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As filed with the Securities and Exchange Commission on
December 30, 1999. File Nos.2-98772; 811-4347.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 60
/ /
(Check appropriate box or boxes)
GMO Alpha LIBOR Fund
(Exact name of registrant as specified in charter)
c/o GMO Trust, 40 Rowes Wharf, Boston, Massachusetts 02110
(Address of principal executive offices)
(617) 330-7500
(Registrant's Telephone Number, including Area Code)
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R. Jeremy Grantham
GMO Trust
40 Rowes Wharf
Boston, Massachusetts 02110
(Name and address of agent for service)
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Copy to:
J. B. Kittredge, Jr., Esquire
ROPES & GRAY
One International Place
Boston, Massachusetts 02110
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It is intended that this filing become effective immediately upon
filing in accordance with Section 8 under the Investment Company Act of 1940.
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PRIVATE PLACEMENT MEMORANDUM
DECEMBER 31, 1999
GMO ALPHA LIBOR FUND
40 Rowes Wharf, Boston, Massachusetts 02110
The GMO ALPHA LIBOR FUND (the "Fund") is one of forty separate
investment portfolios of GMO Trust (the "Trust"), an open-end management
investment company. The other portfolios are offered pursuant to separate
prospectuses.
INVESTMENT MANAGER
GMO
Grantham, Mayo, Van Otterloo & Co. LLC
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This Private Placement Memorandum concisely describes the information
which investors ought to know about the Fund before investing. Please read this
memorandum carefully and keep it for further reference. A Statement of
Additional Information dated December 31, 1999, as revised from time to time, is
available free of charge by writing to GMO Funds Division, 40 Rowes Wharf,
Boston, Massachusetts 02110 or by calling (617) 790-5000. The Statement, which
contains more detailed information about the Fund, has been filed with the
Securities and Exchange Commission ("SEC") and is incorporated by reference into
this Private Placement Memorandum.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED OR THE SECURITIES LAWS OF ANY STATE, AND MAY
NOT BE TRANSFERRED OR RESOLD UNLESS SO REGISTERED OR EXEMPT THEREFROM. HOWEVER,
THE SECURITIES ARE REDEEMABLE AS DESCRIBED IN THIS PRIVATE PLACEMENT MEMORANDUM.
IN CERTAIN CASES INVESTORS MAY BE REDEEMED "IN KIND" AND RECEIVE PORTFOLIO
SECURITIES HELD BY THE FUND IN LIEU OF CASH UPON REDEMPTION. IN SUCH CASE, AN
INVESTOR WILL INCUR COSTS WHEN THE INVESTOR SELLS THE SECURITIES DISTRIBUTED.
NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY REPRESENTATIONS OR PROVIDE
ANY INFORMATION WITH RESPECT TO THE SHARES EXCEPT SUCH INFORMATION AS IS
CONTAINED IN THIS MEMORANDUM AND IN THE STATEMENT OF ADDITIONAL INFORMATION OR
IN OTHER MATERIALS APPROVED BY THE TRUST. NO SALES MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN MATTERS
DISCUSSED HEREIN SINCE THE DATE HEREOF.
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GMO ALPHA LIBOR FUND (the "Fund") is a series of GMO Trust (the
"Trust"). At this time GMO does not intend to offer Fund shares for sale to the
public. Fund shares are currently available for purchase only by certain other
funds of the Trust. The Fund is managed by Grantham, Mayo, Van Otterloo & Co.
LLC (the "Manager" or "GMO").
The Manager does not charge the Fund any management or service fees. In
addition, the Manager will bear all of the Fund's expenses (excluding 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) to the extent such expenses exceed 0.00%.
INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES, AND RELATED RISKS
Note: Except for policies specifically identified as "fundamental," the
trustees of the Trust may change any of the Fund's operating policies and
restrictions without shareholder approval.
Investment Objective & Principal Strategies:
The Fund is a non-diversified investment company. The Fund's investment
objective is high total return. The Fund seeks to achieve its objective by
investing primarily in relatively high quality, low volatility fixed income
instruments. The Fund's benchmark index is the 3- month London Inter-Bank Offer
Rate ("LIBOR") index.
Fixed income instruments in which the Fund may invest include those
securities issued by federal, state, local, and foreign governments, and a wide
range of private issuers. The Fund may invest in government securities,
corporate debt securities, mortgage-related and asset-backed securities, money
market instruments, reverse repurchase agreements, and repurchase agreements.
The Fund's fixed income investments may have all types of interest rate, payment
and reset terms, including fixed rate, adjustable rate, zero coupon, contingent,
deferred, payment-in-kind, and auction rate features. The Fund will generally
have a dollar-weighted portfolio duration of zero to two years (excluding
short-term investments).
The Fund may use derivative instruments, including options, futures,
options on futures, and swap contracts.
The Fund will invest primarily in investment-grade instruments, but may
invest up to 5% of its total assets in securities rated below investment grade
(that is, rated below BBB by Standard & Poor's Ratings Group ("S&P"), below Baa
by Moody's Investors Service, Inc. ("Moody's"), or comparable unrated
securities) at the time of purchase.
Related Investment Risks:
The value of your investment in the Fund changes with the value of the
Fund's investments. Many factors can affect those values, and you can lose money
by investing in the
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Fund. Factors that may affect the portfolio as a whole are called "principal
risks" and are summarized in this section. This summary describes the nature of
these general risks but is not intended to include every potential risk. The
Fund could be subject to additional risks because the types of investments it
makes change over time. The Statement of Additional Information (the "SAI")
includes more information about the Fund and its investments. The SAI is
available free of charge by contacting the Manager.
- Market Risk
The Fund is subject to market risk, which is the risk of unfavorable
market-induced changes in the value of the securities owned by the Fund. The
following summarizes certain general market risks associated with investments in
fixed income securities.
The value of the Fund's 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, values of
fixed income securities generally decline. Conversely, during periods of falling
interest rates, values of fixed income securities generally rise. This kind of
market risk, also called interest rate risk, is generally greater for fixed
income securities with longer maturities and when the Fund's portfolio is
characterized by longer durations (a measure of the expected cash flows of a
fixed income security). This risk is also present, but to a somewhat lesser
extent, in securities with short durations. Because the Fund invests primarily
in fixed income securities, this risk will be particularly pronounced. 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 to
the extent the Fund invests in lower-rated securities (also called "junk bonds")
or comparable unrated securities.
In addition, a related market risk exists when the Fund invests 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
investments 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. The Fund may also invest to a
material extent in debt securities paying no interest, such as zero coupon,
principal-only and interest-only securities and, to the extent it makes such
investments, the Fund 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 the
Fund may be prevented from selling particular securities at the price at which
the Fund values them. 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 when the Fund invests a significant
portion of its assets in foreign
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securities and related derivatives that are not widely traded and that may be
subject to purchase and sale restrictions.
- Derivatives Risk
The Fund may use derivatives, which are financial contracts whose value
depends upon, or is derived from, the value of an underlying asset, reference
rate or index. Derivatives may relate to stocks, bonds, interest rates,
currencies or currency exchange rates, commodities, and related indexes. The
Fund can use derivatives for hedging purposes. The Fund may also use derivatives
as a way to efficiently adjust the exposure of the Funds to various securities,
markets and currencies without the Fund 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 Fund, please see
the SAI.
The use of derivative instruments involves risks different from, or
greater than, the risks associated with investing directly in securities and
other more traditional investments. Derivatives are subject to a number of risks
described elsewhere in this section, including market risk, liquidity risk and
the credit risk of the counterparty to the derivatives contract. Since their
value is calculated and derived from the value of other assets, instruments or
references, there is greater risk that derivatives will be improperly valued.
Derivatives also involve the risk that changes in the value of the derivative
may not correlate perfectly with relevant assets, rates or indexes they are
designed to hedge or to closely track. Also, suitable derivative transactions
may not be available in all circumstances and there can be no assurance that the
Fund will engage in these transactions to reduce exposure to other risks when
that would be beneficial.
- Non-Diversification Risk
Most analysts believe that overall risk can be reduced through
diversification, while concentration of investments in a small number of
securities increases risk. The Fund is not "diversified" within the meaning of
the Investment Company Act of 1940, as amended (the "1940 Act"). This means it
is allowed to invest in a relatively small number of issuers and/or foreign
currencies with greater concentration of risk. As a result, credit, market and
other risks associated with the Fund's investment strategies or techniques may
be more pronounced.
- Leveraging Risk
The Fund's portfolio may at times be economically leveraged when the
Fund temporarily borrows money to meet redemption requests and/or to settle
investment transactions. Additionally, the Fund may invest in derivatives and
may enter into reverse repurchase agreements. While the Fund does not intend to
use derivatives to create net exposure to securities or other assets in amounts
greater than the total assets of the Fund, the Fund will often consider
derivative instruments as offsetting one another or other assets such that only
the net difference in value of the derivatives and/or assets that are offsetting
will be
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considered for these purposes. This practice is significant as the Fund may use
derivatives and offsetting derivatives as the principal means of achieving
desired economic exposure. To the extent that the offsetting positions do not
behave in relation to one another as expected, the Fund may perform as if it was
leveraged.
- 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 Fund is subject to the risk that the issuers of
the securities it owns 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 subdivisions 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 lower-rated securities (also
called "junk bonds"), which are fixed income securities rated lower than Baa by
Moody's or BBB by S&P, or are determined by the Manager to be of comparable
quality to securities so rated. Lower-rated securities 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.
In addition, the Fund is also exposed to credit risk because it may
generally make use of OTC derivatives (such as swap contracts) and because it
may engage to a significant extent in the lending of the Fund's securities or
use of repurchase agreements.
- Management Risk
The Fund is subject to management risk because it relies on the
Manager's ability to pursue its objective. The Manager will apply investment
techniques and risk analyses in making investment decisions for the Fund, but
there can be no guarantee that these will produce the desired results. As noted
above, the Manager may also fail to use derivatives effectively, for example,
choosing to hedge or not to hedge positions precisely when it is least
advantageous to do so. As indicated above, however, the Fund is generally not
subject to the risk of market timing because it generally stays fully invested
in fixed income securities and related derivative instruments.
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- Special Year 2000 Considerations
Many of the services provided to the Fund depend on the proper
functioning of computer systems. Many systems in use today cannot distinguish
between the year 1900 and the year 2000. Should any of the Fund's service
systems fail to process information properly, that could have an adverse impact
on the Fund's operations and services provided to shareholders. GMO, as well as
the Trust's administrator, transfer agent, custodians and other service
providers, have reported that each has worked to mitigate 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 Fund's operations and
services provided to shareholders will not be adversely affected, nor can there
be any assurance that the Year 2000 problem will not have an adverse effect on
the entities whose securities are held by the Fund or on U.S. or global markets
or economies generally.
MANAGEMENT, ORGANIZATION, CAPITAL STRUCTURE
Management of the Trust:
The Fund is a series of the Trust, which 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. GMO converted from a
general partnership to a limited liability company on December 16, 1996. Each of
the following four members holds a greater than 5% interest in the Manager: R.
Jeremy Grantham, Richard A. Mayo, Eyk H.A. Van Otterloo and Kingsley Durant.
Under a Management Contract with the Trust, the Manager selects and
reviews the Fund's investments and provides executive and other personnel for
the management of the Trust. Pursuant to the Trust's Agreement and Declaration
of Trust, the Board of Trustees supervises the affairs of the Trust as conducted
by the Manager. In the event that the Manager ceases to be the manager of the
Trust, the right of the Trust to use the identifying name "GMO" may be
withdrawn.
Mr. William L. Nemerever, Mr. Thomas F. Cooper and Mr. Steven Edelstein
are primarily responsible for the day-to-day management of the Fund, and have
served in such capacity since the Fund's inception. Mr. Nemerever and Mr. Cooper
are each members of the Manager and have been employed by the Manager in
fixed-income portfolio management since October, 1993. Prior to that, Mr.
Edelstein was Vice President in the Fixed Income Futures and Options Group at
Morgan Stanley & Company.
Pursuant to an Administrative Services Agreement with GMO, Investors
Bank & Trust Company provides administrative services to the Fund. GMO pays
Investors Bank & Trust Company an annual fee for its services to the Fund.
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Organization and Capitalization of the Trust:
The Trust was established on June 24, 1985 as a business trust under
Massachusetts law. The Trust has an unlimited authorized number of shares of
beneficial interest which may, without shareholder approval, be divided into an
unlimited number of series of such shares, and which are presently divided into
forty series of shares: one for the Fund, and one for each of the U.S. Core
Fund, Tobacco-Free Core Fund, Value Fund, Fundamental Value Fund, Intrinsic
Value Fund, Growth Fund, Small Cap Value Fund, Small Cap Growth Fund, REIT Fund,
International Core Fund, Currency Hedged International Core Fund, Foreign Fund,
International Small Companies Fund, Japan Fund, Emerging Markets Fund, Evolving
Countries Fund, Asia 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, 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, Asia Fund, Tax-Managed
U.S. Equities Fund, Tax-Managed International Equities Fund, Tax-Managed Small
Companies Fund, International Core Plus Allocation Fund and Pelican Fund. All
shares of all series are entitled to vote at any meetings of shareholders. The
Trust does not generally hold annual meetings of shareholders and will do so
only when required by law. All shares entitle their holders to one vote per
share. Matters submitted to shareholder vote must be approved by the Fund
separately except (i) when required by the 1940 Act, shares shall be voted
together as a single class and (ii) when the Trustees have determined that the
matter does not affect the Fund, then only shareholders of the Fund(s) affected
shall be entitled to vote on the matter. Shareholders of a particular class of
shares do not have separate class voting rights except with respect to matters
that affect only that class of shares or as otherwise required by law. Shares
are freely transferable, are entitled to dividends as declared by the Trustees,
and, in liquidation of the Trust, are entitled to receive the net assets of
their Fund, but not of any other Fund. Shareholders holding a majority of the
outstanding shares of all series may remove Trustees from office by votes cast
in person or by proxy at a meeting of shareholders or by written consent.
SHAREHOLDER INFORMATION
Purchase of Fund Shares:
Currently, shares of the Fund may only be purchased by other funds of
the Trust. All investors must be "accredited investors" as defined in Regulation
D under the Securities Act of 1933.
An investment in the Fund may be made without a sales load by eligible
investors. The Fund imposes a purchase premium of 0.05% of the value of the
investment on each investor. The purchase premium is paid to the Fund to
allocate transaction costs associated with an investment in the Fund to the
shareholder initiating the transaction. The purchase premium will be waived in
the following circumstances:
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- There is an offsetting cash redemption on the same day
- There is an in-kind purchase of Fund shares.
All investments are made at the net asset value next determined after an order
and payment for the investment are received by the Fund by the designated cutoff
time for each accredited investor. There is no minimum initial or subsequent
investment in the Fund. The Fund reserves the right to cease accepting
investments in the Fund at any time or to reject any investment order.
Shares may be purchased (i) in cash, (ii) in exchange for securities
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.
Securities acceptable to the Manager as consideration for Fund shares will be
valued as set forth under "Determination of Net Asset Value" (generally the last
quoted sale price) as of the time of the next determination of net asset value
after such acceptance. All dividends, subscription or other rights which are
reflected in the market price of accepted securities at the time of valuation
become the property of the Fund and must be delivered to the Trust upon receipt
by the investor from the issuer. A gain or loss for federal income tax purposes
may be realized by investors 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 Fund.
Redemption of Fund Shares:
An investor in the Fund may redeem all or a portion of its investment
at the net asset value next determined after receipt by the Fund of a redemption
request in proper form on any day the New York Stock Exchange ("Exchange") is
open for business ("business day"). The redemption request must be received by
the close of regular trading on the Exchange (normally 4:00 p.m. Eastern time).
Proceeds of the redemption will be paid as promptly as possible but in any event
within seven business days after receipt of the request.
If the Manager determines, in its sole discretion, that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in-kind of securities held by the Fund in
lieu of cash. Securities used to redeem Fund shares in-kind will be valued in
accordance with the Fund's procedures for valuation described under
"Determination of Net Asset Value." Securities distributed by the Fund in-kind
will be selected by the Manager in light of the Fund's objective and will not
generally represent a pro rata distribution of each security held in the Fund's
portfolio. Any in-kind redemptions will be of readily marketable securities to
the extent available. Investors may incur brokerage charges on the sale of any
such securities so received in payment of redemptions.
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The Fund may suspend the right of redemption and may postpone payment
for more than seven days when the 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.
Determination of Net Asset Value:
The net asset value of a share is determined for the Fund once on each
day on which the Exchange is open for regular business, except that the Fund may
not determine its net asset value on days during which no security is tendered
for redemption and no order to purchase or sell such security is received by the
Fund. Net asset value is determined as of the close of regular trading on the
Exchange, generally 4:00 p.m. New York City Time. The Fund's net asset value is
determined by dividing the total market value of the Fund's portfolio
investments and other assets, less any liabilities, by the total outstanding
shares of the Fund. Portfolio securities listed on a securities exchange for
which market quotations are available are valued at the last quoted sale price
on each business day or, if there is no such reported sale, at the most recent
quoted bid price. However, for those securities that are listed on an exchange
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 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
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current exchange rates or at such other rates as the Trustees may determine in
computing net asset value.
Distributions:
The Fund's policy is to declare and pay distributions of its dividends
and interest semi-annually. The Fund also intends to distribute net gains from
the sale of securities held for not more than one year ("net short-term capital
gains") and net gains from the sale of securities held for more than one year
("net long-term capital gains") at least annually.
All dividends and/or distributions will be paid in shares of the Fund,
at net asset value, unless the shareholder elects to receive cash. There is no
purchase premium on reinvested dividends or distributions. Shareholders may make
this election by marking the appropriate box on the application or by writing to
the Trust.
Taxes:
The following is a general summary of the principal federal
income tax consequences to shareholders of investing in the Fund. The only
shareholders of the Fund will be certain other funds of the Trust. The summary
below does not address tax consequences to shareholders of those other funds.
Shareholders of those other funds should refer to the prospectuses and
statements of additional information for those funds for a summary of the tax
consequences to such shareholders.
- The Fund will be 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 result in taxable ordinary income to the Fund's
shareholders, whether paid in cash or reinvested in shares of
the Fund. Properly designated Fund distributions derived from
net long-term capital gains will result in taxable long-term
capital gain income to the Fund's shareholders, whether paid
in cash or reinvested in shares of the Fund. Distributions by
the Fund will result in a reduction in the net asset value of
the Fund's shares. Should a distribution reduce the net asset
value of a shareholder's shares below a shareholder's cost
basis in such shares, such distribution may result in taxable
income to a shareholder as described above even though, from
an investment standpoint, it may constitute a partial return
of capital. In particular, shareholders purchasing shares just
prior to a taxable distribution may receive what is
economically a return of their investment upon the
distribution, but the distribution may nevertheless result in
taxable income to such shareholder.
- The Fund's investments in mortgage-backed and other
asset-backed securities, debt obligations issued or purchased
at a discount, assets "marked to the
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market" for federal income tax purposes, and, potentially,
so-called "indexed securities" (including inflation indexed
bonds) may increase or accelerate the Fund's recognition of
income, including the recognition of taxable income in excess
of the cash generated by such investments. These investments
may, therefore, affect the timing or amount of the Fund's
distributions and may cause the Fund to liquidate other
investments to satisfy the distribution requirements that
apply to entities taxed as regulated investment companies.
- Any gain resulting from a shareholder's sale or exchange of
shares will generally also be subject to tax.
DISTRIBUTION ARRANGEMENTS
The Fund does not charge any sales load or Rule 12b-1 fees. Currently,
the Fund offers only a single class of shares.
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GMO Alpha LIBOR FUND
STATEMENT OF ADDITIONAL INFORMATION
December 31, 1999
This Statement of Additional Information is not a prospectus. It relates to the
GMO Alpha LIBOR Fund Private Placement Memorandum dated December 31, 1999, and
as amended from time to time thereafter (the "Private Placement Memorandum"),
and should be read in conjunction therewith. Information from the Private
Placement Memorandum is incorporated by reference into this Statement of
Additional Information. The Private Placement Memorandum may be obtained free of
charge from GMO Trust, 40 Rowes Wharf, Boston, Massachusetts 02110, or by
calling the Trust collect at (617) 346-7500.
<PAGE> 14
Investment Objective and Policies
The principal strategies and risks of investing in the Fund are
described in the Private Placement Memorandum. Unless otherwise indicated in the
Private Placement Memorandum or this Statement of Additional Information, the
investment objective and policies of the Fund may be changed without shareholder
approval.
Descriptions and Risks of Fund Investments
The following is a detailed description of the various investment
practices in which the Fund may engage and the risks associated with their use.
For additional information relating to the Fund's investments, including
information regarding the extent to which the Fund may engage in certain
practices, please refer to "Investment Guidelines" in this Statement.
Portfolio Turnover
Portfolio turnover is not a limiting factor with respect to investment
decisions for the Fund. In any particular year, market conditions may well
result in greater rates than are presently anticipated. High portfolio turnover
involves correspondingly greater brokerage commissions and other transaction
costs, which will be borne directly by the Fund, and may well involve
realization of capital gains that would be taxable when ultimately distributed
to shareholders of the other funds of the Trust investing in the Fund, unless
such shareholders are themselves exempt. See "Taxes" below.
Non-Diversified Portfolio
The Fund is a "non-diversified" fund under the 1940 Act. As a
non-diversified fund, the Fund 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 the Fund 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. The Fund must, however, meet certain diversification standards
to qualify as a "regulated investment company" under the Internal Revenue Code
of 1986.
Debt and Other Fixed Income Securities Generally
Debt and other fixed income securities include fixed income securities
of any maturity. Fixed income securities pay a specified rate of interest or
dividends, or a rate that is adjusted periodically be reference to some
specified index or market rate. Fixed income securities include securities
issued by federal, state, local and foreign governments and related agencies,
and by a wide range of private issuers.
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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 Fund's
future income from investing in such securities. The net asset value of the
Fund's shares will vary as a result of changes in the value of the securities in
its portfolio and will be affected by the absence and/or success of hedging
strategies.
Temporary High Quality Cash Items
The Fund may temporarily invest a portion of its assets in cash or cash
items pending other investments or in connection with the maintenance of a
segregated account. These cash items must be of high quality and may include a
number of money market instruments such as securities issued by the United
States government and agencies thereof, bankers' acceptances, commercial paper,
and bank certificates of deposit. By investing only in high quality money market
securities the Fund will seek to minimize credit risk with respect to such
investments.
U.S. Government Securities and Foreign Government Securities
U.S. Government Securities include securities issued or guaranteed by
the U.S. government or its authorities, agencies or instrumentalities. Foreign
Government Securities include securities issued or guaranteed by foreign
governments (including political subdivisions) or their authorities, agencies or
instrumentalities or by supra-national agencies. U.S. Government Securities and
Foreign Government Securities have different kinds of government support. For
example, some U.S. Government Securities, such as U.S. Treasury bonds, are
supported by the full faith and credit of the United States, whereas certain
other U.S. Government Securities have different kinds of government support. For
example, some U.S. Government Securities, such as U.S. Treasury bonds, are
supported by the full faith and credit of the United States, whereas certain
other U.S. Government Securities issued or guaranteed by federal agencies or
government-sponsored enterprises are not supported by the full faith and credit
of the United States. Similarly, some Foreign Government Securities are
supported by the full faith and credit of a foreign national government or
political subdivision and some are not. In the case of certain countries,
Foreign Government Securities may involve varying degrees of credit risk as a
result of financial or political instability in such countries and the possible
inability of the Fund to enforce its rights against the foreign government
issuer.
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Supra-national agencies are agencies whose member nations make capital
contributions to support the agencies' activities, and include such entities as
the International Bank for Reconstruction and Development (the World Bank), the
Asian Development Bank, the European Coal and Steel Community and the
Inter-American Development Bank.
Like other fixed income securities, U.S. Government Securities and
Foreign Government Securities are subject to market risk and their market values
fluctuate as interest rates change. Thus, for example, the value of an
investment in the Fund which holds U.S. Government Securities or Foreign
Government Securities may fall during times of rising interest rates. Yields on
U.S. Government Securities and Foreign Government Securities tend to be lower
than those of corporate securities of comparable maturities.
In addition to investing directly in U.S. Government Securities and
Foreign Government Securities, the Fund may purchase certificates of accrual or
similar instruments evidencing undivided ownership interests in interest
payments or principal payments, or 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 security. 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 the
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 losses 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 the Fund may
include adjustable rate securities, further discussed 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
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guaranteed mortgage-backed securities and also involve risk of loss of principal
if the obligors of the underlying obligations default in payment of the
obligations.
Collateralized Mortgage Obligations ("CMOs"); Strips and Residuals. A
CMO is a security backed by a portfolio of mortgages or mortgage-backed
securities held under an indenture. the issuer's obligation to make interest and
principal payments is secured by the underlying portfolio of mortgages or
mortgage-backed securities. CMOs are issued in multiple classes or series which
have different maturities representing interests in some or all of the interest
or principal on the underlying collateral or a combination thereof. CMOs of
different classes are generally retired in sequence as the underlying mortgage
loans in the mortgage pool are repaid. In the event of sufficient early
prepayments on such mortgages, the class or series of CMO first to mature
generally will be retired prior to its stated maturity. Thus, the early
retirement of a particular class or series of CMO held by the 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 amounts 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 be 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,
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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
The Fund may invest up to 5% of its assets in securities rated below
investment grade (that is, rated below BBB by Standard & Poor's or below Baa by
Moody's) at the time of purchase, including securities in the lowest rating
categories, and comparable unrated securities ("Lower Rated Securities"). The
Fund will not necessarily dispose of a security when its rating is reduced below
its rating at the time of purchase, although the Manager will monitor the
investment to determine whether continued investment in the security will assist
in meeting the Fund's investment objective.
Lower Rated Securities generally provide higher yields, but are subject
to greater credit and market risk, than higher quality fixed income securities.
Lower Rated Securities are considered predominantly speculative with respect to
the ability of the issuer to meet principal and interest payments. Achievement
of the Fund's investment objective through investments in Lower Rated Securities
may be more dependent on the Manager's own credit analysis than is the case with
higher quality bonds. The market for Lower Rated Securities may be more severely
affected than some other financial markets by economic recession or substantial
interest rate increases, by changing public perceptions of this market or by
legislation that limits the ability of certain categories of financial
institutions to invest in these securities. In addition, the secondary market
may be less liquid for Lower Rated Securities. This reduced liquidity at certain
times may affect the values of these securities and may make the valuation and
sale of these securities more difficult. Securities of below investment grade
quality are commonly referred to as "junk bonds." Securities in the lowest
rating categories may be in poor standing or in default. Securities in the
lowest investment grade category (BBB or Baa) have some speculative
characteristics. See "Credit Ratings," below, for more information concerning
commercial paper and corporate debt ratings.
Zero Coupon Securities
The Fund, when 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. The Fund is required to distribute
the income on these securities to its shareholders as the income accrues, even
though the Fund is not receiving the income in cash on a current basis. Thus,
the 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.
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Loans, Loan Participations and Assignments
The Fund may invest in direct debt instruments which are interests in
amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates (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 the 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 the repayment of the debt may be
unable, or unwilling, to pay interest and repay principal when due.
When investing in a loan participation, the 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,
the Fund typically will be able to enforce its rights only through the lender,
and not directly against the borrower. As a result, the 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 interest with respect to a loan may involve additional risks to
the Fund. For example, if a loan is foreclosed, the Fund could become part owner
of any collateral, and would bear the costs and liabilities associated with
owning and disposing of the collateral. In addition, it is conceivable that
under emerging legal theories of lender liability, the 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 the Fund in the event of fraud or misrepresentation. In the
absence of definitive regulatory guidance, the Fund may rely on the Manager's
research to attempt to avoid situations where fraud or misrepresentations 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, the Fund has direct recourse against the borrower, it may have to
rely on the agent to apply appropriate credit remedies against a borrower.
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Direct indebtedness purchased by the 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. The Fund will set aside
appropriate liquid assets in a segregated custodial account to cover its
potential obligations under standby financing commitments.
Certain Risks of Foreign Investments
General. Investment in foreign issuers or securities principally traded
overseas may involve certain special risks due to foreign economic, political
and legal developments, including favorable or unfavorable changes in currency
exchange rates, exchange control regulations (including currency blockage),
expropriation or nationalization of assets, imposition of withholding taxes on
dividend or interest payments, and possible difficulty in obtaining and
enforcing judgments against foreign entities. Furthermore, issuers of foreign
securities are subject to different, often less comprehensive, accounting,
reporting and disclosure requirements than domestic issuers. The securities of
some foreign governments and companies and foreign securities markets are less
liquid and at times more volatile than comparable U.S. securities and securities
markets. Foreign brokerage commissions and other fees are also generally higher
than in the United States. The laws of some foreign countries may limit the
Fund's ability to invest in securities of certain issuers located in these
foreign countries. There are also special tax considerations which apply to
securities of foreign issuers and securities principally traded overseas.
Investors should also be aware that under certain circumstances, markets which
are perceived to have similar characteristics to troubled markets may be
adversely affected whether or not similarities actually exist.
Emerging Markets. The risks described above apply to an even greater
extent to 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 U.S. and developed foreign markets. Disclosure
and regulatory standards in many respects are less stringent than in the U.S.
and developed foreign markets. There also may be a lower level of monitoring and
regulation of securities markets in emerging market countries and the activities
of investors in such markets, and enforcement of existing regulations has been
extremely limited. Many emerging countries have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have very
negative effects on the economies and securities markets of certain emerging
countries. Economies in emerging markets generally are heavily dependent upon
international trade and, accordingly, have been and may continue to be affected
adversely by trade barriers, exchange controls, managed adjustments in relative
currency values, and other protectionist measures imposed or negotiated by the
countries with which they trade. These economies also have been and may continue
to be adversely affected by economic conditions in the countries in which they
trade. The economies of countries with emerging markets may also be
predominantly based on only a few industries or dependent on revenues from
particular
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commodities. In addition, custodial services and other costs relating to
investment in foreign markets may be more expensive in emerging markets than in
many developed foreign markets, which could reduce the Fund's income from such
securities. Finally, because publicly traded debt instruments of emerging
markets represent a relatively recent innovation in the world debt markets,
there is little historical data or related market experience concerning the
attributes of such instruments under all economic, market and political
conditions.
In many cases, governments of emerging countries continue to exercise
significant control over their economies, and government actions relative to the
economy, as well as economic developments generally, may affect the capacity of
issuers of emerging country debt instruments to make payments on their debt
obligations, regardless of their financial condition. In addition, there is a
heightened possibility of expropriation or confiscatory taxation, imposition of
withholding taxes on interest payments, or other similar developments that could
affect investments in those countries. There can be no assurance that adverse
political changes will not cause the Fund to suffer a loss of any or all of its
investments in such countries, or, in the case of fixed-income securities,
interest thereon.
Securities Lending
The Fund may make secured loans of portfolio securities amounting to
100% of the Fund's total assets. The risks in lending portfolio securities, as
with other extensions of credit, consist of possible delay in recovery of the
securities or possible loss of rights in the collateral should the borrower fail
financially. However, such loans will be made only to broker-dealers that are
believed by the Manager to be of relatively high credit standing. Securities
loans are made to broker-dealers pursuant to agreements requiring that loans be
continuously secured by collateral in cash or U.S. Government Securities at
least equal at all times to the market value of the securities lent. The
borrower pays to the 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 cash, the Fund typically invests the cash collateral for its
own account in interest-bearing, short-term securities and pays a fee to the
borrower. Although voting rights or rights to consent with respect to the loaned
securities pass to the borrower, the Fund retains the right to call the loans at
any time on reasonable notice, and it will do so in order that the securities
may be voted by the Fund if the holders of such securities are asked to vote
upon or consent to matters materially affecting the investment. The Fund may
also call such loans in order to sell the securities involved. The Manager has
retained lending agents on behalf of the Fund that are compensated based on a
percentage of the Fund's return on the securities lending activity. The Fund
also pays various fees in connection with such loans including shipping fees and
reasonable custodian fees approved by the Trustees of the Trust or persons
acting pursuant to direction of the Board.
Depository Receipts
The Fund may invest in American Depositary Receipts (ADRs), Global
Depository Receipts (GDRs) and European Depository Receipts (EDRs)
(collectively, "Depository
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Receipts") if issues of such Depository Receipts are available that are
consistent with the Fund's investment objective. Depository Receipts generally
evidence an ownership interest in a corresponding foreign security on deposit
with a financial institution. Transactions in Depository Receipts usually do not
settle in the same currency in which the underlying securities are denominated
or traded. Generally, ADRs, in registered form, are designed for use in the U.S.
securities markets and EDRs, in bearer form, are designed for use in European
securities markets. GDRs may be traded in any public or private securities
markets and may represent securities held by institutions located anywhere in
the world.
Futures and Options
The Fund may use futures and options for hedging purposes, or as a way
to efficiently adjust the exposure of the Fund to various securities, markets
and currencies without the Fund having to actually sell current assets and
purchase different ones. Such transactions may involve options, futures and
related options on futures contracts, and those instruments may relate to
particular equity and fixed income securities, equity and fixed income indexes,
and foreign currencies. The Fund may also enter into a combination of long and
short positions (including spreads and straddles) for a variety of investment
strategies, including protecting against changes in certain yield relationships.
The use of futures contracts and options on futures contracts involves
risk. Thus, while the Fund may benefit from the use of futures and options on
futures, unanticipated changes in interest rates, securities prices, or currency
exchange rates may result in poorer overall performance for the Fund than if it
had not entered into any futures contracts or options transactions. Losses
incurred in transactions in futures and options on futures and the costs of
these transactions will affect the Fund's performance.
The Fund may enter into options, futures contracts and buy and sell
options thereon for hedging purposes. For example, if the Fund wants to hedge
certain of its fixed income securities against a decline in value resulting from
a general increase in market rates of interest, it might sell futures contracts
with respect to fixed income securities or indexes of fixed income securities.
If the hedge is effective, then should the anticipated change in market rates
cause a decline in the value of the Fund's fixed income security, the value of
the futures contract should increase. The Fund may also use futures contracts in
anticipatory hedge transactions by taking a long position in a futures contract
with respect to an index or foreign currency that the Fund intends to purchase
(or whose value is expected to correlate closely with the security or currency
to be purchased) pending receipt of cash from other transactions (including the
proceeds from this offering) to be used for the actual purchase. Then if the
cost of the security or foreign currency to be purchased by the Fund increases
and if the anticipatory hedge is effective, that increased cost should be
offset, at least in part, by the value of the futures contract. Options on
futures contracts may be used for hedging as well. For example, if the value of
a fixed-income security in the Fund's portfolio is expected to decline as a
result of an increase in rates, the Fund might purchase put options or write
call options on futures contracts rather than selling futures
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<PAGE> 23
contracts. Similarly, for anticipatory hedging, the Fund may purchase call
options or write put options as a substitute for the purchase of futures
contracts.
The Fund may enter into swaps and contracts for differences for hedging
purposes. When using swaps for hedging, the Fund may enter into an interest
rate, currency or equity swap, as the case may be, on either an asset-based or
liability-based basis, depending on whether it is hedging its assets or its
liabilities.
The Fund may buy or sell foreign currencies, deal in forward foreign
currency contracts, currency futures contracts and related options and options
on currencies. 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 contract 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 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.
The Fund may enter into forward contracts for hedging under three
circumstances. First, when the Fund enters into a contract for the purchase or
sale of security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transaction, the Fund will be able
to protect itself against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and the subject foreign currency during
the period between the date on which the security is purchased or sold and the
date on which payment is made or received.
Second, when the Manager of the Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or 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.
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Third, the Fund may engage in currency "cross hedging" when, in the
opinion of the Manager, the historical relationship among foreign currencies
suggests that the Fund may achieve the same protection for a foreign security at
reduced cost through the use of a forward foreign currency contract relating to
a currency other than the U.S. dollar or the foreign currency in which the
security is denominated. By engaging in cross hedging transaction, the Fund
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.
The Fund is not required to enter into hedging transactions with regard
to its foreign currency-denominated securities and will not do so unless deemed
appropriate by the Manager. By entering into the above hedging transactions, the
Fund may be required to forego the benefits of advantageous changes in the
exchange rates.
Repurchase Agreements
The Fund may enter into repurchase agreements with banks and
broker-dealers by which the Fund acquires a security (usually an obligation of
the Government where the transaction is initiated or in whose currency the
agreement is denominated) for a 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.
Reverse Repurchase Agreements and Dollar Roll Agreements
The Fund may enter into reverse repurchase agreements and dollar roll
agreements with banks and brokers to enhance return. Reverse repurchase
agreements involve sales by the Fund of portfolio assets concurrently with an
agreement by the Fund to repurchase the same assets at a later date at a fixed
price. During the reverse repurchase agreement period, the Fund continues to
receive principal and interest payments on these securities and also has the
opportunity to earn a return on the collateral furnished by the counterparty to
secure its obligation to redeliver the securities.
Dollar rolls are transactions in which the Fund sells securities for
delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date. During the roll period, the Fund forgoes principal and
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<PAGE> 25
interest paid on the securities. The Fund is compensated by the difference
between the current sales price and the forward price for the future purchase
(often referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale.
The Fund, when making such investments, will establish segregated
accounts with its custodian in which the Fund will maintain cash, U.S.
Government Securities or other liquid obligations equal in value to its
obligations in respect of reverse repurchase agreements and dollar rolls.
Reverse repurchase agreements and dollar rolls involve the risk that the market
value of the securities retained by the Fund may decline below the price of the
securities the Fund has sold but is obligated to repurchase under the agreement.
In the event the buyer of securities under a reverse repurchase agreement or
dollar roll files for bankruptcy or becomes insolvent, the Fund's use of the
proceeds of the agreement may be restricted pending a determination by the other
party or its trustee or receiver whether to enforce the Fund's obligation to
repurchase the securities. Reverse repurchase agreements and dollar rolls are
not considered borrowings by the Fund for purposes of the Fund's fundamental
investment restriction with respect to borrowings.
Illiquid Securities
The Fund may purchase "illiquid securities," i.e., securities which may
not be sold or disposed of in the ordinary course of business within seven days
at approximately the value at which the Fund has valued the investment, which
include securities whose disposition is restricted by securities laws, so long
as no more than 15% of net assets would be invested in such illiquid securities.
The Fund currently intends to invest in accordance with the SEC staff view that
repurchase agreements maturing in more than seven days are illiquid securities.
The SEC staff has stated informally that it is of the view that over-the-counter
options and securities serving as cover for over-the-counter options are
illiquid securities. While the Trust does not agree with this view, it will
operate in accordance with any relevant formal guidelines adopted by the SEC.
Special Year 2000 Risk Considerations
Many of the services provided to the Fund depend on the proper
functioning of computer systems. Many systems in use today cannot distinguish
between the year 1900 and the year 2000. Should any of the Fund's service
systems fail to process information properly, that could have an adverse impact
on the Fund's operations and services provided to shareholders. GMO, as well as
the Trust's administrator, transfer agent, custodians and other service
providers, have reported that each is working toward mitigating the risks
associated with the so-called "Year 2000 problem." However, there can be no
assurance that the problem will be corrected in all respects and that the Fund's
operations and services provided to shareholders will not be adversely affected.
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Investment Restrictions
Fundamental Investment Restrictions
The following are Fundamental Investment Restrictions, which may not be
changed without shareholder approval:
1. The Fund may not borrow money except under the following
circumstances: (i) the Fund may borrow money from banks so
long as after such a transaction, the total assets (including
the amount borrowed) less liabilities other than debt
obligations, represent at least 300% of outstanding debt
obligations; (ii) the Fund may also borrow amounts equal to an
additional 5% of its total assets without regard to the
forgoing limitation for temporary purposes, such as for the
clearance and settlement of portfolio transactions and to meet
shareholder redemption requests; and (iii) the Fund may enter
into transactions that are technically borrowings under the
Investment Company Act of 1940 (the "1940 Act") because they
involve the sale of a security coupled with an agreement to
repurchase that security (e.g., reverse repurchase agreements,
dollar rolls and other similar investment techniques) without
regard to the asset coverage restriction described in (i)
above, so long as and to the extent that the Fund establishes
a segregated account with its custodian in which it maintains
cash and/or liquid securities equal in value to its
obligations in respect of these transactions.
2. The Fund may not 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. The Fund may not 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. The Fund may not 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. The Fund may not purchase or sell real estate, although it may
purchase securities of issuers which deal in real estate,
including securities of real estate investment rusts, and may
purchase securities which are secured by interests in real
estate.
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<PAGE> 27
6. The Fund may not make loans, except by purchase of debt
obligations or by entering into repurchase agreements or
through the lending of the fund's portfolio securities. Loans
of portfolio securities may be made with respect to up to 100%
of the Fund's total assets.
7. The Fund may not concentrate more than 25% of the value of its
total assets in any one industry.
8. The Fund may not purchase or sell commodities or commodity
contracts, except that the fund may purchase and sell
financial futures contracts and options thereon.
9. The Fund may not issue senior securities, as defined in the
1940 Act and as amplified by rules, regulations and
pronouncements of the SEC. The SEC has concluded that even
though reverse repurchase agreements, firm commitment
agreements and standby commitment agreements fall within the
functional meaning of the term "evidence of indebtedness", the
issue of compliance with Section 18 of the 1940 Act will not
be raised with the SEC by the Division of Investment
Management if the fund covers such securities by maintaining
certain "segregated accounts." Similarly, so long as such
segregated accounts are maintained, the issue of compliance
with Section 18 will not be raised with respect to any of the
following: any swap contract or contract for differences; any
pledge or encumbrance of assets permitted by non-fundamental
policy (4) below; any borrowing permitted by restriction 1
above; any collateral arrangements with respect to initial and
variational margin; and the purchase or sale of options,
forward contracts, futures contracts or options on futures
contracts.
Non-Fundamental Investment Restrictions
The following are Non-Fundamental Investment Restrictions, which may be
changed without shareholder approval:
1. The Fund may not buy or sell oil, gas or other mineral leases,
rights or royalty contracts.
2. The Fund may not make an investment for the purpose of gaining
control of a company's management.
3. The Fund may not 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
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<PAGE> 28
under Section 4(2) or Rule 144A under the Securities Act of
1933 are in fact liquid, they will not be included in the 15%
limit on investment in illiquid securities.
4. The Fund may not pledge, hypothecate, mortgage or otherwise
encumber its assets in excess of 33 1/3% of the fund's total
assets (taken at cost). (For the purposes of this restriction,
collateral arrangements with respect to swap agreements, the
writing of options, stock index, interest rate, currency or
other futures, options on futures contracts and collateral
arrangements with respect to initial and variation margin are
not deemed to be a pledge or other encumbrance of assets. The
deposit of securities or cash or cash equivalents in escrow in
connection with the writing of covered call or put options,
respectively is not deemed to be a pledge or encumbrance.)
Except as indicated above in Fundamental Restriction (1), all
percentage limitations on investments set forth herein and in the Prospectus
will apply at the time of the making of an investment and shall not be
considered violated unless an excess or deficiency occurs or exists immediately
after and as a result of such investment.
The phrase "shareholder approval," as used in the Prospectus and in
this Statement of Additional Information, and the phrase "vote of a majority of
the outstanding voting securities," as used herein with respect to the Fund,
means the affirmative vote of the lesser of (1) more than 50% of the outstanding
shares of that Fund, or (2) 67% or more of the shares of the Fund present at a
meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy. Except for policies that are explicitly described
as fundamental in the Prospectus or this Statement of Additional Information,
the investment policies of the Fund (including all policies, restrictions and
limitations set forth in the "Investment Guidelines") may be changed by the
Trust's Trustees without the approval of shareholders.
Management of the Trust
The Fund is a series of GMO Trust (the "Trust"). Subject to the
provisions of the GMO Trust Agreement and Declaration of Trust, the business of
the Trust shall be managed by the Trustees, and they shall have all powers
necessary or convenient to carry out that responsibility including the power to
engage in securities transactions of all kinds on behalf of the trust. Without
limiting the foregoing, the Trustees may adopt By-Laws not inconsistent with the
Declaration of Trust providing for the regulation and management of the affairs
of the Trust and may amend and repeal them to the extent that such By-Laws do
not reserve that right to the Shareholders; they may fill vacancies in or remove
from their number (including any vacancies created by an increase in the number
of Trustees); they may remove from their number with or without cause; they may
elect and remove such officers and appoint and terminate such agents as they
consider appropriate; they may appoint from their own number and terminate one
or more
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<PAGE> 29
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.
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<PAGE> 30
ANN SPRUILL (D.O.B. 8/30/54). Secretary of the Trust. Member, Grantham,
Mayo, Van Otterloo & Co. LLC.
ROBERT V. BROKAW, JR. (D.O.B. 10/7/43). Secretary of the Trust. Member,
Grantham, Mayo, Van Otterloo & Co. LLC.
FORREST BERKLEY (D.O.B. 4/25/54). Vice President of the Trust. Member,
Grantham, Mayo, Van Otterloo & Co. LLC.
SCOTT ESTON (D.O.B. 1/20/56). Vice President of the Trust. Chief
Financial Officer, 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. As of the date of this
Statement, the Trustees and officers of the Trust as a group owned less than 1%
of the outstanding shares of the Fund.
Except as stated above, the principal occupations of the officers and
Trustees for the last five years have been with the employers as shown above,
although in some cases they have held different positions with such employers.
Other than as set forth in the table below, no Trustee or officer of
the Trust receives any direct compensation from the Trust or any series thereof.
<TABLE>
<CAPTION>
NAME OF PERSON, TOTAL ANNUAL COMPENSATION
POSITION FROM THE TRUST
-------- --------------
<S> <C>
Harvey R. Margolis, Trustee $70,000
</TABLE>
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<PAGE> 31
<TABLE>
<S> <C>
Jay O. Light, Trustee $70,000
</TABLE>
Messrs. Grantham, Mayo, Van Otterloo, Durant, Lai, Brokaw, Eston and
Berkley, and Mses. Harbert and Spruill, as members of the Manager, will benefit
from the management fees paid by each fund of the Trust.
Investment Advisory and Other Services
Management Contract
As disclosed in the Prospectus under the heading "Management of the
Trust," under the Management Contract ("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 the
Fund and will make investment decisions on behalf of the Fund and place all
orders for the purchase and sale of portfolio securities. Subject to the control
of the Trustees, the Manager also manages, supervises and conducts the other
affairs and business of the Trust, furnishes office space and equipment,
provides bookkeeping and certain clerical services and pays all salaries, fees
and expenses of officers and Trustees of the Trust who are affiliated with the
Manager. As indicated under "Portfolio Transactions--Brokerage and Research
Services," the Trust's portfolio transactions may be placed with broker-dealers
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.
The Manager has contractually agreed to reimburse the Fund with respect
to certain Fund expenses to the extent that the Fund's total annual operating
expenses (excluding brokerage commissions and other investment-related costs,
hedging transaction fees, extraordinary, non-recurring and certain other unusual
expenses (including taxes), securities lending fees and expenses and transfer
taxes), would otherwise exceed a specified percentage of the Fund's daily net
assets.
The Management Contract provides that the Manger shall not be subject
to any liability in connection with the performance of its services thereunder
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
The Management Contract was approved by the Trustees of the Trust
(including a majority of the Trustees who were not "interested persons" of the
Manager) and by the Fund's sole shareholder in connection with the organization
of the Trust and the establishment of the Fund. The Management Contract will
continue in effect for a period more than two years from the date of its
execution only so long as its continuance is approved at least annually by (i)
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 Fund. The Management Contract
automatically terminates on assignment, and is terminable on not more
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<PAGE> 32
than 60 days' notice by the trust to the Manager. In addition, the Management
Contract may be terminated on not more than 60 days' written notice by the
Manager to the Trust.
Custodial Arrangements
Investors Bank & Trust Company ("IBT"), 200 Clarendon Street, Boston,
Massachusetts 02116, serves as the Trust's custodian on behalf of the Fund. As
such, IBT holds in safekeeping certificated securities and cash belonging to the
Fund and, in such capacity, is the registered owner of securities in book-entry
form belonging to the Fund. Upon instruction, IBT receives and delivers the
Fund's cash and securities in connection with Fund transactions and collects all
dividends and other distributions made with respect to Fund portfolio
securities. IBT also maintains certain accounts and records of the Trust and
calculates the total net asset value, total net income and net asset value per
share of the Fund on a daily basis.
Portfolio Transactions
The purchase and sale of portfolio securities for the Fund (and for the
other investment advisory clients of the Manager) are made by the Manager with a
view to achieving their respective investment objectives. For example, a
particular security may be bought or sold for certain clients of the Manager
even though it could have been bought or sold for other clients at the same
time. Likewise, a particular security may be bought for one or more clients when
one or more other clients are selling the security. In some instances,
therefore, one client may 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 the Fund, the
Manager will seek the best price and execution available, except to the extent
it may be permitted to pay higher brokerage commissions for brokerage and
research services as described below. The determination of what may constitute
best price and execution by a broker-dealer in effecting a
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<PAGE> 33
securities transaction involves a number of considerations, including, without
limitation, the overall net economic result to the Fund (involving price paid or
received and any commissions and other costs paid), the efficiency with which
the transaction is effected, the ability to effect the transaction at all where
a large block is involved, availability of the broker to stand ready to execute
possibly difficult transactions in the future and the financial strength and
stability of the broker. Because of such factors, a broker-dealer effecting a
transaction may be paid a commission higher than that charged by another
broker-dealer. Most of the foregoing are judgmental considerations.
Over-the-counter transactions often involve dealers acting for their
own account. It is the Manager's policy to place over-the-counter market orders
for the Fund with primary market makers unless better prices or executions are
available elsewhere.
Although the Manager does not consider the receipt of research services
as a factor in selecting brokers to effect portfolio transactions for the Fund,
the Manager will receive such services from brokers who are expected to handle a
substantial amount of the Fund's portfolio transactions. Research services may
include a wide variety of analyses, reviews and reports on such matters as
economic and political developments, industries, companies, securities and
portfolio strategy. The Manager uses such research in servicing other clients as
well as the 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.
Determination of Net Asset Value
The net asset value per share of the Fund 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, 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
Private Placement Memorandum for additional information.
Description of the Trust and Ownership of the 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
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<PAGE> 34
of the Declaration of Trust is on file with the Secretary of The Commonwealth of
Massachusetts. The fiscal year for the Fund ends on February 28/29.
Pursuant to the Declaration of Trust, the Trustees have currently
authorized the issuance of an unlimited number of full and fractional shares of
forty series. One for the Fund, and one for each of the following: U.S. Core
Fund; Tobacco-Free Core Fund; Value Fund; Growth Fund; U.S. Sector Fund; Small
Companies Value Fund; Small Cap Growth Fund; Fundamental Value Fund; REIT Fund;
International Core Fund; Currency Hedged International Core Fund; Foreign Fund;
International Small Companies Fund; Japan Fund; Emerging Markets Fund; Evolving
Countries Fund; Global Properties Fund; Domestic Bond Fund; U.S. Bond/Global
Alpha A Fund; U.S. Bond/Global Alpha B Fund; International Bond Fund; Currency
Hedged International Bond Fund; Global Bond Fund; Emerging Country Debt Fund;
Short-Term Income Fund; Global Hedged Equity Fund; Inflation Indexed Bond Fund;
International Equity Allocation Fund; World Equity Allocation Fund; Global
(U.S.+) Equity Allocation Fund; Global Balanced Allocation Fund; International
Core Plus Allocation Fund; Emerging Country Debt Share Fund; Pelican Fund; Asia
Fund; Tax-Managed U.S. Equities Fund; Tax-Managed International Equities Fund;
Tax-Managed U.S. Small Cap Fund; and Intrinsic Value Fund. Interests in each
portfolio (Fund) are represented by shares of the corresponding series. Each
share of each series represents an equal proportionate interest, together with
each other share, in the corresponding Fund. The shares of such series do not
have any preemptive rights. Upon liquidation of a Fund, shareholders of the
corresponding series are entitled to share pro rata in the net assets of the
Fund available for distribution to shareholders. The Declaration of Trust also
permits the Trustees to charge shareholders directly for custodial and transfer
agency expenses, but there is no present intention to make such charges.
The Declaration of Trust also permits the Trustees, without shareholder
approval, to subdivide any series of shares into various sub-series or classes
of shares with such dividend preferences and other rights as the Trustees may
designate. This power is intended to allow the Trustees to provide for an
equitable allocation of the impact of any future regulatory requirements which
might affect various classes of shareholders differently. The Trustees have
currently authorized the establishment and designation of up to eight classes of
shares for each series of the Trust (except for the Pelican Fund): Class I
Shares, Class II Shares, Class III Shares, Class IV Shares, Class V Shares,
Class VI Shares, Class VII Shares and Class VIII Shares.
The Trustees may also, without shareholder approval, establish one or
more additional separate portfolios for investments in the Trust or merge two or
more existing portfolios (i.e., a new fund). Shareholders' investments in such a
portfolio would be evidenced by a separate series of shares.
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
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<PAGE> 35
authorization of a majority of its outstanding shares in order to change the
nature of its business so as to cease to be an investment company.
Voting Rights
Shareholders are entitled to one vote for each full share held (with
fractional votes for fractional shares held) and will vote (to the extent
provided herein) in the election of Trustees and the termination of the Trust
and on other matters submitted to the vote of shareholders. Shareholders vote by
individual Fund on all matters except (i) when required by the Investment
Company Act of 1940, shares shall be voted in the aggregate and not by
individual Fund, and (ii) when the Trustees have determined that the matter
affects only the interests of one or more Funds, then only shareholders of such
affected Funds shall be entitled to vote thereon. Shareholders of one Fund shall
not be entitled to vote on matters exclusively affecting another Fund, such
matters including, without limitation, the adoption of or change in the
investment objectives, policies or restrictions of the other Fund and the
approval of the investment advisory contracts of the other Fund. Shareholders of
a particular class of shares do not have separate class voting rights except
with respect to matters that affect only that class of shares and as otherwise
required by law.
There will normally be no meetings of shareholders for the purpose of
electing Trustees except that in accordance with the 1940 Act (i) the Trust will
hold a shareholders' meeting for the election of Trustees at such time as less
than a majority of the Trustees holding office have been elected by
shareholders, and (ii) if, as a result of a vacancy in the Board of Trustees,
less than two-thirds of the Trustees holding office have been elected by the
shareholders, that vacancy may only be filled by a vote of the shareholders. In
addition, Trustees may be removed from office by a written consent signed by the
holders of two-thirds of the outstanding shares and filed with the Trust's
custodian or by a vote of the holders of two-thirds of the outstanding shares at
a meeting duly called for the purpose, which meeting shall be held upon the
written request of the holders of not less than 10% of the outstanding shares.
Upon written request by the holders of at least 1% of the outstanding shares
stating that such shareholders wish to communicate with the other shareholders
for the purpose of obtaining the signatures necessary to demand a meeting to
consider removal of a Trustee, the Trust has undertaken to provide a list of
shareholders or to disseminate appropriate materials (at the expense of the
requesting shareholders). Except as set forth above, the Trustees shall continue
to hold office and may appoint successor Trustees. Voting rights are not
cumulative.
No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the Trust except (i)
to change the Trust's name or to cure technical problems in the Declaration of
Trust and (ii) to establish, designate or modify new and existing series or
sub-series of Trust shares or other provisions relating to Trust shares in
response to applicable laws or regulations.
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<PAGE> 36
Shareholder and Trustee Liability
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Declaration of Trust provides for indemnification out of
all the property of the relevant Fund for all loss and expense of any
shareholder of that Fund held personally liable for the obligations of the
Trust. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is considered remote since it is limited to circumstances
in which the disclaimer is inoperative and the Fund of which he is or was a
shareholder would be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing in
the Declaration of Trust protects a Trustee against any liability to which the
Trustee would otherwise be subject to by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office. The By-Laws of the Trust provide for indemnification by
the Trust of the Trustees and the officers of the Trust except with respect to
any matter as to which any such person did not act in good faith in the
reasonable belief that his action was in or not opposed to the best interests of
the Trust. Such person may not be indemnified against any liability to the Trust
or the Trust shareholders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
Beneficial Owners of 5% or More of the Fund's Shares
As of the date of this Statement of Additional Information, no shares
of the Fund were outstanding.
Distributions
The Private Placement Memorandum describes the distribution policies of
the Fund under the heading "Distributions". It is the policy of the 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 the Fund, net gains from certain closing purchase and sale
transactions with respect to such options and a portion of net gains from other
options and futures transactions are treated as short-term capital gain (i.e.,
gain from the sale of securities held for 12 months or less). It is the policy
-24-
<PAGE> 37
of the 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
Distributions
It is the policy of the 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. The Fund's investments in mortgage-backed and other asset-backed
securities and in zero-coupon bonds may result in taxable income in excess of
cash received by the Fund. This may require the Fund to sell investments
(including when it is not advantageous to do so) in order to generate sufficient
cash to make distributions. It is the policy of the 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.
Tax Status and Taxation of the Fund
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). In order to qualify for the special tax treatment accorded regulated
investment companies and their shareholders, the Fund must, among other things:
(a) derive at least 90% of its gross income from dividends, interest,
payments with respect to certain securities loans, and gains from the
sale of stock, securities and foreign currencies, or other income
(including but not limited to gains from options, futures or forward
contracts) derived with respect to its business of investing in such
stock, securities, or currencies;
(b) distribute with respect to each taxable year at least 90% of the sum of
its taxable net investment income, its net tax-exempt income, and the
excess, if any, of net short-term capital gains over net long-term
capital losses for such year; and
(c) diversify its holdings so that at the end of each fiscal quarter, (i)
at least 50% of the market value of the Fund's assets is represented by
cash and cash items, U.S. government securities, securities of other
regulated investment companies, and other securities limited in respect
of any one issuer to a value not greater than 5% of the value of the
Fund's total net assets and to not more than 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities (other than those of
the U.S. Government or other regulated investment companies) of any one
issuer or of two or more
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<PAGE> 38
issuers which the Fund controls and which are engaged in the same,
similar, or related trades or businesses.
If the Fund qualifies as a regulated investment company that is
accorded special tax treatment, the Fund will not be subject to federal income
tax on income paid to its shareholders in the form of dividends (including
capital gain dividends).
If the Fund fails to distribute in a calendar year substantially all of
its ordinary income for such year and substantially all of its capital gain net
income for the one-year period ending October 31 (or later if the Fund is
permitted so to elect and so elects), plus any retained amount from the prior
year, the Fund will be subject to a 4% excise tax on the undistributed amounts.
A dividend paid to shareholders by the Fund in January of a year generally will
be deemed to have been paid by the Fund on December 31 of the preceding year, if
the dividend was declared and payable to shareholders of record on a date in
October, November or December of that preceding year. The Fund intends generally
to make distributions sufficient to avoid imposition of the 4% excise tax.
TAXATION OF FUND DISTRIBUTIONS AND SALES OF FUND SHARES
The only shareholders of the Fund will be other funds of the Trust. The
following summary does not discuss the tax consequences to the shareholders of
those other funds of distributions by the funds or of the sale of shares of the
funds. Shareholders of the funds should consult the prospectuses and statements
of additional income of those funds for a discussion of the tax consequences to
them.
Fund distributions derived from interest, dividends and certain other
income, including in general short-term capital gains, will result in taxable
ordinary income to the shareholders of the Fund, whether received in cash or
reinvested in 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 result in taxable long-term capital gain
income to the shareholders of the Fund, regardless of whether the distributions
are received in cash or reinvested in shares and regardless of how long a
shareholder has held the shares in the Fund.
Dividends and distributions on the Fund's shares are generally subject
to federal income tax as described herein to the extent they do not exceed the
Fund's realized income and gains, even though such dividends and distributions
may economically represent a return of a particular shareholder's investment.
Such distributions are likely to occur in respect of shares purchased at a time
when the Fund's net asset value reflects gains that are either unrealized, or
realized but not distributed.
The sale, exchange or redemption of Fund shares may give rise to a gain
or loss. In general, any gain or loss realized upon a taxable disposition of
shares will be treated as long-term
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<PAGE> 39
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 Fund are purchased
within 30 days before or after the disposition. In such a case, the basis of the
newly purchased shares will be adjusted to reflect the disallowed loss.
If a Fund makes a distribution to its shareholders 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 each
shareholder's tax basis in its shares, and thereafter as capital gain. A return
of capital is not taxable, but it reduces the shareholder's tax basis in its
shares, thus reducing any loss or increasing any gain on a subsequent taxable
disposition of the shares.
TAX IMPLICATIONS OF CERTAIN INVESTMENTS
Certain of the Fund's investments, including investments in
mortgage-backed and other asset-backed securities, 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), may create taxable income in excess of the cash they generate.
In such cases, the Fund may be required to sell assets (including when it is not
advantageous to do so) to generate the cash necessary to distribute as dividends
to its shareholders all of its income and gains and therefore to eliminate any
tax liability at the Fund level.
The Fund's transactions in options, futures contracts, hedging
transactions, forward contracts, and straddles may accelerate income, defer
losses, cause adjustments in the holding periods of the Fund's 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.
LOSS OF REGULATED INVESTMENT COMPANY STATUS
The Fund may experience particular difficulty qualifying as a regulated
investment company in the case of highly unusual market movements, in the case
of high redemption levels and/or during the first year of its operations. If the
Fund does not qualify for taxation as a regulated investment company for any
taxable year, the Fund's income will be taxed at the Fund level at regular
corporate rates, and all distributions from earnings and profits, including
distributions of net long-term capital gains, will be taxable to shareholders as
ordinary income. In addition, in order to requalify for taxation as a regulated
investment company that is accorded
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<PAGE> 40
special tax treatment, the Fund may be required to recognize unrealized gains,
pay substantial taxes and interest on such gains, and make certain substantial
distributions.
Performance Information
The Fund may from time to time include its total return in
advertisements or in information furnished to present or prospective
shareholders.
Quotations of average annual total return for the Fund will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Fund or class over periods of one, three, five,
and ten years (or for such shorter or longer periods as shares of the Fund have
been offered), calculated pursuant to the following formula: P (1 + T)n = ERV
(where P = a hypothetical initial payment of $10,000, T = the average annual
total return, n = the number of years, and ERV = the ending redeemable value of
a hypothetical $10,000 payment made at the beginning of the period). Except as
then noted, all total return figures will reflect the deduction of a
proportional share of Fund expenses on an annual basis, and assume that all
dividends and distributions are reinvested when paid. Quotations of total return
may also be shown for other periods. The Fund may also, with respect to certain
periods of less than one year, provide total return information for that period
that is unannualized. Any such information would be accompanied by standardized
total return information.
The Fund may also from time to time advertise net return and gross
return data for each month and calendar quarter since the Fund's inception.
Monthly and quarterly return data is calculated by linking daily performance for
the Fund (current net asset value divided by prior net asset value), and assumes
reinvestment of all dividends and gains. Monthly and quarterly performance data
does not reflect payment of any applicable purchase premiums or redemption fees.
All quotations of monthly and quarterly returns would be accompanied by
standardized total return information. Information relating to the Fund's return
for a particular month or calendar quarter is provided to permit evaluation of
the Fund's performance and volatility in different market conditions, and should
not be considered in isolation.
From time to time, in advertisements, in sales literature, or in
reports to shareholders, the Fund may compare its respective performance to that
of other mutual funds with similar investment objectives and to stock or other
relevant indices. For example, the Fund may compare its total return to rankings
prepared by Lipper Analytical Services, Inc. or Morningstar, Inc., widely
recognized independent services that monitor mutual fund performance, or the
three-month London Inter Bank Offer Rate ("LIBOR").
Performance rankings and listings reported in national financial
publications, such as Money Magazine, Barron's and Changing Times, may also be
cited (if the Fund is listed in any such publication) or used for comparison, as
well as performance listings and rankings from
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<PAGE> 41
various other sources including No Load Fund X, CDA Investment Technologies,
Inc., Weisenberger Investment Companies Service, and Donoghue's Mutual Fund
Almanac.
Quotations of the Fund's gross return do not reflect any reduction for
any Fund fees or expenses unless otherwise noted; if the gross return data
reflected the estimated fees and expenses of the Fund, the returns would be
lower than those shown. Quotations of gross return for the Fund for a particular
month or quarter will be calculated in accordance with the following formula:
Gross Return =
Net Return + (Total Annual Operating Expense Ratio) (# of days in relevant
period/365)
Information relating to the Fund's return for a particular month or calendar
quarter is provided to permit evaluation of the Fund's performance and
volatility in different market conditions, and should not be considered in
isolation.
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<PAGE> 42
- --------------------------------------------------------------------------------
INVESTMENT GUIDELINES
- --------------------------------------------------------------------------------
GMO ALPHA LIBOR 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(1) "bonds" of U.S. issuers. "Bonds" mean any fixed income obligations with an
original maturity of two years or more, as well as "synthetic" bonds created by
combining a futures contract or option on a fixed income security with cash, a
cash equivalent investment or another fixed income security.
securities issued by federal, state,
local and foreign governments (traded
in U.S. and abroad)
convertible bonds
fixed income securities of private issuers
depository receipts: ADRs, GDRs, EDRs
foreign issues traded in the U.S. and abroad
investment companies (open & closed end)
preferred stock
illiquid securities
144A securities
restricted securities
repurchase agreements
reverse repurchase agreements
sovereign debt of emerging countries
securities purchased and sold on a when-issued or
delayed delivery
indexed securities
firm commitments (with banks or broker-dealers)
interest rate/bond futures and related options
exchange-traded and OTC options on securities and
indexes (including writing covered options)
interest rate swap contracts
total return swap contracts
credit default swap contracts
contracts for differences
interest rate caps, floors and collars
asset-backed securities including mortgage-backed,
CMOs, strips and residuals
loan participations (and other direct debt)
adjustable rate securities
zero coupon securities
dollar roll transactions
warrants
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.
- --------
(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.
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<PAGE> 43
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 ASSETS - Except that collateral arrangements
with respect to swap agreements,
the writing of options, index,
interest rate, currency or 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.
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 AGREEMENTS
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 10% of the Fund's net
assets will be invested in time on
options on particular securities
(as opposed to options on indexes).
OTHER FUNDS OF THE TRUST - 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-/Baaa3 or less
(or equivalent, as determined by
the Manager).
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<PAGE> 44
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
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 Heading: If the Fund
receives or anticipates significant
cash purchase transactions, the
fund may hedge market risk (risk of
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 longswap contracts) in place of
investing directly in securities.
RISK MANAGEMENT - The Fund may use options, futures,
related options and swap contracts
to adjust the weight of the fund to
a level the Manager believes is the
optimal exposure to individual
countries and issuers. Sometimes,
such transactions are used as a
precursor to actual sales and
purchases.
LIMITATIONS ON THE USE OF
DERIVATIVES - Counterparties used for OTC
derivatives must have a
long-term debt rating of A or
higher when the derivative is
entered into. Occasionally,
short-term derivatives will be
entered into with
counterparties that have only
high short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
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<PAGE> 45
TYPES OF FOREIGN CURRENCY - Forward foreign currency contracts.
TRANSACTIONS
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 dominated
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 that 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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<PAGE> 46
Commercial Paper and Corporate Debt Ratings
Commercial Paper Ratings
Commercial paper ratings of Standard & Poor's Ratings Group ("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 RATINGS GROUP. A Standard & Poor's corporate debt
rating is a current assessment of the creditworthiness of an obligor with
respect to a specific obligation. The following is a summary of the ratings used
by Standard & Poor's for corporate debt;
AAA -- This is the highest rating assigned by Standard & poor's to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA -- Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay interest and repay principal is very strong, and in the maturity of
instances they differ from AAA issues only in small degree.
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<PAGE> 47
A -- Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC -- Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. while
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C -- The rating C is reserved for income bonds on which no interest is being
paid.
D -- Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-): the ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MOODY'S INVESTORS SERVICES, INC. The following is a summary of the
ratings used by Moody's Investor Services, Inc. for corporate debt:
Aaa -- bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large, or by an exceptionally
stable, margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds that are rated Aa are judged to be high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds that are rated A posses many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and
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<PAGE> 48
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.
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.
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<PAGE> 49
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
Not applicable.
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<PAGE> 50
GMO TRUST
PART C. OTHER INFORMATION
Item 23. Exhibits
(a). Amended and Restated Agreement and Declaration of Trust
-- Exhibit 1.
(b). Amended and Restated By-laws of the Trust.(1)
(c). Please refer to Article 5 of the Trust's Amended and Restated
Declaration of Trust, which is hereby incorporated by
reference.
(d). 1. Form of Management Contracts between the Trust, on behalf
of each of its GMO U.S. Core Fund (formerly "GMO Core Fund"),
GMO Tobacco-Free Core Fund, GMO Value Fund (formerly "GMO
Value Allocation Fund"), GMO Fundamental Value Fund, GMO
Growth Fund (formerly "GMO Growth Allocation Fund"), GMO Small
Cap Value Fund (formerly "GMO Core II Secondaries Fund"), GMO
Small Cap Growth Fund, GMO REIT Fund, GMO International Core
Fund, GMO Currency Hedged International Core Fund, GMO Foreign
Fund, GMO International Small Companies Fund, GMO Japan Fund,
GMO Emerging Markets Fund, GMO Evolving Countries Fund, GMO
Asia Fund, GMO Global Properties Fund, GMO Global Hedged
Equity Fund, GMO Domestic Bond Fund, GMO U.S. Bond/Global
Alpha A Fund (formerly "GMO Global Fund"), GMO U.S.
Bond/Global Alpha B Fund, GMO International Bond Fund, GMO
Currency Hedged International Bond Fund (formerly "GMO SAF
Core Fund"), GMO Global Bond Fund, GMO Emerging Country Debt
Fund, GMO Short-Term Income Fund, GMO Inflation Indexed Bond
Fund, GMO Intrinsic Value Fund; GMO Tax-Managed U.S. Small Cap
Fund; GMO International Equity Allocation Fund, GMO World
Equity Allocation Fund, GMO Global (U.S.+) Equity Allocation
Fund, GMO Global Balanced Allocation Fund, GMO U.S. Sector
Fund (formerly "GMO U.S. Sector Allocation Fund"), GMO
International Core Plus Allocation Fund, Pelican Fund, GMO
Tax-Managed U.S. Equities Fund and GMO Tax-Managed
International Equities Fund, and Grantham, Mayo, Van Otterloo
& Co. ("GMO");1
2. Form of Consulting Agreements between GMO, on behalf of
each of its GMO Emerging Markets Fund, GMO Evolving Countries
Fund and GMO Asia Fund, and Dancing Elephant, Ltd.;(1)
- -------------------
(1) = Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
<PAGE> 51
3. Form of Management Contract between the Trust, on behalf of
its GMO Alpha LIBOR Fund, and GMO. -- Exhibit 2
(e). None.
(f). None.
(g). 1. Custodian Agreement (the "IBT Custodian Agreement") among
the Trust, on behalf of its GMO U.S. Core Fund (formerly "GMO
Core Fund"), GMO Currency Hedged International Bond Fund
(formerly "GMO SAF Core Fund"), GMO Value Fund (formerly "GMO
Value Allocation Fund"), GMO Growth Fund (formerly "GMO Growth
Allocation Fund"), and GMO Short-Term Income Fund, GMO and
Investors Bank & Trust Company ("IBT");(1)
2. Custodian Agreement (the "BBH Custodian Agreement") among
the Trust, on behalf of its GMO International Core Fund and
GMO Japan Fund, GMO and Brown Brothers Harriman & Co.
("BBH");(1)
3. Custodian Agreement (the "SSB Custodian Agreement") among
the Trust, on behalf of its Pelican Fund, GMO and State Street
Bank and Trust Company ("SSB");(1)
4. Forms of Letter Agreements with respect to the IBT
Custodian Agreement among the Trust, on behalf of its GMO U.S.
Bond/Global Alpha B Fund, GMO Tobacco-Free Core Fund, GMO
Fundamental Value Fund, GMO U.S. Sector Fund (formerly "GMO
U.S. Sector Allocation Fund"), GMO International Bond Fund,
GMO Small Cap Value Fund (formerly "GMO Core II Secondaries
Fund"), GMO Emerging Country Debt Fund, GMO Domestic Bond
Fund, GMO REIT Fund, GMO Global Bond Fund, GMO International
Equity Allocation Fund, GMO Global (U.S.+) Equity Allocation
Fund, GMO World Equity Allocation Fund, GMO Global Balanced
Allocation Fund, GMO International Core Plus Allocation Fund,
GMO Emerging Country Debt Share Fund, GMO Small Cap Growth
Fund, GMO U.S. Bond/Global Alpha A Fund (formerly "GMO Global
Fund"), GMO Tax-Managed U.S. Equities Fund, GMO Inflation
Indexed Bond Fund, GMO Intrinsic Value Fund and GMO
Tax-Managed U.S. Small Cap Fund, GMO and IBT;(1)
- -------------------
1 = Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
-2-
<PAGE> 52
5. Forms of Letter Agreements with respect to the BBH
Custodian Agreement among the Trust, on behalf of its GMO
Emerging Markets Fund, GMO Currency Hedged International Core
Fund, GMO Evolving Countries Fund, GMO Global Hedged Equity
Fund, GMO International Small Companies Fund, GMO Foreign
Fund, GMO Asia Fund, GMO Tax-Managed International Equities
Fund and GMO Global Properties Fund, GMO and BBH;(1)
6. Form of Letter Agreement with respect to the IBT Custodian
Agreement among the Trust, on behalf of its GMO Alpha LIBOR
Fund, GMO and IBT. -- Exhibit 3.
(h). 1. Transfer Agency Agreement among the Trust, on behalf of its
GMO U.S. Core Fund (formerly "GMO Core Fund"), GMO Currency
Hedged International Bond Fund, GMO Growth Fund (formerly "GMO
Growth Allocation Fund"), GMO Value Fund (formerly "GMO Growth
Allocation Fund"), GMO Short-Term Income Fund, GMO
International Core Fund and GMO Japan Fund, GMO and IBT; (1)
2. Forms of Letter Agreements to the Transfer Agency Agreement
among the Trust, on behalf of each of its GMO Tobacco-Free
Core Fund, GMO Fundamental Value Fund, GMO Small Cap Value
Fund (formerly "GMO Core II Secondaries Fund"), GMO Small Cap
Growth Fund, GMO REIT Fund, GMO Currency Hedged International
Core Fund, GMO Foreign Fund, GMO International Small Companies
Fund, GMO Emerging Markets Fund, GMO Evolving Countries Fund,
GMO Asia Fund, GMO Global Properties Fund, GMO Global Hedged
Equity Fund, GMO Domestic Bond Fund, GMO U.S. Bond/Global
Alpha A Fund (formerly "GMO Global Fund"), GMO U.S.
Bond/Global Alpha B Fund, GMO International Bond Fund, GMO
Global Bond Fund, GMO Emerging Country Debt Fund, GMO
Inflation Indexed Bond Fund, GMO Emerging Country Debt Share
Fund, Pelican Fund, GMO International Equity Allocation Fund,
GMO World Equity Allocation Fund, GMO Global (U.S.+) Equity
Allocation Fund, GMO Global Balanced Allocation Fund, GMO U.S.
Sector Fund (formerly "GMO U.S. Sector Allocation Fund"), GMO
International Core Plus Allocation Fund, GMO Tax-Managed U.S.
Equities Fund, GMO Tax-Managed International Equities Fund,
GMO Intrinsic Value Fund and GMO Tax-Managed U.S. Small Cap
Fund, GMO and IBT.(1)
3. Form of Letter Agreement to the Transfer Agency Agreement
among the Trust, on behalf of its GMO Alpha LIBOR Fund, GMO
and IBT. -- Exhibit 4.
4. Form of Notification of Obligation to Reimburse Certain
Fund Expenses by Grantham, Mayo, Van Otterloo & Co. LLC to the
Trust -- Exhibit 5.
-3-
<PAGE> 53
5. Form of Amended and Restated Servicing Agreement between
the Trust, on behalf of certain Funds, and Grantham, Mayo, Van
Otterloo & Co. LLC. (1)
(i). Opinion and Consent of Ropes & Gray.(1)
(j). Consent of PricewaterhouseCoopers LLP - Not applicable.
(k). Financial Statements - Not applicable.
(l). None.
(m). None.
(n). Financial Data Schedules -- Not Applicable.
(o). Form of Rule 18f-3 Multiclass Plan (1).
Item 24. Persons Controlled by or Under Common Control with Registrant
None.
Item 25. Indemnification
See Item 27 of Pre-Effective Amendment No. 1 which is hereby
incorporated by reference.
Item 26. Business and Other Connections of Investment Adviser
See Item 28 of Pre-Effective Amendment No. 1 which is hereby
incorporated by reference.
- -------------------
1 = Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
-4-
<PAGE> 54
Item 27. Principal Underwriters
Not Applicable.
Item 28. Location of Accounts and Records
See Item 30 of Pre-Effective Amendment No. 1 which is hereby
incorporated by reference.
Item 29. Management Services
Not Applicable.
Item 30. Undertakings
None.
- -------------------
1 = Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
-5-
<PAGE> 55
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940 (the
"1940 Act"), the Registrant, GMO Trust, has duly caused this Post-Effective
Amendment No. 60 under the 1940 Act, to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston and The
Commonwealth of Massachusetts, on the 29th day of December, 1999.
GMO Trust
By: R. JEREMY GRANTHAM*
----------------------------
R. Jeremy Grantham
President - Quantitative;
Principal Executive Officer;
Title: Trustee
Pursuant to the Securities Act of 1933, this Post-Effective Amendment No. 53
to the Trust's Registration Statement under the Securities Act has been signed
below by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
R. JEREMY GRANTHAM* President - Quantitative; Principal December 29, 1999
- ---------------------- Executive Officer; Trustee
R. Jeremy Grantham
SUSAN RANDALL HARBERT* Treasurer; Principal Financial and December 29, 1999
- ---------------------- Accounting Officer
Susan Randall Harbert
HARVEY R. MARGOLIS* Trustee December 29, 1999
- ----------------------
Harvey R. Margolis
JAY O. LIGHT* Trustee December 29, 1999
- ----------------------
Jay O. Light
</TABLE>
* By: /S/ WILLIAM R. ROYER
---------------------------
William R. Royer
Attorney-in-Fact
<PAGE> 56
POWER OF ATTORNEY
We, the undersigned officers and trustees of GMO Trust, a Massachusetts
business trust, hereby severally constitute and appoint William R. Royer our
true and lawful attorney, with full power to him to sign for us, and in our
names and in the capacities indicated below, any and all amendments to the
Registration Statement filed with the Securities and Exchange Commission for the
purpose of registering shares of beneficial interest of GMO Trust, hereby
ratifying and confirming our signatures as they may be signed by our said
attorneys on said Registration Statement.
Witness our hands and common seal on the date set forth below.
(Seal)
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
President-Domestic;
Principal Executive
/S/ R. Jeremy Grantham Officer; Trustee March 12, 1996
- --------------------------
R. Jeremy Grantham
/S/ Eyk H.A. Van Otterloo President-International March 12, 1996
- --------------------------
Eyk H.A. Van Otterloo
/S/ Harvey Margolis Trustee March 12, 1996
- --------------------------
Harvey Margolis
Treasurer; Principal
Financial and
/S/ Kingsley Durant Accounting Officer March 12, 1996
- -----------------------------
Kingsley Durant
</TABLE>
<PAGE> 57
POWER OF ATTORNEY
I, the undersigned trustee of GMO Trust, a Massachusetts business trust,
hereby constitute and appoint William R. Royer my true and lawful attorney, with
full power to him to sign for me, and in my names and in the capacity indicated
below, any and all amendments to the Registration Statement filed with the
Securities and Exchange Commission for the purpose of registering shares of
beneficial interest of GMO Trust, hereby ratifying and confirming my signature
as it may be signed by my said attorney on said Registration Statement.
Witness my hand and common seal on the date set forth below.
(Seal)
Signature Title Date
- --------- ----- ----
/S/ JAY O. LIGHT Trustee May 23, 1996
- --------------------
Jay O. Light
<PAGE> 58
POWER OF ATTORNEY
I, the undersigned officer of GMO Trust, a Massachusetts business trust,
hereby constitute and appoint William R. Royer my true and lawful attorney, with
full power to him to sign for me, and in my name and in the capacity indicated
below, any and all amendments to the Registration Statement filed with the
Securities and Exchange Commission for the purpose of registering shares of
beneficial interest of GMO Trust, hereby ratifying and confirming my signature
as it may be signed by my said attorney on said Registration Statement.
Witness my hand and common seal on the date set forth below.
(Seal)
Signature Title Date
- --------- ----- ----
/S/ SUSAN RANDALL HARBERT Treasurer; Principal April 29, 1999
- ------------------------- Financial and Accounting
Susan Randall Harbert Officer
<PAGE> 59
EXHIBIT INDEX
GMO TRUST
Exhibit No. Title of Exhibit
----------- ----------------
1 Form of Amended and Restated Agreement and Declaration of
Trust for the Trust.
2 Form of Management Contract between the Trust, on behalf of
its GMO Alpha LIBOR Fund, and GMO.
3 Form of Letter Agreement to the Custodian Contract between the
Trust, on behalf of its GMO Alpha LIBOR Fund, GMO and IBT.
4 Form of Letter Agreement to the Transfer Agency Agreement
among the Trust, on behalf of its GMO Alpha LIBOR Fund, GMO
and IBT.
5 Form of Notification of Obligation to Reimburse Certain Fund
Expenses by Grantham, Mayo, Van Otterloo & Co. LLC to the
Trust
<PAGE> 1
AMENDED AND RESTATED
--------------------
AGREEMENT AND DECLARATION OF TRUST
----------------------------------
GMO TRUST
---------
THIS AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST made at
Boston, Massachusetts this ____th day of December, 1999 by the Trustees
hereunder and the holders of shares of beneficial interest issued hereunder and
to be issued hereunder as hereinafter provided:
WITNESSETH that
WHEREAS the Trustees desire to restate all prior Amendments to the
original Agreement and Declaration of Trust made to date and additionally desire
to amend and restate this Agreement and Declaration of Trust in connection with
the creation of Classes within each Series of the GMO Trust pursuant to the
power of the Trustees set forth in Article III, Section 5 of the original
Agreement and Declaration of Trust.
WHEREAS the Trustees have agreed to manage all property coming into
their hands as trustees of a Massachusetts business trust in accordance with the
provisions hereinafter set forth.
NOW, THEREFORE, the Trustees hereby direct that this Amended and
Restated Agreement and Declaration of Trust be filed with the Secretary of The
Commonwealth of Massachusetts and with the City Clerk of the City of Boston and
do hereby declare that they will hold all cash, securities and other assets,
which they may from time to time acquire in any manner as Trustees hereunder IN
TRUST to manage and dispose of the same upon the following terms and conditions
for the pro rata benefit of the holders from time to time of Shares in this
Trust as hereinafter set forth.
ARTICLE I.
Name and Definitions
SECTION 1. This Trust shall be known as GMO Trust with its principal place of
business at 40 Rowes Wharf, Boston, Massachusetts 02110, and the Trustees shall
conduct the business of the Trust under that name or any other name as they may
from time to time determine.
<PAGE> 2
SECTION 2. DEFINITIONS. Whenever used herein, unless otherwise required by the
context or specifically provided:
(a) "Trust" refers to the Massachusetts business trust established by this
Amended and Restated Agreement and Declaration of Trust, as amended from time to
time;
(b) "Trustees" refers to the Trustees of the Trust named in Article IV hereof or
elected in accordance with such Article;
(c) "Shares" means the equal proportionate units of interest into which the
beneficial interest in the Trust or in the Trust property belonging to any
Series of the Trust (or in the property belonging to any Series allocable to any
Class of that Series) (as the context may require) shall be divided from time to
time;
(d) "Shareholder" means a record owner of Shares;
(e) "1940 Act" refers to the Investment Company Act of 1940 and the Rules and
Regulations thereunder, all as amended from time to time;
(f) The terms "Commission" and "principal underwriter" shall have the meanings
given to them in the 1940 Act;
(g) "Declaration of Trust" shall mean this Agreement and Declaration of Trust,
as amended or restated from time to time;
(h) "By-Laws" shall mean the By-Laws of the Trust as amended from time to time;
(i) "Series Company" refers to the form of registered open-end investment
company described in Section 18(f)(2) of the 1940 Act or in any successor
statutory provision;
(j) "Series" refers to Series of Shares established and designated under or in
accordance with the provisions of Article III; and
(k) "Class" refers to any Class of Shares established and designated under or in
accordance with the provisions of Article III. The Shares of any Class shall
represent a subset of Shares of a Series, and together with all other Classes of
the same Series, shall constitute all Shares of that Series.
ARTICLE II.
Purpose of Trust
The purpose of the Trust is to provide investors a managed investment
primarily in
-2-
<PAGE> 3
securities (including options), debt instruments, commodities, commodity
contracts and options thereon.
ARTICLE III.
Shares
SECTION 1. DIVISION OF BENEFICIAL INTEREST. The beneficial interest in the Trust
shall at all times be divided into an unlimited number of transferable Shares,
without par value. Subject to the provisions of Section 6 of this Article III,
each Share shall have voting rights as provided in Article V hereof, and holders
of the Shares of any Series or Class shall be entitled to receive dividends,
when and as declared with respect thereto in the manner provided in Article VI,
Section 1 hereof. No Share shall have any priority or preference over any other
Share of the same Series and Class with respect to dividends or distributions
upon termination of the Trust or of such Series or Class made pursuant to
Article VIII, Section 4 hereof. All dividends and distributions shall be made
ratably among all Shareholders of a particular Series or Class from the assets
belonging to such Series (or, in the case of a Class, allocable to such Class)
according to the number of Shares of such Series or Class held of record by such
Shareholders on the record date for any dividend or on the date of termination,
as the case may be. Shareholders shall have no preemptive or other right to
subscribe to any additional Shares or other securities issued by the Trust. The
Trust may from time to time divide or combine the Shares of any particular
Series or Class into a greater or lesser number of Shares of that Series or
Class without thereby changing the proportionate beneficial interest of the
Shares of that Series or Class in the assets belonging to that Series (or, in
the case of a Class, allocable to such Class) in any way affecting the rights of
Shares of any other Series or Class.
SECTION 2. OWNERSHIP OF SHARES. The ownership of Shares shall be recorded on the
books of the Trust or a transfer or similar agent for the Trust, which books
shall be maintained separately for the Shares of each Series and Class. No
certificates certifying the ownership of Shares shall be issued except as the
Trustees may otherwise determine from time to time. The Trustees may make such
rules as they consider appropriate for the transfer of Shares of each Series and
Class and similar matters. The record books of the Trust as kept by the Trust or
any transfer or similar agent, as the case may be, shall be conclusive as to who
are the Shareholders of each Series and Class and as to the number of Shares of
each Series and Class held from time to time by each.
SECTION 3. INVESTMENTS IN THE TRUST. The Trustees shall accept investments in
the Trust from such persons and on such terms and for such consideration as they
from time to time authorize.
SECTION 4. STATUS OF SHARES AND LIMITATION OF PERSONAL LIABILITY. Shares shall
be deemed to be personal property giving only the rights provided in this
instrument. Every Shareholder by virtue of having become a Shareholder shall be
held to have expressly assented and agreed to
-3-
<PAGE> 4
the terms hereof and to have become a party hereto. The death of a Shareholder
during the continuance of the Trust shall not operate to terminate the same nor
entitle the representative of any deceased Shareholder to an accounting or to
take any action in court or elsewhere against the Trust or the Trustees, but
entitles such representative only to the rights of said deceased Shareholder
under this Trust. Ownership of Shares shall not entitle the Shareholder to any
title in or to the whole or any part of the Trust property or right to call for
a partition or division of the same or for an accounting, nor shall the
ownership of Shares constitute the Shareholders partners. Neither the Trust nor
the Trustees, nor any officer, employee or agent of the Trust shall have any
power to bind personally any Shareholders, nor except as specifically provided
herein to call upon any Shareholder for the payment of any sum of money or
assessment whatsoever other than such as the Shareholder may at any time
personally agree to pay.
SECTION 5. POWER OF TRUSTEES TO CHANGE PROVISIONS RELATING TO SHARES.
Notwithstanding any other provisions of this Declaration of Trust and without
limiting the power of the Trustees to amend the Declaration of Trust as provided
elsewhere herein, the Trustees shall have the power to amend this Declaration of
Trust, at any time and from time to time, in such manner as the Trustees may
determine in their sole discretion, without the need for Shareholder action, so
as to add to, delete, replace or otherwise modify any provisions relating to the
Shares contained in this Declaration of Trust for the purpose of (i) responding
to or complying with any regulations, orders, rulings or interpretations of any
governmental agency or any laws, now or hereafter applicable to the Trust, or
(ii) designating and establishing Series and Classes in addition to the Series
and Classes established in Section 6 of this Article III; provided that before
adopting any such amendment without Shareholder approval the Trustees shall
determine that it is consistent with the fair and equitable treatment of all
Shareholders. The establishment and designation of any Series or Class of Shares
in addition to the Series and Classes established and designated in Section 6 of
this Article III shall be effective upon the execution by a majority of the then
Trustees of an amendment to this Declaration of Trust, taking the form of a
complete restatement or otherwise, setting forth such establishment and
designation and the relative rights and preferences of such Series or Class, as
the case may be, or as otherwise provided in such instrument.
Without limiting the generality of the foregoing, the Trustees may, for
the above-stated purposes, amend the Declaration of Trust to:
(a) create one or more Series or Classes of Shares (in addition to any Series or
Classes already existing or otherwise) with such rights and preferences and such
eligibility requirements for investment therein as the Trustees shall determine
and reclassify any or all outstanding Shares as shares of particular Series or
Classes in accordance with such eligibility requirements;
(b) amend any of the provisions set forth in paragraphs (a) through (j) of
Section 6 of this Article III;
-4-
<PAGE> 5
(c) combine one or more Series or Classes of Shares into a single Series or
Class on such terms and conditions as the Trustees shall determine;
(d) change or eliminate any eligibility requirements for investment in Shares of
any Series or Class, including without limitation the power to provide for the
issue of Shares of any Series or Class in connection with any merger or
consolidation of the Trust with another trust or company or any acquisition by
the Trust of part or all of the assets of another trust or company;
(e) change the designation of any Series or Class of Shares;
(f) change the method of allocating dividends among the various Series and
Classes of Shares;
(g) allocate any specific assets or liabilities of the Trust or any specific
items of income or expense of the Trust to one or more Series or Classes of
Shares; and
(h) specifically allocate assets to any or all Series or Classes of Shares or
create one or more additional Series or Classes of Shares which are preferred
over all other Series or Classes of Shares in respect of assets specifically
allocated thereto or any dividends paid by the Trust with respect to any net
income, however determined, earned from the investment and reinvestment of any
assets so allocated or otherwise and provide for any special voting or other
rights with respect to such Series or Classes.
SECTION 6. ESTABLISHMENT AND DESIGNATION OF SERIES. Without limiting the
authority of the Trustees set forth in Section 5, INTER ALIA, to establish and
designate any further Series or Classes or to modify the rights and preferences
of any Series, each Series set forth on Schedule 3.6 hereto (as may be amended
from time to time by the Trustees) shall be, and are hereby, established and
designated. In addition, with respect to each such Series, the 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 which each such Series may issue
from time to time, shall be, and are hereby, established and designated, which
Classes shall have the respective rights and preferences as are set forth in
Exhibit 3.6 attached hereto as it may be amended from time to time by the Board
of Trustees.
Shares of each Series (or Class, as the case may be) established in this Section
6 shall have the following relative rights and preferences:
(a) ASSETS BELONGING TO SERIES. All consideration received by the Trust for the
issue or sale of Shares of a particular Series, together with all assets in
which such consideration is invested or reinvested, all income, earnings,
profits, and proceeds thereof from whatever source derived, including, without
limitation, any proceeds derived from the sale, exchange or liquidation of such
assets, and any funds or payments derived from any reinvestment of such
-5-
<PAGE> 6
proceeds in whatever form the same may be, shall irrevocably belong to that
Series for all purposes, subject only to the rights of creditors, and shall be
so recorded upon the books of account of the Trust. Such consideration, assets,
income, earnings, profits and proceeds thereof, from whatever source derived,
including, without limitation, any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds, in whatever form the same may be, are herein
referred to as "assets belonging to" that Series. In the event that there are
any assets, income, earnings, profits and proceeds thereof, funds or payments
which are not readily identifiable as belonging to any particular Series
(collectively "General Assets"), the Trustees shall allocate such General Assets
to, between or among any one or more of the Series established and designated
from time to time in such manner and on such basis as they, in their sole
discretion, deem fair and equitable, and any General Asset so allocated to a
particular Series shall belong to that Series. Each such allocation by the
Trustees shall be conclusive and binding upon the Shareholders of all Series for
all purposes.
(b) LIABILITIES BELONGING TO SERIES. The assets belonging to each particular
Series shall be charged solely with the liabilities of the Trust in respect to
that Series, expenses, costs, charges and reserves attributable to that Series,
and any general liabilities of the Trust which are not readily identifiable as
belonging to any particular Series but which are allocated and charged by the
Trustees to and among any one or more of the Series established and designated
from time to time in a manner and on such basis as the Trustees in their sole
discretion deem fair and equitable. The liabilities, expenses, costs, charges,
and reserves so charged to a Series are herein referred to as "liabilities
belonging to" that Series. Each allocation of liabilities, expenses, costs,
charges and reserves by the Trustees shall be conclusive and binding upon the
holders of all Series for all purposes.
(c) DIVIDENDS, DISTRIBUTIONS, REDEMPTIONS, AND REPURCHASES. Notwithstanding any
other provisions of this Declaration, including, without limitation, Article VI,
no dividend or distribution (including, without limitation, any distribution
paid upon termination of the Trust or of any Series or Class) with respect to,
nor any redemption or repurchase of, the Shares of any Series shall be effected
by the Trust other than from the assets belonging to such Series, nor shall any
Shareholder of any particular Series otherwise have any right or claim against
the assets belonging to any other Series except to the extent that such
Shareholder has such a right or claim hereunder as a Shareholder of such other
Series.
(d) VOTING. Notwithstanding any of the other provisions of this Declaration,
including, without limitation, Section 1 of Article V, the Shareholders of any
particular Series or Class shall not be entitled to vote on any matters as to
which such Series or Class is not affected except as otherwise required by the
1940 Act or other applicable law. On any matter submitted to a vote of
Shareholders, all Shares of the Trust then entitled to vote shall be voted by
individual Series, unless otherwise required by the 1940 Act or other applicable
law.
-6-
<PAGE> 7
(e) EQUALITY. All the Shares of each particular Class of a Series shall
represent an equal proportionate interest in the assets allocable to that Class,
and each Share of any particular Series shall be equal to each other Share of
that Series (subject to the liabilities allocated to each Class of that Series).
(f) FRACTIONS. Any fractional Share of a Series or Class shall carry
proportionately all the rights and obligations of a whole share of that Series
or Class, including rights with respect to voting, receipt of dividends and
distributions, redemption of Shares and termination of the Trust.
(g) EXCHANGE PRIVILEGE. The Trustees shall have the authority to provide that
the holders of Shares of any Series or Class shall have the right to exchange
said Shares for Shares of one or more other Series or Class of Shares in
accordance with such requirements and procedures as may be established by the
Trustees.
(h) COMBINATION OF SERIES OR CLASSES. The Trustees shall have the authority,
without the approval of the Shareholders of any Series or Class unless otherwise
required by applicable law, to combine the assets and liabilities belonging to
any two or more Series (or the assets allocable to any two or more Classes) into
assets and liabilities belonging (or allocable) to a single Series (or Class).
(i) ELIMINATION OF SERIES OR CLASSES. At any time that there are no Shares
outstanding of any particular Series or Class previously established and
designated, the Trustees may amend this Declaration of Trust to abolish that
Series or Class and to rescind the establishment and designation thereof, such
amendment to be effected in the manner provided in Section 5 of this Article
III.
(j) ASSETS AND LIABILITIES ALLOCABLE TO A CLASS. The assets and liabilities
belonging to a Series shall be proportionately allocated among all the Classes
of that Series according to the percentage of net assets allocated to each
particular Class. For purposes of determining the assets and liabilities
belonging to a Series that are allocable to a Class of that Series, subject to
the provisions of paragraph (g) of Section 5 of this Article III, expenses shall
be accrued as set forth in Exhibit 3.6 attached hereto.
SECTION 7. INDEMNIFICATION OF SHAREHOLDERS. In case any Shareholder or former
Shareholder shall be held to be personally liable solely by reason of his or her
being or having been a Shareholder of the Trust or of a particular Series and
not because of his or her acts or omissions or for some other reason, the
Shareholder or former Shareholder (or his or her heirs, executors,
administrators or other legal representatives or in the case of a corporation or
other entity, its corporate or other general successor) shall be entitled out of
the assets of the Series of which he is a Shareholder or former Shareholder to
be held harmless from and indemnified against all loss and expense arising from
such liability.
-7-
<PAGE> 8
SECTION 8. NO PREEMPTIVE RIGHTS. Shareholders shall have no preemptive or other
right to subscribe to any additional Shares or other securities issued by the
Trust.
ARTICLE IV.
The Trustees
SECTION 1. ELECTION AND TENURE. The Trustees may fix the number of vacancies
arising from an increase in the number of Trustees, or remove Trustees with or
without cause. Each Trustee shall serve during the continued lifetime of the
Trust until he dies, resigns or is removed, or if sooner, until the next meeting
of Shareholders called for the purpose of electing Trustees and until the
election and qualification of his successor. Any Trustee may resign at any time
by written instrument signed by him and delivered to any officer of the Trust or
to a meeting of the Trustees. Such resignation shall be effective upon receipt
unless specified to be effective at some other time. Except to the extent
expressly provided in a written agreement with the Trust, no Trustee resigning
and no Trustee removed shall have any right to any compensation for any period
following his resignation or removal, or any right to damages on account of such
removal. The Shareholders may fix the number of Trustees and elect Trustees at
any meeting of Shareholders called by the Trustees for that purpose.
SECTION 2. EFFECT OF DEATH, RESIGNATION, ETC. OF A TRUSTEE. The death,
declination, resignation, retirement, removal, or incapacity of the Trustees, or
any of them, shall not operate to annul the Trust or to revoke any existing
agency created pursuant to the terms of this Declaration of Trust.
SECTION 3. POWERS. Subject to the provisions of this Declaration of Trust, the
business of 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 this Declaration of Trust providing for the regulation and management of
the affairs of the Trust and may amend and repeal them to the extent that such
By-Laws do not reserve that right to the Shareholders; they may fill vacancies
in or remove from their number (including any vacancies created by an increase
in the number of Trustees); they may remove from their number with or without
cause; they may elect and remove such officers and appoint and terminate such
agents as they consider appropriate; they may appoint from their own number and
terminate one or more committees consisting of two or more Trustees which may
exercise the powers and authority of the Trustees to the extent that the
Trustees determine; they may employ one or more custodians of the assets of the
Trust and may authorize such 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,
-8-
<PAGE> 9
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.
Without limiting the foregoing, the Trustees shall have power
and authority:
(a) To invest and reinvest cash, and to hold cash uninvested;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate, lease, or write
options with respect to or otherwise deal in any property rights relating to any
or all of the assets of the Trust;
(c) To vote or give assent, or exercise any rights of ownership, with respect to
stock or other securities or property; and to execute and deliver proxies or
powers of attorney to such person or persons as the Trustees shall deem proper,
granting to such person or persons such power and discretion with relation to
securities or property as the Trustees shall deem proper;
(d) To exercise power and rights of subscription or otherwise which in any
manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating any trust, whether
in bearer, unregistered or other negotiable form, or in its own name or in the
name of a custodian or subcustodian or a nominee or nominees or otherwise;
(f) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or issuer of any security which is
held in the Trust; to consent to any contract, lease, mortgage, purchase or sale
of property by such corporation or issuer; and to pay calls or subscriptions
with respect to any security held in the Trust;
(g) To join with other security holders in acting through a committee,
depositary, voting trustee or otherwise, and in that connection to deposit any
security with, or transfer any security to, any such committee, depositary or
trustee, and to delegate to them such power and authority with relation to any
security (whether or not so deposited or transferred) as the Trustees shall deem
proper and to agree to pay, and to pay, such portion of the expenses and
compensation of such committee, depositary or trustee as the Trustees shall deem
proper;
(h) To compromise, arbitrate or otherwise adjust claims in favor of or against
the Trust or any matter in controversy, including but not limited to claims for
taxes;
(i) To enter into joint ventures, general or limited partnerships and any other
combinations or associations;
-9-
<PAGE> 10
(j) To borrow funds or other property;
(k) To endorse or guarantee the payment of any notes or other obligations of any
person; to make contracts of guaranty or suretyship, or otherwise assume
liability for payment thereof;
(l) To purchase and pay for entirely out of Trust property such insurance as
they may deem necessary or appropriate for the conduct of the business,
including without limitation, insurance policies insuring the assets of the
Trust and payment of distributions and principal on its portfolio investments,
and insurance policies insuring the Shareholders, Trustees, officers, employees,
agents, investment advisers, principal underwriters, or independent contractors
of the Trust individually against all claims and liabilities of every nature
arising by reason of holding being or having held any such office or position,
or by reason of any action alleged to have been taken or omitted by any such
person as Trustee, officer, employee, agent, investment adviser, principal
underwriter, or independent contractor, including any action taken or omitted
that may be determined to constitute negligence, whether or not the Trust would
have the power to indemnify such person against liability; and
(m) To pay pensions as deemed appropriate by the Trustees and to adopt,
establish and carry out pension, profit-sharing, share bonus, share purchase,
savings, thrift and other retirement, incentive and benefit plans, trusts and
provisions, including the purchasing of life insurance and annuity contracts as
a means of providing such retirement and other benefits, for any or all of the
Trustees, officers, employees and agents of the Trust.
The Trustees shall not in any way be bound or limited by any present or
future law or custom in regard to investments by Trustees. The Trustees shall
not be required to obtain any court order to deal with any assets of the Trust
or take any other action hereunder.
SECTION 4. PAYMENT OF EXPENSES BY THE TRUST. The Trustees are authorized to pay
or cause to be paid out of the principal or income of the Trust, or partly out
of principal and partly out of income, as they deem fair, all expenses, fees,
charges, taxes and liabilities incurred or arising in connection with the Trust,
or in connection with the management thereof, including but not limited to, the
Trustees' compensation and such expenses and charges for the services of the
Trust's officers, employees, investment adviser or manager, principal
underwriter, auditor, counsel, custodian, transfer agent, shareholder servicing
agent, and such other agents or independent contractors and such other expenses
and charges as the Trustees may deem necessary or proper to incur.
SECTION 5. PAYMENT OF EXPENSES BY SHAREHOLDERS. The Trustees shall have the
power, as frequently as they may determine, to cause each Shareholder, or each
Shareholder of any particular Series or Class, to pay directly, in advance or
arrears, for charges of the Trust's custodian or transfer, shareholder servicing
or similar agent, an amount fixed from time to time by the Trustees, by setting
off such charges due from such Shareholder from declared but unpaid dividends
owed such Shareholder and/or by reducing the number of Shares in the
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account of such Shareholder by that number of full and/or fractional Shares
which represents the outstanding amount of such charges due from such
Shareholder.
SECTION 6. OWNERSHIP OF ASSETS OF THE TRUST. Title to all of the assets of the
Trust shall at all times be considered as vested in the Trustees.
SECTION 7. ADVISORY, MANAGEMENT AND DISTRIBUTION CONTRACTS. Subject to such
requirements and restrictions as may be set forth in the By-Laws, the Trustees
may, at any time and from time to time, contract for exclusive or nonexclusive
advisory and/or management services for the Trust or for any Series with
Grantham, Mayo, Van Otterloo & Co. LLC (including any limited liability company,
provided that a majority of the beneficial owners of Grantham, Mayo, Van
Otterloo & Co. LLC hold a majority of the equity interest in such entity and
substantially all business of Grantham, Mayo, Van Otterloo & Co. LLC is assigned
thereto) or any other partnership, corporation, trust, association or other
organization (the "Manager"); and any such contract may contain such other terms
as the Trustees may determine, including, without limitation, authority for a
Manager to determine from time to time without prior consultation with the
Trustees what investments shall be purchased, held, sold or exchanged and what
portion, if any, of the assets of the Trust shall be held uninvested and to make
changes in the Trust's investments. The Trustees may also, at any time and from
time to time, contract with the Manager or any other partnership, corporation,
trust, association or other organization, appointing it exclusive or
nonexclusive distributor or principal underwriter for the Shares, every such
contract to comply with such requirements and restrictions as may be set forth
in the By-Laws; and any such contract may contain such other terms as the
Trustees may determine.
The fact that:
(i) any of the Shareholders, Trustees or officers of the Trust is a
shareholder, director, officer, partner, trustee, employee, manager, adviser,
principal underwriter, distributor or affiliate or agent of or for any
partnership, corporation, trust, association, or other organization, or of or
for any parent or affiliate of any organization, with which an advisory or
management contract, or principal underwriter's or distributor's contract, or
transfer, shareholder servicing or other agency contract may have been or may
hereafter be made, or that any such organization, or any parent or affiliate
thereof, is a Shareholder or has an interest in the Trust, or that
(ii) any corporation, trust, association or other organization with
which an advisory or management contract or principal underwriter's or
distributor's contract, or transfer, shareholder servicing or other agency
contract may have been or may hereafter be made also has an advisory or
management contract, or principal underwriter's or distributor's contract, or
transfer, shareholder servicing or other agency contract with one or more other
corporations, trusts, associations, or other organizations, or has other
business or interests,
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shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same or create any liability or accountability to the Trust or its Shareholders.
ARTICLE V.
Shareholders' Voting Powers and Meetings
SECTION 1. VOTING POWERS. The Shareholders shall have power to vote only (i) for
the election of Trustees as provided in Article IV, Section 1, (ii) with respect
to any amendment of this Declaration of Trust to the extent and as provided in
Article VIII, Section 8, (iii) to the same extent as the stockholders of a
Massachusetts business corporation as to whether or not a court action,
proceeding or claim should or should not be brought or maintained derivatively
or as a class action on behalf of the Trust or the Shareholders, (iv) with
respect to the termination of the Trust or any Series or Class to the extent and
as provided in Article VIII, Section 4, and (v) with respect to such additional
matters relating to the Trust as may be required by this Declaration of Trust,
the By-Laws or any registration of the Trust with the Commission (or any
successor agency) or any state, or as the Trustees may consider necessary or
desirable. Each whole Share shall be entitled to one vote as to any matter on
which it is entitled to vote and each fractional Share shall be entitled to a
proportionate fractional vote. There shall be no cumulative voting in the
election of Trustees. Shares may be voted in person or by proxy. A proxy with
respect to Shares held in the name of two or more persons shall be valid if
executed by any one of them unless at or prior to exercise of the proxy the
Trust receives a specific written notice to the contrary from any one of them. A
proxy purporting to be executed by or on behalf of a Shareholder shall be deemed
valid unless challenged at or prior to its exercise and the burden of proving
invalidity shall rest on the challenger. At any time when no Shares of a Series
or Class are outstanding the Trustees may exercise all rights of Shareholders of
that Series or Class with respect to matters affecting that Series or Class and
may with respect to that Series or Class take any action required by law, this
Declaration of Trust or the By-Laws to be taken by the Shareholders.
SECTION 2. VOTING POWER AND MEETINGS. Meetings of the Shareholders may be called
by the Trustees for the purpose of electing Trustees as provided in Article IV,
Section 1 and for such other purposes as may be prescribed by law, by this
Declaration of Trust or by the By-Laws. Meetings of the Shareholders may also be
called by the Trustees from time to time for the purpose of taking action upon
any other matter deemed by the Trustees to be necessary or desirable. A meeting
of Shareholders may be held at any place designated by the Trustees. Written
notice of any meeting of Shareholders shall be given or caused to be given by
the Trustees by mailing such notice at least seven days before such meeting,
postage prepaid, stating the time and place of the meeting, to each Shareholder
at the Shareholder's address as it appears on the records of the Trust. Whenever
notice of a meeting is required to be given to a Shareholder under this
Declaration of Trust or the By-Laws, a written waiver thereof, executed
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before or after the meeting by such Shareholder or his attorney thereunto
authorized and filed with the records of the meeting, shall be deemed equivalent
to such notice.
SECTION 3. QUORUM AND REQUIRED VOTE. Except when a larger quorum is required by
law, by the By-Laws or by this Declaration of Trust, 40% of the Shares entitled
to vote shall constitute a quorum at a Shareholders' meeting. When any one
Series or Class is to vote separately from any other Shares which are to vote on
the same matters as a separate Series or Class, 40% of the Shares of each such
Series or Class entitled to vote shall constitute a quorum at a Shareholder's
meeting of that Series or Class. Any meeting of Shareholders may be adjourned
from time to time by a majority of the votes property cast upon the question,
whether or not a quorum is present, and the meeting may be held as adjourned
within a reasonable time after the date set for the original meeting without
further notice. When a quorum is present at any meeting, a majority of the
Shares voted shall decide any questions and a plurality shall elect a Trustee,
except when a larger vote is required by any provision of this Declaration of
Trust or the By-Laws or by law. If any question on which the Shareholders are
entitled to vote would adversely affect the rights of any Series or Class of
Shares, the vote of a majority (or such larger vote as is required as aforesaid)
of the Shares of such Series or Class which are entitled to vote, voting
separately, shall also be required to decide such question.
SECTION 4. ACTION BY WRITTEN CONSENT. Any action taken by Shareholders may be
taken without a meeting if Shareholders holding a majority of the Shares
entitled to vote on the matter (or such larger proportion thereof as shall be
required by any express provision of this Declaration of Trust or by the
By-Laws) and holding a majority (or such larger proportion as aforesaid) of the
Shares of any Series or Class entitled to vote separately on the matter consent
to the action in writing and such written consents are filed with the records of
the meetings of Shareholders. Such consent shall be treated for all purposes as
a vote taken at a meeting of Shareholders.
SECTION 5. RECORD DATES. For the purpose of determining the Shareholders of any
Series or Class who are entitled to vote or act at any meeting or any
adjournment thereof, the Trustees may from time to time fix a time, which shall
be not more than 60 days before the date of any meeting of Shareholders, as the
record date for determining the Shareholders of such Series or Class having the
right to notice of and to vote at such meeting and any adjournment thereof, and
in such case only Shareholders of record on such record date shall have such
right, notwithstanding any transfer of shares on the books of the Trust after
the record date. For the purpose of determining the Shareholders of any Series
or Class who are entitled to receive payment of any dividend or of any other
distribution, the Trustees may from time to time fix a date, which shall be
before the date for the payment of such dividend or such other payment, as the
record date for determining the Shareholders of such Series or Class having the
right to receive such dividend or distribution. Without fixing a record date the
Trustees may for voting and/or distribution purposes close the register or
transfer books for one or more Series or Class for all or any part of the period
between a record date and a meeting of shareholders or
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the payment of a distribution. Nothing in this section shall be construed as
precluding the Trustees from setting different record dates for different Series
or Classes.
SECTION 6. ADDITIONAL PROVISIONS. The By-Laws may include further provisions for
Shareholders' votes and meetings and related matters.
ARTICLE VI.
Net Income, Distributions, and Redemptions and Repurchases
SECTION 1. DISTRIBUTIONS OF NET INCOME. The Trustees shall each year, or more
frequently if they so determine in their sole discretion, distribute to the
Shareholders of each Series or Class, in shares of that Series or Class, cash or
otherwise, an amount approximately equal to the net income attributable to the
assets belonging to such Series (or the assets allocable to such Class) and may
from time to time distribute to the Shareholders of each Series or Class, in
shares of that Series, cash or otherwise, such additional amounts, but only from
the assets belonging to such Series (or allocable to that Class), as they may
authorize. All dividends and distributions on Shares of a particular Series or
Class shall be distributed pro rata to the holders of that Series or Class in
proportion to the number of Shares of that Series or Class held by such holders
and recorded on the books of the Trust at the date and time of record
established for that payment or such dividend or distributions.
The manner of determining net income, income, asset values, capital gains,
expenses, liabilities and reserves of any Series or Class may from time to time
be altered as necessary or desirable in the judgment of the Trustees to conform
such manner of determination to any other method prescribed or permitted by
applicable law. Net income shall be determined by the Trustees or by such person
as they may authorize at the times and in the manner provided in the By-Laws.
Determinations of net income of any Series or Class and determination of income,
asset value, capital gains, expenses, and liabilities made by the Trustees, or
by such person as they may authorize, in good faith, shall be binding on all
parties concerned. The foregoing sentence shall not be construed to protect any
Trustee, officer or agent of the Trust against any liability to the Trust or its
security holders 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.
If, for any reason, the net income of any Series or Class determined at any time
is a negative amount, the pro rata share of such negative amount allocable to
each Shareholder of such Series or Class shall constitute a liability of such
Shareholder to that Series or Class which shall be paid out of such
Shareholder's account at such times and in such manner as the Trustees may from
time to time determine (x) out of the accrued dividend account of such
Shareholder, (y) by reducing the number of Shares of that Series or Class in the
account of such Shareholder, or (z) otherwise.
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SECTION 2. REDEMPTIONS AND REPURCHASES. The Trust shall purchase such Shares as
are offered by any Shareholder for redemption, upon the presentation of a proper
instrument of transfer together with a request directed to the Trust or a person
designated by the Trust that the Trust purchase such Shares or in accordance
with such other procedures for redemption as the Trustees may from time to time
authorize; and the Trust will pay therefor the net asset value thereof, as
determined in accordance with the By-Laws, next determined. Payment for said
Shares shall be made by the Trust to the Shareholder within seven days after the
date on which the request is made. The obligation set forth in this Section 2 is
subject to the provision that in the event that any time the New York Stock
Exchange is closed for other than weekends or holidays, or if permitted by the
rules of the Commission during periods when trading on the Exchange is
restricted or during any emergency which makes it impracticable for the Trust to
dispose of the investments of the applicable Series or to determine fairly the
value of the net assets belonging to such Series (or net assets allocable to
such Class) or during any other period permitted by order of the Commission for
the protection of investors, such obligations may be suspended or postponed by
the Trustees. The Trust may also purchase or repurchase Shares at a price not
exceeding the net asset value of such Shares in effect when the purchase or
repurchase or any contract to purchase or repurchase is made.
The redemption price may in any case or cases be paid wholly or partly
in kind if the Trustees determine that such payment is advisable in the interest
of the remaining Shareholders of the Series or Class the Shares of which are
being redeemed. In making any such payment wholly or partly in kind, the Trust
shall, so far as may be practicable, deliver assets which approximate the
diversification of all of the assets belonging at the time to the Series (or
allocable to the Class) the Shares of which are being redeemed. Subject to the
foregoing, the fair value, selection and quantity of securities or other
property so paid or delivered as all or part of the redemption price may be
determined by or under authority of the Trustees. In no case shall the Trust be
liable for any delay of any corporation or other person in transferring
securities selected for delivery as all or part of any payment in kind.
SECTION 3. REDEMPTIONS AT THE OPTION OF THE TRUST. The Trust shall have the
right at its option and at any time to redeem Shares of any Shareholder at the
net asset value thereof as described in Section 1 of this Article VI: (i) if at
such time such Shareholder owns Shares of any Series or Class having an
aggregate net asset value of less than an amount determined from time to time by
the Trustees; or (ii) to the extent that such Shareholder owns Shares equal to
or in excess of a percentage determined from time to time by the Trustees of the
outstanding Shares of the Trust or of any Series or Class.
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ARTICLE VII.
Compensation and Limitation of Liability of Trustees
SECTION 1. COMPENSATION. The Trustees as such shall be entitled to reasonable
compensation from the Trust; they may fix the amount of their compensation.
Nothing herein shall in any way prevent the employment of any Trustee for
advisory, management, legal, accounting, investment banking or other services
and payment for the same by the Trust.
SECTION 2. LIMITATION OF LIABILITY. The Trustees shall not be responsible or
liable in any event for any neglect or wrong-doing of any officer, agent,
employee, Manager or principal underwriter of the Trust, nor shall any Trustee
be responsible for the act or omission of any other Trustee, but nothing herein
contained shall protect any Trustee against any liability 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.
Every note, bond, contract, instrument, certificate or undertaking and every
other act or thing whatsoever issued, executed or done by or on behalf of the
Trust or the Trustees or any of them in connection with the Trust shall be
conclusively deemed to have been issued, executed or done only in or with
respect to their or his capacity as Trustees or Trustee, and such Trustees or
Trustee shall not be personally liable thereon.
ARTICLE VIII.
Miscellaneous
SECTION 1. TRUSTEES, SHAREHOLDERS, ETC. NOT PERSONALLY LIABLE; NOTICE. All
persons extending credit to, contracting with or having any claim against the
Trust or any Series or Class shall look only to the assets of the Trust, or, to
the extent that the liability of the Trust may have been expressly limited by
contract to the assets of a particular Series (or the assets allocable to a
particular Class), only to the assets belonging to the relevant Series (or
allocable to the relevant Class), for payment under such credit, contract or
claim; and neither the Shareholders nor the Trustees, nor any of the Trust's
officers, employees or agents, whether past, present or future, shall be
personally liable therefor. Nothing in this Declaration of Trust shall protect
any Trustee against any liability to which such Trustee would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of the office of
Trustee.
Every note, bond, contract, instrument, certificate or undertaking made
or issued on behalf of the Trust by the Trustees, by any officers or officer or
otherwise shall give notice that this Declaration of Trust is on file with the
Secretary of The Commonwealth of Massachusetts and shall recite that the same
was executed or made by or on behalf of the Trust or by them as Trustee or
Trustees or as officers or officer or otherwise and not individually
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and that the obligations of such instrument are not binding upon any of them or
the shareholders individually but are binding only upon the assets and property
of the Trust or upon the assets belonging to the Series (or allocable to the
Class) for the benefit of which the Trustees have caused the note, bond,
contract, instrument, certificate or undertaking to be made, or issued, and may
contain such further recital as he or they may deem appropriate, but the
omission of any such recital shall not operate to bind any Trustee or Trustees
or officers or officer or Shareholders or any other person individually.
SECTION 2. TRUSTEE'S GOOD FAITH ACTION, EXPERT ADVICE, NO BOND OR SURETY. The
exercise by the Trustees of their powers and discretions hereunder shall be
binding upon everyone interested. A Trustee shall be liable for his own willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of the office of Trustee, and for nothing else, and
shall not be liable for errors of judgment or mistakes of fact or law. The
Trustees may take advice of counsel or other experts with respect to the meaning
and operation of this Declaration of Trust, and shall be under no liability for
any act or omission in accordance with such advice or for failing to follow such
advice. The Trustees shall not be required to give any bond as such, nor any
surety if a bond is required.
SECTION 3. LIABILITY OF THIRD PERSONS DEALING WITH TRUSTEES. No person dealing
with the Trustees shall be bound to make any inquiry concerning the validity of
any transaction made or to be made by the Trustees or to see to the application
of any payments made or property transferred to the Trust or upon its order.
SECTION 4. TERMINATION OF TRUST OR SERIES OR CLASS. Unless terminated as
provided herein, the Trust shall continue without limitation of time. The Trust
may be terminated at any time by vote of at least 66-2/3% of the Shares of each
Series entitled to vote and voting separately by Series or by the Trustees by
written notice to the Shareholders. Any Series may be terminated at any time by
vote of at least 66-2/3% of the Shares of that Series or by the Trustees by
written notice to the Shareholders of that Series. Any Class may be separately
terminated at any time by vote of at least a majority of the Shares of that
Class present and voting on the question (a quorum being present) or by the
Trustees by written notice to the Shareholders of that Class.
Upon termination of the Trust (or any Series or Class, as the case may
be), after paying or otherwise providing for all charges, taxes, expenses and
liabilities belonging, severally, to each Series or allocable to each Class (or
the applicable Series or Classes, as the case may be), whether due or accrued or
anticipated as may be determined by the Trustees, the Trust shall in accordance
with such procedures as the Trustees consider appropriate reduce the remaining
assets belonging, severally, to each Series or allocable to each Class (or the
applicable Series or Classes, as the case may be), to distributable form in cash
or shares or other securities, or any combination thereof, and distribute the
proceeds belonging to each Series or allocable to each Class (or the applicable
Series or Classes, as the case may be), to the Shareholders of that
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Series or Class, as a Series or Class, ratably according to the number of Shares
of that Series or Class held by the several Shareholders on the date of
termination.
SECTION 5. MERGER AND CONSOLIDATION. The Trustees may cause the Trust to be
merged into or consolidated with another trust or company or its shares
exchanged under or pursuant to any state or federal statute, if any, or
otherwise to the extent permitted by law, if such merger or consolidation or
share exchange has been authorized by vote of a majority of the outstanding
Shares; provided that in all respects not governed by statute or applicable law,
the Trustees shall have power to prescribe the procedure necessary or
appropriate to accomplish a sale of assets, merger or consolidation.
SECTION 6. FILING OF COPIES, REFERENCES, HEADINGS. The original or a copy of
this instrument and of each amendment hereto shall be kept at the office of the
Trust where it may be inspected by any Shareholder. A copy of this instrument
and of each amendment hereto shall be filed by the Trust with the Secretary of
The Commonwealth of Massachusetts and with any other governmental office where
such filing may from time to time be required. Anyone dealing with the Trust may
rely on a certificate by an officer of the Trust as to whether or not any such
amendments have been made and as to any matters in connection with the Trust
hereunder; and, with the same effect as if it were the original, may rely on a
copy certified by an officer of the Trust to be a copy of this instrument or of
any such amendments. In this instrument and in any such amendment, references to
this instrument, and all expressions like "herein", "hereof" and "hereunder",
shall be deemed to refer to this instrument as amended or affected by any such
amendments. Headings are placed herein for convenience of reference only and
shall not be taken as a part hereof or control or affect the meaning,
construction or effect of this instrument. This instrument may be executed in
any number of counterparts each of which shall be deemed an original.
SECTION 7. APPLICABLE LAW. This Declaration of Trust is made in The Commonwealth
of Massachusetts, and it is created under and is to be governed by and construed
and administered according to the laws of said Commonwealth. The Trust shall be
of the type commonly called a Massachusetts business trust, and without limiting
the provisions hereof, the Trust may exercise all powers which are ordinarily
exercised by such a trust.
SECTION 8. AMENDMENTS. This Declaration of Trust may be amended at any time by
an instrument in writing signed by a majority of the then Trustees when
authorized so to do by vote of a majority of the Shares entitled to vote, except
that amendments described in Article III, Section 5 hereof or having the purpose
of changing the name of the Trust or of supplying any omission, curing any
ambiguity or curing, correcting or supplementing any defective or inconsistent
provision contained herein shall not require authorization by Shareholder vote.
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IN WITNESS WHEREOF, the Trustees as aforesaid do hereto set their hands
this ____ day of December, 1999.
------------------------------
R. Jeremy Grantham
40 Rowes Wharf
Boston, MA 02110
------------------------------
Jay O. Light
30 Wellesley Road
Belmont, MA 02178
------------------------------
Harvey R. Margolis
50 Pinckney Street
Boston, MA 02114
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Exhibit 3.6 to Decl. of Trust
GMO TRUST
Plan pursuant to Rule 18f-3 under the
Investment Company Act of 1940
-------------------------------------
Effective June 1, 1996
As Amended May ___, 1999
This Plan (the "Plan") is adopted by GMO Trust (the "Trust") pursuant
to Rule 18f-3 under the Investment Company Act of 1940 (the "Act") and sets
forth the general characteristics of, and the general conditions under which the
Trust may offer, multiple classes of shares of its now existing and hereafter
created portfolios ("Funds"). This Plan may be revised or amended from time to
time as provided below.
CLASS DESIGNATIONS
Each Fund of the Trust may from time to time issue one or more of the
following classes of shares: Class I Shares, Class II Shares, Class III Shares,
Class IV Shares, Class V Shares, Class VI Shares, Class VII Shares and Class
VIII Shares. Each of the classes of shares of any Fund will represent interests
in the same portfolio of investments and, except as described herein, shall have
the same rights and obligations as each other class. Each class shall be subject
to such investment minimums and other conditions of eligibility as are set forth
in the Trust's prospectus or statement of additional information as from time to
time in effect (the "Prospectus").
CLASS ELIGIBILITY
Class eligibility is generally dependent on the size of the client's
total account under the management of Grantham, Mayo, Van Otterloo & Co. LLC,
the Trust's investment adviser (referred to herein as "GMO" or the "Adviser"),
as described from time to time in the Prospectus.
CLASS I, CLASS II AND CLASS III SHARES:
With certain exceptions described below, eligibility for Class I, Class II and
Class III Shares depends on a client's "TOTAL INVESTMENT" with GMO.
For clients establishing a relationship with GMO on or after June 1,
1996: A client's Total Investment will be determined by GMO as of December 31 of
each year and on such other dates as may be determined by GMO (each a
"Determination Date"). Subject to as provided below, a client's Total Investment
as of any Determination Date will equal the greater
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of (a) the market value of assets managed by GMO and its affiliates for the
client (whether in a pooled vehicle or otherwise) as of such Determination Date,
and (b) the client's Total Investment as of the previous Determination Date
(less the market value of any account managed by GMO's Domestic Active Division
as of the previous Determination Date), plus contributions made to, and less
Large Withdrawals (defined below) from, any GMO-managed product or account
(other than any account managed by GMO's Domestic Active Division) since the
previous Determination Date (plus the market value of any account managed by
GMO's Domestic Active Division as of the then current Determination Date). For
these purposes, "Large Withdrawals" means the total of all withdrawals made from
any GMO-managed product or account (other than any account managed by GMO's
Domestic Active Division) since the previous Determination Date if such total
exceeds 7% of the sum of the client's Total Investment as of the previous
Determination Date and any contributions to any GMO-managed product or account
(other than any account managed by GMO's Domestic Active Division) made since
the previous Determination Date. For clients that have accounts with GMO as of
November 30, 1997, their Initial Total Investment is the greater of the market
value of assets managed by GMO and its affiliates for the client as of the close
of business on November 30, 1997 or on December 31, 1997. For clients
establishing a relationship with GMO on or after December 1, 1997, their Total
Investment will be determined as described above. Assets invested in the Pelican
Fund will not be considered when determining a client's Total Investment.
Investments by defined contribution pension plans (such as 401(k)
plans) will always be invested in the class of shares of the relevant Fund(s)
with the highest Shareholder Service Fee offered from time to time by the
relevant Fund(s) regardless of the size of the investment, and will not be
eligible to convert to other classes.
For Clients with Accounts as of May 31, 1996: Any client of GMO whose
Total Investment as of May 31, 1996 was equal to or greater than $7 million will
remain eligible for Class III Shares indefinitely, provided that such client
does not make a withdrawal or redemption that causes the client's Total
Investment to fall below $7 million. Any client whose Total Investment as of May
31, 1996 was less than $7 million, but greater than $0, will convert to Class II
Shares on July 31, 1997 or such later date as may be determined by the Manager.
For clients with GMO accounts as of May 31, 1996, their initial Total Investment
will equal the market value of all of their GMO investments as of the close of
business on May 31, 1996 and will subsequently be calculated as described in the
preceding section.
CLASS IV, CLASS V, CLASS VI, CLASS VII AND CLASS VIII SHARES:
Eligibility for Class IV, Class V, Class VI, Class VII and Class VIII
Shares is dependent upon the client meeting either (i) a minimum "TOTAL FUND
INVESTMENT" requirement, which includes only a client's total investment in the
particular Fund, or (ii) a minimum "Total Investment" requirement, calculated as
described above for Class I, Class II and Class III Shares. For clients that
have accounts with GMO as of November 30, 1997,
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their initial Total Investment or initial Total Fund Investment for purposes of
determining eligibility for Class IV, Class V, Class VI, Class VII and Class
VIII Shares will be the greater of the market value of all of their investments
advised by GMO and its affiliates, or the market value of their investment in
the particular Fund, as the case may be, as of the close of business on November
30, 1997 or December 31, 1997. For clients establishing a relationship with GMO
on or after December 1, 1997, their Total Fund Investment and Total Investment
will be determined as described above.
The Manager will make all determinations as to aggregation of client
accounts for purposes of determining eligibility.
CLASS CHARACTERISTICS
The sole difference among the various classes of shares is the level of
shareholder service fee ("Shareholder Service Fee") borne by the class for
client and shareholder service, reporting and other support provided to such
class by GMO.
The multiple class structure reflects the fact that, as the size of the
client relationship increases, the cost to service that relationship is expected
to decrease as a percentage of the account. Thus, the Shareholder Service Fee is
lower for classes for which eligibility criteria generally require greater
assets under GMO's management.
Certain Funds are subject to either an initial purchase premium, a
redemption fee, or both. The initial purchase premium and redemption fee, if
any, may, in some limited cases, be subject to reduction or waiver if the
Adviser determines that there are minimal brokerage and/or transaction costs
incurred as a result of the purchase or redemption, as set forth in the
Prospectus in effect from time to time.(1)
ALLOCATIONS TO EACH CLASS
EXPENSE ALLOCATIONS
Shareholder Service Fees payable by the Trust to the shareholder
services of the Trust's shares (the "Shareholder Servicer") shall be allocated,
to the extent practicable, on a class-by-class basis. Subject to the approval of
the Trust's Board of Trustees, including a majority of the independent Trustees,
the following "Class Expenses" may (if such expense is properly
- ----------------------------
(1) All purchase premiums are paid to and retained by the relevant Fund
and are intended to cover the brokerage and other costs associated with putting
an investment to work in the relevant markets. All redemption fees are paid to
and retained by the relevant Fund and are designed to allocate transaction costs
caused by shareholder activity to the shareholder generating the activity.
-22-
<PAGE> 23
assessable at the class level) in the future be allocated on a class-by-class
basis: (a) transfer agency costs attributable to each class, (b) printing and
postage expenses related to preparing and distributing materials such as
shareholder reports, prospectuses and proxy statements to current shareholders
of a specific Class, (c) SEC registration fees incurred with respect to a
specific class, (d) blue sky and foreign registration fees and expenses incurred
with respect to a specific class, (e) the expenses of administrative personnel
and services required to support shareholders of a specific class (including,
but not limited to, maintaining telephone lines and personnel to answer
shareholder inquiries about their accounts or about the Trust), (f) litigation
and other legal expenses relating to a specific class of shares, (g) Trustees'
fees or expenses incurred as a result of issues relating to a specific class of
shares, (h) accounting and consulting expenses relating to a specific class of
shares, (i) any fees imposed pursuant to a non-Rule 12b-1 shareholder service
plan that relate to a specific class of shares, and (j) any additional expenses,
not including advisory or custodial fees or other expenses related to the
management of the Trust's assets, if these expenses are actually incurred in a
different amount with respect to a class, or if services are provided with
respect to a class, or if services are provided with respect to a class that are
of a different kind or to a different degree than with respect to one or more
other classes.
All expenses not now or hereafter designated as Class Expenses ("Fund
Expenses") will be allocated to each class on the basis of the net asset value
of that class in relation to the net asset value of the relevant Fund.
However, notwithstanding the above, a Fund may allocate all expenses
other than Class Expenses on the basis of any methodology permitted by Rule
18f-3(c) under the Act, provided, however, that until such time as this Plan is
amended with respect to the Fund's allocation methodology, the Fund will
allocate all expenses other than Class Expenses on the basis of relative net
assets.
WAIVERS AND REIMBURSEMENTS
The Adviser and the Shareholder Servicer may choose to waive or
reimburse Shareholder Service Fees, or any other Class Expenses on a voluntary
or temporary basis.
INCOME, GAINS AND LOSSES
Income and realized and unrealized capital gains and losses shall be
allocated to each class on the basis of the net asset value of that class in
relation to the net asset value of the relevant Fund.
Each Fund may allocate income and realized and unrealized capital gains
and losses to each share based on any methodology permitted by Rule 18f-3(c)(2)
under the Act, consistent with the provisions set forth in "Expense Allocations"
above.
-23-
<PAGE> 24
CONVERSION AND EXCHANGE FEATURES
On December 31 of each year and on such other dates as may be
determined by GMO (each a "DETERMINATION DATE") the value of each client's Total
Investment and Total Fund Investment with GMO will be determined. Based on that
determination, each client's shares of each Fund will be automatically converted
to the class of shares of such Fund which is then being offered with the lowest
Shareholder Service Fee for which the client is eligible based on the amount of
their Total Investment or Total Fund Investment, as the case may be, on the
Determination Date. The conversion will occur within 15 business days following
the Determination Date. Also, if a client makes an investment in a GMO Fund
(except for the Pelican Fund) or puts additional assets under GMO's management
(except for accounts managed by GMO's Domestic Active Division) so as to cause
the client to be eligible for a new class of shares, such determination will be
made as of the close of business on the last day of the calendar quarter in
which the investment was made, and the conversion will be effected within 15
business days of that quarter. Notwithstanding the foregoing, there will be no
automatic conversion from a class of shares with a lower Shareholder Service Fee
to a class of shares with a higher Shareholder Service Fee unless appropriate
disclosure regarding the higher Shareholder Service Fee has been given to the
affected client(s) in the Prospectus or otherwise.
Shares of one class will always convert into shares of another class on
the basis of the relative net asset value of the two classes, without the
imposition of any sales load, fee or other charge. The conversion of a client's
investment from one class of shares to another is not a taxable event, and will
not result in the realization of gain or loss that may exist in Fund shares held
by the client. The client's tax basis in the new class of shares will equal
their basis in the old class before conversion. The conversion of shares from
one class to another class of shares may be suspended if the opinion of counsel
obtained by the Trust that the conversion does not constitute a taxable event
under current federal income tax law is no longer available.
Certain special rules will be applied by the Manager with respect to
clients for whom GMO managed assets prior to the creation of multiple classes on
May 31, 1996. Clients whose Total Investment as of May 31, 1996 is equal to $7
million or more will be eligible to remain invested in Class III Shares
indefinitely (irrespective of whether the Fund has a higher investment minimum),
provided that such client does not make a withdrawal or redemption that causes
the client's Total Investment to fall below $7 million. Clients whose Total
Investment as of May 31, 1996 is less than $7 million but greater than $0 will
be eligible to invest in or convert to Class II Shares indefinitely
(irrespective of whether the Fund has a higher investment minimum), and such
conversion will not occur until on or after July 31, 1997. Notwithstanding the
foregoing special rules applicable to clients owning shares of the Funds on May
31, 1996, such clients shall always be eligible to remain in and/or be converted
to any class of shares of the relevant Fund with a lower Shareholder Service Fee
which the client would be eligible to purchase pursuant to the eligibility
requirements set forth elsewhere in this Plan or in the Prospectus.
-24-
<PAGE> 25
Notwithstanding anything to the contrary in this Plan, pursuant to
Article VI, Section 3 of the Trust's Amended and Restated Agreement and
Declaration of Trust, the Trust has the right to redeem unilaterally any
shareholder of any Fund if at such time such shareholder owns shares of any Fund
or class thereof "having an aggregate net asset value of less than an amount
determined from time to time by the Trustees."
DIVIDENDS
Dividends paid by the Trust with respect to its Class I, Class II,
Class III, Class IV, Class V, Class VI, Class VII and Class VIII Shares, to the
extent any dividends are paid, will be calculated in the same manner, at the
same time and will be in the same amount, except that any Shareholder Service
Fee payments relating to a class of shares will be borne exclusively by that
class and, if applicable, Class Expenses relating to a class shall be borne
exclusively by that class.
VOTING RIGHTS
Each share of the Trust entitles the shareholder of record to one vote.
Each class of shares of the Trust will vote separately as a class on matters for
which class voting is required under applicable law.
RESPONSIBILITIES OF THE TRUSTEES
On an ongoing basis, the Trustees will monitor the Trust for the
existence of any material conflicts among the interests of the eight classes of
shares. The Trustees shall further monitor on an ongoing basis the use of
waivers or reimbursement of expenses by the Adviser to guard against
cross-subsidization between classes. The Trustees, including a majority of the
independent Trustees, shall take such action as is reasonably necessary to
eliminate any such conflict that may develop.
REPORTS TO THE TRUSTEES
The Adviser and the Shareholder Servicer will be responsible for
reporting any potential or existing conflicts among the eight classes of shares
to the Trustees.
-25-
<PAGE> 26
AMENDMENTS
The Plan may be amended from time to time in accordance with the
provisions and requirements of Rule 18f-3 under the Act.
Adopted this ____ day of ___________, 1999
By:________________________
Name:
Title:
-26-
<PAGE> 27
Schedule 3.6 to Decl. of Trust
SERIES
GMO U.S. Core Fund
GMO Tobacco-Free Core Fund
GMO Value Fund
GMO Growth Fund
GMO U.S. Sector Fund
GMO Small Cap Value Fund
GMO Fundamental Value Fund
GMO REIT Fund
GMO Small Cap Growth Fund
GMO International Core Fund
GMO Currency Hedged International Core Fund
GMO Foreign Fund
GMO U.S. Bond/Global Alpha A Fund
GMO U.S. Bond/Global Alpha B Fund
GMO International Small Companies Fund
GMO Japan Fund GMO Emerging Markets Fund
GMO Global Properties Fund
GMO Short-Term Income Fund
GMO Global Hedged Equity Fund
GMO Domestic Bond Fund
GMO International Bond Fund
GMO Currency Hedged International Bond Fund
GMO Global Bond Fund
GMO Emerging Country Debt Fund
GMO Inflation Indexed Bond Fund
GMO International Equity Allocation Fund
GMO Evolving Countries Fund
GMO World Equity Allocation Fund
GMO Global (U.S.+) Equity Allocation Fund
GMO Global Balanced Allocation Fund
GMO International Core Plus Allocation Fund Pelican Fund
GMO Asia Fund
GMO Tax-Managed U.S. Equities Fund
GMO Tax-Managed International Equities Fund
GMO Tax-Managed Global Allocation Fund
GMO Emerging Country Debt Share Fund
GMO Intrinsic Value Fund
GMO Tax-Managed U.S. Small Companies Fund
GMO Alpha LIBOR Fund
-27-
<PAGE> 1
MANAGEMENT CONTRACT
Management Contract executed as of December ___, 1999 between GMO
TRUST, a Massachusetts business trust (the "Trust") on behalf of its GMO Alpha
LIBOR Fund (the "Fund"), and GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC, a
Massachusetts limited liability company (the "Manager").
W I T N E S S E T H:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY MANAGER TO THE TRUST.
(a) Subject always to the control of the Trustees of the Trust and to
such policies as the Trustees may determine, the Manager will, at its expense,
(i) furnish continuously an investment program for the Fund and will make
investment decisions on behalf of the Fund and place all orders for the purchase
and sale of its portfolio securities and (ii) furnish office space and
equipment, provide bookkeeping and clerical services (excluding determination of
net asset value, shareholder accounting services and the fund accounting
services for the Fund being supplied by Investors Bank & Trust Company) and pay
all salaries, fees and expenses of officers and Trustees of the Trust who are
affiliated with the Manager. In the performance of its duties, the Manager will
comply with the provisions of the Agreement and Declaration of Trust and By-laws
of the Trust and the Fund's stated investment objective, policies and
restrictions.
(b) In placing orders for the portfolio transactions of the Fund, the
Manager will seek the best price and execution available, except to the extent
it may be permitted to pay higher brokerage commissions for brokerage and
research services as described below. In using its best efforts to obtain for
the Fund the most favorable price and execution available, the Manager shall
consider all factors it deems relevant, 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 financial strength and stability of the
broker. Subject to such policies as the Trustees may determine, the Manager
shall not be deemed to have acted unlawfully or to have breached any duty
created by this Contract or otherwise solely by reason of its having caused a
Fund to pay a broker or dealer that provides brokerage and research services 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, if the Manager determines in good
faith that such amount of commission was reasonable in relation to the value of
the brokerage
<PAGE> 2
and research services provided by such broker or dealer, viewed in terms of
either that particular transaction or the Manager's overall responsibilities
with respect to the Trust and to other clients of the Manager as to which the
Manager exercises investment discretion.
(c) The Manager shall not be obligated under this agreement to pay any
expenses of or for the Trust or of or for the Fund not expressly assumed by the
Manager pursuant to this Section 1 other than as provided in Section 3.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers and
employees of the Trust may be a partner, shareholder, director, officer or
employee of, or be otherwise interested in, the Manager, and in any person
controlled by or under common control with the Manager, and that the Manager and
any person controlled by or under common control with the Manager may have an
interest in the Trust. It is also understood that the Manager and persons
controlled by or under common control with the Manager have and may have
advisory, management service, distribution or other contracts with other
organizations and persons, and may have other interests and businesses.
3. COMPENSATION TO BE PAID BY THE TRUST TO THE MANAGER.
The Fund will pay no direct fee to the Manager as compensation for the
Manager's investment management services rendered hereunder. Since the Fund's
shares may be purchased by other Funds of the Trust, the Manager will be
indirectly compensated for its services rendered hereunder pursuant to the terms
of other Management Contracts between the Trust, on behalf of such other Funds
of GMO Trust, and the Manager.
In the event that the expenses of the Fund exceed any expense
limitation which the Manager may, by written notice to the Trust, voluntarily
declare to be effective with respect to the Fund, subject to such terms and
conditions as the Manager may prescribe in such notice, the Manager shall bear
the Fund's expenses to the extent required by such expense limitation.
4. ASSIGNMENT TERMINATES THIS CONTRACT; AMENDMENTS OF THIS CONTRACT.
This Contract shall automatically terminate, without the payment of any
penalty, in the event of its assignment; and this Contract shall not be amended
unless such amendment is approved at a meeting by the affirmative vote of a
majority of the outstanding shares of the Fund, and by the vote, cast in person
at a meeting called for the purpose of voting on such approval, of a majority of
the Trustees of the Trust who are not interested persons of the Trust or of the
Manager.
-2-
<PAGE> 3
5. EFFECTIVE PERIOD AND TERMINATION OF THIS CONTRACT.
This Contract shall become effective upon its execution, and shall
remain in full force and effect continuously thereafter (unless terminated
automatically as set forth in Section 4) until terminated as follows:
(a) Either party hereto may at any time terminate this Contract by not
more than sixty days' written notice delivered or mailed by registered mail,
postage prepaid, to the other party, or
(b) If (i) the Trustees of the Trust or the shareholders by the
affirmative vote of a majority of the outstanding shares of the Fund, and (ii) a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of the Manager, by vote cast in person at a meeting called for the
purpose of voting on such approval, do not specifically approve at least
annually the continuance of this Contract, then this Contract shall
automatically terminate at the close of business on the second anniversary of
its execution, or upon the expiration of one year from the effective date of the
last such continuance, whichever is later; provided, however, that if the
continuance of this Contract is submitted to the shareholders of the Fund for
their approval and such shareholders fail to approve such continuance of this
Contract as provided herein, the Manager may continue to serve hereunder in a
manner consistent with the Investment Company Act of 1940 and the rules and
regulations thereunder.
Action by the Trust under (a) above may be taken either (i) by vote of
a majority of its Trustees, or (ii) by the affirmative vote of a majority of the
outstanding shares of the Fund.
Termination of this Contract pursuant to this Section 5 shall be
without the payment of any penalty.
6. CERTAIN DEFINITIONS.
For the purposes of this Contract, the "affirmative vote of a majority
of the outstanding shares" of the Fund means the affirmative vote, at a duly
called and held meeting of shareholders, (a) of the holders of 67% or more of
the shares of the Fund present (in person or by proxy) and entitled to vote at
such meeting, if the holders of more than 50% of the outstanding shares of the
Fund entitled to vote at such meeting are present in person or by proxy, or (b)
of the holders of more than 50% of the outstanding shares of the Fund entitled
to vote at such meeting, whichever is less.
For the purposes of this Contract, the terms "affiliated person",
"control", "interested person" and "assignment" shall have their respective
meanings defined in the Investment Company Act of 1940 and the rules and
regulations thereunder, subject, however, to such exemptions as may be granted
by the Securities and Exchange Commission under said Act; and
-3-
<PAGE> 4
the phrase "specifically approve at least annually" shall be construed in a
manner consistent with the Investment Company Act of 1940 and the rules and
regulations thereunder.
7. NONLIABILITY OF MANAGER.
In the absence of willful misfeasance, bad faith or gross negligence on
the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Trust, or to
any shareholder of the Trust, for any act or omission in the course of, or
connected with, rendering services hereunder.
8. INITIALS "GMO".
The Manager owns the initials "GMO" which may be used by the Trust only
with the consent of the Manager. The Manager consents to the use by the Trust of
the name "GMO Trust" or any other name embodying the initials "GMO", in such
forms as the Manager shall in writing approve, but only on condition and so long
as (i) this Contract shall remain in full force and (ii) the Trust shall fully
perform, fulfill and comply with all provisions of this Contract expressed
herein to be performed, fulfilled or complied with by it. No such name shall be
used by the Trust at any time or in any place or for any purposes or under any
conditions except as in this section provided. The foregoing authorization by
the Manager to the Trust to use said initials as part of a business or name is
not exclusive of the right of the Manager itself to use, or to authorize others
to use, the same; the Trust acknowledges and agrees that as between the Manager
and the Trust, the Manager has the exclusive right so to authorize others to use
the same; the Trust acknowledges and agrees that as between the Manager and the
Trust, the Manager has the exclusive right so to use, or authorize others to
use, said initials and the Trust agrees to take such action as may reasonably be
requested by the Manager to give full effect to the provisions of this section
(including, without limitation, consenting to such use of said initials).
Without limiting the generality of the foregoing, the Trust agrees that, upon
any termination of this Contract by either party or upon the violation of any of
its provisions by the Trust, the Trust will, at the request of the Manager made
within six months after the Manager has knowledge of such termination or
violation, use its best efforts to change the name of the Trust so as to
eliminate all reference, if any, to the initials "GMO" and will not thereafter
transact any business in a name containing the initials "GMO" in any form or
combination whatsoever, or designate itself as the same entity as or successor
to an entity of such name, or otherwise use the initials "GMO" or any other
reference to the Manager. Such covenants on the part of the Trust shall be
binding upon it, its trustees, officers, stockholders, creditors and all other
persons claiming under or through it.
-4-
<PAGE> 5
9. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
A copy of the Agreement and Declaration of Trust of the Trust is on
file with the Secretary of The Commonwealth of Massachusetts, and notice is
hereby given that this instrument is executed on behalf of the Trustees of the
Trust as Trustees and not individually and that the obligations of this
instrument are not binding upon any of the Trustees or shareholders individually
but are binding only upon the assets and property of the Fund.
-5-
<PAGE> 6
IN WITNESS WHEREOF, GMO TRUST and GRANTHAM, MAYO, VAN OTTERLOO & CO.
LLC have each caused this instrument to be signed in duplicate on its behalf
by its duly authorized representative, all as of the day and year first above
written.
GMO TRUST
By_______________________________________
Title:
GRANTHAM, MAYO, VAN OTTERLOO & CO.
LLC
By_______________________________________
Title:
-6-
<PAGE> 1
December ___, 1999
Investors Bank & Trust Company
Financial Product Services
200 Clarendon Street
Boston, MA 02116
Re: Custodian Agreement dated August 1, 1991 by and among
GMO Trust, Grantham, Mayo, Van Otterloo & Co. and
Investors Bank & Trust Company
Ladies and Gentlemen:
GMO Trust (the "Trust") hereby notifies you that it has established an
additional series of shares, namely, the "GMO Alpha LIBOR Fund" (the "New
Fund"). The Trust and the Manager (as defined in the Agreement) desire that you
serve as custodian of the assets of the New Fund under the terms of the
Agreement.
If you agree to so serve as custodian for the New Fund, kindly sign and
return to the Trust the enclosed counterpart hereof, whereupon the New Fund
shall be deemed a "Fund" under the Agreement. This letter agreement shall
constitute an amendment to the Agreement and, as such, a binding agreement among
the Trust, the Manager and you in accordance with its terms.
Very truly yours,
GMO TRUST
By__________________________________
Name:
Title:
GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC
By__________________________________
Name:
Title:
The foregoing is hereby
accepted and agreed.
INVESTORS BANK & TRUST COMPANY
By__________________________________
Name:
Title:
<PAGE> 1
December ___ , 1999
Investors Bank & Trust Company
Financial Product Services
200 Clarendon Street
Boston, MA 02116
Re: Transfer Agency and Service Agreement dated August 1, 1991
by and among GMO Trust, Grantham, Mayo, Van Otterloo &
Co. LLC and Investors Bank & Trust Co. (the "Agreement")
Ladies and Gentlemen:
Pursuant to Article 17 of the Agreement, GMO Trust (the "Company")
hereby notifies you that it has created a new series of shares, namely, the "GMO
Alpha LIBOR Fund" (the "New Fund"), with respect to which the Company and the
Manager (as defined in the Agreement) desire that you serve as transfer agent
under the terms of the Agreement.
If you agree to so serve as transfer agent for the New Fund, kindly
sign and return to the Company the enclosed counterpart hereof, whereupon the
New Fund shall be deemed a "Fund" under the Agreement. This letter agreement
shall constitute an amendment to the Agreement and, as such, a binding agreement
among the Trust, the Manager and you in accordance with its terms.
Very truly yours,
GMO TRUST
By__________________________________
Name:
Title:
GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC
By__________________________________
Name:
Title:
The foregoing is hereby
accepted and agreed.
INVESTORS BANK & TRUST COMPANY
By__________________________________
Name:
Title:
<PAGE> 1
GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC
NOTIFICATION OF OBLIGATION TO REIMBURSE
CERTAIN FUND EXPENSES
NOTIFICATION made December ____, 1999 by GRANTHAM, MAYO, VAN OTTERLOO &
CO. LLC, a Massachusetts limited liability company (the "Advisor"), to GMO
TRUST, a Massachusetts business trust (the "Trust").
WITNESSETH:
WHEREAS, the Advisor has organized the Trust to serve primarily as an
investment vehicle for certain large institutional accounts; and
WHEREAS, the Advisor believes it would benefit from a high sales volume
of shares of the Trust in that such a volume would maximize the Advisor's fee as
investment adviser to each series of the Trust constituting a separate
investment portfolio set forth below (each a "Fund" and, collectively, the
"Funds"); and
WHEREAS, the Advisor has agreed to reimburse the Funds for certain Fund
expenses so as to reduce or eliminate certain costs otherwise borne by
shareholders of the Funds and to enhance the returns generated by shareholders
of the Funds.
NOW, THEREFORE, the Advisor hereby notifies the Trust that the Advisor
shall, through June 30, 2000 (and any subsequent periods as may be designated by
the Advisor by notice to the Trust), reimburse each Fund to the extent the
Fund's total annual operating expenses (not including Shareholder Service Fees,
brokerage commissions and other investment-related costs, interest expense,
hedging transaction fees, extraordinary, non-recurring and certain other unusual
expenses (including taxes), securities lending fees and expenses and transfer
taxes; and, in the case of the Emerging Markets Fund, Evolving Countries Fund,
Emerging Country Debt Fund, Global Hedged Equity Fund and Global Properties
Fund, also excluding custodial fees; and, in the case of the U.S. Sector Fund,
Global Hedged Equity Fund, International Equity Allocation Fund, World Equity
Allocation Fund, Global (U.S.+) Equity Allocation Fund, Global Balanced
Allocation Fund, Tax-Managed Global Equities Allocation Fund and International
Core Plus Allocation Fund, also excluding expenses indirectly incurred by
investment in other Funds of the Trust (collectively, "Excluded Fund Fees and
Expenses")) exceed the percentage of that Fund's average daily net assets (the
"Post-Reimbursement Expense Limitation") set forth in the table below:
<PAGE> 2
<TABLE>
<CAPTION>
POST-REIMBURSEMENT EXPENSE
FUND LIMITATION
- ----------------------------------------------- --------------------------
<S> <C>
U.S. Core Fund 0.33%
Tobacco-Free Core Fund 0.33%
Value Fund 0.46%
Growth Fund 0.33%
U.S. Sector Fund 0.33%
Small Cap Value Fund 0.33%
Small Cap Growth Fund 0.33%
Fundamental Value Fund 0.60%
REIT Fund 0.54%
International Core Fund 0.54%
Currency Hedged International Core Fund 0.54%
Foreign Fund 0.60%
International Small Companies Fund 0.60%
Japan Fund 0.54%
Emerging Markets Fund 0.81%
Evolving Countries Fund 0.65%
Global Properties Fund 0.60%
Domestic Bond Fund 0.10%
U.S. Bond/Global Alpha A Fund 0.25%
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%
International Equity Allocation Fund 0.00%
</TABLE>
-2-
<PAGE> 3
<TABLE>
<S> <C>
World Equity Allocation Fund 0.00%
Global (U.S.+) Equity Allocation Fund 0.00%
Global Balanced Allocation Fund 0.00%
Pelican Fund 0.95%
Asia Fund 0.81%
Tax-Managed U.S. Equities Fund 0.33%
Tax-Managed International Equities Fund 0.54%
Tax-Managed Global Equities Allocation Fund 0.00%
International Core Plus Allocation Fund 0.00%
Emerging Country Debt Share Fund 0.00%
Intrinsic Value Fund 0.33%
Tax-Managed U.S. Small Companies Fund 0.55%
Alpha LIBOR Fund 0.00%
</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.
In providing this Notification, the Advisor understands and
acknowledges that the Trust intends to rely on this Notification, including in
connection with the preparation and printing of the Trust's prospectuses and its
daily calculation of each Fund's net asset value.
Please be advised that all previous notifications by the Advisor with
respect to fee waivers and/or expense limitations regarding any of the Funds
shall hereafter be null and void and of no further force and effect.
-3-
<PAGE> 4
IN WITNESS WHEREOF, the Advisor has executed this Notification of
Obligation to Reimburse Certain Fund Expenses on the day and year first above
written.
GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC
By:___________________________________
Title: Member
-4-
