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File Nos. 2-98772
811-4347
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON JULY 3, 2000
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
Post-Effective Amendment No. 63 /X/
GMO TRUST
(Exact Name of Registrant as Specified in Charter)
40Rowes Wharf, Boston,
Massachusetts 02110 (Address of
principal executive offices)
617-330-7500
(Registrant's telephone number, including area code)
with a copy to:
R. Jeremy Grantham J.B. Kittredge, Esq.
GMO Trust Ropes & Gray
40 Rowes Wharf One International Place
Boston, Massachusetts 02110 Boston, Massachusetts 02110
(Name and address of agents for service)
It is proposed that this filing will become effective upon filing pursuant to
Section 8 of the Investment Company Act of 1940.
This filing relates solely to the GMO Foreign Small Companies Fund; it is
intended that no information relating to any other series of GMO Trust is
amended or superseded hereby.
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GMO TRUST
Private Placement
Memorandum
June 30, 2000
- GMO FOREIGN SMALL COMPANIES 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 O BOSTON, MASSACHUSETTS 02110
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this private placement memorandum. Any
representation to the contrary is a criminal offense.
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.
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TABLE OF CONTENTS
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SUMMARY OF FUND OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES... 1
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES.................... 2
SUMMARY OF PRINCIPAL RISKS....................................... 2
FEES AND EXPENSES................................................ 6
FUND BENCHMARK................................................... 7
MANAGEMENT OF THE FUND........................................... 7
DETERMINATION OF NET ASSET VALUE................................. 8
HOW TO PURCHASE SHARES........................................... 10
HOW TO REDEEM SHARES............................................. 11
DISTRIBUTIONS AND TAXES.......................................... 13
ADDITIONAL INFORMATION........................................... BACK COVER
SHAREHOLDER INQUIRIES............................................ BACK COVER
</TABLE>
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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 Private Placement Memorandum (the "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 specific Fund investments and
strategies. The Fund 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 bank deposit and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency.
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GMO FOREIGN SMALL COMPANIES FUND
Fund Inception Date: 6/30/00
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Foreign Small Companies Fund seeks high total
return. The Fund seeks to achieve its objective through investment in a
diversified portfolio of equity securities of non-U.S. issuers. The Fund's
current benchmark is the SSB EMI World ex-U.S. Index. See "Fund Benchmark" for
more information.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities of
smaller companies located or doing business outside of the U.S. including but
not limited to companies in the SSB EMI World ex-U.S. universe. Companies in the
Fund's portfolio may have market capitalizations that are larger or smaller than
companies in this universe. The Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take defensive positions through investment in cash and high quality
money market instruments. The Fund may also use exchange-traded and
over-the-counter derivative instruments and related techniques to: (i) adjust
its equity or foreign currency exposure; (ii) replace direct investing; and
(iii) implement shifts in investment exposure as a substitute for buying and
selling securities.
METHODOLOGY/PORTFOLIO CONSTRUCTION: In selecting stocks for the Fund's
portfolio, the Manager uses a value-oriented, bottom-up approach, researching
and evaluating individual companies, to select stocks for the Fund. The Manager
looks at the following characteristics when considering a company for the
portfolio:
- Price to earnings ratio, which shows the relationship between a stock's
price and the company's earnings over the past four quarters;
- Price to book ratio, which compares a stock's current market value with the
amount shareholders would theoretically receive if the company liquidated;
- Price to cash flow ratio, which compares the price of the stock to the cash
flow per share; and
- Yield, which is the rate of return paid in dividends on common or preferred
stock.
The Manager then focuses on the companies that rank attractively based on these
criteria. Sector and country allocations are determined by the Manager's
top-down analysis of economic and market data. The Manager meets with company
management and other knowledgeable participants in world markets.
RISKS: The most significant risks of an investment in the Fund are Smaller
Company Risk, Market Risk, Foreign Investment Risk, Currency Risk and
Derivatives Risk. For more information about these risks and other principal
risks of an investment in the Fund, see "Summary of Principal Risks" below.
The Fund commenced operations as a registered investment company on
June 30, 2000. Prior to that date, the Fund operated as a portfolio of a private
investment pool with investment objectives, policies and guidelines that were
substantially the same as those of the Fund.
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.
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- 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. Because the Fund invests primarily in the securities of
smaller companies, these risks may be particularly pronounced.
- 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 a
Fund. General market risks associated with investments in equity securities
include the following:
Equity Securities. A principal risk of the Fund is that the equity
securities held by the Fund will decline in value due to factors affecting the
issuing companies, their industries, or the economy and equity markets
generally. The values of equity securities may decline for a number of reasons
that directly relate to the issuing company, such as management performance,
financial leverage and reduced demand for the issuer's goods or services. They
may also decline due to factors that affect a particular industry or industries,
such as labor shortages or increased production costs and competitive conditions
within an industry. In addition, they may decline due to general market
conditions which are not specifically related to a company or industry, such as
real or perceived adverse economic conditions, changes in the general outlook
for corporate earnings, changes in interest or currency rates or adverse
investor sentiment generally.
The Fund maintains substantial exposure to equities and generally does
not attempt to time the market. Because of this exposure, the possibility that
stock market prices in general will decline over short or extended periods
subjects the Fund to unpredictable declines in the value of their shares, as
well as periods of poor performance.
Value Securities Risk. Some equity securities (generally referred to as
"value securities") are purchased primarily because they are selling at a price
lower than what is believed to be their true value and not necessarily because
the issuing companies are expected to experience significant earnings growth.
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 the securities may decline or may not approach the value that the
Manager anticipates. Since value criteria are used extensively by the Manager
with the Fund, the Fund will be exposed to these risks.
Growth Securities Risk. Some equity securities (generally known as
"growth securities") are purchased primarily because it is believed that the
companies issuing the securities will experience relatively rapid earnings
growth. Growth securities typically trade at higher multiples of current
earnings than other types of stocks. 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. The Fund may invest to a significant extent in growth securities
and therefore is subject to these risks.
- FOREIGN INVESTMENT RISK. Investments in securities traded principally
in securities markets outside the United States are subject to additional and
more varied risks, and may experience more rapid and extreme changes in value.
The securities markets of many foreign countries are relatively small, with a
limited number of companies representing a small number of industries.
Additionally, issuers of foreign securities may not be subject to the same
degree of regulation as U.S. issuers. Reporting, accounting and auditing
standards of foreign countries differ, in some cases significantly, from U.S.
standards. There are generally higher commission rates on foreign portfolio
transactions, transfer taxes, higher custodial costs and the possibility that
foreign taxes will be charged on dividends and interest payable on foreign
securities. Also, for less developed countries, nationalization, expropriation
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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.
Emerging Markets Risk. In addition, the Fund may invest in the
securities of issuers based in countries with developing or "emerging market"
economies. These investments are subject to greater levels of foreign investment
risk than similar investments 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.
Foreign investment and emerging markets risks will be particularly
pronounced for the Fund, which invests primarily in foreign securities.
- 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 the currencies in which the Fund's
investments are denominated or currencies in which the Fund has taken an active
investment position will decline in value relative to the U.S. Dollar and, in
the case of hedging positions, that the U.S. Dollar will decline in value
relative to the currency being hedged. Currency rates in foreign countries may
fluctuate significantly for a number of reasons, including the forces of supply
and demand in the foreign exchange markets, actual or perceived changes in
interest rates, and intervention (or the failure to intervene) by U.S. or
foreign governments or central banks, or by currency controls or political
developments in the U.S. or abroad.
The Fund may engage in proxy hedging of currencies by entering into
derivative transactions with respect to a currency whose value is expected to
correlate to the value of a currency the Fund owns or wants to own. In the case
of cross-hedging positions, currency risk also includes the risk that the two
currencies may not move in relation to one another as expected. In that case,
the Fund could lose money on its investment and also lose money on the position
designed to act as a proxy-hedge. The Fund may also take active currency
positions and may cross-hedge currency exposure represented by its securities
exposure into another foreign currency. This may result in the Fund's currency
exposure being substantially different than that suggested by its securities
investments.
Any fund that invests or trades in foreign currencies or in securities
denominated in foreign currencies or related derivative instruments may be
adversely affected by changes in foreign currency exchange rates. Currency risk
is particularly pronounced for the Fund, which may regularly enter into
derivative foreign currency transactions and may take active long and short
currency positions through exchange traded and over-the-counter ("OTC") foreign
currency transactions for investment purposes. Derivative foreign currency
transactions (such as futures, forwards and swaps) may also involve leveraging
risk in addition to currency risk as described below under "Leveraging Risk."
- DERIVATIVES RISK. The Fund may use derivatives, but generally will
limit its use of derivatives to spot and forward currency contracts. Derivatives
are financial contracts whose values depend upon, or are derived from, the value
of an underlying asset, reference rate or index. Derivatives may relate to
stocks, bonds, interest rates, currencies or currency exchange rates,
commodities, and related indexes. The Fund may use derivatives for many
purposes, including for hedging and as a substitute for direct investment in
securities or other assets. The Fund may also use derivatives as a way to
efficiently adjust its exposure to various securities, indexes and currencies
without actually selling current assets and purchasing different assets. This is
generally done either because the adjustment is expected to be relatively
temporary or in anticipation of effecting the sales and purchases of Fund assets
over time. For a description of the various derivative instruments that may be
utilized by the Fund, 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
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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.
- 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 the equity securities of non-U.S. issuers and other investments described in
this Prospectus.
- 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. This risk may be particularly pronounced
for the Fund, because its principal investment strategies involve investments in
securities of companies with smaller market capitalizations, foreign securities,
derivatives or securities with substantial market and/or credit risk.
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FEES AND EXPENSES
The following describes the fees and expenses you may pay if you buy
and hold shares of the Fund:
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR INVESTMENT)
None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
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Management fee 0.70%
Shareholder service fee 0.15%
Other expenses(1) 0.50%
-------------------------------------------------
Total annual operating expenses 1.35%
Expense reimbursement(2) 0.50%
-------------------------------------------------
Net annual operating expenses 0.85%
=================================================
</TABLE>
NOTES TO FEES AND EXPENSES:
1. Based on estimated amounts for the Fund's first fiscal year.
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), investment expense and
transfer taxes) would otherwise exceed 0.70% of the Fund's daily net
assets.
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FUND BENCHMARK
The Manager measures the Fund's performance against a specific
benchmark or index, although the Fund is not managed as an "index fund" or
"index-plus fund," and the actual composition of the Fund's portfolio may differ
substantially from that of its benchmark. The SSB EMI World ex-U.S. is the small
capitalization stock component of the SSB Broad Market Index (BMI). The BMI is a
float-weighted index that spans 22 countries and includes the listed shares of
all companies with an available market capitalization (float) of at least $100
million at the end of May each year. Companies are deleted if their float falls
below $75 million. Changes are effective before the open of the first business
day of July. The EMI ex-U.S. is defined as those stocks falling in the bottom
20% of the cumulative available capital in each country. This index is published
by Salomon Smith Barney.
MANAGEMENT OF THE FUND
Grantham, Mayo, Van Otterloo & Co., LLC ("GMO"), 40 Rowes Wharf,
Boston, Massachusetts 02110 provides investment advisory services to the Fund.
The Fund is a series of GMO Trust, a registered, open-end management investment
company. 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. 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 fund has been managed since inception by a team
of investment professionals led by Jui Lai and Ann Spruill. Mr. Lai has been an
investment director at GMO since 1988 and Ms. Spruill has been an investment
director since 1990. Both Mr. Lai and Ms. Spruill have been partners/members of
GMO since 1996 and 1993, respectively.
CUSTODIANS
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts
02109, serves as the Fund's custodians.
TRANSFER AGENT
Investors Bank & Trust Co. 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 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 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
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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 holds portfolio securities listed
on foreign exchanges which may trade on days on which the NYSE is closed, the
net asset value of Fund 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 Fund 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. Investors may be charged a
fee to 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. Investors
must have a minimum total investment of $1 million with the Manager to invest in
the Fund. There is no minimum additional investment required to purchase
additional shares of the Fund. The Trust may waive the minimum initial
investment amount for certain accounts.
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." 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.
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.
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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, Boston, Massachusetts
ABA#: 011-001-438
Attn: Transfer Agent
Credit: GMO Deposit Account 55555-4444
Further credit: GMO Foreign Small Companies Fund
- 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:
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<CAPTION>
By U.S. postal service: By overnight courier:
----------------------- ---------------------
<S> <C>
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 02117-9130
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
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Redemption requests received by the Trust or its agent after the
deadline will be honored on the next 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
- 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
The 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 C during
periods when trading on the NYSE is restricted
- during an emergency which makes it impracticable for the 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.
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<PAGE> 16
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 one year or more ("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. 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 a 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, including a redemption in kind, will generally also be subject
to tax.
- The Fund's hedging transactions and investments in derivatives,
including investments in options, futures and swaps, will be subject to
special tax rules (including constructive sale, mark-to-market,
straddle, wash sale and short sale rules) which could accelerate
income, defer losses, or otherwise affect the amount, timing or
character of distributions to shareholders.
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).
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<PAGE> 17
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 ("SAI") are available free of charge by writing to GMO, 40 Rowes
Wharf, Boston, Massachusetts 02110 or by calling collect (617) 346-7646. The SAI
contains more detailed information about the Fund and is incorporated by
reference into this Prospectus.
Investors can review and copy the Prospectus, SAI 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)
INVESTMENT COMPANY ACT FILE NO. 811-4347
<PAGE> 18
GMO FOREIGN SMALL COMPANIES FUND
STATEMENT OF ADDITIONAL INFORMATION
June 30, 2000
This Statement of Additional Information is not a prospectus. It relates to the
GMO Foreign Small Companies Fund (the "Fund") Private Placement Memorandum dated
June 30, 2000, as amended from time to time (the "Prospectus"), and should be
read in conjunction therewith. The Fund is a series of GMO Trust (the "Trust").
Information from the Prospectus is incorporated by reference into this Statement
of Additional Information. The Prospectus may be obtained free of charge from
GMO Trust, 40 Rowes Wharf, Boston, Massachusetts 02110, or by calling the Trust
collect at (617) 346-7646.
<PAGE> 19
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES...............................................................................2
DESCRIPTIONS AND RISKS OF FUND INVESTMENTS.......................................................................2
INVESTMENT RESTRICTIONS.........................................................................................27
MANAGEMENT OF THE TRUST.........................................................................................28
INVESTMENT ADVISORY AND OTHER SERVICES..........................................................................30
PORTFOLIO TRANSACTIONS..........................................................................................32
DETERMINATION OF NET ASSET VALUE \F C \L........................................................................33
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES................................................................34
VOTING RIGHTS...................................................................................................35
SHAREHOLDER AND TRUSTEE LIABILITY...............................................................................36
BENEFICIAL OWNERS OF 5% OR MORE OF THE FUND'S SHARES............................................................36
DISTRIBUTIONS...................................................................................................36
TAXES...........................................................................................................37
PERFORMANCE INFORMATION.........................................................................................41
FINANCIAL STATEMENTS............................................................................................42
</TABLE>
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<PAGE> 20
INVESTMENT OBJECTIVES AND POLICIES
The principal strategies and risks of investing in the GMO Foreign
Small Companies Fund (the "Fund") are described in the Prospectus. Unless
otherwise indicated in the Prospectus or this Statement of Additional
Information, the investment objective and policies of the Fund may be changed
without shareholder approval.
The Fund is a "diversified company" under the Investment Company Act of
1940 (the "1940 Act"). This means that at least 75 percent of the fund's total
asset value is limited in respect of any one issuer to not greater five percent
of the total asset value of the fund, and to not more than ten percent of the
outstanding voting securities of any one issuer.
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.
The Fund may not necessarily engage in all practices described below. Please
refer to "Fund Objectives and Principal Investment Strategies" in the Prospectus
and "Investment Guidelines" in this Statement of Additional Information for
additional information regarding in which practices the Fund may engage.
PORTFOLIO TURNOVER
In any particular year, market conditions may well result in greater rates than
are presently anticipated. High portfolio turnover involves correspondingly
greater brokerage commissions and other transaction costs, which will be borne
directly by the Fund, and may involve realization of capital gains that would be
taxable when distributed to shareholders of the Fund unless such shareholders
are themselves exempt. See "Distributions and Taxes" in the Prospectus and
"Distributions" and "Taxes" in this Statement of Additional Information. To the
extent that portfolio turnover results in the recognition of short-term capital
gains, such gains are typically taxed to shareholders at ordinary income tax
rates.
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
-2-
<PAGE> 21
overseas. Investors should also be aware that under certain circumstances,
markets which are perceived to have similar characteristics to troubled markets
may be adversely affected whether or not similarities actually exist.
EMERGING MARKETS. The risks described above apply to an even greater
extent to investments in emerging markets. The securities markets of emerging
countries are generally smaller, less developed, less liquid, and more volatile
than the U.S. and developed foreign securities markets. Disclosure and
regulatory standards in many respects are less stringent than in the U.S. and
developed foreign securities markets. There also may be a lower level of
monitoring and regulation of securities markets in emerging market countries and
the activities of investors in such markets, and enforcement of existing
regulations has been extremely limited. Many emerging countries have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have very negative effects on the economies and securities markets
of certain emerging countries. Economies in emerging markets generally are
heavily dependent upon international trade and, accordingly, have been and may
continue to be affected adversely by trade barriers, exchange controls, managed
adjustments in relative currency values, and other protectionist measures
imposed or negotiated by the countries with which they trade. These economies
also have been and may continue to be adversely affected by economic conditions
in the countries in which they trade. The economies of countries with emerging
markets may also be predominantly based on only a few industries or dependent on
revenues from particular commodities. In addition, custodial services and other
costs relating to investment in foreign markets may be more expensive in
emerging markets than in many developed foreign markets, which could reduce 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 or, in the case of fixed-income securities, interest thereon.
INVESTMENTS IN ASIA. In addition to the foregoing risks of foreign
investments and risks specific to emerging markets, investments by the Fund in
Asia involve additional risks specific to investment in the region. The region
encompasses countries at varying levels of economic development ranging from
emerging markets to more developed economies. Each country provides unique
investment risks, yet the political and economic prospects of one country or
group of countries may impact other countries in the region. For example, some
Asian economies are directly affected by Japanese capital investment in the
region and by Japanese
-3-
<PAGE> 22
consumer demands. In addition, a recession, a debt-crisis or a decline in
currency valuation in one country can spread to other countries.
Investments in Asia are susceptible to political and social factors
affecting issuers in Asian countries. Some countries have authoritarian or
relatively unstable governments. Certain governments in the region provide less
supervision and regulation of financial markets than is typical of other
emerging markets, and less financial information is available. Restrictions on
direct foreign investments in securities markets also exist in some countries.
For example, Taiwan permits foreign investment only through authorized qualified
foreign institutional investors. The return of Hong Kong to China in 1997 will
continue to affect the region.
Some countries in the region are heavily dependent upon foreign trade.
The economies of some Asian countries are not diversified and are based upon
only a few commodities or industries. Markets in some of these countries are in
the early stages of development, exhibit a high concentration of market
capitalization, have less trading volume, lower liquidity and more volatility
than more developed markets.
The region periodically experiences increased market volatility and
declines in foreign currency exchange rates. Fluctuation in currency exchange
rates can affect a country's ability to service its debt. Currency fluctuation
will affect the value of the securities in the Fund's portfolio because the
prices of these securities are generally denominated or quoted in currencies
other than the U.S. dollar.
DIRECT INVESTMENT IN RUSSIAN SECURITIES. The Fund may invest directly
in securities of Russian issuers. Investment in securities of such issuers
presents many of the same risks as investing in securities of issuers in other
emerging market economies, as described in the immediately preceding section.
However, the political, legal and operational risks of investing in Russian
issuers, and of having assets custodied within Russia, may be particularly
acute.
A risk of particular note with respect to direct investment in Russian
securities is the way in which ownership of shares of private companies is
recorded. When the Fund invests in a Russian issuer, it will receive a "share
extract," but that extract is not legally determinative of ownership. The
official record of ownership of a company's share is maintained by the company's
share registrar. Such share registrars are completely under the control of the
issuer, and investors are provided with few legal rights against such
registrars.
SECURITIES LENDING
The Fund may make secured loans of portfolio securities amounting to
not more than one-third of the Fund's total assets. Although permitted to do so,
the Fund is under no obligation to engage in securities lending under any
circumstances. The risks in lending portfolio securities, as with other
extensions of credit, consist of possible delay in recovery of the securities or
possible loss of rights in the collateral should the borrower fail financially.
However, such loans will be made only to broker-dealers that are believed by the
Manager to be of relatively high credit standing. Securities loans are made to
broker-dealers pursuant to agreements requiring that loans be continuously
secured by collateral in cash or liquid securities
-4-
<PAGE> 23
at least equal at all times to the market value of the securities lent. The
borrower pays to the lending Fund an amount equal to any dividends or interest
the Fund would have received had the securities not been lent. If the loan is
collateralized by liquid securities, the Fund will receive a fee from the
borrower. In the case of loans collateralized by cash, the Fund typically
invests the cash collateral for its own account in interest-bearing, short-term
securities and pays a fee to the borrower. Although voting rights or rights to
consent with respect to the loaned securities pass to the borrower, the Fund
retains the right to call the loans at any time on reasonable notice and 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 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.
DOMESTIC EQUITY DEPOSITARY RECEIPTS
The Fund may invest in Domestic Equity Depositary Receipts. These
instruments represent interests in a unit investment trust ("UIT") that holds a
portfolio of common stocks that is intended to track the price and dividend
performance of a particular index. Common examples of Domestic Equity Depositary
Receipts include S&P Depositary Receipts ("SPDRs") and Nasdaq 100 Shares, which
may be obtained from the UIT issuing the securities or purchased in the
secondary market (SPDRs and Nasdaq 100 Shares are listed on the American Stock
Exchange).
Domestic Equity Depositary Receipts are not individually redeemable,
except upon termination of the UIT that issued them. The liquidity of small
holdings of Domestic Equity Depositary Receipts depends upon the existence of a
secondary market.
The redemption price (and therefore the sale price) of Domestic Equity
Depositary Receipts is derived from and based upon the securities held by the
UIT that issued them. Accordingly, the level of risk involved in the purchase or
redemption or sale of a Domestic Equity Depositary Receipt is similar to the
risk involved in the purchase or sale of traditional
-5-
<PAGE> 24
common stock, with the exception that the price of Domestic Equity Depositary
Receipts is based on the value of a basket of stocks. Disruptions in the markets
for the securities underlying Domestic Equity Depositary Receipts purchased or
sold by the Fund could result in losses on Domestic Equity Depositary Receipts.
CONVERTIBLE SECURITIES
A convertible security is a fixed-income security (a bond or preferred
stock) which may be converted at a stated price within a specified period of
time into a certain quantity of the common stock of the same or a different
issuer. Convertible securities are senior to common stock in a corporation's
capital structure, but are usually subordinated to similar non-convertible
securities. Convertible securities provide, through their conversion feature, an
opportunity to participate in capital appreciation resulting from a market price
advance in a convertible security's underlying common stock. The price of a
convertible security is influenced by the market value of the underlying common
stock and tends to increase as the market value of the underlying stock rises,
whereas it tends to decrease as the market value of the underlying stock
declines. The Manager regards convertible securities as a form of equity
security.
FUTURES AND OPTIONS
The Fund may use futures and options for various purposes. While
permitted to do so, the Fund is under no obligation to engage in these
transactions under any circumstances. Such transactions may involve options,
futures and related options on futures contracts, and those instruments may
relate to particular equity and fixed income securities, equity and fixed income
indexes, and foreign currencies. The Fund may also enter into a combination of
long and short positions (including spreads and straddles) for a variety of
investment strategies, including protecting against changes in certain yield
relationships.
The use of futures contracts, option contracts and options on futures
contracts involves risk. Thus, while the Fund may benefit from the use of
futures, options and options on futures, unanticipated changes in interest
rates, securities prices, or currency exchange rates may result in poorer
overall performance for the Fund than if it had not entered into any futures
contracts or options transactions. Losses incurred in transactions in futures,
options and options on futures and the costs of these transactions will affect
the Fund's performance.
OPTIONS. As has been noted above, the Fund (1) may enter into contracts giving
third parties the right to buy the Fund's portfolio securities for a fixed price
at a future date (writing "covered call options"); (2) may enter into contracts
giving third parties the right to sell securities to the Fund for a fixed price
at a future date (writing "covered put options"); and (3) may buy the right to
purchase securities from third parties ("call options") or the right to sell
securities to third parties ("put options") for a fixed price at a future date.
WRITING COVERED OPTIONS. The Fund may seek to increase its return by writing
covered call or put options on optionable securities or indexes. A call option
written by the Fund on a security gives the holder the right to buy the
underlying security from the Fund at a stated
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<PAGE> 25
exercise price; a put option gives the holder the right to sell the underlying
security to the Fund at a stated exercise price. In the case of options on
indexes, the options are usually cash-settled based on the difference between
the strike price and the value of the index.
The Fund will receive a premium for writing a put or call option, which
increases the return in the event the option expires unexercised or is closed
out at a profit. The amount of the premium will reflect, among other things, the
relationship of the market price and volatility of the underlying security or
securities index to the exercise price of the option, the remaining term of the
option, supply and demand and interest rates. By writing a call option on a
security, the Fund limits its opportunity to profit from any increase in the
market value of the underlying security above the exercise price of the option.
By writing a put option on a security, the Fund assumes the risk that it may be
required to purchase the underlying security for an exercise price higher than
its then current market value, resulting in a potential capital loss unless the
security subsequently appreciates in value. In the case of options on an index,
if the Fund writes a call, any profit in respect of portfolio securities
expected to correlate with the index will be limited by an increase in the index
above the exercise price of the option. If the Fund writes a put on an index, it
may be required to make a cash settlement greater than the premium received if
the index declines.
A call option on a security is "covered" if the Fund owns the
underlying security or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration earmarked and maintained by the Fund's custodian on the
custodian's books and records) upon conversion or exchange of other securities
held in its portfolio. A call option on a security is also covered if the Fund
holds on a share-for-share basis a call on the same security as the call written
where the exercise price of the call held is equal to or less than the exercise
price of the call written or greater than the exercise price of the call written
if the difference is maintained by the Fund in cash, U.S. Government Securities
or other high grade debt obligations earmarked on the Custodian's books and
records. A call option on an index is "covered" if the Fund maintains cash, U.S.
Government Securities or other liquid assets with a value equal to the exercise
price in a segregated account with its custodian. A put option is "covered" if
the Fund's custodian earmarks and maintains cash, U.S. Government Securities or
other liquid assets with a value equal to the exercise price, or else holds on a
share-for-share basis a put on the same security as the put written where the
exercise price of the put held is equal to or greater than the exercise price of
the put written.
If the writer of an option wishes to terminate its obligation, it may
effect a "closing purchase transaction." This is accomplished, in the case of
exchange traded options, by buying an option of the same series as the option
previously written. The effect of the purchase is that the writer's position
will be canceled by the clearing corporation. The writer of an option may not
effect a closing purchase transaction after it has been notified of the exercise
of an option. Likewise, an investor who is the holder of an option may liquidate
its position by effecting a "closing sale transaction." This is accomplished by
selling an option of the same series as the option previously purchased. There
is no guarantee that the Fund will be able to effect a closing purchase or a
closing sale transaction at any particular time. Also, an over-the-counter
option may be closed out only with the other party to the option transaction.
-7-
<PAGE> 26
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price or expiration date or both, or in the
case of a written put option will permit the Fund to write another put option to
the extent that the exercise price thereof is secured by deposited cash or high
grade debt obligations. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option. The Fund will realize a
loss from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security or
index of securities, any loss resulting from the repurchase of a written call
option is likely to be offset in whole or in part by appreciation of the
underlying security or securities owned by the Fund.
The Fund may write options in connection with buy-and-write
transactions; that is, it may purchase a security and then write a call option
against that security. The exercise price of the call the Fund may write will
depend upon the expected price movement of the underlying security. The exercise
price of a call option may be below ("in-the-money"), equal to ("at-the-money")
or above ("out-of-the-money") the current value of the underlying security at
the time the option is written. Buy-and-write transactions using in-the-money
call options may be used when it is expected that the price of the underlying
security will remain flat or decline moderately during the option period.
Buy-and-write transactions using at-the-money call options may be used when it
is expected that the price of the underlying security will remain fixed or
advance moderately during the option period. Buy-and-write transactions using
out-of-the-money call options may be used when it is expected that the premiums
received from writing the call option plus the appreciation in the market price
of the underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If the call options
are exercised in such transactions, the Fund's maximum gain will be the premium
received by it for writing the option, adjusted upward or downward by the
difference between the Fund's purchase price of the security and the exercise
price. If the options are not exercised and the price of the underlying security
declines, the amount of such decline will be offset in part, or entirely, by the
premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund may elect to close the position or take
delivery of the security at the exercise price. In that event, the Fund's return
will be the premium received from the put option minus the cost of closing the
position or, if it chooses to take delivery of the security, the premium
received from the put option minus the amount by which the market price of the
-8-
<PAGE> 27
security is below the exercise price. Out-of-the-money, at-the-money and
in-the-money put options may be used by the Fund in market environments
analogous to those in which call options are used in buy-and-write transactions.
The extent to which the Fund will be able to write and purchase call
and put options may be restricted by the its intention to qualify as a regulated
investment company under the Internal Revenue Code.
RISK FACTORS IN OPTIONS TRANSACTIONS. An option writer has no control over when
the underlying securities or futures contract must be sold, in the case of a
call option, or purchased, in the case of a put option, since the writer may be
assigned an exercise notice at any time prior to the termination of the
obligation. If an option expires unexercised, the writer realizes a gain in the
amount of the premium. Such a gain, of course, may, in the case of a covered
call option, be offset by a decline in the market value of the underlying
security or futures contract during the option period. If a call option is
exercised, the writer realizes a gain or loss from the sale of the underlying
security or futures contract. If a put option is exercised, the writer must
fulfill the obligation to purchase the underlying security or futures contract
at the exercise price, which will usually exceed the then market value of the
underlying security or futures contract.
An exchange-traded option may be closed out only on a national
securities exchange ("Exchange") which generally provides a liquid secondary
market for an option of the same series. An over-the-counter option may be
closed out only with the other party to the option transaction. If a liquid
secondary market for an exchange-traded option does not exist, it might not be
possible to effect a closing transaction with respect to a particular option
with the result that the Fund holding the option would have to exercise the
option in order to realize any profit. For example, in the case of a written
call option, if the Fund is unable to effect a closing purchase transaction in a
secondary market (in the case of a listed option) or with the purchaser of the
option (in the case of an over-the-counter option), the Fund will not be able to
sell the underlying security (or futures contract) until the option expires or
it delivers the underlying security (or futures contract) upon exercise. Reasons
for the absence of a liquid secondary market on an Exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an Exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an Exchange; (v) the facilities of an Exchange or
the Options Clearing Corporation may not at all times be adequate to handle
current trading volume; or (vi) one or more Exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that Exchange (or in that class or series of options)
would cease to exist, although outstanding options on that Exchange that had
been issued by the Options Clearing Corporation as a result of trades on that
Exchange should continue to be exercisable in accordance with their terms.
The Exchanges have established limitations governing the maximum number
of options which may be written by an investor or group of investors acting in
concert. It is possible that the Fund, the Manager and other clients of the
Manager may be considered to be such a group.
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These position limits may restrict the Fund's ability to purchase or sell
options on a particular security.
The amount of risk the Fund assumes when it purchases an option is the
premium paid for the option plus related transaction costs. In addition to the
correlation risks discussed below, the purchase of an option also entails the
risk that changes in the value of the underlying security or futures contract
will not be fully reflected in the value of the option purchased.
FUTURES. A financial futures contract sale creates an obligation by the seller
to deliver the type of financial instrument called for in the contract in a
specified delivery month for a stated price. A financial futures contract
purchase creates an obligation by the purchaser to pay for and take delivery of
the type of financial instrument called for in the contract in a specified
delivery month, at a stated price. In some cases, the specific instruments
delivered or taken, respectively, at settlement date are not determined until on
or near that date. The determination is made in accordance with the rules of the
exchange on which the futures contract sale or purchase was made. Some futures
contracts are "cash-settled" (rather than "physically settled," as described
above) which means that the purchase price is subtracted from the current market
value of the instrument and the net amount if positive is paid to the purchaser,
and if negative is paid by the purchaser. Futures contracts are traded in the
United States only on commodity exchanges or boards of trade -- known as
"contract markets" -- approved for such trading by the Commodity Futures Trading
Commission ("CFTC"), and must be executed through a futures commission merchant
or brokerage firm which is a member of the relevant contract market. Under U.S.
law, futures contracts on individual equity securities are not permitted.
The purchase or sale of a futures contract differs from the purchase or
sale of a security or option in that no price or premium is paid or received.
Instead, an amount of cash, U.S. Government Securities or other liquid assets
generally not exceeding 5% of the face amount of the futures contract must be
deposited with the broker. This amount is known as initial margin. Subsequent
payments to and from the broker, known as variation margin, are made on a daily
basis as the price of the underlying futures contract fluctuates making the long
and short positions in the futures contract more or less valuable, a process
known as "marking to market." Prior to the settlement date of the futures
contract, the position may be closed out by taking an opposite position that
will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash may be required
to be either paid to or released by the broker, and the purchaser realizes a
loss or gain. In addition, a commission is paid on each completed purchase and
sale transaction.
In most cases futures contracts are closed out before the settlement
date without the making or taking of delivery. Closing out a futures contract
sale is effected by purchasing a futures contract for the same aggregate amount
of the specific type of financial instrument or commodity and the same delivery
date. If the price of the initial sale of the futures contract exceeds the price
of the offsetting purchase, the seller is paid the difference and realizes a
gain. Conversely, if the price of the offsetting purchase exceeds the price of
the initial sale, the seller realizes a loss. Similarly, the closing out of a
futures contract purchase is effected by the purchaser entering into a futures
contract sale. If the offsetting sale price exceeds the purchase
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<PAGE> 29
price, the purchaser realizes a gain, and if the purchase price exceeds the
offsetting sale price, a loss will be realized.
The ability to establish and close out positions on options on futures
will be subject to the development and maintenance of a liquid secondary market.
It is not certain that this market will develop or be maintained.
INDEX FUTURES. The Fund may purchase futures contracts on various securities
indexes ("Index Futures"). For example, the Fund may purchase Index Futures on
such foreign stock indexes as the Manager may deem appropriate, including those
which trade outside the United States. The Fund's purchase and sale of Index
Futures is limited to contracts and exchanges which have been approved by the
CFTC.
An Index Future may call for "physical delivery" or be "cash-settled."
An Index Future that calls for physical delivery is a contract to buy an
integral number of units of the particular securities index at a specified
future date at a price agreed upon when the contract is made. A unit is the
value from time to time of the relevant index. While an Index Future that calls
for physical delivery would obligate the Fund to pay the face amount on the
stated date, such an Index Future may be closed out on that date or any earlier
date by selling an Index Future with the same face amount and contract date.
This will terminate the Fund's position and the Fund will realize a profit or a
loss based on the difference between the cost of purchasing the original Index
Future and the price obtained from selling the closing Index Future. The amount
of the profit or loss is determined by the change in the value of the relevant
index while the Index Future was held.
For example, if the value of a unit of a particular index were $1,000,
a contract to purchase 500 units would be worth $500,000 (500 units x $1,000).
The Index Futures contract specifies that no delivery of the actual stocks
making up the index will take place. Instead, settlement in cash must occur upon
the termination of the contract, with the settlement being the difference
between the contract price and the actual level of the relevant index at the
expiration of the contract. For example, if the Fund enters into one futures
contract to buy 500 units of an index at a specified future date at a contract
price of $1,000 per unit and the index is at $1,010 on that future date, the
Fund will gain $5,000 (500 units x gain of $10).
Index Futures that are "cash-settled" provide by their terms for
settlement on a net basis reflecting changes in the value of the underlying
index. Thus, the purchaser of such an Index Future is never obligated to pay the
face amount of the contract. The net payment obligation may in fact be very
small in relation to the face amount.
The Fund may close open positions on the futures exchange on which
Index Futures are then traded at any time up to and including the expiration
day. All positions which remain open at the close of the last business day of
the contract's life are required to settle on the next business day (based upon
the value of the relevant index on the expiration day) with settlement made, in
the case of S&P 500 Index Futures, with the Commodities Clearing House.
Additional or different margin requirements as well as settlement procedures may
be applicable to foreign stock Index Futures at the time the Fund purchases
foreign stock Index Futures.
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<PAGE> 30
The price of Index Futures may not correlate perfectly with movement in
the relevant index due to certain market distortions. First, all participants in
the futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions that could distort the normal
relationship between the Index and futures markets. Secondly, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities market, and as a result the futures market may attract more
speculators than does the securities market. Increased participation by
speculators in the futures market may also cause temporary price distortions. In
addition, trading hours for foreign stock Index Futures may not correspond
perfectly to hours of trading on the foreign exchange to which a particular
foreign stock Index Futures relates. This may result in a disparity between the
price of Index Futures and the value of the relevant index due to the lack of
continuous arbitrage between the Index Futures price and the value of the
underlying index.
OPTIONS ON FUTURES CONTRACTS. Options on futures contracts give the purchaser
the right in return for the premium paid to assume a position in a futures
contract at the specified option-exercise price at any time during the period of
the option. The Fund may use options on futures contracts in lieu of writing or
buying options directly on the underlying securities or purchasing and selling
the underlying futures contracts. For example, to hedge against a possible
decrease in the value of its portfolio securities, the Fund may purchase put
options or write call options on futures contracts rather than selling futures
contracts. Similarly, the Fund may purchase call options or write put options on
futures contracts as a substitute for the purchase of futures contracts to hedge
against a possible increase in the price of securities which the Fund expects to
purchase. Such options generally operate in the same manner as options purchased
or written directly on the underlying investments. See "Foreign Currency
Transactions" below for a description of the Fund's use of options on currency
futures.
RISK FACTORS IN FUTURES TRANSACTIONS. Investment in futures contracts involves
risk. If the futures are used for hedging, some of that risk may be caused by an
imperfect correlation between movements in the price of the futures contract and
the price of the security or currency being hedged. The correlation is higher
between price movements of futures contracts and the instrument underlying that
futures contract. The correlation is lower when futures are used to hedge
securities other than such underlying instrument, such as when a futures
contract on an index of securities is used to hedge a single security, a futures
contract on one security (e.g., U.S. Treasury bonds) is used to hedge a
different security (e.g., a mortgage-backed security) or when a futures contract
in one currency is used to hedge a security denominated in another currency. In
the event of an imperfect correlation between a futures position and a portfolio
position (or anticipated position) that is intended to be protected, the desired
protection may not be obtained and the Fund may be exposed to risk of loss. In
addition, it is not always possible to hedge fully or perfectly against currency
fluctuations affecting the value of the securities denominated in foreign
currencies because the value of such securities also is likely to fluctuate as a
result of independent factors not related to currency fluctuations. The risk of
imperfect correlation generally tends to diminish as the maturity date of the
futures contract approaches.
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<PAGE> 31
A hedge will not be fully effective where there is such imperfect
correlation. To compensate for imperfect correlations, the Fund may purchase or
sell futures contracts in a greater amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the futures contracts. Conversely, the Fund may purchase or sell fewer
contracts if the volatility of the price of the hedged securities is
historically less than that of the futures contract.
The Fund may also purchase futures contracts (or options thereon) as an
anticipatory hedge against a possible increase in the price of currency in which
is denominated the securities it anticipates purchasing. In such instances, it
is possible that the currency may instead decline. If the Fund does not then
invest in such securities because of concern as to possible further market
and/or currency decline or for other reasons, it may realize a loss on the
futures contract that is not offset by a reduction in the price of the
securities purchased.
The liquidity of a secondary market in a futures contract may be
adversely affected by "daily price fluctuation limits" established by commodity
exchanges which limit the amount of fluctuation in a futures contract price
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions. Prices have in the past
exceeded the daily limit on a number of consecutive trading days. Short
positions in index futures may be closed out only by entering into a futures
contract purchase on the futures exchange on which the index futures are traded.
The successful use of transactions in futures and related options for
hedging and risk management also depends on the ability of the Manager to
forecast correctly the direction and extent of exchange rate, interest rate and
stock price movements within a given time frame. For example, to the extent
interest rates remain stable during the period in which a futures contract or
option is held by the Fund investing in fixed income securities (or such rates
move in a direction opposite to that anticipated), the Fund may realize a loss
on the futures transaction which is not fully or partially offset by an increase
in the value of its portfolio securities. As a result, the its total return for
such period may be less than if it had not engaged in the hedging transaction.
Unlike trading on domestic commodity exchanges, trading on foreign
commodity exchanges is not regulated by the CFTC and may be subject to greater
risks than trading on domestic exchanges. For example, some foreign exchanges
may be principal markets so that no common clearing facility exists and a trader
may look only to the broker for performance of the contract. In addition, unless
the Fund hedges against fluctuations in the exchange rate between the U.S.
dollar and the currencies in which trading is done on foreign exchanges, any
profits that it might realize in trading could be eliminated by adverse changes
in the exchange rate, or the it could incur losses as a result of those changes.
USES OF OPTIONS, FUTURES AND OPTIONS ON FUTURES
RISK MANAGEMENT. When futures and options on futures are used for risk
management, the Fund will generally take long positions (e.g., purchase call
options, futures contracts or options thereon) in order to increase exposure to
a particular market, market segment or foreign
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<PAGE> 32
currency. For example, if the Fund holds a portfolio of stocks with an average
volatility (beta) lower than that of the Fund's benchmark securities index as a
whole (deemed to be 1.00), the Fund may purchase Index Futures to increase its
average volatility to 1.00. In the case of futures and options on futures, the
Fund is only required to deposit the initial and variation margin as required by
relevant CFTC regulations and the rules of the contract markets. Because the
Fund will then be obligated to purchase the security or index at a set price on
a future date, its net asset value will fluctuate with the value of the security
as if it were already included in the Fund's portfolio. Risk management
transactions have the effect of providing a degree of investment leverage,
particularly when the Fund does not earmark assets equal to the face amount of
the contract (i.e., in cash-settled futures contracts) since the futures
contract (and related options) will increase or decrease in value at a rate
which is a multiple of the rate of increase or decrease in the value of the
initial and variation margin that the Fund is required to deposit. As a result,
the value of the Fund's portfolio will generally be more volatile than the value
of comparable portfolios which do not engage in risk management transactions.
The Fund will not, however, use futures and options on futures to obtain greater
volatility than it could obtain through direct investment in securities; that
is, the Fund will not normally engage in risk management to increase the average
volatility (beta) of that Fund's portfolio above 1.00, the level of risk (as
measured by volatility) that would be present if it were fully invested in the
securities comprising the relevant index. However, the Fund may invest in
futures and options on futures without regard to this limitation if the face
value of such investments, when aggregated with the Index Futures, equity swaps
and contracts for differences as described below does not exceed 10% of the
Fund's assets.
HEDGING. To the extent indicated elsewhere, the Fund may also enter into options
and futures contracts and buy and sell options on futures for hedging. For
example, the Fund may sell equity index futures if it wants to hedge its equity
securities against a general decline in the relevant equity market(s). The Fund
may also use futures contracts in anticipatory hedge transactions by taking a
long position in a futures contract with respect to a security, index or foreign
currency that it intends to purchase (or whose value is expected to correlate
closely with the security or currency to be purchased) pending receipt of cash
from other transactions to be used for the actual purchase. Then if the cost of
the security or foreign currency to be purchased by the Fund increases and if
the anticipatory hedge is effective, that increased cost should be offset, at
least in part, by the value of the futures contract. Options on futures
contracts may be used for hedging as well. For example, if the value of a
fixed-income security in the Fund's portfolio is expected to decline as a result
of an increase in rates, the Fund might purchase put options or write call
options on futures contracts rather than selling futures contracts. Similarly,
for anticipatory hedging, the Fund may purchase call options or write put
options as a substitute for the purchase of futures contracts. See "Foreign
Currency Transactions" below for more information regarding the currency hedging
practices of the Fund.
INVESTMENT PURPOSES. To the extent indicated elsewhere, the Fund may also enter
into futures contracts and buy and sell options thereon for investment. For
example, the Fund may invest in futures when its Manager believes that there are
not enough attractive securities available to maintain the standards of
diversity and liquidity set for the Fund pending investment in such securities
if or when they do become available. Through this use of futures and related
options, the Fund may diversify risk in its portfolio without incurring the
substantial brokerage costs
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<PAGE> 33
which may be associated with investment in the securities of multiple issuers.
This use may also permit the Fund to avoid potential market and liquidity
problems (e.g., driving up the price of a security by purchasing additional
shares of a portfolio security or owning so much of a particular issuer's stock
that the sale of such stock depresses that stock's price) that may result from
increases in positions already held.
When the Fund purchases futures contracts for investment, the Fund's
custodian will earmark and maintain cash, U.S. Government Securities or other
liquid assets in an amount which, together with the initial and variation margin
deposited on the futures contracts, is equal to the face value of the futures
contracts at all times while the futures contracts are held.
Incidental to other transactions in fixed income securities, for
investment purposes the Fund may also combine futures contracts or options on
fixed income securities with cash, cash equivalent investments or other fixed
income securities in order to create "synthetic" bonds which approximate desired
risk and return profiles. This may be done where a "non-synthetic" security
having the desired risk/return profile either is unavailable (e.g., short-term
securities of certain foreign governments) or possesses undesirable
characteristics (e.g., interest payments on the security would be subject to
foreign withholding taxes). The Fund may also purchase forward foreign exchange
contracts in conjunction with U.S. dollar-denominated securities in order to
create a synthetic foreign currency denominated security that approximates
desired risk and return characteristics where the non-synthetic securities
either are not available in foreign markets or possess undesirable
characteristics. For greater detail, see "Foreign Currency Transactions" below.
When the Fund creates a "synthetic" bond with a futures contract, the Fund's
custodian will earmark and maintain cash, U.S. Government Securities or other
liquid assets with a value at least equal to the face amount of the futures
contract (less the amount of any initial or variation margin on deposit).
SYNTHETIC SALES AND PURCHASES. Futures contracts may also be used to reduce
transaction costs associated with short-term restructuring of the Fund's
portfolio. For example, if the Fund's portfolio includes stocks of companies
with medium-sized equity capitalization and, in the opinion of the Manager, such
stocks are likely to underperform larger capitalization stocks, the Fund might
sell some or all of its mid-capitalization stocks, buy large capitalization
stocks with the proceeds and then, when the expected trend had played out, sell
the large capitalization stocks and repurchase the mid-capitalization stocks
with the proceeds. In the alternative, the Fund may use futures to achieve a
similar result with reduced transaction costs. In that case, the Fund might
simultaneously enter into short futures positions on an appropriate index (e.g.,
the MSCI EAFE Index (to synthetically "sell" the stocks in the Fund) and long
futures positions on another index (to synthetically "buy" the larger
capitalization stocks). When the expected trend has played out, the Fund would
then close out both futures contract positions. The Fund will only enter into
these combined positions if (1) the short position (adjusted for historic
volatility) operates as a hedge of existing portfolio holdings, (2) the face
amount of the long futures position is less than or equal to the value of the
portfolio securities that the Fund would like to dispose of, (3) the contract
settlement date for the short futures position is approximately the same as that
for the long futures position and (4) the Fund's custodian earmarks and
maintains an amount of cash, U.S. Government Securities and other liquid assets
whose value, marked-to-market daily, is equal to the Fund's current obligations
in respect of the long futures contract
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<PAGE> 34
positions. If the Fund uses such combined short and long positions, in addition
to possible declines in the values of its investment securities, the Fund may
also suffer losses associated with a securities index underlying the long
futures position underperforming the securities index underlying the short
futures position. However, the Manager will enter into these combined positions
only if the Manager expects that, overall, the Fund will perform as if it had
sold the securities hedged by the short position and purchased the securities
underlying the long position. The Fund may also use swaps and options on futures
to achieve the same objective.
LIMITATIONS ON THE USE OF OPTIONS AND FUTURES PORTFOLIO STRATEGIES. As noted
above, the Fund may use futures contracts and related options for hedging and,
in some circumstances, for risk management or investment but not for
speculation. Thus, except when used for risk management or investment, the
Fund's long futures contract positions (less its short positions) together with
the Fund's cash (i.e., equity or fixed income) positions will not exceed the
Fund's total net assets.
The Fund's ability to engage in the options and futures strategies
described above will depend on the availability of liquid markets in such
instruments. Markets in options and futures with respect to currencies are
relatively new and still developing. It is impossible to predict the amount of
trading interest that may exist in various types of options or futures.
Therefore no assurance can be given that the Fund will be able to utilize these
instruments effectively for the purposes set forth above. Furthermore, its
ability to engage in options and futures transactions may be limited by tax
considerations.
SWAP CONTRACTS AND OTHER TWO-PARTY CONTRACTS
The Fund may use swap contracts and other two-party contracts for the
same or similar purposes as they may use options, futures and related options.
Although permitted to do so, the Fund is under no obligation to engage in swap
transactions under any circumstances. The use of swap contracts and other
two-party contracts involves risk.
SWAP CONTRACTS. Swap agreements are two-party contracts entered into
primarily by institutional investors for periods ranging from a few weeks to
more than one year. In a standard "swap" transaction, two parties agree to
exchange returns (or differentials in rates of return) calculated with respect
to a "notional amount," e.g., the return on or increase in value of a particular
dollar amount invested at a particular interest rate, in a particular foreign
currency, or in a "basket" of securities representing a particular index. The
Fund will usually enter into swaps on a net basis, i.e., the two returns are
netted out, with the Fund receiving or paying, as the case may be, only the net
amount of the two returns.
INTEREST RATE AND CURRENCY SWAPS. Interest rate swaps involve the
exchange of the two parties' respective commitments to pay or receive interest
on a notional principal amount (e.g., an exchange of floating rate payments for
fixed rate payments). Currency swaps involve the exchange of the two parties'
respective commitments to pay or receive fluctuations with respect to a notional
amount of two different currencies (e.g., an exchange of payments with respect
to fluctuations in the value of the U.S. dollar relative to the Japanese yen).
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<PAGE> 35
EQUITY SWAP CONTRACTS AND CONTRACTS FOR DIFFERENCES. Equity swap
contracts involve the exchange of one party's obligation to pay the loss, if
any, with respect to a notional amount of a particular equity index (e.g., MSCI
EAFE Index ) plus interest on such notional amount at a designated rate (e.g.,
the London Inter-Bank Offered Rate or "LIBOR") in exchange for the other party's
obligation to pay the gain, if any, with respect to the notional amount of such
index.
If the Fund enters into a long equity swap contract, the Fund's net
asset value will fluctuate as a result of changes in the value of the equity
index on which the equity swap is based as if it had purchased the notional
amount of securities comprising the index. The Fund will not use long equity
swap contracts to obtain greater volatility than it could obtain through direct
investment in securities; that is, the Fund will not normally enter into an
equity swap contract to increase the volatility (beta) of the Fund's portfolio
above 1.00, the volatility that would be present in the stocks comprising the
Fund's benchmark index. However, the Fund may invest in long equity swap
contracts without regard to this limitation if the notional amount of such
equity swap contracts, when aggregated with the Index Futures as described above
and the contracts for differences as described below, does not exceed 10% of the
Fund's net assets.
Contracts for differences are swap arrangements in which the Fund may
agree with a counterparty that its return (or loss) will be based on the
relative performance of two different groups or "baskets" of securities. As to
one of the baskets, the Fund's return is based on theoretical long futures
positions in the securities comprising that basket (with an aggregate face value
equal to the notional amount of the contract for differences) and as to the
other basket, the Fund's return is based on theoretical short futures positions
in the securities comprising the basket. The Fund may also use actual long and
short futures positions to achieve the same market exposure(s) as contracts for
differences. The Fund will only enter into contracts for differences where
payment obligations of the two legs of the contract are netted and thus based on
changes in the relative value of the baskets of securities rather than on the
aggregate change in the value of the two legs. The Fund will only enter into
contracts for differences (and analogous futures positions) when the Manager
believes that the basket of securities constituting the long leg will outperform
the basket constituting the short leg. However, it is possible that the short
basket will outperform the long basket resulting in a loss, even in
circumstances where the securities in both the long and short baskets appreciate
in value.
Except for instances in which the Fund elects to obtain leverage up to
the 10% limitation mentioned above, the Fund's custodian will earmark and
maintain cash, U.S. Government Securities or liquid assets in an amount equal to
the aggregate of net payment obligations on its swap contracts and contracts for
differences, marked to market daily.
The Fund may enter into swaps and contracts for differences for
hedging, investment and risk management. When using swaps for hedging, the Fund
may enter into an interest rate, currency or equity swap, as the case may be, on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities. For risk management or investment
purposes the Fund may also enter into a contract for differences in which the
notional amount of the theoretical long position is greater than the notional
amount of the theoretical short position. The Fund will not normally enter into
a contract for differences to increase the volatility (beta) of the Fund's
portfolio above 1.00. However, the Fund may invest in contracts
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<PAGE> 36
for differences without regard to this limitation if the aggregate amount by
which the theoretical long positions of such contracts exceed the theoretical
short positions of such contracts, when aggregated with the Index Futures and
equity swaps contracts as described above, does not exceed 10% of the Fund's net
assets.
INTEREST RATE CAPS, FLOORS AND COLLARS. The Fund may use interest rate
caps, floors and collars for the same purposes or similar purposes as they use
interest rate futures contracts and related options. Interest rate caps, floors
and collars are similar to interest rate swap contracts because the payment
obligations are measured by changes in interest rates as applied to a notional
amount and because they are individually negotiated with a specific
counterparty. The purchase of an interest rate cap entitles the purchaser, to
the extent that a specific index exceeds a specified interest rate, to receive
payments of interest on a notional principal amount from the party selling the
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below specified interest
rates, to receive payments of interest on a notional principal amount from the
party selling the interest rate floor. The purchase of an interest rate collar
entitles the purchaser, to the extent that a specified index exceeds or falls
below two specified interest rates, to receive payments of interest on a
notional principal amount from the party selling the interest rate collar.
Except when using such contracts for risk management, the Fund's custodian will
earmark and maintain cash, U.S. Government Securities or other liquid assets in
an amount at least equal to its obligations, if any, under interest rate cap,
floor and collar arrangements. As with futures contracts, when the Fund uses
notional amount contracts for risk management it is only required to earmark and
maintain on the custodian's books and records assets equal to its net payment
obligation, not the notional amount of the contract. In those cases, the
notional amount contract will have the effect of providing a degree of
investment leverage similar to the leverage associated with non-earmarked
futures contracts. The Fund's use of interest rate caps, floors and collars for
the same or similar purposes as those for which they use futures contracts and
related options presents the same risks and similar opportunities as those
associated with futures and related options. Because caps, floors and collars
are recent innovations for which standardized documentation has not yet been
developed they are deemed by the SEC to be relatively illiquid investments which
are subject to the limitation on investment in illiquid securities.
FOREIGN CURRENCY TRANSACTIONS
Foreign currency exchange rates may fluctuate significantly over short
periods of time. They generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries, actual or perceived changes in interest rates and other
complex factors. Currency exchange rates also can be affected unpredictably by
intervention (or the failure to intervene) by U.S. or foreign governments or
central banks, or by currency controls or political developments in the U.S. or
abroad. For example, uncertainty surrounds the introduction of the "euro" (a
common currency unit for the European Union) which occurred in January 1999.
These and other currencies in which the Fund's assets are denominated may be
devalued against the U.S. dollar, resulting in a loss to the Fund.
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<PAGE> 37
The Fund may be permitted to invest in securities denominated in
foreign currencies and may buy or sell foreign currencies, deal in forward
foreign currency contracts, currency futures contracts and related options and
options on currencies. The Fund may use such currency instruments for hedging,
investment or currency risk management. Currency risk management may include
taking active currency positions relative to both the securities portfolio of
the Fund and its performance benchmark.
Forward foreign currency contracts are contracts between two parties to
purchase and sell a specific quantity of a particular currency at a specified
price, with delivery and settlement to take place on a specified future date.
Currency futures contracts are contracts to buy or sell a standard quantity of a
particular currency at a specified future date and price. Options on currency
futures contracts give their owner the right, but not the obligation, to buy (in
the case of a call option) or sell (in the case of a put option) a specified
currency futures contract at a fixed price during a specified period. Options on
currencies give their owner the right, but not the obligation, to buy (in the
case of a call option) or sell (in the case of a put option) a specified
quantity of a particular currency at a fixed price during a specified period.
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 a security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transaction, the Fund will be able
to protect itself against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and the subject foreign currency during
the period between the date on which the security is purchased or sold and the
date on which payment is made or received.
Second, when the Manager of 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 all
of the Fund's portfolio securities denominated in such foreign currency.
Maintaining a match between the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures.
Third, the Fund may engage in currency "cross hedging" when, in the
opinion of the Manager, the historical relationship among foreign currencies
suggests that the Fund may achieve the same protection for a foreign security at
reduced cost through the use of a forward foreign currency contract relating to
a currency other than the U.S. dollar or the foreign currency in which the
security is denominated. By engaging in cross hedging transactions, the Fund
assumes the risk of imperfect correlation between the subject currencies. These
practices may present risks different from or in addition to the risks
associated with investments in foreign currencies.
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.
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By entering into the above hedging transactions, the Fund may be required to
forego the benefits of advantageous changes in the exchange rates.
The Fund may also enter foreign currency forward contracts for
investment and currency risk management. When the Fund uses currency instruments
for such purposes, the foreign currency exposure of the Fund may differ
substantially from the currencies in which the Fund's investment securities are
denominated. However, the Fund's aggregate foreign currency exposure will not
normally exceed 100% of the value of the Fund's securities, except that the Fund
may use currency instruments without regard to this limitation if the amount of
such excess, when aggregated with futures contracts, equity swap contracts and
contracts for differences used in similar ways, does not exceed 10% of the
Fund's net assets.
Except to the extent that the Fund may use such contracts for risk
management, whenever the Fund enters into a foreign currency forward contract,
other than a forward contract entered into for hedging, the Fund's custodian
will earmark and maintain cash, U.S. Government Securities or other liquid
assets with a value, marked to market daily, equal to the amount of the currency
required to be delivered. The Fund's ability to engage in forward contracts may
be limited by tax considerations.
The Fund may use currency futures contracts and related options and
options on currencies for the same reasons for which it uses currency forwards.
Except to the extent that the Fund may use futures contracts and related options
for risk management, the Fund will, so long as it is obligated as the writer of
a call option on currency futures, own on a contract-for-contract basis an equal
long position in currency futures with the same delivery date or a call option
on currency futures with the difference, if any, between the market value of the
call written and the market value of the call or long currency futures purchased
and maintained by the Fund in cash or other liquid assets earmarked on the books
and records of the Fund's custodian. If at the close of business on any day the
market value of the call purchased by the Fund falls below 100% of the market
value of the call written by the Fund, the Fund's custodian will earmark and
maintain an amount of cash or other liquid assets equal in value to the
difference. Alternatively, the Fund may cover the call option by owning
securities denominated in the currency with a value equal to the face amount of
the contract(s) or through earmarking and maintaining with the custodian an
amount of the particular foreign currency equal to the amount of foreign
currency per futures contract option times the number of options written by the
Fund.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with banks and
broker-dealers by which it acquires a security (usually an obligation of the
Government where the transaction is initiated or in whose currency the agreement
is denominated) for a relatively short period (usually not more than a week) for
cash and obtains a simultaneous commitment from the seller to repurchase the
security at an agreed-on price and date. The resale price is in excess of the
acquisition price and reflects an agreed-upon market rate unrelated to the
coupon rate on the purchased security. Such transactions afford an opportunity
for the Fund to earn a return on temporarily available cash at no market risk,
although there is a risk that the seller may default in its obligation to pay
the agreed-upon sum on the redelivery date. Such a default may subject the Fund
to expenses,
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<PAGE> 39
delays and risks of loss including: (a) possible declines in the value of the
underlying security during the period while the Fund seeks to enforce its rights
thereto, (b) possible reduced levels of income and lack of access to income
during this period and (c) inability to enforce rights and the expenses involved
in attempted enforcement.
DEBT AND OTHER FIXED INCOME SECURITIES GENERALLY
Debt and Other Fixed Income Securities include fixed income securities
of any maturity. Fixed income securities pay a specified rate of interest or
dividends, or a rate that is adjusted periodically by reference to some
specified index or market rate. Fixed income securities include securities
issued by federal, state, local and foreign governments and related agencies,
and by a wide range of private issuers.
Fixed income securities are subject to market and credit risk. Market
risk relates to changes in a security's value as a result of changes in interest
rates generally. In general, the values of fixed income securities increase when
prevailing interest rates fall and decrease when interest rates rise. Credit
risk relates to the ability of the issuer to make payments of principal and
interest. Obligations of issuers are subject to the provisions of bankruptcy,
insolvency and other laws, such as the Federal Bankruptcy Reform Act of 1978,
affecting the rights and remedies of creditors. Fixed income securities
denominated in foreign currencies are also subject to the risk of a decline in
the value of the denominating currency.
Because interest rates vary, it is impossible to predict the future
income of the Fund 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
To the extent noted under "Investment Guidelines," the Fund may
temporarily invest a portion of its assets in cash or cash items pending other
investments or in connection with the earmarking and maintenance of such assets
on the custodian's books and records. These cash items must be of high quality
and may include a number of money market instruments such as securities issued
by the United States government and agencies thereof, bankers' acceptances,
commercial paper, and bank certificates of deposit. By investing in high quality
money market securities the Fund may seek to minimize credit risk with respect
to such investments.
U.S. GOVERNMENT SECURITIES AND FOREIGN GOVERNMENT SECURITIES
The Fund may occasionally acquire U.S. or Foreign Government
Securities, however, the Fund does not intend to make significant investments in
these 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
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<PAGE> 40
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.
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 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.
ADJUSTABLE RATE SECURITIES
Adjustable rate securities are securities that have interest rates that
are reset at periodic intervals, usually by reference to some interest rate
index or market interest rate. They may be U.S. Government Securities or
securities of other issuers. Some adjustable rate securities are backed by pools
of mortgage loans. Although the rate adjustment feature may act as a buffer to
reduce sharp changes in the value of adjustable rate securities, these
securities are still subject to changes in value based on changes in market
interest rates or changes in the issuer's creditworthiness. Because the interest
rate is reset only periodically, changes in the interest rates on adjustable
rate securities may lag changes in prevailing market interest rates. Also, some
adjustable rate securities (or, in the case of securities backed by mortgage
loans, the underlying mortgages) are subject to caps or floors that limit the
maximum change in interest rate during a specified period or over the life of
the security. Because of the resetting of interest rates, adjustable rate
securities are less likely than non-adjustable rate securities of comparable
quality and maturity to increase significantly in value when market interest
rates fall.
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LOWER RATED SECURITIES
The Fund may invest 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 investment objective of the Fund investing in Lower Rated Securities may
be more dependent on the Manager's own credit analysis than is the case with
higher quality bonds. The market for Lower Rated Securities may be more severely
affected than some other financial markets by economic recession or substantial
interest rate increases, by changing public perceptions of this market or by
legislation that limits the ability of certain categories of financial
institutions to invest in these securities. In addition, the secondary market
may be less liquid for Lower Rated Securities. This reduced liquidity at certain
times may affect the values of these securities and may make the valuation and
sale of these securities more difficult. Securities of below investment grade
quality are commonly referred to as "junk bonds." Securities in the lowest
rating categories may be in poor standing or in default. Securities in the
lowest investment grade category (BBB or Baa) have some speculative
characteristics.
INDEXED SECURITIES
Indexed securities are securities the redemption values and/or the
coupons of which are indexed to the prices of a specific instrument or
statistic. Indexed securities typically, but not always, are debt securities or
deposits whose value at maturity or coupon rate is determined by reference to
other securities, securities indexes, currencies, precious metals or other
commodities, or other financial indicators. Gold-indexed securities, for
example, typically provide for a maturity value that depends on the price of
gold, resulting in a security whose price tends to rise and fall together with
gold prices. Currency-indexed securities typically are short-term to
intermediate-term debt securities whose maturity values or interest rates are
determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated securities
of equivalent issuers. Currency-indexed securities may be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
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The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
Indexed securities in which the Fund may invest include so-called
"inverse floating obligations" or "residual interest bonds" on which the
interest rates typically decline as short-term market interest rates increase
and increase as short-term market rates decline. Such securities have the effect
of providing a degree of investment leverage, since they will generally increase
or decrease in value in response to changes in market interest rates at a rate
which is a multiple of the rate at which fixed-rate long-term securities
increase or decrease in response to such changes. As a result, the market values
of such securities will generally be more volatile than the market values of
fixed rate securities.
The Fund may invest in inflation indexed securities issued by the U.S.
Treasury, which are fixed income securities whose principal value is
periodically adjusted according to the rate of inflation. The interest rate on
these bonds is fixed at issuance, but over the life of the bond this interest
may be paid on an increasing or decreasing principal value which has been
adjusted for inflation.
Repayment of the original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury inflation indexed bonds,
even during a period of deflation. However, the current market value of the
bonds is not guaranteed, and will fluctuate. The Fund may also invest in other
bonds that may or may not provide a similar guarantee. If a guarantee of
principal is not provided, the adjusted principal value of the bond repaid at
maturity may be less than the original principal.
The value of inflation indexed bonds is expected to fluctuate in
response to changes in real interest rates, which are in turn tied to the
relationship between nominal interest rates and the rate of inflation.
Therefore, if inflation were to rise at a faster rate than nominal interest
rates, real interest rates might decline, leading to an increase in value of
inflation indexed bonds. In contrast, if nominal interest rates increased at a
faster rate than inflation, real interest rates might rise, leading to a
decrease in value of inflation indexed bonds.
Although these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may result in a decline
in value. If interest rates rise due to reasons other than inflation (such as
changes in currency exchange rates), investors in these securities may not be
protected to the extent that the increase is not reflected in the bond's
inflation measure.
The U.S. Treasury has a relatively brief history of issuing inflation
indexed bonds. As such, there is no trading history of these securities, and
there can be no assurance that a liquid market in these instruments will
develop. Certain foreign governments, such as the United
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Kingdom, Canada and Australia, have a longer history of issuing inflation
indexed bonds, and there may be a more liquid market in certain of these
countries for these securities.
The periodic adjustment of U.S. inflation indexed bonds is tied to the
Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated monthly
by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in
the cost of living, made up of components such as housing, food, transportation
and energy. Inflation-indexed bonds issued by a foreign government are generally
adjusted to reflect a comparable inflation index, calculated by that government.
There can be no assurance that the CPI-U or any foreign inflation index will
accurately measure the real rate of inflation in the prices of goods and
services. In addition, there can be no assurance that the rate of inflation in a
foreign country will be correlated to the rate of inflation in the United
States.
Coupon payments received by the Fund from inflation indexed bonds will
be includable in the Fund's gross income in the period in which they accrue. In
addition, any increase in the principal amount of an inflation indexed bond will
be considered taxable ordinary income, even though investors do not receive
their principal until maturity.
The Fund may invest in fixed income securities (including convertible
securities) of any maturity.
The Fund's investments in indexed securities, including inflation
indexed securities, may create taxable income in excess of the cash they
generate. In such cases, the Fund may be required to sell assets 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. See
"Distributions and Taxes in the Prospectus" and "Distributions" and "Taxes" in
this Statement of Additional Information.
FIRM COMMITMENTS
A firm commitment agreement is an agreement with a bank or
broker-dealer for the purchase of securities at an agreed-upon price on a
specified future date. The Fund may enter into firm commitment agreements with
such banks and broker-dealers with respect to any of the instruments eligible
for purchase by the Fund. The Fund will only enter into firm commitment
arrangements with banks and broker-dealers that the Manager determines present
minimal credit risks. The Fund's custodian will earmark and maintain cash, U.S.
Government Securities or other liquid assets in an amount equal to the Fund's
obligations under firm commitment agreements.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS
The Fund may enter into reverse repurchase agreements and dollar roll
agreements with banks and brokers to enhance return. Reverse repurchase
agreements involve sales by the Fund of portfolio assets concurrently with an
agreement by the Fund to repurchase the same assets at a later date at a fixed
price. During the reverse repurchase agreement period, the Fund continues to
receive principal and interest payments on these securities and also has the
opportunity to earn
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a return on the collateral furnished by the counterparty to secure its
obligation to redeliver the securities.
Dollar rolls are transactions in which the Fund sells securities for
delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date. During the roll period, the Fund forgoes principal and interest paid on
the securities. The Fund is compensated by the difference between the current
sales price and the forward price for the future purchase (often referred to as
the "drop") as well as by the interest earned on the cash proceeds of the
initial sale.
The Fund will earmark and maintain on its custodian's books and records
cash, U.S. Government Securities or other liquid assets equal in value to its
obligations in respect of reverse repurchase agreements and dollar rolls.
Reverse repurchase agreements and dollar rolls involve the risk that the market
value of the securities retained by the Fund may decline below the price of the
securities the Fund has sold but is obligated to repurchase under the agreement.
In the event the buyer of securities under a reverse repurchase agreement or
dollar roll files for bankruptcy or becomes insolvent, the Fund's use of the
proceeds of the agreement may be restricted pending a determination by the other
party or its trustee or receiver whether to enforce the Fund's obligation to
repurchase the securities. Reverse repurchase agreements and dollar rolls are
not considered borrowings by the Fund for purposes of the Fund's fundamental
investment restriction with respect to borrowings.
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.
It is possible that certain over-the-counter options and securities serving as
cover for over-the-counter options may be deemed, under certain circumstances,
to be illiquid securities. While the Trust does not agree with this view, it
will operate in accordance with any relevant formal guidelines adopted by the
SEC.
In addition, the SEC staff may, under certain circumstances, consider
equity swap contracts, caps, floors and collars to be illiquid securities.
Consequently, to the extent the SEC staff maintains this position, the Fund will
not enter into an equity swap contract or a reverse equity swap contract or
purchase a cap, floor or collar if, as a result of the investment, the total
value (i.e., marked-to-market value) of such investments (without regard to
their notional amount) together with that of all other illiquid securities which
the Fund owns would exceed 15% of the Fund's total assets.
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<PAGE> 45
INVESTMENT RESTRICTIONS
Fundamental Restrictions:
Without a vote of the majority of the outstanding voting securities of
the Fund, the Trust will not take any of the following actions with respect to
the Fund as indicated:
(1) Borrow money except under the following circumstances and to the
extent permitted by applicable rules, regulations and interpretive guidelines
published by the SEC: (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; and (ii) the Fund may also borrow amounts equal to an
additional 5% of its total assets without regard to the foregoing limitation for
temporary purposes, such as for the clearance and settlement of portfolio
transactions and to meet shareholder redemption requests.
(2) Purchase securities on margin, except such short-term credits as
may be necessary for the clearance of purchases and sales of securities. (For
this purpose, the deposit or payment of initial or variation margin in
connection with futures contracts or related options transactions is not
considered the purchase of a security on margin.)
(3) Make short sales of securities or maintain a short position for the
Fund's account unless at all times when a short position is open the Fund owns
an equal amount of such securities or owns securities which, without payment of
any further consideration, are convertible into or exchangeable for securities
of the same issue as, and equal in amount to, the securities sold short.
(4) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under federal securities laws.
(5) Purchase or sell real estate, although it may purchase securities
of issuers that deal in real estate, including securities of real estate
investment trusts, and may purchase securities which are secured by interests in
real estate.
(6) Make loans, except by purchase of debt obligations or by entering
into repurchase agreements or through the lending of the Fund's portfolio
securities. Loans of portfolio securities may be made with respect to up to 100%
of the Fund's total assets.
(7) Concentrate more than 25% of the value of its total assets in any
one industry.
(8) Purchase or sell commodities or commodity contracts, except that
the Fund may purchase and sell financial futures contracts and options thereon.
(9) Issue senior securities, as defined in the 1940 Act and as
amplified by rules, regulations and pronouncements of the SEC. The SEC has
concluded that even though reverse
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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 earmarking and maintaining certain assets on the books
and records of the Fund's custodian. Similarly, so long as such earmarked assets
are maintained, the issue of compliance with Section 18 will not be raised with
respect to any of the following: any swap contract or contract for differences;
any pledge or encumbrance of assets permitted by Non-Fundamental Restriction (4)
below; any borrowing permitted by Fundamental Restriction (1) above; any
collateral arrangements with respect to initial and variation margin permitted
by Non-Fundamental Restriction (4) below; and the purchase or sale of options,
forward contracts, futures contracts or options on futures contracts.
Non-Fundamental Restrictions:
It is contrary to the present policies of the Fund, which may be
changed by the Trustees without shareholder approval, to:
(1) Make investments for the purpose of gaining control of a company's
management.
(2) Invest more than 15% of net assets in illiquid securities. The
securities currently thought to be included as "illiquid securities" are
restricted securities under the Federal securities laws (including illiquid
securities traded under Rule 144A), repurchase agreements and securities that
are not readily marketable. To the extent the Trustees determine that restricted
securities traded under Section 4(2) or Rule 144A under the Securities Act of
1933 are in fact liquid, they will not be included in the 15% limit on
investment in illiquid securities.
Except as indicated above in Fundamental Restriction No. 1, all
percentage limitations on investments set forth herein and in the Prospectus
will apply at the time of the making of an investment and shall not be
considered violated unless an excess or deficiency occurs or exists immediately
after and as a result of such investment.
The phrase "shareholder approval," as used in the Prospectus, and the
phrase "vote of a majority of the outstanding voting securities," as used herein
with respect to the Fund, means the affirmative vote of the lesser of (1) more
than 50% of the outstanding shares of the Fund, or (2) 67% or more of the shares
of the Fund present at a meeting if more than 50% of the outstanding shares are
represented at the meeting in person or by proxy. Except for policies that are
explicitly described as fundamental in the Prospectus or this Statement of
Additional Information, the investment policies of the Fund (including all
policies, restrictions and limitations set forth under "Investment Guidelines")
may be changed by the Trust's Trustees without the approval of shareholders.
MANAGEMENT OF THE TRUST
Subject to the provisions of the GMO Declaration of Trust, the business
of the GMO Trust (the "Trust"), an open-end management investment company, shall
be managed by the Trustees, and they shall have all powers necessary or
convenient to carry out that responsibility
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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; fill
vacancies in or remove from their number (including any vacancies created by an
increase in the number of Trustees); remove from their number with or without
cause; elect and remove such officers and appoint and terminate such agents as
they consider appropriate; 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; employ
one or more custodians of the assets of the Trust and 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.
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.
SUSAN RANDALL HARBERT (D.O.B. 4/25/57). Chief Financial Officer and
Treasurer of the Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC.
WILLIAM R. ROYER, ESQ. (D.O.B. 7/20/65). Vice President of the Trust.
General Counsel, 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. Research Analyst, GMO Renewable
Resources LLC (July 1999 - present).
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<PAGE> 48
SCOTT ESTON (D.O.B. 1/20/56). Vice President of the Trust. Chief
Financial Officer and Member, Grantham, Mayo, Van Otterloo & Co. LLC
(September 1997 - present). Senior Partner, Coopers & Lybrand (1987 -
1997).
ANNE STETSON (D.O.B. 8/7/62) Vice President of the Trust. Associate
General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (May
1998-present). Legal Counsel, Fidelity Investments (January 1995-April
1998).
ELAINE M. HARTNETT, ESQ. (D.O.B. 2/18/45). Vice President and Clerk of
the Trust. Associate General Counsel, Grantham, Mayo, Van Otterloo &
Co. LLC (June 1999-Present). Associate/Junior Partner, Hale and Dorr
LLP, Boston, Massachusetts (1991-1999).
BRENT ARVIDSON (D.O.B. 6/26/69). Assistant Treasurer of the Trust.
Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC
(September 1997 - present). Senior Financial Reporting Analyst, John
Hancock Funds (August 1996 - September 1997). Account Supervisor/Senior
Account Specialist, Investors Bank and Company (June 1993 - August
1996).
*Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo,
Van Otterloo & Co. LLC ("GMO" or the "Manager"), as defined by the 1940 Act.
The mailing address of each of the officers and Trustees is c/o GMO
Trust, 40 Rowes Wharf, Boston, Massachusetts 02110.
Except as 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(1) $80,000
Jay O. Light, Trustee $80,000
</TABLE>
Messrs. Grantham, Mayo, Van Otterloo, Brokaw and Eston, and Ms.
Harbert, as members of the Manager, will benefit from the management fees paid
by the Fund of the Trust.
INVESTMENT ADVISORY AND OTHER SERVICES
--------
(1) Mr. Margolis served as a Trustee of the Trust until his death in June 2000.
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<PAGE> 49
Management Contracts
As disclosed in the Prospectus under the heading "Management of the
Trust," under separate Management Contracts (each a "Management Contract")
between the Trust and the Manager, subject to such policies as the Trustees of
the Trust may determine, the Manager will furnish continuously an investment
program for the Fund and will make investment decisions on behalf of the Fund
and place all orders for the purchase and sale of portfolio securities. Subject
to the control of the Trustees, the Manager also manages, supervises and
conducts the other affairs and business of the Trust, furnishes office space and
equipment, provides bookkeeping and certain clerical services and pays all
salaries, fees and expenses of officers and Trustees of the Trust who are
affiliated with the Manager. As indicated under "Portfolio
Transactions--Brokerage and Research Services," the Trust's portfolio
transactions may be placed with broker-dealers which furnish the Manager, at no
cost, certain research, statistical and quotation services of value to the
Manager in advising the Trust or its other clients.
As is disclosed in the Prospectus, the Manager has contractually agreed
to reimburse the Fund with respect to certain Fund expenses through June 30,
2001 to the extent that the Fund's total annual operating expenses (excluding
Shareholder Service Fees, brokerage commissions and other investment-related
costs, interest expenses, hedging transaction fees, extraordinary, non-recurring
and certain other unusual expenses (including taxes), securities lending fees
and expenses and transfer taxes) would otherwise exceed a specified percentage
of that Fund's daily net assets.
The Management Contract provides that the Manager shall not be subject
to any liability in connection with the performance of its services thereunder
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
The Management Contract was approved by the Trustees of the Trust
(including the Trustees who are not "interested persons" of the Manager) and by
the Fund's sole shareholder in connection with the establishment of the Fund.
The Management Contract will continue in effect for a period more than two years
from the date of its execution only so long as its continuance is approved at
least annually by (i) vote, cast in person at a meeting called for that purpose,
of a majority of those Trustees who are not "interested persons" of the Manager
or the Trust, and by (ii) the majority vote of either the full Board of Trustees
or the vote of a majority of the outstanding shares of the Fund. The Management
Contract automatically terminates on assignment, and is terminable on not more
than 60 days' notice by the Trust to the Manager. In addition, the Management
Contract may be terminated on not more than 60 days' written notice by the
Manager to the Trust.
For the Fund, the Management Fee is calculated based on a fixed percentage of
the Fund's average daily net assets.
Each of the Trust and the Manager has adopted a Code of Ethics pursuant
to the requirement of the 1940 Act. Under the Code of Ethics, personnel are only
permitted to engage in personal securities transactions in accordance with
certain conditions relating to such persons'
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<PAGE> 50
position, the identity of the security, the timing of the transaction and
similar factors. Transactions in securities that may be held by the Fund are
permitted, subject to compliance with applicable provisions of the Code.
Personal securities transactions must be reported quarterly and broker
confirmations of such transactions must be provided for review.
Custodial Arrangements. Brown Brothers Harriman & Co. ("BBH"), 40 Water
Street, Boston, Massachusetts 02109, serves as the Fund's custodian. As such,
BBH 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, BBH receives and delivers cash and
securities of the Fund in connection with Fund transactions and collects all
dividends and other distributions made with respect to Fund portfolio
securities. BBH also maintains certain accounts and records of the Trust and
calculates the total net asset value, total net income and net asset value per
share of the Fund on a daily basis.
Shareholder Service Arrangements. As disclosed in the Prospectus,
pursuant to the terms of a single Servicing Agreement with the Fund of the
Trust, GMO provides direct client service, maintenance and reporting to
shareholders of the Fund. The Servicing Agreement was approved by the Trustees
of the Trust (including a majority of the Trustees who are not "interested
persons" of the Manager or the Trust). The Servicing Agreement will continue in
effect for a period of more than one year 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 the purpose, of a majority of those Trustees who
are not "interested persons" of the Manager or the Trust, and (ii) the majority
vote of the full Board of Trustees. The Servicing Agreement automatically
terminates on assignment (except as specifically provided in the Servicing
Agreement) and is terminable by either party upon not more than 60 days' written
notice to the other party. The Trust entered into the Servicing Agreement with
GMO on May 30, 1996.
Independent Accountants. The Trust's independent accountants are
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110.
PricewaterhouseCoopers LLP conducts annual audits of the Trust's financial
statements, assists in the preparation of the Fund's federal and state income
tax returns, consults with the Trust as to matters of accounting and federal and
state income taxation and provides assistance in connection with the preparation
of various Securities and Exchange Commission filings.
PORTFOLIO TRANSACTIONS
The purchase and sale of portfolio securities for the Fund and for the
other investment advisory clients of the Manager are made by the Manager with a
view to achieving their respective investment objectives. For example, a
particular security may be bought or sold for certain clients of the Manager
even though it could have been bought or sold for other clients at the same
time. Likewise, a particular security may be bought for one or more clients when
one or more other clients are selling the security. In some instances,
therefore, one client may sell indirectly a particular security to another
client. It also happens that two or more clients may simultaneously buy or sell
the same security, in which event purchases or sales are effected on a pro rata,
rotating or other equitable basis so as to avoid any one account being preferred
over any other account.
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<PAGE> 51
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 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 subjective
considerations.
Over-the-counter transactions often involve dealers acting for their
own account. It is the Manager's policy to place over-the-counter market orders
for the U.S. Funds with primary market makers unless better prices or executions
are available elsewhere.
Although the Manager does not consider the receipt of research services
as a factor in selecting brokers to effect portfolio transactions for the Fund,
the Manager will receive such services from brokers who are expected to handle a
substantial amount of the Fund's portfolio transactions. Research services may
include a wide variety of analyses, reviews and reports on such matters as
economic and political developments, industries, companies, securities and
portfolio strategy. The Manager uses such research in servicing other clients as
well as the Fund.
As permitted by Section 28(e) of the Securities Exchange Act of 1934
and subject to such policies as the Trustees of the Trust may determine, the
Manager may pay an unaffiliated broker or dealer that provides "brokerage and
research services" (as defined in the Act) to the Manager an amount of
commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund of GMO Trust will be
determined on each day the New York Stock Exchange (the "Exchange") is open for
regular business as of the close of regular trading on the Exchange, generally
4:00 p.m. New York City time. However, equity options held by a Fund are priced
as of the close of trading at 4:10 p.m., and futures contracts on
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<PAGE> 52
U.S. government and other fixed-income securities and index options held by a
Fund are priced as of their close of trading at 4:15 p.m. Events affecting the
values of foreign securities may occur between the earlier closings of foreign
exchanges and securities markets and the closing of the New York Stock Exchange
which will not be reflected in the computation of a Fund's net asset value.
Please refer to "Determination of Net Asset Value" in the Prospectus for
additional information.
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES
The Trust is organized as a Massachusetts business trust under the laws
of Massachusetts by an Agreement and Declaration of Trust ("Declaration of
Trust") dated June 24, 1985. A copy of the Declaration of Trust is on file with
the Secretary of The Commonwealth of Massachusetts. The fiscal year for the Fund
ends on the last day of February.
Pursuant to the Declaration of Trust, the Trustees have currently
authorized the issuance of an unlimited number of full and fractional shares of
forty series, one for the Fund described in this Statement of Additional
Information, and for each of U.S. Core Fund; Tobacco-Free Core Fund; Value Fund;
Growth Fund; U.S. Sector Fund; Small Cap Value Fund; Small Cap Growth Fund;
Fundamental Value Fund; REIT Fund; International Core Fund; Currency Hedged
International Core Fund; Foreign Fund; International Small Companies Fund; Japan
Fund; Emerging Markets Fund; Evolving Countries Fund; Domestic Bond Fund; U.S.
Bond/Global Alpha 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; Emerging
Country Debt Share Fund; Pelican Fund; Asia Fund; Alpha LIBOR Fund;
International Core Plus Allocation Fund; Tax-Managed U.S. Equities Fund;
Tax-Managed International Equities Fund; Tax-Managed Small Companies 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 the 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.
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<PAGE> 53
The Trustees may also, without shareholder approval, establish one or
more additional separate portfolios for investments in the Trust or merge two or
more existing portfolios (i.e., a new fund). Shareholders' investments in such a
portfolio would be evidenced by a separate series of shares.
The Declaration of Trust provides for the perpetual existence of the
Trust. The Trust, however, may be terminated at any time by vote of at least
two-thirds of the outstanding shares of the Trust. While the Declaration of
Trust further provides that the Trustees may also terminate the Trust upon
written notice to the shareholders, the 1940 Act requires that the Trust receive
the authorization of a majority of its outstanding shares in order to change the
nature of its business so as to cease to be an investment company.
On June 1, 2000 no shareholders held greater than 25% of the
outstanding shares of the Fund.
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 Funds and the
approval of the investment advisory contracts of the other Funds. 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
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<PAGE> 54
forth above, the Trustees shall continue to hold office and may appoint
successor Trustees. Voting rights are not cumulative.
No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the Trust except (i)
to change the Trust's name or to cure technical problems in the Declaration of
Trust and (ii) to establish, designate or modify new and existing series or
sub-series of Trust shares or other provisions relating to Trust shares in
response to applicable laws or regulations.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Declaration of Trust provides for indemnification out of
all the property of the Fund for all loss and expense of any shareholder of that
Fund held personally liable for the obligations of the Trust. Thus, the risk of
a shareholder incurring financial loss on account of shareholder liability is
considered remote since it is limited to circumstances in which the disclaimer
is inoperative and the Fund of which he is or was a shareholder would be unable
to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing in
the Declaration of Trust protects a Trustee against any liability to which the
Trustee would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office. The By-laws of the Trust provide for indemnification by the Trust of
the Trustees and the officers of the Trust except with respect to any matter as
to which any such person did not act in good faith in the reasonable belief that
his action was in or not opposed to the best interests of the Trust. Such person
may not be indemnified against any liability to the Trust or the Trust
shareholders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
BENEFICIAL OWNERS OF 5% OR MORE OF THE FUND'S SHARES
As of the date of this SAI, no shareholders owned beneficially 5% or
more of the outstanding Class III Shares of the Fund.
DISTRIBUTIONS
The Prospectus 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,
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<PAGE> 55
net gains from certain closing purchase and sale transactions with respect to
such options and a portion of net gains from other options and futures
transactions are treated as short-term capital gain (i.e., gain from the sale of
securities held for 12 months or less). It is the policy of 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
TAX STATUS AND TAXATION OF THE FUND
The Fund is treated as a separate taxable entity for federal income tax
purposes. The Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). In order to qualify for the special tax treatment accorded regulated
investment companies and their shareholders, the Fund must, among other things:
(a) derive at least 90% of its gross income from dividends, interest, payments
with respect to certain securities loans, and gains from the sale of stock,
securities and foreign currencies, or other income (including but not
limited to gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities, or
currencies;
(b) distribute with respect to each taxable year at least 90% of the sum of its
taxable net investment income, its net tax-exempt income, and the excess,
if any, of net short-term capital gains over net long-term capital losses
for such year; and
(c) diversify its holdings so that at the end of each fiscal quarter, (i) at
least 50% of the market value of the Fund's assets is represented by cash
and cash items, U.S. Government Securities, securities of other regulated
investment companies, and other securities limited in respect of any one
issuer to a value not greater than 5% of the value of the Fund's total net
assets and to not more than 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its assets is
invested in the securities (other than those of the U.S. Government or
other regulated investment companies) of any one issuer or of two or more
issuers which the Fund controls and which are engaged in the same, similar,
or related trades or businesses.
If the Fund qualifies as a regulated investment company that is
accorded special tax treatment, the Fund will not be subject to federal income
tax on income paid to its shareholders in the form of dividends (including
capital gain dividends).
If the Fund fails to distribute in a calendar year substantially all of
its ordinary income for such year and substantially all of its capital gain net
income for the one-year period ending October 31 (or later if the Fund is
permitted so to elect and so elects), plus any retained amount from the prior
year, the Fund will be subject to a 4% excise tax on the undistributed amounts.
A dividend paid to shareholders by the Fund in January of a year generally is
deemed to have been paid by the Fund on December 31 of the preceding year if the
dividend was declared and payable to shareholders of record on a date in
October, November or December of that preceding year.
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<PAGE> 56
The Fund intends generally to make distributions sufficient to avoid imposition
of the 4% excise tax, although the Fund reserves the right to pay an excise tax
rather than make an additional distribution when circumstances warrant (e.g.,
payment of excise tax amounts deemed by the Fund to be de minimis).
TAXATION OF FUND DISTRIBUTIONS AND SALES OF FUND SHARES
Fund distributions derived from interest, dividends and certain other
income, including in general short-term capital gains, will be taxable as
ordinary income to shareholders subject to federal income tax whether received
in cash or reinvested 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 generally be taxable as such
(generally at a 20% rate for noncorporate shareholders), regardless of how long
a shareholder has held the shares in the Fund.
Dividends and distributions on 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, including a redemption
in kind, may give rise to a gain or loss. In general, any gain or loss realized
upon a taxable disposition of shares will be treated as long-term capital gains
if the shares have been held for more than 12 months and as short-term capital
gains if the shares have been held for not more than 12 months.
Any loss realized upon a taxable disposition of shares held for six
months or less will be treated as long-term capital loss to the extent of any
long-term capital gain distributions received by a shareholder with respect to
those shares. All or a portion of any loss realized upon a taxable disposition
of Fund shares will be disallowed if other shares of the same Fund are purchased
within 30 days before or after the disposition. In such a case, the basis of the
newly purchased shares will be adjusted to reflect the disallowed loss.
A distribution paid to shareholders by the Fund in January of a year
generally is deemed to have been received by shareholders on December 31 of the
preceding year, if the distribution was declared and payable to shareholders of
record on a date in October, November or December of that preceding year. The
Trust will provide federal tax information annually, including information about
dividends and distributions paid during the preceding year to taxable investors
and others requesting such information.
If the Fund makes a distribution to you in excess of its current and
accumulated "earnings and profits" in any taxable year, the excess distribution
will be treated as a return of capital to the extent of your tax basis in your
shares, and thereafter as capital gain. A return of capital is not taxable, but
it reduces your tax basis in your shares, thus reducing any loss or increasing
any gain on a subsequent taxable disposition by you of your shares.
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<PAGE> 57
For corporate shareholders, the dividends-received deduction will
generally apply (subject to a holding period requirement imposed by the Code) to
the Fund's dividends paid from investment income to the extent derived from
dividends received from U.S. corporations. However, any distributions received
by the Fund from REITs will not qualify for the corporate dividends-received
deduction. The Fund's investments in REIT equity securities may require the Fund
to accrue and distribute income not yet received. In order to generate
sufficient cash to make the requisite distributions, the Fund may be required to
sell securities in its portfolio that it otherwise would have continued to hold
(including when it is not advantageous to do so). The Fund's investments in REIT
equity securities may at other times result in the Fund's receipt of cash in
excess of the REIT's earnings; if the Fund distributes such amounts, such
distribution could constitute a return of capital to Fund shareholders for
federal income tax purposes.
The backup withholding rules do not apply to certain exempt entities
(including corporations and tax-exempt organizations) so long as each such
entity furnishes the Trust with an appropriate certification. However, other
shareholders are subject to backup withholding at a rate of 31% on all
distributions of net investment income and capital gain, whether received in
cash or reinvested in shares of the Fund, and on the amount of the proceeds of
any redemption of Fund shares, where such distributions or redemption proceeds
paid or credited to any shareholder account for which an incorrect or no
taxpayer identification number has been provided, where appropriate
certification has not been provided for a foreign shareholder, or where the
Trust is notified that the shareholder has underreported income in the past (or
the shareholder fails to certify that he is not subject to such withholding). A
"taxpayer identification number" is either the Social Security number or
employer identification number of the record owner of the account.
WITHHOLDING ON DISTRIBUTIONS TO FOREIGN INVESTORS
Dividend distributions (including distributions derived from short-term
capital gains) are in general subject to a U.S. withholding tax of 30% when paid
to a nonresident alien individual, foreign estate or trust, a foreign
corporation, or a foreign partnership ("foreign shareholder"). Persons who are
resident in a country, such as the U.K., that has an income tax treaty with the
U.S. may be eligible for a reduced withholding rate (upon filing of appropriate
forms), and are urged to consult their tax advisors regarding the applicability
and effect of such a treaty. Distributions of net realized long-term capital
gains paid by the Fund to a foreign shareholder, and any gain realized upon the
sale of Fund shares by such a shareholder, will ordinarily not be subject to
U.S. taxation, unless the recipient or seller is a nonresident alien individual
who is present in the United States for more than 182 days during the taxable
year. However, such distributions and sale proceeds may be subject to backup
withholding, unless the foreign investor certifies his non-U.S. residency
status. Foreign investors are subject to the backup withholding rules described
above. Any tax withheld as a result of backup withholding does not constitute an
additional tax imposed on the record owner of the account, and may be claimed as
a credit on the record owner's Federal income tax return. Also, foreign
shareholders with respect to whom income from the Fund is "effectively
connected" with a U.S. trade or business carried on by such shareholder will in
general be subject to U.S. federal income tax on the income derived from the
Fund at the graduated rates applicable to U.S. citizens, residents or domestic
corporations,
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<PAGE> 58
whether such income is received in cash or reinvested in shares, and, in the
case of a foreign corporation, may also be subject to a branch profits tax.
Again, foreign shareholders who are resident in a country with an income tax
treaty with the United States may obtain different tax results, and are urged to
consult their tax advisors.
FOREIGN TAX CREDITS
It is expected that, at the end of each fiscal year, more than 50% of
the value of the total assets of the Fund will be represented by stock or
securities of foreign corporations. In such a case, the Fund may make an
election which allows shareholders whose income from the Fund is subject to U.S.
taxation at the graduated rates applicable to U.S. citizens, residents or
domestic corporations to claim a foreign tax credit or deduction (but not both)
on their U.S. income tax return. The Fund intends to make this election for each
year in which it is entitled to do so. If such an election is made, the amounts
of foreign income taxes paid by the Fund would be treated as additional income
to Fund shareholders from non-U.S. sources and as foreign taxes paid by Fund
shareholders. Investors should consult their tax advisors for further
information relating to the foreign tax credit and deduction, which are subject
to certain restrictions and limitations (including a holding period requirement
applied at both the Fund and shareholder level imposed by the Code).
Shareholders of the Fund whose income from the Fund is not subject to U.S.
taxation at the graduated rates applicable to U.S. citizens, residents or
domestic corporations may receive substantially different tax treatment of
distributions by the Fund, and may be disadvantaged as a result of the election
described in this paragraph.
TAX IMPLICATIONS OF CERTAIN INVESTMENTS
Certain of the Fund's investments, including assets "marked to the
market" for federal income tax purposes, debt obligations issued or purchased at
a discount and potentially so-called "index securities" (including inflation
indexed bonds), will create taxable income in excess of the cash they generate.
In such cases, the Fund may be required to sell assets (including when it is not
advantageous to do so) to generate the cash necessary to distribute as dividends
to its shareholders all of its income and gains and therefore to eliminate any
tax liability at the Fund level.
The Fund's transactions in options, other derivatives, futures
contracts, hedging transactions, forward contracts, straddles and foreign
currencies 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.
Investment by the Fund in certain passive foreign investment companies
("PFICs") could subject the Fund to a U.S. federal income tax (including
interest charges) on distributions received from the company or on proceeds
received from the disposition of shares in the company, which tax cannot be
eliminated by making distributions to Fund shareholders. However, the Fund may
elect to treat a passive foreign investment company as a "qualified electing
fund," in which case the Fund will be required to include its share of the
company's
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<PAGE> 59
income and net capital gain annually, regardless of whether it receives any
distribution from the company. The Fund also may make an election to mark the
gains (and to a limited extent losses) in such holdings "to the market" as
though it had sold and repurchased its holdings in those PFICs on the last day
of the Fund's taxable year. Such gains and losses are treated as ordinary income
and loss. The QEF and mark-to-market elections may have the effect of
accelerating the recognition of income (without the receipt of cash) and
increasing the amount required to be distributed for the Fund to avoid taxation.
Making either of these elections therefore may require the Fund to liquidate
other investments (including when it is not advantageous to do so) to meet its
distribution requirement, which also may accelerate the recognition of gain and
affect the Fund's total return.
A PFIC is any foreign corporation (i) 75% or more of the income of
which for the taxable year is passive income, or (ii) the average percentage of
the assets of which (generally by value, but by adjusted tax basis in certain
cases) that produce or are held for the production of passive income is at least
50%. Generally, passive income for this purpose means dividends, interest
(including income equivalent to interest), royalties, rents, annuities, the
excess of gains over losses from certain property transactions and commodities
transactions, and foreign currency gains. Passive income for this purpose does
not include rents and royalties received by the foreign corporation from active
business and certain income received from related persons.
LOSS OF REGULATED INVESTMENT COMPANY STATUS
The Fund may experience particular difficulty qualifying as a regulated
investment company in the case of highly unusual market movements, in the case
of high redemption levels and/or during the first year of its operations. If the
Fund does not qualify for taxation as a regulated investment company for any
taxable year, the Fund's income will be taxed at the Fund level at regular
corporate rates, and all distributions from earnings and profits, including
distributions of net long-term capital gains, will be taxable to shareholders as
ordinary income and subject to withholding in the case of non-U.S. shareholders.
In addition, in order to requalify for taxation as a regulated investment
company that is accorded special tax treatment, the Fund may be required to
recognize unrealized gains, pay substantial taxes and interest on such gains,
and make certain substantial distributions.
PERFORMANCE INFORMATION
The Fund may from time to time include its total return in
advertisements or in information furnished to present or prospective
shareholders.
Quotations of average annual total return for the Fund will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Fund or class over periods of one, three, five,
and ten years (or for such shorter or longer periods as shares of the Fund have
been offered), calculated pursuant to the following formula: P (1 + T)n = ERV
(where P = a hypothetical initial payment of $10,000, T = the average annual
total return, n = the number of years, and ERV = the ending redeemable value of
a hypothetical $10,000 payment made at the beginning of the period). Except as
noted below, all total return figures reflect the deduction of a proportional
share of Fund expenses on an annual basis, and assume that (i) the
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<PAGE> 60
maximum purchase premium is deducted from the initial $10,000 payment, (ii) all
dividends and distributions are reinvested when paid and (iii) the maximum
redemption fee is charged at the end of the relevant period. Quotations of total
return may also be shown for other periods. The Fund may also, with respect to
certain periods of less than one year, provide total return information for that
period that is unannualized. Any such information would be accompanied by
standardized total return information.
The Fund may also from time to time advertise net return and gross
return data for each month and calendar quarter since the Fund's inception.
Monthly and quarterly return data is calculated by linking daily performance for
the Fund (current net asset value divided by prior net asset value), and assumes
reinvestment of all dividends and gains. Monthly and quarterly performance data
does not reflect payment of any applicable purchase premiums or redemption fees.
All quotations of monthly and quarterly returns would be accompanied by
standardized total return information.
From time to time, in advertisements, in sales literature, or in
reports to shareholders, the Fund may compare its respective performance to that
of other mutual funds with similar investment objectives and to stock or other
relevant indices. For example, the Fund may compare its total return to rankings
prepared by Lipper Analytical Services, Inc. or Morningstar, Inc., widely
recognized independent services, that monitor mutual fund performance; the
Standard & Poor's 500 Stock Index ("S&P 500"), MSCI EAFE or the Russell 2500
Index, indices of unmanaged groups of common stock; or the Dow Jones Industrial
Average, a recognized unmanaged index of common stocks of 30 industrial
companies listed on the New York Stock Exchange.
Performance rankings and listings reported in national financial
publications, such as Money Magazine, Barron's and Changing Times, may also be
cited (if the Fund is listed in any such publication) or used for comparison, as
well as performance listings and rankings from various other sources including
No Load Fund X, CDA Investment Technologies, Inc., Weisenberger Investment
Companies Services, and Donoghue's Mutual Fund Almanac.
Quotations of the Fund's gross return do not reflect any reduction for
any Fund fees or expenses unless otherwise noted; if the gross return data
reflected the estimated fees and expenses of the Fund, the returns would be
lower than those shown. Quotations of gross return for the Fund for a particular
month or quarter will be calculated in accordance with the following formula:
Gross Return = Net Return + (Total Annual Operating Expense Ratio) (# of days in
relevant period/365)
FINANCIAL STATEMENTS
The Fund has not yet commenced operations.
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<PAGE> 61
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 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 Small Companies Fund
(formerly "GMO 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, GMO Alpha LIOR Fund and
GMO Tax-Managed International Equities Fund, and Grantham, Mayo,
Van Otterloo & Co. ("GMO");1
2. Form of Consulting Agreements between GMO, and Dancing
Elephant, Ltd. with respect to GMO Emerging Markets Fund, GMO
Evolving Countries Fund and GMO Asia Fund;1
3. Form of Management Contract between the Trust, on behalf of
its GMO Foreign Small Companies Fund, and GMO. Exhibit 2
(e). None.
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<PAGE> 62
(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
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 and BBH;1 Form of
Letter Agreement among the Trust, on behalf of the GMO Foreign
Small Companies Fund, GMO and BBH. Exhibit 3
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.1
(h). 1. Transfer Agency Agreement among the Trust, on behalf of its
GMO U.S. Core Fund (formerly "GMO Core Fund"), GMO Currency
Hedged International Bond Fund, GMO Growth Fund (formerly "GMO
Growth Allocation Fund"), GMO
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<PAGE> 63
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 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, GMO Alpha LIBOR 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 the GMO Foreign Small Companies
Fund, GMO and IBT. Exhibit 4
4. Form of Notification of Obligation to Reimburse Certain Fund
Expenses by GMO to the Trust. Exhibit 5
5. Form of Amended and Restated Servicing Agreement between the
Trust, on behalf of certain Funds, and GMO. --Exhibit 6
(i). Opinion and Consent of Ropes & Gray.1
(j) Consent of PricewaterhouseCoopers LLP.1
(k). Financial Statements - Not applicable.
(l). None.
(m). None.
(n). Financial Data Schedules -- Not Applicable.
(o). Form of Rule 18f-3 Multiclass Plan 1.
Note 1. Previously filed.
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<PAGE> 64
(p). Code of Ethics adopted by GMO Trust, Grantham, Mayo, Van Otterloo
& Co. LLC, Dancing Elephant, Ltd., GMO Australia Ltd., GMO
Australia LLC, GMO Renewable Resources LLC, GMO Woolley Ltd.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.
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.
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<PAGE> 65
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. 63 under the 1940 Act to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston and The
Commonwealth of Massachusetts, on the 29th day of June, 2000.
GMO Trust
By: R. JEREMY GRANTHAM*
------------------------------------
R. Jeremy Grantham
Title: President - Quantitative;
Principal Executive Officer; Trustee
Pursuant to the requirements of the 1940 Act, this Post-Effective Amendment
No. 63 to the Trust's Registration Statement under the 1940 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 June 30, 2000
---------------------- Executive Officer; Trustee
R. Jeremy Grantham
SUSAN RANDALL HARBERT* Chief Financial Officer and Treasurer; June 30, 2000
---------------------- Principal Financial and Accounting Officer
Susan Randall Harbert
JAY O. LIGHT* Trustee June 30, 2000
----------------------
Jay O. Light
</TABLE>
* By: /s/ William R. Royer
--------------------
William R. Royer
Attorney-in-Fact
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<PAGE> 66
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
Treasurer; Principal
Financial and
/S/ Kingsley Durant Accounting Officer March 12, 1996
---------------------------
Kingsley Durant
</TABLE>
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<PAGE> 67
EXHIBIT INDEX
GMO TRUST
Exhibit No. Title of Exhibit
1 Amended and Restated Agreement and Declaration of Trust.
2 Form of Management Contract between the Trust, on behalf of its
GMO foreign Small Companies Fund, and GMO.
3 Form of Letter Agreement among the Trust, on behalf of the GMO
Foreign Small Companies Fund, GMO and BBH.
4 Form of Letter Agreement to the Transfer Agency Agreement among
the Trust, on behalf of the GMO Foreign Small Companies Fund, GMO
and IBT.
5 Form of Notification of Obligation to Reimburse Certain Fund
Expenses by GMO to the Trust.
6 Form of Amended and Restated Servicing Agreement between the
Trust, on behalf of certain Funds, and GMO.
-7-
