<PAGE> 1
GMO TRUST Prospectus
June 30, 2000
- EMERGING MARKETS FUND
-----------------------------
- GMO TRUST OFFERS A BROAD
SELECTION OF INVESTMENT
ALTERNATIVES TO INVESTORS.
- INFORMATION ABOUT OTHER
FUNDS OFFERED BY GMO
TRUST IS CONTAINED IN
SEPARATE PROSPECTUSES.
GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC
40 ROWES WHARF - BOSTON, MASSACHUSETTS 02110
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
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TABLE OF CONTENTS
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FUND OBJECTIVES AND PRINCIPAL INVESTMENT
STRATEGIES.................................. 2
SUMMARY OF PRINCIPAL RISKS.................. 3
FEES AND EXPENSES........................... 6
BENCHMARKS AND INDEXES...................... 6
MANAGEMENT OF THE FUND...................... 7
DETERMINATION OF NET ASSET VALUE............ 8
HOW TO PURCHASE SHARES...................... 9
HOW TO REDEEM SHARES........................ 10
MULTIPLE CLASSES............................ 12
DISTRIBUTIONS AND TAXES..................... 13
FINANCIAL HIGHLIGHTS........................ 14
ADDITIONAL INFORMATION..................back cover
SHAREHOLDER INQUIRIES...................back cover
DISTRIBUTOR.............................back cover
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SUMMARY OF FUND
OBJECTIVES AND PRINCIPAL
INVESTMENT STRATEGIES
The following summary describes the Fund's investment objective and
principal investment strategies. The Fund may make other investments and engage
in other investment strategies that are not specifically described in the
summary. More information about the Fund's possible investments and strategies
is set forth in the Statement of Additional Information. See the back cover of
this Prospectus for information about how to receive the Statement of Additional
Information. Unless described as fundamental in this Prospectus or in the
Statement of Additional Information, the Fund's investment objective and
policies may be changed by the Trustees without shareholder approval.
In the Fund summary that follows, it is noted that the Fund will "invest
primarily in" a particular type of securities or other assets. Investors should
understand that this Prospectus uses the word "invest" to mean not only direct
investment in a particular asset but also indirect investment in or exposure to
the asset through the use of derivatives and related instruments.
Investing in mutual funds involves risk. The Fund is subject to certain
risks based on the types of investments in the Fund's portfolio and on the
investment strategies the Fund employs. Investors should refer to the SUMMARY OF
PRINCIPAL RISKS in the Prospectus at page 3 for a discussion of the principal
risks of investing in the Fund. See the Statement of Additional Information for
additional information about the risks of Fund investments and strategies. The
Fund described in this Prospectus may not be available for purchase in all
states. This Prospectus is not an offering in any state where an offering may
not lawfully be made.
It is important for you to note:
- You may lose money on an investment in the Fund.
- An investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
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GMO EMERGING MARKETS FUND
Fund Inception Date: 12/9/93
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FUND CODES
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Ticker Symbol Cusip
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Class III GMOEX EmergMkt 362007 60 1
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OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Emerging Markets Fund seeks high total return
through investment in equity securities traded in the securities markets of
developing countries in Asia, Latin America, the Middle East, Africa and Europe
("Emerging Markets"). The Fund's current benchmark is the IFC Investable Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of companies that make up the IFC and MSCI emerging markets databases, and that
are deemed to be emerging or frontier markets by the World Bank. The Fund may
also use derivatives.
PRINCIPAL INVESTMENTS: The Manager has appointed Dancing Elephant, Ltd. to
serve as Consultant to the Fund. The Fund intends to be fully invested, and will
not generally take temporary defensive positions through investment in cash and
high quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivatives and related instruments where available to (i)
hedge equity exposure; (ii) replace direct investing; (iii) implement shifts in
investment exposure as a substitute for selling and buying securities; and (iv)
adjust its foreign currency exposure. The Fund will not use derivative
instruments to expose on a net basis more than 100% of its net assets to equity
securities or markets, nor to hold net aggregate foreign currency exposure in
excess of the net assets of the Fund. However, the Fund's foreign currency
exposure may differ significantly from the currency exposure represented by its
equity investments.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to build a value-biased emerging market
equity portfolio. Using these principles, the Consultant creates forecasted
returns for countries, securities and sectors. To forecast returns for
countries, the Consultant examines factors such as price to earnings ratios,
market momentum, trends in gross domestic products, market conditions, long-term
trends and paradigm shifts, and values currencies based on real effective
exchange rates. For securities, the Consultant examines factors such as fair
value, earnings and price momentum, price to cash flow and measures of neglect
(a measure of low analyst coverage and low price volatility). For sectors, the
Consultant examines factors similar to those used for securities, and also
evaluates economic sensitivity and industrial trends. The Consultant also
monitors the economic and political conditions in these markets and adjusts its
strategies as markets develop or encounter setbacks. The Consultant then uses an
optimization process to weigh the trade-off among a stock's return forecast, how
much risk the stock adds relative to the Fund's benchmark and transaction costs.
RISKS. The most significant risks of an investment in the Fund are Market
Risk, Liquidity Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 3.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
1994 6.29%
1995 -12.57%
1996 11.64%
1997 -0.10%
1998 -28.88%
1999 77.73%
Highest Quarter: 34.40% (2Q1999)
Lowest Quarter: -28.24% (2Q1998)
Year-to-Date (as of 3/31/00): 1.74%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
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1 YEAR 5 YEARS 10 YEARS INCEPT.
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12/9/93
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CLASS III 74.19% 3.85% N/A 5.88%
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IFC INVESTABLE 67.14% 2.16% N/A 1.43%
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SUMMARY OF PRINCIPAL RISKS
The value of your investment in the Fund changes with the values of the
Fund's investments. Many factors can affect those values, and you can lose money
by investing in the Fund. Factors that may affect the Fund's portfolio as a
whole are called "principal risks" and are summarized in this section. This
summary describes the nature of these risks but is not intended to include every
potential risk. The Fund could be subject to additional risks because the types
of investments made by the Fund change over time. The Statement of Additional
Information includes more information about the Fund and its investments.
- 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. General market risks associated with investments in equity and fixed
income securities include the following:
EQUITY SECURITIES. A principal risk of the Fund is that the equity
securities in which it invests will decline in value due to factors affecting
the issuing companies, their industries, or the economy and equity markets
generally. The values of equity securities may decline for a number of reasons
which directly relate to the issuing company, such as management performance,
financial leverage and reduced demand for the issuer's goods or services. They
may also decline due to factors which affect a particular industry or
industries, such as labor shortages or increased production costs and
competitive conditions within an industry. In addition, they may decline due to
general market conditions which are not specifically related to a company or
industry, such as real or perceived adverse economic conditions, changes in the
general outlook for corporate earnings, changes in interest or currency rates or
adverse investor sentiment generally.
The Fund maintains substantial exposure to equities and generally does not
attempt to time the market. Because of this exposure, the possibility that stock
market prices in general will decline over short or extended periods subjects
the Fund to unpredictable declines in the value of its shares, as well as
periods of poor performance.
Value Securities Risk. Some equity securities (generally referred to as
"value securities") are purchased primarily because they are selling at a price
lower than what is believed to be their true value and not necessarily because
the issuing companies are expected to experience significant earnings growth.
These securities bear the risk that the companies may not overcome the adverse
business developments or other factors causing their securities to be out of
favor, or that the market does not recognize the value of the company, such that
the price of its securities may decline or may not approach the value that the
Manager anticipates.
Growth Securities Risk. Certain equity securities (generally known as
"growth securities") are purchased primarily because it is believed that they
will experience relatively rapid earnings growth. Growth securities typically
trade at higher multiples of current earnings than other types of stocks. Growth
securities are often more sensitive to general market movements than other types
of stocks because their market prices tend to place greater emphasis on future
earnings expectations. At times when it appears that these expectations may not
be met, growth stock prices typically fall.
FIXED INCOME SECURITIES. The Fund may invest to a limited extent in
certain 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, the values of fixed income securities generally decline. Conversely,
during periods of falling interest rates, the values of fixed income securities
generally rise.
This kind of market risk, also called interest rate risk, will generally
increase to the extent the Fund invests in fixed income securities with longer
maturities and portfolios with longer durations (a measure of the expected cash
flows of a fixed income security).
- 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. Liquidity risk will generally increase to
the extent that the Fund's principal investment strategy involves securities of
companies with smaller market capitalizations, foreign securities, derivatives,
or securities with substantial market and/or credit risk. This risk may be
particularly pronounced for the Fund, which may invest primarily in emerging
market securities and related derivatives that are not widely traded and that
may be subject to purchase and sale restrictions.
- SMALLER COMPANY RISK. Market risk and liquidity risk are particularly
pronounced for securities of companies with smaller market capitalizations.
These companies may have limited product lines, markets or financial resources
or they may depend on a few key employees. Securities of smaller companies may
trade less frequently and in lesser volume than more widely held securities and
their values may fluctuate more sharply than other securities. They may also
trade in the over-the-counter market or on a regional exchange, or may otherwise
have limited liquidity. Investments in smaller, less seasoned companies may
present greater opportunities for growth and capital appreciation, but also
involve greater risks than customarily are associated with larger, more
established companies. These risks are particularly pronounced for the Fund,
which invests primarily in companies with small or medium-sized market
capitalizations.
3
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- 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 many purposes, including for
hedging, and as a substitute for direct investment in securities or other
assets. The Fund may also use derivatives as a way to efficiently adjust the
exposure of the Fund to various securities, 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, refer to the Statement of Additional Information.
The use of derivative instruments involves risks different from, or greater
than, the risks associated with investing directly in securities and other more
traditional investments. Derivatives are subject to a number of risks described
elsewhere in this section, including market risk, liquidity risk and the credit
risk of the counterparty to the derivatives contract. Since their value is
calculated and derived from the value of other assets, instruments or
references, there is greater risk that derivatives will be improperly valued.
Derivatives also involve the risk that changes in the value of the derivative
may not correlate perfectly with relevant assets, rates or indexes they are
designed to hedge or to closely track. Also, suitable derivative transactions
may not be available in all circumstances and there can be no assurance that the
Fund will engage in these transactions to reduce exposure to other risks when
that would be beneficial.
- FOREIGN INVESTMENT RISK. The Fund, because it invests in securities
traded principally in securities markets outside the United States, is subject
to additional and more varied risks, and may experience more rapid and extreme
changes in value. The securities markets of many foreign countries are
relatively small, with a limited number of companies representing a small number
of industries. Additionally, issuers of foreign securities may not be subject to
the same degree of regulation as U.S. issuers. Reporting, accounting and
auditing standards of foreign countries differ, in some cases significantly,
from U.S. standards. There are generally higher commission rates on foreign
portfolio transactions, transfer taxes, higher custodial costs and the
possibility that foreign taxes will be charged on dividends and interest payable
on foreign securities. Also, for lesser developed countries, nationalization,
expropriation or confiscatory taxation, adverse changes in investment or
exchange control regulations (which may include suspension of the ability to
transfer currency from a country), political changes or diplomatic developments
could adversely affect the Fund's investments. In the event of nationalization,
expropriation or other confiscation, the Fund could lose its entire investment
in foreign securities. These risks are particularly pronounced for the Fund
because it may invest a significant portion of its assets in foreign securities.
In addition, the Fund, which invests a significant portion of its assets in
the securities of issuers based in countries with developing or "emerging
market" economies, is subject to greater levels of foreign investment risk than
a fund investing primarily in more developed foreign markets, since emerging
market securities may present market, credit, currency, liquidity, legal,
political and other risks greater than, or in addition to, risks of investing in
developed foreign countries. These risks include: high currency exchange rate
fluctuations; greater social, economic and political uncertainty and instability
(including the risk of war); more substantial governmental involvement in the
economy; less governmental supervision and regulation of the securities markets
and participants in those markets; unavailability of currency hedging techniques
in certain emerging market countries; the fact that companies in emerging market
countries may be newly organized and may be smaller and less seasoned companies;
the difference in, or lack of, auditing and financial reporting standards, which
may result in unavailability of material information about issuers; different
clearance and settlement procedures, which may be unable to keep pace with the
volume of securities transactions or otherwise make it difficult to engage in
such transactions; the risk that it may be more difficult to obtain and/or
enforce legal judgments in foreign jurisdictions; and significantly smaller
market capitalizations of emerging market issuers.
- CURRENCY RISK. Currency risk is the risk that fluctuations in exchange
rates may negatively affect the value of the Fund's investments. Currency risk
includes both the risk that currencies in which the Fund's investments are
traded in or currencies in which the Fund has taken on an active investment
position will decline in value relative to the U.S. Dollar and, in the case of
hedging positions, that the U.S. Dollar will decline in value relative to the
currency being hedged. Currency rates in foreign countries may fluctuate
significantly for a number of reasons, including the forces of supply and demand
in the foreign exchange markets, actual or perceived changes in interest rates,
and intervention (or the failure to intervene) by U.S. or foreign governments or
central banks, or by currency controls or political developments in the U.S. or
abroad.
The Fund may engage in proxy hedging of currencies by entering into
derivative transactions with respect to a currency whose value is expected to
correlate to the value of a currency the Fund owns or wants to own. This
presents the risk that the two currencies may not move in relation to one
another as expected. In that case, the Fund could lose money on its investment
and also lose money on the position designed to act as a proxy hedge. The Fund
may also take active currency positions and may cross-hedge currency exposure
represented by its securities into another foreign currency. This may result in
the Fund's currency exposure being substantially different than that suggested
by its securities investments.
4
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If the Fund invests or trades in foreign currencies, securities denominated
in foreign currencies, or related derivative instruments, it may be adversely
affected by changes in foreign currency exchange rates. Currency risk is
particularly pronounced for the Fund because it regularly enters into derivative
foreign currency transactions and may take active long and short currency
positions through exchange traded and over-the-counter ("OTC") foreign currency
transactions for investment purposes. Derivative foreign currency transactions
(such as futures, forwards and swaps) may also involve leveraging risk in
addition to currency risk as described below under "Leveraging Risk."
- NON-DIVERSIFICATION RISK. Most analysts believe that overall risk can be
reduced through diversification, while concentration of investments in a small
number of securities increases risk. The Fund is not "diversified" within the
meaning of 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 for this Fund.
- LEVERAGING RISK. The Fund's portfolio may at times be economically
leveraged when the Fund temporarily borrows money to meet redemption requests
and/or to settle investment transactions. Additionally, the Fund may invest in
derivatives and may enter into reverse repurchase agreements. While the Fund
does not intend to use derivatives to create net exposure to securities,
currencies or other assets in amounts greater than the total assets of the Fund,
the Fund will often consider derivative instruments as offsetting one another or
other assets such that only the net difference in value of the derivatives
and/or assets that are offsetting will be considered for these purposes. To the
extent that the offsetting positions do not behave in relation to one another as
expected, the Fund may perform as if it were leveraged.
This same compounding of risk can occur if the Fund takes on simultaneous
long and short positions in different currencies. While these long and short
positions are managed such that the Fund's net investment in foreign currency
does not exceed the Fund's net assets, a lack of correlation between currencies
(which may or may not be anticipated by the Manager) may expose more than one
hundred percent of the Fund's assets to currency risk. Similarly, the Fund may
take long and short positions on equity securities and/or "baskets" of equity
securities, including simultaneous positions through the use of a single
derivative instrument such as a swap contract or other over-the-counter
derivative instrument. A lack of correlation between the equity securities that
are the subject of these instruments (which may or may not be anticipated by the
Manager) could expose more than one hundred percent of the Fund's portfolio to
equity securities risk.
- CREDIT AND COUNTERPARTY RISK. This is the risk that the counterparty to
an OTC derivatives contract or a borrower of the Fund's securities will be
unable or unwilling to make timely settlement payments or to otherwise honor its
obligations.
The Fund is exposed to credit risk because it may generally make use of OTC
derivatives (such as forward foreign currency contracts and/or swap contracts)
and because it may engage to a significant extent in the lending of Fund
securities or use of repurchase agreements.
- MANAGEMENT RISK. The Fund is subject to management risk because it
relies on the Manager's ability to pursue its objective. The Manager and the
Consultant 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 or the Consultant may
also fail to use derivatives effectively, for example, choosing to hedge or not
to hedge positions precisely when it is least advantageous to do so. As
indicated above, however, the Fund is generally not subject to the risk of
market timing because it generally stays fully invested.
5
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FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy
and hold Class III shares of the Fund.
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PURCHASE AND REDEMPTION FEES (fees paid directly to Fund at
purchase or redemption)
Cash Purchase Premium (as a % of amount invested)(1)...... 1.60%
Redemption Fees (as a % of amount redeemed)(1)............ 0.40%
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets)
Management Fee............................................ 0.81%
Shareholder Service Fee................................... 0.15%
Other Expenses............................................ 0.25%
Total Annual Operating Expenses........................... 1.21%
Expense Reimbursement(2).................................. 0.03%
Net Annual Expenses....................................... 1.18%
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NOTES TO FEES AND EXPENSES:
1. Paid to and retained by the Fund to allocate portfolio transaction costs
caused by shareholder activity to the shareholder generating the activity.
Purchase premiums generally apply only to cash purchases. If the Manager
determines that any portion of the purchase or redemption is offset by a
corresponding redemption or purchase occurring on the same day, the purchase
premium or redemption fee will be reduced by 50% with respect to that
portion. Offset/reductions are not available for transactions that are
executed through brokers or agents, including, without limitation,
intermediary platforms.
2. The Manager has contractually agreed to reimburse the Fund with respect to
certain Fund expenses through at least June 30, 2001 to the extent that the
Fund's total annual operating expenses (excluding Shareholder Service Fees,
brokerage commissions and other investment-related costs, hedging
transaction fees, extraordinary, non-recurring and certain other unusual
expenses (including taxes), securities lending fees and expenses, interest
expense, transfer taxes and custodial fees) exceed 0.81% of the Fund's daily
net assets.
EXAMPLES:
The examples illustrate the expenses you would incur on a $10,000 investment in
Class III shares of the Fund over the stated periods, assuming your investment
had a 5% return each year and the Fund's operating expenses remained the same.
The examples are for comparative purposes only; they do not represent past or
future expenses or performance, and your actual expenses and performance may be
higher or lower.
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EXAMPLE 1: EXAMPLE 2:
ASSUMING YOU REDEEM ASSUMING YOU
YOUR SHARES AT THE DO NOT REDEEM
END OF EACH PERIOD YOUR SHARES
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1 Year (after reimbursement)................................ $ 319 $ 278
3 Year...................................................... $ 579 $ 535
5 Year...................................................... $ 859 $ 812
10 Year..................................................... $1,658 $1,601
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BENCHMARKS AND INDEXES
The Manager measures the Fund's performance against the IFC Investable
Composite Index, an emerging market stock index maintained and published by
International Finance Corporation. The Manager may change the Fund's benchmark
from time to time. The Fund is not an "index" fund and the composition of the
Fund's portfolio may differ from the benchmark.
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MANAGEMENT OF THE FUND
Grantham, Mayo, Van Otterloo & Co., LLC, 40 Rowes Wharf, Boston,
Massachusetts 02110 provides investment advisory services to the GMO Funds. GMO
is a private company, founded in 1977. As of May 31, 2000, GMO managed more than
$22 billion for institutional investors such as pension plans, endowments,
foundations and the GMO Funds.
Subject to the approval of the Trust's board of trustees, the Manager
establishes and modifies when necessary the investment strategies of the Fund.
In addition to its management services to the Fund, the Manager administers the
Fund's business affairs. For the fiscal year ended February 29, 2000, the
Manager received as compensation for management services rendered in such year
(after any applicable waivers or reimbursements), 0.78% of the Fund's average
daily net assets.
Each class of shares of the Fund pays the Manager a shareholder service fee
for providing direct client service and reporting, such as performance
information reporting, client account information, personal and electronic
access to Fund information, access to analysis and explanations of Fund reports
and assistance to correct and maintain client-related information.
The Manager has engaged the services of Dancing Elephant, Ltd., 1936
University Avenue, Berkeley, California 94704 ('Dancing Elephant') to provide
consulting services to the Manager with respect to the Fund. Dancing Elephant is
owned by Arjun Divecha, a member of the Manager's management committee. Mr.
Divecha, President of Dancing Elephant since 1993, has been primarily
responsible for the day-to-day management of the Fund since its inception. For
the fiscal year ended February 29, 2000, the Manager paid a consulting fee to
Dancing Elephant. The Fund has no obligation to pay Dancing Elephant.
CUSTODIAN
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts
02109, serves as the Fund's custodian.
TRANSFER AGENT
Investors Bank & Trust Company, 200 Clarendon Street, Boston, Massachusetts
02116, serves as the Fund's transfer agent.
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DETERMINATION OF NET ASSET VALUE
The net asset value or "NAV" of a share is determined as of the close of
regular trading on the New York Stock Exchange ("NYSE"), generally 4:00 p.m. New
York City time. The Fund may not determine its NAV on days during which no
security is tendered for redemption and no order to purchase or sell such
security is received by the Fund. The Fund's net asset value is determined 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. The
market value of the Fund's investments is generally determined as follows:
Exchange listed securities
- Last sale price or
- Most recent bid price (if no reported sale) or
- Broker bid (if the private market is more relevant in determining market
value than the exchange), based on where the securities are principally
traded and what their intended disposition is
Unlisted securities (if market quotations are readily available)
- Most recent quoted bid price
Certain debt obligations (if less than sixty days remain until maturity)
- Amortized cost (unless circumstances dictate otherwise; for example, if
the issuer's creditworthiness has become impaired)
All other fixed income securities and options on those securities (includes
bonds, loans, structured notes)
- Closing bid supplied by a primary pricing source chosen by the Manager
All other assets and securities (if no quotations are readily available)
- Fair value as determined in good faith by the Trustees or persons acting
at their direction
The Manager evaluates primary pricing sources on an ongoing basis, and may
change any pricing source at any time. However, the Manager will not normally
evaluate the prices supplied by the pricing sources on a day-to-day basis. The
Manager is kept informed of erratic or unusual movements (including unusual
inactivity) in the prices supplied for a security and may in its discretion
override a 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
believe 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.
The values of foreign securities quoted in foreign currencies are
translated into U.S. dollars at current exchange rates or at such other rates as
the Trustees or persons acting at their direction may determine in computing net
asset value. Fluctuations in the value of foreign currencies in relation to the
U.S. dollar will affect the net asset value of shares of the Fund even though
there has not been any change in the values of such securities and options
measured in terms of the foreign currencies in which they are denominated.
Foreign exchanges and securities markets usually close prior to the time
the NYSE closes and values of foreign options and foreign securities will be
determined as of those earlier closings. Events affecting the values of foreign
securities may occasionally occur between the earlier closings and the closing
of the NYSE which will not be reflected in the computation of the Fund's net
asset value. If an event materially affecting the value of foreign securities
occurs during that period, then those securities may be valued at fair value as
determined in good faith by the Trustees or persons acting at their direction.
In addition, because the Fund may hold portfolio securities listed on foreign
exchanges which may trade on days on which the NYSE is closed, the net asset
value of the Fund's shares may be significantly affected on days when investors
will have no ability to redeem their shares.
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HOW TO PURCHASE SHARES
You may purchase the Fund's shares from the Trust on any day when the NYSE
is open for business. In addition, brokers and agents are authorized to accept
purchase and redemption orders on the Fund's behalf. You may pay a fee if you
effect a transaction through a broker or agent. To obtain a purchase order form,
call the Trust at (617) 346-7646 or your broker or agent.
PURCHASE POLICIES. Before a purchase order will be acted upon by the
Trust, the Trust must determine that the purchase order is in "good order." A
purchase order is in "good order" if:
- a completed purchase order, containing the following information, is
submitted to the Trust or its agent:
- signature exactly in accordance with the form of registration
- the exact name in which the shares are registered
- the investor's account number
- the number of shares or the dollar amount of shares to be purchased
- the purchase order is received and accepted by the Trust or its agent
(the Trust reserves the right to reject any order)
- payment (by check or wire) for the purchase is received before 4:00 p.m.
on the day the purchase order is accepted
- if an investor provides adequate written assurances of intention to
pay, the Trust may extend settlement up to four business days.
The purchase price of a share of the Fund is the net asset value per share
next determined after the purchase order is determined to be in "good order"
PLUS a purchase premium, if any, for the Fund shares to be purchased. Purchase
order forms received by the Trust or its agent after the deadline will be
honored on the next following business day, and the purchase price will be
effected based on the net asset value per share computed on that day.
Minimum investment amounts are set forth in the table on page 12 of this
Prospectus. There is no minimum additional investment required to purchase
additional shares of the Fund. The Trust may waive initial minimums for certain
accounts.
SUBMITTING YOUR PURCHASE ORDER FORM. Completed purchase order forms can be
submitted by MAIL or by FACSIMILE to the Trust at:
GMO Trust
c/o Grantham, Mayo, Van Otterloo & Co. LLC
40 Rowes Wharf
Boston, Massachusetts 02110
Facsimile: (617) 439-4192
Attention: Shareholder Services
Call the Trust at (617) 346-7646 to CONFIRM RECEIPT of your purchase order
form. Do not send cash, checks or securities directly to the Trust.
FUNDING YOUR INVESTMENT. You may purchase shares:
- with cash (via wire transfer or check)
- BY WIRE. Instruct your bank to wire the amount of your investment to:
Investors Bank & Trust Company, Boston, Massachusetts
ABA#: 011-001-438
Attn: Transfer Agent
Credit: GMO Deposit Account 55555-4444
Further credit: GMO Fund/shareholder name and number
9
<PAGE> 11
- BY CHECK. All checks must be made payable to the Fund or to GMO
Trust. The Trust will not accept any checks payable to a third party
which have been endorsed by the payee to the Trust. Mail checks to:
<TABLE>
<S> <C>
By U.S. Postal Service: By Overnight Courier:
Investors Bank & Trust Company Investors Bank & Trust Company
GMO Transfer Agent MFD 23 GMO Transfer Agent MFD 23
P.O. Box 9130 200 Clarendon Street, 16th Floor
200 Clarendon Street, 16th Floor Boston, MA 02116
Boston, MA 02117-9130
</TABLE>
- by exchange (from another GMO product)
- written instruction should be sent to GMO Trust's Shareholder Services
at (617) 439-4192 (facsimile)
- in exchange for securities acceptable to the Manager
- securities must be approved by the Manager prior to transfer to the
Fund
- securities will be valued as set forth under "Determination of Net
Asset Value" on page 8
- by a combination of cash and securities.
HOW TO REDEEM SHARES
You may redeem shares of the Fund on any day when the NYSE is open for
business.
REDEMPTION POLICIES. Payment on redemption will be made as promptly as
possible (generally on the next business day) and no later than seven days
(subject to the exceptions noted below) after the request for redemption is
received by the Trust or its agent in "good order."
A redemption request is in "good order" if it:
- is received by the Trust or its agent prior to the close of regular
trading on the NYSE (generally 4:00 p.m. New York City time)
- is signed exactly in accordance with the form of registration
- includes the exact name in which the shares are registered
- includes the investor's account number
- includes the number of shares or the dollar amount of shares to be
redeemed
Redemption requests received by the Trust or its agent after the deadline
will be honored on the next following business day, and the redemption will be
effected based on the net asset value per share computed on that day. The
redemption price is the net asset value per share next determined after the
redemption request is determined to be in "good order."
If the Manager determines, in its sole discretion, that it would be
detrimental to the best interests of the remaining shareholders to make a
redemption 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 instead of cash.
If a redemption is made in cash:
- payment will be made in federal funds transferred to the account
designated in writing by authorized persons
- designation of additional accounts and any change in the accounts
originally designated must be made in writing.
- upon request, payment will be made by check mailed to the registration
address
If a redemption is made in-kind, it is important for you to note:
- securities used to redeem Fund shares will be valued as set forth under
"Determination of Net Asset Value" on page 8
- securities distributed by the Fund 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
- to the extent available, in-kind redemptions will be of readily
marketable securities
10
<PAGE> 12
- you may incur brokerage charges on the sale of any securities received as
a result of an in-kind redemption
- in-kind redemptions will be transferred and delivered by the Trust as
directed by you
Each Fund may suspend the right of redemption and may postpone payment for
more than seven days:
- if the NYSE is closed for other than weekends or holidays
- during periods when trading on the NYSE is restricted
- during an emergency which makes it impracticable for a Fund to dispose of
its securities or to fairly determine the net asset value of the Fund
- during any other period permitted by the Securities and Exchange
Commission for the protection of investors.
SUBMITTING YOUR REDEMPTION REQUEST. Redemption requests can be submitted
by MAIL or by FACSIMILE to the Trust at the address/facsimile number set forth
under "How to Purchase Shares -- Submitting Your Purchase Order Form."
Redemption requests submitted by mail are "received" by the Trust when actually
delivered to the Trust or its agent. Call the Trust at (617) 346-7646 to CONFIRM
RECEIPT of redemption requests.
11
<PAGE> 13
MULTIPLE CLASSES
The Fund offers two classes of shares. The sole economic difference between
the Class III shares described in this Prospectus and the Fund's other class of
shares (Class IV) is the level of Shareholder Service Fee that the classes bear
for client and shareholder service, reporting and other support, reflecting the
fact that, as the size of a client relationship increases, the cost to service
that client decreases as a percentage of the assets in that account. Thus, the
Shareholder Service Fee is lower for Class IV shares of the Fund where
eligibility criteria require greater total assets under GMO's management.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
MINIMUM TOTAL INVESTMENT/ SHAREHOLDER SERVICE FEE (AS A %
INTERNATIONAL CORE FUND TOTAL FUND INVESTMENT* OF AVERAGE DAILY NET ASSETS)
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
$1 million/NA 0.15%
Class III
--------------------------------------------------------------------------------------------------------------------
$250 million/$125 million 0.105%
Class IV
--------------------------------------------------------------------------------------------------------------------
</TABLE>
* The eligibility requirements in the table above are subject to certain
exceptions and special rules for certain plan investors and for certain
clients with continuous client relationships with GMO since May 31, 1996.
ELIGIBILITY FOR CLASSES
Eligibility for different classes of the Fund depends upon the client
meeting either (i) the minimum "Total Fund Investment" set forth in the above
table, which includes only a client's total investment in a particular Fund, or
(ii) the minimum "Total Investment" set forth in the above table, calculated as
described below.
DETERMINATION OF TOTAL INVESTMENT
A client's Total Investment equals the market value of all the client's
assets managed by GMO and its affiliates (1) at the time of initial investment,
(2) at close of business on the last business day of each calendar quarter, or
(3) at other times as determined by the Manager (each, a "Determination Date").
The Manager will monitor the value of the MSCI World Index (computed in U.S.
dollars with net dividends reinvested). On December 31 of any year, the Manager
may increase the Minimum Total Investment/Total Fund Investment amounts by the
same percentage by which the value of the MSCI World Index increased from June
30, 2000 through December 31 of the year being evaluated.
You should note:
- There is no minimum additional investment required to purchase additional
shares of the Fund for any class of shares.
- The Manager will make all determinations as to the aggregation of client
accounts for purposes of determining eligibility.
- Eligibility requirements for each class of shares are subject to change
upon notice to shareholders.
- Assets invested in GMO's Pelican Fund will not be considered when
determining a client's Total Investment.
CONVERSIONS BETWEEN CLASSES
Client's shares in the Fund will be converted to the class of shares of the
Fund with the lowest Shareholder Service Fee for which the client is eligible,
based on the amount of the client's Total Investment or Total Fund Investment,
on the Determination Date.
12
<PAGE> 14
DISTRIBUTIONS AND TAXES
The policy of the Fund is to declare and pay distributions of its
dividends, interest and foreign currency gains 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. The Fund is treated as a separate taxable entity for federal income
tax purposes and intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended.
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.
It is important for you to note:
- Fund distributions derived from interest, dividends and certain other
income, including in general short-term capital gains, will be taxable as
ordinary income to shareholders subject to federal income tax whether
paid in cash or in shares. Properly designated Fund distributions derived
from net long-term capital gains will be taxable as such (generally at a
20% federal rate for noncorporate shareholders whether paid in cash or in
shares).
- Distributions by the Fund result in a reduction in the net asset value of
the Fund's shares. If a distribution reduces the net asset value of a
shareholder's shares below a shareholder's cost basis in those shares,
such distribution may be taxable to the shareholder, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, if you buy shares just prior to a taxable distribution by the
Fund, you will pay the full price of the shares (including the value of
the pending distribution) and then receive a portion of the price back as
a taxable distribution.
- The Fund's investment in foreign securities may be subject to foreign
withholding taxes on dividends, interest or capital gains which will
decrease the Fund's yield. In certain instances, shareholders may be
entitled to claim a credit or deduction with respect to foreign taxes.
- The Fund's investment in foreign securities, foreign currencies, debt
obligations issued or purchased at a discount, asset-backed securities,
assets "marked to the market" for federal income tax purposes and,
potentially, so-called "indexed securities" (including inflation indexed
bonds) may increase or accelerate the Fund's recognition of income,
including the recognition of taxable income in excess of the cash
generated by such investments. These investments may, therefore, affect
the timing or amount of the Fund's distributions and may cause the Fund
to liquidate other investments at a time when it is not advantageous to
do so in order to satisfy the distribution requirements that apply to
entities taxed as regulated investment companies.
- Any gain resulting from the sale, exchange or redemption of your shares
will generally also be subject to tax.
The above is a general summary of the principal federal income tax
consequences of investing in the Fund for shareholders who are U.S. citizens,
residents or domestic corporations. You should consult your own tax advisors
about the precise tax consequences of an investment in the Fund in light of your
particular tax situation, including possible foreign, state, local or other
applicable tax laws (including the federal alternative minimum tax).
13
<PAGE> 15
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
the Class III shares of the Fund.
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
CLASS III SHARES
----------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
----------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 6.31 $ 9.56 $ 12.49 $ 10.54 $ 9.52
-------- -------- -------- ---------- --------
Income (loss) from investment operations:
Net investment income...................................... 0.13(2) 0.25 0.16(2) 0.13 0.10
Net realized and unrealized gain (loss).................... 4.77 (3.19) (1.76) 1.96 1.06
-------- -------- -------- ---------- --------
Total from investment operations......................... 4.90 (2.94) (1.60) 2.09 1.16
-------- -------- -------- ---------- --------
Less distributions to shareholders from:
Net investment income...................................... (0.03) (0.19) (0.25) (0.14) (0.01)
In excess of net investment income......................... (0.02)
Net realized gains......................................... -- (0.12) (0.71) -- (0.13)
In excess of net realized gains............................ -- (0.00)(3) (0.37) -- --
-------- -------- -------- ---------- --------
Total distributions...................................... (0.05) (0.31) (1.33) (0.14) (0.14)
-------- -------- -------- ---------- --------
Net asset value, end of period.............................. $ 11.16 $ 6.31 $ 9.56 $ 12.49 $ 10.54
======== ======== ======== ========== ========
Total Return(1)............................................. 77.43% (30.96)% (12.94)% 19.98% 12.24%
Ratios/Supplemental Data:
Net assets, end of period (000's).......................... $727,197 $524,741 $913,615 $1,725,651 $907,180
Net expenses to average daily net assets................... 1.18% 1.16% 1.24%(4) 1.24%(4) 1.35%
Net investment income to average daily net assets.......... 1.41% 2.75% 1.30% 1.40% 1.31%
Portfolio turnover rate.................................... 73% 76% 88% 41% 35%
Fees and expenses voluntarily waived or borne by the Manager
consisted of the following per share amounts............... $ 0.00(5) $ 0.02 $ 0.03 $ 0.02 $ --(5)
</TABLE>
(1) Calculation excludes purchase premiums and redemption fees. Total returns
would be lower had certain expenses not been waived during the periods
shown.
(2) Computed using average shares outstanding throughout the period.
(3) The distribution in excess of net realized gains was $0.0005.
(4) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .06% and .035% of average daily net assets for
the years ended February 28, 1997 and 1998, respectively.
(5) Fees and expenses voluntarily waived or borne by the Manager were less than
$.01 per share.
14
<PAGE> 16
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<PAGE> 17
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<PAGE> 18
GMO TRUST
ADDITIONAL INFORMATION
The Fund's annual and semi-annual reports to shareholders contain
additional information about the Fund's investments. The Fund's annual report
contains a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. The
Fund's annual and semi-annual reports, and the Fund's Statement of Additional
Information are available free of charge by writing to GMO, 40 Rowes Wharf,
Boston, Massachusetts 02110 or by calling collect (617) 346-7646. The Statement
contains more detailed information about the Fund and is incorporated by
reference into this Prospectus.
Investors can review and copy the Prospectus, Statement and reports at the
SEC's Public Reference Room in Washington, D.C. Information regarding the
operation of the Public Reference Room may be obtained by calling the SEC at
1-202-942-8090. Reports and other information about the Fund are available on
the SEC's Internet site at http://www.sec.gov. Copies of this information may be
obtained, upon payment of a duplicating fee, by writing the Public Reference
Section of the SEC, Washington, D.C. 20549-0102.
SHAREHOLDER INQUIRIES
Shareholders may request additional
information from and direct inquiries to:
Shareholder Services at
Grantham, Mayo, Van Otterloo & Co. LLC,
40 Rowes Wharf, Boston, MA 02110
1-617-346-7646 (CALL COLLECT)
1-617-439-4192 (FAX)
DISTRIBUTOR
Funds Distributor, Inc.
60 State Street
Boston, Massachusetts 02109
INVESTMENT COMPANY ACT FILE NO. 811-4347
