercial paper,
bank certificates of deposit and repurchase
agreements.
FOREIGN CURRENCY TRANSACTIONS - Fund may invest in spot currency transactions, forward
foreign currency contracts, currency swap contracts, options on
currencies, currency futures and related options.
</TABLE>
(31) Debt-equity Conversion Funds may be established to exchange foreign
bank debt of countries whose principal repayments are in arrears, into a
portfolio of listed and unlisted equities, subject to certain repatriation
restrictions.
(32) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
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PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
<TABLE>
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PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its
net assets from banks for the payment of redemptions or
settlement of securities transactions, but not as a leveraged
investment strategy.
PLEDGING, HYPOTHECATING OR MORTGAGING - Except that collateral arrangements with respect to swap
FUND ASSETS 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.
</TABLE>
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
<TABLE>
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RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES - No more than 5% of the Fund's net assets will be invested in
time premiums on options on particular securities (as opposed to
options on indexes)
OTHER INVESTMENT COMPANIES - The Fund will not own more than 3% of the outstanding voting
securities of any investment company
- No more than 5% of the Fund's net assets will be invested in
any single investment company
- No more than 10% of the Fund's net assets will be invested in
securities of investment companies in the aggregate
- The Fund will not own other Funds of GMO Trust
ILLIQUID SECURITIES - No more than 15% of the Fund's net assets will be invested in
illiquid securities.
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 purchase more than 5% of any class
BROKERS, DEALERS, UNDERWRITERS AND of stock of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such
company's total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets
will be invested in the securities of a single broker, dealer,
underwriter or investment adviser. The net payment obligation of
swap contracts where one of these types of companies is the
counterparty also counts for purposes of this restriction.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
UNLISTED SECURITIES/UNREGULATED - No more than 25% of the Fund's total assets will be invested
in shares of
</TABLE>
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SECURITIES MARKETS companies that are traded in unregulated over-the-counter markets
or other types of unlisted securities markets.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - The Fund will not purchase more than 10% of the outstanding
securities of any issuer. However, the Fund may own up to 100%
of the outstanding securities of investment funds, partnerships
or special purpose entities used as a means of obtaining exposure
to an underlying security, securities or market, so long as
investment in the underlying securities represents less than 10%
of the outstanding securities of any particular issuer.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in
securities of issuers in any one industry.
DERIVATIVE INSTRUMENTS (OTHER THAN FOREIGN CURRENCY TRANSACTIONS)
TYPES OF DERIVATIVES - Options, futures contracts and related options on securities
indexes
- Long equity swap contracts: where the Fund pays a fixed rate
plus the negative performance, if any, and receives the positive
performance, if any, of an index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed
rate plus the negative performance, if any, and pays the positive
performance of an index or basket of securities
- Contracts for differences: equity swaps that contain both a
long and short equity component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity futures, related options
and short equity swap contracts used to hedge against an equity
risk already generally present in the Fund.(33)
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the Fund may hedge market
risk (risk of not being invested in the market) by purchasing
long futures contracts or entering long equity swap contracts to
obtain market exposure until such time as direct investments can
be made efficiently. Conversely, if the Fund receives or
anticipates a significant demand for cash redemptions, the Fund
may sell futures contracts or enter into short equity swap
contracts, to allow the Fund to dispose of securities in a more
orderly fashion without the Fund being exposed to leveraged loss
exposure in the interim.
INVESTMENT - The Fund may use derivative instruments (particularly long
futures contracts, related options and long equity swap
contracts) in place of investing directly in securities. This
will include using equity derivatives to "equitize" cash balances
held by the Fund. Because a foreign equity derivative generally
only provides the return of a foreign market in local currency
terms, the Fund will often purchase a foreign currency forward in
conjunction with using equity derivatives to give the effect of
investing directly. The Fund may also use long derivatives for
investment in conjunction with short hedging transactions to
adjust the weights of the Fund's underlying equity portfolio to a
level the Manager believes is the optimal exposure to individual
countries and equities. For example, if the Manager expects a
positive return forecast for a select group of companies
</TABLE>
(33) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g., a single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund.
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<TABLE>
<S> <C> <C>
in a particular market, but a negative return for that market as a
whole, then this Fund may overweight the select group of equities
and reduce exposure to the market generally by selling equity
futures or enter a swap contract that is long a specific basket
of securities and short the market generally.
RISK MANAGEMENT - - The Fund may use equity futures, related options and equity
SYNTHETIC SALES AND PURCHASES swap contracts to adjust the weight of the Fund to a level the
manager believes is the optimal exposure to individual countries
and equities. Sometimes, such transactions are used as a
precursor to actual sales and purchases. For example, if the
Fund held a large proportion of stocks of a particular market and
the Manager believed that stocks of another market would
outperform such stocks, the Fund might use a short futures
contract on an appropriate index (to synthetically "sell" a
portion of the Fund's portfolio) in combination with a long
futures contract on another index (to synthetically "buy"
exposure to that index). Long and short equity swap contracts
and contracts for differences may also be used for these
purposes. Often, a foreign currency forward will be used in
conjunction with the long derivative position to create the
effect of investing directly. Equity derivatives (and
corresponding currency forwards) used to effect synthetic sales
and purchases will generally be unwound as actual portfolio
securities are sold and purchased.
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging
purposes.
- The face value of derivatives used for investment purposes
will be limited to 25% of the Fund's assets. When a currency
forward is used in conjunction with an equity derivative for
investment purposes, the currency forward will not be
independently counted for this restriction.
- When long futures contracts and long equity swaps are used
for investment, an amount of cash or high quality debt securities
equal to the face value of all such long derivative positions
will be segregated against such exposure. However, for purposes
of this restriction, if an existing long equity exposure is
reduced or eliminated by a short derivative position, the
combination of the long and short position will be considered as
cash available to segregate against a new long derivative
exposure.
- The net long equity exposure of the Fund, including direct
investment in securities and long derivative positions, will not
exceed 100% of the Fund's net assets.
- The aggregate absolute face value of all futures contracts
and swap contracts (without regard to sign and assuming no offset
of long and short positions, and counting both components of any
contract for differences) will not exceed 100% of the Fund's
assets.
- Except when such instruments are used for bona-fide hedging,
no more than 5% of the Fund's net assets will be committed to
initial margin on futures contracts and time premiums on related
options.
- Counterparties used for OTC derivatives must have a long-term
debt rating of A or higher when the derivative is entered into.
Occasionally, short-term derivatives will be entered into with
counterparties that have only high short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS - Buying and selling spot currencies
- Forward foreign currency contracts
- Currency futures contracts and related options
- Options on currencies
- Currency swap contracts
USES OF FOREIGN CURRENCY TRANSACTIONS
</TABLE>
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HEDGING - Traditional Hedging: The Fund may effect foreign
currency transactions - generally short forward or futures
contracts - to hedge the risk of foreign currencies
represented by its securities investments back into the
U.S. dollar. The Fund is not required to hedge any of the
currency risk obtained by investing in securities
denominated in foreign currencies.
- Anticipatory Hedging: When the Fund enters into a
contract for the purchase or anticipates the need to
purchase a security denominated in a foreign currency, it
may "lock in" the U.S. dollar price of the security by
buying the foreign currency or through currency forwards
or futures.
- Proxy Hedging: The Fund may hedge the exposure of a
given foreign currency by using an instrument relating to
a different currency which the Manager believes is highly
correlated to the currency being hedged.
INVESTMENT - The Fund may enter into currency forwards or futures
contracts in conjunction with entering into a futures
contract on a foreign index in order to create synthetic
foreign currency denominated securities
RISK MANAGEMENT - Subject to the limitations described below, the Fund
may use foreign currency transactions for risk management,
which will permit the Fund to have foreign currency
exposure that is significantly different than the currency
exposure represented by its portfolio investments. This
may include long exposure to particular currencies beyond
the amount of the Fund's investment in securities
denominated in that currency.
LIMITATIONS OF FOREIGN CURRENCY
TRANSACTIONS - The Fund's aggregate net foreign currency exposure,
assuming full offset of long and short positions, will not
exceed 100% of the Fund's net assets denominated in
foreign currencies, though the currency exposure of the
Fund may differ substantially from the currencies in which
the Fund's securities are denominated
- The aggregate absolute face value of all currency
forward, currency futures and currency swap contracts
(without regard to sign and assuming no offset of long and
short positions, and counting both components of any
contract for differences) will not exceed 50% of the
Fund's assets
- The Fund will not be net short in any foreign
currency, except that, when the Fund is attempting to
hedge all or nearly all of its exposure to a particular
currency, changes in the market value of foreign equities
may cause the Fund to be temporarily net short in the
currency. Such temporary net short positions will not
exceed 1% of the Fund's assets.
</TABLE>
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GMO GLOBAL PROPERTIES 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.
PERMITTED INVESTMENTS
<TABLE>
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REAL ESTATE COMPANIES: - Under normal market conditions, at least 65% of the
equity real estate investment trusts Fund's total assets will be invested in securities of
mortgage real estate investment trusts Real Estate Companies principally traded in the
real estate brokers or developers securities markets of at least three countries (one of
issuers with substantial real estate holdings which may be the United States). Real Estate
Companies are securities of issuers throughout the
OTHER EQUITY INVESTMENTS: world which are principally engaged in or related to
common stock the real estate industry or which own significant real
preferred stock estate assets. The Fund will not invest directly in
convertible securities real estate.
foreign issues traded in the U.S. and abroad - The Fund will typically make investments in
depository receipts: ADRs, GDRs, EDRs approximately 30 countries.
investment companies (open & closed-end)
illiquid securities
144A securities
restricted securities
OTHER INVESTMENTS:
asset-backed securities
mortgage backed, CMO's, strips and
residuals
adjustable rate securities
lower rated fixed income securities
zero coupon securities
indexed securities
firm commitments (with banks or broker-
dealers)
foreign currency exchange transactions
exchange traded options
warrants or rights
repurchase agreements
</TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
<TABLE>
<S> <C> <C>
DIRECT INVESTMENTS IN REAL ESTATE - The Fund will not invest directly in real estate.
However, under certain circumstances, the Fund may
acquire direct real estate holdings because of the
nature of its security holdings.
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of
its net assets from banks for the payment of redemptions
or settlement of securities transactions, but not as a
leveraged investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an
underwriter for securities law purposes in connection
with disposition of portfolio investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase
agreements and engaging in securities lending will not
be considered
</TABLE>
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<TABLE>
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making loans for this purpose. The Fund may loan securities
valued at up to one-third of its total assets.
</TABLE>
MAKING SHORT SALES OF SECURITIES
PLEDGING, HYPOTHECATING OR MORTGAGING FUND ASSETS
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
<TABLE>
<S> <C>
RESTRICTIONS AND LIMITATIONS
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).
OTHER INVESTMENT COMPANIES - The Fund will not own more than 3% of the outstanding
voting securities of any investment company.
- No more than 5% of the Fund's net assets will be invested
in any single investment company.
- No more than 10% of the Fund's net assets will be invested
in securities of investment companies in the aggregate.
- The Fund will not own other Funds of GMO Trust.
INVESTMENT IN SECURITIES ISSUED BY - Equity: The Fund will not purchase more than 5% of any
BROKERS, DEALERS, UNDERWRITERS class of stock of a broker, dealer, underwriter or investment
AND INVESTMENT ADVISERS adviser.
- Debt: The Fund may not purchase more than 10% of any such
company's total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total
assets will be invested in the securities of a single broker,
dealer, underwriter or investment adviser. The net payment
obligation of swap contracts where one of these types of
companies is the counterparty also counts for purposes of this
restriction.
- This policy does not apply to companies that derived less
than 15% of revenues from "securities-related businesses" during
the most recent fiscal year.
INVESTMENT IN LOWER-RATED BONDS - The Fund will not invest greater than 5% of its assets in
lower-rated bonds ("junk bonds").
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - At least 50% of the Fund's total assets will be invested
in U.S. government securities, cash, and money market
instruments, or other securities where investment in such other
securities is limited such that no more than 5% of the Fund's
total assets is invested in any one security and the Fund
invests no more than 10% of the outstanding securities of any
issuer.
- The Fund will not invest more than 25% of its assets in
the securities of a single issuer.
</TABLE>
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FIXED INCOME FUNDS
- --------------------------------------------------------------------------------
GMO DOMESTIC BOND 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.
PERMITTED INVESTMENTS
At least 65% of the Fund's total assets will be invested in or exposed to
(34) "bonds" of U.S. issuers. "Bonds" mean any fixed income obligations with an
original maturity of two years or more, as well as "synthetic" bonds created by
combining a futures contract or option on a fixed income security with cash, a
cash equivalent investment or another fixed income security.
<TABLE>
<S> <C>
securities issued by federal, state, local and securities purchased and sold on a when-issued or delayed
foreign governments (traded in U.S. and delivery basis
abroad) indexed securities
convertible bonds firm commitments (with banks or broker-dealers)
fixed income securities of private issuers interest rate/bond futures and related options
depository receipts: ADRs, GDRs, EDRs exchange-traded and OTC options on securities and indexes
foreign issues traded in the u.s. and abroad (including writing covered options)
investment companies (open & closed end) interest rate swap contracts
preferred stock total return swap contracts
illiquid securities contracts for differences
144A securities interest rate caps, floors and collars
restricted securities asset-backed securities including mortgage-backed, CMOs,
repurchase agreements strips and residuals
reverse repurchase agreements loan participations (and other direct debt)
adjustable rate securities
zero coupon securities
dollar roll transactions
warrants
</TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
<TABLE>
<S> <C>
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its
net assets from banks for the payment of redemptions or settlement of
securities transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of portfolio
investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase agreements
and engaging in securities lending will not be considered making
loans for this purpose. The Fund may loan securities valued at up to
one-third of its total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING FUND - Except that collateral arrangements with respect to swap
ASSETS agreements, the writing of options, 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.
</TABLE>
- --------
(34) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the Fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
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INVESTMENT IN BANKRUPT CORPORATE SECURITIES
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
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
<TABLE>
<S> <C>
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES - No more than 10% of the Fund's net assets will be invested in
time premiums on options on particular securities (as opposed to
options on indexes).
OTHER INVESTMENT COMPANIES - The Fund will not own more than 3% of the outstanding voting
securities of any investment company.
- No more than 5% of the Fund's net assets will be invested in
any single investment company.
- No more than 10% of the Fund's net assets will be invested in
securities of investment companies in the aggregate.
- The Fund will not own other Funds of GMO Trust.
ILLIQUID SECURITIES - No more than 15% of the Fund's net assets will be invested in
illiquid securities.
- The average rating of bonds invested in directly by the
INVESTMENT IN LOWER RATED SECURITIES portfolio will not be less than A+/A1 with non-rated securities
excluded from the calculation of the average. The Fund will invest
less than 5% of its assets in securities rated BBB-/Baa3 or less (or
equivalent, as determined by the Manager).
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in a
single industry.
DERIVATIVE INSTRUMENTS (OTHER THAN
FOREIGN CURRENCY TRANSACTIONS)
TYPES OF DERIVATIVES - Options, futures contracts and related options on bonds or
baskets or indexes of securities.
- Options on bonds and other securities.
- Swap contracts, including interest rate swaps, total return
swaps, credit default swaps and contracts for differences.
- Structured notes.
USES OF DERIVATIVES
- Traditional Hedging: Bond futures, related options, Bond
HEDGING options and swap contracts used to hedge against a market or credit
risk already generally present in the Fund.
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the fund may hedge market
risk (risk of not being invested in the market) by purchasing long
futures contracts or entering into long swap contracts to obtain
market exposure until such time as direct investments can be made
efficiently. Conversely, if the Fund receives or anticipates a
significant demand for cash redemptions, the Fund may sell futures
contracts or enter into short swap contracts while the Fund disposes
of securities in an orderly fashion.
INVESTMENT - The Fund may use derivative instruments (particularly long
futures contracts, related options and long swap contracts) in place
of investing directly in securities.
RISK MANAGEMENT - The Fund may use options, futures, related options and swap
contracts to adjust
</TABLE>
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<TABLE>
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the weight of the Fund to a level the Manager believes is the
optimal exposure to individual countries and issuers. Sometimes,
such transactions are used as a precursor to actual sales and
purchases.
LIMITATIONS ON THE USE OF - The net long exposure of the Fund, including direct investment
DERIVATIVES in securities and long derivative positions, will not exceed 100% of
the Fund's net assets.
- Counterparties used for OTC derivatives must have a long-term
debt rating of A or higher when the derivative is entered into.
Occasionally, short-term derivatives will be entered into with
counterparties that have only high short-term debt ratings.
</TABLE>
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- --------------------------------------------------------------------------------
GMO U.S. BOND/GLOBAL ALPHA A 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.
While the Fund seeks to outperform a U.S. fixed income benchmark, the Fund
will also invest in foreign bond markets and foreign currencies and may hedge
some or all of its exposure to domestic or foreign markets and currencies. The
Fund will also invest up to 10% in debt securities (bonds, including convertible
bonds and loans) of Emerging Countries. The Fund generally will be managed to
have no more than 25% of the Fund's net asset value exposed to foreign bond
markets and no more than 25% of the Fund's net asset value exposed to foreign
currencies. However, aggregate long and short positions in foreign bond markets
and foreign currencies may equal up to 100% of the Fund's net asset value in
each case.
PERMITTED INVESTMENTS
At least 65% of the Fund's total assets will be invested in or exposed to
(35) "bonds." "Bonds" mean any fixed income obligations with an original
maturity of two years or more, as well as "synthetic" bonds created by combining
a futures contract or option on a fixed income security with cash, a cash
equivalent investment or another fixed income security.
<TABLE>
<S> <C>
securities issued by federal, state, local and securities purchased and sold on a when-issued or delayed delivery basis
foreign governments indexed securities
convertible bonds firm commitments (with banks or broker-dealers)
fixed income securities of private issuers interest rate/bond futures and related options
depository receipts: ADRs, GDRs, EDRs exchange-traded and OTC options on securities and indexes
foreign issues traded in the U.S. and abroad (including writing covered options)
investment companies (open & closed end) interest rate swap contracts
preferred stock total return swap contracts
illiquid securities contracts for differences
144A securities credit default swaps
restricted securities interest rate caps, floors and collars
reverse repurchase agreements asset-backed securities including mortgage-backed, CMOs, strips
zero coupon securities and residuals
repurchase agreements loan participations (and other direct debt)
warrants sovereign debt of emerging countries
</TABLE>
<TABLE>
<S> <C>
FOREIGN CURRENCY TRANSACTIONS - The Fund may invest in spot currency transactions, forward
currency contracts, currency swap contracts, options on
currencies, currency futures and related options.
- The Fund may also use synthetic bonds and synthetic foreign
currency denominated securities (36) to approximate desired
risk/return profiles.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following
practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its
net assets from banks for the payment of redemptions or settlement
of securities
</TABLE>
- --------
(35) 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) The Fund may purchase forward foreign exchange contracts in
conjunction with U.S. dollar-denominated securities in order to create a
synthetic foreign currency denominated security.
154
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<TABLE>
<S> <C>
transactions, but not as a leveraged investment
strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter
for securities law purposes in connection with disposition of
portfolio investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase
agreements and engaging in securities lending will not be
considered making loans for this purpose. The Fund may loan
securities valued at up to one-third of its total assets.
PLEDGING, HYPOTHECATING OR - Except that collateral arrangements with respect to swap
MORTGAGING FUND ASSETS agreements, the writing of options, 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.
</TABLE>
MAKING SHORT SALES OF SECURITIES
INVESTMENT IN BANKRUPT CORPORATE SECURITIES
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
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
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
OPTIONS ON SECURITIES - No more than 10% of the Fund's net assets will be invested in
time premiums on options on particular securities (as opposed to
options on indexes).
OTHER INVESTMENT COMPANIES - The Fund will not own more than 3% of the outstanding voting
securities of any investment company.
- No more than 5% of the Fund's net assets will be invested in
any single investment company.
- No more than 10% of the Fund's net assets will be invested in
securities of investment companies in the aggregate.
- The Fund will not own other Funds of GMO Trust.
ILLIQUID SECURITIES - No more than 15% of the Fund's net assets will be invested in
illiquid securities.
INVESTMENT IN LOWER RATED SECURITIES - The average rating of bonds invested in directly by the
portfolio will not be less than A+/A1 with non-rated securities
excluded from the calculation of the average. The Fund will invest
less than 25% of its assets in securities rated BBB-/Baa3 or less
(or equivalent, as determined by the Manager).
SOVEREIGN DEBT
- The Fund will not invest greater than 10% of its total assets
in sovereign debt of Emerging Countries. These include bonds,
convertible bonds and Brady bonds, and loans of countries in Asia,
Latin America, the Middle East, Southern Europe, Eastern Europe and
Africa of the type invested in by the GMO Emerging Country Debt
Fund.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in
a single industry.
</TABLE>
155
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<TABLE>
<S> <C>
DERIVATIVE INSTRUMENTS
DERIVATIVES AND GMO'S GLOBAL BOND - The fundamental strategy of the Fund requires that the Fund
STRATEGY take active over-weighted and under-weighted positions with respect
to particular bond markets and currencies relative to the Fund's
performance benchmark. Often these active positions will be
achieved using long and short derivative positions and combinations
of such positions to create synthetic securities. The aggregate
net exposure (assuming complete offset of over-weighted and
under-weighted positions across all markets) created by such active
positions will generally be small relative to the Fund's benchmark
- less than 25% for example. However, the total of the exposures
may be quite large. The total of the absolute values of all
deviations from the benchmark (that is, without regard to sign and
allowing no netting of positions) may exceed 100% of the value of
the Fund for both bonds and currencies, which are generally
considered separately. The risk of the Fund relative to its
benchmark, however, is expected to be significantly less than this
since many markets are correlated, so that over-weighted and
under-weighted positions will often offset each other. This means
that losses relative to the benchmark from a declining bond or
currency market that is over-weighted will often be offset by
losses from a correlated bond or currency market that is
under-weighted.
TYPES OF DERIVATIVES - Options, futures contracts and related options on bonds or
baskets or indexes of securities.
- Options on bonds and other securities.
- Swap contracts, including interest rate swaps, total return
swaps, credit default swaps and contracts for differences.
- Structured notes.
USES OF DERIVATIVES
(OTHER THAN FOREIGN CURRENCY)
HEDGING - Traditional Hedging: Bond futures, related options, bond
options and swap contracts used to hedge against a market or credit
risk already generally present in the Fund.
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the fund may hedge market
risk (risk of not being invested in the market) by purchasing long
futures contracts or entering into long swap contracts to obtain
market exposure until such time as direct investments can be made
efficiently. Conversely, if the Fund receives or anticipates a
significant demand for cash redemptions, the Fund may sell futures
contracts or enter into short swap contracts while the Fund
disposes of securities in an orderly fashion.
INVESTMENT - The Fund may use derivative instruments (particularly long
futures contracts, related options and long swap contracts) in
place of investing directly in securities. Because a foreign
derivative generally only provides the return of a foreign market
in local currency terms, the Fund will often purchase a foreign
currency forward in conjunction with using derivatives to give the
effect of investing directly.
RISK MANAGEMENT - The Fund may use options, futures, related options and swap
contracts to adjust the weight of the Fund to a level the Manager
believes is the optimal exposure to individual countries and
issuers. Sometimes, such transactions are used as a precursor to
actual sales and purchases.
</TABLE>
156
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<TABLE>
<S> <C>
LIMITATIONS ON THE USE OF DERIVATIVES - The net long exposure of the Fund, including direct
investment in securities and long derivative positions, will not
exceed 100% of the Fund's net assets.
- Counterparties used for OTC derivatives must have a long-term
debt rating of A or higher when the derivative is entered into.
Occasionally, short-term derivatives will be entered into with
counterparties that have only high short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS - Buying and selling spot currencies.
- Forward foreign currency contracts.
- Currency futures contracts and related options.
- Options on currencies.
- Currency swap contracts.
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING - Traditional Hedging: The Fund may effect foreign currency
transactions - generally short forward or futures contracts - to
hedge the risk of foreign currencies represented by its securities
investments back into the U.S. dollar. The Fund is not required to
hedge any of the currency risk obtained by investing in securities
denominated in foreign currencies.
- Anticipatory Hedging: When the Fund enters into a contract
for the purchase or anticipates the need to purchase a security
denominated in a foreign currency, it may "lock in" the U.S. dollar
price of the security by buying the foreign currency or through
currency forwards or futures.
- Proxy Hedging: The Fund may hedge the exposure of a given
foreign currency by using an instrument relating to a different
currency which the Manager believes is highly correlated to the
currency being hedged.
INVESTMENT - The Fund may enter into currency forwards or futures
contracts in conjunction with entering into a futures contract on a
foreign index in order to create synthetic foreign currency
denominated securities.
RISK MANAGEMENT - Subject to the limitations described below, the Fund may use
foreign currency transactions for risk management, which will
permit the Fund to have foreign currency exposure that is
significantly different than the currency exposure represented by
its portfolio investments. This may include long and short
exposure to particular currencies beyond the amount of the Fund's
investment in securities denominated in that currency.
</TABLE>
157
<PAGE> 245
- --------------------------------------------------------------------------------
GMO U.S. BOND/GLOBAL ALPHA B 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.
While the Fund seeks to outperform a U.S. fixed income benchmark, the Fund
will also invest in foreign bond markets and foreign currencies and may hedge
some or all of its exposure to domestic or foreign markets and currencies. The
Fund generally will be managed to have no more than 25% of the Fund's net asset
value exposed to foreign bond markets and no more than 25% of the Fund's net
asset value exposed to foreign currencies. However, aggregate long and short
positions in foreign bond markets and foreign currencies may equal up to 100% of
the Fund's net asset value in each case.
PERMITTED INVESTMENTS
At least 65% of the Fund's total assets will be invested in or exposed to
(37) "bonds." "Bonds" mean any fixed income obligations with an original
maturity of two years or more, as well as "synthetic" bonds created by combining
a futures contract or option on a fixed income security with cash, a cash
equivalent investment or another fixed income security.
<TABLE>
<S> <C>
securities issued by federal, state, local and securities purchased and sold on a when-issued or delayed delivery basis
foreign governments indexed securities
convertible bonds firm commitments (with banks or broker-dealers)
fixed income securities of private issuers interest rate/bond futures and related options
depository receipts: ADRs, GDRs, EDRs exchange-traded and OTC options on securities and indexes (including
foreign issues traded in the U.S. and abroad writing covered options)
investment companies (open & closed-end) interest rate swap contracts
preferred stock total return swap contracts
illiquid securities contracts for differences
144A securities credit default swaps
restricted securities interest rate caps, floors and collars
reverse repurchase agreements asset-backed securities including mortgage-backed, CMOs, strips and
zero coupon securities residuals
repurchase agreements warrants
</TABLE>
<TABLE>
<S> <C>
FOREIGN CURRENCY TRANSACTIONS - The Fund may invest in spot currency transactions, forward
currency contracts, currency swap contracts, options on currencies,
currency futures and related options.
- The Fund may also use synthetic bonds and synthetic foreign
currency denominated securities (38) to approximate desired risk/return
profiles.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following
practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its
net assets from banks for the payment of redemptions or settlement
of securities transactions, but not as a leveraged investment
strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter
for securities law purposes in connection with disposition of
portfolio investments.
</TABLE>
- ------------
(37) 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.
(38) The Fund may purchase forward foreign exchange contracts in
conjunction with U.S. dollar-denominated securities in order to create a
synthetic foreign currency denominated security.
158
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<TABLE>
<S> <C>
MAKING LOANS - Except that purchasing debt obligations, repurchase agreements
and engaging in securities lending will not be considered making
loans for this purpose. The Fund may loan securities valued at up
to one-third of its total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING - Except that collateral arrangements with respect to swap
FUND ASSETS agreements, the writing of options, 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.
</TABLE>
MAKING SHORT SALES OF SECURITIES
DEBT SECURITIES OF EMERGING COUNTRIES
INVESTMENT IN BANKRUPT CORPORATE SECURITIES
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
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
<TABLE>
<S> <C>
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES - No more than 10% of the Fund's net assets will be invested in time
premiums on options on particular securities (as opposed to options on
indexes).
OTHER INVESTMENT COMPANIES - The Fund will not own more than 3% of the outstanding voting
securities of any investment company.
- No more than 5% of the Fund's net assets will be invested in any
single investment company.
- No more than 10% of the Fund's net assets will be invested in
securities of investment companies in the aggregate.
- The Fund will not own other Funds of GMO Trust.
ILLIQUID SECURITIES - No more than 15% of the Fund's net assets will be invested in
illiquid securities.
INVESTMENT IN LOWER-RATED SECURITIES - The average rating of bonds invested in directly by the portfolio
will not be less than A+/A1 with non-rated securities excluded from the
calculation of the average. The Fund will invest less than 25% of its
assets in securities rated BBB-/Baa3 or less (or equivalent, as
determined by the Manager).
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in a
single industry.
DERIVATIVE INSTRUMENTS
DERIVATIVES AND GMO'S GLOBAL BOND - The fundamental strategy of the Fund requires that the Fund take
STRATEGY active over-weighted and under-weighted positions with respect to
particular bond markets and currencies relative to the Fund's
performance benchmark. Often these active positions will be achieved
using long and short derivative positions and combinations of such
positions to create synthetic securities. The aggregate net exposure
(assuming complete offset of over-weighted and under-weighted positions
across all markets) created by such active positions will generally be
small relative to the Fund's benchmark - less than 25% for example.
However, the total of the exposures may be quite large. The total of
the absolute values of all deviations from the benchmark (that is,
without regard to sign and allowing no netting of positions) may exceed
100% of the value of the Fund for both bonds and currencies, which are
generally considered separately. The risk of the Fund relative to its
benchmark, however, is expected to be significantly less than this since
many markets are correlated, so that over-weighted and under-weighted
positions will often offset each other. This means that losses relative
to the benchmark from a declining bond or currency market that is
over-weighted will
</TABLE>
159
<PAGE> 247
<TABLE>
<S> <C>
often be offset by losses from a correlated bond or
currency market that is under-weighted.
USES OF DERIVATIVES
(OTHER THAN FOREIGN CURRENCY)
TYPES OF DERIVATIVES
- Options, futures contracts and related options on bonds or baskets
or indexes of securities
- Options on bonds and other securities.
- Swap contracts, including interest rate swaps, total return swaps,
credit default swaps and contracts for differences.
- Structured notes.
HEDGING - Traditional Hedging: Bond futures, related options, bond options
and swap contracts used to hedge against a market or credit risk already
generally present in the Fund.
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the fund may hedge market risk
(risk of not being invested in the market) by purchasing long futures
contracts or entering into long swap contracts to obtain market exposure
until such time as direct investments can be made efficiently.
Conversely, if the Fund receives or anticipates a significant demand for
cash redemptions, the Fund may sell futures contracts or enter into
short swap contracts while the Fund disposes of securities in an orderly
fashion.
INVESTMENT - The Fund may use derivative instruments (particularly long futures
contracts, related options and long swap contracts) in place of
investing directly in securities. Because a foreign derivative generally
only provides the return of a foreign market in local currency terms,
the Fund will often purchase a foreign currency forward in conjunction
with using derivatives to give the effect of investing directly.
RISK MANAGEMENT - The Fund may use options, futures, related options and swap
contracts to adjust the weight of the Fund to a level the Manager
believes is the optimal exposure to individual countries and issuers.
Sometimes, such transactions are used as a precursor to actual sales and
purchases.
LIMITATIONS ON THE USE OF DERIVATIVES - The net long exposure of the Fund, including direct investment in
securities and long derivative positions, will not exceed 100% of the
Fund's net assets.
- Counterparties used for OTC derivatives must have a long-term debt
rating of A or higher when the derivative is entered into.
Occasionally, short-term derivatives will be entered into with
counterparties that have only high short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY - Buying and selling spot currencies.
TRANSACTIONS
- Forward foreign currency contracts.
- Currency futures contracts and related options.
- Options on currencies.
- Currency swap contracts.
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING - Traditional Hedging: The Fund may effect foreign currency
transactions - generally short forward or futures contracts - to hedge
the risk of foreign currencies represented by its securities investments
back into the U.S. dollar. The Fund is not required to hedge any of the
currency risk obtained by investing in securities denominated in foreign
currencies.
- Anticipatory Hedging: When the Fund enters into a contract for the
purchase or anticipates the need to purchase a security denominated in a
foreign currency, it
</TABLE>
160
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<TABLE>
<S> <C>
may "lock in" the U.S. dollar price of the security
by buying the foreign currency or through currency forwards or futures.
- Proxy Hedging: The Fund may hedge the exposure of a given foreign
currency by using an instrument relating to a different currency, which
the Manager believes is highly correlated to the currency being hedged.
INVESTMENT - The Fund may enter into currency forwards or futures contracts in
conjunction with entering into a futures contract on a foreign index in
order to create synthetic foreign currency denominated securities.
RISK MANAGEMENT - Subject to the limitations described below, the Fund may use
foreign currency transactions for risk management, which will permit the
Fund to have foreign currency exposure that is significantly different
than the currency exposure represented by its portfolio investments.
This may include long and short exposure to particular currencies beyond
the amount of the Fund's investment in securities denominated in that
currency.
</TABLE>
161
<PAGE> 249
- --------------------------------------------------------------------------------
GMO INTERNATIONAL BOND 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.
PERMITTED INVESTMENTS
At least 65% of the Fund's total assets will be invested in or exposed to
(39) "bonds." "Bonds" mean any fixed income obligations with an original
maturity of two years or more, as well as "synthetic" bonds created by combining
a futures contract or option on a fixed income security with cash, a cash
equivalent investment or another fixed income security.
<TABLE>
<S> <C>
securities issued by federal, state, local and securities purchased and sold on a when-issued or delayed delivery basis
foreign governments indexed securities
convertible bonds firm commitments (with banks or broker-dealers)
fixed income securities of private issuers interest rate/bond futures and related options
depository receipts: ADRs, GDRs, EDRs exchange-traded and OTC options on securities and indexes (including
foreign issues traded in the U.S. and abroad writing covered options)
investment companies (open & closed end) interest rate swap contracts
preferred stock total return swap contracts
illiquid securities contracts for differences
144A securities credit default swap
restricted securities interest rate caps, floors and collars
repurchase agreements asset-backed securities including mortgage-backed, CMOs, strips and
reverse repurchase agreements residuals
zero coupon securities loan participations (and other direct debt)
warrants sovereign debt of emerging countries
</TABLE>
<TABLE>
<S> <C>
FOREIGN CURRENCY TRANSACTIONS - The Fund may invest in spot currency transactions, forward
currency contracts, currency swap contracts, options on currencies,
currency futures and related options.
- The Fund may also use synthetic bonds and synthetic foreign
currency denominated securities (40) to approximate desired risk/return
profiles.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following
practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its
net assets from banks for the payment of redemptions or settlement
of securities transactions, but not as a leveraged investment
strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter
for securities law purposes in connection with disposition of
portfolio investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase agreements
and engaging in securities lending will not be considered making
loans for this purpose. The Fund may loan securities valued at up
to one-third of its total assets.
PLEDGING, HYPOTHECATING OR - Except that collateral arrangements with respect to swap
MORTGAGING FUND ASSETS agreements, the writing of options, index, interest rate, currency
or other futures contracts, options on futures contracts and
collateral arrangements with respect to initial
</TABLE>
- --------
(39) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the Fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
(40) The Fund may purchase forward foreign exchange contracts in conjunction
with U.S. dollar-denominated securities in order to create a synthetic foreign
currency denominated security.
162
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<TABLE>
<S> <C>
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.
</TABLE>
MAKING SHORT SALES OF SECURITIES
INVESTMENT IN BANKRUPT CORPORATE SECURITIES
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
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
<TABLE>
<S> <C>
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES - No more than 10% of the Fund's net assets will be invested in
time premiums on options on particular securities (as opposed to
options on indexes).
OTHER INVESTMENT COMPANIES - The Fund will not own more than 3% of the outstanding voting
securities of any investment company.
- No more than 5% of the Fund's net assets will be invested in
any single investment company.
- No more than 10% of the Fund's net assets will be invested in
securities of investment companies in the aggregate.
- The Fund will not own other Funds of GMO Trust.
ILLIQUID SECURITIES No more than 15% of the Fund's net assets will be invested in illiquid
securities.
INVESTMENT IN LOWER-RATED SECURITIES - The average rating of bonds invested in directly by the
portfolio will not be less than A+/A1 with non-rated securities
excluded from the calculation of the average. The Fund will invest
less than 5% of its assets in securities rated BBB-/Baa3 or less (or
equivalent, as determined by the Manager).
SOVEREIGN DEBT - The Fund will not invest greater than 10% of its total assets
in sovereign debt of Emerging Countries. These include bonds,
convertible bonds and Brady bonds, and loans of countries in Asia,
Latin America, the Middle East, Southern Europe, Eastern Europe and
Africa of the type invested in by the GMO Emerging Country Debt Fund.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in
a single industry.
DERIVATIVE INSTRUMENTS
DERIVATIVES AND GMO'S GLOBAL BOND - The fundamental strategy of the Fund requires that the Fund
STRATEGY take active over-weighted and under-weighted positions with respect
to particular bond markets and currencies relative to the Fund's
performance benchmark. Often these active positions will be
achieved using long and short derivative positions and combinations
of such positions to create synthetic securities. The aggregate net
exposure (assuming complete offset of over-weighted and
under-weighted positions across all markets) created by such active
positions will generally be small relative to the Fund's benchmark -
less than 25%, for example. However, the total of the exposures may
be quite large. The total of the absolute values of all deviations
from the benchmark (that is, without regard to sign and allowing no
netting of positions) may exceed 100% of the value of the Fund for
both bonds and currencies, which are generally considered
separately. The risk of the Fund relative to its benchmark,
however, is expected to be significantly less than this since many
markets are correlated, so that over-weighted and under-weighted
positions will often offset each other. This means that losses
relative to the benchmark from a
</TABLE>
163
<PAGE> 251
<TABLE>
<S> <C>
declining bond or currency market that is over-weighted will often
be offset by losses from a correlated bond or currency market that is
under-weighted.
USES OF DERIVATIVES
(OTHER THAN FOREIGN CURRENCY)
TYPES OF DERIVATIVES - Options, futures contracts and related options on bonds or
baskets or indexes of securities.
- Options on bonds and other securities.
- Swap contracts, including interest rate swaps, total return
swaps, credit default swaps and contracts for differences.
- Structured notes.
HEDGING - Traditional Hedging: Bond futures, related options, bond
options and swap contracts used to hedge against a market or credit
risk already generally present in the Fund.
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the fund may hedge market
risk (risk of not being invested in the market) by purchasing long
futures contracts or entering into long swap contracts to obtain
market exposure until such time as direct investments can be made
efficiently. Conversely, if the Fund receives or anticipates a
significant demand for cash redemptions, the Fund may sell futures
contracts or enter into short swap contracts while the Fund disposes
of securities in an orderly fashion.
INVESTMENT - The Fund may use derivative instruments (particularly long
futures contracts, related options and long swap contracts) in place
of investing directly in securities. Because a foreign derivative
generally only provides the return of a foreign market in local
currency terms, the Fund will often purchase a foreign currency
forward in conjunction with using derivatives to give the effect of
investing directly.
RISK MANAGEMENT - The Fund may use options, futures, related options and swap
contracts to adjust the weight of the Fund to a level the Manager
believes is the optimal exposure to individual countries and
issuers. Sometimes, such transactions are used as a precursor to
actual sales and purchases.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS - Buying and selling spot currencies.
- Forward foreign currency contracts.
- Currency futures contracts and related options.
- Options on currencies.
- Currency swap contracts.
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING - Traditional Hedging: The Fund may effect foreign currency
transactions - generally short forward or futures contracts - to
hedge the risk of foreign currencies represented by its securities
investments back into the U.S. dollar. The Fund is not required to
hedge any of the currency risk obtained by investing in securities
denominated in foreign currencies.
- Anticipatory Hedging: When the Fund enters into a contract for
the purchase or anticipates the need to purchase a security
denominated in a foreign currency, it may "lock in" the U.S. dollar
price of the security by buying the foreign currency or through
currency forwards or futures.
- Proxy Hedging: The Fund may hedge the exposure of a given
foreign currency by using an instrument relating to a different
currency, which the Manager believes is highly correlated to the
currency being hedged.
INVESTMENT - The Fund may enter into currency forwards or futures contracts
in conjunction with entering into a futures contract on a foreign
index in order to create synthetic foreign currency denominated
securities.
</TABLE>
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<S> <C>
RISK MANAGEMENT - Subject to the limitations described below, the Fund may use
foreign currency transactions for risk management, which will permit
the Fund to have foreign currency exposure that is significantly
different than the currency exposure represented by its portfolio
investments. This may include long and short exposure to particular
currencies beyond the amount of the Fund's investment in securities
denominated in that currency.
</TABLE>
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GMO CURRENCY HEDGED INTERNATIONAL BOND 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.
PERMITTED INVESTMENTS
At least 65% of the Fund's total assets will be invested in or exposed to
(41) "bonds." "Bonds" mean any fixed income obligations with an original
maturity of two years or more, as well as "synthetic" bonds created by combining
a futures contract or option on a fixed income security with cash, a cash
equivalent investment or another fixed income security. While the Fund invests
primarily in obligations denominated in foreign currencies, the Fund will employ
currency transactions so that, under normal conditions, at least 75% of the
Fund's net exposure to currencies will be to the U.S. dollar.
<TABLE>
<S> <C>
securities issued by federal, state, local and securities purchased and sold on a when-issued or delayed delivery basis
foreign governments indexed securities
convertible bonds firm commitments (with banks or broker-dealers)
fixed income securities of private issuers interest rate/bond futures and related options
depository receipts: ADRs, GDRs, EDRs exchange-traded and otc options on securities and indexes (including
foreign issues traded in the U.S. and abroad writing covered options)
investment companies (including closed-end interest rate swap contracts
funds) total return swap contracts
preferred stock contracts for differences
illiquid securities credit default swaps
144A securities interest rate caps, floors and collars
restricted securities asset-backed securities including mortgage-backed, cmos, strips and
reverse repurchase agreements residuals
zero coupon securities loan participations (and other direct debt)
repurchase agreements sovereign debt of emerging countries
warrants
</TABLE>
<TABLE>
<S> <C>
FOREIGN CURRENCY TRANSACTIONS - The Fund may invest in spot currency transactions, forward
currency contracts, currency swap contracts, options on currencies,
currency futures and related options.
- The Fund may also use synthetic bonds and synthetic foreign
currency denominated securities(42) to approximate desired risk/return
profiles.
</TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
<TABLE>
<S> <C>
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily up to 20% of its net
assets from banks for the payment of redemptions or settlement of
securities transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter
for securities law purposes in connection with disposition of
portfolio investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase agreements
and engaging in securities lending will not be considered making
loans for this purpose.
</TABLE>
- --------
(41) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the Fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
(42) The Fund may purchase forward foreign exchange contracts in
conjunction with U.S. dollar-denominated securities in order to create a
synthetic foreign currency denominated security.
166
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<TABLE>
<S> <C>
The Fund may loan securities valued at up to one-third of its
total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING - Except that collateral arrangements with respect to swap
FUND ASSETS agreements, the writing of options, 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.
</TABLE>
MAKING SHORT SALES OF SECURITIES
INVESTMENT IN BANKRUPT CORPORATE SECURITIES
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
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
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
OPTIONS ON SECURITIES - No more than 10% of the Fund's net assets will be invested in
time premiums on options on particular securities (as opposed to
options on indexes).
OTHER INVESTMENT COMPANIES - The Fund will not own more than 3% of the outstanding voting
securities of any investment company.
- No more than 5% of the Fund's net assets will be invested in
any single investment company.
- No more than 10% of the Fund's net assets will be invested in
securities of investment companies in the aggregate.
- The Fund will not own other Funds of GMO Trust.
ILLIQUID SECURITIES - No more than 15% of the Fund's net assets will be invested in
illiquid securities.
INVESTMENT IN LOWER-RATED SECURITIES - The average rating of bonds invested in directly by the
portfolio will not be less than A+/A1 with non-rated securities
excluded from the calculation of the average. The Fund will invest
less than 25% of its assets in securities rated BBB-/Baa3 or less (or
equivalent, as determined by the Manager).
SOVEREIGN DEBT - The Fund will not invest more than 10% of its total assets in
sovereign debt of Emerging Countries. These include bonds,
convertible bonds and Brady bonds, and loans of countries in Asia,
Latin America, the Middle East, Southern Europe, Eastern Europe and
Africa of the type invested in by the GMO Emerging Country Debt Fund.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in a
single industry.
DERIVATIVE INSTRUMENTS
DERIVATIVES AND GMO'S GLOBAL BOND - The fundamental strategy of the Fund requires that the Fund
STRATEGY take active over-weighted and under-weighted positions with respect
to particular bond markets and currencies relative to the Fund's
performance benchmark. Often these active positions will be
achieved using long and short derivative positions and combinations
of such positions to create synthetic securities. The aggregate
net exposure (assuming complete offset of over-weighted and
under-weighted positions across all markets) created by such active
positions will generally be small relative to the Fund's benchmark
- less than 25% for example. However, the total of the exposures
may be quite large. The total of the absolute values of all
deviations from the benchmark (that is, without regard to sign and
allowing no netting of positions) may exceed 100% of the value of
the Fund for both bonds and currencies, which are generally
</TABLE>
167
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<TABLE>
<S> <C>
considered separately. The risk of the Fund relative to its
benchmark, however, is expected to be significantly less than this
since many markets are correlated, so that over-weighted and
under-weighted positions will often offset each other. This means
that losses relative to the benchmark from a declining bond or
currency market that is over-weighted will often be offset by
losses from a correlated bond or currency market that is
under-weighted.
Note: The Fund is a currency-hedged fund in that it seeks to limit
its aggregate net exposure to foreign currencies (assuming complete
offset of overweighted and underweighted positions across all
currency markets) to not more than 25% of the Fund's net asset
value. However, the Fund will not specifically hedge the currency
exposure represented by the Fund's investments in foreign bonds and
synthetic foreign currency denominated fixed income securities.
TYPES OF DERIVATIVES - Options, futures contracts and related options on bonds or
baskets or indexes of securities.
- Options on bonds and other securities.
- Swap contracts, including interest rate swaps, total return
swaps, credit default swaps and contracts for differences.
- Structured notes.
USES OF DERIVATIVES
(OTHER THAN FOREIGN CURRENCY)
HEDGING - Traditional Hedging: Bond futures, related options, bond
options and swap contracts used to hedge against a market or credit
risk already generally present in the Fund.
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the fund may hedge market
risk (risk of not being invested in the market) by purchasing long
futures contracts or entering into long swap contracts to obtain
market exposure until such time as direct investments can be made
efficiently. Conversely, if the Fund receives or anticipates a
significant demand for cash redemptions, the Fund may sell futures
contracts or enter into short swap contracts while the Fund disposes
of securities in an orderly fashion.
INVESTMENT The Fund may use derivative instruments (particularly long futures
contracts, related options and long swap contracts) in place of
investing directly in securities. Because a foreign derivative generally
only provides the return of a foreign market in local currency terms,
the Fund will often purchase a foreign currency forward in conjunction
with using derivatives to give the effect of investing directly.
RISK MANAGEMENT - The Fund may use options, futures, related options and swap
contracts to adjust the weight of the Fund to a level the Manager
believes is the optimal exposure to individual countries and
issuers. Sometimes, such transactions are used as a precursor to
actual sales and purchases.
LIMITATIONS ON THE USE OF DERIVATIVES - The net long exposure of the Fund, including direct investment
in securities and long derivative positions, will not exceed 100% of
the Fund's net assets.
- Counterparties used for OTC derivatives must have a long-term
debt rating of A or higher when the derivative is entered into.
Occasionally, short-term derivatives will be entered into with
counterparties that have only high short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS - Buying and selling spot currencies.
- Forward foreign currency contracts.
- Currency futures contracts and related options.
- Options on currencies.
- Currency swap contracts.
</TABLE>
168
<PAGE> 256
USES OF FOREIGN CURRENCY TRANSACTIONS
<TABLE>
<S> <C>
HEDGING - Traditional Hedging: The Fund may effect foreign currency
transactions - generally short forward or futures contracts - to
hedge the risk of foreign currencies represented by its securities
investments back into the U.S. dollar. The Fund is not required to
hedge any of the currency risk obtained by investing in securities
denominated in foreign currencies.
- Anticipatory Hedging: When the Fund enters into a contract to
purchase or anticipates the need to purchase a security denominated
in a foreign currency, it may "lock in" the U.S. dollar price of the
security by buying the foreign currency or through currency forwards
or futures
- Proxy Hedging: The Fund may hedge the exposure of a particular
foreign currency by using an instrument relating to a different
currency, which the Manager believes is highly correlated to the
currency being hedged.
INVESTMENT - The Fund may enter into currency forwards or futures contracts
in conjunction with entering into a futures contract on a foreign
index in order to create synthetic foreign currency denominated
securities.
RISK MANAGEMENT - Subject to the limitations described below, the Fund may use
foreign currency transactions for risk management, which will permit
the Fund to have foreign currency exposure that is significantly
different than the currency exposure represented by its portfolio
investments. This may include long and short exposure to particular
currencies beyond the amount of the Fund's investment in securities
denominated in that currency.
</TABLE>
169
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GMO GLOBAL BOND 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.
PERMITTED INVESTMENTS
At least 65% of the Fund's total assets will be invested in or exposed
to(43) "bonds." "Bonds" mean any fixed income obligations with an original
maturity of two years or more, as well as "synthetic" bonds created by combining
a futures contract or option on a fixed income security with cash, a cash
equivalent investment or another fixed income security.
<TABLE>
<S> <C>
securities issued by federal, state, local and securities purchased and sold on a when-issued or delayed delivery basis
foreign governments indexed securities
convertible bonds firm commitments (with banks or broker-dealers)
fixed income securities of private issuers interest rate/bond futures and related options
depository receipts: ADRs, GDRs, EDRs exchange-traded and OTC options on securities and indexes (including
foreign issues traded in the U.S. and abroad writing covered options)
investment companies (open & closed end) interest rate swap contracts
preferred stock total return swap contracts
illiquid securities contracts for differences
144A securities credit default swaps
restricted securities interest rate caps, floors and collars
repurchase agreements asset-backed securities including mortgage-backed, CMOs, strips and
reverse repurchase agreements residuals
dollar roll transactions loan participations (and other direct debt)
adjustable rate securities sovereign debt of emerging countries
zero coupon securities warrants
FOREIGN CURRENCY TRANSACTIONS - The Fund may invest in spot currency transactions, forward
currency contracts, currency swap contracts, options on currencies,
currency futures and related options.
- The Fund may also use synthetic bonds and synthetic foreign
currency denominated securities(44) to approximate desired risk/return
profiles.
</TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
<TABLE>
<S> <C>
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its
net assets from banks for the payment of redemptions or settlement of
securities transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of portfolio
investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase agreements
and engaging in securities lending will not be considered making
loans for this purpose. The Fund may loan securities valued at up to
one-third of its total assets.
PLEDGING, HYPOTHECATING OR - Except that collateral arrangements with respect to swap
agreements, the
</TABLE>
- ----------
(43) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the Fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
(44) The Fund may purchase forward foreign exchange contracts in
conjunction with U.S. dollar-denominated securities in order to create a
synthetic foreign currency denominated security.
170
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<TABLE>
<S> <C>
MORTGAGING FUND ASSETS writing of options, 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.
</TABLE>
MAKING SHORT SALES OF SECURITIES
INVESTMENT IN BANKRUPT CORPORATE SECURITIES
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
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
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
OPTIONS ON SECURITIES - No more than 10% of the Fund's net assets will be invested in time
premiums on options on particular securities (as opposed to options on
indexes).
OTHER INVESTMENT COMPANIES - The Fund will not own more than 3% of the outstanding voting
securities of any investment company.
- No more than 5% of the Fund's net assets will be invested in any
single investment company.
- No more than 10% of the Fund's net assets will be invested in
securities of investment companies in the aggregate.
- The Fund will not own other Funds of GMO Trust.
ILLIQUID SECURITIES - No more than 15% of the Fund's net assets will be invested in
illiquid securities.
INVESTMENT IN LOWER-RATED SECURITIES - The average rating of bonds invested in directly by the portfolio
will not be less than A+/A1 with non-rated securities excluded from the
calculation of the average. The Fund will invest less than 5% of its
assets in securities rated BBB-/Baa3 or less (or equivalent, as
determined by Manager).
SOVEREIGN DEBT - The Fund will not invest greater than 10% of its total assets in
sovereign debt of Emerging Countries. These include bonds, convertible
bonds and Brady bonds, and loans of countries in Asia, Latin America, the
Middle East, Southern Europe, Eastern Europe and Africa of the type
invested in by the GMO Emerging Country Debt Fund.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in a
single industry.
DERIVATIVE INSTRUMENTS
DERIVATIVES AND GMO'S GLOBAL - The fundamental strategy of the Fund requires that the Fund take
BOND STRATEGY active over-weighted and under-weighted positions with respect to
particular bond markets and currencies relative to the Fund's
performance benchmark. Often these active positions will be achieved
using long and short derivative positions and combinations of such
positions to create synthetic securities. The aggregate net exposure
(assuming complete offset of over-weighted and under-weighted positions
across all markets) created by such active positions will generally be
small relative to the Fund's benchmark - less than 25%, for example.
However, the total of the exposures may be quite large. The total of
the absolute values of all deviations from the benchmark (that is,
without regard to sign and allowing no netting of positions) may exceed
100% of the value of the Fund for both bonds and currencies, which are
generally considered separately. The risk of the Fund relative to its
benchmark, however, is expected to be significantly less than
</TABLE>
171
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<TABLE>
<S> <C>
this since many markets are correlated, so that over-weighted and
under-weighted positions will often offset each other. This means that
losses relative to the benchmark from a declining bond or currency
market that is over-weighted will often be offset by losses from a
correlated bond or currency market that is under-weighted.
TYPES OF DERIVATIVES - Options, futures contracts and related options on bonds or baskets
or indexes of securities.
- Options on bonds and other securities.
- Swap contracts, including interest rate swaps, total return swaps,
credit default swaps and contracts for differences.
- Structured notes.
USES OF DERIVATIVES
(OTHER THAN FOREIGN CURRENCY)
HEDGING - Traditional Hedging: Bond futures, related options, bond options
and swap contracts used to hedge against a market or credit risk already
generally present in the Fund.
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the fund may hedge market risk
(risk of not being invested in the market) by purchasing long futures
contracts or entering into long swap contracts to obtain market exposure
until such time as direct investments can be made efficiently.
Conversely, if the Fund receives or anticipates a significant demand for
cash redemptions, the Fund may sell futures contracts or enter into short
swap contracts while the Fund disposes of securities in an orderly
fashion.
INVESTMENT - The Fund may use derivative instruments (particularly long futures
contracts, related options and long swap contracts) in place of investing
directly in securities. Because a foreign derivative generally only
provides the return of a foreign market in local currency terms, the Fund
will often purchase a foreign currency forward in conjunction with using
derivatives to give the effect of investing directly.
RISK MANAGEMENT - The Fund may use options, futures, related options and swap
contracts to adjust the weight of the Fund to a level the Manager
believes is the optimal exposure to individual countries and issuers.
Sometimes, such transactions are used as a precursor to actual sales and
purchases.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS - Buying and selling spot currencies.
- Forward foreign currency contracts.
- Currency futures contracts and related options.
- Options on currencies.
- Currency swap contracts.
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING - Traditional Hedging: The Fund may effect foreign currency
transactions - generally short forward or futures contracts - to hedge
the risk of foreign currencies represented by its securities investments
back into the U.S. dollar. The Fund is not required to hedge any of the
currency risk obtained by investing in securities denominated in foreign
currencies.
- Anticipatory Hedging: When the Fund enters into a contract for the
purchase or anticipates the need to purchase a security denominated in a
foreign currency, it may "lock in" the U.S. dollar price of the security
by buying the foreign currency or through currency forwards or futures.
- Proxy Hedging: The Fund may hedge the exposure of a given foreign
currency by using an instrument relating to a different currency, which
the Manager believes is
</TABLE>
172
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<TABLE>
<S> <C>
highly correlated to the currency being hedged.
INVESTMENT - The Fund may enter into currency forwards or futures contracts in
conjunction with entering into a futures contract on a foreign index in
order to create synthetic foreign currency denominated securities.
RISK MANAGEMENT - Subject to the limitations described below, the Fund may use
foreign currency transactions for risk management, which will permit the
Fund to have foreign currency exposure that is significantly different
than the currency exposure represented by its portfolio investments.
This may include long and short exposure to particular currencies beyond
the amount of the Fund's investment in securities denominated in that
currency.
</TABLE>
173
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GMO EMERGING COUNTRY DEBT 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
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
FIXED INCOME SECURITIES: - At least 65% of the Fund's total assets will be invested
securities issued by federal, state, in or exposed to(45) bonds.
local and foreign governments - At least 50% of the Fund's total assets will be
convertible bonds, brady bonds denominated in, or hedged into, U.S. dollars.
sovereign debt - At least 65% of the Fund's total assets will be invested
private issues in debt securities of Emerging Countries.
loan participations (and other direct debt)
</TABLE>
OTHER INVESTMENTS:
foreign issues traded in the U.S. and abroad
investment companies (open and closed-end)
preferred stock
illiquid securities
144A securities
restricted securities
reverse repurchase agreements
securities purchased and sold on a
when-issued or delayed delivery basis
indexed securities
firm commitments (with banks or
broker-dealers)
exchange-traded and OTC options on
securities and indexes (including writing
covered options)
interest rate swap contracts
total return swap contracts
contracts for differences
credit default swaps
interest rate caps, floors and collars
asset-backed securities including
mortgage-backed, CMOs, strips
and residuals
warrants
repurchase agreements
- ----------
(45) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the Fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
174
<PAGE> 262
<TABLE>
<S> <C>
FOREIGN CURRENCY TRANSACTIONS - The Fund may invest in spot currency transactions, forward
currency contracts, currency swap contracts, options on currencies,
currency futures and related options.
- The Fund may also use synthetic bonds(46) and synthetic foreign
currency denominated securities(47) to approximate desired risk/return
profiles.
</TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
<TABLE>
<S> <C>
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its
net assets from banks for the payment of redemptions or settlement of
securities transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of portfolio
investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase agreements
and engaging in securities lending will not be considered making
loans for this purpose. The Fund may loan securities valued at up to
one-third of its total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING - Except that collateral arrangements with respect to swap
FUND ASSETS agreements, the writing of options, 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.
</TABLE>
INVESTING IN SECURITIES ISSUED BY NORTHERN IRELAND COMPANIES
INVESTING IN SECURITIES ISSUED BY IRANIAN COMPANIES
INVESTING IN BANKRUPT CORPORATE SECURITIES
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
MAKING SHORT SALES OF SECURITIES
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
OPTIONS ON SECURITIES - No more than 10% of the Fund's net assets will be invested in
time premiums on options on particular securities (as opposed to
options on indexes).
OTHER INVESTMENT COMPANIES - The Fund will not own more than 3% of the outstanding voting
securities of any investment company.
- No more than 5% of the Fund's net assets will be invested in
any single investment company.
- No more than 10% of the Fund's net assets will be invested in
securities of investment companies in the aggregate.
ILLIQUID SECURITIES - No more than 15% of the Fund's net assets will be invested in
illiquid securities.
- The average rating of bonds invested in directly by the
INVESTMENT IN LOWER-RATED SECURITIES portfolio will not be less than A+/A1 with non-rated securities
excluded from the calculation of the average. The Fund will invest
less than 5% of its assets in securities rated BBB-/Baa3 or less (or
equivalent, as determined by Manager).
</TABLE>
DIVERSIFICATION/CONCENTRATION
- ----------
(46) For investment purposes, the Fund may combine futures contracts or
options on fixed income securities with cash, cash equivalent investments or
other fixed income securities to create "synthetic" bonds.
(47) The Fund may purchase forward foreign exchange contracts in
conjunction with U.S. dollar-denominated securities in order to create a
synthetic foreign currency-denominated security.
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DIVERSIFICATION - Except for U.S. government securities, cash, and money market
instruments, the Fund will not invest more than 25% of its assets in
the securities of a single issuer.
- The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in a
single industry.
</TABLE>
DERIVATIVE INSTRUMENTS (OTHER THAN FOREIGN CURRENCY)
<TABLE>
<S> <C>
TYPES OF DERIVATIVES - Options, futures contracts and related options on bonds or
baskets or indexes of securities.
- Options on bonds and other securities.
- Swap contracts, including interest rate swaps, total return
swaps, credit default swaps and contracts for differences.
- Structured notes.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Bond futures, related options, Bond
options and swap contracts used to hedge against a market or credit
risk already generally present in the Fund.
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the fund may hedge market
risk (risk of not being invested in the market) by purchasing long
futures contracts or entering into long swap contracts to obtain
market exposure until such time as direct investments can be made
efficiently. Conversely, if the Fund receives or anticipates a
significant demand for cash redemptions, the Fund may sell futures
contracts or enter into short swap contracts while the Fund disposes
of securities in an orderly fashion.
INVESTMENT - The Fund may use derivative instruments (particularly long
futures contracts, related options and long swap contracts) in place
of investing directly in securities. Because a foreign derivative
generally only provides the return of a foreign market in local
currency terms, the Fund will often purchase a foreign currency
forward in conjunction with using derivatives to give the effect of
investing directly.
RISK MANAGEMENT - - The Fund may use options, futures, related options and swap
SYNTHETIC SALES AND PURCHASES contracts to adjust the weight of the Fund to a level the Manager
believes is the optimal exposure to individual countries and
issuers. Sometimes, such transactions are used as a precursor to
actual sales and purchases.
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging
purposes.
- The face value of derivatives used for investment purposes will
be limited to 25% of the Fund's assets. When a currency forward is
used in conjunction with a derivative for investment purposes, the
currency forward will not be independently counted for this
restriction.
- When long futures contracts and long swaps are used for
investment, an amount of cash or high quality debt securities equal
to the face value of all such long derivative positions will be
segregated against such exposure. However, for purposes of this
restriction, if an existing long exposure is reduced or eliminated by
a short derivative position, the combination of the long and short
position will be considered as cash available to segregate against a
new long derivative exposure.
- The net long exposure of the Fund, including direct investment
in securities and long derivative positions, will not exceed 100% of
the Fund's net assets.
- The aggregate absolute face value of all futures contracts and
swap contracts (without regard to sign and assuming no offset of long
and short positions, and counting both components of any contract for
differences) will not exceed 100% of the Fund's assets.
- Except when such instruments are used for bona fide hedging, no
more than 5% of the Fund's net assets will be committed to initial
margin on futures contracts and time premiums on related options.
- Counterparties used for OTC derivatives must have a long-term
debt rating of
</TABLE>
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<S> <C>
A or higher when the derivative is entered into.
Occasionally, short-term derivatives will be entered into with
counterparties that have only high short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS - Buying and selling spot currencies.
- Forward foreign currency contracts.
- Currency futures contracts and related options.
- Options on currencies.
- Currency swap contracts.
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING - Traditional Hedging: The Fund may effect foreign currency
transactions - generally short forward or futures contracts - to
hedge the risk of foreign currencies represented by its securities
investments back into the U.S. dollar. The Fund is not required to
hedge any of the currency risk obtained by investing in securities
denominated in foreign currencies.
- Anticipatory Hedging: When the Fund enters into a contract for
the purchase or anticipates the need to purchase a security
denominated in a foreign currency, it may "lock in" the U.S. dollar
price of the security by buying the foreign currency or through
currency forwards or futures.
- Proxy Hedging: The Fund may hedge the exposure of a given
foreign currency by using an instrument relating to a different
currency, which the Manager believes is highly correlated to the
currency being hedged.
INVESTMENT - The Fund may enter into currency forwards or futures contracts
in conjunction with entering into a futures contract on a foreign
index in order to create synthetic foreign currency-denominated
securities.
RISK MANAGEMENT - Subject to the limitations described below, the Fund may use
foreign currency transactions for risk management, which will permit
the Fund to have foreign currency exposure that is significantly
different than the currency exposure represented by its portfolio
investments. This may include long and short exposure to particular
currencies beyond the amount of the Fund's investment in securities
denominated in that currency.
LIMITATIONS OF FOREIGN CURRENCY TRANSACTIONS - The aggregate absolute face value of all currency forward,
currency futures and currency swap contracts (without regard to sign
and assuming no offset of long and short positions, and counting both
components of any contract for differences) will not exceed 50% of
the Fund's total assets.
</TABLE>
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GMO SHORT-TERM INCOME 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.
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
U.S. government securities - The Fund seeks to maintain a duration of not greater than two years.
prime commercial paper
master demand notes
certificates of deposit
bankers' acceptances
other bank obligations (including foreign
branches of domestic banks)
foreign securities
repurchase agreements
adjustable rate securities
high quality corporate debt securities
(including those backed by pools of
commercial or consumer finance loans)
warrants
</TABLE>
The Fund may purchase any of the above instruments through firm commitment
arrangements with domestic commercial banks and registered broker-dealers. The
Fund may enter into repurchase agreements with such banks and broker-dealers
with respect to any of the above instruments and with respect to longer term
U.S. Government Securities or corporate debt securities rated at least "AA" by
S&P or at least "Aa" by Moody's. When the Fund has purchased a security subject
to a repurchase agreement, the amount and maturity of the Fund's investment will
be determined by reference to the amount and term of the repurchase agreement,
not by reference to the underlying security.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
<TABLE>
<S> <C>
DERIVATIVE INSTRUMENTS - The Fund will not invest in options, futures, options on
futures, forward foreign currency contracts or swap contracts.
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 5% of its net
assets from banks for the payment of redemptions or settlement of
securities transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of portfolio
investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase agreements
and engaging in securities lending will not be considered making
loans for this purpose. The Fund may loan securities valued at up to
one-third of its total assets.
</TABLE>
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING SHORT SALES OF SECURITIES
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
PRIME COMMERCIAL PAPER/MASTER - At the time of investment, prime commercial paper and master
DEMAND NOTES demand notes must be rated "A-1" by S&P or "Prime-1" by Moody's or,
if unrated, issued by companies having an outstanding debt issue
rated at least "AA" by S&P or at least "Aa" by Moody's.
</TABLE>
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INVESTMENT IN SECURITIES ISSUED BY - Debt: The Fund may not purchase more than 10% of any such
BROKERS, DEALERS, UNDERWRITERS AND company's total outstanding debt in the aggregate.
INVESTMENT ADVISERS
- Investment Limits: No more than 5% of the Fund's total assets
will be invested in the securities of a single broker, dealer,
underwriter or investment adviser.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
DIVERSIFICATION/CONCENTRATION
CONCENTRATION - The Fund will not invest more than 25% of its total assets in
securities of issuers in any one industry, except that up to 100% of
the Fund's assets may be invested in obligations issued by banks.
</TABLE>
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GMO GLOBAL HEDGED EQUITY FUND
The Global Hedged Equity Fund seeks high total return consistent with minimal
exposure to general equity market risk. Although at least 65% of the Fund's
total assets will be invested in equity securities either directly or indirectly
through investment in other Funds of the Trust as described below ("underlying
Funds"), as a result of the Fund's hedging techniques, the Fund expects to
create a return more similar to that received by an investment in fixed income
securities. The Fund will pursue its investment objective by investing
substantially all of its assets in a combination of (i) equity securities, (ii)
GMO Domestic Equity Funds and GMO International Equity Funds (including the GMO
Emerging Markets Funds) (iii) derivative instruments intended to hedge the value
of the Fund's equity securities held directly or through investment in
underlying Funds against substantially all of the general movements in the
relevant equity market(s), including hedges against substantially all of the
changes in the value of the U.S. dollar relative to the currencies represented
in the indexes used to hedge general equity market risk and (iv) long interest
rate futures contracts intended to adjust the duration of the theoretical fixed
income security embedded in the pricing of the derivatives used for hedging the
Fund's equity exposure (the "Theoretical Fixed Income Security"). To the extent
that the Fund's portfolio strategy is successful, the Fund is expected to
achieve a total return consisting of (i) the performance of the Fund's equity
securities held directly or through in investment in underlying Funds, relative
to the relevant equity market indexes (including appreciation or depreciation of
any overweighted currency relative to the currency weighting of the equity
hedge), plus or minus (ii) short-term capital gains or losses approximately
equal to the total return on the Theoretical Fixed Income Security, plus or
minus (iii) capital gains or losses on the Fund's interest rate futures
positions, minus (iv) transaction costs and other Fund expenses.
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.
PERMITTED INVESTMENTS
LONG POSITIONS:
<TABLE>
<S> <C>
EQUITY SECURITIES: OTHER EQUITY SECURITIES:
common stocks depository receipts: ADRs, GDRs, EDRs
convertible bonds foreign issues traded in the U.S. and abroad
preferred stocks investment companies (open and closed-end)
warrants or rights illiquid securities
144A Securities
GMO FUNDS:(48) restricted securities
U. S. Core Fund equity futures and related options
Tobacco-Free Core Fund exchange-traded and OTC Options on securities and Indexes
Value Fund (including writing covered options)
Fundamental Value Fund equity swap contracts
Growth Fund contracts for differences
Small Cap Value Fund interest rate futures contracts
Small Cap Growth Fund repurchase agreements
REIT Fund warrants
International Core Fund
Currency Hedged International Core Fund
Foreign Fund
International Small Companies Fund
Japan Fund
Emerging Markets Fund
Evolving Countries Fund
Asia Fund
Global Properties Fund
</TABLE>
- ----------
(48) Investors should review the Summary of Investment Guidelines for each
of these underlying Funds in considering investment in the Global Hedged Equity
Fund.
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PERMITTED INVESTMENTS - CONTINUED
- - At least 65% of the Fund's total assets will be invested in or exposed
to(49) equity securities.
- - The Fund will generally invest in at least 125 different common stocks
chosen from among the U.S. stocks in which the GMO Core Fund is permitted
to invest and stocks traded primarily outside of the United States in which
the GMO International Core Fund is permitted to invest. To the extent that
the Underlying Funds are used, this requirement is intended to apply to the
securities in which the Underlying Funds invest.
- - The Fund may invest up to 20% of its total assets in securities of issuers
in newly industrialized countries of the type invested in by the GMO
Emerging Markets Fund.
- - The Fund may invest in the securities identified in this Summary directly
or through investment in other Funds of GMO Trust ("Underlying Funds") as
set forth above. Thus, the Fund may operate as a Fund of Funds.
<TABLE>
<S> <C>
SHORT POSITIONS:
- The Fund will enter into short EAFE futures
contracts or swap contracts where the Fund pays to the
counterparty the positive return of EAFE (or EAFE with a
reduced weight in Japan) as a notional invested value,
and receives an interest payment and the negative return
of the index on such notional amount
- The Fund will enter into short futures contracts
and/or short swap contracts on the S&P 500 Index or
other established U.S. market indexes.
- The face value of the futures and swaps will be less
than or equal to the value of stocks held long at the
time the futures and swaps are implemented.
- The Fund may use futures or options to raise the
underlying short-term interest rate return up to the
return of a 2-year U.S. Treasury note.
- Each of the Underlying Funds may make use of
derivatives, as described in the Summary of Investment
Guidelines applicable to each such Fund.
FOREIGN CURRENCY TRANSACTIONS - The Fund may invest in spot currency transactions,
forward foreign currency contracts, currency swap
contracts, options on currencies, currency futures and
related options for hedging purposes only.
- Any short-term assets held directly will be invested
CASH AND MONEY MARKET INSTRUMENTS in cash or high quality money market instruments
including securities issued by the U.S. government and
agencies thereof, bankers' acceptances, commercial
paper, bank certificates of deposit and repurchase
agreements
</TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
<TABLE>
<S> <C>
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for
clearance of transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to
20% of its assets from banks for the payment of
redemptions or settlement of securities transactions,
but not as a leveraged investment strategy.
</TABLE>
- ----------
(49) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
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MAKING LOANS - Except that purchasing debt obligations, repurchase
agreements and engaging in securities lending will
not be considered making loans for this purpose. The
Fund may loan securities valued at up to one-third of
its total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING FUND - Except that collateral arrangements with respect to
ASSETS 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.
</TABLE>
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
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
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)
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 BROKERS, - Equity: The Fund will not purchase more than 5% of any
DEALERS, UNDERWRITERS AND INVESTMENT ADVISERS class of stock of a broker, dealer, underwriter or
investment adviser.
- Debt: The Fund may not purchase more than 10% of any
such company's total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total
assets will be invested in the securities of a single
broker, dealer, underwriter or investment adviser. The net
payment obligation of swap contracts where one of these
types of companies is the counterparty also counts for
purposes of this restriction.
- This policy does not apply to companies that derived
less than 15% of revenues from "securities-related
businesses" during the most recent fiscal year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - Except for U.S. government securities, shares of other
investment companies, cash, money market instruments and
shares of the Underlying Funds, the Fund will not invest
more than 5% of its assets in any one security.
- Except with respect to Underlying Funds, the Fund will
not purchase more than 10% of the outstanding securities of
any issuer.
CONCENTRATION - The Fund will not invest more than 25% of its total
assets in securities of issuers in any one industry.
</TABLE>
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FOREIGN CURRENCY TRANSACTIONS
<TABLE>
<S> <C>
TYPES OF FOREIGN CURRENCY TRANSACTIONS - Buying and selling spot currencies
- Forward foreign currency contracts
- Currency futures contracts and related options
- Options on currencies
- Currency swap contracts
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING - Traditional Hedging: The Fund may effect foreign
currency transactions - generally short forward or futures
contracts - to hedge the risk of foreign currencies
represented by its securities investments back into the
U.S. dollar. The Fund is not required to hedge any of the
currency risk obtained by investing in securities
denominated in foreign currencies.
- Proxy Hedging: The Fund may hedge the exposure of a
given foreign currency by using an instrument relating to a
different currency which the Manager believes is highly
correlated to the currency being hedged.
INVESTMENT - The Fund may enter into currency forwards or futures
contracts in conjunction with entering into a futures
contract on a foreign index in order to create synthetic
foreign currency denominated securities
RISK MANAGEMENT - Subject to the limitations described below, the Fund
may use foreign currency transactions for risk management,
which will permit the Fund to have foreign currency
exposure that is significantly different than the currency
exposure represented by its portfolio investments. This
may include long exposure to particular currencies beyond
the amount of the Fund's investment in securities
denominated in that currency.
LIMITATIONS OF FOREIGN CURRENCY TRANSACTIONS - The Fund's aggregate net foreign currency exposure,
assuming full offset of long and short positions, will not
exceed 100% of the Fund's net assets denominated in foreign
currencies, though the currency exposure of the Fund may
differ substantially from the currencies in which the
Fund's securities are denominated.
- The Fund will not be net short in any foreign currency,
except that, when the Fund is attempting to hedge all or
nearly all of its exposure to a particular currency,
changes in the market value of foreign equities may cause
the Fund to be temporarily net short in the currency. Such
temporary net short positions will not exceed 1% of the
Fund's assets.
</TABLE>
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GMO INFLATION INDEXED BOND 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.
PERMITTED INVESTMENTS
At least 65% of the Fund's total assets will be comprised of inflation
indexed bonds. A bond is "linked" to general measures of inflation if, by the
bond's terms, principal or interest components change with general movements of
inflation in the country of issue. The fund may invest in the following types of
securities:
<TABLE>
<S> <C>
securities issued by federal, state, local and securities purchased and sold on a when-issued or delayed delivery basis
foreign governments indexed securities
convertible bonds firm commitments (with banks or broker-dealers)
fixed income securities of private issuers interest rate/bond futures and related options
depository receipts: ADRs, GDRs, EDRs exchange-traded and OTC Options on securities and indexes
foreign issues traded in the U.S. and abroad (including writing covered options)
investment companies (open & closed-end) interest rate swap contracts
preferred stock total return swap contracts
illiquid securities contracts for differences
144A securities credit default swaps
restricted securities interest rate caps, floors and collars
repurchase agreements asset-backed securities including mortgage-backed, CMOs, strips and
reverse repurchase agreements residuals
adjustable rate securities loan participations (and other direct debt)
zero coupon securities lower-rated securities
warrants
</TABLE>
<TABLE>
<S> <C>
FOREIGN CURRENCY TRANSACTIONS - The Fund may invest in spot currency transactions, forward
currency contracts, currency swap contracts, options on
currencies, currency futures and related options.
- The Fund may also use synthetic bonds(50) and synthetic
foreign currency denominated securities(51) to approximate
desired risk/return profiles.
</TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
<TABLE>
<S> <C>
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of
its net assets from banks for the payment of redemptions or
settlement of securities transactions, but not as a
leveraged investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter
for securities law purposes in connection with disposition
of portfolio investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase
agreements and engaging in securities lending will not be
considered making loans for this purpose. The Fund may
loan securities valued at up to one-third of its total
assets.
PLEDGING, HYPOTHECATING OR - Except regarding collateral arrangements with respect to
swap
</TABLE>
- ----------
(50) For investment purposes, the Fund may combine futures contracts or
options on fixed income securities with cash, cash equivalent investments or
other fixed income securities to create "synthetic" bonds.
(51) The Fund may purchase forward foreign exchange contracts in
conjunction with U.S. dollar-denominated securities in order to create a
synthetic foreign currency denominated security.
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MORTGAGING FUND ASSETS agreements, the writing of options, 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.
</TABLE>
DEBT SECURITIES OF EMERGING COUNTRIES
INVESTMENT IN BANKRUPT CORPORATE SECURITIES
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 ON SECURITIES
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
OPTIONS ON SECURITIES - No more than 10% of the Fund's net assets will be invested
in time premiums on options on particular securities (as
opposed to options on indexes)
OTHER INVESTMENT COMPANIES - The Fund will not own more than 3% of the outstanding
voting securities of any investment company
- No more than 5% of the Fund's net assets will be invested
in any single investment company
- No more than 10% of the Fund's net assets will be invested
in securities of investment companies in the aggregate
- The Fund will not own other Funds of GMO Trust
ILLIQUID SECURITIES - No more than 15% of the Fund's net assets will be invested
in illiquid securities.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - The Fund will not purchase more than 10% of the
outstanding securities of any issuer.
CONCENTRATION - The Fund will not invest more than 25% of its total assets
in securities of issuers in a single industry.
DERIVATIVE INSTRUMENTS
TYPES OF DERIVATIVES - Options, futures contracts and related options on bonds or
baskets or indexes of securities
- Options on bonds and other securities
- Swap contracts, including interest rate swaps, total
return swaps, credit default swaps and contracts for
differences
- Structured notes
USES OF DERIVATIVES (OTHER THAN
FOREIGN CURRENCY)
HEDGING - Traditional Hedging: Bond futures, related options, Bond
options and swap contracts used to hedge against a market or
credit risk already generally present in the Fund.
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the fund may hedge
market risk (risk of not being invested in the market) by
purchasing long futures contracts or entering into long swap
contracts to obtain market exposure until such time as direct
investments can be made efficiently. Conversely, if the Fund
receives or anticipates a significant demand for cash
redemptions, the Fund may sell futures contracts or enter into
short swap contracts while the Fund disposes of securities in
an orderly fashion.
RISK MANAGEMENT - The Fund may use options, futures, related options and
swap contracts
</TABLE>
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<TABLE>
<S> <C>
to adjust the weight of the Fund to a level the
Manager believes is the optimal exposure to individual
countries and issuers. Sometimes, such transactions are used
as a precursor to actual sales and purchases.
LIMITATIONS ON THE USE OF DERIVATIVES - The net long exposure of the Fund, including direct
investment in securities and long derivative positions, will
not exceed 100% of the Fund's net assets.
- Counterparties used for OTC derivatives must have a
long-term debt rating of A or higher when the derivative is
entered into. Occasionally, short-term derivatives will be
entered into with counterparties that have only high
short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS - Buying and selling spot currencies
- Forward foreign currency contracts
- Currency futures contracts and related options
- Options on currencies
- Currency swap contracts
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING - Traditional Hedging: The Fund may effect foreign currency
transactions - generally short forward or futures contracts -
to hedge the risk of foreign currencies represented by its
securities investments back into the U.S. dollar. The Fund is
not required to hedge any of the currency risk obtained by
investing in securities denominated in foreign currencies.
- Anticipatory Hedging: When the Fund enters into a contract
for the purchase or anticipates the need to purchase a
security denominated in a foreign currency, it may "lock in"
the U.S. dollar price of the security by buying the foreign
currency or through currency forwards or futures.
- Proxy Hedging: The Fund may hedge the exposure of a given
foreign currency by using an instrument relating to a
different currency which the Manager believes is highly
correlated to the currency being hedged.
INVESTMENT - The Fund may enter into currency forwards or futures
contracts in conjunction with entering into a futures contract
on a foreign index in order to create synthetic foreign
currency denominated securities
RISK MANAGEMENT - Subject to the limitations described below, the Fund may
use foreign currency transactions for risk management, which
will permit the Fund to have foreign currency exposure that is
significantly different than the currency exposure represented
by its portfolio investments. This may include long and short
exposure to particular currencies beyond the amount of the
Fund's investment in securities denominated in that currency.
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ASSET ALLOCATION FUND
GMO U.S. SECTOR 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.
PERMITTED INVESTMENTS
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EQUITY SECURITIES: - At least 65% of the Fund's total assets will be
domestic common stocks invested in or exposed to(52) domestic common stocks.
convertible securities - The U.S. Sector Fund may invest in the securities
securities of foreign issuers (traded on U.S. identified in this Summary directly or through investment in
exchanges) other Funds of GMO Trust ("Underlying Funds"). Thus, the
Fund may operate as a Fund-of-Funds. The Fund may invest in
any of the following underlying Funds:
OTHER EQUITY SECURITIES:
depository receipts
illiquid securities GMO U.S. Core Fund.
144A securities GMO Growth Fund.
restricted securities GMO Value Fund.
futures and related options on GMO Small Cap Growth Fund.
securities and indexes GMO Small Cap Value Fund.
REITs GMO REIT Fund.
exchange-traded and OTC options on
securities and indexes Investors should review the Investment Guidelines for each of
(including writing covered options) these underlying Funds in considering investment in the U.S.
equity swap contracts Sector Fund.
contracts for differences
warrants
repurchase agreements
investment companies (open and closed end)
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have greater than 5% of its net
Any short-term assets will be invested in assets exposed to cash and money market instruments. This
cash or high quality money market limitation does not include cash and money market instruments in
instruments including securities issued by margin accounts or otherwise held against exposure achieved through
the U.S. government and agencies thereof, derivative instruments ("equitized cash").
bankers' acceptances, commercial paper,
bank certificates of deposit and repurchase
agreements
</TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
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PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its
net assets from banks for the payment of redemptions or settlement
of securities transactions, but not as a leveraged investment
strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter
for securities law purposes in connection with disposition of
portfolio investments.
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(52) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the Fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
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MAKING LOANS - Except that purchasing debt obligations, repurchase agreements
and engaging in securities lending will not be considered making
loans for this purpose. The Fund may loan securities valued at up
to one-third of its total assets.
PLEDGING, HYPOTHECATING OR - Except that collateral arrangements with respect to swap
MORTGAGING FUND ASSETS 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.
</TABLE>
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
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
RESTRICTIONS AND LIMITATIONS
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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).
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 purchase more than 5% of any class
BROKERS, DEALERS, UNDERWRITERS AND of stock of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such
company's total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets
will be invested in the securities of a single broker, dealer,
underwriter or investment adviser. The net payment obligation of
swap contracts where one of these types of companies is the
counterparty also counts for purposes of this restriction.
- This policy does not apply to companies that derived less than
15% of revenues from "securities-related businesses" during the most
recent fiscal year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - Except for U.S. government securities, shares of other
investment companies, cash, money market instruments and shares of
the underlying Funds, the Fund will not invest more than 5% of its
assets in any one security.
- The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
- The Fund will be invested in the securities of at least 125
issuers, when the securities held by the Underlying Funds are
counted for this purpose.
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 - Options, 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
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negative performance, if any, and pays the positive
performance of an index or basket of securities.
- Contracts for differences: equity swaps that contain both a
long and short equity component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity futures, related options and
short equity swap contracts used to hedge against an equity risk
already generally present in the Fund.13
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the Fund may hedge market
risk (risk of not being invested in the market) by purchasing long
futures contracts or entering long equity swap contracts to obtain
market exposure until such time as direct investments can be made
efficiently. Conversely, if the Fund receives or anticipates a
significant demand for cash redemptions, the Fund may sell futures
contracts or enter into short equity swap contracts, to allow the
Fund to dispose of securities in a more orderly fashion without the
Fund being exposed to leveraged loss exposure in the interim.
INVESTMENT - The Fund may use derivative instruments (particularly long
futures contracts, related options and long equity swap contracts)
in place of investing directly in securities. This will include
using equity derivatives to "equitize" cash balances held by the
Fund. The Fund may also use long derivatives for investment in
conjunction with short hedging transactions to adjust the weights of
the Fund's underlying equity portfolio to a level the Manager
believes is the optimal exposure to individual markets, sectors and
equities.
RISK MANAGEMENT - - The Fund may use equity futures, related options and equity
SYNTHETIC SALES AND PURCHASES swap contracts to adjust the weight of the Fund to a level the
manager believes is the optimal exposure to individual markets,
sectors and equities. Sometimes, such transactions are used as a
precursor to actual sales and purchases. For example, if the Fund
held a large proportion of stocks of a particular market and the
Manager believed that stocks of another market would outperform such
stocks, the Fund might use a short futures contract on an
appropriate index (to synthetically "sell" a portion of the Fund's
portfolio) in combination with a long futures contract on another
index (to synthetically "buy" exposure to that index). Long and
short equity swap contracts and contracts for differences may also
be used for these purposes. Equity derivatives (and corresponding
currency forwards) used to effect synthetic sales and purchases will
generally be unwound as actual portfolio securities are sold and
purchased.
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging
purposes.
- The face value of derivatives used for investment purposes
will be limited to 25% of the Fund's assets. When a currency
forward is used in conjunction with an equity derivative for
investment purposes, the currency forward will not be independently
counted for this restriction.
- When long futures contracts and long equity swaps are used for
investment, an amount of cash or high quality debt securities equal
to the face value of all such long derivative positions will be
segregated against such exposure. However, for purposes of this
restriction, if an existing long equity exposure is reduced or
eliminated by a short derivative position, the combination of the
long and short position will be considered as cash available to
segregate against a new long derivative exposure.
</TABLE>
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(53) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g., a single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund.
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- 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.
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COMMERCIAL PAPER AND CORPORATE DEBT RATINGS
COMMERCIAL PAPER RATINGS
Commercial paper ratings of Standard & Poor's Corporation ("Standard & Poor's")
are current assessments of the likelihood of timely payment of debts having
original maturities of no more than 365 days. Commercial paper rated A-1 by
Standard & Poor's indicates that the degree of safety regarding timely payment
is either overwhelming or very strong. Those issues determined to possess
overwhelming safety characteristics are denoted A-1+. Commercial paper rated A-2
by Standard & Poor's indicates that capacity for timely payment on issues is
strong. However, the relative degree of safety is not as high as for issues
designated A-1. Commercial paper rated A-3 indicates capacity for timely
payment. It is, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
The rating Prime-1 is the highest commercial paper rating assigned by Moody's
Investors Service, Inc. ("Moody's"). Issuers rated Prime-1 (or related
supporting institutions) are considered to have a superior capacity for
repayment of short-term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) have a strong capacity for repayment of
short-term promissory obligations. This will normally be evidenced by many of
the characteristics of Prime-1 rated issuers, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variations.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternative liquidity is maintained. Issuers rated
Prime-3 have an acceptable capacity for repayment of short-term promissory
obligations. The effect of industry characteristics and market composition may
be more pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and the requirement of
relatively high financial leverage. Adequate alternative liquidity is
maintained.
CORPORATE DEBT RATINGS
Standard & Poor's Corporation. A Standard & Poor's corporate debt rating is a
current assessment of the creditworthiness of an obligor with respect to a
specific obligation. The following is a summary of the ratings used by Standard
& Poor's for corporate debt:
AAA -- This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA -- Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay interest and repay principal is very strong, and in the maturity of
instances they differ from AAA issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
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BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC -- Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C -- The rating C is reserved for income bonds on which no interest is being
paid.
D -- Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Moody's Investors Services, Inc. The following is a summary of the ratings used
by Moody's Investor Services, Inc. for corporate debt:
Aaa -- Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large, or by an exceptionally
stable, margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds that are rated Aa are judged to be high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds that are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
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Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often, the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Should no rating be assigned by Moody's, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.
3. There is lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1 and B1.
FINANCIAL STATEMENTS
The Trust's audited financial statements for the fiscal year ended
February 28, 1999 included in the Trust's Annual Reports filed with the
Securities and Exchange Commission on May 10, 1999 pursuant to Section 30(d) of
the Investment Company Act of 1940, as amended, and the rules promulgated
thereunder, are (with the exception of the financial statements relating to the
Pelican Fund, the GMO Tax-Managed U.S. Equities Fund and the GMO Tax-Managed
International Equities Fund) hereby incorporated in this Statement of Additional
Information by reference.
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GMO TRUST
SPECIMEN PRICE-MAKE-UP SHEETS
Following are computations of the total offering price per share for
each class of shares of each Fund of the Trust (except for the Pelican Fund and
the Tax-Managed Funds) offering shares of beneficial interest as of February 28,
1999, in each case based upon their respective net asset values and shares of
beneficial interest outstanding at the close of business on February 28, 1999.
<TABLE>
<S> <C>
U.S. Core Fund-Class II
Net Assets at Value (Equivalent to $18.57 per share based on 2,244,091 shares of $ 41,683,734
beneficial interest outstanding)
Offering Price ($18.57 x 100/99.86) * $ 18.60
Core Fund-Class III
Net Assets at Value (Equivalent to $18.59 per share based on 95,765,511 shares of $1,780,010,556
beneficial interest outstanding)
Offering Price ($18.59 x 100/99.86)* $ 18.62
Core Fund-Class IV
Net Assets at Value (Equivalent to $18.58 per share based on 83,082,861 shares of $1,543,655,409
beneficial interest outstanding)
Offering Price ($18.58 x 100/99.86)* $ 18.61
Tobacco-Free Core Fund-Class III
Net Assets at Value (Equivalent to $14.26 per share based on 15,926,141 shares of $ 227,158,485
beneficial interest outstanding)
Offering Price ($14.26 x 100/99.86)* $ 14.28
Value Fund-Class III
Net Assets at Value (Equivalent to $10.40 per share based on 19,509,551 shares of $ 202,841,748
beneficial interest outstanding)
Offering Price ($10.40 x 100/99.86) * $ 10.41
Fundamental Value Fund-Class III
Net Assets at Value (Equivalent to $7.07 per share based on 11,614,256 shares of $ 82,061,827
beneficial interest outstanding)
Offering Price ($7.07 x 100/99.85)* $ 7.08
Growth Fund-Class III
Net Assets at Value (Equivalent to $4.14 per share based on 38,161,658 shares of $ 158,084,241
beneficial interest outstanding)
Offering Price ($4.14 x 100/99.86)* $ 4.15
Small Cap Value Fund-Class III
Net Assets at Value (Equivalent to $11.69 per share based on 29,733,908 shares of $ 347,683,667
beneficial interest outstanding)
Offering Price ($11.69 x 100/99.50)* $ 11.75
Small Cap Growth Fund-Class III
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*Represents maximum offering price charged on certain cash purchases. See
"Purchase of Shares" in the Shareholder's Manual.
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Net Assets at Value (Equivalent to $10.88 per share based on 11,941,849 shares of $ 129,983,371
beneficial interest outstanding)
Offering Price ($10.88 x 100/99.50) * $ 10.93
REIT Fund-Class III
Net Assets at Value (Equivalent to $9.13 per share based on 15,679,339 shares of $ 143,129,061
beneficial interest outstanding)
Offering Price ($9.13 x 100/99.50) * $ 9.18
International Core Fund-Class II
Net Assets at Value (Equivalent to $20.33 per share based on 900,016 shares of $ 18,295,165
beneficial interest outstanding)
Offering Price ($20.33 x 100/99.40)* $ 20.45
International Core Fund-Class III
Net Assets at Value (Equivalent to $20.38 per share based on 98,063,484 shares of $ 1,998,447,051
beneficial interest outstanding)
Offering Price ($20.38 x 100/99.40)* $ 20.50
International Core Fund-Class IV
Net Assets at Value (Equivalent to $20.37 per share based on 27,849,815 shares of $ 567,219,366
beneficial interest outstanding)
Offering Price ($20.37 x 100/99.40)* $ 20.49
Currency Hedged International Core Fund-Class III
Net Assets at Value (Equivalent to $9.28 per share based on 10,505,539 shares of $ 97,450,066
beneficial interest outstanding)
Offering Price ($9.28 x 100/99.40)* $ 9.34
Currency Hedged International Core Fund-Class IV
Net Assets at Value (Equivalent to $9.27 per share based on 11,752,364 shares of $ 108,955,994
beneficial interest outstanding)
Offering Price ($9.27 x 100/99.40)* $ 9.33
Foreign Fund-Class II
Net Assets at Value (Equivalent to $11.79 per share based on 2,864,266 shares of $ 33,779,775
beneficial interest outstanding)
Offering Price $ 11.79
Foreign Fund-Class III
Net Assets at Value (Equivalent to $11.81 per share based on 78,531,599 shares of $ 927,108,342
beneficial interest outstanding)
Offering Price $ 11.81
Foreign Fund-Class IV
Net Assets at Value (Equivalent to $11.81 per share based on 11,072,392 shares of $ 130,759,656
beneficial interest outstanding)
Offering Price $ 11.81
International Small Companies Fund-Class III
Net Assets at Value (Equivalent to $11.02 per share based on 14,345,328 shares of $ 158,141,534
beneficial interest outstanding)
Offering Price ($11.02 x 100/99.00)* $ 11.13
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*Represents maximum offering price charged on certain cash purchases. See
"Purchase of Shares" in the Shareholder's Manual.
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Japan Fund-Class III
Net Assets at Value (Equivalent to $6.20 per share based on 20,716,627 shares of $128,389,472
beneficial interest outstanding)
Offering Price ($6.20 x 100/99.60)* $ 6.22
Emerging Markets Fund-Class III
Net Assets at Value (Equivalent to $6.31 per share based on 83,107,843 shares of $524,741,263
beneficial interest outstanding
Offering Price ($6.31 x 100/98.40) * $ 6.41
Emerging Markets Fund-Class IV
Net Assets at Value (Equivalent to $6.31 per share based on 41,401,009 shares of $261,186,930
beneficial interest outstanding)
Offering Price ($6.31 x 100/98.40)* $ 6.41
Evolving Countries Fund-Class III
Net Assets at Value (Equivalent to $5.74 per share based on 5,527,608 shares of $ 31,718,289
beneficial interest outstanding)
Offering Price ($5.74 x 100/98.4) * $ 5.83
Asia Fund-Class III
Net Assets at Value (Equivalent to $7.67 per share based on 10,094,391 shares of $ 77,404,021
beneficial interest outstanding)
Offering Price ($7.67 x 100/98.80) * $ 7.76
Global Properties Fund-Class III
Net Assets at Value (Equivalent to $7.96 per share based on 984,265 shares of $ 7,831,831
beneficial interest outstanding)
Offering Price ($7.96 x 100/99.40) * $ 8.01
Global Hedged Equity Fund-Class III
Net Assets at Value (Equivalent to $7.59 per share based on 6,678,751 shares of $ 50,670,702
beneficial interest outstanding)
Offering Price ($7.59 x 100/99.63) * $ 7.62
Domestic Bond Fund-Class III
Net Assets at Value (Equivalent to $9.65 per share based on 18,150,835 shares of $175,070,670
beneficial interest outstanding)
Offering Price $ 9.65
U.S. Bond/Global Alpha A Fund-Class III
Net Assets at Value (Equivalent to $10.23 per share based on 14,047,932 shares of $143,702,899
beneficial interest outstanding)
Offering Price ($10.23 x 100/99.85) * $ 10.25
U.S. Bond/Global Alpha B Fund-Class III
Net Assets at Value (Equivalent to $7.18 per share based on 19,250,632 shares of $138,146,240
beneficial interest outstanding)
Offering Price ($7.18 x 100/99.85) * $ 7.19
International Bond Fund-Class III
</TABLE>
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*Represents maximum offering price charged on certain cash purchases. See
"Purchase of Shares" in the Shareholder's Manual.
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Net Assets at Value (Equivalent to $10.06 per share based on 18,065,517 shares of $ 181,828,896
beneficial interest outstanding)
Offering Price ($10.06 x 100/99.85)* $ 10.08
Currency Hedged International Bond Fund-Class III
Net Assets at Value (Equivalent to $10.47 per share based on 30,919,079 shares of $ 323,711,300
beneficial interest outstanding)
Offering Price ($10.47 x 100/99.85) * $ 10.49
Global Bond Fund-Class III
Net Assets at Value (Equivalent to $9.87 per share based on 16,536,313 shares of $ 163,210,494
beneficial interest outstanding)
Offering Price ($9.87 x 100/99.85)* $ 9.88
Emerging Country Debt Fund-Class III
Net Assets at Value (Equivalent to $6.89 per share based on 65,316,585 shares of $ 450,336,336
beneficial interest outstanding)
Offering Price ($6.89 x 100/99.50)* $ 6.92
Emerging Country Debt Fund-Class IV
Net Assets at Value (Equivalent to $6.90 per share based on 46,885,196 shares of $ 323,284,624
beneficial interest outstanding)
Offering Price ($6.90 x 100/99.50)* $ 6.93
Short-Term Income Fund-Class III
Net Assets at Value (Equivalent to $9.63 per share based on 5,543,812 shares of $ 53,387,397
beneficial interest outstanding)
Offering Price $ 9.63
Inflation Indexed Bond Fund-Class III
Net Assets at Value (Equivalent to $9.88 per share based on 2,544,042 shares of $ 25,147,410
beneficial interest outstanding)
Offering Price ($9.88 x 100/99.90) * $ 9.89
Emerging Country Debt Share Fund
Net Assets at Value (Equivalent to $6.84 per share based on 6,024,383 shares of $ 41,215,717
beneficial interest outstanding) *
Offering Price $ 6.84
International Equity Allocation Fund-Class III
Net Assets at Value (Equivalent to $8.28 per share based on 10,891,670 shares of $ 90,161,168
beneficial interest outstanding)
Offering Price ($8.28 x 100/99.20) * $ 8.35
World Equity Allocation Fund-Class III
Net Assets at Value (Equivalent to $8.52 per share based on 3,472,311 shares of $ 29,581,806
beneficial interest outstanding)
Offering Price ($8.52 x 100/99.34)* $ 8.58
Global (U.S.+) Equity Allocation Fund-Class III
Net Assets at Value (Equivalent to $8.85 per share based on 3,670,478 shares of $ 32,473,608
beneficial interest outstanding)
Offering Price ($8.85 x 100/99.53) * $ 8.89
</TABLE>
- ------------
*Represents maximum offering price charged on certain cash purchases. See
"Purchase of Shares" in the Shareholder's Manual.
197
<PAGE> 285
<TABLE>
<S> <C>
Global Balanced Allocation Fund-Class III
Net Assets at Value (Equivalent to $10.51 per share based on 12,144,101 shares of $ 127,600,424
beneficial interest outstanding)
Offering Price ($10.51 x 100/99.65)* $ 10.55
U.S. Sector Fund-Class III
Net Assets at Value (Equivalent to $4.63 per share based on 3,636,151 shares of $ 16,830,002
beneficial interest outstanding)
Offering Price ($4.63 x 100/99.73)* $ 4.64
</TABLE>
198
<PAGE> 286
GMO TRUST
SHAREHOLDER'S MANUAL
SHAREHOLDER'S MANUAL FOR CLASS II, CLASS III AND CLASS IV SHARES
GMO FUNDS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
U.S. FUNDS INTERNATIONAL EQUITY FUNDS FIXED INCOME FUNDS ASSET ALLOCATION FUNDS
U.S. Core Fund International Core Fund Domestic Bond Fund International Equity
Tobacco-Free Core Fund Currency Hedged U.S. Bond/Global Alpha A Allocation Fund
Value Fund International Core Fund Fund World Equity Allocation
Fundamental Value Fund Foreign Fund U.S. Bond/Global Alpha B Fund
Intrinsic Value Fund International Small Fund Global (U.S.+) Equity
Growth Fund Companies Fund International Bond Fund Allocation Fund
Small Cap Value Fund Japan Fund Currency Hedged Global Balanced Allocation
Small Cap Growth Fund Emerging Markets Fund International Bond Fund Fund
REIT Fund Evolving Countries Fund Global Bond Fund U.S. Sector Fund
Tax-Managed U.S. Asia Fund Emerging Country Debt
Equities Fund Global Properties Fund Fund
Tax-Managed International Short-Term Income Fund
Equities Fund Global Hedged Equity Fund
Inflation Indexed Bond
Fund
Emerging Country Debt Share
Fund
</TABLE>
This GMO Trust Shareholder's Manual (the "Manual") contains detailed
information about purchase and redemption options and procedures for each of the
funds listed above (the "Funds"). This Manual also includes information
regarding Class II, Class III and Class IV Shares of the Funds, including the
classes of shares available for each Fund, the eligibility requirements for each
class and the circumstances under which a shareholder's shares of one class of a
Fund will be automatically converted to a different class of shares of that
Fund. This Manual is not a prospectus, and should be used in conjunction with
each relevant Fund's prospectus, as amended from time to time (collectively, the
"Prospectuses"). This Manual, and the information disclosed herein, is
incorporated by reference into the Prospectuses, and is considered part of the
Prospectuses.
You can call GMO Trust (the "Trust") collect at 1-617-346-7646 to find out
more about the Funds.
TABLE OF CONTENTS
PAGE
----
How to Buy Shares........................................................ 2
Purchase Procedures.................................................... 2
How to Redeem Shares..................................................... 3
Purchase Premiums and Redemption Fees.................................... 4
Multiple Classes......................................................... 6
Eligibility for Classes................................................ 7
Conversions between Classes............................................ 8
Distributions............................................................ 8
JUNE 30, 1999
SHAREHOLDER'S MANUAL AS REVISED OCTOBER 5, 1999
<PAGE> 287
HOW TO BUY SHARES
Shares of each Fund are available only from the Trust and may be purchased
on any day when the New York Stock Exchange is open for business (a "business
day"). Shares may be purchased by sending a purchase order to the Trust. See
"Purchase Procedures" below.
The purchase price of a share of each Fund is (i) the net asset value next
determined after a purchase order is received in good order plus (ii) a premium,
if any, established from time to time by the Trust for the particular Fund and
class to be purchased. All purchase premiums are paid to and retained by the
Fund and are intended to cover the brokerage and other costs associated with
putting the investment to work in the relevant markets. Purchase premiums
generally apply only to cash purchases, subject to certain exceptions described
below. Each class of shares of a Fund has the same rate of purchase premium, if
any. The purchase premiums currently in effect for each Fund are set forth under
"Purchase Premiums and Redemption Fees" on page 4. Purchase premiums are not
sales loads.
Shares may be purchased (i) in cash, (ii) in exchange for securities on
deposit at the Depository Trust Company ("DTC") (or such other depository
acceptable to the Manager), subject to the determination by the Manager that the
securities to be exchanged are acceptable, or (iii) by a combination of such
securities and cash. In all cases, the Manager reserves the right to reject any
purchase order. Securities acceptable to the Manager as consideration for Fund
shares will be valued as set forth under "Determination of Net Asset Value"
(generally the last quoted sale price) as of the time of the next determination
of net asset value after such acceptance. All dividends, subscription or other
rights which are reflected in the market price of accepted securities at the
time of valuation become the property of the relevant Fund and must be delivered
to the Trust upon receipt by the investor from the issuer. A gain or loss for
federal income tax purposes may be realized by the investor subject to federal
income taxation upon the exchange, depending upon the investor's basis in the
securities tendered.
The Manager will not approve securities as acceptable consideration for
Fund shares unless (1) the Manager, in its sole discretion, believes the
securities are appropriate investments for the Fund; (2) the investor represents
and agrees that all securities offered to the Fund are not subject to any
restrictions upon their sale by the Fund under the Securities Act of 1933, or
otherwise; and (3) the securities may be acquired under the investment
restrictions applicable to the relevant Fund. Investors interested in making
in-kind purchases should telephone the Trust at (617) 346-7646.
For purposes of calculating the purchase price of Trust shares, a purchase
order is received by the Trust on the day that it is in "good order." For a
purchase order to be in "good order" on a particular day, the investor's
consideration must be received before the relevant deadline on that day. If the
investor makes a cash investment, the deadline for wiring Federal funds to the
Trust is 2:00 p.m. Boston time. If the investor makes an investment in-kind, the
investor's securities must be placed on deposit at DTC (or such other depository
as is acceptable to the Manager) and 2:00 p.m. Boston time is the deadline for
transferring those securities to the account designated by the Trust's transfer
agent, Investors Bank & Trust Company, 200 Clarendon Street, Boston,
Massachusetts 02116. Investors should be aware that approval of the securities
to be used for purchase must be obtained from the Manager prior to this time.
When the consideration is received by the Trust after the relevant deadline, the
purchase order is not considered to be in good order and is required to be
resubmitted on the following business day. With the prior consent of the
Manager, in certain circumstances the Manager may, in its discretion, permit
purchases based on receiving adequate written assurances that Federal funds or
securities, as the case may be, will be delivered to the Trust by 2:00 p.m.
Boston time on or prior to the fourth business day after such assurances are
received.
PURCHASE PROCEDURES:
(a) General: Investors should call the Trust at (617) 346-7646 to obtain a
Purchase Order Form, which contains wire transfer and mailing instructions. The
Trust reserves the right to reject any order for Trust Shares. DO NOT SEND CASH,
CHECKS OR SECURITIES DIRECTLY TO THE TRUST.
Purchases will be made in full and fractional shares of each Fund
calculated to three decimal places. The Trust's Transfer Agent will send a
written confirmation (including a statement of shares owned) to shareholders at
the time of each transaction.
(b) Purchase Order Form: Investors must submit an application to the Trust and
it must be accepted by the Trust before it will be considered in "good order."
The Purchase Order Form may be submitted to the Trust (i) By Mail to GMO Trust
c/o Grantham, Mayo, Van Otterloo & Co. LLC, 40 Rowes Wharf, Boston, MA 02110,
Attention: Shareholder Services, or (ii) By Facsimile to (617) 439-4192,
Attention: Shareholder Services.
(c) Acceptance of Order: A shareholder may confirm acceptance of a mailed or
faxed purchase order by calling the Trust at (617) 346-7646. If a Purchase Order
is mailed to the Trust, it will be acted upon when received.
2
<PAGE> 288
(d) Payment: All Federal funds must be transmitted to Investors Bank & Trust
Company for the account of the specific Fund of GMO Trust. "Federal funds" are
monies credited to Investors Bank & Trust Company's account with the Federal
Reserve Bank of Boston. All checks must be made payable to the relevant Fund or
to GMO Trust. The Trust will not accept any third party checks. The wiring
instructions and mailing address for checks are as follows:
<TABLE>
<S> <C>
WIRING INSTRUCTIONS: MAILING ADDRESS FOR CHECKS:
Investors Bank and Trust, Boston, Massachusetts Investors Bank and Trust
ABA # 011001438 GMO Transfer Agent MFD 23
Attn.: Transfer Agent P.O. Box 9130
GMO Deposit Account 55555-4444 (200 Clarendon Street), 16th
Further credit: GMO Fund/Account Name, Shareholder Name Floor
and/or Number Boston, MA 02117-9130
Payable to: GMO Trust or [Name]
Fund
</TABLE>
NOTE: The Trust may attempt to process orders for Trust shares that are
submitted less formally than as described above, but, in such cases, the
investor should carefully review confirmations sent by the Trust to verify that
the order was properly executed. The Trust cannot be held responsible for
failure to execute orders or improperly executing orders that are not submitted
in accordance with these procedures.
HOW TO REDEEM SHARES
Shares of each Fund may be redeemed on any business day in cash or in kind.
The redemption price is the net asset value per share next determined after
receipt of the redemption request in "good order" less any applicable redemption
fee. All redemption fees are paid to and retained by the Fund and are intended
to cover the brokerage and other Fund costs associated with redemptions. All
classes of a particular Fund bear the same redemption fee rate, if any. The
redemption fees currently in effect for each Fund are set forth under "Purchase
Premiums and Redemption Fees" on page 4. Redemption fees are not sales loads or
contingent deferred sales charges.
If the Manager determines, in its sole discretion, that it would be
detrimental to the best interest of the remaining shareholders of a Fund to make
payment wholly or partly in cash, the Fund may pay the redemption price in whole
or in part by a distribution in-kind of securities held by the Fund in lieu of
cash. Securities used to redeem Fund shares in-kind will be valued in accordance
with the relevant Fund's procedures for valuation described under "Determination
of Net Asset Value." Securities distributed by a Fund in-kind will be selected
by the Manager in light of the Fund's objective and will not generally represent
a pro rata distribution of each security held in the Fund's portfolio. Any
in-kind redemptions will be of readily marketable securities to the extent
available. Investors may incur brokerage charges on the sale of any such
securities so received in payment of redemptions.
Payment on redemption will be made as promptly as possible and in any event
within seven days after the request for redemption is received by the Trust in
"good order." A redemption request is in "good order" if it includes the exact
name in which shares are registered, the investor's account number and the
number of shares or the dollar amount of shares to be redeemed and if it is
signed exactly in accordance with the form of registration. In addition, for a
redemption request to be in "good order" on a particular day, the investor's
request must be received by the Trust prior to the close of regular trading on
the New York Stock Exchange on that day (generally 4:00 p.m. New York City
Time). Redemption requests received after such deadline will be honored on the
next following business day, and the redemption will be effected based on the
net asset value per share computed on such next following business day (subject
to any applicable redemption fee). Persons acting in a fiduciary capacity, or on
behalf of a corporation, partnership or trust, must specify, in full, the
capacity in which they are acting. The redemption request will be considered
"received" by the Trust only after (i) it is mailed to, and received by, the
Trust at the appropriate address set forth above for purchase orders, or (ii) it
is faxed to the Trust at the appropriate facsimile number set forth above for
purchase orders, and the investor has confirmed receipt of the faxed request by
calling the Trust at (617) 346-7646. In-kind distributions will be transferred
and delivered as directed by the investor. Cash payments will be made by
transfer of Federal funds for payment into the investor's account or, upon
request, a check can be mailed to the registration address.
When opening an account with the Trust, shareholders will be required to
designate the account(s) to which funds or securities may be transferred upon
redemption. Designation of additional accounts and any change in the accounts
originally designated must be made in writing.
Each Fund may suspend the right of redemption and may postpone payment for
more than seven days when the New York Stock Exchange is closed for other than
weekends or holidays, or if permitted by the rules of the Securities and
Exchange Commission during periods when trading on the Exchange is restricted or
during an emergency which makes it impracticable for the Fund to dispose of its
securities or to fairly determine the value of the net assets of the Fund, or
during any other period permitted by the Securities and Exchange Commission for
the protection of investors. Because certain Funds hold portfolio securities
listed on foreign exchanges which may trade on days on which the New York Stock
Exchange is closed, the net asset value of such Funds' shares may be
significantly affected on days when shareholders have no access to such Funds.
3
<PAGE> 289
PURCHASE PREMIUMS AND REDEMPTION FEES
The following table sets forth the purchase premiums and redemption fees,
if any, for each of the Funds. Purchase premiums and redemption fees are not
sales loads or contingent deferred sales charges, and are paid directly to the
relevant Fund at purchase or redemption of Fund shares. Notes to the table begin
on page 5.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
CASH PURCHASE PREMIUM REDEMPTION FEES
GMO FUND NAME (AS A % OF AMOUNT REDEEMED)(1) (AS A % OF AMOUNT REDEEMED)(1)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. EQUITY FUNDS
U.S. Core Fund 0.14%(2) None
- ------------------------------------------------------------------------------------------------------------------------------
Tobacco-Free Core Fund 0.14%(2) None
- ------------------------------------------------------------------------------------------------------------------------------
Value Fund 0.14%(2) None
- ------------------------------------------------------------------------------------------------------------------------------
Fundamental Value Fund 0.15%(2) None
- ------------------------------------------------------------------------------------------------------------------------------
Intrinsic Value Fund 0.14%(2) None
- ------------------------------------------------------------------------------------------------------------------------------
Growth Fund 0.14%(2) None
- ------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund 0.50%(2) 0.50%(2)
- ------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund 0.50%(2) 0.50%(2)
- ------------------------------------------------------------------------------------------------------------------------------
REIT Fund 0.50%(2) 0.50%(2)
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Managed U.S. Equities Fund 0.14%(2) None
- ------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUNDS
International Core Fund 0.60%(2) None
- ------------------------------------------------------------------------------------------------------------------------------
Currency Hedged International Core Fund 0.60%(2) None
- ------------------------------------------------------------------------------------------------------------------------------
Foreign Fund None None
- ------------------------------------------------------------------------------------------------------------------------------
International Small Companies Fund 1.00%(2) 0.60%(2)
- ------------------------------------------------------------------------------------------------------------------------------
Japan Fund 0.20%(2) 0.20%(2)
- ------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund 1.60%(3) 0.40%(3,4)
- ------------------------------------------------------------------------------------------------------------------------------
Evolving Countries Fund 1.60%(3) 0.40%(3)
- ------------------------------------------------------------------------------------------------------------------------------
Asia Fund 1.20%(3) 0.40%(3)
- ------------------------------------------------------------------------------------------------------------------------------
Global Properties Fund 0.60%(2,5) 0.30%(2,5)
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Managed International Equities Fund 0.60%(2) None
- ------------------------------------------------------------------------------------------------------------------------------
FIXED INCOME FUNDS
Domestic Bond Fund None None
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Bond/Global Alpha A Fund 0.15%(3) None
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Bond/Global Alpha B Fund 0.15%(3) None
- ------------------------------------------------------------------------------------------------------------------------------
International Bond Fund 0.15%(3) None
- ------------------------------------------------------------------------------------------------------------------------------
Currency Hedged International Bond Fund 0.15%(3) None
- ------------------------------------------------------------------------------------------------------------------------------
Global Bond Fund 0.15%(3) None
- ------------------------------------------------------------------------------------------------------------------------------
Emerging Country Debt Fund 0.50%(3) 0.25%(3,9)
- ------------------------------------------------------------------------------------------------------------------------------
Short-Term Income Fund None None
- ------------------------------------------------------------------------------------------------------------------------------
Global Hedged Equity Fund 0.51%(2,6) 1.40%(6,8)
- ------------------------------------------------------------------------------------------------------------------------------
Inflation Indexed Bond Fund 0.10%(3) 0.10%(3)
- ------------------------------------------------------------------------------------------------------------------------------
Emerging Country Debt Share Fund *(11) *(11)
- ------------------------------------------------------------------------------------------------------------------------------
ASSET ALLOCATION FUNDS
International Equity Allocation Fund 0.80%(2,10) 0.11%(2,10)
- ------------------------------------------------------------------------------------------------------------------------------
World Equity Allocation Fund 0.66%(2,10) 0.15%(2,10)
- ------------------------------------------------------------------------------------------------------------------------------
Global (U.S.+) Equity Allocation Fund 0.47%(2,10) 0.15%(2,10)
- ------------------------------------------------------------------------------------------------------------------------------
Global Balanced Allocation Fund 0.35%(2,10) 0.11%(2,10)
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Sector Fund 0.27%(2,6) 0.18%(2,6,7)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 290
1. Purchase premiums and redemption fees generally apply only to cash
transactions. These fees are paid to and retained by the Fund itself and
are designed to allocate transaction costs caused by shareholder activity
to the shareholder generating the activity, rather than to the Fund as a
whole. The Manager may reduce these fees in certain limited circumstances
described below.
Normally, no purchase premium is charged with respect to in-kind purchases
of Fund shares. However, the International Core Fund, Currency Hedged
International Core Fund, International Small Companies Fund, Japan Fund,
Tax-Managed International Equities Fund and Global Hedged Equity Fund may
each charge a purchase premium of up to 0.10%, and the Emerging Markets
Fund, Evolving Countries Fund and Asia Fund may each charge a premium of up
to 0.20%, for in-kind purchases involving transfers of large positions in
markets where re-registration and transfer costs are high. Special rules
also apply with respect to in-kind transactions in certain Fixed Income
Funds as described in footnote 3 below.
2. The purchase premium and/or redemption fee for this Fund may generally not
be waived due to offsetting transactions, and may be waived in only rare
circumstances. The premium or fee will only be waived for this Fund (i) if
the purchase or redemption is part of a transfer from or to another Fund
where the Manager is able to transfer securities among the Funds as part of
effecting the transaction, (ii) during periods (expected to exist only
rarely) when the Manager determines that the Fund is either substantially
overweighted or underweighted with respect to its cash position so that a
redemption or purchase will not require a securities transaction, or (iii)
in certain other instances (not including offsetting transactions) where it
is compelling to the Manager that the purchase or redemption will not
result in transaction costs to the Fund. Any waiver with respect to this
Fund must be arranged in advance with the Manager.
3. The stated purchase premium and/or redemption fee for this Fund will always
be charged in full except that the relevant purchase premium or redemption
fee will be reduced by 50% with respect to any portion of a purchase or
redemption that is offset by a corresponding redemption or purchase,
respectively, occurring on the same day. The Manager examines each purchase
and redemption of shares eligible for such treatment to determine if
circumstances warrant waiving a portion of the purchase premium or
redemption fee. Absent a clear determination that transaction costs will be
reduced or absent for the purchase or redemption, the full premium or fee
will be charged. In addition, except for the Emerging Markets Fund,
Evolving Countries Fund and Asia Fund, the purchase premium or redemption
fee for this Fund will be reduced by 50% if the purchaser makes an in-kind
purchase of Fund shares or if the purchase or redemption is part of a
transfer from or to another Fund where the Manager is able to transfer
securities among the Funds as part of effecting the transaction.
4. Applies only to shares acquired on or after June 1, 1995 (including shares
acquired by reinvestment of dividends or other distribution on or after
such date).
5. It is expected that the purchase premiums and redemption fees for this Fund
will be eliminated once the net assets of the Fund exceed $100 million.
However, even thereafter, the Fund will reserve the right to charge a
purchase premium of up to 0.60% and a redemption fee of up to 0.30% on
purchases or redemptions of amounts that are equal to or greater than 5% of
the Fund's net assets.
6. The Fund invests in various other Funds with different levels of purchase
premiums and/or redemption fees which reflect the trading costs of
different asset classes. Therefore, the Fund's purchase premium and/or
redemption fee has been computed as the weighted average of the purchase
premiums and/or redemption fees of other GMO Funds in which the Fund is
invested and/or which hold securities of the same asset class and/or sector
as securities owned directly by the Fund. The amount of purchase premium
and/or redemption fee for the Fund will be adjusted approximately annually
based on underlying Funds owned by the Fund during the prior year. The
Manager may, but is not obligated to, adjust the purchase premium and/or
redemption fee for the Fund more frequently if the Manager believes in its
discretion that circumstances warrant.
7. Applies only to shares acquired on or after June 30, 1998 (including shares
acquired by reinvestment of dividends or other distributions on or after
such date).
8. If it is not necessary to incur costs relating to the early termination of
hedging transactions to meet redemption requests, the redemption fee will
be reduced to 0.13%.
9. Applies only to shares acquired on or after July 1, 1995 (including shares
acquired by reinvestment of dividends or other distributions on or after
such date).
10. Each of the Asset Allocation Funds invests in various other Funds with
different levels of purchase premiums and redemption fees, which reflect
the trading costs of different asset classes. Therefore, the purchase
premium and redemption fee of each Asset Allocation Fund has been set as
the weighted average of the premiums and fees, respectively, of the
underlying Funds in which the Asset Allocation Fund is invested, based on
actual investments by
5
<PAGE> 291
each Asset Allocation Fund. The amount of purchase premium and redemption
fee for each Asset Allocation Fund is adjusted approximately annually based
on underlying Funds owned by each Asset Allocation Fund during the prior
year. The Manager may, but is not obligated to, adjust the purchase premium
and/or redemption fee for an Asset Allocation Fund more frequently if the
Manager believes in its discretion that circumstances warrant.
11. No purchase premium or redemption fee is charged directly by the Fund. By
virtue of the Fund's investment in the Emerging Country Debt Fund, Fund
shareholders will, however, indirectly bear the Emerging Country Debt
Fund's purchase premium and redemption fee, which are presently up to 0.50%
and 0.25%, respectively.
MULTIPLE CLASSES
Each Fund may offer multiple classes of shares. All Funds offer Class III
Shares and, as described below, certain Funds also offer Class II and/or Class
IV Shares. The Funds may offer other classes of shares not described in this
Manual. The sole economic difference among the various classes of shares
described in this Manual is the level of Shareholder Service Fee that the
classes bear for client and shareholder service, reporting and other support,
reflecting 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 described in this Manual. The following table summarizes
the current eligibility requirements for each class (subject to the exceptions
noted below) and the Shareholder Service Fees each class will pay under the
Plan, expressed as an annual percentage of the average daily net assets
attributable to that class of shares:
CLASS II AND CLASS III SHARES:
<TABLE>
<CAPTION>
U.S. CORE FUND, INTERNATIONAL CORE FUND
AND FOREIGN FUND (COLLECTIVELY, MINIMUM TOTAL INVESTMENT/ SHAREHOLDER
THE "CLASS II FUNDS") TOTAL FUND INVESTMENT* SERVICE FEE ("SSF")**
- --------------------------------------- ------------------------- -----------------------
<S> <C> <C>
Class II................................................ $1 million/N/A 0.22%
Class III............................................... $35 million/N/A 0.15%
ASSET ALLOCATION FUNDS (EXCEPT U.S. SECTOR
FUND) AND EMERGING COUNTRY DEBT
SHARE FUND
- ------------------------------------------
Class III............................................... $1 million/N/A 0.00%***
U.S. SECTOR FUND AND GLOBAL
HEDGED EQUITY FUND
- ---------------------------
Class III............................................... $1 million/N/A 0.15%****
ALL OTHER FUNDS (EXCEPT
CLASS II FUNDS AND
ASSET ALLOCATION FUNDS)
- -----------------------
Class III............................................... $1 million/N/A 0.15%
CLASS IV SHARES:
U.S. CORE FUND............................................ $250 million/$125 million 0.105%
INTERNATIONAL CORE FUND................................... $250 million/$125 million 0.09%
FOREIGN FUND.............................................. $250 million/N/A 0.09%
CURRENCY HEDGED INTERNATIONAL CORE FUND................... $250 million/$125 million 0.09%
EMERGING MARKETS FUND..................................... $250 million/$125 million 0.105%
EMERGING COUNTRY DEBT FUND................................ $250 million/$125 million 0.10%
</TABLE>
* The eligibility requirements in the table above are subject to certain
exceptions and special rules for certain plan investors and for certain
clients with continuous client relationships with GMO since May 31, 1996.
These exceptions and special rules are explained under "Eligibility for
Classes" below.
** All classes of shares of a Fund pay the same investment management fee.
*** These Funds will indirectly bear an additional SSF of 0.15% by virtue of
their investments in other Funds of the Trust. Thus, the total SSF borne by
Class III Shares of these Funds is the same as that borne by Class III
Shares of the other Funds. See "Fees and Expenses" in the Prospectuses.
**** The SSF charged to these Funds will be reduced by a corresponding amount
for all SSF's indirectly borne by the relevant Fund by reason of its
investments in Class III Shares of other Funds of the Trust. Thus, the
total SSF borne by Class III Shares of these Funds is the same as that
borne by Class III Shares of the other Funds of the Trust.
6
<PAGE> 292
ELIGIBILITY FOR CLASSES
CLASS II AND CLASS III SHARES:
Class II Shares are currently being offered only for the "Class II Funds"
listed in the table above. Class III Shares are currently being offered for all
Funds. With certain exceptions described below, for a client to be eligible for
Class II or Class III Shares, the client must satisfy the minimum "Total
Investment" (as defined below) requirement set forth in the table.
For clients establishing a relationship with GMO on or after June 1,
1996: A client's Total Investment will be determined by GMO at the time of a
new client's initial investment with GMO, at least annually as of December 31 of
each year and on such other dates as may be determined by GMO (each a
"Determination Date"). Subject to as provided below, a client's Total Investment
as of any Determination Date will equal the greater of (a) the market value of
assets managed by GMO and its affiliates for the client (whether in a pooled
vehicle or otherwise) as of such Determination Date, and (b) the client's Total
Investment as of the previous Determination Date (less the market value of any
account managed by GMO's U.S. Active Division as of the previous Determination
Date), plus contributions made to, and less Large Withdrawals (defined below)
from, any GMO-managed product or account (other than any account managed by
GMO's U.S. Active Division) since the previous Determination Date (plus the
market value of any account managed by GMO's U.S. Active Division as of the then
current Determination Date). For these purposes, "Large Withdrawals" means the
total of all withdrawals made from any GMO-managed product or account (other
than any account managed by GMO's U.S. Active Division) since the previous
Determination Date if such total exceeds 7% of the sum of the client's Total
Investment as of the previous Determination Date and any contributions to any
GMO-managed product or account (other than any account managed by GMO's Active
U.S. Division) made since the previous Determination Date. For clients with GMO
accounts as of November 30, 1997, their initial Total Investment is the greater
of the market value of assets managed by GMO and its affiliates for the client
as of the close of business on November 30, 1997 or on December 31, 1997. For
clients establishing a relationship with GMO on or after December 31, 1997,
their Total Investment will be determined as described above. Notwithstanding
anything to the contrary in this Manual or the Prospectuses, assets invested in
the Pelican Fund will not be considered when determining a client's Total
Investment. For purposes of this Manual and the Prospectuses, accounts managed
by GMO's U.S. Active Division include certain separate accounts managed by GMO.
Clients with any questions regarding whether certain of their assets are deemed
to be managed by GMO's U.S. Active Division should call GMO at (617) 346-7646.
For Clients with Accounts as of May 31, 1996: Any client of GMO whose
Total Investment as of May 31, 1996 was equal to or greater than $7 million will
remain eligible for Class III Shares indefinitely, provided that such client
does not make a withdrawal or redemption that causes the client's Total
Investment to fall below $7 million.
CLASS IV SHARES:
Class IV Shares are currently being offered only for the Funds listed in
the table on the previous page. Eligibility for Class IV Shares of a Fund is
dependent upon the client meeting either (i) the minimum "Total Fund Investment"
set forth in the table, which includes only a client's total investment in the
particular Fund, or (ii) the minimum "Total Investment" set forth in the table,
calculated as described above for Class II and Class III Shares. For clients
that have accounts with GMO as of November 30, 1997, their initial Total
Investment or initial Total Fund Investment for purposes of determining
eligibility for Class IV Shares will be the greater of the market value of all
of their investments advised by GMO and its affiliates, or the market value of
their investment in the particular Fund, as the case may be, as of the close of
business on November 30, 1997 or December 31, 1997. For clients establishing a
relationship with GMO on or after December 1, 1997, their Total Fund Investment
and Total Investment will be determined as described above.
ALL CLASSES:
- - Investments by defined contribution plans (such as 401(k) plans) will
generally be invested in the class of shares of the relevant Fund(s) with the
highest Shareholder Service Fee (including classes of shares that may not be
described in this Manual) 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.
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CONVERSIONS BETWEEN CLASSES
On December 31 of each year and on such other dates as may be determined by
GMO (each a "Determination Date") the value of each client's Total Investment
and Total Fund Investment with GMO, as defined above, will be determined. Based
on that determination, each client's shares of each Fund will be automatically
converted to the class of shares of such Fund which is then being offered with
the lowest Shareholder Service Fee for which the client is eligible based on the
amount of their Total Investment or Total Fund Investment, as the case may be,
on the Determination Date. The conversion will occur within 15 business days
following the Determination Date on a date selected by the Manager. Also, if a
client makes an investment in any Fund of the Trust (except for the Pelican
Fund) or puts additional assets under GMO's management (except for accounts
managed by GMO's U.S. Active Division) so as to cause the client to be eligible
for a new class of shares, such determination will be made as of the close of
business on the last day of the calendar quarter in which the investment was
made, and the conversion will be effected within 15 business days of that
quarter end, on a date selected by the Manager.
The Trust has been advised by counsel that the conversion of a client's
investment from one class of shares to another class of shares in the same Fund
should not result in the recognition of gain or loss in the converted Fund's
shares. The client's tax basis in the new class of shares immediately after the
conversion should equal the client's basis in the converted shares immediately
before conversion, and the holding period of the new class of shares should
include the holding period of the converted shares.
Certain special rules will be applied by the Manager with respect to
clients for whom GMO managed assets prior to the creation of multiple classes on
May 31, 1996. Clients whose Total Investment as of May 31, 1996 was equal to $7
million or more will be eligible to remain invested in Class III Shares
indefinitely (irrespective of whether the Fund has a higher investment minimum),
provided that such client does not make a withdrawal or redemption that causes
the client's Total Investment to fall below $7 million. Clients whose Total
Investment as of May 31, 1996 was less than $7 million but greater than $0 will
be eligible to invest in or convert to Class II Shares indefinitely
(irrespective of whether the Fund has a higher investment minimum).
Notwithstanding the foregoing special rules, clients shall always remain
eligible to remain in and/or be converted to any class of shares of the relevant
Fund which the client would be eligible to purchase pursuant to the eligibility
requirements set forth herein.
Investors should be aware that not all classes of shares of all Funds are
available in all jurisdictions.
DISTRIBUTIONS
The policy of each U.S. Equity Fund (except for the REIT Fund), the
Short-Term Income Fund and the Domestic Bond Fund is to declare and pay
distributions of its dividends and interest quarterly. The policy of each other
Fund is to declare and pay distributions of its dividends, interest and foreign
currency gains semi-annually. Each Fund also intends to distribute net gains
from the sale of securities held for not more than one year ("net short-term
capital gains") and net gains from the sale of securities held for more than one
year ("net long-term capital gains") at least annually.
All dividends and/or distributions will be paid in shares of the relevant Fund,
at net asset value, unless the shareholder elects to receive cash. There is no
purchase premium on reinvested dividends or distributions. Shareholders may make
this election by marking the appropriate box on the application or by writing to
the Trust.
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