<PAGE>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO VALUE FUND (A SERIES OF GMO TRUST)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Value Fund at February 29,
2000, the results of its operations, the changes in its net assets and the
financial highlights for each of the periods indicated therein, in conformity
with accounting principles generally accepted in the United States. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at February 29, 2000 by correspondence with the custodian, provide
a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 13, 2000
<PAGE>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS -- 96.6%
AEROSPACE -- 0.9%
12,500 Boeing Co 460,937
70,000 Lockheed Martin Corp 1,220,625
-------------
1,681,562
-------------
AUTOMOTIVE -- 2.3%
25,000 Delphi Automotive Systems 417,188
37,500 Ford Motor Co 1,560,937
27,500 General Motors Corp 2,091,719
-------------
4,069,844
-------------
BANKING AND FINANCIAL SERVICES -- 10.9%
25,000 Bank of America Corp 1,151,562
37,500 Bank One Corp 967,969
75,000 Block (HR) Inc 3,290,625
50,000 Chase Manhattan Corp 3,981,250
100,000 Citigroup Inc 5,168,750
50,000 First Union Corp 1,475,000
12,500 PNC Bank Corp 483,594
135,000 Washington Mutual Inc 2,986,875
-------------
19,505,625
-------------
CHEMICALS -- 1.5%
12,500 Air Products and Chemicals 321,875
5,000 Du Pont (E.I.) De Nemours 252,500
25,000 Hercules Inc 412,500
35,000 PPG Industries Inc 1,728,125
-------------
2,715,000
-------------
COMPUTER AND OFFICE EQUIPMENT -- 3.5%
8,500 Electronic Data Systems Corp 550,375
42,500 IBM Corp 4,335,000
12,500 Pitney Bowes Inc 618,750
37,500 Xerox Corp 813,281
-------------
6,317,406
-------------
</TABLE>
See accompanying notes to the financial statements.
1
<PAGE>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER GOODS -- 3.3%
35,000 Black and Decker Corp 1,152,812
65,000 Eastman Kodak Co 3,725,312
25,000 Hasbro Inc 393,750
25,000 Mattel Co 240,625
50,000 Pactiv Corp* 415,625
-------------
5,928,124
-------------
ELECTRONIC EQUIPMENT -- 1.9%
25,000 Emerson Electric Co 1,139,062
10,000 General Electric Co 1,321,875
45,000 Raytheon Co, Class B 832,500
-------------
3,293,437
-------------
FOOD AND BEVERAGE -- 4.3%
25,000 Anheuser Busch Cos Inc 1,603,125
30,000 Coca Cola Enterprises Inc 701,250
122,500 ConAgra Inc 2,005,937
50,000 Nabisco Group Holdings 431,250
7,500 Nestle SA ADR 632,294
37,500 Pepsico Inc 1,209,375
10,000 Ralston-Purina Group 283,125
50,000 Sara Lee Corp 750,000
-------------
7,616,356
-------------
HEALTH CARE -- 0.9%
37,500 Becton Dickinson & Co 1,164,844
5,000 Johnson & Johnson 358,750
-------------
1,523,594
-------------
INSURANCE -- 1.8%
42,500 Aetna Life and Casualty Co 1,747,812
47,500 Allstate Corp 926,250
15,000 AON Corp 314,062
5,000 Loews Corp 222,500
-------------
3,210,624
-------------
MACHINERY -- 2.2%
40,000 Baker Hughes Inc 1,035,000
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<S> <C> <C>
MACHINERY -- CONTINUED
22,500 Caterpillar Inc 788,906
15,000 FMC Corp* 724,687
37,500 Ingersoll Rand Co 1,436,719
-------------
3,985,312
-------------
MANUFACTURING -- 2.8%
7,500 Minnesota Mining and Manufacturing Co 660,937
125,000 Owens Corning 1,812,500
17,500 Tyco International Ltd 663,906
37,500 United Technologies Corp 1,910,156
-------------
5,047,499
-------------
METALS AND MINING -- 0.7%
37,500 Alcan Aluminum Ltd 1,237,500
-------------
OIL AND GAS -- 9.8%
22,500 Amerada Hess Corp 1,137,656
75,000 Burlington Resources Inc 2,071,875
5,000 Chevron Corp 373,437
20,000 EOG Resources Inc 305,000
12,401 Exxon Mobil Corp 933,950
135,000 Occidental Petroleum Corp 2,168,437
32,500 Phillips Petroleum Co 1,243,125
700 Questar Corp 9,756
65,000 Texaco Inc 3,083,437
100,000 Union Pacific Resources Group 893,750
115,000 Unocal Corp 3,076,250
100,000 USX - Marathon Group 2,162,500
-------------
17,459,173
-------------
PAPER AND ALLIED PRODUCTS -- 5.9%
72,500 Fort James Corp 1,363,906
67,500 International Paper Co 2,484,844
125,000 Kimberly-Clark Corp 6,460,937
5,000 Weyerhaeuser Co 256,563
-------------
10,566,250
-------------
</TABLE>
See accompanying notes to the financial statements.
3
<PAGE>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<S> <C> <C>
PHARMACEUTICALS -- 3.2%
6,900 Glaxo Wellcome PLC ADR 336,375
25,000 Lilly (Eli) & Co 1,485,938
90,000 McKesson HBOC Inc 1,743,750
32,500 Schering Plough Corp 1,133,438
17,500 Smithkline Beecham PLC ADR 983,281
-------------
5,682,782
-------------
PRIMARY PROCESSING -- 0.3%
20,000 USX-US Steel Group Inc 437,500
-------------
PRINTING AND PUBLISHING -- 0.9%
85,000 R.R. Donnelley and Sons 1,625,625
-------------
REAL ESTATE -- 7.6%
22,500 Duke Realty Investments, REIT 413,438
167,500 Equity Office Properties Trust, REIT 4,009,531
75,000 Equity Residential Properties Trust, REIT 2,995,313
80,000 JP Realty Inc, REIT 1,445,000
75,000 Liberty Property Trust, REIT 1,701,563
75,000 Mack-Cali Realty Corp, REIT 1,781,250
15,000 Simon Property Group Inc, REIT 352,500
10,000 Spieker Properties Inc, REIT 401,250
45,000 United Dominion Realty Trust Inc, REIT 450,000
-------------
13,549,845
-------------
REFINING -- 2.5%
75,000 Conoco Inc 1,439,063
110,000 Conoco Inc, Class B 2,165,625
15,000 Royal Dutch Petroleum Co 787,500
-------------
4,392,188
-------------
RETAIL TRADE -- 8.0%
100,000 Albertsons Inc 2,450,000
105,000 CVS Corp 3,675,000
52,500 Federated Department Stores Inc* 1,926,094
65,000 Kroger Co* 966,875
45,000 Safeway Inc* 1,735,313
42,500 Saks Inc* 488,750
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<S> <C> <C>
RETAIL TRADE -- CONTINUED
150,000 Toys R Us Inc* 1,856,250
25,000 Wal Mart Stores Inc 1,217,188
-------------
14,315,470
-------------
SERVICES -- 2.4%
35,000 FedEx Corp* 1,222,813
10,000 Halliburton Company 381,875
2,000 Meredith Corp 57,250
175,000 Waste Management Inc 2,625,000
-------------
4,286,938
-------------
TECHNOLOGY -- 4.6%
117,500 Compaq Computer Corp 2,922,813
17,500 Computer Sciences Corp* 1,379,219
20,000 Honeywell International Inc 962,500
225,000 Storage Technology Corp* 2,868,750
-------------
8,133,282
-------------
TELECOMMUNICATIONS -- 5.9%
35,000 AT & T Corp 1,730,313
50,000 Bell Atlantic Corp 2,446,875
50,000 GTE Corp 2,950,000
7,500 MediaOne Group Inc* 588,750
72,500 SBC Communications Inc 2,755,000
-------------
10,470,938
-------------
TRANSPORTATION -- 2.4%
20,000 AMR Corp* 1,057,500
50,000 Canadian Pacific 975,000
7,500 Delta Air Lines Inc 342,188
75,000 Ryder System Inc 1,396,875
30,000 USAir Group Inc* 560,625
-------------
4,332,188
-------------
UTILITIES -- 6.1%
35,000 Cinergy Corp 748,125
25,000 Duke Power Co 1,212,500
25,000 El Paso Energy Corp 926,563
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES -- CONTINUED
35,000 PG & E Corp 721,875
37,500 Reliant Energy Inc 771,094
75,000 Sempra Energy 1,350,000
62,500 Southern Co 1,386,719
70,000 Texas Utilities Co 2,283,750
40,000 Unicom Corp 1,512,500
-------------
10,913,126
-------------
TOTAL COMMON STOCKS (COST $201,949,563) 172,297,188
-------------
PREFERRED STOCKS -- 3.3%
OFFICE -- 0.4%
37,500 Reckson Associates Realty Corp 7.625% 696,094
-------------
OIL AND GAS -- 1.2%
50,000 Unocal Corp Convertible 6.25% 144A 2,068,750
-------------
REAL ESTATE -- 0.2%
32,500 Crescent Real Estate 6.75% 455,000
-------------
TRANSPORTATION -- 1.5%
67,500 Union Pacific Capital Trust 6.25% 144A* 2,632,500
-------------
TOTAL PREFERRED STOCKS (COST $7,478,517) 5,852,344
-------------
<CAPTION>
PAR VALUE ($)
- -------------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 2.7%
CASH EQUIVALENTS -- 2.7%
$ 47,293 BankBoston Eurodollar Time Deposit, 6.1175%, due
4/28/00(a) 47,293
$ 365,715 First Union National Bank Time Deposit, 5.8125%, due
3/01/00(a) 365,715
$ 548,573 Fleet National Bank Time Deposit, 5.79%, due 3/10/00(a) 548,573
1,900,000 Merrimac Cash Fund Premium Class(a) 1,900,000
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE ($) DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<S> <C> <C>
CASH EQUIVALENTS -- CONTINUED
$ 2,000,000 Prudential Securities Group, Inc. Master Note, 6.1875%,
due 3/10/00(a) 2,000,000
-------------
4,861,581
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $4,861,581) 4,861,581
-------------
TOTAL INVESTMENTS -- 102.6%
(Cost $214,289,661) 183,011,113
Other Assets and Liabilities (net) -- (2.6%) (4,681,628)
-------------
TOTAL NET ASSETS -- 100.0% $ 178,329,485
=============
NOTES TO THE SCHEDULE OF INVESTMENTS:
</TABLE>
144A - Securities exempt from registration under rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional investors.
ADR - American Depositary Receipt
REIT - Real Estate Investment Trust
* Non-income producing security.
(a) Represents investments of security lending collateral (Note 1).
See accompanying notes to the financial statements. 7
<PAGE>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $214,289,661) (Note 1) $183,011,113
Receivable for investments sold 1,621,587
Dividends and interest receivable 460,244
Receivable for expenses waived or borne by Manager (Note
2) 8,780
------------
Total assets 185,101,724
------------
LIABILITIES:
Payable for investments purchased 351,844
Payable upon return of securities loaned (Note 1) 4,861,581
Payable for Fund shares repurchased 604,656
Due to custodian 820,866
Payable to affiliate for (Note 2):
Management fee 68,273
Shareholder service fee 22,264
Accrued expenses 42,755
------------
Total liabilities 6,772,239
------------
NET ASSETS $178,329,485
============
NET ASSETS CONSIST OF:
Paid-in capital $204,382,896
Accumulated net realized gain 5,225,137
Net unrealized depreciation (31,278,548)
------------
$178,329,485
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $178,329,485
============
SHARES OUTSTANDING:
Class III 22,348,335
============
NET ASSET VALUE PER SHARE:
Class III $ 7.98
============
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $19,951) $ 5,400,941
Interest (including securities lending income of $30,942) 373,347
------------
Total income 5,774,288
------------
EXPENSES:
Management fee (Note 2) 996,644
Custodian and transfer agent fees 48,948
Audit fees 40,521
Legal fees 4,861
Trustees fees (Note 2) 2,425
Registration fees 2,107
Miscellaneous 3,195
Fees waived or borne by Manager (Note 2) (102,057)
------------
996,644
SHAREHOLDER SERVICE FEE (NOTE 2)
Class III 324,993
------------
Net expenses 1,321,637
------------
Net investment income 4,452,651
------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain on investments 24,670,419
------------
Change in net unrealized appreciation (depreciation) on
investments (47,175,356)
------------
Net realized and unrealized loss (22,504,937)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(18,052,286)
============
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 4,452,651 $ 4,794,401
Net realized gain 24,670,419 56,251,289
Change in net unrealized appreciation (depreciation) (47,175,356) (51,003,336)
------------ --------------
Net increase (decrease) in net assets from
operations (18,052,286) 10,042,354
------------ --------------
Distributions to shareholders from:
Net investment income
Class III (4,344,843) (5,045,206)
------------ --------------
Total distributions from net investment income (4,344,843) (5,045,206)
------------ --------------
In excess of net investment income
Class III (520,269) --
------------ --------------
Total distributions in excess of net investment
income (520,269) --
------------ --------------
Net realized gains
Class III (33,002,007) (71,266,327)
------------ --------------
Total distributions from net realized gains (33,002,007) (71,266,327)
------------ --------------
(37,867,119) (76,311,533)
------------ --------------
Net share transactions: (Note 5)
Class III 31,407,142 (62,992,395)
------------ --------------
Increase (decrease) in net assets resulting from net
share transactions 31,407,142 (62,992,395)
------------ --------------
Total decrease in net assets (24,512,263) (129,261,574)
NET ASSETS:
Beginning of period 202,841,748 332,103,322
------------ --------------
End of period (including accumulated undistributed
net investment income of $0 and $6,056,
respectively) $178,329,485 $ 202,841,748
============ ==============
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.40 $ 14.33 $ 14.85 $ 14.25 $ 12.05
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.21 0.26 0.31 0.31 0.39
Net realized and unrealized gain
(loss) (0.83) 0.13 3.81 2.47 3.71
-------- -------- -------- -------- --------
Total from investment operations (0.62) 0.39 4.12 2.78 4.10
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.21) (0.27) (0.35) (0.32) (0.39)
In excess of net investment income (0.02) -- -- -- --
From net realized gains (1.57) (4.05) (4.29) (1.86) (1.51)
-------- -------- -------- -------- --------
Total distributions (1.80) (4.32) (4.64) (2.18) (1.90)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 7.98 $ 10.40 $ 14.33 $ 14.85 $ 14.25
======== ======== ======== ======== ========
TOTAL RETURN(A) (8.45)% 2.24% 31.54% 21.26% 35.54%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $178,329 $202,842 $332,103 $469,591 $317,612
Net expenses to average daily net
assets 0.61% 0.61% 0.61% 0.61% 0.61%
Net investment income to average
daily net assets 2.06% 1.82% 1.89% 2.17% 2.66%
Portfolio turnover rate 104% 37% 40% 84% 65%
Fees and expenses voluntarily waived
or borne by the Manager consisted
of the following per share amounts: --(b) $ 0.04 $ 0.05 $ 0.04 $ 0.02
</TABLE>
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(b) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
See accompanying notes to the financial statements. 11
<PAGE>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Value Fund (the "Fund") is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended,
as an open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24,
1985. The Declaration of Trust permits the Trustees to create an unlimited
number of series ("Funds"), each of which issues a separate series of
shares, and to subdivide a series of shares into classes.
The Fund seeks long-term capital growth primarily through investment in
equity securities. The Fund's benchmark is the Russell 1000 Value Index.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of the financial statements
in accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Securities for
which quotations are not readily available are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts on domestic stock
indices. Stock index futures contracts represent commitments for future
delivery of cash based upon the level of a specified index of equity
securities at a given date. The Fund may use futures contracts to manage
its exposure to the stock markets. Buying futures tends to increase the
Fund's exposure to the underlying instrument. Selling futures tends to
decrease the Fund's exposure to the underlying instrument or hedge other
Fund instruments. Upon entering into a futures contract, the Fund is
required to deposit with its custodian, in a segregated account in the
name of the futures broker, an amount of cash or U.S. government and
agency obligations in accordance with the initial margin requirements of
the broker or exchange. Futures contracts are marked to market daily and
an appropriate payable or receivable for the change in value ("variation
margin") is recorded by the
12
<PAGE>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
Fund. The payable or receivable is liquidated on the following business
day. Gains or losses are recognized but not considered realized until the
contracts expire or are closed. Futures contracts involve, to varying
degrees, risk of loss in excess of the variation margin disclosed in the
Statement of Assets and Liabilities. Losses may arise from changes in the
value of the underlying instrument, if there is an illiquid secondary
market for the contracts, or if counterparties do not perform under the
contract terms. Futures contracts are valued at the settlement price
established each day by the board of trade or exchange on which they are
traded. As of February 29, 2000 the Fund held no open futures contracts.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, realization of collateral by the Fund may be delayed or
limited.
SECURITY LENDING
The Fund may lend its securities to qualified brokers. The loans are
collateralized at all times with cash or securities with a market value at
least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending
its securities. At February 29, 2000, the Fund loaned securities having a
market value of $4,712,938 collateralized by cash in the amount of
$4,861,581, which was invested in short-term instruments.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
equity markets. A swap is an agreement to exchange the return generated by
one instrument for the return generated by another instrument. The Fund
enters into equity swap agreements which involve a commitment by one party
in the agreement to pay interest in exchange for a market linked return,
both based on notional amounts. To the extent that the total return of the
security or index underlying the transaction exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make a payment to the counterparty. The Fund also enters into contracts
for differences in which the Fund agrees with the counterparty that its
return will be based on the
13
<PAGE>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
relative performance of two different groups or "baskets" of securities,
adjusted by an interest rate payment. To the extent that the relative
performance of the two baskets of securities exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make a payment to the counterparty, respectively. Equity swaps are
marked to market daily based upon quotations from market makers and the
change, if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
Entering into these agreements involves, to varying degrees, elements of
credit and market risk in excess of the amounts recognized on the
Statement of Assets and Liabilities. Such risks involve the possibility
that there will be no liquid market for these agreements, that the
counterparty to the agreements may default on its obligation to perform,
or that there may be unfavorable changes in the price of the security or
index underlying these transactions. As of February 29, 2000 the Fund held
no open swap agreements.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary. Taxes on foreign dividend income are withheld in
accordance with the applicable country's tax treaty with the United
States.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. Distributions to shareholders are recorded by the Fund on
the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to the classification of distributions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable
14
<PAGE>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
income and capital gains under U.S. federal tax rules versus accounting
principles generally accepted in the United States. The calculation of net
investment income per share in the financial highlights excludes these
adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
<S> <C> <C>
$406,405 $(410,994) $4,589
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable foreign withholding taxes, is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis and is
adjusted for the accretion of discounts. In determining the net gain or
loss on securities sold, the cost of securities is determined on the
identified cost basis. Dividends representing a return of capital are
reflected as a reduction of cost.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is .14% of the amount
invested. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. For the year ended February 29, 2000, the Fund received
$12,197 in purchase premiums. There is no premium for redemptions,
reinvested distributions or in-kind transactions.
Effective April 7, 2000, the Fund will no longer charge a purchase
premium.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .46% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder
15
<PAGE>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
service fee for client and shareholder service, reporting, and other
support. Pursuant to the Shareholder Service Plan, the shareholder service
fee is calculated based on the average daily net assets at the annual rate
of .15% for Class III shares.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding brokerage commissions, certain other transaction costs
(including transfer taxes), shareholder service fees and extraordinary
expenses) exceed the management fee.
Prior to March 1, 1999, GMO earned a management fee at the annual rate of
.70% of average daily net assets. GMO had agreed to waive a portion of its
fee and bear other expenses to the extent that the Fund's annual expenses
(including the management fee but excluding brokerage commissions, certain
other transaction costs (including transfer taxes), shareholder service
fees and extraordinary expenses) exceeded .46% of average daily net
assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000 was $2,425. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 29, 2000, aggregated
$224,283,968 and $220,299,193 respectively.
At February 29, 2000 the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
$217,687,338 $12,135,768 $(46,811,993) $(34,676,225)
</TABLE>
4. PRINCIPAL SHAREHOLDER
At February 29, 2000, 63.3% of the outstanding shares of the Fund were
held by one shareholder. Investment activities of this shareholder could
have a material effect.
16
<PAGE>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including the purchase premiums received by the Fund, were as
follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
------------------------- --------------------------
Shares Amount Shares Amount
Class III: ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Shares sold 3,412,687 $40,253,289 254,879 $ 3,308,655
Shares issued to shareholders
in reinvestment of distributions 3,457,550 33,971,151 5,904,295 68,359,733
Shares repurchased (4,031,453) (42,817,298) (9,828,113) (134,660,783)
------------ ----------- ------------ ------------
Net increase (decrease) 2,838,784 $31,407,142 (3,668,939) $(62,992,395)
============ =========== ============ ============
</TABLE>
17
<PAGE>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
For the fiscal year ended February 29, 2000, all of the Funds
distributions are from investment company taxable income, except that the
Fund has designated 72.64% of the distributions as net capital gain
dividends.
18
<PAGE>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER
Mr. Richard Mayo is responsible for the management of the GMO Value Fund.
Mr. Mayo has been a portfolio manager with GMO since its founding in 1977 and
began his career in the late 1960's.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO Value Fund returned -8.5% for the fiscal year
ended February 29, 2000, as compared to -3.3% for the Russell 1000 Value Index.
Consistent with the Fund's investment objectives and policies, the Fund was
invested substantially in common stocks throughout the period.
In the past year the S&P 500 Index was up. Without technology (66 companies) the
S & P 500 would have declined.
[LOGO]
During this same period the majority of stocks in the index were down. Investors
left companies that are perceived to exist in the "Old Economy" (and therefore
have limited future growth potential) in search of huge returns in companies
that are revolutionizing the business landscape. This has been frustrating to
money managers like ourselves that buy stocks that are not yet priced for very
optimistic growth and profitability assumptions.
We accept the fact that technology and the Internet are rapidly altering
business practices and are great opportunities for some companies, and may
diminish future profitability for those companies that do not adapt. We have
tried to take advantage of the "technology revolution" in companies that would
benefit before their potential was fully recognized. Our mistake was taking
profits when we thought valuations were stretched or extreme. We bought the
following:
<PAGE>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
Electronic Data Systems--An information outsourcer--bought it at $36 and sold at
$60, 30x earnings. It is now at $70.
Computer Sciences--The same business, bought at $55, sold at $80 and it went to
$90.
Corning--bought it at $35 before broadband became the hue and cry; it seemed
reasonable to take profits at $100 and 50x earnings, but it went to $200.
There are other examples, but you can see performance suffered from valuation
disciplines during a time that investors were willing to pay for growth at any
price.
Performance was also impacted by our holdings of low-risk stocks--utilities,
food companies, and REITs--that we held to provide a good return if technology
valuations cracked. This happened in April and May of 1999 and the first week of
this year, and these stocks did provide stability. The periods of outperformance
were very short and not sufficient to keep pace. However, considering the
average stock declined 40% from the peak in 1999 to February 2000 lows, they did
preserve capital and have given us an opportunity to take advantage of some
great opportunities that the "bifurcated market", NASDAQ up and the Dow down,
has created. I want to spend the rest of this letter describing some of these
situations, because in our opinion, they are so compelling and exciting.
I shall divide these into several categories. Companies benefiting from the
robust new economy--wireless, business-to-business and the demand for computing
capability either directly or indirectly; regular businesses where profitability
is improving dramatically due to the dramatic worldwide economic recovery; and
stocks that have been unfairly penalized due to the fear that some of the
Internet startups will take significant business from market leaders in certain
industries.
THE DIRECT BENEFICIARIES
IBM--This is the e-commerce company at a 35% discount to the market due to the
Y2K bump, but that is over.
Compaq--Also impacted by the Y2K slowdown; selling at only 12-14 times earnings
power if early indications of a turnaround continue.
Unisys--After the fiscal year end we added--15x earnings with possibly the best
Windows 2000 server entering the market in the second half. The opportunity
exists because momentum investors prefer to wait until the acceleration is
obvious.
Pitney Bowes--The mailing process must go digital (Post Office mandate). This
will stimulate revenues, and the company has a business to business niche that
could grow rapidly. Companies with comparable potential sell at 30-40x earnings;
Pitney Bowes is selling at only 17x earnings.
AT&T--About to monetize its wireless assets. Wireless value $20 per share, cable
business $25 per share, implying the rest of the company only has $12 value, far
too low in our opinion.
<PAGE>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
Bell Atlantic--GTE--After the merger and including the joint venture with
Vodafone Airtouch, will control the largest U.S. wireless network. Valuation:
18x 2000 earnings. Either the telephone operation has a very low valuation--not
fair since revenues are accelerating--or you can buy wireless at a huge discount
compared to independent companies.
INDIRECT BENEFICIARIES
Federated Department Stores--This company now has the largest Internet business
among existing retailers and this business is growing rapidly. What do you pay
for this growth? Nothing. The earnings multiple is 10x.
Chase Manhattan--This company was early in the venture capital business and now
has a portfolio of $7.9 billion. Street analysts think this alone is worth $30
billion and it sells at only a peer group multiple.
Xerox--The stock dropped 64% last year due to disappointing sales and profits.
The company did not manage its transition to the digital world very well. Now
business has stabilized, and new business initiatives, such as their new
printers (a full-fledged assault on Hewlett-Packard), and a rapidly growing
product category may stimulate growth. The price--14x earnings.
Toys R Us--The company now has the leading toy retailing website. This company
is extremely undervalued, ignored, and unloved. Does management agree with our
assessment? Well, they have announced a buyback of 35% of their stock.
THIRTY-FIVE PERCENT.
BOOMING ECONOMY BENEFICIARIES
Energy stocks--Oil demand, due to the economic recovery, has reduced inventories
to 10 year lows, dramatically reducing the probability that oil prices fall back
to $20 per barrel, but the stocks are priced as though oil will drop below that
level. Many are very inexpensive, but our favorite is Texaco. Priced at a
discount to its peers, this is fair since it has a lower return on capital, but
it gets no credit for its one billion+ barrel discovery off the coast of West
Africa, which could add $10 per share to the company's asset value. What did the
stock do? It dropped $10. This is an opportunity.
International Paper--I disagree with management's recent actions; however, one
should look at stocks that sell at 1982 prices. Pricing of their products has
been rising, and most will continue to do so. Earnings estimates have doubled in
the last year. Now the multiple is only 7x. Could there be some financial
engineering in the future?
Inco--This is the world's largest nickel producer. Nickel prices have doubled in
the last year and could go higher. The second largest supplier is Russia, which
is exporting less since their recovering economy is demanding more, and there is
no new capacity on the horizon. Cash flow is surging, and we are optimistic that
management will consider using some of this to repurchase stock. This is a new
and growing position.
<PAGE>
GMO VALUE FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
THE UNFAIRLY PENALIZED STOCKS
CVS--Investors assumed the "dot com" startups would thwart growth and caused the
stock to drop 50%. CVS is about to become the biggest Internet pharmacy. There
has been no slowdown in growth, and at the bottom, we were able to buy 15%
growth at 15x earnings. The company's recently announced $1 billion stock
buyback has restored confidence, and the stock has rallied 25%.
Safeway--The same story. Investors feared Webvan, the Internet grocer, would
wreak havoc with their business. Webvan is smaller than one Safeway store.
Safeway now has an Internet operation with a lower cost structure, and we are
delighted with the stock's 50% rally. We have now shifted most of the position
into Kroger, which was a late mover and is catching attention due to good
comparable store sales improvement.
Eastman-Kodak--Expected to be hurt by the new digital upstarts--now over one
hundred--but none earn money and Kodak will outlast them. Its joint venture with
AOL helps. The stock price is now at an all-time record low relative to the
market at less than 10x this year's earnings. Too low for management to resist a
major stock repurchase.
THE EVERYDAY GROUP
<TABLE>
<CAPTION>
GROWTH RATE MULTIPLE
----------- --------
<S> <C> <C>
Kimberly-Clark.............................................. 11 16
United Technology........................................... 15 17
H. & R. Block............................................... 15 15
Citigroup................................................... 15 19
Rockwell (New).............................................. 12 12
</TABLE>
These companies have demonstrated improving business fundamentals, which could
be recognized when the technology obsession subsides. Also note that United
Technologies and Rockwell are leaders in B2B (business to business) developments
in their industries.
We are excited about the opportunities that the market divergence has created,
and are optimistic that these are money making situations as we see more and
more managements acting dramatically (major stock buybacks). Also, we see many
of the companies today activated by the Internet potential so we are convinced
the prevailing opinion, that "Old Economy" companies are losers in the future,
is wrong. The real losers may be some of the newly created Internet operations.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO VALUE FUND CLASS FUND CLASS III SHARES AND THE RUSSELL 1000 VALUE INDEX
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
Average Annual Total Returns
Inception 11/13/90
1yr 5yr 10yr (ITD)
<S> <C> <C>
-8.58 15.09 15.29
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
Date GMO Value Fund-III Russell 1000 Value
<S> <C> <C>
11/13/90 9986 10000
12/31/90 10585 10394
3/31/91 12508 11755
6/30/91 12630 11767
9/30/91 12903 12392
12/31/91 13310 12953
3/31/92 13641 13099
6/30/92 14138 13647
9/30/92 14146 13929
12/31/92 14554 14742
3/31/93 15636 16166
6/30/93 16152 16640
9/30/93 16710 17462
12/31/93 17272 17415
3/31/94 16602 16806
6/30/94 16525 16910
9/30/94 17333 17340
12/31/94 17378 17065
3/31/95 19119 18686
6/30/95 20919 20361
9/30/95 22683 22140
12/31/95 24014 23610
3/31/96 25462 24946
6/30/96 26177 25375
9/30/96 26328 26114
12/31/96 28991 28719
3/31/97 29176 29454
6/30/97 33473 33797
9/30/97 37193 37161
12/31/97 37810 38823
3/31/98 42040 43345
6/30/98 42016 43540
9/30/98 37439 38491
12/31/98 42218 44883
3/31/99 42020 45527
6/30/99 47111 50660
9/30/99 42266 45699
12/31/99 43356 48181
2/29/00 37565 43147
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes.
Each performance figure assumes purchase at the beginning and redemption at the
end of the stated period and reflects a transaction fee of 14 bp on the
purchase. Transaction fees are retained by the Fund to cover trading costs.
Past performance is not indicative of future performance. Information is
unaudited.
<PAGE>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Tobacco-Free Core Fund at
February 29, 2000, the results of its operations, the changes in its net assets
and the financial highlights for each of the periods indicated therein, in
conformity with accounting principles generally accepted in the United States.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at February 29, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 10, 2000
<PAGE>
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 94.9%
AEROSPACE -- 0.9%
28,500 Boeing Co 1,050,937
5,300 General Dynamics Corp 229,225
48,200 Lockheed Martin Corp 840,487
14,300 Northrop Grumman Corp 649,756
------------
2,770,405
------------
AUTOMOTIVE -- 3.8%
45,900 Autonation Inc* 347,119
15,800 Dana Corp 336,737
10,000 Eaton Corp 749,375
77,700 Ford Motor Co 3,234,262
79,500 General Motors Corp 6,046,969
4,700 General Motors Corp, Class H* 566,350
11,900 Genuine Parts Co 268,494
33,800 Goodyear Tire & Rubber Co 766,837
------------
12,316,143
------------
BANKING AND FINANCIAL SERVICES -- 12.1%
10,100 American Express Co 1,355,294
9,800 Amsouth Bancorp 142,100
106,164 Bank of America Corp 4,890,179
5,800 BB&T Corp 136,300
19,221 Bear Stearns Cos Inc 754,424
46,600 Chase Manhattan Corp 3,710,525
155,922 Citigroup Inc 8,059,218
19,500 Countrywide Credit Industries Inc 486,281
8,200 Donaldson Lufkin & Jenrette 356,187
44,600 Fannie Mae 2,363,800
2,000 Fifth Third Bancorp 104,125
52,200 Firstar Corp 929,812
12,000 Fleet Boston Financial Corp 327,000
23,000 Franklin Resources Inc 625,312
41,200 Freddie Mac 1,720,100
23,200 Golden West Financial Corp 661,200
9,400 Greenpoint Financial Corp 149,812
23,200 Household International Inc 740,950
16,400 J.P. Morgan & Co Inc 1,820,400
15,700 Lehman Brothers Holding Inc 1,138,250
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
BANKING AND FINANCIAL SERVICES -- CONTINUED
300 M & T Bank Corp 110,700
66,600 MBNA Corp 1,515,150
34,000 Merrill Lynch 3,485,000
19,300 MGIC Investment Corp 721,337
16,700 Morgan Stanley Dean Witter & Co 1,176,306
3,800 Old Kent Financial Corp 99,512
18,100 Paine Webber Group Inc 692,325
6,400 Summit Bancorp 153,200
8,700 UnionBanCal Corp 279,487
8,700 Wells Fargo & Co 287,644
------------
38,991,930
------------
CHEMICALS -- 1.3%
22,600 Air Products and Chemicals 581,950
7,400 Du Pont (E.I.) De Nemours 373,700
8,400 Eastman Chemical Co 301,875
9,400 PPG Industries Inc 464,125
21,200 Praxair Inc 715,500
9,058 Rohm & Haas Co 365,717
17,700 Sherwin Williams Co 338,512
21,200 Union Carbide Corp 1,138,175
------------
4,279,554
------------
COMPUTER AND OFFICE EQUIPMENT -- 10.0%
59,400 Cisco Systems Inc* 7,851,937
15,400 Computer Associates International Inc 990,412
3,900 Electronic Data Systems Corp 252,525
15,500 Gateway Inc* 1,065,625
18,900 Hewlett Packard Co 2,542,050
26,400 IBM Corp 2,692,800
7,600 Micron Technology Inc* 745,275
216,500 Oracle Corp* 16,075,125
------------
32,215,749
------------
CONSTRUCTION -- 0.5%
20,900 Georgia-Pacific Corp 724,969
12,750 Home Depot Inc 737,109
------------
1,462,078
------------
</TABLE>
See accompanying notes to the financial statements.
2
<PAGE>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
CONSUMER GOODS -- 1.2%
16,800 Eastman Kodak Co 962,850
13,400 Fortune Brands Inc 293,125
7,400 Johnson Controls 394,975
64,300 Mattel Co 618,887
14,500 Nike Inc, Class B 412,344
4,600 Procter and Gamble Co 404,800
12,700 VF Corp 313,531
7,100 Whirlpool Corp 385,619
------------
3,786,131
------------
ELECTRONIC EQUIPMENT -- 10.4%
13,100 Analog Devices Inc* 2,056,700
28,300 Emerson Electric Co 1,289,419
23,600 General Electric Co 3,119,625
6,100 Jabil Circuit Inc* 423,569
6,600 Linear Technology Corp 692,587
33,800 LSI Logic Corp* 2,165,312
28,400 Motorola Inc 4,842,200
16,900 National Semiconductor Corp* 1,269,612
50,100 Nortel Networks Corp 5,586,150
27,300 Qualcomm Inc* 3,888,544
26,200 Raytheon Co, Class B 484,700
10,400 Tellabs Inc* 499,200
35,100 Texas Instruments Inc 5,844,150
14,900 Xilinx Inc* 1,188,275
------------
33,350,043
------------
FOOD AND BEVERAGE -- 1.4%
11,600 Anheuser Busch Cos Inc 743,850
44,335 Archer Daniels Midland Co 446,121
3,500 Bestfoods 146,781
3,300 Heinz (HJ) Co 105,394
51,800 Nabisco Group Holdings 446,775
30,800 Seagrams Co Ltd 1,809,500
8,100 Sysco Corp 265,781
10,300 Tyson Food Inc, Class A 106,219
8,800 Wrigley (William Jr) Co 595,100
------------
4,665,521
------------
</TABLE>
See accompanying notes to the financial statements.
3
<PAGE>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
HEALTH CARE -- 2.5%
58,700 Columbia HCA Healthcare Corp 1,133,644
39,200 Johnson & Johnson 2,812,600
7,300 Pharmacia & Upjohn Inc 347,662
11,600 Stryker Corp 678,600
41,500 Tenet Healthcare Corp* 726,250
35,700 United Healthcare Corp 1,825,162
8,900 Wellpoint Health Network* 600,750
------------
8,124,668
------------
INSURANCE -- 3.5%
17,700 Aetna Life and Casualty Co 727,912
7,100 Allmerica Financial Corp 296,425
75,600 Allstate Corp 1,474,200
8,300 AMBAC Inc 364,681
14,700 American General Corp 767,156
24,000 AXA Financial Inc 718,500
18,300 Chubb Corp 900,131
15,100 Cigna Corp 1,114,569
8,400 CNA Financial Corp* 226,800
44,566 Conseco Inc 651,778
26,500 Hartford Financial Services Group Inc 828,125
3,800 Jefferson Pilot Corp 197,837
15,500 Lincoln National Corp 431,094
13,700 MBIA Inc 525,737
10,200 ReliaStar Financial Corp 284,962
26,300 Saint Paul Cos Inc 588,462
13,000 Torchmark Corp 257,562
13,100 Travelers Property Casualty Corp, Class A 414,287
25,700 Unumprovident Corp 343,737
------------
11,113,955
------------
MACHINERY -- 1.9%
20,600 Applied Materials Inc* 3,768,512
20,300 Baker Hughes Inc 525,263
11,400 Caterpillar Inc 399,713
26,700 Deere and Co 954,525
4,800 Dover Corp 185,100
9,700 Parker-Hannifin Corp 351,625
------------
6,184,738
------------
</TABLE>
See accompanying notes to the financial statements.
4
<PAGE>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
MANUFACTURING -- 2.0%
17,500 Corning Inc 3,290,000
15,600 Leggett & Platt Inc 262,275
16,700 Minnesota Mining and Manufacturing Co 1,471,688
20,400 Owens Illinois Inc* 281,775
19,200 Rockwell International Corp 868,800
7,700 Temple Inland Inc 393,663
------------
6,568,201
------------
METALS AND MINING -- 0.8%
21,600 Alcan Aluminum Ltd 712,800
22,100 Phelps Dodge Corp 1,041,463
10,400 Reynolds Metals Co 660,400
------------
2,414,663
------------
OIL AND GAS -- 4.4%
11,300 Amerada Hess Corp 571,356
35,400 Atlantic Richfield Co 2,513,400
17,600 Burlington Resources Inc 486,200
11,900 Chevron Corp 888,781
12,300 Columbia Energy Group 725,700
31,500 Diamond Offshore Drilling Inc 1,000,125
53,877 Exxon Mobil Corp 4,057,612
4,600 Kerr-McGee Corp 205,850
30,900 Occidental Petroleum Corp 496,331
17,600 Phillips Petroleum Co 673,200
26,900 Texaco Inc 1,276,069
10,500 Unocal Corp 280,875
31,700 USX - Marathon Group 685,513
2,600 Vastar Resources Inc 137,963
------------
13,998,975
------------
PAPER AND ALLIED PRODUCTS -- 1.1%
16,300 Champion International Corp 843,525
24,895 International Paper Co 916,447
10,100 Kimberly-Clark Corp 522,044
16,200 Mead Corp 484,988
10,700 Weyerhaeuser Co 549,044
10,700 Willamette Industries Inc 363,131
------------
3,679,179
------------
</TABLE>
See accompanying notes to the financial statements.
5
<PAGE>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
PHARMACEUTICALS -- 3.5%
96,500 Abbott Laboratories 3,160,375
65,900 Amgen Inc* 4,493,556
36,800 Bristol Myers Squibb Co 2,090,700
8,500 Immunex Corp* 1,678,219
------------
11,422,850
------------
PRIMARY MATERIALS -- 0.0%
8,900 Crown Cork & Seal Inc 124,600
------------
PRIMARY PROCESSING -- 0.8%
15,500 Alcoa Inc 1,061,750
5,700 Dow Chemical Co 618,450
19,600 Nucor Corp 973,875
------------
2,654,075
------------
PRINTING AND PUBLISHING -- 0.5%
5,500 Gannett Co Inc 358,531
9,600 Knight Ridder Inc 450,000
12,800 Tribune Co 498,400
300 Washington Post Co, Class B 146,325
------------
1,453,256
------------
REFINING -- 1.2%
60,100 Royal Dutch Petroleum Co 3,155,250
21,600 Tosco Corp 577,800
------------
3,733,050
------------
RETAIL TRADE -- 3.6%
68,476 Albertsons Inc 1,677,662
24,300 Autozone Inc* 596,869
12,900 Circuit City Stores Inc 520,838
29,100 Federated Department Stores Inc* 1,067,606
111,500 Kmart Corp* 982,594
25,600 May Department Stores Co 670,400
22,500 McDonald's Corp 710,156
21,800 Penney (JC) Co Inc 343,350
15,000 Safeway Inc* 578,438
58,500 Sears Roebuck & Co 1,612,406
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
RETAIL TRADE -- CONTINUED
12,600 Tandy Corp 479,588
11,900 Tiffany & Co 763,831
60,500 Toys R Us Inc* 748,688
16,600 Wal Mart Stores Inc 808,213
------------
11,560,639
------------
SERVICES -- 1.0%
31,000 Cendant Corp* 552,188
4,300 FedEx Corp* 150,231
12,100 Fluor Corp 344,094
13,300 Marriott International Inc, Class A 366,581
31,800 The Walt Disney Co. 1,065,300
9,800 Time Warner Inc 837,900
------------
3,316,294
------------
TECHNOLOGY -- 10.6%
57,000 BMC Software Inc* 2,622,000
19,200 First Data Corp 864,000
7,200 Grainger (WW) Inc 308,250
46,100 Honeywell International Inc 2,218,563
79,300 Intel Corp 8,960,900
11,900 JDS Uniphase Corp* 3,137,138
20,000 Microsoft Corp* 1,787,500
11,000 PE Corp - PE Biosystems Group 1,160,500
47,600 Seagate Technology Corp* 2,374,050
23,700 Solectron Corp* 1,552,350
74,400 Sun Microsystems Inc* 7,086,600
23,900 Teradyne Inc* 2,079,300
------------
34,151,151
------------
TELECOMMUNICATIONS -- 10.1%
5,800 Alltel Corp 336,400
223,532 AT & T Corp 11,050,863
16,600 AT & T Liberty Media Group* 867,350
42,186 Bell Atlantic Corp 2,064,477
36,400 Bellsouth Corp 1,483,300
21,000 CBS Corp* 1,250,813
51,400 GTE Corp 3,032,600
50,638 MCI Worldcom Inc* 2,259,721
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
TELECOMMUNICATIONS -- CONTINUED
10,800 MediaOne Group Inc* 847,800
11,400 Nextel Communications Inc, Class A* 1,558,950
87,914 SBC Communications Inc 3,340,732
20,900 Sprint Corp 1,274,900
6,200 Telephone and Data Systems Inc 654,100
4,600 United States Cellular Corp* 307,913
6,600 US West Inc 479,325
32,200 Viacom Inc, Class B* 1,795,150
------------
32,604,394
------------
TRANSPORTATION -- 1.8%
24,100 AMR Corp* 1,274,288
57,800 Burlington Northern Santa Fe Railroad Co 1,137,938
23,700 CSX Corp 525,844
14,800 Delta Air Lines Inc 675,250
27,200 Norfolk Southern Corp 368,900
18,800 UAL Corp* 916,500
24,900 Union Pacific Corp 946,200
------------
5,844,920
------------
UTILITIES -- 4.0%
2,200 AES Corp* 184,387
9,100 Allegheny Energy Inc 236,031
15,500 Ameren Corp 465,000
9,700 American Electric Power Inc 272,813
32,200 Central & South West Corp 541,363
9,100 Cinergy Corp 194,513
19,500 Coastal Corp 820,219
6,400 Consolidated Edison Inc 176,400
21,100 Constellation Energy Group Inc 627,725
16,000 Dominion Resources Inc 587,000
30,000 DTE Energy Co 905,625
13,800 Edison International 363,113
10,900 El Paso Energy Corp 403,981
57,300 Entergy Corp 1,160,325
23,000 Firstenergy Corp 429,813
2,900 Florida Progress Corp 123,613
7,300 FPL Group Inc 281,963
25,600 General Public Utilities Inc 636,800
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
<C> <S> <C>
UTILITIES -- CONTINUED
10,400 Keyspan Corp 211,900
12,800 New Century Energies Inc 346,400
1,800 New England Electric System 97,200
15,400 Niagara Mohawk Holdings Inc* 180,950
8,600 Northern States Power Co 151,038
22,000 PG & E Corp 453,750
5,400 Pinnacle West Capital Corp 149,175
6,400 Potomac Electric Power Co 130,000
14,100 PPL Corp 283,763
25,600 Public Service Enterprise Group Inc 742,400
7,200 Reliant Energy Inc 148,050
3,000 Southern Co 66,563
5,800 Teco Energy Inc 104,400
33,400 Texas Utilities Co 1,089,675
4,600 Unicom Corp 173,938
-------------
12,739,886
-------------
TOTAL COMMON STOCKS (COST $296,954,528) 305,527,048
-------------
SHORT-TERM INVESTMENTS -- 7.6%
CASH EQUIVALENTS -- 2.7%
$ 685,384 BankBoston Eurodollar Time Deposit, 6.1175%, due
4/28/00(a) 685,384
$ 645,024 First Union National Bank Time Deposit, 5.8125%, due
3/01/00(a) 645,024
$ 967,537 Fleet National Bank Time Deposit, 5.79%, due 3/10/00(a) 967,537
3,276,589 Merrimac Cash Fund Premium Class(a) 3,276,589
$ 3,000,000 Prudential Securities Group, Inc. Master Note, 6.1875%,
due 3/10/00(a) 3,000,000
-------------
8,574,534
-------------
U.S. GOVERNMENT -- 0.8%
$ 2,760,000 U.S. Treasury Bill, 5.689%, due 6/29/00(b) 2,708,388
-------------
</TABLE>
See accompanying notes to the financial statements.
9
<PAGE>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE ($) DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENT -- 4.1%
$ 13,111,484 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/29/00, due 3/1/00, with a maturity value of
$13,113,287 and an effective yield of 4.95%,
collateralized by a U.S. Treasury Obligation with a
rate of 8.125%, maturity date of 8/15/19 and market
value, including accrued interest, of $13,373,714. 13,111,484
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $24,395,786) 24,394,406
-------------
TOTAL INVESTMENTS -- 102.5%
(Cost $321,350,314) 329,921,454
Other Assets and Liabilities (net) -- (2.5%) (8,135,760)
-------------
TOTAL NET ASSETS -- 100.0% $ 321,785,694
=============
NOTES TO THE SCHEDULE OF INVESTMENTS:
</TABLE>
* Non-income producing security.
(a) Represents investments of security lending collateral (Note 1).
(b) Security has been segregated to cover margin requirements on open financial
futures contracts.
10 See accompanying notes to the financial statements.
<PAGE>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $321,350,314) (Note 1) $329,921,454
Dividends and interest receivable 486,956
Receivable for variation margin on open futures contracts
(Notes 1 and 6) 109,350
Receivable for expenses waived or borne by Manager
(Note 2) 5,825
------------
Total assets 330,523,585
------------
LIABILITIES:
Payable upon return of securities loaned (Note 1) 8,574,534
Payable to affiliate for (Note 2):
Management fee 83,712
Shareholder service fee 38,050
Accrued expenses 41,595
------------
Total liabilities 8,737,891
------------
NET ASSETS $321,785,694
============
NET ASSETS CONSIST OF:
Paid-in capital $301,127,355
Accumulated undistributed net investment income 774,890
Accumulated net realized gain 11,406,835
Net unrealized appreciation 8,476,614
------------
$321,785,694
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $321,785,694
============
SHARES OUTSTANDING:
Class III 22,424,824
============
NET ASSET VALUE PER SHARE:
Class III $ 14.35
============
</TABLE>
See accompanying notes to the financial statements. 11
<PAGE>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $9,290) $ 3,292,950
Interest (including securities lending income
of $24,068) 1,417,122
-----------
Total income 4,710,072
-----------
EXPENSES:
Management fee (Note 2) 855,754
Custodian and transfer agent fees 86,279
Audit fees 34,851
Legal fees 6,479
Trustees fees (Note 2) 3,009
Registration fees 2,107
Miscellaneous 2,833
Fees waived or borne by Manager (Note 2) (135,558)
-----------
855,754
Shareholder service fee (Note 2)
Class III 388,979
-----------
Net expenses 1,244,733
-----------
Net investment income 3,465,339
-----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments 40,468,811
Closed futures contracts 3,002,730
Closed swap contracts (1,012,894)
-----------
Net realized gain 42,458,647
-----------
Change in net unrealized appreciation (depreciation) on:
Investments (11,292,493)
Open futures contracts 125,762
Open swap contracts 173,044
-----------
Net unrealized loss (10,993,687)
-----------
Net realized and unrealized gain 31,464,960
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $34,930,299
===========
</TABLE>
12 See accompanying notes to the financial statements.
<PAGE>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 3,465,339 $ 1,799,442
Net realized gain 42,458,647 12,285,912
Change in net unrealized appreciation (depreciation) (10,993,687) 2,331,870
------------ ------------
Net increase in net assets from operations 34,930,299 16,417,224
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (3,120,661) (1,592,308)
------------ ------------
Total distributions from net investment income (3,120,661) (1,592,308)
------------ ------------
Net realized gains
Class III (34,891,112) (15,222,676)
------------ ------------
Total distributions from net realized gains (34,891,112) (15,222,676)
------------ ------------
(38,011,773) (16,814,984)
------------ ------------
Net share transactions: (Note 5)
Class III 97,708,683 127,633,807
------------ ------------
Increase in net assets resulting from net share
transactions 97,708,683 127,633,807
------------ ------------
Total increase in net assets 94,627,209 127,236,047
NET ASSETS:
Beginning of period 227,158,485 99,922,438
------------ ------------
End of period (including accumulated undistributed
net investment income of $774,890 and
$430,212, respectively) $321,785,694 $227,158,485
============ ============
</TABLE>
See accompanying notes to the financial statements. 13
<PAGE>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
---------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.26 $ 14.05 $ 12.98 $ 12.93 $ 10.65
-------- -------- ------- ------- -------
Income from investment operations:
Net investment income 0.20 0.18 0.22 0.24 0.28
Net realized and unrealized gain 1.94 1.99 4.07 2.41 3.71
-------- -------- ------- ------- -------
Total from investment operations 2.14 2.17 4.29 2.65 3.99
-------- -------- ------- ------- -------
Less distributions to shareholders:
From net investment income (0.19) (0.19) (0.22) (0.24) (0.25)
From net realized gains (1.86) (1.77) (3.00) (2.36) (1.46)
-------- -------- ------- ------- -------
Total distributions (2.05) (1.96) (3.22) (2.60) (1.71)
-------- -------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 14.35 $ 14.26 $ 14.05 $ 12.98 $ 12.93
======== ======== ======= ======= =======
TOTAL RETURN(a) 15.10% 16.29% 37.82% 22.76% 38.64%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $321,786 $227,158 $99,922 $66,260 $57,485
Net expenses to average daily net
assets 0.48% 0.48% 0.48% 0.48% 0.48%
Net investment income to average
daily net assets 1.34% 1.35% 1.66% 1.83% 2.25%
Portfolio turnover rate 108% 77% 70% 131% 81%
Fees and expenses voluntarily waived
or borne by the Manager consisted
of the following per
share amounts: $ 0.01 $ 0.03 $ 0.04 $ 0.04 $ 0.03
</TABLE>
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
14 See accompanying notes to the financial statements.
<PAGE>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Tobacco-Free Core Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, diversified management investment company. The
Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24,
1985. The Declaration of Trust permits the Trustees to create an unlimited
number of series ("Funds"), each of which issues a separate series of
shares, and to subdivide a series of shares into classes.
The Fund seeks high total return through investment in U.S. equity
securities. The Fund's benchmark is the S&P 500 Index.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of the financial statements
in accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Securities for
which quotations are not readily available are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts on domestic stock
indices. Stock index futures contracts represent commitments for future
delivery of cash based upon the level of a specified index of equity
securities at a given date. The Fund may use futures contracts to manage
its exposure to the stock markets. Buying futures tends to increase the
Fund's exposure to the underlying instrument. Selling futures tends to
decrease the Fund's exposure to the underlying instrument or hedge other
Fund instruments. Upon entering into a futures contract, the Fund is
required to deposit with its custodian, in a segregated account in the
name of the futures broker, an amount of cash or U.S. government and
agency obligations in accordance with the initial margin requirements of
the broker or exchange. Futures contracts are marked to market daily and
an
15
<PAGE>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
appropriate payable or receivable for the change in value ("variation
margin") is recorded by the Fund. The payable or receivable is liquidated
on the following business day. Gains or losses are recognized but not
considered realized until the contracts expire or are closed. Futures
contracts involve, to varying degrees, risk of loss in excess of the
variation margin disclosed in the Statement of Assets and Liabilities.
Losses may arise from changes in the value of the underlying instrument,
if there is an illiquid secondary market for the contracts, or if
counterparties do not perform under the contract terms. Futures contracts
are valued at the settlement price established each day by the board of
trade or exchange on which they are traded. See Note 6 for all open
futures contracts as of February 29, 2000.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, realization of collateral by the Fund may be delayed or
limited.
SECURITY LENDING
The Fund may lend its securities to qualified brokers. The loans are
collateralized at all times with cash or securities with a market value at
least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending
its securities. At February 29, 2000, the Fund loaned securities having a
market value of $8,366,490, collateralized by cash in the amount of
$8,574,534, which was invested in short-term instruments.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
equity markets. A swap is an agreement to exchange the return generated by
one instrument for the return generated by another instrument. The Fund
enters into equity swap agreements which involve a commitment by one party
in the agreement to pay interest in exchange for a market linked return,
both based on notional amounts. To the extent that the total return of the
security or index underlying the transaction exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make a payment to the counterparty. The Fund also enters into contracts
for
16
<PAGE>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
differences in which the Fund agrees with the counterparty that its return
will be based on the relative performance of two different groups or
"baskets" of securities, adjusted by an interest rate payment. To the
extent that the relative performance of the two baskets of securities
exceeds or falls short of the offsetting interest rate obligation, the
Fund will receive a payment from or make a payment to the counterparty,
respectively. Swaps are marked to market daily based upon quotations from
market makers and the change, if any, is recorded as unrealized gain or
loss in the Statement of Operations. Payments received or made at the end
of the measurement period are recorded as realized gain or loss in the
Statement of Operations. Entering into these agreements involves, to
varying degrees, elements of credit and market risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform, or that there may be unfavorable changes in the
price of the security or index underlying these transactions. As of
February 29, 2000, there were no open swap agreements.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary. Taxes on foreign dividend income are withheld in
accordance with the applicable country's tax treaty with the United
States.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. Distributions to shareholders are recorded by the Fund on
the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States.
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
17
<PAGE>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable foreign withholding taxes, is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis and is
adjusted for the accretion of discounts. In determining the net gain or
loss on securities sold, the cost of securities is determined on the
identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is .14% of the amount
invested. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. For the year ended February 29, 2000, the Fund received
$156,532 in purchase premiums. There is no premium for redemptions,
reinvested distributions or in-kind transactions.
Effective April 7, 2000, the Fund will no longer charge a purchase
premium.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .33% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding brokerage commissions, certain other transaction costs
(including transfer taxes), shareholder service fees and extraordinary
expenses) exceed the management fee.
Prior to March 1, 1999, GMO earned a management fee at the annual rate of
.50% of average daily net assets. GMO had agreed to waive a portion of its
fee and bear other expenses to the extent that the Fund's annual expenses
(including the management fee but excluding brokerage commissions, certain
other transaction costs (including transfer taxes), shareholder service
fees and extraordinary expenses) exceeded .33% of average daily net
assets.
18
<PAGE>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000 was $3,009. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 29, 2000, aggregated
$339,310,987 and $247,020,354, respectively.
At February 29, 2000 the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
$322,628,917 $43,971,347 $(36,678,810) $7,292,537
</TABLE>
4. PRINCIPAL SHAREHOLDERS
At February 29, 2000, 57.0% of the outstanding shares of the Fund were
held by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
------------------------ -----------------------
Shares Amount Shares Amount
Class III: ---------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Shares sold 8,011,905 $123,086,297 8,174,912 $118,663,463
Shares issued to shareholders
in reinvestment of distributions 2,549,261 37,093,513 1,181,509 16,525,109
Shares repurchased (4,062,483) (62,471,127) (544,280) (7,554,765)
---------- ------------ --------- ------------
Net increase 6,498,683 $ 97,708,683 8,812,141 $127,633,807
========== ============ ========= ============
</TABLE>
19
<PAGE>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 29, 2000 is as
follows:
FUTURES CONTRACTS
<TABLE>
<CAPTION>
Number of Contract Net Unrealized
Contracts Type Expiration Date Value Depreciation
---------- ---------- --------------- ---------- --------------
<S> <C> <C> <C> <C>
Buys
18 S&P 500 March 2000 6,174,000 $(94,526)
========
</TABLE>
At February 29, 2000, the Fund has sufficient cash and/or securities to
cover any commitments or margin on open futures contracts.
20
<PAGE>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
For the fiscal year ended February 29, 2000, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 64.7% of distributions as net capital gain dividends.
21
<PAGE>
GMO TOBACCO-FREE CORE FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Robert Soucy are
primarily responsible for the day-to-day management of the Fund's portfolio.
Mssrs. Grantham and Darnell have each been portfolio managers at Grantham, Mayo,
Van Otterloo & Co. LLC for more than fifteen years; Mr. Soucy for more than ten
years.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO Tobacco-Free Core Fund returned 15.1% for the
fiscal year ended February 29, 2000, as compared to 11.7% for the S&P 500.
Consistent with the Fund's investment objectives and policies, the Fund was
invested substantially in common stocks throughout the period.
For the fiscal year, narrow market conditions persisted despite a brief
broadening in the market in the second quarter. U.S. market returns were
dominated by technology and telecommunications stocks. Growth stocks across all
market capitalization bands outperformed value stocks.
Sector selection was neutral relative to the benchmark. The Fund's underweight
in consumer staple (particularly food and beverage) stocks added 190 basis
points as these stocks underperformed the benchmark by 35% for the fiscal year.
The underweight positions in financial services and health care stocks, also
poor performers, added modestly to performance. The exclusion of tobacco stocks,
which underperformed the benchmark by 56% during the period, also contributed
positively to performance. These positive contributions were offset by an
overweight position in value stocks, including auto/transportation stocks and
electric utilities. These positions detracted -200 basis points in aggregate
from performance.
Stock selection added value. Selection was particularly strong in technology,
pharmaceutical and producer durable stocks. Weak selection among telephone
utility, financial services, consumer staple and consumer durable stocks
detracted from performance.
The MOMENTUM stock selection strategy performed well. The INTRINSIC VALUE
strategy was neutral relative to the benchmark, while the NEGLECT, BOOK VALUE
and CASH FLOW strategies underperformed.
OUTLOOK
The portfolio is conservatively positioned, with a lower price-to-book, lower
price-to-earnings and a higher dividend yield than the S&P 500. In our view,
value stocks are significantly undervalued compared to growth stocks. The spread
of value stocks relative to growth stocks is at its widest level since the early
1970's. The Fund is overweight in both auto/transportation stocks and electric
utilities, reflecting our preference for value stocks. We are gradually reducing
our exposure to technology stocks. While earlier in 1999 many of these stocks
were attractive to our intrinsic value methodology, most technology stocks have
appreciated to a point where they are now expensive on this measure.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO &
CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO TOBACCO-FREE CORE FUND CLASS III SHARES AND THE S&P 500 INDEX
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
Average Annual Total Returns
Inception 10/31/91
1yr 5yr 10yr (ITD)
<S> <C> <C>
14.94 25.64 19.8
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
Date GMO Tobacco Free Core Fund-III S&P 500
<S> <C> <C>
10/31/91 9986 10000
12/31/91 10648 10695
3/31/92 10327 10426
6/30/92 10639 10625
9/30/92 10771 10960
12/31/92 11254 11512
3/31/93 12039 12015
6/30/93 12340 12074
9/30/93 12997 12385
12/31/93 13214 12673
3/31/94 12852 12191
6/30/94 12889 12243
9/30/94 13379 12841
12/31/94 13530 12840
3/31/95 14785 14090
6/30/95 16386 15435
9/30/95 18132 16661
12/31/95 19349 17664
3/31/96 20057 18613
6/30/96 20744 19446
9/30/96 21351 20049
12/31/96 22889 21720
3/31/97 23473 22302
6/30/97 27315 26196
9/30/97 30640 28158
12/31/97 31038 28967
3/31/98 35284 33007
6/30/98 36144 34096
9/30/98 32527 30705
12/31/98 38859 37244
3/31/99 40865 39099
6/30/99 43755 41856
9/30/99 40864 39242
12/31/99 47117 45079
2/29/00 45105 42004
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes.
Each performance figure assumes purchase at the beginning and redemption at the
end of the stated period and reflects a transaction fee of 14 bp on the
purchase. Transaction fees are retained by the Fund to cover trading costs.
Past performance is not indicative of future performance. Information is
unaudited.
<PAGE>
GMO TAX MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Tax-Managed Small Companies
Fund at February 29, 2000, the results of its operations, the changes in its net
assets and the financial highlights for the period from June 1, 1999
(commencement of operations) to February 29, 2000, in conformity with accounting
principles generally accepted in the United States. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Trust's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit, which included confirmation of securities at
February 29, 2000 by correspondence with the custodian, provides a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 10, 2000
<PAGE>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 94.8%
AEROSPACE -- 0.3%
500 Curtiss Wright Corp 18,500
1,000 Fairchild Corp, Class A* 6,125
5,700 Kaman Corp, Class A 56,644
5,600 Kellstrom Industries Inc* 38,850
-------------
120,119
-------------
AUTOMOTIVE -- 1.3%
6,700 Arvin Industries Inc 123,112
600 Bandag Inc 14,100
800 Borg Warner Automotive Inc 25,600
1,900 Cooper Tire & Rubber Co 20,544
7,000 Dura Automotive Systems Inc* 91,437
1,500 Meritor Automotive Inc 21,000
1,000 Modine Manufacturing Co 22,812
1,400 Smith (AO) Corp, Class B 24,150
800 Superior Industries International Inc 19,100
3,100 Titan International Inc 22,862
12,400 United Automotive Group Inc* 103,850
2,300 Wabash National Corp 32,200
-------------
520,767
-------------
BANKING AND FINANCIAL SERVICES -- 8.0%
5,000 Acceptance Insurance Cos Inc* 20,625
12,000 Advanta Corp, Class A 223,500
36,600 Amresco Inc* 50,325
1,100 Andover Bancorp Inc 29,425
5,100 Astoria Financial Corp 121,444
100 Bancfirst Corp 2,775
2,200 Bancwest Corp 33,412
3,200 Bay View Capital Corp 28,000
1,800 BSB Bancorp Inc 32,287
1,200 Charter Municipal Mortgage Acceptance 14,325
4,600 Commercial Federal Corp 59,512
1,200 Corus Bancshares Inc 29,550
100 CPB Inc 2,250
3,600 Credit Acceptance Corp* 19,800
500 Dain Rauscher Corp 28,187
6,300 Downey Financial Corp 124,031
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
BANKING AND FINANCIAL SERVICES -- CONTINUED
2,400 Edwards (AG) Inc 76,050
800 First Bancorp Puerto Rico 13,600
2,600 First Citizens Bancshares, Class A 167,700
1,000 First Commerce Bancshares Inc, Class A 34,750
1,100 First Federal Financial Corp* 14,025
500 First Indiana Corp 10,125
3,000 First Republic Bank* 45,750
4,000 Flagstar Bancorp Inc 51,500
4,100 GBC Bancorp (California) 110,700
3,300 Hamilton Bancorp Inc* 55,069
7,500 Hibernia Corporation, Class A 67,969
7,800 Imperial Credit Industries Inc* 44,850
1,000 Interwest Bancorp Inc 17,500
4,700 Jefferies Group Inc 109,862
3,500 Leucadia National Corp 74,812
7,400 Liberty Financial Cos 142,912
700 Midland Co 15,750
1,200 Morgan Keegan Inc 17,100
800 North Fork Bancorp 13,100
20,800 Ocwen Financial Corp* 123,500
12,300 Pacific Century Financial Corp 186,806
3,900 PFF Bancorp Inc 58,987
1,050 PMI Group Inc 38,128
1,600 Raymond James Financial Corp 31,600
17,800 Resource America Inc 125,712
11,200 Resource Bancshares Mortgage Group Inc 41,300
1,800 Ryland Group Inc 31,950
35,800 Sovereign Bancorp Inc 259,550
2,400 Student Loan Group 93,300
4,900 U.S. Bancorp Inc 48,081
2,860 UMB Financial Corp 96,167
500 Value Line Inc 17,937
6,500 Westcorp 83,281
-------------
3,138,871
-------------
CHEMICALS -- 1.1%
5,600 Cytec Industries Inc* 135,800
1,600 IMC Global Inc 21,600
6,600 Mississippi Chemical Corp 49,500
1,500 Olin Corp 23,250
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
CHEMICALS -- CONTINUED
700 Omnova Solutions Inc 4,594
900 Stepan Co 18,450
23,700 Terra Industries Inc 54,806
6,900 Wellman Inc 128,512
-------------
436,512
-------------
COMPUTER AND OFFICE EQUIPMENT -- 2.6%
700 Micros Systems Inc* 38,762
28,000 Neomagic Corp* 151,376
7,500 Reynolds & Reynolds Inc, Class A 207,187
17,500 Sterling Software Inc* 627,812
-------------
1,025,137
-------------
CONSTRUCTION -- 2.5%
500 Centex Construction Products Inc 11,625
700 Centex Corp 13,781
3,600 Horton (DR) Inc 40,500
1,100 Kaufman & Broad Home Corp 21,037
300 MDC Holdings Inc 4,556
12,100 Pulte Corp 203,431
10,500 Texas Industries Inc 315,000
16,600 Toll Brothers Inc* 275,975
2,600 US Home Corp* 89,050
-------------
974,955
-------------
CONSUMER GOODS -- 4.4%
700 Bassett Furniture Industries Inc 9,450
900 Brown Shoe Co Inc 9,450
15,500 Burlington Industries Inc* 43,594
2,200 Callaway Golf Co 26,400
25,100 CHS Electronics Inc* 21,962
3,500 Compucom Systems Inc* 15,750
1,775 CoorsTek Inc* 34,612
8,100 Daisytek International Corp* 185,794
700 Department 56 Inc* 9,887
600 Enesco Group Inc 4,350
11,200 Footstar Inc* 276,500
1,900 Gibson Greetings Inc* 15,319
1,100 Hon Industries Inc 20,281
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
CONSUMER GOODS -- CONTINUED
5,200 Kellwood Co 87,750
9,900 Kimball International, Class B 150,356
900 Lancaster Colony Corp 26,775
1,000 Liz Claiborne Inc 37,437
300 Mikasa Inc 2,737
900 Mohawk Industries Inc* 19,969
3,700 Natures Sunshine Products Inc 38,850
12,900 Nautica Enterprises Inc* 136,256
2,800 Oakley Inc* 24,150
600 Oxford Industries Inc 9,975
8,542 Pittston Brinks Group 152,688
1,000 Polo Ralph Lauren Corp* 16,750
2,100 Russell Corp 29,006
5,100 Standard Register Co 69,487
4,600 Tech Data Corp* 99,762
7,700 Unifi Inc* 73,631
2,400 US Industries Inc 27,450
1,200 Wallace Computer Services 12,525
1,900 Wolverine World Wide Inc 21,850
-------------
1,710,753
-------------
ELECTRONIC EQUIPMENT -- 9.7%
6,300 3DFX Interactive Inc* 58,275
13,500 Arrow Electronics Inc* 408,375
7,500 Baldor Electric Co. 121,406
1,000 C-Cube Microsystems Inc* 93,250
8,600 Cable Design Technologies Corp* 198,875
2,600 Diebold Inc 63,700
200 Franklin Electric Inc 13,325
1,600 Genlyte Group Inc* 32,000
68,700 Glenayre Technologies Inc* 1,365,412
2,800 Harman International Industries 173,425
4,300 Hubbell Inc, Class B 104,544
4,200 Innovex Inc 39,637
14,200 Komag Inc* 31,507
400 Litton Industries * 11,975
8,200 Magnetek Inc* 70,725
900 Moog Inc, Class A* 16,087
3,300 Oak Technology Inc* 60,225
12,600 Picturetel Corp* 95,287
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
ELECTRONIC EQUIPMENT -- CONTINUED
16,000 Pioneer Standard Electronics Inc 294,000
2,400 Primex Technologies 50,400
21,800 Sensormatic Electronics Corp* 414,200
400 Thermo Ecotek Corp* 2,500
400 Thomas & Betts Corp 8,975
1,300 Triumph Group Inc* 38,025
-------------
3,766,130
-------------
FOOD AND BEVERAGE -- 1.8%
1,600 Agribrands International Inc* 58,500
16,900 Bob Evans Farms Inc 229,206
1,600 Chiquita Brands International Inc 7,100
1,100 Corn Product International Inc 25,919
200 Farmer Brothers Co 32,000
15,900 IBP Inc 198,750
7,300 Imperial Sugar Co 19,619
600 International Multifoods Corp 6,562
800 Interstate Bakeries Corp 9,150
700 Luby's Cafeterias Inc 7,306
700 Michael Foods Inc 15,312
2,400 Ralcorp Holdings Inc* 35,850
900 Smithfield Foods Inc* 13,950
600 Suiza Foods Corp* 23,475
900 Universal Corp 14,737
1,200 Universal Foods Corp 21,675
-------------
719,111
-------------
HEALTH CARE -- 3.8%
4,200 Alterra Healthcare Corp* 25,200
1,200 Apria Healthcare Group* 17,100
800 Arrow International Inc 31,600
16,000 Beverly Enterprises Inc* 42,000
600 Bindley Western Industries Inc 10,312
2,100 Coventry Health Care Inc* 17,194
700 Dentsply International Inc 17,937
27,200 Health Management Associates Inc* 292,400
18,400 Healthsouth Corp* 89,700
900 Invacare Corp 21,937
2,200 Lincare Holdings Inc* 51,562
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
HEALTH CARE -- CONTINUED
10,500 Magellan Health Services Inc* 61,687
1,200 Mallinckrodt Inc 29,550
7,700 Manor Care Inc* 66,894
1,100 Mentor Corp 30,525
2,200 Mid Atlantic Medical Services Inc* 18,012
900 Ocular Sciences Inc* 13,500
4,700 Pediatrix Medical Group Inc* 37,012
21,600 Phycor Inc* 24,976
33,900 PSS World Medical Inc* 218,231
11,100 Quorum Health Group Inc* 98,860
9,800 Sierra Health Services Inc* 60,025
3,800 Sola International Inc* 19,000
3,500 Steris Corp* 33,906
44,200 Total Renal Care Holdings* 132,600
900 Trigon Healthcare Inc* 28,744
-------------
1,490,464
-------------
INDUSTRIAL -- 0.3%
5,800 Gerber Scientific Inc 97,150
-------------
INSURANCE -- 4.9%
910 ACE Ltd 16,266
900 American Financial Group Inc 18,900
700 American National Insurance Co 40,950
8,000 Amerus Life Holdings Inc 162,500
1,000 Argonaut Group Inc 19,000
4,500 Berkley (WR) Corp 72,281
800 Commerce Group Inc 23,900
1,836 Delphi Financial Group Inc* 48,424
1,300 Everest Re Group Ltd 31,931
3,300 Fidelity National Financial Inc 41,456
2,600 First American Financial Corp 30,225
1,700 Fremont General Corp 12,325
1,500 Frontier Insurance Group Inc 2,812
5,100 Harleysville Group Inc 66,619
800 Horace Mann Educators Corp 12,400
2,000 Kansas City Life Insurance Co 64,000
7,000 Landamerica Financial Group Inc 126,000
5,800 Mercury General Corp 131,587
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
INSURANCE -- CONTINUED
3,300 MMI Companies Inc 31,144
700 Mony Group Inc 20,037
300 National Western Life Insurance, Class A* 20,850
23,000 Ohio Casualty Corp 284,625
10,200 Old Republic International Corp 119,212
3,200 Pacificare Health Systems Inc* 145,400
300 PMA Capital Corp, Class A 5,550
1,200 Presidential Life Corp 18,750
700 PXRE Group Ltd 9,844
2,000 Radian Group Inc 69,375
2,800 Reliance Group Holdings Inc 12,425
600 RLI Corp 17,887
400 SCPIE Holdings Inc 12,625
6,600 Selective Insurance Group 101,887
5,400 Stewart Information Services Corp 73,912
400 Transatlantic Holding Inc 28,175
1,000 Trenwick Group Inc 13,187
-------------
1,906,461
-------------
LODGING -- 0.2%
10,000 Boca Resorts Inc* 90,000
300 Boyd Gaming Corp* 1,556
-------------
91,556
-------------
MACHINERY -- 1.9%
5,400 Agco Corp 59,400
4,998 Albany International Corp* 72,471
1,400 Cummins Engine Inc 46,637
11,600 Donaldson Co Inc 263,900
1,100 Federal Mogul Corp 14,987
7,200 Flowserve Corp 82,800
800 FMC Corp* 38,650
13,400 Harnischfeger Industries Inc* 10,050
300 IRI International Corp* 1,462
800 Kaydon Corp 18,400
1,300 Kennametal Inc 30,225
900 Milacron Inc 12,488
2,600 Paxar Corp* 25,838
600 Starrett (LS) Co, Class A 13,800
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
MACHINERY -- CONTINUED
500 Tecumseh Products Co 21,563
1,000 York International Corp 18,125
-------------
730,796
-------------
MANUFACTURING -- 2.6%
7,100 ACX Technologies Inc* 22,631
1,700 Amcast Industrial Corp 20,294
600 Applied Power Inc, Class A 14,513
400 Armstrong World Industries Inc 7,600
800 Barnes Group Inc 11,350
1,300 Champion Enterprises Inc* 8,206
15,700 Clayton Homes Inc 127,563
1,400 Commercial Intertech Corp 25,200
1,600 Crane Co 31,800
15,500 Griffon Corp* 129,813
1,000 Harsco Corp 24,813
4,700 Hughes Supply Inc 84,013
355 Huttig Building Products Inc* 1,509
500 Lafarge Corp 9,844
13,300 Metals USA Inc* 103,075
700 NCI Building Systems Inc* 10,588
17,300 Omnicare Inc 158,944
1,000 Snap-On Inc 21,813
800 Standex International Corp 12,650
8,100 Trinity Industries Inc 179,213
-------------
1,005,432
-------------
METALS AND MINING -- 1.2%
4,200 Arch Coal Inc 37,275
500 Cleveland Cliffs Inc 12,469
2,900 Commercial Metals Co 80,113
1,700 Nacco Industries Inc, Class A 73,844
2,800 Phelps Dodge Corp 131,950
5,250 Reliance Steel and Aluminum Co 101,719
1,600 Timken Co 22,900
-------------
460,270
-------------
OIL AND GAS -- 9.3%
3,852 Friede Goldman International Inc* 20,223
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
OIL AND GAS -- CONTINUED
700 Helmerich & Payne Inc 18,638
45,600 Kinder Morgan Inc 1,271,100
16,500 Parker Drilling Co* 66,000
49,600 Pride International Inc* 734,700
700 Questar Corp 9,756
500 Seacor Smit Inc* 24,250
6,800 Tidewater Inc 192,525
24,800 Transocean Sedco Forex Inc 978,050
2,900 Varco International Inc* 32,081
13,900 Veritas DGC Inc* 278,000
-------------
3,625,323
-------------
PAPER AND ALLIED PRODUCTS -- 1.6%
1,700 Boise Cascade Office Products* 25,288
900 Caraustar Industries Inc 14,963
4,557 Kimberly-Clark Corp 235,540
20,500 Mail-Well Inc* 178,094
3,500 Rock-Tenn Co, Class A 39,375
3,300 Schweitzer-Mauduit International 44,963
1,400 Shorewood Packaging Corp* 29,050
2,000 United Stationers Inc* 53,750
1,500 Wausau-Mosinee Paper Corp 19,594
-------------
640,617
-------------
PHARMACEUTICALS -- 1.5%
15,700 Henry Schein Inc* 294,375
9,200 Mylan Laboratories Inc 211,600
3,300 NBTY Inc* 46,406
10,000 NCS Healthcare Inc, Class A* 22,813
-------------
575,194
-------------
PRIMARY MATERIALS -- 0.0%
400 West Pharmaceutical Services Inc 11,775
-------------
PRIMARY PROCESSING -- 2.5%
5,400 AK Steel Holding Corp 44,888
500 Ameron Inc 17,438
900 Belden Inc 20,363
4,900 Bethlehem Steel Corp* 27,869
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
PRIMARY PROCESSING -- CONTINUED
700 Carpenter Technology Corp 15,575
200 Intermet Corp 2,250
25,400 LTV Corp 84,138
18,800 National Steel Corp, Class B 131,600
500 NCH Corp 19,813
1,600 Oregon Steel Mills Inc 6,600
600 Precision Castparts Corp 15,488
800 Quanex Corp 17,050
1,000 Ryerson Tull Inc 13,250
3,708 Superior TeleCom Inc 46,350
1,600 Titanium Metals Corp 7,300
23,000 USX-US Steel Group Inc 503,125
-------------
973,097
-------------
PRINTING AND PUBLISHING -- 0.4%
4,700 Hollinger International Inc 56,694
4,059 Quebecor Printing Inc 79,404
-------------
136,098
-------------
REAL ESTATE -- 0.8%
1,400 Lennar Corp 23,100
16,600 Meristar Hospitality Corp, REIT 264,563
2,400 Webb (Del) Corp* 36,000
-------------
323,663
-------------
REFINING -- 0.7%
5,000 Ashland Inc 155,625
4,000 Ultramar Diamond Shamrock Corp 86,750
1,200 Valero Energy Corp 30,600
-------------
272,975
-------------
RETAIL TRADE -- 3.7%
6,400 Burlington Coat Factory Warehouse 73,200
9,200 CBRL Group Inc 85,100
8,400 Central Garden and Pet Co* 80,850
22,700 CKE Restaurants Inc 144,713
1,100 Claire's Stores Inc 19,181
7,100 Dress Barn Inc* 102,950
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
RETAIL TRADE -- CONTINUED
1,500 Finish Line Inc* 9,000
3,700 Fruit of the Loom Inc, Class A* 5,550
8,100 Goodys Family Clothing Inc* 56,700
10,600 Heilig Meyers Co 34,450
3,700 Homebase Inc* 9,481
2,700 Inacom Corp* 9,113
1,700 Ingles Markets Inc, Class A 18,594
600 Jo-ann Stores* 5,400
17,000 Just For Feet Inc* 1,360
28,500 Landry's Seafood Restaurants* 201,281
11,700 Lone Star Steakhouse and Saloon Inc* 103,838
1,500 Neiman Marcus Group Inc, Class A* 31,969
1,400 NPC International Inc* 11,550
4,800 Outback Steakhouse Inc* 125,400
600 Payless ShoeSource Inc* 23,700
1,600 Petco Animal Supplies Inc* 17,200
1,600 Phillips Van Heusen 11,100
4,400 Rainforest Cafe Inc* 17,600
2,400 Ross Stores Inc 34,800
900 Ruby Tuesday Inc 15,244
900 Ruddick Corp 12,094
8,700 Ryan's Family Steak Houses Inc* 83,194
600 Shopko Stores Inc* 9,975
2,900 Systemax Inc* 28,638
5,900 Value City Department Stores Inc* 77,806
-------------
1,461,031
-------------
SERVICES -- 7.1%
2,200 Alternative Resources Corp* 7,425
700 Amerco* 11,988
1,300 Anchor Gaming* 54,113
12,400 Arctic Cat Inc 125,550
800 Avis Rent a Car Inc* 11,650
3,000 Aztar Corp* 28,500
4,400 Banta Corp 80,300
1,100 Berlitz International Inc* 16,913
1,600 Bowne and Co Inc 19,100
10,900 Buffets Inc* 94,694
700 Carmike Cinemas Inc, Class A* 5,469
1,800 CDI Corp* 32,850
</TABLE>
See accompanying notes to the financial statements. 11
<PAGE>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
SERVICES -- CONTINUED
1,800 Dollar Thrifty Automotive Group Inc* 23,625
2,900 Electro Rent Corp* 31,538
18,125 Encompass Services Corp* 130,273
5,200 Family Golf Centers Inc* 6,500
18,900 Fleming Cos Inc 291,769
5,000 Franklin Covey Co* 40,938
2,100 Harrahs Entertainment Inc* 40,163
2,572 Hilton Hotels Corp 18,004
8,400 Ingram Micro Inc* 90,825
2,000 Interpool Inc 13,250
700 Jacobs Engineering Group* 19,644
4,800 Kelly Services, Class A 115,500
10,000 Loews Cineplex Entertainment Corp* 41,250
1,500 Manpower Inc 49,031
900 Marcus Corp 9,394
8,400 Modis Professional Services Inc* 132,300
1,500 Nash Finch Co 11,813
1,500 National Processing Inc* 13,219
3,800 Olsten Corp 45,363
9,700 Personnel Group of America Inc* 73,963
2,200 Prime Hospitality Corp* 18,700
1,500 Rollins Truck Leasing Corp 12,563
1,200 RWD Technologies Inc* 10,725
8,000 Safety-Kleen Corp* 39,000
1,900 Staff Leasing Inc* 10,925
30,300 Staffmark Inc* 340,875
14,829 Supervalu Inc 254,873
2,500 Unifirst Corp 25,156
22,300 Veterinary Centers of America Inc* 246,694
3,000 XTRA Corp* 119,438
-------------
2,765,863
-------------
TECHNOLOGY -- 11.1%
4,200 Analysts International Corp 55,650
2,400 Aspen Technologies Inc* 107,400
1,200 Autodesk Inc 53,625
5,371 Avnet Inc 359,186
19,600 Cabletron Systems Inc* 960,400
900 Caci International Inc* 25,594
11,300 Cambridge Technology Partners Inc* 169,500
</TABLE>
12 See accompanying notes to the financial statements.
<PAGE>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
TECHNOLOGY -- CONTINUED
2,500 Cirrus Logic Corp* 52,031
29,700 Computer Horizons Corp* 660,825
5,700 Cotelligent Group Inc* 34,200
11,100 Deluxe Corp 260,156
3,900 Esterline Corp* 43,388
1,300 G TECH Holdings Corp* 26,000
8,200 Gartner Group Inc, Class A 117,363
2,900 Hypercom Corp* 50,206
3,200 Hyperion Solutions Corp* 158,000
10,000 Information Resources Inc* 78,125
5,200 Informix Corp* 83,200
4,700 Input/Output Inc* 28,494
11,100 Keane Inc* 266,400
9,900 Midway Games Inc* 146,644
1,700 MTS Systems Inc 13,069
4,500 Network Equipment Tech Inc* 47,250
5,000 Saga Systems Inc* 169,688
5,100 Solectron Corp* 334,050
1,200 Thermo Electron Corp* 18,750
-------------
4,319,194
-------------
TELECOMMUNICATIONS -- 1.9%
12,000 Ameripath Inc* 118,500
37,400 Brightpoint Inc* 481,525
1,100 North Pittsburgh Systems 13,888
2,400 Star Telecommunications Inc* 14,400
4,500 West Teleservices* 88,875
1,800 World Access Inc* 34,200
-------------
751,388
-------------
TEXTILES -- 0.5%
2,400 Cone Mills Corp* 9,450
1,800 Dan River Inc, Class A* 9,900
8,100 Guilford Mills 74,925
9,500 Interface Flooring Systems Inc 42,750
4,200 Pillowtex Corp 18,375
600 Springs Industries Inc, Class A 21,263
-------------
176,663
-------------
</TABLE>
See accompanying notes to the financial statements.
13
<PAGE>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
TRANSPORTATION -- 1.6%
800 Airborne Freight Corp 14,800
400 Alaska Air Group Inc* 10,600
1,100 America West Holdings Corp, Class B* 14,713
6,100 Brunswick Corp 107,894
6,300 Consolidated Freightways Corp* 41,738
700 Continental Airlines Inc, Class B* 22,138
1,200 Fleetwood Enterprises Inc 18,525
6,000 Fritz Companies Inc* 50,250
3,000 GATX Corp 93,375
1,400 Heartland Express Inc* 19,994
400 Landstar System Inc* 22,475
12,200 Offshore Logistics Inc* 121,238
3,200 Ryder System Inc 59,600
1,000 Yellow Corp* 16,000
-------------
613,340
-------------
UTILITIES -- 5.5%
2,200 Alliant Energy Corp 61,875
6,100 Citizens Utilities, Class B* 93,025
8,500 CMP Group Inc 240,125
7,700 Connectiv Inc 109,725
2,500 El Paso Electric Co* 23,906
11,200 Hawaiian Electric Industries Inc 322,700
3,000 Niagara Mohawk Holdings Inc* 35,250
8,100 Oneok Inc 183,769
31,900 Public Service Co of New Mexico 490,463
2,500 Puget Sound Power and Light Co 50,781
15,400 RGS Energy Group Inc 303,188
1,100 Southwestern Energy Co 7,700
1,200 UniSource Energy Corp 16,200
1,100 United Illuminating Co 44,688
4,900 Utilicorp United Inc 80,238
100 Western Gas Resources Inc 1,375
4,700 Western Resources Inc 72,556
-------------
2,137,564
-------------
TOTAL COMMON STOCKS (COST $39,591,846) 36,978,269
-------------
</TABLE>
See accompanying notes to the financial statements.
14
<PAGE>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE ($) DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENTS -- 4.5%
REPURCHASE AGREEMENT -- 4.5%
$ 1,764,383 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/29/00, due 3/01/00, with a maturity value of
$1,764,625, and an effective yield of 4.95%,
collateralized by a U.S. Treasury Obligation with a
rate of 8.125%, maturity date of 8/15/19, and a market
value, including accrued interest, of $1,799,670. 1,764,383
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $1,764,383) 1,764,383
-------------
TOTAL INVESTMENTS -- 99.3%
(Cost $41,356,229) 38,742,652
Other Assets and Liabilities (net) -- 0.7% 257,307
-------------
TOTAL NET ASSETS -- 100.0% $ 38,999,959
=============
NOTES TO THE SCHEDULE OF INVESTMENTS:
</TABLE>
<TABLE>
<S> <C>
REIT - Real Estate Investment Trust
</TABLE>
* Non-income producing security.
See accompanying notes to the financial statements. 15
<PAGE>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $41,356,229) (Note 1) $38,742,652
Receivable for investments sold 252,700
Dividends and interest receivable 55,943
Receivable for expenses waived or borne by Manager (Note
2) 2,023
-----------
Total assets 39,053,318
-----------
LIABILITIES:
Payable to affiliate for (Note 2):
Management fee 16,695
Shareholder service fee 4,553
Accrued expenses 32,111
-----------
Total liabilities 53,359
-----------
NET ASSETS $38,999,959
===========
NET ASSETS CONSIST OF:
Paid-in capital $42,188,144
Accumulated undistributed net investment income 65,701
Accumulated net realized loss (640,309)
Net unrealized depreciation (2,613,577)
-----------
$38,999,959
===========
NET ASSETS ATTRIBUTABLE TO:
Class III shares $38,999,959
===========
SHARES OUTSTANDING:
Class III 4,098,174
===========
NET ASSET VALUE PER SHARE:
Class III $ 9.52
===========
</TABLE>
16 See accompanying notes to the financial statements.
<PAGE>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- PERIOD FROM JUNE 1, 1999 (COMMENCEMENT OF OPERATIONS)
THROUGH FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $85) $ 373,872
Interest 104,320
-----------
Total income 478,192
-----------
EXPENSES:
Management fee (Note 2) 148,043
Audit fees 32,910
Custodian and transfer agent fees 19,300
Registration fees 1,117
Legal fees 810
Trustees fees (Note 2) 282
Miscellaneous 1,361
Fees waived or borne by Manager (Note 2) (55,780)
-----------
Shareholder service fee (Note 2) 148,043
Class III 40,375
-----------
Net expenses 188,418
-----------
Net investment income 289,774
-----------
REALIZED AND UNREALIZED LOSS:
Net realized loss on:
Investments (358,571)
Closed futures contracts (281,738)
-----------
Net realized loss (640,309)
-----------
Change in net unrealized appreciation (depreciation) on
investments (2,613,577)
-----------
Net realized and unrealized loss (3,253,886)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(2,964,112)
===========
</TABLE>
See accompanying notes to the financial statements. 17
<PAGE>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM JUNE 1, 1999
(COMMENCEMENT OF OPERATIONS)
THROUGH FEBRUARY 29, 2000
----------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 289,774
Net realized loss (640,309)
Change in net unrealized appreciation (depreciation) (2,613,577)
-----------
Net decrease in net assets from operations (2,964,112)
-----------
Distributions to shareholders from:
Net investment income
Class III (224,073)
-----------
Total distributions from net investment income (224,073)
-----------
Net share transactions: (Note 5)
Class III 42,188,144
-----------
Increase in net assets resulting from net share
transactions 42,188,144
-----------
Total increase in net assets 38,999,959
NET ASSETS:
Beginning of period --
-----------
End of period (including accumulated undistributed net
investment income of $65,701) $38,999,959
===========
</TABLE>
18 See accompanying notes to the financial statements.
<PAGE>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 1, 1999
(COMMENCEMENT
OF OPERATIONS) THROUGH
FEBRUARY 29, 2000
----------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
Income from investment operations:
Net investment income 0.08
Net realized and unrealized loss (0.50)
-------
Total from investment operations (0.42)
-------
Less distributions to shareholders:
From net investment income (0.06)
-------
Total distributions (0.06)
-------
NET ASSET VALUE, END OF PERIOD $ 9.52
=======
TOTAL RETURN(a) (4.25)%+
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $39,000
Net expenses to average daily net assets 0.70%*
Net investment income to average daily net assets 1.08%*
Portfolio turnover rate 18%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amount: $ 0.01
</TABLE>
(a) Calculation excludes purchase premiums. The total return would have been
lower had certain expenses not been waived during the period shown.
* Annualized.
+ Not annualized.
See accompanying notes to the financial statements. 19
<PAGE>
GMO TAX MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Tax Managed Small Companies Fund (the "Fund"), which commenced
operations on June 1, 1999, is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended,
as an open-end, diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24,
1985. The Declaration of Trust permits the Trustees to create an unlimited
number of series ("Funds"), each of which issues a separate series of
shares, and to subdivide a series into classes.
The Fund seeks to maximize after-tax total return through investment in a
portfolio of common stocks of smaller companies principally traded in the
U.S. The Fund's benchmark is the Russell 2500 Index (After Tax).
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of the financial statements
in accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Securities for
which quotations are not readily available are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts on domestic stock
indices. Stock index futures contracts represent commitments for future
delivery of cash based upon the level of a specified index of equity
securities at a given date. The Fund may use futures contracts to manage
its exposure to the stock markets. Buying futures tends to increase the
Fund's exposure to the underlying instrument. Selling futures tends to
decrease the Fund's exposure to the underlying instrument or hedge other
fund instruments. Upon entering into a futures contract, the Fund is
required to deposit with its custodian, in a segregated account in the
name of the futures broker, an amount of cash or U.S. government and
agency obligations in accordance with the initial margin
20
<PAGE>
GMO TAX MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
requirements of the broker or exchange. Futures contracts are marked to
market daily and an appropriate payable or receivable for the change in
value ("variation margin") is recorded by the Fund. The payable or
receivable is liquidated on the following business day. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from contracts, or if counterparties do not
perform under the contract terms. Futures contracts are valued at the
settlement price established each day by the board of trade or exchange on
which they are traded. As of February 29, 2000, the Fund held no open
futures contracts.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
equity markets. A swap is an agreement to exchange the return generated by
one instrument for the return generated by another instrument. The Fund
enters into equity swap agreements which involve a commitment by one party
in the agreement to pay interest in exchange for a market linked return,
both based on notional amounts. To the extent that the total return of the
security or index underlying the transaction exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make a payment to the counterparty. The Fund also enters into contracts
for differences in which the Fund agrees with the counterparty that its
return will be based on the relative performance of two different groups
or "baskets" of securities, adjusted by an interest rate payment. To the
extent that the relative performance of the two baskets of securities
exceeds or falls short of the offsetting interest rate obligation, the
Fund will receive a payment from or make a payment to the counterparty,
respectively. Swaps are marked to market daily based upon quotations from
market makers and the change, if any, is recorded as unrealized gain or
loss in the Statement of Operations. Payments received or made at the end
of the measurement period are recorded as realized gain or loss in the
Statement of Operations. Entering into these agreements involves, to
varying degrees, elements of credit and market risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform, or that there may be unfavorable changes in the
price of the security or index underlying these transactions. As of
February 29, 2000 the Fund held no open swap agreements.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at
21
<PAGE>
GMO TAX MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
the counterparty's custodian in a segregated account for the benefit of
the Fund and the counterparty. In connection with transactions in
repurchase agreements, if the seller defaults and the value of the
collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. Distributions to shareholders are recorded by the Fund on
the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States.
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable foreign withholding taxes, is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis and is
adjusted for the accretion of discounts. In determining the net gain or
loss on securities sold, the cost of securities is determined on the
identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
22
<PAGE>
GMO TAX MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is .50% of the amount
invested. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. For the period ended February 29, 2000, the Fund received
$162,713 in purchase premiums. There is no premium for redemptions,
reinvested distributions or in-kind transactions.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .55% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding brokerage commissions, certain other transaction costs
(including transfer taxes), shareholder service fees and extraordinary
expenses) exceed the management fee.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the period ended February 29, 2000 was $282. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the period ended February 29, 2000, aggregated
$45,698,349 and $5,747,932, respectively.
At February 29, 2000 the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
$41,356,229 $6,296,775 $(8,910,352) $(2,613,577)
</TABLE>
4. PRINCIPAL SHAREHOLDERS
At February 29, 2000, 76.9% of the outstanding shares of the Fund were
held by four shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
23
<PAGE>
GMO TAX MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Period from June 1,
1999
(commencement of
operations)
through February 29,
2000
----------------------
Shares Amount
Class III: --------- -----------
<S> <C> <C>
Shares sold 4,096,497 $42,171,883
Shares issued to shareholders
in reinvestment of distributions 1,677 16,261
Shares repurchased -- --
--------- -----------
Net increase 4,098,174 $42,188,144
========= ===========
</TABLE>
The Fund was formed with a taxable contribution of securities in-kind,
which had a market value of $620,625 on the date of contribution.
24
<PAGE>
GMO TAX MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
At February 29, 2000 the Fund had a capital loss carryforward available to
offset future capital gains, if any, of the following amount:
<TABLE>
<CAPTION>
Year of Expiration Amount
------------------------------------------------------------ --------
<S> <C>
2008 $640,309
</TABLE>
25
<PAGE>
GMO TAX-MANAGED SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Robert Soucy are
primarily responsible for the management of the Fund's portfolio. Mssrs.
Grantham and Darnell have each been portfolio managers at Grantham, Mayo, Van
Otterloo & Co. LLC for more than fifteen years; Mr. Soucy for more than ten
years.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The GMO Tax-Managed Small Companies Fund returned -4.3% since its inception on
June 1, 1999 to February 29, 2000. The Fund's benchmark, the Russell 2500 Index,
returned 32.1% during the same period. On an after-tax basis, the Fund returned
- -4.5% to the benchmark's 31.6% for the same period. Consistent with the Fund's
investment objectives and policies, the Fund was invested substantially in U.S.
equity securities throughout the period.
From its inception, the Fund has focused on the least expensive stocks using
price-to-book or price-to-fair value strategies, which we continue to expect
will outperform when the market's enthusiasm for growth stocks subsides and more
fundamentals-based market conditions prevail. This positioning proved
detrimental during the partial year, as growth stocks outperformed value stocks
by more than 85%, as represented by the Russell 2500 Growth and Russell 2500
Value Indices. Technology stocks were the driving force in the Russell 2500
Index return, posting a return of almost 190% for the nine-month period. Health
care and producer durables also outperformed the benchmark for the partial year.
These strong returns were able to mask negative returns during the period by the
financial services, consumer staples, materials processing, automotive and
transportation sectors, as well as stocks classified as other, which in
combination account for approximately 35% of the benchmark.
Within the Fund, a 5.9% underweight of technology stocks, was the primary source
of relative underperformance within sector selection. Stock selection was also
disappointingly weak during the nine-month period. The Fund's 25% overweight of
stocks within the Russell 2500 Value Index and similar underweight of stocks
within the Russell 2500 Growth Index worked against the Fund during the period,
as did the tilt away from larger-capitalization stocks within the Index. Both
stock selection strategies, price-to-fair value and price-to-book, were
unsuccessful in adding value during the partial year. We expect these strategies
to perform better in the current year.
OUTLOOK
We currently believe that low price-to-book stocks are as attractive as we've
experienced in over twenty years, and we will be maintaining our exposure to
these stocks over the coming months. We expect that the Fund's focused value
orientation will work to the Fund's advantage when market expectations return to
fundamentals-based valuations.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO TAX-MANAGED SMALL COMPANIES FUND CLASS III SHARES
AND THE RUSSELL 2500 INDEX
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
Average Annual Total Returns*
Inception 6/1/99
1yr 5yr 10yr (ITD)
<S> <C> <C>
N/A N/A -4.73
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
Date GMO Tax Managed Small Companies Fund Russell 2500
<S> <C> <C>
6/1/99 9950 10000
6/30/99 10378 10556
9/30/99 9594 9875
12/31/99 9947 11817
2/29/00 9527 13212
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes.
Each performance figure assumes purchase at the beginning and redemption at the
end of the stated period and reflects a transaction fee of 50 bp on the
purchase. Transaction fees are retained by the Fund to cover trading costs.
Past performance is not indicative of future performance. Information is
unaudited.
* Returns are before taxes
<PAGE>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO
TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Tax-Managed U.S. Equities Fund
at February 29, 2000, the results of its operations, the changes in its net
assets and the financial highlights for each of the periods indicated therein,
in conformity with accounting principles generally accepted in the United
States. These financial statements and financial highlights (hereafter referred
to as "financial statements") are the responsibility of the Trust's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at February 29, 2000 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 10, 2000
<PAGE>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 95.2%
ADVERTISING -- 0.1%
400 Interpublic Group Inc 16,075
-----------
AEROSPACE -- 0.2%
200 Cordant Technologies Inc 6,475
700 Goodrich (BF) Co 16,756
-----------
23,231
-----------
AUTOMOTIVE -- 0.6%
1,100 Autonation Inc* 8,319
100 Borg Warner Automotive Inc 3,200
139 Delphi Automotive Systems* 2,320
300 Eaton Corp 22,481
200 General Motors Corp 15,212
1,300 Genuine Parts Co 29,331
200 Lear Corp* 4,225
-----------
85,088
-----------
BANKING AND FINANCIAL SERVICES -- 6.1%
1,900 American Express Co 254,956
565 Bank of America Corp 26,025
810 Bank One Corp 20,908
21 Berkshire Hathaway Inc, Class B* 30,240
700 Countrywide Credit Industries Inc 17,456
200 Fannie Mae 10,600
400 First Union Corp 11,800
836 Firstar Corp 14,891
1,200 Franklin Resources Inc 32,625
1,600 Key Corp 27,100
7,900 MBNA Corp 179,725
1,000 MGIC Investment Corp 37,375
1,100 Regions Financial Corp 22,275
200 Student Loan Group 7,775
22 Waddell and Reed Financial Inc, Class A 637
97 Waddell and Reed Financial Inc, Class B 2,631
3,500 Wells Fargo & Co 115,719
-----------
812,738
-----------
</TABLE>
See accompanying notes to the financial statements.
1
<PAGE>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------
<C> <S> <C>
CHEMICALS -- 0.8%
300 Eastman Chemical Co 10,781
1,100 Engelhard Corp 14,987
400 Ferro Corp 7,550
600 Great Lakes Chemical Corp 17,437
200 Minerals Technologies Inc 8,112
150 Octel Corp* 1,406
600 PPG Industries Inc 29,625
300 Rohm & Haas Co 12,112
-----------
102,010
-----------
COMPUTER AND OFFICE EQUIPMENT -- 17.1%
7,500 Cisco Systems Inc* 991,406
400 Electronic Data Systems Corp 25,900
16,600 Oracle Corp* 1,232,550
800 Xerox Corp 17,350
-----------
2,267,206
-----------
CONSUMER GOODS -- 0.7%
1,200 Fortune Brands Inc 26,250
450 Hasbro Inc 7,087
400 Jones Apparel Group Inc* 9,050
400 Lancaster Colony Corp 11,900
400 Nautica Enterprises Inc* 4,225
300 Newell Rubbermaid Inc 6,937
600 Nike Inc, Class B 17,062
600 VF Corp 14,812
-----------
97,323
-----------
ELECTRONIC EQUIPMENT -- 13.9%
15,600 3 Com Corp* 1,528,800
600 AVX Corp 38,100
1,400 Emerson Electric Co 63,787
1,600 General Electric Co 211,500
-----------
1,842,187
-----------
FOOD AND BEVERAGE -- 4.3%
1,000 Anheuser Busch Cos Inc 64,125
5,040 Archer Daniels Midland Co 50,715
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------
<C> <S> <C>
FOOD AND BEVERAGE -- CONTINUED
8,100 Pepsico Inc 261,225
500 Ralston-Purina Group 14,156
1,600 Seagrams Co Ltd 94,000
800 Universal Foods Corp 14,450
200 Whitman Corp 2,500
1,000 Wrigley (William Jr) Co 67,625
-----------
568,796
-----------
HEALTH CARE -- 4.3%
300 Arrow International Inc 11,850
8,100 Columbia HCA Healthcare Corp 156,431
400 First Health Group Corp* 9,650
200 Hillenbrand Industries Inc 6,075
400 Invacare Corp 9,750
3,100 Johnson & Johnson 222,425
400 Lincare Holdings Inc* 9,375
300 Mallinckrodt Inc 7,387
700 Stryker Corp 40,950
426 Triad Hospitals Inc* 6,816
1,500 United Healthcare Corp 76,687
300 Wellpoint Health Network* 20,250
-----------
577,646
-----------
INSURANCE -- 3.5%
200 AMBAC Inc 8,787
400 Hartford Financial Services Group Inc 12,500
500 Loews Corp 22,250
400 MBIA Inc 15,350
21,600 Old Republic International Corp 252,450
100 Progressive Corp 5,950
200 Safeco Corp 4,200
400 Saint Paul Cos Inc 8,950
800 Torchmark Corp 15,850
500 Transatlantic Holding Inc 35,219
2,600 Travelers Property Casualty Corp, Class A 82,225
-----------
463,731
-----------
MACHINERY -- 0.4%
700 Deere and Co 25,025
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------
<C> <S> <C>
MACHINERY -- CONTINUED
600 Donaldson Co Inc 13,650
200 FMC Corp* 9,662
-----------
48,337
-----------
MANUFACTURING -- 1.0%
400 American Greetings Corp 6,900
1,000 Illinois Tool Works Inc 51,687
600 International Game Technology* 10,687
1,100 Leggett & Platt Inc 18,494
1,500 Owens Illinois Inc* 20,719
400 United Technologies Corp 20,375
-----------
128,862
-----------
METALS AND MINING -- 0.4%
1,000 Phelps Dodge Corp 47,125
-----------
OIL AND GAS -- 3.8%
700 Amerada Hess Corp 35,394
1,700 Atlantic Richfield Co 120,700
1,190 BP Amoco PLC ADR 55,930
2,000 EOG Resources Inc 30,500
800 Exxon Mobil Corp 60,250
1,600 Phillips Petroleum Co 61,200
1,900 Texaco Inc 90,131
2,100 USX - Marathon Group 45,412
-----------
499,517
-----------
PAPER AND ALLIED PRODUCTS -- 0.1%
400 Sonoco Products Co 7,375
-----------
PHARMACEUTICALS -- 7.0%
7,900 Abbott Laboratories 258,725
9,400 Amgen Inc* 640,963
200 Bristol Myers Squibb Co 11,363
600 Mark IV Industries Inc 12,000
-----------
923,051
-----------
</TABLE>
See accompanying notes to the financial statements.
4
<PAGE>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------
<C> <S> <C>
PRIMARY MATERIALS -- 0.4%
500 A. Schulman Inc 6,625
300 Vulcan Materials Co 12,000
900 Weatherford International Inc 40,500
-----------
59,125
-----------
PRIMARY PROCESSING -- 0.6%
1,300 Nucor Corp 64,594
400 USX-US Steel Group Inc 8,750
300 Valspar Corp 9,844
-----------
83,188
-----------
PRINTING AND PUBLISHING -- 0.7%
400 Central Newspapers Inc, Class A 11,425
200 Gannett Co Inc 13,038
200 Pulitzer Inc 7,763
1,200 TV Guide Inc, Class A* 56,550
-----------
88,776
-----------
REAL ESTATE -- 0.6%
2,700 Mack-Cali Realty Corp, REIT 64,125
600 Parkway Properties Inc, REIT 17,775
-----------
81,900
-----------
REFINING -- 0.1%
400 Tosco Corp 10,700
-----------
RETAIL TRADE -- 4.2%
2,100 Albertsons Inc 51,450
1,600 Autozone Inc* 39,300
700 Delhaize America Inc 13,125
500 Dillard's Inc 8,688
1,400 Federated Department Stores Inc* 51,363
200 Hannaford Brothers Co 14,250
1,500 Kmart Corp* 13,219
300 Lands End Inc* 9,956
4,000 McDonald's Corp 126,250
900 Office Depot Inc* 10,969
450 Outback Steakhouse Inc* 11,756
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------
<C> <S> <C>
RETAIL TRADE -- CONTINUED
600 Ross Stores Inc 8,700
1,200 Safeway Inc* 46,275
4,600 Toys R Us Inc* 56,925
1,500 Wal Mart Stores Inc 73,031
1,200 Wendy's International Inc 18,900
-----------
554,157
-----------
SERVICES -- 3.7%
400 Banta Corp 7,300
200 Catalina Marketing Corp* 17,025
206 Chris Craft Industries Inc* 13,557
6,200 Convergys Corp* 238,700
500 Fluor Corp 14,219
900 Harrahs Entertainment Inc* 17,213
600 Hertz Corp 21,488
400 Lee Enterprises Inc 8,325
4,400 Marriott International Inc, Class A 121,275
1,900 Mirage Resorts Inc* 30,163
329 Supervalu Inc 5,655
-----------
494,920
-----------
TECHNOLOGY -- 8.7%
700 BMC Software Inc* 32,200
500 DST Systems Inc* 28,063
4,400 First Data Corp 198,000
2,000 Grainger (WW) Inc 85,625
5,500 Honeywell International Inc 264,688
1,800 Intel Corp 203,400
3,900 Microsoft Corp* 348,563
-----------
1,160,539
-----------
TELECOMMUNICATIONS -- 7.0%
11,500 AT & T Corp 568,531
400 Bell Atlantic Corp 19,575
300 Bellsouth Corp 12,225
243 CBS Corp* 14,474
200 GTE Corp 11,800
327 Hearst-Argyle Television Inc* 6,806
2,400 MCI Worldcom Inc* 107,100
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------
<C> <S> <C>
TELECOMMUNICATIONS -- CONTINUED
400 Nextlink Communications, Class A* 44,075
3,926 SBC Communications Inc 149,188
-----------
933,774
-----------
TOBACCO -- 0.7%
4,800 Philip Morris Cos Inc 96,300
-----------
TRANSPORTATION -- 1.4%
5,700 Burlington Northern Santa Fe Railroad Co 112,219
1,500 Continental Airlines Inc, Class B* 47,438
500 Galileo International Inc 8,500
400 UAL Corp* 19,500
-----------
187,657
-----------
UTILITIES -- 2.8%
1,600 Citizens Utilities, Class B* 24,400
600 Coastal Corp 25,238
600 Constellation Energy Group Inc 17,850
700 DTE Energy Co 21,131
2,400 Entergy Corp 48,600
600 General Public Utilities Inc 14,925
692 Keyspan Corp 14,100
9,400 Niagara Mohawk Holdings Inc* 110,450
1,900 Northeast Utilities 35,744
1,500 PG & E Corp 30,938
300 Pinnacle West Capital Corp 8,288
600 Potomac Electric Power Co 12,188
400 SCANA Corp 9,525
300 Western Resources Inc 4,631
-----------
378,008
-----------
TOTAL COMMON STOCKS (COST $10,638,447) 12,639,342
-----------
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE ($) DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENTS -- 4.9%
REPURCHASE AGREEMENTS -- 4.9%
$ 12,785 Morgan Stanley Inc. Repurchase Agreement, dated
2/29/00, due 3/01/00, with a maturity value of $12,786,
and an effective yield of 4.93%, collateralized by a
U.S. Treasury Obligation with a rate of 0.00%, maturity
date of 6/01/00, and a market value, including accrued
interest, of $19,708. 12,785
$ 639,519 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/29/00, due 3/01/00, with a maturity value of
$639,607, and an effective yield of 4.95%,
collateralized by a U.S. Treasury Obligation with a
rate of 8.125%, maturity date of 8/15/19, and a market
value, including accrued interest, of $652,310. 639,519
---------------
652,304
---------------
TOTAL SHORT-TERM INVESTMENTS (COST $652,304) 652,304
---------------
TOTAL INVESTMENTS -- 100.1%
(Cost $11,290,751) 13,291,646
Other Assets and Liabilities (net) -- (0.1%) (16,551)
---------------
TOTAL NET ASSETS -- 100.0% $ 13,275,095
===============
</TABLE>
NOTES TO THE SCHEDULE OF INVESTMENTS:
ADR - American Depositary Receipt
REIT - Real Estate Investment Trust
* Non-income producing security.
8 See accompanying notes to the financial statements.
<PAGE>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $11,290,751) (Note 1) $13,291,646
Dividends and interest receivable 12,472
Receivable for expenses waived or borne by Manager (Note
2) 5,491
-----------
Total assets 13,309,609
-----------
LIABILITIES:
Payable to affiliate for (Note 2):
Management fee 3,349
Shareholder service fee 1,522
Accrued expenses 29,643
-----------
Total liabilities 34,514
-----------
NET ASSETS $13,275,095
===========
NET ASSETS CONSIST OF:
Paid-in capital $11,444,408
Accumulated undistributed net investment income 11,954
Accumulated net realized loss (182,162)
Net unrealized appreciation 2,000,895
-----------
$13,275,095
===========
NET ASSETS ATTRIBUTABLE TO:
Class III shares $13,275,095
===========
SHARES OUTSTANDING:
Class III 1,050,117
===========
NET ASSET VALUE PER SHARE:
Class III $ 12.64
===========
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $4,678) $ 153,611
Interest 23,323
----------
Total income 176,934
----------
EXPENSES:
Management fee (Note 2) 36,665
Audit fees 35,019
Custodian and transfer agent fees 7,201
Registration fees 4,655
Legal fees 186
Trustees fees (Note 2) 128
Miscellaneous 1,189
Fees waived or borne by Manager (Note 2) (48,378)
----------
36,665
Shareholder service fee (Note 2)
Class III 16,666
----------
Net expenses 53,331
----------
Net investment income 123,603
----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss on investments (183,244)
----------
Change in net unrealized appreciation (depreciation) on
investments 2,070,332
----------
Net realized and unrealized gain 1,887,088
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,010,691
==========
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM JULY 23, 1998
YEAR ENDED (COMMENCEMENT OF OPERATIONS)
FEBRUARY 29, 2000 THROUGH FEBRUARY 28, 1999
----------------- ----------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 123,603 $ 41,974
Net realized gain (loss) (183,244) 274,006
Change in net unrealized appreciation (depreciation) 2,070,332 (151,997)
----------- ----------
Net increase in net assets from operations 2,010,691 163,983
----------- ----------
Distributions to shareholders from:
Net investment income
Class III (122,085) (30,456)
----------- ----------
Total distributions from net investment income (122,085) (30,456)
----------- ----------
Net share transactions: (Note 5)
Class III 3,270,972 7,981,990
----------- ----------
Increase in net assets resulting from net share
transactions 3,270,972 7,981,990
----------- ----------
Total increase in net assets 5,159,578 8,115,517
NET ASSETS:
Beginning of period 8,115,517 --
----------- ----------
End of period (including accumulated undistributed
net investment income of $11,954 and $11,518,
respectively) $13,275,095 $8,115,517
=========== ==========
</TABLE>
See accompanying notes to the financial statements. 11
<PAGE>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JULY 23, 1998
(COMMENCEMENT
YEAR ENDED OF OPERATIONS) THROUGH
FEBRUARY 29, 2000 FEBRUARY 28, 1999
----------------- ----------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.67 $ 10.00
------- -------
Income from investment operations:
Net investment income 0.13 0.09
Net realized and unrealized gain 1.97 0.65
------- -------
Total from investment operations 2.10 0.74
------- -------
Less distributions to shareholders:
From net investment income (0.13) (0.07)
------- -------
Total distributions (0.13) (0.07)
------- -------
NET ASSET VALUE, END OF PERIOD $ 12.64 $ 10.67
======= =======
TOTAL RETURN(a) 19.83% 7.48%+
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $13,275 $ 8,116
Net expenses to average daily net assets 0.48% 0.48%*
Net investment income to average daily net assets 1.11% 1.30%*
Portfolio turnover rate 19% 33%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share
amounts: $ 0.05 $ 0.10
</TABLE>
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
* Annualized.
+ Not annualized.
12 See accompanying notes to the financial statements.
<PAGE>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Tax-Managed U.S. Equities Fund (the "Fund"), which commenced
operations on July 23, 1998, is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended,
as an open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24,
1985. The Declaration of Trust permits the Trustees to create an unlimited
number of series ("Funds"), each of which issues a separate series of
shares, and to subdivide a series of shares into classes.
The Fund seeks high after-tax total return primarily through investment in
U.S. equity securities. The Fund's benchmark is the GMO S&P 500 (After
Tax).
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of the financial statements
in accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Securities for
which quotations are not readily available are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts on domestic stock
indices. Stock index futures contracts represent commitments for future
delivery of cash based upon the level of a specified index of equity
securities at a given date. The Fund may use futures contracts to manage
its exposure to the stock markets. Buying futures tends to increase the
Fund's exposure to the underlying instrument. Selling futures tends to
decrease the Fund's exposure to the underlying instrument or hedge other
fund instruments. Upon entering into a futures contract, the Fund is
required to deposit with its custodian, in a segregated account in the
name of the futures broker, an amount of cash or U.S. government and
agency obligations in accordance with the initial margin requirements of
the broker or exchange. Futures contracts are marked to market daily and
an
13
<PAGE>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
appropriate payable or receivable for the change in value ("variation
margin") is recorded by the Fund. The payable or receivable is liquidated
on the following business day. Gains or losses are recognized but not
considered realized until the contracts expire or are closed. Futures
contracts involve, to varying degrees, risk of loss in excess of the
variation margin disclosed in the Statement of Assets and Liabilities.
Losses may arise from changes in the value of the underlying instrument,
if there is an illiquid secondary market for the contracts, or if
counterparties do not perform under the contract terms. Futures contracts
are valued at the settlement price established each day by the board of
trade or exchange on which they are traded. As of February 29, 2000, the
Fund held no open futures contracts.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, realization of collateral by the Fund may be delayed or
limited.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
equity markets. A swap is an agreement to exchange the return generated by
one instrument for the return generated by another instrument. The Fund
enters into equity swap agreements which involve a commitment by one party
in the agreement to pay interest in exchange for a market linked return,
both based on notional amounts. To the extent that the total return of the
security or index underlying the transaction exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make a payment to the counterparty. The Fund also enters into contracts
for differences in which the Fund agrees with the counterparty that its
return will be based on the relative performance of two different groups
or "baskets" of securities, adjusted by an interest rate payment. To the
extent that the relative performance of the two baskets of securities
exceeds or falls short of the offsetting interest rate obligation, the
Fund will receive a payment from or make a payment to the counterparty,
respectively. Swaps are marked to market daily based upon quotations from
market makers and the change, if any, is recorded as unrealized gain or
loss in the Statement of Operations. Payments received or made at the end
of the measurement period are recorded as realized gain or loss in the
Statement of Operations. Entering into these agreements involves, to
varying degrees, elements of credit and market risk in excess of the
amounts recognized on the
14
<PAGE>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities. Such risks involve the possibility
that there will be no liquid market for these agreements, that the
counterparty to the agreements may default on its obligation to perform,
or that there may be unfavorable changes in the price of the security or
index underlying these transactions. As of February 29, 2000, there were
no open swap agreements.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary. Taxes on foreign dividend income are withheld in
accordance with the applicable country's tax treaty with the United
States.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. Distributions to shareholders are recorded by the Fund on
the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to the classification of distributions from
REIT securities.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable income and capital gains under U.S.
federal tax rules versus accounting principles generally accepted in the
United States. The calculation of net investment income per share in the
financial highlights excludes these adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
<S> <C> <C>
$(1,082) $1,082 $ --
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for
15
<PAGE>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
financial statement and tax purposes which result in temporary
over-distributions for financial statement purposes are classified as
distributions in excess of net investment income or accumulated net
realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable foreign withholding taxes, is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis and is
adjusted for the accretion of discounts. In determining the net gain or
loss on securities sold, the cost of securities is determined on the
identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is .14% of the amount
invested. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. For the year ended February 29, 2000, the Fund received
$4,500 in purchase premiums. There is no premium for redemptions,
reinvested distributions or in-kind transactions.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .33% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding brokerage commissions, certain other transaction costs
(including transfer taxes), shareholder service fees and extraordinary
expenses) exceed the management fee.
Prior to March 1, 1999, GMO earned a management fee at the annual rate of
.525% of average daily net assets. GMO had agreed to waive a portion of
its fee and bear other expenses to the extent that the Fund's annual
expenses (including the management fee but excluding brokerage
commissions, certain other transaction costs (including transfer taxes),
shareholder service fees and extraordinary expenses) exceeded .33% of
average daily net assets.
16
<PAGE>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000 was $128. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 29, 2000, aggregated
$4,949,504 and $2,014,330, respectively.
At February 29, 2000, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
$11,347,996 $3,673,564 $(1,729,914) $1,943,650
</TABLE>
4. PRINCIPAL SHAREHOLDERS
At February 29, 2000, 98.4% of the outstanding shares of the Fund were
held by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares. Investment activities of these shareholders could have
a material effect.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Period from July 23, 1998
(commencement of
Year Ended operations)
February 29, 2000 to February 28, 1999
-------------------- -------------------------
Shares Amount Shares Amount
Class III: -------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Shares sold 284,602 $3,214,362 928,320 $ 9,723,200
Shares issued to shareholders
in reinvestment of distributions 4,942 56,610 -- --
Shares repurchased -- -- (167,747) (1,741,210)
-------- ---------- ---------- -----------
Net increase 289,544 $3,270,972 760,573 $ 7,981,990
======== ========== ========== ===========
</TABLE>
17
<PAGE>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
The Fund has elected to defer to March 1, 2000 post October capital losses
of $192.
At February 29, 2000 the Fund had a capital loss carryforward available to
offset future capital gains, if any, of the following amount:
<TABLE>
<CAPTION>
Year of Expiration Amount
------------------ --------
<S> <C>
2008 $124,725
</TABLE>
18
<PAGE>
GMO TAX-MANAGED U.S. EQUITIES FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Robert Soucy are
primarily responsible for the management of the Fund's portfolio. Mssrs.
Grantham and Darnell have each been portfolio managers at Grantham, Mayo, Van
Otterloo & Co. LLC for more than fifteen years; Mr. Soucy for more than ten
years.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The GMO Tax-Managed U.S. Equities Fund returned 19.8% for the fiscal year ended
February 29, 2000, as compared to 11.7% for the S&P 500 before taxes. On an
after-tax basis, the Fund returned 19.3% to the benchmark's 11.2% for the same
period. Consistent with the Fund's investment objectives and policies, the Fund
was invested substantially in U.S. equity securities throughout the period.
The Fund's striking outperformance of the benchmark for the period is directly
attributed to overweights in four stocks -- Amgen, Cisco Systems, Oracle and 3
Com -- which posted remarkable results for the period, especially in the last
quarter of the fiscal year. Excluding these selections, both stock selection and
sector selection detracted from relative performance for the period. The Fund's
value bias proved detrimental as growth stocks outperformed value stocks by 35%,
as represented by the Russell 1000 Growth and Russell 1000 Value Indices.
Within sector selection, the Fund's 3.6% underweight in technology stocks
detracted 67 basis points from relative performance, as the sector returned over
80% for the fiscal year. Overweights in financial services and health care
stocks, which underperformed by 23.8% and 25.2%, respectively, combined to
detract 158 basis points from relative performance. The Fund's 3.0% underweight
in consumer discrecionary stocks, which underperformed by 10.7%, contributed
moderately to performance. In combination, sector selection detracted 520 basis
points from relative performance.
As discussed earlier, stock selection was positive within health care and
technology stocks, contributing 18.8% to relative performance. Selection within
these two sectors more than offset weaker selection in other sectors, including
utilities, automotive and transportation and consumer discretionary stocks. In
combination, stock selection contributed 13.4% to relative performance.
Historically, our price-to-fair value stock selection model has a strong record
of selecting relatively undervalued stocks outside traditional value filters. It
was this strategy which identified the four stocks that dominated performance
for the fiscal year. While the price-to-book stock selection strategy was
unsuccessful in adding value during the fiscal year, we expect both strategies
to perform well over the long term.
OUTLOOK
The unanticipated takeoff of the technology stocks within the Fund has moved it
away from its long-term target weights with respect to stocks which are
attractive on price-to-book and price-to-fair value measures, and we have
already begun moving the Fund back to these targets. The timing of this move
will be carefully controlled as we pay close attention to the trade-off between
our expectations for these stocks and the tax liability incurred as we move out
of some of our most highly appreciated positions.
<PAGE>
We currently believe that low price-to-book stocks are as attractive as we've
experienced in over twenty years, and we will be increasing our exposure to
these stocks over the coming months. In addition, we are incorporating a price
momentum strategy into the Fund, which we have successfully used in other GMO
quantitative equity funds. Turnover of this model is carefully controlled to
minimize tax impact. We expect the addition of this strategy will contribute
positively to the Fund's long-term expected value added.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO TAX-MANAGED U.S. EQUITIES FUND CLASS III SHARES AND THE S&P 500 INDEX
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
Average Annual Total Returns*
Inception 7/23/98
1yr 5yr 10yr (ITD)
<S> <C> <C>
19.67 N/A 16.97
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
Date GMO Tax Managed U.S. Equities Fund S&P 500
<S> <C> <C>
7/23/98 9986 10000
9/30/98 9497 8952
12/31/98 10944 10859
3/31/99 10954 11400
6/30/99 11974 12203
9/30/99 11054 11441
12/31/99 12801 13143
2/29/00 12862 12247
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes.
Each performance figure assumes purchase at the beginning and redemption at the
end of the stated period and reflects a transaction fee of 14 bp on the
purchase. Transaction fees are retained by the Fund to cover trading costs.
Past performance is not indicative of future performance. Information is
unaudited.
* Returns are before taxes
<PAGE>
GMO U.S. SECTOR FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO U.S. Sector Fund at
February 29, 2000, the results of its operations, the changes in its net assets
and the financial highlights for each of the periods indicated therein, in
conformity with accounting principles generally accepted in the United States.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at February 29, 2000 by correspondence with the custodian, provide
a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 10, 2000
<PAGE>
GMO U.S. SECTOR FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
MUTUAL FUNDS -- 100.4%
22,014 GMO REIT Fund 181,839
7,749 GMO Small Cap Growth Fund 130,725
13,917 GMO Small Cap Value Fund 172,716
67,574 GMO U.S. Core Fund 1,123,755
------------
TOTAL MUTUAL FUNDS (COST $1,787,206) 1,609,035
------------
SHORT-TERM INVESTMENTS -- 0.6%
REPURCHASE AGREEMENT -- 0.6%
$ 9,330 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/29/00, due 3/01/00, with a maturity value of $9,331,
and an effective yield of 4.95%, collateralized by a
U.S. Treasury Obligation with a rate of 8.125%,
maturity date of 8/15/19, and a market value, including
accrued interest, of $9,517. 9,330
------------
TOTAL SHORT-TERM INVESTMENTS (COST $9,330) 9,330
------------
TOTAL INVESTMENTS -- 101.0%
(Cost $1,796,536) 1,618,365
Other Assets and Liabilities (net) -- (1.0%) (15,873)
------------
TOTAL NET ASSETS -- 100.0% $ 1,602,492
============
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO U.S. SECTOR FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $1,796,536) (Note 1) $1,618,365
Receivable for expenses waived or borne by Manager (Note
2) 3,318
----------
Total assets 1,621,683
----------
LIABILITIES:
Payable to affiliate for (Note 2):
Management fee 429
Accrued expenses 18,762
----------
Total liabilities 19,191
----------
NET ASSETS $1,602,492
==========
NET ASSETS CONSIST OF:
Paid-in capital $1,876,105
Accumulated net realized loss (95,442)
Net unrealized depreciation (178,171)
----------
$1,602,492
==========
NET ASSETS ATTRIBUTABLE TO:
Class III shares $1,602,492
==========
SHARES OUTSTANDING:
Class III 330,928
==========
NET ASSET VALUE PER SHARE:
Class III $ 4.84
==========
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. SECTOR FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends from investment company shares $ 258,780
Interest 764
-----------
Total income 259,544
-----------
EXPENSES:
Management fee (Note 2) 46,391
Audit fees 19,574
Custodian and transfer agent fees 2,249
Registration fees 2,016
Trustees fees (Note 2) 186
Legal fees 181
Miscellaneous 1,921
Fees waived or borne by Manager (Note 2) (72,518)
-----------
Net expenses --
-----------
Net investment income 259,544
-----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (1,407,288)
Realized gain distributions from investment company
shares 2,479,580
-----------
Net realized gain 1,072,292
-----------
Change in net unrealized appreciation (depreciation) on
investments 1,162,450
-----------
Net realized and unrealized gain 2,234,742
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,494,286
===========
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO U.S. SECTOR FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 259,544 $ 366,640
Net realized gain 1,072,292 5,068,304
Change in net unrealized appreciation (depreciation) 1,162,450 (2,256,138)
------------ ------------
Net increase in net assets resulting from operations 2,494,286 3,178,806
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (259,544) (366,924)
------------ ------------
Total distributions from net investment income (259,544) (366,924)
------------ ------------
In excess of net investment income
Class III (429,148) (347,888)
------------ ------------
Total distributions in excess of net investment
income (429,148) (347,888)
------------ ------------
Net realized gains
Class III (601,330) (8,557,355)
------------ ------------
Total distributions from net realized gains (601,330) (8,557,355)
------------ ------------
In excess of net realized gains
Class III -- (619,626)
------------ ------------
Total distributions in excess of net realized
gains -- (619,626)
------------ ------------
(1,290,022) (9,891,793)
------------ ------------
Net share transactions: (Note 5)
Class III (16,431,774) (47,279,849)
------------ ------------
Decrease in net assets resulting from net share
transactions (16,431,774) (47,279,849)
------------ ------------
Total decrease in net assets (15,227,510) (53,992,836)
NET ASSETS:
Beginning of period 16,830,002 70,822,838
------------ ------------
End of period (including distributions in excess of
net investment income of $0 and $0, respectively) $ 1,602,492 $ 16,830,002
============ ============
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. SECTOR FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
-------------------------------------------------
2000 1999 1998 1997 1996
----------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 4.63 $ 8.53 $ 13.03 $ 13.63 $ 11.06
----------- ------- ------- -------- --------
Income from investment operations:
Net investment income(a) 0.09+ 0.10+ 0.29+ 0.26 0.29
Net realized and unrealized gain 0.54 0.27 2.61 2.20 3.90
----------- ------- ------- -------- --------
Total from investment operations 0.63 0.37 2.90 2.46 4.19
----------- ------- ------- -------- --------
Less distributions to shareholders:
From net investment income (0.09) (0.10) (0.40) (0.22) (0.29)
In excess of net investment income (0.14) (0.15) (0.01) -- --
From net realized gains (0.19) (3.75) (6.99) (2.84) (1.33)
In excess of net realized gains -- (0.27) -- -- --
----------- ------- ------- -------- --------
Total distributions (0.42) (4.27) (7.40) (3.06) (1.62)
----------- ------- ------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 4.84 $ 4.63 $ 8.53 $ 13.03 $ 13.63
=========== ======= ======= ======== ========
TOTAL RETURN(b) 13.35% 3.13% 29.61% 20.88% 38.90%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 1,602 $16,830 $70,823 $226,711 $211,319
Net expenses to average daily net
assets(c) 0.00% 0.00% 0.27% 0.48% 0.48%
Net investment income to average
daily net assets(a) 1.85% 1.51% 2.53% 1.99% 2.27%
Portfolio turnover rate 22% 16% 150% 104% 84%
Fees and expenses voluntarily waived
or borne by the Manager consisted
of the following per share amounts: $ 0.03 $ 0.04 $ 0.04 $ 0.02 $ 0.01
</TABLE>
(a) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the Fund invests.
(b) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(c) On August 20, 1997, the Fund began to invest a substantial portion of its
assets in other funds of GMO Trust and revised its voluntary expense
waiver. Net expenses exclude expenses incurred indirectly through
investment in underlying funds.
See Note 2.
+ Computed using average shares outstanding throughout the period.
See accompanying notes to the financial statements. 5
<PAGE>
GMO U.S. SECTOR FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO U.S. Sector Fund (the "Fund") is a series of GMO Trust (the "Trust").
The Fund is registered under the Investment Company Act of 1940, as
amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on June
24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series of shares into classes.
The Fund seeks total return greater than that of the S&P 500 through
investment in common stocks, either directly or through investment in
other Funds of the Trust ("underlying Funds").
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of the financial statements
in accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Shares of underlying Funds are valued at their net asset value as reported
on each business day. Portfolio securities listed on a securities exchange
for which market quotations are available are valued at the last quoted
sale price on each business day, or if there is no such reported sale, at
the most recent quoted bid price. Unlisted securities for which market
quotations are readily available are valued at the most recent quoted bid
price. Short-term investments with a remaining maturity of sixty days or
less are valued at amortized cost which approximates market value.
Securities for which quotations are not readily available are valued at
fair value as determined in good faith by the Trustees or other persons
acting at their direction.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty.
6
<PAGE>
GMO U.S. SECTOR FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
In connection with transactions in repurchase agreements, if the seller
defaults and the value of the collateral declines or if the seller enters
insolvency proceedings, realization of collateral by the Fund may be
delayed or limited.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary. Taxes on foreign dividend income are withheld in
accordance with the applicable country's tax treaty with the United
States.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. Distributions to shareholders are recorded by the Fund on
the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to differing treatments for the
classification of distributions received from underlying funds and
redemptions in-kind. Gains resulting from such in-kind transactions
amounted to $71,086.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable income and capital gains under U.S.
federal tax rules versus accounting principles generally accepted in the
United States. The calculation of net investment income per share in the
financial highlights excludes these adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
<S> <C> <C>
$429,148 $(113,806) $(315,342)
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for
7
<PAGE>
GMO U.S. SECTOR FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
financial statement and tax purposes which result in temporary
over-distributions for financial statement purposes are classified as
distributions in excess of net investment income or accumulated net
realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Income dividends
and capital gain distributions from underlying funds are recorded on the
ex-dividend date. Dividend income is recorded on the ex-dividend date.
Interest income is recorded on the accrual basis. In determining the net
gain or loss on securities sold, the cost of securities is determined on
the identified cost basis. Dividends representing a return of capital are
reflected as a reduction of cost.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. In
addition, the Fund will also incur fees and expenses indirectly as a
shareholder in the underlying funds. Because the underlying Funds have
varied expense and fee levels and the Fund may own different proportions
of underlying funds at different times, the amount of fees and expenses
indirectly incurred by the Fund will vary. (See Note 2).
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is .27% of the amount
invested. In the case of cash redemptions, the fee is .18% of the amount
redeemed. All purchase premiums and redemption fees are paid to and
recorded by the Fund as paid-in capital. For the year ended February 29,
2000, the Fund received $12,587 in redemption fees and no purchase
premiums. There is no premium for reinvested distributions or in-kind
transactions.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .33% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on average daily net assets at the annual rate of .15% for Class III
shares. The Fund will invest in Class III shares of each underlying Fund
being offered. Like the management fee (as described below), the
shareholder service fee will be waived (but not below zero) to the extent
of the indirect shareholder service fees paid in connection with the
Fund's investment in shares of underlying Funds.
8
<PAGE>
GMO U.S. SECTOR FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding shareholder service fees and the following expenses:
brokerage commissions, and other investment-related costs, hedging
transaction fees, extraordinary, non-recurring and certain other unusual
expenses (including taxes), securities lending fees and expenses and
transfer taxes ("fund expenses")) plus the amount of fees and expenses,
excluding shareholder service fee and fund expenses (as defined above)
incurred indirectly by the Fund through investment in underlying Funds
exceed the management fee. Because GMO will not reimburse expenses
incurred indirectly to the extent they exceed .33%, and because the amount
of fees and expenses incurred indirectly by the Fund will vary, the
operating expenses (excluding shareholder service fees and fund expenses)
incurred indirectly by the Fund through investment in underlying Funds may
exceed .33% of the Fund's average daily net assets. For the year ended
February 29, 2000, operating expenses (excluding shareholder service fees
and fund expenses) incurred indirectly by the Fund were .35% of the Fund's
average daily net assets.
Prior to March 1, 1999, GMO earned a management fee at the annual rate of
.49% of average daily net assets. GMO had agreed to waive a portion of its
fee (but not below zero) and bear other expenses to the extent that the
Fund's annual expenses (including the management fee but excluding
brokerage commissions, certain other transaction costs (including transfer
taxes), shareholder service fees and extraordinary expenses ("fund
expenses")) plus the amount of fees and expenses, excluding shareholder
service fee and fund expenses (as defined above) incurred indirectly by
the Fund through investment in underlying Funds exceeded .33% of average
daily net assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000 was $186. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 29, 2000, aggregated
$2,892,814 and $17,876,557, respectively.
At February 29, 2000 the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
$1,907,835 $49,763 $(339,233) $(289,470)
</TABLE>
9
<PAGE>
GMO U.S. SECTOR FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
4. PRINCIPAL SHAREHOLDER
At February 29, 2000, 100% of the outstanding shares of the Fund were held
by one shareholder. Investment activities of this shareholder could have a
material effect.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
------------------------- -------------------------
Shares Amount Shares Amount
Class III: ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Shares sold -- $ -- -- $ --
Shares issued to shareholders
in reinvestment of distributions 184,352 932,337 1,801,919 9,891,793
Shares repurchased (3,489,575) (17,364,111) (6,465,314) (57,171,642)
----------- ------------ ----------- ------------
Net decrease (3,305,223) $(16,431,774) (4,663,395) $(47,279,849)
=========== ============ =========== ============
</TABLE>
10
<PAGE>
GMO U.S. SECTOR FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
For the fiscal year ended February 29, 2000, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 46.6% of distributions as net capital gain dividends.
11
<PAGE>
GMO U.S. SECTOR FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Robert Soucy are
primarily responsible for the day-to-day management of the Fund's portfolio.
Mssrs. Grantham and Darnell have each been portfolio managers at Grantham, Mayo,
Van Otterloo & Co. LLC for more than fifteen years; Mr. Soucy for more than ten
years.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO U.S. Sector Fund returned 13.4% for the fiscal
year ended February 29, 2000, as compared to 11.7% for the S&P 500. The GMO U.S.
Sector Fund currently invests in the GMO U.S. Core Fund, GMO REIT Fund, GMO
Small Cap Growth Fund and GMO Small Cap Value Fund. Consistent with the Fund's
investment objectives and policies, the Fund was invested substantially in funds
invested in common stocks throughout the period.
The Fund's outperformance relative to the S&P 500 for the fiscal year was due
primarily to the allocation in favor of small-cap growth stocks. These stocks
outperformed all other segments of the market. For the fiscal year, the Russell
2000 Growth Index outperformed the Russell 2000 Value Index by 72.3%. The
benchmark for our Small Cap Growth Fund, the Russell 2500 Growth Index,
outperformed the Russell 2500 Value Index by an even greater margin, 98.1%. The
positive impact of this decision was somewhat offset by the overweight in REITs
and small cap value stocks. REITs, as represented by the Morgan Stanley REIT
Index, declined -1.3% for the fiscal year despite their attractive dividend
yields, underperforming the S&P 500 by 13.0%.
Implementation within the Fund detracted from performance for the fiscal year.
While the U.S. Core and Small Cap Value Funds outperformed their respective
benchmarks, the Small Cap Growth and REIT Funds underperformed their benchmarks.
The Funds' bias toward value stocks detracted from performance in a narrow
market dominated by growth stocks.
OUTLOOK
Small-cap value stocks and REITs are extremely attractively valued. We expect
the Fund to benefit from an eventual recovery of these sectors of the market.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO &
CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO U.S. SECTOR FUND CLASS III SHARES AND THE S&P 500 INDEX
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
Average Annual Total Returns
Inception 12/31/92
1yr 5yr 10yr (ITD)
<S> <C> <C>
12.84 20.4 17.83
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
Date GMO U.S. Sector Fund-III S&P 500
<S> <C> <C>
12/31/92 9973 10000
3/31/93 10621 10437
6/30/93 10871 10488
9/30/93 11439 10758
12/31/93 11657 11008
3/31/94 11424 10590
6/30/94 11405 10634
9/30/94 11911 11154
12/31/94 12038 11153
3/31/95 13134 12239
6/30/95 14580 13407
9/30/95 16160 14472
12/31/95 17236 15344
3/31/96 17835 16167
6/30/96 18443 16893
9/30/96 18955 17415
12/31/96 20379 18867
3/31/97 20840 19373
6/30/97 23384 22755
9/30/97 26126 24459
12/31/97 26215 25161
3/31/98 28951 28670
6/30/98 28821 29617
9/30/98 25212 26671
12/31/98 29267 32351
3/31/99 29329 33963
6/30/99 32114 36357
9/30/99 29762 34086
12/31/99 33456 39157
2/29/00 32416 36486
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The total returns would have been lower had certain expenses
not been reimbursed during the periods shown and do not include the effect of
taxes. Each performance figure assumes purchase at the beginning and
redemption at the end of the stated period and reflects a transaction fee of
27 bp on the purchase and 18 bp on the redemption. Transaction fees are
retained by the Fund to cover trading costs. Past performance is not
indicative of future performance. Information is unaudited.
<PAGE>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO GROWTH FUND (A SERIES OF GMO TRUST)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Growth Fund at February 29,
2000, the results of its operations, the changes in its net assets and the
financial highlights for each of the periods indicated therein, in conformity
with accounting principles generally accepted in the United States. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at February 29, 2000 by correspondence with the custodian, provide
a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 10, 2000
<PAGE>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 98.0%
AEROSPACE -- 0.1%
5,500 Cordant Technologies Inc 178,062
1,500 Northrop Grumman Corp 68,156
-------------
246,218
-------------
AUTOMOTIVE -- 0.5%
14,600 Autonation Inc* 110,412
1,100 General Motors Corp 83,669
3,500 General Motors Corp, Class H* 421,750
5,850 Genuine Parts Co 131,991
2,900 Goodyear Tire & Rubber Co 65,794
4,900 Lear Corp* 103,512
3,300 Meritor Automotive Inc 46,200
-------------
963,328
-------------
BANKING AND FINANCIAL SERVICES -- 2.2%
7,200 American Express Co 966,150
5,286 Bear Stearns Cos Inc 207,476
8,500 Comdisco Inc 326,719
8,000 Countrywide Credit Industries Inc 199,500
2,000 Donaldson Lufkin & Jenrette 86,875
2,700 Edwards (AG) Inc 85,556
6,300 Fannie Mae 333,900
8,900 Franklin Resources Inc 241,969
10,200 Freddie Mac 425,850
4,100 Hibernia Corporation, Class A 37,156
23,600 Household International Inc 753,725
1,800 Lehman Brothers Holding Inc 130,500
450 Liberty Financial Cos 8,691
5,500 MGIC Investment Corp 205,562
1,800 Morgan Stanley Dean Witter & Co 126,787
900 Paine Webber Group Inc 34,425
4,500 PMI Group Inc 163,406
3,000 Rowe (T) Price & Associates Inc 98,812
2,100 UnionBanCal Corp 67,462
-------------
4,500,521
-------------
</TABLE>
See accompanying notes to the financial statements.
1
<PAGE>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
CHEMICALS -- 1.1%
19,800 Air Products and Chemicals 509,850
3,100 Eastman Chemical Co 111,406
7,300 Engelhard Corp 99,462
2,300 Hercules Inc 37,950
2,300 IMC Global Inc 31,050
3,300 PPG Industries Inc 162,937
13,500 Praxair Inc 455,625
8,423 Rohm & Haas Co 340,079
7,300 Sherwin Williams Co 139,612
3,700 Terra Industries Inc 8,556
6,200 Union Carbide Corp 332,862
1,200 Wellman Inc 22,350
-------------
2,251,739
-------------
COMMUNICATIONS -- 0.0%
1,031 NTL Inc* 94,359
-------------
COMPUTER AND OFFICE EQUIPMENT -- 20.8%
5,700 Advanced Micro Devices Inc* 223,012
4,600 Apple Computer Inc* 527,275
106,100 Cisco Systems Inc* 14,025,094
31,600 Computer Associates International Inc 2,032,275
3,750 Comverse Technology Inc* 738,281
1,800 Concord EFS Inc* 35,212
25,700 Dell Computer Corp* 1,048,881
16,600 Electronic Data Systems Corp 1,074,850
34,300 EMC Corp* 4,081,700
500 Emulex Corp* 80,000
10,300 Gateway Inc* 708,125
47,500 Hewlett Packard Co 6,388,750
5,500 Lexmark International Group Inc* 655,875
16,200 Micron Technology Inc* 1,588,612
119,100 Oracle Corp* 8,843,175
4,400 Reynolds & Reynolds Inc, Class A 121,550
200 Safeguard Scientifics Inc* 34,987
1,000 Sandisk Corp* 89,000
5,700 Silicon Graphics Inc* 55,931
9,600 Xerox Corp 208,200
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
COMPUTER AND OFFICE EQUIPMENT -- CONTINUED
800 Zebra Technologies Corp* 53,250
-------------
42,614,035
-------------
CONSTRUCTION -- 1.4%
50,450 Home Depot Inc 2,916,641
-------------
CONSUMER GOODS -- 2.0%
1,800 Department 56 Inc* 25,425
14,600 Eastman Kodak Co 836,762
3,500 Furniture Brands International Inc* 56,219
3,250 Hasbro Inc 51,187
2,700 Hon Industries Inc 49,781
5,400 Johnson Controls 288,225
10,900 Jones Apparel Group Inc* 246,612
4,500 Lancaster Colony Corp 133,875
3,900 Liz Claiborne Inc 146,006
36,400 Mattel Co 350,350
800 Maytag Corp 21,150
37,191 Newell Rubbermaid Inc 860,042
13,100 Nike Inc, Class B 372,531
200 Patterson Dental Company* 7,206
3,000 Polo Ralph Lauren Corp* 50,250
2,200 Procurenet* 0
1,300 Reebok International Ltd* 10,400
2,700 Steelcase Inc 33,075
1,600 Tech Data Corp* 34,700
1,600 Tupperware Corp 27,500
2,600 US Industries Inc 29,737
7,100 VF Corp 175,281
500 Wallace Computer Services 5,219
4,000 Warnaco Group Inc, Class A 43,500
5,000 Whirlpool Corp 271,562
-------------
4,126,595
-------------
ELECTRONIC EQUIPMENT -- 13.7%
15,600 3 Com Corp* 1,528,800
9,300 Adaptec Inc* 381,300
8,800 ADC Telecommunications Inc* 394,900
3,300 Altera Corp* 263,175
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
ELECTRONIC EQUIPMENT -- CONTINUED
9,000 American Power Conversion Corp* 305,437
300 Amphenol Corp, Class A* 23,981
5,400 Analog Devices Inc* 847,800
1,200 Antec Corp* 63,525
27,700 Atmel Corp* 1,371,150
1,400 C-Cube Microsystems Inc* 130,550
3,900 Cooper Industries Inc 117,975
2,600 Dallas Semiconductor Corp 104,975
7,200 EchoStar Communications Corp* 820,800
10,500 Emerson Electric Co 478,406
3,500 Hubbell Inc, Class B 85,094
4,000 Integrated Device Technology Inc* 147,500
8,300 Jabil Circuit Inc* 576,331
1,000 Kemet Corp* 61,437
1,000 Lattice Semiconductor Corp* 70,250
4,100 Linear Technology Corp 430,244
3,000 Litton Industries * 89,812
15,000 LSI Logic Corp* 960,937
6,900 Maxim Integrated Products Inc* 461,006
5,550 Microchip Technology Inc* 346,528
5,850 Molex Inc 326,869
16,042 Motorola Inc 2,735,161
14,700 National Semiconductor Corp* 1,104,337
2,200 Nortel Networks Corp 245,300
8,800 PMC-Sierra Inc* 1,698,950
26,600 Qualcomm Inc* 3,788,837
10,900 Raytheon Co, Class B 201,650
200 Read Rite Corp* 756
1,000 Sanmina Corp* 117,062
1,400 SCI Systems Inc* 56,350
14,300 Tellabs Inc* 686,400
29,900 Texas Instruments Inc 4,978,350
800 Thomas & Betts Corp 17,950
9,200 Vitesse Semiconductor Corp* 955,075
13,500 Xilinx Inc* 1,076,625
-------------
28,051,585
-------------
FOOD AND BEVERAGE -- 2.1%
1,900 Anheuser Busch Cos Inc 121,837
33,120 Archer Daniels Midland Co 333,270
25,700 Coca Cola Co 1,244,844
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
FOOD AND BEVERAGE -- CONTINUED
3,600 Coca Cola Enterprises Inc 84,150
15,000 ConAgra Inc 245,625
1,300 Dole Food Co 19,987
5,900 IBP Inc 73,750
3,800 Interstate Bakeries Corp 43,462
20,900 Nabisco Group Holdings 180,262
2,200 Nabisco Holdings Corp, Class A 64,350
4,100 Pepsico Inc 132,225
12,600 Ralston-Purina Group 356,737
15,966 RJ Reynolds Tobacco Holdings 287,388
1,700 Seagrams Co Ltd 99,875
15,900 Sysco Corp 521,719
3,700 Tyson Food Inc, Class A 38,156
2,600 Universal Corp 42,575
5,200 Wrigley (William Jr) Co 351,650
-------------
4,241,862
-------------
HEALTH CARE -- 3.6%
7,300 Becton Dickinson & Co 226,756
10,800 BioMet Inc 356,400
14,400 Boston Scientific Corp* 262,800
300 Cardinal Health Inc 12,375
3,800 Chiron Corp* 190,000
43,300 Columbia HCA Healthcare Corp 836,231
6,100 Dentsply International Inc 156,312
22,100 Health Management Associates Inc* 237,575
64,300 Healthsouth Corp* 313,462
4,700 Hillenbrand Industries Inc 142,762
8,600 Integrated Health Services Inc* 1,118
15,600 Johnson & Johnson 1,119,300
1,200 Lincare Holdings Inc* 28,125
4,400 Mallinckrodt Inc 108,350
11,500 Manor Care Inc* 99,906
6,500 Mariner Post-Acute Network Inc* 1,170
2,200 Medimmune Inc* 436,700
5,300 Novacare Corp* 943
100 Pharmacia & Upjohn Inc 4,762
1,200 Quest Diagnostics Inc* 41,175
6,100 Quorum Health Group Inc* 54,328
3,100 St Jude Medical Inc* 80,987
5,500 Stryker Corp 321,750
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
HEALTH CARE -- CONTINUED
28,800 Tenet Healthcare Corp* 504,000
1,300 Trigon Healthcare Inc* 41,519
22,300 United Healthcare Corp 1,140,087
1,300 Universal Health Services, Class B* 50,537
4,000 Visx Inc* 67,750
7,800 Wellpoint Health Network* 526,500
-------------
7,363,680
-------------
INSURANCE -- 1.6%
10,300 Aetna Life and Casualty Co 423,588
2,400 Allstate Corp 46,800
900 AMBAC Inc 39,544
1,100 American National Insurance Co 64,350
9,700 Cigna Corp 715,981
2,300 CNA Financial Corp* 62,100
600 Commerce Group Inc 17,925
4,100 Conseco Inc 59,963
1,400 Erie Indemnity Company - Class A 43,400
6,900 Foundation Health Systems Inc, Class A* 57,356
4,800 Hartford Financial Services Group Inc 150,000
12,400 Humana Inc* 84,475
5,700 Loews Corp 253,650
3,400 MBIA Inc 130,475
1,500 Nationwide Financial Service, Class A 34,594
2,000 Old Republic International Corp 23,375
4,000 Oxford Health Plans Inc* 61,750
6,100 Pacificare Health Systems Inc* 277,169
3,100 Safeco Corp 65,100
14,900 Saint Paul Cos Inc 333,388
2,400 Torchmark Corp 47,550
2,400 Transatlantic Holding Inc 169,050
2,600 Travelers Property Casualty Corp, Class A 82,225
1,800 Unumprovident Corp 24,075
-------------
3,267,883
-------------
MACHINERY -- 2.3%
2,100 American Standard Co* 73,238
20,700 Applied Materials Inc* 3,786,806
900 Cooper Cameron Corp* 49,725
300 Deere and Co 10,725
2,500 Federal Mogul Corp 34,063
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
MACHINERY -- CONTINUED
2,100 Lam Research Corp* 327,863
4,400 Novellus System Inc* 260,975
1,700 Parker-Hannifin Corp 61,625
300 Tecumseh Products Co, Class B 12,094
1,500 York International Corp 27,188
-------------
4,644,302
-------------
MANUFACTURING -- 1.4%
1,100 American Greetings Corp 18,975
1,900 Armstrong World Industries Inc 36,100
900 Benjamin Moore & Co 25,538
1,700 Corning Inc 319,600
1,100 Crane Co 21,863
5,200 Illinois Tool Works Inc 268,775
9,200 International Game Technology* 163,875
10,000 Leggett & Platt Inc 168,125
2,200 Minnesota Mining and Manufacturing Co 193,875
8,800 Owens Illinois Inc* 121,550
1,900 Rockwell International Corp 85,975
17,772 Tyco International Ltd 674,225
15,900 United Technologies Corp 809,906
-------------
2,908,382
-------------
METALS AND MINING -- 0.1%
2,050 Allegheny Technologies Inc 34,722
9,800 Freeport-McMoran Copper & Gold Inc* 134,750
-------------
169,472
-------------
OIL AND GAS -- 1.8%
5,700 Apache Corp 208,050
8,200 Atlantic Richfield Co 582,200
2,300 Burlington Resources Inc 63,538
7,300 Columbia Energy Group 430,700
10,700 Diamond Offshore Drilling Inc 339,725
1,300 EOG Resources Inc 19,825
5,200 Kerr-McGee Corp 232,700
400 Kinder Morgan Inc 11,150
14,800 Occidental Petroleum Corp 237,725
8,700 Phillips Petroleum Co 332,775
2,700 Tidewater Inc 76,444
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
OIL AND GAS -- CONTINUED
14,600 Transocean Sedco Forex Inc 575,788
6,400 Union Pacific Resources Group 57,200
9,500 Unocal Corp 254,125
10,800 USX - Marathon Group 233,550
1,800 Vastar Resources Inc 95,513
-------------
3,751,008
-------------
PAPER AND ALLIED PRODUCTS -- 0.5%
10,900 Kimberly-Clark Corp 563,394
2,700 Mead Corp 80,831
600 Pentair Inc 20,625
9,650 Sonoco Products Co 177,922
3,300 Westvaco Corp 90,956
-------------
933,728
-------------
PHARMACEUTICALS -- 5.7%
57,608 Abbott Laboratories 1,886,662
2,000 Alza Corp* 73,375
57,700 Amgen Inc* 3,934,419
7,050 Bergen Brunswig Corp, Class A 34,809
1,300 Biogen Inc* 140,319
1,300 Genzyme Corp - General Division* 74,669
1,900 IDEC Pharmaceuticals Corp* 267,663
5,500 Immunex Corp* 1,085,906
21,100 IMS Health Inc 424,638
2,730 Mark IV Industries Inc 54,600
9,400 Merck & Co Inc 578,688
17,600 Mylan Laboratories Inc 404,800
5,100 Nu Skin Enterprises Inc* 45,581
74,736 Pfizer Inc 2,400,894
8,300 Schering Plough Corp 289,463
-------------
11,696,486
-------------
PRIMARY MATERIALS -- 0.2%
7,300 Crown Cork & Seal Inc 102,200
4,200 Sealed Air Corp* 208,688
2,800 Weatherford International Inc 126,000
-------------
436,888
-------------
</TABLE>
See accompanying notes to the financial statements.
8
<PAGE>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
PRIMARY PROCESSING -- 0.3%
7,200 Howmet International Inc* 131,850
300 Mueller Industries Inc* 8,588
7,500 Nucor Corp 372,656
2,100 Worthington Industries Inc 27,825
-------------
540,919
-------------
PRINTING AND PUBLISHING -- 0.4%
2,800 Central Newspapers Inc, Class A 79,975
2,400 Gannett Co Inc 156,450
3,000 Houghton Mifflin Co 119,438
2,800 John Wiley and Sons Inc, Class A 39,900
7,700 TV Guide Inc, Class A* 362,863
-------------
758,626
-------------
REFINING -- 0.2%
3,100 Ashland Inc 96,488
10,100 Tosco Corp 270,175
600 Ultramar Diamond Shamrock Corp 13,013
-------------
379,676
-------------
RETAIL TRADE -- 3.2%
17,342 Albertsons Inc 424,879
5,400 Autozone Inc* 132,638
500 Blair Corp 8,688
1,000 Circuit City Stores Inc 40,375
4,533 Delhaize America Inc 84,994
7,700 Dillard's Inc 133,788
2,400 Federated Department Stores Inc* 88,050
1,700 Fruit of the Loom Inc, Class A* 2,550
1,200 Hannaford Brothers Co 85,500
7,100 Kmart Corp* 62,569
15,000 Kroger Co* 223,125
2,000 May Department Stores Co 52,375
4,800 Neiman Marcus Group Inc, Class A* 102,300
5,250 Office Depot Inc* 63,984
1,100 Payless ShoeSource Inc* 43,450
400 Pier 1 Imports Inc 3,500
4,300 Rite Aid Corp 29,563
38,026 Safeway Inc* 1,466,378
3,500 Sears Roebuck & Co 96,469
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
RETAIL TRADE -- CONTINUED
1,300 TJX Cos Inc 20,719
22,300 Toys R Us Inc* 275,963
60,400 Wal Mart Stores Inc 2,940,725
12,700 Wendy's International Inc 200,025
-------------
6,582,607
-------------
SERVICES -- 1.8%
500 Catalina Marketing Corp* 42,563
1,100 Chris Craft Industries Inc* 72,394
3,300 Fluor Corp 93,844
8,500 Harrahs Entertainment Inc* 162,563
3,200 Hertz Corp 114,600
16,079 Hilton Hotels Corp 112,553
2,200 Icos Corp* 115,225
1,300 Mandalay Resort Group* 18,281
2,900 Manpower Inc 94,794
6,400 Marriott International Inc, Class A 176,400
9,400 Mirage Resorts Inc* 149,225
300 Omnicom Group 28,256
27,700 Park Place Entertainment Corp* 313,356
2,400 Republic Services Inc, Class A* 26,100
14,900 Service Corp International 54,944
6,900 Servicemaster Company 75,900
1,400 Speedway Motorsports Inc* 42,875
10,800 Supervalu Inc 185,625
49,100 The Walt Disney Co. 1,644,850
2,200 UnitedGlobal.Com Inc, Class A* 229,900
-------------
3,754,248
-------------
TECHNOLOGY -- 25.0%
12,900 Adobe Systems Inc 1,315,800
37,100 America Online Inc* 2,188,900
1,300 American Management Systems Inc* 41,356
4,500 Automatic Data Processing Inc 196,031
500 Avnet Inc 33,438
4,400 Beckman Coulter Inc 211,750
16,400 BMC Software Inc* 754,400
7,500 Cabletron Systems Inc* 367,500
5,000 Cadence Design Systems Inc* 99,688
6,200 Ceridian Corp* 122,838
6,800 Citrix Systems Inc* 716,975
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
TECHNOLOGY -- CONTINUED
6,000 CMG Information Services Inc* 777,375
13,761 Compaq Computer Corp 342,305
4,400 Computer Sciences Corp* 346,775
1,100 CSG Systems International Inc* 56,513
300 DST Systems Inc* 16,838
1,700 Electronics For Imaging Inc* 100,938
16,300 First Data Corp 733,500
400 G TECH Holdings Corp* 8,000
28,100 Honeywell International Inc 1,352,313
1,200 Hyperion Solutions Corp* 59,250
105,204 Intel Corp 11,888,052
13,384 JDS Uniphase Corp* 3,528,357
4,200 KLA Instruments Corp* 327,338
400 Macromedia Inc* 34,575
1,600 Mercury Interactive Corp* 154,200
122,900 Microsoft Corp* 10,984,188
1,400 National Data Corp 43,400
6,100 Network Appliance Inc* 1,151,375
15,500 Novell Inc* 512,469
7,700 Parametric Technology Corp* 233,406
13,800 PE Corp - PE Biosystems Group 1,455,900
3,000 Psinet Inc* 139,125
300 Remedy Corp* 17,006
1,000 RSA Security Inc* 66,938
17,800 Seagate Technology Corp* 887,775
400 Shared Medical Systems Corp 15,575
16,100 Solectron Corp* 1,054,550
89,000 Sun Microsystems Inc* 8,477,250
1,900 Symantec Co* 135,731
4,700 Synopsys Inc* 187,706
-------------
51,137,399
-------------
TELECOMMUNICATIONS -- 4.0%
1,000 Adtran Inc* 73,563
3,000 Alltel Corp 174,000
1,200 Aspect Communications Corp* 77,325
18,700 AT & T Corp 924,481
9,700 Bell Atlantic Corp 474,694
1,800 Centennial Cellular Corp, Class A* 43,706
3,825 Centurytel Inc 128,616
1,895 Comsat Corp 31,860
</TABLE>
See accompanying notes to the financial statements. 11
<PAGE>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
TELECOMMUNICATIONS -- CONTINUED
27,200 GTE Corp 1,604,800
7,800 Lucent Technologies Inc 464,100
20,935 MCI Worldcom Inc* 934,224
700 MRV Communications Inc* 109,769
6,200 Nextel Communications Inc, Class A* 847,850
36,900 SBC Communications Inc 1,402,200
2,000 Telephone and Data Systems Inc 211,000
4,000 United States Cellular Corp* 267,750
6,300 Viacom Inc, Class B* 351,225
-------------
8,121,163
-------------
TEXTILES -- 0.0%
6,300 Shaw Industries Inc 79,931
800 Westpoint Stevens Inc 13,300
-------------
93,231
-------------
TOBACCO -- 1.2%
119,384 Philip Morris Cos Inc 2,395,142
-------------
TRANSPORTATION -- 0.4%
10,200 Brunswick Corp 180,413
22,300 Burlington Northern Santa Fe Railroad Co 439,031
12,300 CSX Corp 272,906
2,000 Galileo International Inc 34,000
-------------
926,350
-------------
UTILITIES -- 0.4%
7,100 Citizens Utilities, Class B* 108,275
8,100 Coastal Corp 340,706
2,139 Dynegy Inc 100,266
5,400 El Paso Energy Corp 200,138
1,300 Oneok Inc 29,494
-------------
778,879
-------------
TOTAL COMMON STOCKS (COST $127,886,867) 200,646,952
-------------
</TABLE>
See accompanying notes to the financial statements.
12
<PAGE>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE ($) DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENTS -- 5.2%
CASH EQUIVALENTS -- 2.7%
$ 211,252 BankBoston Eurodollar Time Deposit, 6.1175%, due
4/28/00(a) 211,252
$ 415,798 First Union National Bank Time Deposit, 5.8125%, due
3/01/00(a) 415,798
$ 623,697 Fleet National Bank Time Deposit, 5.79%, due 3/10/00(a) 623,697
276,605 Merrimac Cash Fund Premium Class(a) 276,605
$ 4,000,000 Prudential Securities Group, Inc. Master Note, 6.1875%,
due 3/10/00(a) 4,000,000
-------------
5,527,352
-------------
U.S. GOVERNMENT -- 0.4%
$ 865,000 U.S. Treasury Bill, 5.689%, due 6/29/00(b) 848,825
-------------
REPURCHASE AGREEMENT -- 2.1%
$ 4,222,650 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/29/00, due 3/1/00, with a maturity value of
$4,223,231 and an effective yield of 4.95%,
collateralized by a U.S. Treasury Obligation with a
rate of 8.125%, maturity date of 8/15/19 and market
value, including accrued interest, of $4,307,103. 4,222,650
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $10,599,259) 10,598,827
-------------
TOTAL INVESTMENTS -- 103.2%
(Cost $138,486,126) 211,245,779
Other Assets and Liabilities (net) -- (3.2%) (6,583,983)
-------------
TOTAL NET ASSETS -- 100.0% $ 204,661,796
=============
</TABLE>
See accompanying notes to the financial statements.
13
<PAGE>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<C> <S> <C>
NOTES TO THE SCHEDULE OF INVESTMENTS:
</TABLE>
* Non-income producing security.
(a) Represents investments of security lending collateral (Note 1).
(b) Security has been segregated to cover margin requirements on open financial
futures contracts (Note 6).
14 See accompanying notes to the financial statements.
<PAGE>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $138,486,126) (Note 1) $211,245,779
Dividends and interest receivable 111,300
Receivable for variation margin on open futures contracts
(Notes 1 and 6) 36,240
Receivable for expenses waived or borne by Manager (Note
2) 8,962
------------
Total assets 211,402,281
------------
LIABILITIES:
Payable upon return of securities loaned (Note 1) 5,527,352
Payable for Fund shares repurchased 1,097,833
Payable to affiliate for (Note 2):
Management fee 52,118
Shareholder service fee 23,691
Accrued expenses 39,491
------------
Total liabilities 6,740,485
------------
NET ASSETS $204,661,796
============
NET ASSETS CONSIST OF:
Paid-in capital $117,575,585
Accumulated undistributed net investment income 59,467
Accumulated net realized gain 14,291,487
Net unrealized appreciation 72,735,257
------------
$204,661,796
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $204,661,796
============
SHARES OUTSTANDING:
Class III 41,348,373
============
NET ASSET VALUE PER SHARE:
Class III $ 4.95
============
</TABLE>
See accompanying notes to the financial statements. 15
<PAGE>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $353) $ 1,129,063
Interest (including securities lending income of $23,370) 589,730
-----------
Total income 1,718,793
-----------
EXPENSES:
Management fee (Note 2) 579,315
Custodian and transfer agent fees 52,740
Audit fees 37,868
Legal fees 3,939
Registration fees 2,078
Trustees fees (Note 2) 2,008
Miscellaneous 2,647
Fees waived or borne by Manager (Note 2) (101,280)
-----------
579,315
Shareholder service fee (Note 2)
Class III 263,325
-----------
Net expenses 842,640
-----------
Net investment income 876,153
-----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain on:
Investments 34,022,505
Closed futures contracts 1,013,219
Closed swap contracts 2,486,982
-----------
Net realized gain 37,522,706
-----------
Change in net unrealized appreciation (depreciation) on:
Investments 28,449,619
Open futures contracts 89,159
Open swap contracts (39,789)
-----------
Net unrealized gain 28,498,989
-----------
Net realized and unrealized gain 66,021,695
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $66,897,848
===========
</TABLE>
16 See accompanying notes to the financial statements.
<PAGE>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 876,153 $ 1,101,856
Net realized gain 37,522,706 35,847,656
Change in net unrealized appreciation (depreciation) 28,498,989 (1,539,965)
------------ ------------
Net increase in net assets from operations 66,897,848 35,409,547
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (909,886) (1,131,539)
------------ ------------
Total distributions from net investment income (909,886) (1,131,539)
------------ ------------
Net realized gains
Class III (33,701,424) (37,976,729)
------------ ------------
Total distributions from net realized gains (33,701,424) (37,976,729)
------------ ------------
(34,611,310) (39,108,268)
------------ ------------
Net share transactions: (Note 5)
Class III 14,291,017 (41,140,532)
------------ ------------
Increase (decrease) in net assets resulting from net
share transactions 14,291,017 (41,140,532)
------------ ------------
Total increase (decrease) in net assets 46,577,555 (44,839,253)
NET ASSETS:
Beginning of period 158,084,241 202,923,494
------------ ------------
End of period (including accumulated undistributed
net investment income of $59,467 and $93,200,
respectively) $204,661,796 $158,084,241
============ ============
</TABLE>
See accompanying notes to the financial statements. 17
<PAGE>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 4.14 $ 4.38 $ 5.18 $ 5.65 $ 4.45
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.02 0.03 0.04 0.07 0.08
Net realized and unrealized gain 1.71 0.89 1.41 1.03 1.54
-------- -------- -------- -------- --------
Total from investment operations 1.73 0.92 1.45 1.10 1.62
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.02) (0.03) (0.06) (0.08) (0.07)
From net realized gains (0.90) (1.13) (2.19) (1.49) (0.35)
-------- -------- -------- -------- --------
Total distributions (0.92) (1.16) (2.25) (1.57) (0.42)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 4.95 $ 4.14 $ 4.38 $ 5.18 $ 5.65
======== ======== ======== ======== ========
TOTAL RETURN(a) 45.24% 22.90% 36.37% 21.64% 37.77%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $204,662 $158,084 $202,923 $244,183 $391,366
Net expenses to average daily net
assets 0.48% 0.48% 0.48% 0.48% 0.48%
Net investment income to average
daily net assets 0.50% 0.64% 0.79% 1.21% 1.54%
Portfolio turnover rate 48% 50% 60% 100% 76%
Fees and expenses voluntarily waived
or borne by the Manager consisted
of the following per
share amounts: --(b) $ 0.01 $ 0.01 $ 0.01 --(b)
</TABLE>
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(b) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
18 See accompanying notes to the financial statements.
<PAGE>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Growth Fund (the "Fund") is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended,
as an open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24,
1985. The Declaration of Trust permits the Trustees to create an unlimited
number of series ("Funds"), each of which issues a separate series of
shares, and to subdivide a series of shares into classes.
The Fund seeks long-term growth of capital. The Funds benchmark is the
Russell 1000 Growth Index.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of the financial statements
in accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Securities for
which quotations are not readily available are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts on domestic stock
indices. Stock index futures contracts represent commitments for future
delivery of cash based upon the level of a specified index of equity
securities at a given date. The Fund may use futures contracts to manage
its exposure to the stock markets. Buying futures tends to increase the
Fund's exposure to the underlying instrument. Selling futures tends to
decrease the Fund's exposure to the underlying instrument or hedge other
Fund instruments. Upon entering into a futures contract, the Fund is
required to deposit with its custodian, in a segregated account in the
name of the futures broker, an amount of cash or U.S. government and
agency obligations in accordance with the initial margin requirements of
the broker or exchange. Futures contracts are marked to market daily and
an appropriate payable or receivable for the change in value ("variation
margin") is recorded by the
19
<PAGE>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
Fund. The payable or receivable is liquidated on the following business
day. Gains or losses are recognized but not considered realized until the
contracts expire or are closed. Futures contracts involve, to varying
degrees, risk of loss in excess of the variation margin disclosed in the
Statement of Assets and Liabilities. Losses may arise from changes in the
value of the underlying instrument, if there is an illiquid secondary
market for the contracts, or if counterparties do not perform under the
contract terms. Futures contracts are valued at the settlement price
established each day by the board of trade or exchange on which they are
traded. See Note 6 for all open futures contracts as of February 29, 2000.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, realization of collateral by the Fund may be delayed or
limited.
SECURITY LENDING
The Fund may lend its securities to qualified brokers. The loans are
collateralized at all times with cash or securities with a market value at
least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending
its securities. At February 29, 2000, the Fund loaned securities having a
market value of $5,407,186 collateralized by cash in the amount of
$5,527,352 which was invested in short-term instruments.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
equity markets. A swap is an agreement to exchange the return generated by
one instrument for the return generated by another instrument. The Fund
enters into equity swap agreements which involve a commitment by one party
in the agreement to pay interest in exchange for a market linked return,
both based on notional amounts. To the extent that the total return of the
security or index underlying the transaction exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make a payment to the counterparty. The Fund also enters into contracts
for differences in which the Fund agrees with the counterparty that its
return will be based on the
20
<PAGE>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
relative performance of two different groups or "baskets" of securities,
adjusted by an interest rate payment. To the extent that the relative
performance of the two baskets of securities exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make payment to the counterparty, respectively. Swaps are marked to
market daily based upon quotations from market makers and the change, if
any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
Entering into these agreements involves, to varying degrees, elements of
credit and market risk in excess of the amounts recognized on the
Statement of Assets and Liabilities. Such risks involve the possibility
that there will be no liquid market for these agreements, that the
counterparty to the agreements may default on its obligation to perform,
or that there may be unfavorable changes in the price of the security or
index underlying these transactions. There were no open swap agreements as
of February 29, 2000.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary. Taxes on foreign dividend income are withheld in
accordance with the applicable country's tax treaty with the United
States.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. Distributions to shareholders are recorded by the Fund on
the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States.
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
21
<PAGE>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable foreign withholding taxes, is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis and is
adjusted for the accretion of discounts. In determining the net gain or
loss on securities sold, the cost of securities is determined on the
identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is .14 % of the amount
invested. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. For the year ended February 29, 2000, the Fund received
$2,599 in purchase premiums. There is no premium for redemptions,
reinvested distributions or in-kind transactions.
Effective April 7, 2000, the Fund will no longer charge a purchase
premium.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .33% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding brokerage commissions, certain other transaction costs
(including transfer taxes), shareholder service fees and extraordinary
expenses) exceed the management fee.
Prior to March 1, 1999, GMO earned a management fee at the annual rate of
.50% of average daily net assets. GMO had agreed to waive a portion of its
fee and bear other expenses to the extent that the Fund's annual expenses
(including the management fee but excluding brokerage commissions, certain
other transaction costs (including transfer taxes), shareholder service
fees and extraordinary expenses) exceeded .33% of average daily net
assets.
22
<PAGE>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000 was $2,008. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 29, 2000, aggregated
$77,863,310 and $91,137,989 respectively.
At February 29, 2000 the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
$138,737,529 $88,268,784 $(15,760,534) $72,508,250
</TABLE>
4. PRINCIPAL SHAREHOLDERS
At February 29, 2000, 84.2% of the outstanding shares of the Fund were
held by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares. Investment activities of these shareholders could have
a material effect.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
------------------------ -------------------------
Shares Amount Shares Amount
Class III: ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Shares sold 411,884 $ 1,856,585 735,556 $ 3,204,280
Shares issued to shareholders
in reinvestment of distributions 7,675,138 34,556,251 9,514,574 39,000,762
Shares repurchased (4,900,307) (22,121,819) (18,430,431) (83,345,574)
---------- ------------ ----------- ------------
Net increase (decrease) 3,186,715 $ 14,291,017 (8,180,301) $(41,140,532)
========== ============ =========== ============
</TABLE>
23
<PAGE>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 29, 2000 is as
follows:
FUTURES CONTRACTS
<TABLE>
<CAPTION>
Number of Contract Net Unrealized
Contracts Type Expiration Date Value Depreciation
---------- ---------- --------------- ---------- --------------
<C> <S> <C> <C> <C>
Buys
3 S&P 500 March 2000 1,029,000 $(24,396)
========
</TABLE>
At February 29, 2000, the Fund has sufficient cash and/or securities to
cover any commitments or margin on open futures contracts.
24
<PAGE>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
For the fiscal year ended February 29, 2000, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 87% of distributions as net capital gain dividends.
25
<PAGE>
GMO GROWTH FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Robert Soucy are
primarily responsible for the day-to-day management of the Fund's portfolio.
Mssrs. Grantham and Darnell have each been portfolio managers at Grantham, Mayo,
Van Otterloo & Co. LLC for more than fifteen years; Mr. Soucy for more than ten
years.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO Growth Fund returned 45.2% for the fiscal year
ended February 29, 2000, as compared to 11.7% for the S&P 500 and 31.8% for the
Russell 1000 Growth Index. Consistent with the Fund's investment objectives and
policies, the Fund was invested substantially in common stocks throughout the
period.
For the fiscal year, large cap growth stocks outperformed large cap value stocks
by 35.0% primarily due to the strong performance of technology stocks.
Similarly, small cap growth stocks outperformed small cap value stocks by an
even wider margin. Sector selection within the Fund was strong and accounted for
the majority of value added. The Fund is underweight in large cap issues and
overweight in small cap stocks. These positions added value for the fiscal year
because of the significant outperformance of small cap stocks. The Fund's
overweight in technology stocks coupled with underweight positions in
underperforming sectors, including health care, consumer staples (particularly
the beverage industry) and consumer discretionary stocks also added to relative
performance. Overweighting materials/processing and auto/transportation stocks
detracted from performance as these sectors underperformed the benchmark.
Stock selection also added value for the year, albeit to a lesser extent than
sector selection. Strong selection among technology, health care and producer
durable stocks offset weak selection in consumer staple and multi-industry
stocks.
For the fiscal year, the MOMENTUM stock selection strategy performed well. The
INTRINSIC VALUE strategy was neutral relative to the benchmark, while the
NEGLECT and CASH FLOW strategies underperformed.
OUTLOOK
While the Fund currently maintains an overweight position in technology stocks,
this position is likely to decline as our intrinsic value methodology
demonstrates these stocks to be increasingly overvalued. We continue to maintain
an underweight position in health care and consumer staple stocks.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO GROWTH FUND CLASS III SHARES AND THE RUSSELL 1000 GROWTH INDEX
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
Average Annual Total Returns
Inception 12/30/88
1yr 5yr 10yr
<S> <C> <C>
45.04 32.39 21.97
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
Date GMO Growth Fund-III Russell 1000 Growth
<S> <C> <C>
2/28/90 9986 10000
3/31/90 10342 10398
6/30/90 11542 11451
9/30/90 9490 9706
12/31/90 10761 10770
3/31/91 12936 12702
6/30/91 12551 12580
9/30/91 13256 13459
12/31/91 15202 15202
3/31/92 14382 14451
6/30/92 14098 14295
9/30/92 14926 14924
12/31/92 15842 15965
3/31/93 15911 15831
6/30/93 15416 15585
9/30/93 15840 15816
12/31/93 16571 16427
3/31/94 15363 15704
6/30/94 15521 15545
9/30/94 16779 16740
12/31/94 16852 16865
3/31/95 18461 18472
6/30/95 20135 20289
9/30/95 22357 22131
12/31/95 23567 23139
3/31/96 24571 24380
6/30/96 26322 25931
9/30/96 27058 26865
12/31/96 28374 28486
3/31/97 28548 28638
6/30/97 33391 34055
9/30/97 37862 36614
12/31/97 36703 37169
3/31/98 42213 42800
6/30/98 43774 44748
9/30/98 39536 40692
12/31/98 50392 51577
3/31/99 53307 54855
6/30/99 56905 56967
9/30/99 55299 54878
12/31/99 70065 68678
2/29/00 73015 68658
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes.
Each performance figure assumes purchase at the beginning and redemption at the
end of the stated period and reflects a transaction fee of 14 bp on the
purchase. Transaction fees are retained by the Fund to cover trading costs.
Past performance is not indicative of future performance. Information is
unaudited.
<PAGE>
GMO EMERGING COUNTRY DEBT SHARE FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Emerging Country Debt Share
Fund at February 29, 2000, the results of its operations, the changes in its net
assets and the financial highlights for each of the periods indicated therein,
in conformity with accounting principles generally accepted in the United
States. These financial statements and financial highlights (hereafter referred
to as "financial statements") are the responsibility of the Trust's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at February 29, 2000 by correspondence with the
custodian, provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 10, 2000
<PAGE>
GMO EMERGING COUNTRY DEBT SHARE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
MUTUAL FUND -- 100.0%
9,871,065 GMO Emerging Country Debt Fund (Cost $90,593,536) 86,273,108
------------
SHORT-TERM INVESTMENTS -- 0.0%
REPURCHASE AGREEMENT -- 0.0%
$ 15,969 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/29/00, due 3/1/00, with a maturity value of $15,971
and an effective yield of 4.95%, collateralized by a
U.S. Treasury Obligation with a rate of 8.125%,
maturity date of 8/15/19 and market value, including
accrued interest, of $16,288. 15,969
------------
TOTAL SHORT-TERM INVESTMENTS (COST $15,969) 15,969
------------
TOTAL INVESTMENTS -- 100.0%
(Cost $90,609,505) 86,289,077
Other Assets and Liabilities (net) -- (0.0%) (9,001)
------------
TOTAL NET ASSETS -- 100.0% $ 86,280,076
============
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO EMERGING COUNTRY DEBT SHARE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $90,609,505) (Note 1) $86,289,077
Receivable for expenses waived or borne by Manager (Note
2) 3,167
-----------
Total assets 86,292,244
-----------
LIABILITIES:
Accrued expenses 12,168
-----------
Total liabilities 12,168
-----------
NET ASSETS $86,280,076
===========
NET ASSETS CONSIST OF:
Paid-in capital $90,601,820
Accumulated undistributed net realized loss (1,316)
Net unrealized depreciation (4,320,428)
-----------
$86,280,076
===========
NET ASSETS ATTRIBUTABLE TO:
Class III shares $86,280,076
===========
SHARES OUTSTANDING:
Class III 9,918,037
===========
NET ASSET VALUE PER SHARE:
Class III $ 8.70
===========
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO EMERGING COUNTRY DEBT SHARE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends from investment company shares $ 9,369,314
Interest 2,443
-----------
Total income 9,371,757
-----------
EXPENSES:
Audit fees 10,982
Custodian and transfer agent fees 9,221
Legal fees 3,521
Trustees fees (Note 2) 792
Registration fees 29
Miscellaneous 1,739
Fees waived or borne by Manager (Note 2) (26,284)
-----------
Net expenses --
-----------
Net investment income 9,371,757
-----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (1,316)
Realized gain distributions from investment company
shares 1,062,790
-----------
Net realized gain 1,061,474
-----------
Change in net unrealized appreciation (depreciation) on
investments 14,631,128
-----------
Net realized and unrealized gain 15,692,602
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $25,064,359
===========
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO EMERGING COUNTRY DEBT SHARE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM JULY 20,1998
YEAR ENDED (COMMENCEMENT OF OPERATIONS)
FEBRUARY 29, 2000 TO FEBRUARY 28, 1999
----------------- ----------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 9,371,757 $ 167,273
Net realized gain 1,061,474 --
Change in net unrealized appreciation (depreciation) 14,631,128 (18,951,556)
------------ ------------
Net increase (decrease) in net assets from
operations 25,064,359 (18,784,283)
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (9,371,757) (168,000)
------------ ------------
Total distributions from net investment income (9,371,757) (168,000)
------------ ------------
In excess of net investment income
Class III (963,503) --
------------ ------------
Total distributions in excess of net investment
income (963,503) --
------------ ------------
Net realized gains
Class III (103,181) --
------------ ------------
Total distributions from net realized gains (103,181) --
------------ ------------
(10,438,441) (168,000)
------------ ------------
Net share transactions: (Note 5)
Class III 30,438,441 60,168,000
------------ ------------
Increase in net assets resulting from net share
transactions 30,438,441 60,168,000
------------ ------------
Total increase in net assets 45,064,359 41,215,717
NET ASSETS:
Beginning of period 41,215,717 --
------------ ------------
End of period (including accumulated undistributed
net investment income of $0 and $0, respectively) $ 86,280,076 $ 41,215,717
============ ============
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO EMERGING COUNTRY DEBT SHARE FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JULY 20, 1998
(COMMENCEMENT
YEAR ENDED OF OPERATIONS) THROUGH
FEBRUARY 29, 2000 FEBRUARY 28, 1999
----------------- ----------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 6.84 $ 10.00
------- -------
Income from investment operations:
Net investment income(a) 1.10 0.03
Net realized and unrealized gain (loss) 1.97 (3.16)
------- -------
Total from investment operations 3.07 (3.13)
------- -------
Less distributions to shareholders:
From net investment income (1.09) (0.03)
In excess of net investment income (0.11) --
From net realized gains (0.01) --
------- -------
Total distributions (1.21) (0.03)
------- -------
NET ASSET VALUE, END OF PERIOD $ 8.70 $ 6.84
======= =======
TOTAL RETURN(b) 46.71% (31.32)%+
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $86,280 $41,216
Net expenses to average daily net assets(c) 0.00% 0.00%*
Net investment income to average daily net assets(a) 14.22% 0.64%*
Portfolio turnover rate 0% 0%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share
amounts: --(d) --(d)
</TABLE>
* Annualized
(a) Recognition of net investment income is affected by the timing of the
declaration of dividends by GMO Emerging Country Debt Fund.
(b) The total returns would have been lower had certain expenses not been
waived during the periods shown.
(c) Net expenses exclude expenses incurred indirectly through investment in
underlying fund. (See Note 1.)
(d) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
+ Not annualized.
See accompanying notes to the financial statements. 5
<PAGE>
GMO EMERGING COUNTRY DEBT SHARE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Emerging Country Debt Share Fund (the "Fund"), is a series of GMO
Trust (the "Trust"). The Fund is registered under the Investment Company
Act of 1940, as amended, as an open-end, diversified management investment
company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo &
Co. LLC (the "Manager" or "GMO"). The Trust was established as a
Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series of shares
into classes.
The Fund seeks high total return through investment in the Class III
Shares of the GMO Emerging Country Debt Fund ("ECDF"), a portfolio of the
Trust. GMO also serves as investment manager to ECDF. ECDF pursues its
objectives by investing primarily in sovereign debt of developing
countries in Asia, Latin America, the Middle East, Africa and Europe
("Emerging Countries"). The Fund's benchmark is the J.P. Morgan Emerging
Markets Bond Index Global.
The financial statements of ECDF should be read in conjunction with the
Fund's financial statements.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of financial statements in
accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Shares of ECDF are valued at their net asset value as reported on each
business day. Short-term investments with a remaining maturity of sixty
days or less are valued at amortized cost, which approximates market
value. Securities for which quotations are not readily available are
valued at fair value as determined in good faith by the Trustees or other
persons acting at their direction.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at
6
<PAGE>
GMO EMERGING COUNTRY DEBT SHARE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
the counterparty's custodian in a segregated account for the benefit of
the Fund and the counterparty. In connection with transactions in
repurchase agreements, if the seller defaults and the value of the
collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable income and capital gains under U.S.
federal tax rules versus accounting principles generally accepted in the
United States. The calculation of net investment income per share in the
financial highlights excludes these adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
<S> <C> <C>
$963,503 $(959,609) $(3,894)
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for
7
<PAGE>
GMO EMERGING COUNTRY DEBT SHARE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
financial statement and tax purposes which result in temporary
over-distributions for financial statement purposes are classified as
distributions in excess of net investment income or accumulated net
realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Income dividends
and capital gain distributions are recorded on the ex-dividend date of
ECDF. Interest income is recorded on the accrual basis. In determining the
net gain or loss on securities sold, the cost of securities is determined
on the identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. In
addition, the Fund will also incur fees and expenses indirectly as a
shareholder in ECDF (See Note 2).
PURCHASES AND REDEMPTIONS OF FUND SHARES
The Fund does not charge any purchase premium or redemption fee in
connection with the purchase and sale of Fund shares. As a shareholder in
ECDF, the Fund will indirectly bear ECDF's purchase premium and redemption
fees which are .50% and .25%, respectively. These fees are paid to and
retained by ECDF.
INVESTMENT RISK
The Fund is subject to the investment risk associated with an investment
in ECDF. Investments in emerging country debt present certain risks that
are not inherent in many other securities. Many emerging countries present
elements of political and/or economic instability, which may result in the
Fund's inability to collect on a timely basis, or in full, principal and
interest payments. Further, countries may impose various types of foreign
currency regulations or controls which may impede the Fund's ability to
repatriate amounts it receives. ECDF may acquire interests in securities
or bank loans which are in default at the time of acquisition in
anticipation of improving conditions in the related countries. These
factors may result in significant volatility in the values of its
holdings. The markets for emerging country debt are relatively illiquid.
Accordingly, ECDF may not be able to realize in an actual sale amounts
approximating those used to value its holdings.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Manager does not charge an advisory fee or shareholder service fee. As
a shareholder in ECDF, the Fund will indirectly bear all fees and expenses
associated with an investment in ECDF. GMO, in
8
<PAGE>
GMO EMERGING COUNTRY DEBT SHARE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
its capacity as Manager of ECDF, has agreed to waive a portion of its fee
and bear other expenses to the extent that ECDF's annual expenses
(including the management fee but excluding custody fees, brokerage
commissions, certain other transaction costs (including transfer taxes),
shareholder service fees and extraordinary expenses) exceed .35% of
average daily net assets. Class III shares of ECDF also bear an annual
shareholder service fee of .15% of ECDF's average daily net assets. The
management fee earned by GMO in its capacity as Manager of ECDF is .35% of
average daily net assets. GMO has entered into a binding agreement
effective until June 30, 2000 to reimburse ECDF to the extent that ECDF's
total annual operating expense (excluding custody fees, brokerage
commissions, certain other transaction costs (including transfer taxes),
shareholder service fees and extraordinary expenses) exceeds the
management fee.
GMO has contractually agreed to reimburse all expenses directly incurred
by the Fund until June 30, 2000 (excluding brokerage commissions, certain
other transaction costs (including transfer taxes), and extraordinary
expenses).
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000 was $792. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 29, 2000, aggregated
$30,438,283 and $4,300 respectively.
At February 29, 2000 the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
$90,610,821 $ -- $(4,321,744) $(4,321,744)
</TABLE>
4. PRINCIPAL SHAREHOLDER
At February 29, 2000, 100% of the outstanding shares of the Fund were held
by one shareholder. Investment activities of this shareholder could have a
material effect.
9
<PAGE>
GMO EMERGING COUNTRY DEBT SHARE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Period from
July 20, 1998
(commencement of
Year Ended operations) through
February 29, 2000 February 28, 1999
----------------------- -----------------------
Shares Amount Shares Amount
Class III: ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Shares sold 2,574,003 $20,000,000 6,000,000 $60,000,000
Shares issued to shareholders
in reinvestment of distributions 1,319,651 10,438,441 24,383 168,000
Shares repurchased -- -- -- --
---------- ----------- ---------- -----------
Net increase 3,893,654 $30,438,441 6,024,383 $60,168,000
========== =========== ========== ===========
</TABLE>
6. OTHER
During April 2000, contract settlement on certain swap agreements in ECDF
was triggered by an event of default on the underlying debt instruments.
The counterparty to the swap agreements made an initial determination of
amounts due to ECDF under procedures specified by the swap agreements.
ECDF does not agree with certain elements of the determination and is
currently in negotiation with the counterparty over amounts approximating
10-20% of the settlement date value of these swaps. All undisputed amounts
have been paid to ECDF by the counterparty. The outcome of those
negotiations is not currently predictable.
10
<PAGE>
GMO EMERGING COUNTRY DEBT SHARE FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
For the fiscal year ended February 29, 2000, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 1% of distributions as net capital gain dividends.
11
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO EMERGING COUNTRY DEBT SHARE FUND CLASS III SHARES AND THE
J.P. MORGAN EMERGING MARKETS BOND INDEX GLOBAL - BLENDED
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
Average Annual Total Returns
Inception 7/20/1998
1yr 5yr 10yr (ITD)
<S> <C> <C>
46.71 N/A 0.47
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
Date GMO Emerging Country Debt Shares Fund J.P. Morgan EMBI Global J.P. Morgan Emerging Markets Plus
<S> <C> <C> <C>
7/20/1998 10000 10000 10000
9/30/1998 6160 7586 7586
12/31/1998 6968 8338 8338
3/31/1999 7269 8760 8760
6/30/1999 7701 9220 9220
9/30/1999 7802 9330 9330
12/31/1999 9207 10504 10504
2/29/2000 10076 10898 10959
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The total returns would have been lower had certain expenses
not been reimbursed during the periods shown and do not include the effect of
taxes. Past performance is not indicative of future performance. Information
is unaudited.
*The manager changed the benchmark due to the belief that the EMBIG is more
diversified and representative of the universe of emerging country debt.
<PAGE>
GMO EMERGING COUNTRY DEBT SHARE FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Mr. Thomas F. Cooper and Mr. William L. Nemerever are primarily responsible for
the day-to-day management of the Fund's portfolio. Each of these individuals has
been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the Emerging Country Debt Share Fund returned 46.7% for
the fiscal year ended February 29, 2000, which compared favorably with the 33.8%
benchmark return. Consistent with the Fund's investment objectives and policies,
the Fund was substantially invested in sovereign debt instruments of emerging
countries throughout the period.
Sovereign spreads on the J.P. Morgan Emerging Markets Bond Index Plus (EMBI+)
declined from 1330 basis points to 816 basis points. Emerging country debt
markets weathered several events, including the decision by Ecuador to default
on its Brady bond obligations in September 1999, political developments in
Russia and concerns about Y2K. Russia, the worst performing country in 1998,
returned 166% in 1999, and was the best performing country in the universe.
Although Brazil devalued its currency in January 1999, its debt returned 41%, as
the country's new economic team managed economic policy adroitly.
The portfolio's overweight exposure to Ecuador was hedged using credit default
swaps. These swaps protected the portfolio when Ecuador defaulted on its Brady
bonds. Most of the value added by the Fund relative to the Index occurred
between October 1999 and February 2000. Underweight positions in Poland, Mexico,
Panama and South Korea added value to the portfolio. Overweight positions in
countries outside the Index, such as Algeria, Vietnam and Tunisia, also added
value. In addition, security selection in Russia and Brazil contributed to the
Fund's positive performance. The Fund remained fully invested throughout the
period.
The benchmark for this Fund was changed on January 1, 2000 from the J.P. Morgan
Emerging Markets Bond Index Plus (EMBI+) to the J.P. Morgan Emerging Markets
Bond Index Global (EMBIG). The EMBIG is a broader index with 26 countries,
versus the 16 countries that are included in the EMBI+. The EMBIG offers
additional exposure to Asia (15% versus 4%), and less to Latin America (67%
versus 81%). The change in index is not expected to have a material effect on
the management of this portfolio.
OUTLOOK
The Fund's strategy continues to emphasize issue selection with a preference for
cheaper, long duration, less marketable issues that offer higher yields versus
the new benchmark, the J.P. Morgan Emerging Markets Bond Index Global. The Fund
is currently underweight in Ecuador, Mexico, Panama, Philippines, Poland,
Russia, South Korea and Turkey. Our largest overweight positions (within the
Index) are in Argentina, Bulgaria and Morocco. Jordan and Tunisia are the Fund's
largest positions outside the benchmark universe.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Short-Term Income Fund at
February 29, 2000, the results of its operations, the changes in its net assets
and the financial highlights for each of the periods indicated therein, in
conformity with accounting principles generally accepted in the United States.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at February 29, 2000 by correspondence with the custodian, provide
a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 10, 2000
<PAGE>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
DEBT OBLIGATIONS -- 25.0%
U.S. GOVERNMENT -- 10.8%
$ 4,728,870 U.S. Treasury Inflation Indexed Note, 3.63%, due
07/15/02 4,687,492
-------------
U.S. GOVERNMENT AGENCY -- 14.2%
303,333 Agency for International Development Floater (Support
of Botswana), Variable Rate, 6 mo. U.S. Treasury Bill
+ .40%, 6.42%, due 10/01/12 294,233
1,950,300 Agency for International Development Floater (Support
of C.A.B.E.I.), Variable Rate, 6 mo. U.S. Treasury
Bill + .40%, 6.42%, due 10/01/12 1,891,791
2,000,990 Agency for International Development Floater (Support
of Honduras), Variable Rate, 3 mo. U.S. Treasury Bill
x 117%, 5.93%, due 10/01/11 1,930,956
86,859 Agency for International Development Floater (Support
of Peru), Series A, Variable Rate, 6 mo. U.S.
Treasury Bill + .35%, 5.99%, due 05/01/14 83,384
1,995,963 Small Business Administration Pool #502320,
Variable Rate, Prime - 2.18%, 6.31%, due 08/25/18 2,005,943
-------------
6,206,307
-------------
TOTAL DEBT OBLIGATIONS (COST $11,027,232) 10,893,799
-------------
MUTUAL FUND -- 71.9%
1,236,707 GMO Alpha Libor Fund 31,276,310
-------------
TOTAL MUTUAL FUND (COST $30,917,146) 31,276,310
-------------
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENTS -- 5.5%
COMMERCIAL PAPER -- 4.8%
$2,100,000 Koch Industries Inc., 5.83%, due 3/01/00 2,100,000
----------
REPURCHASE AGREEMENT -- 0.7%
$ 279,522 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/29/00, due 3/1/00, with a maturity value of $279,560
and an effective yield of 4.95%, collateralized by a
U.S. Treasury Obligation with a rate of 8.125%,
maturity date of 8/15/19 and market value, including
accrued interest, of $285,112. 279,522
----------
TOTAL SHORT-TERM INVESTMENTS (COST $2,379,522) 2,379,522
----------
TOTAL INVESTMENTS -- 102.4%
(Cost $44,323,900) 44,549,631
Other Assets and Liabilities (net) -- (2.4%) (1,058,468)
----------
TOTAL NET ASSETS -- 100.0% $43,491,163
==========
</TABLE>
Variable rates - The rates shown on variable rate notes are the current interest
rates at February 29, 2000, which are subject to change based on the terms of
the security.
2 See accompanying notes to the financial statements.
<PAGE>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $44,323,900) (Note 1) $44,549,631
Cash 4,015,883
Receivable for investments sold 1,504,773
Receivable for Fund shares sold 831,564
Interest receivable 163,488
-----------
Total assets 51,065,339
-----------
LIABILITIES:
Payable for Fund shares repurchased 7,547,000
Payable to affiliate for (Note 2):
Management fee 1,779
Shareholder service fee 5,340
Accrued expenses and other liabilities 20,057
-----------
Total liabilities 7,574,176
-----------
NET ASSETS $43,491,163
===========
NET ASSETS CONSIST OF:
Paid-in capital $43,497,151
Accumulated undistributed net investment income 108,089
Accumulated net realized loss (339,808)
Net unrealized appreciation 225,731
-----------
$43,491,163
===========
SHARES OUTSTANDING 4,520,663
===========
NET ASSET VALUE PER SHARE $ 9.62
===========
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $2,543,795
----------
Total income 2,543,795
----------
EXPENSES:
Management fee (Note 2) 25,341
Audit fees 21,594
Custodian and transfer agent fees 12,606
Registration fees 3,867
Legal fees 2,089
Trustees fees (Note 2) 654
Miscellaneous 1,740
Fees waived or borne by Manager (Note 2) (42,550)
----------
25,341
Shareholder service fee (Note 2) 76,023
----------
Net expenses 101,364
----------
Net investment income 2,442,431
----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss on investments (313,585)
----------
Change in net unrealized appreciation (depreciation) on
investments 528,627
----------
Net realized and unrealized gain 215,042
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,657,473
==========
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 2,442,431 $ 1,817,518
Net realized loss (313,585) (22,156)
Change in net unrealized appreciation (depreciation) 528,627 (360,921)
----------- -----------
Net increase in net assets from operations 2,657,473 1,434,441
----------- -----------
Distributions to shareholders from:
Net investment income (2,673,480) (1,788,988)
----------- -----------
(2,673,480) (1,788,988)
----------- -----------
Fund share transactions: (Note 5)
Proceeds from sale of shares 15,635,155 77,435,093
Net asset value of shares issued to shareholders in
payment of distributions declared 2,605,023 1,459,945
Cost of shares repurchased (28,120,405) (62,529,846)
----------- -----------
Net increase (decrease) in net assets resulting from
Fund share transactions (9,880,227) 16,365,192
----------- -----------
Total increase (decrease) in net assets (9,896,234) 16,010,645
NET ASSETS:
Beginning of period 53,387,397 37,376,752
----------- -----------
End of period (including accumulated undistributed
net investment income of $108,089 and $339,138,
respectively) $43,491,163 $53,387,397
=========== ===========
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
-------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.63 $ 9.81 $ 9.78 $ 9.77 $ 9.56
------- ------- ------- ------- -------
Income from investment operations:
Net investment income(a) 0.46+ 0.57 0.55 0.47 0.57
Net realized and unrealized gain
(loss) 0.05 (0.16) 0.03 0.06 0.20
------- ------- ------- ------- -------
Total from investment operations 0.51 0.41 0.58 0.53 0.77
------- ------- ------- ------- -------
Less distributions to shareholders:
From net investment income (0.52) (0.59) (0.55) (0.52) (0.56)
------- ------- ------- ------- -------
Total distributions (0.52) (0.59) (0.55) (0.52) (0.56)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 9.62 $ 9.63 $ 9.81 $ 9.78 $ 9.77
======= ======= ======= ======= =======
TOTAL RETURN(B) 5.42% 4.29% 6.10% 5.62% 8.32%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $43,491 $53,387 $37,377 $40,937 $11,066
Net expenses to average daily net
assets 0.20% 0.20% 0.20% 0.20% 0.25%
Net investment income to average
daily net assets(a) 4.82% 5.50% 5.73% 5.88% 6.49%
Portfolio turnover rate 178% 76% 50% 287% 139%
Fees and expenses voluntarily waived
or borne by the Manager consisted
of the following per share amounts: $ 0.01 $ 0.03 $ 0.03 $ 0.03 $ 0.03
</TABLE>
+ Computed using average shares outstanding throughout the period.
(a) Net investment income for the year ended February 29, 2000 is affected by
the timing of the declaration of dividends by other Funds of the Trust in
which the Fund invests.
(b) The total returns would have been lower had certain expenses not been
waived during the periods shown.
6 See accompanying notes to the financial statements.
<PAGE>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Short-Term Income Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on June
24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares.
The Fund seeks to provide current income to the extent consistent with the
preservation of capital and liquidity through investment in a portfolio of
high-quality fixed income instruments. The Fund's benchmark is the Salomon
Smith Barney 3 Month T-Bill Index.
At February 29, 2000, 71.9% of the Fund is invested in GMO Alpha Libor
Fund, a separate fund of GMO Trust managed by GMO. Alpha Libor invests
primarily in relatively high quality, low volatility fixed income
securities.
The financial statements of the Alpha Libor Fund should be read in
conjunction with the Fund's financial statements.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of financial statements in
accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost, which approximates market value. Shares of other
Funds of the Trust are valued at their net asset value as reported on each
business day. Securities for which quotations are not readily available
are valued at fair value as determined in good faith by the Trustees or
other persons acting at their direction.
Some fixed income securities and options thereon are valued at the closing
bid for such securities as supplied by a primary pricing source chosen by
the Manager. The Manager evaluates such primary
7
<PAGE>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
pricing sources on an ongoing basis, and may change a pricing source
should it deem it appropriate. The Manager is informed of erratic or
unusual movements (including unusual inactivity) in the prices supplied
for a security and at its discretion may override a price supplied by a
source (by taking a price supplied by another source).
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from
yield data relating to investments or securities with similar
characteristics.
Certain securities held by the Fund were valued on the basis of a price
provided by a principal market maker. The prices provided by the principal
market makers may differ from the value that would be realized if the
securities were sold.
At February 29, 2000, the total value of these securities represented 10%
of net assets, substantially all of which consist of U.S. Government
backed securities.
INDEXED SECURITIES
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to
increase or decrease its exposure to different underlying instruments and
to gain exposure to markets that may be difficult to invest in through
conventional securities. Indexed securities may be more volatile than
their underlying instruments, but any loss is limited to the amount of the
original investment.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, realization of collateral by the Fund may be delayed or
limited.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities
8
<PAGE>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
on loan. As with other extensions of credit, the Fund may bear the risk of
delay in recovery or even loss of rights in the collateral should the
borrower of the securities fail financially. The Fund receives
compensation for lending its securities. At February 29, 2000, the Fund
had no securities on loan.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. Distributions to shareholders are recorded by the Fund on
the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States.
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis and is adjusted for the accretion of
discounts and amortization of premiums. Dividend income is recognized on
the ex-dividend date. In determining the net gain or loss on securities
sold, the cost of securities is determined on the identified cost basis.
Interest income on U.S. Treasury inflation indexed securities is accrued
daily based upon the inflation adjusted principal. Additionally, any
increase in the principal or face amount of the securities is recorded as
interest income.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
9
<PAGE>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .05% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of the Fund at the annual rate of .15%.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding brokerage commissions, certain other transaction costs
(including transfer taxes), shareholder service fees and extraordinary
expenses) exceed the management fees.
Prior to March 1, 1999, GMO earned a management fee at the annual rate of
.25% of average daily net assets. GMO had agreed to waive a portion of its
fee and bear other expenses to the extent that the Fund's annual expenses
(including the management fee but excluding brokerage commissions, certain
other transaction costs (including transfer taxes), shareholder service
fees and extraordinary expenses) exceeded .05% of average daily net
assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000 was $654. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
3. PURCHASES AND SALES OF SECURITIES
For the year ended February 29, 2000, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Sales
----------- -----------
<S> <C> <C>
U.S. Government securities $ -- $ 520,504
Investments (non-U.S. Government securities) 85,762,273 87,346,396
</TABLE>
During the year ended February 29, 2000, the Fund exchanged securities
with a market value of $30,668,721 for shares of GMO Alpha Libor Fund with
a value equal to that market value in taxable transactions. Such amounts
are included in purchases and sales above.
10
<PAGE>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
At February 29, 2000 the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
$44,323,900 $365,776 $(140,045) $225,731
</TABLE>
4. PRINCIPAL SHAREHOLDERS
At February 29, 2000, 75.1% of the outstanding shares of the Fund were
held by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares. Investment activities of these shareholders could have
a material effect.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
----------------- -----------------
<S> <C> <C>
Shares sold 1,627,899 8,045,249
Shares issued to shareholders in reinvestment of
distributions 273,049 150,962
Shares repurchased (2,924,097) (6,463,182)
----------- -----------
Net increase (decrease) (1,023,149) 1,733,029
Fund shares:
Beginning of period 5,543,812 3,810,783
----------- -----------
End of period 4,520,663 5,543,812
=========== ===========
</TABLE>
11
<PAGE>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
The Fund has elected to defer to March 1, 2000 post October Capital losses
of $272,374.
At February 29, 2000 the Fund had capital loss carryforwards available to
offset future capital gains, if any, of the following amounts:
<TABLE>
<CAPTION>
Year of Expiration Amount
------------------ -------
<S> <C>
2002 $ 4,067
2007 $22,157
2008 $41,210
</TABLE>
12
<PAGE>
GMO SHORT-TERM INCOME FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Mr. Thomas F. Cooper and Mr. William L. Nemerever are primarily responsible for
the day-to-day management of the Fund's portfolio. Each of these individuals has
been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The GMO Short-Term Income Fund returned 5.4% for the fiscal year ended
February 29, 2000, as compared with 4.8% for the Salomon Smith Barney 3-Month
Treasury Bill Index. Consistent with the Fund's investment objectives and
policies, the Fund was substantially invested in high-quality, fixed income
instruments throughout the period.
The Fund outperformed the benchmark during the fiscal year by 59 basis points.
While spreads relative to U.S. Treasuries declined during the period, they
remained high relative to historical levels. The Fund benefited from capital
gains and from the higher spreads.
At the fiscal year end approximately 71% of the Fund was invested in
highly-rated, floating rate, asset-backed securities (including holdings of GMO
Alpha LIBOR Fund), 17% in U.S. Government-backed bonds, and 12% in U.S. Treasury
notes and cash equivalents. The asset-backed issues included issues backed by
auto, truck, credit card and health care receivables. The additional yield
provided by these holdings plus the capital gains due to its
longer-than-benchmark maturity accounted for the Fund's performance.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO SHORT-TERM INCOME FUND CLASS III SHARES AND THE
SALOMON SMITH BARNEY 3 MONTH T-BILL INDEX
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
Average Annual Total Returns
Inception 4/18/90
1yr 5yr 10yr (ITD)
<S> <C> <C>
5.42 5.94 5.98
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
Date GMO Short Term Income Fund Salomon Smith Barney 3 Mo. T-Bill
<S> <C> <C>
4/18/90 10000 10000
6/30/90 10164 10160
9/30/90 10366 10357
12/31/90 10570 10545
3/31/91 10753 10712
6/30/91 10901 10866
9/30/91 11052 11018
12/31/91 11439 11152
3/31/92 11412 11264
6/30/92 11719 11372
9/30/92 12098 11467
12/31/92 12101 11556
3/31/93 12422 11643
6/30/93 12546 11730
9/30/93 12685 11821
12/31/93 12785 11912
3/31/94 12850 12006
6/30/94 12877 12123
9/30/94 12984 12258
12/31/94 12990 12418
3/31/95 13379 12592
6/30/95 13733 12775
9/30/95 13978 12955
12/31/95 14285 13132
3/31/96 14417 13301
6/30/96 14567 13470
9/30/96 14812 13645
12/31/96 15056 13822
3/31/97 15243 13997
6/30/97 15495 14178
9/30/97 15748 14361
12/31/97 15976 14548
3/31/98 16206 14735
6/30/98 16403 14922
9/30/98 16667 15107
12/31/98 16692 15280
3/31/99 16902 15448
6/30/99 17110 15622
9/30/99 17324 15797
12/31/99 17542 15994
2/29/00 17745 16133
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The total returns would have been lower had certain expenses
not been reimbursed during the periods shown and do not include the effect of
taxes. Each performance figure assumes purchase at the beginning and
redemption at the end of the stated period. The Fund operated as a money
market fund from April 18, 1990 to June 30, 1991. Subsequently, the Fund
became a short-term income fund. Past performance is not indicative of future
performance. Information is unaudited.
<PAGE>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Inflation Indexed Bond Fund at
February 29, 2000, the results of its operations, the changes in its net assets
and the financial highlights for each of the periods indicated therein, in
conformity with accounting principles generally accepted in the United States.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at February 29, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 10, 2000
<PAGE>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
DEBT OBLIGATIONS -- 102.8%
NEW ZEALAND -- 0.9%
NZD 1,000,000 New Zealand Index Linked Bond Series 216, 4.50%,
due 02/15/16 469,430
----------
UNITED STATES -- 101.9%
ASSET BACKED SECURITIES -- 6.2%
USD 400,279 Constellation Series 99-1A, 144A, 5.73%, due
04/18/02 400,029
USD 3,000,000 Oasis CBO Ltd, 144A,
Variable Rate, 6 mo. LIBOR + .38%, 6.42%,
due 05/30/11 2,835,000
----------
3,235,029
----------
CORPORATE DEBT -- 2.0%
USD 1,200,000 JP Morgan and Co. Series A,
Variable Rate, CPI + 4.00%, 6.43%, due 02/15/12 1,040,400
----------
U.S. GOVERNMENT -- 53.4%
USD 15,970,656 U.S. Treasury Inflation Indexed Bond, 3.88%, due
04/15/29 15,202,068
USD 1,040,560 U.S. Treasury Inflation Indexed Bond, 3.63%, due
04/15/28 948,861
USD 11,934,939 U.S. Treasury Inflation Indexed Note, 3.88%, due
01/15/09(a) 11,554,512
----------
27,705,441
----------
U.S. GOVERNMENT AGENCY -- 40.3%
USD 8,625,000 Federal Home Loan Bank,
Variable Rate, CPI + 3.15%, 5.59%, due 02/15/02 8,392,900
USD 13,809,380 Tennessee Valley Authority (Indexed Principal),
3.38%, due 01/15/07 12,549,810
----------
20,942,710
----------
TOTAL UNITED STATES 52,923,580
----------
TOTAL DEBT OBLIGATIONS (COST $54,526,620) 53,393,010
----------
</TABLE>
See accompanying notes to the financial statements.
1
<PAGE>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS -- 0.1%
REPURCHASE AGREEMENT -- 0.1%
USD 49,203 Salomon Smith Barney Inc. Repurchase Agreement,
dated 2/29/00, due 3/1/00, with a maturity value
of $49,210 and an effective yield of 4.95%,
collateralized by a U.S. Treasury Obligation with
a rate of 8.125%, maturity date of 8/15/19 and
market value, including accrued interest of
$50,188. 49,203
----------
TOTAL SHORT-TERM INVESTMENTS (COST $49,203) 49,203
----------
TOTAL INVESTMENTS -- 102.9%
(Cost $54,575,823) 53,442,213
Other Assets and Liabilities (net) -- (2.9%) (1,491,372)
----------
TOTAL NET ASSETS -- 100.0% $51,950,841
==========
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
- -------------------------------------------------------------------------------
144A - Securities exempt from registration under rule 144A
of the Securities Act of 1933. These securities may be
resold in transactions exempt from registration, normally
to qualified institutional investors.
Variable rates - The rates shown on variable rate notes are
the current interest rates at February 29, 2000, which are
subject to change based on the terms of the security.
CURRENCY ABBREVIATIONS:
<TABLE>
<S> <C>
NZD - New Zealand Dollars
USD - United States Dollar
</TABLE>
(a) All or a portion of this security has been segregated to cover collateral
requirements on reverse repurchase agreements (Note 6).
2 See accompanying notes to the financial statements.
<PAGE>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $54,575,823) (Note 1) $53,442,213
Interest receivable 438,143
Net receivable for open forward foreign currency
contracts (Notes 1 and 6) 22,640
Receivable for expenses waived or borne by Manager (Note
2) 7,125
-----------
Total assets 53,910,121
-----------
LIABILITIES:
Payable for Fund shares repurchased 68,000
Payable to affiliate for (Note 2):
Management fee 4,083
Shareholder service fee 6,024
Payable for reverse repurchase agreements (Notes 1 and 6) 1,849,755
Accrued expenses and other liabilities 31,418
-----------
Total liabilities 1,959,280
-----------
NET ASSETS $51,950,841
===========
NET ASSETS CONSIST OF:
Paid-in capital $53,451,686
Accumulated undistributed net investment income 407,403
Accumulated net realized loss (796,981)
Net unrealized depreciation (1,111,267)
-----------
$51,950,841
===========
NET ASSETS ATTRIBUTABLE TO:
Class III shares $51,950,841
===========
SHARES OUTSTANDING:
Class III 5,344,578
===========
NET ASSET VALUE PER SHARE:
Class III $ 9.72
===========
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $3,004,277
----------
Total income 3,004,277
----------
EXPENSES:
Management fee (Note 2) 41,797
Interest expense (Notes 1 and 6) 188,144
Audit fees 30,716
Custodian fees 17,531
Registration fees 3,568
Legal fees 1,535
Trustees fees (Note 2) 470
Miscellaneous 1,026
Fees waived or borne by Manager (Note 2) (54,846)
----------
229,941
----------
Shareholder service fee (Note 2)
Class III 62,695
----------
Net expenses 292,636
----------
Net investment income 2,711,641
----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (537,774)
Foreign currency, forward contracts and foreign
currency related transactions 27,300
----------
Net realized loss (510,474)
----------
Change in net unrealized appreciation (depreciation) on:
Investments (876,039)
Foreign currency, forward contracts and foreign
currency related transactions 8,650
----------
Net unrealized loss (867,389)
----------
Net realized and unrealized loss (1,377,863)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,333,778
==========
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 2,711,641 $ 1,498,147
Net realized loss (510,474) (208,075)
Change in net unrealized appreciation (depreciation) (867,389) (23,506)
----------- -----------
Net increase in net assets from operations 1,333,778 1,266,566
----------- -----------
Distributions to shareholders from:
Net investment income
Class III (2,424,991) (1,437,398)
----------- -----------
Total distributions from net investment income (2,424,991) (1,437,398)
----------- -----------
Net share transactions: (Note 5)
Class III 27,894,644 (341,835)
----------- -----------
Increase (decrease) in net assets resulting from net
share transactions 27,894,644 (341,835)
----------- -----------
Total increase (decrease) in net assets 26,803,431 (512,667)
NET ASSETS:
Beginning of period 25,147,410 25,660,077
----------- -----------
End of period (including accumulated undistributed
net investment income of $407,403 and $93,454,
respectively) $51,950,841 $25,147,410
=========== ===========
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
---------------------------
2000 1999 1998*
------- ------- ---------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.88 $ 10.04 $ 10.00
------- ------- -------
Income from investment operations:
Net investment income 0.65+ 0.61 0.42+
Net realized and unrealized loss (0.30) (0.18) (0.04)
------- ------- -------
Total from investment operations 0.35 0.43 0.38
------- ------- -------
Less distributions to shareholders:
From net investment income (0.51) (0.59) (0.30)
In excess of net investment income -- -- (0.02)
From net realized gains -- -- --(a)
From tax return of capital -- -- (0.02)
------- ------- -------
Total distributions (0.51) (0.59) (0.34)
------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 9.72 $ 9.88 $ 10.04
======= ======= =======
TOTAL RETURN(b) 3.57% 4.28% 3.77%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $51,951 $25,147 $25,660
Net operating expenses to average daily net
assets 0.25% 0.25% 0.25%**
Interest expense to average daily net assets 0.45% -- --
Total net expenses to average daily net assets 0.70%(c) 0.25% 0.25%**
Net investment income to average daily net
assets 6.49% 4.93% 4.48%**
Portfolio turnover rate 112% 94% 9%
Fees and expenses voluntarily waived or borne
by the Manager
consisted of the following per share amounts: $ 0.01 $ 0.04 $ 0.04
</TABLE>
* Period from March 31, 1997 (commencement of operations) to February 28,
1998.
** Annualized.
+ Computed using average shares outstanding throughout the period.
++ Not annualized.
(a) The per share distributions from net realized gains was $0.002.
(b) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(c) Interest expense incurred as a result of entering into reverse repurchase
agreements is included in the Fund's net expenses. Income earned on
investing proceeds from reverse repurchase agreements is included in
interest income.
6 See accompanying notes to the financial statements.
<PAGE>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Inflation Indexed Bond Fund (the "Fund"), is a series of GMO Trust
(the "Trust"). The Fund is registered under the Investment Company Act of
1940, as amended, as an open-end, non-diversified management investment
company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo &
Co. LLC (the "Manager" or "GMO"). The Trust was established as a
Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series of shares
into classes.
The Fund seeks high total return through investment in government bonds
that are indexed or otherwise "linked" to general measures of inflation in
the country of issue ("inflation indexed bonds"). The Fund's benchmark is
the Lehman Brothers Treasury Inflation Notes Index.
Inflation indexed securities issued by the U.S. Treasury are fixed income
securities whose principal value is periodically adjusted according to the
rate of U.S. inflation. Inflation indexed bonds issued by a foreign
government are generally adjusted to reflect a comparable local inflation
index.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of the financial statements
in accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Securities for
which quotations are not readily available are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction.
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from
yield data relating to investments or securities with similar
characteristics.
7
<PAGE>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
Certain investments in securities held by the Fund were valued on the
basis of a price provided by a principal market maker. The prices provided
by the principal market makers may differ from the value that would be
realized if the securities were sold and the differences could be material
to the financial statements. At February 29, 2000, the total value of
these securities represented 30% of net assets, substantially all of which
consist of U.S. Government backed securities and highly rated
collateralized debt obligations.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at current exchange rates when accrued
or incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign currency contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or
all of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency
contracts are marked to market daily and the change in value is recorded
by the Fund as an unrealized gain or loss. Realized gains or losses equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed are recorded upon delivery
or receipt of the currency or, if a forward currency contract is offset by
entering into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market
risk in excess of the unrealized gain or loss reflected in the Fund's
Statement of Assets and Liabilities. In addition, the Fund could be
exposed to risk if the counterparties are unable to meet the terms of the
contracts or if the value of the currency changes unfavorably to the U.S.
dollar. The U.S. dollar value of the currency the Fund has committed to
buy or sell is shown under Note 6 and represents the currency exposure the
Fund has acquired or hedged through a currency contract as of February 29,
2000.
8
<PAGE>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, realization of collateral by the Fund may be delayed or
limited.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements with certain banks
and broker/dealers whereby the Fund sells portfolio assets concurrent with
an agreement by the Fund to repurchase the same assets at a later date at
a fixed price. In connection with these agreements, the Fund establishes
segregated accounts with its custodian in which the Fund maintains cash,
U.S. Government securities or other liquid high grade debt obligations in
the name of the counterparty equal in value to its obligations in respect
of reverse repurchase agreements. Reverse repurchase agreements involve
the risk that the market value of the securities the Fund was sold may
decline below the contracted repurchase price under the agreement. At
February 29, 2000, the Fund had entered into a reverse repurchase
agreement having a market value of $1,849,755, collateralized by a
security with a market value of $1,883,693. See Note 6 for a summary of
open reverse repurchase agreements as of February 29, 2000.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of delay in
recovery or even loss of rights in the collateral should the borrower of
the securities fail financially. The Fund receives compensation for
lending its securities. At February 29, 2000, the Fund had no securities
on loan.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary.
9
<PAGE>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to section 988 gains.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable income and capital gains under U.S.
federal tax rules versus accounting principles generally accepted in the
United States. The calculation of net investment income per share in the
financial highlights excludes these adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
<S> <C> <C>
$27,299 $(27,299) $ --
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis and is adjusted for the accretion of
discounts. In determining the net gain or loss on securities sold, the
cost of securities is determined on the identified cost basis. Interest
income on U.S. Treasury inflation indexed securities is accrued daily
based upon the inflation adjusted principal. Additionally, any increase in
the principal or face amount of the securities is recorded as interest
income.
10
<PAGE>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases and fee on redemptions of Fund shares is
.10% of the amount invested or redeemed. These fees will be reduced by 50%
with respect to any portion of a purchase or redemption that is offset by
a corresponding redemption or purchase, respectively, occurring on the
same day. In addition, the purchase premium or redemption fee for the Fund
will be reduced by 50% if the purchaser makes an in-kind purchase of Fund
shares or if the purchase or redemption is part of a transfer from or to
another Fund where the Manager is able to transfer securities among the
Funds to effect the transaction. All purchase premiums and redemption fees
are paid to and recorded by the Fund as paid-in capital. For the year
ended February 29, 2000, the Fund received $29,494 in purchase premiums
and $3,128 in redemption fees. There is no premium for reinvested
distributions or in-kind transactions.
Effective March 15, 2000, the Fund will no longer charge a premium on cash
purchases or a fee on redemptions of Fund shares.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .10% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding brokerage commissions, certain other transaction costs
(including transfer taxes), shareholder service fees and extraordinary
expenses) exceed the management fee.
Prior to March 1, 1999, GMO earned a management fee at the annual rate of
.25% of average daily net assets. GMO had agreed to waive a portion of its
fee and bear other expenses to the extent that the Fund's annual expenses
(including the management fee but excluding brokerage commissions, certain
other transaction costs (including transfer taxes), shareholder service
fees and extraordinary expenses) exceeded .10% of average daily net
assets.
11
<PAGE>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000 was $470. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
3. PURCHASES AND SALES OF SECURITIES
For the year ended February 29, 2000 cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Sales
----------- -----------
<S> <C> <C>
U.S. Government securities $59,189,417 $46,284,638
Investments (non-U.S. Government securities) 21,525,521 4,000,000
</TABLE>
At February 29, 2000 the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
$54,635,153 $309,938 $(1,502,878) $(1,192,940)
</TABLE>
4. PRINCIPAL SHAREHOLDER
At February 29, 2000, 10.8% of the outstanding shares of the Fund were
held by one shareholder.
12
<PAGE>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares, including the purchase premiums and redemption fees received by
the Fund, were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
----------------------- -------------------------
Shares Amount Shares Amount
Class III: ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Shares sold 2,953,506 $29,494,235 1,673,497 $ 16,929,247
Shares issued to shareholders
in reinvestment of distributions 168,614 1,618,872 99,325 980,335
Shares repurchased (321,584) (3,218,463) (1,785,715) (18,251,417)
---------- ----------- ----------- ------------
Net increase (decrease) 2,800,536 $27,894,644 (12,893) $ (341,835)
========== =========== =========== ============
</TABLE>
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 29, 2000 is as
follows:
FORWARD CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Settlement Units Net Unrealized
Date Deliver of Currency Value Appreciation
---------- ------- ----------- -------- --------------
<S> <C> <C> <C> <C>
Sales
3/30/00 NZD 1,000,000 $485,740 $22,640
=======
</TABLE>
13
<PAGE>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
REVERSE REPURCHASE AGREEMENT
<TABLE>
<CAPTION>
Face Value Description Market Value
---------- ------------------------------------------------------- ------------
<C> <S> <C>
$1,849,755 J.P. Morgan, 5.90%, dated 2/29/00, to be repurchased on
demand at face value plus accrued interest. $ 1,849,755
===========
</TABLE>
<TABLE>
<S> <C>
Average balance outstanding $3,995,818
Average interest rate 5.16%
Maximum balance outstanding $9,476,874
Average shares outstanding 4,348,182
Average balance per share outstanding $ .92
</TABLE>
Average balance outstanding was calculated based on daily balances
outstanding during the period that the Fund had entered into reverse
repurchase agreements.
14
<PAGE>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
The Fund has elected to defer to March 1, 2000 post October capital losses
of $29,052.
At February 29, 2000, the Fund had capital loss carryforwards available to
offset future capital gains, if any, of the following amounts:
<TABLE>
<CAPTION>
Year of Expiration Amount
------------------ ------
<S> <C>
2007 $108,055
2008 $600,546
</TABLE>
15
<PAGE>
GMO INFLATION INDEXED BOND FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Mr. Thomas F. Cooper and Mr. William L. Nemerever are primarily responsible for
the day-to-day management of the Fund's portfolio. Each of these individuals has
been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO Inflation Indexed Bond Fund returned 3.6% during
the fiscal year that ended February 29, 2000, compared to 3.3% for the Lehman
Brothers Inflation Notes Index. Consistent with the Fund's investment objectives
and policies, the Fund was substantially invested throughout the period in U.S.
government and foreign bonds that are indexed or otherwise linked to general
measures of inflation in the country of issue.
The Fund added 0.3% in value to its benchmark during the fiscal year. Real (or
inflation-adjusted) yields on U.S. inflation-indexed bonds in the United States
currently are 4.3%. In addition to inflation-indexed bonds issued by the U.S.
Treasury Department, the Fund holds inflation-indexed bonds issued by various
U.S. Government agencies, as well as one bond issued by a U.S. corporation. The
Fund also is permitted to own securities of foreign countries that are not in
the benchmark. Currently, the only foreign holding is an inflation-indexed bond
issued by the Government of New Zealand. In addition, the Fund maintains an
interest rate exposure quite similar to that of its benchmark.
OUTLOOK
The Fund will continue to focus on attractive inflation-indexed issues of the
U.S. government, but will also attempt to broaden its foreign exposure. The Fund
may also enter into interest rate swaps as a means of outperforming its
benchmark.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO INFLATION INDEXED BOND FUND CLASS III SHARES AND THE
LEHMAN BROTHERS TREASURY INFLATION NOTES INDEX - BLENDED
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
Average Annual Total Returns
Inception 3/31/97
1yr 5yr 10yr (ITD)
<S> <C> <C>
3.36 N/A 3.91
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
Date GMO Inflation Indexed Bond Fund-III Lehman Brothers Inflation Notes-Blended*
<S> <C> <C>
3/31/97 9990 10000
6/30/97 10080 10099
9/30/97 10240 10226
12/31/97 10326 10332
3/31/98 10357 10368
6/30/98 10491 10507
9/30/98 10739 10793
12/31/98 10756 10741
3/31/99 10843 10785
6/30/99 10997 10938
9/30/99 11026 10994
12/31/99 11046 10994
2/29/00 11185 11146
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The total returns would have been lower had certain expenses
not been reimbursed during the periods shown and do not include the effect of
taxes. Each performance figure assumes purchase at the beginning and
redemption at the end of the stated period and reflects a transaction fee of
10 bp on the purchase and 10 bp on the redemption. Transaction fees are
retained by the Fund to cover trading costs. Past performance is not
indicative of future performance. Information is unaudited.
* Lehman Inflation Notes represent the Merrill Lynch Inflation Notes
performance through to 9/30/97 and the Lehman Inflation Notes performance
thereafter.
<PAGE>
GMO ALPHA LIBOR FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO ALPHA LIBOR FUND (A SERIES OF GMO TRUST)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Alpha LIBOR Fund at February
29, 2000, the results of its operations, the changes in its net assets and the
financial highlights for the period from December 31, 1999 (commencement of
operations) through February 29, 2000, in conformity with accounting principles
generally accepted in the United States. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at February 29, 2000 by
correspondence with the custodian and brokers, provides a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 10, 2000
<PAGE>
GMO ALPHA LIBOR FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE ($) DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
DEBT OBLIGATIONS -- 103.5%
ASSET BACKED SECURITIES -- 93.9%
18,000,000 Aircraft Finance Trust Series 99-1A Class A1,
Variable Rate, 1 mo. LIBOR + .48%, 6.36%, due
05/15/24 17,966,250
7,000,000 American Express Credit Account Master Trust Series
00-2 Class A,
Variable Rate, 1 mo. LIBOR + .17%, 6.23%, due
09/17/07 7,000,000
6,000,000 American Express Credit Account Master Trust Series
99-5 Class A,
Variable Rate, 1 mo. LIBOR + .24%, 6.13%, due
02/15/07 6,018,750
10,000,000 Anfield Road I Ltd. Class A,
Variable Rate, 6 mo. LIBOR + .25%, 5.83%, due
11/06/06 9,842,187
13,000,000 Augusta Funding Ltd. X, 144A,
Variable Rate, 3mo. LIBOR + .25%, 6.43%, due 06/30/17 12,599,844
5,000,000 BEA CBO Series 98-1A Class A2A, 144A, 6.72%, due
06/15/10 4,517,969
5,000,000 Big Flower Receivables Master Trust Series 96-2 Class
A,
Variable Rate, LIBOR +.25%, 6.13%, due 04/25/03 4,925,000
6,590,000 Brazos Student Loan Finance Corp Series 96-B Class A4,
Variable Rate, 3 mo. U.S. Treasury Bill + .50%,
6.21%, due 12/01/02 6,582,792
4,000,000 Chase Credit Card Master Trust Series 98-6 Class A,
Variable Rate, 1 mo. LIBOR + .26%, 6.15%, due
09/15/04 4,010,000
9,000,000 Chevy Chase Master Credit Card Trust Series 96-A Class
A,
Variable Rate, 1 mo. LIBOR + .15%, 6.04%, due
02/15/05 8,997,187
23,800,000 Chevy Chase Master Credit Card Trust Series 98-A,
Variable Rate, 1 mo. LIBOR + .15%, 6.04%, due
10/16/06 23,750,727
10,000,000 Chyps CBO Series 97-1A Class A2A, 144A, 6.72%, due
01/15/10 9,190,625
4,000,000 Circuit City Credit Card Master Trust Series 96-1 Class
A,
Variable Rate, 1 mo. LIBOR + .17%, 6.06%, due
10/15/06 3,989,375
1,601,115 Constellation Series 99-1A, 144A, 5.73%, due 04/18/02 1,600,115
10,000,000 Discover Card Master Trust I Series 00-1 Class A,
Variable Rate, 1 mo. LIBOR + .17%, 6.06%, due
08/16/07 9,997,656
22,045,000 Discover Card Master Trust I Series 94-2 Class A,
Variable Rate, 1 mo. LIBOR + .35%, 6.24%, due
10/16/04(a) 22,118,196
10,000,000 Discover Card Master Trust I Series 97-3 Class A,
Variable Rate, 1 mo. LIBOR + .13%, 6.01%, due
04/16/07 9,987,500
6,000,000 EMAC Series 98-1 Class A2, 144A, 6.38%, due 01/15/25 5,604,375
5,000,000 First Deposit Master Trust Series 96-1 Class A,
Variable Rate, 1 mo. LIBOR +.17%, 6.06%, due 08/15/07 4,992,383
5,000,000 First USA Credit Card Master Trust Series 98-5 Class A,
Variable Rate, 1 mo. LIBOR + .10%, 5.98%, due
04/18/06 4,991,992
20,000,000 Fleet Credit Card Master Trust II Series 99-A Class A,
Variable Rate, 1 mo. LIBOR + .11%, 6.00%, due
09/15/04 19,993,750
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO ALPHA LIBOR FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE ($) DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
ASSET BACKED SECURITIES -- CONTINUED
10,238,462 Great Point CBO Ltd. Series 98-1A Class A1, 144A,
Variable Rate, 6 mo. LIBOR + .30%, 6.39%, due
10/15/10 10,171,272
1,950,000 Keycorp Student Loan Trust Series 94-B Certificates,
Variable Rate, 1 mo. LIBOR + .73%, 6.61%, due
11/25/21 1,947,075
5,000,000 MBNA Master Credit Card Trust Series 95-G Class A,
Variable Rate, 1 mo. LIBOR + .21%, 6.10%, due
10/15/02 5,007,422
6,000,000 MBNA Master Credit Card Trust Series 95-J Class A,
Variable Rate, 1 mo. LIBOR + .23%, 6.12%, due
04/15/05 6,015,234
7,000,000 MBNA Master Credit Card Trust Series 96-A Class A,
Variable Rate, 1 mo. LIBOR + .21%, 6.10%, due
07/15/05 7,014,492
8,450,000 MBNA Master Credit Card Trust Series 97-J Class A,
Variable Rate, 1 mo. LIBOR + .12%, 6.01%, due
02/15/07 8,439,768
6,000,000 MBNA Master Credit Card Trust Series 98-I Class A,
Variable Rate, 1 mo. LIBOR + .26%, 6.15%, due
10/15/03 6,014,062
7,457,807 Northstar CBO Ltd. Series 97-2 Class A2, 144A,
Variable Rate, Step Up, 6.62%, due 07/15/09 6,920,612
8,000,000 NPF VI, Inc. Series 99-1 Class A, 144A, 6.25%, due
02/01/03 7,784,000
2,500,000 NPF XII, Inc. Series 99-2 Class A, 144A, 7.05%, due
06/01/03 2,468,750
10,000,000 Pacific Life CBO Series 98-1A Class A2A, 144A,
Variable Rate, Step Up, 6.56%, due 02/15/10 9,151,563
10,000,000 Rhyno CBO Delaware Corp Series 97-1 Class A-2, 144A,
Variable Rate, Step Up, 6.33%, due 09/15/09 9,843,750
5,000,000 SHYPPCO Finance Company Series 98-1 Class A-2B, 6.64%,
due 06/15/10 4,562,500
2,620,000 SMS Student Loan Trust Series 94-B Certificates,
Variable Rate, 1 mo. LIBOR + .75%, 6.56%, due
10/25/23 2,624,716
2,933,200 SMS Student Loan Trust Series 94-B Class A2,
Variable Rate, 1 mo. LIBOR + .30%, 6.18%, due
04/25/16 2,936,720
5,000,000 Starvest Emerging Markets CBO-I Series 1A, Class A,
Variable Rate, 6 mo. LIBOR + .19%, 144A, 6.41%, due
07/30/11 4,869,531
12,463,000 Team Fleet Financing Corp Series 98-3A Class A, 144A,
6.13%, due 10/25/04 11,948,901
11,152,308 The Money Store Business Loan Backed Trust Series 99-1
Class AN,
Variable Rate, 1 mo. LIBOR +.50%, 6.39%, due 09/15/17 11,173,219
------------
317,570,260
------------
CORPORATE DEBT -- 4.0%
2,000,000 Banco Santander, Series MBIA, 6.50%, due 11/01/05 1,867,000
3,000,000 Eagle Pier Corp BV,
Variable Rate, 6 mo. LIBOR + .25%, 6.21%, due
10/03/01 3,002,400
7,000,000 Pemex Finance Ltd. Series 1A1 Class A2, 144A, 6.30%,
due 05/15/10 6,244,000
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO ALPHA LIBOR FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE ($) DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE DEBT -- CONTINUED
2,500,000 Westralia Airports Corp, 144A, 6.48%, due 04/01/10 2,266,250
------------
13,379,650
------------
STRUCTURED NOTES -- 1.1%
3,933,333 Polaris Funding Company,
Variable Rate, 1 mo. LIBOR + .45%, 6.34%, due
01/07/05 3,852,823
------------
U.S. GOVERNMENT AGENCY -- 4.5%
1,400,000 Agency for International Development Floater (Support
of Belize),
Variable Rate, 6 mo. U.S. Treasury Bill + .50%,
6.52%, due 01/01/14 1,365,000
4,334,000 Agency for International Development Floater
(Support of C.A.B.E.I.),
Variable Rate, 6 mo. U.S. Treasury Bill + .40%,
6.42%, due 10/01/12 4,203,980
4,000,000 Agency for International Development Floater (Support
of India),
Variable Rate, 3 mo. LIBOR + .10%, 6.15%, due
02/01/27 3,920,000
1,000,000 Federal Farm Credit Bank,
Variable Rate, CPI + 3.00%, 5.42%, due 02/14/02 970,440
2,000,000 Federal Home Loan Bank,
Variable Rate, CPI + 3.15%, 5.59%, due 02/15/02(b) 1,946,180
984,000 Ship Co 668, Series A, 8.50%, due 05/11/02 984,000
1,745,119 Small Business Administration Series 95-C, 6.88%, due
09/01/05 1,683,168
------------
15,072,768
------------
TOTAL DEBT OBLIGATIONS (COST $349,790,165) 349,875,501
------------
<CAPTION>
PRINCIPAL
AMOUNT
- -------------
<C> <S> <C>
CALL OPTIONS PURCHASED -- 0.0%
OPTIONS ON FUTURES -- 0.0%
1,662,500 Eurodollar, Expires 3/13/00, Strike 93.75 91,437
------------
TOTAL CALL OPTIONS PURCHASED (COST $64,999) 91,437
------------
</TABLE>
See accompanying notes to the financial statements.
3
<PAGE>
GMO ALPHA LIBOR FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE ($) DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENTS -- 3.9%
COMMERCIAL PAPER -- 3.8%
13,000,000 Koch Industries Inc., 5.83%, due 3/01/00 13,000,000
------------
REPURCHASE AGREEMENT -- 0.1%
206,979 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/29/00, due 3/1/00, with a maturity value of $207,007
and an effective yield of 4.95%, collateralized by a
U.S. Treasury Obligation with a rate of 8.125%,
maturity date of 8/15/19 and market value, including
accrued interest, of $211,119. 206,979
------------
TOTAL SHORT-TERM INVESTMENTS (COST $13,206,979) 13,206,979
------------
TOTAL INVESTMENTS -- 107.4%
(Cost $363,062,143) 363,173,917
Other Assets and Liabilities (net) -- (7.4%) (25,072,950)
------------
TOTAL NET ASSETS -- 100.0% $338,100,967
============
</TABLE>
NOTES TO THE SCHEDULE OF INVESTMENTS:
- -------------------------------------------------------------------------------
144A - Securities exempt from registration under rule 144A
of the Securities Act of 1933. These securities may be
resold in transactions exempt from registration, normally
to qualified institutional investors.
CPI - Consumer Price Index
MBIA - Municipal Bond Insurance Association
Variable and Step up rates - The rates shown on variable and
step up rate notes are the current interest rates at
February 29, 2000, which are subject to change based on
the terms of the security, including varying reset dates.
(a) All or a portion of this security has been segregated to cover collateral
requirements on reverse repurchase agreements (Note 6).
(b) All or a portion of this security has been segregated to cover margin
requirements on open financial futures contracts (Note 6).
4 See accompanying notes to the financial statements.
<PAGE>
GMO ALPHA LIBOR FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $363,062,143) (Note 1) $363,173,917
Interest receivable 2,171,965
Receivable for open swap contracts (Notes 1 and 6) 276,837
Receivable for expenses waived or borne by Manager (Note
2) 28,995
------------
Total assets 365,651,714
------------
LIABILITIES:
Payable for Fund shares repurchased 5,500,000
Interest payable for open swap contracts (Notes 1 and 6) 17,611
Payable for variation margin on open futures contracts
(Notes 1 and 6) 970
Payable for reverse repurchase agreements (Notes 1 and 6) 21,769,437
Accrued expenses 262,729
------------
Total liabilities 27,550,747
------------
NET ASSETS $338,100,967
============
NET ASSETS CONSIST OF:
Paid-in capital $334,243,683
Accumulated undistributed net investment income 3,505,641
Accumulated net realized gain 194,512
Net unrealized appreciation 157,131
------------
$338,100,967
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $338,100,967
============
SHARES OUTSTANDING:
Class III 13,367,318
============
NET ASSET VALUE PER SHARE:
Class III $ 25.29
============
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO ALPHA LIBOR FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- PERIOD FROM DECEMBER 31, 1999 (COMMENCEMENT OF
OPERATIONS) THROUGH FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $3,714,757
----------
Total income 3,714,757
----------
EXPENSES:
Interest expense (Notes 1 and 6) 209,116
Audit fees 42,978
Custodian and transfer agent fees 9,975
Registration fees 1,026
Legal fees 741
Trustees fees (Note 2) 709
Miscellaneous 1,482
Fees waived or borne by Manager (Note 2) (56,911)
----------
Net expenses 209,116
----------
Net investment income 3,505,641
----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain on:
Investments 54,621
Closed futures contracts 139,891
----------
Net realized gain 194,512
----------
Change in net unrealized appreciation (depreciation) on:
Investments 111,774
Open futures contracts (231,480)
Open swap contracts 276,837
----------
Net unrealized gain 157,131
----------
Net realized and unrealized gain 351,643
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,857,284
==========
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO ALPHA LIBOR FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM DECEMBER 31, 1999
(COMMENCEMENT OF OPERATIONS)
THROUGH FEBRUARY 29, 2000
-----------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 3,505,641
Net realized gain 194,512
Change in net unrealized appreciation (depreciation) 157,131
------------
Net increase in net assets from operations 3,857,284
------------
Net share transactions: (Note 5)
Class III 334,243,683
------------
Increase in net assets resulting from net share
transactions 334,243,683
------------
Total increase in net assets 338,100,967
NET ASSETS:
Beginning of period --
------------
End of period (including accumulated undistributed net
investment income of $3,505,641) $338,100,967
============
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO ALPHA LIBOR FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 31, 1999
(COMMENCEMENT
OF OPERATIONS) THROUGH
FEBRUARY 29, 2000
----------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 25.00
--------
Income from investment operations:
Net investment income 0.26
Net realized and unrealized gain 0.03
--------
Total from investment operations 0.29
--------
Less distributions to shareholders:
From net investment income --
From net realized gains --
--------
Total distributions --
--------
NET ASSET VALUE, END OF PERIOD $ 25.29
========
TOTAL RETURN(a) 1.16%+
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $338,101
Net operating expenses to average daily net assets 0.00 % *
Interest expense to average daily net assets 0.40%*
Total net expenses to average daily net assets 0.40%*(c)
Net investment income to average daily net assets 6.77%*
Portfolio turnover rate 4%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts: --(b)
</TABLE>
(a) The total return would have been lower had certain expenses not been waived
during the period shown.
(b) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
(c) Interest expense incurred as a result of entering into reverse repurchase
agreements is included in the Fund's net expenses. Income earned on
investing proceeds from reverse repurchase agreements is included in
interest income.
* Annualized.
+ Not annualized.
8 See accompanying notes to the financial statements.
<PAGE>
GMO ALPHA LIBOR FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Alpha LIBOR Fund (the "Fund") , which commenced operations on
December 31, 1999, is a series of GMO Trust (the "Trust"). The Fund is
registered under the Investment Company Act of 1940, as amended, as an
open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24,
1985. The Declaration of Trust permits the Trustees to create an unlimited
number of series ("Funds"), each of which issues a separate series of
shares, and to subdivide a series of shares into classes.
The Fund seeks high total return by investing primarily in relatively high
quality, low volatility fixed income instruments. The Fund's benchmark is
the 3 month London Inter-Bank Offer Rate ("LIBOR") Index.
Shares of Alpha Libor Fund are not available for direct purchase by
investors, and are currently available only to other Funds of GMO Trust.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of the financial statements
in accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost
which approximates market value. Securities for which quotations are not
readily available are valued at fair value as determined in good faith by
the Trustees or other persons acting at their direction.
Some fixed income securities and options thereon are valued at the closing
bid for such securities as supplied by a primary pricing source chosen by
the Manager. The Manager evaluates such primary pricing sources on an
ongoing basis, and may change a pricing source should it deem it
appropriate.
9
<PAGE>
GMO ALPHA LIBOR FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
The Manager is informed of erratic or unusual movements (including unusual
inactivity) in the prices supplied for a security and at its discretion
may override a price supplied by a source (by taking a price supplied by
another source).
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from
yield data relating to investments or securities with similar
characteristics.
Certain securities held by the Fund were valued on the basis of a price
provided by a principal market maker. The prices provided by the principal
market makers may differ from the value that would be realized if the
securities were sold and the differences could be material to the
financial statements. At February 29, 2000, the total value of these
securities represented 34% of net assets. Included in this total are U.S.
Government backed securities and other highly rated collateralized debt
obligations that represent 33% of net assets at February 29, 2000.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at current exchange rates when accrued
or incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign currency contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FUTURES CONTRACTS
The Fund may use futures contracts to manage its exposure to the bond and
currency markets. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments.
Upon entering into a futures contract, the Fund is required to deposit
with its custodian, in a segregated account in the name of the futures
broker, an amount of cash or U.S. government and agency obligations in
accordance with the initial margin requirements of the broker or exchange.
Futures contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. Gains or losses are recognized but not considered realized until the
contracts expire or are closed. Futures contracts involve, to varying
degrees, risk of loss in excess of the variation margin disclosed in the
Statement of Assets and
10
<PAGE>
GMO ALPHA LIBOR FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts, or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 29, 2000.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or
all of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency
contracts are marked to market daily and the change in value is recorded
by the Fund as an unrealized gain or loss. Realized gains or losses equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed are recorded upon delivery
or receipt of the currency or, if a forward currency contract is offset by
entering into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market
risk in excess of the unrealized gain or loss reflected in the Fund's
Statement of Assets and Liabilities. In addition, the Fund could be
exposed to risk if the counterparties are unable to meet the terms of the
contracts or if the value of the currency changes unfavorably to the U.S.
dollar. There were no forward foreign currency contracts outstanding as of
February 29, 2000.
OPTIONS
The Fund may write call and put options on securities or currencies it
owns or in which it may invest. Writing put options tends to increase the
Fund's exposure to the underlying instrument. Writing call options tends
to decrease the Fund's exposure to the underlying instrument. When the
Fund writes a call or put option, an amount equal to the premium received
is recorded as a liability and subsequently marked to market to reflect
the current value of the option written. Premiums received from writing
options which expire are treated as realized gains. Premiums received from
writing options which are exercised or closed are added to the proceeds or
offset against amounts paid on the underlying future, security or currency
transaction to determine the realized gain or loss. The Fund as a writer
of an option has no control over whether the underlying future, security
or currency may be sold (call) or purchased (put) and as a result bears
the market risk of an unfavorable change in the price of the future,
security or currency underlying the written option. There is the risk the
Fund may not be able to enter into a closing transaction because of an
illiquid market. At February 29, 2000 the Fund had no written option
contracts outstanding.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's
11
<PAGE>
GMO ALPHA LIBOR FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
exposure to the underlying instrument. The Fund pays a premium which is
included in the Fund's Statement of Assets and Liabilities as an
investment and subsequently marked to market to reflect the current value
of the option. Premiums paid for purchasing options which expire are
treated as realized losses. The risk associated with purchasing put and
call options is limited to the premium paid. Premiums paid for purchasing
options which are exercised or closed are added to the amounts paid or
offset against the proceeds on the underlying future, security or currency
transaction to determine the realized gain or loss.
LOAN AGREEMENTS
The Fund may invest in direct debt instruments which are interests in
amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates. The Fund's investments in loans may be in the form of
participations in loans or assignments of all or a portion of loans from
third parties. A loan is often administered by a bank or other financial
institution (the lender) that acts as agent for all holders. The agent
administers the terms of the loan, as specified in the loan agreement.
When investing in a loan participation, the Fund has the right to receive
payments of principal, interest and any fees to which it is entitled only
from the lender selling the loan agreement and only upon receipt by the
lender of payments from the borrower. The Fund generally has no right to
enforce compliance with the terms of the loan agreement with the borrower.
As a result, the Fund may be subject to the credit risk of both the
borrower and the lender that is selling the loan agreement. When the Fund
purchases assignments from lenders it acquires direct rights against the
borrower on the loan. Direct indebtedness of emerging countries involves a
risk that the governmental entities responsible for the repayment of the
debt may be unable or unwilling to pay the principal and interest when
due.
INDEXED SECURITIES
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to
increase or decrease its exposure to different underlying instruments and
to gain exposure to markets that may be difficult to invest in through
conventional securities. Indexed securities may be more volatile than
their underlying instruments, but any loss is limited to the amount of the
original investment.
SWAP AGREEMENTS
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into interest rate, total return and credit
default swap agreements to manage its exposure to interest rates and
credit risk. Interest rate swap agreements involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. Total return swap
agreements
12
<PAGE>
GMO ALPHA LIBOR FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
involve commitments to pay interest in exchange for a market linked
return, both based on notional amounts. To the extent the total return of
the security or index underlying the transaction exceeds or falls short of
the offsetting interest rate obligation, the Fund will receive a payment
from or make a payment to the counterparty. Credit default swaps involve
the payment of a specified rate based on the notional amount. The Fund
receives payment upon a default of the underlying security. In connection
with these agreements, cash or securities may be set aside as collateral
by the Fund's custodian in accordance with the terms of the swap
agreement. The Fund earns interest on cash set aside as collateral, which
is paid by the counterparty. Swaps are marked to market daily based upon
quotations from market makers and the change, if any, is recorded as
unrealized gain or loss in the Statement of Operations. Payments received
or made at the end of the measurement period are recorded as realized gain
or loss in the Statement of Operations. Net payments of interest on
interest rate swap agreements are included as part of interest income.
Entering into these agreements involves, to varying degrees, elements of
credit and market risk in excess of the amounts recognized on the
Statement of Assets and Liabilities. Such risks involve the possibility
that there will be no liquid market for these agreements, that the
counterparty to the agreements may default on its obligation to perform
and that there may be unfavorable changes in the fluctuation of interest
rates. See Note 6 for a summary of open swap agreements as of February 29,
2000.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, realization of collateral by the Fund may be delayed or
limited.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements with certain banks
and broker/dealers whereby the Fund sells portfolio assets concurrent with
an agreement by the Fund to repurchase the same assets at a later date at
a fixed price. In connection with these agreements, the Fund establishes
segregated accounts with its custodian in which the Fund maintains cash,
U.S. Government securities or other liquid high grade debt obligations in
the name of the counterparty equal in value to its obligations in respect
of reverse repurchase agreements. Reverse repurchase agreements involve
the risk that the market value of the securities the Fund has sold may
decline below the contractual repurchase price under the agreement. At
February 29, 2000, the Fund had entered into a
13
<PAGE>
GMO ALPHA LIBOR FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
reverse repurchase agreement having a market value of $21,769,437,
collateralized by a security with a market value of $22,118,196. See Note
6 for a summary of open reverse repurchase agreements as of February 29,
2000.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of delay in
recovery or even loss of rights in the collateral should the borrower fail
financially. The Fund receives compensation for lending its securities. At
February 29, 2000, the Fund had no securities on loan.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States.
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis and is adjusted for the accretion of
discounts. Dividend income is recorded on the ex-dividend date. In
determining the net gain or loss on securities sold, the cost of
securities is determined on the identified cost basis. Interest income on
U.S. Treasury inflation indexed securities is accrued daily based upon an
inflation adjusted principal. Additionally, any increase in principal or
face amount of these securities is recorded as interest income.
14
<PAGE>
GMO ALPHA LIBOR FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is .05% of the amount
invested. The premium will be waived with respect to any portion of a
purchase that is offset by a corresponding redemption occurring on the
same day. In addition, the purchase premium for the Fund will be waived if
the purchaser makes an in-kind purchase of Fund shares. All purchase
premiums are paid to and recorded by the Fund as paid-in capital. For the
period ended February 29, 2000, the Fund received $11,066 in purchase
premiums. There is no premium for redemptions or reinvested distributions.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO does not charge the Fund any management or service fees. In addition,
GMO has contractually agreed to reimburse all of the Fund's expenses
(excluding brokerage commissions and other investment-related costs,
hedging transaction fees, extraordinary, non-recurring and certain other
unusual expenses (including taxes), securities lending fees and expenses,
interest expense and transfer taxes) until June 30, 2000.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the period ended February 29, 2000, was $709. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the period ended February 29, 2000, aggregated
$365,170,447 and $12,993,984, respectively.
At February 29, 2000 the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
$363,062,143 $539,049 $(427,275) $111,774
</TABLE>
15
<PAGE>
GMO ALPHA LIBOR FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
4. PRINCIPAL SHAREHOLDERS
At February 29, 2000, 100% of the outstanding shares of the Fund were held
by other Funds of the GMO Trust.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Period from December 31, 1999
(commencement of operations)
through February 29, 2000
----------------------------------
Shares Amount
Class III: ---------------- ----------------
<S> <C> <C> <C> <C>
Shares sold 13,962,351 $ 349,243,683
Shares issued to shareholders
in reinvestment of distributions -- --
Shares repurchased (595,033) (15,000,000)
------------- -------------
Net increase 13,367,318 $ 334,243,683
============= =============
</TABLE>
The Fund was formed with a taxable contribution of securities in-kind,
which had a market value of $327,112,459 on the date of contribution.
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 29, 2000 is as
follows:
FUTURES CONTRACTS
<TABLE>
<CAPTION>
Net Unrealized
Number of Contract Appreciation
Contracts Type Expiration Date Value (Depreciation)
--------- --------------------------------------------- --------------- ------------- --------------
<C> <S> <C> <C> <C>
Sales
158 U.S. Treasury Note 10 Yr. June 2000 $15,071,719 $ 31,067
348 U.S. Treasury Note 5 Yr. June 2000 33,788,625 (262,547)
---------
$(231,480)
=========
</TABLE>
16
<PAGE>
GMO ALPHA LIBOR FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
FUTURES CONTRACTS -- CONTINUED
At February 29, 2000, the Fund has sufficient cash and/or securities to
cover any commitments or margin on these contracts.
REVERSE REPURCHASE AGREEMENT
<TABLE>
<CAPTION>
Face Value Description Market Value
----------- ------------------------------------------------------- ------------
<C> <S> <C>
Barclays Bank, 6.09%, dated 1/5/00, to be repurchased
at $22,108,243 on 4/6/00. $21,769,437
$21,769,437
===========
</TABLE>
<TABLE>
<S> <C>
Average balance outstanding $22,097,174
Average interest rate 6.06%
Maximum balance outstanding $24,773,688
Average shares outstanding 13,234,554
Average balance per share outstanding $ 1.67
</TABLE>
Average balance outstanding was calculated based on daily balances
outstanding during the period that the Fund had entered into reverse
repurchase agreements.
SWAP AGREEMENTS
<TABLE>
<CAPTION>
Notional Expiration Net Unrealized
Amount Date Description Appreciation
----------- ---------- -------------------------------------------------- --------------
<C> <C> <S> <C>
INTEREST RATE SWAPS
$30,000,000 1/12/07 Agreement with UBS AG dated 1/10/00 to pay the $265,102
notional amount multiplied by 7.2175% and to
receive the notional amount multiplied by 3 month
LIBOR adjusted for a specific spread.
30,000,000 2/7/07 Agreement with Morgan Guaranty Trust Company dated 11,735
2/03/00 to receive the notional amount multiplied
by 7.395% and to pay the notional amount
multiplied by 3 month LIBOR adjusted by a specific
spread.
--------
$276,837
========
</TABLE>
17
<PAGE>
GMO ALPHA LIBOR FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
The Fund has elected to defer to March 1, 2000 post October capital losses
of $10,529.
18
<PAGE>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO U.S. CORE FUND (A SERIES OF GMO TRUST)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO U.S. Core Fund at February 29,
2000, the results of its operations, the changes in its net assets and the
financial highlights for each of the periods indicated therein, in conformity
with accounting principles generally accepted in the United States. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at February 29, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 10, 2000
<PAGE>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 95.7%
AEROSPACE -- 0.9%
269,600 Boeing Co 9,941,500
50,400 General Dynamics Corp 2,179,800
457,000 Lockheed Martin Corp 7,968,937
135,500 Northrop Grumman Corp 6,156,781
--------------
26,247,018
--------------
AUTOMOTIVE -- 3.8%
435,100 Autonation Inc* 3,290,444
149,800 Dana Corp 3,192,612
94,900 Eaton Corp 7,111,569
736,500 Ford Motor Co 30,656,812
753,500 General Motors Corp 57,313,094
44,700 General Motors Corp, Class H* 5,386,350
110,300 Genuine Parts Co 2,488,644
319,900 Goodyear Tire & Rubber Co 7,257,731
--------------
116,697,256
--------------
BANKING AND FINANCIAL SERVICES -- 12.1%
97,100 American Express Co 13,029,606
92,800 Amsouth Bancorp 1,345,600
1,006,009 Bank of America Corp 46,339,290
55,400 BB&T Corp 1,301,900
182,179 Bear Stearns Cos Inc 7,150,526
441,700 Chase Manhattan Corp 35,170,362
1,476,860 Citigroup Inc 76,335,201
185,100 Countrywide Credit Industries Inc 4,615,931
77,600 Donaldson Lufkin & Jenrette 3,370,750
422,500 Fannie Mae 22,392,500
19,000 Fifth Third Bancorp 989,187
494,300 Firstar Corp 8,804,719
114,000 Fleet Boston Financial Corp 3,106,500
218,200 Franklin Resources Inc 5,932,312
389,800 Freddie Mac 16,274,150
220,000 Golden West Financial Corp 6,270,000
88,600 Greenpoint Financial Corp 1,412,062
219,400 Household International Inc 7,007,087
155,500 J.P. Morgan & Co Inc 17,260,500
148,400 Lehman Brothers Holding Inc 10,759,000
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
<C> <S> <C>
BANKING AND FINANCIAL SERVICES -- CONTINUED
3,000 M & T Bank Corp 1,107,000
630,900 MBNA Corp 14,352,975
322,300 Merrill Lynch 33,035,750
183,000 MGIC Investment Corp 6,839,625
157,800 Morgan Stanley Dean Witter & Co 11,115,037
35,700 Old Kent Financial Corp 934,894
171,700 Paine Webber Group Inc 6,567,525
60,800 Summit Bancorp 1,455,400
82,000 UnionBanCal Corp 2,634,250
82,000 Wells Fargo & Co 2,711,125
--------------
369,620,764
--------------
CHEMICALS -- 1.3%
214,200 Air Products and Chemicals 5,515,650
70,400 Du Pont (E.I.) De Nemours 3,555,200
79,700 Eastman Chemical Co 2,864,219
89,500 PPG Industries Inc 4,419,062
200,900 Praxair Inc 6,780,375
86,241 Rohm & Haas Co 3,481,980
167,200 Sherwin Williams Co 3,197,700
201,000 Union Carbide Corp 10,791,187
--------------
40,605,373
--------------
COMPUTER AND OFFICE EQUIPMENT -- 10.0%
562,300 Cisco Systems Inc* 74,329,031
145,800 Computer Associates International Inc 9,376,762
36,600 Electronic Data Systems Corp 2,369,850
147,200 Gateway Inc* 10,120,000
179,400 Hewlett Packard Co 24,129,300
249,900 IBM Corp 25,489,800
72,200 Micron Technology Inc* 7,080,112
2,050,800 Oracle Corp* 152,271,900
--------------
305,166,755
--------------
CONSTRUCTION -- 0.5%
198,400 Georgia-Pacific Corp 6,882,000
121,150 Home Depot Inc 7,003,984
--------------
13,885,984
--------------
</TABLE>
See accompanying notes to the financial statements.
2
<PAGE>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
<C> <S> <C>
CONSUMER GOODS -- 1.2%
158,900 Eastman Kodak Co 9,106,956
127,100 Fortune Brands Inc 2,780,312
69,800 Johnson Controls 3,725,575
609,500 Mattel Co 5,866,437
137,600 Nike Inc, Class B 3,913,000
43,300 Procter and Gamble Co 3,810,400
68,300 Readers Digest Association Inc 2,347,812
120,500 VF Corp 2,974,844
67,600 Whirlpool Corp 3,671,525
--------------
38,196,861
--------------
ELECTRONIC EQUIPMENT -- 10.3%
124,100 Analog Devices Inc* 19,483,700
267,700 Emerson Electric Co 12,197,081
223,600 General Electric Co 29,557,125
57,900 Jabil Circuit Inc* 4,020,431
62,300 Linear Technology Corp 6,537,606
321,000 LSI Logic Corp* 20,564,062
268,800 Motorola Inc 45,830,400
160,500 National Semiconductor Corp* 12,057,562
475,000 Nortel Networks Corp 52,962,500
259,000 Qualcomm Inc* 36,891,312
248,200 Raytheon Co, Class B 4,591,700
98,500 Tellabs Inc* 4,728,000
332,200 Texas Instruments Inc 55,311,300
140,900 Xilinx Inc* 11,236,775
--------------
315,969,554
--------------
FOOD AND BEVERAGE -- 1.4%
110,200 Anheuser Busch Cos Inc 7,066,575
421,564 Archer Daniels Midland Co 4,241,988
33,200 Bestfoods 1,392,325
29,100 Heinz (HJ) Co 929,381
490,500 Nabisco Group Holdings 4,230,562
291,500 Seagrams Co Ltd 17,125,625
76,300 Sysco Corp 2,503,594
98,000 Tyson Food Inc, Class A 1,010,625
83,000 Wrigley (William Jr) Co 5,612,875
--------------
44,113,550
--------------
</TABLE>
See accompanying notes to the financial statements.
3
<PAGE>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
<C> <S> <C>
HEALTH CARE -- 2.5%
556,200 Columbia HCA Healthcare Corp 10,741,612
371,400 Johnson & Johnson 26,647,950
68,900 Pharmacia & Upjohn Inc 3,281,362
109,800 Stryker Corp 6,423,300
393,500 Tenet Healthcare Corp* 6,886,250
338,100 United Healthcare Corp 17,285,362
84,300 Wellpoint Health Network* 5,690,250
--------------
76,956,086
--------------
INSURANCE -- 3.6%
167,200 Aetna Life and Casualty Co 6,876,100
67,400 Allmerica Financial Corp 2,813,950
715,800 Allstate Corp 13,958,100
78,200 AMBAC Inc 3,435,912
139,400 American General Corp 7,274,937
227,500 AXA Financial Inc 6,810,781
173,200 Chubb Corp 8,519,275
142,800 Cigna Corp 10,540,425
79,200 CNA Financial Corp* 2,138,400
421,836 Conseco Inc 6,169,351
250,800 Hartford Financial Services Group Inc 7,837,500
36,000 Jefferson Pilot Corp 1,874,250
147,000 Lincoln National Corp 4,088,437
135,800 Loews Corp 6,043,100
129,500 MBIA Inc 4,969,562
96,300 ReliaStar Financial Corp 2,690,381
249,300 Saint Paul Cos Inc 5,578,087
123,300 Torchmark Corp 2,442,881
123,900 Travelers Property Casualty Corp, Class A 3,918,337
243,000 Unumprovident Corp 3,250,125
--------------
111,229,891
--------------
MACHINERY -- 1.9%
195,400 Applied Materials Inc* 35,745,987
192,000 Baker Hughes Inc 4,968,000
107,900 Caterpillar Inc 3,783,244
253,300 Deere and Co 9,055,475
45,400 Dover Corp 1,750,738
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
<C> <S> <C>
MACHINERY -- CONTINUED
92,000 Parker-Hannifin Corp 3,335,000
--------------
58,638,444
--------------
MANUFACTURING -- 2.0%
166,100 Corning Inc 31,226,800
147,800 Leggett & Platt Inc 2,484,888
158,000 Minnesota Mining and Manufacturing Co 13,923,750
193,400 Owens Illinois Inc* 2,671,338
181,600 Rockwell International Corp 8,217,400
73,100 Temple Inland Inc 3,737,238
--------------
62,261,414
--------------
METALS AND MINING -- 0.8%
204,600 Alcan Aluminum Ltd 6,751,800
209,700 Phelps Dodge Corp 9,882,113
98,800 Reynolds Metals Co 6,273,800
--------------
22,907,713
--------------
OIL AND GAS -- 4.3%
107,000 Amerada Hess Corp 5,410,188
328,000 Atlantic Richfield Co 23,288,000
166,500 Burlington Resources Inc 4,599,563
112,600 Chevron Corp 8,409,813
116,250 Columbia Energy Group 6,858,750
297,900 Diamond Offshore Drilling Inc 9,458,325
510,505 Exxon Mobil Corp 38,447,408
43,800 Kerr-McGee Corp 1,960,050
292,600 Occidental Petroleum Corp 4,699,888
166,900 Phillips Petroleum Co 6,383,925
255,200 Texaco Inc 12,106,050
99,100 Unocal Corp 2,650,925
300,100 USX - Marathon Group 6,489,663
24,800 Vastar Resources Inc 1,315,950
--------------
132,078,498
--------------
PAPER AND ALLIED PRODUCTS -- 1.1%
154,500 Champion International Corp 7,995,375
235,811 International Paper Co 8,680,792
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
<C> <S> <C>
PAPER AND ALLIED PRODUCTS -- CONTINUED
96,000 Kimberly-Clark Corp 4,962,000
153,200 Mead Corp 4,586,425
101,200 Weyerhaeuser Co 5,192,825
101,500 Willamette Industries Inc 3,444,656
--------------
34,862,073
--------------
PHARMACEUTICALS -- 3.5%
914,200 Abbott Laboratories 29,940,050
624,500 Amgen Inc* 42,583,094
349,100 Bristol Myers Squibb Co 19,833,244
80,900 Immunex Corp* 15,972,694
--------------
108,329,082
--------------
PRIMARY MATERIALS -- 0.0%
84,500 Crown Cork & Seal Inc 1,183,000
--------------
PRIMARY PROCESSING -- 0.8%
146,600 Alcoa Inc 10,042,100
54,400 Dow Chemical Co 5,902,400
185,700 Nucor Corp 9,226,969
--------------
25,171,469
--------------
PRINTING AND PUBLISHING -- 0.5%
52,400 Gannett Co Inc 3,415,825
90,900 Knight Ridder Inc 4,260,938
120,800 Tribune Co 4,703,650
2,800 Washington Post Co, Class B 1,365,700
--------------
13,746,113
--------------
REFINING -- 1.2%
568,900 Royal Dutch Petroleum Co 29,867,250
204,700 Tosco Corp 5,475,725
--------------
35,342,975
--------------
RETAIL TRADE -- 3.6%
648,952 Albertsons Inc 15,899,324
230,200 Autozone Inc* 5,654,288
121,800 Circuit City Stores Inc 4,917,675
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
<C> <S> <C>
RETAIL TRADE -- CONTINUED
276,100 Federated Department Stores Inc* 10,129,419
1,056,200 Kmart Corp* 9,307,763
242,900 May Department Stores Co 6,360,944
213,500 McDonald's Corp 6,738,594
206,100 Penney (JC) Co Inc 3,246,075
141,600 Safeway Inc* 5,460,450
553,700 Sears Roebuck & Co 15,261,356
119,100 Tandy Corp 4,533,244
112,700 Tiffany & Co 7,233,931
572,700 Toys R Us Inc* 7,087,163
156,800 Wal Mart Stores Inc 7,634,200
--------------
109,464,426
--------------
SERVICES -- 1.0%
293,800 Cendant Corp* 5,233,313
41,000 FedEx Corp* 1,432,438
114,800 Fluor Corp 3,264,625
122,700 Marriott International Inc, Class A 3,381,919
301,600 The Walt Disney Co. 10,103,600
92,600 Time Warner Inc 7,917,300
--------------
31,333,195
--------------
TECHNOLOGY -- 10.6%
539,600 BMC Software Inc* 24,821,600
182,300 First Data Corp 8,203,500
68,100 Grainger (WW) Inc 2,915,531
436,400 Honeywell International Inc 21,001,750
750,800 Intel Corp 84,840,400
112,600 JDS Uniphase Corp* 29,684,175
189,500 Microsoft Corp* 16,936,563
103,400 PE Corp - PE Biosystems Group 10,908,700
450,400 Seagate Technology Corp* 22,463,700
224,800 Solectron Corp* 14,724,400
704,400 Sun Microsystems Inc* 67,094,100
225,900 Teradyne Inc* 19,653,300
--------------
323,247,719
--------------
TELECOMMUNICATIONS -- 10.1%
54,600 Alltel Corp 3,166,800
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
<C> <S> <C>
TELECOMMUNICATIONS -- CONTINUED
2,117,882 AT & T Corp 104,702,791
157,700 AT & T Liberty Media Group* 8,239,825
399,414 Bell Atlantic Corp 19,546,323
346,700 Bellsouth Corp 14,128,025
198,800 CBS Corp* 11,841,025
486,600 GTE Corp 28,709,400
479,927 MCI Worldcom Inc* 21,416,742
102,600 MediaOne Group Inc* 8,054,100
108,300 Nextel Communications Inc, Class A* 14,810,025
832,366 SBC Communications Inc 31,629,908
198,400 Sprint Corp 12,102,400
58,900 Telephone and Data Systems Inc 6,213,950
43,300 United States Cellular Corp* 2,898,394
62,400 US West Inc 4,531,800
304,800 Viacom Inc, Class B* 16,992,600
--------------
308,984,108
--------------
TOBACCO -- 1.0%
1,491,100 Philip Morris Cos Inc 29,915,194
--------------
TRANSPORTATION -- 1.8%
228,100 AMR Corp* 12,060,788
547,700 Burlington Northern Santa Fe Railroad Co 10,782,844
224,500 CSX Corp 4,981,094
139,800 Delta Air Lines Inc 6,378,375
257,800 Norfolk Southern Corp 3,496,413
177,900 UAL Corp* 8,672,625
235,700 Union Pacific Corp 8,956,600
--------------
55,328,739
--------------
UTILITIES -- 3.9%
21,100 AES Corp* 1,768,444
86,400 Allegheny Energy Inc 2,241,000
146,900 Ameren Corp 4,407,000
92,000 American Electric Power Inc 2,587,500
304,800 Central & South West Corp 5,124,450
86,100 Cinergy Corp 1,840,388
185,000 Coastal Corp 7,781,563
60,300 Consolidated Edison Inc 1,662,019
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
<C> <S> <C>
UTILITIES -- CONTINUED
199,500 Constellation Energy Group Inc 5,935,125
151,800 Dominion Resources Inc 5,569,163
284,000 DTE Energy Co 8,573,250
130,700 Edison International 3,439,044
103,100 El Paso Energy Corp 3,821,144
542,400 Entergy Corp 10,983,600
217,400 Firstenergy Corp 4,062,663
27,200 Florida Progress Corp 1,159,400
68,700 FPL Group Inc 2,653,538
243,000 General Public Utilities Inc 6,044,625
98,400 Keyspan Corp 2,004,900
121,400 New Century Energies Inc 3,285,388
17,500 New England Electric System 945,000
145,500 Niagara Mohawk Holdings Inc* 1,709,625
81,300 Northern States Power Co 1,427,831
211,100 PG & E Corp 4,353,938
51,300 Pinnacle West Capital Corp 1,417,163
61,000 Potomac Electric Power Co 1,239,063
133,600 PPL Corp 2,688,700
242,000 Public Service Enterprise Group Inc 7,018,000
68,000 Reliant Energy Inc 1,398,250
28,700 Southern Co 636,781
54,600 Teco Energy Inc 982,800
316,000 Texas Utilities Co 10,309,500
43,900 Unicom Corp 1,659,969
--------------
120,730,824
--------------
TOTAL COMMON STOCKS (COST $2,746,193,845) 2,932,214,078
--------------
SHORT-TERM INVESTMENTS -- 6.9%
CASH EQUIVALENTS -- 2.7%
$ 6,901,808 BankBoston Eurodollar Time Deposit, 6.1175%, due
4/28/00(a) 6,901,808
$ 6,258,549 First Union National Bank Time Deposit, 5.8125%, due
3/01/00(a) 6,258,549
$ 9,387,821 Fleet National Bank Time Deposit, 5.79%, due 3/10/00(a) 9,387,821
20,648,872 Merrimac Cash Fund Premium Class(a) 20,648,872
$ 40,000,000 Prudential Securities Group, Inc. Master Note, 6.1875%,
due 3/10/00(a) 40,000,000
--------------
83,197,050
--------------
</TABLE>
See accompanying notes to the financial statements.
9
<PAGE>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE ($) DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
<C> <S> <C>
U.S. GOVERNMENT -- 0.5%
$ 14,500,000 U.S. Treasury Bill, 5.689%, due 6/29/00(b) 14,228,850
--------------
REPURCHASE AGREEMENT -- 3.7%
$ 113,496,517 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/29/00, due 3/01/00, with a maturity value of
$113,512,123, and an effective yield of 4.95%,
collateralized by a U.S. Treasury Obligation with a
rate of 8.125%, maturity date of 8/15/19, and a market
value, including accrued interest, of $115,766,448. 113,496,517
--------------
TOTAL SHORT-TERM INVESTMENTS (COST $210,929,667) 210,922,417
--------------
TOTAL INVESTMENTS -- 102.6%
(Cost $2,957,123,512) 3,143,136,495
Other Assets and Liabilities (net) -- (2.6%) (80,901,116)
--------------
TOTAL NET ASSETS -- 100.0% $3,062,235,379
==============
NOTES TO THE SCHEDULE OF INVESTMENTS:
</TABLE>
* Non-income producing security.
(a) Represents investments of security lending collateral (Note 1).
(b) All or a portion of this security has been segregated to cover margin
requirements on open financial futures contracts (Note 6).
10 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $2,957,123,512) (Note 1) $3,143,136,495
Dividends and interest receivable 4,637,481
Receivable for variation margin on open futures contracts
(Notes 1 and 6) 662,175
Receivable for expenses waived or borne by Manager (Note
2) 55,936
--------------
Total assets 3,148,492,087
--------------
LIABILITIES:
Payable upon return of securities loaned (Note 1) 83,197,050
Payable for Fund shares repurchased 1,795,283
Payable to affiliate for (Note 2):
Management fee 803,581
Shareholder service fee 321,841
Accrued expenses 138,953
--------------
Total liabilities 86,256,708
--------------
NET ASSETS $3,062,235,379
==============
NET ASSETS CONSIST OF:
Paid-in capital $2,619,575,961
Accumulated undistributed net investment income 6,365,865
Accumulated net realized gain 250,852,685
Net unrealized appreciation 185,440,868
--------------
$3,062,235,379
==============
NET ASSETS ATTRIBUTABLE TO:
Class II shares $ 95,041,041
==============
Class III shares $1,623,733,870
==============
Class IV shares $1,343,460,468
==============
SHARES OUTSTANDING:
Class II 5,720,143
==============
Class III 97,625,347
==============
Class IV 80,829,331
==============
NET ASSET VALUE PER SHARE:
Class II $ 16.62
==============
Class III $ 16.63
==============
Class IV $ 16.62
==============
</TABLE>
See accompanying notes to the financial statements. 11
<PAGE>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $118,939) $ 46,527,139
Interest (including securities lending income of
$260,916) 12,649,511
-------------
Total income 59,176,650
-------------
EXPENSES:
Management fee (Note 2) 11,161,595
Custodian and transfer agent fees 518,806
Legal fees 83,807
Audit fees 57,894
Trustees fees (Note 2) 39,227
Registration fees 5,540
Miscellaneous 33,333
Fees waived or borne by Manager (Note 2) (738,607)
-------------
11,161,595
Shareholder service fee (Note 2)
Class II 179,753
Class III 2,541,507
Class IV 1,686,571
-------------
Net expenses 15,569,426
-------------
Net investment income 43,607,224
-------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments 815,818,151
Closed futures contracts 11,693,846
Closed swap contracts (9,044,517)
-------------
Net realized gain 818,467,480
-------------
Change in net unrealized appreciation (depreciation) on:
Investments (431,036,228)
Open futures contracts 784,766
Open swap contracts 4,358,815
-------------
Net unrealized loss (425,892,647)
-------------
Net realized and unrealized gain 392,574,833
-------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 436,182,057
=============
</TABLE>
12 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 43,607,224 $ 49,037,379
Net realized gain 818,467,480 624,236,822
Change in net unrealized appreciation (depreciation) (425,892,647) (170,678,257)
-------------- --------------
Net increase in net assets from operations 436,182,057 502,595,944
-------------- --------------
Distributions to shareholders from:
Net investment income
Class II (1,009,817) (438,239)
Class III (21,707,190) (32,457,119)
Class IV (21,473,272) (20,082,410)
-------------- --------------
Total distributions from net investment income (44,190,279) (52,977,768)
-------------- --------------
Net realized gains
Class II (19,476,292) (7,077,306)
Class III (357,534,849) (420,933,348)
Class IV (322,165,035) (249,579,720)
-------------- --------------
Total distributions from net realized gains (699,176,176) (677,590,374)
-------------- --------------
(743,366,455) (730,568,142)
-------------- --------------
Net share transactions: (Note 5)
Class II 64,741,476 27,619,700
Class III 1,301,568 (396,156,147)
Class IV (61,972,966) 257,262,203
-------------- --------------
Increase (decrease) in net assets resulting from net
share transactions 4,070,078 (111,274,244)
-------------- --------------
Total decrease in net assets (303,114,320) (339,246,442)
NET ASSETS:
Beginning of period 3,365,349,699 3,704,596,141
-------------- --------------
End of period (including accumulated undistributed
net investment income of $6,365,865 and $6,948,920,
respectively) $3,062,235,379 $3,365,349,699
============== ==============
</TABLE>
See accompanying notes to the financial statements. 13
<PAGE>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS II SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
-----------------------------------------------------------
2000 1999 1998(1) 1997(2) 1997(3)
------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 18.57 $ 19.98 $ 17.65 $ 20.10 $ 20.12
------- ------- ------- ----------- -------
Income from investment operations:
Net investment income 0.23+ 0.25+ 0.04+ 0.24+ 0.25
Net realized and unrealized gain 2.29 2.55 2.29 3.99 2.92
------- ------- ------- ----------- -------
Total from investment operations 2.52 2.80 2.33 4.23 3.17
------- ------- ------- ----------- -------
Less distributions to shareholders:
From net investment income (0.24) (0.29) -- (0.22) (0.30)
From net realized gains (4.23) (3.92) -- (3.90) (2.89)
------- ------- ------- ----------- -------
Total distributions (4.47) (4.21) 0.00 (4.12) (3.19)
------- ------- ------- ----------- -------
NET ASSET VALUE, END OF PERIOD $ 16.62 $ 18.57 $ 19.98 $ 20.21 $ 20.10
======= ======= ======= =========== =======
TOTAL RETURN(a) 13.61% 14.99% 13.20%++ 23.00%++ 17.46%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $95,041 $41,684 $16,958 $ 2,037 $64,763
Net expenses to average daily net
assets 0.55% 0.55% 0.55%* 0.55%* 0.55%*
Net investment income to average
daily net assets 1.21% 1.29% 1.53%* 1.66%* 1.63%*
Portfolio turnover rate 90% 71% 60% 60% 107%
Fees and expenses voluntarily waived
or borne by the Manager consisted
of the following per share amounts: --(b) $ 0.04 $ 0.01 $ 0.03 $ 0.03
</TABLE>
(1) Period from January 9, 1998 to February 28, 1998.
(2) Period from March 1, 1997 to November 17, 1997.
(3) Period from June 7, 1996 (commencement of operations) to February 28, 1997.
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(b) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
+ Computed using average shares outstanding throughout the period.
++ Not annualized.
* Annualized.
14 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
----------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 18.59 $ 19.99 $ 20.12 $ 19.46 $ 15.45
---------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment income 0.24+ 0.26+ 0.35 0.36 0.41
Net realized and unrealized gain 2.28 2.55 5.89 3.58 5.49
---------- ---------- ---------- ---------- ----------
Total from investment operations 2.52 2.81 6.24 3.94 5.90
---------- ---------- ---------- ---------- ----------
Less distributions to shareholders:
From net investment income (0.25) (0.29) (0.32) (0.39) (0.42)
From net realized gains (4.23) (3.92) (6.05) (2.89) (1.47)
---------- ---------- ---------- ---------- ----------
Total distributions (4.48) (4.21) (6.37) (3.28) (1.89)
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD $ 16.63 $ 18.59 $ 19.99 $ 20.12 $ 19.46
========== ========== ========== ========== ==========
TOTAL RETURN(a) 13.66% 15.02% 36.69% 22.05% 39.08%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $1,623,734 $1,780,011 $2,317,103 $3,051,344 $3,179,314
Net expenses to average daily net
assets 0.48% 0.48% 0.48% 0.48% 0.48%
Net investment income to average
daily net assets 1.27% 1.36% 1.67% 1.78% 2.25%
Portfolio turnover rate 90% 71% 60% 107% 77%
Fees and expenses voluntarily waived
or borne by the Manager consisted
of the following per share amounts: --(b) $ 0.04 $ 0.05 $ 0.04 $ 0.01
</TABLE>
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(b) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
+ Computed using average shares outstanding throughout the period.
See accompanying notes to the financial statements. 15
<PAGE>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
----------------------------------
2000 1999 1998*
---------- ---------- ----------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 18.58 $ 19.99 $ 17.65
---------- ---------- ----------
Income from investment operations:
Net investment income 0.25+ 0.27+ 0.04+
Net realized and unrealized gain 2.28 2.55 2.30
---------- ---------- ----------
Total from investment operations 2.53 2.82 2.34
---------- ---------- ----------
Less distributions to shareholders:
From net investment income (0.26) (0.31) --
From net realized gains (4.23) (3.92) --
---------- ---------- ----------
Total distributions (4.49) (4.23) 0.00
---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD $ 16.62 $ 18.58 $ 19.99
========== ========== ==========
TOTAL RETURN(a) 13.74% 15.07% 13.26%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $1,343,460 $1,543,655 $1,370,535
Net expenses to average daily net assets 0.44% 0.44% 0.44%**
Net investment income to average daily net
assets 1.32% 1.41% 1.67%**
Portfolio turnover rate 90% 71% 60%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following per
share amounts: --(b) $ 0.04 $ 0.01
</TABLE>
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(b) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
* Period from January 9, 1998 (commencement of operations) to February 28,
1998.
** Annualized.
+ Computed using average shares outstanding throughout the period.
++ Not annualized.
16 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO U.S. Core Fund (the "Fund") is a series of GMO Trust (the "Trust").
The Fund is registered under the Investment Company Act of 1940, as
amended, as an open-end, diversified management investment company. The
Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24,
1985. The Declaration of Trust permits the Trustees to create an unlimited
number of series ("Funds"), each of which issues a separate series of
shares, and to subdivide a series of shares into classes.
The Fund seeks high total return through investment in U.S. equity
securities. The Fund's benchmark is the S&P 500 index.
The Fund offers three classes of shares: Class II, Class III, and Class
IV. The principal economic difference between the classes of shares is the
level of shareholder service fee borne by the classes. Eligibility for and
automatic conversion between the various classes of shares is generally
based on the total amount of assets invested with GMO, as more fully
outlined in the Trust's prospectus.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of the financial statements
in accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Securities for
which quotations are not readily available are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts on domestic stock
indices. Stock index futures contracts represent commitments for future
delivery of cash based upon the level of a specified index of equity
securities at a given date. The Fund may use futures contracts to manage
its exposure to the stock markets. Buying futures tends to increase the
Fund's exposure to the underlying instrument. Selling futures tends to
decrease the Fund's exposure to the underlying
17
<PAGE>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
instrument or hedge other Fund instruments. Upon entering into a futures
contract, the Fund is required to deposit with its custodian, in a
segregated account in the name of the futures broker, an amount of cash or
U.S. government and agency obligations in accordance with the initial
margin requirements of the broker or exchange. Futures contracts are
marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. The payable
or receivable is liquidated on the following business day. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from changes in the value of the underlying
instrument, if there is an illiquid secondary market for the contracts, or
if counterparties do not perform under the contract terms. Futures
contracts are valued at the settlement price established each day by the
board of trade or exchange on which they are traded. See Note 6 for all
open futures contracts as of February 29, 2000.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, realization of collateral by the Fund may be delayed or
limited.
SECURITY LENDING
The Fund may lend its securities to qualified brokers. The loans are
collateralized at all times with cash or securities with a market value at
least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending
its securities. At February 29, 2000, the Fund loaned securities having a
market value of $80,787,867, collateralized by cash in the amount of
$83,197,050, which was invested in short-term instruments.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
equity markets. A swap is an agreement to exchange the return generated by
one instrument for the return generated by another instrument. The Fund
enters into equity swap agreements which involve a commitment by
18
<PAGE>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
one party in the agreement to pay interest in exchange for a market linked
return, both based on notional amounts. To the extent that the total
return of the security or index underlying the transaction exceeds or
falls short of the offsetting interest rate obligation, the Fund will
receive a payment from or make a payment to the counterparty. The Fund
also enters into contracts for differences in which the Fund agrees with
the counterparty that its return will be based on the relative performance
of two different groups or "baskets" of securities, adjusted by an
interest rate payment. To the extent that the relative performance of the
two baskets of securities exceeds or falls short of the offsetting
interest rate obligation, the Fund will receive a payment from or make a
payment to the counterparty, respectively. Swaps are marked to market
daily based upon quotations from market makers and the change, if any, is
recorded as unrealized gain or loss in the Statement of Operations.
Payments received or made at the end of the measurement period are
recorded as realized gain or loss in the Statement of Operations. Entering
into these agreements involves, to varying degrees, elements of credit and
market risk in excess of the amounts recognized on the Statement of Assets
and Liabilities. Such risks involve the possibility that there will be no
liquid market for these agreements, that the counterparty to the
agreements may default on its obligation to perform, or that there may be
unfavorable changes in the price of the security or index underlying these
transactions. As of February 29, 2000 the Fund had no open swap
agreements.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary. Taxes on foreign dividend income are withheld in
accordance with the applicable country's tax treaty with the United
States.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. The Fund declares separate dividends from net investment
income on each class of shares. Distributions to shareholders are recorded
by the Fund on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to redemptions in-kind. Gains resulting from
such in-kind transactions amounted to $52,390,734.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This
19
<PAGE>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
reclassification has no impact on net investment income, realized
gain/loss or the net asset value of the Fund and is primarily attributable
to certain differences in the computation of distributable income and
capital gains under U.S. federal tax rules versus accounting principles
generally accepted in the United States. The calculation of net investment
income per share in the financial highlights excludes these adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
<S> <C> <C>
$ -- $(86,138,001) $86,138,001
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable foreign withholding taxes, is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis and is
adjusted for the accretion of discounts. In determining the net gain or
loss on securities sold, the cost of securities is determined on the
identified cost basis.
ALLOCATION OF OPERATING ACTIVITY
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. Investment
income, common expenses and realized and unrealized gains and losses are
allocated pro-rata among the classes of shares of the Fund based on the
relative net assets of each class. Shareholder service fees, which are
directly attributable to a class of shares, are charged to that class'
operations.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is .14% of the amount
invested. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. This fee is allocated relative to each class' net assets
on the share transaction date. For the year ended February 29, 2000, the
Fund received $413,339 in purchase premiums. There is no premium for cash
redemptions, reinvested distributions or in-kind transactions.
Effective April 7, 2000, the Fund will no longer charge a purchase
premium.
20
<PAGE>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .33% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of each class at the annual rate of .22%
for Class II shares, .15% for Class III shares, and .105% for Class IV
shares.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding brokerage commissions, certain other transaction costs
(including transfer taxes), shareholder service fees and extraordinary
expenses) exceed the management fee.
Prior to March 1, 1999, GMO earned a management fee at the annual rate of
.525% of average daily net assets. GMO had agreed to waive a portion of
its fee and bear other expenses to the extent that the Fund's annual
expenses (including the management fee but excluding brokerage
commissions, certain other transaction costs (including transfer taxes),
shareholder service fees and extraordinary expenses) exceeded .33% of
average daily net assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000 was $39,227. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 29, 2000, aggregated
$2,772,912,220 and $3,342,904,994, respectively.
At February 29, 2000, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
$2,969,416,324 $537,760,565 $(364,040,394) $173,720,171
</TABLE>
4. PRINCIPAL SHAREHOLDER
At February 29, 2000, 14.9% of the outstanding shares of the Fund were
held by one shareholder.
21
<PAGE>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
-------------------------- --------------------------
Shares Amount Shares Amount
Class II: ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares sold 3,985,880 $ 74,957,732 1,137,984 $ 23,036,514
Shares issued to shareholders
in reinvestment of distributions 1,158,453 20,008,247 394,655 7,372,964
Shares repurchased (1,668,281) (30,224,503) (137,205) (2,789,778)
----------- ------------- ----------- -------------
Net increase 3,476,052 $ 64,741,476 1,395,434 $ 27,619,700
=========== ============= =========== =============
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
-------------------------- --------------------------
Shares Amount Shares Amount
Class III: ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares sold 11,331,748 $ 215,996,626 7,724,323 $ 155,828,896
Shares issued to shareholders
in reinvestment of distributions 21,061,629 368,034,755 23,463,193 440,891,297
Shares repurchased (30,533,541) (582,729,813) (51,356,934) (992,876,340)
----------- ------------- ----------- -------------
Net increase (decrease) 1,859,836 $ 1,301,568 (20,169,418) $(396,156,147)
=========== ============= =========== =============
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
-------------------------- --------------------------
Shares Amount Shares Amount
Class IV: ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares sold 3,955,702 $ 79,266,480 22,393,827 $ 428,114,213
Shares issued to shareholders
in reinvestment of distributions 19,531,086 342,781,629 14,303,391 268,384,348
Shares repurchased (25,740,318) (484,021,075) (22,187,638) (439,236,358)
----------- ------------- ----------- -------------
Net increase (decrease) (2,253,530) $ (61,972,966) 14,509,580 $ 257,262,203
=========== ============= =========== =============
</TABLE>
22
<PAGE>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 29, 2000 is as
follows:
FUTURES CONTRACTS
<TABLE>
<CAPTION>
Number of Contract
Contracts Type Expiration Date Value
--------- --------------------------------------------- --------------------------------------------- -------------
<C> <S> <C> <C>
Buys
109 S&P 500 March 2000 $37,387,000
<CAPTION>
Number of Net Unrealized
Contracts Depreciation
--------- --------------
<C> <C>
Buys
109 $(572,115)
=========
</TABLE>
At February 29, 2000 the Fund has sufficient cash and/or securities to
cover any commitments or margin on open futures contracts.
23
<PAGE>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
For the fiscal year ended February 29, 2000, all of the Funds
distributions are from investment company taxable income, except that the
Fund has designated 79.11% of the distributions as net capital gain
dividends.
24
<PAGE>
GMO U.S. CORE FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Robert Soucy are
primarily responsible for the day-to-day management of the Fund's portfolio.
Mssrs. Grantham and Darnell have each been portfolio managers at Grantham, Mayo,
Van Otterloo & Co. LLC for more than fifteen years; Mr. Soucy for more than ten
years.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO U.S. Core Fund returned 13.7% for the fiscal
year ended February 29, 2000, as compared to 11.7% for the S&P 500. Consistent
with the Fund's investment objectives and policies, the Fund was invested
substantially in common stocks throughout the period.
For the fiscal year, narrow market conditions persisted despite a brief
broadening in the market in the second quarter. U.S. market returns were
dominated by technology and telecommunications stocks. Growth stocks across all
market capitalization bands outperformed value stocks.
Sector selection detracted modestly from performance. The Fund's underweight in
consumer staple (particularly food and beverage) stocks added 130 basis points
as these stocks underperformed the benchmark by 35% for the fiscal year. The
underweight positions in financial services and health care stocks, also poor
performers, added modestly to performance. However, these positive contributions
were offset by an overweight position in value stocks, including
auto/transportation stocks and electric utilities. These positions detracted
- -200 basis points in aggregate from performance. The Fund's underweight in the
largest stocks also hurt performance as these stocks dominated the market for
most of the fiscal year.
The Fund's outperformance relative to the benchmark for the fiscal year was
attributable to strong stock selection. Selection was particularly strong in
technology, pharmaceutical and producer durable stocks. Weak selection among
telephone utility, financial services, consumer staple and consumer
discretionary stocks detracted from performance.
The MOMENTUM stock selection strategy performed well. The INTRINSIC VALUE
strategy was neutral relative to the benchmark, while the NEGLECT, BOOK VALUE
and CASH FLOW strategies underperformed.
OUTLOOK
The portfolio is conservatively positioned, with a lower price-to-book, lower
price-to-earnings and a higher dividend yield than the S&P 500. In our view,
value stocks are significantly undervalued compared to growth stocks. The spread
of value stocks relative to growth stocks is at its widest level since the early
1970's. The Fund is overweight in both auto/transportation stocks and electric
utilities, reflecting our preference for value stocks. We are gradually reducing
our exposure to technology stocks. While earlier in 1999 many of these stocks
were attractive to our intrinsic value methodology, most technology stocks have
now appreciated to a point where they are now expensive on this measure.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO &
CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO U.S. CORE FUND CLASS III SHARES AND THE S&P 500 INDEX
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
Average Annual Total Returns
Class III
Inception 9/18/85
1yr 5yr 10yr
<S> <C> <C>
13.5 24.78 18.35
<CAPTION>
Class II
Inception 6/07/96*
1yr 5yr 10yr (ITD)
<S> <C> <C>
13.46 N/A 21.88
<CAPTION>
Class IV
Inception 1/09/98
1yr 5yr 10yr (ITD)
<S> <C> <C>
13.58 N/A 20.11
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
Date GMO U.S. Core Fund-III S&P 500
<S> <C> <C>
2/28/90 9986 10000
3/31/90 10162 10265
6/30/90 10780 10909
9/30/90 9322 9410
12/31/90 10242 10253
3/31/91 11888 11742
6/30/91 11703 11716
9/30/91 12286 12343
12/31/91 13304 13377
3/31/92 12947 13041
6/30/92 13347 13289
9/30/92 13559 13709
12/31/92 14093 14400
3/31/93 15004 15029
6/30/93 15340 15102
9/30/93 16106 15491
12/31/93 16388 15851
3/31/94 15884 15249
6/30/94 15916 15313
9/30/94 16599 16062
12/31/94 16775 16060
3/31/95 18308 17623
6/30/95 20312 19306
9/30/95 22516 20840
12/31/95 24031 22094
3/31/96 24896 23280
6/30/96 25731 24325
9/30/96 26448 25077
12/31/96 28263 27167
3/31/97 28954 27896
6/30/97 33658 32766
9/30/97 37609 35220
12/31/97 38183 36231
3/31/98 43183 41284
6/30/98 44071 42647
9/30/98 39843 38405
12/31/98 47610 46584
3/31/99 49348 48905
6/30/99 53033 52353
9/30/99 49410 49083
12/31/99 56463 56385
2/29/00 53995 52538
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The total returns would have been lower had certain expenses
not been reimbursed during the periods shown and do not include the effect of
taxes. Each performance figure assumes purchase at the beginning and
redemption at the end of the stated period and reflects a transaction fee of
14 bp on the purchase. Transaction fees are retained by the Fund to cover
trading costs. Performance for Class IV and Class II shares may vary due to
different shareholder service fees. Past performance is not indicative of
future performance. Information is unaudited.
* Class II performance includes Class III performance for the period November
17, 1997 to January 9, 1998, during which no Class II shares were outstanding.
<PAGE>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Domestic Bond Fund at
February 29, 2000, the results of its operations, the changes in its net assets
and the financial highlights for each of the periods indicated therein, in
conformity with accounting principles generally accepted in the United States.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at February 29, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 10, 2000
<PAGE>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE ($) DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
DEBT OBLIGATIONS -- 95.3%
ASSET BACKED SECURITIES -- 28.2%
10,000,000 Augusta Funding Ltd. X, 144A,
Variable Rate, 3mo. LIBOR + .25%, 6.43%, due 06/30/17 9,692,187
400,279 Constellation Series 99-1A, 144A, 5.73%, due 04/18/02 400,029
2,792,308 Great Point CBO Ltd. Series 98-1A Class A1, 144A,
Variable Rate, 6 mo. LIBOR + .30%, 6.39%, due
10/15/10 2,773,983
4,492,655 Northstar CBO Ltd. Series 97-2 Class A2, 144A,
Variable Rate, Step Up, 6.62%, due 07/15/09 4,169,043
17,000,000 NPF XII, Inc. Series 99-2 Class A, 144A, 7.05%, due
06/01/03(a) 16,787,500
5,000,000 Rhyno CBO Delaware Corp Series 97-1 Class A-2, 144A,
Variable Rate, Step Up, 6.33%, due 09/15/09 4,921,875
4,932,000 SMS Student Loan Trust 95-A Certificates,
Variable Rate, 1 mo. LIBOR + .65%, 6.46%, due
04/25/25 4,919,670
2,637,000 SMS Student Loan Trust Series 94-B Certificates,
Variable Rate, 1 mo. LIBOR + .75%, 6.56%, due
10/25/23 2,641,747
8,000 Society Student Loan Trust Series 93-A Class B,
Variable Rate, 1 mo. LIBOR + .75%, 6.56%, due
07/25/03 8,000
------------
46,314,034
------------
CORPORATE DEBT -- 1.1%
1,000,000 Banco Santander, Series MBIA, 6.50%, due 11/01/05 933,500
1,000,000 Pemex Finance Ltd. Series 1A1 Class A2, 144A, 6.30%,
due 05/15/10 892,000
------------
1,825,500
------------
FOREIGN GOVERNMENT OBLIGATIONS -- 5.3%
25,000,000 Bulgaria Discount Strips, 0.00%, due 07/28/24(b) 4,913,062
20,000,000 Republic of Ecuador Discount Bond Series A Receipts,
Zero Coupon, due 02/28/25(b) 3,836,938
------------
8,750,000
------------
U.S. GOVERNMENT -- 0.3%
513,110 U.S. Treasury Inflation Indexed Note, 3.88%, due
01/15/09(c) 496,755
------------
U.S. GOVERNMENT AGENCY -- 60.4%
10,000,000 Agency for International Development Floater (Support
of India),
Variable Rate, 3 mo. LIBOR + .10%, 6.15%, due
02/01/27 9,800,000
7,500,000 Agency for International Development Floater (Support
of Jamaica),
Variable Rate, 6 mo. LIBOR + .30%, 6.65%, due
12/01/14 7,443,750
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE ($) DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
U.S. GOVERNMENT AGENCY -- CONTINUED
6,131,451 Agency for International Development Floater (Support
of Jamaica),
Variable Rate, 6 mo. U.S. Treasury Bill + .75%,
6.77%, due 03/30/19 6,085,465
20,000,000 Agency for International Development Floater (Support
of Morocco),
Variable Rate, 6 mo. LIBOR - .015%, 6.34%, due
02/01/25 19,200,000
15,000,000 Agency for International Development Floater (Support
of Morocco),
Variable Rate, 6 mo. LIBOR + .15%, 6.51%, due
10/29/26 14,737,500
25,000,000 Agency for International Development Floater (Support
of Portugal),
Variable Rate, 6 mo. LIBOR, 6.35%, due 01/01/21 24,968,750
8,687,500 Agency for International Development Floater (Support
of Sri Lanka),
Variable Rate, 6 mo. LIBOR + .20%, 6.55%, due
06/15/12 8,622,344
8,800,002 Agency for International Development Floater (Support
of Zimbabwe),
Variable Rate, 3 mo. U.S. Treasury Bill X 115%,
5.83%, due 01/01/12 8,448,002
------------
99,305,811
------------
TOTAL DEBT OBLIGATIONS (COST $158,911,897) 156,692,100
------------
<CAPTION>
PRINCIPAL
AMOUNT
- -------------
<C> <S> <C>
CALL OPTIONS PURCHASED -- 0.0%
OPTIONS ON FUTURES -- 0.0%
530,000 Eurodollar, Expires 3/13/00, Strike 93.75 29,150
------------
TOTAL CALL OPTIONS PURCHASED (COST $20,520) 29,150
------------
<CAPTION>
SHARES
- -------------
<C> <S> <C>
PREFERRED STOCKS -- 4.9%
BANKING AND FINANCIAL SERVICES -- 4.9%
10,000 Home Ownership Funding 2 Preferred 144A, 13.338% 8,009,120
------------
TOTAL PREFERRED STOCKS (COST $9,296,160) 8,009,120
------------
</TABLE>
See accompanying notes to the financial statements.
2
<PAGE>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE ($) DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENTS -- 1.2%
COMMERCIAL PAPER -- 1.1%
1,800,000 Koch Industries Inc., 5.83%, due 3/01/00 1,800,000
------------
REPURCHASE AGREEMENT -- 0.1%
222,352 Salomon Smith Barney, Inc. Repurchase Agreement, dated
2/29/00, due 3/01/00, with a maturity value of
$222,383, and an effective yield of 4.95%,
collateralized by a U.S. Treasury Obligation with a
rate of 8.125%, maturity date of 8/15/19, and a market
value, including accrued interest, of $226,799. 222,352
------------
TOTAL SHORT-TERM INVESTMENTS (COST $2,022,352) 2,022,352
------------
TOTAL INVESTMENTS -- 101.4%
(Cost $170,250,929) 166,752,722
Other Assets and Liabilities (net) -- (1.4%) (2,295,491)
------------
TOTAL NET ASSETS -- 100.0% $164,457,231
============
</TABLE>
NOTES TO THE SCHEDULE OF INVESTMENTS:
- -------------------------------------------------------------------------------
144A - Securities exempt from registration under rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional investors.
Variable and Step up rates - The rates shown on variable and step up rate notes
are the current interest rates at February 29,
2000, which are subject to change based on the
terms of the security, including varying reset
dates.
(a) All or a portion of this security has been segregated to cover collateral
requirements on reverse repurchase agreements (Note 6).
(b) Valued by management (Note 1).
(c) All or a portion of this security has been segregated to cover margin
requirements on open financial futures contracts (Note 6).
See accompanying notes to the financial statements. 3
<PAGE>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $170,250,929) (Note 1) $166,752,722
Interest receivable 1,612,182
Receivable for variation margin on open futures contracts
(Notes 1 and 6) 8,405
Receivable for open swap contracts (Notes 1 and 6) 1,121,100
Receivable for expenses waived or borne by Manager (Note
2) 7,452
------------
Total assets 169,501,861
------------
LIABILITIES:
Payable for Fund shares repurchased 164,050
Payable to affiliate for (Note 2):
Management fee 13,563
Shareholder service fee 20,208
Payable for reverse repurchase agreements (Notes 1 and 6) 4,798,000
Accrued expenses 48,809
------------
Total liabilities 5,044,630
------------
NET ASSETS $164,457,231
============
NET ASSETS CONSIST OF:
Paid-in capital $172,021,639
Accumulated undistributed net investment income 895,261
Accumulated net realized loss (5,912,734)
Net unrealized depreciation (2,546,935)
------------
$164,457,231
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $164,457,231
============
SHARES OUTSTANDING:
Class III 17,825,718
============
NET ASSET VALUE PER SHARE:
Class III $ 9.23
============
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest (including securities lending income of $982) $9,773,691
Dividends 953,630
----------
Total income 10,727,321
----------
EXPENSES:
Management fee (Note 2) 170,540
Interest expense (Notes 1 and 6) 323,186
Audit fees 37,439
Custodian and transfer agent fees 32,068
Legal fees 3,498
Registration fees 2,868
Trustees fees (Note 2) 1,781
Miscellaneous 2,379
Fees waived or borne by Manager (Note 2) (80,033)
----------
493,726
Shareholder service fee (Note 2)
Class III 255,809
----------
Net expenses 749,535
----------
Net investment income 9,977,786
----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (861,157)
Closed futures contracts 1,864,515
Closed swap contracts (1,515,001)
----------
Net realized loss (511,643)
----------
Change in net unrealized appreciation (depreciation) on:
Investments (1,847,558)
Open futures contracts (541,642)
Open swap contracts (3,908,178)
----------
Net unrealized loss (6,297,378)
----------
Net realized and unrealized loss (6,809,021)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,168,765
==========
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 9,977,786 $ 16,849,450
Net realized gain (loss) (511,643) 1,274,151
Change in net unrealized appreciation (depreciation) (6,297,378) (2,987,171)
------------ --------------
Net increase in net assets from operations 3,168,765 15,136,430
------------ --------------
Distributions to shareholders from:
Net investment income
Class III (10,394,028) (18,501,522)
------------ --------------
Total distributions from net investment income (10,394,028) (18,501,522)
------------ --------------
Net realized gains
Class III (318,238) (4,552,278)
------------ --------------
Total distributions from net realized gains (318,238) (4,552,278)
------------ --------------
In excess of net realized gains
Class III (8,745) (5,488,875)
------------ --------------
Total distributions in excess of net realized
gains (8,745) (5,488,875)
------------ --------------
(10,721,011) (28,542,675)
------------ --------------
Net share transactions: (Note 5)
Class III (3,061,193) (242,933,466)
------------ --------------
Decrease in net assets resulting from net share
transactions (3,061,193) (242,933,466)
------------ --------------
Total decrease in net assets (10,613,439) (256,339,711)
NET ASSETS:
Beginning of period 175,070,670 431,410,381
------------ --------------
End of period (including accumulated undistributed
net investment income of $895,261 and $1,320,248,
respectively) $164,457,231 $ 175,070,670
============ ==============
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.65 $ 10.26 $ 10.18 $ 10.40 $ 10.13
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.60 0.68 0.67 0.58 0.66
Net realized and unrealized gain
(loss) (0.42) (0.15) 0.38 (0.09) 0.58
-------- -------- -------- -------- --------
Total from investment operations 0.18 0.53 1.05 0.49 1.24
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.58) (0.68) (0.70) (0.60) (0.60)
From net realized gains (0.02) (0.21) (0.27) (0.08) (0.37)
In excess of net realized gains --(c) (0.25) -- (0.03) --
-------- -------- -------- -------- --------
Total distributions (0.60) (1.14) (0.97) (0.71) (0.97)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 9.23 $ 9.65 $ 10.26 $ 10.18 $ 10.40
======== ======== ======== ======== ========
TOTAL RETURN(a) 2.03% 5.03% 10.71% 4.93% 12.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $164,457 $175,071 $431,410 $570,862 $310,949
Net operating expenses to average
daily net assets 0.25% 0.25% 0.25% 0.25% 0.25%
Interest expense to average daily net
assets 0.19% 0.02% -- -- --
Total net expenses to average daily
net assets 0.44%(d) 0.27%(d) 0.25% 0.25% 0.25%
Net investment income to average
daily net assets 5.85% 6.21% 6.14% 6.15% 6.52%
Portfolio turnover rate 20% 17% 59% 25% 70%
Fees and expenses voluntarily waived
or borne by the Manager consisted
of the following per share amounts: --(b) $ 0.02 $ 0.02 $ 0.02 $ 0.01
</TABLE>
(a) The total returns would have been lower had certain expenses not been
waived during the periods shown.
(b) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
(c) The per share distribution in excess of net realized gains was less than
$0.001.
(d) Interest expense incurred as a result of entering into reverse repurchase
agreements is included in the Fund's net expenses. Income earned on
investing proceeds from reverse repurchase agreements is included in
interest income.
See accompanying notes to the financial statements. 7
<PAGE>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Domestic Bond Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on June
24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series of shares into classes.
The Fund seeks high total return through investment in U.S. investment
grade securities. The Fund's benchmark is the Lehman Brothers Government
Bond Index.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of financial statements in
accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Securities for
which quotations are not readily available are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction.
Some fixed income securities and options thereon are valued at the closing
bid for such securities as supplied by a primary pricing source chosen by
the Manager. The Manager evaluates such primary pricing sources on an
ongoing basis, and may change a pricing source should it deem it
appropriate. The Manager is informed of erratic or unusual movements
(including unusual inactivity) in the prices supplied for a security and
at its discretion may override a price supplied by a source (by taking a
price supplied by another source).
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from
yield data relating to investments or securities with similar
characteristics.
8
<PAGE>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
Certain securities held by the Fund were valued on the basis of a price
provided by a principal market maker. The prices provided by the principal
market makers may differ from the value that would be realized if the
securities were sold and the differences could be material to the
financial statements.
At February 29, 2000, the total value of these securities represented 79%
of net assets. Included in this total are U.S. Government backed
securities and highly rated collateralized debt obligations that represent
78% of net assets at February 29, 2000.
FUTURES CONTRACTS
The Fund may use futures contracts to manage its exposure to the bond
markets. Buying futures tends to increase the Fund's exposure to the
underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments.
Upon entering into a futures contract, the Fund is required to deposit
with its custodian, in a segregated account in the name of the futures
broker, an amount of cash or U.S. government and agency obligations in
accordance with the initial margin requirements of the broker or exchange.
Futures contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. The payable or receivable is liquidated on the following business
day. Gains or losses are recognized but not considered realized until the
contracts expire or are closed. Futures contracts involve, to varying
degrees, risk of loss in excess of the variation margin disclosed in the
Statement of Assets and Liabilities. Losses may arise from changes in the
value of the underlying instrument, if there is an illiquid secondary
market for the contracts, or if counterparties do not perform under the
contract terms. Futures contracts are valued at the settlement price
established each day by the board of trade or exchange on which they are
traded. See Note 6 for all open futures contracts as of February 29, 2000.
OPTIONS
The Fund may write call and put options on futures or securities it owns
or in which it may invest. Writing put options tends to increase the
Fund's exposure to the underlying instrument. Writing call options tends
to decrease the Fund's exposure to the underlying instrument. When the
Fund writes a call or put option, an amount equal to the premium received
is recorded as a liability and subsequently marked to market to reflect
the current value of the option written. Premiums received from writing
options which expire are treated as realized gains. Premiums received from
writing options which are exercised or closed are added to the proceeds or
offset against the amounts paid on the future or security transaction to
determine the realized gain or loss. If a written put option is exercised,
the premium reduces the cost basis of the securities purchased by the
Fund. The Fund as a writer of an option has no control over whether the
underlying future or security may be sold (call) or purchased (put) and as
a result bears the market risk of an unfavorable change in the price
9
<PAGE>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
of the security underlying the written option. There is the risk the Fund
may not be able to enter into a closing transaction because of an illiquid
market. At February 29, 2000, the Fund had no written option contracts
outstanding.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. Premiums paid for purchasing options which are exercised or closed
are added to the amounts paid or offset against the proceeds on the
underlying future or security transaction to determine the realized gain
or loss. The risk associated with purchasing put and call options is
limited to the premium paid.
LOAN AGREEMENTS
The Fund may invest in direct debt instruments which are interests in
amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates. The Fund's investments in loans may be in the form of
participations in loans or assignments of all or a portion of loans from
third parties. A loan is often administered by a bank or other financial
institution (the lender) that acts as agent for all holders. The agent
administers the terms of the loan, as specified in the loan agreement.
When investing in a loan participation, the Fund has the right to receive
payments of principal, interest and any fees to which it is entitled only
from the lender selling the loan agreement and only upon receipt by the
lender of payments from the borrower. The Fund generally has no right to
enforce compliance with the terms of the loan agreement with the borrower.
As a result, the Fund may be subject to the credit risk of both the
borrower and the lender that is selling the loan agreement. When the Fund
purchases assignments from lenders it acquires direct rights against the
borrower on the loan. Direct indebtedness of emerging countries involves a
risk that the governmental entities responsible for the repayment of the
debt may be unable or unwilling to pay the principal and interest when
due.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterpartys custodian in a segregated account
for the benefit of the Fund and the counterparty.
10
<PAGE>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
In connection with transactions in repurchase agreements, if the seller
defaults and the value of the collateral declines or if the seller enters
insolvency proceedings, realization of collateral by the Fund may be
delayed or limited.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements with certain banks
and broker/dealers whereby the Fund sells portfolio assets concurrent with
an agreement by the Fund to repurchase the same assets at a later date at
a fixed price. In connection with these agreements, the Fund establishes
segregated accounts with its custodian in which the Fund maintains cash,
U.S. Government securities or other liquid high grade debt obligations
equal in value to its obligations in the name of the counterparty in
respect of reverse repurchase agreements. Reverse repurchase agreements
involve the risk that the market value of the securities the Fund was sold
may decline below the contractual repurchase price under the agreement. At
February 29, 2000, the Fund had entered into reverse repurchase agreements
having a market value of $4,798,000, collateralized by securities with a
market value of $4,937,500. See Note 6 for a summary of open reverse
repurchase agreements as of February 29, 2000
INDEXED SECURITIES
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to
increase or decrease its exposure to different underlying instruments and
to gain exposure to markets that may be difficult to invest in through
conventional securities. Indexed securities may be more volatile than
their underlying instruments, but any loss is limited to the amount of the
original investment.
SECURITY LENDING
The Fund may lend its securities to qualified brokers. The loans are
collateralized at all times with cash or securities with a market value at
least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending
its securities. At February 29, 2000, there were no securities on loan.
SWAP AGREEMENTS
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into interest rate and total return swap
agreements to manage its exposure to interest rates. Interest rate swap
agreements involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments with respect to a notional
amount of principal. Total return swap agreements involve commitments to
pay
11
<PAGE>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
interest in exchange for a market linked return, both based on notional
amounts. To the extent that the total return of the security or index
underlying the transaction exceeds or falls short of the offsetting
interest rate obligation, the Fund will receive a payment from or make a
payment to the counterparty. Swaps are marked to market daily based upon
quotations from market makers and the change, if any, is recorded as
unrealized gain or loss in the Statement of Operations. Payments received
or made at the end of the measurement period are recorded as realized gain
or loss in the Statement of Operations. Net payments of interest on
interest rate swap agreements are included as part of interest income.
Entering into these agreements involves, to varying degrees, elements of
credit and market risk in excess of the amounts recognized on the
Statement of Assets and Liabilities. Such risks involve the possibility
that there will be no liquid market for these agreements, that the
counterparty to the agreements may default on its obligation to perform
and that there may be unfavorable changes in the fluctuation of interest
rates. See Note 6 for a summary of the open swap agreement as of February
29, 2000.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. Distributions to shareholders are recorded by the Fund on
the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to the classification of distributions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable
12
<PAGE>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
income and capital gains under U.S. federal tax rules versus accounting
principles generally accepted in the United States. The calculation of net
investment income per share in the financial highlights excludes these
adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
<S> <C> <C>
$(8,745) $8,745 $--
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis and is adjusted for the accretion of
discounts. Dividend income is recorded on the ex-dividend date. In
determining the net gain or loss on securities sold, the cost of
securities is determined on the identified cost basis. Interest income on
U.S. Treasury inflation indexed securities is accrued daily based upon an
inflation adjusted principal. Additionally, any increase in the principal
or face amount of the securities adjusted for inflation is recorded as
interest income.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .10% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding brokerage commissions, certain other transaction costs
(including transfer taxes), shareholder service fees and extraordinary
expenses) exceed the management fee.
13
<PAGE>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
Prior to March 1, 1999, GMO earned a management fee at the annual rate of
.25% of average daily net assets. GMO had agreed to waive a portion of its
fee and bear other expenses to the extent that the Fund's annual expenses
(including the management fee but excluding brokerage commissions, certain
other transaction costs (including transfer taxes), shareholder service
fees and extraordinary expenses) exceeded .10% of average daily net
assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000, was $1,781. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
For the year ended February 29, 2000, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Sales
----------- -----------
<S> <C> <C>
U.S. Government securities $ 1,002,341 $ 1,004,246
Investments (non-U.S. Government securities) 33,598,875 40,285,306
</TABLE>
At February 29, 2000 the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
$170,250,929 $1,062,159 $(4,560,366) $(3,498,207)
</TABLE>
4. PRINCIPAL SHAREHOLDERS
At February 29, 2000, 39.0% of the outstanding shares of the Fund were
held by three shareholders, each holding in excess of 10% of the Funds
outstanding shares.
14
<PAGE>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
------------------------ --------------------------
Shares Amount Shares Amount
Class III: ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Shares sold 2,481,680 $ 23,173,404 7,444,098 $ 76,654,884
Shares issued to shareholders in reinvestment
of distributions 870,554 8,051,201 2,308,399 23,190,329
Shares repurchased (3,677,351) (34,285,798) (33,636,371) (342,778,679)
---------- ------------ ----------- -------------
Net decrease (325,117) $ (3,061,193) (23,883,874) $(242,933,466)
========== ============ =========== =============
</TABLE>
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 29, 2000 is as
follows:
FUTURES CONTRACTS
<TABLE>
<CAPTION>
Number of Expiration Contract
Contracts Type Date Value
--------- --------------------------------------------- --------------------------------------------- ------------
<C> <S> <C> <C>
Sales
1 U.S. Long Bond June 2000 $ 94,687
16 U.S. Treasury Note 10 Yr. June 2000 1,526,250
230 U.S. Treasury Note 5 Yr. June 2000 22,331,563
<CAPTION>
Net Unrealized
Number of Appreciation
Contracts (Depreciation)
--------- --------------
<C> <C>
Sales
1 $ 549
16 3,146
230 (173,523)
---------
$(169,828)
=========
</TABLE>
At February 29, 2000 the Fund has sufficient cash and/or securities to
cover any commitments or margin on open futures contracts.
15
<PAGE>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
REVERSE REPURCHASE AGREEMENTS
<TABLE>
<CAPTION>
Face Value Description Market Value
---------- ------------------------------------------------------- ------------
<C> <S> <C>
Bear Stearns, 6.19%, dated 2/16/00, to be repurchased
$4,798,000 on demand at face value plus accrued interest. $4,798,000
==========
</TABLE>
<TABLE>
<S> <C>
Average balance outstanding $10,582,224
Average interest rate 5.32%
Maximum balance outstanding $18,242,000
Average shares outstanding 18,049,854
Average balance per share outstanding $ .59
</TABLE>
Average balance outstanding was calculated based on daily balances
outstanding during the period that the Fund had entered into reverse
repurchase agreements.
TOTAL RETURN SWAP AGREEMENTS
<TABLE>
<CAPTION>
Notional Expiration Net Unrealized
Amount Date Description Appreciation
------------ ---------- -------------------------------------------------- --------------
<C> <C> <S> <C>
$ 25,000,000 11/12/00 Agreement with Morgan Guaranty Trust Company dated $ 226,331
11/09/98 to receive (pay) the notional amount
multiplied by the return on the Lehman Aggregate
Index and to pay the notional amount multiplied by
3 month LIBOR adjusted by a specified spread. +
100,000,000 6/01/01 Agreement with Lehman Brothers Special Financing 894,769
Inc. dated 5/20/99 to receive (pay) the notional
amount multiplied by the return on the Lehman
Brothers U.S. Government Bond Index and to pay the
notional amount multiplied by 1 month LIBOR
adjusted by a specified spread. +
----------
$1,121,100
==========
</TABLE>
+ This swap agreement is valued by management (Note 1).
16
<PAGE>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
For the fiscal year ended February 29, 2000, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 3% of the distributions as net capital gain dividends.
The fund has elected to defer to March 1, 2000 post October capital losses
of $1,617,004.
At February 29, 2000 the Fund had a capital loss carryforward available to
offset future capital gains, if any, of the following amount:
<TABLE>
<CAPTION>
Year of Expiration Amount
------------------ ----------
<S> <C>
2008 $3,335,828
</TABLE>
17
<PAGE>
GMO DOMESTIC BOND FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Mr. William L. Nemerever and Mr. Thomas F. Cooper are primarily responsible for
the day-to-day management of the Fund's portfolio. Each of these individuals has
been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO Domestic Bond Fund returned 2.0% for the fiscal
year ended February 29, 2000, as compared with the 1.1% return of the Lehman
Brothers Government Bond Index. Consistent with the Fund's investment objectives
and policies, the Fund was substantially invested in high-quality, domestic
fixed income instruments throughout the period.
The Fund outperformed the benchmark during the fiscal year by 0.9%. While
spreads relative to U.S. Treasuries declined during the period, they remained
high relative to historical levels. The Fund benefited from capital gains and
from wider spreads.
At fiscal year end, approximately 28% of the Fund was invested in highly-rated,
floating rate, asset-backed securities. These included issues backed by auto,
truck, credit card and health care receivables. Also, approximately 65% of the
Fund was invested in U.S. government agency issues that offer higher yields than
similar maturity U.S. Treasury securities. The remainder of the Fund was split
between U.S. Treasuries (less than 1%), corporates (1%), and foreign governments
bonds (5%).
Although spreads relative to U.S. Treasuries declined during the fiscal year,
they remain high relative to historical levels. Yield to maturity for the Fund
is currently about 80 basis points higher than the benchmark. The Fund's
duration is designed to match the benchmark.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO DOMESTIC BOND FUND CLASS III SHARES AND THE
LEHMAN BROTHERS GOVERNMENT BOND INDEX
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
Average Annual Total Returns
Inception 8/18/94
1yr 5yr 10yr (ITD)
<S> <C> <C>
2.03 6.96 6.87
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
Date GMO Domestic Bond Fund-III Lehman Brothers Government Bond
<S> <C> <C>
8/18/94 10000 10000
9/30/94 9890 9927
12/31/94 9939 9962
3/31/95 10377 10431
6/30/95 11036 11078
9/30/95 11272 11275
12/31/95 11785 11790
3/31/96 11506 11523
6/30/96 11560 11578
9/30/96 11785 11773
12/31/96 12143 12116
3/31/97 12035 12018
6/30/97 12472 12435
9/30/97 12876 12852
12/31/97 13352 13278
3/31/98 13510 13478
6/30/98 13899 13834
9/30/98 14662 14599
12/31/98 14427 14586
3/31/99 14192 14378
6/30/99 14190 14255
9/30/99 14185 14350
12/31/99 14168 14260
2/29/00 14450 14484
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The total returns would have been lower had certain expenses
not been reimbursed during the periods shown and do not include the effect of
taxes. Each performance figure assumes purchase at the beginning and
redemption at the end of the stated period. Past performance is not
indicative of future performance. Information is unaudited.
<PAGE>
GMO GLOBAL BALANCED ALLOCATION FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO GLOBAL BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Global Balanced Allocation Fund
at February 29, 2000, the results of its operations, the changes in its net
assets and the financial highlights for each of the periods indicated therein,
in conformity with accounting principles generally accepted in the United
States. These financial statements and financial highlights (hereafter referred
to as "financial statements") are the responsibility of the Trusts management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at February 29, 2000 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 10, 2000
<PAGE>
GMO GLOBAL BALANCED ALLOCATION FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
MUTUAL FUNDS -- 100.0%
524,691 GMO Currency Hedged International Core Fund 5,267,894
1,797,460 GMO Domestic Bond Fund 16,590,559
454,260 GMO Emerging Country Debt Fund 3,970,230
503,426 GMO Emerging Markets Fund 5,618,234
508,367 GMO Evolving Countries Fund 5,800,465
58,404 GMO Growth Fund 289,102
579,490 GMO Inflation Indexed Bond Fund 5,632,642
299,661 GMO International Bond Fund 2,753,884
413,569 GMO International Core Fund 8,647,732
76,310 GMO International Small Companies Fund 880,622
806,422 GMO REIT Fund 6,661,050
224,860 GMO Small Cap Growth Fund 3,793,380
498,732 GMO Small Cap Value Fund 6,189,265
2,810,603 GMO U.S. Bond/Global Alpha A Fund 27,094,212
1,059,749 GMO U.S. Core Fund 17,623,622
283,950 GMO Value Fund 2,265,923
-------------
TOTAL MUTUAL FUNDS (COST $126,875,338) 119,078,816
-------------
SHORT-TERM INVESTMENTS -- 0.0%
REPURCHASE AGREEMENT -- 0.0%
$ 7,286 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/29/00, due 3/01/00, with a maturity value of $7,287,
and an effective yield of 4.95%, collateralized by a
U.S. Treasury Obligation with a rate of 8.125%,
maturity date of 8/15/19, and a market value, including
accrued interest, of $7,432. 7,286
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $7,286) 7,286
-------------
TOTAL INVESTMENTS -- 100.0%
(Cost $126,882,624) 119,086,102
Other Assets and Liabilities (net) -- (0.0%) (11,513)
-------------
TOTAL NET ASSETS -- 100.0% $ 119,074,589
=============
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO GLOBAL BALANCED ALLOCATION FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $126,882,624) (Note 1) $119,086,102
Receivable for expenses waived or borne by Manager (Note
2) 4,961
------------
Total assets 119,091,063
------------
LIABILITIES:
Accrued expenses 16,474
------------
Total liabilities 16,474
------------
NET ASSETS $119,074,589
============
NET ASSETS CONSIST OF:
Paid-in capital $127,127,984
Accumulated undistributed net investment income 1,382,361
Accumulated net realized loss (1,639,234)
Net unrealized depreciation (7,796,522)
------------
$119,074,589
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $119,074,589
============
SHARES OUTSTANDING:
Class III 11,050,953
============
NET ASSET VALUE PER SHARE:
Class III $ 10.78
============
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO GLOBAL BALANCED ALLOCATION FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends from investment company shares $ 4,884,402
Interest 3,606
-----------
Total income 4,888,008
-----------
EXPENSES:
Audit fees 17,556
Custodian and transfer agent fees 18,292
Legal fees 3,021
Registration fees 2,136
Trustees fees (Note 2) 1,315
Miscellaneous 1,646
Fees waived or borne by Manager (Note 2) (43,966)
-----------
Net expenses --
-----------
Net investment income 4,888,008
-----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (5,563,922)
Realized gain distributions from investment company
shares 5,502,787
-----------
Net realized loss (61,135)
-----------
Change in net unrealized appreciation (depreciation) on
investments 10,164,723
-----------
Net realized and unrealized gain 10,103,588
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $14,991,596
===========
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO GLOBAL BALANCED ALLOCATION FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 4,888,008 $ 3,054,707
Net realized gain (loss) (61,135) 11,000,413
Change in net unrealized appreciation (depreciation) 10,164,723 (17,495,459)
------------ ------------
Net increase (decrease) in net assets from
operations 14,991,596 (3,440,339)
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (4,730,381) (3,054,707)
------------ ------------
Total distributions from net investment income (4,730,381) (3,054,707)
------------ ------------
In excess of net investment income
Class III -- (3,098,321)
------------ ------------
Total distributions in excess of net investment
income -- (3,098,321)
------------ ------------
Net realized gains
Class III (6,097,300) (5,840,251)
------------ ------------
Total distributions from net realized gains (6,097,300) (5,840,251)
------------ ------------
In excess of net realized gains
Class III (7,803) --
------------ ------------
Total distributions in excess of net realized
gains (7,803) --
------------ ------------
(10,835,484) (11,993,279)
------------ ------------
Net share transactions: (Note 5)
Class III (12,681,947) 27,754,476
------------ ------------
Increase (decrease) in net assets resulting from net
share transactions (12,681,947) 27,754,476
------------ ------------
Total increase (decrease) in net assets (8,525,835) 12,320,858
NET ASSETS:
Beginning of period 127,600,424 115,279,566
------------ ------------
End of period (including accumulated undistributed
net investment income of $1,382,361 and $14,964,
respectively) $119,074,589 $127,600,424
============ ============
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO GLOBAL BALANCED ALLOCATION FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
-----------------------------
2000 1999 1998*
-------- -------- ---------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.51 $ 11.87 $ 11.56
-------- -------- --------
Income from investment operations:
Net investment income(b) 0.44 0.31 0.17+
Net realized and unrealized gain (loss) 0.91 (0.54) 1.30
-------- -------- --------
Total from investment operations 1.35 (0.23) 1.47
-------- -------- --------
Less distributions to shareholders:
From net investment income (0.43) (0.28) (0.33)
In excess of net investment income -- (0.29) --(c)
From net realized gains (0.65) (0.56) (0.83)
In excess of net realized gains --(f) -- --
-------- -------- --------
Total distributions (1.08) (1.13) (1.16)
-------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 10.78 $ 10.51 $ 11.87
======== ======== ========
TOTAL RETURN(a) 12.77% (2.27)% 13.31%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $119,075 $127,600 $115,280
Net expenses to average daily net assets(d) 0.00% 0.00% 0.00%**
Net investment income to average daily net
assets(b) 4.18% 2.50% 1.91%**
Portfolio turnover rate 26% 10% 18%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following per
share amounts: --(e) $ 0.01 $ 0.01
</TABLE>
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(b) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
(c) The per share distribution in excess of net investment income was $0.001.
(d) Net expenses excludes expenses incurred indirectly through investment in
underlying funds. See Note 1.
(e) Fees and expenses waved or borne by the Manager were less than $0.01 per
share.
(f) The per share distribution in excess of net realized gains is $0.001.
+ Computed using average shares outstanding throughout the period.
++ Not annualized.
* Period from June 2, 1997 (commencement of operations) to February 28, 1998.
** Annualized.
See accompanying notes to the financial statements. 5
<PAGE>
GMO GLOBAL BALANCED ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Global Balanced Allocation Fund (the "Fund") is a series of GMO Trust
(the "Trust"). The Fund is registered under the Investment Company Act of
1940, as amended, as an open-end, diversified management investment
company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo &
Co. LLC (the "Manager" or "GMO"). The Trust was established as a
Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series of shares
into classes.
The Fund operates as a "fund-of-funds" in that, pursuant to management
provided by the Manager, it makes investments in other funds of the Trust
("underlying funds"). The Fund seeks total return greater than the return
of the GMO Global Balanced Index through investment to varying extents in
other funds of the Trust. The Fund will pursue its objective by investing
in Class III shares of domestic equity, international equity, and fixed
income funds of the Trust.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of financial statements in
accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Shares of underlying funds are valued at their net asset value as reported
on each business day. Short-term investments with a remaining maturity of
sixty days or less are valued at amortized cost, which approximates market
value. Securities for which quotations are not readily available are
valued at fair value as determined in good faith by the Trustees or other
persons acting at their direction.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty.
6
<PAGE>
GMO GLOBAL BALANCED ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
In connection with transactions in repurchase agreements, if the seller
defaults and the value of the collateral declines or if the seller enters
insolvency proceedings, realization of collateral by the Fund may be
delayed or limited.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to the classification of distributions
received from underlying funds.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable income and capital gains under U.S.
federal tax rules versus accounting principles generally accepted in the
United States. The calculation of net investment income per share in the
financial highlights excludes these adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
<S> <C> <C>
$1,209,770 $(1,247,402) $37,632
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for
7
<PAGE>
GMO GLOBAL BALANCED ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
financial statement and tax purposes which result in temporary
over-distributions for financial statement purposes are classified as
distributions in excess of net investment income or accumulated net
realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Income dividends
and capital gain distributions from underlying funds are recorded on the
ex-dividend date. Interest income is recorded on the accrual basis. In
determining the net gain or loss on securities sold, the cost of
securities is determined on the identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. In
addition, the Fund will also incur fees and expenses indirectly as a
shareholder in the underlying funds. Because the underlying funds have
varied expense and fee levels and the Fund may own different proportions
of underlying funds at different times, the amount of fees and expenses
indirectly incurred by the Fund will vary.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is .35% of the amount
invested. In the case of cash redemptions, the fee is .11% of the amount
redeemed. All purchase premiums and redemption fees are paid to and
recorded by the Fund as paid-in capital. For the year ended February 29,
2000 the Fund received $56,308 in purchase premiums and $34,277 in
redemption fees. There is no premium for reinvested distributions or
in-kind transactions.
INVESTMENT RISK
The Fund is subject to the investment risk associated with an investment
in the underlying funds, some of which may invest in foreign securities.
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments,
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times more
volatile than securities of comparable U.S. companies and U.S. securities
markets. The risks described above apply to an even greater extent to
investments in emerging markets. The securities markets of emerging
countries are generally smaller, less developed, less liquid, and more
volatile than the securities markets of the U.S. and developed foreign
markets.
8
<PAGE>
GMO GLOBAL BALANCED ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Manager determines the allocation of the assets of the Fund among
designated underlying funds. The Manager does not charge an advisory fee
for asset allocation advice provided to the Fund, but receives advisory
and shareholder service fees from the underlying funds in which the Fund
invests. The Fund has adopted a Shareholder Service Plan under which the
Fund pays GMO a shareholder service fee for client and shareholder
service, reporting and other support. No shareholder service fee is
charged for Class III shares.
GMO has contractually agreed to reimburse all expenses directly incurred
by the Fund until June 30, 2000 (excluding brokerage commissions, certain
other transaction costs (including transfer taxes), shareholder service
fees and extraordinary expenses).
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000 was $1,315. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 29, 2000 aggregated
$29,999,964 and $43,127,702, respectively.
At February 29, 2000, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
$128,813,854 $4,203,823 $(13,931,575) $(9,727,752)
</TABLE>
4. PRINCIPAL SHAREHOLDERS
At February 29, 2000, 53.0% of the outstanding shares of the Fund were
held by four shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
9
<PAGE>
GMO GLOBAL BALANCED ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
------------------------- -----------------------
Shares Amount Shares Amount
Class III: ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Shares sold 1,463,905 $ 16,122,366 2,130,109 $24,341,942
Shares issued to shareholders
in reinvestment of distributions 937,011 10,247,908 1,001,505 11,059,081
Shares repurchased (3,494,064) (39,052,221) (695,474) (7,646,547)
----------- ------------ ---------- -----------
Net increase (decrease) (1,093,148) $(12,681,947) 2,436,140 $27,754,476
=========== ============ ========== ===========
</TABLE>
10
<PAGE>
GMO GLOBAL BALANCED ALLOCATION FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
For the fiscal year ended February 29, 2000, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 56% of distributions as net capital gain dividends.
11
<PAGE>
GMO GLOBAL BALANCED ALLOCATION FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Mr. R. Jeremy Grantham and Mr. Ben Inker are primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. Grantham has been a portfolio
manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years.
Mr. Inker has been with the firm for eight years.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the Global Balanced Allocation Fund returned 12.8% for
the twelve months ended February 29, 2000. During that period the benchmark
(48.75% S&P 500/16.25% GMO EAFE Extended/35% Lehman Aggregate) returned 10.3%.
Our fundamental conclusion at the outset of 1999 was that the developed, large
cap equity markets in the U.S. and abroad were markedly overvalued. Our research
indicated that better long-term returns could be achieved from investments in
other asset classes, including both REITs and small caps in the U.S., emerging
and small cap international equities and fixed income instruments. By
diversifying out of large cap equities and into other asset classes with good
return potential, we believed we were exposing our clients to a portfolio with
better return potential and a reasonable level of risk. For the period, our
emerging equities and small cap growth outperformed the benchmark by large
margins, while small cap value and REITs underperformed substantially.
During the fiscal year, the Fund was underweight in U.S. stocks by 18% relative
to the benchmark. This weighting was split between emerging equities, which
outperformed the S&P 500 by 56%, and fixed income, which underperformed the S&P
500 by 10%. Within U.S. stocks, we tilted the portfolio towards the most
attractively valued sectors including real estate investment trusts (REITs),
where we were 5% overweight. For the fiscal year, the allocation to REITs hurt
performance, as the GMO REIT Fund underperformed the S&P 500 Index by 16%.
Performance of the GMO Growth Fund was 33% above the S&P 500 and GMO Small Cap
Growth was 56% above the S&P 500. However, this gain was partially offset by
underperformance of the GMO Small Cap Value and Value Funds, which
underperformed the S&P 500 by 1% and 20%, respectively.
Performance of the International Core Fund lagged the benchmark substantially as
the rally in expensive multinationals continued. The GMO International Core Fund
returned 8%, underperforming the MSCI EAFE Index by 17%. The Fund was 7%
overweight in emerging equities for the period, helping performance as both the
GMO Emerging Markets Fund and the GMO Evolving Countries Fund outperformed the
IFC Investable Composite by 9.5% and 31%, respectively. Collectively, the
allocation to international equities added 1.3% to the Fund relative to the
benchmark, with well more than 100% of this due to the overweight and strong
implementation in emerging equities.
The Fund was overweight 12% in fixed income, with allocations to international
and emerging bonds along with U.S. fixed income. The drag on the portfolio due
to the fixed income overweight was partially offset by the extremely strong
performance (+46%) of emerging debt within the fixed income portfolio.
<PAGE>
GMO GLOBAL BALANCED ALLOCATION FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
OUTLOOK
The fundamentals of today's markets do not justify the extreme valuation
disparities that we see. The investment climate has become astonishingly
speculative, exemplified by the extraordinary returns of "new economy" stocks.
Our conviction that these conditions cannot prevail indefinitely remains firm.
As such, we will hold our positions, which remain remarkably cheap on a relative
basis. With the eventual return to intrinsic value, we expect the opportunities
for value-added resulting from these extreme conditions will be extraordinary
with the good relative performance of the last year merely a small down payment.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO &
CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO GLOBAL BALANCED ALLOCATION FUND CLASS III SHARES AND THE
S&P 500 INDEX (50%)/LEHMAN AGGREGATE (50%)
AS OF FEBRUARY 29, 2000
[GRAPH]
<TABLE>
<CAPTION>
Average Annual Total Returns
Inception 7/29/96
1yr 5yr 10yr (ITD)*
<S> <C> <C>
12.25 N/A 11.65
</TABLE>
<TABLE>
<CAPTION>
Date GMO Global Balanced Allocation Fund-III 50% SP500/50% Lehman Agg Bond GMO Global Balanced Index
<S> <C> <C> <C>
7/29/96 9965 10000 10000
9/30/96 10583 10574 10604
12/31/96 11205 11175 11206
3/31/97 11307 11298 11357
6/30/97 12255 12476 12672
9/30/97 13114 13159 13304
12/31/97 12979 13548 13462
3/31/98 13910 14587 14766
6/30/98 13638 15001 15116
9/30/98 12562 14590 14260
12/31/98 13548 16122 16174
3/31/99 13485 16482 16563
6/30/99 14526 16988 17178
9/30/99 14083 16510 16783
12/31/99 15034 17701 18445
2/29/00 14852 17169 17778
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The total returns would have been lower had certain expenses
not been reimbursed during the periods shown and do not include the effect of
taxes. Each performance figure assumes purchase at the beginning and
redemption at the end of the stated period and reflects a transaction fee of
35 bp on the purchase and 11 bp on the redemption. Transaction fees are
retained by the Fund to cover trading costs. Past performance is not
indicative of future performance. Information is unaudited.
*Performance is linked to Class I shares (originating share class) and is
converted to Class III shares on June 2, 1997 (commencement date of Class
III shares).
<PAGE>
GMO INTERNATIONAL EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO International Equity Allocation
Fund at February 29, 2000, and the results of its operations, the changes in its
net assets and the financial highlights for each of the periods indicated
therein, in conformity with accounting principles generally accepted in the
United States. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Trust's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 29, 2000 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 10, 2000
<PAGE>
GMO INTERNATIONAL EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
MUTUAL FUNDS -- 100.0%
377,841 GMO Emerging Country Debt Fund 3,302,326
736,141 GMO Emerging Markets Fund 8,215,334
1,061,198 GMO Evolving Countries Fund 12,108,267
196,955 GMO Inflation Indexed Bond Fund 1,914,405
181,215 GMO International Bond Fund 1,665,362
2,140,337 GMO International Core Fund 44,754,441
244,551 GMO International Small Companies Fund 2,822,119
131,257 GMO U.S. Bond/Global Alpha A Fund 1,265,313
------------
TOTAL MUTUAL FUNDS (COST $70,141,702) 76,047,567
------------
SHORT-TERM INVESTMENTS -- 0.0%
REPURCHASE AGREEMENT -- 0.0%
$ 7,382 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/29/00, due 3/1/00, with a maturity value of $7,383
and an effective yield of 4.95%, collateralized by a
U.S. Treasury Obligation with a rate of 8.125%,
maturity date of 8/15/19 and market value, including
accrued interest of $7,530. 7,382
------------
TOTAL SHORT-TERM INVESTMENTS (COST $7,382) 7,382
------------
TOTAL INVESTMENTS -- 100.0%
(Cost $70,149,084) 76,054,949
Other Assets and Liabilities (net) -- (0.0%) (8,101)
------------
TOTAL NET ASSETS -- 100.0% $ 76,046,848
============
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO INTERNATIONAL EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $70,149,084) (Note 1) $ 76,054,949
Receivable for investments sold 68,000
Receivable for expenses waived or borne by Manager (Note
2) 3,935
------------
Total assets 76,126,884
------------
LIABILITIES:
Payable for Fund shares repurchased 65,000
Accrued expenses 15,036
------------
Total liabilities 80,036
------------
NET ASSETS $ 76,046,848
============
NET ASSETS CONSIST OF:
Paid-in capital $ 75,018,749
Accumulated undistributed net investment income 2,339,736
Accumulated net realized loss (7,217,502)
Net unrealized appreciation 5,905,865
------------
$ 76,046,848
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $ 76,046,848
============
SHARES OUTSTANDING:
Class III 7,703,655
============
NET ASSET VALUE PER SHARE:
Class III $ 9.87
============
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO INTERNATIONAL EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends from investment company shares $ 1,902,062
Interest 456
-----------
Total income 1,902,518
-----------
EXPENSES:
Audit fees 17,465
Custodian and transfer agent fees 12,411
Registration fees 2,533
Legal fees 2,289
Trustees fees (Note 2) 1,025
Miscellaneous 1,369
Fees waived or borne by Manager (Note 2) (37,092)
-----------
Net expenses --
-----------
Net investment income 1,902,518
-----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (6,003,884)
Realized gain distributions from investment company
shares 1,609,100
-----------
Net realized loss (4,394,784)
Change in net unrealized appreciation (depreciation) on
investments 22,936,622
-----------
Net realized and unrealized gain 18,541,838
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $20,444,356
===========
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO INTERNATIONAL EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 1,902,518 $ 1,656,149
Net realized gain (loss) (4,394,784) 1,219,443
Change in net unrealized appreciation (depreciation) 22,936,622 (10,858,440)
------------ ------------
Net increase (decrease) in net assets from
operations 20,444,356 (7,982,848)
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (624,175) (1,656,149)
------------ ------------
Total distributions from net investment income (624,175) (1,656,149)
------------ ------------
In excess of net investment income
Class III -- (2,114,210)
------------ ------------
Total distributions in excess of net investment
income -- (2,114,210)
------------ ------------
Net realized gains
Class III (2,308,096) (4,795,515)
------------ ------------
Total distributions from net realized gains (2,308,096) (4,795,515)
------------ ------------
(2,932,271) (8,565,874)
------------ ------------
Net share transactions: (Note 5)
Class III (31,626,405) 20,834,383
------------ ------------
Increase (decrease) in net assets resulting from net
share transactions (31,626,405) 20,834,383
------------ ------------
Total increase (decrease) in net assets (14,114,320) 4,285,661
NET ASSETS:
Beginning of period 90,161,168 85,875,507
------------ ------------
End of period (including accumulated undistributed
net investment income of $2,339,736 and $0,
respectively) $ 76,046,848 $ 90,161,168
============ ============
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO INTERNATIONAL EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
------------------------------------
2000 1999 1998 1997*
------- ------- ------- ---------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.28 $ 10.18 $ 10.41 $ 10.00
------- ------- ------- -------
Income from investment operations:
Net investment income(a) 0.22+ 0.19+ 0.33+ 0.10
Net realized and unrealized gain (loss) 1.73 (1.01) 0.31 0.41
------- ------- ------- -------
Total from investment operations 1.95 (0.82) 0.64 0.51
------- ------- ------- -------
Less distributions to shareholders:
From net investment income (0.08) (0.19) (0.29) (0.07)
In excess of net investment income -- (0.31) --(b) --
From net realized gains (0.28) (0.58) (0.58) (0.03)
------- ------- ------- -------
Total distributions (0.36) (1.08) (0.87) (0.10)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 9.87 $ 8.28 $ 10.18 $ 10.41
======= ======= ======= =======
TOTAL RETURN(c) 23.58% (8.77)% 6.73% 5.11%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $76,047 $90,161 $85,876 $30,459
Net expenses to average daily net
assets(d) 0.00% 0.00% 0.00% 0.01%**
Net investment income to average daily net
assets(a) 2.24% 2.06% 3.13% 3.60%**
Portfolio turnover rate 8% 36% 16% 0%
Fees and expenses voluntarily waived or
borne by the Manager consisted of the
following per share amounts: --(e) $ 0.01 $ 0.01 $ 0.01
</TABLE>
(a) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
(b) The per share distribution in excess of net investment income was $0.001.
(c) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(d) Net expenses exclude expenses incurred indirectly through investment in
underlying funds. See Note 1.
(e) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
* Period from October 11, 1996 (commencement of operations) to February 28,
1997.
** Annualized.
+ Computed using average shares outstanding throughout the period.
++ Not annualized.
See accompanying notes to the financial statements. 5
<PAGE>
GMO INTERNATIONAL EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO International Equity Allocation Fund (the "Fund"), is a series of GMO
Trust (the "Trust"). The Fund is registered under the Investment Company
Act of 1940, as amended, as an open-end, diversified management investment
company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo &
Co. LLC (the "Manager" or "GMO"). The Trust was established as a
Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series of shares
into classes.
The Fund operates as a "fund-of-funds" in that, pursuant to management
provided by the Manager, it makes investments in other funds of the Trust
("underlying funds"). The Fund seeks total return greater than the return
of the GMO EAFE Extended benchmark through investment to varying extents
in other Funds of the Trust. The Fund will pursue its objective by
investing in Class III shares of international equity and fixed income
funds of the Trust.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of financial statements in
accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Shares of underlying funds are valued at their net asset value as reported
on each business day. Short-term investments with a remaining maturity of
sixty days or less are valued at amortized cost, which approximates market
value. Securities for which quotations are not readily available are
valued at fair value as determined in good faith by the Trustees or other
persons acting at their direction.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty.
6
<PAGE>
GMO INTERNATIONAL EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
In connection with transactions in repurchase agreements, if the seller
defaults and the value of the collateral declines or if the seller enters
insolvency proceedings, realization of collateral by the Fund may be
delayed or limited.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to the classification of distributions
received from underlying funds.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable income and capital gains under U.S.
federal tax rules versus accounting principles generally accepted in the
United States. The calculation of net investment income per share in the
financial highlights excludes these adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
<S> <C> <C>
$1,061,393 $ (1,224,974) $163,581
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for
7
<PAGE>
GMO INTERNATIONAL EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
financial statement and tax purposes which result in temporary
over-distributions for financial statement purposes are classified as
distributions in excess of net investment income or accumulated net
realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Income dividends
and capital gain distributions from underlying funds are recorded on the
ex-dividend date. Interest income is recorded on the accrual basis. In
determining the net gain or loss on securities sold, the cost of
securities is determined on the identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. In
addition, the Fund will also incur fees and expenses indirectly as a
shareholder in the underlying funds. Because the underlying funds have
varied expense and fee levels and the Fund may own different proportions
of underlying funds at different times, the amount of fees and expenses
indirectly incurred by the Fund will vary.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is .80% of the amount
invested. In the case of cash redemptions, the fee is .11% of the amount
redeemed. All purchase premiums and redemption fees are paid to and
recorded by the Fund as paid-in capital. For the year ended February 29,
2000, the Fund received $6,311 in purchase premiums and $38,774 in
redemption fees. There is no premium for reinvested distributions or
in-kind transactions.
INVESTMENT RISK
The Fund is subject to the investment risk associated with an investment
in the underlying funds, some of which may invest in foreign securities.
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments,
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times more
volatile than securities of comparable U.S. companies and U.S. securities
markets. The risks described above apply to an even greater extent to
investments in emerging markets. The securities markets of emerging
countries are generally smaller, less developed, less liquid, and more
volatile than the securities markets of the U.S. and developed foreign
markets.
8
<PAGE>
GMO INTERNATIONAL EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Manager determines the allocation of the assets of the Fund among
designated underlying funds. The Manager does not charge an advisory fee
for asset allocation advice provided to the Fund, but receives advisory
and shareholder service fees from the underlying funds in which the Fund
invests. The Fund has adopted a Shareholder Service Plan under which the
Fund pays GMO a shareholder service fee for client and shareholder
service, reporting and other support. No shareholder service fee is
charged for Class III shares.
GMO has contractually agreed to reimburse all expenses directly incurred
by the Fund until June 30, 2000 (excluding brokerage commissions, certain
other transaction costs (including transfer taxes), shareholder service
fees and extraordinary expenses).
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000 was $1,025. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 29, 2000, aggregated
$6,850,792 and $37,901,457, respectively.
At February 29, 2000 the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
$72,959,021 $5,443,184 $(2,347,256) $3,095,928
</TABLE>
4. PRINCIPAL SHAREHOLDERS
At February 29, 2000, 58.4% of the outstanding shares of the Fund were
held by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
9
<PAGE>
GMO INTERNATIONAL EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
------------------------- -----------------------
Shares Amount Shares Amount
Class III: ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Shares sold 78,119 $ 788,869 4,350,530 $37,996,130
Shares issued to shareholders
in reinvestment of distributions 286,054 2,864,228 770,742 7,138,503
Shares repurchased (3,552,188) (35,279,502) (2,665,394) (24,300,250)
----------- ------------ ---------- -----------
Net increase (decrease) (3,188,015) $(31,626,405) 2,455,878 $20,834,383
=========== ============ ========== ===========
</TABLE>
10
<PAGE>
GMO INTERNATIONAL EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
For the fiscal year ended February 29, 2000, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 78.6% of the distributions as net capital gain
dividends.
At February 29, 2000 the Fund had a capital loss carryforward available to
offset future capital gains, if any, of the following amount:
<TABLE>
<CAPTION>
Year of Expiration Amount
------------------------------------------------------------ ----------
<S> <C>
2008 $4,407,565
</TABLE>
11
<PAGE>
GMO INTERNATIONAL EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER
Mr. R. Jeremy Grantham and Mr. Ben Inker are primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. Grantham has been a portfolio
manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years.
Mr. Inker has been with the firm for eight years.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the International Equity Allocation Fund returned 23.6%
for the twelve months ended February 29, 2000. The Fund's benchmark, the GMO
EAFE Extended + Index, returned 26.6%.
During fiscal 1999, the Fund's performance lagged the benchmark by 3%. This was
basically due to a tug-of-war between the strong performance of emerging markets
and strong implementation in the emerging funds, and very weak implementation in
international developed equities and the drag of a fixed income allocation.
The International Core Fund (the Fund's largest holding) returned 8%,
underperforming its index by 17%. This was due to stock selection, and in
particular to the Fund's tilt towards value. Because of the opportunities
represented by the wide dispersion in price-to-book ratios, the Fund is heavily
concentrated in the cheaper stocks on price-to-book. The Fund is 50% invested in
the cheapest 25% of stocks within the EAFE universe and 90% within the cheapest
half. Those groups underperformed EAFE by -14.5% and -9.3% respectively for the
fiscal year. The Fund was further hurt by its emphasis on smaller capitalization
stocks, which underperformed significantly even after accounting for their
overlap with value. Small stocks within EAFE underperformed by -17%, and small
value stocks underperformed by -30%.
Value stocks did very poorly whether defined on the basis of book, earnings,
sales or dividend yield, which shows that the Fund's underperformance is not a
consequence of focussing on price-to-book as a valuation measure. The Fund's
more sophisticated value models, which make further adjustments to credit
companies for growth and financial quality, fared equally poorly. In this
overheated environment, reasonable adjustments did not suffice to make the most
expensive price-to-book stocks look attractive.
Much of the size and value underperformance was driven by telecommunications and
technology stocks. Of that, over 7% of negative attribution is due to just five
large capitalization stocks that doubled or tripled in price from expensive
starting levels.
The Fund was overweight 10% in fixed income, with allocations to international
and emerging bonds along with U.S. fixed income. The drag on the portfolio due
to the fixed income overweight was substantially offset by the extremely strong
performance (+46%) of emerging debt within the fixed income portfolio.
OUTLOOK
Based on a careful analysis of current company fundamentals and valuation, GMO
has decided to retain its substantial overweights in value stocks and small
companies in order to benefit from the inevitable rebound. While the growth
oriented bull market of the last few years has been a difficult period for the
International
<PAGE>
GMO INTERNATIONAL EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
Core Fund, it leaves us at a moment of great opportunity. For value investors it
is always darkest before the dawn. Markets overshoot fair value, and it is
difficult to call the turning points. Yet the greater the overshoot past fair
value, the more certain is the eventual rebound, and greater is the reward to
those that participate.
Despite the strong performance of emerging equity in 1999, we are also
maintaining our overweight here. Emerging equities are still very cheap relative
to the developed markets, and the recovery process from the crises of 1997-98
still has more room to go.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO &
CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO INTERNATIONAL EQUITY ALLOCATION FUND CLASS III SHARES AND THE
MSCI ALL COUNTRY WORLD EX-U.S. INDEX
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
Average Annual Total Returns
Inception 10/11/96
1yr 5yr 10yr (ITD)
<S> <C> <C>
22.46 N/A 6.9
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
Date GMO International Equity Allocation Fund-III MSCI AC World ex US GMO EAFE Extended +
<S> <C> <C> <C>
10/11/96 9920 10000 10000
12/31/96 10186 10254 10317
3/31/97 10306 10246 10435
6/30/97 11198 11575 11627
9/30/97 11486 11461 11719
12/31/97 10363 10430 10853
3/31/98 11774 11858 12470
6/30/98 10932 11648 12412
9/30/98 9192 9890 10590
12/31/98 10570 11901 12672
3/31/99 10668 12211 12787
6/30/99 12249 12845 13246
9/30/99 12222 13264 13722
12/31/99 13399 15685 16145
2/29/00 12533 15286 15585
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The total returns would have been lower had certain expenses
not been reimbursed during the periods shown and do not include the effect of
taxes. Each performance figure assumes purchase at the beginning and
redemption at the end of the stated period and reflects a transaction fee of
80 bp on the purchase and 11 bp on the redemption. Transaction fees are
retained by the Fund to cover trading costs. Past performance is not
indicative of future performance. Information is unaudited.
<PAGE>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Intrinsic Value Fund at
February 29, 2000, the results of its operations, the changes in its net assets
and the financial highlights for the period from August 2, 1999 (commencement of
operations) through February 29, 2000, in conformity with accounting principles
generally accepted in the United States. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at February 29, 2000 by
correspondence with the custodian and brokers, provides a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 10, 2000
<PAGE>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 96.9%
AEROSPACE -- 0.7%
1,900 Cordant Technologies Inc 61,512
4,300 Goodrich (BF) Co 102,931
2,800 Northrop Grumman Corp 127,225
------------
291,668
------------
AUTOMOTIVE -- 7.7%
4,600 Autonation Inc* 34,787
3,600 Cooper Tire & Rubber Co 38,925
15,800 Ford Motor Co 657,675
25,800 General Motors Corp 1,962,412
700 General Motors Corp, Class H* 84,350
2,600 Genuine Parts Co 58,662
2,900 Goodyear Tire & Rubber Co 65,794
2,500 Meritor Automotive Inc 35,000
800 Paccar Inc 34,450
800 Tenneco Automotive Inc 5,900
------------
2,977,955
------------
BANKING AND FINANCIAL SERVICES -- 13.1%
3,300 Astoria Financial Corp 78,581
2,000 Bancwest Corp 30,375
6,900 Bank of America Corp 317,831
13,700 Bank One Corp 353,631
7,980 Bear Stearns Cos Inc 313,215
6,700 Chase Manhattan Corp 533,487
700 Commercial Federal Corp 9,056
5,200 Countrywide Credit Industries Inc 129,675
200 Donaldson Lufkin & Jenrette 8,687
4,600 Edwards (AG) Inc 145,762
5,800 Fannie Mae 307,400
300 Financial Security Assurance Holdings Ltd 13,500
8,500 First Union Corp 250,750
500 Fleet Boston Financial Corp 13,625
7,300 Franklin Resources Inc 198,469
8,100 Golden West Financial Corp 230,850
5,300 Greenpoint Financial Corp 84,469
1,400 Heller Financial Inc 26,337
6,700 J.P. Morgan & Co Inc 743,700
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
BANKING AND FINANCIAL SERVICES -- CONTINUED
5,400 Key Corp 91,462
6,400 Lehman Brothers Holding Inc 464,000
500 Leucadia National Corp 10,687
3,900 MGIC Investment Corp 145,762
4,500 Pacific Century Financial Corp 68,344
3,250 PMI Group Inc 118,016
6,400 Rowe (T) Price & Associates Inc 210,800
8,700 Sovereign Bancorp Inc 63,075
1,800 UnionBanCal Corp 57,825
1,600 Washington Mutual Inc 35,400
------------
5,054,771
------------
CHEMICALS -- 0.8%
4,000 Engelhard Corp 54,500
5,200 IMC Global Inc 70,200
3,200 Millenium Chemicals Inc 44,800
1,800 PPG Industries Inc 88,875
1,000 Praxair Inc 33,750
------------
292,125
------------
COMPUTER AND OFFICE EQUIPMENT -- 3.6%
3,700 Advanced Micro Devices Inc* 144,762
14,600 Oracle Corp* 1,084,050
3,000 Reynolds & Reynolds Inc, Class A 82,875
4,100 Silicon Graphics Inc* 40,231
1,400 Sterling Software Inc* 50,225
------------
1,402,143
------------
CONSTRUCTION -- 0.1%
1,500 Georgia-Pacific Corp 52,031
------------
CONSUMER GOODS -- 2.0%
200 Eastman Kodak Co 11,462
2,800 Fastenal Co 123,725
4,500 Fortune Brands Inc 98,437
1,600 Hon Industries Inc 29,500
6,700 Jones Apparel Group Inc* 151,587
3,500 Lancaster Colony Corp 104,125
2,600 Liz Claiborne Inc 97,337
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
CONSUMER GOODS -- CONTINUED
1,400 Polo Ralph Lauren Corp* 23,450
1,000 Steelcase Inc 12,250
2,800 US Industries Inc 32,025
1,100 VF Corp 27,156
4,400 Warnaco Group Inc, Class A 47,850
------------
758,904
------------
ELECTRONIC EQUIPMENT -- 2.8%
10,800 American Power Conversion Corp* 366,525
3,200 Andrew Corp* 79,200
4,500 Arrow Electronics Inc* 136,125
4,200 Emerson Electric Co 191,362
2,000 Harris Corp 63,750
1,500 Hubbell Inc, Class B 36,469
500 Litton Industries* 14,969
9,600 Raytheon Co, Class B 177,600
------------
1,066,000
------------
FOOD AND BEVERAGE -- 3.8%
17,115 Archer Daniels Midland Co 172,220
4,800 IBP Inc 60,000
16,700 Nabisco Group Holdings 144,037
17,100 Seagrams Co Ltd 1,004,625
1,600 Unilever NV 72,800
------------
1,453,682
------------
HEALTH CARE -- 0.7%
3,500 Columbia HCA Healthcare Corp 67,594
900 Dentsply International Inc 23,062
900 First Health Group Corp* 21,712
21,300 Healthsouth Corp* 103,837
800 Trigon Healthcare Inc* 25,550
600 United Healthcare Corp 30,675
------------
272,430
------------
INSURANCE -- 8.4%
8,000 Aetna Life and Casualty Co 329,000
100 Alleghany Corp* 18,594
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
INSURANCE -- CONTINUED
2,700 Allmerica Financial Corp 112,725
14,700 Allstate Corp 286,650
200 AMBAC Inc 8,787
900 American Financial Group Inc 18,900
200 American General Corp 10,437
1,200 American National Insurance Co 70,200
2,700 Chubb Corp 132,806
3,300 Cigna Corp 243,581
6,200 Cincinnati Financial Corp 185,225
1,800 CNA Financial Corp* 48,600
13,500 Conseco Inc 197,437
1,700 Everest Re Group Ltd 41,756
9,200 Foundation Health Systems Inc, Class A* 76,475
1,200 Fremont General Corp 8,700
3,500 Hartford Financial Services Group Inc 109,375
4,900 Humana Inc* 33,381
5,000 Lincoln National Corp 139,062
5,500 Loews Corp 244,750
1,800 MBIA Inc 69,075
1,300 Mercury General Corp 29,494
5,400 Old Republic International Corp 63,112
6,400 Safeco Corp 134,400
10,000 Saint Paul Cos Inc 223,750
4,700 Torchmark Corp 93,119
800 Transatlantic Holding Inc 56,350
5,700 Travelers Property Casualty Corp, Class A 180,262
2,800 Unitrin Inc 95,025
------------
3,261,028
------------
MACHINERY -- 2.0%
3,500 Cooper Cameron Corp* 193,375
1,600 Cummins Engine Inc 53,300
10,200 Deere and Co 364,650
2,400 FMC Corp* 115,950
900 R&B Falcon Corp* 13,894
1,100 York International Corp 19,937
------------
761,106
------------
</TABLE>
See accompanying notes to the financial statements.
4
<PAGE>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
MANUFACTURING -- 1.7%
400 Blyth Industries Inc* 8,975
5,400 Clayton Homes Inc 43,875
4,000 Crane Co 79,500
4,600 International Game Technology* 81,937
2,100 Minnesota Mining and Manufacturing Co 185,062
2,800 Rockwell International Corp 126,700
2,500 Temple Inland Inc 127,812
------------
653,861
------------
METALS AND MINING -- 1.7%
9,100 Alcan Aluminum Ltd 300,300
3,749 Phelps Dodge Corp 176,672
3,100 Reynolds Metals Co 196,850
------------
673,822
------------
OIL AND GAS -- 3.3%
4,700 Amerada Hess Corp 237,644
4,600 Apache Corp 167,900
1,000 BJ Services Co* 57,062
4,600 Diamond Offshore Drilling Inc 146,050
2,200 Ensco International Inc 66,550
300 Kerr-McGee Corp 13,425
3,500 Kinder Morgan Inc 97,562
2,000 Nabors Industries Inc* 71,750
1,400 Pioneer Natural Resources Co* 11,637
1,700 Questar Corp 23,694
1,500 Rowan Cos Inc* 37,688
5,900 Tidewater Inc 167,044
3,200 Transocean Sedco Forex Inc 126,200
1,600 USX - Marathon Group 34,600
------------
1,258,806
------------
PAPER AND ALLIED PRODUCTS -- 2.9%
2,100 Boise Cascade Corp 62,606
1,000 Bowater Inc 49,188
4,200 Champion International Corp 217,350
500 Consolidated Papers Inc 18,969
3,700 Ikon Office Solutions Inc 25,900
13,200 International Paper Co 485,925
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
PAPER AND ALLIED PRODUCTS -- CONTINUED
2,900 Louisiana Pacific Corp 34,256
4,300 Mead Corp 128,731
3,400 Westvaco Corp 93,713
------------
1,116,638
------------
PHARMACEUTICALS -- 4.1%
15,400 Abbott Laboratories 504,350
10,900 Amgen Inc* 743,244
5,700 Bristol Myers Squibb Co 323,831
200 ICN Pharmaceuticals Inc 3,975
800 Nu Skin Enterprises Inc* 7,150
------------
1,582,550
------------
PRIMARY MATERIALS -- 0.2%
400 Carlisle Cos Inc 13,250
5,500 Crown Cork & Seal Inc 77,000
------------
90,250
------------
PRIMARY PROCESSING -- 1.0%
1,100 Howmet International Inc* 20,144
4,200 Nucor Corp 208,688
7,000 USX-US Steel Group Inc 153,125
------------
381,957
------------
PRINTING AND PUBLISHING -- 0.3%
2,400 TV Guide Inc, Class A* 113,100
------------
REAL ESTATE -- 1.7%
1,400 AMB Property Corp, REIT 28,263
2,200 Archstone Communities Trust, REIT 43,038
2,400 Arden Realty Group Inc, REIT 49,950
1,600 Avalonbay Communities Inc, REIT 54,000
1,700 CarrAmerica Realty Corp, REIT 36,125
2,300 Cornerstone Properties Inc, REIT 38,813
2,700 Crescent Real Estate Equities, REIT 46,069
1,300 Duke Realty Investments, REIT 23,888
3,300 Equity Office Properties Trust, REIT 78,994
1,000 Equity Residential Properties Trust, REIT 39,938
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
REAL ESTATE -- CONTINUED
2,200 Highwood Properties Inc, REIT 46,063
5,100 HRPT Properties Trust, REIT 40,800
600 Liberty Property Trust, REIT 13,613
1,200 Mack-Cali Realty Corp, REIT 28,500
6,900 Meditrust Corp, REIT 19,406
400 Post Properties Inc, REIT 15,050
1,700 Public Storage Inc, REIT 37,506
------------
640,016
------------
REFINING -- 1.0%
3,500 Ashland Inc 108,938
200 Murphy Oil Corp 10,125
2,500 Sunoco Inc 61,719
4,100 Tosco Corp 109,675
5,400 Ultramar Diamond Shamrock Corp 117,113
------------
407,570
------------
RETAIL TRADE -- 3.7%
2,689 Albertsons Inc 65,881
7,100 Autozone Inc* 174,394
4,500 Bed, Bath & Beyond Inc* 127,688
5,000 Dillard's Inc 86,875
9,900 Federated Department Stores Inc* 363,206
20,400 Kmart Corp* 179,775
1,200 Neiman Marcus Group Inc, Class A* 25,575
1,600 Outback Steakhouse Inc* 41,800
1,000 Payless ShoeSource Inc* 39,500
1,500 Penney (JC) Co Inc 23,625
6,100 Ross Stores Inc 88,450
400 Sears Roebuck & Co 11,025
13,500 Toys R Us Inc* 167,063
3,600 Venator Group Inc* 20,475
------------
1,415,332
------------
SERVICES -- 0.8%
300 BHC Communications Inc, Class A 47,850
900 Chris Craft Industries Inc* 59,231
2,600 Fluor Corp 73,938
600 Harrahs Entertainment Inc* 11,475
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
SERVICES -- CONTINUED
3,900 Mandalay Resort Group* 54,844
100 Manpower Inc 3,269
1,200 Modis Professional Services Inc* 18,900
1,300 Premier Parks Inc* 26,325
------------
295,832
------------
TECHNOLOGY -- 3.7%
400 Adobe Systems Inc 40,800
2,700 Autodesk Inc 120,656
1,000 Avnet Inc 66,875
7,500 BMC Software Inc* 345,000
2,100 Gartner Group Inc, Class A 30,056
10,500 Honeywell International Inc 505,313
500 Intel Corp 56,500
3,600 Seagate Technology Corp* 179,550
6,600 Thermo Electron Corp* 103,125
------------
1,447,875
------------
TELECOMMUNICATIONS -- 8.6%
5,800 AT & T Corp 286,738
11,000 AT & T Liberty Media Group* 574,750
1,400 Bell Atlantic Corp 68,513
2,000 Bellsouth Corp 81,500
13,500 GTE Corp 796,500
1,200 MediaOne Group Inc* 94,200
1,700 PanAmSat Corp* 82,981
3,853 SBC Communications Inc 146,414
800 Sprint Corp 48,800
3,100 Telephone and Data Systems Inc 327,050
1,700 United States Cellular Corp* 113,794
12,900 Viacom Inc, Class B* 719,175
------------
3,340,415
------------
TOBACCO -- 1.0%
19,200 Philip Morris Cos Inc 385,200
------------
TRANSPORTATION -- 4.1%
7,100 AMR Corp* 375,413
2,700 Brunswick Corp 47,756
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
TRANSPORTATION -- CONTINUED
19,500 Burlington Northern Santa Fe Railroad Co 383,906
1,000 Continental Airlines Inc, Class B* 31,625
6,500 CSX Corp 144,219
700 Delta Air Lines Inc 31,938
400 Norfolk Southern Corp 5,425
2,700 UAL Corp* 131,625
11,500 Union Pacific Corp 437,000
------------
1,588,907
------------
UTILITIES -- 11.4%
800 Allegheny Energy Inc 20,750
1,100 Alliant Energy Corp 30,938
2,300 Ameren Corp 69,000
2,200 American Electric Power Inc 61,875
6,800 Central & South West Corp 114,325
8,600 Citizens Utilities, Class B* 131,150
2,300 Connectiv Inc 32,775
3,900 Consolidated Edison Inc 107,494
5,000 Constellation Energy Group Inc 148,750
8,200 Dominion Resources Inc 300,838
4,500 DTE Energy Co 135,844
700 Dynegy Inc 32,813
11,000 Edison International 289,438
4,300 El Paso Energy Corp 159,369
1,500 Energy East Corp 31,500
9,000 Entergy Corp 182,250
7,800 Firstenergy Corp 145,763
4,700 General Public Utilities Inc 116,913
3,200 Keyspan Corp 65,200
1,300 Kinder Morgan Energy Partners 51,350
500 New England Electric System 27,000
8,700 Niagara Mohawk Holdings Inc* 102,225
6,900 Northeast Utilities 129,806
3,800 Northern States Power Co 66,738
13,600 PG & E Corp 280,500
2,600 Pinnacle West Capital Corp 71,825
3,400 Potomac Electric Power Co 69,063
5,000 Public Service Enterprise Group Inc 145,000
600 Puget Sound Power and Light Co 12,188
3,300 Reliant Energy Inc 67,856
1,500 SCANA Corp 35,719
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
UTILITIES -- CONTINUED
14,800 Southern Co 328,375
14,100 Texas Utilities Co 460,013
7,300 Unicom Corp 276,031
3,000 Western Resources Inc 46,313
3,100 Wisconsin Energy Corp 54,831
------------
4,401,818
------------
TOTAL COMMON STOCKS (COST $44,085,685) 37,437,792
------------
<CAPTION>
PAR VALUE ($)
- --------------
<C> <S> <C>
SHORT-TERM INVESTMENTS -- 7.8%
CASH EQUIVALENTS -- 4.8%
$ 1,525,870 BankBoston Eurodollar Time Deposit, 6.1175%, due
4/28/00(a) 1,525,870
$ 141,371 First Union National Bank Time Deposit, 5.8125%, due
3/01/00(a) 141,371
$ 212,059 Fleet National Bank Time Deposit, 5.79%, due 3/10/00(a) 212,059
------------
1,879,300
------------
U.S. GOVERNMENT -- 0.3%
$ 125,000 U.S. Treasury Bill, 5.689%, due 6/29/00(b) 122,662
------------
REPURCHASE AGREEMENT -- 2.7%
$ 1,030,813 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/29/00, due 3/1/00, with a maturity value of
$1,030,955 and an effective yield of 4.95%,
collateralized by a U.S. Treasury Obligation with a
rate of 8.125%, maturity date of 8/15/19 and market
value, including accrued interest, of $1,051,429. 1,030,813
------------
TOTAL SHORT-TERM INVESTMENTS (COST $3,032,838) 3,032,775
------------
TOTAL INVESTMENTS -- 104.7%
(Cost $47,118,523) 40,470,567
Other Assets and Liabilities (net) -- (4.7%) (1,820,679)
------------
TOTAL NET ASSETS -- 100.0% $ 38,649,888
============
</TABLE>
See accompanying notes to the financial statements.
10
<PAGE>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<C> <S> <C>
NOTES TO THE SCHEDULE OF INVESTMENTS:
</TABLE>
REIT - Real Estate Investment Trust
* Non-income producing security.
(a) Represents investments of security lending collateral (Note 1).
(b) Security has been segregated to cover margin requirements on open financial
futures contracts (Note 6).
See accompanying notes to the financial statements. 11
<PAGE>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $47,118,523) (Note 1) $40,470,567
Dividends and interest receivable 96,349
Receivable for variation margin on open futures contracts
(Notes 1 and 6) 12,150
Receivable for expenses waived or borne by Manager (Note
2) 2,603
-----------
Total assets 40,581,669
-----------
LIABILITIES:
Payable upon return of securities loaned (Note 1) 1,879,300
Payable to affiliate for (Note 2):
Management fee 10,346
Shareholder service fee 4,703
Accrued expenses 37,432
-----------
Total liabilities 1,931,781
-----------
NET ASSETS $38,649,888
===========
NET ASSETS CONSIST OF:
Paid-in capital $44,937,664
Accumulated undistributed net investment income 108,358
Accumulated net realized gain 277,663
Net unrealized depreciation (6,673,797)
-----------
$38,649,888
===========
NET ASSETS ATTRIBUTABLE TO:
Class III shares $38,649,888
===========
SHARES OUTSTANDING:
Class III 4,396,330
===========
NET ASSET VALUE PER SHARE:
Class III $ 8.79
===========
</TABLE>
12 See accompanying notes to the financial statements.
<PAGE>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- PERIOD FROM AUGUST 2, 1999 (COMMENCEMENT OF
OPERATIONS) THROUGH FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $1,696) $ 517,844
Interest (including securities lending income of $1,874) 40,925
-----------
Total income 558,769
-----------
EXPENSES:
Management fee (Note 2) 76,163
Audit fees 38,918
Custodian and transfer agent fees 15,659
Registration fees 6
Legal fees 476
Trustees fees (Note 2) 341
Miscellaneous 2,518
Fees waived or borne by Manager (Note 2) (57,918)
-----------
76,163
Shareholder service fee (Note 2)
Class III 34,620
-----------
Net expenses 110,783
-----------
Net investment income 447,986
-----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments 278,757
Closed futures contracts (4,880)
-----------
Net realized gain 273,877
-----------
Change in net unrealized appreciation (depreciation) on:
Investments (5,480,544)
Open futures contracts (25,841)
-----------
Net unrealized loss (5,506,385)
-----------
Net realized and unrealized loss (5,232,508)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(4,784,522)
===========
</TABLE>
.
See accompanying notes to the financial statements. 13
<PAGE>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM AUGUST 2, 1999
(COMMENCEMENT OF OPERATIONS)
THROUGH FEBRUARY 29, 2000
----------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 447,986
Net realized gain 273,877
Change in net unrealized appreciation (depreciation) (5,506,385)
-----------
Net decrease in net assets from operations (4,784,522)
-----------
Distributions to shareholders from:
Net investment income
Class III (335,842)
-----------
Total distributions from net investment income (335,842)
-----------
Net share transactions: (Note 5)
Class III 43,770,252
-----------
Increase in net assets resulting from net share
transactions 43,770,252
-----------
Total increase in net assets 38,649,888
NET ASSETS:
Beginning of period --
-----------
End of period (including accumulated undistributed net
investment income of $108,358) $38,649,888
===========
</TABLE>
14 See accompanying notes to the financial statements.
<PAGE>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT THE PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 2, 1999
(COMMENCEMENT
OF OPERATIONS) THROUGH
FEBRUARY 29, 2000
----------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
-------
Income from investment operations:
Net investment income 0.11+
Net realized and unrealized loss (1.24)
-------
Total from investment operations (1.13)
-------
Less distributions to shareholders:
From net investment income (0.08)
-------
Total distributions (0.08)
-------
NET ASSET VALUE, END OF PERIOD $ 8.79
=======
TOTAL RETURN(a) (11.36)%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $38,650
Net expenses to average daily net assets 0.48%*
Net investment income to average daily net assets 1.94%*
Portfolio turnover rate 26%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts: $ 0.01
</TABLE>
(a) Calculation excludes purchase premiums. The total return would have been
lower had certain expenses not been waived during the period shown.
* Annualized.
+ Computed using average shares throughout the period.
++ Not annualized.
See accompanying notes to the financial statements. 15
<PAGE>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Intrinsic Value Fund (the "Fund"), which commenced operations on
August 2, 1999, is a series of GMO Trust (the "Trust"). The Fund is
registered under the Investment Company Act of 1940, as amended, as an
open-end, diversified management investment company. The Fund is advised
and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or
"GMO"). The Trust was established as a Massachusetts Business Trust under
the laws of the Commonwealth of Massachusetts on June 25, 1985. The
Declaration of Trust permits the Trustees to create an unlimited number of
series ("Funds"), each of which issues a separate series of shares, and to
subdivide a series of shares into classes.
The Fund seeks long-term capital growth through investment in equity
securities. The Funds benchmark is the Russell 1000 Value Index.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of the financial statements
in accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Securities for
which quotations are not readily available are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts on domestic stock
indices. Stock index futures contracts represent commitments for future
delivery of cash based upon the level of a specified index of equity
securities at a given date. The Fund may use futures contracts to manage
its exposure to the stock markets. Buying futures tends to increase the
Fund's exposure to the underlying instrument. Selling futures tends to
decrease the Fund's exposure to the underlying instrument or hedge other
fund instruments. Upon entering into a futures contract, the Fund is
required to deposit with its custodian, in a segregated account in the
name of the futures broker, an amount of cash or U.S. government and
agency obligations in accordance with the initial margin requirements of
the broker or exchange. Futures contracts are marked to market daily and
an
16
<PAGE>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
appropriate payable or receivable for the change in value ("variation
margin") is recorded by the Fund. The payable or receivable is liquidated
on the following business day. Gains or losses are recognized but not
considered realized until the contracts expire or are closed. Futures
contracts involve, to varying degrees, risk of loss in excess of the
variation margin disclosed in the Statement of Assets and Liabilities.
Losses may arise from contracts, or if counterparties do not perform under
the contract terms. Futures contracts are valued at the settlement price
established each day by the board of trade or exchange on which they are
traded. See Note 6 for all open futures contracts as of February 29, 2000.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, realization of collateral by the Fund may be delayed or
limited.
SECURITY LENDING
The Fund may lend its securities to qualified brokers. The loans are
collateralized at all times with cash or securities with a market value at
least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending
its securities. At February 29, 2000, the Fund loaned securities having a
market value of $1,818,444 collateralized by cash in the amount of
$1,879,300 which was invested in short-term instruments.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
equity markets. A swap is an agreement to exchange the return generated by
one instrument for the return generated by another instrument. The Fund
enters into equity swap agreements which involve a commitment by one party
in the agreement to pay interest in exchange for a market linked return,
both based on notional amounts. To the extent that the total return of the
security or index underlying the transaction exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make a payment to the counterparty. The Fund also enters into contracts
for differences in which the Fund agrees with the counterparty that its
return will be based on the
17
<PAGE>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
relative performance of two different groups or "baskets" of securities,
adjusted by an interest rate payment. To the extent that the relative
performance of the two baskets of securities exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make a payment to the counterparty, respectively. Swaps are marked to
market daily based upon quotations from market makers and the change, if
any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
Entering into these agreements involves, to varying degrees, elements of
credit and market risk in excess of the amounts recognized on the
Statement of Assets and Liabilities. Such risks involve the possibility
that there will be no liquid market for these agreements, that the
counterparty to the agreements may default on its obligation to perform,
or that there may be unfavorable changes in the price of the security or
index underlying these transactions. As of February 29, 2000 the Fund had
no open swap contracts.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary. Taxes on foreign dividend income have been
withheld in accordance with the applicable country's tax treaty with the
United States.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. Distributions to shareholders are recorded by the Fund on
the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to the classification of distributions from
REIT securities.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable
18
<PAGE>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
income and capital gains under U.S. federal tax rules versus accounting
principles generally accepted in the United States. The calculation of net
investment income per share in the financial highlights excludes these
adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
<S> <C> <C>
$(3,786) $3,786 $ --
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable foreign withholding taxes, is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis and is
adjusted for the accretion of discounts. In determining the net gain or
loss on securities sold, the cost of securities is determined on the
identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is .14% of the amount
invested. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. For the period ended February 29, 2000, the Fund received
$5,591 in purchase premiums. There is no premium for redemptions,
reinvested distributions or in-kind transactions.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .33% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
19
<PAGE>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding brokerage commissions, certain other transaction costs
(including transfer taxes), shareholder service fees and extraordinary
expenses) exceed the management fee.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the period ended February 29, 2000 was $341. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the period ended February 29, 2000, aggregated
$53,681,177 and $9,874,250, respectively.
At February 29, 2000 the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
$47,179,118 $2,801,739 $(9,510,290) $(6,708,551)
</TABLE>
4. PRINCIPAL SHAREHOLDER
At February 29, 2000, 90.5% of the outstanding shares of the Fund were
held by one shareholder. Investment activities of this shareholder could
have a material effect.
20
<PAGE>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Period from August 2, 1999
(commencement of operations)
through February 29, 2000
----------------------------
Shares Amount
Class III: ------------- -------------
<S> <C> <C> <C> <C>
Shares sold 4,395,372 $ 43,761,197
Shares issued to shareholders
in reinvestment of distributions 958 9,055
Shares repurchased -- --
------------- -------------
Net increase 4,396,330 $ 43,770,252
============= =============
</TABLE>
The Fund was formed with an initial tax-free contribution of
securities-in-kind, which had a historical cost of $36,907,073 and
unrealized depreciation of $1,167,412 on the date of contribution.
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 29, 2000 is as
follows:
FUTURES CONTRACTS
<TABLE>
<CAPTION>
Number of
Contracts Type
----------------------------------- ---------------------------------------------
<C> <S>
Buys
2 S&P 500
<CAPTION>
Number of Contract Net Unrealized
Contracts Expiration Date Value Depreciation
-------------------------- --------------------------------------------- -------- --------------
<C> <C> <C> <C>
Buys
2 March 2000 $686,000 $(25,841)
========
</TABLE>
At February 29, 2000 the Fund has sufficient cash and/or securities to
cover any commitments or margin on open futures contracts.
21
<PAGE>
GMO INTRINSIC VALUE FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Robert Soucy are
primarily responsible for the day-to-day management of the Fund's portfolio.
Mssrs. Grantham and Darnell have each been portfolio managers at Grantham, Mayo,
Van Otterloo & Co. LLC for more than fifteen years; Mr. Soucy for more than ten
years.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO Intrinsic Value Fund returned -11.4% for the
fiscal year ended February 29, 2000 (since the Fund's August 2, 1999 inception)
as compared to 3.6% for the S&P 500 and -12.3% for the Russell 1000 Value Index.
Consistent with the Fund's investment objectives and policies, the Fund was
invested substantially in common stocks throughout the period.
For the fiscal year, U.S. market returns were dominated by technology and
telecommunications stocks. Value stocks across all market capitalization bands
underperformed growth stocks. Sector selection detracted modestly from
performance. The Fund's overweight in auto/transportation, electric utilities
and materials/ processing stocks detracted -120 basis points from relative
performance in aggregate. This positioning offset positive contributions from
the Fund's overweight in technology stocks coupled with the underweight in
financial services stocks, which added 90 basis points to performance in
aggregate.
The Fund's outperformance relative to the benchmark for the fiscal year was
attributable to strong stock selection. Selection was particularly strong in
technology, pharmaceutical, consumer staple (beverage) and auto/transportation
stocks. Selection in these stocks contributed over 250 basis points in
aggregate. Strong selection offset weak selection among financial services,
electric utilities and consumer discretionary stocks.
OUTLOOK
Value stocks are significantly undervalued compared to growth stocks. The spread
of value stocks relative to growth stocks is at its widest level since the early
1970's. The Fund is overweight in both auto/transportation stocks and electric
utilities, reflecting our preference for value stocks. We are gradually reducing
our exposure to technology stocks. While earlier in 1999 many of these stocks
were attractive to our intrinsic value methodology, most technology stocks have
now appreciated to a point where they are now expensive on this measure.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO INTRINSIC VALUE FUND CLASS III SHARES AND THE RUSSELL 1000 VALUE INDEX
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
Average Annual Total Returns
Inception 8/2/99
1yr 5yr 10yr (ITD)
<S> <C> <C>
N/A N/A -11.48
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
Date GMO Intrinsic Value Fund-III Russell 1000 Value
<S> <C> <C>
8/2/99 9986 10000
9/30/99 9277 9287
12/31/99 9919 9792
2/29/00 8852 8769
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The total returns would have been lower had certain expenses
not been reimbursed during the periods shown and do not include the effect of
taxes. Each performance figure assumes purchase at the beginning and
redemption at the end of the stated period and reflects a transaction fee of
14 bp on the purchase. Transaction fees are retained by the Fund to cover
trading costs. Past performance is not indicative of future performance.
Information is unaudited.
<PAGE>
GMO WORLD EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO WORLD EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO World Equity Allocation Fund at
February 29, 2000, the results of its operations, the changes in its net assets
and the financial highlights for each of the periods indicated therein, in
conformity with accounting principles generally accepted in the United States.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at February 29, 2000 by correspondence with the custodian, provide
a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 10, 2000
<PAGE>
GMO WORLD EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
MUTUAL FUNDS -- 100.0%
15,852 GMO Currency Hedged International Core Fund 159,159
67,686 GMO Emerging Country Debt Fund 591,574
91,237 GMO Emerging Markets Fund 1,018,200
109,045 GMO Evolving Countries Fund 1,244,199
15,715 GMO Growth Fund 77,791
44,590 GMO Inflation Indexed Bond Fund 433,411
21,471 GMO International Bond Fund 197,317
161,642 GMO International Core Fund 3,379,926
17,513 GMO International Small Companies Fund 202,102
65,080 GMO REIT Fund 537,561
23,651 GMO Small Cap Growth Fund 398,985
40,723 GMO Small Cap Value Fund 505,367
25,623 GMO U.S. Bond/Global Alpha A Fund 247,001
97,019 GMO U.S. Core Fund 1,613,431
28,422 GMO Value Fund 226,807
-------------
TOTAL MUTUAL FUNDS (COST $10,614,210) 10,832,831
-------------
SHORT-TERM INVESTMENTS -- 0.1%
REPURCHASE AGREEMENT -- 0.1%
$ 12,419 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/29/00, due 3/1/00, with a maturity value of $12,421
and an effective yield of 4.95%, collateralized by a
U.S. Treasury Obligation with a rate of 8.125%,
maturity date of 8/15/19 and market value, including
accrued interest, of $12,668. 12,419
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $12,419) 12,419
-------------
TOTAL INVESTMENTS -- 100.1%
(Cost $10,626,629) 10,845,250
Other Assets and Liabilities (net) -- (0.1%) (11,121)
-------------
TOTAL NET ASSETS -- 100.0% $ 10,834,129
=============
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO WORLD EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $10,626,629) (Note 1) $10,845,250
Receivable for expenses waived or borne by Manager (Note
2) 2,538
-----------
Total assets 10,847,788
-----------
LIABILITIES:
Accrued expenses 13,659
-----------
Total liabilities 13,659
-----------
NET ASSETS $10,834,129
===========
NET ASSETS CONSIST OF:
Paid-in capital $15,960,806
Accumulated undistributed net investment income 432,639
Accumulated net realized loss (5,777,937)
Net unrealized appreciation 218,621
-----------
$10,834,129
===========
NET ASSETS ATTRIBUTABLE TO:
Class III shares $10,834,129
===========
SHARES OUTSTANDING:
Class III 1,209,140
===========
NET ASSET VALUE PER SHARE:
Class III $ 8.96
===========
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO WORLD EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends from investment company shares $ 271,970
Interest 619
----------
Total income 272,589
----------
EXPENSES:
Audit fees 17,924
Custodian and transfer agent fees 2,187
Registration fees 1,989
Legal fees 279
Trustees fees (Note 2) 130
Miscellaneous 825
Fees waived or borne by Manager (Note 2) (23,334)
----------
Net expenses --
----------
Net investment income 272,589
----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (5,627,815)
Realized gain distributions from investment company
shares 559,160
----------
Net realized loss (5,068,655)
----------
Change in net unrealized appreciation (depreciation) on
investments 7,580,313
----------
Net realized and unrealized gain 2,511,658
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,784,247
==========
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO WORLD EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 272,589 $ 885,699
Net realized gain (loss) (5,068,655) 1,737,055
Change in net unrealized appreciation (depreciation) 7,580,313 (5,741,678)
----------- ------------
Net increase (decrease) in net assets from
operations 2,784,247 (3,118,924)
----------- ------------
Distributions to shareholders from:
Net investment income
Class III -- (885,699)
----------- ------------
Total distributions from net investment income -- (885,699)
----------- ------------
In excess of net investment income
Class III -- (1,377,961)
----------- ------------
Total distributions in excess of net investment
income -- (1,377,961)
----------- ------------
Net realized gains
Class III (1,505,715) (3,441,070)
----------- ------------
Total distributions from net realized gains (1,505,715) (3,441,070)
----------- ------------
(1,505,715) (5,704,730)
----------- ------------
Net share transactions: (Note 5)
Class III (20,026,209) (12,546,195)
----------- ------------
Decrease in net assets resulting from net share
transactions (20,026,209) (12,546,195)
----------- ------------
Total decrease in net assets (18,747,677) (21,369,849)
NET ASSETS:
Beginning of period 29,581,806 50,951,655
----------- ------------
End of period (including accumulated undistributed
net investment income of $432,639 and $0,
respectively) $10,834,129 $ 29,581,806
=========== ============
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO WORLD EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
------------------------------------
2000 1999 1998 1997*
------- ------- ------- ---------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.52 $ 10.39 $ 10.52 $ 10.07
------- ------- ------- -------
Income from investment operations:
Net investment income(a) 0.20+ 0.18+ 0.29+ 0.11
Net realized and unrealized gain (loss) 1.69 (0.82) 1.03 0.63
------- ------- ------- -------
Total from investment operations 1.89 (0.64) 1.32 0.74
------- ------- ------- -------
Less distributions to shareholders:
From net investment income -- (0.18) (0.28) (0.11)
In excess of net investment income -- (0.33) --(b) --
From net realized gains (1.45) (0.72) (1.17) (0.18)
------- ------- ------- -------
Total distributions (1.45) (1.23) (1.45) (0.29)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 8.96 $ 8.52 $ 10.39 $ 10.52
------- ------- ------- -------
------- ------- ------- -------
TOTAL RETURN(c) 22.45% (6.67)% 13.56% 7.51%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $10,834 $29,582 $50,952 $36,746
Net expenses to average daily net
assets(d) 0.00% 0.00% 0.00% 0.00%**
Net investment income to average daily net
assets(a) 2.24% 1.91% 2.65% 0.91%**
Portfolio turnover rate 12% 17% 49% 31%
Fees and expenses voluntarily waived or
borne by the Manager consisted of the
following per share amounts: $ 0.02 $ 0.01 $ 0.01 $ 0.03
</TABLE>
(a) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
(b) The per share distribution in excess of net investment income was $0.0004.
(c) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(d) Net expenses exclude expenses incurred indirectly through investment in
underlying funds. (See Note 1.)
+ Computed using average shares outstanding throughout the period.
* Period from October 22, 1996 (commencement of operations) to February 28,
1997.
** Annualized.
++ Not annualized.
See accompanying notes to the financial statements. 5
<PAGE>
GMO WORLD EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO World Equity Allocation Fund (the "Fund") is a series of GMO Trust
(the "Trust"). The Fund is registered under the Investment Company Act of
1940, as amended, as an open-end, diversified management investment
company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo &
Co. LLC (the "Manager" or "GMO"). The Trust was established as a
Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series of shares
into classes.
The Fund operates as a "fund-of-funds" in that, pursuant to management
provided by the Manager, it makes investments in other funds of the Trust
("underlying funds"). The Fund seeks total return greater than the return
of the GMO World Extended benchmark through investment to varying extents
in other Funds of the Trust. The Fund will pursue its objective by
investing in Class III shares of domestic equity, international equity,
and fixed income funds of the Trust.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of financial statements in
accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Shares of underlying funds are valued at their net asset value as reported
on each business day. Short-term investments with a remaining maturity of
sixty days or less are valued at amortized cost, which approximates market
value. Securities for which quotations are not readily available are
valued at fair value as determined in good faith by the Trustees or other
persons acting at their direction.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty.
6
<PAGE>
GMO WORLD EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
In connection with transactions in repurchase agreements, if the seller
defaults and the value of the collateral declines or if the seller enters
insolvency proceedings, realization of collateral by the Fund may be
delayed or limited.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to the classification of distributions
received from underlying funds.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable income and capital gains under U.S.
federal tax rules versus accounting principles generally accepted in the
United States. The calculation of net investment income per share in the
financial highlights excludes these adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
<S> <C> <C>
$160,050 $(172,951) $12,901
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for
7
<PAGE>
GMO WORLD EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
financial statement and tax purposes which result in temporary
over-distributions for financial statement purposes are classified as
distributions in excess of net investment income or accumulated net
realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Income dividends
and capital gain distributions from underlying funds are recorded on the
ex-dividend date. Interest income is recorded on the accrual basis. In
determining the net gain or loss on securities sold, the cost of
securities is determined on the identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. In
addition, the Fund will also incur fees and expenses indirectly as a
shareholder in the underlying funds. Because the underlying funds have
varied expense and fee levels and the Fund may own different proportions
of underlying funds at different times, the amount of fees and expenses
indirectly incurred by the Fund will vary.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is .66% of the amount
invested. In the case of cash redemptions, the fee is .15% of the amount
redeemed. All purchase premiums and redemption fees are paid to and
recorded by the Fund as paid-in capital. For the year ended February 29,
2000, the Fund received $3,734 in purchase premiums and $33,146 in
redemption fees. There is no premium for reinvested distributions or
in-kind transactions.
INVESTMENT RISK
The Fund is subject to the investment risk associated with an investment
in the underlying funds, some of which may invest in foreign securities.
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments,
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times more
volatile than securities of comparable U.S. companies and U.S. securities
markets. The risks described above apply to an even greater extent to
investments in emerging markets. The securities markets of emerging
countries are generally smaller, less developed, less liquid, and more
volatile than the securities markets of the U.S. and developed foreign
markets.
8
<PAGE>
GMO WORLD EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Manager determines the allocation of the assets of the Fund among
designated underlying funds. The Manager does not charge an advisory fee
for asset allocation advice provided to the Fund, but receives advisory
and shareholder service fees from the underlying funds in which the Fund
invests. The Fund has adopted a Shareholder Service Plan under which the
Fund pays GMO a shareholder service fee for client and shareholder
service, reporting and other support. No shareholder service fee is
charged for Class III shares.
GMO has contractually agreed to reimburse all expenses directly incurred
by the Fund until June 30, 2000 (excluding brokerage commissions, certain
other transaction costs (including transfer taxes), shareholder service
fees and extraordinary expenses).
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000 was $130. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 29, 2000, aggregated
$1,640,463 and $22,344,634, respectively.
At February 29, 2000 the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
$11,021,209 $873,256 $(1,049,215) $(175,959)
</TABLE>
4. PRINCIPAL SHAREHOLDERS
At February 29, 2000, 99.9% of the outstanding shares of the Fund were
held by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares. Investment activities of these shareholders could have
a material effect.
9
<PAGE>
GMO WORLD EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
------------------------ ------------------------
Shares Amount Shares Amount
Class III: ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold 61,132 $ 565,696 497 $ 4,496
Shares issued to shareholders
in reinvestment of distributions 170,716 1,505,715 535,862 4,995,646
Shares repurchased (2,495,019) (22,097,620) (1,968,349) (17,546,337)
---------- ------------ ---------- ------------
Net decrease (2,263,171) $(20,026,209) (1,431,990) $(12,546,195)
========== ============ ========== ============
</TABLE>
10
<PAGE>
GMO WORLD EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
For the fiscal year ended February 29, 2000, the Fund has designated 100%
of distributions as net capital gain dividends.
At February 29, 2000 the Fund had a capital loss carryforward available to
offset future capital gains, if any, of the following amount:
<TABLE>
<CAPTION>
Year of Expiration Amount
------------------------------------------------------------ ----------
<S> <C>
2008 $5,383,357
</TABLE>
11
<PAGE>
GMO WORLD EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Mr. R. Jeremy Grantham and Mr. Ben Inker are primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. Grantham has been a portfolio
manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years.
Mr. Inker has been with the firm for eight years.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO World Equity Allocation Fund returned 22.5% for
the twelve months ended February 29, 2000. During that period the Fund's
benchmark (GMO World Extended + Index) returned 20.2%.
Our fundamental conclusion at the outset of 1999 was that the developed, large
cap equity markets in the U.S. and abroad were markedly overvalued. Our research
indicated that better long-term returns could be achieved from investments in
other asset classes, including both REITs (Real Estate Investment Trusts) and
small caps in the U.S., emerging and small cap international equities and fixed
income instruments. By diversifying out of large cap equities and into other
asset classes with good return potential, we believed we were exposing our
clients to a portfolio with better return potential and a reasonable level of
risk. For the period, our emerging equities and small cap growth outperformed
the benchmark by large margins, while small cap value and REITs underperformed
substantially.
During the fiscal year, the Fund was underweight in U.S. stocks by 21% relative
to the benchmark. This weighting was split between emerging equities, which
outperformed the S&P 500 by 56%, and fixed income, which underperformed the S&P
500 by 10%. Within U.S. stocks, we tilted the portfolio towards the most
attractively valued sectors including REITs, where we were 5% overweight. For
the fiscal year, the allocation to REITs hurt performance, as the GMO REIT Fund
underperformed the S&P 500 Index by 16%. Performance of the GMO Growth Fund was
33% above the S&P 500 and GMO Small Cap Growth was 56% above the S&P 500.
However, this gain was partially offset by underperformance of the GMO Small Cap
Value and Value Funds, which underperformed the S&P 500 by 1% and 20%,
respectively.
Performance of the International Core Fund lagged the benchmark substantially as
the rally in expensive multinationals continued. The GMO International Core Fund
returned 8%, underperforming the MSCI EAFE Index by 17%. The Fund was 14%
overweight in emerging equities for the period, helping performance as both the
GMO Emerging Markets Fund and the GMO Evolving Countries Fund outperformed the
IFC Investable Composite by 9.5% and 31%, respectively. Collectively, the
allocation to international equities added 1.5% to the Fund relative to the
benchmark, with well more than 100% of this due to the overweight and strong
implementation in emerging equities.
The Fund was overweight 13% in fixed income, with allocations to international
and emerging bonds along with U.S. fixed income. The drag on the portfolio due
to the fixed income overweight was partially offset by the extremely strong
performance (+46%) of emerging debt within the fixed income portfolio.
<PAGE>
GMO WORLD EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
OUTLOOK
The fundamentals of today's markets do not justify the extreme valuation
disparities that we see. The investment climate has become astonishingly
speculative, exemplified by the extraordinary returns of "new economy" stocks.
Our conviction that these conditions cannot prevail indefinitely remains firm.
As such, we will hold our positions, which remain remarkably cheap on a relative
basis. With the eventual return to intrinsic value, we expect the opportunities
for value-added resulting from these extreme conditions will be extraordinary
with the good relative performance of the last year merely a small down payment.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO &
CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO WORLD EQUITY ALLOCATION FUND CLASS III SHARES AND THE
MSCI ALL COUNTRY WORLD INDEX
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
Average Annual Total Returns
Inception 6/28/96
1yr 5yr 10yr (ITD)*
<S> <C> <C>
21.46 N/A 9.1
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
Date GMO World Equity Allocation Fund-III MSCI All Country World GMO World Extended +
<S> <C> <C> <C>
6/28/96 9934 10000 10000
9/30/96 9884 10094 10171
12/31/96 10283 10510 10749
3/31/97 10435 10625 10935
6/30/97 11475 12212 12479
9/30/97 12137 12493 12981
12/31/97 11335 12051 12664
3/31/98 12683 13723 14490
6/30/98 11997 13810 14676
9/30/98 10188 12114 12834
12/31/98 11645 14669 15470
3/31/99 11724 15265 15972
6/30/99 13377 16167 16877
9/30/99 12975 15904 16656
12/31/99 14375 18674 19406
2/29/00 13770 17764 18470
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The total returns would have been lower had certain expenses
not been reimbursed during the periods shown and do not include the effect of
taxes. Each performance figure assumes purchase at the beginning and
redemption at the end of the stated period and reflects a transaction fee of
66 bp on the purchase and 15 bp on the redemption. Transaction fees are
retained by the Fund to cover trading costs. Past performance is not
indicative of future performance. Information is unaudited.
*Performance is linked to Class I shares (originating share class) and is
converted to Class III shares on October 22, 1996 (commencement date of Class
III shares).
<PAGE>
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly in all
material respects, the financial position of GMO Global (U.S.+) Equity
Allocation Fund at February 29, 2000, the results of its operations, the changes
in its net assets and the financial highlights for each of the periods indicated
therein, in conformity with accounting principles generally accepted in the
United States. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Trust's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 29, 2000 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 10, 2000
<PAGE>
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
MUTUAL FUNDS -- 100.0%
53,052 GMO Currency Hedged International Core Fund 532,646
194,970 GMO Emerging Country Debt Fund 1,704,041
211,855 GMO Emerging Markets Fund 2,364,306
238,601 GMO Evolving Countries Fund 2,722,433
57,182 GMO Growth Fund 283,049
144,718 GMO Inflation Indexed Bond Fund 1,406,661
232,393 GMO International Core Fund 4,859,342
34,353 GMO International Small Companies Fund 396,430
346,935 GMO REIT Fund 2,865,682
115,093 GMO Small Cap Growth Fund 1,941,623
234,993 GMO Small Cap Value Fund 2,916,264
130,088 GMO U.S. Bond/Global Alpha A Fund 1,254,044
729,397 GMO U.S. Core Fund 12,129,869
162,251 GMO Value Fund 1,294,760
-------------
TOTAL MUTUAL FUNDS (COST $39,441,842) 36,671,150
-------------
SHORT-TERM INVESTMENTS -- 0.0%
REPURCHASE AGREEMENT -- 0.0%
$ 8,423 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/29/00, due 3/1/00, with a maturity value of $8,424
and an effective yield of 4.95%, collateralized by a
U.S. Treasury Obligation with a rate of 8.125%,
maturity date of 8/15/19 and market value, including
accrued interest, of $8,591. 8,423
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $8,423) 8,423
-------------
TOTAL INVESTMENTS -- 100.0%
(Cost $39,450,265) 36,679,573
Other Assets and Liabilities (net) -- (0.0%) (10,729)
-------------
TOTAL NET ASSETS -- 100.0% $ 36,668,844
=============
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $39,450,265) (Note 1) $36,679,573
Receivable for expenses waived or borne by Manager
(Note 2) 3,521
-----------
Total assets 36,683,094
-----------
LIABILITIES:
Accrued expenses 14,250
-----------
Total liabilities 14,250
-----------
NET ASSETS $36,668,844
===========
NET ASSETS CONSIST OF:
Paid-in capital $39,039,144
Accumulated net realized gain 400,392
Net unrealized depreciation (2,770,692)
-----------
$36,668,844
===========
NET ASSETS ATTRIBUTABLE TO:
Class III shares $36,668,844
===========
SHARES OUTSTANDING:
Class III 3,863,392
===========
NET ASSET VALUE PER SHARE:
Class III $ 9.49
===========
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends from investment company shares $ 938,133
Interest 690
----------
Total income 938,823
----------
EXPENSES:
Audit fees 17,376
Custodian and transfer agent fees 9,180
Registration fees 1,989
Legal fees 825
Trustees fees (Note 2) 376
Miscellaneous 1,189
Fees waived or borne by Manager (Note 2) (30,935)
----------
Net expenses --
----------
Net investment income 938,823
----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (640,925)
Realized gain distributions from investment company
shares 3,318,792
----------
Net realized gain 2,677,867
----------
Change in net unrealized appreciation (depreciation) on
investments 2,595,656
----------
Net realized and unrealized gain 5,273,523
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $6,212,346
==========
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 938,823 $ 697,497
Net realized gain 2,677,867 3,942,235
Change in net unrealized appreciation (depreciation) 2,595,656 (6,146,786)
----------- ------------
Net increase (decrease) in net assets from
operations 6,212,346 (1,507,054)
----------- ------------
Distributions to shareholders from:
Net investment income
Class III (938,823) (697,497)
----------- ------------
Total distributions from net investment income (938,823) (697,497)
----------- ------------
In excess of net investment income
Class III (709,581) (1,211,441)
----------- ------------
Total distributions in excess of net investment
income (709,581) (1,211,441)
----------- ------------
Net realized gains
Class III (2,295,053) (3,274,986)
----------- ------------
Total distributions from net realized gains (2,295,053) (3,274,986)
----------- ------------
(3,943,457) (5,183,924)
----------- ------------
Net share transactions: (Note 5)
Class III 1,926,347 (5,936,414)
----------- ------------
Increase (decrease) in net assets resulting from net
share transactions 1,926,347 (5,936,414)
----------- ------------
Total increase (decrease) in net assets 4,195,236 (12,627,392)
NET ASSETS:
Beginning of period 32,473,608 45,101,000
----------- ------------
End of period (including accumulated undistributed
net investment income of $0 and $0, respectively) $36,668,844 $ 32,473,608
=========== ============
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
------------------------------------
2000 1999 1998 1997*
------- ------- ------- ---------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.85 $ 10.48 $ 10.30 $ 10.00
------- ------- ------- -------
Income from investment operations:
Net investment income(a) 0.25 0.16+ 0.26+ 0.12
Net realized and unrealized gain (loss) 1.45 (0.40) 1.83 0.38
------- ------- ------- -------
Total from investment operations 1.70 (0.24) 2.09 0.50
------- ------- ------- -------
Less distributions to shareholders:
From net investment income (0.24) (0.16) (0.26) (0.12)
In excess of net investment income (0.19) (0.40) --(c) --
From net realized gains (0.63) (0.83) (1.65) (0.08)
------- ------- ------- -------
Total distributions (1.06) (1.39) (1.91) (0.20)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 9.49 $ 8.85 $ 10.48 $ 10.30
======= ======= ======= =======
TOTAL RETURN(b) 19.14% (2.84)% 21.86% 5.09%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $36,669 $32,474 $45,101 $30,787
Net expenses to average daily net
assets(d) 0.00% 0.00% 0.00% 0.00%**
Net investment income to average daily net
assets(a) 2.63% 1.64% 2.39% 3.21%**
Portfolio turnover rate 18% 34% 32% 10%
Fees and expenses voluntarily waived or
borne by the Manager consisted of the
following per share amounts: $ 0.01 $ 0.01 $ 0.01 $ 0.01
</TABLE>
(a) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
(b) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(c) The per share distribution in excess of net investment income was $0.0009.
(d) Net expenses exclude expenses incurred indirectly through investment in
underlying funds. See Note 1.
* Period from November 26, 1996 (commencement of operations) to February 28,
1997.
** Annualized.
+ Computed using average shares outstanding throughout the period.
++ Not annualized.
See accompanying notes to the financial statements. 5
<PAGE>
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Global (U.S.+) Equity Allocation Fund (the "Fund") is a series of GMO
Trust (the "Trust"). The Fund is registered under the Investment Company
Act of 1940, as amended, as an open-end, diversified management investment
company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo &
Co. LLC (the "Manager" or "GMO"). The Trust was established as a
Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series of shares
into classes.
The Fund operates as a "fund-of-funds" in that, pursuant to management
provided by the Manager, it makes investments in other funds of the Trust
("underlying funds"). The Fund seeks total return greater than that of the
GMO Global (U.S.+) Equity Index, a benchmark developed by the Manager. The
Fund will pursue its objective by investing in Class III shares of
domestic equity, international equity, and fixed income funds of the
Trust.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of financial statements in
accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Shares of underlying funds are valued at their net asset value as reported
on each business day. Short-term investments with a remaining maturity of
sixty days or less are valued at amortized cost, which approximates market
value. Securities for which quotations are not readily available are
valued at fair value as determined in good faith by the Trustees or other
persons acting at their direction.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party agreements is
held at the counterparty's custodian in a segregated account for the
benefit of the Fund and the counterparty. In connection with transactions
in repurchase agreements, if the seller defaults and the value of the
collateral declines or if the seller enters insolvency proceedings,
realization of collateral by the Fund may be delayed or limited.
6
<PAGE>
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to the classification of distributions
received from underlying funds.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable income and capital gains under U.S.
federal tax rules versus accounting principles generally accepted in the
United States. The calculation of net investment income per share in the
financial highlights excludes these adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
<S> <C> <C>
$709,581 $(732,518) $22,937
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Income dividends
and capital gain distributions from underlying funds are recorded on the
ex-dividend date. Interest income is recorded on the accrual basis. In
determining the net gain or loss on securities sold, the cost of
securities is determined on the identified cost basis.
7
<PAGE>
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. In
addition, the fund will also incur fees and expenses indirectly as a
shareholder in the underlying funds. Because the underlying funds have
varied expense and fee levels and the Fund may own different proportions
of underlying funds at different times, the amount of fees and expenses
indirectly incurred by the Fund will vary.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is .47% of the amount
invested. In the case of cash redemptions, the fee is .15% of the amount
redeemed. All purchase premiums and redemption fees are paid to and
recorded by the Fund as paid-in capital. For the year ended February 29,
2000, the Fund received $15,897 in purchase premiums and $3,005 in
redemption fees. There is no premium for reinvested distributions or
in-kind transactions.
INVESTMENT RISK
The Fund is subject to the investment risk associated with an investment
in the underlying funds, some of which may invest in foreign securities.
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments,
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times more
volatile than securities of comparable U.S. companies and U.S. securities
markets. The risks described above apply to an even greater extent to
investments in emerging markets. The securities markets of emerging
countries are generally smaller, less developed, less liquid, and more
volatile than the securities markets of the U.S. and developed foreign
markets.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Manager determines the allocation of the assets of the Fund among
designated underlying funds. The Manager does not charge an advisory fee
for asset allocation advice provided to the Fund, but receives advisory
and shareholder service fees from the underlying funds in which the Fund
invests. The Fund has adopted a Shareholder Service Plan under which the
Fund pays GMO a shareholder service fee for client and shareholder
service, reporting and other support. No shareholder service fee is
charged for Class III shares.
GMO has contractually agreed to reimburse all expenses directly incurred
by the Fund until June 30, 2000 (excluding brokerage commissions, certain
other transaction costs (including transfer taxes), shareholder service
fees and extraordinary expenses).
8
<PAGE>
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000 was $376. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 29, 2000, aggregated
$8,577,426 and $6,336,783, respectively.
At February 29, 2000 the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
$40,630,737 $1,506,040 $(5,457,204) $(3,951,164)
</TABLE>
4. PRINCIPAL SHAREHOLDER
At February 29, 2000, 81.8% of the outstanding shares of the Fund were
held by one shareholder. Investment activities of this shareholder could
have a material effect.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
--------------------- ------------------------
Shares Amount Shares Amount
Class III: -------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Shares sold 346,147 $ 3,382,445 531,374 $ 5,481,883
Shares issued to shareholders
in reinvestment of distributions 71,629 699,986 136,208 1,323,898
Shares repurchased (224,862) (2,156,084) (1,298,592) (12,742,195)
-------- ----------- ---------- ------------
Net increase (decrease) 192,914 $ 1,926,347 (631,010) $ (5,936,414)
======== =========== ========== ============
</TABLE>
9
<PAGE>
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
For the fiscal year ended February 29, 2000, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 58.2% of distributions as net capital gain dividends.
10
<PAGE>
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Mr. R. Jeremy Grantham and Mr. Ben Inker are primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. Grantham has been a portfolio
manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years.
Mr. Inker has been with the firm for eight years.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the Global (U.S.+) Equity Allocation Fund returned 19.1%
for the fiscal year ended February 29, 2000. During that period the Fund's
benchmark (75% S&P 500/25% GMO EAFE Extended) returned 15.2%.
Our fundamental conclusion at the outset of 1999 was that the developed, large
cap equity markets in the U.S. and abroad were markedly overvalued. Our research
indicated that better long-term returns could be achieved from investments in
other asset classes, including both REITs (Real Estate Investment Trusts) and
small caps in the U.S., emerging and small cap international equities and fixed
income instruments. By diversifying out of large cap equities and into other
asset classes with good return potential, we believed we were exposing our
clients to a portfolio with better return potential and a reasonable level of
risk. For the period, our emerging equities and small cap growth outperformed
the benchmark by large margins, while small cap value and REITs underperformed
substantially.
During the fiscal year, the Fund was underweight in U.S. stocks by 18% relative
to the benchmark. This weighting was split between emerging equities, which
outperformed the S&P 500 by 56%, and fixed income, which underperformed the S&P
500 by 10%. Within U.S. stocks, we tilted the portfolio towards the most
attractively valued sectors including REITs, where we were 7% overweight. For
the fiscal year, the allocation to REITs hurt performance, as the GMO REIT Fund
underperformed the S&P 500 Index by 16%. Performance of the GMO Growth Fund was
33% above the S&P 500 and GMO Small Cap Growth was 56% above the S&P 500.
However, this gain was partially offset by underperformance of the GMO Small Cap
Value and Value Funds, which underperformed the S&P 500 by 1% and 20%,
respectively.
Performance of the International Core Fund lagged the benchmark substantially as
the rally in expensive multinationals continued. The GMO International Core Fund
returned 8%, underperforming the MSCI EAFE Index by 17%. The Fund was 10%
overweight in emerging equities for the period, helping performance as both the
GMO Emerging Markets Fund and the GMO Evolving Countries Fund outperformed the
IFC Investable Composite by 9.5% and 31%, respectively. Collectively, the
allocation to international equities added 2.6% to the Fund relative to the
benchmark, with well more than 100% of this due to the overweight and strong
implementation in emerging equities.
The Fund was overweight 12% in fixed income, with allocations to international
and emerging bonds along with U.S. fixed income. The drag on the portfolio due
to the fixed income overweight was partially offset by the extremely strong
performance (+46%) of emerging debt within the fixed income portfolio.
<PAGE>
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
OUTLOOK
The fundamentals of today's markets do not justify the extreme valuation
disparities that we see. The investment climate has become astonishingly
speculative, exemplified by the extraordinary returns of 'new economy' stocks.
Our conviction that these conditions cannot prevail indefinitely remains firm.
As such, we will hold our positions, which remain remarkably cheap on a relative
basis. With the eventual return to intrinsic value, we expect the opportunities
for value-added resulting from these extreme conditions will be extraordinary
with the good relative performance of the last year merely a small down payment.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO &
CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND CLASS III SHARES AND THE
S&P 500 INDEX (50%)/MSCI ALL COUNTRY WORLD INDEX (50%)
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
Average Annual Total Returns
Inception 11/26/96
1yr 5yr 10yr (ITD)
<S> <C> <C>
18.4 N/A 12.62
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
Date GMO Global (US+) Equity Allocation Fund-III 50% S&P 500/50% MSCI All Country World GMO Global Equity Index
<S> <C> <C> <C>
11/26/96 9953 10000 10000
12/31/96 10023 9823 9848
3/31/97 10185 10011 10079
6/30/97 11394 11634 11693
9/30/97 12412 12201 12374
12/31/97 12017 12157 12395
3/31/98 13317 13848 14154
6/30/98 12892 14121 14488
9/30/98 11149 12553 12882
12/31/98 12734 15214 15574
3/31/99 12804 15903 16192
6/30/99 14357 16933 17194
9/30/99 13629 16264 16526
12/31/99 15190 18891 19095
2/29/00 14732 17787 17949
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The total returns would have been lower had certain expenses
not been reimbursed during the periods shown and do not include the effect of
taxes. Each performance figure assumes purchase at the beginning and
redemption at the end of the stated period and reflects a transaction fee of
47 bp on the purchase and 15 bp on the redemption. Transaction fees are
retained by the Fund to cover trading costs. Past performance is not
indicative of future performance. Information is unaudited.
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Small Cap Growth Fund at
February 29, 2000, the results of its operations, the changes in its net assets
and the financial highlights for each of the periods indicated therein, in
conformity with accounting principles generally accepted in the United States.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at February 29, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 10, 2000
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 98.9%
ADVERTISING -- 0.6%
15,300 e4L Inc* 34,425
6,600 Source Media Inc* 98,175
4,700 TMP Worldwide Inc* 638,906
-------------
771,506
-------------
AUTOMOTIVE -- 0.4%
8,800 Copart Inc* 185,075
10,200 Exide Corp 103,275
10,200 Meritor Automotive Inc 142,800
6,250 Monaco Coach Corp* 112,500
3,700 National R.V. Holdings Inc* 48,100
-------------
591,750
-------------
BANKING AND FINANCIAL SERVICES -- 1.8%
6,100 Advanta Corp, Class A 113,612
1,200 Bancfirst Corp 33,300
3,800 Bank United Corp 99,512
8,700 Comdisco Inc 334,406
182 Commerce Bancorp Inc 6,120
3,300 Commonwealth Bancorp Inc 51,769
9,400 Dime Bancorp Inc 114,562
6,200 Dime Community Bancshares 91,837
4,100 Eaton Vance Corp 169,894
2,500 Financial Security Assurance Holdings Ltd 112,500
33,400 FiNet.com Inc* 45,925
7,300 First Federal Financial Corp* 93,075
1,500 GBC Bancorp (California) 40,500
3,500 Medallion Financial Corp 63,875
7,966 Metris Companies Inc 206,120
5,500 OceanFirst Financial Corp 87,656
105 Old National Bancorp 2,625
5,200 PFF Bancorp Inc 78,650
3,300 Pioneer Group* 66,206
4,850 Queens County Bancorp Inc 92,150
4,500 Ryland Group Inc 79,875
4,000 SEI Investments Co 357,250
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
BANKING AND FINANCIAL SERVICES -- CONTINUED
6,100 SierraCities.com Inc* 128,862
-------------
2,470,281
-------------
CHEMICALS -- 0.4%
5,100 Geon Co 106,462
13,000 Lubrizol Corp 322,562
6,500 W.R. Grace & Co* 65,406
-------------
494,430
-------------
COMMUNICATIONS -- 0.8%
4,800 Aerial Communications Inc* 287,700
700 Ancor Communications Inc* 41,912
8,966 Per-Se Technologies Inc* 70,607
2,200 Powerwave Technologies Inc* 351,725
5,800 ZixIt Corp* 311,932
-------------
1,063,876
-------------
COMPUTER AND OFFICE EQUIPMENT -- 5.6%
8,200 Advanced Micro Devices Inc* 320,825
15,200 Auspex Systems Inc* 196,650
5,100 CDW Computer Centers Inc* 279,862
10,800 Emulex Corp* 1,728,000
10,000 Infocus Systems Inc* 335,000
12,400 MTI Technology Corp* 650,225
18,600 Rational Software Corp* 1,322,925
4,800 Safeguard Scientifics Inc* 839,700
6,000 Sandisk Corp* 534,000
9,400 Symbol Technologies Inc 894,175
3,400 Visual Networks Inc* 223,550
8,700 Xircom Inc* 361,322
900 Zebra Technologies Corp* 59,906
-------------
7,746,140
-------------
CONSTRUCTION -- 0.7%
3,000 Centex Construction Products Inc 69,750
1,100 Centex Corp 21,656
14,600 Horton (DR) Inc 164,250
6,200 Insituform Technologies Inc, Class A* 175,150
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
CONSTRUCTION -- CONTINUED
5,600 MDC Holdings Inc 85,050
2,900 NVR Inc* 127,962
10,300 Pulte Corp 173,169
8,100 Standard Pacific Corp 86,062
-------------
903,049
-------------
CONSUMER GOODS -- 2.5%
4,600 Brown Shoe Co Inc 48,300
9,500 Callaway Golf Co 114,000
9,200 Church & Dwight Co Inc 156,975
15,000 Cytyc Corp* 690,000
9,100 Donna Karan International Inc* 65,406
6,650 Fossil Inc* 150,872
8,700 Furniture Brands International Inc* 139,744
7,300 Genesco Inc* 74,825
3,100 Guess ? Inc* 66,069
5,200 Insight Enterprises Inc* 163,150
5,500 Jakks Pacific Inc* 90,750
18,300 Jones Apparel Group Inc* 414,037
3,600 K-Swiss Inc, Class A 40,050
8,200 La-Z-Boy Chair Co 136,325
2,700 Oneida Ltd 47,925
6,000 Patterson Dental Company* 216,188
8,300 Pinnacle Systems Inc* 416,037
5,550 Quiksilver Inc* 71,456
3,300 Salton Inc* 155,512
3,500 SCP Pool Corp* 86,844
7,150 THQ Inc* 144,341
-------------
3,488,806
-------------
ELECTRONIC EQUIPMENT -- 24.4%
32,200 Adaptec Inc* 1,320,200
4,800 Alpha Industries Inc* 696,900
7,900 American Power Conversion Corp* 268,106
7,900 Antec Corp* 418,206
4,000 Applied Micro Circuits Corp* 1,100,250
37,200 Atmel Corp* 1,841,400
4,900 Atmi Inc* 231,219
4,800 AVX Corp 304,800
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
ELECTRONIC EQUIPMENT -- CONTINUED
12,400 C-Cube Microsystems Inc* 1,156,300
5,100 Concord Communications Inc* 228,225
5,900 Conexant Systems Inc* 579,675
7,400 CTS Corp 477,300
28,300 Cypress Semiconductor Corp* 1,291,187
22,000 Digital Microwave Corp* 734,250
6,600 DII Group Inc* 638,137
5,400 Electro Scientific Industries* 306,112
370 eMerge Interactive Inc, Class A* 19,656
4,500 Hadco Corp* 249,187
4,600 Harmonic Lightwaves Inc* 629,912
28,600 Integrated Device Technology Inc* 1,054,625
17,000 Interdigital Communications Corp* 542,937
17,900 International Rectifier Corp* 749,562
10,800 Kemet Corp* 663,525
7,700 Kent Electronics Corp* 260,837
24,700 Komag Inc* 54,804
8,200 MEMC Electronic Materials Inc* 142,987
17,550 Microchip Technology Inc* 1,095,778
20,800 National Semiconductor Corp* 1,562,600
29,600 P-Com Inc* 540,200
20,600 Picturetel Corp* 155,787
28,600 PMC-Sierra Inc* 5,521,587
4,500 Polycom Inc* 523,406
5,700 Powertel Inc* 533,662
12,400 QLogic Corp* 1,934,400
14,500 Scientific Atlanta Inc 1,488,969
3,600 SDL Inc* 1,476,000
8,200 Semtech Corp* 512,500
19,000 Sensormatic Electronics Corp* 361,000
10,800 Silicon Valley Group Inc* 273,375
1,500 Texas Instruments Inc 249,750
1,800 Titan Corp* 67,500
3,750 Transwitch Corp* 440,625
2,800 TriQuint Semiconductor Inc* 332,500
4,700 Vicor Corp* 106,925
10,700 Westell Technologies Inc* 366,475
-------------
33,503,338
-------------
</TABLE>
See accompanying notes to the financial statements.
4
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
FOOD AND BEVERAGE -- 0.5%
3,700 Agribrands International Inc* 135,281
6,900 Coors (Adolph) Co, Class B 302,737
13,000 IBP Inc 162,500
10,100 Topp Inc (The)* 75,750
-------------
676,268
-------------
HEALTH CARE -- 4.5%
22,700 Apria Healthcare Group* 323,475
4,700 Bard (CR) 185,650
8,566 Bindley Western Industries Inc 147,228
1,400 Celera Genomics Group* 341,600
8,500 Chiron Corp* 425,000
14,300 Columbia Laboratories Inc* 180,537
3,000 Cooper (The) Companies Inc 82,312
6,100 Enzon Inc* 353,800
4,300 Express Scripts Inc, Class A* 198,069
7,000 Hooper Holmes Inc 215,250
36,100 Laboratory Corporation of America Holdings* 144,400
5,600 Lincare Holdings Inc* 131,250
9,390 Medimmune Inc* 1,863,915
14,700 Medquist Inc* 378,525
7,500 Mid Atlantic Medical Services Inc* 61,406
7,500 Renal Care Group Inc* 131,719
4,100 ResMed Inc* 305,962
23,900 Summit Technology Inc* 179,250
2,300 Techne Corp* 197,297
20,000 Visx Inc* 338,750
-------------
6,185,395
-------------
INSURANCE -- 0.5%
2,700 E. W. Blanch Holdings Inc 126,900
2,415 Medical Assurance Inc* 47,394
32,400 Oxford Health Plans Inc* 500,175
2,200 Risk Capital Holdings Inc* 33,550
-------------
708,019
-------------
LODGING -- 0.2%
11,800 Boyd Gaming Corp* 61,212
8,000 MGM Grand Inc 159,000
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
LODGING -- CONTINUED
2,000 Trendwest Resorts Inc* 48,750
-------------
268,962
-------------
MACHINERY -- 4.0%
6,300 American Standard Co* 219,712
4,500 Astec Industries* 119,812
10,800 Asyst Technologies Inc* 495,450
6,900 Briggs & Stratton Corp 230,719
5,200 Cummins Engine Inc 173,225
4,400 Donaldson Co Inc 100,100
12,675 Dycom Industries Inc* 633,750
11,500 Helix Technology Corp 817,937
8,200 Kulicke & Soffa Industries* 651,900
9,300 Lam Research Corp* 1,451,962
1,200 Novellus System Inc* 71,175
8,300 Pall Corp 163,925
4,400 Scott Technologies Inc* 84,700
7,600 Terex Corp* 90,250
3,000 Toro Co 99,375
6,300 Ultratech Stepper Inc* 110,250
2,100 Woodward Governor Co 48,300
-------------
5,562,542
-------------
MANUFACTURING -- 1.3%
5,200 Cymer Inc* 285,350
15,300 Gentex Corp* 447,048
3,700 Maverick Tube Corp* 83,250
4,500 PRI Automation Inc* 359,437
6,600 Temple Inland Inc 337,425
7,300 Tower Automotive Inc* 86,687
2,600 Zomax Inc* 127,237
-------------
1,726,434
-------------
METALS AND MINING -- 0.2%
4,900 Amcol International Corp 77,175
1,860 Phelps Dodge Corp 87,652
900 Reynolds Metals Co 57,150
-------------
221,977
-------------
</TABLE>
See accompanying notes to the financial statements.
6
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
OIL AND GAS -- 2.8%
3,100 Barrett Resources Corp* 90,287
2,000 Berry Petroleum Co, Class A 35,750
6,200 Brown Tom Inc* 82,150
41,600 Chesapeake Energy Corp* 122,200
12,200 Cross Timbers Oil Co 105,225
20,100 EEX Corp* 48,994
11,200 Ensco International Inc 338,800
3,000 Equitable Resources Inc 113,250
6,900 Forest Oil Corp* 56,494
66,500 Grey Wolf Inc* 232,750
4,200 Houston Exploration Co* 63,787
4,100 HS Resources Inc* 67,650
5,400 Louis Dreyfus Natural Gas* 111,375
17,400 Marine Drilling Co Inc* 396,937
11,600 Meridian Resource Corp* 39,875
4,700 Mitchell Energy, Class B 98,994
4,400 Newfield Exploration Co* 136,400
5,800 Nuevo Energy Co* 102,950
21,200 Ocean Energy Inc* 226,575
10,700 Patterson Energy Inc* 244,094
19,700 Pioneer Natural Resources Co* 163,756
3,100 Plains Resource Inc* 43,012
9,700 Pogo Producing Co 224,312
10,300 Santa Fe Snyder Corp* 77,250
2,800 St. Mary Land & Exploration Co 77,875
5,500 Stone Energy Corp* 223,437
11,400 Union Pacific Resources Group 101,887
3,400 UTI Energy Corp* 109,012
11,700 Vintage Petroleum Inc 169,650
-------------
3,904,728
-------------
PAPER AND ALLIED PRODUCTS -- 0.7%
6,200 Boise Cascade Corp 184,837
17,600 EarthShell Corp* 106,700
20,000 Gaylord Container Corp, Class A* 107,500
11,400 Longview Fibre Co 155,325
5,300 Mead Corp 158,669
9,000 United Stationers Inc* 241,875
-------------
954,906
-------------
</TABLE>
See accompanying notes to the financial statements.
7
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
PHARMACEUTICALS -- 3.0%
3,700 Algos Pharmaceuticals Corp* 73,769
3,400 Andrx Corp* 326,612
4,600 Coulter Pharmaceutical Inc* 178,250
4,600 Cygnus Inc* 84,812
1,100 Gilead Sciences Inc* 84,150
10,500 IDEC Pharmaceuticals Corp* 1,479,187
32,700 Ivax Corp* 743,925
13,600 Ligand Pharmaceuticals Inc, Class B* 295,800
16,600 Liposome Company Inc* 223,062
7,900 Millipore Corp 422,156
8,800 Triangle Pharmaceuticals Inc* 201,300
-------------
4,113,023
-------------
PRIMARY MATERIALS -- 0.3%
3,975 Elcor Corp 133,162
9,200 USG Corp 299,000
-------------
432,162
-------------
PRIMARY PROCESSING -- 0.3%
5,500 Belden Inc 124,438
6,700 Commscope Inc* 260,881
-------------
385,319
-------------
PRINTING AND PUBLISHING -- 0.7%
2,000 Central Newspapers Inc, Class A 57,125
6,300 Harland (JH) Co 97,256
4,300 Houghton Mifflin Co 171,194
2,600 McClatchy Newspapers Inc 89,863
2,600 Playboy Enterprises Inc, Class B* 57,363
4,000 TV Guide Inc, Class A* 188,500
10,600 Valassis Communications Inc* 293,488
-------------
954,789
-------------
REAL ESTATE -- 0.1%
3,400 CN Fairfield Communities Inc* 29,963
3,300 Town & Country Trust 57,956
-------------
87,919
-------------
</TABLE>
See accompanying notes to the financial statements.
8
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
REFINING -- 0.1%
2,800 Murphy Oil Corp 141,750
-------------
RETAIL TRADE -- 4.7%
17,400 7 Eleven Inc* 45,132
10,900 American Eagle Outfitters Inc* 277,950
6,400 Ames Department Stores Inc* 90,400
5,600 AnnTaylor Stores Corp* 106,750
11,700 Brinker International Inc* 254,475
8,900 Cato Corp, Class A 89,000
10,450 CEC Entertainment Inc* 237,738
34,100 Charming Shoppes Inc* 204,600
6,600 Chicos Fas Inc* 83,325
7,600 Children's Place Retail Stores Inc* 89,775
11,750 Cost Plus Inc* 218,109
4,900 CSK Auto Corp* 56,350
2,800 Cyberian Outpost Inc* 24,675
11,800 Darden Restaurants Inc 155,613
8,125 Dollar Tree Stores Inc* 315,352
5,300 Factory 2-U Stores Inc* 128,525
4,900 Haverty Furniture Companies Inc 52,981
12,100 Jack in the Box Inc* 242,756
3,000 Lands End Inc* 99,563
7,600 Linens N Things Inc* 149,625
10,900 Musicland Stores Corp* 74,256
1,700 NPC International Inc* 14,025
8,600 Outback Steakhouse Inc* 224,675
11,600 Pacific Sunwear of California* 295,075
4,700 Papa Johns International Inc* 112,800
8,600 Petco Animal Supplies Inc* 92,450
2,100 Rare Hospitality International Inc* 39,638
21,100 Ross Stores Inc 305,950
15,500 Spiegel Inc, Class A* 111,406
20,800 Sunglass Hut Inc* 178,100
6,100 Talbots Inc 220,744
6,200 The Cheesecake Factory Inc* 184,450
2,600 The Mens Wearhouse Inc* 60,369
15,800 Tiffany & Co 1,014,163
10,000 Valuevision International Inc, Class A* 500,000
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
RETAIL TRADE -- CONTINUED
5,600 Williams-Sonoma Inc* 173,250
-------------
6,524,045
-------------
SERVICES -- 8.5%
3,800 Advo Inc* 105,450
26,300 AMF Bowling Inc* 85,475
6,800 Argosy Gaming Co* 76,925
1,500 autobytel.com Inc* 16,031
17,200 Aztar Corp* 163,400
5,300 Bally Total Fitness Holdings Corp* 142,438
2,500 Career Education Corp* 93,750
92,100 Caremax Rx Inc* 414,450
4,100 Catalina Marketing Corp* 349,013
16,000 Cephalon Inc* 1,063,501
2,300 Championship Auto Racing Teams, Inc* 46,000
9,200 COR Therapeutics Inc* 824,550
8,600 Dollar Thrifty Automotive Group Inc* 112,875
9,200 Education Management Corp* 119,600
11,000 Hollywood Entertainment Corp* 112,063
5,900 Icos Corp* 309,013
9,700 IT Group Inc* 73,963
2,600 Korn/Ferry International* 97,500
7,100 Mandalay Resort Group* 99,844
2,700 Millennium Pharmaceuticals Inc* 702,338
2,800 Modis Professional Services Inc* 44,100
9,900 Navigant Consulting Inc* 95,288
4,600 NCO Group Inc* 107,525
4,500 ON Assignment Inc* 168,188
5,900 Pegasystems Inc* 138,650
7,000 Players International Inc* 57,532
10,700 Rare Medium Group Inc* 642,000
22,200 Sitel Corp* 191,475
4,700 Sonic Corp* 113,975
1,900 Speedway Motorsports Inc* 58,188
11,700 Station Casinos Inc* 229,613
31,000 UnitedGlobal.Com Inc, Class A* 3,239,500
5,000 VeriSign Inc* 1,265,000
5,000 Whittman-Hart Inc* 226,875
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
SERVICES -- CONTINUED
12,200 WMS Industries Inc* 138,775
-------------
11,724,863
-------------
TECHNOLOGY -- 21.6%
800 About.com Inc* 56,200
3,800 Advanced Digital Information Corp* 344,375
3,700 Advanced Energy Industries Inc* 269,175
1,800 Advent Software Inc* 163,238
7,000 American Management Systems Inc* 222,688
3,000 Aspect Development Inc* 446,625
6,600 AVT Corp* 174,488
10,000 BEA Systems Inc* 1,265,625
5,600 Bisys Group Inc* 288,750
6,200 BroadVision Inc* 1,565,888
2,700 Cabletron Systems Inc* 132,300
5,400 Clarify Inc* 779,288
157 CMG Information Services Inc* 20,341
9,200 Cognex Corp* 404,225
5,200 Cohu Inc 293,150
6,800 Credence Systems Corp* 906,100
4,100 CSG Systems International Inc* 210,638
9,800 Cybercash Inc* 102,900
12,600 Data Broadcasting Corp* 124,425
10,700 Dendrite International Inc* 263,488
5,800 Dionex Corp* 183,063
3,700 DST Systems Inc* 207,663
1,615 EarthLink Inc* 40,173
5,500 Electroglas Inc* 213,125
3,600 Electronic Arts Inc* 360,000
13,400 Electronics For Imaging Inc* 795,625
2,100 Exodus Communications Inc* 298,988
3,000 Factset Research Systems Inc 90,375
9,400 FileNet Corp* 402,438
1,000 Go2Net Inc* 87,000
1,900 Great Plains Software Inc* 132,169
8,200 Harbinger Corp* 262,913
1,600 i2 Technologies Inc* 261,600
17,800 Informix Corp* 284,800
1,700 ISS Group Inc* 178,500
7,424 JDS Uniphase Corp* 1,957,152
</TABLE>
See accompanying notes to the financial statements. 11
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
TECHNOLOGY -- CONTINUED
3,300 Kronos Inc* 209,550
11,700 Legato Systems Inc* 416,813
9,700 LTX Corp* 409,219
2,400 Macromedia Inc* 207,450
2,300 Manugistics Group Inc* 130,669
5,700 Mercury Computer Systems Inc* 274,669
28,200 Mercury Interactive Corp* 2,717,776
5,000 Micromuse Inc* 709,063
4,000 MicroStrategy Inc* 556,250
9,500 Midway Games Inc* 140,719
8,000 National Computer System Inc 318,000
13,200 Network Appliance Inc* 2,491,500
9,300 Network Associates Inc* 283,069
1,400 Network Solutions Inc* 451,413
6,100 Nvidia Corp* 390,400
6,900 Open Market Inc* 345,863
5,400 Progress Software Corp* 134,663
5,000 Psinet Inc* 231,875
1,200 QRS Corp* 113,250
4,700 Radiant Systems Inc* 240,288
2,150 Radisys Corp* 105,350
12,200 Remedy Corp* 691,588
10,800 RSA Security Inc* 722,925
23,400 S3 Inc* 372,938
4,000 Sanchez Computer Associates Inc* 194,000
34,800 Sybase Inc* 872,175
7,800 Symantec Co* 557,213
7,000 Synopsys Inc* 279,563
16,800 USWeb Corp* 653,100
4,500 Verity Inc* 240,188
700 Vignette Corp* 161,350
2,700 Waters Corp* 264,769
-------------
29,677,149
-------------
TELECOMMUNICATIONS -- 4.9%
9,600 American Mobile Satellite Corp* 278,400
6,300 Aspect Communications Corp* 405,956
16,800 Brightpoint Inc* 216,300
1,900 Carrier Access Corp* 107,825
37,500 Centennial Cellular Corp, Class A* 910,549
</TABLE>
12 See accompanying notes to the financial statements.
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
TELECOMMUNICATIONS -- CONTINUED
2,600 Commonwealth Telephone Enterprises Inc* 113,425
3,100 Cumulus Media Inc* 92,613
400 Entercom Communications Corp* 16,825
3,900 Hispanic Broadcasting Corp* 364,406
6,500 Liberty Digital Inc, Class A* 356,688
2,100 McLeodUSA Inc* 184,800
1,100 Metricom Inc* 85,663
1,400 MRV Communications Inc* 219,538
7,700 Pacific Gateway Exchange Inc* 155,925
58,600 Paging Network Inc* 170,309
7,100 Pinnacle Entertainment Inc* 122,475
9,000 Price Communications Corp* 214,875
900 RF Micro Devices Inc* 124,481
18,400 Talk Com Inc* 310,500
8,100 Telephone and Data Systems Inc 854,550
3,508 Voicestream Wireless Corp* 466,783
13,500 WebLink Wireless Inc* 243,000
9,800 Western Wireless Corp, Class A* 475,300
2,400 Winstar Communications Inc* 185,700
-------------
6,676,886
-------------
TEXTILES -- 0.3%
34,300 Shaw Industries Inc 435,181
-------------
TOBACCO -- 0.0%
3,530 Brooke Group Ltd 46,773
-------------
TRANSPORTATION -- 0.9%
29,700 Airtran Holdings Inc* 121,586
9,600 American Freightways Corp* 104,400
3,700 Landstar System Inc* 207,894
3,100 M.S. Carriers Inc* 68,588
9,500 Mesa Airline Group Inc* 56,406
4,800 Mesaba Holdings Inc* 54,900
2,600 Midwest Express Holdings Inc* 67,113
5,300 Newport News Shipbuilding Inc 150,056
5,100 Roadway Express Inc 105,188
6,700 Skywest Inc 198,906
3,600 US Freightways Corp 119,700
-------------
1,254,737
-------------
</TABLE>
See accompanying notes to the financial statements. 13
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
UTILITIES -- 1.6%
12,100 Calpine Corp* 1,107,150
3,588 Dynegy Inc 168,188
19,300 Energy East Corp 405,300
9,400 Northeast Utilities 176,838
600 Potomac Electric Power Co 12,188
8,000 Southwest Natural Gas Corp 148,000
6,400 Southwestern Energy Co 44,800
6,700 Western Gas Resources Inc 92,125
-------------
2,154,589
-------------
TOTAL COMMON STOCKS (COST $84,470,442) 135,851,592
-------------
SHORT-TERM INVESTMENTS -- 10.2%
CASH EQUIVALENTS -- 8.9%
$ 3,807,369 BankBoston Eurodollar Time Deposit, 6.1175%, due
4/28/00(a) 3,807,369
$ 918,915 First Union National Bank Time Deposit, 5.8125%, due
3/01/00(a) 918,915
$ 1,378,371 Fleet National Bank Time Deposit, 5.79%, due 3/10/00(a) 1,378,371
1,610,799 Merrimac Cash Fund Premium Class(a) 1,610,799
$ 4,500,000 Prudential Securities Group, Inc. Master Note, 6.1875%,
due 3/10/00(a) 4,500,000
-------------
12,215,454
-------------
U.S. GOVERNMENT -- 0.7%
$ 1,000,000 U.S. Treasury Bill, 5.689%, due 6/29/00(b) 981,300
-------------
</TABLE>
See accompanying notes to the financial statements.
14
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE ($) DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENT -- 0.6%
$ 782,935 Salomon Smith Barney, Inc. Repurchase Agreement, dated
2/29/00, due 3/1/00, with a maturity value of $783,042
and an effective yield of 4.95%, collaterized by a U.S.
Treasury Obligation with a rate of 8.125%, maturity
date of 8/15/19 and market value, including accrued
interest, of $798,594. 782,935
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $13,980,189) 13,979,689
-------------
TOTAL INVESTMENTS -- 109.1%
(Cost $98,450,631) 149,831,281
Other Assets and Liabilities (net) -- (9.1%) (12,541,472)
-------------
TOTAL NET ASSETS -- 100.0% $ 137,289,809
=============
NOTES TO THE SCHEDULE OF INVESTMENTS:
</TABLE>
* Non-income producing security.
(a) Represents investments of security lending collateral (Note 1).
(b) All or a portion of this security has been segregated to cover margin
requirements on open
financial futures contracts (Note 6).
See accompanying notes to the financial statements. 15
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $98,450,631) (Note 1) $149,831,281
Receivable for investments sold 213,716
Dividends and interest receivable 33,672
Receivable for variation margin on open futures contracts
(Notes 1 and 6) 60,750
Receivable for expenses waived or borne by Manager (Note
2) 13,399
------------
Total assets 150,152,818
------------
LIABILITIES:
Payable upon return of securities loaned (Note 1) 12,215,454
Payable for Fund shares repurchased 552,623
Payable to affiliate for (Note 2):
Management fee 32,702
Shareholder service fee 14,870
Accrued expenses 47,360
------------
Total liabilities 12,863,009
------------
NET ASSETS $137,289,809
============
NET ASSETS CONSIST OF:
Paid-in capital $ 78,147,374
Accumulated undistributed net realized gain 7,461,400
Net unrealized appreciation 51,681,035
------------
$137,289,809
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $137,289,809
============
SHARES OUTSTANDING:
Class III 8,138,248
============
NET ASSET VALUE PER SHARE:
Class III $ 16.87
============
</TABLE>
16 See accompanying notes to the financial statements.
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $135) $ 425,232
Interest (including securities lending income of $63,677) 318,817
-----------
Total income 744,049
-----------
EXPENSES:
Management fee (Note 2) 430,598
Custodian and transfer agent fees 98,648
Audit fees 35,211
Legal fees 2,418
Registration fees 2,045
Trustees fees (Note 2) 1,316
Miscellaneous 2,839
Fees waived or borne by Manager (Note 2) (142,477)
-----------
430,598
Shareholder service fee (Note 2)
Class III 195,726
-----------
Net expenses 626,324
-----------
Net investment income 117,725
-----------
REALIZED AND UNREALIZED GAIN:
Net realized gain on:
Investments 17,159,965
Closed futures contracts 734,429
-----------
Net realized gain 17,894,394
-----------
Change in net unrealized appreciation (depreciation) on:
Investments 46,528,581
Open futures contracts 315,245
-----------
Net unrealized gain 46,843,826
-----------
Net realized and unrealized gain 64,738,220
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $64,855,945
===========
</TABLE>
See accompanying notes to the financial statements. 17
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 117,725 $ 644,666
Net realized gain 17,894,394 10,411,205
Change in net unrealized appreciation (depreciation) 46,843,826 (29,532,766)
------------ ------------
Net increase (decrease) in net assets from
operations 64,855,945 (18,476,895)
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (266,924) (535,430)
------------ ------------
Total distributions from net investment income (266,924) (535,430)
------------ ------------
Net realized gains
Class III (9,060,286) (10,987,255)
------------ ------------
Total distributions from net realized gains (9,060,286) (10,987,255)
------------ ------------
(9,327,210) (11,522,685)
------------ ------------
Net share transactions: (Note 5)
Class III (48,222,297) (239,630,042)
------------ ------------
Decrease in net assets resulting from net share
transactions (48,222,297) (239,630,042)
------------ ------------
Total increase (decrease) in net assets 7,306,438 (269,629,622)
NET ASSETS:
Beginning of period 129,983,371 399,612,993
------------ ------------
End of period (including accumulated undistributed
net investment income of $0 and $109,236,
respectively) $137,289,809 $129,983,371
============ ============
</TABLE>
18 See accompanying notes to the financial statements.
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
---------------------------------------
2000 1999 1998 1997*
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.88 $ 12.28 $ 9.82 $ 10.00
-------- -------- -------- --------
Income from investment operations:
Net investment income 0.01 0.03 0.05 0.01
Net realized and unrealized gain (loss) 7.02 (0.98) 3.43 (0.19)
-------- -------- -------- --------
Total from investment operations 7.03 (0.95) 3.48 (0.18)
-------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.03) (0.02) (0.06) --
In excess of net investment income -- -- (0.01) --
From net realized gains (1.01) (0.43) (0.95) --
-------- -------- -------- --------
Total distributions (1.04) (0.45) (1.02) --
-------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 16.87 $ 10.88 $ 12.28 $ 9.82
======== ======== ======== ========
TOTAL RETURN(a) 67.27% (8.20)% 36.66% (1.80)%+
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $137,290 $129,983 $399,613 $159,898
Net expenses to average daily net assets 0.48% 0.48% 0.48% 0.48%**
Net investment income to average daily net
assets 0.09% 0.21% 0.47% 0.70%**
Portfolio turnover rate 122% 113% 132% 13%
Fees and expenses voluntarily waived or
borne by the Manager consisted of the
following per share amounts: $ 0.01 $ 0.03 $ 0.03 $ 0.01
</TABLE>
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
* Period from December 31, 1996 (commencement of operations) to February 28,
1997.
** Annualized.
+ Not annualized.
See accompanying notes to the financial statements. 19
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Small Cap Growth Fund (the "Fund"), is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on June
24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series of shares into classes.
The Fund seeks long-term growth of capital. The Fund's benchmark is the
Russell 2500 Growth Index.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of the financial statements
in accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Securities for
which quotations are not readily available are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts on domestic stock
indices. Stock index futures contracts represent commitments for future
delivery of cash based upon the level of a specified index of equity
securities at a given date. The Fund may use futures contracts to manage
its exposure to the stock markets. Buying futures tends to increase the
Fund's exposure to the underlying instrument. Selling futures tends to
decrease the Fund's exposure to the underlying instrument or hedge other
Fund instruments. Upon entering into a futures contract, the Fund is
required to deposit with its custodian, in a segregated account in the
name of the futures broker, an amount of cash or U.S. government and
agency obligations in accordance with the initial margin requirements of
the broker or exchange. Futures contracts are marked to market daily and
an appropriate payable or receivable for the change in value ("variation
margin") is recorded by the
20
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
Fund. The payable or receivable is liquidated on the following business
day. Gains or losses are recognized but not considered realized until the
contracts expire or are closed. Futures contracts involve, to varying
degrees, risk of loss in excess of the variation margin disclosed in the
Statement of Assets and Liabilities. Losses may arise from changes in the
value of the underlying instrument, if there is an illiquid secondary
market for the contracts, or if counterparties do not perform under the
contract terms. Futures contracts are valued at the settlement price
established each day by the board of trade or exchange on which they are
traded. See Note 6 for all open futures contracts as of February 29, 2000.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, realization of collateral by the Fund may be delayed or
limited.
SECURITY LENDING
The Fund may lend its securities to qualified brokers. The loans are
collateralized at all times with cash or securities with a market value at
least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending
its securities. At February 29, 2000, the Fund loaned securities having a
market value of $11,836,035, collateralized by cash in the amount of
$12,215,454, which was invested in short-term instruments.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
equity markets. A swap is an agreement to exchange the return generated by
one instrument for the return generated by another instrument. The Fund
enters into equity swap agreements which involve a commitment by one party
in the agreement to pay interest in exchange for a market linked return,
both based on notional amounts. To the extent that the total return of the
security or index underlying the transaction exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make a payment to the counterparty. The Fund also enters into contracts
for differences in which the Fund agrees with the counterparty that its
return will be based on the
21
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
relative performance of two different groups or "baskets" of securities,
adjusted by an interest rate payment. To the extent that the relative
performance of the two baskets of securities exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make a payment to the counterparty, respectively. Swaps are marked to
market daily based upon quotations from market makers and the change, if
any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
Entering into these agreements involves, to varying degrees, elements of
credit and market risk in excess of the amounts recognized on the
Statement of Assets and Liabilities. Such risks involve the possibility
that there will be no liquid market for these agreements, that the
counterparty to the agreements may default on its obligation to perform,
or that there may be unfavorable changes in the price of the security or
index underlying these transactions. As of February 29, 2000, there were
no open swap agreements.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary. Taxes on foreign dividend income are withheld in
accordance with the applicable country's tax treaty with the United
States.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. Distributions to shareholders are recorded by the Fund on
the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. The
differences are primarily due to the classification of distributions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable
22
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
income and capital gains under U.S. federal tax rules versus accounting
principles generally accepted in the United States. The calculation of net
investment income per share in the financial highlights excludes these
adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
<S> <C> <C>
$39,963 $(39,963) $ --
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable foreign withholding taxes, is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis and is
adjusted for the accretion of discounts. In determining the net gain or
loss on securities sold, the cost of securities is determined on the
identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases and fee on redemptions of Fund shares is
.50% of the amount invested or redeemed. All purchase premiums and
redemption fees are paid to and recorded by the Fund as paid-in capital.
For the year ended February 29, 2000, the Fund received $34,968 in
purchase premiums and $321,811 in redemption fees. There is no premium for
reinvested distributions or in-kind transactions.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .33% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder
23
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
service fee for client and shareholder service, reporting, and other
support. Pursuant to the Shareholder Service Plan, the shareholder service
fee is calculated based on the average daily net assets at the annual rate
of .15% for Class III shares.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding brokerage commissions, certain other transaction costs
(including transfer taxes), shareholder service fees and extraordinary
expenses) exceed the management fee.
Prior to March 1, 1999, GMO earned a management fee at the annual rate of
.50% of average daily net assets. GMO had agreed to waive a portion of its
fee and bear other expenses to the extent that the Fund's annual expenses
(including the management fee but excluding brokerage commissions, certain
other transaction costs (including transfer taxes), shareholder service
fees and extraordinary expenses) exceeded .33% of average daily net
assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000 was $1,316. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 29, 2000, aggregated
$151,598,478 and $201,237,382, respectively.
At February 29, 2000 the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
$99,309,257 $60,064,790 $(9,542,766) $50,522,024
</TABLE>
4. PRINCIPAL SHAREHOLDER
At February 29, 2000, 31.1% of the outstanding shares of the Fund were
held by one shareholder.
24
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
------------------------ --------------------------
Shares Amount Shares Amount
Class III: ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Shares sold 565,817 $ 6,993,580 3,439,182 $ 39,799,712
Shares issued to shareholders
in reinvestment of distributions 692,802 9,146,296 907,024 11,146,358
Shares repurchased (5,062,220) (64,362,173) (24,951,990) (290,576,112)
---------- ------------ ----------- -------------
Net decrease (3,803,601) $(48,222,297) (20,605,784) $(239,630,042)
========== ============ =========== =============
</TABLE>
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 29, 2000 is as
follows:
FUTURES CONTRACTS
<TABLE>
<CAPTION>
Number of
Contracts Type
----------------------------------- ---------------------------------------------
<C> <S>
Buys
6 Russell 2000
<CAPTION>
Number of Contract Net Unrealized
Contracts Expiration Date Value Appreciation
-------------------------- --------------------------------------------- ---------- --------------
<C> <C> <C> <C>
Buys
6 March 2000 $1,739,250 $300,385
========
</TABLE>
At February 29, 2000, the Fund has sufficient cash and/or securities to
cover any commitments or margin on open futures contracts.
25
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
For the fiscal year ended February 29, 2000, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 34.5% of distributions as net capital gain dividends.
26
<PAGE>
GMO SMALL CAP GROWTH FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Robert Soucy are
primarily responsible for the day-to-day management of the Fund's portfolio.
Mssrs. Grantham and Darnell have each been portfolio managers at Grantham, Mayo,
Van Otterloo & Co. LLC for more than fifteen years; Mr. Soucy for more than ten
years.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO Small Cap Growth Fund returned 67.3% for the
fiscal year ended February 29, 2000 as compared to 11.7% for the S&P 500 and
105.5% for the Russell 2500 Growth Index. Consistent with the Fund's investment
objectives and policies, the Fund was primarily invested in common stocks
throughout the period.
For the fiscal year, small capitalization growth stocks outperformed all other
market capitalization bands in the U.S. market. Market returns were driven by
the lofty returns of a small number of technology and telecommunications stocks.
The majority of the other sectors in the Russell 2500 Growth Index besides
technology, telecommunications and integrated oils posted negative returns for
the fiscal year, including consumer staple, consumer discretionary, financial
services and auto/transportation stocks.
Though performance was strong on an absolute basis, the Fund significantly
underperformed its benchmark for the fiscal year. The performance shortfall was
attributed both to weak sector and stock selection. The Fund's focus on more
reasonably priced stocks within all other sectors of the small cap market beside
technology detracted from performance as many of these sectors posted negative
returns.
The GMO Small Cap Growth Fund selects stocks based on three strategies: the
trend in consensus analyst estimates, price momentum and earnings surprise.
Using these strategies, we favor the stocks of companies that have had upward
revisions in earnings expectations, strong price momentum and positive earnings
surprises. Although on a long-term basis our strategies for selecting small cap
growth stocks have added value, two out of the three strategies fared poorly in
the fiscal year. The price momentum strategy added value while the earnings
momentum and earnings surprise strategies underperformed. Stock selection was
particularly weak among technology, telephone utilities, consumer discretionary
and financial services stocks.
OUTLOOK
We do not expect the strong performance of Internet stocks to persist
indefinitely. Accordingly, we expect our strategy of focusing on more reasonably
priced small cap growth stocks to generate much better returns relative to the
benchmark. In our asset allocation accounts, while we are overweight in small
cap stocks relative to large cap stocks, we strongly prefer the small cap value
sector of the market to small cap growth.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO SMALL CAP GROWTH FUND CLASS III SHARES AND THE RUSSELL 2500 GROWTH INDEX
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
Average Annual Total Returns
Inception 12/31/96
1yr 5yr 10yr (ITD)
<S> <C> <C>
65.61 N/A 25.27
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
Date GMO Small Cap Growth Fund-III Russell 2500 Growth
<S> <C> <C> <C>
12/31/96 9950 10000
3/31/97 9502 9200
6/30/97 11207 10696
9/30/97 13388 12475
12/31/97 12407 11477
3/31/98 13983 12755
6/30/98 13756 12133
9/30/98 10718 9438
12/31/98 13125 11831
3/31/99 12381 11707
6/30/99 13791 13675
9/30/99 13477 13201
12/31/99 17113 18398
2/29/00 20401 22987
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The total returns would have been lower had certain expenses
not been reimbursed during the periods shown and do not include the effect of
taxes. Each performance figure assumes purchase at the beginning and
redemption at the end of the stated period and reflects a transaction fee of
50 bp on the purchase and 50 bp on the redemption. Transaction fees are
retained by the Fund to cover trading costs. Past performance is not
indicative of future performance. Information is unaudited.
gg<PAGE>
GMO REIT FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO REIT FUND (A SERIES OF GMO TRUST)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO REIT Fund at February 29, 2000,
the results of its operations, the changes in its net assets and the financial
highlights for each of the periods indicated therein, in conformity with
accounting principles generally accepted in the United States. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at February 29, 2000 by correspondence with the custodian, provide
a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 10, 2000
<PAGE>
GMO REIT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------
<C> <S> <C>
REAL ESTATE INVESTMENTS -- 97.5%
COMMON STOCKS -- 10.1%
DIVERSIFIED -- 1.9%
92,500 Catellus Development Corp* 1,138,906
50,000 St. Joe Co 1,209,375
-----------
2,348,281
-----------
LODGING -- 5.5%
255,000 Starwood Hotels and Resorts Worldwide Inc 5,721,562
374,871 Wyndham International Inc, Class A* 890,319
-----------
6,611,881
-----------
OFFICE -- 2.4%
43,800 Brookfield Properties Corp 451,687
165,000 Trizec Hahn Corporation 2,444,062
-----------
2,895,749
-----------
UTILITIES -- 0.3%
20,000 Reliant Energy Inc 411,250
-----------
TOTAL COMMON STOCKS (COST $26,960,638) 12,267,161
-----------
PREFERRED STOCKS -- 0.2%
OFFICE -- 0.2%
10,000 Reckson Associates Realty Corp 7.625% 185,625
-----------
TOTAL PREFERRED STOCKS (COST $193,525) 185,625
-----------
REAL ESTATE INVESTMENT TRUSTS -- 87.2%
APARTMENTS -- 12.0%
75,000 Apartment Investment & Management Co, Class A 2,775,000
26,300 BRE Properties Inc 621,337
82,500 Cornerstone Realty Income Trust 825,000
135,000 Equity Residential Properties Trust 5,391,543
29,600 Gables Residential Trust 651,200
25,000 Mid America Apartment Community 571,875
27,500 Smith (Charles E) Residential 960,781
37,500 Summit Properties Inc 712,500
157,500 United Dominion Realty Trust Inc 1,575,000
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO REIT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------
<C> <S> <C>
APARTMENTS -- CONTINUED
17,500 Walden Residential Properties Inc 403,594
-----------
14,487,830
-----------
DIVERSIFIED -- 16.1%
90,000 Colonial Properties Trust 2,244,375
412,500 Crescent Real Estate Equities 7,038,281
75,000 Glenborough Realty Trust Inc 1,120,312
50,000 Meditrust Corp 140,625
115,000 The Rouse Company 2,515,625
207,500 Vornado Realty Trust 6,341,719
-----------
19,400,937
-----------
FACTORY OUTLET -- 0.5%
20,000 Chelsea GCA Realty Inc 530,000
17,500 Prime Retail Inc 40,469
-----------
570,469
-----------
INDUSTRIAL -- 6.7%
57,500 Eastgroup Properties Inc 1,132,031
90,000 First Industrial Realty Trust 2,340,000
82,500 Liberty Property Trust 1,871,719
149,000 Prologis Trust 2,691,313
-----------
8,035,063
-----------
LODGING -- 5.4%
95,000 Felcor Lodging Trust Inc 1,626,875
34,200 Hospitalities Properties Trust 662,625
475,000 Host Marriott Corp 4,215,625
-----------
6,505,125
-----------
MANUFACTURED HOUSING -- 0.6%
29,000 Chateau Communities Inc 717,750
-----------
OFFICE -- 35.0%
25,000 Alexandria Real Estate Equity Inc 764,062
42,900 Arden Realty Group Inc 892,856
71,000 Bedford Property Investors 1,189,250
17,500 Boston Properties Inc 530,469
225,000 Brandywine Realty Trust 3,600,000
45,000 CarrAmerica Realty Corp 956,250
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO REIT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------
<C> <S> <C>
OFFICE -- CONTINUED
62,500 Cornerstone Properties Inc 1,054,688
272,500 Duke Realty Investments 5,007,188
190,000 Equity Office Properties Trust 4,548,125
170,000 Highwood Properties Inc 3,559,375
55,700 Kilroy Realty Corp 1,190,588
62,800 Koger Equity Inc 1,110,775
265,000 Mack-Cali Realty Corp 6,293,750
73,600 Parkway Properties Inc 2,180,400
105,000 Prentiss Properties Trust 2,159,063
22,500 Prime Group Realty Trust 310,781
5,000 PS Business Parks Inc 109,375
67,500 Reckson Associates Realty Corp 1,248,750
24,955 Reckson Associates Realty Corp, Class B 497,540
42,500 SL Green Realty Corp 988,125
100,000 Speiker Properties Inc 4,012,500
-----------
42,203,910
-----------
REGIONAL MALLS -- 7.7%
29,800 CBL & Associates Properties Inc 666,775
60,000 General Growth Properties 1,736,250
50,000 JP Realty Inc 903,125
68,600 Macerich Co 1,380,575
74,500 Mills Corp 1,261,844
42,500 Simon Property Group Inc 998,750
55,600 Urban Shopping Centers Inc 1,542,900
57,500 Westfield America Inc 812,188
-----------
9,302,407
-----------
SELF STORAGE -- 0.4%
5,200 Public Storage Inc 114,725
15,000 Shurgard Storage Centers Inc 354,375
-----------
469,100
-----------
SHOPPING/POWER CENTER -- 2.3%
100,000 Developers Diversified Realty Corp 1,150,000
49,400 JDN Realty Corp 531,050
76,780 New Plan Excel Realty Trust 1,070,121
-----------
2,751,171
-----------
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO REIT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- -------------------------------------------------------------------------------------
<C> <S> <C>
TRIPLE NET LEASING -- 0.5%
37,375 Starwood Financial Inc 630,703
-------------
TOTAL REAL ESTATE INVESTMENT TRUSTS (COST $134,518,373) 105,074,465
-------------
TOTAL REAL ESTATE INVESTMENTS (COST $161,672,536) 117,527,251
-------------
SHORT-TERM INVESTMENTS -- 5.4%
CASH EQUIVALENTS -- 2.7%
$ 1,890,780 BankBoston Eurodollar Time Deposit, 6.1175%, due
4/28/00(a) 1,890,780
$ 241,068 First Union National Bank Time Deposit, 5.8125%, due
3/01/00(a) 241,068
$ 361,602 Fleet National Bank Time Deposit, 5.79%, due 3/10/00(a) 361,602
711,150 Merrimac Cash Fund Premium Class(a) 711,150
-------------
3,204,600
-------------
REPURCHASE AGREEMENT -- 2.7%
$ 3,226,820 Salomon Smith Barney, Inc. Repurchase Agreement, dated
2/29/00, due 3/1/00, with a maturity value of
$3,227,264 and an effective yield of 4.95%,
collateralized by a U.S. Treasury Obligation with a
rate of 8.125%, maturity date of 8/15/19 and market
value, including accrued interest, of $3,291,356. 3,226,820
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $6,431,420) 6,431,420
-------------
TOTAL INVESTMENTS -- 102.9%
(Cost $168,103,956) 123,958,671
Other Assets and Liabilities (net) -- (2.9%) (3,451,089)
-------------
TOTAL NET ASSETS -- 100.0% $ 120,507,582
=============
NOTES TO THE SCHEDULE OF INVESTMENTS:
</TABLE>
REIT - Real Estate Investment Trust
* Non-income producing security.
(a) Represents investments of security lending collateral (Note 1).
4 See accompanying notes to the financial statements.
<PAGE>
GMO REIT FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $168,103,956) (Note 1) $123,958,671
Dividends and interest receivable 97,638
Receivable for expenses waived or borne by Manager
(Note 2) 5,629
------------
Total assets 124,061,938
------------
LIABILITIES:
Payable upon return of securities loaned (Note 1) 3,204,600
Payable for Fund shares repurchased 247,872
Payable to affiliate for (Note 2):
Management fee 52,083
Shareholder service fee 14,473
Accrued expenses 35,328
------------
Total liabilities 3,554,356
------------
NET ASSETS $120,507,582
============
NET ASSETS CONSIST OF:
Paid-in capital $182,982,556
Accumulated undistributed net investment income 6,717,589
Accumulated net realized loss (25,047,278)
Net unrealized depreciation (44,145,285)
------------
$120,507,582
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $120,507,582
============
SHARES OUTSTANDING:
Class III 14,581,930
============
NET ASSET VALUE PER SHARE:
Class III $ 8.26
============
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO REIT FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $4,586) $ 8,112,284
Interest (including securities lending income of $11,285) 163,011
-----------
Total income 8,275,295
-----------
EXPENSES:
Management fee (Note 2) 705,890
Audit fees 40,040
Custodian and transfer agent fees 23,572
Registration fees 3,440
Legal fees 2,325
Trustees fees (Note 2) 1,405
Miscellaneous 2,285
Fees waived or borne by Manager (Note 2) (73,067)
-----------
705,890
Shareholder service fee (Note 2)
Class III 196,081
-----------
Net expenses 901,971
-----------
Net investment income 7,373,324
-----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (9,323,816)
Closed futures contracts 31,149
-----------
Net realized loss (9,292,667)
-----------
Change in net unrealized appreciation (depreciation) on:
Investments (2,875,371)
Open futures contracts 14,056
-----------
Net unrealized loss (2,861,315)
-----------
Net realized and unrealized loss (12,153,982)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(4,780,658)
===========
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO REIT FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 7,373,324 $ 10,721,126
Net realized loss (9,292,667) (12,500,837)
Change in net unrealized appreciation (depreciation) (2,861,315) (60,036,287)
------------ -------------
Net decrease in net assets from operations (4,780,658) (61,815,998)
------------ -------------
Distributions to shareholders from:
Net investment income
Class III (7,382,589) (3,197,384)
------------ -------------
Total distributions from net investment income (7,382,589) (3,197,384)
------------ -------------
Net realized gains
Class III -- (15,126,689)
------------ -------------
Total distributions from net realized gains -- (15,126,689)
------------ -------------
(7,382,589) (18,324,073)
------------ -------------
Net share transactions: (Note 5)
Class III (10,458,232) (151,505,021)
------------ -------------
Decrease in net assets resulting from net share
transactions (10,458,232) (151,505,021)
------------ -------------
Total decrease in net assets (22,621,479) (231,645,092)
NET ASSETS:
Beginning of period 143,129,061 374,774,153
------------ -------------
End of period (including accumulated undistributed
net investment income of $6,717,589 and $7,233,108,
respectively) $120,507,582 $ 143,129,061
============ =============
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO REIT FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
---------------------------------------
2000 1999 1998 1997*
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.13 $ 12.92 $ 12.62 $ 10.00
-------- -------- -------- --------
Income from investment operations:
Net investment income 0.51+ 0.51+ 0.53 0.24
Net realized and unrealized gain (loss) (0.87) (3.36) 1.26 2.60
-------- -------- -------- --------
Total from investment operations (0.36) (2.85) 1.79 2.84
-------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.51) (0.19) (0.57) (0.17)
In excess of net investment income -- -- (0.03) --
From net realized gains -- (0.75) (0.89) (0.05)
-------- -------- -------- --------
Total distributions (0.51) (0.94) (1.49) (0.22)
-------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 8.26 $ 9.13 $ 12.92 $ 12.62
======== ======== ======== ========
TOTAL RETURN(a) (4.69)% (23.27)% 14.29% 28.49%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $120,508 $143,129 $374,774 $260,929
Net expenses to average daily net assets 0.69% 0.69% 0.69% 0.69%**
Net investment income to average daily net
assets 5.64% 4.60% 4.10% 4.72%**
Portfolio turnover rate 13% 59% 86% 21%
Fees and expenses voluntarily waived or
borne by the Manager consisted of the
following per share amounts: $ 0.01 $ 0.03 $ 0.03 $ 0.02
</TABLE>
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
+ Computed using average shares outstanding throughout the period.
++ Not annualized.
* Period from May 31, 1996 (commencement of operations) to February 28, 1997.
** Annualized.
8 See accompanying notes to the financial statements.
<PAGE>
GMO REIT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO REIT Fund (the "Fund"), is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended,
as an open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24,
1985. The Declaration of Trust permits the Trustees to create an unlimited
number of series ("Funds"), each of which issues a separate series of
shares, and to subdivide a series of shares into classes.
The Fund seeks high total return through investment in or exposure to real
estate investment trusts ("REITS"), which are managed vehicles that invest
in real estate or real estate-related assets. The Fund's benchmark is the
Morgan Stanley REIT Index.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of the financial statements
in accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Securities for
which quotations are not readily available are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts on domestic stock
indices. Stock index futures contracts represent commitments for future
delivery of cash based upon the level of a specified index of equity
securities at a given date. The Fund may use futures contracts to manage
its exposure to the stock markets. Buying futures tends to increase the
Fund's exposure to the underlying instrument. Selling futures tends to
decrease the Fund's exposure to the underlying instrument or hedge other
Fund instruments. Upon entering into a futures contract, the Fund is
required to deposit with its custodian, in a segregated account in the
name of the futures broker, an amount of cash or U.S. government and
agency obligations in accordance with the initial margin requirements of
the broker or exchange. Futures contracts are marked to market daily and
an
9
<PAGE>
GMO REIT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
appropriate payable or receivable for the change in value ("variation
margin") is recorded by the Fund. The payable or receivable is liquidated
on the following business day. Gains or losses are recognized but not
considered realized until the contracts expire or are closed. Futures
contracts involve, to varying degrees, risk of loss in excess of the
variation margin disclosed in the Statement of Assets and Liabilities.
Losses may arise from changes in the value of the underlying instrument,
if there is an illiquid secondary market for the contracts, or if
counterparties do not perform under the contract terms. Futures contracts
are valued at the settlement price established each day by the board of
trade or exchange on which they are traded. As of February 29, 2000, the
Fund held no open futures contracts.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, realization of collateral by the Fund may be delayed or
limited.
SECURITY LENDING
The Fund may lend its securities to qualified brokers. The loans are
collateralized at all times with cash or securities with a market value at
least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending
its securities. At February 29, 2000, the Fund loaned securities having a
market value of $3,114,638, collateralized by cash in the amount of
$3,204,600, which was invested in short-term instruments.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary.
10
<PAGE>
GMO REIT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to the classification of distributions from
REIT securities.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable income and capital gains under U.S.
federal tax rules versus accounting principles generally accepted in the
United States. The calculation of net investment income per share in the
financial highlights excludes these adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
<S> <C> <C>
$(506,254) $506,254 $ --
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
The Fund's investments in REIT equity securities may at times result in
the Fund's receipt of cash in excess of its interest in the REIT's
earnings. The excess amount cannot be determined by the Fund at the time
of receipt. If the Fund distributes amounts which are subsequently
determined to exceed REIT earnings, such amounts would constitute a return
of capital to Fund shareholders for federal income tax purposes.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable foreign withholding taxes, is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis and is
adjusted for the accretion of discounts. In determining the net gain or
loss on securities
11
<PAGE>
GMO REIT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
sold, the cost of securities is determined on the identified cost basis.
Dividends representing a return of capital are reflected as a reduction of
cost, when the amount of return of capital is conclusively determined.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases and fee on redemptions of Fund shares is
.50% of the amount invested or redeemed. All purchase premiums and
redemption fees are paid to and recorded by the Fund as paid-in capital.
For the year ended February 29, 2000, the Fund received $166,908 in
purchase premiums and $242,174 in redemption fees. There is no premium for
reinvested distributions or in-kind transactions.
INVESTMENT RISK
There are certain additional risks involved in investing in REITs rather
than a more diversified portfolio of investments. Since the Fund's
investments are concentrated in real-estate related securities, the value
of its shares can be expected to change in light of factors affecting the
real estate industry, including local or regional economic conditions,
changes in zoning laws, changes in real estate value and property taxes,
and changes in interest rates. The value of the Fund's shares may
fluctuate more widely than the value of shares of a portfolio that invests
in a broader range of industries.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .54% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding brokerage commissions, certain other transaction costs
(including transfer taxes), shareholder service fees and extraordinary
expenses) exceed the management fee.
12
<PAGE>
GMO REIT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
Prior to March 1, 1999, GMO earned a management fee at the annual rate of
.75% of average daily net assets. GMO had agreed to waive a portion of its
fee and bear other expenses to the extent that the Fund's annual expenses
(including the management fee but excluding brokerage commissions, certain
other transaction costs (including transfer taxes), shareholder service
fees and extraordinary expenses) exceeded .54% of average daily net
assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000 was $1,405. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 29, 2000, aggregated
$17,079,332 and $26,736,541, respectively.
At February 29, 2000, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
$168,802,843 $360,933 $(45,205,105) $(44,844,172)
</TABLE>
4. PRINCIPAL SHAREHOLDER
At February 29, 2000, 12.7% of the outstanding shares of the Fund were
held by one shareholder.
13
<PAGE>
GMO REIT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
------------------------ --------------------------
Shares Amount Shares Amount
---------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Class III:
Shares sold 3,881,568 $ 33,381,589 2,311,420 $ 26,773,478
Shares issued to shareholders
in reinvestment of distributions 483,941 4,594,949 1,482,780 16,781,879
Shares repurchased (5,462,918) (48,434,770) (17,130,461) (195,060,378)
---------- ------------ ----------- -------------
Net decrease (1,097,409) $(10,458,232) (13,336,261) $(151,505,021)
========== ============ =========== =============
</TABLE>
14
<PAGE>
GMO REIT FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
At February 29, 2000 the Fund had capital loss carryforwards available to
offset future capital gains, if any, of the following amounts:
<TABLE>
<CAPTION>
Year of Expiration Amount
------------------ -----------------
<S> <C>
2007 $ 8,368,927
2008 $15,979,464
</TABLE>
15
<PAGE>
GMO REIT FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Mr. Jeremy Grantham, Mr. Richard Mayo and Mr. Wilson Magee are primarily
responsible for the day-to-day management of the Fund's portfolio.
Mssrs. Grantham and Mayo have been with Grantham, Mayo, Van Otterloo & Co. LLC
since its founding in 1977. Mr. Magee has been with GMO for three years.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO REIT Fund returned -4.7% during the twelve
months ended February 28, 2000. The Morgan Stanley REIT Index (MSRI) returned
- -1.3% while the S&P 500 returned 11.7% during the same period.
REIT INDUSTRY REVIEW
REIT performance during 1999 represented a significant improvement over 1998,
but investor interest in the group continued to decline. Returns were buoyed by
large dividends as stock prices, reacting to investor disinterest, fell by about
9%. Among major sectors, apartments, office and industrial property companies
produced positive total returns, and were joined by the diversified and
manufactured housing sectors in outperforming the benchmark. Retail property
sectors were beset by investor fears about competition from internet retailing
and, as a result, performed poorly. Lodging stocks also underperformed primarily
due to bothersome levels of new construction in the face of declining revenue
growth rates.
Economic fundamentals in both the property markets and the property companies
were generally very good, driving industry cash earnings growth in excess of 10%
and leading companies to raise dividends by over 4.5%. Although cash earnings
growth slowed, unleveraged property cash flow growth significantly beat
inflation. Many REIT managements have concluded that the return on investment in
their stock was the best use of capital, so announcements of stock repurchases
proliferated. To date, over 60 companies have announced buybacks and over
$5.0 billion has been repurchased.
STOCK SELECTION
The managers continue to reduce the number of issuers in the portfolio and to
invest in companies based more on fundamental analysis and less on quantitative
methods. Property sector weightings are decided by analyzing securities
valuations by sector and assessing property market trends geographically. Stock
selection uses three analysis models: 1) quality adjusted growth;
2) fundamental value; and 3) asset valuation. Manager judgment is crucial to
final stock selection and is generally based on quality and sustainability of
cash flows, limiting capital structure risks and quality of management.
Due to the low volatility and nearly flat returns for REITs, we chose to
implement these changes gradually, so portfolio turnover was quite low, at less
than 20%. Sector selection was positive to relative performance for the fiscal
year while stock selection was negative.
<PAGE>
GMO REIT FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
OUTLOOK
Commercial construction spending has declined from recent peaks and underlying
real estate markets are fundamentally sound with supply/demand conditions in
equilibrium. Rental rate growth will moderate, but should exceed inflation for
most property types. Rising interest rates will effect REIT cash earnings
negatively, but will likely regulate construction spending even more. More
companies have been focused on stabilizing balance sheets, reducing risk and
improving financial flexibility and this should diminish the effect of rising
interest rates. Real estate companies are embracing new ideas and new technology
that will enable them to improve customer services, increase revenues and reduce
costs. The REIT Modernization Act will allow REITs to operate taxable
subsidiaries beginning in 2001 and this should lead to enhanced returns on
invested capital for the better managed companies.
REIT stock prices imply asset values that are below both private market property
valuations and replacement costs, while REIT dividends yield over 8.5% are
secure and growing rapidly. Continued cash earnings growth coupled with lower
stock prices suggest that REIT valuations are very attractive. Stock buybacks
should enhance forward earnings growth and, combined with limited equity
issuance in 1999, reduce the supply of stock available. This bodes well for
stock prices in 2000 and beyond.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO REIT FUND CLASS III SHARES AND THE MORGAN STANLEY REIT INDEX
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
Average Annual Total Returns
Inception 5/31/96
1yr 5yr 10yr (ITD)
<S> <C> <C>
- -5.64 N/A 1.64
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
Date GMO REIT Fund-III Morgan Stanley REIT Index
<S> <C> <C>
5/31/96 9950 10000
6/30/96 10089 10187
9/30/96 10786 10849
12/31/96 12744 13015
3/31/97 12876 13044
6/30/97 13483 13687
9/30/97 15037 15283
12/31/97 15210 15433
3/31/98 14939 15322
6/30/98 14113 14649
9/30/98 11817 13099
12/31/98 11505 12824
3/31/99 11075 12205
6/30/99 12303 13415
9/30/99 10994 12332
12/31/99 10969 12241
2/29/00 10631 12122
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The total returns would have been lower had certain expenses
not been reimbursed during the periods shown and do not include the effect of
taxes. Each performance figure assumes purchase at the beginning and
redemption at the end of the stated period and reflects a transaction fee of
50 bp on the purchase and 50 bp on the redemption. Transaction fees are
retained by the fund to cover trading costs. Past performance is not
indicative of future performance. Information is unaudited.
<PAGE>
GMO FUNDAMENTAL VALUE FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO FUNDAMENTAL VALUE FUND (A SERIES OF GMO TRUST)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Fundamental Value Fund at
February 29, 2000, the results of its operations, the changes in its net assets
and the financial highlights for each of the periods indicated therein, in
conformity with accounting principles generally accepted in the United States.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at February 29, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 13, 2000
<PAGE>
GMO FUNDAMENTAL VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 102.4%
BANKING AND FINANCIAL SERVICES -- 15.8%
500 Bank of America Corp 23,031
700 Block (HR) Inc 30,712
1,500 Washington Mutual Inc 33,187
---------
86,930
---------
HEALTH CARE -- 17.5%
2,500 Acuson Corp* 33,437
1,000 Columbia HCA Healthcare Corp 19,312
2,500 Tenet Healthcare Corp* 43,750
---------
96,499
---------
MACHINERY -- 5.4%
1,500 Pall Corp 29,625
---------
OIL AND GAS -- 16.4%
5,000 Gulf Canada Resources Ltd* 16,250
500 Questar Corp 6,969
2,500 Unocal Corp 66,875
---------
90,094
---------
PAPER AND ALLIED PRODUCTS -- 12.0%
1,500 Fort James Corp 28,219
500 Kimberly-Clark Corp 25,844
500 St. Joe Co 12,094
---------
66,157
---------
PHARMACEUTICALS -- 6.3%
1,000 Schering Plough Corp 34,875
---------
REAL ESTATE -- 2.2%
500 Mack-Cali Realty Corp, REIT 11,875
---------
REFINING -- 1.8%
500 Conoco Inc, Class B 9,844
---------
</TABLE>
See accompanying notes to the financial statements.
1
<PAGE>
GMO FUNDAMENTAL VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------
<C> <S> <C>
RETAIL TRADE -- 13.1%
500 CVS Corp 17,500
1,500 TJX Cos Inc 23,906
2,500 Toys R Us Inc* 30,938
---------
72,344
---------
TECHNOLOGY -- 8.4%
500 Avnet Inc 33,438
1,000 Storage Technology Corp* 12,750
---------
46,188
---------
TELECOMMUNICATIONS -- 3.5%
500 SBC Communications Inc 19,000
---------
TOTAL COMMON STOCKS (COST $615,225) 563,431
---------
TOTAL INVESTMENTS -- 102.4%
(Cost $615,225) 563,431
Other Assets and Liabilities (net) -- (2.4%) (12,942)
---------
TOTAL NET ASSETS -- 100.0% $ 550,489
=========
NOTES TO THE SCHEDULE OF INVESTMENTS:
</TABLE>
<TABLE>
<S> <C>
REIT - Real Estate Investment Trust
</TABLE>
* Non-income producing security.
2 See accompanying notes to the financial statements.
<PAGE>
GMO FUNDAMENTAL VALUE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $615,225) (Note 1) $563,431
Receivable for investments sold 73,633
Dividends and interest receivable 5,599
--------
Total assets 642,663
--------
LIABILITIES:
Payable for investments purchased 47,348
Due to custodian 13,282
Payable to affiliate for (Note 2):
Management fee 277
Shareholder service fee 67
Accrued expenses and other liabilities 31,200
--------
Total liabilities 92,174
--------
NET ASSETS $550,489
========
NET ASSETS CONSIST OF:
Paid-in capital $481,624
Distributions in excess of net investment income (239,226)
Accumulated undistributed net realized gain 360,314
Net unrealized depreciation (52,223)
--------
$550,489
========
NET ASSETS ATTRIBUTABLE TO:
Class III shares $550,489
========
SHARES OUTSTANDING:
Class III 81,855
========
NET ASSET VALUE PER SHARE:
Class III $ 6.73
========
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO FUNDAMENTAL VALUE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $8,352) $ 690,283
Interest (including securities lending income of $2,849) 62,000
-----------
Total income 752,283
-----------
EXPENSES:
Management fee (Note 2) 183,059
Audit fees 16,564
Custodian and transfer agent fees 11,063
Registration fees 2,012
Legal fees 1,071
Trustees fees (Note 2) 366
Miscellaneous 1,835
Fees waived or borne by Manager (Note 2) (32,911)
-----------
183,059
Shareholder service fee (Note 2)
Class III 45,765
-----------
Net expenses 228,824
-----------
Net investment income 523,459
-----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments 21,350,704
Foreign currency and foreign currency related
transactions (229)
-----------
Net realized gain 21,350,475
-----------
Change in net unrealized appreciation (depreciation) on:
Investments (11,811,730)
Foreign currency and foreign currency related
transactions (498)
-----------
Net unrealized loss (11,812,228)
-----------
Net realized and unrealized gain 9,538,247
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $10,061,706
===========
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO FUNDAMENTAL VALUE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 523,459 $ 1,653,398
Net realized gain 21,350,475 28,697,755
Change in net unrealized appreciation (depreciation) (11,812,228) (26,005,231)
------------ ------------
Net increase in net assets from operations 10,061,706 4,345,922
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (703,229) (1,820,272)
------------ ------------
Total distributions from net investment income (703,229) (1,820,272)
------------ ------------
In excess of net investment income
Class III (72,555) --
------------ ------------
Total distributions in excess of net investment
income (72,555) --
------------ ------------
Net realized gains
Class III (4,135,387) (43,849,538)
------------ ------------
Total distributions from net realized gains (4,135,387) (43,849,538)
------------ ------------
(4,911,171) (45,669,810)
------------ ------------
Net share transactions: (Note 5)
Class III (86,661,873) (3,650,568)
------------ ------------
Decrease in net assets resulting from net share
transactions (86,661,873) (3,650,568)
------------ ------------
Total decrease in net assets (81,511,338) (44,974,456)
NET ASSETS:
Beginning of period 82,061,827 127,036,283
------------ ------------
End of period (including distributions in excess of
net investment income income of $239,226 and
accumulated undistributed net investment income of
$179,770, respectively) $ 550,489 $ 82,061,827
============ ============
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO FUNDAMENTAL VALUE FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
-------------------------------------------------
2000 1999 1998 1997 1996
---------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.07 $ 11.92 $ 16.33 $ 15.04 $ 12.54
---------- ------- -------- -------- --------
Income from investment operations:
Net investment income 0.13+ 0.18 0.35 0.33 0.37
Net realized and unrealized gain 1.92 0.19 3.90 2.53 3.26
---------- ------- -------- -------- --------
Total from investment operations 2.05 0.37 4.25 2.86 3.63
---------- ------- -------- -------- --------
Less distributions to shareholders:
From net investment income (1.35) (0.20) (0.38) (0.32) (0.37)
In excess of net investment income (0.14) -- -- -- --
From net realized gains (0.90) (5.02) (8.28) (1.25) (0.76)
---------- ------- -------- -------- --------
Total distributions (2.39) (5.22) (8.66) (1.57) (1.13)
---------- ------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 6.73 $ 7.07 $ 11.92 $ 16.33 $ 15.04
========== ======= ======== ======== ========
TOTAL RETURN(a) 33.16% 2.30% 30.43% 20.03% 29.95%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 550 $82,062 $127,036 $232,583 $212,428
Net expenses to average daily net
assets 0.75% 0.75% 0.75% 0.75% 0.75%
Net investment income to average
daily net assets 1.72% 1.67% 1.84% 2.15% 2.61%
Portfolio turnover rate 54% 34% 21% 25% 34%
Fees and expenses voluntarily waived
or borne by the Manager consisted
of the following per share amounts: $ 0.01 $ 0.02 $ 0.04 $ 0.02 $ 0.01
</TABLE>
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
+ Computed using average shares outstanding throughout the period.
6 See accompanying notes to the financial statements.
<PAGE>
GMO FUNDAMENTAL VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Fundamental Value Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, diversified management investment company. The
Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24,
1985. The Declaration of Trust permits the Trustees to create an unlimited
number of series ("Funds"), each of which issues a separate series of
shares, and to subdivide a series of shares into classes.
The Fund seeks long-term capital growth primarily through investment in
stocks of approximately 20-30 companies. The Fund's benchmark is the S&P
500 Index.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of the financial statements
in accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Securities for
which quotations are not readily available are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, realization of collateral by the Fund may be delayed or
limited.
7
<PAGE>
GMO FUNDAMENTAL VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SECURITY LENDING
The Fund may lend its securities to qualified brokers. The loans are
collateralized at all times with cash or securities with a market value at
least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending
its securities. At February 29, 2000, the Fund had no securities on loan.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary. Taxes on foreign dividend income are withheld in
accordance with the applicable country's tax treaty with the United
States.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. Distributions to shareholders are recorded by the Fund on
the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to differing treatments for redemptions
in-kind. Gains resulting from such in-kind transactions amounted to
$13,263,667.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable income and capital gains under U.S.
federal tax rules versus accounting principles generally accepted in the
United States. The calculation of net investment income per share in the
financial highlights excludes these adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
<S> <C> <C>
$(166,671) $(20,638,266) $20,804,937
</TABLE>
8
<PAGE>
GMO FUNDAMENTAL VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable foreign withholding taxes, is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis and is
adjusted for the accretion of discounts. In determining the net gain or
loss on securities sold, the cost of securities is determined on the
identified cost basis. Dividends representing a return of capital are
reflected as a reduction of cost.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is .15% of the amount
invested. The Manager may waive such premium to the extent that a
transaction results in minimal brokerage and transaction costs to the
Fund. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. For the year ended February 29, 2000, the Fund received
$751 in purchase premiums. There is no premium for cash redemptions,
reinvested distributions or in-kind transactions.
Effective April 7, 2000, the Fund will no longer charge a purchase
premium.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .60% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding brokerage commissions, certain other transaction costs
(including transfer taxes), shareholder service fees and extraordinary
expenses) exceed the management fee.
9
<PAGE>
GMO FUNDAMENTAL VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
Prior to March 1, 1999, GMO earned a management fee at the annual rate of
.75% of average daily net assets. GMO had agreed to waive a portion of its
fee and bear other expenses to the extent that the Fund's annual expenses
(including the management fee but excluding brokerage commissions, certain
other transaction costs (including transfer taxes), shareholder service
fees and extraordinary expenses) exceeded .60% of average daily net
assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000 was $366. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 29, 2000, aggregated
$15,709,866 and $105,122,156, respectively.
At February 29, 2000, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
$602,104 $8,745 $(47,418) $(38,673)
</TABLE>
4. PRINCIPAL SHAREHOLDERS
At February 29, 2000, 100% of the outstanding shares of the Fund were held
by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares. Investment activities of these shareholders could have
a material effect.
10
<PAGE>
GMO FUNDAMENTAL VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
-------------------------- -------------------------
Shares Amount Shares Amount
Class III: ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Shares sold 81,855 $ 500,376 2,272 $ 16,500
Shares issued to shareholders
in reinvestment of distributions 597,068 4,179,059 5,275,741 43,852,942
Shares repurchased (12,211,324) (91,341,308) (4,319,130) (47,520,010)
------------ ------------ ----------- ------------
Net increase (decrease) (11,532,401) $(86,661,873) 958,883 $ (3,650,568)
============ ============ =========== ============
</TABLE>
11
<PAGE>
GMO FUNDAMENTAL VALUE FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER
Mr. Richard Mayo is responsible for the management of the GMO Fundamental Value
Fund. Mr. Mayo has been a portfolio manager with GMO since its founding in 1977
and began his career in the late 1960's.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO Fundamental Value Fund returned 33.2% for the
fiscal year ended February 29, 2000, as compared to 11.7% for the S&P 500.
Consistent with the Fund's investment objectives and policies, the Fund was
invested substantially in common stocks throughout the period.
The market the last six months has been consumed by the excitement of
technology's potential spurred by the rapid development of the Internet. This
has been a dilemma for valuation oriented money managers. Can many of these new
companies meet the expectations now embedded in their lofty stock prices? They
may grow dramatically, yet profitability is uncertain and they will be risky
investments if investors' hopes are not realized.
[CHART]
We have participated in this market-dominating sector by buying some companies
that are perceived to be "Old Economy" but which have some exposure in the
exciting sectors. A good example is Bell Atlantic: after the merger with GTE,
the company will be the largest wireless provider in the United States.
Valuations of independent wireless companies suggest that Bell Atlantic's stock
has very little of the wireless operation's value in the current price. We
bought the stock and very quickly made a 20% profit.
<PAGE>
GMO FUNDAMENTAL VALUE FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
Electronic Data Systems, International Rectifier, and Corning enjoyed tremendous
gains, and we reduced or eliminated these positions. We are probably unique
technology investors in this regard, taking profits. However, we look at the
sector as offering opportunity; and since momentum investors dominate the
pricing of these stocks, even though we are trying to participate in the lower
risk segments, volatile price movements can affect our investments. This view is
based on our opinion that most technology stocks are over-owned and extremely
valued.
Some opportunities still exist. Avnet--a semiconductor distributor--has lagged
the surging semiconductor group. Now that profits are beginning to accelerate,
we think the stock will be noticed and it only sells at 14x next year's
projected earnings. Storage Technology is a work in progress. Profitability was
postponed as the company tried to grow too fast. Management is being changed and
we hope the new officers will be able to capitalize on the company's dominant
position in tape storage. After year-end we added Pitney-Bowes (digitalization
of the mailing process will stimulate revenues) and they may have a
business-to-business market niche that may be underestimated. In technology, we
are always looking for opportunities--it can't be ignored since it is now almost
35% of the S&P 500--but for the moment we prefer to be underweighted. Sometime
out in the future, a 25% decline should be expected, and valuation will matter.
In seeking other opportunities, we have looked for companies with double-digit
growth rates where skepticism existed about the future. CVS is the best example.
Investors thought the "dot com" competitors would significantly impact its
growth potential. Growth investors liquidated their positions during the last
year, driving the stock down 50%. At the low you could buy 15% growth at 15x
earnings. We couldn't resist and now we are pleased to see some of these
investors return. The company restored some confidence with the announcement of
a $1 billion stock buyback. In the health care sector we have also added
Columbia Healthcare and Tenet Health where skepticism has also created
opportunity. Schering-Plough fits this mold also, but was more of a trading call
as a major institution liquidated their position. Kimberly-Clark is another
stable growth company at a reasonable price.
The rest of the portfolio is a collection of companies with good fundamentals at
record low valuations. Bank of America and H.R. Block both sell at 10-12 times
earnings. The largest segment--energy--reached 15% of the portfolio and with the
recent addition (after fiscal year end) of Texaco is near 20%. The investment
<PAGE>
GMO FUNDAMENTAL VALUE FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
rationale is simple: the price of oil has gone from $20 per barrel to $30 per
barrel, and since inventories are at ten-year lows, the price is not going back
to $20. It is time for the price of oil to drift down and the stock prices to
reverse their decline. The chart below tells the story.
[CHART]
The last situation I want to mention is Toys 'R Us. This company has the
ingredients we search for at this phase of the market: extremely depressed stock
price, business is decent (preferably healthy), and management is agitated about
their low-valuation stock. To that end, we find it fascinating that the company
announced a $1 billion stock repurchase while its total market capitalization is
only $3 billion. We like to see such solid confirmation of our valuation
analysis, and though this may be the most dramatic example, there are others.
This is how you'll be able to make money in "Old Economy" stocks. We are excited
about the opportunities.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO &
CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO FUNDAMENTAL VALUE FUND CLASS III SHARES AND THE S&P 500 INDEX
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
Average Annual Total Returns
Inception 10/31/91
1yr 5yr 10yr (ITD)
<S> <C> <C>
32.96 22.55 19.4
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
Date GMO Fundamental Value Fund-III S&P 500
<S> <C> <C>
10/31/91 9985 10000
12/31/91 10337 10695
3/31/92 10629 10426
6/30/92 10932 10625
9/30/92 11196 10960
12/31/92 11776 11512
3/31/93 13001 12015
6/30/93 13605 12074
9/30/93 14128 12385
12/31/93 14422 12673
3/31/94 14093 12191
6/30/94 14048 12243
9/30/94 15068 12841
12/31/94 14935 12840
3/31/95 16361 14090
6/30/95 17618 15435
9/30/95 18841 16661
12/31/95 19503 17664
3/31/96 20747 18613
6/30/96 21378 19448
9/30/96 21612 20049
12/31/96 23948 21720
3/31/97 23842 22302
6/30/97 26976 26196
9/30/97 29884 28158
12/31/97 30832 28967
3/31/98 33640 33007
6/30/98 33886 34096
9/30/98 30502 30705
12/31/98 33948 37244
3/31/99 33343 39099
6/30/99 37405 41856
9/30/99 39448 39242
12/31/99 46589 45079
2/29/00 43840 42004
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The total returns would have been lower had certain expenses
not been reimbursed during the periods shown and do not include the effect of
taxes. Each performance figure assumes purchase at the beginning and
redemption at the end of the stated period and reflects a transaction fee of
15 bp on the purchase. Transaction fees are retained by the Fund to cover
trading costs. Past performance is not indicative of future performance.
Information is unaudited.
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Small Cap Value Fund at
February 29, 2000, the results of its operations, the changes in its net assets
and the financial highlights for each of the periods indicated therein, in
conformity with accounting principles generally accepted in the United States.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at February 29, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 13, 2000
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 90.0%
ADVERTISING -- 0.1%
800 Grey Advertising Inc 316,800
------------
AEROSPACE -- 0.6%
35,100 BE Aerospace Inc* 311,512
17,600 Cordant Technologies Inc 569,800
8,900 Curtiss Wright Corp 329,300
19,600 Gencorp Inc 153,125
18,800 Kaman Corp, Class A 186,825
------------
1,550,562
------------
AUTOMOTIVE -- 1.6%
17,300 Arvin Industries Inc 317,887
10,300 Bandag Inc 242,050
14,900 Borg Warner Automotive Inc 476,800
46,200 Cooper Tire & Rubber Co 499,537
23,500 Dura Automotive Systems Inc* 306,969
14,700 Lear Corp* 310,537
35,900 Meritor Automotive Inc 502,600
17,900 Modine Manufacturing Co 408,344
15,450 Monaco Coach Corp* 278,100
15,650 Smith (AO) Corp, Class B 269,962
14,900 Superior Industries International Inc 355,737
17,900 Wabash National Corp 250,600
------------
4,219,123
------------
BANKING AND FINANCIAL SERVICES -- 5.2%
19,900 Advanta Corp, Class A 370,637
13,100 Astoria Financial Corp 311,944
18,800 Baldwin and Lyons Inc, Class B 340,750
32,800 Bancwest Corp 498,150
19,528 BOK Financial Corporation* 302,684
23,000 CFS Bancorp Inc 202,687
23,600 Comdisco Inc 907,125
27,800 Commercial Federal Corp 359,662
7,400 Corus Bancshares Inc 182,225
6,100 Dain Rauscher Corp 343,887
17,216 Downey Financial Corp 338,940
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
BANKING AND FINANCIAL SERVICES -- CONTINUED
4,100 Duff & Phelps Credit Rating Co 327,487
8,500 Eaton Vance Corp 352,219
7,100 Financial Security Assurance Holdings Ltd 319,500
10,400 FINOVA Group Inc 297,700
13,100 First Bancorp Puerto Rico 222,700
5,000 First Citizens Bancshares, Class A 322,500
17,600 First Federal Financial Corp* 224,400
23,400 Heller Financial Inc 440,212
55,500 Imperial Credit Industries Inc* 319,125
13,000 Jefferies Group Inc 303,875
5,400 JSB Financial 260,887
20,300 Leucadia National Corp 433,912
23,600 Liberty Financial Cos 455,775
11,100 Metris Companies Inc 287,212
20,625 Morgan Keegan Inc 293,906
31,100 Pacific Century Financial Corp 472,331
19,050 PMI Group Inc 691,753
25,375 Raymond James Financial Corp 501,156
32,700 Resource America Inc 230,944
31,300 Riggs National Corp 312,023
23,900 Roslyn Bancorp Inc 367,462
83,296 Sovereign Bancorp Inc 603,896
8,500 Student Loan Group 330,437
12,100 TCF Financial Corp 239,731
8,101 UMB Financial Corp 272,396
8,800 Value Line Inc 315,700
24,764 Washington Federal Inc 379,199
------------
13,737,129
------------
CHEMICALS -- 2.5%
20,700 Albemarle Corp 311,794
24,500 CK Witco Corp 260,312
24,400 Cytec Industries Inc* 591,700
9,400 Dexter Corp 433,575
18,600 Engelhard Corp 253,425
11,850 Ferro Corp 223,669
13,800 Geon Co 288,075
8,800 Great Lakes Chemical Corp 255,750
30,800 Hanna (MA) Co 352,275
51,400 IMC Global Inc 693,900
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
CHEMICALS -- CONTINUED
45,200 Kaiser Aluminum Corp* 257,075
18,300 Lubrizol Corp 454,069
36,000 Millenium Chemicals Inc 504,000
23,800 Mississippi Chemical Corp 178,500
26,900 Olin Corp 416,950
15,800 Stepan Co 323,900
65,800 Terra Industries Inc 152,162
26,700 W.R. Grace & Co* 268,669
28,000 Wellman Inc 521,500
------------
6,741,300
------------
COMPUTER AND OFFICE EQUIPMENT -- 2.7%
11,900 Advanced Micro Devices Inc* 465,587
9,300 CDW Computer Centers Inc* 510,337
9,900 Everex Systems Inc(a)* --
36,900 Exabyte Corp* 295,200
57,700 Maxtor Corp* 461,600
8,300 Micros Systems Inc* 459,612
32,800 Neomagic Corp* 177,327
31,700 Reynolds & Reynolds Inc, Class A 875,712
5,100 Safeguard Scientifics Inc* 892,181
11,400 Sandisk Corp* 1,014,600
42,700 Silicon Graphics Inc* 418,994
22,600 Sterling Software Inc* 810,775
9,600 Zebra Technologies Corp* 639,000
------------
7,020,925
------------
CONSTRUCTION -- 1.3%
9,100 Centex Construction Products Inc 211,575
25,100 Centex Corp 494,156
32,200 Foster Wheeler Corp 181,125
38,200 Horton (DR) Inc 429,750
27,300 Kaufman & Broad Home Corp 522,112
36,400 McDermott International Inc 341,250
23,300 Pulte Corp 391,731
14,600 Texas Industries Inc 438,000
26,600 Toll Brothers Inc* 442,225
------------
3,451,924
------------
</TABLE>
See accompanying notes to the financial statements.
3
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
CONSUMER GOODS -- 5.7%
11,500 Bassett Furniture Industries Inc 155,250
8,641 Block Drug Co Inc, Class A 284,073
15,700 Brown Shoe Co Inc 164,850
72,300 Burlington Industries Inc* 203,344
39,800 Callaway Golf Co 477,600
58,700 Compucom Systems Inc* 264,150
2,750 CoorsTek Inc* 53,625
15,500 Department 56 Inc* 218,937
11,500 Enesco Group Inc 83,375
14,500 Fastenal Co 640,719
13,000 Footstar Inc* 320,937
12,900 Fossil Inc* 292,669
19,500 Furniture Brands International Inc* 313,219
42,600 Gibson Greetings Inc* 343,462
37,900 HA-LO Industries Inc* 402,687
28,000 Hon Industries Inc 516,250
13,281 Jones Apparel Group Inc* 300,483
24,800 Justin Industries 447,950
12,500 Kellwood Co 210,937
21,400 Kimball International, Class B 325,012
17,500 La-Z-Boy Chair Co 290,937
15,915 Lancaster Colony Corp 473,471
17,600 Liz Claiborne Inc 658,900
23,300 Mohawk Industries Inc* 516,969
41,300 Moore Corp Ltd 191,012
20,700 National Service Industries 424,350
37,800 Nautica Enterprises Inc* 399,262
49,200 Oakley Inc* 424,350
11,050 Oneida Ltd 196,137
16,100 Osh Kosh B Gosh, Class A 305,900
20,300 Pittston Brinks Group 362,862
27,300 Polo Ralph Lauren Corp* 457,275
31,700 Reebok International Ltd* 253,600
19,100 Russell Corp 263,819
9,700 Salton Inc* 457,112
5,100 Scholastic Corp* 264,244
24,700 Steelcase Inc 302,575
73,432 Sunbeam Corp* 302,907
28,700 Tech Data Corp* 622,431
13,000 Tupperware Corp 223,437
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
CONSUMER GOODS -- CONTINUED
30,100 Unifi Inc* 287,831
44,320 US Industries Inc 506,910
21,300 Wallace Computer Services 222,319
31,400 Warnaco Group Inc, Class A 341,475
35,100 Wolverine World Wide Inc 403,650
------------
15,173,264
------------
ELECTRONIC EQUIPMENT -- 10.4%
14,100 Adaptec Inc* 578,100
29,400 Andrew Corp* 727,650
59,700 Arrow Electronics Inc* 1,805,925
28,800 Atmel Corp* 1,425,600
16,600 AVX Corp 1,054,100
9,600 C-Cube Microsystems Inc* 895,200
17,300 Cable Design Technologies Corp* 400,062
7,500 Ciena Corp* 1,198,594
6,700 Coherent Inc* 710,200
6,300 CTS Corp 406,350
12,800 Cypress Semiconductor Corp* 584,000
14,400 Dallas Semiconductor Corp 581,400
20,900 Diebold Inc 512,050
7,800 DII Group Inc* 754,162
840 eMerge Interactive Inc, Class A* 44,625
3,800 Franklin Electric Inc 253,175
6,800 Hadco Corp* 376,550
6,500 Harman International Industries 402,594
12,100 Hubbell Inc, Class B 294,181
29,500 Hussmann International Inc 425,906
13,000 Imation Corp* 402,187
18,500 International Rectifier Corp* 774,687
12,600 Intervoice Inc* 455,175
15,600 Kemet Corp* 958,425
7,300 Lattice Semiconductor Corp* 512,825
17,800 Lincoln Electric Holdings Inc 347,100
7,800 Litton Industries* 233,512
16,200 LSI Logic Corp* 1,037,812
21,700 MEMC Electronic Materials Inc* 378,394
16,200 Methode Electronics, Class A 941,625
10,700 Microchip Technology Inc* 668,081
14,600 National Semiconductor Corp* 1,096,825
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
ELECTRONIC EQUIPMENT -- CONTINUED
26,800 Oak Technology Inc* 489,100
24,400 Pioneer Standard Electronics Inc 448,350
24,400 SCI Systems Inc* 982,100
37,100 Sensormatic Electronics Corp* 704,900
22,300 Silicon Valley Group Inc* 564,469
7,200 Siliconix Inc* 583,200
27,700 SLI Inc* 337,594
17,800 Thomas & Betts Corp 399,387
19,300 Valmont Industries Inc 291,912
32,937 Vishay Intertechnology Inc* 1,416,291
54,728 Zilog Inc(b)* 136,393
------------
27,590,768
------------
ENTERTAINMENT & LEISURE -- 0.2%
25,800 Metro Goldwyn Mayer Inc* 615,975
------------
FOOD AND BEVERAGE -- 1.8%
8,100 Agribrands International Inc* 296,156
18,800 Corn Product International Inc 442,975
9,600 Dean Foods Co 260,400
2,500 Farmer Brothers Co 400,000
47,700 IBP Inc 596,250
12,400 International Multifoods Corp 135,625
23,600 Interstate Bakeries Corp 269,925
22,600 Luby's Cafeterias Inc 235,887
11,900 Michael Foods Inc 260,312
23,700 Pilgrims Pride Corp 189,600
790 Seaboard Corp 141,410
15,600 Smithfield Foods Inc* 241,800
14,600 Suiza Foods Corp* 571,225
16,900 Universal Corp 276,737
21,650 Universal Foods Corp 391,053
------------
4,709,355
------------
HEALTH CARE -- 3.5%
20,700 Apria Healthcare Group* 294,975
13,700 Arrow International Inc 541,150
65,400 Beverly Enterprises Inc* 171,675
13,733 Bindley Western Industries Inc 236,036
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
HEALTH CARE -- CONTINUED
35,700 Coventry Health Care Inc* 292,294
21,200 Dentsply International Inc 543,250
20,900 First Health Group Corp* 504,212
13,800 Haemonetics Corp* 328,612
21,800 Health Management Associates Inc* 234,350
9,200 Hillenbrand Industries Inc 279,450
20,600 Invacare Corp 502,125
91,500 Laboratory Corporation of America Holdings* 366,000
19,400 Lincare Holdings Inc* 454,687
21,000 Mallinckrodt Inc 517,125
32,800 Manor Care Inc* 284,950
93,900 Mariner Post-Acute Network Inc* 16,902
43,900 Mid Atlantic Medical Services Inc* 359,431
15,000 Ocular Sciences Inc* 225,000
15,500 Quest Diagnostics Inc* 531,844
41,200 Quorum Health Group Inc* 366,940
21,300 RightCHOICE Managed Care, Class A* 315,506
25,450 Sierra Health Services Inc* 155,881
27,600 Sola International Inc* 138,000
29,500 Sunrise Assisted Living Inc* 372,437
26,900 Sunrise Medical Inc* 116,006
15,100 Trigon Healthcare Inc* 482,256
11,300 Universal Health Services, Class B* 439,287
9,500 Wesley Jessen Visioncare Inc* 273,125
------------
9,343,506
------------
INSURANCE -- 4.9%
1,557 Alleghany Corp* 289,505
20,400 American Financial Group Inc 428,400
7,500 American National Insurance Co 438,750
13,900 Amerus Life Holdings Inc 282,344
17,500 Argonaut Group Inc 332,500
437,600 ARM Financial Group Inc, Class A 19,692
15,500 Berkley (WR) Corp 248,969
15,300 Commerce Group Inc 457,087
12,999 Delphi Financial Group Inc* 342,849
7,500 Erie Indemnity Company - Class A 232,500
23,300 Everest Re Group Ltd 572,306
18,870 Fidelity National Financial Inc 237,054
37,950 First American Financial Corp 441,169
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
INSURANCE -- CONTINUED
65,410 Foundation Health Systems Inc, Class A* 543,721
52,830 Fremont General Corp 383,017
7,000 Gallagher (Arthur J) and Co 357,875
19,800 Harleysville Group Inc 258,637
32,300 HCC Insurance Holdings Inc 411,825
14,100 Horace Mann Educators Corp 218,550
58,800 Humana Inc* 400,575
15,900 Kansas City Life Insurance Co 508,800
4,800 Liberty Corp 161,400
21,600 Mercury General Corp 490,050
15,700 Mony Group Inc 449,412
35,300 Ohio Casualty Corp 436,837
37,700 Old Republic International Corp 440,619
21,200 Oxford Health Plans Inc* 327,275
8,800 Pacificare Health Systems Inc* 399,850
21,300 Presidential Life Corp 332,812
16,200 Radian Group Inc 561,937
86,100 Reliance Group Holdings Inc 382,069
9,643 RLI Corp 287,482
22,400 Selective Insurance Group 345,800
5,200 Transatlantic Holding Inc 366,275
10,350 Trenwick Group Inc 136,491
31,900 UICI* 279,125
38,100 Vesta Insurance Group* 183,356
------------
12,986,915
------------
LODGING -- 0.1%
106,600 Wyndham International Inc, Class A* 253,175
------------
MACHINERY -- 4.8%
36,700 Agco Corp 403,700
18,500 Cooper Cameron Corp* 1,022,125
24,400 Cummins Engine Inc 812,825
17,700 Detroit Diesel Corp 296,475
22,000 Donaldson Co Inc 500,500
22,300 Federal Mogul Corp 303,837
19,400 Flowserve Corp 223,100
14,000 FMC Corp* 676,375
14,400 Kaydon Corp 331,200
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
MACHINERY -- CONTINUED
22,700 Kennametal Inc 527,775
8,700 Kulicke & Soffa Industries* 691,650
6,400 Lam Research Corp* 999,200
27,400 Milacron Inc 380,175
7,400 Nordson Corp 286,750
10,500 Novellus System Inc* 622,781
13,700 Smith International Inc* 858,819
30,200 SpeedFam-IPEC Inc* 870,137
16,300 Stanley Works 374,900
10,600 Starrett (LS) Co, Class A 243,800
10,000 Tecumseh Products Co 431,250
14,900 Tecumseh Products Co, Class B 600,656
9,900 Toro Co 327,937
14,000 Varian Medical Systems Inc* 559,125
24,400 York International Corp 442,250
------------
12,787,342
------------
MANUFACTURING -- 3.5%
25,000 ACX Technologies Inc* 79,687
29,700 Amcast Industrial Corp 354,544
26,600 American Greetings Corp 458,850
15,600 Applied Power Inc, Class A 377,325
16,700 Armstrong World Industries Inc 317,300
11,300 Ball Corp 304,394
12,400 Barnes Group Inc 175,925
13,000 Blyth Industries Inc* 291,687
41,000 Champion Enterprises Inc* 258,812
67,612 Clayton Homes Inc 549,348
29,050 Crane Co 577,369
6,000 CSS Industries Inc* 114,375
60,400 General Cable Corp 604,000
12,000 Gentex Corp* 350,626
7,500 Greif Brothers Corp 236,250
34,300 Griffon Corp* 287,262
17,700 Harsco Corp 439,181
20,700 International Game Technology* 368,719
22,300 Lafarge Corp 439,031
15,800 Lydall Inc* 111,587
5,000 Mine Safety Appliances 317,500
19,900 NCI Building Systems Inc* 300,987
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
MANUFACTURING -- CONTINUED
28,200 Omnicare Inc 259,087
15,100 Owens Corning 218,950
5,900 Sequa Corp, Class A* 218,669
13,200 Standex International Corp 208,725
22,000 Tower Automotive Inc* 261,250
22,300 Trinity Industries Inc 493,387
17,100 Watts Industries Inc, Class A 247,950
------------
9,222,777
------------
METALS AND MINING -- 0.7%
30,200 Arch Coal Inc 268,025
12,900 Cleveland Cliffs Inc 321,694
11,500 Commercial Metals Co 317,687
5,200 Nacco Industries Inc, Class A 225,875
12,700 Southern Peru Copper Corp 193,675
36,200 Timken Co 518,112
------------
1,845,068
------------
OIL AND GAS -- 5.2%
8,900 Apache Corp 324,850
24,300 BJ Services Co* 1,386,619
11,200 Cal Dive International Inc* 403,200
26,600 Ensco International Inc 804,650
10,400 Equitable Resources Inc 392,600
191,140 Friede Goldman International Inc* 1,003,485
34,900 Global Industries Limited* 357,725
25,800 Global Marine Inc* 578,888
17,500 Helmerich & Payne Inc 465,938
43,800 KCS Energy Inc* 60,225
14,000 Kerr-McGee Corp 626,500
34,900 Kinder Morgan Inc 972,838
18,700 Mitchell Energy, Class B 393,869
32,000 Nabors Industries Inc* 1,148,000
25,200 National-Oilwell Inc* 611,100
36,800 Newpark Resources Inc* 287,500
53,000 Ocean Energy Inc* 566,438
19,500 Pogo Producing Co 450,938
33,900 Pride International Inc* 502,144
25,900 R&B Falcon Corp* 399,831
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
OIL AND GAS -- CONTINUED
8,900 Seacor Smit Inc* 431,650
32,600 Tidewater Inc 922,988
32,500 Varco International Inc* 359,531
20,900 Veritas DGC Inc* 418,000
------------
13,869,507
------------
PAPER AND ALLIED PRODUCTS -- 2.3%
17,800 Boise Cascade Corp 530,663
6,400 Bowater Inc 314,800
16,100 Caraustar Industries Inc 267,663
79,700 Ikon Office Solutions Inc 557,900
5,926 Kimberly-Clark Corp 306,300
31,400 Louisiana Pacific Corp 370,913
29,700 Mail-Well Inc* 258,019
15,500 Pentair Inc 532,813
11,200 Potlatch Corp 425,600
26,500 Rock-Tenn Co, Class A 298,125
24,800 Shorewood Packaging Corp* 514,600
20,121 Smurfit-Stone Container Corp* 274,149
15,900 Sonoco Products Co 293,156
14,900 United Stationers Inc* 400,438
26,700 Wausau-Mosinee Paper Corp 348,769
15,300 Westvaco Corp 421,706
------------
6,115,614
------------
PHARMACEUTICALS -- 0.9%
18,900 Amerisource Health Corp* 275,231
49,450 Bergen Brunswig Corp, Class A 244,159
31,800 Henry Schein Inc* 596,250
21,900 ICN Pharmaceuticals Inc 435,263
30,575 Mark IV Industries Inc 611,500
29,800 Nu Skin Enterprises Inc* 266,338
------------
2,428,741
------------
PRIMARY MATERIALS -- 0.8%
20,500 A. Schulman Inc 271,625
12,900 Carlisle Cos Inc 427,313
9,000 Florida Rock Industries 299,813
22,400 Weatherford International Inc 1,008,000
</TABLE>
See accompanying notes to the financial statements. 11
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
PRIMARY MATERIALS -- CONTINUED
7,700 West Pharmaceutical Services Inc 226,669
------------
2,233,420
------------
PRIMARY PROCESSING -- 2.6%
52,300 AK Steel Holding Corp 434,744
8,500 Ameron Inc 296,438
14,400 Belden Inc 325,800
85,200 Bethlehem Steel Corp* 484,575
15,300 Carpenter Technology Corp 340,425
22,300 Howmet International Inc* 408,369
15,500 Lone Star Technologies Inc* 581,250
125,800 LTV Corp 416,713
4,200 Maxxam Inc* 123,375
10,000 Mueller Industries Inc* 286,250
37,900 National Steel Corp, Class B 265,300
8,400 NCH Corp 332,850
28,300 Oregon Steel Mills Inc 116,738
14,900 Precision Castparts Corp 384,606
14,800 Quanex Corp 315,425
20,700 Rouge Industries Inc, Class A 159,131
15,900 Ryerson Tull Inc 210,675
25,513 Superior TeleCom Inc 318,913
29,700 USX-US Steel Group Inc 649,688
10,600 Valspar Corp 347,813
------------
6,799,078
------------
PRINTING AND PUBLISHING -- 0.6%
26,000 Consolidated Graphics Inc* 355,875
26,100 Hollinger International Inc 314,831
21,500 TV Guide Inc, Class A* 1,013,188
------------
1,683,894
------------
REAL ESTATE -- 0.8%
34,000 Lennar Corp 561,000
26,700 Meristar Hospitality Corp, REIT 425,531
12,100 Parkway Properties Inc, REIT 358,463
39,900 Prison Realty Trust Inc, REIT 204,488
29,700 Security Capital Group, Class B, REIT* 384,244
</TABLE>
12 See accompanying notes to the financial statements.
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
REAL ESTATE -- CONTINUED
12,600 Webb (Del) Corp* 189,000
------------
2,122,726
------------
REFINING -- 0.7%
11,400 Holly Corp 151,050
41,100 Lyondell Petro Chemical Co 351,919
6,800 Murphy Oil Corp 344,250
20,392 Ultramar Diamond Shamrock Corp 442,252
21,300 Valero Energy Corp 543,150
------------
1,832,621
------------
RETAIL TRADE -- 6.2%
134,700 7 Eleven Inc* 349,385
29,500 Action Performance Cos Inc* 267,344
16,400 Ames Department Stores Inc* 231,650
14,700 Applebees International Inc 413,898
13,700 BJ's Wholesale Club Inc* 424,700
26,600 Borders Group Inc* 327,513
24,540 Burlington Coat Factory Warehouse 280,676
34,100 Cash American Investments Inc 383,625
32,300 CBRL Group Inc 298,775
58,500 Charming Shoppes Inc* 351,000
45,300 CKE Restaurants Inc 288,788
18,100 Claire's Stores Inc 315,619
26,900 Consolidated Stores Corp* 302,625
12,000 CPI Corp 295,500
29,100 Dave and Busters Inc* 187,331
18,400 Dillard's Inc 319,700
19,200 Dress Barn Inc* 278,400
45,100 Goodys Family Clothing Inc* 315,700
15,500 Great Atlantic & Pacific Tea Co 363,281
6,800 Hannaford Brothers Co 484,500
62,100 Heilig Meyers Co 201,825
42,500 Inacom Corp* 143,438
30,200 Ingles Markets Inc, Class A 330,313
12,800 Jack in the Box Inc* 256,800
9,300 Lands End Inc* 308,644
35,900 Lone Star Steakhouse and Saloon Inc* 318,613
12,000 Michaels Stores Inc* 325,500
</TABLE>
See accompanying notes to the financial statements. 13
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
RETAIL TRADE -- CONTINUED
25,500 Neiman Marcus Group Inc, Class A* 543,469
24,300 NPC International Inc* 200,475
92,200 OfficeMax Inc* 651,163
20,100 Outback Steakhouse Inc* 525,113
14,600 Payless ShoeSource Inc* 576,700
25,900 Petco Animal Supplies Inc* 278,425
28,500 Phillips Van Heusen 197,719
62,500 Pier 1 Imports Inc 546,875
53,500 Rainforest Cafe Inc* 214,000
41,400 Ross Stores Inc 600,300
15,800 Ruby Tuesday Inc 267,613
15,500 Ruddick Corp 208,281
33,700 Ryan's Family Steak Houses Inc* 322,256
23,600 Saks Inc* 271,400
19,600 Shopko Stores Inc* 325,850
45,500 Spiegel Inc, Class A* 327,031
25,600 The Pep Boys - Manny, Moe & Jack 158,400
25,500 Value City Department Stores Inc* 336,281
82,000 Venator Group Inc* 466,375
10,900 Weismarkets Inc 461,206
17,400 Whitehall Jewellers Inc* 340,388
8,400 Zale Corp* 316,050
------------
16,500,513
------------
SERVICES -- 5.8%
42,300 Alternative Resources Corp* 142,763
9,300 Amerco* 159,263
6,300 Anchor Gaming* 262,238
23,325 Arctic Cat Inc 236,166
27,800 Avid Technology Inc* 488,238
18,000 Avis Rent a Car Inc* 262,125
31,700 Aztar Corp* 301,150
12,150 Banta Corp 221,738
16,000 Berlitz International Inc* 246,000
27,300 Bowne and Co Inc 325,894
33,400 Buffets Inc* 290,163
15,000 Carmike Cinemas Inc, Class A* 117,188
6,700 Catalina Marketing Corp* 570,338
8,700 Chemed Corp 256,106
7,000 Chris Craft Industries Inc* 460,688
</TABLE>
14 See accompanying notes to the financial statements.
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
SERVICES -- CONTINUED
26,100 Dollar Thrifty Automotive Group Inc* 342,563
29,900 Electro Rent Corp* 325,163
36,625 Encompass Services Corp* 263,242
35,400 Fleming Cos Inc 546,488
21,200 Franklin Covey Co* 173,575
31,900 Harrahs Entertainment Inc* 610,088
19,100 Hollywood Entertainment Corp* 194,581
36,100 Ingram Micro Inc* 390,331
26,300 Interim Services Inc* 655,856
28,600 Interpool Inc 189,475
13,200 Jacobs Engineering Group* 370,425
21,300 Kelly Services, Class A 512,531
38,900 Mandalay Resort Group* 547,031
25,600 Manpower Inc 836,800
15,250 Marcus Corp 159,172
48,200 Modis Professional Services Inc* 759,150
60,500 Olsten Corp 722,219
38,300 Prime Hospitality Corp* 325,550
11,500 Rent-A-Center Inc* 172,500
24,600 Republic Services Inc, Class A* 267,525
27,600 Res-Care Inc* 274,275
26,400 Rollins Truck Leasing Corp 221,100
29,800 Romac International Inc* 402,300
32,300 Staff Leasing Inc* 185,725
33,000 Staffmark Inc* 371,250
9,600 Stone & Webster Inc 122,400
24,200 Supervalu Inc 415,938
39,900 U.S. Oncology Inc* 164,588
17,700 United Rentals Inc* 276,563
24,100 Veterinary Centers of America Inc* 266,606
------------
15,405,068
------------
TECHNOLOGY -- 5.1%
50,800 Acclaim Entertainment Inc* 252,415
30,000 Autodesk Inc 1,340,625
21,608 Avnet Inc 1,445,035
21,200 Cabletron Systems Inc* 1,038,800
23,000 Cambridge Technology Partners Inc* 345,000
21,600 Cirrus Logic Corp* 449,550
23,300 Computer Horizons Corp* 518,425
</TABLE>
See accompanying notes to the financial statements. 15
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
TECHNOLOGY -- CONTINUED
13,200 Data Transmission Network Corp* 336,600
17,800 Datastream Systems Inc* 398,275
10,000 Deluxe Corp 234,375
7,000 Dionex Corp* 220,938
13,800 Esterline Corp* 153,525
22,400 G TECH Holdings Corp* 448,000
28,400 Gartner Group Inc, Class A 406,475
22,600 Inprise Corp* 228,825
7,500 Jack Henry and Associates Inc 524,063
15,200 Keane Inc* 364,800
13,700 Mettler-Toledo International Inc* 529,163
21,800 Midway Games Inc* 322,913
31,600 MTS Systems Inc 242,925
11,100 Network Associates Inc* 337,856
8,300 Plexus Corp* 468,691
26,100 Policy Management System Corp* 231,638
45,900 Renaissance Worldwide Inc* 240,975
34,900 Structural Dynamics Research Corp* 497,325
5,200 Symantec Co* 371,475
5,100 Synopsys Inc* 203,681
17,250 Tektronix Inc 1,000,500
31,300 Thermo Electron Corp* 489,063
------------
13,641,931
------------
TELECOMMUNICATIONS -- 0.9%
9,780 Adtran Inc* 719,441
14,300 Aspect Communications Corp* 921,456
19,600 Pacific Gateway Exchange Inc* 396,900
2,300 Telephone and Data Systems Inc 242,650
7,300 West Teleservices* 144,175
------------
2,424,622
------------
TEXTILES -- 0.4%
41,600 Cone Mills Corp* 163,800
4,200 Crystal Brands Inc(a) --
21,050 Guilford Mills 194,713
25,300 Shaw Industries Inc 320,994
10,300 Springs Industries Inc, Class A 365,006
------------
1,044,513
------------
</TABLE>
See accompanying notes to the financial statements.
16
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
TRANSPORTATION -- 3.0%
23,400 Airborne Freight Corp 432,900
12,700 Alaska Air Group Inc* 336,550
19,900 America West Holdings Corp, Class B* 266,163
17,500 American Freightways Corp* 190,313
21,100 Atlantic Coast Airlines Holdings* 377,163
43,500 Brunswick Corp 769,406
8,800 CNF Transportation Inc 282,150
12,300 Continental Airlines Inc, Class B* 388,988
12,200 Expeditors International Washington Inc 460,550
23,900 Fleetwood Enterprises Inc 368,956
22,000 Frontier Airlines Inc* 244,750
12,700 GATX Corp 395,288
24,200 Heartland Express Inc* 345,607
62,100 Laidlaw Inc, Class B 190,181
7,500 Landstar System Inc* 421,406
8,300 Navistar International Corp* 271,825
37,300 Ryder System Inc 694,713
14,800 Swift Transportation Co* 219,225
15,400 US Freightways Corp 512,050
17,500 Werner Enterprises Inc 234,063
28,500 Wisconsin Central Transport* 352,688
17,300 Yellow Corp* 276,800
------------
8,031,735
------------
UTILITIES -- 5.1%
13,000 Alliant Energy Corp 365,625
14,300 Avista Corp 429,894
12,400 Calpine Corp* 1,134,600
13,400 CH Energy Group Inc 382,738
45,700 Citizens Utilities, Class B* 696,925
9,900 Cleco Corp 316,800
14,300 CMP Group Inc 403,975
34,950 Connectiv Inc 498,038
35,095 Dynegy Inc 1,645,078
8,500 Eastern Utilities Associates 264,031
41,200 El Paso Electric Co* 393,975
19,600 Energen Corp 318,500
9,300 Hawaiian Electric Industries Inc 267,956
22,700 Keyspan Corp 462,513
7,300 Kinder Morgan Energy Partners 288,350
</TABLE>
See accompanying notes to the financial statements. 17
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------
<C> <S> <C>
UTILITIES -- CONTINUED
19,500 MCN Corp 469,219
22,000 Midamerican Energy Holdings Co* 761,750
36,400 Northeast Utilities 684,775
11,300 Nui Corporation 268,375
18,500 Oneok Inc 419,719
28,400 Public Service Co of New Mexico 436,650
13,100 Puget Sound Power and Light Co 266,094
16,500 RGS Energy Group Inc 324,844
8,300 TNP Enterprises Inc 358,456
20,240 UniSource Energy Corp 273,240
6,200 United Illuminating Co 251,875
24,600 Utilicorp United Inc 402,825
25,500 Western Gas Resources Inc 350,625
29,700 Western Resources Inc 458,494
------------
13,595,939
------------
TOTAL COMMON STOCKS (COST $262,458,425) 239,295,830
------------
RIGHTS AND WARRANTS -- 0.0%
CONSUMER GOODS -- 0.0%
6,934 Sunbeam Corporation Warrants, Expires 08/24/03* 8,668
------------
TOTAL RIGHTS AND WARRANTS (COST $0) 8,668
------------
<CAPTION>
SHARES/
PAR VALUE ($)
- -------------
<C> <S> <C>
SHORT-TERM INVESTMENTS -- 15.5%
CASH EQUIVALENTS -- 3.4%
$ 667,273 First Union National Bank Time Deposit, 5.8125%, due
3/01/00(c) 667,273
$ 1,000,909 Fleet National Bank Time Deposit, 5.79%, due 3/10/00(c) 1,000,909
$ 126,124 BankBoston Eurodollar Time Deposit, 6.1175%, due
4/28/00(c) 126,124
1,075,984 Merrimac Cash Fund Premium Class(c) 1,075,984
$ 6,000,000 Prudential Securities Group, Inc. Master Note, 6.1875%,
due 3/10/00(c) 6,000,000
------------
8,870,290
------------
</TABLE>
See accompanying notes to the financial statements.
18
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE ($) DESCRIPTION VALUE ($)
- ------------- ------------------------------------------------------- ------------
<C> <S> <C>
U.S. GOVERNMENT -- 1.8%
$ 4,835,000 U.S. Treasury Bill, 5.65%, due 6/29/00(d) 4,744,586
------------
REPURCHASE AGREEMENTS -- 10.3%
$ 13,716,669 Morgan Stanley Inc. Repurchase Agreement, dated
2/29/00, due 3/01/00, with a maturity value of
$13,718,548 and effective yield of 4.93%,
collateralized by a U.S. Treasury Obligation with a
rate of 8.49%, maturity date of 10/12/00, and market
value, including accrued interest, of $13,991,732. 13,716,669
------------
$ 13,716,669 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/29/00, due 3/01/00, with a maturity value of
$13,718,555 and an effective yield of 4.95%,
collateralized by a U.S. Treasury Obligation with a
rate of 8.125%, maturity date of 8/15/19 and market
value, including accrued interest, of $13,991,002. 13,716,669
------------
27,433,338
------------
TOTAL SHORT-TERM INVESTMENTS (COST $41,051,501) 41,048,214
------------
TOTAL INVESTMENTS -- 105.5%
(Cost $303,509,926) 280,352,712
Other Assets and Liabilities (net) -- (5.5%) (14,575,169)
------------
TOTAL NET ASSETS -- 100.0% $265,777,543
============
NOTES TO THE SCHEDULE OF INVESTMENTS:
</TABLE>
<TABLE>
<S> <C>
REIT - Real Estate Investment Trust
</TABLE>
* Non-income producing security.
(a) Bankrupt issuer.
(b) Security valued at fair value using methods determined in good faith by or
at the direction of the Trustees.
(c) Represents investments of security lending collateral (Note 1).
(d) Security has been segregated to cover margin requirements on open financial
futures contracts (Note 1 and 6).
See accompanying notes to the financial statements. 19
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $303,509,926) (Note 1) $280,352,712
Cash 6,451,177
Receivable for investments sold 1,332,000
Dividends and interest receivable 300,732
Receivable for variation margin on open futures contracts
(Notes 1 and 6) 999,700
Receivable for open swap contracts (Notes 1 and 6) 642,213
Receivable for expenses waived or borne by Manager (Note
2) 25,151
------------
Total assets 290,103,685
------------
LIABILITIES:
Payable upon return of securities loaned (Note 1) 8,870,290
Payable for Fund shares repurchased 15,294,121
Payable to affiliate for (Note 2):
Management fee 72,083
Shareholder service fee 32,780
Accrued expenses 56,868
------------
Total liabilities 24,326,142
------------
NET ASSETS $265,777,543
============
NET ASSETS CONSIST OF:
Paid-in capital $285,540,044
Accumulated undistributed net investment income 525,151
Accumulated net realized gain 1,331,045
Net unrealized depreciation (21,618,697)
------------
$265,777,543
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $265,777,543
============
SHARES OUTSTANDING:
Class III 21,422,932
============
NET ASSET VALUE PER SHARE:
Class III $ 12.41
============
</TABLE>
20 See accompanying notes to the financial statements.
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $3,884) $ 4,591,036
Interest (including securities lending income of $88,986) 831,656
-----------
Total income 5,422,692
-----------
EXPENSES:
Management fee (Note 2) 1,119,033
Custodian and transfer agent fees 134,459
Audit fees 44,141
Legal fees 6,826
Trustees fees (Note 2) 3,826
Registration fees 2,159
Miscellaneous 4,754
Fees waived or borne by Manager (Note 2) (196,165)
-----------
1,119,033
Shareholder service fee (Note 2)
Class III 508,651
-----------
Net expenses 1,627,684
-----------
Net investment income 3,795,008
-----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments 12,096,326
Closed futures contracts 4,078,662
Closed swap contracts (8,074,003)
-----------
Net realized gain 8,100,985
-----------
Change in net unrealized appreciation (depreciation) on:
Investments 20,413,352
Open futures contracts 1,121,270
Open swap contracts 2,047,340
-----------
Net unrealized gain 23,581,962
-----------
Net realized and unrealized gain 31,682,947
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $35,477,955
===========
</TABLE>
See accompanying notes to the financial statements. 21
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 3,795,008 $ 5,029,707
Net realized gain 8,100,985 83,696,862
Change in net unrealized appreciation (depreciation) 23,581,962 (162,379,486)
------------ ------------
Net increase (decrease) in net assets from
operations 35,477,955 (73,652,917)
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (3,821,691) (5,866,332)
------------ ------------
Total distributions from net investment income (3,821,691) (5,866,332)
------------ ------------
Net realized gains
Class III (10,205,405) (102,038,674)
------------ ------------
Total distributions from net realized gains (10,205,405) (102,038,674)
------------ ------------
(14,027,096) (107,905,006)
------------ ------------
Net share transactions: (Note 5)
Class III (103,356,983) (240,370,696)
------------ ------------
Decrease in net assets resulting from net share
transactions (103,356,983) (240,370,696)
------------ ------------
Total decrease in net assets (81,906,124) (421,928,619)
NET ASSETS:
Beginning of period 347,683,667 769,612,286
------------ ------------
End of period (including accumulated undistributed
net investment income of $525,151 and $552,066,
respectively) $265,777,543 $347,683,667
============ ============
</TABLE>
22 See accompanying notes to the financial statements.
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.69 $ 18.28 $ 15.89 $ 13.89 $ 13.61
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.15 0.18 0.27 0.28 0.23
Net realized and unrealized gain
(loss) 1.11 (2.50) 4.85 2.32 3.20
-------- -------- -------- -------- --------
Total from investment operations 1.26 (2.32) 5.12 2.60 3.43
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.14) (0.19) (0.29) (0.27) (0.23)
From net realized gains (0.40) (4.08) (2.44) (0.33) (2.92)
-------- -------- -------- -------- --------
Total distributions (0.54) (4.27) (2.73) (0.60) (3.15)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 12.41 $ 11.69 $ 18.28 $ 15.89 $ 13.89
======== ======== ======== ======== ========
TOTAL RETURN(a) 10.66% (14.74)% 34.43% 19.12% 27.18%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $265,778 $347,684 $769,612 $655,373 $231,533
Net expenses to average daily net
assets 0.48% 0.48% 0.48% 0.48% 0.48%
Net investment income to average
daily net assets 1.12% 0.99% 1.51% 2.15% 1.67%
Portfolio turnover rate 50% 49% 56% 58% 135%
Fees and expenses voluntarily waived
or borne by the Manager consisted
of the following per share amounts: $ 0.01 $ 0.04 $ 0.04 $ 0.03 $ 0.02
</TABLE>
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
See accompanying notes to the financial statements. 23
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Small Cap Value Fund (the "Fund"), is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, diversified management investment company. The
Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24,
1985. The Declaration of Trust permits the Trustees to create an unlimited
number of series ("Funds"), each of which issues a separate series of
shares, and to subdivide a series of shares into classes.
The Fund seeks long-term growth of capital. The Fund's benchmark is GMO
Russell 2500 Value + Index.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of the financial statements
in accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term investments with a remaining maturity of sixty days or less are
valued at amortized cost which approximates market value. Securities for
which quotations are not readily available are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts on domestic stock
indices. Stock index futures contracts represent commitments for future
delivery of cash based upon the level of a specified index of equity
securities at a given date. The Fund may use futures contracts to manage
its exposure to the stock markets. Buying futures tends to increase the
Fund's exposure to the underlying instrument. Selling futures tends to
decrease the Fund's exposure to the underlying instrument or hedge other
fund instruments. Upon entering into a futures contract, the Fund is
required to deposit with its custodian, in a segregated account in the
name of the futures broker, an amount of cash or U.S. government and
agency obligations in accordance with the initial margin requirements of
the broker or exchange. Futures contracts are marked to market daily and
an appropriate payable or receivable for the change in value ("variation
margin") is recorded by the
24
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
Fund. The payable or receivable is liquidated on the following business
day. Gains or losses are recognized but not considered realized until the
contracts expire or are closed. Futures contracts involve, to varying
degrees, risk of loss in excess of the variation margin disclosed in the
Statement of Assets and Liabilities. Losses may arise from changes in the
value of the underlying instrument, if there is an illiquid secondary
market for the contracts, or if counterparties do not perform under the
contract terms. Futures contracts are valued at the settlement price
established each day by the board of trade or exchange on which they are
traded. See Note 6 for all open futures contracts as of February 29, 2000.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, realization of collateral by the Fund may be delayed or
limited.
SECURITY LENDING
The Fund may lend its securities to qualified brokers. The loans are
collateralized at all times with cash or securities with a market value at
least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending
its securities. At February 29, 2000, the Fund loaned securities having a
market value of $8,477,207, collateralized by cash in the amount of
$8,870,290, which was invested in short-term instruments.
SWAP AGREEMENTS
The Fund may enter into swap agreements to manage its exposure to the
equity markets. A swap is an agreement to exchange the return generated by
one instrument for the return generated by another instrument. The Fund
enters into equity swap agreements which involve a commitment by one party
in the agreement to pay interest in exchange for a market linked return,
both based on notional amounts. To the extent that the total return of the
security or index underlying the transaction exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make a payment to the counterparty. The Fund also enters into contracts
for differences in which the Fund agrees with the counterparty that its
return will be based on the
25
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
relative performance of two different groups or "baskets" of securities,
adjusted by an interest rate payment. To the extent that the relative
performance of the two baskets of securities exceeds or falls short of the
offsetting interest rate obligation, the Fund will receive a payment from
or make a payment to the counterparty, respectively. Swaps are marked to
market daily based upon quotations from market makers and the change, if
any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations.
Entering into these agreements involves, to varying degrees, elements of
credit and market risk in excess of the amounts recognized on the
Statement of Assets and Liabilities. Such risks involve the possibility
that there will be no liquid market for these agreements, that the
counterparty to the agreements may default on its obligation to perform,
or that there may be unfavorable changes in the price of the security or
index underlying these transactions. See Note 6 for a summary of the open
swap agreements as of February 29, 2000.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary. Taxes on foreign dividend income have been
withheld in accordance with the applicable country's tax treaty with the
United States.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless the shareholder elects to receive cash
distributions. Distributions to shareholders are recorded by the Fund on
the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are due to differing treatments for redemptions in-kind. Gains
resulting from such in-kind transactions amounted to $1,045,273.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable
26
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
income and capital gains under U.S. federal tax rules versus accounting
principles generally accepted in the United States. The calculation of net
investment income per share in the financial highlights excludes these
adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
<S> <C> <C>
$(232) $920,231 $(919,999)
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income,
net of applicable foreign withholding taxes, is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis and is
adjusted for the accretion of discounts. In determining the net gain or
loss on securities sold, the cost of securities is determined on the
identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases and fee on redemptions of Fund shares is
.50% of the amount invested or redeemed. All purchase premiums and
redemption fees are paid to and recorded by the Fund as paid-in capital.
For the year ended February 29, 2000, the Fund received $136,891 in
purchase premiums and $670,299 in redemption fees. There is no premium for
reinvested distributions or in-kind transactions.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .33% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder
27
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
service fee for client and shareholder service, reporting, and other
support. Pursuant to the Shareholder Service Plan, the shareholder service
fee is calculated based on the average daily net assets at the annual rate
of .15% for Class III shares.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding brokerage commissions, certain other transaction costs
(including transfer taxes), shareholder service fees and extraordinary
expenses) exceed the management fee.
Prior to March 1, 1999, GMO earned a management fee at the accrual rate of
.50% of average daily net assets. GMO had agreed to waive a portion of its
fee and bear other expenses to the extent that the Fund's annual expenses
(including the management fee but excluding brokerage commissions, certain
other transaction costs (including transfer taxes), shareholder service
fees and extraordinary expenses) exceeded .33% of average daily net
assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000 was $3,826. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 29, 2000, aggregated
$160,626,903 and $293,306,994, respectively.
At February 29, 2000, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
$315,872,348 $38,989,356 $(74,508,992) $(35,519,636)
</TABLE>
4. PRINCIPAL SHAREHOLDER
At February 29, 2000, 24.56% of the outstanding shares of the Fund were
held by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
28
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
--------------------------- ---------------------------
Shares Amount Shares Amount
Class III: ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Shares sold 2,179,613 $ 27,387,551 6,086,481 $ 84,771,299
Shares issued to shareholders
in reinvestment of distributions 987,722 12,477,700 7,418,240 103,948,872
Shares repurchased (11,478,311) (143,222,234) (25,867,398) (429,090,867)
------------ ------------- ------------ -------------
Net decrease (8,310,976) $(103,356,983) (12,362,677) $(240,370,696)
============ ============= ============ =============
</TABLE>
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 29, 2000 is as
follows:
FUTURES CONTRACTS
<TABLE>
<CAPTION>
Number of Contract
Contracts Type Expiration Date Value
--------- --------------------------------------------- --------------------------------------------- ------------
<C> <S> <C> <C>
Buys
48 Russell 2000 March 2000 $13,914,000
<CAPTION>
Number of Net Unrealized
Contracts Appreciation
--------- --------------
<C> <C>
Buys
48 $896,304
========
</TABLE>
At February 29, 2000, the Fund has sufficient cash and/or securities to
cover any commitments or margin on open futures contracts.
29
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SWAP AGREEMENTS
<TABLE>
<CAPTION>
Notional Amount Expiration Net Unrealized
Fund/Counterparty Date Description Appreciation
----------------- ---------- -------------------------------------------------- --------------
<C> <C> <S> <C>
$12,930,095/
12,069,505 7/21/00 Agreement with Lehman Brothers Finance S.A. dated $202,292
7/16/99 to pay (receive) the notional amount
multiplied by the return on the Standard & Poor's
500 Index (including dividends) less the notional
amount multiplied by 3 month LIBOR adjusted by a
specified spread and to receive (pay) the change
in market value of a basket of selected securities
(including dividends) less the counterparty's
notional amount multiplied by 3 month LIBOR
adjusted by a specified spread.
21,973,375/
24,811,159 7/21/00 Agreement with Deutsche Bank AG dated 7/20/99 to 439,921
pay (receive) the notional amount multiplied by
the return on the Standard & Poor's 500 Index
(including dividends) less the notional amount
multiplied by 3 month LIBOR adjusted by a
specified spread and to receive (pay) the change
in market value of a basket of selected securities
(including dividends) less the counterparty's
notional amount multiplied by 3 month LIBOR
adjusted by a specified spread.
--------
$642,213
========
</TABLE>
30
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
For the fiscal year ended February 29, 2000, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 72.75% of the distributions as net capital gain
dividends.
31
<PAGE>
GMO SMALL CAP VALUE FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Robert Soucy are
primarily responsible for the day-to-day management of the Fund's portfolio.
Mssrs. Grantham and Darnell have each been portfolio managers at Grantham, Mayo,
Van Otterloo & Co. LLC for more than fifteen years; Mr. Soucy for more than ten
years.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO Small Cap Value Fund returned 10.7% for the
fiscal year ended February 29, 2000, as compared to 11.7% for the S&P 500 and
7.4% for the Russell 2500 Value Index. Consistent with the Fund's investment
objectives and policies, the Fund was primarily invested in common stocks
throughout the period.
Technology was by far the strongest performing sector in the Russell 2500 Value
Index. Healthcare stocks, particularly biotechnology stocks, were also strong
performers during this period. On the other hand, auto/ transportation, consumer
staple and financial services stocks posted negative returns.
Sector selection was positive for the year. The Fund maintained an overweight
position in technology stocks for most of the fiscal year, as well as an
underweight in financial services. This positioning contributed 750 basis points
in aggregate. The slight overweight in healthcare stocks also added value.
Detracting from performance were the overweight positions in consumer
discretionary (retail), telephone utilities, auto/ transportation and
multi-industry stocks.
Stock selection detracted from performance for the fiscal year. Selection among
financial services and healthcare (drug) stocks was particularly weak,
detracting -440 basis points in aggregate. Stock selection was also weak, albeit
to a lesser extent, in materials/processing and producer durable stocks. Weak
stock selection offset positive selection among auto/ transportation, energy and
consumer staple stocks. In aggregate, stock selection in these industries
contributed 130 basis points for the fiscal year.
The INTRINSIC VALUE, BOOK VALUE and CASH FLOW stock selection strategies all
added value while the PRICE-TO-SALES strategy was weak.
OUTLOOK
Small cap stocks, particularly small cap value stocks, are undervalued relative
to the rest of the U.S. equity market. The Fund is positioned to take advantage
of the valuation spread, and we are overweight with respect to smaller stocks in
the Russell 2500 benchmark.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO &
CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO SMALL CAP FUND CLASS III SHARES AND THE RUSSELL 2500 VALUE INDEX
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
Average Annual Total Returns
Inception 12/31/91
1yr 5yr 10yr (ITD)
<S> <C> <C>
9.56 13.71 14.69
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
Date GMO Small Cap Value Fund-III Russell 2500 Value GMO Russell 2500 Value +
<S> <C> <C> <C>
12/31/91 9950 10000 10000
3/31/92 10965 10844 10427
6/30/92 10975 10827 9954
9/30/92 11215 11151 10226
12/31/92 12360 12490 11617
3/31/93 13396 13619 12168
6/30/93 13580 13873 12423
9/30/93 14355 14739 13303
12/31/93 14851 14899 13540
3/31/94 14701 14665 13240
6/30/94 14229 14525 12772
9/30/94 15491 15225 13700
12/31/94 15422 14706 13409
3/31/95 16364 15627 14400
6/30/95 17499 17016 15683
9/30/95 19190 18378 17190
12/31/95 19628 19082 17660
3/31/96 20802 19944 18694
6/30/96 21509 20555 19472
9/30/96 22074 21192 19911
12/31/96 23585 23317 21019
3/31/97 23402 23505 21188
6/30/97 27021 26836 24190
9/30/97 30956 30175 27200
12/31/97 30595 31033 27974
3/31/98 34005 33994 30643
6/30/98 32855 32775 29543
9/30/98 26839 27375 24676
12/31/98 30605 30434 27434
3/31/99 27630 27997 25236
6/30/99 32671 32480 29278
9/30/99 29740 29671 26746
12/31/99 31508 30883 27838
2/29/00 30634 30110 27141
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The total returns would have been lower had certain expenses
not been reimbursed during the periods shown and do not include the effect of
taxes. Each performance figure assumes purchase at the beginning and
redemption at the end of the stated period and reflects a transaction fee of
50 bp on the purchase and 50 bp on the redemption. Transaction fees are
retained by the Fund to cover trading costs. Past performance is not
indicative of future performance. Information is unaudited.
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA A FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO U.S. BOND/GLOBAL ALPHA A FUND (A SERIES OF GMO TRUST)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO U.S. Bond/Global Alpha A Fund
at February 29, 2000, the results of its operations, the changes in its net
assets and the financial highlights for the periods indicated therein, in
conformity with accounting principles generally accepted in the United States.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at February 29, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 13, 2000
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA A FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
DEBT OBLIGATIONS -- 101.9%
ALBANIA -- 2.3%
USD 15,681,227 Republic of Albania Par Bond, Zero Coupon, due
08/31/25 2,783,418
-----------
AUSTRIA -- 0.7%
GBP 500,000 Bank Austria AG Series EMTN, 8.38%, due 11/04/11 870,416
-----------
BRAZIL -- 0.7%
USD 1,000,000 Brazil Discount ZL Bond, Variable Rate, 6 mo.
LIBOR + .81%, 6.94%, due 04/15/24 781,250
-----------
BULGARIA -- 0.3%
USD 2,000,000 Bulgaria Discount Series B Interest Strips, Basket
2, 0.00%, due 07/28/24 358,000
-----------
CAYMAN ISLANDS -- 3.7%
USD 5,000,000 Pemex Finance Ltd. Series 1A1 Class A2, 144A,
6.30%, due 05/15/10 4,460,000
-----------
GERMANY -- 1.7%
GBP 2,000,000 Schweiz Bankgesellschaft, Zero Coupon, due
03/31/06 2,083,253
-----------
JORDAN -- 0.1%
USD 250,000 Hashemite Kingdom of Jordan Par Bond,
Variable Rate, Step Up, 144A, 6.00%, due
12/23/23 169,375
-----------
MEXICO -- 6.5%
FRF 44,500,000 Mexico Par Bond, 6.63%, due 12/31/19 5,772,317
CHF 5,000,000 Mexico Par Bond, 3.75%, due 12/31/19 2,019,150
-----------
7,791,467
-----------
NIGERIA -- 0.4%
USD 987,181 Central Bank of Nigeria Par Bond Odd Lot,
Variable Rate, Step Up, 6.25%, due 11/15/20(a) 510,866
-----------
SUPRA NATIONAL -- 0.8%
AUD 11,800,000 European Bank for Reconstruction and Development,
Zero Coupon, due 02/10/28 921,890
-----------
</TABLE>
See accompanying notes to the financial statements.
1
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA A FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
SWEDEN -- 0.4%
SEK 3,700,000 Kingdom of Sweden, 6.00%, due 02/09/05 427,228
-----------
UNITED STATES -- 84.3%
ASSET BACKED SECURITIES -- 58.6%
USD 3,000,000 American Express Credit Account Master Trust
Series 99-6 Class A, Variable Rate, 1 mo. LIBOR
+ .20%, 6.09%, due 03/15/05 3,004,805
USD 9,000,000 American Express Credit Account Master Trust
Series 99-5 Class A, Variable Rate, 1 mo. LIBOR
+ .24%, 6.13%, due 02/15/07 9,028,125
USD 1,000,000 BEA CBO Series 98-1A Class A2A, 144A, 6.72%, due
06/15/10 903,594
USD 20,500,000 Big Flower Receivables Master Trust Series 96-2
Class A,
Variable Rate, LIBOR + .25%, 6.13%, due 04/25/03 20,192,500
USD 7,430,000 Brazos Student Loan Finance Corp Series 96-B Class
A4,
Variable Rate, 3 mo. U.S. Treasury Bill + .50%,
6.21%, due 12/01/02 7,421,873
USD 2,800,000 Cigna CBO Ltd Series 96-1 Class A2, 144A, 6.46%,
due 11/15/08 2,786,000
USD 5,000,000 Discover Card Master Trust I Series 00-1 Class A,
Variable Rate, 1 mo. LIBOR + .17%, 6.06%, due
08/16/07 4,998,828
USD 4,492,655 Northstar CBO Ltd. Series 97-2 Class A2, 144A,
Variable Rate, Step Up, 6.62%, due 07/15/09 4,169,043
USD 3,000,000 NPF VI, Inc. Series 99-1 Class A, 144A, 6.25%, due
02/01/03 2,919,000
USD 3,000,000 Rhyno CBO Delaware Corp Series 97-1 Class A-2,
144A,
Variable Rate, Step Up, 6.33%, due 09/15/09 2,953,125
USD 10,000,000 Shyppco 98-1 A2B, 6.64%, due 06/15/10(b) 9,125,000
USD 3,000,000 Starvest Emerging Markets CBO-I Series 1A, Class
A,
Variable Rate, 6 mo. LIBOR + .19%, 144A, 6.41%,
due 07/30/11 2,921,719
-----------
70,423,612
-----------
STRUCTURED NOTES -- 2.4%
USD 2,950,000 Polaris Funding Company,
Variable Rate, 1 mo. LIBOR + .45%, 6.34%, due
01/07/05 2,889,617
-----------
U.S. GOVERNMENT -- 11.3%
USD 10,100,000 U.S. Treasury 0.00% Receipts, due 02/15/10(a) 4,994,782
USD 10,100,000 U.S. Treasury 0.00% Receipts, due 02/15/12(a) 4,369,983
USD 10,100,000 U.S. Treasury 0.00% Receipts, due 08/15/12(a) 4,236,386
-----------
13,601,151
-----------
</TABLE>
See accompanying notes to the financial statements.
2
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA A FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY -- 12.0%
USD 5,000,000 Federal Home Loan Bank,
Variable Rate, CPI + 3.15%, 5.66%, due
02/15/02(c) 4,865,450
USD 10,000,000 Government National Mortgage Association, TBA,
7.00% 9,571,875
-----------
14,437,325
-----------
TOTAL UNITED STATES 101,351,705
-----------
TOTAL DEBT OBLIGATIONS (COST $128,808,778) 122,508,868
-----------
LOAN ASSIGNMENTS -- 1.1%
RUSSIA -- 1.1%
USD 5,500,000 Russia Vnesh Restructured Loan Agreements* 1,299,375
-----------
TOTAL LOAN ASSIGNMENTS (COST $3,541,183) 1,299,375
-----------
<CAPTION>
PRINCIPAL
AMOUNT
----------
<S> <C> <C> <C>
CALL OPTIONS PURCHASED -- 0.0%
OPTIONS ON CURRENCY -- 0.0%
USD 8,848,000 Euro, Expires 5/03/00, Strike 1.12 1,770
-----------
OPTIONS ON FUTURES -- 0.0%
USD 730,000 Eurodollar, Expires 3/13/00, Strike 93.75 40,150
-----------
TOTAL CALL OPTIONS PURCHASED (COST $218,059) 41,920
-----------
PUT OPTIONS PURCHASED -- 0.6%
CROSS CURRENCY OPTIONS -- 0.0%
EUR 16,300,000 Euro Put/Swiss Franc Call, Expires 6/05/00, Strike
1.58485 23,540
-----------
OPTIONS ON CURRENCY -- 0.6%
USD 8,453,000 Euro, Expires 5/03/00, Strike 1.07 746,400
-----------
TOTAL PUT OPTIONS PURCHASED (COST $361,816) 769,940
-----------
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA A FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
RIGHTS AND WARRANTS -- 0.0%
MEXICO -- 0.0%
11,078,000 United Mexican States Warrants, Expires 6/30/03** --
-----------
NIGERIA -- 0.0%
987 Central Bank of Nigeria Warrants, Expires
11/15/20** --
-----------
TOTAL RIGHTS AND WARRANTS (COST $0) --
-----------
<CAPTION>
PAR VALUE
- ------------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS -- 1.3%
COMMERCIAL PAPER -- 1.1%
USD 1,400,000 Koch Industries Inc., 5.83%, due 3/01/00 1,400,000
-----------
REPURCHASE AGREEMENT -- 0.2%
USD 205,543 Salomon Smith Barney Inc. Repurchase Agreement,
dated 2/29/00, due 3/01/00. with a maturity
value of $205,571 and an effective yield of
4.95%, collateralized by a U.S. Treasury
Obligation with a rate of 8.125%, maturity date
of 8/15/19 and market value, including accrued
interest, of $209,654. 205,543
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $1,605,543) 1,605,543
-----------
TOTAL INVESTMENTS -- 104.9%
(Cost $134,535,379) 126,225,646
Other Assets and Liabilities (net) -- (4.9%) (5,949,473)
-----------
TOTAL NET ASSETS -- 100.0% $120,276,173
===========
</TABLE>
See accompanying notes to the financial statements.
4
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA A FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
NOTES TO THE SCHEDULE OF INVESTMENTS:
144A - Securities exempt from registration under rule 144A
of the Securities Act of 1933. These securities may be
resold in transactions exempt from registration, normally
to qualified institutional investors.
CBO - Collateralized Bond Obligation
CPI - Consumer Price Index
EMTN - Euromarket Medium Term Note
TBA - To Be Announced (Note 1)
Variable and Step up rates - The rates shown on variable and
step up rate notes are the current interest rates at
February 29, 2000, which are subject to change based on
the terms of the security, including varying reset dates.
CURRENCY ABBREVIATIONS:
AUD - Australian Dollar
BEF - Belgian Franc
CAD - Canadian Dollar
CHF - Swiss Franc
EUR - Euro
FRF - French Franc
GBP - British Pound
ITL - Italian Lira
JPY - Japanese Yen
SEK - Swedish Krona
USD - United States Dollar
(a) Valued by management (Note 1).
(b) All or a portion of this security has been segregated to cover collateral
requirements on TBA obligations (Note 1).
(c) All or a portion of this security has been segregated to cover margin
requirements on open financial futures contracts (Note 6).
* Non-performing. Borrower not currently paying interest.
** Non-income producing security.
See accompanying notes to the financial statements. 5
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA A FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $134,535,379) (Note 1) $126,225,646
Cash at interest on deposit at brokers (Note 1) 2,558,083
Interest receivable 456,791
Net receivable for open forward foreign currency
contracts (Notes 1 and 6) 278,855
Receivable for variation margin on open futures contracts
(Notes 1 and 6) 52,063
Receivable for open swap contracts (Notes 1 and 6) 945,587
Receivable for expenses waived or borne by Manager (Note
2) 6,207
------------
Total assets 130,523,232
------------
LIABILITIES:
Payable for forward commitment (Note 1) 9,509,375
Payable to affiliate for (Note 2):
Management fee 23,755
Shareholder service fee 14,168
Interest payable for open swap contracts (Notes 1 and 6) 655,788
Accrued expenses 43,973
------------
Total liabilities 10,247,059
------------
NET ASSETS $120,276,173
============
NET ASSETS CONSIST OF:
Paid-in capital $127,486,320
Accumulated undistributed net investment income 2,497,480
Accumulated net realized loss (2,448,254)
Net unrealized depreciation (7,259,373)
------------
$120,276,173
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $120,276,173
============
SHARES OUTSTANDING:
Class III 12,472,150
============
NET ASSET VALUE PER SHARE:
Class III $ 9.64
============
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA A FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $ 8,039,245
Dividends 132,700
-----------
Total income 8,171,945
-----------
EXPENSES:
Management fee (Note 2) 309,352
Custodian and transfer agent fees 67,181
Audit fees 47,519
Interest expense (Notes 1 and 6) 16,266
Legal fees 3,025
Registration fees 2,049
Trustees fees (Note 2) 1,221
Miscellaneous 1,923
Fees waived or borne by Manager (Note 2) (122,918)
-----------
325,618
Shareholder service fee (Note 2)
Class III 185,609
-----------
Net expenses 511,227
-----------
Net investment income 7,660,718
-----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (2,043,084)
Closed futures contracts 1,793,795
Closed swap contracts (5,053,737)
Written options 420,000
Foreign currency, forward contracts and foreign
currency related transactions 1,427,390
-----------
Net realized loss (3,455,636)
-----------
Change in net unrealized appreciation (depreciation) on:
Investments (4,528,016)
Open futures contracts (892,945)
Open swap contracts 3,491,039
Written options (102,144)
Foreign currency, forward contracts and foreign
currency related transactions 725,741
-----------
Net unrealized loss (1,306,325)
-----------
Net realized and unrealized loss (4,761,961)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,898,757
===========
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA A FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 7,660,718 $ 13,927,844
Net realized loss (3,455,636) (4,990,111)
Change in net unrealized appreciation (depreciation) (1,306,325) (6,000,013)
------------ ------------
Net increase in net assets from operations 2,898,757 2,937,720
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (8,388,446) (2,920,291)
------------ ------------
Total distributions from net investment income (8,388,446) (2,920,291)
------------ ------------
Net realized gains
Class III (1,232,734) (5,164,180)
------------ ------------
Total distributions from net realized gains (1,232,734) (5,164,180)
------------ ------------
(9,621,180) (8,084,471)
------------ ------------
Net share transactions: (Note 5)
Class III (16,704,303) (79,536,376)
------------ ------------
Decrease in net assets resulting from net share
transactions (16,704,303) (79,536,376)
------------ ------------
Total decrease in net assets (23,426,726) (84,683,127)
NET ASSETS:
Beginning of period 143,702,899 228,386,026
------------ ------------
End of period (including accumulated undistributed
net investment income of $2,497,480 and $3,289,449,
respectively) $120,276,173 $143,702,899
============ ============
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA A FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
-----------------------------
2000 1999 1998*
-------- -------- ---------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.23 $ 10.60 $ 10.00
-------- -------- --------
Income from investment operations:
Net investment income 0.62+ 0.64+ 0.55+
Net realized and unrealized gain (loss) (0.40) (0.58) 0.66
-------- -------- --------
Total from investment operations 0.22 0.06 1.21
-------- -------- --------
Less distributions to shareholders:
From net investment income (0.70) (0.12) (0.27)
From net realized gains (0.11) (0.31) (0.34)
-------- -------- --------
Total distributions (0.81) (0.43) (0.61)
-------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 9.64 $ 10.23 $ 10.60
======== ======== ========
TOTAL RETURN(a) 2.26% 0.44% 12.16%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $120,276 $143,703 $228,386
Net operating expenses to average daily net
assets 0.40% 0.40% 0.40%**
Interest expense to average daily net assets 0.01% -- --
Total net expenses to average daily net assets 0.41%(b) -- --
Net investment income to average daily net
assets 6.19% 5.97% 6.05%**
Portfolio turnover rate 40% 113% 58%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following per
share amounts: $ 0.01 $ 0.03 $ 0.02
</TABLE>
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(b) Interest expense incurred as a result of entering into reverse repurchse
agreements is included in the Fund's net expenses. Income earned on
investing proceeds from reverse repurchase agreements is included in
interest income.
+ Calculated using average shares outstanding throughout the period.
++ Not annualized.
* For the period from April 30, 1997 (commencement of operations) to February
28, 1998.
** Annualized.
See accompanying notes to the financial statements. 9
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA A FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO U.S. Bond/Global Alpha A Fund (the "Fund") is a series of GMO Trust
(the "Trust"). The Fund is registered under the Investment Company Act of
1940, as amended, as an open-end, non-diversified management investment
company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo &
Co. LLC (the "Manager" or "GMO"). The Trust was established as a
Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series of shares
into classes.
The Fund seeks a high total return relative to its performance benchmark
through investment in U.S. investment grade securities. The Fund achieves
exposure to international bond and currency markets by investing in a
combination of foreign bond and currency derivatives, effectively adding
to or subtracting from the U.S. bond return the performance of the Funds
international bond and currency investments. The Funds benchmark is the
Lehman Brothers Aggregate Bond Index.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of the financial statements
in accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost
which approximates market value. Securities for which quotations are not
readily available are valued at fair value as determined in good faith by
the Trustees or other persons acting at their direction.
Some fixed income securities and options thereon are valued at the closing
bid for such securities as supplied by a primary pricing source chosen by
the Manager. The Manager evaluates such primary pricing sources on an
ongoing basis, and may change a pricing source should it deem it
appropriate.
10
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA A FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
The Manager is informed of erratic or unusual movements (including unusual
inactivity) in the prices supplied for a security and at its discretion
may override a price supplied by a source (by taking a price supplied by
another source).
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from
yield data relating to investments or securities with similar
characteristics.
Certain securities held by the Fund were valued on the basis of a price
provided by a principal market maker. The prices provided by the principal
market makers may differ from the value that would be realized if the
securities were sold and the differences could be material to the
financial statements.
At February 29, 2000, the total value of these securities represented 44%
of net assets. Included in this total are U.S. Government backed
securities and highly rated collateralized debt obligations that represent
38% of net assets at February 29, 2000.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at current exchange rates when accrued
or incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign currency contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FUTURES CONTRACTS
The Fund may use futures contracts to manage its exposure to the bond and
currency markets. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments.
Upon entering into a futures contract, the Fund is required to deposit
with its custodian, in a segregated account in the name of the futures
broker, an amount of cash or U.S. government and agency obligations in
accordance with the initial margin requirements of the broker or exchange.
Futures contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. Gains or losses are recognized but
11
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA A FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
not considered realized until the contracts expire or are closed. Futures
contracts involve, to varying degrees, risk of loss in excess of the
variation margin disclosed in the Statement of Assets and Liabilities.
Losses may arise from the changes in the value of the underlying
instrument, if there is an illiquid secondary market for the contracts, or
if counterparties do not perform under the contract terms. Futures
contracts are valued at the settlement price established each day by the
board of trade or exchange on which they are traded. See Note 6 for all
open futures contracts as of February 29, 2000
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or
all of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency
contracts are marked to market daily and the change in value is recorded
by the Fund as an unrealized gain or loss. Realized gains or losses equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed are recorded upon delivery
or receipt of the currency or, if a forward currency contract is offset by
entering into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market
risk in excess of the unrealized gain or loss reflected in the Fund's
Statement of Assets and Liabilities. In addition, the Fund could be
exposed to risk if the counterparties are unable to meet the terms of the
contracts or if the value of the currency changes unfavorably to the U.S.
dollar. The U.S. dollar value of the currencies the Fund has committed to
buy or sell is shown under Note 6 and represents the currency exposure the
Fund has acquired or hedged through currency contracts as of February 29,
2000.
OPTIONS
The Fund may write call and put options on securities or currencies it
owns or in which it may invest. Writing put options tends to increase the
Funds exposure to the underlying instrument. Writing call options tends to
decrease the Funds exposure to the underlying instrument. When the Fund
writes a call or put option, an amount equal to the premium received is
recorded as a liability and subsequently marked to market to reflect the
current value of the option written. Premiums received from writing
options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
added to the proceeds or offset against amounts paid on the underlying
future, security or currency transaction to determine the realized gain or
loss. The Fund as a writer of an option has no control over whether the
underlying future, security or currency may be sold (call) or purchased
(put) and as a result bears the market risk of an unfavorable change in
the price of the future, security or currency underlying
12
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA A FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
the written option. There is the risk the Fund may not be able to enter
into a closing transaction because of an illiquid market. At February 29,
2000, the Fund had no written option contracts outstanding.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. The risk associated with purchasing put and call options is
limited to the premium paid. Premiums paid for purchasing options which
are exercised or closed are added to the amounts paid or offset against
the proceeds on the underlying future, security or currency transaction to
determine the realized gain or loss.
LOAN AGREEMENTS
The Fund may invest in direct debt instruments which are interests in
amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates. The Fund's investments in loans may be in the form of
participations in loans or assignments of all or a portion of loans from
third parties. A loan is often administered by a bank or other financial
institution (the "lender") that acts as agent for all holders. The agent
administers the terms of the loan, as specified in the loan agreement.
When investing in a loan participation, the Fund has the right to receive
payments of principal, interest and any fees to which it is entitled only
from the lender selling the loan agreement and only upon receipt by the
lender of payments from the borrower. The Fund generally has no right to
enforce compliance with the terms of the loan agreement with the borrower.
As a result, the Fund may be subject to the credit risk of both the
borrower and the lender that is selling the loan agreement. When the Fund
purchases assignments from lenders it acquires direct rights against the
borrower on the loan. Direct indebtedness of emerging countries involves a
risk that the governmental entities responsible for the repayment of the
debt may be unable or unwilling to pay the principal and interest when
due.
INDEXED SECURITIES
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to
increase or decrease its exposure to different underlying instruments and
to gain exposure to markets that may be difficult to invest in through
conventional securities. Indexed securities may be more volatile than
their underlying instruments, but any loss is limited to the amount of the
original investment.
13
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA A FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SWAP AGREEMENTS
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into interest rate, total return and credit
default swap agreements to manage its exposure to interest rates and
credit risk. Interest rate swap agreements involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. Total return swap
agreements involve commitments to pay interest in exchange for a
market-linked return, both based on notional amounts. To the extent the
total return of the security or index underlying the transaction exceeds
or falls short of the offsetting interest rate obligation, the Fund will
receive a payment from or make a payment to the counterparty. Credit
default swaps involve the payment of a specified rate based on the
notional amount. The Fund receives payment upon a default of the
underlying security. In connection with these agreements, cash or
securities may be set aside as collateral by the Fund's custodian in
accordance with the terms of the swap agreement. The Fund earns interest
on cash set aside as collateral, which is paid by the counterparty. At
February 29, 2000, $2,558,083 in cash has been set aside. Swaps are marked
to market daily based upon quotations from market makers and the change,
if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations. Net
payments of interest on interest rate swap agreements are included as part
of interest income. Entering into these agreements involves, to varying
degrees, elements of credit and market risk in excess of the amounts
recognized on the Statement of Assets and Liabilities. Such risks involve
the possibility that there will be no liquid market for these agreements,
that the counterparty to the agreements may default on its obligation to
perform and that there may be unfavorable changes in the fluctuation of
interest rates. See Note 6 for a summary of open swap agreements as of
February 29, 2000.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, realization of collateral by the Fund may be delayed or
limited.
14
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA A FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements with certain banks
and broker/dealers whereby the Fund sells portfolio assets concurrent with
an agreement by the Fund to repurchase the same assets at a later date at
a fixed price. In connection with these agreements, the Fund establishes
segregated accounts with its custodian in which the Fund maintains cash,
U.S. Government securities or other liquid high grade debt obligations in
the name of the counterparty equal in value to its obligations in respect
of reverse repurchase agreements. Reverse repurchase agreements involve
the risk that the market value of the securities the Fund has sold may
decline below the contractual repurchase price under the agreement. During
the year ended February 29, 2000, the Fund had entered into reverse
repurchase agreements with an average balance outstanding of $2,145,200
and an average interest rate of 5.69%. The maximum balance outstanding was
$2,955,000. The average shares outstanding were 12,418,901 and the average
balance per share outstanding was $0.17. Average balance outstanding was
calculated based on daily balances outstanding during the period the Fund
had entered into reverse repurchase agreements. At February 29, 2000,
there were no open reverse repurchase agreements.
DELAYED DELIVERY COMMITMENTS
The Fund may purchase or sell securities on a when-issued or forward
commitment basis. Payment and delivery may take place a month or more
after the date of the transaction. The price of the underlying securities
and the date when the securities will be delivered and paid for are fixed
at the time the transaction is negotiated. Collateral consisting of liquid
securities or cash and cash equivalents is maintained in an amount at
least equal to these commitments with the custodian.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of delay in
recovery or even loss of rights in the collateral should the borrower fail
financially. The Fund receives compensation for lending its securities. At
February 29, 2000, the Fund had no securities on loan.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary.
15
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA A FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to Section 988 gains.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable income and capital gains under U.S.
federal tax rules versus accounting principles generally accepted in the
United States. The calculation of net investment income per share in the
financial highlights excludes these adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
<S> <C> <C>
$(64,241) $55,818 $(8,423)
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis and is adjusted for the accretion of
discounts. Dividend income is recorded on the ex-dividend date. In
determining the net gain or loss on securities sold, the cost of
securities is determined on the identified cost basis. Interest income on
U.S. Treasury inflation indexed securities is accrued daily based upon an
inflation adjusted principal. Additionally, any increase in principal or
face amount of these securities is recorded as interest income.
16
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA A FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is .15% of the amount
invested. The premium will be reduced by 50% with respect to any portion
of a purchase that is offset by a corresponding redemption occurring on
the same day. In addition, the purchase premium for the Fund will be
reduced by 50% if the purchaser makes an in-kind purchase of Fund shares
or if the purchase or redemption is part of a transfer from or to another
Fund where the Manager is able to transfer securities among the Funds to
effect the transaction. All purchase premiums are paid to and recorded by
the Fund as paid-in capital. For the year ended February 29, 2000, the
Fund received $22,790 in purchase premiums. There is no premium for
redemptions or reinvested distributions.
INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments,
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets. The risks described above apply to an even greater
extent to investments in emerging markets. The securities markets of
emerging countries are generally smaller, less developed, less liquid, and
more volatile than the securities markets of the U.S. and developed
foreign markets.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .25% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding brokerage commissions, certain other transaction costs
(including transfer taxes), shareholder service fees and extraordinary
expenses) exceed the management fee.
17
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA A FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
Prior to March 1, 1999, GMO earned a management fee at the annual rate of
.40% of average daily net assets. GMO had agreed to waive a portion of its
fee and bear other expenses to the extent that the Fund's annual expenses
(including the management fee but excluding brokerage commissions, certain
other transaction costs (including transfer taxes and interest expense),
shareholder service fees and extraordinary expenses) exceeded .25% of
average daily net assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000 was $1,221. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
For the year ended February 29, 2000 cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Sales
----------- -----------
<S> <C> <C>
U.S. Government securities $ 9,509,375 $ --
Investments (non-U.S. Government securities) 45,883,406 65,644,935
</TABLE>
At February 29, 2000 the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
$134,506,675 $764,301 $(9,045,330) $(8,281,029)
</TABLE>
4. PRINCIPAL SHAREHOLDERS
At February 29, 2000, 45.29% of the outstanding shares of the Fund were
held by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
18
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA A FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
------------------------ -------------------------
Shares Amount Shares Amount
Class III: ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Shares sold 1,559,385 $ 15,511,210 7,957,888 $ 84,927,873
Shares issued to shareholders
in reinvestment of distributions 681,181 6,580,233 596,366 6,299,415
Shares repurchased (3,816,348) (38,795,746) (16,055,030) (170,763,664)
---------- ------------ ----------- ------------
Net decrease (1,575,782) $(16,704,303) (7,500,776) $(79,536,376)
========== ============ =========== ============
</TABLE>
19
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA A FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 29, 2000 is as
follows:
FORWARD CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
---------- --------------- ----------------- ------------- --------------
<S> <C> <C> <C> <C>
Buys
3/10/00 CAD 18,800,000 $12,959,827 $ 175,060
3/23/00 EUR 9,200,000 8,872,572 (326,213)
3/03/00 GBP 9,400,000 14,839,601 (233,691)
4/21/00 JPY 10,000,000 91,858 936
---------
$(383,908)
=========
Sales
4/28/00 AUD 5,800,000 $ 3,564,697 $ 67,698
3/10/00 CAD 2,200,000 1,516,575 4,660
3/23/00 EUR 8,300,000 8,004,603 352,845
3/03/00 GBP 9,400,000 14,839,602 211,738
5/05/00 GBP 4,000,000 6,314,136 3,244
4/21/00 JPY 570,000,000 5,235,883 62,106
---------
$ 702,291
=========
</TABLE>
FORWARD CROSS CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Net Unrealized
Settlement Appreciation
Date Deliver/Units of Currency Receive/In Exchange For (Depreciation)
---------- -------------------------- ------------------------ --------------
<S> <C> <C> <C>
4/14/00 CHF 12,999,488 EUR 8,100,000 (5,274)
4/14/00 EUR 2,400,000 CHF 3,849,528 255
4/07/00 SEK 19,726,755 EUR 2,300,000 (34,509)
--------
$(39,528)
========
</TABLE>
20
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA A FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
<TABLE>
<CAPTION>
Net Unrealized
Number of Expiration Contract Appreciation
Contracts Type Date Value (Depreciation)
--------- ------------------------------------ -------------- ------------- --------------
<C> <S> <C> <C> <C>
Buys
5 Australian Government Bond 10 Yr. March 2000 $ 425,312 $ 12,252
9 Australian Government Bond 3 Yr. March 2000 634,939 (3,321)
20 Canadian Government Bond 10 Yr. June 2000 1,357,409 3,690
9 Japanese Government Bond 10 Yr. March 2000 10,827,363 (3,618)
208 Swiss Government Bond 10 Yr. March 2000 14,748,502 (262,423)
---------
$(253,420)
=========
Sales
42 Euro Bund 10 Yr. March 2000 $ 4,194,177 $ 15,646
9 Japanese Government Bond 10 Yr. March 2000 10,824,086 600
10 Japanese Government Bond 10 Yr. June 2000 11,908,425 1,947
48 U.K. Gilt 10 Yr. June 2000 8,463,634 47,903
45 U.S. Treasury Bond 20 Yr. June 2000 4,260,938 20,574
250 U.S. Treasury Note 10 Yr. June 2000 23,847,656 49,157
55 U.S. Treasury Note 5 Yr. June 2000 5,340,156 (41,494)
---------
$ 94,333
=========
</TABLE>
February 29, 2000, the Fund has sufficient cash and/or securities to cover
any commitments or margin on these contracts.
21
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA A FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
WRITTEN OPTION TRANSACTIONS
<TABLE>
<CAPTION>
Puts Calls
Principal Amount Principal Amount
of Contracts of Contracts
(000's omitted) Premiums (000's omitted) Premiums
---------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period 5,600 $ 352,464 5,600 $ 420,000
Options written -- -- -- --
Options closed -- -- -- --
Options exercised (5,600) (352,464) -- --
Options expired -- -- (5,600) (420,000)
Options sold -- -- -- --
------- ---------- ------- ----------
Outstanding, end of period -- $ -- -- $ --
======= ========== ======= ==========
</TABLE>
SWAP AGREEMENTS
<TABLE>
<CAPTION>
Net Unrealized
Notional Amount Appreciation
Fund Expiration Date Description (Depreciation)
-------------------------- --------------- -------------------------------------------------- --------------
<C> <C> <S> <C>
CREDIT DEFAULT SWAPS
378,000,000,000 ITL 3/31/03 Agreement with Morgan Guaranty Trust Company dated $ (206,417)
3/26/98 to pay .07% per year times the notional
amount. The Fund receives payment only upon a
default event in Italy, the notional amount times
the difference between the par value and the
then-market value of Italy BTP, 6.00% due
11/01/07.
</TABLE>
22
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA A FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<TABLE>
<CAPTION>
Net Unrealized
Notional Amount Appreciation
Fund Expiration Date Description (Depreciation)
-------------------------- --------------- -------------------------------------------------- --------------
<C> <C> <S> <C>
7,922,250,000 BEF 3/31/03 Agreement with Morgan Guaranty Trust Company dated $ (244,309)
3/26/98 to pay .07% per year times the notional
amount. The Fund receives payment only upon a
default event in Belgium, the notional amount
times the difference between the par value and the
then-market value of Kingdom of Belgium, 5.75% due
3/28/08.
INTEREST RATE SWAPS
11,200,000 CHF 6/05/05 Agreement with Morgan Guaranty Trust Company dated 173,254
6/03/98 to pay the notional amount multiplied by
3.245% and to receive the notional amount
multiplied by 6 month Floating Rate Swiss LIBOR
adjusted by a specified spread.
15,000,000 CHF 6/10/05 Agreement with Credit Suisse Financial Products 228,871
dated 6/08/98 to pay the notional amount
multiplied by 3.2625% and to receive the notional
amount multiplied by 6 month Floating Rate Swiss
LIBOR adjusted by a specified spread.
</TABLE>
23
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA A FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<TABLE>
<CAPTION>
Net Unrealized
Notional Amount Appreciation
Fund Expiration Date Description (Depreciation)
-------------------------- --------------- -------------------------------------------------- --------------
<C> <C> <S> <C>
19,200,000 CHF 6/10/05 Agreement with Credit Suisse Financial Products 539,465
dated 10/01/98 to pay the notional amount
multiplied by 3.2625% and to receive the notional
amount multiplied by 6 month Floating Rate Swiss
LIBOR adjusted by a specified spread.
10,600,000 CHF 6/11/05 Agreement with Morgan Guaranty Trust Company dated $ 167,412
6/09/98 to pay the notional amount multiplied by
3.245% and to receive the notional amount
multiplied by 6 month Floating Rate Swiss LIBOR
adjusted by a specified spread.
3,300,000 CHF 9/16/05 Agreement with Morgan Guaranty Trust Company dated 69,452
9/14/98 to pay the notional amount multiplied by
3.1175% and to receive the notional amount
multiplied by 6 month Floating Rate Swiss LIBOR
adjusted by a specified spread.
14,000,000 USD 7/29/06 Agreement with Morgan Guaranty Trust Company dated (496,511)
7/27/99 to receive the notional amount multiplied
by 6.664% and to pay the notional amount
multiplied by 3 month LIBOR adjusted by a
specified spread.
</TABLE>
24
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA A FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
Net Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
-------------------------- ---------- -------------------------------------------------- --------------
<C> <C> <S> <C>
14,000,000 SEK 9/13/06 Agreement with UBS AG dated 9/09/99 to receive the $ 6,486
notional amount multiplied by 6.465% and to pay
the notional amount multiplied by 3 month Floating
Rate Swedish LIBOR adjusted by a specified spread.
TOTAL RETURN SWAPS
75,000,000 USD 11/12/00 Agreement with Morgan Guaranty Trust Company dated 678,995
11/09/98 to receive (pay) the notional amount
multiplied by the return on the Lehman Aggregate
Index and to pay the notional amount multiplied by
3 month LIBOR adjusted by a specified spread.+
9,838,021 USD/
10,000,000 USD 2/25/01 Agreement with UBS AG dated 1/12/00 to receive 28,889
(pay) the notional amount multiplied by the change
in market value (including accrued interest) of
Federal National Mortgage Association TBA 30 Year
7.50% and to pay the initial market value
multiplied by 1 month LIBOR adjusted by a
specified spread.
-----------
$ 945,587
===========
</TABLE>
See Notes to Schedule of Investments for definitions of currency
abbreviations.
+ This swap agreement is valued by management (Note 1).
25
<PAGE>
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
The Fund has elected to defer to March 1, 2000 post October losses of
$303,603.
At February 29, 2000, the Fund had a capital loss carryforward available
to offset future capital gains, if any, of the following amount:
<TABLE>
<CAPTION>
Year of Expiration Amount
------------------ ----------
<S> <C>
2008 $1,396,650
</TABLE>
26
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA A FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Mr. William L. Nemerever and Mr. Thomas F. Cooper are primarily responsible for
the day-to-day management of the Fund's portfolio. Each of these individuals has
been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO U.S. Bond/Global Alpha A Fund returned 2.3% for
the fiscal year ended February 29, 2000, compared to 1.1% for the Lehman
Brothers Aggregate Bond Index. Consistent with the Fund's investment objectives
and policies, the Fund was substantially invested in investment-grade, foreign
and domestic fixed income instruments throughout the period. Although the Fund
is benchmarked against a domestic bond index, the value added is derived from
global bond and currency strategies.
The Fund outperformed the benchmark during the fiscal year by 1.2%. Currency and
emerging country debt selection added value during the fiscal year, while bond
market and issue selection were negative and reduced portfolio return. Long bond
yields increased by 20 to 200 basis points in developed countries, except in
Japan where yields declined by 60 basis points. Other than in Japan, bond market
returns were negative across the international bond universe. The U.S. dollar
appreciated against European currencies, but declined against the Japanese yen,
Canadian dollar and Australian dollar.
Bond market selection during the fiscal year was hurt by an underweight position
in Japanese bonds. These losses were offset to some extent by returns on an
underweight position in Swiss bonds. Currency selection added modest value
during the fiscal year. An overweight position in Canadian dollars and
underweight positions in Japanese yen and Swiss francs added value, but were
offset to some extent by losses on an overweight position in British pounds.
Emerging country debt exposure added more than 250 basis points during the
fiscal year, with much of it concentrated in the second half of the fiscal year.
Sovereign spreads on the J.P. Morgan Emerging Markets Bond Index Plus declined
from 1330 to end the fiscal year at 816 basis points.
OUTLOOK
The Fund is structured to benefit from outperformance in the Australian,
Canadian, EMU member countries, New Zealand, Swedish, U.S. and emerging bond
markets. We expect the Danish, Japanese, Swiss and British bond markets to
underperform. Our strategy maintains a market duration in each country. Strong
relative performance is expected from Canadian dollars, Euros and Swiss francs.
The Australian dollar, Danish krone, Japanese yen, Swedish krona, British pound
and U.S. dollar are expected to underperform.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO &
CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
<TABLE>
<CAPTION>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO U.S. BOND/GLOBAL ALPHA A FUND CLASS III SHARES AND THE
LEHMAN BROTHERS AGGREGATE BOND INDEX
AS OF FEBRUARY 29, 2000
Average Annual Total Returns
Inception 4/30/97
1yr 5yr 10yr (ITD)
<S> <C> <C>
2.1 N/A 5.06
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
Date GMO US Bond/Global Alpha A Fund-III Lehman Brothers Aggregate Bond
<S> <C> <C>
4/30/97 9985 10000
6/30/97 10235 10214
9/30/97 10754 10554
12/31/97 11178 10864
3/31/98 11315 11033
6/30/98 11453 11285
9/30/98 11626 11762
12/31/98 11611 11802
3/31/99 11336 11743
6/30/99 11270 11640
9/30/99 11259 11719
12/31/99 11335 11705
2/29/00 11502 11807
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The total returns would have been lower had certain expenses
not been reimbursed during the periods shown and do not include the effect of
taxes. Each performance figure assumes purchase at the beginning and
redemption at the end of the stated period and reflects a transaction fee of
15 bp on the purchase. Transaction fees are retained by the Fund to cover
trading costs. Past performance is not indicative of future performance.
Information is unaudited.
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA B FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO U.S. BOND/GLOBAL ALPHA B FUND (A SERIES OF GMO TRUST)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO U.S. Bond/Global Alpha B Fund
at February 29, 2000, the results of its operations, the changes in its net
assets and the financial highlights for each of the periods indicated therein,
in conformity with accounting principles generally accepted in the United
States. These financial statements and financial highlights (hereafter referred
to as "financial statements") are the responsibility of the Trust's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at February 29, 2000 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 13, 2000
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA B FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE DESCRIPTION VALUE ($)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEBT OBLIGATIONS -- 15.7%
BRAZIL -- 1.3%
USD 10,000,000 Brazil Discount Bond, Principal Strip, 0.00%, due
04/15/24(a) 1,992,001
-----------
BULGARIA -- 0.6%
USD 5,000,000 Bulgaria Discount Strips, 0.00%, due 07/28/24(a) 982,612
-----------
CAYMAN ISLANDS -- 2.2%
CAD 1,000,000 Government of Canada (Cayman), 7.25%, due 06/01/08 716,747
USD 3,000,000 Pemex Finance Ltd. Series 1A1 Class A2, 144A,
6.30%, due 05/15/10 2,676,000
-----------
3,392,747
-----------
CHILE -- 0.4%
USD 750,000 Banco Santander, Series MBIA, 6.50%, due 11/01/05 700,125
-----------
SWEDEN -- 0.2%
SEK 2,500,000 Kingdom of Sweden, 6.00%, due 02/09/05 288,668
-----------
UNITED STATES -- 11.0%
U.S. GOVERNMENT -- 2.5%
USD 10,100,000 U.S. Treasury 0.00% Receipts, due 08/15/13(a) 3,956,225
-----------
U.S. GOVERNMENT AGENCY -- 8.5%
USD 4,000,000 Federal Home Loan Bank, Variable Rate, CPI +
3.15%, 5.59%, due 02/15/02(b) 3,892,360
USD 10,000,000 Government National Mortgage Association, TBA,
7.00% 9,571,875
-----------
13,464,235
-----------
TOTAL UNITED STATES 17,420,460
-----------
TOTAL DEBT OBLIGATIONS (COST $25,734,215) 24,776,613
-----------
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA B FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
MUTUAL FUND -- 88.8%
5,551,640 GMO Alpha Libor Fund (c) 140,400,980
-----------
TOTAL MUTUAL FUND (COST $138,809,202) 140,400,980
-----------
<CAPTION>
PRINCIPAL
AMOUNT
-------------
<S> <C> <C> <C>
CALL OPTIONS PURCHASED -- 0.0%
OPTIONS ON CURRENCY -- 0.0%
USD 5,712,000 Euro, Expires 5/03/00, Strike 1.12 1,142
-----------
OPTIONS ON FUTURES -- 0.0%
USD 480,000 Eurodollar, Expires 3/13/00, Strike 93.75 26,400
-----------
TOTAL CALL OPTIONS PURCHASED (COST $141,109) 27,542
-----------
PUT OPTIONS PURCHASED -- 0.3%
CROSS CURRENCY OPTIONS -- 0.0%
EUR 10,200,000 Euro Put/Swiss Franc Call, Expires 6/05/00, Strike
1.58485 14,731
-----------
OPTIONS ON CURRENCY -- 0.3%
USD 5,457,000 Euro, Expires 5/03/00, Strike 1.07 481,853
-----------
TOTAL PUT OPTIONS PURCHASED (COST $230,781) 496,584
-----------
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA B FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE DESCRIPTION VALUE ($)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS -- 0.9%
COMMERCIAL PAPER -- 0.8%
USD 1,200,000 Koch Industries Inc., 5.83%, due 3/01/00 1,200,000
-----------
REPURCHASE AGREEMENT -- 0.1%
USD 227,254 Salomon Smith Barney Inc. Repurchase Agreement,
dated 2/29/00, due 3/1/00, with a maturity value
of $227,285 and an effective yield of 4.95%,
collateralized by a U.S. Treasury Obligation with
a rate of 8.125%, maturity date of 8/15/19 and
market value, including accrued interest, of
$231,799. 227,254
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $1,427,254) 1,427,254
-----------
TOTAL INVESTMENTS -- 105.7%
(Cost $166,342,561) 167,128,973
Other Assets and Liabilities (net) -- (5.7%) (8,975,439)
-----------
TOTAL NET ASSETS -- 100.0% $158,153,534
===========
</TABLE>
See accompanying notes to the financial statements.
3
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA B FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
NOTES TO THE SCHEDULE OF INVESTMENTS:
144A - Securities exempt from registration under rule 144A
of the Securities Act of 1933.
These securities may be resold in transactions exempt
from registration, normally to qualified institutional
investors.
CPI - Consumer Price Index
TBA - To Be Announced (Note 1)
Variable and Step up rates - The rates shown on variable and
step up rate notes are the current
interest rates at February 29, 2000, which are subject
to change based on the terms of the security, including
varying reset dates.
CURRENCY ABBREVIATIONS:
AUD - Australian Dollar
BEF - Belgian Franc
CAD - Canadian Dollar
CHF - Swiss Franc
EUR - Euro
GBP - British Pound
ITL - Italian Lira
JPY - Japanese Yen
SEK - Swedish Krona
USD - United States Dollar
(a) Valued by management (Note 1).
(b) All or a portion of this security has been segregated to cover margin
requirements on open financial futures contracts (Note 6).
(c) All or a portion of this security has been segregated to cover collateral
requirements on TBA obligations (Note 1).
4 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA B FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $166,342,561) (Note 1) $167,128,973
Cash at interest on deposit at brokers (Note 1) 434,093
Interest receivable 72,347
Receivable for variation margin on open futures contracts
(Notes 1 and 6) 9,949
Receivable for open swap contracts (Notes 1 and 6) 294,975
Receivable for expenses waived or borne by Manager (Note
2) 1,846
Miscellaneous receivable 67,114
------------
Total assets 168,009,297
------------
LIABILITIES:
Payable for forward commitment (Note 1) 9,509,375
Payable to affiliate for (Note 2):
Management fee 24,894
Shareholder service fee 18,669
Net payable for open forward foreign currency contracts
(Notes 1 and 6) 249,500
Interest payable for open swap contracts (Notes 1 and 6) 15,175
Accrued expenses 38,150
------------
Total liabilities 9,855,763
------------
NET ASSETS $158,153,534
============
NET ASSETS CONSIST OF:
Paid-in capital $166,646,324
Accumulated undistributed net investment income 624,162
Accumulated net realized loss (9,961,355)
Net unrealized appreciation 844,403
------------
$158,153,534
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $158,153,534
============
SHARES OUTSTANDING:
Class III 22,907,101
============
NET ASSET VALUE PER SHARE:
Class III $ 6.90
============
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA B FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest (including securities lending income of $1,973) $ 8,480,593
-----------
Total income 8,480,593
-----------
EXPENSES:
Management fee (Note 2) 317,901
Custodian and transfer agent fees 84,594
Audit fees 36,941
Interest expense (Notes 1 and 6) 13,589
Legal fees 5,527
Registration fees 2,078
Trustees fees (Note 2) 1,648
Miscellaneous 2,374
Fees waived or borne by Manager (Note 2) (133,162)
-----------
331,490
SHAREHOLDER SERVICE FEE (NOTE 2)
Class III 238,423
-----------
Net expenses 569,913
-----------
Net investment income 7,910,680
-----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (6,215,579)
Closed futures contracts 102,885
Closed swap contracts (3,903,958)
Written options 45,000
Foreign currency, forward contracts and foreign
currency related transactions (125,268)
-----------
Net realized loss (10,096,920)
-----------
Change in net unrealized appreciation (depreciation) on:
Investments 1,438,944
Open futures contracts 84,241
Open swap contracts 1,005,264
Written options (10,944)
Foreign currency, forward contracts and foreign
currency related transactions (136,130)
-----------
Net unrealized gain 2,381,375
-----------
Net realized and unrealized loss (7,715,545)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 195,135
===========
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA B FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 7,910,680 $ 10,596,718
Net realized gain (loss) (10,096,920) 514,377
Change in net unrealized appreciation (depreciation) 2,381,375 (2,439,559)
------------ --------------
Net increase in net assets from operations 195,135 8,671,536
------------ --------------
Distributions to shareholders from:
Net investment income
Class III (6,265,992) (15,078,084)
------------ --------------
Total distributions from net investment income (6,265,992) (15,078,084)
------------ --------------
In excess of net investment income
Class III -- (3,785,552)
------------ --------------
Total distributions in excess of net investment
income -- (3,785,552)
------------ --------------
Net realized gains
Class III -- (1,159,070)
------------ --------------
Total distributions from net realized gains -- (1,159,070)
------------ --------------
In excess of net realized gains
Class III -- (1,427,853)
------------ --------------
Total distributions in excess of net realized
gains -- (1,427,853)
------------ --------------
(6,265,992) (21,450,559)
------------ --------------
Net share transactions: (Note 5)
Class III 26,078,151 (229,679,318)
------------ --------------
Increase (decrease) in net assets resulting from net
share transactions 26,078,151 (229,679,318)
------------ --------------
Total increase (decrease) in net assets 20,007,294 (242,458,341)
NET ASSETS:
Beginning of period 138,146,240 380,604,581
------------ --------------
End of period (including accumulated undistributed
net investment income of $624,162 and distributions
in excess of net investment income of $873,945,
respectively) $158,153,534 $ 138,146,240
============ ==============
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA B FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
----------------------------------
2000 1999 1998**
-------- -------- --------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.18 $ 10.14 $ 10.00
-------- -------- --------
Income from investment operations:
Net investment income(a) 0.35+ 0.59+ 0.35+
Net realized and unrealized gain (loss) (0.34) (0.19) 0.06
-------- -------- --------
Total from investment operations 0.01 0.40 0.41
-------- -------- --------
Less distributions to shareholders:
From net investment income (0.29) (2.36)(b) (0.21)
In excess of net investment income -- (0.59)(b) --
From net realized gains -- (0.18) (0.06)
In excess of net realized gains -- (0.23) --
-------- -------- --------
Total distributions (0.29) (3.36) (0.27)
-------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 6.90 $ 7.18 $ 10.14
======== ======== ========
TOTAL RETURN(c) 0.27% 3.42% 4.15%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $158,154 $138,146 $380,605
Net operating expenses to average daily net
assets 0.35% 0.35% 0.35%*
Interest expense to average daily net assets 0.01% -- --
Total net expenses to average daily net assets 0.36%(d) 0.35% 0.35%*
Net investment income to average daily net
assets(a) 4.98% 5.96% 5.88%*
Portfolio turnover rate 94% 134% 27%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following per
share amounts: $ 0.01 $ 0.03 $ 0.02
</TABLE>
(a) Net investment income for the year ending February 29, 2000, is affected by
the timing of the declaration of dividends by other Funds of the Trust in
which the Fund invests.
(b) The amount shown for a share outstanding does not correspond with the
aggregate distributions to shareholders for the year ended February 28,
1999 due to the timing of purchases and redemptions of Fund shares in
relationto the declaration of distributions to shareholders.
(c) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(d) Interest expense incurred as a result of entering into reverse repurchase
agreements is included in the Fund's net expenses. Income earned on
investing proceeds from reverse repurchase agreements is included in
interest income.
+ Computed using average shares outstanding throughout the period.
++ Not annualized.
* Annualized.
** Period from July 29, 1997 (commencement of operations) to February 28,
1998.
8 See accompanying notes to the financial statements.
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA B FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO U.S. Bond/Global Alpha B Fund (the "Fund") is a series of GMO Trust
(the "Trust"). The Fund is registered under the Investment Company Act of
1940, as amended, as an open-end, non-diversified management investment
company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo &
Co. LLC (the "Manager" or "GMO"). The Trust was established as a
Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series of shares
into classes.
The Fund seeks a high total return relative to its performance benchmark
through investment in U.S. investment grade securities. The Fund achieves
exposure to international bond and currency markets by investing in a
combination of foreign bond and currency derivatives, effectively adding
to or subtracting from the U.S. bond return the performance of the Fund's
international bond and currency investments. The Fund's benchmark is the
Lehman Brothers Aggregate Bond Index.
At February 29, 2000, 88.8% of the Fund is invested in GMO Alpha Libor
Fund, a separate fund of GMO Trust managed by GMO. Alpha Libor invests
primarily in relatively high quality, low volatility fixed income
securities.
The financial statements of the GMO Alpha Libor Fund should be read in
conjunction with the Fund's financial statements.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of the financial statements
in accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost
which
9
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA B FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
approximates market value. Shares of other Funds of the Trust are valued
at their net asset value as reported on each business day. Securities for
which quotations are not readily available are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction.
Some fixed income securities and options thereon are valued at the closing
bid for such securities as supplied by a primary pricing source chosen by
the Manager. The Manager evaluates such primary pricing sources on an
ongoing basis, and may change a pricing source should it deem it
appropriate. The Manager is informed of erratic or unusual movements
(including unusual inactivity) in the prices supplied for a security and
at its discretion may override a price supplied by a source (by taking a
price supplied by another source).
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from
yield data relating to investments or securities with similar
characteristics.
Certain securities held by the Fund were valued on the basis of a price
provided by a principal market maker. The prices provided by the principal
market makers may differ from the value that would be realized if the
securities were sold and the differences could be material to the
financial statements.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at current exchange rates when accrued
or incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign currency contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FUTURES CONTRACTS
The Fund may use futures contracts to manage its exposure to the bond and
currency markets. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments.
Upon entering into a futures contract, the Fund is required to deposit
with its custodian, in a segregated account in the name of the futures
broker, an amount of cash or U.S. government and
10
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA B FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
agency obligations in accordance with the initial margin requirements of
the broker or exchange. Futures contracts are marked to market daily and
an appropriate payable or receivable for the change in value ("variation
margin") is recorded by the Fund. Gains or losses are recognized but not
considered realized until the contracts expire or are closed. Futures
contracts involve, to varying degrees, risk of loss in excess of the
variation margin disclosed in the Statement of Assets and Liabilities.
Losses may arise from the changes in the value of the underlying
instrument, if there is an illiquid secondary market for the contracts, or
if counterparties do not perform under the contract terms. Futures
contracts are valued at the settlement price established each day by the
board of trade or exchange on which they are traded. See Note 6 for all
open futures contracts as of February 29, 2000.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or
all of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency
contracts are marked to market daily and the change in value is recorded
by the Fund as an unrealized gain or loss. Realized gains or losses equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed are recorded upon delivery
or receipt of the currency or, if a forward currency contract is offset by
entering into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market
risk in excess of the unrealized gain or loss reflected in the Fund's
Statement of Assets and Liabilities. In addition, the Fund could be
exposed to risk if the counterparties are unable to meet the terms of the
contracts or if the value of the currency changes unfavorably to the U.S.
dollar. The U.S. dollar value of the currencies the Fund has committed to
buy or sell is shown under Note 6 and represents the currency exposure the
Fund has acquired or hedged through currency contracts as of February 29,
2000.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying
instrument. When the Fund writes a call or put option, an amount equal to
the premium received is recorded as a liability and subsequently marked to
market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
added to the proceeds or offset against the amounts paid on the underlying
future, security or currency transaction to determine the realized gain or
loss. The Fund as a writer of an option has no control over whether the
underlying future,
11
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA B FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
security or currency may be sold (call) or purchased (put) and as a result
bears the market risk of an unfavorable change in the price of the future,
security or currency underlying the written option. There is the risk the
Fund may not be able to enter into a closing transaction because of an
illiquid market. At February 29, 2000 the Fund had no open written option
contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. The risk associated with purchasing put and call options is
limited to the premium paid. Premiums paid for purchasing options which
are exercised or closed are added to the amounts paid or offset against
the proceeds on the underlying future, security or currency transaction to
determine the realized gain or loss.
INDEXED SECURITIES
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to
increase or decrease its exposure to different underlying instruments and
to gain exposure to markets that may be difficult to invest in through
conventional securities. Indexed securities may be more volatile than
their underlying instruments, but any loss is limited to the amount of the
original investment.
SWAP AGREEMENTS
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into interest rate, total return and credit
default swap agreements to manage its exposure to interest rates and
credit risk. Interest rate swap agreements involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. Total return swap
agreements involve commitments to pay interest in exchange for a market
linked return, both based on notional amounts. To the extent the total
return of the security or index underlying the transaction exceeds or
falls short of the offsetting interest rate obligation, the Fund will
receive a payment from or make a payment to the counterparty. Credit
default swaps involve the payment of a specified rate based on the
notional amount. The Fund receives payment upon a default of the
underlying security. In connection with these agreements, cash or
securities may be set aside as collateral by the Fund's custodian in
accordance with the terms of the swap agreement. The Fund earns interest
on cash set aside as collateral, which is paid by the counterparty. At
February 29, 2000, $434,093 in cash has been set aside. Swaps are marked
to market daily based upon quotations from market makers and the change,
if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments
12
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA B FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
received or made at the end of the measurement period are recorded as
realized gain or loss in the Statement of Operations. Net payments of
interest on interest rate swap agreements are included as part of interest
income. Entering into these agreements involves, to varying degrees,
elements of credit and market risk in excess of the amounts recognized on
the Statement of Assets and Liabilities. Such risks involve the
possibility that there will be no liquid market for these agreements, that
the counterparty to the agreements may default on its obligation to
perform and that there may be unfavorable changes in the fluctuation of
interest rates. See Note 6 for a summary of open swap agreements as of
February 29, 2000.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, realization of collateral by the Fund may be delayed or
limited.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements with certain banks
and broker/dealers whereby the Fund sells portfolio assets concurrent with
an agreement by the Fund to repurchase the same assets at a later date at
a fixed price. In connection with these agreements, the Fund establishes
segregated accounts with its custodian in which the Fund maintains cash,
U.S. Government securities or other liquid high grade debt obligations in
the name of the counterparty equal in value to its obligations in respect
of reverse repurchase agreements. Reverse repurchase agreements involve
the risk that the market value of the securities the Fund was sold may
decline below the contractual repurchase price under the agreement. During
the year ended February 29, 2000, the Fund had entered into reverse
repurchase agreements with an average balance outstanding of $1,949,000
and an average interest rate of 5.70%. The maximum balance outstanding was
$1,949,000. The average shares outstanding were 21,989,122 and the average
balance per share outstanding was $0.09. Average balance outstanding was
calculated based on daily balances outstanding during the period that the
Fund had entered into reverse repurchase agreements. At February 29, 2000,
the Fund had no open reverse repurchase agreements.
13
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA B FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
DELAYED DELIVERY COMMITMENTS
The Fund may purchase or sell securities on a when-issued or forward
commitment basis. Payment and delivery may take place a month or more
after the date of the transaction. The price of the underlying securities
and the date when the securities will be delivered and paid for are fixed
at the time the transaction is negotiated. Collateral consisting of liquid
securities or cash and cash equivalents is maintained in an amount at
least equal to these commitments with the custodian.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of delay in
recovery or even loss of rights in the collateral should the borrower fail
financially. The Fund receives compensation for lending its securities. At
February 29, 2000, the Fund had no securities on loan.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to section 988 gains.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable
14
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA B FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
income and capital gains under U.S. federal tax rules versus accounting
principles generally accepted in the United States. The calculation of net
investment income per share in the financial highlights excludes these
adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
<S> <C> <C>
$(146,581) $146,987 $(406)
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis and is adjusted for the accretion of
discounts. Dividend income is recorded on the ex-dividend date. In
determining the net gain or loss on securities sold, the cost of
securities is determined on the identified cost basis. Interest income on
U.S. Treasury inflation indexed securities is accrued daily based upon an
inflation adjusted principal. Additionally, any increase in principal or
face amount of these securities is recorded as interest income.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is .15% of the amount
invested. The premium will be reduced by 50% with respect to any portion
of a purchase that is offset by a corresponding redemption occurring on
the same day. In addition, the purchase premium for this Fund will be
reduced by 50% if the purchaser makes an in-kind purchase of Fund shares
or if the purchase or redemption is part of a transfer from or to another
Fund where the Manager is able to transfer securities among the Funds to
effect the transaction. All purchase premiums are paid to and recorded by
the Fund as paid-in capital. For the year ended February 29, 2000, the
Fund received $45,205 in purchase premiums. There is no premium for
redemptions or reinvested distributions.
15
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA B FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments,
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .20% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting, and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding brokerage commissions, certain other transaction costs
(including transfer taxes), shareholder service fees and extraordinary
expenses) exceed the management fee.
Prior to March 1, 1999, GMO earned a management fee at an annual rate of
.40% of average daily net assets. GMO had agreed to waive a portion of its
fee and bear other expenses to the extent that the Fund's annual expenses
(including the management fee but excluding brokerage commissions, certain
other transaction costs (including transfer taxes), shareholder service
fees and extraordinary expenses) exceeded .20% of average daily net
assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000 was $1,648. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
For the year ended February 29, 2000 cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Sales
------------ ------------
<S> <C> <C>
U.S. Government securities $ 9,509,375 $ 1,516,641
Investments (non-U.S. Government securities) 188,452,580 157,558,911
</TABLE>
16
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA B FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
During the year ended February 29, 2000, the Fund exchanged securities
with a market value of $135,809,200 for shares of GMO Alpha Libor Fund
with a value equal to that market value in taxable transactions. Such
amounts are included in purchase and sales above.
At February 29, 2000 the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
$166,342,561 $2,176,075 $ (1,389,663) $786,412
</TABLE>
4. PRINCIPAL SHAREHOLDERS
At February 29, 2000, 98.3% of the outstanding shares of the Fund were
held by three shareholders, each holding in excess of 10% of the Funds
outstanding shares. Investment activities of these shareholders could have
a material effect.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
------------------------- ---------------------------
Shares Amount Shares Amount
Class III: ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Shares sold 4,187,339 $ 30,136,852 18,651,438 $ 158,378,340
Shares issued to shareholders
in reinvestment of distributions 921,469 6,265,992 2,639,708 20,620,609
Shares repurchased (1,452,339) (10,324,693) (39,582,432) (408,678,267)
----------- ------------ ------------ -------------
Net increase (decrease) 3,656,469 $ 26,078,151 (18,291,286) $(229,679,318)
=========== ============ ============ =============
</TABLE>
17
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA B FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 29, 2000 is as
follows:
FORWARD CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Net Unrealized
Settlement Deliver/ Units Appreciation
Date Receive of Currency Value (Depreciation)
---------- --------------------------------------------- ------------ ----------- --------------
<C> <S> <C> <C> <C>
Buys
3/10/00 CAD 12,100,000 $ 8,341,165 $ 112,671
3/23/00 EUR 9,200,000 8,872,572 (268,621)
3/3/00 GBP 8,400,000 13,260,920 (338,980)
---------
$(494,930)
=========
Sales
4/28/00 AUD 3,300,000 $ 2,028,190 $ 38,518
3/10/00 CAD 1,300,000 896,158 3,510
3/23/00 EUR 1,700,000 1,639,497 25,385
3/3/00 GBP 8,400,000 13,260,920 169,166
5/5/00 GBP 1,300,000 2,052,094 1,055
4/21/00 JPY 380,000,000 3,490,589 41,403
---------
$ 279,037
=========
</TABLE>
FORWARD CROSS CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Settlement
Date Deliver/Units of Currency Receive/In Exchange For
---------- ----------------------------------------------------- ----------------------------------------------------
<C> <S> <C> <C> <C>
4/14/00 CHF 5,617,063 EUR 3,500,000
4/14/00 EUR 1,700,000 CHF 2,726,749
4/7/00 SEK 18,011,385 EUR 2,100,000
<CAPTION>
Net Unrealized
Settlement Appreciation
Date (Depreciation)
---------- --------------
<C> <C>
4/14/00 $ (2,279)
4/14/00 180
4/7/00 (31,508)
--------
$(33,607)
========
</TABLE>
18
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA B FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
<TABLE>
<CAPTION>
Number of Expiration Contract
Contracts Type Date Value
--------- --------------------------------------------- --------------------------------------------- -----------
<C> <S> <C> <C>
Buys
42 Australian Government Bond 10 Yr. March 2000 $3,572,622
4 Canadian Government Bond 10 Yr. June 2000 271,482
26 Euro Bund 10 Yr. March 2000 2,596,395
6 Japanese Government Bond 10 Yr. March 2000 7,218,242
5 Swiss Government Bond 10 Yr. March 2000 354,531
16 U.S. Treasury Note 20 Yr. June 2000 1,526,250
Sales
5 Australian Government Bond 3 Yr. March 2000 $ 352,744
6 Japanese Government Bond 10 Yr. March 2000 7,216,057
7 Japanese Government Bond 10 Yr. June 2000 8,335,897
25 U.K. Gilt 10 Yr. June 2000 4,408,143
32 U.S. Treasury Bond 20 Yr. June 2000 3,030,000
<CAPTION>
Net Unrealized
Number of Appreciation
Contracts (Depreciation)
--------- --------------
<C> <C>
Buys
42 $32,770
4 738
26 (19,107)
6 (2,412)
5 (2,160)
16 (2,417)
-------
$ 7,412
=======
Sales
5 $ 1,679
6 (25,483)
7 1,333
25 11,845
32 17,542
-------
$ 6,916
=======
</TABLE>
At February 29, 2000, the Fund has sufficient cash and/or securities to
cover any commitments or margin on these contracts.
WRITTEN OPTION TRANSACTIONS
<TABLE>
<CAPTION>
Puts Calls
Principal Amount Principal Amount
of Contracts of Contracts
(000's omitted) Premiums (000's omitted) Premiums
---------------- ------------ ---------------- ------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period 600 $ 37,764 600 $ 45,000
Options written -- -- -- --
Options closed -- -- -- --
Options exercised (600) (37,764) -- --
Options expired -- -- (600) (45,000)
------ -------- ------ --------
Outstanding, end of period -- $ -- -- $ --
====== ======== ====== ========
</TABLE>
19
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA B FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SWAP AGREEMENTS
<TABLE>
<CAPTION>
Notional Net Unrealized
Amount Expiration Appreciation
Fund Date Description (Depreciation)
------------------- ---------- -------------------------------------------------- --------------
<C> <C> <S> <C>
CREDIT DEFAULT
SWAPS
49,000,000,000 ITL 3/31/03 Agreement with Morgan Guaranty Trust Company dated $ (26,758)
3/26/98 to pay .07% per year times the notional
amount. The Fund receives payment only upon a
default event in Italy, the notional amount times
the difference between the par value and the
then-market value of Italy BTP, 6.00% due
11/01/07.
1,058,750,000 BEF 3/31/03 Agreement with Morgan Guaranty Trust Company dated (32,650)
3/26/98 to pay .07% per year times the notional
amount. The Fund receives payment only upon a
default event in Belgium, the notional amount
times the difference between the par value and the
then-market value of Kingdom of Belgium, 5.75% due
3/28/08.
INTEREST RATE SWAPS
5,000,000 CHF 6/11/05 Agreement with Morgan Guaranty Trust Company dated 78,969
6/09/98 to pay the notional amount multiplied by
3.245% and to receive the notional amount
multiplied by 6 month Floating Rate Swiss LIBOR
adjusted by a specified spread.
9,000,000 USD 7/29/06 Agreement with Morgan Guaranty Trust Company dated (319,186)
7/27/99 to receive the notional amount multiplied
by 6.664% and to pay the notional amount
multiplied by 3 month LIBOR adjusted by a
specified spread.
</TABLE>
20
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA B FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<TABLE>
<CAPTION>
Notional Net Unrealized
Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
------------------- ---------- -------------------------------------------------- --------------
<C> <C> <S> <C>
8,000,000 SEK 9/13/06 Agreement with UBS AG dated 9/09/99 to receive the $ 3,707
notional amount multiplied by 6.465% and to pay
the notional amount multiplied by 3 month Floating
Rate Swedish LIBOR adjusted by a specified spread.
20,000,000 USD 2/07/07 Agreement with Morgan Guaranty Trust Company dated 7,823
2/03/00 to receive the notional amount multiplied
7.395% and to pay the notional amount multiplied
by 3 month LIBOR adjusted by a specified spread.
TOTAL RETURN SWAPS
75,000,000 USD 8/01/00 Agreement with Goldman Sachs International dated 525,293
7/13/99 to receive (pay) the notional amount
multiplied by the return on the Lehman Aggregate
Index and to pay the notional amount multiplied by
1 month LIBOR adjusted by a specified spread.+
19,676,042 USD/
20,000,000 USD 2/25/01 Agreement with UBS AG dated 1/12/00 to receive 57,777
(pay) the notional amount multiplied by the change
in market value (including accrued interest) of
Federal National Mortgage Association TBA 30 Year
7.50% and to pay the initial market value
multiplied by 1 month LIBOR adjusted by a
specified spread.
---------
$ 294,975
=========
</TABLE>
See Notes to the Schedule of Investments for definitions of currency
abbreviations.
+ This swap agreement is valued by management (Note 1).
21
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA B FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
The Fund has elected to defer to March 1, 2000 post October losses of
$4,702,113.
At February 29, 2000, the Fund had a capital loss carryforward available
to offset future capital gains, if any, of the following amount:
<TABLE>
<CAPTION>
Year of Expiration Amount
------------------------------------------------------------ ----------
<S> <C>
2008 $4,653,232
</TABLE>
22
<PAGE>
GMO U.S. BOND/GLOBAL ALPHA B FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Mr. William L. Nemerever and Mr. Thomas F. Cooper are primarily responsible for
the day-to-day management of the Fund's portfolio. Each of these individuals has
been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO U.S. Bond/Global Alpha B Fund returned 0.3% for
the fiscal year ended February 29, 2000, compared to 1.1% for the Lehman
Brothers Aggregate Bond Index. Consistent with the Fund's investment objectives
and policies, the Fund was substantially invested in investment-grade, foreign
and domestic fixed income instruments throughout the period. Although the Fund
is benchmarked against a domestic bond index, the value added is derived from
global bond and currency strategies.
The Fund underperformed the benchmark during the fiscal year by 0.8%. Currency
selection added value during the fiscal year, while bond market and issue
selection reduced portfolio return. Long bond yields increased by 20 to 200
basis points in developed countries, except in Japan where yields declined by 60
basis points. Other than in Japan, bond market returns were negative across the
international bond universe. The U.S. dollar appreciated against European
currencies, but declined against the Japanese yen, Canadian dollar and
Australian dollar.
Bond market selection during the fiscal year was hurt by an underweight position
in Japanese bonds. These losses were offset to some extent by returns due to an
underweight position in Swiss bonds. Currency selection added modest value
during the fiscal year. An overweight position in Canadian dollars and
underweight positions in Japanese yen and Swiss francs added value, but were
offset to some extent by losses on an overweight position in British pounds.
This Fund is not permitted to purchase emerging country debt. Issue selection
was negative.
OUTLOOK
The Fund is structured to benefit from outperformance in the Australian,
Canadian, EMU member countries, New Zealand, Swedish and U.S. bond markets. We
expect the Danish, Japanese, Swiss and British bond markets to underperform. Our
strategy maintains a market duration in each country. Strong relative
performance is expected from Canadian dollars, Euros and Swiss francs. The
Australian dollar, Danish krone, Japanese yen, Swedish krona, British pound and
U.S. dollar are expected to underperform.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO U.S. BOND/GLOBAL ALPHA B FUND CLASS III SHARES AND THE
LEHMAN BROTHERS AGGREGATE BOND INDEX
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
Average Annual Total Returns
Inception 7/29/97
1yr 5yr 10yr (ITD)
<S> <C> <C>
0.12 N/A 2.96
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
Date GMO US Bond/Global Alpha B Fund-III Lehman Brothers Aggregate Bond
<S> <C> <C>
7/29/97 9985 10000
9/30/97 10055 10097
12/31/97 10276 10394
3/31/98 10461 10556
6/30/98 10625 10796
9/30/98 11041 11253
12/31/98 10995 11291
3/31/99 10800 11235
6/30/99 10695 11136
9/30/99 10710 11212
12/31/99 10643 11198
2/29/00 10784 11296
</TABLE>
Performance shown is net of all fees after reimbursement form the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The total returns would have been lower had certain expenses
not been reimbursed during the periods shown and do not include the effect of
taxes. Each performance figure assumes purchase at the beginning and
redemption at the end of the stated period and reflects a transaction fee of
15 bp on the purchase. Transaction fees are retained by the fund to cover
trading costs. Past performance is not indicative of future performance.
Information is unaudited.
<PAGE>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Global Bond Fund at February
29, 2000, the results of its operations, the changes in its net assets and the
financial highlights for each of the periods indicated therein, in conformity
with accounting principles generally accepted in the United States. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at February 29, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 18, 2000
<PAGE>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEBT OBLIGATIONS -- 14.8%
ARGENTINA -- 0.8%
USD 500,000 Republic of Argentina, 12.13%, due 02/25/19 520,500
USD 1,000,000 Republic of Argentina, 12.00%, due 02/01/20 1,033,500
-------------------
1,554,000
-------------------
BRAZIL -- 1.5%
USD 3,500,000 Brazil Discount ZL Bond,
Variable Rate, 6 mo. LIBOR + .81%, 6.94%, due
04/15/24 2,734,375
-------------------
BULGARIA -- 0.4%
USD 2,000,000 Bulgaria Discount Series B Interest Strips, Basket 2,
0.00%, due 07/28/24 358,000
USD 500,000 Bulgaria FLIRB Series B,
Variable Rate, Step Up, 3.25%, due 07/28/12 375,000
-------------------
733,000
-------------------
CANADA -- 0.9%
CAD 2,000,000 Government of Canada Real Return, 4.25%, due 12/01/21 1,624,231
-------------------
ECUADOR -- 0.1%
USD 500,000 Republic of Ecuador Par Bond,
Variable Rate, Step Up, 4.00%, due 02/28/25* 183,750
-------------------
JORDAN -- 0.2%
USD 500,000 Hashemite Kingdom of Jordan Par Bond,
Variable Rate, Step Up, 144A, 6.00%, due 12/23/23 338,750
-------------------
MEXICO -- 4.8%
FRF 5,000,000 Mexico Par Bond, 6.63%, due 12/31/19 648,575
CHF 20,000,000 Mexico Par Bond, 3.75%, due 12/31/19 8,076,600
-------------------
8,725,175
-------------------
NEW ZEALAND -- 1.2%
NZD 4,500,000 New Zealand Index Linked Bond Series 216, 4.50%, due
02/15/16 2,112,433
-------------------
NIGERIA -- 0.3%
USD 706,672 Central Bank of Nigeria Par Bond Odd Lot,
Variable Rate, Step Up, 6.25%, due 11/15/20(a) 365,703
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NIGERIA -- CONTINUED
USD 500,000 Central Bank of Nigeria Par Bond,
Variable Rate, Step Up, 6.25%, due 11/15/20 283,750
-------------------
649,453
-------------------
SUPRA NATIONAL -- 1.2%
AUD 4,600,000 European Bank for Reconstruction and Development, Zero
Coupon, due 02/10/28 359,381
GBP 1,000,000 International Bank for Reconstruction and Development,
11.50%, due 11/09/03 1,815,505
-------------------
2,174,886
-------------------
SWEDEN -- 0.7%
SEK 5,000,000 Government of Sweden Index Linked Bond, 4.00%, due
12/01/20 576,708
SEK 6,600,000 Kingdom of Sweden, 6.00%, due 02/09/05 762,083
-------------------
1,338,791
-------------------
UNITED STATES -- 2.5%
STRUCTURED NOTES -- 2.5%
USD 5,000,000 Federal Home Loan Bank,
Variable Rate, (10.00% - 6 mo. LIBOR), 4.06%, due
09/22/03(b) 4,515,000
-------------------
VENEZUELA -- 0.2%
USD 500,000 Republic of Venezuela Discount Bond Series A,
Variable Rate, 6 mo. LIBOR + .81%, 7.00%, due
03/31/20 386,250
-------------------
TOTAL DEBT OBLIGATIONS (COST $29,089,508) 27,070,094
-------------------
LOAN ASSIGNMENTS -- 0.3%
RUSSIA -- 0.3%
USD 2,000,000 Russia Vnesh Restructured Loan Agreements* 472,500
-------------------
TOTAL LOAN ASSIGNMENTS (COST $1,278,948) 472,500
-------------------
MUTUAL FUND -- 85.1%
6,146,875 GMO Alpha Libor Fund 155,454,468
-------------------
TOTAL MUTUAL FUND (COST $153,671,874) 155,454,468
-------------------
</TABLE>
See accompanying notes to the financial statements.
2
<PAGE>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CALL OPTIONS PURCHASED -- 0.0%
OPTIONS ON CURRENCY -- 0.0%
USD 13,888,000 Euro, Expires 5/03/00, Strike 1.12 2,778
--------------------------
OPTIONS ON FUTURES -- 0.0%
USD 942,500 Eurodollar, Expires 3/13/00, Strike 93.75 51,837
--------------------------
TOTAL CALL OPTIONS PURCHASED (COST $334,758) 54,615
--------------------------
PUT OPTIONS PURCHASED -- 0.7%
CROSS CURRENCY OPTIONS -- 0.0%
EUR 25,100,000 Euro Put/Swiss Franc Call, Expires 6/05/00, Strike
1.58485 36,250
--------------------------
OPTIONS ON CURRENCY -- 0.7%
USD 13,268,000 Euro, Expires 5/03/00, Strike 1.07 1,171,564
--------------------------
TOTAL PUT OPTIONS PURCHASED (COST $563,714) 1,207,814
--------------------------
RIGHTS AND WARRANTS -- 0.0%
MEXICO -- 0.0%
14,210,000 United Mexican States Warrants, Expires 6/30/03** --
--------------------------
NIGERIA -- 0.0%
1,206 Central Bank of Nigeria Payment Adjusted Warrants,
Expires 11/15/20** --
--------------------------
</TABLE>
See accompanying notes to the financial statements.
3
<PAGE>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES/
PAR VALUE DESCRIPTION VALUE ($)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
VENEZUELA -- 0.0%
3,570 Republic of Venezuela Recovery Warrants, Expires
4/15/20** --
--------------------------
TOTAL RIGHTS AND WARRANTS (COST $0) --
--------------------------
SHORT-TERM INVESTMENTS -- 0.9%
COMMERCIAL PAPER -- 0.8%
USD 1,500,000 Koch Industries Inc., 5.83%, due 3/01/00 1,500,000
--------------------------
REPURCHASE AGREEMENT -- 0.1%
USD 215,441 Salomon Smith Barney Inc. Repurchase Agreement, dated
2/29/00, due 3/1/00, with a maturity value of $215,470
and an effective yield of 4.95%, collateralized by a
U.S. Treasury Obligation with a rate of 8.125%,
maturity date of 8/15/19 and market value, including
accrued interest, of $219,750. 215,441
--------------------------
TOTAL SHORT-TERM INVESTMENTS (COST $1,715,441) 1,715,441
--------------------------
TOTAL INVESTMENTS -- 101.8%
(Cost $186,654,243) 185,974,932
Other Assets and Liabilities (net) -- (1.8%) (3,244,817)
--------------------------
TOTAL NET ASSETS -- 100.0% $ 182,730,115
==========================
</TABLE>
See accompanying notes to the financial statements.
4
<PAGE>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
NOTES TO SCHEDULE OF INVESTMENTS:
FLIRB - Front Loaded Interest Reduction Bond
Variable and Step up rates - The rates shown on variable and
step up rate notes are the current interest rates at
February 29, 2000, which are subject to change based on
the terms of the security, including varying reset dates.
CURRENCY ABBREVIATIONS:
AUD - Australian Dollar
BEF - Belgian Franc
CAD - Canadian Dollar
CHF - Swiss Franc
EUR - Euro
FRF - French Franc
GBP - British Pound
ITL - Italian Lira
JPY - Japanese Yen
NZD - New Zealand Dollars
SEK - Swedish Krona
USD - United States Dollar
<TABLE>
<S> <C>
(a) Valued by management (Note 1).
(b) All or a portion of this security has been segregated to
cover margin requirements on open financial futures
contracts (Note 6).
* Non-performing. Borrower not currently paying interest.
** Non-income producing security.
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $186,654,243) (Note 1) $ 185,974,932
Cash at interest on deposit at brokers (Note 1) 1,386,122
Receivable for investments sold 28,221
Interest receivable 374,786
Receivable for variation margin on open futures contracts
(Notes 1 and 6) 75,337
-----------------
Total assets 187,839,398
-----------------
LIABILITIES:
Payable for investments purchased 545,133
Payable to affiliate for (Note 2):
Management fee 27,897
Shareholder service fee 21,971
Net payable for open forward foreign currency contracts
(Notes 1 and 6) 3,728,029
Interest payable for open swap contracts (Notes 1 and 6) 194,950
Payable for open swap contracts (Notes 1 and 6) 543,782
Accrued expenses and other liabilities 47,521
-----------------
Total liabilities 5,109,283
-----------------
NET ASSETS $ 182,730,115
=================
NET ASSETS CONSIST OF:
Paid-in capital $ 197,784,398
Distributions in excess of net investment income (6,013,314)
Accumulated net realized loss (4,071,540)
Net unrealized depreciation (4,969,429)
-----------------
$ 182,730,115
=================
NET ASSETS ATTRIBUTABLE TO:
Class III shares $ 182,730,115
=================
SHARES OUTSTANDING:
Class III 19,426,265
=================
NET ASSET VALUE PER SHARE:
Class III $ 9.41
=================
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest (including securities lending income of $3,821) $ 10,776,989
------------
Total income 10,776,989
------------
EXPENSES:
Management fee (Note 2) 365,979
Interest expense (Note 1) 313,665
Custodian and transfer agent fees 95,176
Audit fees 38,020
Legal fees 3,595
Registration fees 2,889
Trustees fees (Note 2) 2,151
Miscellaneous 2,829
Fees waived or borne by Manager (Note 2) (144,660)
------------
679,644
Shareholder service fee (Note 2)
Class III 288,931
------------
Net expenses 968,575
------------
Net investment income 9,808,414
------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (4,779,946)
Closed futures contracts (3,392,274)
Closed swap contracts (1,088,455)
Written options 262,500
Foreign currency, forward contracts and foreign
currency related transactions (5,579,696)
------------
Net realized loss (14,577,871)
------------
Change in net unrealized appreciation (depreciation) on:
Investments 2,079,365
Open futures contracts 821,360
Open swap contracts 184,088
Written options (63,840)
Foreign currency, forward contracts and foreign
currency related transactions (2,241,806)
------------
Net unrealized gain 779,167
------------
Net realized and unrealized loss (13,798,704)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (3,990,290)
============
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 9,808,414 $ 8,148,695
Net realized gain (loss) (14,577,871) 362,534
Change in net unrealized appreciation (depreciation) 779,167 (6,074,290)
------------ ------------
Net increase (decrease) in net assets from operations (3,990,290) 2,436,939
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (4,475,228) (5,497,905)
------------ ------------
Total distributions from net investment income (4,475,228) (5,497,905)
------------ ------------
In excess of net investment income
Class III (639,858) (1,386,848)
------------ ------------
Total distributions in excess of net investment income (639,858) (1,386,848)
------------ ------------
Net realized gains
Class III -- (793,938)
------------ ------------
Total distributions from net realized gains -- (793,938)
------------ ------------
In excess of net realized gains
Class III -- (907,937)
------------ ------------
Total distributions in excess of net realized gains -- (907,937)
------------ ------------
(5,115,086) (8,586,628)
------------ ------------
Net share transactions: (Note 5)
Class III 28,624,997 64,308,107
------------ ------------
Increase in net assets resulting from net share
transactions 28,624,997 64,308,107
------------ ------------
Total increase in net assets 19,519,621 58,158,418
NET ASSETS:
Beginning of period 163,210,494 105,052,076
------------ ------------
End of period (including distributions in excess of net
investment income of $6,013,314 and $504,944,
respectively) $182,730,115 $163,210,494
============ ============
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
--------------------------------------------------------
2000 1999 1998 1997 1996*
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.87 $ 10.15 $ 10.16 $ 9.89 $ 10.00
-------- -------- -------- ------- -------
Income from investment operations:
Net investment income(a) 0.51 0.55 0.65+ 0.61 0.05
Net realized and unrealized gain (loss) (0.71) (0.25) 0.36 0.59 (0.16)
-------- -------- -------- ------- -------
Total from investment operations (0.20) 0.30 1.01 1.20 (0.11)
-------- -------- -------- ------- -------
Less distributions to shareholders:
From net investment income (0.23) (0.37) (0.56) (0.57) --
In excess of net investment income (0.03) (0.09) -- -- --
From net realized gains -- (0.06) (0.28) (0.36) --
In excess of net realized gains -- (0.06) (0.18) -- --
-------- -------- -------- ------- -------
Total distributions (0.26) (0.58) (1.02) (0.93) --
-------- -------- -------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 9.41 $ 9.87 $ 10.15 $ 10.16 $ 9.89
======== ======== ======== ======= =======
TOTAL RETURN(b) (2.07)% 2.69% 10.19% 12.01% (1.10)%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $182,730 $163,210 $105,052 $70,768 $31,072
Net operating expenses to average daily net
assets 0.34% 0.34% 0.34% 0.34% 0.34%**
Interest expense to average daily net assets 0.16% -- -- -- --
Total net expenses to average daily net
assets 0.50%(c) 0.34% 0.34% 0.34% 0.34%**
Net investment income to average daily net
assets(a) 5.09% 5.86% 6.21% 6.31% 6.16%**
Portfolio turnover rate 116% 75% 103% 72% 0%
Fees and expenses voluntarily waived or
borne by the Manager consisted of the
following per share amounts: $ 0.01 $ 0.03 $ 0.04 $ 0.04 $ 0.01
</TABLE>
<TABLE>
<S> <C>
* Period from December 28, 1995 (commencement of operations)
to February 29, 1996.
** Annualized.
+ Computed using average shares outstanding throughout the
period.
++ Not annualized.
(a) Net investment income for the year ended February 29, 2000
is affected by the timing of the declaration of dividends by
other Funds of the Trust in which the Fund invests.
(b) Calculation excludes purchase premiums. The total returns
would have been lower had certain expenses not been waived
during the periods shown.
(c) Interest expense incurred as a result of entering into
reverse repurchase agreements is included in the Fund's net
expenses. Income earned on investing proceeds from reverse
repurchase agreements is included in interest income.
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Global Bond Fund (the "Fund") is a series of GMO Trust (the "Trust").
The Fund is registered under the Investment Company Act of 1940, as
amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on June
24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series of shares into classes.
The Fund seeks high total return through investment in global bond and
currency markets. The Fund's benchmark is the J.P. Morgan Global
Government Bond Index.
At February 29, 2000, 85.1% of the Fund is invested in GMO Alpha Libor
Fund, a separate fund of GMO Trust managed by GMO. Alpha Libor invests
primarily in relatively high quality, low volatility fixed income
securities.
The financial statements of GMO Alpha Libor Fund should be read in
conjunction with the Fund's financial statements.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of financial statements in
accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost
which approximates market value. Shares of other Funds of the Trust are
valued at their net asset value as reported on each business day.
Securities for which quotations are not readily available are valued at
fair value as determined in good faith by the Trustees or other persons
acting at their direction.
Some fixed income securities and options thereon are valued at the closing
bid for such securities as supplied by a primary pricing source chosen by
the Manager. The Manager evaluates such primary
10
<PAGE>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
pricing sources on an ongoing basis, and may change a pricing source
should it deem it appropriate. The Manager is informed of erratic or
unusual movements (including unusual inactivity) in the prices supplied
for a security and at its discretion may override a price supplied by a
source (by taking a price supplied by another source).
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from
yield data relating to investments or securities with similar
characteristics.
Certain securities held by the Fund were valued on the basis of a price
provided by a principal market maker. The prices provided by the principal
market makers may differ from the value that would be realized if the
securities were sold and the differences could be material to the
financial statements. At February 29, 2000, the total value of these
securities represented 5% of net assets.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at current exchange rates when accrued
or incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign currency contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FUTURES CONTRACTS
The Fund may use futures contracts to manage its exposure to the bond and
currency markets. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments.
Upon entering into a futures contract, the Fund is required to deposit
with its custodian, in a segregated account in the name of the futures
broker, an amount of cash or U.S. government and agency obligations in
accordance with the initial margin requirements of the broker or exchange.
Futures contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. Gains or losses are recognized but not considered realized until the
contracts expire or are closed. Futures contracts involve, to varying
degrees, risk of loss in excess of the variation margin disclosed in the
Statement of Assets and Liabilities. Losses may arise from the changes in
the value of the underlying instrument, if there is
11
<PAGE>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
an illiquid secondary market for the contracts, or if counterparties do
not perform under the contract terms. Futures contracts are valued at the
settlement price established each day by the board of trade or exchange on
which they are traded. See Note 6 for all open futures contracts as of
February 29, 2000.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or
all of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency
contracts are marked to market daily and the change in value is recorded
by the Fund as an unrealized gain or loss. Realized gains or losses equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed are recorded upon delivery
or receipt of the currency or, if a forward currency contract is offset by
entering into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market
risk in excess of the unrealized gain or loss reflected in the Fund's
Statement of Assets and Liabilities. In addition, the Fund could be
exposed to risk if the counterparties are unable to meet the terms of the
contracts or if the value of the currency changes unfavorably to the U.S.
dollar. The U.S. dollar value of the currencies the Fund has committed to
buy or sell is shown under Note 6 and represents the currency exposure the
Fund has acquired or hedged through currency contracts as of February 29,
2000.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Funds exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying
instrument. When the Fund writes a call or put option, an amount equal to
the premium received is recorded as a liability and subsequently marked to
market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
added to the proceeds or offset against the amounts paid on the underlying
future, security or currency transaction to determine the realized gain or
loss. The Fund as a writer of an option has no control over whether the
underlying future, security or currency may be sold (call) or purchased
(put) and as a result bears the market risk of an unfavorable change in
the price of the future, security or currency underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. At February 29, 2000 there were
no open written option contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's
12
<PAGE>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
exposure to the underlying instrument. The Fund pays a premium which is
included in the Fund's Statement of Assets and Liabilities as an
investment and subsequently marked to market to reflect the current value
of the option. Premiums paid for purchasing options which expire are
treated as realized losses. The risk associated with purchasing put and
call options is limited to the premium paid. Premiums paid for purchasing
options which are exercised or closed are added to the amounts paid or
offset against the proceeds on the underlying future, security or currency
transaction to determine the realized gain or loss.
LOAN AGREEMENTS
The Fund may invest in direct debt instruments which are interests in
amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates. The Fund's investments in loans may be in the form of
participations in loans or assignments of all or a portion of loans from
third parties. A loan is often administered by a bank or other financial
institution (the lender) that acts as agent for all holders. The agent
administers the terms of the loan, as specified in the loan agreement.
When investing in a loan participation, the Fund has the right to receive
payments of principal, interest and any fees to which it is entitled only
from the lender selling the loan agreement and only upon receipt by the
lender of payments from the borrower. The Fund generally has no right to
enforce compliance with the terms of the loan agreement with the borrower.
As a result, the Fund may be subject to the credit risk of both the
borrower and the lender that is selling the loan agreement. When the Fund
purchases assignments from lenders it acquires direct rights against the
borrower on the loan. Direct indebtedness of emerging countries involves a
risk that the governmental entities responsible for the repayment of the
debt may be unable or unwilling to pay the principal and interest when
due.
INDEXED SECURITIES
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to
increase or decrease its exposure to different underlying instruments and
to gain exposure to markets that may be difficult to invest in through
conventional securities. Indexed securities may be more volatile than
their underlying instruments, but any loss is limited to the amount of the
original investment.
SWAP AGREEMENTS
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into interest rate, total return and credit
default swap agreements to manage its exposure to interest rates and
credit risk. Interest rate swap agreements involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. Total return swap
agreements involve commitments to pay interest in exchange for a
market-linked return, both based on notional
13
<PAGE>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
amounts. To the extent the total return of the security or index
underlying the transaction exceeds or falls short of the offsetting
interest rate obligation, the Fund will receive a payment from or make a
payment to the counterparty. Credit default swaps involve the payment of a
specified rate based on the notional amount. The Fund receives payment
upon a default of the underlying security. In connection with these
agreements, cash or securities may be set aside as collateral by the
Fund's custodian in accordance with the terms of the swap agreement. The
Fund earns interest on cash set aside as collateral, which is paid by the
counterparty. At February 29, 2000, $1,386,122 in cash has been set aside.
Swaps are marked to market daily based upon quotations from market makers
and the change, if any, is recorded as unrealized gain or loss in the
Statement of Operations. Payments received or made at the end of the
measurement period are recorded as realized gain or loss in the Statement
of Operations. Net payments of interest on interest rate swap agreements
are included as part of interest income. Entering into these agreements
involves, to varying degrees, elements of credit and market risk in excess
of the amounts recognized on the Statement of Assets and Liabilities. Such
risks involve the possibility that there will be no liquid market for
these agreements, that the counterparty to the agreements may default on
its obligation to perform and that there may be unfavorable changes in the
fluctuation of interest rates. See Note 6 for a summary of open swap
agreements as of February 29, 2000.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, realization of collateral by the Fund may be delayed or
limited.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements with certain banks
and broker/dealers whereby the Fund sells portfolio assets concurrent with
an agreement by the Fund to repurchase the same assets at a later date at
a fixed price. In connection with these agreements, the Fund establishes
segregated accounts with its custodian in which the Fund maintains cash,
U.S. Government securities or other liquid high grade debt obligations in
the name of the counterparty equal in value to its obligations in respect
of reverse repurchase agreements. Reverse repurchase agreements involve
the risk that the market value of the securities the Fund was sold may
decline below the contractual repurchase price under the agreement. During
the year ended February 29, 2000, the Fund had entered into reverse
repurchase agreements with an average balance outstanding of
14
<PAGE>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
$9,387,949 and an average interest rate of 5.23%. The maximum balance
outstanding was $15,713,000. The average shares outstanding were
19,705,043 and the average balance per share outstanding was $0.48.
Average balance outstanding was calculated based on daily balances
outstanding during the period the Fund had entered into reverse repurchase
agreements. At February 29, 2000, there were no open reverse repurchase
agreements.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of delay in
recovery or even loss of rights in the collateral should the borrower fail
financially. The Fund receives compensation for lending its securities. At
February 29, 2000, the Fund had no securities on loan.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to differing treatments for foreign currency
transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable
15
<PAGE>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
income and capital gains under U.S. federal tax rules versus accounting
principles generally accepted in the United States. The calculation of net
investment income per share in the financial highlights excludes these
adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
<S> <C> <C>
$(10,201,698) $10,307,402 $(105,704)
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis, and is adjusted for the accretion of
discounts. In determining the net gain or loss on securities sold, the
cost of securities is determined on the identified cost basis. Interest
income on U.S. Treasury inflation indexed securities is accrued daily
based upon an inflation adjusted principal. Additionally, any increase in
the principal or face amount of the securities is recorded as interest
income.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is .15% of the amount
invested. The premium will be reduced by 50% with respect to any portion
of a purchase that is offset by a corresponding redemption occurring on
the same day. In addition, the purchase premium for the Fund will be
reduced by 50% if the purchaser makes an in-kind purchase of Fund shares
or if the purchase or redemption is part of a transfer from or to another
Fund where the Manager is able to transfer securities among the Funds to
effect the transaction. All purchase premiums are paid to and recorded by
the Fund as paid-in capital. For the year ended February 29, 2000, the
Fund received $82,781 in purchase premiums. There is no premium for cash
redemptions or reinvested distributions.
16
<PAGE>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments,
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets. The risks described above apply to an even greater
extent to investments in emerging markets. The securities markets of
emerging countries are generally smaller, less developed, less liquid, and
more volatile than the securities markets of the U.S. and developed
foreign markets.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .19% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding brokerage commissions, certain other transaction costs
(including transfer taxes), shareholder service fees and extraordinary
expenses) exceed the management fee.
Prior to March 1, 1999, GMO earned a management fee at the annual rate of
.35% of average daily net assets. GMO had agreed to waive a portion of its
fee and bear other expenses to the extent that the Fund's annual expenses
(including the management fee but excluding brokerage commissions, certain
other transaction costs (including transfer taxes), shareholder service
fees and extraordinary expenses) exceeded .19% of average daily net
assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000, was $2,151. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 29, 2000, aggregated
$253,362,632 and $225,169,587, respectively.
17
<PAGE>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
During the year ended February 29, 2000, the Fund exchanged securities
with a market value of $160,634,538 for shares of GMO Alpha Libor Fund
with a value equal to that market value in taxable transactions. Such
amounts are included in purchases and sales above.
At February 29, 2000 the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
$186,665,850 $3,086,010 $(3,776,928) $(690,918)
</TABLE>
4. PRINCIPAL SHAREHOLDERS
At February 29, 2000, 68.1% of the outstanding shares of the Fund were
held by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares. Investment activities of these shareholders could have
a material effect.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
-------------------------- --------------------------
Shares Amount Shares Amount
Class III: ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Shares sold 5,558,244 $ 55,187,578 8,321,672 $ 86,437,108
Shares issued to shareholders
in reinvestment of
distributions 509,734 4,888,345 780,362 8,048,789
Shares repurchased (3,178,026) (31,450,926) (2,915,212) (30,177,790)
---------- ------------ ---------- ------------
Net increase 2,889,952 $ 28,624,997 6,186,822 $ 64,308,107
========== ============ ========== ============
</TABLE>
18
<PAGE>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 29, 2000 is as
follows:
FORWARD CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
--------------------- --------------- ----------------- ----------- --------------
<S> <C> <C> <C> <C>
Buys
3/10/00 CAD 33,500,000 $23,093,308 $ 311,941
3/23/00 EUR 74,600,000 71,944,986 (3,642,773)
3/03/00 GBP 14,900,000 23,522,347 (479,271)
5/05/00 GBP 3,600,000 5,682,723 (2,920)
4/21/00 JPY 3,725,000,000 34,216,952 (373,457)
-----------
$(4,186,480)
===========
Sales
4/28/00 AUD 5,600,000 $ 3,441,777 $ 65,363
3/10/00 CAD 2,700,000 1,861,252 2,556
3/23/00 EUR 1,500,000 1,446,615 22,863
3/03/00 GBP 14,900,000 23,522,347 279,975
4/21/00 JPY 60,000,000 551,145 (520)
3/30/00 NZD 4,500,000 2,185,830 101,880
-----------
$ 472,117
===========
</TABLE>
FORWARD CROSS CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Net Unrealized
Settlement Deliver/Units of Appreciation
Date Currency Receive/In Exchange For (Depreciation)
--------------------- ----------------- ----------------------- --------------
<S> <C> <C> <C> <C> <C>
4/14/00 CHF 27,282,875 EUR 17,000,000 $(11,068)
4/14/00 EUR 3,800,000 CHF 6,095,086 403
4/7/00 SEK 1,715,370 EUR 200,000 (3,001)
--------
$(13,666)
========
</TABLE>
19
<PAGE>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
<TABLE>
<CAPTION>
Net Unrealized
Number of Expiration Contract Appreciation
Contracts Type Date Value (Depreciation)
--------------------- ------------------------------ ---------- ----------- --------------
<S> <C> <C> <C> <C>
Buys
50 Australian Government Bond 10 March 2000 $ 4,253,121 $ 49,955
Yr.
28 Australian Government Bond 3 March 2000 1,975,366 (10,330)
Yr.
41 Canadian Government Bond 10 June 2000 2,782,688 7,565
Yr.
191 Euro Bund 10 Yr. March 2000 19,073,519 (303,622)
2 Japanese Government Bond 10 March 2000 2,406,081 (804)
Yr.
109 U.S. Long Bond June 2000 10,320,937 (61,170)
150 U.S. Treasury Note 5 Yr. June 2000 14,564,063 110,998
---------
$(207,408)
=========
Sales
2 Japanese Government Bond 10 March 2000 $ 2,405,353 $ 6,404
Yr.
5 Japanese Government Bond 10 June 2000 5,954,212 720
Yr.
106 Swiss Government Bond 10 Yr. March 2000 7,516,063 138,019
37 U.K. Gilt June 2000 6,524,052 37,742
163 U.S. Treasury Note 10 Yr. June 2000 15,548,672 32,050
---------
$ 214,935
=========
</TABLE>
At February 29, 2000, the Fund has cash and/or securities to cover any
margin requirements on open futures contracts.
20
<PAGE>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
WRITTEN OPTION TRANSACTIONS
<TABLE>
<CAPTION>
Puts Calls
Principal Amount Principal Amount
of Contracts of Contracts
(000's omitted) Premiums (000's omitted) Premiums
---------------- --------- ---------------- ---------
<S> <C> <C> <C> <C>
Outstanding, beginning of
period 3,500 $220,290 3,500 $262,500
Options written -- -- -- --
Options closed -- -- -- --
Options exercised (3,500) (220,290) -- --
Options expired -- -- (3,500) (262,500)
Options sold -- -- -- --
------ -------- ------ --------
Outstanding, end of period -- $ -- -- $ --
====== ======== ====== ========
</TABLE>
SWAP AGREEMENTS
<TABLE>
<CAPTION>
Net Unrealized
Expiration Appreciation
Notional Amount Date Description (Depreciation)
--------------------- ---------- ------------------------------------ --------------
<C> <C> <S> <C>
CREDIT DEFAULT SWAPS
108,000,000,000 ITL 3/31/03 Agreement with Morgan Guaranty Trust $ (58,976)
Company dated 3/26/98 to pay .07%
per year times the notional amount.
The Fund receives payment only upon
a default event in Italy, the
notional amount times the difference
between the par value and the
then-market value of Italy BTP,
6.00% due 11/01/07.
2,263,500,000 BEF 3/31/03 Agreement with Morgan Guaranty Trust (69,802)
Company dated 3/26/98 to pay .07%
per year times the notional amount.
The Fund receives payment only upon
a default event in Belgium, the
notional amount times the difference
between the par value and the
then-market value of Kingdom of
Belgium, 5.75% due 3/28/08.
</TABLE>
21
<PAGE>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<TABLE>
<CAPTION>
Expiration Net Unrealized
Notional Amount Date Description Appreciation
--------------------- ---------- ------------------------------------ --------------
<C> <C> <S> <C>
INTEREST RATE SWAPS
7,100,000 CHF 6/05/05 Agreement with Morgan Guaranty Trust $ 109,829
Company dated 6/03/98 to pay the
notional amount multiplied by 3.245%
and to receive the notional amount
multiplied by 6 month Floating Rate
Swiss LIBOR adjusted by a specified
spread.
7,400,000 CHF 6/10/05 Agreement with Credit Suisse 112,909
Financial Products dated 6/08/98 to
pay the notional amount multiplied
by 3.2625% and to receive the
notional amount multiplied by 6
month Floating Rate Swiss LIBOR
adjusted by a specified spread.
2,300,000 CHF 6/10/05 Agreement with Credit Suisse 64,623
Financial Products dated 10/01/98 to
pay the notional amount multiplied
by 3.2625% and to receive the
notional amount multiplied by 6
month Floating Rate Swiss LIBOR
adjusted by a specified spread.
3,900,000 CHF 6/11/05 Agreement with Morgan Guaranty Trust 61,596
Company dated 6/09/98 to pay the
notional amount multiplied by 3.245%
and to receive the notional amount
multiplied by 6 month Floating Rate
Swiss LIBOR adjusted by a specified
spread.
6,800,000 CHF 9/16/05 Agreement with Morgan Guaranty Trust 170,159
Company dated 9/14/98 to pay the
notional amount multiplied by
3.1175% and to receive the notional
amount multiplied by 6 month
Floating Rate Swiss LIBOR adjusted
by a specified spread.
</TABLE>
22
<PAGE>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<TABLE>
<CAPTION>
Net Unrealized
Expiration Appreciation
Notional Amount Date Description (Depreciation)
--------------------- ---------- ------------------------------------ --------------
<C> <C> <S> <C>
22,000,000 USD 7/29/06 Agreement with Morgan Guaranty Trust $(780,232)
Company dated 7/27/99 to receive the
notional amount multiplied by 6.664%
and to pay the notional amount
multiplied by 3 month LIBOR adjusted
by a specified spread.
30,000,000 SEK 9/13/06 Agreement with UBS AG dated 9/09/99 13,899
to receive the notional amount
multiplied by 6.465% and to pay the
notional amount multiplied by 3
month Floating Rate Swedish LIBOR
adjusted by a specified spread.
TOTAL RETURN SWAPS
30,000,000 USD 7/25/01 Agreement with Morgan Guaranty Trust (26,841)
Company dated 7/01/99 to receive
(pay) the notional amount multiplied
by the return on the JP Morgan
Non-U.S. Traded Total Return
Government Bond Index and to pay the
notional amount multiplied by 1
month LIBOR adjusted by a specified
spread.+
75,000,000 USD 9/27/01 Agreement with Morgan Guaranty Trust (140,946)
Company dated 9/22/99 to receive
(pay) the notional amount multiplied
by the return on the JP Morgan
Traded Total Return Government Bond
Index and to pay the notional amount
multiplied by 1 month LIBOR adjusted
by a specified spread.+
---------
$(543,782)
=========
</TABLE>
<TABLE>
<S> <C>
+ This swap agreement is valued by management (Note 1).
See Notes to the Schedule of Investments for definitions of currency abbreviations.
</TABLE>
23
<PAGE>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
The Fund has elected to defer to March 1, 2000 post October capital losses
of $3,974,684 and foreign currency losses of $9,832,019.
24
<PAGE>
GMO GLOBAL BOND FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Mr. William L. Nemerever and Mr. Thomas F. Cooper are primarily responsible for
the day-to-day management of the Fund's portfolio. Each of these individuals has
been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the Global Bond Fund returned -2.1% for the fiscal year
ended February 29, 2000, compared to -3.4% for the J.P. Morgan Global Government
Bond Index. Consistent with the Fund's investment objectives and policies, the
Fund was substantially invested in investment-grade, foreign and domestic fixed
income instruments throughout the period.
The Fund outperformed the benchmark during the fiscal year by 1.3%. Currency and
emerging country debt selection added value during the fiscal year, while bond
market and issue selection were negative and reduced portfolio return. Long bond
yields increased by 20 to 200 basis points in developed countries, except in
Japan where yields declined by 60 basis points. Other than in Japan, bond market
returns were negative across the international bond universe. The U.S. dollar
appreciated against European currencies, but declined against the Japanese yen,
Canadian dollar and Australian dollar.
Bond market selection during the fiscal year was hurt by an underweight position
in Japanese bonds and an overweight position in Swedish bonds. These losses were
offset to some extent by an underweight position in Swiss bonds. Currency
selection added modest value during the fiscal year. Overweight positions in
Canadian dollars and British pounds added more than 150 basis points in value,
but were offset to some extent by losses on underweight positions in U.S. and
Australian dollars and an overweight position in Euros.
Emerging country debt exposure added nearly 200 basis points during the fiscal
year, with much of it concentrated in the second half of the period. Sovereign
spreads on the J.P. Morgan Emerging Markets Bond Index Plus declined from 1330
basis points to end the fiscal year at 816 basis points.
Issue selection was neutral during the fiscal year despite rising short-term
interest rates and concerns about Y2K.
OUTLOOK
The Fund is structured to benefit from outperformance in the Australian,
Canadian, European, New Zealand, Swedish, U.S. and emerging bond markets. We
expect the Danish, Japanese, Swiss and British bond markets to underperform. Our
strategy maintains a market duration in each country. Strong relative
performance is expected from Canadian dollars, Euros and Swiss francs. The
Australian dollar, Danish krone, Japanese yen, Swedish krona, British pound and
U.S. dollar are expected to underperform.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO GLOBAL BOND FUND CLASS III SHARES AND THE
J.P. MORGAN GLOBAL GOVERNMENT BOND INDEX
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
Average Annual Total Returns
Inception 12/28/95
1yr 5yr 10yr (ITD)
<S> <C> <C>
- -2.21 N/A 5
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
Date GMO Global Bond Fund-III JP Morgan Global Gov't Bond
<S> <C> <C>
12/28/95 9985 10000
12/31/95 9985 10002
3/31/96 9815 9826
6/30/96 10255 9886
9/30/96 10750 10165
12/31/96 11290 10442
3/31/97 10920 10033
6/30/97 11334 10328
9/30/97 11869 10506
12/31/97 12009 10588
3/31/98 12201 10693
6/30/98 12321 10934
9/30/98 12959 11855
12/31/98 13240 12210
3/31/99 12580 11734
6/30/99 12175 11331
9/30/99 12568 11777
12/31/99 12506 11589
2/29/00 12258 11304
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The total returns would have been lower had certain expenses
not been reimbursed during the periods shown and do not include the effect of
taxes. Each performance figure assumes purchase at the beginning and
redemption at the end of the stated period and reflects a transaction fee of
15 bp on the purchase. Transaction fees are retained by the Fund to cover
trading costs. Past performance is not indicative of future performance.
Information is unaudited.
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO International Bond Fund at
February 29, 2000, the results of its operations, the changes in its net assets
and the financial highlights for each of the periods indicated therein, in
conformity with accounting principles generally accepted in the United States.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at February 29, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 18, 2000
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEBT OBLIGATIONS -- 93.7%
ARGENTINA -- 0.9%
USD 500,000 Republic of Argentina, 12.13%, due 02/25/19 520,500
USD 1,000,000 Republic of Argentina Discount Bond,
Variable Rate, 6 mo. LIBOR + .81%, 6.88%, due
03/31/23 825,000
-----------
1,345,500
-----------
AUSTRALIA -- 2.8%
AUD 2,620,000 Queensland Treasury Corp, 8.00%, due 09/14/07 1,705,756
USD 2,500,000 Westralia Airports Corp, 144A, 6.48%, due 04/01/10 2,266,250
-----------
3,972,006
-----------
BRAZIL -- 1.6%
USD 3,000,000 Brazil Discount ZL Bond,
Variable Rate, 6 mo. LIBOR + .81%, 6.94%, due
04/15/24 2,343,750
-----------
BULGARIA -- 2.5%
USD 1,000,000 Bulgaria Discount Bond Series B,
Variable Rate, 6 mo. LIBOR + 1.31%, 7.56%,
due 07/28/24 823,750
USD 5,000,000 Bulgaria Discount Series B Interest Strips, Basket
2, 0.00%, due 07/28/24 895,000
USD 10,000,000 Bulgaria Discount Strips, 0.00%, due 07/28/24(a) 1,965,225
-----------
3,683,975
-----------
CANADA -- 10.3%
CAD 750,000 Government of Canada, 10.25%, due 03/15/14 715,524
CAD 5,000,000 Government of Canada Real Return, 4.25%,
due 12/01/21 4,060,579
CAD 3,000,000 Government of Canada Real Return, 4.25%,
due 12/01/26 2,321,599
CAD 2,000,000 Province of British Columbia, 7.88%, due 11/30/23 1,586,492
GBP 3,500,000 Province of Quebec, 8.62%, due 11/04/11 6,255,362
-----------
14,939,556
-----------
CAYMAN ISLANDS -- 8.4%
GBP 2,000,000 BA Credit Card Corp Series 97-1, 7.13%,
due 09/15/02 3,143,507
GBP 2,000,000 Chester Asset Receivables, Inc., Deal 2,
Variable Rate, 3 mo. GBP LIBOR + .10%, 6.11%,
due 06/15/01 3,157,084
CAD 2,000,000 Government of Canada (Cayman), 7.25%,
due 06/01/08 1,433,494
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
CAYMAN ISLANDS -- CONTINUED
USD 5,000,000 Pemex Finance Ltd. Series 1A1 Class A2, 144A,
6.30%, due 05/15/10 4,460,000
-----------
12,194,085
-----------
CHILE -- 2.2%
USD 3,500,000 Banco Santander, Series MBIA, 6.50%, due 11/01/05 3,267,250
-----------
FRANCE -- 1.5%
FRF 14,000,000 Auxiliare Credit Foncier, 10.00%, due 04/20/01 2,181,061
-----------
GERMANY -- 2.2%
GBP 3,000,000 Schweiz Bankgesellschaft, Zero Coupon,
due 03/31/06 3,124,879
-----------
JAPAN -- 7.7%
GBP 2,000,000 Export Import Bank of Japan, 10.75%, due 05/15/01 3,291,590
USD 1,030,000 Japan Highway Public Corporation, 7.63%,
due 09/22/04 1,031,545
GBP 4,000,000 Kobe City, 9.50%, due 10/20/04 6,917,863
-----------
11,240,998
-----------
JORDAN -- 0.5%
USD 1,000,000 Hashemite Kingdom of Jordan Par Bond Series DEF,
Variable Rate, Step Up, 144A, 6.00%,
due 12/23/23 667,500
-----------
MEXICO -- 3.8%
FRF 15,000,000 Mexico Par Bond, 6.63%, due 12/31/19 1,945,725
CHF 9,000,000 Mexico Par Bond, 3.75%, due 12/31/19 3,634,470
-----------
5,580,195
-----------
NEW ZEALAND -- 2.2%
NZD 6,800,000 New Zealand Index Linked Bond Series 216, 4.50%,
due 02/15/16 3,192,121
-----------
NIGERIA -- 0.4%
USD 1,228,385 Central Bank of Nigeria Par Bond Odd Lot,
Variable Rate, Step Up, 6.25%, due 11/15/20(a) 635,689
-----------
NORWAY -- 0.5%
SEK 6,300,000 A/S Eksportfinans, 7.50%, due 08/16/01 737,503
-----------
</TABLE>
See accompanying notes to the financial statements.
2
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPRA NATIONAL -- 3.6%
AUD 14,000,000 European Bank for Reconstruction and Development,
Zero Coupon, due 02/10/28 1,093,767
CAD 700,000 European Investment Bank, 8.50%, due 08/30/05 523,191
GBP 2,000,000 International Bank for Reconstruction and
Development, 11.50%, due 11/09/03 3,631,010
-----------
5,247,968
-----------
SWEDEN -- 3.0%
SEK 20,000,000 Government of Sweden Index Linked Bond, 4.00%,
due 12/01/20 2,306,832
SEK 17,200,000 Kingdom of Sweden, 6.00%, due 02/09/05 1,986,034
-----------
4,292,866
-----------
UNITED STATES -- 39.1%
ASSET BACKED SECURITIES -- 29.7%
USD 5,000,000 Aircraft Finance Trust Series 99-1A Class A1,
Variable Rate, 1 mo. LIBOR + .48%, 6.36%,
due 05/15/24 4,990,625
USD 5,000,000 Augusta Funding Ltd. X, 144A,
Variable Rate, 3mo. LIBOR + .25%, 6.43%,
due 06/30/17 4,846,094
USD 5,000,000 Big Flower Receivables Master Trust Series 96-2
Class A,
Variable Rate, LIBOR + .25%, 6.13%,
due 04/25/03 4,925,000
USD 3,500,000 Discover Card Master Trust I Series 99-3 Class A,
Variable Rate, 1 mo. LIBOR + .11%, 5.99%,
due 09/15/04 3,498,906
USD 4,492,655 Northstar CBO Ltd. Series 97-2 Class A2, 144A,
Variable Rate, Step Up, 6.62%, due 07/15/09 4,169,043
USD 5,000,000 Rhyno CBO Delaware Corp Series 97-1 Class A-2,
144A,
Variable Rate, Step Up, 6.33%, due 09/15/09 4,921,875
USD 5,966,000 SMS Student Loan Trust Series 94-A Certificates,
Variable Rate, 1 mo. LIBOR + .70%, 6.51%,
due 07/26/21 5,969,580
USD 5,000,000 Society Student Loan Trust Series 93-A Class B,
Variable Rate, 1 mo. LIBOR + .75%, 6.56%,
due 07/25/03 5,000,000
USD 5,000,000 Starvest Emerging Markets CBO-I Series 1A, Class
A,
Variable Rate, 6 mo. LIBOR + .19%, 144A, 6.41%,
due 07/30/11 4,869,531
-----------
43,190,654
-----------
CORPORATE DEBT -- 1.1%
SEK 14,000,000 Toyota Motor Credit, 7.50%, due 08/06/01 1,639,535
-----------
</TABLE>
See accompanying notes to the financial statements.
3
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY -- 8.3%
USD 2,401,188 Agency for International Development Floater
(Support of Honduras),
Variable Rate, 3 mo. U.S. Treasury Bill x 117%,
5.93%, due 10/01/11 2,317,146
USD 1,000,000 Agency for International Development Floater
(Support of India),
Variable Rate, 3 mo. LIBOR + .10%, 6.15%,
due 02/01/27 980,000
USD 1,681,201 Agency for International Development Floater
(Support of Morocco),
Variable Rate, 6 mo. U.S. Treasury Bill + .45%,
6.47%, due 11/15/14 1,634,968
USD 825,165 Agency for International Development Floater
(Support of Peru), Series A,
Variable Rate, 6 mo. U.S. Treasury Bill + .35%,
5.99%, due 05/01/14 792,159
USD 2,342,054 Agency for International Development Floater
(Support of Peru), Series A,
Variable Rate, 6 mo. U.S. Treasury Bill +.35%,
6.18%, due 05/01/14 2,248,371
USD 133,333 Agency for International Development Floater
(Support of Peru),
Variable Rate, 3 mo. U.S. Treasury Bill x 114%,
6.18%, due 02/01/02 132,667
USD 4,000,000 Federal Home Loan Bank,
Variable Rate, CPI + 3.15%, 5.66%,
due 02/15/02(b) 3,892,360
-----------
11,997,671
-----------
TOTAL UNITED STATES 56,827,860
-----------
VENEZUELA -- 0.5%
USD 1,000,000 Republic of Venezuela Discount Bond Series W-B,
Variable Rate, 6 mo. LIBOR + .81%, 6.88%,
due 03/31/20 772,500
-----------
TOTAL DEBT OBLIGATIONS (COST $144,102,898) 136,247,262
-----------
LOAN ASSIGNMENTS -- 1.6%
RUSSIA -- 1.6%
USD 9,646,950 Russia Vnesh Restructured Loan Agreements* 2,279,092
-----------
TOTAL LOAN ASSIGNMENTS (COST $4,624,582) 2,279,092
-----------
</TABLE>
See accompanying notes to the financial statements.
4
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
MUTUAL FUND -- 3.1%
178,260 GMO Alpha Libor Fund 4,508,186
-----------
TOTAL MUTUAL FUND (COST $4,499,740) 4,508,186
-----------
<CAPTION>
PRINCIPAL
AMOUNT
-------------
<S> <C> <C> <C>
CALL OPTIONS PURCHASED -- 0.0%
OPTIONS ON CURRENCY -- 0.0%
USD 12,880,000 Euro, Expires 5/03/00, Strike 1.12 2,576
-----------
OPTIONS ON FUTURES -- 0.0%
USD 910,000 Eurodollar, Expires 3/13/00, Strike 93.75 50,050
-----------
TOTAL CALL OPTIONS PURCHASED (COST $311,528) 52,626
-----------
PUT OPTIONS PURCHASED -- 0.8%
CROSS CURRENCY OPTIONS -- 0.0%
EUR 21,800,000 Euro Put/Swiss Franc Call, Expires 6/05/00, Strike
1.58485 31,484
-----------
OPTIONS ON CURRENCY -- 0.8%
USD 12,305,000 Euro, Expires 5/03/00, Strike 1.07 1,086,531
-----------
TOTAL PUT OPTIONS PURCHASED (COST $509,995) 1,118,015
-----------
<CAPTION>
SHARES
-------------
<S> <C> <C> <C>
RIGHTS AND WARRANTS -- 0.0%
MEXICO -- 0.0%
8,613,000 United Mexican States Warrants, Expires 6/30/03** --
-----------
NIGERIA -- 0.0%
1,227 Central Bank of Nigeria Payment Adjusted Warrants,
Expires 11/15/20** --
-----------
</TABLE>
See accompanying notes to the financial statements.
5
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES/
PAR VALUE DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
VENEZUELA -- 0.0%
7,140 Republic of Venezuela Recovery Warrants, Expires
4/15/20** --
-----------
TOTAL RIGHTS AND WARRANTS (COST $0) --
-----------
SHORT-TERM INVESTMENTS -- 1.5%
COMMERCIAL PAPER -- 1.4%
USD 2,000,000 Koch Industries Inc., 5.83%, due 3/01/00 2,000,000
-----------
REPURCHASE AGREEMENT -- 0.1%
USD 116,115 Salomon Smith Barney Inc. Repurchase Agreement,
dated 2/29/00, due 3/1/00, with a maturity value
of $116,131 and an effective yield of 4.95%,
collateralized by a U.S. Treasury Obligation with
a rate of 8.125%, maturity date of 8/15/19 and
market value, including accrued interest, of
$118,437. 116,115
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $2,116,115) 2,116,115
-----------
TOTAL INVESTMENTS -- 100.7%
(Cost $156,164,858) 146,321,296
Other Assets and Liabilities (net) -- (0.7%) (948,108)
-----------
TOTAL NET ASSETS -- 100.0% $145,373,188
===========
</TABLE>
See accompanying notes to the financial statements.
6
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
NOTES TO SCHEDULE OF INVESTMENTS:
CPI - Consumer Price Index
144A - Securities exempt from registration under rule 144A
of the Securities Act of 1933.
These securities may be resold in transactions exempt
from registration, normally to qualified institutional
investors.
Variable and Step up rates - The rates shown on variable and
step up rate notes are the current
interest rates at February 29, 2000, which are subject
to change based on the terms of the security, including
varying reset dates.
CURRENCY ABBREVIATIONS:
AUD - Australian Dollar
BEF - Belgian Franc
CAD - Canadian Dollar
CHF - Swiss Franc
EUR - Euro
FRF - French Franc
GBP - British Pound
ITL - Italian Lira
JPY - Japanese Yen
NZD - New Zealand Dollars
SEK - Swedish Krona
USD - United States Dollar
(a) Valued by management (Note 1).
(b) All or a portion of this security has been segregated to cover margin
requirements on open financial futures contracts (Note 6).
* Non-performing. Borrower not currently paying interest.
** Non-income producing security.
See accompanying notes to the financial statements. 7
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $156,164,858) (Note 1) $146,321,296
Cash at interest on deposit at brokers (Note 1) 1,841,096
Receivable for investments sold 28,221
Interest receivable 2,350,200
Receivable for expenses waived or borne by Manager (Note
2) 6,735
------------
Total assets 150,547,548
------------
LIABILITIES:
Payable for investments purchased 545,133
Payable to affiliate for (Note 2):
Management fee 29,162
Shareholder service fee 17,402
Net payable for open forward foreign currency contracts
(Notes 1 and 6) 3,838,565
Interest payable for open swap contracts (Note 1) 446,184
Payable for open swap contracts (Notes 1 and 6) 228,263
Payable for variation margin on open futures contracts
(Notes 1 and 6) 9,259
Accrued expenses 60,392
------------
Total liabilities 5,174,360
------------
NET ASSETS $145,373,188
============
NET ASSETS CONSIST OF:
Paid-in capital $161,827,531
Distributions in excess of net investment income (2,483,990)
Accumulated net realized gain 469,227
Net unrealized depreciation (14,439,580)
------------
$145,373,188
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $145,373,188
============
SHARES OUTSTANDING:
Class III 15,816,518
============
NET ASSET VALUE PER SHARE:
Class III $ 9.19
============
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest (including securities lending income of $2,177) $11,423,732
Dividends 165,875
-----------
Total income 11,589,607
-----------
EXPENSES:
Management fee (Note 2) 417,278
Custodian and transfer agent fees 99,271
Audit fees 55,901
Interest expense (Note 1) 53,732
Legal fees 2,976
Registration fees 2,471
Trustees fees (Note 2) 1,872
Miscellaneous 2,924
Fees waived or borne by Manager (Note 2) (165,415)
-----------
471,010
Shareholder service fee (Note 2)
Class III 250,367
-----------
Net expenses 721,377
-----------
Net investment income 10,868,230
-----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (2,785,697)
Closed futures contracts (280,291)
Closed swap contracts (695,971)
Written options 472,500
Foreign currency, forward contracts and foreign
currency related transactions (7,439,304)
-----------
Net realized loss (10,728,763)
-----------
Change in net unrealized appreciation (depreciation) on:
Investments (3,912,442)
Open futures contracts 80,175
Open swap contracts 1,129,271
Written options (114,912)
Foreign currency, forward contracts and foreign
currency related transactions (1,818,403)
-----------
Net unrealized loss (4,636,311)
-----------
Net realized and unrealized loss (15,365,074)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(4,496,844)
===========
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 10,868,230 $ 17,115,565
Net realized gain (loss) (10,728,763) 11,107,758
Change in net unrealized appreciation (depreciation) (4,636,311) (16,558,967)
------------ -------------
Net increase (decrease) in net assets from
operations (4,496,844) 11,664,356
------------ -------------
Distributions to shareholders from:
Net investment income
Class III (6,522,666) (8,308,647)
------------ -------------
Total distributions from net investment income (6,522,666) (8,308,647)
------------ -------------
In excess of net investment income
Class III -- (1,994,554)
------------ -------------
Total distributions in excess of net investment
income -- (1,994,554)
------------ -------------
Net realized gains
Class III (3,231,690) (5,508,618)
------------ -------------
Total distributions from net realized gains (3,231,690) (5,508,618)
------------ -------------
(9,754,356) (15,811,819)
------------ -------------
Net share transactions: (Note 5)
Class III (22,204,508) (107,045,783)
------------ -------------
Decrease in net assets resulting from net share
transactions (22,204,508) (107,045,783)
------------ -------------
Total decrease in net assets (36,455,708) (111,193,246)
NET ASSETS:
Beginning of period 181,828,896 293,022,142
------------ -------------
End of period (including distributions in excess of
net investment income of $2,483,990 and accumulated
undistributed net investment income of $4,362,615,
respectively) $145,373,188 $ 181,828,896
============ =============
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.06 $ 10.45 $ 10.78 $ 10.92 $ 9.64
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income(a) 0.70 0.71 0.59 0.71 0.62
Net realized and unrealized gain
(loss) (0.99) (0.42) 0.08 0.65 1.55
-------- -------- -------- -------- --------
Total from investment operations (0.29) 0.29 0.67 1.36 2.17
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (0.39) (0.36) (0.54) (0.81) (0.59)
In excess of net investment income -- (0.09) -- -- --
From net realized gains (0.19) (0.23) (0.10) (0.54) (0.30)
In excess of net realized gains -- -- (0.36) (0.15) --
-------- -------- -------- -------- --------
Total distributions (0.58) (0.68) (1.00) (1.50) (0.89)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 9.19 $ 10.06 $ 10.45 $ 10.78 $ 10.92
======== ======== ======== ======== ========
TOTAL RETURN(b) (2.98)% 2.48% 6.32% 12.39% 22.72%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $145,373 $181,829 $293,022 $235,783 $193,920
Net operating expenses to average
daily net assets 0.40% 0.40% 0.40% 0.40% 0.40%
Interest expense to average daily net
assets 0.03% -- -- -- --
Total net expenses to average daily
net assets 0.43%(c) 0.40% 0.40% 0.40% 0.40%
Net investment income to average
daily net assets(a) 6.51% 6.45% 6.24% 6.93% 8.17%
Portfolio turnover rate 39% 106% 105% 95% 99%
Fees and expenses voluntarily waived
or borne by the Manager consisted
of the following per share amounts: $ 0.01 $ 0.03 $ 0.02 $ 0.02 $ 0.01
</TABLE>
(a) Net investment income is affected by the timing of the declaration of
dividends by other Funds of the Trust in which the Fund invests.
(b) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(c) Interest expense incurred as a result of entering into reverse repurchase
agreements is included in the Fund's net expenses. Income earned on
investing proceeds from reverse repurchase agreements is included in
interest income.
See accompanying notes to the financial statements. 11
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO International Bond Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager"or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on June
24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series of shares into classes.
The Fund seeks high total return through investment in foreign bond and
currency markets. The Fund's benchmark is the J.P. Morgan Non-U.S.
Government Bond Index.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of financial statements in
accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost
which approximates market value. Shares of other Funds of the Trust are
valued at their net asset value as reported on each business day.
Securities for which quotations are not readily available are valued at
fair value as determined in good faith by the Trustees or other persons
acting at their direction.
Some fixed income securities and options thereon are valued at the closing
bid for such securities as supplied by a primary pricing source chosen by
the Manager. The Manager evaluates such primary pricing sources on an
ongoing basis, and may change a pricing source should it deem it
appropriate. The Manager is informed of erratic or unusual movements
(including unusual inactivity) in the prices supplied for a security and
at its discretion may override a price supplied by a source (by taking a
price supplied by another source).
12
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from
yield data relating to investments or securities with similar
characteristics.
Certain securities held by the Fund were valued on the basis of a price
provided by a principal market maker. The prices provided by the principal
market makers may differ from the value that would be realized if the
securities were sold and the differences could be material to the
financial statements. At February 29, 2000, the total value of these
securities represented 23% of net assets. Included in this total are U.S.
Government backed securities and other highly rated collateralized debt
obligations that represent 19% of net assets at February 29, 2000.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at current exchange rates when accrued
or incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign currency contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FUTURES CONTRACTS
The Fund may use futures contracts to manage its exposure to the bond and
currency markets. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments.
Upon entering into a futures contract, the Fund is required to deposit
with its custodian, in a segregated account in the name of the futures
broker, an amount of cash or U.S. government and agency obligations in
accordance with the initial margin requirements of the broker or exchange.
Futures contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. Gains or losses are recognized but not considered realized until the
contracts expire or are closed. Futures contracts involve, to varying
degrees, risk of loss in excess of the variation margin disclosed in the
Statement of Assets and Liabilities. Losses may arise from the changes in
the value of the underlying instrument, if there is an illiquid secondary
market for the contracts, or if counterparties do not perform under the
contract
13
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
terms. Futures contracts are valued at the settlement price established
each day by the board of trade or exchange on which they are traded. See
Note 6 for all open futures contracts as of February 29, 2000.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or
all of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency
contracts are marked to market daily and the change in value is recorded
by the Fund as an unrealized gain or loss. Realized gains or losses equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed are recorded upon delivery
or receipt of the currency or, if a forward currency contract is offset by
entering into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market
risk in excess of the unrealized gain or loss reflected in the Fund's
Statement of Assets and Liabilities. In addition, the Fund could be
exposed to risk if the counterparties are unable to meet the terms of the
contracts or if the value of the currency changes unfavorably to the U.S.
dollar. The U.S. dollar value of the currencies the Fund has committed to
buy or sell is shown under Note 6 and represents the currency exposure the
Fund has acquired or hedged through currency contracts as of February 29,
2000.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying
instrument. When the Fund writes a call or put option, an amount equal to
the premium received is recorded as a liability and subsequently marked to
market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
added to the proceeds or offset against the amounts paid on the underlying
future, security or currency transaction to determine the realized gain or
loss. The Fund as a writer of an option has no control over whether the
underlying future, security or currency may be sold (call) or purchased
(put) and as a result bears the market risk of an unfavorable change in
the price of the future, security or currency underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. At February 29, 2000 there were
no open written option contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's
14
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities as an investment and subsequently
marked to market to reflect the current value of the option. Premiums paid
for purchasing options which expire are treated as realized losses. The
risk associated with purchasing put and call options is limited to the
premium paid. Premiums paid for purchasing options which are exercised or
closed are added to the amounts paid or offset against the proceeds on the
underlying future, security or currency transaction to determine the
realized gain or loss.
LOAN AGREEMENTS
The Fund may invest in direct debt instruments which are interests in
amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates. The Fund's investments in loans may be in the form of
participations in loans or assignments of all or a portion of loans from
third parties. A loan is often administered by a bank or other financial
institution (the lender) that acts as agent for all holders. The agent
administers the terms of the loan, as specified in the loan agreement.
When investing in a loan participation, the Fund has the right to receive
payments of principal, interest and any fees to which it is entitled only
from the lender selling the loan agreement and only upon receipt by the
lender of payments from the borrower. The Fund generally has no right to
enforce compliance with the terms of the loan agreement with the borrower.
As a result, the Fund may be subject to the credit risk of both the
borrower and the lender that is selling the loan agreement. When the Fund
purchases assignments from lenders it acquires direct rights against the
borrower on the loan. Direct indebtedness of emerging countries involves a
risk that the governmental entities responsible for the repayment of the
debt may be unable or unwilling to pay the principal and interest when
due.
INDEXED SECURITIES
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to
increase or decrease its exposure to different underlying instruments and
to gain exposure to markets that may be difficult to invest in through
conventional securities. Indexed securities may be more volatile than
their underlying instruments, but any loss is limited to the amount of the
original investment.
SWAP AGREEMENTS
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into interest rate, total return and credit
default swap agreements to manage its exposure to interest rates and
credit risk. Interest rate swap agreements involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. Total return swap
agreements involve commitments to pay interest in exchange for a market
linked return, both based on notional
15
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
amounts. To the extent the total return of the security or index
underlying the transaction exceeds or falls short of the offsetting
interest rate obligation, the Fund will receive a payment from or make a
payment to the counterparty. Credit default swaps involve the payment of a
specified rate based on the notional amount. The Fund receives payment
upon a default of the underlying security. In connection with these
agreements, cash or securities may be set aside as collateral by the
Fund's custodian in accordance with the terms of the swap agreement. The
Fund earns interest on cash set aside as collateral, which is paid by the
counterparty. At February 29, 2000, $1,841,096 in cash has been set aside.
Swaps are marked to market daily based upon quotations from market makers
and the change, if any, is recorded as unrealized gain or loss in the
Statement of Operations. Payments received or made at the end of the
measurement period are recorded as realized gain or loss in the Statement
of Operations. Net payments of interest on interest rate swap agreements
are included as part of interest income. Entering into these agreements
involves, to varying degrees, elements of credit and market risk in excess
of the amounts recognized on the Statement of Assets and Liabilities. Such
risks involve the possibility that there will be no liquid market for
these agreements, that the counterparty to the agreements may default on
its obligation to perform and that there may be unfavorable changes in the
fluctuation of interest rates. See Note 6 for a summary of open swap
agreements as of February 29, 2000.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, realization of collateral by the Fund may be delayed or
limited.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements with certain banks
and broker/dealers whereby the Fund sells portfolio assets concurrent with
an agreement by the Fund to repurchase the same assets at a later date at
a fixed price. In connection with these agreements, the Fund establishes
segregated accounts with its custodian in which the Fund maintains cash,
U.S. Government securities or other liquid high grade debt obligations in
the name of the counterparty equal in value to its obligations in respect
of reverse repurchase agreements. Reverse repurchase agreements involve
the risk that the market value of the securities the Fund has sold may
decline below the contractual repurchase price under the agreement. During
the year ended February 29, 2000, the
16
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
Fund had entered into reverse repurchase agreements with an average
balance outstanding of $3,527,724 and an average interest rate of 5.23%.
The maximum balance outstanding was $6,299,000. The average shares
outstanding were 17,640,282 and the average balance per share outstanding
was $0.20. Average balance outstanding was calculated based on daily
balances outstanding during the period the Fund had entered into reverse
repurchase agreements. At February 29, 2000, there were no open reverse
repurchase agreements.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of delay in
recovery or even loss of rights in the collateral should the borrower of
the securities fail financially. The Fund receives compensation for
lending its securities. At February 29, 2000 the Fund had no securities on
loan.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to differing treatments for foreign currency
transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable
17
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
income and capital gains under U.S. federal tax rules versus accounting
principles generally accepted in the United States. The calculation of net
investment income per share in the financial highlights excludes these
adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
<S> <C> <C>
$(11,192,169) $11,171,959 $20,210
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis, and is adjusted for the accretion of
discounts. Dividend income is recorded on the ex-dividend date. In
determining the net gain or loss on securities sold, the cost of
securities is determined on the identified cost basis. Interest income on
U.S. Treasury inflation indexed securities is accrued daily based upon an
inflation adjusted principal. Additionally, any increase in the principal
or face amount of these securities is recorded as interest income.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is .15% of the amount
invested. The premium will be reduced by 50% with respect to any portion
of a purchase that is offset by a corresponding redemption occurring on
the same day. In addition, the purchase premium for the Fund will be
reduced by 50% if the purchaser makes an in-kind purchase of Fund shares
or if the purchase or redemption is part of a transfer from or to another
Fund where the Manager is able to transfer securities among the Funds to
effect the transaction. All purchase premiums are paid to and recorded by
the Fund as paid-in capital. For the year ended February 29, 2000, the
Fund received $7,451 in purchase premiums. There is no premium for cash
redemptions or reinvested distributions.
18
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments,
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets. The risks described above apply to an even greater
extent to investments in emerging markets. The securities markets of
emerging countries are generally smaller, less developed, less liquid, and
more volatile than the securities markets of the U.S. and developed
foreign markets.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .25% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding brokerage commissions, certain other transaction costs
(including transfer taxes), shareholder service fees and extraordinary
expenses) exceed the management fee.
Prior to March 1, 1999, GMO earned a management fee at the annual rate of
.40% of average daily net assets. GMO had agreed to waive a portion of its
fee and bear other expenses to the extent that the Fund's annual expenses
(including the management fee but excluding brokerage commissions, certain
other transaction costs (including transfer taxes), shareholder service
fees and extraordinary expenses) exceeded .25% of average daily net
assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000, was $1,872. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 29, 2000, aggregated
$63,294,081 and $98,034,683, respectively.
19
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
At February 29, 2000, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
$156,266,898 $2,265,628 $(12,211,230) $(9,945,602)
</TABLE>
4. PRINCIPAL SHAREHOLDERS
At February 29, 2000, 56.1% of the outstanding shares of the Fund were
held by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares. Investment activities of these shareholders could have
a material effect.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
------------------------ --------------------------
Shares Amount Shares Amount
Class III: ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Shares sold 506,647 $ 5,058,435 5,484,951 $ 57,695,554
Shares issued to shareholders
in reinvestment of distributions 824,412 7,759,488 1,255,142 13,253,099
Shares repurchased (3,580,058) (35,022,431) (16,723,091) (177,994,436)
---------- ------------ ----------- -------------
Net decrease (2,248,999) $(22,204,508) (9,982,998) $(107,045,783)
========== ============ =========== =============
</TABLE>
20
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 29, 2000 is as
follows:
FORWARD CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Net Unrealized
Settlement Units Appreciation
Date Deliver/Receive of Currency Value (Depreciation)
---------- --------------- ------------------- ---------------- --------------
<S> <C> <C> <C> <C>
Buys
3/10/00 CAD 17,700,000 $12,201,539 $ 164,817
3/23/00 EUR 78,500,000 75,706,185 (3,843,304)
3/03/00 GBP 19,200,000 30,310,675 (305,961)
4/21/00 JPY 4,660,000,000 42,805,637 (469,256)
-----------
$(4,453,704)
===========
Sales
4/28/00 AUD 7,800,000 $ 4,793,903 $ 91,042
3/10/00 CAD 4,200,000 2,895,280 7,544
3/23/00 EUR 600,000 578,646 8,694
3/03/00 GBP 19,200,000 30,310,675 428,029
5/05/00 GBP 12,800,000 20,205,236 10,380
4/21/00 JPY 110,000,000 1,010,434 (954)
3/30/00 NZD 6,800,000 3,303,032 153,952
-----------
$ 698,687
===========
</TABLE>
FORWARD CROSS CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Net Unrealized
Settlement Appreciation
Date Deliver/Units of Currency Receive/In Exchange For (Depreciation)
---------- ------------------------- ----------------------- --------------
<S> <C> <C> <C> <C> <C>
4/14/00 CHF 18,135,088 EUR 11,300,000 $ (7,357)
4/14/00 EUR 3,100,000 CHF 4,972,307 329
4/07/00 SEK 43,741,935 EUR 5,100,000 (76,520)
--------
$(83,548)
========
</TABLE>
21
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
<TABLE>
<CAPTION>
Net Unrealized
Number of Contract Appreciation
Contracts Type Expiration Date Value (Depreciation)
-------------------------- --------------------------------------------- --------------- ------------ --------------
<S> <C> <C> <C> <C>
Buys
30 Australian Government Bond 3 Yr. March 2000 $ 2,116,463 $ (11,068)
345 Euro Bund 10 Yr. March 2000 34,452,168 (495,556)
17 Japanese Government Bond 10 Yr. March 2000 20,445,496 53,251
13 Japanese Government Bond 10 Yr. June 2000 15,480,952 (2,464)
81 Swiss Government Bond 10 Yr. March 2000 5,743,407 (104,225)
---------
$(560,062)
=========
Sales
3 Australian Government Bond 3 Yr. March 2000 $ 255,187 $ 309
49 Canadian Government Bond 10 Yr. June 2000 3,325,651 (10,120)
17 Japanese Government Bond 10 Yr. March 2000 20,451,686 6,063
78 U.K. Gilt June 2000 13,753,406 77,365
68 U.S. Treasury Bond June 2000 6,438,750 37,277
226 U.S. Treasury Note 10 Yr. June 2000 21,558,281 44,438
---------
$ 155,332
=========
</TABLE>
At February 29, 2000, the Fund has sufficient cash and/or securities to
cover any margin requirements on open futures contracts.
22
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
WRITTEN OPTION TRANSACTIONS
<TABLE>
<CAPTION>
Puts Calls
Principal Amount Principal Amount
of Contracts of Contracts
(000's omitted) Premiums (000's omitted) Premiums
---------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period 6,300 $ 396,522 6,300 $ 472,500
Options written -- -- -- --
Options closed -- -- -- --
Options exercised (6,300) (396,522) -- --
Options expired -- -- (6,300) (472,500)
----------- --------- ----------- ---------
Outstanding, end of period -- $ -- -- $ --
=========== ========= =========== =========
</TABLE>
SWAP AGREEMENTS
<TABLE>
<CAPTION>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
----------------------- ---------- -------------------------------------------------- --------------
<C> <C> <S> <C>
CREDIT DEFAULT SWAPS
270,000,000,000 ITL 3/31/03 Agreement with Morgan Guaranty Trust Company dated $(147,441)
3/26/98 to pay .07% per year times the notional
amount. The Fund receives payment only upon a
default event in Italy, the notional amount times
the difference between the par value and the then-
market value of Italy BTP, 6.00% due 11/01/07.
5,658,750,000 BEF 3/31/03 Agreement with Morgan Guaranty Trust Company dated (174,506)
3/26/98 to pay .07% per year times the notional
amount. The Fund receives payment only upon a
default event in Belgium, the notional amount
times the difference between the par value and the
then-market value of Kingdom of Belgium, 5.75% due
3/28/08.
</TABLE>
23
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<TABLE>
<CAPTION>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
----------------------- ---------- -------------------------------------------------- --------------
<C> <C> <S> <C>
INTEREST RATE SWAPS
16,800,000 CHF 6/05/05 Agreement with Morgan Guaranty Trust Company dated $ 260,920
6/03/98 to pay the notional amount multiplied by
3.245% and to receive the notional amount
multiplied by 6 month Floating Rate Swiss LIBOR
adjusted by a specified spread.
14,500,000 CHF 6/10/05 Agreement with Credit Suisse Financial Products 221,240
dated 6/08/98 to pay the notional amount
multiplied by 3.2625% and to receive the notional
amount multiplied by 6 month Floating Rate Swiss
LIBOR adjusted by a specified spread.
10,000,000 CHF 6/11/05 Agreement with Morgan Guaranty Trust Company dated 157,936
6/09/98 to pay the notional amount multiplied by
3.245% and to receive the notional amount
multiplied by 6 month Floating Rate Swiss LIBOR
adjusted by a specified spread.
4,400,000 CHF 9/16/05 Agreement with Morgan Guaranty Trust Company dated 190,642
9/14/98 to pay the notional amount multiplied by
3.1175% and to receive the notional amount
multiplied by 6 month Floating Rate Swiss LIBOR
adjusted by a specified spread.
</TABLE>
24
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<TABLE>
<CAPTION>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
----------------------- ---------- -------------------------------------------------- --------------
<C> <C> <S> <C>
20,000,000 USD 7/29/06 Agreement with Morgan Guaranty Trust Company dated $(709,301)
7/27/99 to receive the notional amount multiplied
by 6.664% and to pay the notional amount
multiplied by 3 month LIBOR adjusted by a
specified spread.
27,000,000 SEK 9/13/06 Agreement with UBS AG dated 9/09/99 to receive the 12,509
notional amount multiplied by 6.465% and to pay
the notional amount multiplied by 3 month Floating
Rate Swedish LIBOR adjusted by a specified spread.
TOTAL RETURN SWAP
45,000,000 USD 7/25/01 Agreement with Morgan Guaranty Trust Company dated (40,262)
7/01/99 to receive (pay) the notional amount
multiplied by the return on the JP Morgan Non-U.S.
Traded Total Return Government Bond Index and to
pay the notional amount multiplied by 1 month
LIBOR adjusted by a specified spread.+
---------
$(228,263)
=========
</TABLE>
+ This swap agreement is valued by management (Note 1).
See Notes to the Schedule of Investments for definitions of currency
abbreviations.
25
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
The Fund has elected to defer to March 1, 2000 post October foreign
currency losses of $6,027,432.
For the fiscal year ended February 29, 2000, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 33.1% of distributions as net capital gain dividends.
26
<PAGE>
GMO INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Mr. William L. Nemerever and Mr. Thomas F. Cooper are primarily responsible for
the day-to-day management of the Fund's portfolio. Each of these individuals has
been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the International Bond Fund returned -3.0% for the
fiscal year ended February 29, 2000, compared to -5.4% for the J.P. Morgan
Non-U.S. Government Bond Index. Consistent with the Fund's investment objectives
and policies, the Fund was substantially invested in investment-grade, foreign
and domestic fixed income instruments throughout the period.
The Fund outperformed the benchmark during the fiscal year by 2.4%. Currency and
emerging country debt selection added value during the fiscal year, while bond
market and issue selection were negative and reduced portfolio return. Long bond
yields increased by 20 to 200 basis points in developed countries, except in
Japan where yields declined by 60 basis points. Other than in Japan, bond market
returns were negative across the international bond universe. The U.S. dollar
appreciated against European currencies, but declined against the Japanese yen,
Canadian dollar and Australian dollar.
Bond market selection during the fiscal year was hurt by an underweight position
in Japanese bonds and an overweight position in Swedish bonds. These losses were
offset to some extent by an underweight position in Swiss bonds. Currency
selection added modest value during the fiscal year. Overweight positions in
Canadian dollars and British pounds added more than 150 basis points in value,
but were offset to some extent by losses on underweight positions in U.S. and
Australian dollars and an overweight position in Euros.
Emerging country debt exposure added more than 250 basis points during the
fiscal year, with much of it concentrated in the second half of the period.
Sovereign spreads on the J.P. Morgan Emerging Markets Bond Index Plus declined
from 1330 basis points to end the fiscal year at 816 basis points.
Issue selection was neutral during the fiscal year despite rising short-term
interest rates and concerns about Y2K.
OUTLOOK
The Fund is structured to benefit from outperformance in the Australian,
Canadian, European, New Zealand, Swedish, U.S. and emerging bond markets. We
expect the Danish, Japanese, Swiss and British bond markets to underperform. Our
strategy maintains a market duration in each country. Strong relative
performance is expected from Canadian dollars, Euros and Swiss francs. The
Australian dollar, Danish krone, Japanese yen, Swedish krona, British pound and
U.S. dollar are expected to underperform.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO INTERNATIONAL BOND FUND CLASS III SHARES AND THE
J.P. MORGAN NON-U.S. GOVERNMENT BOND INDEX
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
Average Annual Total Returns
Inception 12/22/93
1yr 5yr 10yr (ITD)
<S> <C> <C>
- -3.13 7.79 7.55
[GRAPH]
<CAPTION>
Date GMO International Bond Fund-III JP Morgan Non-US Gov't Bond
<S> <C> <C> <C>
12/22/93 9985 10000
12/31/93 9885 9900
3/31/94 9945 10017
6/30/94 10065 10147
9/30/94 10560 10320
12/31/94 10395 10386
3/31/95 11490 11846
6/30/95 12428 12393
9/30/95 12579 12240
12/31/95 13235 12579
3/31/96 13247 12368
6/30/96 13876 12453
9/30/96 14653 12893
12/31/96 15441 13242
3/31/97 14655 12472
6/30/97 15137 12791
9/30/97 15687 12864
12/31/97 15575 12742
3/31/98 15726 12826
6/30/98 15787 13081
9/30/98 16675 14384
12/31/98 17256 15072
3/31/99 16259 14325
6/30/99 15599 13665
9/30/99 16319 14424
12/31/99 16311 14142
2/29/00 15696 13523
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The total returns would have been lower had certain expenses
not been reimbursed during the periods shown and do not include the effect of
taxes. Each performance figure assumes purchase at the beginning and
redemption at the end of the stated period and reflects a transaction fee of
15 bp on the purchase. Transaction fees are retained by the Fund to cover
trading costs. Past performance is not indicative of future performance.
Information is unaudited.
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Emerging Country Debt Fund at
February 29, 2000, the results of its operations, the changes in its net assets
and the financial highlights for each of the periods indicated therein, in
conformity with accounting principles generally accepted in the United States.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at February 29, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 18, 2000
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE DESCRIPTION VALUE ($)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEBT OBLIGATIONS -- 74.3%
ARGENTINA -- 11.6%
ARS 4,400,000 Provincia Corrientes Series 1, PIK,
Variable Rate, 1 mo. Peso Deposit Rate, 2.87%,
due 04/01/09 2,134,213
ARS 2,500,000 Provincia Corrientes Series 2, PIK,
Variable Rate, 1 mo. Peso Deposit Rate, 2.87%,
due 04/01/09 1,212,621
USD 50,250,000 Republic of Argentina, 12.13%, due 02/25/19 52,310,250
ARS 17,823,800 Republic of Argentina Bocon Pro 1, PIK,
Variable Rate, 1 mo. Peso Deposit Rate, 2.87%,
due 04/01/07(a) 12,014,443
ARS 4,000,000 Republic of Argentina Bocon Pro 1, PIK,
Variable Rate, 1 mo. Peso Deposit Rate , 2.87%,
due 04/01/07 2,860,286
DEM 3,830,000 Republic of Argentina Discount Bond,
Variable Rate, 6 mo. DEM LIBOR + .81%, 4.31%,
due 03/31/23 1,319,781
ARS 27,436,201 Republic of Argentina INDER Certificates, 6.00%,
due 04/15/06 15,365,809
ARS 35,134,370 Republic of Argentina Pro 1 Co-Participation
Rights,
Variable Rate, 1 mo. Peso Deposit Rate, 2.87%,
due 04/01/07 17,561,915
USD 2,000,000 Republic of Argentina Pro 4,
Variable Rate, 1 mo. LIBOR, 5.87%, due 12/28/10 1,985,000
-----------
106,764,318
-----------
BOSNIA & HERZEGOVINA -- 0.3%
DEM 25,244,000 Bosnia & Herzegovina Series A, Step Up, 2.00%, due
12/11/17 2,485,382
DEM 12,335,000 Bosnia & Herzegovina Series B, Zero Coupon, due
12/11/17 151,804
-----------
2,637,186
-----------
BRAZIL -- 17.5%
USD 306,740 Brazil Capitalization Bond, PIK, 8.00%, due
04/15/14 226,605
USD 52,500,000 Brazil DCB (Bearer),
Variable Rate, 6 mo. LIBOR + .88%, 7.00%, due
04/15/12 39,046,875
USD 18,000,000 Brazil DCB (Registered),
Variable Rate, 6 mo. LIBOR + .88%, 7.00%, due
04/15/12 13,387,500
USD 25,525,000 Brazil Discount ZL Bond,
Variable Rate, 6 mo. LIBOR + .81%, 6.94%, due
04/15/24 19,941,406
USD 18,000,000 Brazil FLIRB (Bearer),
Variable Rate, Step Up, 5.00%, due 04/15/09 13,680,000
USD 52,320,000 Brazil FLIRB (Registered),
Variable Rate, Step Up, 5.00%, due 04/15/09 39,763,200
USD 16,091,423 Brazil MYDFA Trust Certificates,
Variable Rate, 6 mo. LIBOR + .81%, 6.81%, due
09/15/07 13,355,881
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE DESCRIPTION VALUE ($)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
BRAZIL -- CONTINUED
USD 16,000,000 Brazil New Money Bond,
Variable Rate, 6 mo. LIBOR + .88%, 7.00%, due
04/15/09 13,160,000
USD 10,000,000 Republic of Brazil, 12.25%, due 03/06/30 9,490,000
-----------
162,051,467
-----------
BULGARIA -- 4.3%
USD 6,551,707 Bulgaria Discount Bond Series B,
Variable Rate, 6 mo. LIBOR + 1.31%, 7.56%, due
07/28/24 5,396,969
USD 18,000,000 Bulgaria Discount Series B Interest Strips, Basket
2, 0.00%, due 07/28/24 3,222,000
USD 39,844,572 Bulgaria FLIRB Series B,
Variable Rate, Step Up, 3.25%, due 07/28/12 29,883,429
USD 5,000,000 Bulgaria Par Bond, Series B Strips, Tranche B,
0.00%, due 07/28/24 895,000
-----------
39,397,398
-----------
COLOMBIA -- 0.4%
USD 4,000,000 Republic of Colombia, 11.75%, due 02/25/20 3,870,000
-----------
COSTA RICA -- 0.1%
USD 1,000,000 Central Bank of Costa Rica Principal Bond Series
A, 6.25%, due 05/21/10 920,000
-----------
DOMINICAN REPUBLIC -- 1.3%
USD 17,957,000 Dominican Republic Discount Bond,
Variable Rate, 6 mo. LIBOR + .81%, 6.88%, due
08/30/24 11,941,405
-----------
ECUADOR -- 2.5%
USD 41,465,000 Republic of Ecuador Discount Bond (Global
Registered),
Variable Rate, 6 mo. LIBOR + .81%, 6.75%, due
02/28/25* 16,586,000
USD 1,000,000 Republic of Ecuador Par Bond,
Variable Rate, Step Up, 4.00%, due 02/28/25* 367,500
USD 22,101,904 Republic of Ecuador PDI (Bearer), PIK,
Variable Rate, 6 mo. LIBOR +.81%, 6.75%, due
02/27/15* 5,359,712
USD 2,363,840 Republic of Ecuador PDI (Registered), PIK,
Variable Rate, 6 mo. LIBOR + .81%, 6.75%, due
02/27/15* 573,231
-----------
22,886,443
-----------
</TABLE>
See accompanying notes to the financial statements.
2
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE DESCRIPTION VALUE ($)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
IVORY COAST -- 2.5%
FRF 25,000,000 Ivory Coast Discount Bond,
Variable Rate, Step Up, 3.00%, due 03/31/28 1,247,612
FRF 538,720,000 Ivory Coast FLIRB,
Variable Rate, Step Up, 2.00%, due 03/29/18 13,442,274
FRF 260,269,625 Ivory Coast PDI,
Variable Rate, Step Up, 1.90%, due 03/29/18 8,786,422
-----------
23,476,308
-----------
JORDAN -- 3.4%
USD 263,000 Hashemite Kingdom of Jordan IAB, 144A,
Variable Rate, 6 mo. LIBOR + .81%, 7.00%, due
12/23/05 251,165
USD 25,780,215 Hashemite Kingdom of Jordan Par Bond Series DEF,
Variable Rate, Step Up, 144A, 6.00%, due
12/23/23 17,208,294
USD 9,000,000 Hashemite Kingdom of Jordan Par Bond,
Variable Rate, Step Up, 6.00%, due 12/23/23 6,097,500
USD 8,105,423 Hashemite Kingdom of Jordan PDI,
Variable Rate, 6 mo. LIBOR + .81%, 7.00%, due
12/23/05 7,740,679
-----------
31,297,638
-----------
MACEDONIA -- 1.6%
USD 23,513,118 Macedonia Capitalization Bond, PIK,
Variable Rate, 6 mo. LIBOR + .81%, 7.02%, due
07/12/12 15,048,395
-----------
MEXICO -- 11.0%
USD 19,000 Mexico Discount Bond Series A Odd Lot,
Variable Rate, 6 mo. LIBOR + .81%, 6.93%, due
12/31/19(a) 17,237
USD 6,000,000 Mexico Discount Bond Series D,
Variable Rate, 6 mo. LIBOR + .81%, 6.90%, due
12/31/19 5,752,500
DEM 30,000,000 Mexico Discount Bond,
Variable Rate, 6 mo. DEM LIBOR + .81%, 4.31%,
due 12/31/19 12,682,153
FRF 335,250,000 Mexico Par Bond, 6.63%, due 12/31/19 43,117,914
CHF 72,000,000 Mexico Par Bond, 3.75%, due 12/31/19 29,075,761
USD 3,000,000 Mexico Par Bond, Series A, 6.25%, due 12/31/19 2,441,250
USD 10,500,000 Mexico Par Bond, Series B, 6.25%, due 12/31/19 8,544,375
USD 159,000 Mexico Par Bond, Series B Odd Lot, 6.25%, due
12/31/19(a) 120,840
-----------
101,752,030
-----------
</TABLE>
See accompanying notes to the financial statements.
3
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE DESCRIPTION VALUE ($)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
NIGERIA -- 2.8%
USD 29,500,000 Central Bank of Nigeria Par Bond,
Variable Rate, Step Up, 6.25%, due 11/15/20 16,741,250
USD 18,172,706 Nigeria Odd Lot, 6.25%, due 11/15/20(a) 9,404,377
-----------
26,145,627
-----------
PERU -- 2.1%
USD 4,325,000 Peru Discount Bond,
Variable Rate, 6 mo. LIBOR + .81%, 144A, 6.81%,
due 03/08/27 3,243,750
USD 7,775,000 Peru FLIRB,
Variable Rate, Step Up, 3.75%, due 03/07/17 4,966,281
USD 5,150,000 Peru FLIRB,
Variable Rate, Step Up, 144A, 3.75%, due
03/07/17 3,289,563
USD 14,000,000 Peru Par Bond,
Variable Rate, Step Up, 144A, 3.00%, due
03/07/27 5,810,000
USD 3,200,000 Peru PDI,
Variable Rate, Step Up, 4.50%, due 03/07/17 2,236,000
-----------
19,545,594
-----------
QATAR -- 0.2%
USD 2,000,000 State of Qatar, 9.50%, due 05/21/09 2,092,500
-----------
RUSSIA -- 0.6%
RUB 22,852,579 Russia Federal Loan Bond Series 25021, 15.00%, due
01/17/01(a) 347,964
RUB 114,950,000 Russia Federal Loan Bond Series 25023, 14.00%, due
09/12/01(a) 1,477,929
RUB 41,474,497 Russia Federal Loan Bond Series 26003, 10.00%, due
03/15/05(a) 229,049
USD 10,000,000 Russia Federation, 2.25%, due 03/31/30(b) 3,112,500
-----------
5,167,442
-----------
SOUTH KOREA -- 0.6%
USD 6,000,000 Export Import Bank of Korea, 7.10%, due 03/15/07 5,865,600
-----------
SUPRA NATIONAL -- 0.3%
ZAR 100,000,000 International Bank for Reconstruction and
Development, Zero Coupon, due 05/14/12* 3,070,279
-----------
TRINIDAD & TOBAGO -- 0.3%
USD 3,000,000 Republic of Trinidad & Tobago, 144A , 9.88%, due
10/01/09 3,127,500
-----------
</TABLE>
See accompanying notes to the financial statements.
4
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE DESCRIPTION VALUE ($)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
TUNISIA -- 1.0%
JPY 200,000,000 Banque Centrale De Tunisie, 4.35%, due 08/15/17 1,784,170
JPY 800,000,000 Banque National Development Touristique, 4.75%,
due 06/09/17 7,063,857
-----------
8,848,027
-----------
TURKEY -- 0.7%
USD 2,000,000 Republic of Turkey, 11.88%, due 01/15/30 2,077,500
USD 4,000,000 Republic of Turkey Notes, 12.00%, due 12/15/08 4,205,000
-----------
6,282,500
-----------
UKRAINE -- 0.2%
USD 3,000,000 Ukraine Government, 11.00%, due 03/15/07 1,680,000
-----------
UNITED STATES -- 1.6%
ASSET BACKED SECURITIES -- 0.5%
USD 5,000,000 SHYPPCO Finance Company Series 98-1 Class A-2B,
6.64%, due 06/15/10 4,562,500
-----------
U.S. GOVERNMENT AGENCY -- 1.1%
USD 1,083,500 Agency for International Development Floater
(Support of C.A.B.E.I.),
Variable Rate, 6 mo. U.S. Treasury Bill + .40%,
6.42%, due 10/01/12 1,050,995
USD 9,000,000 Federal Home Loan Bank,
Variable Rate, CPI + 3.15%, 5.66%, due
02/15/02(c) 8,757,810
-----------
9,808,805
-----------
TOTAL UNITED STATES 14,371,305
-----------
VENEZUELA -- 6.1%
USD 10,000,000 Republic of Venezuela, 9.25%, due 09/15/27 6,750,000
USD 1,650,288 Republic of Venezuela DCB DL Odd Lot,
Variable Rate, 6 mo. LIBOR + .88%, 7.00%, due
12/18/07(a) 1,291,351
USD 1,129,307 Republic of Venezuela DCB IL, Odd Lot,
Variable Rate, 6 mo. LIBOR + .88%, 7.00%, due
12/18/08(a) 855,450
USD 15,965,217 Republic of Venezuela DCB IL,
Variable Rate, 6 mo. LIBOR + .88%, 7.00%, due
12/18/08 12,891,913
USD 5,000,000 Republic of Venezuela Discount Bond Series A,
Variable Rate, 6 mo. LIBOR + .81%, 7.00%, due
03/31/20 3,862,500
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE DESCRIPTION VALUE ($)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
VENEZUELA -- CONTINUED
USD 182,143 Republic of Venezuela FLIRB Series A Odd Lot,
Variable Rate, 6 mo. LIBOR + .88%, 6.88%, due
03/31/07(a) 142,299
USD 522,857 Republic of Venezuela FLIRB Series B Odd Lot,
Variable Rate, 6 mo. LIBOR + .88%, 6.88%, due
03/31/07 411,097
CHF 28,571,392 Republic of Venezuela FLIRB,
Variable Rate, CHF, 6 mo. LIBOR + .88%, 2.75%,
due 03/31/07 12,888,722
USD 8,877,180 Republic of Venezuela New Money Bond Series A Odd
Lot,
Variable Rate, 6 mo. LIBOR + 1%, 7.13%, due
12/18/05(a) 6,835,429
USD 6,141,177 Republic of Venezuela New Money Bond Series A,
Variable Rate, 6 mo. LIBOR + 1%, 7.13%, due
12/18/05 5,035,765
USD 739,059 Republic of Venezuela New Money Bond Series B Odd
Lot,
Variable Rate, 6 mo. LIBOR + .88%, 7.00%, due
12/18/05(a) 569,084
DEM 1,070,000 Republic of Venezuela New Money Bond Series B,
Variable Rate, DEM, 6 mo. LIBOR + .88%, 4.44%,
due 12/18/05 389,781
FRF 39,175,000 Republic of Venezuela Par Bond, 7.71%, due
03/31/20 4,355,644
-----------
56,279,035
-----------
VIETNAM -- 1.3%
USD 4,000,000 Vietnam Discount Bond,
Variable Rate, 6 mo. LIBOR + .81%, 6.81%, due
03/13/28 2,240,000
USD 19,000,000 Vietnam Par Bond,
Variable Rate, Step Up, 3.00%, due 03/12/28 6,270,000
USD 6,591,000 Vietnam PDI,
Variable Rate, Step Up, 3.50%, due 03/14/16 3,427,320
-----------
11,937,320
-----------
TOTAL DEBT OBLIGATIONS (COST $696,676,554) 686,455,317
-----------
LOAN ASSIGNMENTS -- 20.8%
ALGERIA -- 6.7%
JPY 495,430,068 Algeria Tranche 1, JPY 6 mo. LIBOR + .8125%,
(1.0625%) 3,089,250
USD 3,085,714 Algeria Tranche 2, USD 6 mo. LIBOR + .8125%,
(6.8125%) 2,345,143
JPY 8,431,773,548 Algeria Tranche 3 Loan Agreement, JPY, 6 mo. LIBOR
+ .8125%, (1.0625%) 44,709,008
FRF 90,564,324 Algeria Tranche 3, FRF 6 mo. LIBOR + .8125%,
(3.9375%) 8,773,276
JPY 550,000,000 Algeria Tranche S1, JPY Long Term Prime + .8125%,
(1.0625%) 2,853,761
-----------
61,770,438
-----------
</TABLE>
See accompanying notes to the financial statements.
6
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE DESCRIPTION VALUE ($)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
CAMEROON -- 0.2%
NLG 23,084,718 Cameroon Loan Agreement, (No Tranche specified,
dated January 31, 1981)* 1,411,999
FRF 18,396,841 Republic of Cameroon Tranche B, (dated January 30,
1979)* 378,035
-----------
1,790,034
-----------
CONGO REPUBLIC (BRAZZAVILLE) -- 0.3%
EUR 8,195,761 Republic of Congo Loan Agreement* 848,269
FRF 102,097,964 Republic of Congo Loan Agreement* 1,610,965
USD 5,295,244 Republic of Congo Loan Agreement* 622,191
-----------
3,081,425
-----------
MOROCCO -- 3.3%
JPY 1,301,299,530 Morocco Restructuring and Consolidating Agreement
Tranche A, JPY Long Term Prime + .1175%,
(2.03175%) 10,068,769
USD 21,789,474 Morocco Tranche A, USD 6 mo. LIBOR + .8125%,
(6.84375%) 20,264,210
-----------
30,332,979
-----------
RUSSIA -- 10.3%
DEM 15,000,000 International Bank for Economic Cooperation Loan
Agreement* 738,408
EUR 5,000,000 International Bank for Economic Cooperation Loan
Agreement* 481,400
DEM 5,208,190 Russia Foreign Trade Obligations(a)* 515,974
USD 396,440,309 Russia Vnesh Restructured Loan Agreements* 93,659,023
-----------
95,394,805
-----------
YUGOSLAVIA -- 0.0%
USD 1,400,368 Yugoslavia New Financing Agreement Tranche A* 101,527
USD 1,499,573 Yugoslavia New Financing Agreement Tranche C* 108,719
-----------
210,246
-----------
TOTAL LOAN ASSIGNMENTS (COST $248,948,743) 192,579,927
-----------
LOAN PARTICIPATIONS -- 1.2%
CAMEROON -- 0.0%
NLG 4,968,184 Cameroon Loan Agreement, (No Tranche specified,
dated January 31, 1981), (Participation with
Salomon)* 303,884
-----------
</TABLE>
See accompanying notes to the financial statements.
7
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE DESCRIPTION VALUE ($)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
INDONESIA -- 0.4%
USD 480,000 Republic of Indonesia Loan Agreement, dated June
14, 1995 LIBOR + .625%, (6.75%), (Participation
with Salomon) 307,200
USD 480,000 Republic of Indonesia Loan Agreement, dated June
14, 1995 LIBOR + .625%, (6.8125%),
(Participation with Salomon) 307,200
USD 640,000 Republic of Indonesia Loan Agreement, dated June
14, 1995 LIBOR + .625%, (6.875%), (Participation
with Salomon) 409,600
USD 558,000 Republic of Indonesia Loan Agreement, dated March
25, 1997 LIBOR + .625%, (6.75%), (Participation
with Salomon) 371,070
USD 1,302,000 Republic of Indonesia Loan Agreement, dated March
25, 1997 LIBOR + .625%, (6.875%), (Participation
with Salomon) 865,830
USD 570,000 Republic of Indonesia Loan Agreement, dated May
21, 1996 LIBOR + .625%, (6.75%), (Participation
with Salomon) 384,750
USD 1,330,000 Republic of Indonesia Loan Agreement, dated May
21, 1996 LIBOR + .625%, (6.875%), (Participation
with Salomon) 897,750
-----------
3,543,400
-----------
JAMAICA -- 0.4%
USD 4,312,500 Jamaica Refinancing Agreement Tranche B, LIBOR +
.8125%, (6.9375%), (Participation with Chase
Manhattan Bank and Salomon) 3,622,500
-----------
MOROCCO -- 0.3%
JPY 329,400,722 Morocco Restructuring and Consolidating Agreement
Tranche A, JPY Long Term Prime + .2175%,
(3.0175%), (Participation with J.P. Morgan) 2,548,729
-----------
RUSSIA -- 0.1%
DEM 3,500,000 International Bank for Economic Cooperation Loan
Agreement, (Participation with Salomon)* 172,295
JPY 900,000,000 International Investment Bank Loan Agreement,
(Participation with Bank of America)* 819,262
-----------
991,557
-----------
YUGOSLAVIA -- 0.0%
USD 2,100,416 Yugoslavia New Financing Agreement Tranche B,
(Participation with Chase Manhattan Bank)* 152,280
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE DESCRIPTION VALUE ($)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
YUGOSLAVIA -- CONTINUED
USD 352,431 Yugoslavia New Financing Agreement Tranche C,
(Participation with Chase Manhattan Bank)* 25,551
-----------
177,831
-----------
TOTAL LOAN PARTICIPATIONS (COST $13,568,564) 11,187,901
-----------
PROMISSORY NOTES -- 0.8%
KENYA -- 0.6%
GBP 672,890 Republic of Kenya Promissory Notes, 0.00%, due
1/30/03(a) 592,971
GBP 1,856,250 Republic of Kenya Promissory Notes, 0.00%, due
7/30/02(a) 1,807,509
GBP 672,890 Republic of Kenya Promissory Notes, 0.00%, due
1/30/02(a) 724,058
GBP 1,856,250 Republic of Kenya Promissory Notes, 0.00%, due
7/30/01(a) 2,207,224
-----------
5,331,762
-----------
NIGERIA -- 0.1%
USD 3,000,000 Nigeria Promissory Notes, 5.09%, due 1/5/10 1,080,000
-----------
ROMANIA -- 0.1%
USD 599,637 Romania Trade Finance Promissory Notes, 0.00%, due
12/5/01(a) 383,348
USD 643,236 Romania Trade Finance Promissory Notes, 0.00%, due
6/5/01(a) 466,732
-----------
850,080
-----------
TOTAL PROMISSORY NOTES (COST $8,696,744) 7,261,842
-----------
<CAPTION>
PRINCIPAL
AMOUNT
-------------
<S> <C> <C> <C>
CALL OPTIONS PURCHASED -- 0.2%
OPTIONS ON BONDS -- 0.0%
USD 14,000,000 Republic of Venezuela Global Bond, Expires
3/30/00, Strike 67.75 147,000
-----------
OPTIONS ON FUTURES -- 0.2%
USD 5,385,000 Eurodollar, Expires 3/13/00, Strike 93.75 296,175
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT DESCRIPTION VALUE ($)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPTIONS ON FUTURES -- CONTINUED
USD 40,000,000 U.S. Treasury Bond, Expires 5/20/00, Strike 92 1,387,500
-----------
1,683,675
-----------
TOTAL CALL OPTIONS PURCHASED (COST $1,586,141) 1,830,675
-----------
PUT OPTIONS PURCHASED -- 0.2%
OPTIONS ON CURRENCY -- 0.2%
USD 50,000,000 Euro, Expires 3/06/00, Strike .996 1,680,000
USD 20,000,000 Japanese Yen, Expires 3/7/00, Strike 108 385,000
-----------
2,065,000
-----------
TOTAL PUT OPTIONS PURCHASED (COST $1,752,500) 2,065,000
-----------
<CAPTION>
SHARES
-------------
<S> <C> <C> <C>
RIGHTS AND WARRANTS -- 0.0%
MEXICO -- 0.0%
29,000 United Mexican States Recovery Warrants, Expires
6/30/03** --
148,605,000 United Mexican States Warrants, Expires 6/30/03** --
-----------
--
-----------
NIGERIA -- 0.0%
45,710 Central Bank of Nigeria Payment Adjusted Warrants,
Expires 11/15/20** --
-----------
VENEZUELA -- 0.0%
74,355 Republic of Venezuela Recovery Warrants, Expires
4/15/20** --
-----------
TOTAL RIGHTS AND WARRANTS (COST $0) --
-----------
</TABLE>
See accompanying notes to the financial statements.
10
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE DESCRIPTION VALUE ($)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS -- 4.2%
REPURCHASE AGREEMENTS -- 0.2%
EUR 2,131,466 JP Morgan Repurchase Agreement, dated 2/29/00, due
3/1/00, with a maturity value of $2,052,265 and an
effective yield of 1.65%, collateralized by a
Turkish Government Bond with a rate of 9.625%,
maturity date of 11/30/06 and a market value,
including accrued interest, of $2,110,493. 2,052,170
-----------
CASH EQUIVALENTS -- 0.5%
USD 3,237,602 BankBoston Eurodollar Time Deposit, 6.1175%, due
4/28/00(d) 3,237,602
USD 346,287 First Union National Bank Time Deposit, 5.8125%,
due 3/01/00(d) 346,287
USD 519,431 Fleet National Bank Time Deposit, 5.79%, due
3/10/00(d) 519,431
USD 500,000 Prudential Securities Group, Inc. Master Note,
6.1875%, due 3/10/00(d) 500,000
-----------
4,603,320
-----------
COMMERCIAL PAPER -- 3.5%
USD 31,900,000 Koch Industries Inc., 5.83%, due 3/01/00 31,900,000
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $38,555,490) 38,555,490
-----------
TOTAL INVESTMENTS -- 101.7%
(Cost $1,009,784,736) 939,936,152
Other Assets and Liabilities (net) -- (1.7%) (15,474,158)
-----------
TOTAL NET ASSETS -- 100.0% $924,461,994
===========
</TABLE>
See accompanying notes to the financial statements.
11
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
NOTES TO SCHEDULE OF INVESTMENTS:
144A - Securities exempt from registration under rule 144A
of the Securities Act of 1933. These securities may be
resold in transactions exempt from registration, normally
to qualified institutional investors.
DCB - Debt Conversion Bond
FLIRB - Front Loaded Interest Reduction Bond
IAB - Interest Arrears Bond
PDI - Past Due Interest
PIK - Payment In Kind
Variable and Step up rates - The rates shown on variable and
step up rate notes are the current interest rates at
February 29, 2000, which are subject to change based on
the terms of the security, including varying reset dates.
CURRENCY ABBREVIATIONS:
ARS - Argentine Peso
CHF - Swiss Franc
DEM - German Mark
EUR - Euro
FRF - French Franc
GBP - British Pound
JPY - Japanese Yen
NLG - Netherlands Guilder
RUB - Russian Ruble
USD - United States Dollar
ZAR - South African Rand
(a) Valued by management (Note 1).
* Non-performing. Borrower not currently paying interest.
(b) When issued security (Note 1).
(c) All or a portion of this security has been segregated to cover margin
requirements on open financial futures contracts (Note 6).
** Non-income producing security.
(d) Represents investments of security lending collateral (Note 1).
12 See accompanying notes to the financial statements.
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $1,009,784,736) (Note 1) $ 939,936,152
Cash 192,102
Cash at interest on deposit at brokers (Note 1) 4,857,604
Receivable for investments sold 14,295,268
Receivable for Fund shares sold 309
Interest receivable 15,963,494
Net receivable for open forward foreign currency
contracts (Notes 1 and 6) 7,486,070
Receivable for variation margin on open futures contracts
(Notes 1 and 6) 19,439
Receivable for open swap contracts (Notes 1 and 6) 37,386,833
Receivable for expenses waived or borne by Manager (Note
2) 28,358
Miscellaneous receivable 35,440
-------------
Total assets 1,020,201,069
-------------
LIABILITIES:
Payable for investments purchased 76,361,496
Payable upon return of securities loaned (Note 1) 4,603,320
Payable for Fund shares repurchased 14,211,440
Payable to affiliate for (Note 2):
Management fee 253,885
Shareholder service fee 87,291
Payable for closed swap contracts (Notes 1 and 6) 48,763
Accrued expenses and other liabilities 172,880
-------------
Total liabilities 95,739,075
-------------
NET ASSETS $ 924,461,994
=============
NET ASSETS CONSIST OF:
Paid-in capital $ 940,720,322
Accumulated undistributed net investment income 28,595,715
Accumulated undistributed net realized loss (18,802,077)
Net unrealized depreciation (26,051,966)
-------------
$ 924,461,994
=============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $ 378,593,292
=============
Class IV shares $ 545,868,702
=============
SHARES OUTSTANDING:
Class III 43,309,512
=============
Class IV 62,483,099
=============
NET ASSET VALUE PER SHARE:
Class III $ 8.74
=============
Class IV $ 8.74
=============
</TABLE>
See accompanying notes to the financial statements. 13
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest (including securities lending income of $15,159) $ 95,641,508
------------
Total income 95,641,508
------------
EXPENSES:
Management fee (Note 2) 2,943,719
Custodian fees 452,647
Audit fees 99,734
Legal fees 94,486
Transfer agent fees 35,047
Trustees fees (Note 2) 9,746
Registration fees 3,166
Miscellaneous 9,933
Fees waived or borne by Manager (Note 2) (252,112)
------------
3,396,366
Shareholder service fee (Note 2)
Class III 661,663
Class IV 399,954
------------
Net expenses 4,457,983
------------
Net investment income 91,183,525
------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (7,696,071)
Closed futures contracts 1,044,534
Closed swap contracts 32,344,540
Written options (9,735,695)
Foreign currency, forward contracts and foreign
currency related transactions 16,201,508
------------
Net realized gain 32,158,816
------------
Change in net unrealized appreciation (depreciation) on:
Investments 176,454,223
Open futures contracts (262,049)
Open swap contracts 16,219,852
Written options 10,871,437
Foreign currency, forward contracts and foreign
currency related transactions 793,630
------------
Net unrealized gain 204,077,093
------------
Net realized and unrealized gain 236,235,909
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $327,419,434
============
</TABLE>
14 See accompanying notes to the financial statements.
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 91,183,525 $ 80,159,030
Net realized gain (loss) 32,158,816 (59,206,097)
Change in net unrealized appreciation (depreciation) 204,077,093 (318,647,695)
------------- -------------
Net increase (decrease) in net assets from
operations 327,419,434 (297,694,762)
------------- -------------
Distributions to shareholders from:
Net investment income
Class III (51,599,442) (7,987,181)
Class IV (57,663,578) (9,997,511)
------------- -------------
Total distributions from net investment income (109,263,020) (17,984,692)
------------- -------------
Net realized gains
Class III (5,234,784) (33,861,250)
Class IV (6,680,035) (42,566,783)
------------- -------------
Total distributions from net realized gains (11,914,819) (76,428,033)
------------- -------------
In excess of net realized gains
Class III (46,638) (58,659)
Class IV (59,515) (73,741)
------------- -------------
Total distributions in excess of net realized
gains (106,153) (132,400)
------------- -------------
(121,283,992) (94,545,125)
------------- -------------
Net share transactions: (Note 5)
Class III (175,611,247) 168,649,238
Class IV 120,316,839 226,245,142
------------- -------------
Increase (decrease) in net assets resulting from net
share transactions (55,294,408) 394,894,380
------------- -------------
Total increase in net assets 150,841,034 2,654,493
NET ASSETS:
Beginning of period 773,620,960 770,966,467
------------- -------------
End of period (including accumulated undistributed
net investment income of $28,595,715 and
$14,414,488, respectively) $ 924,461,994 $ 773,620,960
============= =============
</TABLE>
See accompanying notes to the financial statements. 15
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 6.89 $ 11.64 $ 14.09 $ 11.76 $ 8.39
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.84+ 0.92+ 1.13+ 1.48 1.35
Net realized and unrealized gain
(loss) 2.20 (4.41) 1.51 6.40 3.84
-------- -------- -------- -------- --------
Total from investment operations 3.04 (3.49) 2.64 7.88 5.19
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (1.07) (0.23) (0.84) (1.58) (1.17)
From net realized gains (0.12) (1.03) (4.25) (3.97) (0.65)
In excess of net realized gains --(a) --(a) -- -- --
-------- -------- -------- -------- --------
Total distributions (1.19) (1.26) (5.09) (5.55) (1.82)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 8.74 $ 6.89 $ 11.64 $ 14.09 $ 11.76
======== ======== ======== ======== ========
TOTAL RETURN(b) 46.81% (32.94)% 22.27% 74.32% 63.78%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $378,593 $450,336 $460,387 $555,452 $615,485
Net expenses to average daily net
assets 0.56% 0.56% 0.53% 0.57% 0.50%
Net investment income to average
daily net assets 10.82% 10.99% 8.62% 8.35% 12.97%
Portfolio turnover rate 123% 272% 255% 152% 158%
Fees and expenses voluntarily waived
or borne by the Manager consisted
of the following per share amounts: --(c) $ 0.02 $ 0.03 $ 0.03 $ 0.02
</TABLE>
+ Computed using average shares outstanding throughout the period.
(a) The distribution in excess of net realized gains was less than $.001.
(b) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(c) Fees and expenses waived or borned by the Manager were less than $0.01 per
share.
16 See accompanying notes to the financial statements.
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
----------------------------------
2000 1999 1998**
-------- -------- --------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 6.90 $ 11.63 $ 10.99
-------- -------- --------
Income from investment operations:
Net investment income 0.84+ 0.91+ 0.10+
Net realized and unrealized gain (loss) 2.20 (4.37) 0.54
-------- -------- --------
Total from investment operations 3.04 (3.46) 0.64
-------- -------- --------
Less distributions to shareholders:
From net investment income (1.08) (0.24) --
From net realized gains (0.12) (1.03) --
In excess of net realized gains --(a) --(a) --
-------- -------- --------
Total distributions (1.20) (1.27) 0.00
-------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 8.74 $ 6.90 $ 11.63
======== ======== ========
TOTAL RETURN(b) 47.00% (32.82)% 5.82%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $545,869 $323,285 $310,580
Net expenses to average daily net assets 0.51% 0.51% 0.50%*
Net investment income to average daily net
assets 10.87% 10.87% 7.17%*
Portfolio turnover rate 123% 272% 255%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following per
share amounts: --(c) $ 0.02 --(c)
</TABLE>
* Annualized.
** Period from January 9, 1998 (commencement of operations) to February 28,
1998.
+ Computed using average shares outstanding throughout the period.
(a) The distribution in excess of net realized gains was less than $.001.
(b) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(c) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
See accompanying notes to the financial statements. 17
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Emerging Country Debt Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on
June 24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series of shares into classes.
The Fund seeks to earn high total return through investment in sovereign
debt of developing countries in Asia, Latin America, the Middle East,
Africa and Europe. The Fund's benchmark is the J.P. Morgan Emerging
Markets Bond Index Global.
The Fund offers two classes of shares: Class III and Class IV. The
principal economic difference between the classes of shares is the level
of shareholder service fee borne by the classes. Eligibility for and
automatic conversion between the various classes of shares is generally
based on the total amount of assets invested with GMO, as more fully
outlined in the Trust's prospectus.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of financial statements in
accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost
which approximates market value. Securities for which quotations are not
readily available are valued at fair value as determined in good faith by
the Trustees or other persons acting at their direction. At February 29,
2000, the total value of these securities represented 4% of net assets.
18
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
Some fixed income securities and options thereon are valued at the closing
bid for such securities as supplied by a primary pricing source chosen by
the Manager. The Manager evaluates such primary pricing sources on an
ongoing basis, and may change a pricing source should it deem it
appropriate. The Manager is informed of erratic or unusual movements
(including unusual inactivity) in the prices supplied for a security and
at its discretion may override a price supplied by a source (by taking a
price supplied by another source).
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from
yield data relating to investments or securities with similar
characteristics.
Certain securities held by the Fund were valued on the basis of a price
provided by a principal market maker. The prices provided by the principal
market makers may differ from the value that would be realized if the
securities were sold and the differences could be material to the
financial statements. At February 29, 2000, the total value of these
securities represented 17% of net assets. Included in this total are U.S.
Government backed securities and other highly rated collateralized debt
obligations that represent 1% of net assets at February 29, 2000.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at current exchange rates when accrued
or incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign currency contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FUTURES CONTRACTS
The Fund may use futures contracts to manage its exposure to the bond and
currency markets. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments.
Upon entering into a futures contract, the Fund is required to deposit
with its custodian, in a segregated account in the name of the futures
broker, an amount of cash or U.S. government and agency obligations in
accordance with the initial margin requirements of the broker or exchange.
Futures contracts are marked to market daily and an appropriate payable or
receivable for the
19
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
change in value ("variation margin") is recorded by the Fund. Gains or
losses are recognized but not considered realized until the contracts
expire or are closed. Futures contracts involve, to varying degrees, risk
of loss in excess of the variation margin disclosed in the Statement of
Assets and Liabilities. Losses may arise from the changes in the value of
the underlying instrument, if there is an illiquid secondary market for
the contracts, or if counterparties do not perform under the contract
terms. Futures contracts are valued at the settlement price established
each day by the board of trade or exchange on which they are traded. See
Note 6 for all open futures contracts as of February 29, 2000.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts in connection with
settling planned purchases or sales of securities or to hedge the currency
exposure associated with some or all of the Fund's portfolio securities. A
forward currency contract is an agreement between two parties to buy and
sell a currency at a set price on a future date. The market value of a
forward currency contract fluctuates with changes in forward currency
exchange rates. Forward currency contracts are marked to market daily and
the change in value is recorded by the Fund as an unrealized gain or loss.
Realized gains or losses equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed
are recorded upon delivery or receipt of the currency or, if a forward
currency contract is offset by entering into another forward currency
contract with the same broker, upon settlement of the net gain or loss.
These contracts may involve market risk in excess of the unrealized gain
or loss reflected in the Fund's Statement of Assets and Liabilities. In
addition, the Fund could be exposed to risk if the counterparties are
unable to meet the terms of the contracts or if the value of the currency
changes unfavorably to the U.S. dollar. The U.S. dollar value of the
currencies the Fund has committed to buy or sell is shown under Note 6 and
represents the currency exposure the Fund has acquired or hedged through
currency contracts as of February 29, 2000.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying
instrument. When the Fund writes a call or put option, an amount equal to
the premium received is recorded as a liability and subsequently marked to
market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
added to the proceeds or offset against the amounts paid on the underlying
future, security or currency transaction to determine the realized gain or
loss. The Fund as a writer of an option has no control over whether the
underlying future, security or currency may be sold (call) or purchased
(put) and as a result bears the market risk of an
20
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
unfavorable change in the price of the future, security or currency
underlying the written option. There is the risk the Fund may not be able
to enter into a closing transaction because of an illiquid market. At
February 29, 2000 there were no open written option contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. The risk associated with purchasing put and call options is
limited to the premium paid. Premiums paid for purchasing options which
are exercised or closed are added to the amounts paid or offset against
the proceeds on the underlying future, security or currency transaction to
determine the realized gain or loss.
LOAN AGREEMENTS
The Fund may invest in direct debt instruments which are interests in
amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates. The Fund's investments in loans may be in the form of
participations in loans or assignments of all or a portion of loans from
third parties. A loan is often administered by a bank or other financial
institution (the lender) that acts as agent for all holders. The agent
administers the terms of the loan, as specified in the loan agreement.
When investing in a loan participation, the Fund has the right to receive
payments of principal, interest and any fees to which it is entitled only
from the lender selling the loan agreement and only upon receipt by the
lender of payments from the borrower. The Fund generally has no right to
enforce compliance with the terms of the loan agreement with the borrower.
As a result, the Fund may be subject to the credit risk of both the
borrower and the lender that is selling the loan agreement. When the Fund
purchases assignments from lenders it acquires direct rights against the
borrower on the loan. Direct indebtedness of emerging countries involves a
risk that the governmental entities responsible for the repayment of the
debt may be unable or unwilling to pay the principal and interest when
due.
INDEXED SECURITIES
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to
increase or decrease its exposure to different underlying instruments and
to gain exposure to markets that may be difficult to invest in through
conventional securities. Indexed securities may be more volatile than
their underlying instruments, but any loss is limited to the amount of the
original investment.
21
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SWAP AGREEMENTS
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into interest rate, total return and credit
default swap agreements to manage its exposure to interest rates and
credit risk. Interest rate swap agreements involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. Total return swap
agreements involve commitments to pay interest in exchange for a market
linked return, both based on notional amounts. To the extent the total
return of the security or index underlying the transaction exceeds or
falls short of the offsetting interest rate obligation, the Fund will
receive a payment from or make a payment to the counterparty. Credit
default swaps involve the payment of a specified rate based on the
notional amount. The Fund receives payment upon a default of the
underlying security. In connection with these agreements, cash or
securities may be set aside as collateral by the Funds custodian in
accordance with the terms of the swap agreement. The Fund earns interest
on cash set aside as collateral, which is paid by the counterparty. At
February 29, 2000, $4,857,604 in cash has been set aside. Swaps are marked
to market daily based upon quotations from market makers and the change,
if any, is recorded as unrealized gain or loss in the Statement of
Operations. Payments received or made at the end of the measurement period
are recorded as realized gain or loss in the Statement of Operations. Net
payments of interest on interest rate swap agreements are included as part
of interest income. Entering into these agreements involves, to varying
degrees, elements of credit and market risk in excess of the amounts
recognized on the Statement of Assets and Liabilities. Such risks involve
the possibility that there will be no liquid market for these agreements,
that the counterparty to the agreements may default on its obligation to
perform and that there may be unfavorable changes in the fluctuation of
interest rates. See Note 6 for a summary of open swap agreements as of
February 29, 2000.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, realization of collateral by the Fund may be delayed or
limited.
22
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements with certain banks
and broker/dealers whereby the Fund sells portfolio assets concurrent with
an agreement by the Fund to repurchase the same assets at a later date at
a fixed price. In connection with these agreements, the Fund establishes
segregated accounts with its custodian in which the Fund maintains cash,
U.S. Government securities or other liquid high grade debt obligations in
the name of the counterparty equal in value to its obligations in respect
of reverse repurchase agreements. Reverse repurchase agreements involve
the risk that the market value of the securities the Fund was sold may
decline below the contracted repurchase price under the agreement. At
February 29, 2000, the Fund had not entered into a reverse repurchase
agreement.
DELAYED DELIVERY COMMITMENTS
The Fund may purchase or sell securities on a when-issued or forward
commitment basis. Payment and delivery may take place a month or more
after the date of the transaction. The price of the underlying securities
and the date when the securities will be delivered and paid for are fixed
at the time the transaction is negotiated. Collateral consisting of liquid
securities or cash and cash equivalents is maintained in an amount at
least equal to these commitments with the custodian.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of delay in
recovery or even loss of rights in the collateral should the borrower of
the securities fail financially. The Fund receives compensation for
lending its securities. At February 29, 2000, the Fund loaned securities
having a market value of $4,499,166 collateralized by cash in the amount
of $4,603,320, which was invested in short-term instruments.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be
23
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
paid in shares of the Fund, at net asset value, unless the shareholder
elects to receive cash distributions. The Fund declares separate dividends
from net investment income on each class of shares. Distributions to
shareholders are recorded by the Fund on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to the differing treatments for foreign
currency transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable income and capital gains under U.S.
federal tax rules versus accounting principles generally accepted in the
United States. The calculation of net investment income per share in the
financial highlights excludes these adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
<S> <C> <C>
$32,260,722 $(38,765,595) $6,504,873
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis, and is adjusted for the accretion of
discounts. Income is not recognized and discounts are not amortized on
securities for which collection is not expected. In determining the net
gain or loss on securities sold, the cost of securities is determined on
the identified cost basis. Interest income on U.S. Treasury inflation
indexed securities is accrued daily based upon an inflation adjusted
principal. Additionally, any increase in the principal or face amount of
these securities is recorded as interest income.
24
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
ALLOCATION OF OPERATING ACTIVITY
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. Investment
income, common expenses and realized and unrealized gains and losses are
allocated pro-rata among the classes of shares of the Fund based on the
relative net assets of each class. Shareholder service fees, which are
directly attributable to a class of shares, are charged to that class'
operations.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is .50% of the amount
invested. In the case of cash redemptions, the fee is .25% of the amount
redeemed. These fees will be reduced by 50% with respect to any portion of
a purchase or redemption that is offset by a corresponding redemption or
purchase, respectively, occurring on the same day. In addition, the
purchase premium or redemption fee for the Fund will be reduced by 50% if
the purchaser makes an in-kind purchase of Fund shares or if the purchase
or redemption is part of a transfer from or to another Fund where the
Manager is able to transfer securities among the Funds to effect the
transaction. All purchase premiums and redemption fees are paid to and
recorded by the Fund as paid-in capital. These fees are allocated relative
to each class net assets on the share transaction date. Purchase premiums
are included as part of each class "shares sold" and redemption fees are
included as part of each class "shares repurchased", respectively, as
summarized in Note 5. For the year ended February 29, 2000, the Fund
received $344,391 in purchase premiums and $557,354 in redemption fees.
There is no premium for reinvested distributions.
INVESTMENT RISK
Investments in emerging country debt present certain risks that are not
inherent in many other securities. Many emerging countries present
elements of political and/or economic instability, which may result in the
Fund's inability to collect on a timely basis, or in full, principal and
interest payments. Further, countries may impose various types of foreign
currency regulations or controls which may impede the Fund's ability to
repatriate amounts it receives. The Fund may acquire interests in
securities or bank loans which are in default at the time of acquisition
in anticipation of improving conditions in the related countries. These
factors may result in significant volatility in the values of its
holdings. The markets for emerging country debt are relatively illiquid.
Accordingly, the Fund may not be able to realize in an actual sale amounts
approximating those used to value its holdings.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .35% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder
25
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
service fee for client and shareholder service, reporting and other
support. Pursuant to the Shareholder Service Plan, the shareholder service
fee is calculated based on the average daily net assets of each class at
the annual rate of .15% for Class III shares and .10% for Class IV shares.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Funds total annual operating
expenses (excluding custody fees, brokerage commissions, certain other
transaction costs (including transfer taxes), shareholder service fees and
extraordinary expenses) exceed the management fee.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000 was $9,746. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 29, 2000, aggregated
$975,104,585 and $983,547,456, respectively.
At February 29, 2000, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
$1,018,837,352 $74,343,418 $(153,244,618) $(78,901,200)
</TABLE>
4. PRINCIPAL SHAREHOLDERS
At February 29, 2000, 38.5% of the outstanding shares of the Fund were
held by two shareholders, each holding in excess of 10% of the Funds
outstanding shares.
26
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
--------------------------- ---------------------------
Shares Amount Shares Amount
Class III: ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Shares sold 8,327,628 $ 64,234,029 45,405,396 $ 367,745,404
Shares issued to shareholders in reinvestment
of distributions 5,357,740 41,374,128 3,380,175 32,138,997
Shares repurchased (35,692,441) (281,219,404) (23,019,717) (231,235,163)
------------ ------------- ------------ -------------
Net increase (decrease) (22,007,073) $(175,611,247) 25,765,854 $ 168,649,238
============ ============= ============ =============
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
--------------------------- ---------------------------
Shares Amount Shares Amount
Class IV: ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Shares sold 22,519,103 $ 171,859,561 21,916,084 $ 239,168,023
Shares issued to shareholders in reinvestment
of distributions 7,990,878 62,255,370 5,400,677 51,286,039
Shares repurchased (14,912,078) (113,798,092) (7,130,859) (64,208,920)
------------ ------------- ------------ -------------
Net increase 15,597,903 $ 120,316,839 20,185,902 $ 226,245,142
============ ============= ============ =============
</TABLE>
27
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 29, 2000 is as
follows:
FORWARD CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
---------- --------------------------------------------- ----------------- ------------ --------------
<C> <S> <C> <C> <C>
Buys
3/01/00 EUR 40,534,864 $39,029,804 $ (329,479)
3/23/00 EUR 40,500,000 39,058,605 (204,930)
3/03/00 GBP 1,500,000 2,368,022 (1,228)
4/21/00 JPY 1,689,190,000 15,516,492 16,492
----------
$ (519,145)
==========
Sales
3/14/00 CHF 63,000,000 $37,818,381 $2,449,818
3/01/00 EUR 40,529,409 39,024,552 207,798
3/23/00 EUR 87,100,000 84,000,111 4,501,639
3/03/00 GBP 1,500,000 2,368,021 22,094
5/05/00 GBP 1,500,000 2,367,801 1,217
4/21/00 JPY 6,600,000,000 60,558,515 786,616
3/10/00 ZAR 9,200,000 1,448,317 36,033
----------
$8,005,215
==========
</TABLE>
28
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
<TABLE>
<CAPTION>
Net Unrealized
Number of Expiration Contract Appreciation
Contracts Type Date Value (Depreciation)
---------------------------- --------------------------------------------- -------------- ----------- --------------
<C> <S> <C> <C> <C>
Buys
6 Japanese Government Bond 10 Yr. March 2000 $ 7,218,242 $ (2,412)
=========
Sales
100 90 Day Euro Dollar September 2000 $23,292,500 $ (1,900)
6 Japanese Government Bond 10 Yr. March 2000 7,216,058 (183,328)
6 Japanese Government Bond 10 Yr. June 2000 7,145,055 1,229
---------
$(183,999)
=========
</TABLE>
At February 29, 2000, the Fund has cash and/or securities to cover any
margin requirements on open futures contracts.
WRITTEN OPTION TRANSACTIONS
<TABLE>
<CAPTION>
Puts Calls
Principal Amount Principal Amount
of Contracts of Contracts
(000's omitted) Premiums (000's omitted) Premiums
---------------- -------------- ---------------- ------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period 17,500 $ 713,125 17,500 $ 836,938
Options written 40,000 1,250,000 50,000 550,000
Options closed -- -- -- --
Options exercised -- -- (50,000) (550,000)
Options expired (57,500) (1,963,125) -- --
Options sold -- -- (17,500) (836,938)
-------- ----------- -------- ---------
Outstanding, end of period -- $ -- -- $ --
======== =========== ======== =========
</TABLE>
29
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SWAP AGREEMENTS
<TABLE>
<CAPTION>
Net Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
----------------------- ---------- -------------------------------------------------- --------------
<C> <C> <S> <C>
CREDIT DEFAULT SWAPS
10,000,000 USD 9/15/00 Agreement with Morgan Guaranty Trust Company dated $ (199,914)
9/10/98 to pay 2.20% per year times the notional
amount. The Fund receives payment only upon a
default event in Poland, the notional amount times
the difference between the par value and the then-
market value of Republic of Poland Past Due
Interest PDI Brady Bond due 10/27/14.
15,000,000 USD 11/03/00 Agreement with Credit Suisse Financial Products (159,695)
dated 10/29/97 to pay 3.45% per year times the
notional amount. The Fund receives payment only
upon a default event in Bulgaria, the notional
amount times the difference between 59.50 USD and
the then-market value of Bulgaria FLIRB Note
Series A due 7/28/12.
10,000,000 USD 11/07/00 Agreement with Credit Suisse Financial Products (228,327)
dated 11/04/97 to pay 3.50% per year times the
notional amount. The Fund receives payment only
upon a default event in Brazil, the notional
amount times the difference between 74.75 USD and
the then-market value of Brazil Debt Conversion
"DCB" Bond due 4/15/12.
</TABLE>
30
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<TABLE>
<CAPTION>
Net Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
----------------- ---------- -------------------------------------------------- --------------
<C> <C> <S> <C>
10,000,000 USD 12/18/00 Agreement with Morgan Guaranty Trust Company dated $ (424,707)
12/11/98 to pay 6.50% per year times the notional
amount. The Fund receives payment only upon a
default event in Argentina, the notional amount
times the difference between the par value and the
then-market value of Republic of Argentina
Floating Rate Bond due 3/31/05.
20,000,000 USD 3/01/01 Agreement with Morgan Guaranty Trust Company dated (904,163)
2/24/99 to pay 4.60% per year times the notional
amount. The Fund receives payment only upon a
default event in Bulgaria, the notional amount
times the difference between the par value and the
then-market value of Bulgaria IAB Floating Rate
Bond due 7/28/11.
25,411,280 USD 5/29/01 Agreement with Credit Suisse Financial Products 16,519,718
dated 5/21/97 to pay 4.78% per year times the
notional amount. The Fund receives payment only
upon a default event in Ecuador, the current
notional amount times the difference between the
par value and the then-market value of Republic of
Ecuador Past Due Interest PDI Floating Rate Note
due 2/27/15. * +
</TABLE>
31
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<TABLE>
<CAPTION>
Net Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
----------------- ---------- -------------------------------------------------- --------------
<C> <C> <S> <C>
55,550,240 USD 5/29/01 Agreement with Credit Suisse Financial Products $14,040,786
dated 5/23/97 to pay 3.30% per year times the
notional amount. The Fund receives payment only
upon a default event in Ecuador, the current
notional amount times the difference between 60.25
USD and the then-market value of the Republic of
Ecuador Past Due Interest PDI Floating Rate Note
due 2/27/15. * +
25,000,000 USD 9/10/01 Agreement with Credit Suisse Financial Products (88,176)
dated 9/05/97 to pay 1.75% per year times the
notional amount. The Fund receives payment only
upon a default event in Brazil, the notional
amount times the difference between 83.625 USD and
the then-market value of Brazil Debt Conversion
"DCB" Bond due 4/15/12.
15,000,000 USD 6/05/02 Agreement with Lehman Brothers International (939,880)
(Europe) dated 5/25/99 to pay 3.75% per year times
the notional amount. The Fund receives payment
only upon a default event in Mexico, the notional
amount times the difference between the par value
and the then-market value of United Mexican
States, 9.875% due 1/15/07.
</TABLE>
32
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<TABLE>
<CAPTION>
Net Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
----------------- ---------- -------------------------------------------------- --------------
<C> <C> <S> <C>
10,000,000 USD 5/15/03 Agreement with Banque Paribas dated 5/12/98 to pay $ 33,005
.75% per year times the notional amount. The Fund
receives payment only upon a default event, the
notional amount times the difference between the
par value and the then-market value of any series
of Banco Latinoamericano de Exportaciones S.A.
Euro Medium Term Notes.
10,000,000 USD 5/15/03 Agreement with Banque Paribas dated 10/01/98 to (653,704)
pay 3.50% per year times the notional amount. The
Fund receives payment only upon a default event,
the notional amount times the difference between
the par value and the then-market value of any
series of Banco Latinoamericano de Exportaciones
S.A. Euro Medium Term Notes.
15,000,000 USD 6/20/03 Agreement with Goldman Sachs International dated 2,875,572
1/14/99 to receive 11.60% per year times the
notional amount. The Fund pays only upon a default
event in Colombia, the notional amount times the
difference between the par value and the
then-market value of Republic of Colombia, 7.625%
due 2/15/07.
</TABLE>
33
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<TABLE>
<CAPTION>
Net Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
----------------- ---------- -------------------------------------------------- --------------
<C> <C> <S> <C>
INTEREST RATE
SWAPS
2,400,000 CHF 6/05/05 Agreement with Morgan Guaranty Trust Company dated $ 37,126
6/03/98 to pay the notional amount multiplied by
3.245% and to receive the notional amount
multiplied by 6 month Floating Rate Swiss LIBOR
adjusted by a specified spread.
3,300,000 CHF 6/10/05 Agreement with Credit Suisse Financial Products 50,351
dated 6/08/98 to pay the notional amount
multiplied by 3.2625% and to receive the notional
amount multiplied by 6 month Floating Rate Swiss
LIBOR adjusted by a specified spread.
2,500,000 CHF 6/11/05 Agreement with Morgan Guaranty Trust Company dated 39,484
6/09/98 to pay the notional amount multiplied by
3.245% and to receive the notional amount
multiplied by 6 month Floating Rate Swiss LIBOR
adjusted by a specified spread.
</TABLE>
34
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<TABLE>
<CAPTION>
Net Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
----------------- ---------- -------------------------------------------------- --------------
<C> <C> <S> <C>
13,500,000 CHF 6/11/05 Agreement with Morgan Guaranty Trust Company dated $ 433,866
9/30/98 to pay the notional amount multiplied by
3.245% and to receive the notional amount
multiplied by 6 month Floating Rate Swiss LIBOR
adjusted by a specified spread.
15,000,000 EUR 2/22/07 Agreement with UBS AG dated 2/18/00 to pay the (142,849)
notional amount multiplied by 5.76% and to receive
the notional amount multiplied by 6 month Floating
Rate Euro LIBOR.
TOTAL RETURN
SWAPS
6,877,500 USD/
7,000,000 USD 3/03/00 Agreement with Morgan Guaranty Trust Company dated 387,841
2/01/00 to receive (pay) the notional amount
multiplied by the change in market value
(including accrued interest) of Republic of
Argentina Global Bond, 12.00% due 2/01/20 and to
pay initial market value multiplied by 1 month
LIBOR adjusted by a specified spread.
</TABLE>
35
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<TABLE>
<CAPTION>
Net Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
----------------- ---------- -------------------------------------------------- --------------
<C> <C> <S> <C>
8,235,944 USD/
8,000,000 USD 3/08/00 Agreement with Deutsche Bank AG dated 2/04/00 to $ 170,488
receive (pay) the notional amount multiplied by
the change in market value (including accrued
interest) of Republic of Argentina, 11.75% due
4/07/09 and to pay initial market value multiplied
by 1 month LIBOR adjusted by a specified spread.
8,515,524 USD/
7,000,000 USD 3/13/00 Agreement with Morgan Guaranty Trust Company dated 158,559
2/24/00 to receive (pay) the notional amount
multiplied by the change in market value
(including accrued interest) of United Mexican
States, 11.375% due 9/15/16 and to pay initial
market value multiplied by 1 month LIBOR adjusted
by a specified spread.
9,496,813 USD/
12,000,000 USD 3/14/00 Agreement with Deutsche Bank AG dated 2/25/00 to 195,000
receive (pay) the notional amount multiplied by
the change in market value (including accrued
interest) of Brazil Discount ZL Floating Rate Note
due 4/15/24 and to pay initial market value
multiplied by 1 month LIBOR adjusted by a
specified spread.
</TABLE>
36
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<TABLE>
<CAPTION>
Net Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
----------------- ---------- -------------------------------------------------- --------------
<C> <C> <S> <C>
10,765,600 USD/
12,000,000 USD 3/15/00 Agreement with Morgan Guaranty Trust Company dated $ 244,190
12/13/99 to receive (pay) the notional amount
multiplied by the change in market value
(including accrued interest) of Brazil
Capitalization Floating Rate Note due 4/15/14 and
to pay initial market value multiplied by 3 month
LIBOR adjusted by a specified spread.
5,156,209 USD/
5,500,000 USD 3/16/00 Agreement with Morgan Guaranty Trust Company dated 142,578
12/14/99 to receive (pay) the notional amount
multiplied by the change in market value
(including accrued interest) of Mexico Discount
Floating Rate Note Series D due 12/31/19 and to
pay initial market value multiplied by 3 month
LIBOR adjusted by a specified spread.
10,608,889 USD/
14,000,000 USD 3/21/00 Agreement with Deutsche Bank AG dated 2/16/00 to (94,537)
receive (pay) the notional amount multiplied by
the change in market value (including accrued
interest) of Republic of Bulgaria FLIRB Series A
Floating Rate Note due 7/28/12 and to pay initial
market value multiplied by 1 month LIBOR adjusted
by a specified spread.
</TABLE>
37
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<TABLE>
<CAPTION>
Net Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
----------------- ---------- -------------------------------------------------- --------------
<C> <C> <S> <C>
12,697,929 USD/
13,000,000 USD 3/22/00 Agreement with Morgan Guaranty Trust Company dated $ 83,959
2/17/00 to receive (pay) the notional amount
multiplied by the change in market value
(including accrued interest) of Mexico Discount
Floating Rate Note Series A due 12/31/19 and to
pay initial market value multiplied by 1 month
LIBOR adjusted by a specified spread.
17,275,385 USD/
22,000,000 USD 3/23/00 Agreement with Deutsche Bank AG dated 2/18/00 to 476,526
receive (pay) the notional amount multiplied by
the change in market value (including accrued
interest) of Brazil Discount ZL Floating Rate Note
due 4/15/24 and to pay initial market value
multiplied by 1 month LIBOR adjusted by a
specified spread.
17,325,375 USD/
23,500,000 USD 4/03/00 Agreement with Deutsche Bank AG dated 9/29/99 to 2,038,131
receive (pay) the notional amount multiplied by
the change in market value (including accrued
interest) of Republic of Argentina Discount
Floating Rate Note due 3/31/23 and to pay initial
market value multiplied by 4 month LIBOR adjusted
by a specified spread.
</TABLE>
38
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<TABLE>
<CAPTION>
Net Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
----------------- ---------- -------------------------------------------------- --------------
<C> <C> <S> <C>
4,804,570 USD/
5,000,000 USD 4/07/00 Agreement with Morgan Guaranty Trust Company dated $ 69,496
2/22/00 to receive (pay) the notional amount
multiplied by the change in market value
(including accrued interest) of Mexico Discount
Floating Rate Note Series D due 12/31/19 and to
pay initial market value multiplied by 2 month
LIBOR adjusted by a specified spread.
10,205,694 USD/
10,000,000 USD 4/14/00 Agreement with Morgan Guaranty Trust Company dated (319,046)
1/12/00 to receive (pay) the notional amount
multiplied by the change in market value
(including accrued interest) of Republic of
Argentina, 11.375% due 1/30/17 and to pay initial
market value multiplied by 3 month LIBOR adjusted
by a specified spread.
14,531,750 USD/
18,500,000 USD 4/28/00 Agreement with Deutsche Bank AG dated 10/26/99 to 754,431
receive (pay) the notional amount multiplied by
the change in market value (including accrued
interest) of Republic of Argentina Discount
Floating Rate Note due 3/31/23 and to pay initial
market value multiplied by 6 month LIBOR adjusted
by a specified spread.
</TABLE>
39
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<TABLE>
<CAPTION>
Net Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
----------------- ---------- -------------------------------------------------- --------------
<C> <C> <S> <C>
17,707,500 USD/
15,000,000 USD 5/04/00 Agreement with Morgan Guaranty Trust Company dated $ 826,218
2/04/00 to receive (pay) the notional amount
multiplied by the change in market value
(including accrued interest) of United Mexican
States, 11.375% due 9/15/16 and to pay initial
market value multiplied by 3 month LIBOR adjusted
by a specified spread.
9,997,050 USD/
12,600,000 USD 5/22/00 Agreement with Morgan Guaranty Trust Company dated 453,342
11/18/99 to receive (pay) the notional amount
multiplied by the change in market value
(including accrued interest) of Republic of
Argentina Discount L Floating Rate Note due
3/31/23 and to pay initial market value multiplied
by 3 month LIBOR adjusted by a specified spread.
15,000,000 USD 5/25/00 Agreement with Morgan Guaranty Trust Company dated 196,642
5/25/99 to (pay) receive the notional amount
multiplied by the return on the Merrill Lynch High
Yield Corporate Index and to receive the notional
amount multiplied by 3 month LIBOR adjusted by a
specified spread. +
</TABLE>
40
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<TABLE>
<CAPTION>
Net Unrealized
Notional Amount Expiration Appreciation
Fund/Counterparty Date Description (Depreciation)
----------------- ---------- -------------------------------------------------- --------------
<C> <C> <S> <C>
13,164,444 USD/
16,000,000 USD 8/18/00 Agreement with Morgan Guaranty Trust Company dated $ 288,752
2/16/00 to receive (pay) the notional amount
multiplied by the change in market value
(including accrued interest) of Republic of
Argentina Discount L Floating Rate Note due
3/31/23 and to pay initial market value multiplied
by 6 month LIBOR adjusted by a specified spread.
19,344,922 USD/
25,000,000 USD 11/09/00 Agreement with Deutsche Bank AG dated 2/07/00 to 780,796
receive (pay) the notional amount multiplied by
the change in market value (including accrued
interest) of Brazil Discount ZL Floating Rate Note
due 4/15/24 and to pay initial market value
multiplied by 1 month LIBOR adjusted by a
specified spread.
8,157,639 USD/
10,000,000 USD 11/14/00 Agreement with Deutsche Bank AG dated 2/09/00 to 244,974
receive (pay) the notional amount multiplied by
the change in market value (including accrued
interest) of Republic of Argentina Discount
Floating Rate Note due 3/31/23 and to pay initial
market value multiplied by 9 month LIBOR adjusted
by a specified spread.
-----------
$37,386,833
===========
</TABLE>
41
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
See Notes to the Schedule of Investments for definitions of currency
abbreviations.
+ This swap agreement is valued by management (Note 1) During April
* 2000, contract settlement was triggered by an event of default on
the underlying debt instruments. The counterparty to the swap
agreements made an initial determination of amounts due to the
Fund under procedures specified by the swap agreements. The Fund
does not agree with certain elements of the determination and is
currently in negotiation with the counterparty over amounts
approximating 10 - 20% of the settlement date value of these
swaps. All undisputed amounts have been paid to the Fund by the
counterparty. The outcome of those negotiations is not currently
predictable.
42
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
The Fund elected to defer to March 1, 2000 post October losses of
$11,831,694.
For the fiscal year ended February 29, 2000, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 1% of the distributions as net capital gain dividends.
43
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO EMERGING COUNTRY DEBT FUND CLASS III SHARES AND THE
J.P. MORGAN EMERGING MARKETS BOND INDEX GLOBAL
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
Average Annual Total Returns
Class III
Inception 4/19/1994
1yr 5yr 10yr (ITD)
<S> <C> <C>
45.71 27.76 20.67
<CAPTION>
Class IV
Inception 1/09/98
1yr 5yr 10yr (ITD)
<S> <C> <C>
45.89 N/A 1.72
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
Date GMO Emerging Country Debt Fund-III J.P. Morgan EMBI Global* J.P. Morgan Emerging Markets Plus
<S> <C> <C> <C>
4/19/1994 9950 10000 10000
6/30/1994 9741 9906 9906
9/30/1994 10587 10982 10982
12/31/1994 9535 10062 10062
3/31/1995 8770 8948 8948
6/30/1995 11065 10991 10991
9/30/1995 12128 11741 11741
12/31/1995 13835 12800 12800
3/31/1996 14753 13309 13309
6/30/1996 17312 14781 14781
9/30/1996 20528 16652 16652
12/31/1996 22926 17831 17832
3/31/1997 23817 17971 17971
6/30/1997 27308 19664 19664
9/30/1997 31393 21020 21020
12/31/1997 30034 20153 20153
3/31/1998 31800 21203 21203
6/30/1998 28322 19936 19936
9/30/1998 18435 15703 15703
12/31/1998 20864 17261 17261
3/31/1999 21759 18134 18134
6/30/1999 23072 19086 19086
9/30/1999 23372 19315 19315
12/31/1999 27600 21744 21744
2/29/2000 30116 22560 22687
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The total returns would have been lower had certain expenses
not been reimbursed during the periods shown and do not include the effect of
taxes. Each performance figure assumes purchase at the beginning and
redemption at the end of the stated period and reflects a transaction fee of
50 bp on the purchase and 25 bp on the redemption. Transaction fees are
retained by the Fund to cover trading costs. Performance for Class IV shares
may be different due to lower shareholder service fees. Past performance is
not indicative of future performance. Information is unaudited.
* J.P. Morgan EMBI Global represents the J.P. EMBI prior to 8/95, J.P. Morgan
EMBI through 12/31/99 and the J.P. Morgan EMBI Global thereafter. The
manager changed the benchmark due to the belief that the EMBIG is more
diversified and representative of the universe of emerging country debt.
<PAGE>
GMO EMERGING COUNTRY DEBT FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Mr. Thomas F. Cooper and Mr. William L. Nemerever are primarily responsible for
the day-to-day management of the Fund's portfolio. Each of these individuals has
been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the Emerging Country Debt Fund returned 46.8% from March
1, 1999 to February 29, 2000, which compared favorably with the 33.8% benchmark
return. Consistent with the Fund's investment objectives and policies, the Fund
was substantially invested in sovereign debt instruments of emerging countries
throughout the period.
Sovereign spreads on the J.P. Morgan Emerging Markets Bond Index Plus (EMBI+)
narrowed from 1330 basis points to 816 basis points. Emerging country debt
markets weathered several events, including the decision by Ecuador to default
on its Brady bond obligations in September 1999, political developments in
Russia and concerns about Y2K. Russia, the worst performing country in 1998,
returned 166% in 1999, and was the best performing country in the universe.
Although Brazil devalued its currency in January 1999, its debt returned 41%, as
the country's new economic team managed economic policy adroitly.
The portfolio's overweight exposure to Ecuador was hedged using credit default
swaps. These swaps protected the portfolio when Ecuador defaulted on its Brady
bonds. Most of the value added by the Emerging Country Debt Fund relative to the
Index occurred between October 1999 and February 2000. Underweight positions in
Poland, Mexico, Panama and South Korea added value to the portfolio. Overweight
positions in countries outside the Index, such as Algeria, Vietnam and Tunisia,
also added value. In addition, security selection in Russia and Brazil
contributed to the Fund's positive performance. The Fund remained fully invested
throughout the period.
The benchmark for this Fund was changed on January 1, 2000 from the J.P. Morgan
Emerging Markets Bond Index Plus (EMBI+) to the J.P. Morgan Emerging Markets
Bond Index Global (EMBIG). The EMBIG is a broader index with 26 countries,
versus the 16 countries that are included in the EMBI+. The EMBIG offers
additional exposure to Asia (15% versus 4%), and less to Latin America (67%
versus 81%). The change in index is not expected to have a material effect on
the management of this portfolio.
OUTLOOK
The Fund's strategy continues to emphasize issue selection with a preference for
cheaper, long duration, less marketable issues that offer higher yields versus
the new benchmark, the J.P. Morgan Emerging Markets Bond Index Global. The Fund
is currently underweight in Ecuador, Mexico, Panama, Philippines, Poland,
Russia, South Korea and Turkey. Our largest overweight positions (within the
Index) are in Argentina, Bulgaria and Morocco. Jordan and Tunisia are the Fund's
largest positions outside the benchmark universe.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
ANNUAL REPORT
FEBRUARY 29, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Currency Hedged International
Bond Fund at February 29, 2000, the results of its operations, the changes in
its net assets and the financial highlights for each of the periods indicated
therein, in conformity with accounting principles generally accepted in the
United States. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Trust's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at February 29, 2000 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 18, 2000
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
DEBT OBLIGATIONS -- 92.7%
ARGENTINA -- 0.3%
USD 1,000,000 Republic of Argentina Discount Bond,
Variable Rate, 6 mo. LIBOR + .81%, 6.88%, due
03/31/23 825,000
-----------
AUSTRALIA -- 0.6%
AUD 2,620,000 Queensland Treasury Corp, 8.00%, due 09/14/07 1,705,756
-----------
AUSTRIA -- 2.8%
GBP 4,500,000 Bank Austria AG Series EMTN, 8.38%, due 11/04/11 7,833,746
-----------
BRAZIL -- 1.9%
USD 7,000,000 Brazil Discount ZL Bond,
Variable Rate, 6 mo. LIBOR + .81%, 6.94%, due
04/15/24 5,468,750
-----------
BULGARIA -- 1.9%
USD 10,000,000 Bulgaria Discount Series B Interest Strips, Basket
2, 0.00%, due 07/28/24 1,790,000
USD 15,000,000 Bulgaria Discount Strips, 0.00%, due 07/28/24(a) 2,947,838
USD 1,000,000 Bulgaria FLIRB Series B,
Variable Rate, Step Up, 3.25%, due 07/28/12 750,000
-----------
5,487,838
-----------
CANADA -- 8.7%
CAD 3,750,000 Government of Canada, 10.25%, due 03/15/14 3,577,619
CAD 8,000,000 Government of Canada Real Return, 4.25%, due
12/01/21 6,496,926
CAD 5,000,000 Government of Canada Real Return, 4.25%, due
12/01/26 3,869,332
GBP 6,000,000 Province of Quebec, 8.62%, due 11/04/11 10,723,478
-----------
24,667,355
-----------
CAYMAN ISLANDS -- 7.2%
GBP 2,000,000 BA Credit Card Corp Series 97-1, 7.13%, due
09/15/02 3,143,507
GBP 3,000,000 Chester Asset Receivables, Inc., Deal 2,
Variable Rate, 3 mo. GBP LIBOR + .10%, 6.11%,
due 06/15/01 4,735,626
CAD 4,000,000 Government of Canada (Cayman), 7.25%, due 06/01/08 2,866,988
USD 3,723,077 Great Point CBO Ltd. Series 98-1A Class A1, 144A,
Variable Rate, 6 mo. LIBOR + .30%, 6.39%, due
10/15/10 3,698,644
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
CAYMAN ISLANDS -- CONTINUED
USD 6,650,000 Pemex Finance Ltd. Series 1A1 Class A2, 144A,
6.30%, due 05/15/10 5,931,800
-----------
20,376,565
-----------
CHILE -- 1.6%
USD 4,750,000 Banco Santander, Series MBIA, 6.50%, due 11/01/05 4,434,125
-----------
DENMARK -- 0.5%
DKK 9,680,000 Kingdom of Denmark Bullet, 8.00%, due 03/15/06 1,399,010
-----------
ECUADOR -- 0.1%
USD 566,140 Republic of Ecuador PDI (Registered), PIK,
Variable Rate, 6 mo. LIBOR + .81%, 6.75%, due
02/27/15* 137,289
-----------
FRANCE -- 2.7%
FRF 21,000,000 Auxiliare Credit Foncier, 10.00%, due 04/20/01 3,271,592
FRF 30,000,000 Auxiliare Credit Foncier, 6.25%, due 03/28/03 4,498,009
-----------
7,769,601
-----------
JAPAN -- 5.0%
GBP 2,300,000 Export Import Bank of Japan, 10.75%, due 05/15/01 3,785,328
GBP 6,000,000 Kobe City, 9.50%, due 10/20/04 10,376,795
-----------
14,162,123
-----------
JORDAN -- 0.2%
USD 1,000,000 Hashemite Kingdom of Jordan Par Bond Series DEF,
Variable Rate, Step Up, 144A, 6.00%, due
12/23/23 667,500
-----------
MEXICO -- 3.0%
FRF 10,000,000 Mexico Par Bond, 6.63%, due 12/31/19 1,297,150
CHF 18,000,000 Mexico Par Bond, 3.75%, due 12/31/19 7,268,940
-----------
8,566,090
-----------
NEW ZEALAND -- 1.0%
NZD 6,200,000 New Zealand Index Linked Bond Series 216, 4.50%,
due 02/15/16 2,910,463
-----------
</TABLE>
See accompanying notes to the financial statements.
2
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
NIGERIA -- 0.3%
USD 1,603,625 Central Bank of Nigeria Par Bond Odd Lot,
Variable Rate, Step Up, 6.25%, due 11/15/20(a) 829,875
-----------
NORWAY -- 0.6%
SEK 13,700,000 A/S Eksportfinans, 7.50%, due 08/16/01 1,603,777
-----------
SUPRA NATIONAL -- 3.1%
AUD 16,100,000 European Bank for Reconstruction and Development,
Zero Coupon, due 02/10/28 1,257,832
CAD 2,700,000 European Investment Bank, 8.50%, due 08/30/05 2,018,022
GBP 3,000,000 International Bank for Reconstruction and
Development, 11.50%, due 11/09/03 5,446,515
-----------
8,722,369
-----------
SWEDEN -- 1.9%
SEK 35,000,000 Government of Sweden Index Linked Bond, 4.00%, due
12/01/20 4,036,957
SEK 5,700,000 Kingdom of Sweden, 8.00%, due 08/15/07 734,817
SEK 6,100,000 Kingdom of Sweden, 6.50%, due 10/25/06 722,718
-----------
5,494,492
-----------
UNITED STATES -- 48.0%
ASSET BACKED SECURITIES -- 37.3%
USD 17,000,000 Aircraft Finance Trust Series 99-1A Class A1,
Variable Rate, 1 mo. LIBOR + .48%, 6.36%, due
05/15/24 16,968,125
USD 4,000,000 American Express Credit Account Master Trust
Series 98-1A, Variable Rate, 1 mo. LIBOR +
.09%, 5.97%, due 01/17/06 3,993,906
USD 10,000,000 American Express Credit Account Master Trust
Series 99-5 Class A, Variable Rate, 1 mo.
LIBOR + .24%, 6.13%, due 02/15/07 10,031,250
USD 2,000,000 Augusta Funding Ltd. X, 144A,
Variable Rate, 3mo. LIBOR + .25%, 6.43%, due
06/30/17 1,938,438
USD 7,500,000 BEA CBO Series 98-1A Class A2A, 144A, 6.72%, due
06/15/10 6,776,953
USD 5,000,000 Chyps CBO Series 97-1A Class A2A, 144A, 6.72%, due
01/15/10 4,595,313
USD 7,000,000 Discover Card Master Trust I Series 00-1 Class A,
Variable Rate, 1 mo. LIBOR + .17%, 6.06%, due
08/16/07 6,998,359
USD 6,500,000 Discover Card Master Trust I Series 94-2 Class A,
Variable Rate, 1 mo. LIBOR + .35%, 6.24%, due
10/16/04 6,521,582
USD 3,500,000 Fleet Credit Card Master Trust II Series 00-A
Class A,
Variable Rate, 1 mo. LIBOR + .13%, 6.05%, due
07/15/05 3,499,453
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSET BACKED SECURITIES -- CONTINUED
USD 5,000,000 Honda Auto Lease Trust Series 99-A Class A4,
6.45%, due 09/16/02 4,957,422
USD 5,000,000 MBNA Master Credit Card Trust Series 95-G
Class A,
Variable Rate, 1 mo. LIBOR + .21%, 6.10%, due
10/15/02 5,007,422
USD 5,000,000 Navistar Financial Dealer Note Master Trust
Series 97-1 Class A, Variable Rate, 1 mo.
LIBOR + .15%, 5.96%, due 08/25/03 4,993,555
USD 3,000,000 NPF VI, Inc. Series 99-1 Class A, 144A, 6.25%, due
02/01/03 2,919,000
USD 5,500,000 NPF XII, Inc. Series 99-2 Class A, 144A, 7.05%,
due 06/01/03 5,431,250
USD 5,000,000 Rhyno CBO Delaware Corp Series 97-1 Class A-2,
144A,
Variable Rate, Step Up, 6.33%, due 09/15/09 4,921,875
USD 10,000,000 SHYPPCO Finance Company Series B Class A-2B,
6.64%, due 06/15/10 9,125,000
USD 5,000,000 Student Loan Marketing Association Series 96-4
Class A2,
Variable Rate, 3 mo. U.S. Treasury Bill + .64%,
5.95%, due 07/25/09 4,932,813
USD 2,000,000 Team Fleet Financing Corp Series 98-3A Class A,
144A, 6.13%, due 10/25/04 1,917,500
-----------
105,529,216
-----------
CORPORATE DEBT -- 4.9%
USD 9,738,885 Continental Airlines Series 99-1A, 6.55%, due
02/02/19 8,716,302
SEK 44,000,000 Toyota Motor Credit, 7.50%, due 08/06/01 5,152,823
-----------
13,869,125
-----------
U.S. GOVERNMENT -- 1.7%
USD 10,100,000 U.S. Treasury 0.00% Receipts, due 02/15/14(a) 3,827,058
USD 1,026,220 U.S. Treasury Inflation Indexed Note, 3.88%, due
01/15/09(b) 993,509
-----------
4,820,567
-----------
U.S. GOVERNMENT AGENCY -- 4.1%
USD 5,000,000 Agency for International Development Floater
(Support of India), Variable Rate, 3 mo.
LIBOR + .10%, 6.15%, due 02/01/27 4,900,000
USD 2,000,000 Agency for International Development Floater
(Support of Zimbabwe),
Variable Rate, 3 mo. U.S. Treasury Bill X 115%,
5.83%, due 01/01/12 1,920,000
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY -- CONTINUED
USD 5,000,000 Federal Home Loan Bank,
Variable Rate, CPI + 3.15%, 5.66%, due
02/15/02(b) 4,865,450
-----------
11,685,450
-----------
TOTAL UNITED STATES 135,904,358
-----------
VENEZUELA -- 1.3%
USD 500,000 Republic of Venezuela, 9.25%, due 09/15/27 337,500
USD 2,152,155 Republic of Venezuela DCB IL,
Variable Rate, 6 mo. LIBOR + .88%, 7.00%, due
12/18/08 1,737,865
USD 2,000,000 Republic of Venezuela Discount Bond Series A,
Variable Rate, 6 mo. LIBOR + .81%, 7.00%, due
03/31/20 1,545,000
-----------
3,620,365
-----------
TOTAL DEBT OBLIGATIONS (COST $276,255,215) 262,586,447
-----------
LOAN ASSIGNMENTS -- 1.3%
RUSSIA -- 1.3%
USD 15,750,278 Russia Vnesh Restructured Loan Agreements* 3,721,003
-----------
TOTAL LOAN ASSIGNMENTS (COST $10,049,552) 3,721,003
-----------
<CAPTION>
SHARES
----------
<S> <C> <C> <C>
MUTUAL FUND -- 2.3%
253,836 GMO Alpha Libor Fund 6,419,520
-----------
TOTAL MUTUAL FUND (COST $6,407,494) 6,419,520
-----------
<CAPTION>
PRINCIPAL
AMOUNT
----------
<S> <C> <C> <C>
CALL OPTIONS PURCHASED -- 0.0%
OPTIONS ON CURRENCY -- 0.0%
USD 22,176,000 Euro, Expires 5/03/00, Strike 1.12 4,435
-----------
</TABLE>
See accompanying notes to the financial statements.
5
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
OPTIONS ON FUTURES -- 0.0%
USD 1,582,500 Eurodollar, Expires 3/13/00, Strike 93.75 87,038
-----------
TOTAL CALL OPTIONS PURCHASED (COST $536,720) 91,473
-----------
PUT OPTIONS PURCHASED -- 0.7%
CROSS CURRENCY OPTIONS -- 0.0%
EUR 40,200,000 Euro Put/Swiss Franc Call, Expires 6/05/00, Strike
1.58485 58,057
-----------
OPTIONS ON CURRENCY -- 0.7%
USD 21,186,000 Euro, Expires 5/03/00, Strike 1.07 1,870,724
-----------
TOTAL PUT OPTIONS PURCHASED (COST $901,171) 1,928,781
-----------
<CAPTION>
SHARES
----------
<S> <C> <C> <C>
RIGHTS AND WARRANTS -- 0.0%
MEXICO -- 0.0%
13,746,000 United Mexican States Warrants, Expires 6/30/03** --
-----------
NIGERIA -- 0.0%
1,602 Central Bank of Nigeria Payment Adjusted Warrants,
Expires 11/15/20** --
-----------
VENEZUELA -- 0.0%
14,280 Republic of Venezuela Recovery Warrants, Expires
4/15/20** --
-----------
TOTAL RIGHTS AND WARRANTS (COST $0) --
-----------
<CAPTION>
PAR VALUE
----------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS -- 3.9%
COMMERCIAL PAPER -- 3.8%
USD 10,800,000 Koch Industries Inc., 5.83%, due 3/01/00 10,800,000
-----------
</TABLE>
See accompanying notes to the financial statements.
6
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
REPURCHASE AGREEMENT -- 0.1%
USD 206,169 Salomon Smith Barney, Inc. Repurchase Agreement,
dated 2/29/00, due 3/1/00, with a maturity value
of $206,197 and an effective yield of 4.95%,
collaterized by a U.S. Treasury Obligation with a
rate of 8.125%, maturity date of 8/15/19 and
market value, including accrued interest, of
$210,292. 206,169
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $11,006,169) 11,006,169
-----------
TOTAL INVESTMENTS -- 100.9%
(Cost $305,156,321) 285,753,393
Other Assets and Liabilities (net) -- (0.9%) (2,413,727)
-----------
TOTAL NET ASSETS -- 100.0% $283,339,666
===========
</TABLE>
See accompanying notes to the financial statements.
7
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -- (CONTINUED)
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
NOTES TO SCHEDULE OF INVESTMENTS:
144A - Securities exempt from registration under rule 144A
of the Securities Act of 1933. These securities may be
resold in transactions exempt from registration, normally
to qualified institutional investors.
CBO - Collateralized Bond Obligation
EMTN - Euromarket Medium Term Note
FLIRB - Front Loaded Interest Reduction Bond
PDI - Past Due Interest
PIK - Payment In Kind
Variable and Step up rates - The rates shown on variable and
step up rate notes are the current interest rates at
February 29, 2000, which are subject to change based on
the terms of the security, including varying reset dates.
CURRENCY ABBREVIATIONS:
AUD - Australian Dollar
BEF - Belgian Franc
CAD - Canadian Dollar
CHF - Swiss Franc
DKK - Danish Krone
EUR - Euro
FRF - French Franc
GBP - British Pound
ITL - Italian Lira
JPY - Japanese Yen
NZD - New Zealand Dollars
SEK - Swedish Krona
USD - United States Dollar
(a) Valued by management (Note 1).
(b) All or a portion of this security has been segregated to cover margin
requirements on open financial futures contracts (Note 6).
* Non-performing. Borrower not currently paying interest.
** Non-income producing security.
8 See accompanying notes to the financial statements.
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $305,156,321) (Note 1) $285,753,393
Cash at interest on deposit at brokers (Note 1) 2,652,354
Receivable for investments sold 4,000,000
Interest receivable 4,241,859
Net receivable for open forward foreign currency
contracts (Notes 1 and 6) 1,361,110
Receivable for expenses waived or borne by Manager
(Note 2) 9,906
------------
Total assets 298,018,622
------------
LIABILITIES:
Payable for Fund shares repurchased 13,535,000
Payable to affiliate for (Note 2):
Management fee 58,885
Shareholder service fee 35,248
Interest payable for open swap contracts (Notes 1 and 6) 668,191
Payable for open swap contracts (Notes 1 and 6) 227,410
Payable for variation margin on open futures contracts
(Notes 1 and 6) 81,443
Accrued expenses 72,779
------------
Total liabilities 14,678,956
------------
NET ASSETS $283,339,666
============
NET ASSETS CONSIST OF:
Paid-in capital $291,897,319
Accumulated undistributed net investment income 7,564,367
Accumulated net realized gain 2,954,477
Net unrealized depreciation (19,076,497)
------------
$283,339,666
============
NET ASSETS ATTRIBUTABLE TO:
Class III shares $283,339,666
============
SHARES OUTSTANDING:
Class III 29,210,729
============
NET ASSET VALUE PER SHARE:
Class III $ 9.70
============
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest (including securities lending income of $1,163) $21,283,097
Dividends 331,750
-----------
Total income 21,614,847
-----------
EXPENSES:
Management fee (Note 2) 781,487
Custodian and transfer agent fees 161,967
Audit fees 58,438
Legal fees 7,643
Trustees fees (Note 2) 3,482
Registration fees 2,955
Miscellaneous 4,099
Fees waived or borne by Manager (Note 2) (238,584)
-----------
781,487
Shareholder service fee (Note 2)
Class III 468,892
-----------
Net expenses 1,250,379
-----------
Net investment income 20,364,468
-----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (3,454,151)
Closed futures contracts 1,249,203
Closed swap contracts (932,555)
Written options 645,000
Foreign currency, forward contracts and foreign
currency related transactions 4,863,325
-----------
Net realized gain 2,370,822
-----------
Change in net unrealized appreciation (depreciation) on:
Investments (9,136,906)
Open futures contracts 239,705
Open swap contracts 1,815,479
Written options (156,864)
Foreign currency, forward contracts and foreign
currency related transactions 1,051,356
-----------
Net unrealized loss (6,187,230)
-----------
Net realized and unrealized loss (3,816,408)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $16,548,060
===========
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 20,364,468 $ 24,198,721
Net realized gain 2,370,822 7,292,715
Change in net unrealized appreciation (depreciation) (6,187,230) (20,892,066)
------------ ------------
Net increase in net assets from operations 16,548,060 10,599,370
------------ ------------
Distributions to shareholders from:
Net investment income
Class III (32,068,429) (6,307,979)
------------ ------------
Total distributions from net investment income (32,068,429) (6,307,979)
------------ ------------
Net realized gains
Class III (3,809,147) (14,428,617)
------------ ------------
Total distributions from net realized gains (3,809,147) (14,428,617)
------------ ------------
(35,877,576) (20,736,596)
------------ ------------
Net share transactions: (Note 5)
Class III (21,042,118) 12,943,319
------------ ------------
Increase (decrease) in net assets resulting from net
share transactions (21,042,118) 12,943,319
------------ ------------
Total increase (decrease) in net assets (40,371,634) 2,806,093
NET ASSETS:
Beginning of period 323,711,300 320,905,207
------------ ------------
End of period (including accumulated undistributed
net investment income of $7,564,367 and
$19,566,701, respectively) $283,339,666 $323,711,300
============ ============
</TABLE>
See accompanying notes to the financial statements. 11
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.47 $ 10.66 $ 12.16 $ 10.92 $ 9.99
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.65+ 0.74 0.88 0.66 1.05
Net realized and unrealized gain
(loss) (.0.17) (0.39) 0.73 2.07 1.62
-------- -------- -------- -------- --------
Total from investment operations 0.48 0.35 1.61 2.73 2.67
-------- -------- -------- -------- --------
Less distributions to shareholders:
From net investment income (1.11) (0.16) (0.88) (0.60) (1.04)
From net realized gains (0.14) (0.38) (2.23) (0.45) (0.42)
In excess of net investment income -- -- -- (0.44) (0.28)
-------- -------- -------- -------- --------
Total distributions (1.25) (0.54) (3.11) (1.49) (1.74)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 9.70 $ 10.47 $ 10.66 $ 12.16 $ 10.92
======== ======== ======== ======== ========
TOTAL RETURN(a) 4.95% 3.20% 14.44% 25.57% 27.36%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $283,340 $323,711 $320,905 $468,979 $236,162
Net expenses to average daily net
assets 0.40% 0.40% 0.40% 0.40% 0.40%
Net investment income to average
daily net assets 6.51% 6.30% 6.50% 6.86% 8.54%
Portfolio turnover rate 65% 116% 135% 90% 85%
Fees and expenses voluntarily waived
or borne by the Manager consisted
of the following per share amounts: $ 0.01 $ 0.04 $ 0.05 $ 0.03 $ 0.03
</TABLE>
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
+ Computed using average shares outstanding throughout the period.
12 See accompanying notes to the financial statements.
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Currency Hedged International Bond Fund (the "Fund") is a series of
GMO Trust (the "Trust"). The Fund is registered under the Investment
Company Act of 1940, as amended, as an open-end, non-diversified
management investment company. The Fund is advised and managed by
Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust
was established as a Massachusetts Business Trust under the laws of the
Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust
permits the Trustees to create an unlimited number of series ("Funds"),
each of which issues a separate series of shares, and to subdivide a
series of shares into classes.
The Fund seeks high total return through investment in foreign bond and
currency markets. The Fund's benchmark is the J.P. Morgan Non-U.S.
Government Bond Index (Hedged).
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of financial statements in
accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost
which approximates market value. Shares of other Funds of the Trust are
valued at their net asset value as reported on each business day.
Securities for which quotations are not readily available are valued at
fair value as determined in good faith by the Trustees or other persons
acting at their direction.
Some fixed income securities and options thereon are valued at the closing
bid for such securities as supplied by a primary pricing source chosen by
the Manager. The Manager evaluates such primary pricing sources on an
ongoing basis, and may change a pricing source should it deem it
appropriate. The Manager is informed of erratic or unusual movements
(including unusual inactivity) in the prices supplied for a security and
at its discretion may override a price supplied by a source (by taking a
price supplied by another source).
13
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
Securities may be valued by independent pricing services which use prices
provided by market-makers or estimates of market values obtained from
yield data relating to investments or securities with similar
characteristics.
Certain securities held by the Fund were valued on the basis of a price
provided by a principal market maker. The prices provided by the principal
market makers may differ from the value that would be realized if the
securities were sold and the differences could be material to the
financial statements. At February 29, 2000, the total value of these
securities represented 17% of net assets. Included in this total are U.S.
Government backed securities and highly rated collateralized debt
obligations that represent 14% of net assets at February 29, 2000.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at current exchange rates when accrued
or incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss on
investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign currency contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
FUTURES CONTRACTS
The Fund may use futures contracts to manage its exposure to the bond and
currency markets. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments.
Upon entering into a futures contract, the Fund is required to deposit
with its custodian, in a segregated account in the name of the futures
broker, an amount of cash or U.S. government and agency obligations in
accordance with the initial margin requirements of the broker or exchange.
Futures contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. Gains or losses are recognized but not considered realized until the
contracts expire or are closed. Futures contracts involve, to varying
degrees, risk of loss in excess of the variation margin disclosed in the
Statement of Assets and Liabilities. Losses may arise from the changes in
the value of the underlying instrument, if there is an illiquid secondary
market for the contracts, or if counterparties do not perform under the
contract
14
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
terms. Futures contracts are valued at the settlement price established
each day by the board of trade or exchange on which they are traded. See
Note 6 for all open futures contracts as of February 29, 2000.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or
all of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency
contracts are marked to market daily and the change in value is recorded
by the Fund as an unrealized gain or loss. Realized gains or losses equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed are recorded upon delivery
or receipt of the currency or, if a forward currency contract is offset by
entering into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market
risk in excess of the unrealized gain or loss reflected in the Fund's
Statement of Assets and Liabilities. In addition, the Fund could be
exposed to risk if the counterparties are unable to meet the terms of the
contracts or if the value of the currency changes unfavorably to the U.S.
dollar. The U.S. dollar value of the currencies the Fund has committed to
buy or sell is shown under Note 6 and represents the currency exposure the
Fund has acquired or hedged through currency contracts as of February 29,
2000.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying
instrument. When the Fund writes a call or put option, an amount equal to
the premium received is recorded as a liability and subsequently marked to
market to reflect the current value of the option written. Premiums
received from writing options which expire are treated as realized gains.
Premiums received from writing options which are exercised or closed are
added to the proceeds or offset against the amounts paid on the underlying
future, security or currency transaction to determine the realized gain or
loss. The Fund as a writer of an option has no control over whether the
underlying future, security or currency may be sold (call) or purchased
(put) and as a result bears the market risk of an unfavorable change in
the price of the future, security or currency underlying the written
option. There is the risk the Fund may not be able to enter into a closing
transaction because of an illiquid market. See Note 6 for all open written
option contracts as of February 29, 2000.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's
15
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities as an investment and subsequently
marked to market to reflect the current value of the option. Premiums paid
for purchasing options which expire are treated as realized losses. The
risk associated with purchasing put and call options is limited to the
premium paid. Premiums paid for purchasing options which are exercised or
closed are added to the amounts paid or offset against the proceeds on the
underlying future, security or currency transaction to determine the
realized gain or loss.
LOAN AGREEMENTS
The Fund may invest in direct debt instruments which are interests in
amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates. The Fund's investments in loans may be in the form of
participations in loans or assignments of all or a portion of loans from
third parties. A loan is often administered by a bank or other financial
institution (the lender) that acts as agent for all holders. The agent
administers the terms of the loan, as specified in the loan agreement.
When investing in a loan participation, the Fund has the right to receive
payments of principal, interest and any fees to which it is entitled only
from the lender selling the loan agreement and only upon receipt by the
lender of payments from the borrower. The Fund generally has no right to
enforce compliance with the terms of the loan agreement with the borrower.
As a result, the Fund may be subject to the credit risk of both the
borrower and the lender that is selling the loan agreement. When the Fund
purchases assignments from lenders it acquires direct rights against the
borrower on the loan. Direct indebtedness of emerging countries involves a
risk that the governmental entities responsible for the repayment of the
debt may be unable or unwilling to pay the principal and interest when
due.
INDEXED SECURITIES
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to
increase or decrease its exposure to different underlying instruments and
to gain exposure to markets that may be difficult to invest in through
conventional securities. Indexed securities may be more volatile than
their underlying instruments, but any loss is limited to the amount of the
original investment.
SWAP AGREEMENTS
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into interest rate, total return and credit
default swap agreements to manage its exposure to interest rates and
credit risk. Interest rate swap agreements involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. Total return swap
agreements involve commitments to pay interest in exchange for a
market-linked return, both based on notional
16
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
amounts. To the extent the total return of the security or index
underlying the transaction exceeds or falls short of the offsetting
interest rate obligation, the Fund will receive a payment from or make a
payment to the counterparty. Credit default swaps involve the payment of a
specified rate based on the notional amount. The Fund receives payment
upon a default of the underlying security. In connection with these
agreements, cash or securities may be set aside as collateral by the
Fund's custodian in accordance with the terms of the swap agreement. The
Fund earns interest on cash set aside as collateral, which is paid by the
counterparty. At February 29, 2000, $2,652,354 in cash has been set aside.
Swaps are marked to market daily based upon quotations from market makers
and the change, if any, is recorded as unrealized gain or loss in the
Statement of Operations. Payments received or made at the end of the
measurement period are recorded as realized gain or loss in the Statement
of Operations. Net payments of interest on interest rate swap agreements
are included as part of interest income. Entering into these agreements
involves, to varying degrees, elements of credit and market risk in excess
of the amounts recognized on the Statement of Assets and Liabilities. Such
risks involve the possibility that there will be no liquid market for
these agreements, that the counterparty to the agreements may default on
its obligation to perform and that there may be unfavorable changes in the
fluctuation of interest rates. See Note 6 for a summary of open swap
agreements as of February 29, 2000.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the Fund and the counterparty. In connection with
transactions in repurchase agreements, if the seller defaults and the
value of the collateral declines or if the seller enters insolvency
proceedings, realization of collateral by the Fund may be delayed or
limited.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements with certain banks
and broker/dealers whereby the Fund sells portfolio assets concurrent with
an agreement by the Fund to repurchase the same assets at a later date at
a fixed price. In connection with these agreements, the Fund establishes
segregated accounts with its custodian in which the Fund maintains cash,
U.S. Government securities or other liquid high grade debt obligations in
the name of the counterparty equal in value to its obligations in respect
of reverse repurchase agreements. Reverse repurchase agreements
17
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
involve the risk that the market value of the securities the Fund has sold
may decline below the contractual repurchase price under the agreement.
For the year ending, February 29, 2000, the Fund had not entered into a
reverse repurchase agreement.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market
value at least equal to the market value of the securities on loan. As
with other extensions of credit, the Fund may bear the risk of delay in
recovery or even loss of rights in the collateral should the borrower fail
financially. The Fund receives compensation for lending its securities. At
February 29, 2000, the Fund had no securities on loan.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to the differing treatments for foreign
currency transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable
18
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
income and capital gains under U.S. federal tax rules versus accounting
principles generally accepted in the United States. The calculation of net
investment income per share in the financial highlights excludes these
adjustments.
<TABLE>
<CAPTION>
Accumulated Accumulated
Undistributed Net Undistributed Net
Investment Income Realized Gain Paid-in Capital
----------------- ----------------- ---------------
<S> <C> <C>
$(298,373) $1,047,524 $(749,151)
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions
for financial statement purposes are classified as distributions in excess
of net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Interest income is
recorded on the accrual basis, and is adjusted for the accretion of
discounts. Dividend income is recorded on the ex-dividend date. In
determining the net gain or loss on securities sold, the cost of
securities is determined on the identified cost basis. Interest income on
U.S. Treasury inflation indexed securities is accrued daily based upon an
inflation adjusted principal. Additionally, any increase in the principal
or face amount of the securities is recorded as interest income.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is .15% of the amount
invested. The premium will be reduced by 50% with respect to any portion
of a purchase that is offset by a corresponding redemption occurring on
the same day. In addition, the purchase premium for the Fund will be
reduced by 50% if the purchaser makes an in-kind purchase of Fund shares
or if the purchase or redemption is part of a transfer from or to another
Fund where the Manager is able to transfer securities among the Funds to
effect the transaction. All purchase premiums are paid to and recorded by
the Fund as paid-in capital. For the year ended February 29, 2000, the
Fund received $111,899 in purchase premiums. There is no premium for
redemptions or reinvested distributions.
19
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments,
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets. The risks described above apply to an even greater
extent to investments in emerging markets. The securities markets of
emerging countries are generally smaller, less developed, less liquid, and
more volatile than the securities markets of the U.S. and developed
foreign markets.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .25% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding brokerage commissions, certain other transaction costs
(including transfer taxes), shareholder service fees and extraordinary
expenses) exceed the management fee.
Prior to March 1, 1999, GMO earned a management fee at the annual rate of
.50% average of daily net assets. GMO had agreed to waive a portion of its
fee and bear other expenses to the extent that the Fund's annual expenses
(including the management fee but excluding brokerage commissions, certain
other transaction costs (including transfer taxes), shareholder service
fees and extraordinary expenses) exceeded .25% of average daily net
assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000, was $3,482. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
20
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
3. PURCHASES AND SALES OF SECURITIES
For the year ended February 29, 2000, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Sales
------------ ------------
<S> <C> <C>
U.S. Government securities $ 2,004,682 $ 2,008,492
Investments (non-U.S. Government securities) 188,349,188 203,117,990
</TABLE>
At February 29, 2000, the cost for U.S. federal income tax purposes and
gross unrealized appreciation and depreciation in value of investments
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C>
$305,308,324 $4,467,701 $(24,042,632) $(19,574,931)
</TABLE>
4. PRINCIPAL SHAREHOLDERS
At February 29, 2000, 91.0% of the outstanding shares of the Fund were
held by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares. Investment activities of these shareholders could have
a material effect.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
-------------------------- --------------------------
Shares Amount Shares Amount
Class III: ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares sold 7,145,457 $ 74,727,562 12,392,112 $ 135,897,894
Shares issued to shareholders
in reinvestment of distributions 3,607,085 34,924,563 1,908,812 20,116,214
Shares repurchased (12,460,892) (130,694,243) (13,476,925) (143,070,789)
----------- ------------- ----------- -------------
Net increase (decrease) (1,708,350) $ (21,042,118) 823,999 $ 12,943,319
=========== ============= =========== =============
</TABLE>
21
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 29, 2000 is as
follows:
FORWARD CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Net Unrealized
Settlement Appreciation
Date Deliver/Receive Units of Currency Value (Depreciation)
---------- --------------------------------------------- ----------------- ------------ --------------
<C> <S> <C> <C> <C>
Buys
3/10/00 CAD 18,700,000 $12,890,891 $ 174,128
3/23/00 EUR 23,900,000 23,049,399 (825,938)
3/03/00 GBP 53,800,000 84,933,038 (888,813)
4/21/00 JPY 90,000,000 826,718 3,328
-----------
$(1,537,295)
===========
Sales
4/28/00 AUD 15,700,000 $ 9,649,267 $ 183,250
3/10/00 CAD 7,200,000 4,963,338 8,599
3/23/00 EUR 32,400,000 31,246,885 1,500,539
3/03/00 GBP 53,800,000 84,933,038 1,150,679
5/05/00 GBP 35,100,000 55,406,544 28,466
4/21/00 JPY 1,420,000,000 13,043,778 154,720
3/30/00 NZD 6,300,000 3,060,162 142,632
-----------
$ 3,168,885
===========
</TABLE>
FORWARD CROSS CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Settlement
Date Deliver/Units of Currency Receive/In Exchange For
---------- ------------------------------------------------------ -----------------------------------------------------
<C> <S> <C> <C> <C>
4/14/00 CHF 35,788,713 EUR 22,300,000
4/14/00 EUR 5,700,000 CHF 9,142,629
4/07/00 SEK 146,664,135 EUR 17,100,000
<CAPTION>
Net Unrealized
Settlement Appreciation
Date (Depreciation)
---------- --------------
<C> <C>
4/14/00 (14,519)
4/14/00 605
4/07/00 (256,566)
---------
$(270,480)
=========
</TABLE>
22
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
<TABLE>
<CAPTION>
Net Unrealized
Number of Contract Appreciation
Contracts Type Expiration Date Value (Depreciation)
--------- --------------------------------------------- ------------------ ------------- --------------
<C> <S> <C> <C> <C>
Buys
43 Australian Government Bond 10 Yr. March 2000 $ 3,657,683 $ 100,454
54 Australian Government Bond 3 Yr. March 2000 3,809,633 (19,923)
726 Euro Bund 10 Yr. March 2000 72,499,346 (1,041,068)
37 Japanese Government Bond 10 Yr. March 2000 44,499,021 339,312
29 Japanese Government Bond 10 Yr. June 2000 34,534,432 (5,497)
99 Swiss Government Bond 10 Yr. March 2000 7,019,719 (131,782)
133 U.S. Long Bond June 2000 12,593,437 72,909
513 U.S. Treasury Note 10 Yr. June 2000 48,935,391 100,869
47 U.S. Treasury Note 5 Yr. June 2000 4,563,406 (35,459)
-----------
$ (620,185)
===========
Sales
52 Canadian Government Bond 10 Yr. June 2000 $ 3,529,263 $ (5,480)
37 Japanese Government Bond 10 Yr. March 2000 44,512,494 13,195
133 U.K. Gilt June 2000 23,451,320 132,115
-----------
$ 139,830
===========
</TABLE>
At February 29, 2000, the Fund has sufficient cash and/or securities to
cover any margin requirements on open futures contracts.
23
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
WRITTEN OPTION TRANSACTIONS
<TABLE>
<CAPTION>
Puts Calls
Principal Amount Principal Amount
of Contracts of Contracts
(000's omitted) Premiums (000's omitted) Premiums
---------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period 8,600 $ 541,284 8,600 $ 645,000
Options written -- -- -- --
Options closed -- -- -- --
Options exercised (8,600) (541,284) -- --
Options expired -- -- (8,600) (645,000)
------- --------- ------- ---------
Outstanding, end of period -- $ -- -- $ --
======= ========= ======= =========
</TABLE>
SWAP AGREEMENTS
<TABLE>
<CAPTION>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
------------------- ---------- -------------------------------------------------- --------------
<C> <C> <S> <C>
CREDIT DEFAULT SWAPS
288,000,000,000 ITL 3/31/03 Agreement with Morgan Guaranty Trust Company dated $ (157,270)
3/26/98 to pay .07% per year times the notional
amount. The Fund receives payment only upon a
default event in Italy, the notional amount times
the difference between the par value and the
then-market value of Italy BTP, 6.00% due
11/01/07.
6,036,000,000 BEF 3/31/03 Agreement with Morgan Guaranty Trust Company dated (186,140)
3/26/98 to pay .07% per year times the notional
amount. The Fund receives payment only upon a
default event in Belgium, the notional amount
times the difference between the par value and the
then-market value of Kingdom of Belgium, 5.75% due
3/28/08.
</TABLE>
24
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<TABLE>
<CAPTION>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
------------------- ---------- -------------------------------------------------- --------------
<C> <C> <S> <C>
INTEREST RATE SWAPS
27,300,000 CHF 6/05/05 Agreement with Morgan Guaranty Trust Company dated $ 422,307
6/03/98 to pay the notional amount multiplied by
3.245% and to receive the notional amount
multiplied by 6 month Floating Rate Swiss LIBOR
adjusted by a specified spread.
23,700,000 CHF 6/10/05 Agreement with Credit Suisse Financial Products 361,614
dated 6/08/98 to pay the notional amount
multiplied by 3.2625% and to receive the notional
amount multiplied by 6 month Floating Rate Swiss
LIBOR adjusted by a specified spread.
14,200,000 CHF 6/11/05 Agreement with Morgan Guaranty Trust Company dated 224,270
6/09/98 to pay the notional amount multiplied by
3.245% and to receive the notional amount
multiplied by 6 month Floating Rate Swiss LIBOR
adjusted by a specified spread.
10,700,000 CHF 9/16/05 Agreement with Morgan Guaranty Trust Company dated 387,466
9/14/98 to pay the notional amount multiplied by
3.1175% and to receive the notional amount
multiplied by 6 month Floating Rate Swiss LIBOR
adjusted by a specified spread.
35,000,000 USD 7/29/06 Agreement with Morgan Guaranty Trust Company dated (1,241,277)
7/27/99 to receive the notional amount multiplied
by 6.664% and to pay the notional amount
multiplied by 3 month LIBOR adjusted by a
specified spread.
</TABLE>
25
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
SWAP AGREEMENTS -- CONTINUED
<TABLE>
<CAPTION>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
------------------- ---------- -------------------------------------------------- --------------
<C> <C> <S> <C>
62,000,000 SEK 9/13/06 Agreement with UBS AG dated 9/09/99 to receive the 28,724
notional amount multiplied by 6.465% and to pay
the notional amount multiplied by 3 month Floating
Rate Swedish LIBOR adjusted by a specified spread.
TOTAL RETURN SWAP
75,000,000 USD 7/25/01 Agreement with Morgan Guaranty Trust Company dated (67,104)
7/01/99 to receive (pay) the notional amount
multiplied by the return on the JP Morgan Non-U.S.
Traded Total Return Government Bond Index and to
pay the notional amount multiplied by 1 month
LIBOR adjusted by a specified spread.+
-----------
$ (227,410)
===========
</TABLE>
See Notes to the Schedule of Investments for definitions of currency
abbreviations.
+ This swap agreement is valued by management (Note 1).
26
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
For the fiscal year ended February 29, 2000, all of the Fund's
distributions are from investment company taxable income, except that the
Fund has designated 10.6% of the distributions as net capital gain
dividends.
27
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
(A SERIES OF GMO TRUST)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS
Mr. William L. Nemerever and Mr. Thomas F. Cooper are primarily responsible for
the day-to-day management of the Fund's portfolio. Each of these individuals has
been a portfolio manager with Grantham, Mayo, Van Otterloo & Co. LLC since 1993.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the Currency Hedged International Bond Fund returned
5.0% for the fiscal year ended February 29, 2000, compared to 2.6% for the J.P.
Morgan Non-U.S. Government Bond Index (Hedged). Consistent with the Fund's
investment objectives and policies, the Fund was substantially invested in
investment-grade, foreign and domestic fixed income instruments throughout the
period.
The Fund outperformed the benchmark during the fiscal year by 2.4%. Currency and
emerging country debt selection added value during the fiscal year, while bond
market and issue selection were negative and reduced portfolio return. Long bond
yields increased by 20 to 200 basis points in developed countries, except in
Japan where yields declined by 60 basis points. Other than in Japan, bond market
returns were negative across the international bond universe. The U.S. dollar
appreciated against European currencies, but declined against the Japanese yen,
Canadian dollar and Australian dollar.
Bond market selection during the fiscal year was hurt by an underweight position
in Japanese bonds and an overweight position in Swedish bonds. These losses were
offset to some extent by an underweight position in Swiss bonds. Currency
selection added modest value during the fiscal year. Overweight positions in
Canadian dollars and British pounds added more than 150 basis points in value,
but were offset to some extent by losses on underweight positions in U.S. and
Australian dollars and an overweight position in Euros.
Emerging country debt exposure added more than 250 basis points during the
fiscal year, with much of it concentrated in the second half of the period year.
Sovereign spreads on the J.P. Morgan Emerging Markets Bond Index Plus declined
from 1330 basis points to end the fiscal year at 816 basis points.
Issue selection was neutral during the fiscal year despite rising short-term
interest rates and concerns about Y2K.
OUTLOOK
The Fund is structured to benefit from outperformance in the Australian,
Canadian, European, New Zealand, Swedish, U.S. and emerging bond markets. We
expect the Danish, Japanese, Swiss and British bond markets to underperform. Our
strategy maintains a market duration in each country. Strong relative
performance is expected from Canadian dollars, Euros and Swiss francs. The
Australian dollar, Danish krone, Japanese yen, Swedish krona, British pound and
U.S. dollar are expected to underperform.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN
OTTERLOO & CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND CLASS III SHARES AND THE
J.P. MORGAN NON-U.S. GOVERNMENT BOND INDEX (HEDGED)
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
Average Annual Returns
Inception 9/30/94
1yr 5yr 10yr (ITD)
<S> <C> <C>
4.79 14.61 13.74
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
GMO Currency Hedged International Bond Fund-III
As of 2/29/00
Date GMO Currency Hedged International Bond Fund-III JP Morgan Non-US Gov't Bond Hedged
<S> <C> <C>
9/30/94 9,985 10,000
12/31/94 9,961 10,162
3/31/95 10,265 10,625
6/30/95 11,138 11,126
9/30/95 11,933 11,548
12/31/95 12,729 12,045
3/31/96 13,024 12,149
6/30/96 13,934 12,482
9/30/96 14,819 13,014
12/31/96 15,766 13,524
3/31/97 16,019 13,694
6/30/97 16,699 14,151
9/30/97 17,782 14,651
12/31/97 18,251 15,046
3/31/98 18,895 15,516
6/30/98 19,051 15,872
9/30/98 19,284 16,721
12/31/98 19,286 16,872
3/31/99 19,488 17,169
6/30/99 19,396 17,044
9/30/99 19,328 17,091
12/31/99 19,798 17,281
2/29/00 20,088 17,404
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The total returns would have been lower had certain expenses
not been reimbursed during the periods shown and do not include the effect of
taxes. Each performance figure assumes purchase at the beginning and
redemption at the end of the stated period and reflects a transaction fee of
15 bp on the purchase. Transaction fees are retained by the Fund to cover
trading costs. Past performance is not indicative of future performance.
Information is unaudited.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of GMO Trust and the Shareholders of
GMO Asia Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Asia Fund at February 29,
2000, the results of its operations, the changes in its net assets and the
financial highlights for the periods presented, in conformity with accounting
principles generally accepted in the United States. These financial statements
and financial highlights (hereafter referred to as "financial statements")
are the responsibility of the Trust's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at February 29, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 13, 2000
<PAGE>
GMO ASIA FUND
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 95.5%
CHINA - 18.4%
2,589,000 Beijing Datang Power Generation Co Ltd Class H 312,697
1,044,000 China Merchants Holdings Co Ltd 647,235
6,433,000 China Overseas Land & Investment Ltd * 843,098
975,000 China Resources Enterprise 1,259,026
1,624,800 China Telecom Ltd * 14,979,108
1,127,000 Cosco Pacific Ltd 644,389
3,310,000 Guangdong Investment Ltd * 446,562
4,885,000 Guangshen Railway Co Class H 502,133
10,000 Huaneng Power International ADR 71,875
1,854,000 Huaneng Power International Inc Class H 321,594
2,754,000 Qingling Motor Co Ltd Class H 293,702
279,474 Shanghai Chlor-Alkali Chemical Class B * 30,183
430,000 Shanghai Industrial Holdings 809,413
4,256,000 Shanghai Petrochemical Co Class H 437,478
4,166 SIIC Medical Science and Technology (Group) Ltd * 985
1,734,000 Yizheng Chemical Fibre Co Class H * 274,043
-----------------
21,873,521
-----------------
INDONESIA - 16.1%
4,009,000 Astra International * 1,984,253
59,000,000 Bank Internasional Indonesia * 794,613
8,231,000 Barito Pacific Timber * 581,990
5,308,000 Citra Marga Nusaphala Persad * 554,034
3,840,000 Gajah Tunggal Tbk * 439,596
2,523,000 Gudang Garam 4,205,000
50,820 Gulf Resources Ltd ADR * 355,740
984,000 HM Sampoerna * 1,626,747
5,008,500 Indah Kiat Pulp & Paper * 1,382,818
2,387,000 Indorama Synthetics * 369,704
874,500 International Nickel * 871,556
4,693,000 Kalbe Farma * 616,253
5,803,000 Matahari Putra Prima Tbk * 781,549
1,535,500 PT Bimantara Citra * 392,923
1,450,000 PT Hero Supermarket Tbk * 380,808
1,869,000 PT Indofood Sukses Makmur Tbk * 1,548,061
20,000 PT Indosat (Persero) Tbk Class B ADR 358,750
2,800,000 PT Multipolar Corp Tbk * 414,815
1,387,000 PT Pabrik Kertas Tjiwi Kimia * 326,902
298,000 Semen Gresik 337,131
93,200 Telekomunikasi Indonesia Class B ADR 902,875
-----------------
19,226,118
-----------------
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO ASIA FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
KOREA - 7.9%
10,336 Cheil Jedang Corp 666,158
104,610 Hanwha Corp 416,182
2,320 Housing & Commercial Bank 41,330
23,150 Hyundai Cement Co 110,520
26,850 Hyundai Electronics Industries * 424,908
22,638 Hyundai Heavy Industries 630,443
37,800 Hyundai Merchant Marine 260,665
91,200 Inchon Oil Refinery * 266,076
36,928 ISU Chemical Co 336,272
10,790 Keum Kang Ltd 496,046
39,783 Kookmin Bank 443,165
7,800 Korea Chemical 486,162
7,500 Korea Telecommunications ADR 326,250
43,735 Korean Air Lines 299,659
5,100 Pohang Iron & Steel (a) 525,362
17,500 Pohang Iron & Steel ADR 439,688
63,300 Poongsan Corp 346,970
29,500 Shin Young Securities Co 492,925
13,782 SK Corp 310,706
22,200 SK Telecom ADR 997,613
78,193 Ssangyong Motor Co * 253,948
30,020 Ssangyong Oil Refining 501,614
30,152 Tai Han Electric Wire 370,534
-----------------
9,443,196
-----------------
MALAYSIA - 21.4%
674,000 Affin Holdings Berhad 695,284
193,800 APM Automotive Holdings Berhad * 142,800
563,000 Asiatic Development Berhad 201,495
232,000 Berjaya Sports Toto 589,158
67,600 British American Tobacco 498,105
248,000 Commerce Asset Holdings 776,632
310,000 Edaran Otomobil Berhad 1,305,257
235,000 Genting Berhad 1,038,947
699,000 Golden Hope Plantations Berhad 621,742
884,000 Hicom Holdings Berhad 786,295
311,000 Hong Leong Credit Berhad 671,105
601,000 IJM Corp Berhad Class A 673,753
836,000 Magnum Corp Berhad 734,800
394,000 Malakoff Berhad 1,067,947
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO ASIA FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MALAYSIA - CONTINUED
510,900 Malayan Banking Berhad 2,299,050
1,184,000 Malaysian International Shipping (Foreign Registered) 1,791,579
865,000 Malaysian Oxygen Berhad 2,708,816
2,172,000 Metroplex Berhad 617,305
505,400 Nylex Berhad 392,350
340,000 Oriental Holdings Berhad 800,789
401,500 Resorts World Berhad 1,458,079
760,000 RHB Capital Berhad 1,210,000
8,594,000 Tan Chong International Ltd 1,302,991
1,292,000 Tan Chong Motor Holdings Berhad 608,600
445,000 Tanjong 1,118,355
459,000 United Engineers * 1,268,289
64,600 Warisan TC Holdings Berhad * 39,100
-----------------
25,418,623
-----------------
PHILIPPINES - 6.7%
8,359,570 Aboitiz Equity Ventures Inc 399,823
4,745,547 Ayala Corp 1,019,054
208,495 Equitable Banking Corp 284,913
271,000 Far East Bank & Trust 419,924
3,430,000 Filinvest Land * 217,618
6,054,500 International Container Terminal * 262,982
886,319 Ionics Circuits Inc * 281,165
4,020,500 JG Summit Holdings Inc Class B 294,327
889,200 La Tondena Distillers Inc 444,817
5,654,000 Petron Corp 336,646
133,870 Philippine Long Distance Telephone 2,907,377
260,000 RFM Corp 20,303
394,350 San Miguel Corp Class B 461,903
2,722,000 SM Prime Holdings 365,325
1,871,000 Universal Robina Corp 305,898
-----------------
8,022,075
-----------------
SINGAPORE - 3.6%
148,000 DBS Group Holdings Ltd 1,828,857
273,000 Oversea-Chinese Banking Corp 1,726,344
174,405 Overseas Union Bank 774,032
-----------------
4,329,233
-----------------
TAIWAN - 3.9%
6,800 GigaMedia Ltd * 476,425
898,000 Legend Holdings Ltd * 4,153,775
-----------------
4,630,200
-----------------
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO ASIA FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
SHARES/
PAR VALUES($) DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
THAILAND - 17.5%
188,300 Advanced Info Service Public Co Ltd (Foreign Registered) * 2,924,665
994,700 Ban Pu Coal Public Co Ltd (Foreign Registered) 515,422
1,037,600 Bangkok Bank Pcl (Foreign Registered) * 1,674,207
2,327,000 Bangkok Expressway Public Co Ltd (Foreign Registered) * 641,047
41,100 Bangkok Insurance (Foreign Registered) 128,320
2,194,400 Bank of Ayudhya Pcl (Foreign Registered) * 564,217
688,320 CP Feedmill Public Co Ltd (Foreign Registered) * 2,492,146
62,932 Delta Electronics Public Co Ltd (Foreign Registered) 723,186
598,500 Electricity Generating Public Co Ltd (Foreign Registered) 537,810
1,813,500 Industrial Finance Corp of Thailand (Foreign Registered) * 511,482
81,000 PTT Exploration and Production Public Co Ltd (Foreign Registered) * 393,152
200,352 Shinawatra Computer Public Co Ltd (Foreign Registered) * 1,587,467
32,200 Siam Cement Pcl (Foreign Registered) * 581,230
923,900 Siam Commercial Bank Pcl (Foreign Registered) * 739,314
1,522,100 Telecomasia Corp Public Co Ltd (Foreign Registered) * 2,116,524
896,800 Thai Farmers Bank Pcl (Foreign Registered) * 847,037
2,305,000 Thai Military Bank (Foreign Registered) * 580,559
1,389,000 Thai Petrochemical (Foreign Registered) * 364,423
1,316,500 Thai Telephone & Telecommunications (Foreign Registered) * 354,037
1,054,030 United Broadcasting Pcl (Foreign Registered) * 926,407
1,346,700 United Communication Industries (Foreign Registered) * 1,687,129
-----------------
20,889,781
-----------------
TOTAL COMMON STOCKS (Cost $108,743,031) 113,832,747
-----------------
DEBT OBLIGATIONS - 3.8%
CHINA - 0.0%
$ 100,000 Qingling Motor Co Ltd, 3.50% due 1/22/02 26,500
-----------------
U.S. GOVERNMENT - 3.8%
$ 3,893,183 U.S. Treasury Inflation Indexed Note, 3.375% due 1/15/07 3,682,710
$ 820,976 U.S. Treasury Inflation Indexed Note, 3.875% due 1/15/09 794,807
-----------------
4,477,517
-----------------
TOTAL DEBT OBLIGATIONS (Cost $4,656,343) 4,504,017
-----------------
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO ASIA FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
SHARES/
PAR VALUES($) DESCRIPTION VALUE ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PREFERRED STOCKS - 1.6%
KOREA - 1.6%
19,500 Samsung Electronics (Non Voting) 1,775,697
4,559 Shinsegae Department Store * 157,192
-----------------
1,932,889
-----------------
TOTAL PREFERRED STOCKS (Cost $518,259) 1,932,889
-----------------
RIGHTS & WARRANTS - 0.0%
INDONESIA - 0.0%
420,000 PT Multipolar Corp Tbk Warrants 12/25/49 * -
-----------------
THAILAND - 0.0%
247,600 Banpu Public Co Warrants 1/14/03 * -
-----------------
TOTAL RIGHTS & WARRANTS (Cost $0) -
-----------------
SHORT-TERM INVESTMENTS - 5.5%
CASH EQUIVALENTS - 5.5%
$ 6,600,000 Royal Bank of Canada Time Deposit, 5.81% due 3/01/00 6,600,000
-----------------
TOTAL SHORT-TERM INVESTMENTS (Cost $6,600,000) 6,600,000
-----------------
TOTAL INVESTMENTS - 106.4%
(Cost $120,517,633) 126,869,653
Other Assets and Liabilities (net) - (6.4%) (7,651,604)
-----------------
TOTAL NET ASSETS - 100.0% $ 119,218,049
-----------------
-----------------
</TABLE>
NOTES TO THE SCHEDULE OF INVESTMENTS:
ADR American Depositary Receipt
(a) Valued by management (Note 1).
* Non-income producing security.
See accompanying notes to the financial statements. 5
<PAGE>
GMO ASIA FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
- ------------------------------------------------------------------------------
At February 29, 2000, industry sector diversification
of the Fund's equity investments was as follows:
<TABLE>
<CAPTION>
INDUSTRY SECTOR (UNAUDITED)
<S> <C>
Telecommunications 24.5 %
Banking 12.2
Electronic Equipment 6.8
Food and Beverage 6.3
Consumer Goods 5.3
Financial Services 4.3
Real Estate 4.1
Automotive 3.9
Chemicals 3.6
Services 3.2
Transportation 3.1
Construction 2.9
Paper and Allied Products 2.8
Conglomerates 2.4
Energy Services 1.9
Health Care 1.7
Utilities 1.3
Machinery 1.2
Metals and Mining 1.1
Communications 0.8
Retail Trade 0.7
Textiles 0.5
Computers 0.4
Insurance 0.1
Miscellaneous 4.9
-------------
100.0 %
-------------
-------------
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO ASIA FUND
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Assets and Liabilities - February 29, 2000
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value (cost $120,517,633) (Note 1) $ 126,869,653
Foreign currency, at value (cost $837,401) (Note 1) 834,379
Cash 3,182
Receivable for investments sold 6,610
Dividends and interest receivable 382,201
Receivable for expenses waived or borne by Manager (Note 2) 7,853
-------------------
Total assets 128,103,878
-------------------
LIABILITIES:
Payable for Fund shares repurchased 7,981,000
Payable for open swap contracts (Notes 1 and 6) 621,410
Accrued capital gain and repatriation taxes payable (Note 1) 91,443
Payable to affiliate for (Note 2):
Management fee 86,728
Shareholder service fee 16,061
Accrued expenses 89,187
-------------------
Total liabilities 8,885,829
-------------------
NET ASSETS $ 119,218,049
-------------------
-------------------
NET ASSETS CONSIST OF:
Paid-in capital $ 101,407,413
Accumulated undistributed net investment income 73,119
Accumulated undistributed net realized gain 12,104,026
Net unrealized appreciation 5,633,491
-------------------
$ 119,218,049
-------------------
-------------------
NET ASSETS ATTRIBUTABLE TO CLASS III SHARES $ 119,218,049
-------------------
-------------------
SHARES OUTSTANDING - CLASS III 9,650,804
-------------------
-------------------
NET ASSET VALUE PER SHARE - CLASS III $ 12.35
-------------------
-------------------
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO ASIA FUND
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Operations - Year Ended February 29, 2000
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends (net of foreign tax expense of $203,954) $ 1,176,403
Interest 505,658
------------------------
Total income 1,682,061
------------------------
EXPENSES:
Management fee (Note 2) 928,350
Custodian fees 334,489
Audit fees 46,355
Transfer agent fees 27,545
Legal fees 4,621
Registration fees 2,041
Trustees fees (Note 2) 1,355
Miscellaneous 2,281
Fees waived or borne by Manager (Note 2) (84,198)
------------------------
1,262,839
Shareholder service fee - Class III (Note 2) 171,917
------------------------
Net expenses 1,434,756
------------------------
Net investment income 247,305
------------------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments 20,573,064
Closed swap contracts 5,973,435
Foreign currency, forward contracts and foreign currency related
transactions (111,396)
------------------------
------------------------
Net realized gain 26,435,103
------------------------
Change in net unrealized appreciation (depreciation) on:
Investments (Note 1) 22,866,545
Open swap contracts (2,184,028)
Foreign currency, forward contracts and foreign currency related
transactions (62,179)
------------------------
------------------------
Net unrealized gain 20,620,338
------------------------
Net realized and unrealized gain 47,055,441
------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 47,302,746
------------------------
------------------------
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO ASIA FUND
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
FEBRUARY 29, 2000 FEBRUARY 28, 1999
------------------- ------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 247,305 $ 767,337
Net realized gain (loss) 26,435,103 (10,861,319)
Change in net unrealized appreciation (depreciation) 20,620,338 (15,400,922)
------------------- ------------------
Net increase (decrease) in net assets resulting
from operations 47,302,746 (25,494,904)
------------------- ------------------
Distributions to shareholders from:
Net investment income - Class III (220,569) (877,511)
In excess of net investment income - Class III - (673,683)
Net realized gains - Class III (3,424,176) -
------------------- ------------------
(3,644,745) (1,551,194)
------------------- ------------------
Net share transactions - Class III (Note 5) (1,843,973) 64,289,234
------------------- ------------------
Total increase in net assets 41,814,028 37,243,136
NET ASSETS:
Beginning of period 77,404,021 40,160,885
------------------- ------------------
End of period (including accumulated
undistributed net investment income of $73,119
and $157,775, respectively) $ 119,218,049 $ 77,404,021
------------------- ------------------
------------------- ------------------
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO ASIA FUND
(A Series of GMO Trust)
Financial Highlights
(For a Class III Share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
-----------------------------------------------------------------
2000 1999 1998*
---------------- --------------- --------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.67 $ 10.44 $ 10.00
---------------- --------------- --------------
Income (loss) from investment operations:
Net investment income 0.03 0.08 (b) 0.01 (b)
Net realized and unrealized gain (loss) 5.01 (2.69) 0.43
---------------- --------------- --------------
Total from investment operations 5.04 (2.61) 0.44
---------------- --------------- --------------
Less distributions to shareholders from:
Net investment income (0.02) (0.08) -
In excess of net investment income - (0.08) -
Net realized gains (0.34) - -
---------------- --------------- --------------
(0.36) (0.16) -
---------------- --------------- --------------
NET ASSET VALUE, END OF PERIOD $ 12.35 $ 7.67 $ 10.44
---------------- --------------- --------------
---------------- --------------- --------------
TOTAL RETURN (a) 65.57% (25.03%) 4.40%***
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 119,218 $ 77,404 $ 40,161
Net expenses to average daily net assets 1.25% 1.26% 2.52% **
Net investment income to average daily net assets 0.22% 1.04% 2.86% **
Portfolio turnover rate 121% 61% 1%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share
amounts: $ 0.01 0.02 $ 0.01
</TABLE>
* Period from February 18, 1998 (commencement of operations) to
February 28, 1998.
** Annualized
*** Not annualized.
(a) Calculation excludes subscription and redemption fees. The total return
would have been lower had certain expenses not been waived during the
periods shown.
(b) Computed using average shares outstanding throughout the period.
10 See accompanying notes to the financial statements.
<PAGE>
GMO ASIA FUND
(A Series of GMO Trust)
Notes to Financial Statements
February 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Asia Fund (the "Fund"), which commenced operations on February 18,
1998, is a series of GMO Trust (the "Trust"). The Fund is registered under
the Investment Company Act of 1940, as amended, as an open-end,
non-diversified management investment company. The Fund is advised and
managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO").
The Trust was established as a Massachusetts Business Trust under the laws
of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of
Trust permits the Trustees to create an unlimited number of series
("Funds"), each of which issues a separate series of shares, and to
subdivide a series of shares into classes.
The Asia Fund seeks high total return through investment in equity
securities traded in the Asian securities markets. The Fund's benchmark is
the GMO Asia 7 Index.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of financial statements in
accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost
which approximates market value. Securities for which quotations are not
readily available are valued at fair value as determined in good faith by
the Trustees or other persons acting at their direction.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets
and liabilities are translated to U.S. dollars based on the current
exchange rates each business day. Income and expenses denominated in
foreign currencies are translated at current exchange rates when accrued
or incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses
that arise from changes in the market value of investments. Such
fluctuations are included with net realized and unrealized gain or loss
on investments. Net realized gains and losses on foreign currency
transactions represent gains and losses on disposition of foreign
currencies and forward foreign exchange contracts, currency gains and
losses realized between the trade and settlement dates on securities
transactions and the difference between the amount of investment income
and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid.
See accompanying notes to the financial statements. 11
<PAGE>
GMO ASIA FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or all
of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency contracts
are marked to market daily and the change in value is recorded by the Fund
as an unrealized gain or loss. Realized gains or losses equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed are recorded upon delivery or receipt
of the currency or, if a forward currency contract is offset by entering
into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market risk
in excess of the unrealized gain or loss reflected in the Fund's Statement
of Assets and Liabilities. In addition, the Fund could be exposed to risk
if the counterparties are unable to meet the terms of the contracts or if
the value of the currency changes unfavorably to the U.S. dollar. There
were no forward foreign currency contracts outstanding as of February 29,
2000.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying instrument.
When the Fund writes a call or put option, an amount equal to the premium
received is recorded as a liability and subsequently marked to market to
reflect the current value of the option written. Premiums received from
writing options which expire are treated as realized gains. Premiums
received from writing options which are exercised or closed are added to
the proceeds or offset against the amounts paid on the future, security, or
currency transaction to determine the realized gain or loss. The Fund as a
writer of an option has no control over whether the underlying future,
security, or currency may be sold (call) or purchased (put) and as a result
bears the market risk of an unfavorable change in the price of the future,
security, or currency underlying the written option. There is the risk the
Fund may not be able to enter into a closing transaction because of an
illiquid market. At February 29, 2000 there were no open written option
contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. Premiums paid for purchasing options which are exercised or closed
are added to the amounts paid or offset against the proceeds on the
transaction to determine the realized gain or loss. The risk associated
with purchasing put and call options is limited to the premium paid.
12
<PAGE>
GMO ASIA FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
The Fund may purchase or sell index futures contracts. Stock index futures
contracts represent commitments for future delivery of cash based upon the
level of a specified index of equity securities at a given date. The Fund
may use futures contracts to manage its exposure to the stock and currency
markets. Buying futures tends to increase the Fund's exposure to the
underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments. Upon
entering into a futures contract, the Fund is required to deposit with its
custodian and agency, in a segregated account in the name of the futures
broker, an amount of cash or U.S. government and agency obligations in
accordance with the initial margin requirements of the broker or exchange.
Futures contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. The payable or receivable is subsequently settled. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. As of February
29, 2000, there were no outstanding futures contracts.
INDEXED SECURITIES
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to increase
or decrease its exposure to different underlying instruments and to gain
exposure to markets that may be difficult to invest in through conventional
securities. Indexed securities may be more volatile than their underlying
instruments, but any loss is limited to the amount of the original
investment.
SWAP AGREEMENTS
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to the equity markets. The Fund enters into total return swap agreements
which involve a commitment by one party in the agreement to pay interest in
exchange for a market linked return, both based on notional amounts. To the
extent that the total return of the security or index underlying the
transaction exceeds or falls short of the offsetting interest rate
obligation, the Fund will receive a payment from or make a payment to the
counterparty. Total return swaps are marked to market daily based upon
quotations from market makers and the change, if any, is recorded as
unrealized gain or loss in the Statement of Operations. Payments received
or made at the end of the measurement period are recorded as realized gain
or loss in the Statement of Operations. Entering into these agreements
involves, to varying degrees, elements of credit and market risk in excess
of the amounts recognized on the Statement of Assets and Liabilities. Such
risks involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default
13
<PAGE>
GMO ASIA FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
on its obligation to perform or that there may be unfavorable changes in
the price of the security or index underlying these transactions. See Note
6 for a summary of the open swap agreements as of February 29, 2000.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 29, 2000, the Fund did not have any securities on
loan.
TAXES
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"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for U.
S. federal income tax purposes. Therefore, no provision for U. S. federal
income or excise tax is necessary. Taxes on foreign interest and dividend
income have been withheld in accordance with the applicable country's tax
treaty with the United States.
Dividends received by shareholders of the Fund which are derived from
foreign source income and foreign taxes paid by the Fund are to be treated,
to the extent allowable under the Code, as if received and paid by the
shareholders of the Fund.
The Fund may be subject to capital gains and repatriation taxes imposed by
certain countries in which it invests. The Fund has recorded a deferred tax
liability in respect of unrealized appreciation on foreign securities of
$91,443 for potential repatriation taxes at February 29, 2000. The accrual
for repatriation taxes is included in net unrealized gain in the Statement
of Operations.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to foreign currency and swap transactions,
and differing treatments for redemptions in-kind. Gross gains resulting
from such in-kind transactions amounted to $245,422.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the
14
<PAGE>
GMO ASIA FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under U. S. federal
tax rules versus accounting principles generally accepted in the United
States. The calculation of net investment income per share in the financial
highlights table excludes these adjustments.
<TABLE>
<CAPTION>
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
- --------------------------- -------------------------- ---------------------
<S> <C> <C>
$ (111,392) $ (758,742) $870,134
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income, net
of applicable withholding taxes, is recorded on the ex-dividend date, or
when the Fund is informed of the ex-dividend date, if later. Interest
income is recorded on the accrual basis and is adjusted for the accretion
of discounts. In determining the net gain or loss on securities sold, the
cost of securities is determined on the identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is 1.20% of the amount
invested. In the case of cash redemptions, the fee is .40% of the amount
redeemed. These fees will be reduced by 50% with respect to any portion of
a purchase or redemption that is offset by a corresponding redemption or
purchase, respectively, occurring on the same day. All purchase premiums
and redemption fees are paid to and recorded by the Fund as paid-in
capital. For the year ended February 29, 2000, the Fund received $127,025
in purchase premiums and $45,840 in redemption fees. There is no premium
for reinvested distributions. While no purchase premium is normally charged
with respect to in-kind purchases of Fund shares, a purchase premium of up
to .20% may be charged on certain in-kind purchases.
INVESTMENT RISK
Investments in emerging countries present certain risks that are not
inherent in many other securities. Many emerging countries present elements
of political and/or economic instability. The securities markets of
emerging countries are generally smaller and less developed than the
securities markets of the
15
<PAGE>
GMO ASIA FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
U.S. and developed foreign markets. Further, countries may impose various
types of foreign currency regulations or controls which may impede the
Fund's ability to repatriate amounts it receives. The Fund may acquire
interests in securities in anticipation of improving conditions in the
related countries. These factors may result in significant volatility in
the values of its holdings. The markets for emerging countries are
relatively illiquid. Accordingly, the Fund may not be able to realize in an
actual sale amounts approximating those used to value its holdings.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .81% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding custody fees, brokerage commissions, certain other
transaction costs (including stamp duties and transfer taxes), shareholder
service fees and extraordinary expenses) exceed the management fee.
Prior to March 1, 1999, GMO earned a management fee at the annual rate of
1.00% of average daily net assets. GMO had agreed to waive a portion of its
fee and bear other expenses to the extent that the Fund's annual expenses
(including the management fee but excluding custody fees, brokerage
commissions, certain other transaction costs (including stamp duties and
transfer taxes), shareholder service fees and extraordinary expenses)
exceeded .81% of average daily net assets.
The Manager has entered into a Consulting Agreement with Dancing Elephant,
Ltd. (the "Consultant") with respect to the management of the portfolio.
Payments made by the Manager to the Consultant will not affect the amounts
payable by the Fund to the Manager or the Fund's expense ratio.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000, was $1,355. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
16
<PAGE>
GMO ASIA FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
3. PURCHASES AND SALES OF SECURITIES
For the year ended February 29, 2000, cost of purchases and proceeds from
sales of investments, other than short term obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Proceeds
--------- --------
<S> <C> <C>
U.S. Government Securities $ 2,346,764 $ --
Investments (non-U.S. Government securities) 138,443,412 130,946,604
</TABLE>
At February 29, 2000, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in the value of investments held
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
---------------------------- -------------------------- ------------------------- ------------------------
<S> <C> <C> <C>
$120,982,450 $23,726,519 $17,839,316 $5,887,203
</TABLE>
4. PRINCIPAL SHAREHOLDERS
At February 29, 2000, 72.1 % of the outstanding shares of the Fund were
held by four shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
---------------------------------------- -------------------------------------------
Class III: Shares Amount Shares Amount
----------------- ------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Shares sold 886,861 $ 10,585,446 6,185,511 $ 63,691,637
-----------------------------
Shares issued to
shareholders in
reinvestment of
distributions 265,213 3,419,887 113,130 916,087
Shares repurchased (1,595,661) (15,849,306) (49,533) (318,490)
----------------- -------------------- -------------------- --------------------
Net increase (decrease) (443,587) $ (1,843,973) 6,249,108 $ 64,289,234
----------------- -------------------- -------------------- --------------------
----------------- -------------------- -------------------- --------------------
</TABLE>
17
<PAGE>
GMO ASIA FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 29, 2000 is as
follows:
SWAP AGREEMENTS
<TABLE>
<CAPTION>
Notional Amount Expiration Net Unrealized
Date Description Depreciation
----------------------- -------------- ------------------------------------------------------- --------------------
<S> <C> <C> <C>
TOTAL RETURN SWAPS
$ 2,675,820 3/02/00 Agreement with Indosuez W.I. Carr Ltd. dated 3/02/99 $ (359,774)
to receive (pay) the notional amount multiplied by
the return on the Thailand SET Index and to pay the
notional amount multiplied by 6 month LIBOR adjusted
by a specified spread.
1,777,198 3/03/00 Agreement with Indosuez W.I. Carr Ltd. dated 3/03/99 (261,636)
to receive (pay) the notional amount multiplied by
the return on the Thailand SET Index and to pay the
notional amount multiplied by 6 month LIBOR adjusted
by a specified spread.
--------------------
$ (621,410)
--------------------
--------------------
</TABLE>
18
<PAGE>
GMO ASIA FUND
(A Series of GMO Trust)
Federal Tax Information -- (Unaudited)
February 29, 2000
- --------------------------------------------------------------------------------
For the fiscal year ended February 29, 2000, all the Fund's distributions are
from investment company taxable income, except that the Fund has designated
93.95% as net capital gain dividends.
19
<PAGE>
GMO ASIA FUND
(A Series of GMO Trust)
PORTFOLIO MANAGERS
Mr. R. Jeremy Grantham and Mr. Arjun Divecha are primarily responsible for
the day-to-day management of the Fund's portfolio. Mr. Grantham has been
with GMO since its founding in 1977. Mr. Divecha is the principal of Dancing
Elephant Ltd., which serves as consultant to the Fund. Dancing Elephant Ltd.
has an exclusive consulting management agreement with GMO.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO Asia Fund returned 65.6% for the fiscal year
ended February 29, 2000. The Fund's benchmark, the GMO Asia 7 Index, returned
70.1% during the same period. The Morgan Stanley Emerging Markets Far East Free
Index rose 73.6% over the same period. Consistent with the Fund's investment
objectives and policies, the Fund was invested substantially in common stocks
throughout the period.
Strong macroeconomic numbers (huge trade surpluses, lower than expected
inflation) from Asia completely changed the sentiment for Asian markets. Within
Asia, Korea and Malaysia were among the best performing markets, rising 90%
while Philippines sank 15% for the year.
Country selection detracted 2.0% while our stock selection cost 2.5%. Of our
four country selection models, the value and neglect models underperformed while
momentum models outperformed. Most of our underperformance in country selection
came from overweighting Thailand (+7%) and underweighting Taiwan (-14%). We
started the year strongly overweight in Thailand, which rose only 22% for the
period while Taiwan gained 75%. Our overweight position in Korea contributed
significantly to performance as Korea rose 91% for the year.
Stock selection detracted 2.5% from performance as it was a difficult year for
value stocks. Overall, value stocks underperformed by 13% in Asia as the
Internet and telecommunications mania in developed markets spilled over to
emerging markets. The divergence between TMT (technology, media and
telecommunications) and old economy stocks was unprecedented. Value stocks in
Korea underperformed expensive stocks by a whopping 175%. In China value stocks
underperformed by 80% with most of the gains coming from telecommunications
stocks. Our emphasis on risk control in addition to a moderate overweight
position in China Telecom (50% of China Index) saved us from significant
underperformance.
OUTLOOK
We continue to be enthusiastic about Asia, but are less bullish given the
region's huge outperformance relative to the rest of the world. Within Asia, our
models have rotated us into Indonesia, Malaysia and China and out of Korea.
<PAGE>
While we have been aggressively overweight in Korea for the past few years,
expensive valuations and the threat of higher interest rates are likely to cap
the market. Within Asia, we prefer countries that are likely to have economic
growth that will surprise on the upside. These markets, including Indonesia,
Malaysia and Thailand, have not participated in the recent rally. Indonesia,
trading at under five times peak earnings, could be the most explosive market
over the next 5 years. Thailand has gone from being an International Monetary
Fund favorite to a totally neglected country as debt restructuring has taken a
back seat. While we are disappointed by the slow progress of reforms in
Thailand, we are convinced that this market offers good medium-term potential.
Poor corporate governance and politics have resulted in Philippines being among
the worst performing markets. The market is not cheap and earnings have been
disappointing.
The technology and telecommunications mania has continued to make value
investing a challenge in the short term. Nevertheless, we are confident that our
emphasis on buying cheap countries and companies will continue to produce
excellent long-term returns.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO &
CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO ASIA FUND CLASS III SHARES AND THE MSCI EMF ASIA INDEX
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
1yr Since Inception
- --------------------------------------------------------------------------------
<S> <C>
2/18/1998
62.93% 12.67%
- --------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH APPEARS HERE]
GMO Asia Fund - III
As of 2/29/00
<TABLE>
<CAPTION>
Date GMO Asia Fund - III MSCI EMF Asia GMO Asia 7
---- ------------------- ------------- ----------
<S> <C> <C> <C>
2/18/1998 9880 10000 10000
3/31/1998 10423 10690 11030
6/30/1998 6797 7144 6789
9/30/1998 5522 6122 6233
12/31/1998 8440 8189 9720
3/31/1999 8380 9096 9560
6/30/1999 13395 12725 15262
9/30/1999 10735 11748 12641
12/31/1999 14137 13955 16220
2/29/2000 12740 14362 15501
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares. When redeemed may be worth more or less than their
original cost. The total returns would have been lower had certain expenses
not been reimbursed during the periods shown and do not include the effect or
taxes. Each performance figure assumes purchase at the beginning and
redemption at the end of the stated period and reflects a transaction fee of
120 bp on the purchase and 40 bp on the redemption. Transaction fees are
retained by the Fund to cover trading costs. Past performance is not
indicative of future results. Information is unaudited.
- --------------------------------------------------------------------------------
Page>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of GMO Trust and the Shareholders of
GMO Currency Hedged International Core Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Currency Hedged International
Core Fund at February 29, 2000, the results of its operations, the changes in
its net assets and the financial highlights for the periods presented, in
conformity with accounting principles generally accepted in the United States.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at February 29, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 13, 2000
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 93.2%
AUSTRALIA - 2.7%
32,500 Amcor Ltd 119,759
26,495 Australia and New Zealand Banking Group Ltd 162,882
15,900 Bank of Western Australia 40,915
29,900 Boral Ltd * 42,786
12,600 Caltex Australia Ltd 16,637
94,100 Colonial Ltd 357,152
100,563 CSR Ltd 219,251
26,400 Delta Gold 35,346
26,500 Email Ltd 33,526
74,200 Harvey Norman Holdings Ltd 132,609
4,400 Jupiters Ltd 7,026
5,400 National Australia Bank Ltd 70,971
66,500 National Food Ltd 107,820
49,100 National Mutual Holdings 69,356
63,503 News Corp Ltd 925,635
29,900 Origin Energy Ltd 22,935
15,900 Pacific Dunlop Ltd 15,722
51,252 Pioneer International Ltd 136,608
21,674 PMP Communications Ltd 28,086
125,935 Qantas Airways Ltd 275,341
91,535 QCT Resources Ltd 39,351
42,200 Resolute Ltd 6,479
27,797 Schroders Property 39,606
45,700 Western Mining Corp Holdings Ltd 171,768
101,765 Westfield Trust Units 192,497
36,850 Westpac Banking Corp 235,367
----------------
3,505,431
----------------
AUSTRIA - 3.6%
977 Austria Mikro Systeme International * 43,456
1,270 Austria Tabakwerke AG 50,619
3,464 Austrian Airlines 54,360
21,777 Bank Austria AG 947,654
4,724 Boehler Uddeholm (Bearer) 175,963
5,515 Brau Union AG 229,161
723 EA-Generali AG 112,408
1,696 Energie-Versorgung Niederoesterreich AG 181,243
10,426 Erste Bank Der Oesterreichischen Sparkassen AG 436,637
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
AUSTRIA - CONTINUED
3,870 Flughafen Wien AG 139,347
155 Leykam-Muerztaler Papier und Zellstoff AG 4,611
1,006 Mayr-Melnhof Karton AG (Bearer) 55,283
7,346 Oesterreichische Brau Beteiligungs AG 283,602
3,789 OMV AG 296,607
6,378 RHI AG 172,730
550 VA Technologie AG (Bearer) 32,512
43,944 Voest-Alpine Stahl AG 1,353,827
----------------
4,570,020
----------------
BELGIUM - 0.9%
1,400 Almanij NV 53,105
550 Arbed SA 51,098
2,698 Compagnie Benelux Paribas SA 144,940
1,601 Credit Commercial Dexia 218,103
409 Electrabel SA 110,530
400 Electrafina NPV 50,602
250 Glaverbel NPV 16,848
1,650 Groupe Bruxelles Lambert NPV 357,898
2,042 Solvay et Cie 142,137
1,350 Union Miniere NPV 44,190
----------------
1,189,451
----------------
CANADA - 0.9%
9,268 Boliden Ltd SDR * 20,826
14,200 Canadian Marconi Co 153,156
4,200 Hudsons Bay Co 39,800
140 Magna Entertainment Corp * 782
700 Magna International Class A 28,222
19,100 Methanex Corp * 41,201
3,300 Molson Co Ltd Class A 55,379
4,700 NS Power Holdings Inc 42,109
3,200 PanCanadian Petroleum Ltd 47,416
2,100 Potash Corp of Saskatchewan 95,520
3,800 Quebecor Inc Class B 138,539
2,146 Rogers Cantel Mobile Communications Class B * 102,789
1,200 Shell Canada Ltd Class A 21,502
6,900 Stelco Inc Class A 36,854
34,430 Transcanada Pipelines Ltd 234,912
2,200 Westcoast Energy Inc 31,840
----------------
1,090,847
----------------
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
DENMARK - 0.1%
590 Den Danske Bank 56,373
430 Kapital Holding AS 15,832
850 Unidanmark AS Class A (Registered) 48,486
----------------
120,691
----------------
FINLAND - 0.9%
10,400 Enso Oyj Class R 105,132
12,200 Fortum Oyj 54,382
800 Helsingin Puhelin Oyj 85,492
700 Instrumentarium Oyj 22,812
2,900 Kesko Oyj 38,390
800 Metra AB Class A 16,290
1,800 Metso Oyj * 23,568
1,500 Pohjola Group Insurance Class B 84,337
16,400 Raisio Group Plc Class V 44,683
1,600 Sampo Insurance Co Ltd Class A 54,684
74 Sanitec Oyj * 976
1,000 Sonera Oyj 77,116
250 Stockmann AB Class A 3,947
3,000 Stora Enso Oyj Class A 30,471
1,000 Tieto Corp 68,837
13,800 UPM-Kymmene Oyj 382,635
----------------
1,093,752
----------------
FRANCE - 11.0%
3,060 Air France * 47,372
2,130 Alcatel Alsthom Cie Generale d'Electricite SA 498,720
12,799 Assurances Generales de France (Bearer) 618,576
22,933 Aventis SA Class A 1,170,174
22,698 Banque Nationale de Paris 1,791,905
215 Bongrain 59,820
2,070 Christian Dior 423,490
180 Clarins 18,543
5,584 Compagnie Generale d'Industrie et de Participations 374,976
380 Credit Commercial de France 43,279
21,900 Credit Lyonnais SA * 742,165
1,021 Dexia * 139,581
2,521 Dexia Strip * 121
4,987 Eridania Beghin-Say SA 418,668
21,700 Eurotunnel SA Units (Bearer) * 26,741
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
FRANCE - CONTINUED
90 Fromageries Bel SA 61,000
1,568 Groupe Danone 315,203
3,598 Lafarge Coppee SA 268,458
160 LVMH (Louis Vuitton Moet Hennessy) 59,382
1,900 Metaleurop SA * 17,396
5,750 Michelin SA Class B 179,526
3,440 Pechiney SA Class A 200,699
5,978 Pernod Ricard 302,154
6,462 Peugeot SA 1,331,978
1,700 Remy Cointreau SA * 36,007
23,170 Renault SA 923,506
4,420 Rhodia SA 75,320
5,564 Saint-Gobain 774,049
11,870 Skis Rossignol 174,275
852 Societe Eurafrance 398,648
8,849 Societe Generale Paris 1,834,221
1,380 SPIE Batignolles 89,016
573 Suez Lyonnaise des Eaux 94,333
1,000 Thomson CSF 39,473
33,504 Usinor Sacilor 488,678
1,380 Vallourec 55,801
----------------
14,093,254
----------------
GERMANY - 8.3%
900 AGIV AG 16,116
250 Axel Springer Verlag AG 329,742
4,400 Bankgesellschaft Berlin AG * 69,684
18,000 BASF AG 820,552
16,251 Bayer AG 676,674
3,350 Bayerische Hypotheken und Wechsel-Bank AG 54,829
900 Bayerische Motoren Werke AG 23,048
900 Bayerische Vereinsbank 49,042
2,050 Bilfinger & Berger 29,605
13,000 Buderus AG 200,252
15,600 Commerzbank AG 555,699
7,959 Continental AG 131,029
6,000 DaimlerChrysler AG 406,666
8,194 Deutsche Bank AG 689,479
19,616 Deutsche Telekom 1,641,133
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
GERMANY - CONTINUED
1,451 Dredsner Bank AG 69,568
8,400 FAG Kugelfischer 70,358
700 Fresenius Medical Care AG 49,197
2,713 Heidelberg Port-Zement 152,799
3,350 Leirheit AG 101,594
3,500 Lufthansa AG 78,074
900 RWE AG 30,067
150 Schering AG 18,037
300 Schmalbach-Lubeca 36,970
15,679 Siemens AG 2,800,115
4,472 Suedzucker AG 45,207
33,138 Thyssen Krupp AG * 799,185
12,048 Veba AG 538,203
1,100 Viag AG 19,539
600 Volkswagen AG 24,088
----------------
10,526,551
----------------
HONG KONG - 4.7%
129,500 Amoy Properties Ltd 72,797
82,000 Cheung Kong Holdings 1,101,018
36,000 Citic Pacific Ltd 180,860
97,500 CLP Holdings Ltd 429,698
133 Dickson Concept International Ltd 145
290,000 Elec & Eltek International Holdings Ltd 54,402
21,281 Great Eagle Holdings Ltd 28,437
700 Guoco Group 1,390
59,300 Hang Lung Development Co Ltd 46,097
42,000 Henderson Land Development Co Ltd 178,625
768 HKR International Ltd 377
100,700 Hong Kong Aircraft Engineering Co Ltd 137,798
123,500 Hong Kong Electric Holdings Ltd 376,873
43,000 Hong Kong Ferry Co Ltd 34,808
17,000 Hong Kong Land Holdings 21,590
32,400 Hong Kong Telecommunications 108,031
600 Hysan Development Co Ltd 624
95,441 Jardine Matheson Holdings Ltd 334,044
136,500 Jardine Strategic Holdings Ltd 215,670
127 Kumagai Gumi Ltd 30
400 Lai Sun Garment International Ltd * 20
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
HONG KONG - CONTINUED
796 Leading Spirit Conrowa Electric * 20
297,400 Mandarin Oriental ADR 153,161
87,600 New Asia Realty & Trust Class A 90,045
79,815 New World Development Co Ltd 114,859
1,000 Oriental Press Group * 379
100 Realty Development Corp Ltd Class A 127
2,939,000 Regal Hotels International Ltd * 215,248
900 Shaw Brothers Ltd 1,249
240,972 South China Morning Post Ltd 239,956
103,000 Sun Hung Kai Properties Ltd 929,710
98,500 Swire Pacific Ltd Class A 472,073
145,000 Wharf Holdings Ltd 248,722
143,200 Wheelock and Co Ltd 95,678
80 Wing Lung Bank 287
46,000 Yue Yuen Industrial Holdings 88,362
----------------
5,973,210
----------------
IRELAND - 0.0%
4,800 Independent News & Media Plc 50,371
----------------
ITALY - 4.4%
6,801 Banca Commerciale Italiana SPA 28,810
437,500 Banca di Roma 497,441
50,083 Banca Intesa SPA 183,708
12,400 Banca Popolare di Bergamo Credit 246,522
49,200 Banca Popolare di Milano 364,728
133,300 Banco Ambrosiano Veneto SPA (Non Convertible) 275,919
87,297 Banco di Napoli 84,129
16,000 Burgo (Cartiere) SPA 93,964
18,200 Compart SPA * 23,287
8,000 Credito Fondiario * 7,779
21,769 Fiat SPA 662,276
13,017 Fiat SPA (Non Convertible) 187,480
305,580 HPI SPA 647,234
23,350 IFIL Finanziaria di Partecipazioni SPA 249,755
29,250 IFIL Finanziaria di Partecipazioni SPA (Non Convertible) 133,199
21,650 Immsi SPA * 49,608
10,000 Industriali Riunite SPA 56,995
2,200 Industrie Natuzzi SPA ADR 24,888
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
[cad 192](A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ITALY - CONTINUED
25,850 Italcementi Fabbriche Riunite Cemento SPA (Non Convertible) 84,616
1,600 Italmobiliare SPA 34,351
5,000 Magneti Marelli SPA 19,014
199,934 Montedison SPA 351,288
107,304 Montedison SPA (Non Convertible) 112,398
75,000 Parmalat Finanziaria SPA 81,521
54,700 Pirelli & Co 121,914
37,781 RAS SPA 329,182
21,650 Sirti SPA 51,067
35,000 SNIA BPD SPA 40,402
11,000 Societa Assicuratrice Industriale (SAI) 43,632
19,800 Tecnost SPA * 82,350
39,870 Telecom Italia SPA (Non Convertible) 314,756
7,700 Toro Assicurazioni 79,988
----------------
5,564,201
----------------
JAPAN - 23.7%
2,000 Acom Ltd 212,280
3,000 Anritsu Corp 29,767
4,200 Arabian Oil Co Ltd * 24,851
53,000 Asahi Bank 224,341
2,000 Asahi Breweries Ltd 19,426
3,000 Asahi Glass Co Ltd 20,482
2,000 Autobacs Seven 48,063
3,000 Bandai Co 114,970
26,000 Bank of Yokohama 92,777
12,000 Brother Industries Ltd 25,670
21,000 Canon Sales Co Inc 277,184
5,000 Chiba Bank 21,574
9,800 Chubu Electric Power Co Inc 139,254
14,000 Chugai Pharmaceutical Co Ltd 214,100
7,600 Chugoku Electric Power Co Inc 94,088
115,000 Cosmo Oil Co Ltd 125,620
26,000 Daicel Chemical Industries Ltd 86,387
17,000 Daido Steel Co Ltd 23,212
25,000 Dai-Ichi Kangyo Bank 197,988
16,000 Daiichi Pharmaceuticals Co Ltd 207,546
7,000 Dainippon Printing Co Ltd 104,820
24,000 Daishowa Paper Manufacturing * 105,521
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
JAPAN - CONTINUED
4,000 Daito Trust Construction Co Ltd 52,069
217,000 Daiwa Bank 539,265
78,000 Daiwa House Industry Co Ltd 533,230
8,000 Daiwa Kosho Lease Co Ltd 19,662
37,000 Daiwa Securities Co Ltd 587,729
13,000 Ezaki Glico Co Ltd 60,116
82,000 Fuji Bank 638,951
13,800 Fuji Photo Film Co Ltd 606,745
48,000 Fujita Corp * 21,847
12,000 Fukuyama Transporting Co Ltd 85,531
28,000 General Sekiyu (KK) 50,976
1,000 Heiwa Corp 19,025
52,000 Hino Motors * 125,911
143,000 Hitachi Ltd 1,951,273
3,700 Hokkaido Electric Power 44,391
14,000 Hokuriku Bank * 28,929
9,000 Honda Motor Co Ltd 294,934
3,000 House Foods Corp 43,694
3,000 INAX Corp 15,266
23,000 Industrial Bank of Japan 179,846
29,000 Ishikawajima-Harima Heavy Industries 29,566
62,000 Itochu Corp * 338,628
12,000 Itoham Foods Inc 46,971
8,000 Japan Airport Terminal Co Ltd 62,774
117,000 Japan Energy Co Ltd 91,593
20,000 Japan Radio Co 207,546
8,000 Japan Securities Finance Co 46,898
6,000 Japan Synthetic Rubber Co Ltd 46,425
75 Japan Tobacco Inc 535,934
2,000 Jusco Co Ltd 28,164
52,000 Kajima Corp 132,538
9,000 Kandenko Co 32,443
9,900 Kansai Electric Power 145,091
51,000 Kawasaki Heavy Industries Ltd 53,389
16,000 Kawasaki Kisen 21,993
76,000 Keio Teito Electric Railway Co Ltd 254,590
11,000 Kirin Brewery Co Ltd 131,273
4,000 Kissei Pharmaceutical Co Ltd 67,362
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
JAPAN - CONTINUED
175,000 Kobe Steel Ltd * 100,360
1,000 Kokusai Denshin Denwa 93,305
12,000 Komatsu Ltd 53,088
119,000 Kubota Corp 346,639
55,000 Kumagai Gumi Co Ltd * 28,538
40,000 Kyowa Hakko Kogyo Co Ltd 520,686
33,800 Kyushu Electric Power Co Inc 401,828
24,000 Maeda Corp 67,726
3,000 Maeda Road Construction 12,152
145,000 Marubeni Corp 590,005
4,000 Marui Co Ltd 52,433
18,000 Matsushita Electric Industrial Co Ltd 524,328
6,000 Meiji Milk Products 37,686
29,000 Mitsubishi Corp 214,091
99,000 Mitsubishi Electric Corp 876,856
274,000 Mitsubishi Heavy Industries 750,753
66,000 Mitsubishi Material * 219,289
53,000 Mitsubishi Motors * 168,377
10,000 Mitsubishi Trust & Banking 68,272
16,000 Mitsui Fudosan Co Ltd 128,460
50,000 Mitsui Petrochemical Industries Ltd 360,930
223,000 Mitsui Trust & Banking Co Ltd 345,091
7,000 Mitsui & Co 43,330
4,000 Mochida Pharmaceutical Co Ltd 22,284
33,000 Mycal Corp 119,558
14,000 New Japan Securities Co Ltd * 64,358
16,000 New Oji Paper Co Ltd 76,756
1,000 Nichiei Co Ltd (Kyoto) * 20,208
93,000 Nichirei 236,193
8,000 Nikko Securities 103,191
1,800 Nintendo Co Ltd 393,082
23,000 Nippon Express Co Ltd 153,675
13,000 Nippon Hodo Co 53,962
22,000 Nippon Light Metal 14,018
10,000 Nippon Meat Packers Inc 91,939
165,550 Nippon Oil Co Ltd 581,697
44,000 Nippon Shinpan Co 100,132
23,000 Nishimatsu Construction 69,929
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
JAPAN - CONTINUED
279,000 Nissan Motor Co * 1,053,980
16,000 Nisshin Oil Mills Ltd 42,966
41,000 Nisshin Steel Co Ltd 38,068
68,000 Nisshinbo Industries Inc 255,646
185,000 Nissho Iwai Corp * 126,303
404,000 NKK Corp * 220,655
19,000 Obayashi Corp 53,962
31,000 Odakyu Electric Railway 91,430
51,000 Oki Electric Industry * 305,011
17,000 Okumura Corp 46,425
3,000 Ono Pharmaceutical Co Ltd 84,657
42,000 Onoda Cement Co Ltd 63,465
13,000 Onward Kashiyama Co Ltd 125,556
33,000 Orient Corp 121,360
12,000 Penta Ocean Construction * 14,965
2,000 Pioneer Electronics Corp 63,538
7,000 Promise Co 516,772
6,000 Q.P. Corp 45,332
71,000 Renown Inc 104,702
5,000 Royal Co Ltd 40,508
7,000 Ryosan Co 114,633
38,000 Sagami Railway Co Ltd 96,855
269,000 Sakura Bank Ltd 1,535,324
11,000 Sankyo Co Ltd 227,800
2,000 Sanwa Bank Ltd 18,406
55,000 Sanyo Electric Co 224,296
500 Secom Co Ltd 44,786
40,000 Seino Transportation Co Ltd 200,628
55,000 Sekisui Chemical 172,227
80,000 Sekisui House Ltd 597,151
25,200 Shikoku Electric Power 303,946
40,000 Shimizu Corp 96,491
5,000 Shionogi and Co Ltd 71,458
32,000 Showa Shell Sekiyu 108,361
22,000 Snow Brand Milk Products Co Ltd 92,322
30,000 Stanley Electric Co Ltd 231,578
8,000 Sumitomo Corp 88,699
5,000 Sumitomo Electric 65,905
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
JAPAN - CONTINUED
4,000 Sumitomo Forestry Co Ltd 23,704
171,000 Sumitomo Metal Industries * 93,396
84,000 Sumitomo Trust & Banking 474,844
16,000 Suzuki Motor Corp 258,814
91,000 Taisei Corp 133,367
3,000 Taisho Pharmaceutical Co Ltd 84,657
6,000 Takara Standard Co 21,902
10,000 Takuma Corp 68,818
8,000 Tanabe Seiyaku Co Ltd 48,646
700 TDK Corp 66,970
34,000 Teijin Ltd 133,394
58,000 Teikoku Oil Co Ltd 165,254
3,000 The Bank of Fukuoka Ltd 16,740
9,000 TOA Corp 10,241
46,000 Toei Co Ltd 418,315
16,000 Tohoku Electric Power Co Inc 189,340
56,000 Tokai Bank 256,411
12,000 Tokyo Gas Co 22,065
4,000 Tokyo Steel Manufacturing Co 8,994
76,000 Tomen Corp 44,968
10,000 Toppan Printing Co Ltd 98,585
14,000 Toray Industries Inc 44,604
8,000 Tostem Corp 110,327
5,000 Toto Ltd 24,305
18,000 Toyo Seikan Kaisha 235,128
5,000 Toyo Suisan Kaisha 30,950
30,000 Toyo Trust & Banking Co Ltd 86,022
144,000 Toyobo Co Ltd 190,069
5,000 Yakult Honsha Co Ltd 41,919
1,000 Yamanouchi Pharmaceutical Co Ltd 47,790
254,000 Yasuda Trust & Banking * 323,699
----------------
30,168,099
----------------
LUXEMBOURG - 0.0%
830 Carrier1 International SA ADR * 26,923
----------------
NETHERLANDS - 2.7%
17,500 ABN Amro Holdings NV 362,235
5,200 Buhrmann NV Maastricht 136,922
6,600 DSM NV 216,486
</TABLE>
See accompanying notes to the financial statements. 11
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
NETHERLANDS - CONTINUED
15,400 Fortis (NL) NV 386,671
7,000 ING Groep NV 353,945
5,050 KLM-Konin Luchtvaart Mij NV 94,078
10,750 Kon Bolswessanen 115,915
4,500 Koninklijke KPN NV 572,090
3,700 Nedlloyd 84,780
19,900 Royal Dutch Petroleum 1,040,127
3,850 Stork NV 47,259
1,400 VIB NV 34,235
----------------
3,444,743
----------------
NEW ZEALAND - 0.1%
14,600 Air New Zealand Class B 14,889
257,000 Brierley Investment Ltd 46,176
58,100 Carter Holt Harvey Ltd 56,145
36,700 Lion Nathan Ltd 66,118
----------------
183,328
----------------
NORWAY - 3.0%
10,100 Bergesen d.y. ASA Class A 168,564
5,400 Bergesen d.y. ASA Class B 88,514
72,900 Christiania Bank OG Kreditkasse 369,345
183,563 Den Norske Bank Class A 665,234
1,700 Dyno Industrier AS 40,532
2,300 Elkem AS Class A 39,757
14,000 Fred Olsen Energy * 113,489
1,700 Kvaerner ASA Class B * 23,610
20,200 Kvaerner ASA * 349,169
200 Leif Hoegh and Co AS 1,943
3,100 Merkantildata ASA 35,847
25,600 Norsk Hydro AS 953,687
5,400 Norske Skogindustrier ASA Class A 207,928
1,400 Norske Skogindustrier ASA Class B 42,642
7,000 Orkla ASA 106,813
33,400 Petroleum Geo-Services * 523,586
2,700 SAS Norge ASA Class B 23,979
900 Schibsted ASA 26,286
1,500 Smedvig ASA Class A 19,133
1,500 Smedvig ASA Class B 17,166
3,000 Storebrand * 18,239
14,100 Tandberg Data ASA * 27,062
----------------
3,862,525
----------------
</TABLE>
12 See accompanying notes to the financial statements.
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
PORTUGAL - 0.4%
1,669 Banco Espirito Santo e Commercial de Lisboa (Registered) 43,336
4,550 Banco Portugues do Atlantico * 18,486
7,062 BPI-SGPS SA (Registered) 26,244
23,153 Electricidade de Portugal 462,083
----------------
550,149
----------------
SINGAPORE - 4.9%
41,000 Cerebos Pacific Ltd 72,785
30,000 City Developments Ltd 121,831
252,000 Comfort Group 112,572
21,000 Creative Technology Ltd 456,866
31,489 DBS Group Holdings Ltd 389,114
292,000 DBS Land Ltd 386,239
59,564 Haw Par Brothers International Ltd 101,594
39,000 Hotel Properties Ltd 34,391
24,308 Inchcape Berhad 18,897
38,000 Keppel Bank Ltd 78,041
31,000 Keppel Corp 69,420
38,000 Keppel Land Ltd 43,430
58,000 Marco Polo Developments Ltd 61,913
26,000 Natsteel Ltd 51,587
38,700 Oversea-Chinese Banking Corp 244,724
188,517 Overseas Union Bank 836,662
49,100 Robinson and Co Ltd 141,287
60,780 Shangri-La Asia Ltd 49,591
181,000 Singapore Airlines Ltd (Registered) 1,680,107
63,000 Singapore Land Ltd 116,227
24,826 Singapore Press Holdings 475,290
96,000 Singapore Telecom 155,944
147,000 Straits Trading Co Ltd 153,507
27,000 Times Publishing Ltd 55,137
49,000 United Industrial Corp Ltd 21,320
7,392 United Overseas Bank 46,744
188,000 United Overseas Land 131,972
221,000 Wing Tai Holdings 165,394
----------------
6,272,586
----------------
SPAIN - 1.6%
17,400 Compania Espanola de Petroleos 166,681
1,400 Corporacion Mapfre (Registered) 19,220
35,700 Endesa 755,113
57,527 Repsol SA 1,088,298
----------------
2,029,312
----------------
</TABLE>
See accompanying notes to the financial statements. 13
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
SWEDEN - 4.8%
24,974 Assi Doman 367,474
44,742 Avesta Sheffield AB * 175,559
5,800 Drott AB Class B 56,895
2,700 Electrolux AB 50,816
20,850 Foreningssparbanken AB Class A 263,984
16,385 Gambro AB Class A 114,005
17,056 Gambro AB Class B 120,620
1,200 Investor AB Class A 17,246
10,800 Investor AB Class B 157,682
32,577 Mo Och Domsjo AB Class B 921,535
102,900 Nordbanken Holdings AB 539,911
4,100 Skandia Forsakrings AB 167,891
54,300 Skandinaviska Enskilda Banken Class A 545,044
900 Skanska AB Class B 31,003
6,600 SKF AB Class B 130,991
12,600 SSAB Swedish Steel Class A 153,063
3,300 SSAB Swedish Steel Class B 39,335
28,877 Svenska Cellulosa Class B 703,233
35,600 Svenska Handelsbanken Class A 416,220
5,000 Svenska Kullagerfabriken AB 93,533
772 Sydkraft AB Class C 14,089
41,718 Trelleborg AB Class B 292,649
4,400 Volvo AB Class A 97,365
25,600 Volvo AB Class B 602,988
----------------
6,073,131
----------------
SWITZERLAND - 1.7%
70 Ascom Holding AG (Bearer) 277,751
340 Baloise Holdings 264,924
100 Banque Cantonale Vaudoise (Bearer) 28,171
910 BK Vision AG (Bearer) * 166,357
40 Financiere Richemont AG Class A 92,304
350 Fischer (Georg) AG (Registered) 104,471
70 Helvetia Patria Holding 48,250
60 Jelmoli (Bearer) 76,600
430 Merkur Holding AG (Registered) 123,711
90 Pargesa Holdings SA (Bearer) 169,923
210 Pharma Vision * 159,224
660 SAir Group (Registered) 125,402
</TABLE>
14 See accompanying notes to the financial statements.
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
SWITZERLAND - CONTINUED
120 Schweizerische Industrie-Gesellschaft Holding AG (Registered) 72,141
450 Schweizerische Lebensversicherungs-und Rentenanstalt 223,058
130 Sika Finanz AG (Bearer) 42,933
100 Sulzer Gebrueder AG (Registered) * 65,152
412 UBS AG (Registered) 100,135
----------------
2,140,507
----------------
UNITED KINGDOM - 12.8%
3,900 3i Group Plc 69,448
8,300 Abbey National Plc 93,161
7,300 Allied Zurich Plc 62,058
6,100 AMEC 14,974
21,500 Anglian Water Plc 151,207
12,440 Arcadia Group 9,917
51,000 Arjo Wiggins Appleton Plc 127,208
49,646 Associated British Food 277,247
24,300 BAA 144,526
20,150 Barclays Plc 485,418
10,999 Barratt Development 29,865
41,056 Bass Plc 435,220
140,806 BG Group Plc 614,058
8,200 Boots Co 59,611
76,840 British Airways Plc 362,697
8,036 British Energy Plc 30,542
19,018 British Energy Plc (Deferred Shares) * -
123,700 Coats Viyella 79,576
4,100 Commercial Union Plc 48,899
238,195 Corus Group Plc 394,828
65,500 Courtaulds Textiles Plc 129,769
6,930 De Vere Group Plc 29,730
28,500 Diageo Plc 217,534
28,500 Great Portland Estates Plc 80,760
53,300 Halifax Group Plc 477,927
7,400 Hammerson Plc 37,616
55,512 Hazlewood Foods 66,164
20,100 HSBC Holdings Plc 234,015
13,100 Hyder Plc 41,619
23,617 Inchcape Plc 90,411
5,600 Johnson Matthey 63,828
38,700 Laird Group 118,216
</TABLE>
See accompanying notes to the financial statements. 15
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
UNITED KINGDOM - CONTINUED
40,080 Land Securities 436,895
39,531 Lonrho Plc 424,358
186,200 Marks & Spencer 668,724
35,122 MEPC Plc 186,851
169,158 National Power 999,402
17,500 Northern Foods Plc 25,554
16,600 Norwich Union Plc 102,398
22,100 Peninsular & Oriental Steam Navigation Co 248,927
53,641 Powergen Plc 369,842
3,303 Railtrack Group Plc 33,632
7,628 RMC Group 87,906
6,300 Royal Bank of Scotland Group 82,846
42,315 Royal & Sun Alliance Insurance Group 231,130
222,200 Sainsbury (J) 913,772
64,066 Scottish Hydro-Electric Plc 536,283
151,035 Scottish Power Plc 1,146,855
7,400 Scottish & Newcastle Plc 47,955
47,230 Severn Trent Plc 393,302
19,640 Shell Transport & Trading (Registered) 135,025
21,600 Slough Estates 95,306
9,000 Southwest Water 60,170
31,430 Storehouse Plc 22,080
5,426 Tarmac Plc 49,853
6,700 Tate & Lyle 27,130
44,300 Taylor Woodrow Plc 94,761
323,500 Tesco 875,839
41,404 Thames Water Plc 454,269
17,186 Thistle Hotels Plc 39,475
47,947 Transport Development Group Plc 180,524
50,817 United Biscuits Plc 208,979
90,155 United Utilities 931,505
55,540 Viglen Technology Plc (Entitlement Letters) * -
45,510 Vodafone Group Plc 255,227
12,081 Whitbread Plc Class A 100,031
231,269 Wilson (Connolly) Holdings 472,795
5,800 Woolwich Plc 26,553
77,277 Yorkshire Water 315,658
----------------
16,359,861
----------------
TOTAL COMMON STOCKS (Cost $125,108,498) 118,888,943
----------------
</TABLE>
16 See accompanying notes to the financial statements.
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT FUNDS - 1.2%
HONG KONG - 1.2%
722,300 Tracker Fund of Hong Kong * 1,582,363
----------------
TOTAL INVESTMENT FUNDS (Cost $1,209,146) 1,582,363
----------------
PREFERRED STOCKS - 0.8%
AUSTRIA - 0.1%
2,873 Bau Holdings AG (Non Voting) 106,490
----------------
GERMANY - 0.2%
550 Hugo Boss AG 66,983
1,900 MAN AG 38,139
9,000 Villeroy & Boch AG (Non Voting) 79,716
4,650 Volkswagen AG 106,100
----------------
290,938
----------------
ITALY - 0.5%
18,000 Compagnia Assicuratrice Unipol 32,060
24,480 Fiat SPA 414,799
8,500 IFI-Istituto Finanziario 215,223
4,000 La Rinascente SPA 13,941
----------------
676,023
----------------
TOTAL PREFERRED STOCKS (Cost $1,324,749) 1,073,451
----------------
RIGHTS & WARRANTS - 0.1%
AUSTRALIA - 0.0%
1,770 Franked Income Fund Warrants 12/31/02 * 217
----------------
FRANCE - 0.1%
155,500 Eurotunnel SA Paris Warrants 10/31/01 * 4,491
155,500 Eurotunnel SA Paris Warrants 10/31/03 * 11,977
3,420 Generale des Eaux Warrants 5/02/01 * 18,965
3,598 Lafarge Co Rights 3/03/00 * 104
----------------
35,537
----------------
HONG KONG - 0.0%
9,400 Gold Peak Industries Ltd Warrants 8/06/00 * 106
59,480 Mandarin Oriental International Ltd Rights 3/06/00 * 595
6 Mandarin Oriental International Ltd Rights 3/06/00 * -
----------------
701
----------------
</TABLE>
See accompanying notes to the financial statements. 17
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares/
Par Value ($) Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ITALY - 0.0%
11,801 Banca Intesa SPA Warrants 11/15/02 * 31,585
----------------
SINGAPORE - 0.0%
113,800 Asia Food & Properties Ltd Warrants 7/12/02 * 23,437
9,500 Haw Par Brothers International Ltd Warrants 7/18/01 * 6,063
----------------
29,500
----------------
TOTAL RIGHTS & WARRANTS (Cost $96,855) 97,540
----------------
SHORT-TERM INVESTMENTS - 4.9%
CASH EQUIVALENTS - 3.9%
$ 3,300,000 Banque Nationale Paribas (London) Time Deposit, 5.81% due 3/01/00 3,300,000
1,662,165 The Boston Global Investment Trust (a) 1,662,165
----------------
4,962,165
----------------
U.S. GOVERNMENT - 1.0%
$ 1,300,000 U.S. Treasury Bill, 5.09% due 1/04/01 (b) 1,234,277
----------------
TOTAL SHORT-TERM INVESTMENTS (Cost $6,198,667) 6,196,442
----------------
TOTAL INVESTMENTS - 100.2%
(Cost $133,937,915) 127,838,739
Other Assets and Liabilities (net) - (0.2%) (258,655)
----------------
TOTAL NET ASSETS - 100.0% $ 127,580,084
----------------
----------------
</TABLE>
NOTES TO THE SCHEDULE OF INVESTMENTS:
ADR American Depositary Receipt
SDR Swedish Depository Receipt
(a) Represents investment of security lending collateral
(Note 1).
(b) All or a portion of this security is held as
collateral for open futures contracts (Note 6).
* Non-income producing security.
18 See accompanying notes to the financial statements.
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
- --------------------------------------------------------------------------------
At February 29, 2000, industry sector diversification
of the Fund's equity investments was as follows:
INDUSTRY SECTOR (UNAUDITED)
<TABLE>
<S> <C>
Banking 16.9%
Utilities 7.5
Electronic Equipment 6.5
Conglomerates 6.3
Automotive 5.3
Energy Services 4.7
Consumer Goods 4.2
Real Estate 4.0
Transportation 3.8
Construction 3.6
Chemicals 3.5
Metals and Mining 3.5
Financial Services 3.4
Services 3.3
Machinery 3.0
Paper and Allied Products 2.9
Telecommunications 2.8
Retail Trade 2.6
Insurance 2.4
Communications 1.8
Food and Beverage 1.8
Health Care 1.4
Textiles 1.1
Aerospace 0.1
Computers 0.1
Miscellaneous 3.5
-----------
100.0%
-----------
-----------
</TABLE>
See accompanying notes to the financial statements. 19
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Assets and Liabilities - February 29, 2000
- ------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value (cost $133,937,915) (Note 1) $ 127,838,739
Foreign currency, at value (cost $599,097) (Note 1) 592,513
Cash 90,690
Receivable for investments sold 15,428
Net receivable for open forward foreign currency contracts (Notes 1 and 6) 1,012,858
Dividends and interest receivable 86,639
Foreign withholding taxes receivable 180,669
Receivable for expenses waived or borne by Manager (Note 2) 23,638
------------------
Total assets 129,841,174
------------------
LIABILITIES:
Payable for investments purchased 311,075
Payable upon return of securities loaned (Note 1) 1,662,165
Payable for variation margin on open futures contracts (Notes 1 and 6) 114,248
Payable to affiliate for (Note 2):
Management fee 55,840
Shareholder service fee 13,000
Accrued expenses 104,762
------------------
Total liabilities 2,261,090
------------------
NET ASSETS $ 127,580,084
------------------
------------------
NET ASSETS CONSIST OF:
Paid-in capital $ 127,006,663
Distributions in excess of net investment income (2,037,299)
Accumulated undistributed net realized gain 7,386,807
Net unrealized depreciation (4,776,087)
------------------
$ 127,580,084
------------------
------------------
NET ASSETS ATTRIBUTABLE TO:
Class III Shares $ 75,053,739
------------------
------------------
Class IV Shares $ 52,526,345
------------------
------------------
SHARES OUTSTANDING:
Class III 7,474,417
------------------
------------------
Class IV 5,235,942
------------------
------------------
NET ASSET VALUE PER SHARE:
Class III $ 10.04
------------------
------------------
Class IV $ 10.03
------------------
------------------
</TABLE>
20 See accompanying notes to the financial statements.
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Operations - Year Ended February 29, 2000
- ------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends (net of foreign tax expense of $484,763) $ 4,636,796
Interest (including securities lending income of $38,454) 591,697
------------------
Total income 5,228,493
------------------
EXPENSES:
Management fee (Note 2) 886,758
Custodian fees 425,041
Audit fees 55,274
Transfer agent fees 43,809
Legal fees 3,348
Registration fees 2,864
Trustees fees (Note 2) 1,691
Miscellaneous 4,285
Fees waived or borne by Manager (Note 2) (536,312)
------------------
886,758
Shareholder service fee - (Note 2)
Class III 127,019
Class IV 71,569
------------------
Net expenses 1,085,346
------------------
Net investment income 4,143,147
------------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain on:
Investments 8,708,081
Closed futures contracts 2,775,168
Foreign currency, forward contracts and foreign currency
related transactions 8,527,332
------------------
Net realized gain 20,010,581
------------------
Change in net unrealized appreciation (depreciation) on:
Investments (Note 1) 9,513,611
Open futures contracts (371,579)
Foreign currency, forward contracts and foreign currency
related transactions (367,134)
------------------
Net unrealized gain 8,774,898
------------------
Net realized and unrealized gain 28,785,479
------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 32,928,626
------------------
------------------
</TABLE>
See accompanying notes to the financial statements. 21
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
INCREASE (DECREASE) IN NET ASSETS: FEBRUARY 29, 2000 FEBRUARY 28, 1999
---------------------- ---------------------
<S> <C>
OPERATIONS:
Net investment income $ 4,143,147 $ 7,386,370
Net realized gain 20,010,581 31,666,041
Change in net unrealized appreciation (depreciation) 8,774,898 (30,470,928)
---------------------- ---------------------
Net increase in net assets resulting from operations 32,928,626 8,581,483
---------------------- ---------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class III (2,479,440) (1,029,703)
Class IV (1,769,224) (1,302,562)
---------------------- ---------------------
Total distributions from net investment income (4,248,664) (2,332,265)
---------------------- ---------------------
In excess of net investment income
Class III (703,048) (2,513,584)
Class IV (501,666) (3,179,653)
---------------------- ---------------------
Total distributions in excess of net investment income (1,204,714) (5,693,237)
---------------------- ---------------------
Net realized gains
Class III (2,379,277) (28,178,223)
Class IV (3,607,975) (33,629,347)
---------------------- ---------------------
Total distributions from net realized gains (5,987,252) (61,807,570)
---------------------- ---------------------
(11,440,630) (69,833,072)
---------------------- ---------------------
NET SHARE TRANSACTIONS - (NOTE 5)
Class III (30,221,889) (78,616,879)
Class IV (70,092,083) (224,207,117)
---------------------- ---------------------
Decrease in net assets resulting from
net share transactions (100,313,972) (302,823,996)
---------------------- ---------------------
Total decrease in net assets (78,825,976) (364,075,585)
NET ASSETS:
Beginning of period 206,406,060 570,481,645
---------------------- ---------------------
End of period (including distributions in excess of net
investment income of $2,037,299 and $982,318,
respectively) $ 127,580,084 $ 206,406,060
---------------------- ---------------------
---------------------- ---------------------
</TABLE>
22 See accompanying notes to the financial statements.
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Financial Highlights
(For a Class III Share Outstanding Throughout Each Period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
--------------------------------------- --------------------------
2000 1999 1998 1997 1996 *
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.28 $ 11.92 $ 12.68 $ 11.54 $ 10.00
--------- --------- --------- --------- ---------
Income from investment operations:
Net investment income 0.23 + 0.23 + 0.27 + 0.22 0.23
Net realized and unrealized gain (loss) 1.26 (0.36) (c) 1.72 1.63 1.44
--------- --------- --------- --------- ---------
Total from investment operations 1.49 (0.13) 1.99 1.85 1.67
--------- --------- --------- --------- ---------
Less distributions to shareholders from:
Net investment income (0.33) (0.08) (0.27) (0.28) (0.06)
In excess of net investment income (0.09) (0.21) - - -
Net realized gains (0.31) (2.22) (2.48) (0.43) (0.07)
--------- --------- --------- --------- ---------
Total distributions (0.73) (2.51) (2.75) (0.71) (0.13)
--------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 10.04 $ 9.28 $ 11.92 $ 12.68 $ 11.54
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL RETURN (a) 15.86% (1.84%) 17.98% 16.55% 16.66% ***
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 75,054 $ 97,450 $207,653 $581,099 $407,227
Net expenses to average
daily net assets 0.69% 0.69% 0.69% 0.72% (b) 0.69% **
Net investment income to average
daily net assets 2.25% 2.07% 2.15% 2.25% 1.89% **
Portfolio turnover rate 68% 68% 96% 84% 7%
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.03 $ 0.05 $ 0.05 $ 0.04 $ 0.05
</TABLE>
* Period from June 30, 1995 (commencement of operations) to February 29,
1996.
** Annualized.
*** Not annualized.
+ Computed using average shares outstanding throughout the period.
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(b) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .03% of average daily net assets.
(c) The amount shown for a share outstanding does not correspond with the
aggregate net realized and unrealized gain (loss) on investments for the
year ended February 28, 1999 due to timing of purchases and redemptions of
Fund shares in relation to fluctuating market values of the investments of
the Fund.
See accompanying notes to the financial statements. 23
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Financial Highlights
(For a Class IV Share Outstanding Throughout Each Period)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended February 28/29,
--------------------------------------------------------------------
2000 1999 1998 *
------------------- ------------------- ------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.27 $ 11.92 $ 10.87
------------------- ------------------- ------------------
Income from investment operations:
Net investment income 0.29 + 0.24 + 0.01 +
Net realized and unrealized gain (loss) 1.21 (0.36) (b) 1.04
------------------- ------------------- ------------------
Total from investment operations 1.50 (0.12) 1.05
------------------- ------------------- ------------------
Less distributions to shareholders from:
Net investment income (0.34) (0.09) -
In excess of net investment income (0.09) (0.22) -
Net realized gains (0.31) (2.22) -
------------------- ------------------- ------------------
Total distributions (0.74) (2.53) -
------------------- ------------------- ------------------
NET ASSET VALUE, END OF PERIOD $ 10.03 $ 9.27 $ 11.92
------------------- ------------------- ------------------
------------------- ------------------- ------------------
TOTAL RETURN (a) 15.94% (1.79%) 9.66% ***
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 52,526 $ 108,956 $ 362,829
Net expenses to average
daily net assets 0.63% 0.63% 0.63% **
Net investment income to average
daily net assets 2.81% 2.17% 0.72% **
Portfolio turnover rate 68% 68% 96%
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.03 $ 0.05 $ 0.01
</TABLE>
* Period from January 9, 1998 (commencement of operations) to February 28,
1998.
** Annualized.
*** Not annualized.
+ Computed using average shares outstanding throughout the period.
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(b) The amount shown for a share outstanding does not correspond with the
aggregate net realized and unrealized gain (loss) on investments for the
year ended February 28, 1999 due to the timing of purchases and redemptions
of Fund shares in relation to fluctuating market values of the investments
of the Fund.
24 See accompanying notes to the financial statements.
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Notes to Financial Statements
February 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Currency Hedged International Core Fund (the "Fund") is a series of GMO
Trust (the "Trust"). The Fund is registered under the Investment Company
Act of 1940, as amended, as an open-end, non-diversified management
investment company. The Fund is advised and managed by Grantham, Mayo, Van
Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a
Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series of shares
into classes.
The Fund seeks high total return through investment in equity securities of
non-U.S. issuers and through management of the Fund's foreign currency
positions. The Fund's benchmark is the MSCI EAFE Index (Hedged).
The Fund offers two classes of shares: Class III and Class IV. The
principal economic difference between the classes of shares is the level of
shareholder service fee borne by the classes. Eligibility for and automatic
conversion between the various classes of shares is generally based on the
total amount of assets invested with GMO, as more fully described in the
Trust's prospectus.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of financial statements in
accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each business
day, or if there is no such reported sale, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Securities which
are primarily traded on foreign exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges,
and those values are then translated into U.S. dollars at the current
exchange rate. Short-term investments with a remaining maturity of sixty
days or less are valued at amortized cost which approximates market value.
Securities for which quotations are not readily available are valued at
fair value as determined in good faith by the Trustees or other persons
acting at their direction.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the current exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at current exchange rates when accrued or
incurred The Fund does not isolate realized and unrealized gains and losses
attributable to changes in exchange rates from gains and losses that arise
from
25
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
changes in the market value of investments. Such fluctuations are included
with net realized and unrealized gain or loss on investments. Net realized
gains and losses on foreign currency transactions represent gains and
losses on disposition of foreign currencies and forward foreign exchange
contracts, currency gains and losses realized between the trade and
settlement dates on securities transactions and the difference between the
amount of investment income and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent amounts actually received or
paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or all
of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency contracts
are marked to market daily and the change in value is recorded by the Fund
as an unrealized gain or loss. Realized gains or losses equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed are recorded upon delivery or receipt
of the currency or, if a forward currency contract is offset by entering
into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market risk
in excess of the unrealized gain or loss reflected in the Fund's Statement
of Assets and Liabilities. In addition, the Fund could be exposed to risk
if the counterparties are unable to meet the terms of the contracts or if
the value of the currency changes unfavorably to the U.S. dollar. The U.S.
dollar value of the currencies the Fund has committed to buy or sell is
shown under Note 6 and represents the currency exposure the Fund has
acquired or hedged through currency contracts as of February 29, 2000.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying instrument.
When the Fund writes a call or put option, an amount equal to the premium
received is recorded as a liability and subsequently marked to market to
reflect the current value of the option written. Premiums received from
writing options which expire are treated as realized gains. Premiums
received from writing options which are exercised or closed are added to
the proceeds or offset against the amounts paid on the future, security or
currency transaction to determine the realized gain or loss. The Fund as a
writer of an option has no control over whether the underlying future,
security or currency may be sold (call) or purchased (put) and as a result
bears the market risk of an unfavorable change in the price of the future,
security or currency underlying the written option. There is the risk the
Fund may not be able to enter into a closing transaction because of an
illiquid market. At February 29, 2000 there were no open written option
contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. Premiums
26
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
paid for purchasing options which are exercised or closed are added to the
amounts paid or offset against the proceeds on the transaction to determine
the realized gain or loss. The risk associated with purchasing put and call
options is limited to the premium paid.
FUTURES CONTRACTS
The Fund may purchase and sell stock index futures contracts. Stock index
futures contracts represent commitments for future delivery of cash based
upon the level of a specified index of equity securities at a given date.
The Fund may use futures contracts to manage its exposure to the stock
market. Buying futures tends to increase the Fund's exposure to the
underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments. Upon
entering into a futures contract, the Fund is required to deposit with its
custodian, in a segregated account in the name of the futures broker, an
amount of cash or U.S. government and agency obligations in accordance with
the initial margin requirements of the broker or exchange. Futures
contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. The payable or receivable is subsequently settled. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 29, 2000.
SWAP AGREEMENTS
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to the equity markets. The Fund enters into total return swap agreements
which involve a commitment by one party in the agreement to pay interest in
exchange for a market linked return, both based on notional amounts. To the
extent that the total return of the security or index underlying the
transaction exceeds or falls short of the offsetting interest rate
obligation, the Fund will receive a payment from or make a payment to the
counterparty. Total return swaps are marked to market daily based upon
quotations from market makers and the change, if any, is recorded as
unrealized gain or loss in the Statement of Operations. Payments received
or made at the end of the measurement period are recorded as realized gain
or loss in the Statement of Operations. Entering into these agreements
involves, to varying degrees, elements of credit and market risk in excess
of the amounts recognized on the Statement of Assets and Liabilities. Such
risks involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform or that there may be unfavorable changes in the price
of the security or index underlying these transactions. At February 29,
2000, there were no open swap agreements.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for
27
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
lending its securities. At February 29, 2000, the Fund loaned securities
having a market value of $1,569,733 collateralized by cash in the amount of
$1,662,165 which was invested in a short-term instrument.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary. Taxes on foreign interest and dividend income have
been withheld in accordance with the applicable country's tax treaty with
the United States.
The Fund may be subject to capital gains and repatriation taxes imposed by
certain countries in which it invests. The Fund has incurred $535,172
related to repatriation taxes which is included in net realized gain in the
Statement of Operations.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. The Fund declares separate dividends from net
investment income on each class of shares. Distributions to shareholders
are recorded by the Fund on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to foreign currency and passive foreign
investment company transactions, foreign taxes, and differing treatments
for redemptions in-kind. Gross gains resulting from such in-kind
transactions amounted to $8,925,740.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss net asset value of
the Fund and is primarily attributable to certain differences in the
computation of distributable income and capital gains under U.S. federal
tax rules versus accounting principles generally accepted in the United
States. The calculation of net investment income per share in the financial
highlights table excludes these adjustments.
<TABLE>
<CAPTION>
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
- --------------------------- -------------------------- -----------------------
<S> <C> <C>
$255,250 $ (2,206,578) $1,951,328
</TABLE>
28
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income, net
of applicable withholding taxes, is recorded on the ex-dividend date, or
when the Fund is informed of the ex-dividend date, if later. Interest
income is recorded on the accrual basis and is adjusted for the accretion
of discounts. In determining the net gain or loss on securities sold, the
cost of securities is determined on the identified cost basis.
ALLOCATION OF OPERATING ACTIVITY
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. Investment
income, common expenses and realized and unrealized gains and losses are
allocated pro-rata among the classes of shares of the Fund based on the
relative net assets of each class. Shareholder service fees, which are
directly attributable to a class of shares, are charged to that class'
operations.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is .60% of the amount
invested. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. These fees are allocated relative to each class' net
assets on the share transaction date. For the year ended February 29, 2000,
the Fund received $6,609 in purchase premiums. There is no premium for cash
redemptions or reinvested distributions. While no purchase premium is
normally charged with respect to in-kind purchases of Fund shares, a
purchase premium of up to .10% may be charged on certain in-kind purchases.
INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .54% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of each class at the annual rate of .15%
for Class III shares and .09% for Class IV shares.
29
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding brokerage commissions, certain other transaction costs
(including stamp duties and transfer taxes), shareholder service fees and
extraordinary expenses) exceed the management fee.
Prior to March 1, 1999, GMO earned a management fee at the annual rate of
.75% of average daily net assets. GMO had agreed to waive a portion of its
fee and bear other expenses to the extent that the Fund's annual expenses
(including the management fee but excluding brokerage commissions, certain
other transaction costs (including stamp duties and transfer taxes),
shareholder service fees and extraordinary expenses) exceeded .54% of
average daily net assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000, was $1,691. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 29, 2000, aggregated
$102,164,945 and $183,495,426, respectively.
At February 29, 2000, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in the value of investments held
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
---------------------------- -------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
$136,968,819 $14,032,029 $23,162,109 $9,130,080
</TABLE>
4. PRINCIPAL SHAREHOLDERS
At February 29, 2000, 56% of the outstanding shares of the Fund were held
by two shareholders, each holding in excess of 10% of the outstanding
shares of the Fund.
30
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
Class III: February 29, 2000 February 28, 1999
-------------------------------------------- -----------------------------------------
Shares Amount Shares Amount
-------------------- ---------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
Shares sold 1,086,050 $ 10,842,254 563,792 $ 5,359,120
Shares issued to
shareholders in
reinvestment of
distributions 461,723 4,817,120 3,031,071 31,219,975
Shares repurchased (4,578,895) (45,881,263) (10,514,340) (115,195,974)
--------------------- -------------------- -------------------- ------------------
Net decrease (3,031,122) $ (30,221,889) (6,919,477) $ (78,616,879)
--------------------- -------------------- -------------------- ------------------
--------------------- -------------------- -------------------- ------------------
<CAPTION>
Year Ended Year Ended
Class IV: February 29, 2000 February 28, 1999
-------------------------------------------- -----------------------------------------
Shares Amount Shares Amount
-------------------- ---------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
Shares sold _ $ _ _ $ 6,173
Shares issued to
shareholders in
reinvestment of
distributions 345,952 3,649,790 3,403,005 35,243,016
Shares repurchased (6,862,374) (73,741,873) (22,085,761) (259,456,306)
--------------------- -------------------- -------------------- ------------------
Net decrease (6,516,422) $ (70,092,083) (18,682,756) $ (224,207,117)
--------------------- -------------------- -------------------- ------------------
--------------------- -------------------- -------------------- ------------------
</TABLE>
31
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 29, 2000 is as
follows:
FORWARD CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Net Unrealized
Settlement Units Appreciation
Date Deliver/Receive of Currency Value (Depreciation)
------------------ ------------------------- ---------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Buys
4/07/00 AUD 6,657,776 $ 4,090,458 $ (257,187)
4/07/00 CAD 17,193,222 11,859,937 109,841
3/03/00 CHF 49,230,097 29,510,643 (2,258,229)
9/08/00 CHF 16,862,576 10,305,045 (266,288)
3/03/00 DKK 89,637,714 11,621,598 (732,860)
9/08/00 DKK 39,573,415 5,186,631 (166,808)
3/03/00 EUR 168,734,389 162,460,242 (9,033,807)
9/08/00 EUR 63,885,001 62,342,036 (2,320,461)
3/03/00 GBP 80,183,447 126,581,141 (2,119,251)
9/08/00 GBP 25,030,522 39,519,995 (759,620)
4/07/00 HKD 135,703,776 17,435,092 27,478
4/07/00 JPY 1,908,598,894 17,479,052 (1,095,762)
3/03/00 NOK 349,547,051 41,669,969 (2,076,928)
9/08/00 NOK 169,722,980 20,268,388 (420,631)
4/07/00 NZD 17,230,928 8,369,820 (571,348)
3/03/00 SEK 603,635,176 68,856,842 (2,697,631)
9/08/00 SEK 276,684,183 31,878,200 (566,336)
4/07/00 SGD 6,089,030 3,544,441 (73,256)
-------------------
$ (25,279,084)
-------------------
-------------------
</TABLE>
32
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
Forward Currency Contracts - Continued
<TABLE>
<CAPTION>
Net Unrealized
Settlement Units Appreciation
Date Deliver/Receive of Currency Value (Depreciation)
------------------ ------------------------- ---------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Sales
4/07/00 AUD 14,122,953 $ 8,676,973 $ 563,593
4/07/00 CAD 11,609,512 8,008,276 (98,049)
3/03/00 CHF 49,230,097 29,510,643 2,380,951
9/08/00 CHF 23,150,416 14,147,667 401,358
3/03/00 DKK 89,637,714 11,621,598 822,976
9/08/00 DKK 43,687,349 5,725,817 137,934
3/03/00 EUR 168,734,389 162,460,242 9,624,751
9/08/00 EUR 102,396,982 99,923,867 2,230,167
3/03/00 GBP 80,183,447 126,581,141 2,323,031
9/08/00 GBP 38,717,036 61,129,253 797,770
4/07/00 HKD 204,818,629 26,314,903 (40,306)
4/07/00 JPY 5,851,483,555 53,588,204 389,666
3/03/00 NOK 349,547,051 41,669,969 1,974,826
9/08/00 NOK 179,824,071 21,474,665 505,678
4/07/00 NZD 15,729,885 7,640,697 484,138
3/03/00 SEK 603,635,176 68,856,842 3,308,619
9/08/00 SEK 297,066,194 34,226,516 387,967
4/07/00 SGD 6,185,244 3,600,447 96,872
-------------------
$ 26,291,942
-------------------
-------------------
</TABLE>
Currency Abbreviations:
AUD Australian Dollar HKD Hong Kong Dollar
CAD Canadian Dollar JPY Japanese Yen
CHF Swiss Franc NOK Norwegian Kroner
DKK Danish Krona NZD New Zealand Dollar
EUR Euro SEK Swedish Krona
GBP British Pound SGD Singapore Dollar
33
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
<TABLE>
<CAPTION>
Net Unrealized
Number of Contract Appreciation
Contracts Type Expiration Date Value (Depreciation)
------------------ ------------------------- --------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Buys
15 DAX March 2000 $ 2,775,609 $ 228,363
41 TSE TOPIX March 2000 6,452,961 345,151
-------------------
$ 573,514
-------------------
-------------------
Sales
25 ALL ORDS March 2000 $ 1,203,734 $ (8,447)
16 IBEX 35 March 2000 1,935,359 (2,419)
6 MIB 30 March 2000 1,436,038 (221,432)
38 NEW FTSE 100 March 2000 3,749,292 (12,078)
-------------------
$ (244,376)
-------------------
-------------------
</TABLE>
At February 29, 2000, the Fund has cash and/or securities to cover any
margin requirements on open futures contracts.
34
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
February 29, 2000
- --------------------------------------------------------------------------------
For the fiscal year ended February 29, 2000, all the Fund's distributions are
from investment company taxable income.
35
<PAGE>
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
(A Series of GMO Trust)
PORTFOLIO MANAGERS
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Forrest Berkley are
primarily responsible for the day-to-day management of the Fund's portfolio. Mr.
Grantham and Mr. Darnell have been portfolio managers at Grantham, Mayo, Van
Otterloo & Co. LLC for more than fifteen years. Mr. Berkley has been with GMO
and involved in portfolio management for more than ten years.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO Currency Hedged International Core Fund returned
15.9% for the fiscal year ended February 29, 2000 as compared to 34.3% for the
MSCI EAFE Hedged Index. The Fund's disappointing performance comes from stock
selection that emphasized value stocks (those companies that are cheaper on
price-to-book, price-to-earnings and other measures) and smaller capitalization
stocks. Consistent with the Fund's investment objectives and policies, the Fund
was invested substantially in common stocks throughout the period.
In international markets, the fiscal year was characterized by explosive
performance of the technology and telecommunications sectors. This effect was
particularly strong in the fourth quarter of 1999, during which period the
(unhedged) MSCI EAFE Growth Index returned 25.6% versus 8.9% for MSCI EAFE
Value. While this paralleled the run-up in the U.S. NASDAQ Index, the EAFE Index
contains relatively few pure Internet and information technology stocks. The
international rally focused more on the best available approximations, which are
telecommunications stocks. Both fixed line and wireless companies performed very
strongly in the markets, as did the related equipment providers. The optimism
about these companies came despite the failure of many other growth stocks, such
as pharmaceuticals and established software companies, to produce continued
strong earnings growth.
In contrast, many neglected stocks - typically smaller capitalization, value
companies - had lackluster market performance for the fiscal year. Throughout
the bull market of the late 1990's, growth stocks have enjoyed increasing
"multiple expansion" to higher relative levels of price-to-book and
price-to-earnings. As a result the spread, or discount, between the valuations
of the cheaper stocks on such measures and the most expensive stocks has reached
levels unprecedented in history. These wide gaps are considerably beyond what
could possibly be justified by the relatively modest differences in consensus
growth rate estimates. This is true even if no regression of the higher
profitability of telecommunications stocks took place in the next 20 years,
which would be contrary to the entire history of corporate competition.
The fiscal year was marked by strong performance in the Asian markets. Japan
rose by 42% in local currency, while Hong Kong and Singapore returned +66% and
+59%, respectively. These markets benefited both from the dissipation of the
crisis mentality and from the underlying recovery in the economic fundamentals
of the region. The only two countries that had higher returns than all the Asian
markets were Finland and Sweden (dominated by the returns of Nokia and Ericsson,
respectively). The major European markets showed mixed returns, with Germany and
France leading the way, both with gains of 56% in Euro. The United Kingdom and
Switzerland were the worst performing major markets, with slightly negative
returns in local currency.
<PAGE>
Currency hedging was a successful strategy for the fiscal year, as the MSCI EAFE
Hedged benchmark (which returned 34.3%) outperformed MSCI EAFE by nearly 10%.
The weakness of the Euro was the driving factor behind the higher hedged
returns, which came despite strengthening of the yen against the dollar.
EFFECT OF COUNTRY ALLOCATION
The Fund was successful in country allocation largely due to the overweighting
of the South East Asian markets. The Fund was also neutral weighted in Japan.
Although this decision did not add to relative return, it represented the first
time in the Fund's history that it was not underweight in Japan. The Fund was
generally underweight in Europe. It suffered from being overweight in Austria,
but benefited from underweights in the United Kingdom and Switzerland.
EFFECT OF STOCK SELECTION
The poor performance in the fiscal year was entirely a result of stock
selection, and in particular of the Fund's tilt towards value. Because of the
opportunities represented by the wide dispersion in price-to-book ratios, the
Fund is heavily concentrated in the cheaper stocks based on price-to-book. Half
of the Fund is invested in stocks within the cheapest 25% of the EAFE universe;
only 10% of the Fund is invested outside the cheapest 50% of the universe. In
local currency, those groups underperformed EAFE by -14.5% and -9.3%
respectively, for the fiscal year. The Fund was further hurt by its emphasis on
smaller capitalization stocks, which underperformed significantly even after
accounting for their overlap with value. Small cap stocks within EAFE
underperformed by -17%, and small value stocks underperformed by -30%.
Value stocks did very poorly whether defined on the basis of book, earnings,
sales or dividend yield, which shows that the Fund's underperformance is not a
consequence of focussing on price-to-book as a valuation measure. The Fund's
more sophisticated value models, which make further adjustments to credit
companies for growth and financial quality, fared equally poorly. In this
overheated environment, reasonable adjustments did not suffice to make the most
expensive price-to-book stocks look attractive.
Much of the size and value underperformance was driven by telecommunications and
technology stocks. Of that, over 7% of negative attribution was due to just five
large capitalization stocks that doubled or tripled in price from expensive
starting levels.
PORTFOLIO STRUCTURE AND OUTLOOK
Based on a careful analysis of current company fundamentals and valuation, GMO
has decided to retain its substantial overweights in value stocks and small
companies, in order to benefit from the inevitable rebound. While the growth
oriented bull market of the last few years has been a difficult period for the
Currency Hedged International Core Fund, it leaves us at a moment of great
opportunity. For value investors it is always darkest before the dawn. Markets
overshoot fair value, and it is difficult to call the turning points. Yet the
greater the overshoot past fair value, the more certain is the eventual rebound,
and greater is the reward to those that participate.
Furthermore, globalization and monetary union have not eliminated the
significance of country selection. This is apparent in the wide spread of
returns during the last fiscal year and also in a wide spread in valuations
between countries, even when adjusted for industry composition. To take
advantage of these opportunities, the Fund remains underweight in Europe and
particularly in favor of Asia ex-Japan. Despite the strong performance of Asia
in 1999, those markets still are attractively valued relative to the rest of
EAFE. Even within Europe there are attractive
<PAGE>
opportunities to favor cheaper markets such as Austria over more expensive ones
such as the United Kingdom and Spain.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO &
CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
Currency Hedged Int'l Core Fund-III
As of 2/29/00
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND CLASS III SHARES AND THE
MSCI EAFE HEDGED INDEX
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
1yr Since Inception
- --------------------------------------------------------------------------------
<S> <C> <C>
6/30/95
Class III 15.16% 13.59%
- --------------------------------------------------------------------------------
1/9/98
Class IV 15.24% 10.62%
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Date Currency Hedged Int'l Core Fund-III MSCI EAFE GMO EAFE Hedged
---- ----------------------------------- --------- ---------------
<S> <C> <C> <C>
6/30/95 9940 10000 10000
9/30/95 10666 10417 11175
12/31/95 11235 10838 11992
3/31/96 11767 11151 12716
6/30/96 12229 11327 13193
9/30/96 12326 11314 13289
12/31/96 12952 11494 13648
3/31/97 13399 11314 14309
6/30/97 14528 12782 16075
9/30/97 15347 12692 16539
12/31/97 14622 11697 15758
3/31/98 17164 13418 18411
6/30/98 17070 13560 18739
9/30/98 13777 11631 15346
12/31/98 15687 14034 17916
3/31/99 16126 14229 19287
6/30/99 18083 14590 20500
9/30/99 18040 15231 20366
12/31/99 18967 17818 24451
2/29/00 18136 17135 24695
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes. Each
performance figure assumes purchase at the beginning and redemption at the end
of the stated period. Past performance is not indicative of future performance.
Information is unaudited.
- --------------------------------------------------------------------------------
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of GMO Trust and the Shareholders of
GMO Evolving Countries Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Evolving Countries Fund at
February 29, 2000, the results of its operations, the changes in its net assets
and the financial highlights for the periods presented, in conformity with
accounting principles generally accepted in the United States. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at February 29, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 18, 2000
<PAGE>
GMO EVOLVING COUNTRIES FUND
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 83.2%
BRAZIL - 5.4%
1,168,133 Cia Saneamento Basico SAO PA * 115,856
6,032,000 Companhia Siderurgica Nacional SA 184,420
49,609,000 Electrobras 860,413
10,331 Investimentos Itau SA 8,816
130,023 Souza Cruz (Registered) 782,563
17,000,000 Telecomunicacoes Brasileiras SA 1,497,768
1,128 Telesp Celular Participacoes SA 13
3,800 Vale Do Rio Doce 87,618
-----------------
3,537,467
-----------------
CHILE - 1.3%
8,000 Banco Santander ADR 118,500
7,300 Banco Santiago ADR 146,000
7,400 Compania Cervecerias ADR 190,550
8,600 Compania de Telefones de Chile ADR 172,000
13,200 Gener SA ADR 204,600
-----------------
831,650
-----------------
CHINA - 6.3%
100,000 China Everbright Technology * 14,648
348,000 China Merchants Holdings Co Ltd 215,745
1,227,000 China Overseas Land & Investment Ltd * 160,808
188,000 China Resources Enterprise 242,766
260,600 China Telecom Ltd * 2,402,484
2,600 China Telecom (Hong Kong) Ltd ADR * 483,275
943,000 Citic Ka Wah Bank Ltd 290,795
237,000 Cosco Pacific Ltd 135,510
102,000 Shanghai Industrial Holdings 192,000
1,708 SIIC Medical Science and Technology (Group) Ltd * 404
-----------------
4,138,435
-----------------
CZECH REPUBLIC - 4.0%
18,910 Ceska Sporitelna * 107,886
426,579 Ceske Energeticke Zavody AS * 1,420,064
4,880 Ceske Radiokomunikace * 298,227
5,775 Komercni Banka AS * 143,795
1,110 Severoceske Doly 17,574
13,630 SPT Telecom AS * 285,744
842 Tabak AS 159,519
99,500 Unipetrol * 178,138
-----------------
2,610,947
-----------------
INDIA - 0.0%
100 Castrol India 699
100 Satyam Computer Service 11,536
100 Satyam Computer Service (New Shares) 11,536
-----------------
23,771
-----------------
See accompanying notes to the financial statements. 1
<PAGE>
GMO EVOLVING COUNTRIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
INDONESIA - 4.6%
487,000 Astra International * 241,040
4,618,400 Bank Internasional Indonesia * 62,201
147,576,000 Bank Internasional Indonesia (Entitlement Letters) (a) (c)* -
354,000 Gajah Tunggal Tbk * 40,525
552,100 Gudang Garam 920,167
9,000 Gulf Resources Ltd ADR * 63,000
162,900 HM Sampoerna * 269,306
580,900 Indah Kiat Pulp & Paper * 160,383
641,000 Matahari Putra Prima Tbk * 86,330
340,600 PT Indofood Sukses Makmur Tbk * 282,113
79,000 PT Indosat (Persero) Tbk 142,572
562,000 PT Lippo Bank Tbk * 15,138
1,407,000 PT Pabrik Kertas Tjiwi Kimia * 331,616
63,000 Semen Gresik 71,273
306,000 Tambang Timah Persero (Foreign Registered) 142,182
397,112 Telekomunikasi Indonesia 195,213
-----------------
3,023,059
-----------------
ISRAEL - 1.1%
120,000 Bank Leumi Le-Israel * 263,410
536 Clal Electronics Industries Ltd * 141,638
22,140 Clal Industries Ltd * 283,495
-----------------
688,543
-----------------
KOREA - 11.3%
10,152 Cheil Jedang Corp 654,299
47,000 Daewoo Heavy Industries 26,801
7,200 Daewoo Securities 75,749
14,084 Hana Bank 102,103
355 Housing & Commercial Bank 6,324
8,900 Hyundai Electronics Industries * 140,845
12,518 Hyundai Heavy Industries 348,612
12,416 Hyundai Merchant Marine 85,620
6,910 Keum Kang Ltd 317,672
34,947 Kookmin Bank 389,294
5,400 Korea Chemical 336,574
10,300 Korea Telecommunications ADR 448,050
33,600 Korean Air Lines 230,217
8,200 LG Electronics Co 168,552
814 LG Information & Communication 90,316
6,620 Pohang Iron & Steel (c) 681,940
5,324 Samsung Electronics 1,204,966
2,564 Samsung Electronics GDR 144A (1/2 Voting) 335,564
1,614 Samsung Electronics GDS 144A (Non Voting) 108,098
3,300 Samsung Heavy Industries * 12,020
10,208 Samsung Securities 312,258
24,936 SK Corp 562,165
7,400 SK Telecom ADR 332,538
19,030 Ssangyong Oil Refining 317,978
-----------------
7,288,555
-----------------
2 See accompanying notes to the financial statements.
<PAGE>
GMO EVOLVING COUNTRIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
MALAYSIA - 10.0%
41,000 British American Tobacco Berhad 302,105
63,000 Edaran Otomobil Berhad 265,263
467,000 Hicom Holdings Berhad 415,384
323,000 Magnum Corp Berhad 283,900
100,000 Malakoff Berhad 271,053
258,000 Malayan Banking Berhad 1,161,000
22,000 Malaysian Pacific Industries 279,342
77,000 Nestle Malaysia 397,158
250,000 Oriental Holdings Berhad 588,816
123,000 Resorts World Berhad 446,684
422,000 Sime Darby Berhad 566,368
1,077,000 Tan Chong International Ltd 163,291
201,000 Tanjong 505,145
170,000 Technology Resources Industries 243,816
90,000 United Engineers * 248,684
219,800 YTL Corp 404,895
-----------------
6,542,904
-----------------
MEXICO - 6.6%
35,500 Carso Global Telecom Class A * 443,371
5,300 Cemex SA de CV ADR (Participating Certificates) * 113,288
17,061 Cemex SA de CV CPO 73,759
43,000 Empresas La Moderna SA de CV Class A * 252,455
1,000 Fomento Economico Mexicano SA 44,438
192,803 Grupo Carso SA de CV Class A * 751,207
53,000 Grupo Financiero Inbursa SA * 244,972
41,000 Grupo Mexico Class B 203,512
1,350 Grupo Televisa SA GDR * 103,697
102,240 Grupo Televisa SA (Participating Certificates) * 392,895
18,200 Telefonos de Mexico Class L ADR 1,196,650
198,062 Wal-Mart de Mexico SA de CV * 473,590
-----------------
4,293,834
-----------------
PAKISTAN - 0.6%
93,312 Pakistan State Oil 419,360
-----------------
POLAND - 0.2%
3,500 Agora SA GDR 144A * 121,188
-----------------
RUSSIA - 6.3%
103,000 Irkutskenergo ADR 337,160
20,400 Lukoil Holding Co ADR 851,700
156,000 Norilsk Nickel (Registered) * 1,332,240
42,000 Surgutneftegaz ADR 481,182
11,000 Unified Energy Systems ADR 158,125
64,500 Unified Energy Systems GDR * 927,188
-----------------
4,087,595
-----------------
See accompanying notes to the financial statements. 3
<PAGE>
GMO EVOLVING COUNTRIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
SOUTH AFRICA - 8.1%
60,340 Amalgamated Bank of South Africa 233,002
8,200 Anglo American Platinum Corp 232,635
6,400 Anglo Gold Ltd 331,868
64,100 Comparex Holding Ltd 447,054
17,700 De Beers Centenary Link Units 387,772
6,500 De Beers Consolidated Mines Ltd ADR 149,094
54,934 Dimension Data Holdings * 510,837
1,000 Impala Platinum Holdings Ltd 35,620
4,610 Investec Group Ltd 191,820
7,599 Liberty International Plc 49,225
68,200 Liberty Life Association of Africa Ltd 664,296
24,453 Nedcor Ltd 516,447
42,700 Rembrandt Group Ltd 370,151
19,100 Sappi Ltd 158,045
69,100 Sasol Ltd 442,174
145,729 Standard Bank Investment Corp 567,325
-----------------
5,287,365
-----------------
TAIWAN - 3.9%
9,000 Acer Inc * 24,455
114,000 China Development Industrial Bank Inc * 192,906
148,000 China Steel Corp 114,624
22,080 China Steel Corp GDR 361,560
44,200 China Trust Commercial Bank * 47,465
189,000 Formosa Chemicals & Fibre Co 282,916
3,500 GigaMedia Ltd * 245,219
7,000 Hon Hai Precision Industry Co Ltd * 65,148
32,000 Legend Holdings Ltd * 148,019
65,000 Nan Ya Plastic Corp 143,833
80,000 Taiwan Semiconductor * 523,267
20,000 Tatung Co * 27,856
101,000 United Microelectronics * 369,753
-----------------
2,547,021
-----------------
THAILAND - 6.1%
44,700 Advanced Info Service Public Co Ltd (Foreign Registered) * 694,278
149,500 Bangkok Bank Pcl (Foreign Registered) * 241,224
18,800 BEC World Public Co Ltd (Foreign Registered) 141,068
71,000 CP Feedmill Public Co Ltd (Foreign Registered) * 257,064
21,045 Delta Electronics Public Co Ltd (Foreign Registered) 241,839
387,231 Krung Thai Bank Public Co Ltd (Foreign Registered)* 134,614
49,700 PTT Exploration and Production Public Co Ltd (Foreign Registered) * 241,230
66,336 Shinawatra Computer Public Co Ltd (Foreign Registered) * 525,606
8,000 Siam Cement Pcl (Foreign Registered) * 144,405
31,300 Siam City Cement (Foreign Registered) * 105,113
181,200 Siam Commercial Bank Pcl (Foreign Registered) * 144,998
369,000 Telecomasia Corp Public Co Ltd (Foreign Registered) * 513,105
321,774 Thai Farmers Bank Pcl (Foreign Registered) * 303,919
324,600 Thai Petrochemical (Foreign Registered) * 85,163
263,200 United Broadcasting Pcl (Foreign Registered) * 231,332
-----------------
4,004,958
-----------------
4 See accompanying notes to the financial statements.
<PAGE>
GMO EVOLVING COUNTRIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares/
Par Value ($) Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
TURKEY - 3.0%
1,692,000 Arcelik 100,084
3,450,000 Dogan Sirketler Grubu Holdings * 102,035
4,609,000 Eregli Demir VE Celik Fabrik * 198,456
5,505,000 Ford Otomotive Sanayii AS * 263,374
1,606,000 KOC Holding AS 307,342
1,921,000 Petkim Petrokimya Holding 81,880
5,767,000 Sabanci Holding 265,876
9,410,000 TAT Konserve * 188,265
15,986,000 Tofas Turk Otomobil Fabrik * 200,242
5,256,000 Turkiye IS Bankasi 251,461
-----------------
1,959,015
-----------------
VENEZUELA - 4.4%
81,224 Compania Anonima Nacional Telefonos de Venezuela (CANTV) ADR 2,705,775
109,300 Siderurgica Venezolana (Sivensa) Class A ADR (Registered) * 163,950
-----------------
2,869,725
-----------------
TOTAL COMMON STOCKS (Cost $49,323,419) 54,275,392
-----------------
PREFERRED STOCKS - 8.5%
BRAZIL - 8.4%
30,000 Aracruz Celulose SA Class B 62,560
35,498,950 Banco Bradesco SA 254,983
3,415,465 Banco Bradesco SA * 24,533
9,322,000 Banco do Brasil SA 55,842
10,288 Companhia Vale do Rio Doce 273,261
27,506,000 Electrobras Class B (Registered) 502,865
44,000 Investimentos Itau SA 40,780
1,273 Investimentos Itau SA * 1,180
3,737,000 Itaubanco SA (Registered) 296,721
2,383,000 Petroleo Brasileiro SA (Petrobras) 619,486
19,642 Telecomunicacoes Brasileiras SA ADR 2,892,285
3,177,000 Telecomunicacoes Brasileiras SA Receipts 465,912
3,177,000 Telecomunicacoes Brasileiras SA (Registered) * 126
182 Telesp Celular Participacoes SA 4
-----------------
5,490,538
-----------------
KOREA - 0.1%
2,647 Shinsegae Department Store * 91,267
-----------------
TOTAL PREFERRED STOCKS (Cost $3,992,498) 5,581,805
-----------------
DEBT OBLIGATIONS - 2.0%
U.S. GOVERNMENT - 2.0%
$ 1,067,571 U.S. Treasury Inflation Indexed Note, 3.375% due 1/15/07 (b) 1,009,856
$ 307,866 U.S. Treasury Inflation Indexed Note, 3.875% due 1/15/09 (b) 298,053
-----------------
1,307,909
-----------------
TOTAL DEBT OBLIGATIONS (Cost $1,338,187) 1,307,909
-----------------
See accompanying notes to the financial statements. 5
<PAGE>
GMO EVOLVING COUNTRIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares/
Par Value ($) Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT FUNDS - 0.9%
TAIWAN - 0.5%
34,900 R.O.C. Taiwan Fund 320,644
-----------------
UNITED STATES - 0.4%
15,000 Morgan Stanley Emerging Markets Fund 247,500
-----------------
TOTAL INVESTMENT FUNDS (Cost $467,617) 568,144
-----------------
RIGHTS & WARRANTS - 0.1%
BRAZIL - 0.0%
900,061 Tele Leste Celular Participacoes SA Preferred Rights 3/23/00 * -
4,816,191 Tele Leste Celular Participacoes SA Rights 3/23/00 * -
-----------------
-
-----------------
INDONESIA - 0.0%
57,050 Bank Internasional Indonesia Warrants 4/16/02 * 446
-----------------
MALAYSIA - 0.1%
27,800 United Engineers Warrants 11/18/02 * 38,042
-----------------
TOTAL RIGHTS & WARRANTS (Cost $333) 38,488
-----------------
SHORT-TERM INVESTMENTS - 1.4%
CASH EQUIVALENTS - 1.4%
$ 900,000 Banque Nationale Paribas (London) Time Deposit, 5.81% due 3/01/00 900,000
-----------------
TOTAL SHORT-TERM INVESTMENTS (Cost $900,000) 900,000
-----------------
TOTAL INVESTMENTS - 96.1%
(Cost $56,022,054) 62,671,738
Other Assets and Liabilities (net) - 3.9% 2,528,929
-----------------
TOTAL NET ASSETS - 100.0% $ 65,200,667
-----------------
-----------------
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO EVOLVING COUNTRIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
- --------------------------------------------------------------------------------
NOTES TO THE SCHEDULE OF INVESTMENTS:
ADR American Depositary Receipt
GDR Global Depository Receipt
GDS Global Depository Shares
(a) Security is restricted as to public resale.
(b) All or a portion of this security is held as
collateral for open swaps (Note 6).
(c) Valued by management (Note 1).
144A Securities exempt from registration under Rule 144A of
the Securities Act of 1933. These securities may be
resold in transactions exempt from registration,
normally to qualified institutional buyers.
* Non-income producing security.
See accompanying notes to the financial statements. 7
<PAGE>
GMO EVOLVING COUNTRIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
- --------------------------------------------------------------------------------
At February 29, 2000, industry sector diversification
of the Fund's equity investments was as follows:
<TABLE>
INDUSTRY SECTOR (UNAUDITED)
<S> <C>
Telecommunications 21.1 %
Banking 8.8
Utilities 7.6
Electronic Equipment 6.9
Metals and Mining 6.4
Consumer Goods 6.1
Financial Services 5.3
Communications 5.2
Energy Services 5.2
Food and Beverage 4.7
Conglomerates 4.7
Construction 2.9
Automotive 2.4
Paper and Allied Products 1.6
Chemicals 1.4
Services 1.2
Insurance 1.1
Real Estate 0.7
Machinery 0.7
Transportation 0.5
Computers 0.4
Health Care 0.4
Retail Trade 0.1
Miscellaneous 4.6
------------
100.0 %
------------
------------
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO EVOLVING COUNTRIES FUND
(A Series of GMO Trust)
STATEMENT OF ASSETS AND LIABILITIES - FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $56,022,054) (Note 1) $ 62,671,738
Foreign currency, at value (cost $2,303,808) (Note 1) 2,277,169
Cash 212,499
Dividends and interest receivable 294,966
Receivable for open swap contracts (Notes 1 and 6) 299,613
Receivable for expenses waived or borne by Manager (Note 2) 8,442
-------------------
Total assets 65,764,427
-------------------
LIABILITIES:
Payable for investments purchased 390,000
Accrued capital gain and repatriation taxes payable (Note 1) 59,998
Payable to affiliate for (Note 2):
Management fee 35,116
Shareholder service fee 8,030
Accrued expenses 80,412
-------------------
Total liabilities 573,556
-------------------
NET ASSETS $ 65,190,871
-------------------
-------------------
NET ASSETS CONSIST OF:
Paid-in capital $ 58,258,811
Accumulated undistributed net investment income 29,179
Accumulated net realized gain 38,097
Net unrealized appreciation 6,864,784
-------------------
$ 65,190,871
-------------------
-------------------
NET ASSETS ATTRIBUTABLE TO CLASS III SHARES $ 65,190,871
-------------------
-------------------
SHARES OUTSTANDING - CLASS III 5,714,403
-------------------
-------------------
NET ASSET VALUE PER SHARE - CLASS III $ 11.41
-------------------
-------------------
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO EVOLVING COUNTRIES FUND
(A Series of GMO Trust)
STATEMENT OF OPERATIONS - FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Dividends (net of foreign tax expense of $114,259) $ 802,945
Interest 141,003
-----------------
Total income 943,948
-----------------
EXPENSES:
Management fee (Note 2) 336,947
Custodian fees 229,093
Audit fees 56,147
Transfer agent fees 28,168
Registration fees 2,018
Legal fees 1,096
Trustees fees (Note 2) 564
Miscellaneous 18,040
Fees waived or borne by Manager (Note 2) (86,122)
-----------------
585,951
Shareholder service fee - Class III (Note 2) 77,765
-----------------
Net expenses 663,716
-----------------
Net investment income 280,232
-----------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments 13,281,649
Closed swap contracts 1,416,249
Foreign currency, forward contracts and foreign
currency related transactions (284,304)
-----------------
Net realized gain 14,413,594
-----------------
Change in net unrealized appreciation (depreciation) on:
Investments (Note 1) 15,616,727
Open swap contracts (185,353)
Foreign currency, forward contracts and foreign
currency related transactions (38,728)
-----------------
Net unrealized gain 15,392,646
-----------------
Net realized and unrealized gain 29,806,240
-----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 30,086,472
=================
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO EVOLVING COUNTRIES FUND
(A Series of GMO Trust)
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
-------------------- --------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 280,232 $ 1,569,067
Net realized gain (loss) 14,413,594 (13,606,696)
Change in net unrealized appreciation (depreciation) 15,392,646 (7,524,498)
-------------------- --------------------
Net increase (decrease) in net assets resulting from operations 30,086,472 (19,562,127)
-------------------- --------------------
Distributions to shareholders from:
Net investment income - Class III - (1,117,606)
Net realized gains - Class III (56,869) -
-------------------- --------------------
(56,869) (1,117,606)
-------------------- --------------------
Net share transactions - Class III (Note 5) 3,442,979 12,699,670
-------------------- --------------------
Total increase (decrease) in net assets 33,472,582 (7,980,063)
NET ASSETS:
Beginning of period 31,718,289 39,698,352
-------------------- --------------------
End of period (including accumulated undistributed net
investment income of $29,179 and distributions in excess of
net investment income of $41,489, respectively) $ 65,190,871 $ 31,718,289
==================== ====================
</TABLE>
See accompanying notes to the financial statements. 11
<PAGE>
GMO EVOLVING COUNTRIES FUND
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
------------------------------------------------------------------------
2000 1999 1998*
------------------ ------------------- -------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 5.74 $ 8.61 $ 10.00
------------------ ------------------- -------------------------
Income from investment operations:
Net investment income 0.05 0.23 0.03 +
Net realized and unrealized gain (loss) 5.63 (2.94) (1.42)
------------------ ------------------- -------------------------
Total from investment operations 5.68 (2.71) (1.39)
------------------ ------------------- -------------------------
Less distributions to shareholders:
From net investment income - (0.16) -
From net realized gains (0.01) - -
------------------ ------------------- -------------------------
Total distributions (0.01) (0.16) -
------------------ ------------------- -------------------------
NET ASSET VALUE, END OF PERIOD $ 11.41 $ 5.74 $ 8.61
------------------ ------------------- -------------------------
------------------ ------------------- -------------------------
TOTAL RETURN (a) 98.96% (31.60%) (13.90%)***
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 65,191 $ 31,718 $ 39,698
Net expenses to average
daily net assets 1.28% 1.27% 1.65% ** (b)
Net investment income to average
daily net assets 0.54% 3.65% 0.78% **
Portfolio turnover rate 157% 158% 56%
Fees and expenses voluntarily waived or
borne by the Manager consisted of
the following per share amounts: $ 0.01 $ 0.02 $ 0.03
</TABLE>
+ Computed using average shares outstanding throughout the period.
* Period from August 29, 1997 (commencement of operations) to February 28,
1998.
** Annualized
*** Not annualized.
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(b) Includes stamp duties and transfer taxes not waived or borne by the
manager, which approximate .16% of average daily net assets.
12 See accompanying notes to the financial statements.
<PAGE>
GMO EVOLVING COUNTRIES FUND
(A Series of GMO Trust)
Notes to Financial Statements
February 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Evolving Countries Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on June
24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series of shares into classes.
The Fund seeks high total return through investment in equity securities
traded in the securities markets of developing countries of Asia, Latin
America, the Middle East, Africa and Europe ("Emerging Markets"). The
Fund's benchmark is the IFC Investable Index.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of financial statements in
accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each business
day, or if there is no such reported sale, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Securities which
are primarily traded on foreign exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges,
and those values are then translated into U.S. dollars at the current
exchange rate. Short-term investments with a remaining maturity of sixty
days or less are valued at amortized cost which approximates market value.
Securities for which quotations are not readily available are valued at
fair value as determined in good faith by the Trustees or other persons
acting at their direction.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the current exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at current exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
gains and losses on disposition of foreign currencies and forward foreign
exchange contracts,
13
<PAGE>
GMO EVOLVING COUNTRIES FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
currency gains and losses realized between the trade and settlement dates
on securities transactions and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or all
of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency contracts
are marked to market daily and the change in value is recorded by the Fund
as an unrealized gain or loss. Realized gains or losses equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed are recorded upon delivery or receipt
of the currency or, if a forward currency contract is offset by entering
into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market risk
in excess of the unrealized gain or loss reflected in the Fund's Statement
of Assets and Liabilities. In addition, the Fund could be exposed to risk
if the counterparties are unable to meet the terms of the contracts or if
the value of the currency changes unfavorably to the U.S. dollar. There
were no forward foreign currency contracts outstanding as of February 29,
2000.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying instrument.
When the Fund writes a call or put option, an amount equal to the premium
received is recorded as a liability and subsequently marked to market to
reflect the current value of the option written. Premiums received from
writing options which expire are treated as realized gains. Premiums
received from writing options which are exercised or closed are added to
the proceeds or offset against the amounts paid on the future, security or
currency transaction to determine the realized gain or loss. The Fund as a
writer of an option has no control over whether the underlying future,
security or currency may be sold (call) or purchased (put) and as a result
bears the market risk of an unfavorable change in the price of the future,
security or currency underlying the written option. There is the risk the
Fund may not be able to enter into a closing transaction because of an
illiquid market. At February 29, 2000, there were no open written option
contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premuims paid for purchasing options which expire are treated as realized
losses. Premiums paid
14
<PAGE>
GMO EVOLVING COUNTRIES FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
for purchasing options which are exercised or closed are added to the
amounts paid or offset against the proceeds on the transaction to determine
the realized gain or loss. The risk associated with purchasing put and call
options is limited to the premium paid.
FUTURES CONTRACTS
The Fund may purchase or sell index futures contracts. Stock index futures
contracts represent commitments for future delivery of cash based upon the
level of a specified index of equity securities at a given date. The Fund
may use futures contracts to manage its exposure to the stock and currency
markets. Buying futures tends to increase the Fund's exposure to the
underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments. Upon
entering into a futures contract, the Fund is required to deposit with its
custodian, in a segregated account in the name of the futures broker, an
amount of cash or U.S. government and agency obligations in accordance with
the initial margin requirements of the broker or exchange. Futures
contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. The payable or receivable is subsequently settled. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. As of February
29, 2000, there were no outstanding futures contracts.
INDEXED SECURITIES
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to increase
or decrease its exposure to different underlying instruments and to gain
exposure to markets that may be difficult to invest in through conventional
securities. Indexed securities may be more volatile than their underlying
instruments, but any loss is limited to the amount of the original
investment.
SWAP AGREEMENTS
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to the equity markets. The Fund enters into total return swap agreements
which involve a commitment by one party in the agreement to pay interest in
exchange for a market linked return, both based on notional amounts. To the
extent that the total return of the security or index underlying the
transaction exceeds or falls short of the offsetting interest rate
obligation, the Fund will receive a payment from or make a payment to the
counterparty. Total return swaps are marked to market daily based upon
quotations from market makers and the change, if any, is recorded as
unrealized gain or loss in the Statement of Operations. Payments received
or made at the end of the measurement period are recorded as realized gain
or loss in the Statement of Operations. Entering into these agreements
involves,
15
<PAGE>
GMO EVOLVING COUNTRIES FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
to varying degrees, elements of credit and market risk in excess of the
amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform or that there may be unfavorable changes in the price
of the security or index underlying these transactions. See Note 6 for a
summary of the open swap agreements as of February 29, 2000.
TAXES
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"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign interest and dividend
income have been withheld in accordance with the applicable country's tax
treaty with the United States.
Dividends received by shareholders of the Fund which are derived from
foreign source income and foreign taxes paid by the Fund are to be treated,
to the extent allowable under the Code, as if received and paid by the
shareholders of the Fund.
The Fund may be subject to capital gains and repatriation taxes imposed by
certain countries in which it invests. The Fund has recorded a deferred tax
liability in respect of unrealized appreciation on foreign securities of
$59,998 for potential capital gains and repatriation taxes at February 29,
2000. The accrual for capital gains and repatriation taxes is included in
net unrealized gain in the Statement of Operations. The Fund has incurred
$44,959 related to repatriation taxes which is included in net realized
gain in the Statement of Operations.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to foreign currency transactions and foreign
taxes.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable income and capital gains under U.S.
federal tax rules versus accounting principles generally accepted in the
United States. The calculation of net investment income per share in the
financial highlights table excludes these adjustments.
16
<PAGE>
GMO EVOLVING COUNTRIES FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
--------------------------- -------------------------- --------------------------
<S> <C> <C>
$(209,564) $210,900 $(1,336)
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income, net
of applicable withholding taxes, is recorded on the ex-dividend date, or
when the Fund is informed of the ex-dividend date, if later. Interest
income is recorded on the accrual basis and is adjusted for the accretion
of discounts. In determining the net gain or loss on securities sold, the
cost of securities is determined on the identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is 1.60% of the amount
invested. In the case of cash redemptions, the fee is .40% of the amount
redeemed. The fees will be reduced by 50% with respect to any portion of a
purchase or redemption that is offset by a corresponding redemption or
purchase, respectively, occurring on the same day. All purchase premiums
and redemption fees are paid to and recorded by the Fund as paid-in
capital. For the year ended February 29, 2000, the Fund received $145,161
in purchase premiums and $22,763 in redemption fees. There is no premium
for reinvested distributions. While no purchase premium is normally charged
with respect to in-kind purchases of Fund shares, a purchase premium of up
to .20% may be charged on certain in-kind purchases.
INVESTMENT RISK
Investments in securities of emerging countries present certain risks that
are not inherent in many other investments. Many emerging countries present
elements of political and/or economic instability. The securities markets
of emerging countries are generally smaller and less developed than the
securities markets of the U.S. and developed foreign markets. Further,
countries may impose various types of foreign currency regulations or
controls which may impede the Fund's ability to repatriate amounts it
17
<PAGE>
GMO EVOLVING COUNTRIES FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
receives. The Fund may acquire interests in securities in anticipation of
improving conditions in the related countries. These factors may result in
significant volatility in the values of its holdings. The markets for
emerging countries are relatively illiquid. Accordingly, the Fund may not
be able to realize in an actual sale amounts approximating those used to
value its holdings.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .65% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding custody fees, brokerage commissions, certain other
transaction costs (including stamp duties and transfer taxes), shareholder
service fees and extraordinary expenses) exceed the management fee.
Prior to March 1, 1999, GMO earned a management fee at the annual rate of
.80% of average daily net assets. GMO had agreed to waive a portion of its
fee and bear other expenses to the extent that the Fund's annual expenses
(including the management fee but excluding custody fees, brokerage
commissions, certain other transaction costs (including stamp duties and
transfer taxes), shareholder service fees and extraordinary expenses)
exceeded .65% of average daily net assets.
The Manager has entered into a Consulting Agreement with Dancing Elephant,
Ltd. (the "Consultant") with respect to the management of the portfolio.
Payments made by the Manager to the Consultant will not affect the amounts
payable by the Fund to the Manager or the Fund's expense ratio.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000, was $564.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 29, 2000, were as
follows:
<TABLE>
<CAPTION>
Purchases Proceeds
------------------- ------------------------
<S> <C> <C>
U.S. Government securities $ 800,128 $ 1,756,813
Investments (non-U.S. Government securities) 75,922,876 72,564,734
</TABLE>
18
<PAGE>
GMO EVOLVING COUNTRIES FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
At February 29, 2000, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in the value of investments held
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
---------------------------- -------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
$56,659,413 $11,952,394 $5,940,069 $6,012,325
</TABLE>
4. PRINCIPAL SHAREHOLDERS
At February 29, 2000, 62% of the outstanding shares of the Fund were held
by four shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
--------------------------------------- ---------------------------------------
Class III: Shares Amount Shares Amount
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Shares sold 905,894 $ 9,227,832 3,158,638 $ 26,166,632
Shares issued to
shareholders in
reinvestment of
distributions 4,836 54,017 134,305 804,354
Shares
repurchased (723,935) (5,838,870) (2,378,020) (14,271,316)
------------------ ------------------ ------------------ ------------------
Net increase 186,795 $ 3,442,979 914,923 $ 12,699,670
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
</TABLE>
19
<PAGE>
GMO EVOLVING COUNTRIES FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 29, 2000 is as
follows:
SWAP AGREEMENTS
<TABLE>
<CAPTION>
Net
Notional Expiration Unrealized
Amount Date Description Appreciation
-------------------- ------------------- ---------------------------------------------- -------------------------------
<S> <C> <C> <C>
TOTAL RETURN SWAPS
$ 630,443 3/31/00 Agreement with Credit Agricole Indosuez (W.I. $ 151,065
Carr) dated 3/16/99 to receive (pay) the
notional amount multiplied by the return on
the MSCI Taiwan Index and to pay the notional
amount multiplied by 3 month LIBOR adjusted
by a specified spread.
620,216 3/31/00 Agreement with Credit Agricole Indosuez (W.I. 148,548
Carr) dated 3/17/99 to receive
(pay) the notional amount
multiplied by the return on the
MSCI Taiwan Index and to pay the
notional amount multiplied by 3
month LIBOR adjusted by a specified
spread.
-----------------
$ 299,613
-----------------
-----------------
</TABLE>
20
<PAGE>
GMO EVOLVING COUNTRIES FUND
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
February 29, 2000
- --------------------------------------------------------------------------------
For the fiscal year ended February 29, 2000, all of the Fund's distributions are
from net capital gain dividends.
The Fund has elected to defer to March 1, 2000 post-October currency losses of
$17,894.
21
<PAGE>
GMO EVOLVING COUNTRIES FUND
(A Series of GMO Trust)
PORTFOLIO MANAGERS
Mr. R. Jeremy Grantham and Mr. Arjun Divecha are primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. Grantham has been with GMO
since its founding in 1977. Mr. Divecha is the principal of Dancing Elephant
Ltd., which serves as consultant to the Fund. Dancing Elephant Ltd. has an
exclusive consulting management agreement with GMO.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO Evolving Countries Fund returned 99.0% for the
fiscal year ended February 29, 2000. The Fund's benchmark, the IFC Investable
Composite, returned 67.9% during the same period. Consistent with the Fund's
investment objectives and policies, the Fund was invested substantially in
equity securities throughout the period.
After a difficult 1998, emerging markets returned an impressive 67.9% for the
fiscal year, outperforming the S&P 500 by 56.2%. Strong macroeconomic numbers
(huge trade surpluses, lower than expected inflation) from Asia completely
changed sentiment in emerging markets. There were huge divergences in market
returns, ranging from China gaining 200% to Philippines losing 15% (in U.S.
dollars) of its value.
Our outperformance of 31% came mainly from country selection, which added 20%,
while our stock selection models added 11%. Of our four country selection
models, the value and momentum models outperformed strongly, while macroeconomic
models slightly underperformed.
Most of our outperformance in country selection came from overweighting Brazil,
Indonesia and Korea and underweighting Greece. We began the year moderately
overweight in Brazil (+2%) and heavily overweight Korea (+7%). We have gradually
increased our weighting in Brazil. Brazil rose 120% during the fiscal year while
Korea climbed 91%. Our 6% average underweight in Greece added significant value
as the market rose approximately 26%, underperforming the benchmark by 40%.
After being overweight in Korea over the last 2 years, we have been reducing our
position there and are now underweight by 3%. Our other significant positions -
an overweight in Thailand (+6%) and an underweight in Mexico (-5%) - hurt
performance. Thailand rose only 22% while Mexico gained 77% for the period.
Stock selection added 11% to performance despite a difficult year for value
stocks. Overall, value stocks underperformed the Index by 7% as the technology
and telecommunications mania in developed markets spilled over to emerging
markets. The Indonesian bank recapitalization process led to one of our holdings
quintupling in value, contributing significantly to stock selection.
OUTLOOK
The first leg of the current emerging markets rally (the IFC Investable
Composite has risen 106% since September 1998) has been centered around
liquidity and confidence. Investors soon realized that, though they suffered
huge losses during the crisis in 1998, Asian and other emerging economies would
not continue their free fall but would in fact resume rapid growth.
<PAGE>
We believe the rally thus far has been fueled less by earnings growth or
corporate restructuring than it has by revaluing markets and currencies that
were priced for destruction. Empirical research shows that markets after a
collapse tend to have a stronger second year than the first year. This holds
true for both developed and emerging markets. We have long argued that it takes
an economy four to ten quarters to realize the full benefits of currency
devaluation as it takes exporters this long to increase capacity and procure
orders. During this period, the premium price of imports forces a resumption of
local spending, which inevitably benefits local producers. We have seen this
pattern in India (1993), Mexico (1994) and Thailand (1998) and are now starting
to see the same effect in Brazil and Russia.
In the coming year we expect to see most emerging economies grow strongly and
corporate earnings increase sharply in tandem. Additionally, most emerging
countries with undervalued currencies are running large and increasing trade
surpluses. For a few large markets, notably Brazil, Indonesia, Turkey and
Russia, we are likely to see significant decreases in both nominal and real
interest rates as a result of falling inflation. The corporate restructuring in
Korea and India and the resulting benefits have set a pattern for other
countries to follow. In an environment of global growth, each of these factors
supports our continued enthusiasm for this asset class.
Within Asia, we prefer countries that are likely to have economic growth that
will surprise on the upside. These markets, including Indonesia, Malaysia and
Thailand, have not participated in the recent rally. Indonesia, trading at under
five times peak earnings, could be the most explosive market over the next 5
years. On the other hand, we have been reducing our position in Korea as its
double-digit GDP growth and 25% rise in industrial production may soon force
interest rate hikes to cool the economy. India's technology boom mirrors the
Internet hysteria in the U.S., and we continue to reduce our position there,
though parabolic moves in some of these stocks have kept us overweight. We are
cautiously reducing our underweight in Turkey, anticipating it may take several
months to see whether the IMF program will be successful.
In Latin America we are positive about Brazil. The government response to the
January 1999 currency crisis has led to an improved trade balance and controlled
inflation. Earnings growth is likely to be strong in 2000, exceeding current
expectations. Though the Mexican economy has benefited from solid policymaking
and robust exports to the U.S., the peso is the most overvalued of all emerging
currencies. Because the stock market is also expensive, we are underweight by
5.2% relative to the benchmark in Mexico.
The technology and telecommunications mania has continued to make value
investing a challenge in the short term. Nevertheless, we are confident that our
emphasis on buying cheap countries and companies will continue to produce
excellent long-term returns.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO &
CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO EVOLVING COUNTRIES FUND CLASS III SHARES AND THE IFC INVESTABLE COMPOSITE
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
1yr Since Inception
- --------------------------------------------------------------------------------
<S> <C>
8/29/97
94.99% 5.68%
- --------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Date Evolving Countries Fund-III IFC Investable Composite
---- --------------------------- ------------------------
<S> <C> <C>
8/29/97 9840 10000
9/30/97 9899 10327
12/31/97 8000 8333
3/31/98 8826 8918
6/30/98 6278 7025
9/30/98 4896 5500
12/31/98 6077 6497
3/31/99 6542 7207
6/30/99 10519 8919
9/30/99 9197 8640
12/31/99 11832 10860
2/29/00 11483 10850
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes. Each
performance figure assumes purchase at the beginning and redemption at the end
of the stated period and reflects a transaction fee. Past performance is not
indicative of future performance. Information is unaudited.
- --------------------------------------------------------------------------------
[caad 234]A<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of GMO Trust and the Shareholders of GMO Foreign Fund (A Series
of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Foreign Fund at February 29,
2000, the results of its operations, the changes in its net assets and the
financial highlights for the periods presented, in conformity with accounting
principles generally accepted in the United States. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Trust's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at February
29, 2000 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 18, 2000
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 95.3%
AUSTRALIA - 4.0%
363,591 Australia and New Zealand Banking Group Ltd 2,235,227
548,362 British American Tobacco Berhad 4,074,996
501,000 Burswood Ltd 187,690
129,100 Caltex Australia Ltd 170,467
383,140 Capral Aluminum Ltd 445,198
551,992 Email Ltd 698,352
490,510 Foodland Associated 2,274,413
2,232,929 Goodman Fielder Ltd 1,604,483
76,000 Lihir Gold Ltd ADR * 722,000
3,365,000 Menzies Gold NL * 268,660
2,128,012 MIM Holdings Ltd 1,346,126
300,000 National Australia Bank Ltd 3,942,843
296,888 Newcrest Mining Ltd * 793,152
2,933,091 Oil Search Ltd * 2,918,200
1,569,200 Orogen Minerals Ltd 1,493,772
54,000 Orogen Minerals Ltd GDR 144A 499,500
4,818,371 Pasminco Ltd * 3,314,307
370,081 Publishing & Broadcasting Ltd 3,452,917
3,786,403 Qantas Airways Ltd 8,278,493
1,426,276 Western Mining Corp Holdings Ltd 5,360,798
813,047 Westpac Banking Corp 5,193,061
-------------------
49,274,655
-------------------
AUSTRIA - 0.2%
38,220 Bank Austria AG 1,663,193
4,827 Oesterreichische Brau Beteiligungs AG 186,352
7,170 RHI AG 194,179
3,072 RHI AG (New Shares) * 82,073
4,264 VA Technologie AG (Bearer) 252,057
26,160 Wienerberger Baustoffindustrie AG 483,562
-------------------
2,861,416
-------------------
BELGIUM - 1.6%
18,144 Almanij NV 688,245
25,192 Cie Francois de Enterprises 4,052,776
7,334 Credit Commercial Dexia 999,104
17,668 Electrabel SA 4,774,670
96,135 Fortis 2,406,403
100,135 Fortis Strip * 964
17,437 GIB Holdings Ltd 520,412
5,649 Groupe Bruxelles Lambert NPV 1,225,311
15,883 Kredietbank NPV 607,067
24,172 Solvay et Cie 1,682,536
62,409 UCB SA 2,129,987
-------------------
19,087,475
-------------------
See accompanying notes to the financial statements. 1
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
BRAZIL - 0.6%
38,500 Cia Paranaense de Energia ADR 358,531
219,200 Tele Norte Leste Participacoes ADR 5,589,600
109,800 Ultrapar Participacoes SA ADR 1,331,325
-------------------
7,279,456
-------------------
CANADA - 1.4%
98,720 Abitibi Consolidated Inc 870,859
26,100 Alcan Aluminum Ltd * 857,109
81,893 Alliance Forest Products Inc (a) * 1,066,697
91,000 AUR Resources Inc * 124,176
295,000 Boliden Ltd * 662,784
55,157 Cambridge Shopping Centres Ltd * 319,310
23,500 Canada Life Financial Corp 144A 370,882
61,581 Canadian Hotel Income Properties 356,499
63,000 Canadian Occidental Petroleum Ltd 1,167,953
73,264 Concord Pacific Group * 33,325
43,000 Falconbridge Ltd 613,439
101,500 Iamgold (International African Mining Gold) * 220,348
90,000 Inco Ltd * 1,572,364
80,000 Industrial-Alliance Life Insurance Co * 904,204
220,100 KAP Resources Ltd (b) * 2,275
79,000 Manulife Financial Corp 974,569
200,000 Meridian Gold Inc * 1,219,848
67,137 Oxford Properties Group * 545,980
109,000 Rothmans Inc 1,220,710
633,600 Semi-Tech Class A (b) * 10,917
38,800 St Laurent Paperboard * 699,256
124,300 Tembec Inc Class A * 1,237,860
97,000 TimberWest Forest Corp 594,969
62,740 Trizec Hahn Corp (Sub-Voting) 918,832
192,000 TVX Gold Inc * 145,555
78,300 Ulster Petroleums Ltd * 366,947
-------------------
17,077,667
-------------------
FINLAND - 0.6%
21,900 Huhtamaki Oyj Class I 727,406
76,500 Merta Serla Oyj 673,901
182,100 Metso Oyj * 2,384,308
182,150 Oyj Hartwall Abp 2,700,620
42,500 UPM-Kymmene Oyj 1,178,406
-------------------
7,664,641
-------------------
2 See accompanying notes to the financial statements.
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
FRANCE - 7.3%
29,853 Alcatel Alsthom Cie Generale d'Electricite SA 6,989,805
53,242 Aventis SA Class A 2,716,713
12,940 Axa SA 1,625,767
39,271 Banque Nationale de Paris 3,100,269
53,495 BIC SA 2,335,630
3,228 Bouygues 2,688,210
5,882 Cap Gemini SA 1,619,588
5,442 Chargeurs International SA 302,307
5,630 Christian Dior 1,151,810
15,281 Club Mediterranee SA * 1,756,587
3,351 Colas SA 583,938
68,117 Compagnie Generale d'Industrie et de Participations 4,574,180
3,073 Elf Gabon 275,143
7,764 Eridania Beghin-Say SA 651,802
661,570 Eurotunnel SA Units (Bearer) * 815,266
20,107 France Telecom SA 3,242,467
17,482 Gaz et Eaux 1,009,848
6,789 Groupe Danone 1,364,740
2,299 Guyenne et Gascogne 847,718
6,054 Imetal 716,904
8,290 Labinal SA 682,392
9,780 Lafarge Coppee SA 729,716
32,610 Lagardere Groupe 3,067,319
2,441 LVMH (Louis Vuitton Moet Hennessy) 905,953
43,484 Michelin SA Class B 1,357,657
26,833 Pechiney SA Class A 1,565,508
17,367 Pernod Ricard 877,804
19,292 Peugeot SA 3,976,559
9,740 Pinault Printemps Redoute 1,960,769
14,600 Renault SA 581,925
10,530 Saint-Gobain 1,464,906
5,565 Sidel (Bearer) 455,405
27,663 Sophia (EX-SFI) * 660,487
33,065 SPIE Batignolles 2,132,833
60,320 Suez Lyonnaise des Eaux 9,930,497
20,719 Suez Lyonnaise des Eaux Strip * 199
6,315 Sylea (Bearer) 210,360
8,830 Technip SA 965,723
62,544 Thomson CSF 2,468,784
113,783 Total Fina SA 15,062,380
93,950 Usinor Sacilor 1,370,323
3,460 Vallourec 139,907
24,686 Worms et Compagnie SA 396,900
-------------------
89,332,998
-------------------
See accompanying notes to the financial statements. 3
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
GERMANY - 6.6%
119,600 Adidas Salomon AG 6,355,998
128,500 Bankgesellschaft Berlin AG * 2,035,085
43,990 Bayer AG 1,831,697
84,400 Bayerische Motoren Werke AG 2,161,412
33,300 Brau und Brunnen * 1,251,926
101,500 Celanese AG * 2,013,014
128,000 Commerzbank AG 4,559,584
360,810 Continental AG 5,940,024
63,800 DaimlerChrysler AG 4,324,211
13,200 DePfa Deutsche Pfandbriefbank AG 1,054,789
79,555 Deutsche Bank AG 6,694,104
165,940 Dredsner Bank AG 7,955,985
3,331 Koelnische Rueckversicherungs-Gesellschaft AG (New Shares) 2,501,398
9,945 Koelnische Rueckversicherungs-Gesellschaft AG (Registered) 7,468,148
201,750 K&S AG 2,521,168
168,500 Lufthansa AG 3,758,716
79,200 Metallgesellschaft 1,490,684
55,000 Rheinmetall AG 540,103
152,460 RWE AG 5,093,296
268,000 Stinnes AG * 4,824,918
136,600 Veba AG 6,102,141
-------------------
80,478,401
-------------------
GREECE - 0.0%
38,400 Hellenic Telecommunications ADR 576,000
-------------------
HONG KONG - 3.7%
7,460,882 Akai Holdings Ltd * 167,762
2,562,400 Amoy Properties Ltd 1,440,420
805,000 CLP Holdings Ltd 3,547,759
293,000 Goldlion Holdings Ltd 27,859
1,580,800 Hang Lung Development Co Ltd 1,228,843
609,000 Henderson Land Development Co Ltd 2,590,058
1,265,000 HKR International Ltd 621,707
2,796,587 Hong Kong Electric Holdings Ltd 8,534,068
4,891,641 Hong Kong Land Holdings 6,212,384
1,044,358 Hysan Development Co Ltd 1,086,922
302,000 Jardine International Motor Holdings Ltd 92,158
487,712 Jardine Matheson Holdings Ltd 1,706,992
875,263 Jardine Strategic Holdings Ltd 1,382,916
1,110,266 Liu Chong Hing Bank Ltd 998,595
1,050,000 New World Infrastructure * 1,180,488
220,000 Orient Overseas International Ltd * 98,936
4 See accompanying notes to the financial statements.
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
HONG KONG - CONTINUED
3,704,073 Regal Hotels International Ltd * 271,280
5,827,000 South China Morning Post Ltd 5,802,443
681,500 Swire Pacific Ltd Class A 3,266,170
2,844,500 Swire Pacific Ltd Class B 1,845,701
1,737,000 Wharf Holdings Ltd 2,979,513
779,000 Wheelock and Co Ltd 520,481
-------------------
45,603,455
-------------------
HUNGARY - 0.1%
9,700 Egis Rt 458,165
48,000 Mol Magyar Olaj es Gazipari Rt (New Shares) 910,481
-------------------
1,368,646
-------------------
INDIA - 2.7%
111,353 Asian Paints Ltd 957,491
89,415 Bajaj Auto Ltd * 613,032
248,950 Bharat Heavy Electricals Ltd 822,008
156,100 Bharat Petrol Corp 994,344
254,000 Container Corp of India 1,269,672
742,650 Corporation Bank 1,726,727
385,000 Gas Authority of India Ltd GDR 144A * 3,753,750
290,069 Grasim Co * 2,055,234
1,507,920 Great Eastern Shipping Co 618,918
182,105 Hindustan Petroleum Corp Ltd 598,161
91,052 Hindustan Petroleum Corp Ltd (New Shares) * 276,113
150,000 Indian Hotels Co Ltd 892,029
562,771 Indo Gulf Corp Ltd 603,274
629,097 Industrial Credit & Investment Corp of India Ltd * 2,365,718
50,000 Mahanagar Telephone Nigam 326,636
20,200 Mahanagar Telephone Nigam GDR 144A * 391,375
59,007 Mahindra & Mahindra GDR (Registered) (a) 755,290
100,000 Oil & Natural Gas Corp Ltd * 376,164
238,491 Reliance Industries 1,692,521
186,000 State Bank of India 963,880
141,800 Videsh Sanchar Nigam Ltd 7,000,057
115,000 Videsh Sanchar Nigam Ltd GDR 144A 4,226,250
-------------------
33,278,644
-------------------
INDONESIA - 0.2%
1,401,000 Indah Kiat Pulp & Paper * 386,808
9,600,000 Matahari Putra Prima Tbk * 1,292,929
690,404 PT Daya Guna Samudera * 146,449
35,700 PT Indosat (Persero) Tbk Class B ADR 640,369
300,000 Tambang Timah Persero (Foreign Registered) 139,394
-------------------
2,605,949
-------------------
See accompanying notes to the financial statements. 5
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
IRELAND - 0.1%
172,335 Allied Irish Banks Plc 1,413,600
80,000 Eircom Plc 352,521
-------------------
1,766,121
-------------------
ITALY - 6.2%
93,061 Assicurazioni Generali SPA 2,531,044
68,334 Banca Commerciale Italiana SPA 289,470
65,113 Banca di Legano SPA 298,393
428,990 Banca Intesa SPA 1,573,569
140,039 Banca Nazionale Del Lavoro SPA * 505,585
236,958 Banca Toscana 707,207
416,369 Banco Ambrosiano Veneto SPA (Non Convertible) 861,847
79,292 Beni Stabili SPA * 42,673
159,857 Buzzi Unicem SPA * 592,524
758,012 Credito Italiano 2,795,042
168,447 Danieli and Co SPA (Non Convertible) 379,483
228,852 Edison SPA 2,141,581
446,652 ENI SPA 2,076,969
27,984 Ericsson SPA 1,749,857
146,530 Falck Acciaierie and Ferriere Lombarde 1,107,413
46,290 Fiat SPA 1,408,276
2,907 Fiat SPA (Non Convertible) 41,869
251,316 Grouppo Editoriale L'Espresso 5,860,137
86,303 IFIL Finanziaria di Partecipazioni SPA (Non Convertible) 393,007
131,669 Immsi SPA * 301,699
650,940 Industriali Riunite SPA 3,710,020
305,204 Istituto Nazionale Delle Assicurazioni 633,215
165,256 Italcementi Fabbriche Riunite Cemento SPA (Non Convertible) 540,941
549,422 Italgas SPA 2,909,258
76,677 La Rinascente SPA 389,774
154,999 Magneti Marelli SPA 589,440
173,101 Mediaset SPA 4,199,655
43,386 Mediobanca SPA 388,460
462,667 Olivetti and Co SPA * 1,821,820
58,000 Pagnossin SPA 184,270
199,293 RAS SPA 1,736,417
53,792 San Paolo IMI SPA 849,327
1,435,372 Seat Pagine Gialle SPA 6,163,294
271,669 Sirti SPA 640,796
122,196 Societa Assicuratrice Industriale (SAI) 484,694
1,276,706 Telecom Italia Mobile SPA (Non Convertible) 6,612,820
648,492 Telecom Italia SPA 11,369,153
734,162 Telecom Italia SPA (Non Convertible) 5,795,879
72,569 Toro Assicurazioni 753,852
-------------------
75,430,730
-------------------
6 See accompanying notes to the financial statements.
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
JAPAN - 27.8%
39,940 Aiful Corp 8,402,106
215,000 Ajinomoto Co Inc 2,368,122
124,000 Alps Electric Co Ltd 1,127,632
63,000 Arisawa Manufacturing 1,284,602
848,000 Asahi Bank 3,589,459
297,000 Asahi Breweries Ltd 2,884,703
378,000 Asahi Chemical Industry Co 2,233,144
29,000 Bandai Co 1,111,374
141,000 Bridgestone Corp 3,151,017
243,000 Canon Inc 10,108,871
38,300 Chubu Electric Power Co Inc 544,229
366,000 Chugai Pharmaceutical Co Ltd 5,597,196
36,580 Circle K Japan Co Ltd 1,395,205
132,400 Credit Saison Co 2,074,192
262,000 Dainippon Ink & Chemicals Inc 932,520
104,000 Dainippon Printing Co Ltd 1,557,326
796,000 Daiwa Securities Co Ltd 12,644,122
692 East Japan Railway Co 3,124,409
188,000 Fuji Heavy Industries Ltd 1,199,654
115,000 Fuji Photo Film Co Ltd 5,056,210
166,000 Fujitec Co 1,453,662
156,000 Fujitsu Ltd 5,183,196
26,000 H I S Co Ltd 1,940,740
69,000 Hitachi Information Systems 4,051,249
466,000 Hitachi Ltd 6,358,691
390,000 Honda Motor Co Ltd 12,780,474
152,000 Hosiden Corp 8,066,633
30,000 Hoya Corp 2,449,593
125,000 INAX Corp 636,066
72,000 Japan Airport Terminal Co Ltd 564,963
266,000 Kao Corp 7,058,304
308,000 Komatsu Ltd 1,362,596
1,246,000 Marubeni Corp 5,069,974
272,000 Matsushita Electric Industrial Co Ltd 7,923,171
594,000 Minebea Co Ltd 6,840,016
223,000 Minolta Co Ltd 880,998
315,000 Mitsubishi Corp 2,325,474
532,000 Mitsui Petrochemical Industries Ltd 3,840,299
235,000 Mitsui & Co 1,454,645
72,000 Nihon Unisys Ltd 1,966,228
649,000 Nikko Securities 8,371,335
37,400 Nintendo Co Ltd 8,167,366
See accompanying notes to the financial statements. 7
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
JAPAN - CONTINUED
177,000 Nippon Express Co Ltd 1,182,632
135,000 Nippon Meat Packers Inc 1,241,182
334,000 Nippon Mining & Metals Co Ltd 2,401,893
655 Nippon Telegraph & Telephone 9,062,856
3,510 Nippon Television Network 4,856,584
111,000 NSK Ltd 767,921
389 NTT Mobile Communication Network Inc 15,686,769
385,000 Oki Electric Industry * 2,302,535
130,000 Onward Kashiyama Co Ltd 1,255,564
80,500 Orix Corp 13,922,898
24,988 Paris Miki Inc 1,956,186
113,000 Pioneer Electronics Corp 3,589,914
33,000 Rinnai Corp 549,725
44,100 Rohm Co Ltd 14,311,274
1,218,000 Sakura Bank Ltd 6,951,764
48,000 Sanrio Co Ltd 1,922,534
140,000 Sekisui House Ltd 1,045,014
119,000 Shibusawa Warehouse 281,644
36,000 Shimachu Co 360,475
167,750 Shin-Etsu Chemical Co Ltd 9,085,727
183,000 Shionogi and Co Ltd 2,615,357
68,000 Showa Corp 241,409
19,100 SMC 3,546,857
164,000 Snow Brand Milk Products Co Ltd 688,216
19,000 Sony Corp 5,621,046
79,000 Sumitomo Bakelite Co Ltd 898,912
271,000 Sumitomo Corp 3,004,670
470,000 Sumitomo Trust & Banking 2,656,866
45,000 Suzuki Motor Corp 727,914
177,000 Takeda Chemical Industries Ltd 9,989,532
92,000 TDK Corp 8,801,784
210,000 Terumo Corp 5,467,207
26,000 Tokyo Broadcasting System Inc 1,185,745
45,100 Tokyo Seimitsu Co Ltd 5,833,790
53,000 Toppan Printing Co Ltd 522,498
112,000 Tsubaki Nakashima Co Ltd 1,131,674
15,000 Unicharm Corp 953,075
208,000 UNY Co Ltd 1,514,724
139,000 Ushio Inc 3,036,730
316 West Japan Railway Co 943,498
145,000 Yamaha Corp 993,901
370,000 Yamanouchi Pharmaceutical Co Ltd 17,682,400
114,000 Yamato Kogyo Co 421,319
-------------------
340,345,981
-------------------
8 See accompanying notes to the financial statements.
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
KOREA - 0.6%
390 Daehan Flour Mill 13,550
57,929 Hana Bank GDR 427,226
19,865 Hansol Paper Manufacturing Ltd 144,012
58,383 Hyundai Electronics Industries * 923,925
40,000 Hyundai Motor Co 426,132
91,044 Hyundai Motor Co GDR 496,190
41,000 Hyundai Motor Co GDR 144A * 146,575
71,528 Kookmin Bank GDR 144A (Registered) 808,266
68 Korea Trust * 408,000
6,693 LG Investments and Securities Co Ltd 119,528
22,290 Nhong Shim 847,375
42,890 Pacific Chemical Corp 678,744
178,373 Shinhan Bank 1,703,138
14,880 Sindoricom Co Ltd 420,969
-------------------
7,563,630
-------------------
MALAYSIA - 0.6%
700,800 Genting Berhad 3,098,274
315,000 New Straits Times 1,326,316
407,000 Resorts World Berhad 1,478,053
477,000 Tanjong 1,198,776
-------------------
7,101,419
-------------------
MEXICO - 0.3%
1,540,000 Controladora Comercial Mexicana SA de CV Classes B and C 1,479,505
89,400 Nuevo Grupo Iusacell SA ADR * 1,899,750
-------------------
3,379,255
-------------------
NETHERLANDS - 5.2%
137,263 ABN Amro Holdings NV 2,841,224
50,929 Aegon NV 3,510,684
77,312 Akzo Nobel NV 2,978,029
119,058 ASM International NV * 3,884,267
14,410 Bam Groep 728,344
45,964 Dordtsche Petroleum 2,267,907
95,422 Elsevier NV 1,010,543
13,329 Fugro NV 708,995
56,682 Hal Trust Class B 965,900
66,932 Hal Trust (Participating Certificates) 1,140,566
43,865 Hunter Douglas NV 1,055,776
26,360 ING Groep NV 1,332,857
44,664 Kon Bolswessanen 481,603
73,531 Koninklijke KPN NV 9,348,080
67,743 Koninklijke Philips Electronics 12,538,463
23,173 Koninklijke Philips Electronics ADR 4,437,630
See accompanying notes to the financial statements. 9
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
NETHERLANDS - CONTINUED
83,507 Koninklijke Volker Wessels 1,326,540
96,930 Laurus NV 1,185,156
86 Moeara Enim Petroleum 2,103,031
51,843 Royal Dutch Petroleum 2,709,714
62,692 TNT Post Group NV 1,553,582
11,683 Unilever NV 531,459
36,181 Van Ommeren Vopak * 851,673
30,242 Vendex NV 521,458
100,000 Wegener Arcade NV 1,920,686
29,107 Wereldhave NV 1,181,160
-------------------
63,115,327
-------------------
NEW ZEALAND - 1.6%
461,000 Air New Zealand Class B 470,109
6,853,617 Brierley Investment Ltd 1,231,403
1,268,587 Carter Holt Harvey Ltd 1,225,891
38,750 DB Group Ltd 53,064
224,448 Fisher and Paykel Industries Ltd 681,200
1,365,110 Fletcher Challenge Buildings 1,537,922
1,299,050 Fletcher Challenge Energy 2,807,143
2,865,891 Fletcher Challenge Ltd * 779,339
2,874,521 Fletcher Challenge Paper 2,010,049
273,307 Lion Nathan Ltd 492,383
1,683,750 Telecom Corp of New Zealand 6,949,847
7,039,327 Trans Tasman Properties Ltd * 786,208
485,082 Wrightson Ltd * 91,867
-------------------
19,116,425
-------------------
NORWAY - 0.5%
30,000 Norsk Data AS Class B ADR (b) * 300
286,100 Petroleum Geo-Services * 4,484,968
136,000 Prosafe ASA * 1,653,693
-------------------
6,138,961
-------------------
PORTUGAL - 0.2%
193,000 Portugal Telecom SA 2,744,425
-------------------
SINGAPORE - 0.3%
3,019,546 Dairy Farm International Holdings Ltd 1,706,043
755,000 Singapore Land Ltd 1,392,876
-------------------
3,098,919
-------------------
SOUTH AFRICA - 1.4%
20,300 Anglo Gold Ltd 1,052,642
460,700 Barlow Ltd 3,376,448
1,232,606 Goldfields Ltd 5,711,636
438,853 Liberty Life Association of Africa Ltd 4,274,610
10 See accompanying notes to the financial statements.
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
SOUTH AFRICA - CONTINUED
1,004,000 Sanlam Ltd 1,265,939
1,065,539 Sun International Ltd 218,324
125,700 Trencor Ltd 69,341
290,500 Western Areas Gold Mining Co Ltd 952,354
-------------------
16,921,294
-------------------
SPAIN - 3.4%
13,800 Acerinox SA (Registered) 496,895
334,732 Banco Bilbao Vizcaya SA 4,866,175
46,230 Banco Popular Espanol 1,286,279
496,292 Banco Santander Central Hispano 5,208,076
27,000 Bankinter SA 1,703,923
186,548 Endesa 3,945,792
129,580 FENOSA SA 2,682,193
186,643 Iberdrola SA 2,341,368
158,580 Repsol SA 3,000,022
91,700 Tabacalera SA Class A 1,024,096
470,164 Telefonica de Espana SA * 13,511,614
83,691 Transportes Azkar SA 974,939
-------------------
41,041,372
-------------------
SWITZERLAND - 2.8%
2,298 Banque Cantonale Vaudoise (Bearer) 647,363
2,186 Belimo Automation AG 921,097
379 Bobst AG (Bearer) 488,402
28,852 Credit Suisse Holdings (Registered) 4,591,349
1,825 Fischer (Georg) AG (Registered) 544,743
291 Flughafen Immobilien 600,872
3,197 Forbo Holdings AG (Registered) 1,314,518
5,230 Geberit International AG * 1,598,717
19,660 Hero AG 2,238,912
847 Holderbank Financiere Glarus AG (Bearer) 929,040
3,526 Jelmoli (Registered) 906,649
6,545 Kraftwerk Laufenberg (Bearer) 980,730
2,149 Merkur Holding AG (Registered) 618,269
1,781 Nestle AG (Registered) 3,002,849
2,696 Novartis AG (Registered) 3,432,213
416 Societe Generale de Surveillance Holding SA (Bearer) * 770,463
1,554 Sulzer Gebrueder AG (Registered) * 1,012,466
2,368 Sulzer Medica AG 565,601
4,003 Swatch Group AG (Bearer) 4,304,353
168 Swiss Insurance Co 262,311
627 Swiss Reinsurance (Bearer) 1,007,920
3,835 Zellweger Luwa AG (Bearer) 2,280,221
2,591 Zurich Allied 1,097,960
-------------------
34,117,018
-------------------
See accompanying notes to the financial statements. 11
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
TAIWAN - 0.2%
2,347,000 Pacific Electric Wire & Cable * 2,436,359
609,500 Standard Foods Taiwan Ltd * 545,436
-------------------
2,981,795
-------------------
THAILAND - 0.2%
428,900 First Bangkok City (Foreign Registered) (b) * 113
1,291,800 Jasmine International Public Co (Foreign Registered) * 703,263
159,000 PTT Exploration and Production Public Co Ltd (Foreign Registered) * 771,743
487,700 Thai Telephone & Telecommunications (Foreign Registered) * 131,154
204,800 Total Access Communication * 790,528
-------------------
2,396,801
-------------------
UNITED KINGDOM - 14.7%
137,441 Allied Domecq Plc 567,380
208,321 Allied Zurich Plc 1,770,943
163,777 Anglian Water Plc 1,151,825
440,000 Arjo Wiggins Appleton Plc 1,097,477
119,598 BAA 711,317
145,277 Barclays Plc 3,499,752
200,170 Bass Plc 2,121,929
101,613 Berkley Group 717,841
714,086 BG Group Plc 3,114,144
865,000 Billiton Plc 3,536,729
214,000 Blue Circle Industries 1,441,694
144,325 BOC Group Plc 2,914,056
135,200 Boots Co 982,861
1,064,998 BP Amoco Plc 8,196,138
226,953 BPB Industries Plc 971,833
113,630 British Aerospace 562,363
104,859 British Airways Plc 494,952
399,350 British Energy Plc 1,517,770
501,600 British Energy Plc (Deferred Shares) * -
98,490 British Land Co 540,297
946,855 British Telecom Plc 16,531,964
1,064,400 British-Borneo Oil & Gas Plc * 1,033,394
650,468 BTR Siebe Plc 2,983,032
271,708 Cable & Wireless 5,640,454
133,375 Capital Shopping Centres Plc 725,353
958,074 Centrica Plc 3,232,891
216,381 Commercial Union Plc 2,580,711
546,432 Cookson Group 1,828,765
1,241,250 Corus Group Plc 2,057,474
347,916 Diageo Plc 2,655,564
79,000 Dixons Group 1,696,102
12 See accompanying notes to the financial statements.
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
UNITED KINGDOM - CONTINUED
292,000 Enterprise Oil 1,463,566
315,000 FKI Plc 1,347,615
777,000 Gallaher Group Plc 3,081,860
191,491 Glaxo Wellcome Plc 4,588,873
278,424 Granada Group Plc 2,804,227
410,586 Great Portland Estates Plc 1,163,468
386,139 Great Universal Stores Plc 2,185,338
172,008 Hanson Plc 1,103,812
682,247 HSBC Holdings Plc 7,943,091
220,136 Imperial Chemical Industries Plc 1,690,674
210,316 Imperial Tobacco Group Plc 1,391,144
180,000 Johnson Matthey 2,051,614
652,060 Ladbroke Group 2,385,575
888,000 Lasmo Plc 1,328,245
211,000 Lloyds TSB Group Plc 1,941,945
265,510 Marconi Plc 3,309,168
472,500 Marks & Spencer 1,696,950
369,600 National Power 2,183,633
143,000 Norwich Union Plc 882,106
334,000 Nycomed Amersham Plc 2,627,883
711,000 Old Mutual Plc * 1,658,518
160,107 Peninsular & Oriental Steam Navigation Co 1,803,392
170,086 Powergen Plc 1,172,701
205,000 Prudential Corp 3,022,641
105,630 Railtrack Group Plc 1,075,556
322,500 Rank Group Plc 804,401
210,000 Reed International Plc 1,540,723
196,699 Reuters Holdings Plc 4,251,003
107,641 RMC Group 1,240,470
190,831 Rolls-Royce 621,339
312,961 Royal & Sun Alliance Insurance Group 1,709,433
154,000 Sainsbury (J) 633,307
195,000 Scottish Hydro-Electric Plc 1,632,304
350,000 Scottish Power Plc 2,657,657
153,771 Scottish & Newcastle Plc 996,491
160,593 Severn Trent Plc 1,337,319
1,045,000 Shell Transport & Trading (Registered) 7,184,397
350,000 Smith (David S.) Holdings Plc 773,539
182,224 Smithkline Beecham Plc 2,041,004
996,000 Stagecoach Holdings Plc 1,450,479
118,482 Standard Chartered 1,672,152
2,309 Tarmac Plc 21,215
See accompanying notes to the financial statements. 13
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
UNITED KINGDOM - CONTINUED
138,263 Thames Water Plc 1,516,969
226,228 TI Group Plc 1,202,652
296,491 Tomkins Plc 820,267
167,347 Trinity Mirror Plc 1,862,486
379,642 Unilever Plc 2,311,884
194,500 United News & Media Plc 2,583,804
194,904 United Utilities 2,013,800
271,030 Viglen Technology Plc (Entitlement Letters) * -
62,000 Viridian Group Plc 677,304
149,000 Whitbread Plc Class A 1,233,723
488,162 Williams Plc 2,022,922
119,146 Wolseley 576,025
-------------------
180,169,669
-------------------
UNITED STATES - 0.2%
116,000 Freeport-McMoran Copper & Gold * 1,595,000
25,000 Impsat Fiber Networks Inc * 917,188
-------------------
2,512,188
-------------------
TOTAL COMMON STOCKS (Cost $955,104,749) 1,166,430,733
-------------------
PREFERRED STOCKS - 0.9%
BRAZIL - 0.1%
36,439,529 Gerdau SA 1,013,182
-------------------
GERMANY - 0.5%
92,800 Bayerische Motoren Werke AG 1,162,355
33,560 Dyckerhoff AG (Non Voting) 864,290
29,772 Metro AG Class I 659,249
23,144 Rheinmetall AG 191,624
51,500 Villeroy & Boch AG (Non Voting) 456,151
126,700 Volkswagen AG 2,890,936
-------------------
6,224,605
-------------------
ITALY - 0.1%
36,213 Fiat SPA 613,608
18,541 IFI-Istituto Finanziario 469,464
-------------------
1,083,072
-------------------
KOREA - 0.1%
22,000 Daewoo Securities Ltd 150,543
27,310 Dongwon Securities Co 346,474
46,976 Hyundai Motor Co GDR 144A 300,646
68,540 Jinro Ltd * 112,102
30,000 LG Investment and Securities Co Ltd 320,925
27,230 Shinyoung Securities 344,255
-------------------
1,574,945
-------------------
14 See accompanying notes to the financial statements.
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares/
Par Value ($) Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
THAILAND - 0.1%
2,300,000 Siam Commercial Bank Ltd * 1,387,905
-------------------
TOTAL PREFERRED STOCKS (Cost $14,694,203) 11,283,709
-------------------
CONVERTIBLE BONDS - 0.3%
HONG KONG - 0.1%
USD 860,000 Sino Land Co, 5.00% due 2/26/01 (a) 894,400
-------------------
KOREA - 0.0%
KRW 19,462 Shinhan Bank, 15.00% due 12/02/48 (c) 199,592
-------------------
MEXICO - 0.0%
USD 870,000 Grupo Financiero Invermexico, 7.50% due 6/16/01 69,600
-------------------
SINGAPORE - 0.2%
USD 1,830,000 Keppel Corp 144A, 2.00% due 8/12/02 1,889,475
-------------------
TOTAL CONVERTIBLE BONDS (Cost $2,981,266) 3,053,067
-------------------
INVESTMENT FUNDS - 0.1%
INDIA - 0.1%
157,150 India Fund Class A * 1,302,445
-------------------
KOREA - 0.0%
39,500 Korea Investment Fund 303,656
-------------------
TOTAL INVESTMENT FUNDS (Cost $1,095,946) 1,606,101
-------------------
RIGHTS & WARRANTS - 0.1%
CANADA - 0.0%
116,600 KAP Resources Ltd Class A Warrants 8/05/00 (b) * 804
-------------------
ITALY - 0.0%
68,334 Banca Intesa SPA Warrants 11/15/02 * 182,892
-------------------
THAILAND - 0.1%
2,300,000 Siam Commercial Bank Ltd Warrants 5/10/02 * 561,196
-------------------
TOTAL RIGHTS & WARRANTS (Cost $172,885) 744,892
-------------------
See accompanying notes to the financial statements. 15
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares/
Par Value ($) Description Value ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
DEBT OBLIGATIONS - 0.0%
UNITED KINGDOM - 0.0%
GBP 102,000 BG Transco Holdings Plc Index Linked, 4.186% due 12/14/22 157,786
GBP 102,000 BG Transco Holdings Plc, 7.00% due 12/16/24 160,306
GBP 102,000 BG Transco Holdings Plc, 7.057% Variable Rate due 12/14/09 161,397
GBP 35,888 British Aerospace Plc, 7.45% due 11/30/03 56,088
-------------------
535,577
-------------------
TOTAL DEBT OBLIGATIONS (Cost $433,564) 535,577
-------------------
SHORT-TERM INVESTMENTS - 4.7%
CASH EQUIVALENTS - 4.7%
$ 6,900,000 Royal Bank of Canada Time Deposit, 5.81% due 3/01/00 6,900,000
50,555,632 The Boston Global Investment Trust (d) 50,555,632
-------------------
57,455,632
-------------------
TOTAL SHORT-TERM INVESTMENTS (Cost $57,455,632) 57,455,632
-------------------
TOTAL INVESTMENTS - 101.4%
(Cost $1,031,938,245) 1,241,109,711
Other Assets and Liabilities (net) - (1.4%) (17,157,720)
-------------------
TOTAL NET ASSETS - 100.0% $ 1,223,951,991
-------------------
-------------------
</TABLE>
16 See accompanying notes to the financial statements.
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
- --------------------------------------------------------------------------------
NOTES TO THE SCHEDULE OF INVESTMENTS:
ADR American Depositary Receipt
GDR Global Depository Receipt
GBP British Pound
KRW Korean Won
USD United States Dollar
(a) Security is restricted as to public resale. The
aggregate market value of restricted securities is
$2,716,387 or .22% of net assets.
(b) Bankrupt issuer.
(c) Warrants included in position of security.
(d) Represents investment of security lending collateral
(Note 1).
144A Securities exempt from registration under
Rule 144A of the Securities Act of 1933. These
securities may be resold in transactions exempt
from registration, normally to qualified
institutional buyers.
* Non-income producing security.
See accompanying notes to the financial statements. 17
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
- --------------------------------------------------------------------------------
At February 29, 2000, industry sector diversification
of the Fund's equity investments was as follows:
<TABLE>
INDUSTRY SECTOR (UNAUDITED)
<S> <C>
Telecommunications 11.1 %
Banking 9.0
Consumer Goods 8.0
Energy Services 5.6
Electronic Equipment 5.4
Utilities 5.2
Conglomerates 4.8
Financial Services 4.8
Health Care 4.6
Chemicals 3.9
Machinery 3.9
Services 3.6
Communications 3.5
Insurance 3.5
Metals and Mining 3.5
Automotive 2.9
Construction 2.6
Transportation 2.6
Retail Trade 2.1
Food and Beverage 2.1
Real Estate 1.9
Computers 1.7
Paper and Allied Products 1.4
Aerospace 0.4
Textiles 0.4
Miscellaneous 1.5
-------------
100.0 %
-------------
-------------
</TABLE>
18 See accompanying notes to the financial statements.
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
<TABLE>
Statement of Assets and Liabilities - February 29, 2000
- ----------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value (cost $1,031,938,245) (Note 1) $ 1,241,109,711
Foreign currency, at value (cost $38,113,560) (Note 1) 36,905,750
Cash 58,423
Receivable for investments sold 7,672,360
Dividends and interest receivable 1,354,868
Foreign withholding taxes receivable 853,424
Receivable for expenses waived or borne by Manager (Note 2) 91,375
-------------------
Total assets 1,288,045,911
-------------------
LIABILITIES:
Payable upon return of securities loaned (Note 1) 50,555,632
Payable for investments purchased 12,068,870
Accrued capital gains taxes payable (Note 1) 526,551
Payable to affiliate for (Note 2):
Management fee 586,888
Shareholder service fee 143,158
Accrued expenses 212,821
-------------------
Total liabilities 64,093,920
-------------------
NET ASSETS $ 1,223,951,991
-------------------
-------------------
NET ASSETS CONSIST OF:
Paid-in capital $ 983,661,450
Distributions in excess of net investment income (5,741,231)
Accumulated undistributed net realized gain 38,633,069
Net unrealized appreciation 207,398,703
-------------------
$ 1,223,951,991
-------------------
-------------------
NET ASSETS ATTRIBUTABLE TO:
Class II Shares $ 60,278,431
-------------------
-------------------
Class III Shares $ 1,022,498,368
-------------------
-------------------
Class IV Shares $ 141,175,192
-------------------
-------------------
SHARES OUTSTANDING:
Class II 4,586,703
-------------------
-------------------
Class III 77,702,492
-------------------
-------------------
Class IV 10,726,851
-------------------
-------------------
NET ASSET VALUE PER SHARE:
Class II $ 13.14
-------------------
-------------------
Class III $ 13.16
-------------------
-------------------
Class IV $ 13.16
-------------------
-------------------
</TABLE>
See accompanying notes to the financial statements. 19
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
<TABLE>
Statement of Operations - Year Ended February 29, 2000
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends (net of foreign tax expense of $2,188,013) $ 24,685,134
Interest (including security lending income of $308,543) 2,217,997
-----------------
Total income 26,903,131
-----------------
EXPENSES:
Management fee (Note 2) 7,261,054
Custodian fees 1,022,950
Audit fees 62,136
Transfer agent fees 51,558
Legal fees 31,214
Trustees fees (Note 2) 13,855
Registration fees 5,207
Miscellaneous 14,979
Fees waived or borne by Manager (Note 2) (1,196,212)
-----------------
7,266,741
Shareholder service fee (Note 2)
Class II 112,462
Class III 1,531,185
Class IV 124,440
-----------------
Net expenses 9,034,828
-----------------
Net investment income 17,868,303
-----------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments 150,637,082
Foreign currency, forward contracts and foreign currency
related transactions (2,455,930)
-----------------
Net realized gain 148,181,152
-----------------
Change in net unrealized appreciation (depreciation) on:
Investments (Note 1) 107,630,225
Foreign currency, forward contracts and foreign currency
related transactions (1,087,835)
-----------------
Net unrealized gain 106,542,390
-----------------
Net realized and unrealized gain 254,723,542
-----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 272,591,845
-----------------
-----------------
</TABLE>
20 See accompanying notes to the financial statements.
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN NET ASSETS: YEAR ENDED YEAR ENDED
Operations: FEBRUARY 29, 2000 FEBRUARY 28, 1999
------------------- -------------------
<S> <C> <C>
Net investment income $ 17,868,303 $ 18,297,050
Net realized gain 148,181,152 31,609,905
Change in net unrealized appreciation (depreciation) 106,542,390 (47,678,215)
------------------- -------------------
Net increase in net assets resulting from operations 272,591,845 2,228,740
------------------- -------------------
Distributions to shareholders from:
Net investment income
Class II (821,414) (1,237,030)
Class III (15,074,302) (18,110,163)
Class IV (2,182,701) (3,254,066)
------------------- -------------------
Total distributions from net investment income (18,078,417) (22,601,259)
------------------- -------------------
Distributions to shareholders from:
Net realized gains
Class II (5,886,575) (536,347)
Class III (106,929,723) (7,886,316)
Class IV (14,634,521) (1,226,681)
------------------- -------------------
Total distributions from net realized gains (127,450,819) (9,649,344)
------------------- -------------------
Net share transactions: (Note 5)
Class II 22,900,809 (19,441,415)
Class III (12,766,551) 104,968,005
Class IV (4,892,649) (85,018,178)
------------------- -------------------
Increase in net assets resulting from net share transactions 5,241,609 508,412
------------------- -------------------
Total increase (decrease) in net assets 132,304,218 (29,513,451)
NET ASSETS:
Beginning of period 1,091,647,773 1,121,161,224
------------------- -------------------
End of period (including distributions in excess of net
investment income of $5,741,231 and $5,330,621,
respectively) $ 1,223,951,991 $ 1,091,647,773
------------------- -------------------
------------------- -------------------
</TABLE>
See accompanying notes to the financial statements. 21
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Financial Highlights
(For a Class II share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
-----------------------------------------------------------------------
2000 1999 1998 1997 *
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.79 $ 12.09 $ 10.65 $ 10.02
-------------- -------------- -------------- --------------
Income from investment operations:
Net investment income 0.17 (c) 0.20 (c) 0.18 (c) 0.06
Net realized and unrealized gain (loss) 2.89 (0.14) 1.48 0.65
-------------- -------------- -------------- --------------
Total from investment operations 3.06 0.06 1.66 0.71
-------------- -------------- -------------- --------------
Less distributions to shareholders from:
Net investment income (0.21) (0.25) (0.22) (0.08)
Net realized gains (1.50) (0.11) (0.00)(d) -
-------------- -------------- -------------- --------------
Total distributions (1.71) (0.36) (0.22) (0.08)
-------------- -------------- -------------- --------------
NET ASSET VALUE, END OF PERIOD $ 13.14 $ 11.79 $ 12.09 $ 10.65
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
TOTAL RETURN (a) 25.63% 0.36% 15.94% 7.08% ***
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 60,278 $ 33,780 $ 53,949 $ 21,957
Net expenses to average
daily net assets 0.82% 0.82% 0.82% 0.84% ** (b)
Net investment income to average
daily net assets 1.28% 1.64% 1.60% 0.83% **
Portfolio turnover rate 35% 27% 19% 13%
Fees and expenses voluntarily waived or
borne by the Manager consisted of the
following per share amounts: $ 0.01 $ 0.03 $ 0.03 $ 0.02
</TABLE>
* Period from September 30, 1996 (commencement of operations) to February 28,
1997.
** Annualized.
*** Not annualized.
(a) The total returns would have been lower had certain expenses not been
waived during the periods shown.
(b) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .02% of average daily net assets.
(c) Computed using average shares outstanding throughout the period.
(d) The per share realized gain distribution was $0.004.
22 See accompanying notes to the financial statements.
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
-----------------------------------------------------------------------
2000 1999 1998 1997 *
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ $11.81 $ $12.10 $ 10.66 $ 10.00
-------------- -------------- -------------- --------------
Income from investment operations:
Net investment income 0.20 (c) 0.20 (c) 0.21 (c) 0.08
Net realized and unrealized gain (loss) 2.86 (0.12) 1.45 0.66
-------------- -------------- -------------- --------------
Total from investment operations 3.06 0.08 1.66 0.74
-------------- -------------- -------------- --------------
Less distributions to shareholders from:
Net investment income (0.21) (0.26) (0.22) (0.08)
Net realized gains (1.50) (0.11) (0.00)(d) -
-------------- -------------- -------------- --------------
Total distributions (1.71) (0.37) (0.22) (0.08)
-------------- -------------- -------------- --------------
NET ASSET VALUE, END OF PERIOD $ 13.16 $ 11.81 $ $12.10 $ 10.66
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
TOTAL RETURN (a) 25.65% 0.00 15.95% 7.37% ***
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 1,022,498 $ 927,108 $ 847,427 $ 671,829
Net expenses to average
daily net assets 0.75% 0.75% 0.75% 0.76% ** (b)
Net investment income to average
daily net assets 1.48% 1.60% 1.80% 1.24% **
Portfolio turnover rate 35% 27% 19% 13%
Fees and expenses voluntarily waived or
borne by the Manager consisted of the
following per share amounts: $ 0.01 $ 0.03 $ 0.03 $ 0.02
</TABLE>
* Period from June 28, 1996 (commencement of operations) to February 28,
1997.
** Annualized.
*** Not annualized.
(a) The total returns would have been lower had certain expenses not been
waived during the periods shown.
(b) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .01% of average daily net assets.
(c) Computed using average shares outstanding throughout the period.
(d) The per share realized gain distribution was $0.004.
See accompanying notes to the financial statements. 23
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
--------------------------------------------------------------
2000 1999 1998 *
------------------ ------------------ ------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.81 $ 12.11 $ 10.90
------------------ ------------------ ------------------
Income from investment operations:
Net investment income 0.21 (d) 0.22 (d) - (b)
Net realized and unrealized gain (loss) 2.86 (0.15) 1.21
------------------ ------------------ ------------------
Total from investment operations 3.07 0.07 1.21
------------------ ------------------ ------------------
Less distributions to shareholders from:
Net investment income (0.22) (0.26) -
Net realized gains (1.50) (0.11) -
------------------ ------------------ ------------------
Total distributions (1.72) (0.37) -
------------------ ------------------ ------------------
NET ASSET VALUE, END OF PERIOD $ 13.16 $ 11.81 $ 12.11
------------------ ------------------ ------------------
------------------ ------------------ ------------------
TOTAL RETURN (a) 25.74% 0.53% 11.10% ***
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 141,175 $ 130,760 $ 219,785
Net expenses to average
daily net assets 0.69% 0.69% 0.69% **
Net investment income to average
daily net assets 1.55% 1.81% 0.26% **
Portfolio turnover rate 35% 27% 19%
Fees and expenses voluntarily waived or
borne by the Manager consisted of the
following per share amounts: $ 0.01 $ 0.03 $ 0.00 (c)
</TABLE>
* Period from January 9, 1998 (commencement of operations) to February 28,
1998.
** Annualized.
*** Not annualized.
(a) The total returns would have been lower had certain expenses not been
waived during the periods shown.
(b) Net investment income earned was less than $.01 per share. Computed using
average shares outstanding throughout the period.
(c) Fees or expenses voluntarily waived or borne by the manager were less
than $.01 per share.
(d) Computed using average shares outstanding throughout the period.
24 See accompanying notes to the financial statements.
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Notes to Financial Statements
February 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Foreign Fund (the "Fund") is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended, as
an open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series of shares into classes.
The Fund seeks high total return through investment in equity securities of
non-U.S. issuers. The Fund's benchmark is the Morgan Stanley Capital
International EAFE Index.
The Fund offers three classes of shares: Class II, Class III and Class IV.
The principal economic difference between the classes of shares is the
level of shareholder service fee borne by the classes. Eligibility for and
automatic conversion between the various classes of shares is generally
based on the total amount of assets invested with GMO, as more fully
outlined in the Trust's prospectus.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of financial statements in
accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each business
day, or if there is no such reported sale, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Securities which
are primarily traded on foreign exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges,
and those values are then translated into U.S. dollars at the current
exchange rate. Short-term investments with a remaining maturity of sixty
days or less are valued at amortized cost which approximates market value.
Securities for which quotations are not readily available are valued at
fair value as determined in good faith by the Trustees or other persons
acting at their direction.
Certain securities held by the Fund were valued on the basis of a price
provided by a principal market maker. These prices may differ from the
value that would have been used had a broader market for the securities
existed and the differences could be material to the financial statements.
25
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the current exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at current exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
gains and losses on disposition of foreign currencies and forward foreign
exchange contracts, currency gains and losses realized between the trade
and settlement dates on securities transactions and the difference between
the amount of investment income and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent amounts actually received
or paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts in connection with
settling planned purchases or sales of securities or to hedge the currency
exposure associated with some or all of the Fund's portfolio securities. A
forward currency contract is an agreement between two parties to buy and
sell a currency at a set price on a future date. The market value of a
forward currency contract fluctuates with changes in forward currency
exchange rates. Forward currency contracts are marked to market daily and
the change in value is recorded by the Fund as an unrealized gain or loss.
Realized gains or losses equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed
are recorded upon delivery or receipt of the currency or, if a forward
currency contract is offset by entering into another forward currency
contract with the same broker, upon settlement of the net gain or loss.
These contracts may involve market risk in excess of the unrealized gain or
loss reflected in the Fund's Statement of Assets and Liabilities. In
addition, the Fund could be exposed to risk if the counterparties are
unable to meet the terms of the contracts or if the value of the currency
changes unfavorably to the U.S. dollar. There were no forward foreign
currency contracts outstanding as of February 29, 2000.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying instrument.
When the Fund writes a call or put option, an amount equal to the premium
received is recorded as a liability and subsequently marked to market to
reflect the current value of the option written. Premiums received from
writing options which expire are treated as realized gains. Premiums
received from writing options which are exercised or closed are offset
against the proceeds or amounts paid on the future, security or currency
transaction to determine the realized gain or loss. The Fund as a writer of
an option has no control over whether the underlying future, security or
currency may be sold (call) or purchased (put) and as a result bears the
market risk of an unfavorable change in the price of the future, security
or currency underlying the written option. There is the risk the Fund may
not be able
26
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
to enter into a closing transaction because of an illiquid market. At
February 29, 2000 there were no open written option contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premuims paid for purchasing options which expire are treated as realized
losses. Premiums paid for purchasing options which are exercised or closed
are added to the amounts paid or offset against the proceeds on the
transaction to determine the realized gain or loss. The risk associated
with purchasing put and call options is limited to the premium paid.
FUTURES CONTRACTS
The Fund may purchase or sell index futures contracts. Stock index futures
contracts represent commitments for future delivery of cash based upon the
level of a specified index of equity securities at a given date. The Fund
may use futures contracts to manage its exposure to the stock and currency
markets. Buying futures tends to increase the Fund's exposure to the
underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments. Upon
entering into a futures contract, the Fund is required to deposit with its
custodian, in a segregated account in the name of the futures broker, an
amount of cash or U.S. government and agency obligations in accordance with
the initial margin requirements of the broker or exchange. Futures
contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. The payable or receivable is subsequently settled. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. As of February
29, 2000, there were no outstanding futures contracts.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 29, 2000, the Fund loaned securities having a
market value of $46,792,975 collateralized by cash in the amount of
$50,555,632 which was invested in a short-term instrument.
27
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
TAXES
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"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryover for U.
S. federal income tax purposes. Therefore, no provision for U. S. federal
income or excise tax is necessary. Taxes on foreign interest and dividend
income have been withheld in accordance with the applicable country's tax
treaty with the United States.
Dividends received by shareholders of the Fund which are derived from
foreign source income and foreign taxes paid by the Fund are to be treated,
to the extent allowable under the Code, as if received and paid by the
shareholders of the Fund.
The Fund may be subject to capital gains and repatriation taxes imposed by
certain countries in which it invests. The Fund has recorded a deferred tax
liability in respect of unrealized appreciation on foreign securities of
$526,551 for potential capital gains taxes at February 29, 2000. The
accrual for capital gains taxes is included in net unrealized gain in the
Statement of Operations.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. The Fund declares separate dividends from net
investment income on each class of shares. Distributions to shareholders
are recorded by the Fund on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to foreign currency and passive foreign
investment company transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable income and capital gains under U. S.
federal tax rules versus accounting principles generally accepted in the
United States. The calculation of net investment income per share in the
financial highlights table excludes these adjustments.
<TABLE>
<CAPTION>
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
--------------------------- -------------------------- ---------------------------
<S> <C> <C>
$(200,496) $200,496 -
</TABLE>
28
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income, net
of applicable withholding taxes, is recorded on the ex-dividend date, or
when the Fund is informed of the ex-dividend date, if later. Interest
income is recorded on the accrual basis and is adjusted for the accretion
of discounts. In determining the net gain or loss on securities sold, the
cost of securities is determined on the identified cost basis.
ALLOCATION OF OPERATING ACTIVITY
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. Investment
income, common expenses and realized and unrealized gains and losses are
allocated pro-rata among the classes of shares of the Fund based on the
relative net assets of each class. Shareholder service fees, which are
directly attributable to a class of shares, are charged to that class'
operations.
INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments of domestic securities.
These risks may involve adverse political and economic developments
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .60% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of each class at the annual rate of .22%
for Class II shares, .15% for Class III shares, and .09% for Class IV
shares.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding brokerage commissions, certain other transaction costs
(including stamp duties and transfer taxes), shareholder service fees and
extraordinary expenses) exceed the management fee.
29
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
Prior to March 1, 1999, GMO earned a management fee at the annual rate of
0.75% of average daily net assets. GMO had agreed to waive a portion of its
fee and bear other expenses to the extent that the Fund's annual expenses
(including the management fee but excluding brokerage commissions, certain
other transaction costs (including stamp duties and transfer taxes),
shareholder service fees and extraordinary expenses) exceeded .60% of
average daily net assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000, was $13,855. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 29, 2000 aggregated
$401,792,976 and $540,952,755, respectively.
At February 29, 2000 the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
-------------------------- -------------------------- ------------------------- ----------------------
<S> <C> <C> <C>
$1,053,701,091 $309,817,032 $122,408,412 $187,408,620
</TABLE>
4. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
-------------------------------------------- --------------------------------------------
Class II: Shares Amount Shares Amount
------------------- --------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Shares sold 1,357,706 $ 17,980,116 854,704 $ 10,796,765
Shares issued to
shareholders in
reinvestment of
distributions 490,326 6,671,247 146,654 1,773,377
Shares repurchased (125,595) (1,750,554) (2,597,721) (32,011,557)
------------------- --------------------- -------------------- -------------------
Net increase (decrease) 1,722,437 $ 22,900,809 (1,596,363) $ (19,441,415)
------------------- --------------------- -------------------- -------------------
------------------- --------------------- -------------------- -------------------
</TABLE>
30
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
SHARE TRANSACTIONS - CONTINUED
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
-------------------------------------------- ----------------------------------------
Class III: Shares Amount Shares Amount
------------------- --------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Shares sold 3,202,401 $ 42,410,128 17,082,138 $ 209,494,684
Shares issued to shareholders
in reinvestment of distributions 8,451,999 115,039,709 1,616,582 19,533,092
Shares repurchased (12,483,507) (170,216,388) (10,176,725) (124,059,771)
------------------- --------------------- ------------------ ------------------
Net increase (decrease) (829,107) $ (12,766,551) 8,521,995 $ 104,968,005
------------------- --------------------- ------------------ ------------------
------------------- --------------------- ------------------ ------------------
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
-------------------------------------------- ----------------------------------------
Class IV: Shares Amount Shares Amount
------------------- --------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Shares sold 3,174,497 $ 41,207,751 445,359 $ 5,633,670
Shares issued to shareholders
in reinvestment of distributions 1,137,658 15,485,345 128,073 1,542,577
Shares repurchased (4,657,696) (61,585,745) (7,653,734) (92,194,425)
------------------- --------------------- ------------------ ------------------
Net decrease (345,541) $ (4,892,649) (7,080,302) $ (85,018,178)
------------------- --------------------- ------------------ ------------------
------------------- --------------------- ------------------ ------------------
</TABLE>
31
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
February 29, 2000
- --------------------------------------------------------------------------------
For the fiscal year ended February 29, 2000, all the Fund's distributions are
from investment company taxable income, except that the Fund has designated
66.18% as net capital gain dividends.
32
<PAGE>
GMO FOREIGN FUND
(A Series of GMO Trust)
PORTFOLIO MANAGERS
Mr. Jui Lai and Ms. Ann Spruill are responsible for the management of the GMO
International Active Division. Mr. Lai and Ms. Spruill have each been portfolio
managers with GMO for more than ten years. The GMO Foreign Fund is managed on a
geographic basis by Mr. Lai, Ms. Spruill, Mr. Hoyt Ludington and Mr. Richard
Mattione.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
For the fiscal year ended February 29, 2000, the Class III shares of the GMO
Foreign Fund returned 25.7%, outperforming its Morgan Stanley Capital
International Europe, Australasia and Far East (EAFE) Index benchmark by 0.2%
after fees. A positive performance on stock selection offset adverse country
selection; there were no hedges in place during the year.
Despite the strong return of the MSCI EAFE Index, only fourteen of the twenty
equity markets within the Index posted positive returns in local currencies over
the past twelve months; exactly the same fourteen posted positive returns in
U.S. dollars over this period. It was a welcome event that the MSCI EAFE Index
posted a higher return than that of the S&P 500, which returned 11.7% during
this period. Still, it was not possible to come close to the returns of the
technology-stock laden NASDAQ Index, which returned 105.2% over the period.
All Pacific markets except New Zealand managed positive returns. Hong Kong led
the way with a return of 65.5%, followed closely by Singapore with a return of
58.6%. Both were boosted by relief at the end of the economic crisis in
Southeast Asia. Meanwhile, Japan returned 52.8% in dollars. Restructuring themes
provided impetus to Japan early in the fiscal year, but by the end of the year
tech themes were dominating the performance of the Japanese market just as they
dominated globally. This was helped by the addition of several "new Japan" tech
names to the Japanese portion of the Index during the year.
The story was mixed in Europe. Ten of the fifteen markets were up. Finland and
Sweden provided stupendous returns of 163.6% and 115.3%, respectively. A telecom
equipment maker drove the performance of each of these markets - Nokia in the
case of Finland, and Ericsson in the case of Sweden. The next best return in
Europe was recorded by Germany, which rose 36.8%. Belgium was not a happy place,
however, with a total return of -27.8% for last place within the MSCI EAFE
countries. Strikingly, Belgium was one of the few markets that did not have a
telecom stock in its index.
Our country selection reduced returns by 199 basis points during the fiscal
year. Low levels of holdings in Finland and Sweden, two markets that excelled on
the strength of rather pricey tech stocks, cut 141 basis points and 135 basis
points, respectively. Together those two markets (which even after the run-up of
the last twelve months are less than 7% of the MSCI EAFE Index) more than
account for the underperformance on country selection. Holdings of cash during
an excellent twelve-month period for stocks accounted for a further 88 basis
points of underperformance. An overweight position in Belgium, the worst
performing market, cost 64 basis points, while a mildly underweight position in
Japan early in the fiscal year sliced 50 basis points from returns. Holdings in
emerging markets added 153 basis points, offsetting some of the negatives. A low
level of holdings in Switzerland and the United Kingdom, two weaker markets,
restored a further 129 basis points and 92 basis points.
<PAGE>
On one crucial aspect, markets within the MSCI EAFE Index mimicked the headlines
from the United States during the past fiscal year. A new "sector" has been
created with the acronym of "TMT" for telecoms, media and technology. Enthusiasm
for these stocks swept the world. Some of these companies have genuine business
prospects, business plans and (on rare occasions) sensible market valuations.
Many are full of hype and subject to the possibility that margins will prove to
be much lower than expected. We have seen this pattern before in energy and
pharmaceutical stocks, but the scope and duration of this sector move has been
stunning.
The enthusiasm for TMT stocks makes it difficult, but not impossible, for a
value investor. We are able to seize returns even in this area by digging to
find those companies where fundamentals justify the enthusiasm or identifying
companies before the values are recognized. Thus we are especially pleased that
our stock selection added 218 basis points to returns during a tough year for
value. Value (as measured by price-to-book, price-earnings and
price-to-cash-flow ratios, along with dividend yield) underperformed the MSCI
EAFE Index by 660 basis points. The only factor with positive returns was
cheapness on cash flow, which was helped by strength in telecom stocks (which
often have considerable gross cash flow but not so much in earnings). Stocks
cheap on yield, a traditional value measure, turned in the worst performance by
undershooting the MSCI EAFE Index by 1149 basis points during the fiscal year.
Our stock selection beat the market in Japan, the Netherlands and Italy.
However, we were behind in larger markets such as Germany and the United
Kingdom, where value greatly lagged the hot telecom and tech stock names.
At the end of the fiscal year we were at a weight of 27.4% in Japan. This is
0.7% underweight relative to the benchmark. We were briefly overweight in Japan,
but decided not to add further to positions in August when the weight of Japan
in the MSCI EAFE Index was bumped up by the addition of numerous "new economy"
companies. Japan's main attraction at this stage is that the ROE seems
considerably below what could be accomplished, while there has been grievous
underperformance over the longer run (despite outperformance in 1999).
Recognition of the need for restructuring so as to boost ROE seems to be
becoming even more prevalent. Unfortunately, attainment of announced targets has
been slow, so the story remains one of mostly modest steps toward adjustment
rather than radical measures to boost earnings. We are currently most overweight
in Australia, New Zealand, Belgium and the emerging markets. We are most
underweight in Germany, but also have sizable underweight positions in the
United Kingdom and Switzerland.
CURRENCY HEDGING
There were no hedges in place during the most recent fiscal year. Our policy is
generally to be unhedged, recognizing that in doing so we achieve the desired
exposure to the underlying real assets (the business operations). However, to
protect the dollar value of our investments, we will on occasion hedge out a
particular currency, either because it is significantly overvalued or because
the currency seems at risk due to unfavorable economic developments.
MALAYSIA VALUATION
Upon imposition of foreign exchange controls in Malaysia in 1998, it was
necessary to review the valuation of our holdings in Malaysia. Initially, we
applied a 35% discount, which had been reduced to 30% at the end of the previous
fiscal year. That discount was brought to zero in September 1999, coincident
with the removal of the foreign exchange controls.
MSCI removed Malaysia from all its benchmarks upon the imposition of exchange
controls. MSCI plans to reinstate Malaysia in many indices, such as the Emerging
Market Free Index, at the end of May 2000, but will not add Malaysia to the MSCI
EAFE benchmark at that time.
<PAGE>
EMERGING MARKETS
Our investments in emerging markets continue to be on an opportunistic
stock-picking basis using GMO's traditional long-term value investment
philosophy. Our policy is to invest from 0% to 10% of the portfolio in emerging
markets, subject to stock selection opportunities and attractive valuations
relative to the developed markets. At the end of the fiscal year 7.7% of the GMO
Foreign Fund was invested in emerging markets. India was the largest emerging
markets exposure at the end of the fiscal year, followed by South Africa and
Korea. Because of the extremely good performance of emerging markets, exposure
to emerging markets enhanced our returns during the past fiscal year.
OUTLOOK
The Foreign Fund is managed with a long-term investment horizon and consequent
low turnover. We typically buy company stocks at relatively low
price-to-earnings, low price-to-cash flow and low price-to-book or asset ratios.
Currently the Foreign Fund stands at a discount to the market on all of these
ratios as well as a premium on yield.
We believe that this is an opportune time to invest in foreign markets. In
Europe we see an increasing number of companies starting to adopt a more
positive attitude to shareholder value which, in line with the U.S. experience,
should be good for returns. In large swathes of Asia's markets there has been a
return to realistic valuations, along with a greater recognition of the need to
change earlier business practices and to restructure. As the economies in the
region continue their recovery, markets should improve. The relative
inefficiencies of foreign markets should allow us to achieve superior returns.
Overseas markets seem to have become as enamored with a narrow selection of tech
stocks as has the U.S. market. This may leave a few bumps in the path to good
investment returns in the short run. However, history shows that a return to
normal conditions should be very favorable to a value-based approach.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO &
CO LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO FOREIGN FUND CLASS III SHARES AND THE MSCI EAFE INDEX
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Since
1yr 5yr 10yr Inception
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
9/30/96
Class II 25.63% n/a n/a 14.04%
- --------------------------------------------------------------------------------
Class III 25.65% 14.31% 10.97% n/a
- --------------------------------------------------------------------------------
1/9/98
Class IV 25.74% n/a n/a 17.24%
- --------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Date Foreign Fund-III MSCI EAFE
---- ---------------- ---------
<S> <C> <C>
2/28/90 10000 10000
3/31/90 10130 8958
6/30/90 10829 9814
9/30/90 8782 7733
12/31/90 9216 8548
3/31/91 10004 9183
6/30/91 9417 8682
9/30/91 10389 9426
12/31/91 10354 9584
3/31/92 10375 8447
6/30/92 11111 8626
9/30/92 10074 8756
12/31/92 9876 8418
3/31/93 11069 9427
6/30/93 11765 10375
9/30/93 12927 11063
12/31/93 13942 11158
3/31/94 14480 11549
6/30/94 14744 12139
9/30/94 15101 12150
12/31/94 14851 12026
3/31/95 14738 12250
6/30/95 15685 12340
9/30/95 16585 12854
12/31/95 16908 13374
3/31/96 17392 13760
6/30/96 18034 13978
9/30/96 18070 13961
12/31/96 19327 14183
3/31/97 19509 13961
6/30/97 21852 15773
9/30/97 22726 15662
12/31/97 20653 14434
3/31/98 23342 16558
6/30/98 23119 16733
9/30/98 20133 14353
12/31/98 23535 17318
3/31/99 23611 17558
6/30/99 25731 18004
9/30/99 27091 18796
12/31/99 30351 21988
2/29/00 28348 21145
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The total returns would have been lower had certain expenses
not been reimbursed during the periods shown and do not include the effect of
taxes. Each performance figure assumes purchase at the beginning and
redemption at the end of the stated period. The Fund commenced operations on
June 28, 1996 subsequent to a transaction involving, in essence, the
reorganization of the GMO International Equities Pool of the Common Fund for
Non-Profit Organizations (the "GMO Pool") as the Foreign Fund. All
information relating to the time periods prior to June 28, 1996 relates to
the GMO Pool. Performance for Class IV and Class II shares may vary due to
different shareholder service fees. Past performance is not indicative of
future performance. Information is unaudited.
- --------------------------------------------------------------------------------
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of GMO Trust and the Shareholders of GMO Global Hedged Equity
Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of GMO Global Hedged
Equity Fund at February 29, 2000, the results of its operations, the changes
in its net assets and the financial highlights for the periods presented, in
conformity with accounting principles generally accepted in the United
States. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Trust's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at February 29, 2000 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 18, 2000
<PAGE>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- ----------------------------------------------------------------------
<S> <C> <C>
MUTUAL FUNDS - 85.9%
UNITED STATES - 85.9%
176,432 GMO Emerging Markets Fund 1,968,984
318,231 GMO Evolving Countries Fund 3,631,016
653,653 GMO International Core Fund 13,667,889
94,487 GMO International Small Companies Fund 1,090,385
294,217 GMO REIT Fund 2,430,230
88,835 GMO Small Cap Growth Fund 1,498,641
165,411 GMO Small Cap Value Fund 2,052,755
830,657 GMO U.S. Core Fund 13,813,819
------------
40,153,719
------------
TOTAL MUTUAL FUNDS (Cost $41,325,272) 40,153,719
------------
COMMON STOCKS - 0.0%
ITALY - 0.0%
12,500 Grassetto SPA (a) * -
------------
UNITED KINGDOM - 0.0%
17,870 Viglen Technology Plc (Entitlement
Letters) * -
------------
TOTAL COMMON STOCKS (Cost $7,040) -
------------
DEBT OBLIGATIONS - 4.0%
U.S. GOVERNMENT AGENCY - 4.0%
$ 1,900,000 Federal Farm Credit Bank Floating Rate
Note, CPI + 3.00%, 5.72% due 2/14/02 (b) 1,843,836
------------
TOTAL DEBT OBLIGATIONS (Cost $1,856,226) 1,843,836
------------
</TABLE>
1 See accompanying notes to the financial Statements.
<PAGE>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS - CONTINUED
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
PAR VALUE ($) DESCRIPTION VALUE ($)
- ----------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS - 8.4%
CASH EQUIVALENTS - 5.4%
$ 2,500,000 Banque Nationale Paribas (London) Time
Deposit, 5.81% due 3/01/00 2,500,000
------------
U.S. GOVERNMENT - 3.0%
$ 1,500,000 U.S. Treasury Bill, 4.91% due 1/04/01 (b) 1,424,166
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $3,927,221) 3,924,166
------------
TOTAL INVESTMENTS - 98.3%
(Cost $47,115,759) 45,921,721
------------
Other Assets and Liabilities (net) - 1.7% 796,710
------------
TOTAL NET ASSETS - 100.0% $ 46,718,431
------------
------------
</TABLE>
NOTES TO THE SCHEDULE OF INVESTMENTS:
(a) Bankrupt issuer.
(b) All or a portion of this security is held as collateral
for open futures contracts (Note 6).
* Non-income producing security.
2 See accompanying notes to the financial statements.
<PAGE>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
STATEMENT OF ASSETS AND LIABILITIES - FEBRUARY 29, 2000
- ---------------------------------------------------------------------
<TABLE>
<S><C> <C>
ASSETS:
Investments, at value (cost $47,115,759) (Note 1) $ 45,921,721
Foreign currency, at value (cost $46,071) (Note 1) 45,348
Cash 16,546
Net receivable for open forward foreign currency
contracts (Notes 1 and 6) 1,338,765
Interest receivable 9,507
Receivable for expenses waived or borne by Manager
(Note 2) 20,459
------------
Total assets 47,352,346
------------
LIABILITIES:
Payable for variation margin on open futures
contracts (Notes 1 and 6) 575,052
Payable to affiliate for (Note 2):
Management fee 18,714
Shareholder service fee 809
Accrued expenses 39,340
------------
Total liabilities 633,915
------------
NET ASSETS $ 46,718,431
------------
------------
NET ASSETS CONSIST OF:
Paid-in capital $ 83,029,403
Accumulated undistributed net investment income 451,652
Accumulated net realized loss (36,536,102)
Net unrealized depreciation (226,522)
------------
$ 46,718,431
------------
------------
NET ASSETS ATTRIBUTABLE TO CLASS III SHARES $ 46,718,431
------------
------------
SHARES OUTSTANDING - CLASS III 6,051,274
------------
------------
NET ASSET VALUE PER SHARE - CLASS III $ 7.72
------------
------------
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
STATEMENT OF OPERATIONS - YEAR ENDED FEBRUARY 29, 2000
- ------------------------------------------------------------------------------
<TABLE>
<S><C> <C>
INVESTMENT INCOME:
Dividends from investment company shares $ 722,838
Interest 341,886
------------
Total income 1,064,724
------------
EXPENSES:
Management fee (Note 2) 253,727
Custodian fees 60,044
Transfer agent fees 28,356
Audit fees 23,437
Registration fees 2,808
Legal fees 837
Trustees fees (Note 2) 472
Miscellaneous 1,371
Fees waived or borne by Manager (Note 2) (272,241)
------------
98,811
Shareholder service fee - Class III (Note 2) 8,662
------------
Net expenses 107,473
------------
Net investment income 957,251
------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (1,998,040)
Realized gain distributions from investment
company shares 3,856,688
Closed futures contracts (7,072,490)
Closed swap contracts (226,070)
Foreign currency, forward contracts and
foreign currency related transactions (345,072)
------------
Net realized loss (5,784,984)
------------
Change in net unrealized appreciation
(depreciation) on:
Investments 5,636,716
Open futures contracts 358,882
Open swap contracts (4,764)
Foreign currency, forward contracts and
foreign currency related transactions 1,161,325
------------
Net unrealized gain 7,152,159
------------
Net realized and unrealized gain 1,367,175
------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 2,324,426
------------
------------
</TABLE>
4 See accompanying notes tot he financial statements.
<PAGE>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
STATEMENT OF CHANGES IN NET ASSETS
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
----------------- -----------------
<C> <S> <S>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 957,251 $ 2,739,761
Net realized loss (5,784,984) (24,490,653)
Change in net unrealized
appreciation (depreciation) 7,152,159 10,006,930
------------- ----------------
Net increase (decrease) in net
assets resulting from operations 2,324,426 (11,743,962)
------------- ----------------
Distributions to shareholders from:
Net investment income - Class III (1,419,125) (2,739,761)
In excess of net investment
income - Class III - (2,683,188)
------------- ----------------
(1,419,125) (5,422,949)
------------- ----------------
Net share transactions - Class III
(Note 5) (4,857,572) (102,868,056)
------------- ----------------
Total increase (decrease) in net
assets (3,952,271) (120,034,967)
NET ASSETS:
Beginning of period 50,670,702 170,705,669
------------- ----------------
End of period (including accumulated
undistributed net investment income
of $451,652 and $322,600, respectively) $ 46,718,431 $ 50,670,702
------------- ----------------
------------- ----------------
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.59 $ 8.72 $ 10.69 $ 10.64 $ 10.12
---------- -------- --------- ---------- ----------
Income from investment operations:
Net investment income (e) 0.16 0.17(c) 0.35 0.24 0.21
Net realized and unrealized gain (loss) 0.20 (0.88) (0.52) 0.01 0.55
---------- -------- --------- ---------- ----------
Total from investment operations 0.36 (0.71) (0.17) 0.25 0.76
---------- -------- --------- ---------- ----------
Less distributions to shareholders:
From net investment income (0.23) (0.21) (0.35) (0.20) (0.24)
In excess of net investment income - (0.21) - - -
From net realized gains - - (1.05) - -
In excess of net realized gains - - (0.40) - -
---------- -------- --------- ---------- ----------
Total distributions (0.23) (0.42) (1.80) (0.20) (0.24)
---------- -------- --------- ---------- ----------
NET ASSET VALUE, END OF PERIOD $ 7.72 $ 7.59 $ 8.72 $ 10.69 $ 10.64
---------- -------- --------- ---------- ----------
---------- -------- --------- ---------- ----------
TOTAL RETURN (A) 4.74% 8.13% (1.63%) 2.34% 7.54%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 46,718 $ 50,671 $ 170,706 $ 296,702 $ 382,934
Net expenses to average
daily net assets (d) 0.21% 0.17% 0.58% 0.91%(b) 0.78%
Net investment income to average
daily net assets (e) 1.89% 1.99% 2.93% 1.99% 2.44%
Portfolio turnover rate 13% 21% 277% 463% 214%
Fees and expenses voluntarily waived or
borne by the Manager consisted of
the following per share amounts: $ 0.04 $ 0.05 $ 0.04 $ 0.02 $ 0.005
</TABLE>
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived
during the periods shown.
(b) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .02% of average daily net assets.
(c) Computed using average shares outstanding throughout the period.
(d) On August 20, 1997, the Fund began to invest a substantial portion of its
assets in other funds of GMO Trust and revised its voluntary waiver.
Net expenses exclude expenses incurred indirectly through investment in
underlying funds. See Note 2.
(e) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
6 See accompanying notes to the financial statements.
<PAGE>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 2000
- ------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Global Hedged Equity Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on June
24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series of shares into classes.
The Fund seeks high total return consistent with minimal exposure to
general equity market risk. On August 20, 1997, the Fund began to invest a
substantial portion of its assets in other Funds of the Trust ("underlying
Funds"). The Fund's benchmark is Salomon Smith Barney 3 Month T-Bill Index.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of financial statements in
accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Shares of underlying Funds are valued at their net asset value as reported
on each business day. Portfolio securities listed on a securities exchange
for which market quotations are available are valued at the last sale price
on each business day, or if there is no such reported sale, at the most
recent quoted bid price. Unlisted securities for which market quotations
are readily available are valued at the most recent quoted bid price.
Securities which are primarily traded on foreign exchanges are generally
valued at the preceding closing values of such securities on their
respective exchanges, and those values are then translated into U.S.
dollars at the current exchange rate. Short-term investments with a
remaining maturity of sixty days or less are valued at amortized cost which
approximates market value. Securities for which quotations are not readily
available are valued at fair value as determined in good faith by the
Trustees or other persons acting at their direction.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings, other assets and
liabilities are translated to U.S. dollars based on the current exchange
rates each business day. Income and expenses denominated in foreign
currencies
7
<PAGE>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
FEBRUARY 29, 2000
- -------------------------------------------------------------------------------
are translated at current exchange rates when accrued or incurred. The Fund
does not isolate realized and unrealized gains and losses attributable to
changes in exchange rates from gains and losses that arise from changes in
the market value of investments. Such fluctuations are included with net
realized and unrealized gain or loss on investments. Net realized gains and
losses on foreign currency transactions represent gains and losses on
disposition of foreign currencies and forward foreign exchange contracts,
currency gains and losses realized between the trade and settlement dates
on securities transactions, forward foreign exchange contracts and the
difference between the amount of investment income and foreign withholding
taxes recorded on the Fund's books and the U.S. dollar equivalent amounts
actually received or paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts in connection with
settling planned purchases or sales of securities or to hedge the currency
exposure associated with some or all of the Fund's portfolio securities. A
forward currency contract is an agreement between two parties to buy and
sell a currency at a set price on a future date. The market value of a
forward currency contract fluctuates with changes in forward currency
exchange rates. Forward currency contracts are marked to market daily and
the change in value is recorded by the Fund as an unrealized gain or loss.
Realized gains or losses equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed
are recorded upon delivery or receipt of the currency or, if a forward
currency contract is offset by entering into another forward currency
contract with the same broker, upon settlement of the net gain or loss.
These contracts may involve market risk in excess of the unrealized gain or
loss reflected in the Fund's Statement of Assets and Liabilities. In
addition, the Fund could be exposed to risk if the counterparties are
unable to meet the terms of the contracts or if the value of the currency
changes unfavorably to the U.S. dollar. The U.S. dollar value of the
currencies the Fund has committed to buy or sell is shown under Note 6 and
represents the currency exposure the Fund has acquired or hedged through
currency contracts as of February 29, 2000.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying instrument.
When the Fund writes a call or put option, an amount equal to the premium
received is recorded as a liability and subsequently marked to market to
reflect the current value of the option written. Premiums received from
writing options which expire are treated as realized gains. Premiums
received from writing options which are exercised or closed are offset
against the proceeds or amounts paid on the future, security or currency
transaction to determine the realized gain or loss. The Fund as a writer of
an option has no control over whether the underlying future,
8
<PAGE>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
FEBRUARY 29, 2000
- -------------------------------------------------------------------------------
security or currency may be sold (call) or purchased (put) and as a result
bears the market risk of an unfavorable change in the price of the future,
security or currency underlying the written option. There is the risk the
Fund may not be able to enter into a closing transaction because of an
illiquid market. At February 29, 2000 there were no open written option
contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. Premiums paid for purchasing options which are exercised or closed
are added to the amount paid or offset agianst the proceeds on the
transaction to determine the realized gain or loss. The risk associated
with purchasing put and call options is limited to the premium paid.
FUTURES CONTRACTS
The Fund may purchase and sell stock index futures contracts. Stock index
futures contracts represent commitments for future delivery of cash based
upon the level of a specified index of equity securities at a given date.
The Fund may use futures contracts to manage its exposure to the stock.
Buying futures tends to increase the Fund's exposure to the underlying
instrument. Selling futures tends to decrease the Fund's exposure to the
underlying instrument or hedge other Fund instruments. Upon entering into a
futures contract, the Fund is required to deposit with its custodian and
agency, in a segregated account in the name of the futures broker, an
amount of cash or U.S. government and agency obligations in accordance with
the initial margin requirements of the broker or exchange. Futures
contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. The payable or receivable is subsequently settled. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 29, 2000.
SWAP AGREEMENTS
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to the equity markets. The Fund enters into total return swap agreements
which involve a commitment by one party in the agreement to pay interest in
exchange for a market linked return, both based on notional amounts. To the
extent that the total return of the security or index underlying the
transaction exceeds or falls short of the offsetting interest rate
obligation, the Fund will receive a payment from or make a payment to the
counterparty. Total return swaps are marked to market daily based upon
quotations from market
9
<PAGE>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
FEBRUARY 29, 2000
- -------------------------------------------------------------------------------
makers and the change, if any, is recorded as unrealized gain or loss in
the Statement of Operations. Payments received or made at the end of the
measurement period are recorded as realized gain or loss in the Statement
of Operations. Entering into these agreements involves, to varying degrees,
elements of credit and market risk in excess of the amounts recognized on
the Statement of Assets and Liabilities. Such risks involve the possibility
that there will be no liquid market for these agreements, that the
counterparty to the agreements may default on its obligation to perform or
that there may be unfavorable changes in the price of the security or index
underlying these transactions. There were no open swap agreements as of
February 29, 2000.
TAXES
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"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryover for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign interest and dividend
income have been withheld in accordance with the applicable country's tax
treaty with the United States.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to foreign currency transactions and foreign
taxes.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable income and capital gains under U.S.
federal tax rules versus accounting principles generally accepted in the
United States. The calculation of net investment income per share in the
financial highlights table excludes these adjustments.
<TABLE>
<CAPTION>
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
--------------------------- -------------------------- --------------------------
<S> <C> <C>
$590,926 $(635,861) $44,935
</TABLE>
10
<PAGE>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
FEBRUARY 29, 2000
- -------------------------------------------------------------------------------
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income, net
of applicable withholding taxes is recorded on the ex-dividend date, or
when the Fund is informed of the ex-dividend date, if later. Interest
income is recorded on the accrual basis and is adjusted for the accretion
of discounts. In determining the net gain or loss on securities sold, the
cost of securities is determined on the identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds. In addition,
the Fund will also incur fees and expenses indirectly as a shareholder in
the underlying funds. Because the underlying funds have varied expense and
fee levels and the Fund may own different proportions of underlying funds
at different times, the amount of fees and expenses indirectly incurred by
the Fund will vary. (See Note 2).
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is .51% of the amount
invested. In the case of cash redemptions, the fee is 1.40% of the amount
redeemed. The Manager may waive the fee on cash redemptions if it is not
necessary to incur costs relating to the early termination of hedging
transactions to meet redemption requests. All purchase premiums and
redemption fees are paid to and are recorded by the Fund as paid-in
capital. For the year ended February 29, 2000, the Fund received $1,970 in
purchase premiums and $17,594 in redemption fees. There is no premium for
reinvested distributions. While no purchase premium is normally charged
with respect to in-kind purchases of Fund shares, a purchase premium of up
to .10% may be charged on certain in-kind purchases.
INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets.
11
<PAGE>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
FEBRUARY 29, 2000
- -------------------------------------------------------------------------------
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .50% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares. The Fund will invest in Class III shares of each underlying Fund
being offered. Like the management fee (as described below), the
shareholder service fee will be waived (but not below zero) to the extent
of the indirect shareholder service fees paid in connection with the Fund's
investment in shares of underlying Funds.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding shareholder service fees, custodial fees, and the
following expenses: brokerage commissions, and other investment-related
costs, hedging transaction fees, extraordinary, non-recurring and certain
other unusual expenses (including taxes), securities lending fees and
expenses and transfer taxes ("fund expenses")) plus the amount of fees and
expenses, excluding shareholder service fees and fund expenses (as defined
above) incurred indirectly by the Fund through investment in underlying
Funds exceed the management fee. Because GMO will not reimburse expenses
incurred indirectly to the extent they exceed .50%, and because the amount
of fees and expenses incurred indirectly by the Fund will vary, the
operating expenses (excluding shareholder service fees and fund expenses)
incurred indirectly by the Fund through investment in underlying Funds may
exceed .50% of the Fund's average daily net assets. For the year ended
February 29, 2000, operating expenses (excluding shareholder service fees
and fund expenses) incurred indirectly by the Fund were .46% of the Fund's
average daily net assets.
Prior to March 1, 1999, GMO earned a management fee at the annual rate of
.65% of average daily net assets. GMO had agreed to waive a portion of its
fee (but not below zero) and bear other expenses to the extent that the
Fund's annual expenses (including the management fee but excluding custody
fees, brokerage commissions, certain other transaction costs (including
transfer taxes), shareholder service fees and extraordinary expenses ("fund
expenses")) plus the amount of fees and expenses (excluding shareholder
service fee and fund expenses (as defined above) incurred indirectly by the
Fund through investment in underlying Funds) exceeded .50% of average daily
net assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000, was $472. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
12
<PAGE>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
FEBRUARY 29, 2000
- -------------------------------------------------------------------------------
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 29, 2000 aggregated
$6,011,095 and $14,267,673, respectively.
At February 29, 2000, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
------------------------- ----------------------------- -------------------------- ----------------------------
<S> <C> <C> <C>
$49,432,654 $1,635,726 $5,146,659 $3,510,933
</TABLE>
4. PRINCIPAL SHAREHOLDERS
At February 29, 2000, 59.6% of the outstanding shares of the Fund were held
by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
--------------------------------------------- ---------------------------------------------
Class III: Shares Amount Shares Amount
-------------------- --------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Shares sold 48,487 $ 386,191 977,477 $ 8,484,590
Shares issued to
shareholders in
reinvestment of
distributions 144,170 1,121,673 613,717 4,694,941
Shares repurchased (820,134) (6,365,436) (14,483,783) (116,047,587)
-------------------- --------------------- -------------------- --------------------
Net decrease (627,477) $ (4,857,572) (12,892,589) $ (102,868,056)
-------------------- --------------------- -------------------- --------------------
-------------------- --------------------- -------------------- --------------------
</TABLE>
13
<PAGE>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
FEBRUARY 29, 2000
- -------------------------------------------------------------------------------
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 29, 2000 is as
follows:
FUTURES CONTRACTS
<TABLE>
<CAPTION>
Net Unrealized
Number of Appreciation
Contracts Type Expiration Date Contract Value (Depreciation)
---------------- --------------------- ----------------------- --------------------- -------------------
<S> <C> <C> <C> <C>
Sales
38 MATIF CAC 40 March 2000 $ 2,272,264 $ (227,064)
14 DAX March 2000 2,590,568 (505,179)
40 FTSE 100 March 2000 3,946,623 280,121
5 HANG SENG March 2000 546,076 (15,470)
5 IBEX March 2000 604,800 (756)
5 MIB30 March 2000 1,196,699 (257,816)
43 OMX March 2000 706,040 (30,757)
12 ALL ORDS March 2000 577,792 (1,357)
65 S&P 500 March 2000 22,295,000 850,468
38 TOPIX March 2000 5,980,793 (462,502)
-------------------
$ (370,312)
-------------------
-------------------
</TABLE>
At February 29, 2000, the Fund had cash and/or securities to cover any
margin requirements on open futures contracts.
FORWARD CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Net Unrealized
Settlement Units Appreciation
Date Deliver/Receive of Currency Value (Depreciation)
--------------- --------------------- ----------------------- -------------------- ---------------------
<S> <C> <C> <C> <C>
Buys
04/07/00 AUD 309,262 $ 190,007 $ (9,993)
03/03/00 CHF 2,569,738 1,540,411 (55,356)
09/08/00 CHF 35,563 21,733 (570)
03/03/00 DKK 1,413,740 183,292 (4,822)
03/03/00 EUR 9,827,102 9,461,695 (423,181)
03/03/00 GBP 4,195,153 6,622,654 (89,803)
09/08/00 GBP 303,841 479,725 (9,528)
04/07/00 HKD 778,200 99,982 (18)
04/07/00 JPY 126,982,000 1,162,908 (87,092)
03/03/00 NOK 790,000 94,177 (1,930)
03/03/00 SEK 4,130,378 471,153 (7,609)
--------------------
$ (689,902)
--------------------
--------------------
</TABLE>
14
<PAGE>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
FEBRUARY 29, 2000
- -------------------------------------------------------------------------------
FORWARD CURRENCY CONTRACTS - CONTINUED
<TABLE>
<CAPTION>
Net Unrealized
Settlement Units Appreciation
Date Deliver/Receive of Currency Value (Depreciation)
--------------- ---------------------- ----------------------- --------------------- -------------------
<S> <C> <C> <C> <C>
Sales
04/07/00 AUD 1,106,549 $ 679,851 $ 39,140
03/03/00 CHF 2,569,738 1,540,411 156,996
09/08/00 CHF 1,661,660 1,015,473 31,902
03/03/00 DKK 1,413,740 183,292 19,481
09/08/00 DKK 1,413,740 185,290 4,882
03/03/00 EUR 9,827,102 9,461,695 877,301
09/08/00 EUR 7,126,910 6,954,779 285,669
03/03/00 GBP 4,195,153 6,622,654 122,755
09/08/00 GBP 2,337,495 3,690,607 30,521
04/07/00 HKD 4,033,339 518,200 (804)
04/07/00 JPY 666,613,710 6,104,885 405,721
03/03/00 NOK 790,000 94,177 7,170
09/08/00 NOK 790,000 94,342 1,917
03/03/00 SEK 4,130,378 471,153 32,551
09/08/00 SEK 4,130,378 475,882 7,769
04/07/00 SGD 341,040 198,520 5,696
--------------------
$ 2,028,667
--------------------
--------------------
</TABLE>
Currency Abbreviations:
AUD Australian Dollar HKD Hong Kong Dollar
CHF Swiss Franc JPY Japanese Yen
DKK Danish Krona NOK Norwegian Kroner
EUR Euro SEK Swedish Krona
GBP British Pound SGD Singapore Dollar
15
<PAGE>
GMO GLOBAL HEDGED EQUITY FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION - (UNAUDITED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
The Fund has elected to defer to March 1, 2000 post-October capital losses of
$1,664,035.
At February 29, 2000, the Fund had a capital loss carryforward available to
offset future capital gains, if any, of the following amounts:
<TABLE>
<CAPTION>
YEAR OF EXPIRATION AMOUNT
------------------ ------
<S> <C>
2007 $10,447,067
2008 $21,237,637
</TABLE>
16
<PAGE>
GMO GLOBAL HEDGED EQUITY FUND
(A Series of GMO Trust)
PORTFOLIO MANAGERS
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Forrest Berkley are
primarily responsible for the day-to-day management of the Fund's portfolio.
Mr. Grantham has been with GMO since its founding in 1977. Mr. Darnell has
been with GMO and involved in portfolio management for more than 15 years.
Mr. Berkley has been with GMO and involved in portfolio management for more
than 10 years.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the Global Hedged Equity Fund returned 4.7% for the
fiscal year ending February 29, 2000. During that period the Fund's benchmark,
the Salomon Smith Barney 3 Month T-Bill, returned 4.8%.
The Fund's objective is to outperform the Salomon Smith Barney 3 Month T-Bill
Index by adding the alpha (value added) of our U.S. and international equity
funds, as well as the value added of our asset allocation strategy, to a
short-term fixed income return. As of February 29, 2000, the Fund held 42% of
its assets in long U.S. equities, 32% in developed international equities and
12% in emerging markets equities. The remaining 14% of the Fund was invested in
U.S. Treasuries and cash holdings. The long equity exposure is hedged, using
short EAFE futures and short international equity swaps combined to represent
the GMO EAFE Index as well as short S&P 500 futures, totaling approximately 100%
of the value of the long assets.
The Fund currently invests in the GMO U.S. Core Fund, GMO REIT Fund, GMO Small
Cap Growth Fund, GMO Small Cap Value Fund, GMO Evolving Countries Fund, GMO
Emerging Markets Fund, GMO International Small Companies Fund and GMO
International Core Fund.
The GMO Global Hedged Equity Fund's performance for the fiscal year was hurt by
the poor performance of the GMO International Core Fund relative to EAFE. For
the fiscal year, the GMO International Core Fund returned 8.2%, trailing its
hedge by 17.5%. Returns for the Fund relative to the benchmark were hurt by the
Fund's value orientation relative to a market that favored large,
technology-oriented international stocks.
The emerging markets position positively affected the relative performance of
the GMO Global Hedged Equity Fund. The 12% weight in emerging markets was hedged
half with short S&P 500 futures and half with short EAFE futures and
international equity swaps. Emerging markets outperformed by almost 70% for the
year, adding substantial value for the Fund.
For the fiscal year, the U.S. equity funds held long by the Fund as a group
returned 13.7%, versus the S&P 500 return of 11.7%. The GMO U.S. Core Fund,
which accounts for the majority of the U.S. equity holdings, outperformed the
S&P 500 Index by 2.0%. Diversification into the GMO Small Cap Value, Small Cap
Growth and REIT Funds was a wash, as extremely strong returns in Small Cap
Growth (+67.3%) were counteracted by the underperformance of REITs (-4.7%) and
Small Cap Value (+10.7%), leading to overall returns equal to the return of U.S.
Core.
The 14% Treasury position was enhanced with bond futures for most of the fiscal
year. As interest rate spreads narrowed, this exposure subtracted a modest
amount of value for the period.
<PAGE>
OUTLOOK
GMO's global equity alpha is positioned to benefit as the extremes of the
current market environment work their way out of the system. Our expectation is
that emerging equities will continue their rebound and outperform developed
markets. Long positions in global small value stocks and REITs, with their
extremely cheap valuations, also look likely to add value relative to overpriced
large cap equities.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO &
CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A $10,000
INVESTMENT IN GMO GLOBAL HEDGED EQUITY FUND CLASS III
SHARES AND THE SALOMON SMITH BARNEY 3 MONTH T-BILL INDEX
AS OF FEBRUARY 29, 2000
Average Annual Return
Since Inception
1yr 5yr 7/29/94
Class III 2.75% 0.44% 0.73%
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Date GMO Global Hedged Equity Fund-III Salomon Smith Barney 3 Mo. T-Bill
---- ---------------------------------- ----------------------------------
<S> <C> <C>
7/29/94 9,949 10,000
9/30/94 9,969 10,075
12/31/94 9,990 10,206
3/31/94 10,091 10,349
6/30/95 10,421 10,500
9/30/95 10,598 10,648
12/31/95 10,793 10,793
3/31/96 10,845 10,932
6/30/96 10,906 11,071
9/30/96 11,012 11,215
12/31/96 11,235 11,360
3/31/97 11,068 11,504
6/30/97 11,036 11,653
9/30/97 11,348 11,804
12/31/97 11,055 11,957
3/31/98 11,068 12,110
6/30/98 10,615 12,265
9/30/98 10,489 12,417
12/31/98 10,273 12,559
3/31/99 10,126 12,697
6/30/99 10,937 12,839
9/30/99 10,787 12,984
12/31/99 10,442 13,145
2/29/00 10,417 13,260
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The total returns would have been lower had certain expensess
not been reimbursed during the periods shown and do not include the effect of
taxes. Each performance figure assumes purchase at the beginning and
redemption at the end of the stated period and reflects a transaction fee of
51 bp on the purchase and 140 bp on the redemption. Transaction fees are
retained by the Fund to cover trading costs. Past performance is not
indicative of future performance. Information is unaudited.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of GMO Trust and the Shareholders of
GMO International Core Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO International Core Fund at
February 29, 2000, the results of its operations, the changes in its net assets
and the financial highlights for the periods presented, in conformity with
accounting principles generally accepted in the United States. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at February 29, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 13, 2000
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 94.6%
AUSTRALIA - 2.7%
625,600 Amcor Ltd 2,305,273
408,275 Australia and New Zealand Banking Group Ltd 2,509,928
780,583 Boral Ltd * 1,116,990
265,969 Caltex Australia Ltd 351,191
1,179,500 Colonial Ltd 4,476,730
1,349,596 CSR Ltd 2,942,433
355,000 Email Ltd 449,128
264,828 General Property Trust Units 416,369
2,587,531 Goodman Fielder Ltd 1,859,285
166,000 Jupiters Ltd 265,067
424,273 National Food Ltd 687,898
834,600 National Mutual Holdings 1,178,910
1,279,507 News Corp Ltd 18,650,390
780,583 Origin Energy Ltd 598,764
662,760 Pacific Dunlop Ltd 655,325
608,817 Pioneer International Ltd 1,622,748
388,921 PMP Communications Ltd 503,986
2,190,379 Qantas Airways Ltd 4,788,988
474,892 Santos Ltd 1,117,038
977,139 Schroders Property 1,392,255
880,767 Western Mining Corp Holdings Ltd 3,310,449
1,889,208 Westfield Trust Units 3,573,592
454,991 Westpac Banking Corp 2,906,100
-----------------
57,678,837
-----------------
AUSTRIA - 3.7%
2,023 Austria Mikro Systeme International * 89,981
36,503 Austria Tabakwerke AG 1,454,931
86,676 Austrian Airlines 1,360,191
408,277 Bank Austria AG 17,766,704
101,377 Boehler Uddeholm (Bearer) 3,776,171
82,962 Brau Union AG 3,447,261
18,385 EA-Generali AG 2,858,399
17,706 Energie-Versorgung Niederoesterreich AG 1,892,156
167,454 Erste Bank Der Oesterreichischen Sparkassen AG 7,012,911
58,727 Flughafen Wien AG 2,114,574
7,655 Interunfall Versicherung AG 972,820
9,192 Leykam-Muerztaler Papier und Zellstoff AG 273,453
See accompanying notes to the financial statements. 1
<PAGE>
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<S> <C> <C>
AUSTRIA - CONTINUED
37,452 Mayr-Melnhof Karton AG (Bearer) 2,058,129
44,545 Oesterreichische Brau Beteiligungs AG 1,719,717
26,763 Oesterreichische Elektrizitaetswirtschafts AG * 3,156,345
44,898 OMV AG 3,514,669
209,276 RHI AG 5,667,646
644,898 Voest-Alpine Stahl AG 19,868,018
-----------------
79,004,076
-----------------
BELGIUM - 0.9%
17,600 Almanij NV 667,609
7,650 Arbed SA 710,726
18,500 Bekaert SA 816,629
36,302 Compagnie Benelux Paribas SA 1,950,196
2,050 Compagnie Maritime Belge SA 88,814
23,779 Credit Commercial Dexia 3,239,392
2,466 Electrabel SA 666,422
23,800 Electrafina NPV 3,010,827
3,550 Glaverbel NPV 239,243
17,100 Groupe Bruxelles Lambert NPV 3,709,120
34,118 Solvay et Cie 2,374,846
30,900 Union Miniere NPV 1,011,465
-----------------
18,485,289
-----------------
CANADA - 0.7%
45,200 Bank of Montreal 1,383,101
139,899 Boliden Ltd SDR * 314,362
39,650 Donohue Inc Class A 907,223
40,807 Fletcher Challenge Ltd Class A 478,097
75,010 Hudsons Bay Co 710,812
176,980 Methanex Corp * 381,769
52,700 NS Power Holdings Inc 472,157
41,720 PanCanadian Petroleum Ltd 618,181
31,000 Potash Corp of Saskatchewan 1,410,062
59,100 Quebecor Inc Class B 2,154,645
48,254 Rogers Cantel Mobile Communications Class B * 2,311,270
83,960 Stelco Inc Class A 448,442
322,074 Transcanada Pipelines Ltd 2,197,473
81,600 Westcoast Energy Inc 1,180,979
-----------------
14,968,573
-----------------
2 See accompanying notes to the financial statements.
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<S> <C> <C>
DENMARK - 0.1%
7,570 Den Danske Bank 723,289
5,920 Kapital Holding AS 217,966
34,400 Topdanmark AS * 561,924
10,890 Unidanmark AS Class A (Registered) 621,197
-----------------
2,124,376
-----------------
FINLAND - 1.1%
41,700 Amer Group Class A 1,083,960
309,500 Enso Oyj Class R 3,128,697
82,500 Finnair Class A 350,273
138,600 Fortum Oyj 617,814
5,400 Helsingin Puhelin Oyj 577,072
26,238 Instrumentarium Oyj 855,072
171,800 Kesko Oyj 2,274,256
19,950 Kone Oyj 979,550
25,200 Metra AB Class A 513,127
6,200 Metra AB Class B 127,141
38,500 Outokumpu Class A 429,964
83,800 Partek Oyj 1,097,227
9,000 Pohjola Group Insurance Class B 506,021
185,901 Rautaruukki Oyj 1,020,164
45,800 Sampo Insurance Co Ltd Class A 1,565,335
2,921 Sanitec Oyj * 38,527
9,400 Sonera Oyj 724,893
42,250 Stockmann AB Class A 667,089
19,400 Stockmann AB Class B 298,838
7,800 Tieto Corp 536,926
222,400 UPM-Kymmene Oyj 6,166,529
-----------------
23,558,475
-----------------
FRANCE - 11.3%
42,220 Air France * 653,609
19,210 Alcatel Alsthom Cie Generale d'Electricite SA 4,497,845
217,801 Assurances Generales de France (Bearer) 10,526,333
376,020 Aventis SA Class A 19,186,703
382,284 Banque Nationale de Paris 30,179,602
4,427 Bongrain 1,231,745
40,902 Christian Dior 8,367,910
91,904 Compagnie Generale d'Industrie et de Participations 6,171,520
456,381 Credit Lyonnais SA * 15,466,204
See accompanying notes to the financial statements. 3
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<S> <C> <C>
FRANCE - CONTINUED
13,002 Dexia * 1,777,510
32,472 Dexia Strip * 1,563
106,255 Eridania Beghin-Say SA 8,920,299
320,300 Eurotunnel SA Units (Bearer) * 394,712
1,004 Fromageries Bel SA 680,487
23,752 Groupe Danone 4,774,679
27,010 Imetal 3,198,477
2,040 Labinal SA 167,923
45,829 Lafarge Coppee SA 3,419,445
86,900 Michelin SA Class B 2,713,190
47,060 Pechiney SA Class A 2,745,605
110,464 Pernod Ricard 5,583,334
108,465 Peugeot SA 22,357,324
87,741 Remy Cointreau SA * 1,858,398
463,370 Renault SA 18,468,932
61,670 Rhodia SA 1,050,898
92,702 Saint-Gobain 12,896,459
4,410 Seb SA 318,430
5,390 Skis Rossignol 79,136
14,863 Societe Eurafrance 6,954,346
165,893 Societe Generale Paris 34,386,313
15,260 SPIE Batignolles 984,335
6,139 Suez Lyonnaise des Eaux 1,010,665
22,783 Thomson CSF 899,308
443,216 Usinor Sacilor 6,464,599
-----------------
238,387,838
-----------------
GERMANY - 10.2%
113,545 AGIV AG 2,033,267
43,600 Bankgesellschaft Berlin AG * 690,504
510,400 BASF AG 23,267,203
398,349 Bayer AG 16,586,829
18,050 Bayerische Hypotheken und Wechsel-Bank AG 295,420
32,050 Bayerische Motoren Werke AG 820,773
26,787 Bayerische Vereinsbank 1,459,668
176,780 Berliner Kraft & Licht AG Class A 1,667,910
207,550 Commerzbank AG 7,393,294
303,197 Continental AG 4,991,540
62,400 DaimlerChrysler AG 4,229,322
4 See accompanying notes to the financial statements.
<PAGE>
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<S> <C> <C>
GERMANY - CONTINUED
121,256 Deutsche Bank AG 10,203,007
399,934 Deutsche Telekom 33,459,668
97,300 Douglas Holdings AG 2,988,251
19,649 Dresdner Bank AG 942,070
44,328 FAG Kugelfischer 371,288
19,500 Fresenius Medical Care AG 1,370,475
79,697 Heidelberg Port-Zement 4,488,605
181,963 Klockner Humboldt Deutz * 895,195
1,500 Leirheit AG 45,490
73,000 Linde AG 3,004,502
108,500 MAN AG 3,614,260
450 Phoenix AG 4,462
9,359 Schering AG 1,125,396
10,900 Schwarz Pharma AG 274,942
349,471 Siemens AG 62,412,070
253,349 SKW Trostberg 1,512,253
24,700 Suedzucker AG 249,689
472,070 Thyssen Krupp AG * 11,384,859
295,052 Veba AG 13,180,445
-----------------
214,962,657
-----------------
HONG KONG - 4.6%
3,013,000 Cathay Pacific Airways Ltd 4,181,066
1,746,000 Cheung Kong Holdings 23,443,619
1,694,122 Chinese Estates Holdings Ltd * 285,154
356,000 Citic Pacific Ltd 1,788,508
1,331,000 CLP Holdings Ltd 5,865,922
134,300 Dao Heng Bank 503,875
766 Dickson Concept International Ltd 837
300 Elec & Eltek International Holdings Ltd 56
525,128 Great Eagle Holdings Ltd 701,718
200,700 Guoco Group 398,419
2,031,700 Hang Lung Development Co Ltd 1,579,353
2,358,000 Henderson Investment Ltd 1,605,772
566,000 Henderson Land Development Co Ltd 2,407,180
1,099,200 Hong Kong Aircraft Engineering Co Ltd 1,504,148
1,923,300 Hong Kong Electric Holdings Ltd 5,869,144
598,700 Hong Kong Ferry Co Ltd 484,634
2,074,421 Jardine Matheson Holdings Ltd 7,260,474
See accompanying notes to the financial statements. 5
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<S> <C> <C>
HONG KONG - CONTINUED
3,611,911 Jardine Strategic Holdings Ltd 5,706,819
622 Kumagai Gumi Ltd 149
2 Leading Spirit Holdings -
700 Lai Sun Garment International Ltd * 34
2,433,462 Mandarin Oriental ADR 1,253,233
1,314,800 New Asia Realty & Trust Class A 1,351,493
1,142,000 New World Development Co Ltd 1,643,419
200 Paul Y ITC Construction Holdings Ltd 17
42,000 Realty Development Corp Ltd Class A 53,426
34,291,371 Regal Hotels International Ltd * 2,511,446
3,756,000 South China Morning Post Ltd 3,740,171
1,801,000 Sun Hung Kai Properties Ltd 16,256,392
688,000 Swire Pacific Ltd Class A 3,297,322
454,000 Wharf Holdings Ltd 778,756
2,999,800 Wheelock and Co Ltd 2,004,286
404 Wing Lung Bank 1,448
880,200 Yue Yuen Industrial Holdings 1,690,778
-----------------
98,169,068
-----------------
ITALY - 3.7%
132,656 Banca Commerciale Italiana SPA 561,944
9,280,000 Banca di Roma 10,551,432
1,100,918 Banca Intesa SPA 4,038,253
169,000 Banca Popolare di Bergamo Credit 3,359,853
537,000 Banca Popolare di Milano 3,980,875
2,142,000 Banco Ambrosiano Veneto SPA (Non Convertible) 4,433,753
950,000 Banco di Napoli 915,527
154,206 Beni Stabili SPA * 82,990
254,300 Burgo (Cartiere) SPA 1,493,447
2,076,700 Dalmine SPA * 554,818
18,650 Ericsson SPA 1,166,196
203,600 Falck Acciaierie and Ferriere Lombarde 1,538,725
369,390 Fiat SPA 11,237,915
159,672 Fiat SPA (Non Convertible) 2,299,714
588,000 Grassetto SPA (c) * 3
693,570 HPI SPA 1,469,016
219,500 IFIL Finanziaria di Partecipazioni SPA 2,347,805
381,925 IFIL Finanziaria di Partecipazioni SPA (Non Convertible) 1,739,213
215,000 Immsi SPA * 492,639
30,800 Industrie Natuzzi SPA ADR 348,425
6 See accompanying notes to the financial statements.
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<S> <C> <C>
ITALY - CONTINUED
274,650 Italcementi Fabbriche Riunite Cemento SPA (Non Convertible) 899,026
37,300 Italmobiliare SPA 800,806
187,470 Magneti Marelli SPA 712,923
3,316,481 Montedison SPA 5,827,119
973,728 Montedison SPA (Non Convertible) 1,019,953
1,045,000 Parmalat Finanziaria SPA 1,135,857
766,975 Pirelli & Co 1,709,408
716,819 RAS SPA 6,245,563
101,206 San Paolo IMI SPA 1,597,952
215,000 Sirti SPA 507,129
982,472 SMI (Societa Metallurgica Italy) 695,218
345,000 SNIA BPD SPA 398,246
88,000 Societa Assicuratrice Industriale (SAI) 349,055
137,000 Sorin Biomedica SPA 568,475
324,329 Telecom Italia SPA (Non Convertible) 2,560,432
36,500 Toro Assicurazioni 379,165
-----------------
78,018,870
-----------------
JAPAN - 24.1%
10,000 Acom Ltd 1,061,399
371,000 Amada Co Ltd 2,502,490
981,000 Asahi Bank 4,152,428
183,000 Ashikaga Bank Ltd * 333,166
37,000 Autobacs Seven 889,172
86,000 Bandai Co 3,295,799
458,000 Bank of Yokohama 1,634,300
72,000 Best Denki Co Ltd 505,321
86,000 Brother Industries Ltd 183,970
257,000 Canon Sales Co Inc 3,392,199
133,000 Chiba Bank 573,866
184,700 Chubu Electric Power Co Inc 2,624,521
44,000 Chudenko Corp 521,087
111,200 Chugoku Electric Power Co Inc 1,376,651
1,502,000 Cosmo Oil Co Ltd 1,640,708
656,000 Daicel Chemical Industries Ltd 2,179,600
145,000 Daido Steel Co Ltd 197,988
372,000 Dai-Ichi Kangyo Bank 2,946,065
225,000 Daiichi Pharmaceuticals Co Ltd 2,918,620
147,000 Daikyo Inc * 271,640
350,000 Dainippon Pharmaceutical Co Ltd 2,724,045
See accompanying notes to the financial statements. 7
<PAGE>
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<S> <C> <C>
JAPAN - CONTINUED
76,000 Dainippon Printing Co Ltd 1,138,046
98,000 Dainippon Screen Manufacturing Co Ltd * 581,639
107,000 Daio Paper Corp 610,705
44,000 Daishowa Paper Manufacturing * 193,455
145,200 Daito Trust Construction Co Ltd 1,890,091
3,652,000 Daiwa Bank 9,075,563
1,109,000 Daiwa House Industry Co Ltd 7,581,439
105,000 Daiwa Kosho Lease Co Ltd 258,067
656,000 Daiwa Securities Co Ltd 10,420,281
260,000 Ezaki Glico Co Ltd 1,202,312
1,414,000 Fuji Bank 11,018,015
247,600 Fuji Photo Film Co Ltd 10,886,241
955,000 Fujita Corp * 434,664
216,000 Fukuyama Transporting Co Ltd 1,539,557
258,000 General Sekiyu (KK) 469,710
219,000 Gunze Ltd 558,190
127,500 Heiwa Corp 2,425,698
229,000 Hino Motors * 554,495
2,600,300 Hitachi Ltd 35,481,769
54,000 Hitachi Maxell Ltd 1,359,155
540,000 Hitachi Metals Ltd 2,910,018
183,200 Hokkaido Electric Power 2,197,966
113,000 Hokuetsu Paper Mills 658,322
72,000 Hokuriku Bank * 148,778
127,000 Honda Motor Co Ltd 4,161,850
221,000 House Foods Corp 3,218,788
6,000 Hyogo Bank Ltd (c) * 1
92,000 INAX Corp 468,144
377,000 Industrial Bank of Japan 2,947,913
756,000 Ishikawajima-Harima Heavy Industries 770,761
1,201,000 Itochu Corp * 6,559,556
98,000 Itoham Foods Inc 383,597
42,000 JACCS Co 148,341
107,000 Japan Airport Terminal Co Ltd 839,598
173,000 Japan Radio Co 1,795,276
173,000 Japan Securities Finance Co 1,014,173
124,000 Japan Steel Works Ltd * 104,975
374,000 Japan Synthetic Rubber Co Ltd 2,893,815
8 See accompanying notes to the financial statements.
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<S> <C> <C>
JAPAN - CONTINUED
1,265 Japan Tobacco Inc 9,039,416
204,000 JGC Corp * 492,103
844,000 Kajima Corp 2,151,199
237,000 Kamigumi Co Ltd 927,677
188,000 Kandenko Co 677,693
38,600 Kansai Electric Power 565,709
28,000 Katokichi Co Ltd 569,660
801,000 Kawasaki Heavy Industries Ltd 838,514
460,000 Kawasaki Kisen 632,288
701,000 Keio Teito Electric Railway Co Ltd 2,348,259
76,000 Kinden Corp 471,130
86,000 Kirin Brewery Co Ltd 1,026,317
157,000 Kissei Pharmaceutical Co Ltd 2,643,940
2,196,000 Kobe Steel Ltd * 1,259,369
21,000 Kokusai Denshin Denwa 1,959,401
157,000 Kokusai Electric 2,060,844
506,000 Komatsu Ltd 2,238,551
140,000 Konica Corp 627,008
32,000 Koyo Seiko Co Ltd 250,221
818,000 Kubota Corp 2,382,777
806,000 Kumagai Gumi Co Ltd * 418,206
78,000 Kyowa Hakko Kogyo Co Ltd 1,015,338
470,000 Kyushu Electric Power Co Inc 5,587,547
452,000 Maeda Corp 1,275,500
110,000 Maeda Road Construction 445,587
102,000 Makita Corp 840,289
2,145,000 Marubeni Corp 8,728,005
41,000 Marui Co Ltd 537,436
32,000 Maruichi Steel Tube 328,579
382,000 Matsushita Electric Industrial Co Ltd 11,127,395
44,000 Misawa Homes 136,180
401,000 Mitsubishi Corp 2,960,366
1,950,000 Mitsubishi Electric Corp 17,271,403
179,000 Mitsubishi Gas Chemical Co Inc 329,143
4,618,000 Mitsubishi Heavy Industries 12,653,207
830,000 Mitsubishi Material * 2,757,726
723,000 Mitsubishi Motors * 2,296,910
102,000 Mitsubishi Paper Mills Ltd 110,491
See accompanying notes to the financial statements. 9
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<S> <C> <C>
JAPAN - CONTINUED
191,000 Mitsubishi Trust & Banking 1,303,992
155,000 Mitsui Fudosan Co Ltd 1,244,459
954,000 Mitsui Petrochemical Industries Ltd 6,886,550
3,692,000 Mitsui Trust & Banking Co Ltd 5,713,349
58,000 Mitsui-Soko 125,129
630,000 Mycal Corp 2,282,463
49,000 Nagase & Co 167,266
208,000 Nagoya Railroad Co Ltd 566,128
38,000 National House Industrial 183,678
371,000 New Japan Securities Co Ltd * 1,705,475
169,000 New Oji Paper Co Ltd 810,732
57,000 Nichicon Corp 1,691,502
26,000 Nichiei Co Ltd (Kyoto) * 525,420
467,000 Nichirei 1,186,045
132,000 Nikko Securities 1,702,644
363,000 Nippon Express Co Ltd 2,425,397
66,000 Nippon Hodo Co 273,961
44,000 Nippon Kayaku Co Ltd 192,253
326,000 Nippon Light Metal 207,728
150,000 Nippon Meat Packers Inc 1,379,091
3,127,975 Nippon Oil Co Ltd 10,990,837
54,000 Nippon Paint Co 130,263
104,000 Nippon Paper Industries 536,780
576,000 Nippon Shinpan Co 1,310,819
232,000 Nippon Suisan Kaisha Ltd 348,459
342,000 Nishimatsu Construction 1,039,807
4,894,000 Nissan Motor Co * 18,488,098
271,000 Nisshin Oil Mills Ltd 727,732
588,000 Nisshin Steel Co Ltd 545,956
1,001,000 Nisshinbo Industries Inc 3,763,261
2,373,000 Nissho Iwai Corp * 1,620,090
6,437,000 NKK Corp * 3,515,725
56,000 NOF Corp 126,421
163,000 Obayashi Corp 462,938
509,000 Oki Electric Industry * 3,044,131
339,000 Okumura Corp 925,766
220,000 Omron Corp 6,067,999
44,000 Ono Pharmaceutical Co Ltd 1,241,637
10 See accompanying notes to the financial statements.
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JAPAN - CONTINUED
650,000 Onoda Cement Co Ltd 982,204
125,000 Onward Kashiyama Co Ltd 1,207,273
298,000 Orient Corp 1,095,917
64,000 Penta Ocean Construction * 79,814
86,000 Promise Co 6,348,914
200,000 Q.P. Corp 1,511,083
900,000 Renown Inc 1,327,204
58,500 Rinnai Corp 974,512
166,000 Royal Co Ltd 1,344,864
83,000 Ryosan Co 1,359,219
256,000 Sagami Railway Co Ltd 652,496
4,804,000 Sakura Bank Ltd 27,418,943
216,000 Sankyo Co Ltd 4,473,169
83,000 Sanwa Shutter Corp 213,063
754,000 Sanyo Electric Co 3,074,890
500 Secom Co Ltd 44,786
636,000 Seino Transportation Co Ltd 3,189,987
762,000 Sekisui Chemical 2,386,127
1,349,000 Sekisui House Ltd 10,069,455
326,200 Shikoku Electric Power 3,934,414
478,000 Shimizu Corp 1,153,065
435,000 Shionogi and Co Ltd 6,216,831
620,000 Showa Denko * 790,132
383,000 Showa Shell Sekiyu 1,296,946
379,000 Snow Brand Milk Products Co Ltd 1,590,451
251,000 Stanley Electric Co Ltd 1,937,536
920,000 Sumitomo Corp 10,200,355
74,000 Sumitomo Electric 975,395
116,000 Sumitomo Forestry Co Ltd 687,415
2,132,000 Sumitomo Metal Industries * 1,164,444
1,516,000 Sumitomo Trust & Banking 8,569,806
365,000 Suzuki Motor Corp 5,904,192
778,000 Taisei Corp 1,140,212
123,000 Takara Standard Co 448,983
163,000 Takuma Corp 1,121,733
401,000 Tanabe Seiyaku Co Ltd 2,438,378
900 TDK Corp 86,104
1,140,000 Teikoku Oil Co Ltd 3,248,100
See accompanying notes to the financial statements. 11
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<S> <C> <C>
JAPAN - CONTINUED
219,000 Toei Co Ltd 1,991,543
382,700 Tohoku Electric Power Co Inc 4,528,788
974,000 Tokai Bank 4,459,715
98,000 Tokuyama Corp 355,050
264,000 Tokyo Electric Co Ltd 1,285,695
145,000 Tokyo Ink Manufacturing Co Ltd 266,624
384,400 Tokyo Steel Manufacturing Co 864,292
71,000 Tokyo Style Co Ltd 581,676
522,000 Tomen Corp 308,862
105,000 Toppan Printing Co Ltd 1,035,137
179,000 Toray Industries Inc 570,297
129,000 Tostem Corp 1,779,027
259,000 Toyo Seikan Kaisha 3,383,232
126,000 Toyo Suisan Kaisha 779,937
498,000 Toyo Trust & Banking Co Ltd 1,427,973
1,238,000 Toyobo Co Ltd 1,634,063
90,000 Victor Co of Japan Ltd 525,966
92,000 Wacoal Corp 661,599
115,000 Yakult Honsha Co Ltd 964,135
53,000 Yamaha Corp 363,288
188,000 Yamazaki Baking Co Ltd 1,567,594
3,556,000 Yasuda Trust & Banking * 4,531,792
200 Yoshitomi Pharmaceutical Industries Ltd 2,740
-----------------
506,794,801
-----------------
LUXEMBOURG - 0.0%
14,080 Carrier1 International SA ADR * 456,720
-----------------
MALAYSIA - 0.0%
511,000 MBF Holdings Berhad * 27,567
751,000 Promet Berhad * 57,313
36,540 Silverstone * 433
234,000 Westmont Industries Berhad (c) * 616
-----------------
85,929
-----------------
NETHERLANDS - 2.3%
203,700 ABN Amro Holdings NV 4,216,412
19,300 Buhrmann NV Maastricht 508,192
110,200 DSM NV 3,614,658
244,000 Fortis (NL) NV 6,126,479
7,100 Gamma Holdings NV 237,876
12 See accompanying notes to the financial statements.
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<S> <C> <C>
NETHERLANDS - CONTINUED
86,700 ING Groep NV 4,383,867
73,450 KLM-Konin Luchtvaart Mij NV 1,368,316
144,350 Kon Bolswessanen 1,556,497
56,100 Koninklijke KPN NV 7,132,057
27,100 Koninklijke Volker Wessels 430,494
27,200 Nedlloyd 623,246
327,900 Royal Dutch Petroleum 17,138,578
45,700 Stork NV 560,970
18,800 VIB NV 459,732
4,200 Wereldhave NV 170,436
-----------------
48,527,810
-----------------
NEW ZEALAND - 0.1%
224,600 Air New Zealand Class B 229,038
3,300,200 Brierley Investment Ltd 592,954
902,200 Carter Holt Harvey Ltd 871,836
108,400 Fletcher Challenge Energy 237,003
62,800 Fletcher Challenge Energy 135,706
524,900 Lion Nathan Ltd 945,647
-----------------
3,012,184
-----------------
NORWAY - 3.0%
195,100 Bergesen d.y. ASA Class A 3,256,124
88,100 Bergesen d.y. ASA Class B 1,444,090
1,104,000 Christiania Bank OG Kreditkasse 5,593,372
3,060,637 Den Norske Bank Class A 11,091,776
17,300 Dyno Industrier AS 412,469
71,300 Elkem AS Class A 1,232,461
259,600 Fred Olsen Energy * 2,104,405
44,650 Kvaerner ASA Class B * 620,102
316,150 Kvaerner ASA * 5,464,833
28,200 Leif Hoegh and Co AS 273,982
432,550 Norsk Hydro AS 16,113,951
80,700 Norske Skogindustrier ASA Class A 3,107,361
29,550 Norske Skogindustrier ASA Class B 900,045
82,000 Orkla ASA 1,251,237
546,200 Petroleum Geo-Services * 8,562,353
126,100 SAS Norge ASA Class B 1,119,920
20,700 Smedvig ASA Class A 264,040
286,800 Tandberg Data ASA * 550,454
-----------------
63,362,975
-----------------
See accompanying notes to the financial statements. 13
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
PORTUGAL - 0.4%
83,084 Banco Espirito Santo e Commercial de Lisboa (Registered) 2,157,307
360,884 Electricidade de Portugal 7,202,453
-----------------
9,359,760
-----------------
SINGAPORE - 5.0%
461 Asia Food & Properties Ltd * 156
318,000 Cerebos Pacific Ltd 564,530
560,000 City Developments Ltd 2,274,178
3,366,000 Comfort Group 1,503,638
366,950 Creative Technology Ltd 7,983,190
664,748 DBS Group Holdings Ltd 8,214,383
6,568,096 DBS Land Ltd 8,687,857
189,309 First Capital Corp Ltd 141,677
37 Hai Sun Hup Group Ltd 16
1,067,203 Haw Par Brothers International Ltd 1,820,257
1,585,104 Hotel Properties Ltd 1,397,783
634,000 Keppel Bank Ltd 1,302,060
553,000 Keppel Corp 1,238,371
949,000 Keppel Land Ltd 1,084,603
189,000 Natsteel Ltd 374,996
556 Neptune Orient Lines Ltd * 455
1,235,850 Oversea-Chinese Banking Corp 7,815,029
2,233,776 Overseas Union Bank 9,913,782
508 Prima Ltd 1,303
694,308 Robinson and Co Ltd 1,997,893
761,166 Shangri-La Asia Ltd 621,037
3,161,000 Singapore Airlines Ltd (Registered) 29,341,533
651,000 Singapore Land Ltd 1,201,009
430,759 Singapore Press Holdings 8,246,822
390,000 Singapore Telecom 633,521
1,913,168 Straits Trading Co Ltd 1,997,855
519,000 Times Publishing Ltd 1,059,860
4,515,960 United Industrial Corp Ltd 1,964,942
236,400 United Overseas Bank 1,494,901
1,012,000 United Overseas Land 710,402
2,805,000 Wing Tai Holdings 2,099,234
-----------------
105,687,273
-----------------
SPAIN - 1.5%
6,620 Cristaleria Espanola SA 231,227
480,900 Endesa 10,171,813
1,120,753 Repsol SA 21,202,447
-----------------
31,605,487
-----------------
14 See accompanying notes to the financial statements.
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
SWEDEN - 4.8%
324,634 Assi Doman 4,776,752
913,758 Avesta Sheffield AB * 3,585,408
5,100 Custos AB Class B 126,816
31,600 Drott AB Class B 309,981
53,788 Esselte AB Class A 306,764
181,400 Esselte AB Class B 1,106,981
316,500 Foreningssparbanken AB Class A 4,007,243
354,102 Gambro AB Class A 2,463,810
295,346 Gambro AB Class B 2,088,679
37,596 Industrivarden AB Class A 1,035,638
53,000 Investor AB Class B 773,811
579,223 Mo Och Domsjo AB Class B 16,385,001
1,739,200 Nordbanken Holdings AB 9,125,493
9,600 PerBio Science AB * 65,701
19,200 Perstorp AB Class B 181,773
31,200 Skandia Forsakrings AB 1,277,609
879,500 Skandinaviska Enskilda Banken Class A 8,828,105
131,246 Skanska AB Class B 4,521,078
148,000 SKF AB Class B 2,937,379
299,300 SSAB Swedish Steel Class A 3,635,845
73,600 SSAB Swedish Steel Class B 877,290
262,763 Stena Line AB Class B * 239,775
398,906 Svenska Cellulosa Class B 9,714,433
446,800 Svenska Handelsbanken Class A 5,223,794
124,400 Svenska Kullagerfabriken AB 2,327,090
696,682 Trelleborg AB Class B 4,887,184
91,350 Volvo AB Class A 2,021,433
365,650 Volvo AB Class B 8,612,607
-----------------
101,443,473
-----------------
SWITZERLAND - 1.3%
670 Ascom Holding AG (Bearer) 2,658,475
4,980 Baloise Holdings 3,880,364
1,850 Banque Cantonale Vaudoise (Bearer) 521,158
14,120 BK Vision AG (Bearer) * 2,581,275
1,800 Fischer (Georg) AG (Registered) 537,281
400 Helvetia Patria Holding 275,713
870 Jelmoli (Bearer) 1,110,705
8,320 Merkur Holding AG (Registered) 2,393,671
See accompanying notes to the financial statements. 15
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
SWITZERLAND - CONTINUED
1,020 Pargesa Holdings SA (Bearer) 1,925,797
3,610 Pharma Vision * 2,737,143
17,330 SAir Group (Registered) 3,292,742
590 Saurer Group Holdings (Registered) * 294,576
680 Schweizerische Industrie-Gesellschaft Holding AG (Registered) 408,799
7,630 Schweizerische Lebensversicherungs-und Rentenanstalt 3,782,073
1,130 Sika Finanz AG (Bearer) 373,190
940 Sulzer Gebrueder AG (Registered) * 612,431
-----------------
27,385,393
-----------------
UNITED KINGDOM - 13.1%
51,100 3i Group Plc 909,946
93,300 Allied Zurich Plc 793,146
484,380 AMEC 1,189,056
335,700 Anglian Water Plc 2,360,940
834,000 Arjo Wiggins Appleton Plc 2,080,219
927,357 Associated British Food 5,178,801
429,900 BAA 2,556,858
291,320 Barclays Plc 7,017,957
555,021 Barratt Development 1,507,036
688,084 Bass Plc 7,294,127
774,000 Beazer Holmes Plc 1,356,281
2,477,597 BG Group Plc 10,804,852
1,794,544 British Airways Plc 8,470,541
224,544 British Energy Plc 853,402
511,082 British Energy Plc (Deferred Shares) * -
379,628 Carillion Plc 530,380
174,100 Christian Salvesen Plc 368,290
1,905,093 Coats Viyella 1,225,546
71,200 Commercial Union Plc 849,181
2,677,875 Corus Group Plc 4,438,799
126,282 De Vere Group Plc 541,747
1,863,900 Eurotunnel SA Units (Registered) * 2,221,547
786,100 Halifax Group Plc 7,048,748
55,000 Hammerson Plc 279,579
744,830 HSBC Holdings Plc 8,671,716
270,485 Hyder Plc 859,340
335,499 Inchcape Plc 1,284,366
72,200 Johnson Matthey 822,925
8,646 Laing (John) 26,820
16 See accompanying notes to the financial statements.
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
UNITED KINGDOM - CONTINUED
97,600 Laird Group 298,138
446,020 Land Securities 4,861,876
424,611 Lonrho Africa Plc * 174,281
726,481 Lonrho Plc 7,798,643
2,787,300 Marks & Spencer 10,010,389
659,664 MEPC Plc 3,509,446
3,173,025 National Power 18,746,541
1,506,400 Northern Foods Plc 2,199,722
245,100 Norwich Union Plc 1,511,918
868,100 Peninsular & Oriental Steam Navigation Co 9,777,990
1,330,081 Powergen Plc 9,170,581
134,362 RMC Group 1,548,407
589,411 Royal & Sun Alliance Insurance Group 3,219,439
3,866,400 Sainsbury (J) 15,900,119
1,054,288 Scottish Hydro-Electric Plc 8,825,225
2,643,405 Scottish Power Plc 20,072,184
279,300 Scottish & Newcastle Plc 1,809,964
706,115 Severn Trent Plc 5,880,087
380,100 Shell Transport & Trading (Registered) 2,613,195
983,924 Signet Group Plc 788,285
293,000 Slough Estates 1,292,812
128,900 Southwest Water 861,772
405,500 Storehouse Plc 284,863
380,728 Tarmac Plc 3,498,031
203,500 Tate & Lyle 824,020
1,349,091 Taylor Woodrow Plc 2,885,801
5,329,500 Tesco 14,429,007
800,387 Thames Water Plc 8,781,540
337,156 Thistle Hotels Plc 774,426
125,100 Unigate 575,681
1,268,650 United Biscuits Plc 5,217,175
1,464,595 United Utilities 15,132,583
723,310 Viglen Technology Plc (Entitlement Letters) * -
284,574 Whitbread Plc Class A 2,356,278
107,400 Wilson (Connolly) Holdings 219,563
1,827,400 Wimpey (George) 2,942,522
1,201,643 Yorkshire Water 4,908,420
-----------------
275,243,070
-----------------
TOTAL COMMON STOCKS (Cost $2,103,499,435) 1,998,322,934
-----------------
See accompanying notes to the financial statements. 17
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT FUNDS - 1.4%
HONG KONG - 1.4%
13,054,100 Tracker Fund of Hong Kong * 28,597,986
-----------------
TOTAL INVESTMENT FUNDS (Cost $21,852,856) 28,597,986
-----------------
PREFERRED STOCKS - 0.7%
AUSTRIA - 0.0%
3,288 Allgemeine Baugesellschaft AG 171,730
3,036 Bau Holdings AG (Non Voting) 112,532
-----------------
284,262
-----------------
GERMANY - 0.3%
36,650 Henkel KGAA 1,919,492
31,500 MAN AG 632,310
121,900 RWE AG 3,297,794
4,000 Villeroy & Boch AG (Non Voting) 35,429
35,100 Volkswagen AG 800,883
-----------------
6,685,908
-----------------
ITALY - 0.4%
115,000 Compagnia Assicuratrice Unipol 204,825
295,170 Fiat SPA 5,001,479
88,200 IFI-Istituto Finanziario 2,233,253
-----------------
7,439,557
-----------------
TOTAL PREFERRED STOCKS (Cost $16,104,618) 14,409,727
-----------------
RIGHTS & WARRANTS - 0.0%
FRANCE - 0.0%
1,096,728 Eurotunnel SA Paris Warrants 10/31/01 * 31,676
1,096,728 Eurotunnel SA Paris Warrants 10/31/03 * 84,470
24,647 Generale des Eaux Warrants 5/02/01 * 136,678
45,829 Lafarge Co Rights 3/03/00 * 1,324
-----------------
254,148
-----------------
HONG KONG - 0.0%
104,212 Chinese Estates Holdings Ltd Warrants 11/24/00 * 6,027
293,200 Gold Peak Industries Ltd Warrants 8/06/00 * 3,315
50 Mandarin Oriental International Ltd Rights 3/06/00 * -
486,692 Mandarin Oriental International Ltd Rights 3/06/00 * 4,870
40 Paul Y ITC Construction Holdings Ltd Warrants 12/22/00 * -
-----------------
14,212
-----------------
18 See accompanying notes to the financial statements.
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares/
Par Value ($) Description Value ($)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ITALY - 0.0%
262,655 Banca Intesa SPA Warrants 11/15/02 * 702,982
-----------------
SINGAPORE - 0.0%
101,959 Asia Food & Properties Ltd Warrants 7/12/02 * 20,999
139,475 Haw Par Brothers International Ltd Warrants 7/18/01 * 89,008
-----------------
110,007
-----------------
UNITED KINGDOM - 0.0%
4,622,000 Eurotunnel SA Warrants 10/31/03 * 300,981
-----------------
TOTAL RIGHTS & WARRANTS (Cost $1,110,161) 1,382,330
-----------------
SHORT-TERM INVESTMENTS - 7.5%
CASH EQUIVALENTS - 6.7%
$ 68,400,000 Royal Bank of Canada Time Deposit, 5.81% due 3/01/00 68,400,000
73,388,157 The Boston Global Investment Trust (b) 73,388,157
-----------------
141,788,157
-----------------
U.S. GOVERNMENT - 0.8%
$ 18,000,000 U.S. Treasury Bill, 4.91% due 1/04/01 (a) 17,089,995
-----------------
TOTAL SHORT-TERM INVESTMENTS (Cost $158,914,806) 158,878,152
-----------------
TOTAL INVESTMENTS - 104.2%
(Cost $2,301,481,876) 2,201,591,129
Other Assets and Liabilities (net) - (4.2%) (88,606,039)
-----------------
TOTAL NET ASSETS - 100.0% $ 2,112,985,090
-----------------
-----------------
</TABLE>
See accompanying notes to the financial statements. 19
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
- --------------------------------------------------------------------------------
NOTES TO THE SCHEDULE OF INVESTMENTS
ADR American Depositary Receipt
SDR Swedish Depository Receipt
(a) All or a portion of this security is held as
collateral for open futures contracts (Note 5).
(b) Represents investment of security lending collateral
(Note 1).
(c) Bankrupt issuer.
* Non-income producing security.
See accompanying notes to the financial statements. 20
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
- --------------------------------------------------------------------------------
At February 29, 2000, industry sector diversification of the
Fund's equity investments was as follows:
INDUSTRY SECTOR (UNAUDITED)
<TABLE>
<S> <C>
Banking 16.8 %
Utilities 7.9
Electronic Equipment 7.2
Conglomerates 5.7
Automotive 5.2
Energy Services 4.7
Chemicals 4.5
Consumer Goods 4.3
Transportation 4.0
Real Estate 3.9
Metals and Mining 3.7
Construction 3.6
Machinery 3.2
Services 3.0
Financial Services 2.9
Paper and Allied Products 2.8
Retail Trade 2.7
Telecommunications 2.4
Insurance 2.2
Communications 1.6
Food and Beverage 1.4
Health Care 1.4
Textiles 1.0
Aerospace 0.1
Computers 0.1
Miscellaneous 3.7
--------
100.0 %
--------
--------
</TABLE>
21 See accompanying notes to the financial statements.
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES - FEBRUARY 29, 2000
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value (cost $2,301,481,876) (Note 1) $ 2,201,591,129
Foreign currency, at value (cost $5,423,828) (Note 1) 5,393,510
Cash 333,969
Receivable for Fund shares sold 29,705
Receivable for investments sold 1,606,735
Dividends and interest receivable 1,628,391
Foreign withholding taxes receivable 2,204,099
Receivable for expenses waived or borne by Manager (Note 2) 176,506
-------------------
Total assets 2,212,964,044
-------------------
LIABILITIES:
Payable upon return of securities loaned (Note 1) 73,388,157
Payable for investments purchased 451,717
Net payable for open forward foreign currency contracts (Notes 1 and 5) 19,347,959
Payable for variation margin on open futures contracts (Notes 1 and 5) 1,795,346
Payable for Fund shares repurchased 3,369,910
Payable to affiliate for (Note 2):
Management fee 935,820
Shareholder service fee 247,145
Accrued expenses 442,900
-------------------
Total liabilities 99,978,954
-------------------
NET ASSETS $ 2,112,985,090
-------------------
-------------------
NET ASSETS CONSIST OF:
Paid-in capital $ 2,198,802,687
Accumulated undistributed net investment income 1,142,971
Accumulated undistributed net realized gain 26,227,058
Net unrealized depreciation (113,187,626)
-------------------
$ 2,112,985,090
-------------------
-------------------
NET ASSETS ATTRIBUTABLE TO:
Class II Shares $ 21,162,422
-------------------
-------------------
Class III Shares $ 1,799,928,594
-------------------
-------------------
Class IV Shares $ 291,894,074
-------------------
-------------------
SHARES OUTSTANDING:
Class II 1,015,155
-------------------
-------------------
Class III 86,087,007
-------------------
-------------------
Class IV 13,968,183
-------------------
-------------------
NET ASSET VALUE PER SHARE:
Class II $ 20.85
-------------------
-------------------
Class III $ 20.91
-------------------
-------------------
Class IV $ 20.90
-------------------
-------------------
</TABLE>
22 See accompanying notes to the financial statements.
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Operations - Year Ended February 29, 2000
- --------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends (net of foreign tax expense of $6,353,075) $ 62,073,104
Interest (including securities lending income of $729,422) 8,079,222
-------------------
Total income 70,152,326
-------------------
EXPENSES:
Management fee (Note 2) 13,366,668
Custodian fees 1,879,768
Audit fees 86,651
Transfer agent fees 60,472
Legal fees 56,709
Trustees fees (Note 2) 27,259
Registration fees 6,889
Miscellaneous 26,341
Fees waived or borne by Manager (Note 2) (2,144,089)
-------------------
13,366,668
Shareholder service fee (Note 2)
Class II 54,439
Class III 3,046,864
Class IV 377,389
-------------------
Net expenses 16,845,360
-------------------
Net investment income 53,306,966
-------------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments 107,186,791
Closed futures contracts 3,308,235
Foreign currency, forward contracts and foreign
currency related transactions (43,502,803)
-------------------
Net realized gain 66,992,223
-------------------
Change in net unrealized appreciation (depreciation) on:
Investments 100,323,621
Open futures contracts 6,241,810
Foreign currency, forward contracts and foreign
currency related transactions (6,607,253)
-------------------
Net unrealized gain 99,958,178
-------------------
Net realized and unrealized gain 166,950,401
-------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 220,257,367
-------------------
-------------------
</TABLE>
See accompanying notes to the financial statements. 23
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
-------------------- ---------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 53,306,966 $ 61,654,740
Net realized gain 66,992,223 328,403,926
Change in net unrealized appreciation (depreciation) 99,958,178 (400,000,792)
-------------------- ---------------------
Net increase (decrease) in net assets resulting from
operations 220,257,367 (9,942,126)
-------------------- ---------------------
Distributions to shareholders from:
Net investment income
Class II (710,851) (178,442)
Class III (49,153,936) (24,881,986)
Class IV (7,672,181) (7,130,973)
-------------------- ---------------------
Total distributions from net investment income (57,536,968) (32,191,401)
-------------------- ---------------------
In excess of net investment income
Class II - (173,986)
Class III - (24,260,672)
Class IV - (6,952,911)
-------------------- ---------------------
Total distributions in excess of net investment income - (31,387,569)
-------------------- ---------------------
Net realized gains
Class II (705,987) (1,663,218)
Class III (57,973,177) (244,048,618)
Class IV (9,597,437) (68,183,244)
-------------------- ---------------------
Total distributions from net realized gains (68,276,601) (313,895,080)
-------------------- ---------------------
Net share transactions: (Note 4)
Class II 2,707,570 8,149,764
Class III (257,158,300) (758,532,071)
Class IV (310,969,560) (20,202,197)
-------------------- ---------------------
Decrease in net assets from net fund share transactions (565,420,290) (770,584,504)
-------------------- ---------------------
Total decrease in net assets (470,976,492) (1,158,000,680)
NET ASSETS:
Beginning of period 2,583,961,582 3,741,962,262
-------------------- ---------------------
End of period (including accumulated undistributed
net investment income of $1,142,971 and
of $4,494,422, respectively) $ 2,112,985,090 $ 2,583,961,582
-------------------- ---------------------
-------------------- ---------------------
</TABLE>
24 See accompanying notes to the financial statements.
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a Class II Share outstanding throughout each period)
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
--------------------------------------------------------------------
2000 1999 1998 1997 *
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 20.33 $ 23.16 $ 24.36 $ 24.60
-------------- -------------- -------------- --------------
Income (loss) from investment operations:
Net investment income 0.41 (c) 0.39 (c) 0.52 (c) 0.14
Net realized and unrealized gain (loss) 1.33 (0.46) 1.94 0.96
-------------- -------------- -------------- --------------
Total from investment operations 1.74 (0.07) 2.46 1.10
-------------- -------------- -------------- --------------
Less distributions to shareholders:
From net investment income (0.56) (0.24) (0.74) (0.27)
In excess of net investment income - (0.24) - -
From net realized gains (0.66) (2.28) (2.92) (1.07)
-------------- -------------- -------------- --------------
Total distributions (1.22) (2.76) (3.66) (1.34)
-------------- -------------- -------------- --------------
NET ASSET VALUE, END OF PERIOD $ 20.85 $ 20.33 $ 23.16 $ 24.36
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
TOTAL RETURN (a) 8.09% (0.76%) 11.60% 4.51%***
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 21,162 $ 18,295 $ 12,500 $ 25,302
Net expenses to average
daily net assets 0.76% 0.76% 0.76% 0.80%**(b)
Net investment income to average
daily net assets 1.84% 1.71% 2.14% 0.98%**
Portfolio turnover rate 53% 60% 68% 97%
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.02 $ 0.06 $ 0.07 $ 0.05
</TABLE>
* Period from September 26, 1996 (commencement of operations) to February 28,
1997.
** Annualized
*** Not annualized.
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(b) Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .04% of average daily net assets.
(c) Computed using average shares outstanding throughout the period.
See accompanying notes to the financial statements. 25
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Financial Highlights
(For a Class III Share outstanding throughout each period)
- --------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
----------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 20.38 $ 23.20 $ 24.37 $ 24.62 $ 22.32
----------- ----------- ----------- ---------- ----------
Income (loss) from investment operations:
Net investment income 0.47 (c) 0.42 (c) 0.54 (c) 0.59 0.36
Net realized and unrealized gain (loss) 1.28 (0.47) 1.96 1.02 3.09
----------- ----------- ----------- ---------- ----------
Total from investment operations 1.75 (0.05) 2.50 1.61 3.45
----------- ----------- ----------- ---------- ----------
Less distributions to shareholders:
From net investment income (0.56) (0.25) (0.75) (0.33) (0.39)
In excess of net investment income - (0.24) - - -
From net realized gains (0.66) (2.28) (2.92) (1.53) (0.76)
----------- ----------- ----------- ---------- ----------
Total distributions (1.22) (2.77) (3.67) (1.86) (1.15)
----------- ----------- ----------- ---------- ----------
NET ASSET VALUE, END OF PERIOD $ 20.91 $ 20.38 $ 23.20 $ 24.37 $ 24.62
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
TOTAL RETURN (a) 8.20% (0.68%) 11.71% 6.72% 15.72%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 1,799,929 $ 1,998,447 $ 3,046,510 $ 4,232,937 $ 4,538,036
Net expenses to average
daily net assets 0.69% 0.69% 0.69% 0.71% (b) 0.71% (b)
Net investment income to average
daily net assets 2.09% 1.84% 2.19% 2.34% 1.93%
Portfolio turnover rate 53% 60% 68% 97% 14%
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.02 $ 0.06 $ 0.07 $ 0.06 $ 0.03
</TABLE>
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(b) Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .02% of average daily net assets.
(c) Computed using average shares outstanding throughout the period.
26 See accompanying notes to the financial statements.
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Financial Highlights
(For a Class IV Share outstanding throughout each period)
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
------------------------------------------------------------------
2000 1999 1998 *
---------------- ---------------- --------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 20.37 $ 23.19 $ 20.61
---------------- ---------------- --------------
Income (loss) from investment operations:
Net investment income 0.55 (b) 0.42 (b) 0.02 (b)
Net realized and unrealized gain (loss) 1.21 (0.46) 2.56
---------------- ---------------- --------------
Total from investment operations 1.76 (0.04) 2.58
---------------- ---------------- --------------
Less distributions to shareholders:
From net investment income (0.57) (0.25) -
In excess of net investment income - (0.25) -
From net realized gains (0.66) (2.28) -
---------------- ---------------- --------------
Total distributions (1.23) (2.78) -
---------------- ---------------- --------------
NET ASSET VALUE, END OF PERIOD $ 20.90 $ 20.37 $ 23.19
---------------- ---------------- --------------
---------------- ---------------- --------------
TOTAL RETURN (a) 8.18% (0.60%) 12.52% ***
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 291,894 $ 567,219 $ 682,952
Net expenses to average
daily net assets 0.63% 0.63% 0.63% **
Net investment income to average
daily net assets 2.47% 1.85% 0.68% **
Portfolio turnover rate 53% 60% 68%
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.02 $ 0.06 $ 0.01
</TABLE>
* Period from January 9, 1998 (commencement of operations) to February 28,
1998.
** Annualized
*** Not annualized.
(a) Calculation excludes purchase premiums. The total returns would have been
lower had certain expenses not been waived during the periods shown.
(b) Computed using average shares outstanding throughout the period.
See accompanying notes to the financial statements. 27
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Notes to Financial Statements
February 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO International Core Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on June
24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series of shares into classes.
The Fund seeks high total return through investment in equity securities of
non-U.S. issuers. The Fund's benchmark is the MSCI EAFE Index.
The Fund offers three classes of shares: Class II, Class III and Class IV.
The principal economic difference between the classes of shares is the
level of shareholder service fee borne by the classes. Eligibility for and
automatic conversion between the various classes of shares is generally
based on the total amount of assets invested with GMO, as more fully
described in the Trust's prospectus.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of financial statements in
accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each business
day, or if there is no such reported sale, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Securities which
are primarily traded on foreign exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges,
and those values are then translated into U.S. dollars at the current
exchange rate. Short-term investments with a remaining maturity of sixty
days or less are valued at amortized cost which approximates market value.
Securities for which quotations are not readily available are valued at
fair value as determined in good faith by the Trustees or other persons
acting at their direction.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the current exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at current exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from
28
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
changes in the market value of investments. Such fluctuations are included
with net realized and unrealized gain or loss on investments. Net realized
gains and losses on foreign currency transactions represent gains and
losses on disposition of foreign currencies and forward foreign exchange
contracts, currency gains and losses realized between the trade and
settlement dates on securities transactions and the difference between the
amount of investment income and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent amounts actually received or
paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts in connection with
settling planned purchases or sales of securities or to hedge the currency
exposure associated with some or all of the Fund's portfolio securities. A
forward currency contract is an agreement between two parties to buy and
sell a currency at a set price on a future date. The market value of a
forward currency contract fluctuates with changes in forward currency
exchange rates. Forward currency contracts are marked to market daily and
the change in value is recorded by the Fund as an unrealized gain or loss.
Realized gains or losses equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed
are recorded upon delivery or receipt of the currency or, if a forward
currency contract is offset by entering into another forward currency
contract with the same broker, upon settlement of the net gain or loss.
These contracts may involve market risk in excess of the unrealized gain or
loss reflected in the Fund's Statement of Assets and Liabilities. In
addition, the Fund could be exposed to risk if the counterparties are
unable to meet the terms of the contracts or if the value of the currency
changes unfavorably to the U.S. dollar. The U.S. dollar value of the
currencies the Fund has committed to buy or sell is shown under Note 5 and
represents the currency exposure the Fund has acquired or hedged through
currency contracts as of February 29, 2000.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying instrument.
When the Fund writes a call or put option, an amount equal to the premium
received is recorded as a liability and subsequently marked to market to
reflect the current value of the option written. Premiums received from
writing options which expire are treated as realized gains. Premiums
received from writing options which are exercised or closed are added to
the proceeds or offset against the amounts paid on the future, security or
currency transaction to determine the realized gain or loss. The Fund as a
writer of an option has no control over whether the underlying future,
security or currency may be sold (call) or purchased (put) and as a result
bears the market risk of an unfavorable change in the price of the future,
security or currency underlying the written option. There is the risk the
Fund may not be able to enter into a closing transaction because of an
illiquid market. At February 29, 2000 there were no open written option
contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the
29
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
option. Premiums paid for purchasing options which expire are treated as
realized losses. Premiums paid for purchasing options which are exercised
or closed are added to the amounts paid or offset against the proceeds on
the transaction to determine the realized gain or loss. The risk associated
with purchasing put and call options is limited to the premium paid.
FUTURES CONTRACTS
The Fund may purchase and sell stock index futures contracts. Stock index
futures contracts represent commitments for future delivery of cash based
upon the level of a specified index of equity securities at a given date.
The Fund may use futures contracts to manage its exposure to the stock
market. Buying futures tends to increase the Fund's exposure to the
underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments. Upon
entering into a futures contract, the Fund is required to deposit with its
custodian and agency, in a segregated account in the name of the futures
broker, an amount of cash or U.S. government and agency obligations in
accordance with the initial margin requirements of the broker or exchange.
Futures contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. The payable or receivable is subsequently settled. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 5 for
all open futures contracts as of February 29, 2000.
SWAP AGREEMENTS
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to the equity markets. The Fund enters into total return swap agreements
which involve a commitment by one party in the agreement to pay interest in
exchange for a market linked return, both based on notional amounts. To the
extent that the total return of the security or index underlying the
transaction exceeds or falls short of the offsetting interest rate
obligation, the Fund will receive a payment from or make a payment to the
counterparty. Total return swaps are marked to market daily based upon
quotations from market makers and the change, if any, is recorded as
unrealized gain or loss in the Statement of Operations. Payments received
or made at the end of the measurement period are recorded as realized gain
or loss in the Statement of Operations. Entering into these agreements
involves, to varying degrees, elements of credit and market risk in excess
of the amounts recognized on the Statement of Assets and Liabilities. Such
risks involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform or that there may be unfavorable changes in the price
of the security or index underlying these transactions. At February 29,
2000, there were no open swap agreements.
30
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 29, 2000, the Fund loaned securities having a
market value of $67,576,308 collateralized by cash in the amount of
$73,388,157 which was invested in a short-term instrument.
TAXES
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"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for U.
S. federal income tax purposes. Therefore, no provision for U. S. federal
income or excise tax is necessary. Taxes on foreign interest and dividend
income have been withheld in accordance with the applicable country's tax
treaty with the United States.
Dividends received by shareholders of the Fund which are derived from
foreign source income and foreign taxes paid by the Fund are to be treated,
to the extent allowable under the Code, as if received and paid by the
shareholders of the Fund.
The Fund may be subject to capital gains and repatriation taxes imposed by
certain countries in which it invests. The Fund has incurred $2,398,652
related to repatriation taxes which is included in net realized gain in the
Statement of Operations.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. The Fund declares separate dividends from net
investment income on each class of shares. Distributions to shareholders
are recorded by the Fund on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to foreign currency and passive foreign
investment company transactions, foreign taxes and differing treatments for
redemptions in-kind. Gross gains resulting from such in-kind transactions
amounted to $911,807.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable income and capital gains under U. S.
federal tax rules versus accounting principles generally accepted in the
United
31
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
States. The calculation of net investment income per share in the financial
highlights table excludes these adjustments.
<TABLE>
<CAPTION>
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
--------------------- -------------------------- ---------------------
<S> <C> <C>
$878,551 $2,145,055 $ (3,023,606)
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income, net
of applicable withholding taxes, is recorded on the ex-dividend date, or
when the Fund is informed of the ex-dividend date, if later. Interest
income is recorded on the accrual basis and is adjusted for the accretion
of discounts. In determining the net gain or loss on securities sold, the
cost of securities is determined on the identified cost basis.
ALLOCATION OF OPERATING ACTIVITY
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. Investment
income, common expenses and realized and unrealized gains and losses are
allocated pro-rata among the classes of shares of the Fund based on the
relative net assets of each class. Shareholder service fees, which are
directly attributable to a class of shares, are charged to that class'
operations.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is .60% of the amount
invested. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. These fees are allocated relative to each class' net
assets on the share transaction date. For the year ended February 29, 2000,
the fund received $1,093,105 in purchase premiums. There is no premium for
cash redemptions or reinvested distributions. While no purchase premium is
normally charged with respect to in-kind purchases of Fund shares, a
premium of up to .10% may be charged on certain in-kind purchases.
INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets.
32
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .54% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of each class at the annual rate of .22%
for Class II shares, .15% for Class III shares, and .09% for Class IV
shares.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding brokerage commissions, certain other transaction costs
(including stamp duties and transfer taxes), shareholder service fees and
extraordinary expenses) exceed the management fee.
Prior to March 1, 1999, GMO earned a management fee at the annual rate of
.75% of average daily net assets. GMO had agreed to waive a portion of its
fee and bear other expenses to the extent that the Fund's annual expenses
(including the management fee but excluding brokerage commissions, certain
other transaction costs (including stamp duties and transfer taxes),
shareholder service fees and extraordinary expenses) exceeded .54% of
average daily net assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000, was $27,259. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 29, 2000, aggregated
$1,235,457,869 and $1,792,111,964, respectively.
At February 29, 2000, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in the value of investments held
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
------------------ -------------------- -------------------- ------------------
<S> <C> <C> <C>
$2,333,440,042 $258,395,733 $390,244,646 $131,848,913
</TABLE>
33
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
4. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
-------------------------------------------- -----------------------------------------
Class II: Shares Amount Shares Amount
--------------------- ---------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Shares sold 363,778 $ 8,290,170 885,462 $ 19,191,959
Shares issued to
shareholders in
reinvestment of
distributions 54,505 1,232,211 73,790 1,596,701
Shares repurchased (303,144) (6,814,811) (598,960) (12,638,896)
--------------------- -------------------- -------------------- ------------------
Net increase 115,139 $ 2,707,570 360,292 $ 8,149,764
--------------------- -------------------- -------------------- ------------------
--------------------- -------------------- -------------------- ------------------
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
--------------------------------------------- --------------------------------------------
Class III: Shares Amount Shares Amount
--------------------- ---------------------- ----------------------- --------------------
<S> <C> <C> <C> <C>
Shares sold 10,362,129 $ 236,178,961 11,023,810 $ 257,852,698
Shares issued to
shareholders in
reinvestment of
distributions 4,170,163 94,366,903 12,569,888 274,662,387
Shares repurchased (26,508,769) (587,704,164) (56,861,371) (1,291,047,156)
--------------------- --------------------- ------------------- ---------------------
Net decrease (11,976,477) $ (257,158,300) (33,267,673) $ (758,532,071)
--------------------- --------------------- ------------------- ---------------------
--------------------- --------------------- ------------------- ---------------------
</TABLE>
34
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
SHARE TRANSACTIONS - CONTINUED
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
-------------------------------------------- -----------------------------------------
Class IV: Shares Amount Shares Amount
--------------------- ---------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Shares sold 5,114,795 $ 114,594,859 6,658,423 $ 166,390,526
Shares issued to
shareholders in
reinvestment of
distributions 750,125 16,972,648 3,674,092 80,195,331
Shares repurchased (19,746,552) (442,537,067) (11,932,488) (266,788,054)
--------------------- -------------------- -------------------- ------------------
Net decrease (13,881,632) $ (310,969,560) (1,599,973) $ (20,202,197)
--------------------- -------------------- -------------------- ------------------
--------------------- -------------------- -------------------- ------------------
</TABLE>
5. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 29, 2000 is as
follows:
FORWARD CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Net Unrealized
Settlement Units Appreciation
Date Deliver/Receive of Currency Value (Depreciation)
------------------ ------------------------- --------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Buys
04/07/00 AUD 60,228,907 $ 37,003,918 $ (1,996,082)
04/07/00 CAD 116,097,707 80,084,552 786,006
03/03/00 CHF 138,826,502 83,218,591 (5,999,424)
09/08/00 CHF 70,751,540 43,237,633 (1,033,166)
03/03/00 DKK 84,990,000 11,019,018 (980,982)
09/08/00 DKK 84,990,000 11,139,088 (314,319)
03/03/00 EUR 795,594,754 766,011,700 (58,805,831)
09/08/00 EUR 147,392,697 143,832,836 (3,928,127)
03/03/00 GBP 194,834,405 307,574,220 (5,915,561)
09/08/00 GBP 30,933,658 48,840,293 (790,794)
04/07/00 HKD 93,332,800 11,991,310 (8,690)
04/07/00 JPY 19,199,544,940 175,830,475 (8,891,939)
03/03/00 NOK 1,693,300,082 201,860,558 (9,188,403)
09/08/00 NOK 231,800,195 27,681,675 (818,490)
</TABLE>
35
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
FORWARD CURRENCY CONTRACTS - CONTINUED
<TABLE>
<CAPTION>
Net Unrealized
Settlement Units Appreciation
Date Deliver/Receive of Currency Value (Depreciation)
------------------ ------------------------- --------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Buys - continued
04/07/00 NZD 48,531,486 $ 23,573,878 $ (1,452,487)
03/03/00 SEK 991,329,574 113,081,256 (5,686,829)
09/08/00 SEK 380,799,517 43,873,861 (559,368)
-------------------
$ (105,584,486)
-------------------
-------------------
Sales
04/07/00 AUD 108,213,495 $ 66,485,073 $ 3,839,834
04/07/00 CAD 13,861,700 9,561,843 (61,843)
03/03/00 CHF 138,826,502 83,218,591 4,847,651
09/08/00 CHF 25,586,362 15,636,320 541,407
03/03/00 DKK 84,990,000 11,019,018 304,678
03/03/00 EUR 795,594,754 766,011,700 44,507,956
09/08/00 EUR 49,229,853 48,040,843 1,660,010
03/03/00 GBP 194,834,405 307,574,220 5,727,751
09/08/00 GBP 38,655,163 61,031,564 1,076,457
04/07/00 HKD 1,059,071,002 136,068,438 (175,704)
04/07/00 JPY 17,152,464,873 157,083,204 8,771,708
03/03/00 NOK 1,693,300,082 201,860,558 9,851,113
09/08/00 NOK 356,651,787 42,591,504 695,472
03/03/00 SEK 991,329,574 113,081,256 4,150,934
09/08/00 SEK 267,060,155 30,769,367 499,103
-------------------
$ 86,236,527
-------------------
-------------------
</TABLE>
Currency Abbreviations:
AUD Australian Dollar HKD Hong Kong Dollar
CAD Canadian Dollar JPY Japanese Yen
CHF Swiss Franc NOK Norwegian Kroner
DKK Danish Krona NZD New Zealand Dollar
EUR Euro SEK Swedish Krona
GBP British Pound
36
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
<TABLE>
<CAPTION>
Net Unrealized
Number of Appreciation
Contracts Type Expiration Date Contract Value (Depreciation)
------------------ ------------------------- --------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Buys
214 DAX March 2000 $ 39,598,687 $ 1,646,658
705 TOPIX March 2000 110,959,447 5,093,055
-------------------
$ 6,739,713
-------------------
-------------------
Sales
368 ALL ORDS March 2000 $ 17,718,961 $ 54,643
629 FTSE 100 March 2000 62,060,642 1,198,053
257 IBEX 35 March 2000 31,086,704 (38,860)
33 MIB 30 March 2000 7,898,210 (1,621,826)
-------------------
$ (407,990)
-------------------
-------------------
</TABLE>
At February 29, 2000, the Fund has cash and/or securities to cover any margin
requirements on open futures contracts.
37
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
February 29, 2000
- --------------------------------------------------------------------------------
For the fiscal year ended February 29, 2000, all the Fund's distributions are
from investment company taxable income, except that the Fund has designated
8.76% as net capital gain dividends.
38
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
PORTFOLIO MANAGERS
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Forrest Berkley are
primarily responsible for the day-to-day management of the Fund's portfolio. Mr.
Grantham and Mr. Darnell have been portfolio managers at Grantham, Mayo, Van
Otterloo & Co. LLC for more than fifteen years. Mr. Berkley has been with GMO
and involved in portfolio management for more than ten years.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO International Core Fund returned 8.2% for the
fiscal year ended February 29, 2000 as compared to 25.4% for the MSCI EAFE
Index. The Fund's disappointing performance comes from stock selection that
emphasized value stocks (those companies that are cheaper on price-to-book,
price-to-earnings and other measures) and smaller capitalization stocks.
Consistent with the Fund's investment objectives and policies, the Fund was
invested substantially in common stocks throughout the period.
In international markets, the fiscal year was characterized by explosive
performance of the technology and telecommunications sectors. This effect was
particularly strong in the fourth quarter of 1999, during which period the MSCI
EAFE Growth Index returned 25.6% versus 8.9% for MSCI EAFE Value. While this
paralleled the run-up in the U.S. NASDAQ Index, the EAFE Index contains
relatively few pure Internet and information technology stocks. The
international rally focused more on the best available approximation, which is
telecommunications stocks. Both fixed line and wireless companies performed very
strongly in the markets, as did the related equipment providers. The optimism
about these companies came despite the failure of many other growth stocks, such
as pharmaceuticals and established software companies, to produce continued
strong earnings growth.
In contrast, many neglected stocks - typically smaller capitalization, value
companies - had lackluster market performance for the fiscal year. Throughout
the bull market of the late 1990's, growth stocks have enjoyed increasing
"multiple expansion" to higher relative levels of price-to-book and
price-to-earnings. As a result the spread, or discount, between the valuations
of the cheaper stocks on such measures and the most expensive stocks has reached
levels unprecedented in history. These wide gaps are considerably beyond what
could possibly be justified by the relatively modest differences in consensus
growth rate estimates. This is true even if no regression of the higher
profitability of telecommunications stocks took place in the next 20 years,
which would be contrary to the entire history of corporate competition.
The fiscal year was marked by strong performance in the Asian markets. Japan
rose by 42% in local currency, while Hong Kong and Singapore returned +66% and
+59%, respectively. These markets benefited both from the dissipation of the
crisis mentality and from the underlying recovery in the economic fundamentals
of the region. The only two countries that had higher returns than all the Asian
markets were Finland and Sweden (dominated by the returns of Nokia and Ericsson
respectively). The major European markets showed mixed returns, with Germany and
France leading the way, both with gains of 56% (+37% in U.S. dollars). The
United Kingdom and Switzerland were the worst performing major markets, with
slightly negative returns in local currency and worse in dollar terms.
<PAGE>
EFFECT OF COUNTRY ALLOCATION
The Fund was successful in country allocation largely due to the overweight of
the South East Asian markets. The Fund was also neutral weighted in Japan.
Although this decision did not add to relative return, it represented the first
time in the Fund's history that it was not underweight in Japan. The Fund was
generally underweight in Europe. It suffered from being overweight in Austria,
but benefited from underweights in the United Kingdom and Switzerland.
EFFECT OF CURRENCY ALLOCATION
The dollar strengthened by 5% over the fiscal year relative to an EAFE basket of
currencies. This was due to the decline of the Euro, which lost 12% against the
dollar in the Euro's debut year. The Fund was modestly overweight in the Euro,
causing a slight negative contribution, which was mostly erased by the Fund's
accompanying underweight in the underperforming Swiss franc. The Fund had also
suffered from being underweight in the yen, which strengthened by 8% against the
dollar, making currency allocation a small net negative for the fund.
EFFECT OF STOCK SELECTION
The poor performance in the fiscal year was almost entirely a result of stock
selection, and in particular of the Fund's tilt towards value. Because of the
opportunities represented by the wide dispersion in price-to-book ratios, the
Fund is heavily concentrated in the cheaper stocks on price-to-book. Half of the
Fund is invested in stocks within the cheapest 25% of the EAFE universe; only
10% of the Fund is invested outside the cheapest 50% of the universe. Those
groups underperformed EAFE by -14.5% and -9.3% respectively for the fiscal year.
The Fund was further hurt by its emphasis on smaller capitalization stocks,
which underperformed significantly even after accounting for their overlap with
value. Small stocks within EAFE underperformed by -17%, and small value stocks
underperformed by -30%.
Value stocks did very poorly whether defined on the basis of book, earnings,
sales or dividend yield, which shows that the Fund's underperformance is not a
consequence of focussing on price-to-book as a valuation measure. The Fund's
more sophisticated value models, which make further adjustments to credit
companies for growth and financial quality, fared equally poorly. In this
overheated environment, reasonable adjustments did not suffice to make the most
expensive price-to-book stocks look attractive.
Much of the size and value underperformance was driven by telecommunications and
technology stocks. Of that, over 7% of negative attribution was due to just five
large capitalization stocks that doubled or tripled in price from expensive
starting levels.
PORTFOLIO STRUCTURE AND OUTLOOK
Based on a careful analysis of current company fundamentals and valuation, GMO
has decided to retain its substantial overweights in value stocks and small
companies, in order to benefit from the inevitable rebound. While the growth
oriented bull market of the last few years has been a difficult period for the
International Core Fund, it leaves us at a moment of great opportunity. For
value investors it is always darkest before the dawn. Markets overshoot fair
value, and it is difficult to call the turning points. Yet the greater the
overshoot past fair value, the more certain is the eventual rebound, and greater
is the reward to those that participate.
Furthermore, globalization and the monetary union have not eliminated the
significance of country selection. This is apparent in the wide spread of
returns during the last fiscal year and also in a wide spread in valuations
between countries, even when adjusted for industry composition. To take
advantage of these opportunities, the Fund remains underweight in Europe
<PAGE>
and particularly in favor of Asia ex-Japan. Despite the strong performance of
Asia in 1999, those markets still are attractively valued relative to the rest
of EAFE. Even within Europe there are attractive opportunities to favor cheaper
markets such as Austria over more expensive ones such as the United Kingdom and
Spain.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO &
CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO INTERNATIONAL CORE FUND CLASS III SHARES AND THE MSCI EAFE INDEX
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Since
1yr 5yr 10yr Inception
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
9/26/96
Class II 7.45% n/a n/a 6.57%
- --------------------------------------------------------------------------------
Class III 7.55% 8.06% 8.31% n/a
- --------------------------------------------------------------------------------
1/9/98
Class IV 7.53% n/a n/a 9.01%
- --------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Date International Core Fund-III MSCI EAFE
---- --------------------------- ---------
<S> <C> <C>
2/28/90 9940 10000
3/31/90 10125 8958
6/30/90 10661 9814
9/30/90 8964 7733
12/31/90 9401 8548
3/31/91 10308 9183
6/30/91 9889 8682
9/30/91 10907 9426
12/31/91 10760 9584
3/31/92 10614 8447
6/30/92 11551 8626
9/30/92 10846 8756
12/31/92 10636 8418
3/31/93 12009 9427
6/30/93 12684 10375
9/30/93 13734 11063
12/31/93 14887 11158
3/31/94 15456 11549
6/30/94 15730 12139
9/30/94 15812 12150
12/31/94 15503 12026
3/31/95 15470 12250
6/30/95 16148 12340
9/30/95 16537 12854
12/31/95 17103 13374
3/31/96 17484 13760
6/30/96 17808 13978
9/30/96 17788 13961
12/31/96 18736 14183
3/31/97 18455 13961
6/30/97 19868 15773
9/30/97 20340 15662
12/31/97 18909 14434
3/31/98 22066 16558
6/30/98 21977 16733
9/30/98 18651 14353
12/31/98 21480 17318
3/31/99 21158 17558
6/30/99 22862 18004
9/30/99 23741 18796
12/31/99 24621 21988
2/29/00 22239 21145
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worthmore or less than their
original cost. The total returns would have been lower had certain expenses
nto been reimbursed during the periods shown and do not include the effect of
taxes. Each performance figure assumes purchase at the beginning and
redemption at the end of the stated period and reflects a transaction fee of
60 bp on the purchase. Transaction fees are retained by the Fund to cover
trading costs. Past performance is not indicative of future performance.
Information is unaudited.
- --------------------------------------------------------------------------------
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of GMO Trust and the Shareholders of GMO International Small
Companies Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO International Small Companies
Fund at February 29, 2000, the results of its operations, the changes in its net
assets and the financial highlights for the periods presented, in conformity
with accounting principles generally accepted in the United States. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at February 29, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 18, 2000
<PAGE>
<TABLE>
<CAPTION>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
Schedule of Investments
(Showing percentage of total net assets)
February 29, 2000
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 89.6%
AUSTRIA - 4.4%
747 Allgemeine Baugesellschaft AG 61,130
36,480 Austrian Airlines 572,474
1,721 Bau Holdings AG 70,087
41,896 Boehler Uddeholm (Bearer) 1,560,576
7,973 Brau Union AG 331,296
2,839 BWT AG 893,772
23,355 Flughafen Wien AG 840,940
3,089 Interunfall Versicherung AG 392,559
13,818 Mayr-Melnhof Karton AG (Bearer) 759,351
1,203 Oesterreichische Brau Beteiligungs AG 46,443
27,327 RHI AG 740,074
16,453 VA Technologie AG (Bearer) 972,584
8,694 Voest-Alpine Stahl AG 267,845
226 Wiener Allianz Versicherungs AG 28,503
4,580 Wolford AG 137,309
--------------
7,674,943
--------------
BELGIUM - 1.0%
18,000 AGFA-Gevaert NV * 302,746
4,750 Colruyt SA 192,069
3,000 Compagnie Benelux Paribas SA 161,164
10,100 Delhaize-Le Lion 577,592
300 D'ieteren NV 86,648
475 Dolmen Computer Applications * 10,925
5,400 GIB Holdings Ltd 161,164
2,850 Tessenderlo Chemie 122,595
3,700 Union Miniere NPV 121,114
--------------
1,736,017
--------------
CANADA - 1.4%
4,180 Cameco Corp 50,846
5,240 Canadian Tire Corp Ltd Class A 70,962
20,460 Cott Corp * 127,611
5,600 Donohue Inc Class A 128,132
58,000 Echo Bay Mines Ltd * 77,946
14,760 Ipsco Inc 203,446
14,570 Mackenzie Financial Corp 218,399
24,410 Methanex Corp * 52,656
10,710 Molson Co Ltd Class A 179,730
6,100 Moore Corp Ltd 27,746
28,200 Nexfor Inc 165,196
14,200 NS Power Holdings Inc 127,223
</TABLE>
See accompanying notes to the financial statements.
1
<PAGE>
<TABLE>
<CAPTION>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
CANADA - CONTINUED
5,110 Quebecor Inc Class B 186,298
3,920 Sears Canada Inc 105,902
5,736 Sobeys Inc * 67,203
9,070 Torstar Corp Class B 112,516
18,140 Transalta Corp 173,774
200 TVA Group Inc Class B 4,652
42,070 TVX Gold Inc * 31,893
3,280 United Dominion Industries Ltd 61,599
15,250 Westcoast Energy Inc 220,710
--------------
2,394,440
--------------
DENMARK - 0.0%
800 Hafnia Holdings (Registered) Class A (a) * 1
--------------
FRANCE - 8.2%
31,100 Accor SA 1,131,790
28,800 Alstom 665,176
3,010 Atos SA * 507,129
7,620 BIC SA 332,695
6,750 Club Mediterranee SA * 775,928
13,893 Compagnie Generale d'Industrie et de Participations 932,940
3,280 Compagnie Parisienne de Reescompte 170,522
2,132 Dexia Strip * 103
3,030 Eridania Beghin-Say SA 254,374
3,920 Essilor International 1,003,879
4,179 Gaz et Eaux 241,400
730 Groupe Andre * 139,859
2,530 Hermes International 319,084
4,330 Imetal 512,751
3,770 Legrand SA 642,433
11,190 Moulinex * 64,962
9,660 Pechiney SA Class A 563,590
15,655 Pernod Ricard 791,272
870 Publicis SA 443,086
8,000 SCOR SA 320,403
2,210 Seb SA 159,576
3,550 Simco Union Habit (Registered) 266,585
838 Societe Eurafrance 392,097
10,810 Sodexho Alliance 1,446,619
5,140 Technip SA 562,154
16,500 Thomson CSF 651,300
1,749 Unibail (Bearer) 220,753
46,270 Usinor Sacilor 674,879
--------------
14,187,339
--------------
</TABLE>
See accompanying notes to the financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
GERMANY - 7.6%
17,080 Adidas Salomon AG 907,696
77,450 AGIV AG 1,386,909
9,140 Altana AG 571,970
750 AMB Aachener & Muenchener Beteiligungs AG 51,989
1,310 Ava Allgemeine Handelsgesellschaft der Verbraucher AG 705,643
7,750 Axa Colonia Konzern AG 702,856
290 Axel Springer Verlag AG 382,501
29,120 Bankgesellschaft Berlin AG * 461,180
11,250 Bayerische Hypotheken und Wechsel-Bank AG 184,126
32,470 Berliner Kraft & Licht AG Class A 306,353
6,350 Bilfinger & Berger 91,702
26,810 Buderus AG 412,981
29,880 Continental AG 491,915
11,670 DBV-Winterthur Holding 408,965
7,140 Douglas Holdings AG 219,282
12,240 FAG Kugelfischer 102,521
16,610 Gehe AG 533,309
1,250 Hannover Rueckversicherungs 74,613
6,695 Heidelberg Port-Zement 377,068
7,330 Hochtief AG 176,424
780 Holzmann (Philipp) * 9,462
7,700 IKB Deutsche Industriebank AG 125,431
16,170 IWKA AG 269,321
5,050 Kamps AG 401,106
11,700 Karstadt Quelle AG 362,706
1,000 Kloeckner-Werke AG * 103,496
7,400 Linde AG 304,566
24,700 MAN AG 822,785
150 Marschollek Lautenschlaeger und Partner AG 58,559
30,790 Metallgesellschaft 579,522
3,500 Puma AG Rudolf Dassler Sport 59,305
770 Schmalbach-Lubeca 94,889
6,320 Schwarz Pharma AG 159,416
4,270 SGL Carbon AG * 411,505
43,186 SKW Trostberg 257,779
18,720 Suedzucker AG 189,238
7,910 Takkt AG * 63,969
7,720 Vereins Und Westbank 208,851
9,590 Wella AG 202,659
--------------
13,234,568
--------------
</TABLE>
See accompanying notes to the financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
HONG KONG - 5.1%
369,000 Amoy Properties Ltd 207,429
127,000 Asia Satellite Telecom 459,353
328,000 Chinese Estates Holdings Ltd * 55,209
66,000 Cross Harbour Tunnel Co Ltd 42,401
171,200 Dah Sing Financial Services 556,530
2,394,000 Denway Investment Ltd * 181,485
315,000 Elec & Eltek International Holdings Ltd 59,092
404,000 Giordano International Ltd 451,611
234,000 Goldlion Holdings Ltd 22,249
124,000 Great Eagle Holdings Ltd 165,699
3,230,000 Guangdong Investment Ltd * 435,769
336,000 Guoco Group 667,009
302,000 Hang Lung Development Co Ltd 234,761
349,000 Henderson Investment Ltd 237,665
446,400 HKR International Ltd 219,391
85,500 Hong Kong Aircraft Engineering Co Ltd 116,998
147,000 Hong Kong & Shanghai Hotels * 64,691
292,000 Hopewell Holdings Ltd 152,888
494,000 Hysan Development Co Ltd 514,134
14,800 Kowloon Motor Bus Holdings Ltd 30,997
298,000 Kumagai Gumi Ltd 71,219
3,378,000 Lippo China Resources Ltd * 125,870
98,000 Mandarin Oriental ADR 50,470
566,000 New World Infrastructure * 636,339
7,444,000 Pearl Oriental Cyberforce Ltd 353,893
100 Realty Development Corp Ltd Class A 127
726,000 Regal Hotels International Ltd * 53,171
372,000 Shun Tak Holdings Ltd 58,791
1,888,000 Sino Land 897,569
998,000 South China Morning Post Ltd 993,794
3,146,000 Top Glory International Holdings * 222,324
101 Tsim Sha Tsui Properties Ltd 64
51,000 Varitronix International 111,400
238,000 Wheelock and Co Ltd 159,017
16,000 Wing Lung Bank 57,357
52,000 Yue Yuen Industrial Holdings 99,887
--------------
8,766,653
--------------
</TABLE>
See accompanying notes to the financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
ITALY - 0.5%
102,000 Fornara SPA (a) * -
213,400 Grassetto SPA (a) * 1
3,500 Recordati Industria Chimica e Farmaceutica SPA 38,077
51,140 Recordati Industria Chimica e Farmaceutica SPA (Non Convertible) 271,285
69,713 Reno de Medici SPA 158,394
308,800 SNIA BPD SPA 356,459
--------------
824,216
--------------
JAPAN - 19.5%
8,000 Aderans 218,470
89,000 Amada Co Ltd 600,328
23,000 Amano Corp 145,510
20,800 Aoyama Trading 293,667
8,000 Asatsu-DK Inc 469,710
14,000 Bandai Co 536,525
46,000 Canon Sales Co Inc 607,164
2,000 Chudenko Corp 23,686
184,000 Citizen Watch Co 1,355,023
202,000 Cosmo Oil Co Ltd 220,655
700 CSK Corp 72,896
43,000 Daicel Chemical Industries Ltd 142,870
90,000 Daido Steel Co Ltd 122,889
133,000 Daiei Inc 467,325
20,000 Dainippon Pharmaceutical Co Ltd 155,660
22,000 Daio Paper Corp 125,566
46,900 Daito Trust Construction Co Ltd 610,505
94,000 Denki Kagaku Kogyo 255,846
3,000 Denny's Japan Co Ltd 52,842
4,000 Don Quijote Co Ltd 582,586
7,000 Enix Corp 655,682
43,000 Ezaki Glico Co Ltd 198,844
8,000 Fuji Soft ABC Inc 565,109
23,000 Fujitec Co 201,411
61,000 Fukuyama Transporting Co Ltd 434,782
89,000 General Sekiyu (KK) 162,032
44,000 Hankyu Department Stores Inc 174,230
8,000 Hanwa Co Ltd * 7,064
165,000 Haseko Corp * 67,589
35,000 Hitachi Maxell Ltd 880,934
96,000 Hitachi Metals Ltd 517,336
27,000 Hokuetsu Paper Mills 157,298
17,000 House Foods Corp 247,599
</TABLE>
See accompanying notes to the financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
JAPAN - CONTINUED
25,000 Hyogo Bank Ltd (a) * 2
66,000 INAX Corp 335,843
19,000 Itoham Foods Inc 74,371
28,000 Izumiya Co Ltd 166,438
22,000 Japan Airport Terminal Co Ltd 172,628
64,000 Japan Steel Works Ltd * 54,181
99,000 Japan Synthetic Rubber Co Ltd 766,010
46,000 JGC Corp * 110,964
25,000 Kamigumi Co Ltd 97,856
34,000 Kandenko Co 122,562
11,000 Katokichi Co Ltd 223,795
155,000 Keihin Electric Express Railway Co Ltd 540,394
194,000 Keio Teito Electric Railway Co Ltd 649,875
23,000 Kikkoman Corp 134,414
15,000 Kissei Pharmaceutical Co Ltd 252,606
5,000 Kokuyo Co Ltd 54,390
22,000 Komori Corp 280,370
48,000 Koyo Seiko Co Ltd 375,331
207,000 Kureha Chemical Industry Co Ltd 480,497
10,000 Kyowa Exeo Corp 63,265
6,000 Kyudenko Corp 17,041
77,000 Lion Corp 262,846
55,000 Maeda Corp 155,205
35,000 Maeda Road Construction 141,778
51,000 Makino Milling Machine Co Ltd 367,220
45,000 Makita Corp 370,716
93,000 Meiji Seika Kaisha Ltd 617,996
5,000 Misumi Corp 600,792
152,000 Mitsubishi Gas Chemical Co Inc 279,496
87,000 Mitsui Trust & Banking Co Ltd 134,632
27,000 Mori Seiki Co Ltd 352,692
12,000 Nagase & Co 40,963
36,000 Nagoya Railroad Co Ltd 97,984
34,000 Nankai Electric Railway Co Ltd 136,180
185,000 New Japan Securities Co Ltd * 850,439
10,000 NHK Spring Co Ltd 31,496
23,000 Nichicon Corp 682,536
12,000 Nichiei Co Ltd (Kyoto) * 242,501
33,000 Nippon Hodo Co 136,981
67,000 Nippon Meat Packers Inc 615,994
900 Nippon Oil Co Ltd 3,162
</TABLE>
See accompanying notes to the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
JAPAN - CONTINUED
23,000 Nippon Paint Co 55,482
22,000 Nippon Shokubai Corp 83,110
68,000 Nippon Suisan Kaisha Ltd 102,135
38,000 Nissan Fire & Marine Insurance Co Ltd 97,547
38,000 Nisshin Oil Mills Ltd 102,044
259,000 Nisshin Steel Co Ltd 240,481
41,000 Nisshinbo Industries Inc 154,140
10,000 Nissin Food Products 213,918
55,000 Nitto Boseki Co Ltd 65,586
35,000 Okamoto Industries Inc 74,871
255,600 Onoda Cement Co Ltd 386,233
51,000 Onward Kashiyama Co Ltd 492,567
2,000 Oyo Corp 22,138
26,000 Q.P. Corp 196,441
273,000 Renown Inc 402,585
5,000 Rinnai Corp 83,292
45,000 Royal Co Ltd 364,571
5,000 Ryosan Co 81,881
20,000 Sanden Corp 102,317
69,000 Sankyo Aluminum Industry Co Ltd * 57,785
12,000 Sanrio Co Ltd 480,634
26,000 Santen Pharmaceutical 446,844
145,000 Sanyo Securities Co Ltd * 1,320
700 Sega Enterprises 22,939
47,000 Seino Transportation Co Ltd 235,738
6,000 Shimachu Co 60,079
325,000 Showa Denko * 414,182
124,000 Showa Shell Sekiyu 419,899
5,000 Skylark Co Ltd 118,565
61,000 Stanley Electric Co Ltd 470,875
43,000 Sumitomo Bakelite Co Ltd 489,281
27,895 Takara Standard Co 101,824
65,000 Tanabe Seiyaku Co Ltd 395,248
69,000 Teikoku Oil Co Ltd 196,596
95,000 Toda Corp 288,835
52,000 Tokai Carbon Co Ltd 84,257
42,000 Tokuyama Corp 152,164
76,000 Tokyo Electric Co Ltd 370,124
88,000 Tokyo Ink Manufacturing Co Ltd 161,813
30,000 Tokyo Style Co Ltd 245,779
10,000 Toyo Suisan Kaisha 61,900
</TABLE>
See accompanying notes to the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
JAPAN - CONTINUED
36,000 Tsubakimoto Chain 141,896
162,000 Victor Co of Japan Ltd 946,739
49,000 Wacoal Corp 352,374
82,000 Yakult Honsha Co Ltd 687,470
10,000 Yamatake Honeywell 81,835
62,000 Yodogawa Steel Works 160,848
18,000 Yokogawa Electric Corp 163,361
89,000 Yokohama Rubber Co 275,454
--------------
33,832,072
--------------
LUXEMBOURG - 0.0%
1,170 Carrier1 International SA ADR * 37,952
--------------
MALAYSIA - 0.0%
357,000 Promet Berhad * 27,245
312,000 Rekapacific Berhad * 37,768
--------------
65,013
--------------
NORWAY - 0.0%
1 SAS Norge ASA Class B 9
--------------
SINGAPORE - 5.4%
1,396,000 Asia Food & Properties Ltd * 473,783
152,000 Aztech Systems Ltd 53,350
26,000 Cerebos Pacific Ltd 46,157
238,000 Comfort Group 106,318
52,000 Creative Technology Ltd 1,131,285
135,000 Cycle & Carriage Ltd 297,616
192,600 Dairy Farm International Holdings Ltd 108,819
91,000 Elec & Eltek International Company Ltd 239,330
216,000 First Capital Corp Ltd 161,652
244,000 Fraser & Neave 679,469
385,000 Goldtron * 88,226
20,000 GP Batteries International Ltd 18,449
23,000 Haw Par Brothers International Ltd 39,230
596,000 Hotel Properties Ltd 525,567
106,500 Keppel FELS Energy & Infrastructure * 68,582
871,000 Keppel Land Ltd 995,457
85,000 Marco Polo Developments Ltd 90,735
285,000 Natsteel Ltd 565,470
592,000 Neptune Orient Lines Ltd * 484,261
16,000 Overseas Union Enterprise 41,028
248,000 Parkway Holdings Ltd 684,852
</TABLE>
See accompanying notes to the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
SINGAPORE - CONTINUED
587,000 Sembcorp Industries Ltd 548,280
135,000 Sembcorp Marine Ltd 106,515
154,000 Shangri-La Asia Ltd 125,649
121,000 Singapore Land Ltd 223,229
26,000 Straits Trading Co Ltd 27,151
16,000 Times Publishing Ltd 32,674
513,000 United Industrial Corp Ltd 223,212
108,000 United Overseas Land 75,814
251,000 Van Der Horst Ltd * 64,800
320,000 Want Want Holdings 336,000
944,000 Wing Tai Holdings 706,480
--------------
9,369,440
--------------
SWEDEN - 3.0%
19,270 Gambro AB Class A 134,079
11,160 Gambro AB Class B 78,923
34,034 Industrivarden AB Class A 937,517
16,210 Kinnevik Investment Class B 645,294
25,670 Mo Och Domsjo AB Class B 726,150
2,100 Modern Times Group AB * 109,228
6,570 SSAB Swedish Steel Class A 79,811
233,084 Stena Line AB Class B * 212,692
9,937 Svedala Industries 145,082
33,800 Svenska Cellulosa Class B 823,121
13,535 Svenska Kullagerfabriken AB 253,193
40,488 Sydkraft AB Class C 738,916
8,398 Tryggtia Compulsory 233,730
--------------
5,117,736
--------------
SWITZERLAND - 5.9%
1,020 Baloise Holdings 794,773
610 Banque Cantonale Vaudoise (Bearer) 171,841
3,190 BK Vision AG (Bearer) * 583,164
40 Bobst AG (Bearer) 51,546
60 Bobst AG (Registered) 37,797
8,430 CIBA Specialty Chemicals Holdings (Registered) 538,117
50 Ems-Chemie Holding AG (Bearer) * 215,776
190 Forbo Holdings AG (Registered) 78,123
240 Helvetia Patria Holding 165,428
280 Hilti AG (Participating Certificate) 221,530
180 Intershop Holdings AG (Bearer) 101,954
120 Jelmoli (Bearer) 153,201
190 Jelmoli (Registered) 48,855
</TABLE>
See accompanying notes to the financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
SWITZERLAND - CONTINUED
490 Julius Baer Holdings (Bearer) 1,503,716
65 Kuoni Reisen Holdings AG (Registered) 296,092
1,490 Lonza AG * 758,217
50 Motor-Columbus (Bearer) 81,665
140 Movenpick Holdings (Bearer) 65,452
1,940 Oerlikon-Buhrle (Registered) * 481,395
110 Pargesa Holdings SA (Bearer) 207,684
900 Pharma Vision * 682,390
330 Rieter Holdings AG (Registered) 203,530
5,340 SAir Group (Registered) 1,014,613
230 Saurer Group Holdings (Registered) * 114,835
70 Schindler-Holding AG (Participating Certificates) 101,283
100 Schindler-Holding AG (Registered) 143,850
170 Schweizerische Industrie-Gesellschaft Holding AG (Registered) 102,200
380 Sika Finanz AG (Bearer) 125,497
150 Societe Generale de Surveillance Holding SA (Registered) * 60,237
1,000 Sulzer Gebrueder AG (Registered) * 651,522
220 Verwalt & Privat-Bank AG 213,486
100 Vontobel Holding AG Class B 179,813
60 Zellweger Luwa AG (Bearer) 35,675
--------------
10,185,257
--------------
UNITED KINGDOM - 27.6%
61,100 Airtours Plc 273,210
234,000 Allied Domecq Plc 965,992
140,600 AMEC 345,145
41,200 Anglian Water Plc 289,755
113,680 Arjo Wiggins Appleton Plc 283,548
163,660 Associated British Ports 538,684
111,540 Barratt Development 302,862
124,200 Beazer Holmes Plc 217,636
87,052 Berisford International 380,666
217,900 BICC Group 202,953
69,390 Blue Circle Industries 467,473
68,710 Bowthorpe Holdings 1,358,575
131,240 BPB Industries Plc 561,981
14,000 Britannic Plc 162,443
244,100 British Energy Plc 927,726
129,790 British Land Co 712,003
198,925 Bunzl Co 902,845
204,000 Caradon Plc 426,709
140,660 Carillion Plc 196,517
</TABLE>
See accompanying notes to the financial statements.
10
<PAGE>
<TABLE>
<CAPTION>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
UNITED KINGDOM - CONTINUED
25,900 Cattle's Plc 91,383
57,300 Celltech Group Plc * 1,208,501
23,870 Charter Plc (Registered) 74,423
43,710 Christian Salvesen Plc 92,464
47,908 Cobham Group Plc 544,536
131,900 Coca-Cola Beverages Plc * 250,910
41,621 De Vere Group Plc 178,553
132,331 Debenhams Plc 312,312
65,330 Delta Plc 110,868
180,450 Electrocomponents Plc 2,049,621
213,574 Elementis Plc 242,754
44,900 Enterprise Oil 225,048
51,962 Express Dairies Plc 66,444
52,100 Gallaher Group Plc 206,647
46,170 Glynwed International 157,617
79,810 Great Portland Estates Plc 226,156
127,896 Hammerson Plc 650,128
102,310 Hazlewood Foods 121,941
91,670 Hepworth Plc 217,072
60,063 Hyder Plc 190,822
32,100 Imperial Tobacco Group Plc 212,327
29,069 Inchcape Plc 111,283
109,820 Johnson Matthey 1,251,712
764,487 Ladbroke Group 2,796,892
46,130 Laird Group 140,913
680,817 Lasmo Plc 1,018,346
73,980 Lex Service 388,322
186,776 Lonrho Africa Plc * 76,662
173,646 Lonrho Plc 1,864,059
50,998 Meyer International 406,565
260,260 MFI Furniture Group 235,217
120,430 Morgan Crucible 475,292
259,097 New Securicor Plc 691,250
68,400 Next Plc 566,893
286,460 NFC Plc 1,505,893
156,725 Northern Foods Plc 228,858
63,500 Northern Rock Plc 268,905
104,000 Nycomed Amersham Plc 826,234
56,262 Ocean Group Plc 1,079,139
247,720 Pilkington 260,057
112,130 Premier Farnell Plc 778,862
</TABLE>
See accompanying notes to the financial statements.
11
<PAGE>
<TABLE>
<CAPTION>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
UNITED KINGDOM - CONTINUED
123,055 Provident Financial Plc 1,000,443
142,920 Racal Electronics 940,838
94,900 Rank Group Plc 236,706
32,000 Reckitt Benckiser Plc 278,095
148,911 Rexam Plc 430,781
143,100 Rolls-Royce 465,929
19,130 Saatchi & Saatchi Plc 124,271
121,400 Safeway Plc 296,575
157,000 Scottish & Newcastle Plc 1,017,416
48,300 Severn Trent Plc 402,212
58,960 Slough Estates 260,151
139,200 Smith & Nephew Plc 416,972
131,810 Smith (WH) Group Plc 658,579
80,800 Somerfield Plc 69,836
69,436 Southwest Water 464,220
218,050 St James's Place Capital 647,142
206,742 Storehouse Plc 145,236
140,660 Tarmac Plc 1,292,348
93,070 Tate & Lyle 376,863
653,480 Taylor Woodrow Plc 1,397,840
83,216 Thames Water Plc 913,014
56,199 Transport Development Group Plc 211,594
78,790 Unigate 362,573
24,100 United Assurance Group Plc 172,726
231,310 United Biscuits Plc 951,235
61,500 United News & Media Plc 816,987
96,926 Viglen Technology Plc (Entitlement Letters) * -
110,760 Wilson (Connolly) Holdings 226,432
402,435 Wimpey (George) 648,010
166,480 Yorkshire Water 680,030
--------------
47,823,658
--------------
UNITED STATES - 0.0%
2,125 Ultramar Diamond Shamrock Corp 46,086
--------------
TOTAL COMMON STOCKS (Cost $184,150,101) 155,295,400
--------------
</TABLE>
See accompanying notes to the financial statements.
12
<PAGE>
<TABLE>
<CAPTION>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
Shares Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
PREFERRED STOCKS - 2.2%
GERMANY - 2.1%
6,140 Fresenius Medical Care AG (Non Voting) 1,111,322
8,650 MAN AG 173,634
490 Porsche AG (Non Voting) 1,419,960
5,250 Prosieben Media AG 748,057
5,650 Wella AG 136,532
--------------
3,589,505
--------------
ITALY - 0.1%
45,350 La Rinascente SPA 158,052
--------------
TOTAL PREFERRED STOCKS (Cost $3,231,923) 3,747,557
--------------
RIGHTS & WARRANTS - 0.0%
GERMANY - 0.0%
5,050 Kamps AG Rights 3/08/00 * 243
--------------
HONG KONG - 0.0%
19,600 Mandarin Oriental International Ltd Rights 3/06/00 * 196
2 Mandarin Oriental International Ltd Rights 3/06/00 * -
--------------
196
--------------
SINGAPORE - 0.0%
1,650 Haw Par Brothers International Ltd Warrants 7/18/01 * 1,053
--------------
TOTAL RIGHTS & WARRANTS (Cost $7,409) 1,492
--------------
</TABLE>
See accompanying notes to the financial statements.
13
<PAGE>
<TABLE>
<CAPTION>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
Shares/
Par Value ($) Description Value ($)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS - 12.7%
CASH EQUIVALENTS - 11.1%
$ 16,200,000 Royal Bank of Canada Time Deposit, 5.81% due 3/01/00 16,200,000
3,053,195 The Boston Global Investment Trust (b) 3,053,195
--------------
19,253,195
--------------
U.S. GOVERNMENT - 1.6%
$ 3,000,000 U.S. Treasury Bill, 4.91% due 1/04/01 (c) 2,848,333
--------------
TOTAL SHORT-TERM INVESTMENTS (Cost $22,107,636) 22,101,528
--------------
TOTAL INVESTMENTS - 104.5%
(Cost $209,497,069) 181,145,977
Other Assets and Liabilities (net) - (4.5%) (7,784,215)
--------------
TOTAL NET ASSETS - 100.0% $ 173,361,762
--------------
--------------
</TABLE>
NOTES TO THE SCHEDULE OF INVESTMENTS:
ADR American Depositary Receipt
(a) Bankrupt issuer.
(b) Represents investment of security lending collateral
(Note 1).
(c) All or a portion of this security is held as collateral
for open futures contracts (Note 6).
* Non-income producing security.
See accompanying notes to the financial statements.
14
<PAGE>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
- --------------------------------------------------------------------------------
At February 29, 2000, industry sector
diversification of the Fund's equity investments
was as follows:
<TABLE>
<CAPTION>
INDUSTRY SECTOR (UNAUDITED)
<S> <C>
Services 10.1%
Consumer Goods 9.6
Machinery 7.6
Construction 7.4
Conglomerates 7.2
Electronic Equipment 6.6
Financial Services 4.8
Health Care 4.8
Retail Trade 4.3
Real Estate 4.2
Transportation 3.9
Chemicals 3.6
Metals and Mining 3.2
Food and Beverage 2.4
Communications 2.4
Paper and Allied Products 2.1
Insurance 2.1
Banking 1.8
Utilities 1.7
Energy Services 1.4
Aerospace 1.4
Textiles 1.3
Automotive 1.2
Computers 1.1
Telecommunications 0.4
Miscellaneous 3.4
--------------
100.0 %
--------------
--------------
</TABLE>
See accompanying notes to the financial statements.
15
<PAGE>
<TABLE>
<CAPTION>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
Statement of Assets and Liabilities - FEBRUARY 29, 2000
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value (cost $209,497,069) (Note 1) $ 181,145,977
Foreign currency, at value (cost $359,667) (Note 1) 359,996
Cash 23,831
Dividends and interest receivable 175,812
Receivable for investments sold 480,638
Foreign withholding taxes receivable 99,120
Receivable for expenses waived or borne by Manager (Note 2) 19,991
-------------------
Total assets 182,305,365
-------------------
LIABILITIES:
Net payable for open forward foreign currency contracts (Notes 1 and 6) 1,613,455
Payable for investments purchased 20,456
Payable upon return of securities loaned (Note 1) 3,053,195
Payable for Fund shares repurchased 3,626,000
Payable for variation margin on open futures contracts (Notes 1 and 6) 321,904
Payable to affiliate for (Note 2):
Management fee 87,822
Shareholder service fee 21,957
Accrued expenses and other liabilities 198,814
-------------------
Total liabilities 8,943,603
-------------------
NET ASSETS $ 173,361,762
-------------------
-------------------
NET ASSETS CONSIST OF:
Paid-in capital $ 189,372,714
Accumulated undistributed net investment income 3,214,543
Accumulated undistributed net realized gain 9,709,723
Net unrealized depreciation (28,935,218)
-------------------
$ 173,361,762
-------------------
-------------------
NET ASSETS ATTRIBUTABLE TO CLASS III SHARES $ 173,361,762
-------------------
-------------------
SHARES OUTSTANDING - CLASS III 15,022,947
-------------------
-------------------
NET ASSET VALUE PER SHARE - CLASS III $ 11.54
-------------------
-------------------
</TABLE>
See accompanying notes to the financial statements.
16
<PAGE>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
<TABLE>
Statement of Operations - Year Ended February 29, 2000
- --------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends (net of foreign tax expense of $473,276) $ 4,167,817
Interest (including securities lending income of $23,541) 732,474
------------------
Total income 4,900,291
------------------
EXPENSES:
Management fee (Note 2) 1,000,168
Custodian fees 298,389
Audit fees 54,368
Transfer agent fees 31,697
Legal fees 3,672
Registration fees 2,078
Trustees fees (Note 2) 1,784
Miscellaneous 3,830
Fees waived or borne by Manager (Note 2) (395,818)
------------------
1,000,168
Shareholder service fee - Class III (Note 2) 250,044
------------------
Net expenses 1,250,212
------------------
Net investment income 3,650,079
------------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments 18,029,895
Closed futures contracts 741,287
Foreign currency, forward contracts and foreign
currency related transactions (3,119,065)
------------------
Net realized gain 15,652,117
------------------
Change in net unrealized appreciation (depreciation) on:
Investments (7,429,244)
Open futures contracts 1,319,913
Foreign currency, forward contracts and foreign
currency related transactions (627,689)
------------------
Net unrealized loss (6,737,020)
------------------
Net realized and unrealized gain 8,915,097
------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 12,565,176
------------------
------------------
</TABLE>
See accompanying notes to the financial statements.
17
<PAGE>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
-------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 3,650,079 $ 3,486,990
Net realized gain 15,652,117 8,155,069
Change in net unrealized appreciation1(depreciation)ommencement (6,737,020) (20,794,784)
-------------------- --------------------
Net increase (decrease) in net assets resulting from operations 12,565,176 (9,152,725)
-------------------- --------------------
Distributions to shareholders from:
Net investment income - Class III (1,936,570) (3,362,663)
Net realized gains - Class III (5,554,088) (6,450,138)
-------------------- --------------------
(7,490,658) (9,812,801)
-------------------- --------------------
Net share transactions - Class III (Note 5) 10,145,710 (57,047,497)
-------------------- --------------------
Total increase (decrease) in net assets 15,220,228 (76,013,023)
NET ASSETS:
Beginning of period 158,141,534 234,154,557
-------------------- --------------------
End of period (including accumulated undistributed
net investment income of $3,214,543 and
$4,386,622, respectively) $ 173,361,762 $ 158,141,534
-------------------- --------------------
-------------------- --------------------
</TABLE>
See accompanying notes to the financial statements.
18
<PAGE>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
Financial Highlights
(For a Class III Share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
-------------------------------------------------------------------
2,000 1999 1998 1997 1996
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.02 $ 12.22 $ 13.46 $ 12.95 $ 11.95
---------- ---------- ----------- ----------- -----------
Income (loss) from investment operations:
Net investment income 0.25 0.55 0.27 0.23 0.18
Net realized and unrealized gain (loss) 0.83 (1.15) 0.42 0.55 1.16
---------- ---------- ----------- ----------- -----------
Total from investment operations 1.08 (0.60) 0.69 0.78 1.34
---------- ---------- ----------- ----------- -----------
Less distributions to shareholders from:
Net investment income (0.15) (0.21) (0.26) (0.07) (0.17)
In excess of net investment income - - - - (0.02)
Net realized gains (0.41) (0.39) (1.67) (0.20) (0.15)
In excess of net realized gains - - - 0.00 -
---------- ---------- ----------- ----------- -----------
Total distributions (0.56) (0.60) (1.93) (0.27) (0.34)
---------- ---------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 11.54 $ 11.02 $ 12.22 $ 13.46 $ 12.95
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
TOTAL RETURN (A) 9.62% (5.06%) 6.92% 5.99% 11.43%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 173,362 $ 158,142 $ 234,155 $ 235,653 $ 218,964
Net expenses to average
daily net assets 0.75% 0.75% 0.75% 0.76%(b) 0.76%(b)
Net investment income to average
daily net assets 2.19% 1.67% 1.93% 1.75% 1.84%
Portfolio turnover rate 55% 8% 79% 13% 13%
Fees and expenses voluntarily waived or borne by
the Manager consisted of the following per
share amounts: $ 0.03 $ 0.27 $ 0.12 $ 0.10 $ 0.07
</TABLE>
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived
during the periods shown.
(b) Includes stamp duties and taxes not waived or borne by the Manager,
which approximate .01% of average daily net assets.
See accompanying notes to the financial statements.
19
<PAGE>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
Notes to Financial Statements
February 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO International Small Companies Fund (the "Fund") is a series of GMO
Trust (the "Trust"). The Fund is registered under the Investment Company
Act of 1940, as amended, as an open-end, non-diversified management
investment company. The Fund is advised and managed by Grantham, Mayo, Van
Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a
Massachusetts Business Trust under the laws of the Commonwealth of
Massachusetts on June 24, 1985. The Declaration of Trust permits the
Trustees to create an unlimited number of series ("Funds"), each of which
issues a separate series of shares, and to subdivide a series of shares
into classes.
The Fund seeks high total return through investment in equity securities of
non-U.S. issuers. The Fund's benchmark is the Salomon Smith Barney EMI
World ex-U.S. Index.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of financial statements in
accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each business
day, or if there is no such reported sale, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Securities which
are primarily traded on foreign exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges,
and those values are then translated into U.S. dollars at the current
exchange rate. Short-term investments with a remaining maturity of sixty
days or less are valued at amortized cost which approximates market value.
Securities for which quotations are not readily available are valued at
fair value as determined in good faith by the Trustees or other persons
acting at their direction.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the current exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at current exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
gains and losses on disposition of foreign currencies and forward foreign
exchange contracts, currency gains and losses realized between the trade
and settlement dates on securities transactions and the difference between
the amount of investment income and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent amounts actually received
or paid.
20
<PAGE>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts in connection with
planned purchases or sales of securities or to hedge the currency exposure
associated with some or all of the Fund's portfolio securities. A forward
currency contract is an agreement between two parties to buy and sell a
currency at a set price on a future date. The market value of a forward
currency contract fluctuates with changes in forward currency exchange
rates. Forward currency contracts are marked to market daily and the change
in value is recorded by the Fund as an unrealized gain or loss. Realized
gains or losses equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed are
recorded upon delivery or receipt of the currency or, if a forward currency
contract is offset by entering into another forward currency contract with
the same broker, upon settlement of the net gain or loss. These contracts
may involve market risk in excess of the unrealized gain or loss reflected
in the Fund's Statement of Assets and Liabilities. In addition, the Fund
could be exposed to risk if the counterparties are unable to meet the terms
of the contracts or if the value of the currency changes unfavorably to the
U.S. dollar. The U.S. dollar value of the currencies the Fund has committed
to sell is shown under Note 6, and represents the currency exposure the
Fund has acquired or hedged through currency contracts as of February 29,
2000.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying instrument.
When the Fund writes a call or put option, an amount equal to the premium
received is recorded as a liability and subsequently marked to market to
reflect the current value of the option written. Premiums received from
writing options which expire are treated as realized gains. Premiums
received from writing options which are exercised or closed are added to
the proceeds or offset against the amounts paid on the future, security or
currency transaction to determine the realized gain or loss. The Fund as a
writer of an option has no control over whether the underlying future,
security or currency may be sold (call) or purchased (put) and as a result
bears the market risk of an unfavorable change in the price of the future,
security or currency underlying the written option. There is the risk the
Fund may not be able to enter into a closing transaction because of an
illiquid market. At February 29, 2000 there were no open written option
contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. Premiums paid for purchasing options which are exercised or closed
are added to the amounts paid or offset against the proceeds on the
transaction to determine the realized gain or loss. The risk associated
with purchasing put and call options is limited to the premium paid.
21
<PAGE>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
The Fund may purchase and sell stock index futures contracts. Stock index
futures contracts represent commitments for future delivery of cash based
upon the level of a specified index of equity securities at a given date.
The Fund may use futures contracts to manage its exposure to the stock
market. Buying futures tends to increase the Fund's exposure to the
underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments. Upon
entering into a futures contract, the Fund is required to deposit with its
custodian, in a segregated account in the name of the futures broker, an
amount of cash or U.S. government and agency obligations in accordance with
the initial margin requirements of the broker or exchange. Futures
contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. The payable or receivable is subsequently settled. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. See Note 6 for
all open futures contracts as of February 29, 2000.
SWAP AGREEMENTS
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund enters into swap agreements to manage its exposure to
the equity markets. The Fund enters into total return swap agreements which
involve a commitment by one party in the agreement to pay interest in
exchange for a market linked return, both based on notional amounts. To the
extent that the total return of the security or index underlying the
transaction exceeds or falls short of the offsetting interest rate
obligation, the Fund will receive a payment from or make a payment to the
counterparty. Total return swaps are marked to market daily based upon
quotations from market makers and the change, if any, is recorded as
unrealized gain or loss in the Statement of Operations. Payments received
or made at the end of the measurement period are recorded as realized gain
or loss in the Statement of Operations. Entering into these agreements
involves, to varying degrees, elements of credit and market risk in excess
of the amounts recognized on the Statement of Assets and Liabilities. Such
risks involve the possibility that there will be no liquid market for these
agreements, that the counterparty to the agreements may default on its
obligation to perform or that there may be unfavorable changes in the price
of the security or index underlying these transactions. At February 29,
2000, there were no open swap agreements.
22
<PAGE>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 29, 2000, the Fund loaned securities having a
market value of $2,897,067 collateralized by cash in the amount of
$3,053,195, which was invested in a short-term instrument.
TAXES
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"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for
U.S. federal income tax purposes. Therefore, no provision for U.S. federal
income or excise tax is necessary. Taxes on foreign interest and dividend
income have been withheld in accordance with the applicable country's tax
treaty with the United States.
Dividends received by shareholders of the Fund which are derived from
foreign source income and foreign taxes paid by the Fund are to be treated,
to the extent allowable under the Code, as if received and paid by the
shareholders of the Fund.
The Fund may be subject to capital gains and repatriation taxes imposed by
certain countries in which it invests. The Fund has incurred $131,475
related to repatriation taxes which is included in net realized gain in the
Statement of Operations.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to foreign currency and passive foreign
investment company transactions, and foreign taxes.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable income and capital gains under U.S.
federal tax rules versus accounting principles generally accepted in the
United
23
<PAGE>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
States. The calculation of net investment income per share in the financial
highlights table excludes these adjustments.
<TABLE>
<CAPTION>
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(loss) Paid-in Capital
-------------------- -------------------------- ------------------
<S> <C> <C>
$(2,885,588) $2,885,588 -
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income, net
of applicable withholding taxes, is recorded on the ex-dividend date, or
when the Fund is informed of the ex-dividend date, if later. Interest
income is recorded on the accrual basis and is adjusted for the accretion
of discounts. In determining the net gain or loss on securities sold, the
cost of securities is determined on the identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the Funds.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is 1.00% of the amount
invested. In the case of cash redemptions, the fee is .60% of the amount
redeemed. All purchase premiums and redemption fees are paid to and
recorded by the Fund as paid-in capital. For the year ended February 29,
2000, the Fund received $510,773 in purchase premiums and $286,789 in
redemption fees. There is no premium for reinvested distributions. While no
purchase premium is normally charged with respect to in-kind purchases of
Fund shares, a premium of up to .10% may be charged on certain in-kind
purchases.
INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets.
24
<PAGE>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .60% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding brokerage commissions, certain other transaction costs
(including stamp duties and transfer taxes), shareholder service fees and
extraordinary expenses) exceed the management fee.
Prior to March 1, 1999, GMO earned a management fee at the annual rate of
1.25% of average daily net assets. GMO had agreed to waive a portion of its
fee and bear other expenses to the extent that the Fund's annual expenses
(including the management fee but excluding brokerage commissions, certain
other transaction costs (including stamp duties and transfer taxes),
shareholder service fees and extraordinary expenses) exceeded .60% of
average daily net assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000, was $1,784. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 29, 2000, aggregated
$83,864,263 and $85,664,442, respectively.
At February 29, 2000, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in the value of investments held
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
---------------------- ------------------ ------------------- -------------------
<S> <C> <C> <C>
$210,794,269 $15,803,275 $45,451,567 $29,648,292
</TABLE>
4. PRINCIPAL SHAREHOLDERS
At February 29, 2000, 50.2% of the outstanding shares of the Fund were held
by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares. Investment activities of these shareholders could have
a material effect.
25
<PAGE>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
Class III: February 29, 2000 February 28, 1999
-------------------------------------------- -------------------------------------------
Shares Amount Shares Amount
--------------------- -------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
Shares sold 4,151,532 $ 51,077,290 816,456 $ 9,903,936
Shares issued to
shareholders in
reinvestment of
distributions 557,607 6,666,063 718,062 8,300,432
Shares repurchased (4,031,520) (47,597,643) (6,353,000) (75,251,865)
--------------------- -------------------- -------------------- --------------------
Net increase/
(decrease) 677,619 $ 10,145,710 (4,818,482) $ (57,047,497)
--------------------- -------------------- -------------------- --------------------
--------------------- -------------------- -------------------- --------------------
</TABLE>
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 29, 2000 is as
follows:
FORWARD CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Net Unrealized
Settlement Units Appreciation
Date Deliver/Receive of Currency Value (Depreciation)
------------------ ------------------------- --------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
Buys
04/07/00 AUD 10,218,795 $ 6,278,305 $ (431,738)
04/07/00 CAD 24,946,400 17,208,103 132,347
03/03/00 CHF 31,304,714 18,765,396 (1,045,917)
09/08/00 CHF 8,709,668 5,322,646 (182,515)
</TABLE>
26
<PAGE>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FORWARD CURRENCY CONTRACTS - CONTINUED
Net Unrealized
Settlement Units Appreciation
Date Deliver/Receive of Currency Value (Depreciation)
------------------ ------------------------- --------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Buys - continued
03/03/00 DKK 16,809,000 $ 2,179,300 $ (125,966)
09/08/00 DKK 8,502,600 1,114,381 (31,445)
03/03/00 EUR 67,575,416 65,062,720 (4,429,369)
09/08/00 EUR 33,387,616 32,581,231 (796,985)
03/03/00 GBP 33,624,792 53,081,586 (980,741)
09/08/00 GBP 11,440,150 18,062,534 (227,101)
04/07/00 HKD 20,791,768 2,671,307 1,954
04/07/00 JPY 1,917,509,184 17,560,653 (956,550)
03/03/00 NOK 147,609,722 17,596,756 (928,021)
09/08/00 NOK 78,836,068 9,414,631 (179,366)
04/07/00 NZD 3,426,980 1,664,635 (97,446)
03/03/00 SEK 98,190,304 11,200,597 (544,463)
09/08/00 SEK 56,760,788 6,539,701 (97,796)
-------------------
$ (10,921,118)
-------------------
-------------------
Sales
04/07/00 AUD 1,716,967 $ 1,054,884 $ 59,264
04/07/00 CAD 5,632,050 3,885,005 (41,510)
03/03/00 CHF 31,304,714 18,765,396 1,353,405
09/08/00 CHF 16,707,752 10,210,430 303,229
03/03/00 DKK 16,809,000 2,179,300 153,550
09/08/00 DKK 8,306,400 1,088,666 28,687
03/03/00 EUR 67,575,415 65,062,720 3,079,687
09/08/00 EUR 18,306,602 17,864,457 615,111
03/03/00 GBP 33,624,792 53,081,586 891,177
09/08/00 GBP 19,465,632 30,733,745 568,477
04/07/00 HKD 69,115,956 8,879,953 (8,391)
04/07/00 JPY 2,735,550,085 25,052,316 1,114,214
03/03/00 NOK 147,609,762 17,596,756 712,921
09/08/00 NOK 42,005,414 5,016,304 102,965
03/03/00 SEK 98,190,304 11,200,597 329,613
09/08/00 SEK 15,913,353 1,833,459 45,264
-------------------
$ 9,307,663
-------------------
-------------------
</TABLE>
27
<PAGE>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A SERIES OF GMO TRUST)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
Currency Abbreviations:
AUD Australian Dollar HKD Hong Kong Dollar
CAD Canadian Dollar JPY Japanese Yen
CHF Swiss Franc NOK Norwegian Kroner
DKK Danish Krona NZD New Zealand Dollar
EUR Euro SEK Swedish Krona
GBP British Pound
FUTURES CONTRACTS
<TABLE>
<CAPTION>
Net Unrealized
Number of Appreciation
Contracts Type Expiration Date Contract Value (Depreciation)
------------------ ------------------------- --------------------- ------------------- -------------------
Buys
<S> <C> <C> <C> <C>
27 ALL ORDS March 2000 $ 1,300,032 $ 19,401
37 CAC 40 March 2000 2,212,467 195,807
82 DAX March 2000 15,173,329 355,867
3 HANG SENG March 2000 327,646 13,460
172 OMX March 2000 2,824,159 136,003
20 S&P/TSE 60 March 2000 1,443,143 67,430
51 TOPIX March 2000 8,026,854 410,735
-------------------
$ 1,198,703
-------------------
-------------------
Sells
209 FTSE 100 March 2000 $ 20,621,104 $ (120,481)
2 MIB 30 March 2000 478,679 (19,781)
-------------------
$ (140,262)
-------------------
-------------------
</TABLE>
At February 29, 2000, the Fund has cash and/or securities to cover any
margin requirements on open futures contracts.
28
<PAGE>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
February 29, 2000
- --------------------------------------------------------------------------------
For the fiscal year ended February 29, 2000, all the Fund's distributions are
from investment company taxable income, except that the Fund has designated
74.15% as net capital gain dividends.
29
<PAGE>
GMO INTERNATIONAL CORE FUND
(A Series of GMO Trust)
PORTFOLIO MANAGERS
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Forrest Berkley are
primarily responsible for the day-to-day management of the Fund's portfolio. Mr.
Grantham and Mr. Darnell have been portfolio managers at Grantham, Mayo, Van
Otterloo & Co. LLC for more than fifteen years. Mr. Berkley has been with GMO
and involved in portfolio management for more than ten years.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO International Core Fund returned 8.2% for the
fiscal year ended February 29, 2000 as compared to 25.4% for the MSCI EAFE
Index. The Fund's disappointing performance comes from stock selection that
emphasized value stocks (those companies that are cheaper on price-to-book,
price-to-earnings and other measures) and smaller capitalization stocks.
Consistent with the Fund's investment objectives and policies, the Fund was
invested substantially in common stocks throughout the period.
In international markets, the fiscal year was characterized by explosive
performance of the technology and telecommunications sectors. This effect was
particularly strong in the fourth quarter of 1999, during which period the MSCI
EAFE Growth Index returned 25.6% versus 8.9% for MSCI EAFE Value. While this
paralleled the run-up in the U.S. NASDAQ Index, the EAFE Index contains
relatively few pure Internet and information technology stocks. The
international rally focused more on the best available approximation, which is
telecommunications stocks. Both fixed line and wireless companies performed very
strongly in the markets, as did the related equipment providers. The optimism
about these companies came despite the failure of many other growth stocks, such
as pharmaceuticals and established software companies, to produce continued
strong earnings growth.
In contrast, many neglected stocks - typically smaller capitalization, value
companies - had lackluster market performance for the fiscal year. Throughout
the bull market of the late 1990's, growth stocks have enjoyed increasing
"multiple expansion" to higher relative levels of price-to-book and
price-to-earnings. As a result the spread, or discount, between the valuations
of the cheaper stocks on such measures and the most expensive stocks has reached
levels unprecedented in history. These wide gaps are considerably beyond what
could possibly be justified by the relatively modest differences in consensus
growth rate estimates. This is true even if no regression of the higher
profitability of telecommunications stocks took place in the next 20 years,
which would be contrary to the entire history of corporate competition.
The fiscal year was marked by strong performance in the Asian markets. Japan
rose by 42% in local currency, while Hong Kong and Singapore returned +66% and
+59%, respectively. These markets benefited both from the dissipation of the
crisis mentality and from the underlying recovery in the economic fundamentals
of the region. The only two countries that had higher returns than all the Asian
markets were Finland and Sweden (dominated by the returns of Nokia and Ericsson
respectively). The major European markets showed mixed returns, with Germany
<PAGE>
and France leading the way, both with gains of 56% (+37% in U.S. dollars). The
United Kingdom and Switzerland were the worst performing major markets, with
slightly negative returns in local currency and worse in dollar terms.
EFFECT OF COUNTRY ALLOCATION
The Fund was successful in country allocation largely due to the overweight of
the South East Asian markets. The Fund was also neutral weighted in Japan.
Although this decision did not add to relative return, it represented the first
time in the Fund's history that it was not underweight in Japan. The Fund was
generally underweight in Europe. It suffered from being overweight in Austria,
but benefited from underweights in the United Kingdom and Switzerland.
EFFECT OF CURRENCY ALLOCATION
The dollar strengthened by 5% over the fiscal year relative to an EAFE basket of
currencies. This was due to the decline of the Euro, which lost 12% against the
dollar in the Euro's debut year. The Fund was modestly overweight in the Euro,
causing a slight negative contribution, which was mostly erased by the Fund's
accompanying underweight in the underperforming Swiss franc. The Fund had also
suffered from being underweight in the yen, which strengthened by 8% against the
dollar, making currency allocation a small net negative for the fund.
EFFECT OF STOCK SELECTION
The poor performance in the fiscal year was almost entirely a result of stock
selection, and in particular of the Fund's tilt towards value. Because of the
opportunities represented by the wide dispersion in price-to-book ratios, the
Fund is heavily concentrated in the cheaper stocks on price-to-book. Half of the
Fund is invested in stocks within the cheapest 25% of the EAFE universe; only
10% of the Fund is invested outside the cheapest 50% of the universe. Those
groups underperformed EAFE by -14.5% and -9.3% respectively for the fiscal year.
The Fund was further hurt by its emphasis on smaller capitalization stocks,
which underperformed significantly even after accounting for their overlap with
value. Small stocks within EAFE underperformed by -17%, and small value stocks
underperformed by -30%.
Value stocks did very poorly whether defined on the basis of book, earnings,
sales or dividend yield, which shows that the Fund's underperformance is not a
consequence of focussing on price-to-book as a valuation measure. The Fund's
more sophisticated value models, which make further adjustments to credit
companies for growth and financial quality, fared equally poorly. In this
overheated environment, reasonable adjustments did not suffice to make the most
expensive price-to-book stocks look attractive.
Much of the size and value underperformance was driven by telecommunications and
technology stocks. Of that, over 7% of negative attribution was due to just five
large capitalization stocks that doubled or tripled in price from expensive
starting levels.
PORTFOLIO STRUCTURE AND OUTLOOK
<PAGE>
Based on a careful analysis of current company fundamentals and valuation, GMO
has decided to retain its substantial overweights in value stocks and small
companies, in order to benefit from the inevitable rebound. While the growth
oriented bull market of the last few years has been a difficult period for the
International Core Fund, it leaves us at a moment of great opportunity. For
value investors it is always darkest before the dawn. Markets overshoot fair
value, and it is difficult to call the turning points. Yet the greater the
overshoot past fair value, the more certain is the eventual rebound, and greater
is the reward to those that participate.
Furthermore, globalization and the monetary union have not eliminated the
significance of country selection. This is apparent in the wide spread of
returns during the last fiscal year and also in a wide spread in valuations
between countries, even when adjusted for industry composition. To take
advantage of these opportunities, the Fund remains underweight in Europe and
particularly in favor of Asia ex-Japan. Despite the strong performance of Asia
in 1999, those markets still are attractively valued relative to the rest of
EAFE. Even within Europe there are attractive opportunities to favor cheaper
markets such as Austria over more expensive ones such as the United Kingdom and
Spain.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO &
CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO INTERNATIONAL SMALL COMPANIES FUND CLASS III SHARES AND THE
SOLOMON EMI WORLD EX-U.S. INDEX
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
1yr 5yr Since Inception
- --------------------------------------------------------------------------------
<S> <C> <C>
10/14/91
7.88% 5.27% 7.20%
- --------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Date GMO Int'l. Small Companies Fund MSCI EAFE Index Salomon EMI World ex-U.S. Index
---- ------------------------------- --------------- -------------------------------
<S> <C> <C> <C>
10/14/91 9900 10000 10000
12/31/91 9402 10162 9951
3/31/92 8956 8956 8978
6/30/92 9848 9146 9345
9/30/92 8892 9284 8852
12/31/92 8707 8925 8444
3/31/93 10051 9995 9709
6/30/93 11406 11001 10735
9/30/93 12432 11730 11393
12/31/93 13493 11831 11072
3/31/94 14900 12245 12062
6/30/94 15175 12871 12503
9/30/94 14768 12883 12415
12/31/94 14132 12752 12010
3/31/95 13708 12989 11936
6/30/95 14075 13084 11930
9/30/95 14694 13629 12402
12/31/95 14827 14181 12639
3/31/96 15535 14590 13365
6/30/96 16018 14821 13956
9/30/96 15731 14803 13640
12/31/96 16286 15039 13556
3/31/97 16178 14804 13306
6/30/97 17405 16724 14263
9/30/97 17417 16606 13688
12/31/97 15709 15305 12280
3/31/98 18400 17556 14392
6/30/98 18231 17742 14340
9/30/98 15548 15219 12170
12/31/98 17045 18363 13772
3/31/99 16970 18617 13967
6/30/99 18223 19090 14851
9/30/99 18616 19929 15607
12/31/99 18920 23314 17071
2/29/00 17907 22421 17347
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The total returns would have been lower had certain expenses
not been reimbursed during the periods shown and do not include the effect of
taxes. Each performance figure assumes purchase at the beginning and
redemption at the end of the stated period and reflects a transaction fee of
100 bp on the purchase and 60 bp on the redemption. Transaction fees are
retained by the Fund to cover trading costs. Past performance is not
indicative of future performance. Information is unaudited.
- --------------------------------------------------------------------------------
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of GMO Trust and the Shareholders of
GMO Japan Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Japan Fund at February 29,
2000, the results of its operations, the changes in its net assets and the
financial highlights for the periods presented, in conformity with accounting
principles generally accepted in the United States. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Trust's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at February
29, 2000 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 13, 2000
<PAGE>
GMO JAPAN FUND
(A Series of GMO Trust)
Schedule of Investments -
(Showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 95.6%
AUTOMOTIVE - 7.7%
7,000 Fuji Heavy Industries Ltd 44,668
9,000 Honda Motor Co Ltd 294,934
23,000 Mitsubishi Motors * 73,069
128,000 Nissan Motor Co * 483,546
10,000 Suzuki Motor Corp 161,759
----------------
1,057,976
----------------
BANKING - 12.8%
18,000 Asahi Bank 76,191
6,000 Bank of Yokohama 21,410
9,000 Dai-Ichi Kangyo Bank 71,276
58,000 Daiwa Bank 144,135
32,000 Fuji Bank 249,347
10,000 Industrial Bank of Japan 78,194
5,000 Mitsubishi Trust & Banking 34,136
82,000 Mitsui Trust & Banking Co Ltd 126,895
93,000 Sakura Bank Ltd 530,800
28,000 Sumitomo Trust & Banking 158,281
23,000 Tokai Bank 105,312
15,000 Toyo Trust & Banking Co Ltd 43,011
98,000 Yasuda Trust & Banking * 124,892
----------------
1,763,880
----------------
CHEMICALS - 3.1%
39,000 Daicel Chemical Industries Ltd 129,580
8,000 Dainippon Ink & Chemicals Inc 28,474
26,000 Mitsui Petrochemical Industries Ltd 187,684
25,000 Sekisui Chemical 78,285
----------------
424,023
----------------
CONSTRUCTION - 9.9%
7,100 Daito Trust Construction Co Ltd 92,422
24,000 Daiwa House Industry Co Ltd 164,071
5,000 INAX Corp 25,443
4,000 JGC Corp * 9,649
24,000 Kajima Corp 61,172
39,000 Maeda Corp 110,054
70,000 Marubeni Corp 284,830
12,000 Nishimatsu Construction 36,484
15,000 Obayashi Corp 42,602
15,000 Okumura Corp 40,963
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO JAPAN FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
CONSTRUCTION - CONTINUED
30,000 Onoda Cement Co Ltd 45,332
28,000 Sekisui House Ltd 209,003
17,000 Shimizu Corp 41,009
13,000 Sumitomo Realty and Development Co Ltd 39,406
31,000 Taisei Corp 45,433
8,000 Tostem Corp 110,327
----------------
1,358,200
----------------
CONSUMER GOODS - 5.3%
4,000 Citizen Watch Co 29,457
14,000 Ezaki Glico Co Ltd 64,740
4,700 Fuji Photo Film Co Ltd 206,645
18,000 Itochu Corp * 98,311
1,500 Nintendo Co Ltd 327,568
----------------
726,721
----------------
ELECTRIC - 5.4%
2,000 Furukawa Electric Co Ltd 30,568
6,000 Matsushita Electric Industrial Co Ltd 174,776
43,000 Mitsubishi Electric Corp 380,856
27,000 Oki Electric Industry * 161,476
----------------
747,676
----------------
ELECTRONICS - 5.0%
3,000 Aiwa Co 49,565
7,000 Fuji Electric Co * 28,929
1,000 Hirose Electric Co Ltd 133,904
5,000 Nichicon Corp 148,377
500 Rohm Co Ltd 162,259
16,000 Sanyo Electric Co 65,250
2,000 Sharp Corp 41,873
7,000 Toshiba Corp 57,157
----------------
687,314
----------------
FINANCIAL SERVICES - 8.0%
2,000 Acom Ltd 212,280
2,000 Credit Saison Co 31,332
14,000 Daiwa Securities Co Ltd 222,384
34,000 New Japan Securities Co Ltd * 156,297
3,000 Nichiei Co Ltd (Kyoto) * 60,625
5,000 Nikko Securities 64,494
8,000 Orient Corp 29,421
200 Orix Corp 34,591
4,000 Promise Co 295,298
----------------
1,106,722
----------------
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO JAPAN FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
FOOD AND BEVERAGE - 2.1%
5,000 House Foods Corp 72,823
6,000 Kirin Brewery Co Ltd 71,603
7,000 Nippon Meat Packers Inc 64,358
700 Q.P. Corp 5,289
18,000 Snow Brand Milk Products Co Ltd 75,536
----------------
289,609
----------------
HEALTH CARE - 1.3%
8,000 Sankyo Co Ltd 165,673
1,000 Shiseido Co Ltd 12,034
----------------
177,707
----------------
LEISURE - 0.6%
4,000 Heiwa Corp 76,100
----------------
MACHINERY - 4.4%
21,000 Amada Co Ltd 141,650
64,000 Ishikawajima-Harima Heavy Industries 65,250
63,000 Kawasaki Heavy Industries Ltd 65,951
18,000 Kubota Corp 52,433
97,000 Mitsubishi Heavy Industries 265,778
5,000 NHK Spring Co Ltd 15,748
----------------
606,810
----------------
MANUFACTURING - 0.7%
7,000 Toyo Seikan Kaisha 91,439
----------------
METALS AND MINING - 4.2%
9,000 Fujikara Ltd 35,392
157,000 Kobe Steel Ltd * 90,037
45,000 Mitsubishi Material * 149,515
1,000 Nitto Denko Corp 38,960
209,000 NKK Corp * 114,150
6,000 NSK Ltd 41,509
111,000 Sumitomo Metal Industries * 60,625
77,000 Tomen Corp 45,560
----------------
575,748
----------------
OIL AND GAS - 2.4%
58,000 Cosmo Oil Co Ltd 63,356
55,900 Nippon Oil Co Ltd 196,417
19,600 Showa Shell Sekiyu 66,371
----------------
326,144
----------------
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO JAPAN FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
PAPER AND ALLIED PRODUCTS - 0.8%
8,000 New Oji Paper Co Ltd 38,378
12,000 Sumitomo Forestry Co Ltd 71,112
----------------
109,490
----------------
PHARMACEUTICALS - 2.9%
8,000 Chugai Pharmaceutical Co Ltd 122,343
9,000 Daiichi Pharmaceutical Co Ltd 116,745
4,000 Kyowa Hakko Kogyo Co Ltd 52,069
1,000 Ono Pharmaceutical Co Ltd 28,219
3,000 Taisho Pharmaceutical Co Ltd 84,657
----------------
404,033
----------------
REAL ESTATE - 0.3%
5,000 Mitsui Fudosan Co Ltd 40,144
----------------
RETAIL TRADE - 0.8%
1,000 Aoyama Trading 14,119
2,000 Jusco Co Ltd 28,164
9,000 Mitsubishi Corp 66,442
----------------
108,725
----------------
SERVICES - 2.7%
9,000 Canon Sales Co Inc 118,793
6,000 Dainippon Printing Co Ltd 89,846
10,000 Nippon Shinpan Co 22,757
111,000 Nissho Iwai Corp * 75,782
6,000 Sumitomo Corp 66,524
----------------
373,702
----------------
TECHNOLOGY - 6.0%
50,000 Hitachi Ltd 682,263
100 Keyence Corp 33,499
3,000 Pioneer Electronics Corp 95,307
200 TDK Corp 19,134
----------------
830,203
----------------
TELECOMMUNICATIONS - 0.7%
2,000 Tokyo Broadcasting System Inc 91,211
----------------
TEXTILES - 1.1%
27,000 Nisshinbo Industries Inc 101,507
6,000 Tokyo Style Co Ltd 49,156
----------------
150,663
----------------
TOBACCO - 1.0%
20 Japan Tobacco Inc 142,916
----------------
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO JAPAN FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION - 2.4%
55,000 Kawasaki Kisen 75,600
18,000 Nippon Express Co Ltd 120,268
18,000 Seino Transportation Co Ltd 90,283
5,000 Toei Co Ltd 45,469
----------------
331,620
----------------
UTILITIES - 4.0%
4,600 Chubu Electric Power Co Inc 65,364
1,400 Hokkaido Electric Power 16,797
800 Hokuriku Electric Power 9,860
2,000 Kokusai Denshin Denwa 186,610
12,500 Kyushu Electric Power Co Inc 148,605
1,300 Shikoku Electric Power 15,680
9,500 Tohoku Electric Power Co Inc 112,421
----------------
555,337
----------------
TOTAL COMMON STOCKS (Cost $12,955,463) 13,154,113
----------------
SHORT-TERM INVESTMENTS - 3.6%
CASH EQUIVALENTS - 3.6%
$ 500,000 Royal Bank of Canada Time Deposit, 5.81% due 3/01/00 500,000
----------------
TOTAL SHORT-TERM INVESTMENTS (Cost $500,000) 500,000
----------------
TOTAL INVESTMENTS - 99.2%
(Cost $13,455,463) 13,654,113
Other Assets and Liabilities (net) - 0.8% 114,222
----------------
TOTAL NET ASSETS - 100.0% $ 13,768,335
----------------
----------------
</TABLE>
NOTES TO THE SCHEDULE OF INVESTMENTS:
* Non-income producing security.
See accompanying notes to the financial statements. 5
<PAGE>
GMO JAPAN FUND
(A Series of GMO Trust)
<TABLE>
Statement of Assets and Liabilities - February 29, 2000
- -----------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value (cost $13,455,463) (Note 1) $ 13,654,113
Foreign currency, at value (cost $117,894) (Note 1) 119,260
Cash 34,087
Dividends and interest receivable 5,273
Receivable for variation margin on open futures contracts (Notes 1 and 6) 7,601
-------------------
Total assets 13,820,334
-------------------
LIABILITIES:
Payable to affiliate for
(Note 2):
Management fee 5,710
Shareholder service fee 1,689
Accrued expenses and other liabilities 44,600
-------------------
Total liabilities 51,999
-------------------
NET ASSETS $ 13,768,335
-------------------
-------------------
NET ASSETS
CONSIST OF:
Paid-in capital $ 60,652,709
Distributions in excess of net investment income (113,032)
Accumulated net realized loss (46,978,959)
Net unrealized appreciation 207,617
-------------------
$ 13,768,335
-------------------
-------------------
NET ASSETS ATTRIBUTABLE TO CLASS III SHARES $ 13,768,335
-------------------
-------------------
SHARES OUTSTANDING - CLASS III 1,766,891
-------------------
-------------------
NET ASSET VALUE PER SHARE - CLASS III $ 7.79
-------------------
-------------------
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO JAPAN FUND
(A Series of GMO Trust)
<TABLE>
Statement of Operations - Year Ended February 29, 2000
- -----------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends (net of foreign tax expense of $104,567) $ 592,560
Interest 66,027
---------------------
Total income 658,587
---------------------
EXPENSES:
Management fee (Note 2) 225,115
Custodian fees 101,453
Audit fees 29,664
Transfer agent fees 28,898
Registration fees 2,016
Legal fees 1,767
Trustees fees (Note 2) 381
Miscellaneous 1,549
Fees waived or borne by Manager (Note 2) (165,728)
---------------------
225,115
Shareholder service fee - Class III (Note 2) 62,532
---------------------
Net expenses 287,647
---------------------
Net investment income 370,940
---------------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments 17,041,585
Closed futures contracts 1,533,520
Foreign currency and foreign currency related transactions (87,803)
---------------------
Net realized gain 18,487,302
---------------------
Change in net unrealized appreciation (depreciation) on:
Investments 6,003,745
Open futures contracts (27,873)
Foreign currency and foreign currency related transactions (7,191)
---------------------
Net unrealized gain 5,968,681
---------------------
Net realized and unrealized gain 24,455,983
---------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 24,826,923
---------------------
---------------------
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO JAPAN FUND
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
-------------------- ---------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 370,940 $ 350,253
Net realized gain (loss) 18,487,302 (26,170,871)
Change in net unrealized appreciation (depreciation) 5,968,681 20,479,042
-------------------- ---------------------
Net increase (decrease) in net assets resulting from operations 24,826,923 (5,341,576)
-------------------- ---------------------
Distributions to shareholders from:
Net investment income - Class III (370,940) -
In excess of net investment income (304,432) -
-------------------- ---------------------
(675,372) -
-------------------- ---------------------
Net share transactions - Class III (Note 5) (138,772,688) (15,421,445)
-------------------- ---------------------
Total decrease in net (114,621,137) (20,763,021)
assets
NET ASSETS:
Beginning of period 128,389,472 149,152,493
-------------------- ---------------------
End of period (including distributions in excess of
net investment income of $113,032 and $23,093,
respectively) $ 13,768,335 $ 128,389,472
-------------------- ---------------------
-------------------- ---------------------
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO JAPAN FUND
(A Series of GMO Trust)
Financial Highlights
(For a Class III Share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 6.20 $ 6.36 $ 7.02 $ 8.52 $ 9.12
------------ ----------- ------------ ------------ -----------
Income (loss) from investment operations:
Net investment income (loss) 0.07 (b)(c) 0.01 0.01 - (b) (0.01) (b)
Net realized and unrealized gain (loss) 1.92 (0.17) (0.67) (1.50) 0.79
------------ ----------- ------------ ------------ -----------
Total from investment operations 1.99 (0.16) (0.66) (1.50) 0.78
------------ ----------- ------------ ------------ -----------
Less distributions to shareholders:
From net investment income (0.22) - - - -
In excess of net investment income (0.18) - - (0.00) -
From net realized gains - - - - (1.38)
------------ ----------- ------------ ------------ -----------
Total distributions (0.40) - - (0.00) (1.38)
------------ ----------- ------------ ------------ -----------
NET ASSET VALUE, END OF PERIOD $ 7.79 $ 6.20 $ 6.36 $ 7.02 $ 8.52
------------ ----------- ------------ ------------ -----------
------------ ----------- ------------ ------------ -----------
TOTAL RETURN (a) 31.54% 2.52% 9.40% 17.69% 8.29%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 13,768 $ 128,389 $ 149,152 $ 218,797 $ 126,107
Net expenses to average
daily net assets 0.69% 0.69% 0.69% 0.70% (d) 0.92%
Net investment income (loss) to average
daily net assets 0.89% (c) 0.25% 0.21% 0.01% (0.13%)
Portfolio turnover rate 56% 102% 128% 4% 23%
Fees and expenses voluntarily waived or
borne by the Manager consisted
of the following per share amounts: $ 0.03 $ 0.02 $ 0.02 $ 0.03 $ 0.01
</TABLE>
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(b) Based on average month end shares outstanding.
(c) Net investment income is affected by the timing of dividends earned and
purchases and redemptions of Fund shares.
(d) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .01% of average daily net assets.
See accompanying notes to the financial statements. 9
<PAGE>
GMO JAPAN FUND
(A Series of GMO Trust)
Notes to Financial Statements
February 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Japan Fund (the "Fund") is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended, as
an open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series of shares into classes.
The Fund seeks high total return through investment in equity securities of
Japanese companies. The Fund's benchmark is the MSCI Japan Index.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of financial statements in
accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each business
day, or if there is no such reported sale, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Securities which
are primarily traded on foreign exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges,
and those values are then translated into U.S. dollars at the current
exchange rate. Short-term investments with a remaining maturity of sixty
days or less are valued at amortized cost, which approximates market value.
Securities for which quotations are not readily available are valued at
fair value as determined in good faith by the Trustees or other persons
acting at their direction.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the current exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at current exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
gains and losses on disposition of foreign currencies and forward foreign
exchange contracts, currency gains and losses realized between the trade
and settlement dates on securities transactions and
10
<PAGE>
GMO JAPAN FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
the difference between the amount of investment income and foreign
withholding taxes recorded on the Fund's books and the U.S. dollar
equivalent amounts actually received or paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts in connection with
settling planned purchases or sales of securities or to hedge the currency
exposure associated with some or all of the Fund's portfolio securities. A
forward currency contract is an agreement between two parties to buy and
sell a currency at a set price on a future date. The market value of a
forward currency contract fluctuates with changes in forward currency
exchange rates. Forward currency contracts are marked to market daily and
the change in value is recorded by the Fund as an unrealized gain or loss.
Realized gains or losses equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed
are recorded upon delivery or receipt of the currency or, if a forward
currency contract is offset by entering into another forward currency
contract with the same broker, upon settlement of the net gain or loss.
These contracts may involve market risk in excess of the unrealized gain or
loss reflected in the Fund's Statement of Assets and Liabilities. In
addition, the Fund could be exposed to risk if the counterparties are
unable to meet the terms of the contracts or if the value of the currency
changes unfavorably to the U.S. dollar. There were no forward foreign
currency contracts outstanding as of February 29, 2000.
FUTURES CONTRACTS
The Fund may purchase and sell stock index futures contracts. Stock index
futures contracts represent commitments for future delivery of cash based
upon the level of a specified index of equity securities at a given date.
The Fund may use futures contracts to manage its exposure to the stock
market. Buying futures tends to increase the Fund's exposure to the
underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments. Upon
entering into a futures contract, the Fund is required to deposit with its
custodian, in a segregated account in the name of the futures broker, an
amount of cash or U.S. government and agency obligations in accordance with
the initial margin requirements of the broker or exchange. Futures
contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. The payable or receivable is subsequently settled. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from changes in the value of the underlying
instrument, if there is an illiquid secondary market for the contracts or
if counterparties do not perform under the contract terms. Futures
contracts are valued at the settlement price established each day by the
board of trade or exchange on which they are traded. See Note 6 for all
open futures contracts as of February 29, 2000.
SWAP AGREEMENTS
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to the equity markets. The Fund enters into total return swap agreements
which involve a commitment by one party in the agreement to pay interest in
exchange for a market linked return, both based on notional amounts. To the
extent that the total return of the security or
11
<PAGE>
GMO JAPAN FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
index underlying the transaction exceeds or falls short of the offsetting
interest rate obligation, the Fund will receive a payment from or make a
payment to the counterparty. Total return swaps are marked to market daily
based upon quotations from market makers and the change, if any, is
recorded as unrealized gain or loss in the Statement of Operations.
Payments received or made at the end of the measurement period are recorded
as realized gain or loss in the Statement of Operations. Entering into
these agreements involves, to varying degrees, elements of credit and
market risk in excess of the amounts recognized on the Statement of Assets
and Liabilities. Such risks involve the possibility that there will be no
liquid market for these agreements, that the counterparty to the agreements
may default on its obligation to perform or that there may be unfavorable
changes in the price of the security or index underlying these
transactions. There were no open swap agreements outstanding as of
February 29, 2000.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 29, 2000, the Fund had no securities out on loan.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary. Taxes on foreign interest and dividend income have
been withheld in accordance with the applicable country's tax treaty with
the United States.
Dividends received by shareholders of the Fund which are derived from
foreign source income and foreign taxes paid by the Fund are to be treated,
to the extent allowable under the Code, as if received and paid by the
shareholders of the Fund.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the Fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to foreign currency and passive foreign
investment company transactions, and differing treatments for redemptions
in-kind. Gross gains resulting from such in-kind transactions amounted to
$5,223,000.
12
<PAGE>
GMO JAPAN FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable income and capital gains under U. S.
federal tax rules versus accounting principles generally accepted in the
United States. The calculation of net investment income per share in the
financial highlights table excludes these adjustments.
<TABLE>
<CAPTION>
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
--------------------------- -------------------------- -----------------------
<S> <C> <C>
$214,493 $ (2,983,282) $2,768,789
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income, net
of applicable withholding taxes, is recorded on the ex-dividend date, or
when the Fund is informed of the ex-dividend date, if later. Interest
income is recorded on the accrual basis and is adjusted for the accretion
of discounts. In determining the net gain or loss on securities sold, the
cost of securities is determined on the identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases and fee on redemptions of Fund shares is .20%
of the amount invested or redeemed. All purchase premiums and redemption
fees are paid to and recorded by the Fund as paid-in capital. For the year
ended February 29, 2000, the Fund received $6,559 in purchase premiums and
$124,393 in redemption fees. There is no premium for reinvested
distributions. While no purchase premium is normally charged with respect
to in-kind purchases of Fund shares, a purchase premium of up to .10% may
be charged on certain in-kind purchases.
13
<PAGE>
GMO JAPAN FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .54% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding brokerage commissions, certain other transaction costs
(including stamp duties and transfer taxes), shareholder service fees and
extraordinary expenses) exceed the management fee.
Prior to March 1, 1999 GMO earned a management fee at the annual rate of
.75% of average daily net assets. GMO had agreed to waive a portion of its
fee and bear other expenses to the extent that the Fund's annual expenses
(including the management fee but excluding brokerage commissions, certain
other transaction costs (including stamp duties and transfer taxes),
shareholder service fees and extraordinary expenses) exceeded .54% of
average daily net assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000, was $381. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 29, 2000, aggregated
$22,412,400 and $156,077,563, respectively.
At February 29, 2000, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in the value of investments held
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
---------------------------- -------------------------- ------------------------- ---------------------
<S> <C> <C> <C>
$14,012,800 $1,886,427 $2,245,114 $358,687
</TABLE>
14
<PAGE>
GMO JAPAN FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
4. PRINCIPAL SHAREHOLDERS
At February 29, 2000, 81.7% of the outstanding shares of the Fund were held
by three shareholders, each holding in excess of 10% of the Fund's
outstanding shares. Investment activities of these shareholders could have
a material effect.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
-------------------------------------------- --------------------------------------
Class III: Shares Amount Shares Amount
------------------- --------------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Shares sold 877,279 $ 6,239,388 7,008,018 $ 42,026,700
Shares issued to shareholders in
reinvestment of distributions
67,649 572,315 - -
Shares repurchased (19,894,664) (145,584,391) (9,737,557) (57,448,145)
------------------- --------------------- ------------------ ----------------
Net decrease (18,949,736) $ (138,772,688) (2,729,539) $ (15,421,445)
------------------- --------------------- ------------------ ----------------
------------------- --------------------- ------------------ ----------------
</TABLE>
6. FINANCIAL INSTRUMENTS
A summary of outstanding long futures contracts purchased at February 29,
2000 is as follows:
<TABLE>
<CAPTION>
Number of Net Unrealized
Contracts Type Expiration Date Contract Value Appreciation
-------------------- ------------------------- -------------------- ------------------------ --------------------
<S> <C> <C> <C> <C>
2 TOPIX March 2000 $ 314,779 $ 7,601
--------------------
--------------------
</TABLE>
At February 29, 2000, the Fund had cash and/or securities to cover any
margin requirements on open futures contracts.
15
<PAGE>
GMO JAPAN FUND
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
February 29, 2000
- --------------------------------------------------------------------------------
For the fiscal year ended February 29, 2000, all the Fund's distributions are
from investment company taxable income.
At February 29, 2000, the Fund had a capital loss carryforward available to
offset future capital gains, if any, of the following amounts:
<TABLE>
<CAPTION>
YEAR OF EXPIRATION AMOUNT
------------------ ------
<S> <C>
2006 $ 11,631,832
2007 34,925,915
</TABLE>
16
<PAGE>
GMO JAPAN FUND
(A Series of GMO Trust)
PORTFOLIO MANAGERS
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Forrest Berkley are
primarily responsible for the day-to-day management of the Fund's portfolio. Mr.
Grantham and Mr. Darnell have been portfolio managers at Grantham, Mayo, Van
Otterloo & Co. LLC for more than fifteen years. Mr. Berkley has been with GMO
and involved in portfolio management for more than ten years.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO Japan Fund returned 31.5% for the fiscal year
ended February 29, 2000. While this is strong absolute performance, it is
disappointing when compared to 52.8% delivered by the MSCI Japan Index. The
Fund's underperformance versus the benchmark comes from an emphasis on value
stocks (those companies that are cheaper on price-to-book, price-to-earnings and
other measures) and smaller capitalization stocks. Consistent with the Fund's
investment objectives and policies, the Fund was invested substantially in
common stocks throughout the period.
The Fund's overweight in value and smaller capitalization stocks is driven by
fundamental valuation analysis. Those segments of the market traded at unusually
deep discounts even before the recent growth rally. These stocks still look
attractive after making appropriate adjustments for relative growth prospects
and firm quality. As a result, the Fund has nearly 90% of its weight in the
cheap 50% of the market (defined on price-to-book), which underperformed the
Index by -21% over the fiscal year. The Fund has a 21% overweight in the
smallest 70% of the stocks within the MSCI universe, which underperformed the
index by -31%. These factors explain all of the performance shortfall relative
to the benchmark for the fiscal year.
The high benchmark return was driven by exceptional returns in a narrow segment
of the market, primarily information technology and telecommunications stocks. A
handful of stocks had a very large impact on relative performance. Underweights
in five such stocks (Sony, NTT, Softbank, Fujitsu and Murata Manufacturing)
accounted for 15% (three quarters) of the performance shortfall. Softbank alone
was responsible for -6% of relative performance. That stock, which had better
than a 10-fold return for the fiscal year, is trading at a premium to the market
valuation of its primary assets, which are stakes in extremely expensive
Internet stocks such as Yahoo Japan.
OUTLOOK
The unprecedented attractive discounts available for smaller cap and value
stocks make us optimistic that the Fund can add significant value going forward.
The Fund's positions in smaller capitalization and value stocks give it a more
domestic focus on the Index, away from
<PAGE>
the handful of "nifty" exporters and internet stocks that have been dominating
performance. The Fund is positioned to do well as the Japanese economy continues
to recover from its decade-long slump.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO &
CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO JAPAN FUND CLASS III SHARES AND THE MSCI JAPAN INDEX
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
1yr 5yr Since Inception
- --------------------------------------------------------------------------------
<S> <C> <C>
6/8/90
31.02% 0.64% 0.65%
- --------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Date Japan Fund-III MSCI Japan
---- -------------- ----------
<S> <C> <C>
6/8/90 9980 10000
6/30/90 9890 9737
9/30/90 7435 7252
12/31/90 8194 8300
3/31/91 9013 9015
6/30/91 8466 8535
9/30/91 8912 9039
12/31/91 8603 9041
3/31/92 7204 7045
6/30/92 7255 6488
9/30/92 7493 7369
12/31/92 7399 7101
3/31/93 8688 8424
6/30/93 9480 10053
9/30/93 10069 10403
12/31/93 9363 8911
3/31/94 11236 10360
6/30/94 12581 11582
9/30/94 11877 10965
12/31/94 11781 10821
3/31/95 11194 10591
6/30/95 10528 9921
9/30/95 10923 10367
12/31/95 11328 10896
3/31/96 11511 10935
6/30/96 11720 11020
9/30/96 11105 10404
12/31/96 9877 9207
3/31/97 8909 8121
6/30/97 10989 10043
9/30/97 9485 8759
12/31/97 7562 7028
3/31/98 7889 7172
6/30/98 7483 6844
9/30/98 6711 5820
12/31/98 8478 7382
3/31/99 9145 8282
6/30/99 9917 8912
9/30/99 11944 10323
12/31/99 11464 11925
2/29/00 10648 11112
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes. Each
performance figure assumes purchase at the beginning and redemption at the end
of the stated period. Past performance is not indicative of future performance.
Information is unaudited.
- --------------------------------------------------------------------------------
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of GMO Trust and the Shareholders of
Pelican Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Pelican Fund at February 29, 2000,
the results of its operations, the changes in its net assets and the financial
highlights for the periods presented, in conformity with accounting principles
generally accepted in the United States. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at February
29, 2000 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 10, 2000
<PAGE>
PELICAN FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS -
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 89.4%
BASIC MATERIALS - 3.5%
35,000 Abitibi-Consolidated Inc 310,625
5,000 Alcan Aluminum Ltd 165,000
5,000 Du Pont (E I) De Nemours & Co Inc 252,500
45,000 Engelhard Corp 613,125
20,000 FMC Corp * 966,250
5,000 Hercules Inc 82,500
32,500 International Paper Co 1,196,406
25,000 Pactiv Corp * 207,813
5,000 Weyerhaeuser Co 256,563
--------------
4,050,782
--------------
CAPITAL GOODS - 6.7%
30,000 Amcol International Corp 472,500
10,000 Boeing Company 368,750
10,000 General Electric Co 1,321,875
12,500 Ingersoll-Rand Co 478,906
15,000 Lockheed Martin Corp 261,563
42,500 Pall Corp 839,375
5,000 Pitney Bowes Inc 247,500
50,000 Thomas & Betts Corp 1,121,875
20,000 United Technologies Corp 1,018,750
112,500 Waste Management Inc 1,687,500
--------------
7,818,594
--------------
COMMUNICATION SERVICES - 3.3%
12,500 Bell Atlantic Corp 611,719
47,500 GTE Corp 2,802,505
12,500 SBC Communications Inc 475,000
--------------
3,889,224
--------------
CONSUMER CYCLICALS - 13.8%
50,000 American Greetings Corp 862,500
15,000 Brunswick Corp 265,313
10,000 Delphi Automotive Systems Corp 166,875
45,000 Federated Department Stores * 1,650,938
15,000 General Motors Corp 1,140,938
15,000 Hilton Hotels Corp 105,000
50,000 Information Resources Inc * 390,625
30,000 Intermet Corp 337,500
25,000 Manpower Inc 817,188
10,000 Mascotech Industries Inc 139,981
62,500 Michelin SA Class B * 1,954,515
75,000 Modis Professional Services Inc * 1,181,250
22,500 Nestle SA ADR 1,896,883
75,000 Owens Corning 1,087,500
72,500 Saks Inc * 833,750
20,000 Stanley Works 460,000
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
PELICAN FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS - CONTINUED
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER CYCLICALS - CONTINUED
13,000 TJX Cos Inc 207,188
115,000 Toys R Us Inc * 1,423,125
25,000 Wal-Mart Stores Inc 1,217,188
--------------
16,138,257
--------------
CONSUMER STAPLES - 13.4%
15,000 Albertson's Inc 367,500
25,000 Anheuser-Busch Cos Inc 1,603,125
25,000 Bergen Brunswig Corp 123,438
12,500 ConAgra Inc 204,688
5,000 Coors (Adolph) Co 219,375
25,000 CVS Corp 875,000
37,500 Eastman Kodak 2,149,219
82,500 Kimberly-Clark Corp 4,264,219
7,500 McKesson HBOC Inc 145,313
15,000 MediaOne Group Inc * 1,177,500
50,000 Owens and Minor Holdings Co 550,000
137,500 Pepsi Bottling Group Inc 2,303,125
87,500 R. R. Donnelley & Sons Co 1,673,438
--------------
15,655,940
--------------
ENERGY - 7.9%
12,500 Amerada Hess Corp 632,031
5,000 Baker Hughes Inc 129,375
15,000 Cabot Oil & Gas Corp Class A 237,188
75,000 Conoco Inc 1,476,563
12,500 EOG Resources Inc 190,625
162,500 Gulf Canada Resources Ltd * 528,125
7,500 Kerr-McGee Corp 335,625
50,000 Lasmo Plc ADR 237,500
25,000 Mitchell Energy Class B 526,563
60,000 Occidental Petroleum Corp 963,750
5,000 Texaco Inc 237,188
100,000 Union Pacific Resources Group Inc 893,750
67,500 Unocal Corp 1,805,625
50,000 USX - Marathon Group 1,081,250
--------------
9,275,158
--------------
FINANCIALS - 22.2%
25,000 Allstate Corp 487,500
7,500 Avalonbay Communities Inc 253,125
10,000 Bank of America Corp 460,625
12,500 Bank One Corp 322,656
62,500 Block (H&R) Inc 2,742,188
20,000 Boston Properties Inc 606,250
62,500 Brandywine Realty Trust 1,000,000
35,000 Chase Manhattan Corp 2,786,875
72,500 Citigroup Inc 3,747,344
80,000 Equity Office Properties Trust 1,915,000
50,000 Equity Residential Properties Trust 1,996,875
7,500 First Union Corp 221,250
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
PELICAN FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS - CONTINUED
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE ($)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCIALS - CONTINUED
162,500 JP Realty Inc 2,935,156
35,000 Mack-Cali Realty Corp 831,250
15,000 Reckson Associates Realty Corp 277,500
22,500 Spieker Properties Inc 902,813
75,000 Summit Properties Inc 1,425,000
50,000 United Dominion Realty Trust Inc 500,000
70,000 Washington Mutual Inc 1,548,750
32,500 Wells Fargo Co 1,074,531
--------------
26,034,688
--------------
HEALTH CARE - 2.9%
65,000 Acuson Corp * 869,375
20,000 Aetna Inc 822,500
15,000 Lilly (Eli) and Co 891,563
12,500 Mylan Laboratories Inc 287,500
5,000 Smithkline Beecham Plc 280,938
12,500 Tenet Healthcare Corp * 218,750
--------------
3,370,626
--------------
TECHNOLOGY - 7.9%
57,500 Compaq Computer Corp 1,430,313
5,000 Computer Sciences Corp * 394,063
12,500 Intel Corp 1,412,500
25,000 International Business Machines Corp 2,550,000
35,000 Parametric Technology Corp * 1,060,938
175,000 Storage Technology Corp * 2,231,250
5,000 Xerox Corp 108,438
--------------
9,187,502
--------------
TRANSPORTATION - 3.6%
12,500 Airborne Freight Corp 231,250
15,000 AMR Corp * 793,125
42,500 Canadian Pacific Ltd 828,750
12,500 Delta Air Lines Inc 570,313
7,500 FedEx Corp * 262,031
75,000 Ryder System Inc 1,396,875
7,500 US Airways Group Inc * 140,156
--------------
4,222,500
--------------
UTILITIES - 4.2%
5,000 Duke Energy Co 242,500
62,500 Niagara Mohawk Holdings Inc * 734,375
25,000 Questar Corp 348,438
47,500 Sempra Energy 855,000
50,000 Texas Utilities 1,631,250
30,000 Unicom Corp 1,134,375
--------------
4,945,938
--------------
TOTAL COMMON STOCKS (Cost $100,885,312) 104,589,209
--------------
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
PELICAN FUND
(A SERIES OF GMO TRUST)
SCHEDULE OF INVESTMENTS - CONTINUED
(SHOWING PERCENTAGE OF TOTAL NET ASSETS)
FEBRUARY 29, 2000
<TABLE>
<CAPTION>
SHARES/
PAR VALUE ($) DESCRIPTION VALUE ($)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
PREFERRED STOCKS - 0.9%
BASIC MATERIALS - 0.5%
25,000 Freeport-McMoran Corp 0.00% 550,000
--------------
ENERGY - 0.4%
12,500 Unocal Corp Convertible 6.25% 517,188
--------------
TOTAL PREFERRED STOCKS (Cost $1,519,458) 1,067,188
--------------
DEBT OBLIGATIONS - 9.1%
TECHNOLOGY - 1.1%
$ 1,500,000 International Business Machines Corp, 6.50% due 1/15/28 1,310,730
--------------
TRANSPORTATION - 0.7%
750,000 United Air Lines Inc, 9.13% due 1/15/12 766,478
--------------
U.S. GOVERNMENT - 7.3%
5,000,000 U.S. Treasury Bond, 11.13% due 8/15/03 5,668,750
1,250,000 U.S. Treasury Bond, 10.75% due 8/15/05 1,474,413
1,500,000 U.S. Treasury Note, 6.625% due 5/15/07 1,495,545
--------------
8,638,708
--------------
TOTAL DEBT OBLIGATIONS (Cost $11,486,109) 10,715,916
--------------
TOTAL INVESTMENTS - 99.4%
(Cost $113,890,879) 116,372,313
Other Assets and Liabilities (net) - 0.6% 660,399
--------------
TOTAL NET ASSETS - 100.0% $ 117,032,712
--------------
--------------
</TABLE>
NOTES TO THE SCHEDULE OF INVESTMENTS:
ADR - American Depositary Receipt
* Non-income producing security.
4 See accompanying notes to the financial statements.
<PAGE>
PELICAN FUND
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Assets and Liabilities - February 29, 2000
- --------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value (cost $113,890,879) (Note 1) $ 116,372,313
Dividends and interest receivable 259,035
Foreign withholding taxes receivable 10,492
Receivable for investments sold 1,156,972
Receivable for Fund shares sold 19,600
Receivable for expenses waived or borne by Manager (Note 2) 24,628
-------------------
Total assets 117,843,040
-------------------
LIABILITIES:
Due to custodian 312,313
Payable for investments purchased 276,361
Payable for Fund shares repurchased 51,319
Payable to affiliate for management fee (Note 2) 72,958
Accrued expenses 97,377
-------------------
Total liabilities 810,328
-------------------
NET ASSETS (equivalent to $11.15 per share based
on 10,493,566 shares outstanding, unlimited shares authorized) $ 117,032,712
-------------------
-------------------
NET ASSETS CONSIST OF:
Paid-in capital $ 101,442,760
Accumulated undistributed net investment income 245,785
Accumulated undistributed net realized gain 12,863,579
Net unrealized appreciation 2,480,588
-------------------
NET ASSETS $ 117,032,712
-------------------
-------------------
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
PELICAN FUND
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Operations - Year Ended February 29, 2000
- ---------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends (net of withholding taxes of $28,488) $ 3,307,288
Interest 1,537,928
-------------------
Total income 4,845,216
-------------------
EXPENSES:
Management fee (Note 2) 1,582,393
Custodian and transfer agent fees 164,274
Audit fees 40,519
Registration fees 18,999
Legal fees 4,594
Trustees fees (Note 2) 2,053
Miscellaneous 10,215
-------------------
Total expenses 1,823,047
Less: expenses waived or borne by Manager (Note 2) (156,849)
-------------------
Net expenses 1,666,198
-------------------
Net investment income 3,179,018
-------------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments 45,410,308
Foreign currency and foreign currency related transactions (191)
-------------------
Net realized gain 45,410,117
-------------------
Change in net unrealized appreciation (depreciation) on:
Investments (50,353,648)
Foreign currency and foreign currency related transactions (846)
-------------------
Net unrealized loss (50,354,494)
-------------------
Net realized and unrealized loss (4,944,377)
-------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (1,765,359)
-------------------
-------------------
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
PELICAN FUND
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
FEBRUARY 29, 2000 FEBRUARY 28, 1999
------------------------ ---------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 3,179,018 $ 3,881,844
Net realized gain 45,410,117 30,658,342
Change in net unrealized appreciation (depreciation) (50,354,494) (25,781,297)
--------------------- ---------------------
Net increase (decrease) in net assets resulting from operations (1,765,359) 8,758,889
--------------------- ---------------------
Distributions to shareholders from:
Net investment income (3,927,061) (4,037,021)
Net realized gains (38,462,287) (31,637,977)
--------------------- ---------------------
(42,389,348) (35,674,998)
--------------------- ---------------------
Fund share transactions: (Note 5)
Proceeds from sale of shares 9,423,293 20,859,512
Net asset value of shares issued to shareholders
in payment of distributions declared 41,267,246 35,005,102
Cost of shares repurchased (113,439,710) (41,297,725)
--------------------- ---------------------
Net increase (decrease) in net assets resulting
from Fund share transactions (62,749,171) 14,566,889
--------------------- ---------------------
Total decrease in net assets (106,903,878) (12,349,220)
NET ASSETS:
Beginning of period 223,936,590 236,285,810
--------------------- ---------------------
End of period (including accumulated undistributed
net investment income of $245,785 and of
$686,825, respectively) $ 117,032,712 $ 223,936,590
--------------------- ---------------------
--------------------- ---------------------
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
PELICAN FUND
(A Series of GMO Trust)
FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout Each Period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28/29,
-------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.73 $ 17.78 $ 16.31 $ 14.52 $ 11.99
------------ ----------- ----------- ----------- ------------
Income from investment operations:
Net investment income 0.30 0.30 0.32 0.33 0.31
Net realized and unrealized gain (loss) (0.78) 0.43 4.13 2.27 3.04
------------ ----------- ----------- ----------- ------------
Total from investment operations (0.48) 0.73 4.45 2.60 3.35
------------ ----------- ----------- ----------- ------------
Less distributions to shareholders:
From net investment income (0.36) (0.31) (0.40) (0.27) (0.29)
From net realized gains (3.74) (2.47) (2.58) (0.54) (0.53)
------------ ----------- ----------- ----------- ------------
Total distributions (4.10) (2.78) (2.98) (0.81) (0.82)
------------ ----------- ----------- ----------- ------------
NET ASSET VALUE, END OF PERIOD $ 11.15 $ 15.73 $ 17.78 $ 16.31 $ 14.52
------------ ----------- ----------- ----------- ------------
------------ ----------- ----------- ----------- ------------
TOTAL RETURN (a) (5.80%) 3.89% 28.97% 18.40% 28.54%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 117,033 $ 223,937 $ 236,286 $ 207,369 $ 177,238
Net expenses to average
daily net assets 0.93% 0.95% 0.95% 0.95% 1.05%
Net investment income to average
daily net assets 1.79% 1.68% 1.77% 2.10% 2.42%
Portfolio turnover rate 32% 34% 28% 27% 32%
Fees and expenses voluntarily waived
or borne by the Manager consisted
of the following per share amounts: $ 0.02 $ 0.01 $ 0.01 $ 0.01 $ -
</TABLE>
(a) The total returns would have been lower had certain expenses not been
waived during the periods shown.
8 See accompanying notes to the financial statements.
<PAGE>
PELICAN FUND
(A Series of GMO Trust)
Notes to Financial Statements
February 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Pelican Fund (the "Fund") is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended, as
an open-end, diversified management investment company. The Fund is advised
and managed by Grantham, Mayo, Van Otterloo & Co. LLC ("the Manager" or
"GMO"). The Trust was established as a Massachusetts Business Trust under
the laws of the Commonwealth of Massachusetts on June 24, 1985. The
Declaration of Trust permits the Trustees to create an unlimited number of
series ("Funds"), each of which will issue a separate series of shares.
The Fund seeks long-term growth of capital primarily through investment in
equity securities. The Fund's benchmark is the Standard & Poor's 500
Composite Stock Market Index.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of financial statements in
accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
business day, or if there is no such reported sale, at the most recent
quoted bid price. Unlisted securities for which market quotations are
readily available are valued at the most recent quoted bid price.
Short-term debt obligations with a remaining maturity of sixty days or less
are valued at amortized cost which approximates market value. Securities
for which quotations are not readily available are valued at fair value as
determined in good faith by the Trustees or other persons acting at their
direction.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the prevailing exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at prevailing exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
gains and losses on disposition of foreign currencies and forward foreign
currency contracts, currency gains and losses realized between the trade
and settlement dates on securities transactions, and the difference between
the amount of investment income and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent amounts actually received
or paid.
FUTURES CONTRACTS
The Fund may purchase and sell futures contracts on domestic stock indices.
Stock index futures contracts represent commitments for future delivery of
cash based upon the level of a specified index of equity securities at a
given date. The Fund may use futures contracts to manage its exposure to
the stock markets. Buying futures tends to increase the Fund's exposure to
the underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments. Upon
entering into a futures contract, the Fund is required to deposit with its
custodian,
9
<PAGE>
PELICAN FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
in a segregated account in the name of the futures broker, an amount of
cash or U.S. government and agency obligations in accordance with the
initial margin requirements of the broker or exchange. Futures contracts
are marked to market daily and an appropriate payable or receivable for the
change in value ("variation margin") is recorded by the Fund. The payable
or receivable is liquidated on the following business day. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from changes in the value of the underlying
instrument, if there is an illiquid secondary market for the contracts, or
if counterparties do not perform under the contract terms. Futures
contracts are valued at the settlement price established each day by the
board of trade or exchange on which they are traded. At February 29, 2000
there were no open futures contracts.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. The
collateral is marked to market daily to ensure that the market value of the
underlying assets remains sufficient to protect the Fund in the event of
default by the seller. In connection with transactions in repurchase
agreements, if the seller defaults and the value of the collateral declines
or if the seller enters insolvency proceedings, realization of collateral
by the Fund may be delayed or limited.
TAXES
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
Fund intends to distribute substantially all of its net investment income
and net realized short-term and long-term capital gains, if any, after
giving effect to any available capital loss carryovers for U.S. federal
income tax purposes. Therefore, no provision for U.S. federal income or
excise tax is necessary. Taxes on foreign interest and dividend income are
withheld in accordance with the applicable country's tax treaty with the
United States.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income quarterly, and from net realized short-term and long-term capital
gains at least annually. All distributions will be paid in shares of the
Fund, at net asset value, unless a shareholder elects to receive cash
distributions. Distributions to shareholders are recorded by the Fund on
the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to market discount.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable income and capital gains under U.S.
federal tax rules versus accounting principles generally accepted in the
United States. The calculation of net investment income per share in the
financial highlights table excludes these adjustments.
10
<PAGE>
PELICAN FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
--------------------------- -------------------------- -------------------
<S> <C> <C>
$307,003 $(307,003) $0
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income, net
of applicable foreign withholding taxes, is recorded on the ex-dividend
date. Interest income is recorded on the accrual basis. In determining the
net gain or loss on securities sold, the cost of securities is determined
on the identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
Fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
2. MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .75% of
average daily net assets. GMO has entered into a binding agreement
effective until June 30, 2000 to reimburse the Fund to the extent that the
Fund's total annual operating expenses (including the management fee but
excluding brokerage commissions, certain other transaction costs (including
transfer taxes), and extraordinary expenses) exceed .75% of average daily
net assets.
Prior to February 1, 2000 GMO earned a management fee paid monthly at the
annual rate of .90% of average daily net assets. GMO had entered into a
binding agreement effective until June 30, 2000 to reimburse the Fund to
the extent that the Fund's total annual operating expenses (including the
management fee but excluding brokerage commissions, certain other
transaction costs (including transfer taxes), and extraordinary expenses)
exceeded .95% of average daily net assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000, was $2,053. No
remuneration is paid to any Trustee or officer who is affiliated with the
Manager.
11
<PAGE>
PELICAN FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
3. PURCHASES AND SALES OF SECURITIES
For the year ended February 29, 2000, cost of purchases and proceeds from
sales of investments, other than short-term obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Proceeds
------------------ ------------------
<S> <C> <C>
U.S. Government securities $183,656 $2,729,981
Investments (non-U.S. Government securities) $53,939,572 $151,573,506
</TABLE>
At February 29, 2000, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
---------------------------- -------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
$114,827,597 $21,363,554 $19,818,838 $1,544,716
</TABLE>
4. PRINCIPAL SHAREHOLDERS
At February 29, 2000, 61.05% of the outstanding shares of the Fund were
held by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
--------------------------- -----------------------
<S> <C> <C>
Shares sold 608,624 1,214,307
Shares issued to shareholders in
reinvestment of distributions 3,145,991 2,112,963
Shares repurchased (7,496,586) (2,378,657)
---------------------- ---------------------------
Net increase (decrease) (3,741,971) 948,613
Fund shares:
Beginning of period 14,235,537 13,286,924
---------------------- ---------------------------
End of period 10,493,566 14,235,537
---------------------- ---------------------------
---------------------- ---------------------------
</TABLE>
12
<PAGE>
PELICAN FUND
(A SERIES OF GMO TRUST)
FEDERAL TAX INFORMATION - (UNAUDITED)
FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
For fiscal year ended February 29, 2000, all of the Fund's distributions are
from investment company taxable income, except that the Fund has designated
84.50% distributions as net capital gain dividends.
13
<PAGE>
PELICAN FUND
(A Series of GMO Trust)
PORTFOLIO MANAGER
Mr. Richard Mayo is responsible for the management of the Pelican Fund. Mr. Mayo
has been a portfolio manager with GMO since its founding in 1977 and began his
career in the late 1960's.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
We can think of only one way to describe the investment climate in 1999:
"bizarre." The market as a whole traded at record levels on virtually all
valuation metrics, but sector performances differed dramatically. Momentum -
chasing the winners - dominated investment techniques. The shift of interest to
growth stocks, then aggressive growth and technology funds, created extreme
divergences in results for value managers and growth managers; the spread is now
at 50 year extremes. Throughout this extraordinary time, we maintained our core
valuation discipline.
The majority of stocks did not participate in the "bull" markets of 1998 and
1999 - in fact, the "average" stock has been declining during this period and is
now down 35%. In 1999, just 30 stocks accounted for all the return in the S&P
500. This is even more remarkable than 1998, when only 84 stocks drove the
entire performance of the index, and most observers noted the incredible
concentration of performance. We owned some of the winners - General Electric,
WalMart, Intel, and Citigroup - but were steady sellers throughout the year as
targets were reached/exceeded.
Increasingly the market became technology focused. The Fund owned stocks in the
sector but made the mistake of selling too early. Even though we adapted our
analysis to account for the dramatic economic changes driven by technology and
the Internet, we felt compelled to reduce or eliminate positions in these
sectors due to valuation concerns. Not fully participating in technology was a
major negative impact on performance. In the short term, however, risk has not
been a concern for the market.
This discipline and our concern about risk have been costly to performance. We
were not fully invested at all times, and some of our low risk stocks lagged
significantly. It has been a frustrating year and a half for value managers, but
we have held our own versus our peers. Russell data shows us in the second
quartile of value managers and confirms we are succeeding in delivering superior
risk-adjusted return.
More importantly, we are optimistic about the future because of the great
opportunities that exist in the market today. The global economy has improved,
and corporate profits should be robust. In addition, acquirers should be
active - companies are actively seeking ways to augment growth. Current stock
prices also look attractive to corporate insiders; in February 2000 alone,
companies announced share repurchases worth $30 billion. The macro
<PAGE>
environment looks solid, but we're most excited by the compelling ideas in the
portfolio today. We can participate in wireless through inexpensive Bell
Atlantic shares or venture capital through Chase Manhattan. CVS operates the
largest drugstore chain, has an industry-leading Internet presence and recently
announced a $1 billion share repurchase. We think the portfolio is in a position
to deliver the returns comparable to the first four days of the year, when the
Pelican Fund outperformed the S&P 500 by 318 basis points and the NASDAQ
Composite by 713 basis points.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO &
CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
PELICAN FUND AND THE S&P 500 INDEX
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
1yr 5yr 10yr
- --------------------------------------------------------------------------------
<S> <C> <C>
-5.80% 13.96% 12.93%
- --------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Date Pelican Fund S&P 500
---- ------------ -------
<S> <C> <C>
2/28/90 10000 10000
3/31/90 10093 10265
6/30/90 10416 10909
9/30/90 8934 9410
12/31/90 9505 10253
3/31/91 10981 11742
6/30/91 10927 11716
9/30/91 11305 12343
12/31/91 11872 13377
3/31/92 12140 13041
6/30/92 12551 13289
9/30/92 12821 13709
12/31/92 13384 14400
3/31/93 14645 15029
6/30/93 15362 15102
9/30/93 15920 15491
12/31/93 16075 15851
3/31/94 15669 15249
6/30/94 15614 15313
9/30/94 16741 16062
12/31/94 16570 16060
3/31/95 18093 17623
6/30/95 19607 19306
9/30/95 20874 20840
12/31/95 21511 22094
3/31/96 22739 23280
6/30/96 23335 24325
9/30/96 23707 25077
12/31/96 25962 27167
3/31/97 25962 27896
6/30/97 29113 32766
9/30/97 32201 35220
12/31/97 32851 36231
3/31/98 35977 41284
6/30/98 36229 42647
9/30/98 32458 38405
12/31/98 36683 46584
3/31/99 36524 48905
6/30/99 40270 52353
9/30/99 36640 49083
12/31/99 37698 56385
2/29/00 33761 52538
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The total returns would have been lower had certain expenses not been
reimbursed during the periods shown and do not include the effect of taxes. Each
performance figure assumes purchase at the beginning and redemption at the end
of the stated period. Past performance is not indicative of future performance.
Information is unaudited.
- --------------------------------------------------------------------------------
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of GMO Trust and the Shareholders of
GMO Tax-Managed International Equities Fund (A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statement of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Tax-Managed International
Equities Fund at February 29, 2000, the results of its operations, the changes
in its net assets and the financial highlights for the periods presented, in
conformity with accounting principles generally accepted in the United States.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at February 29, 2000 by correspondence with the custodian and
brokers, provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 13, 2000
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 95.6%
AUSTRALIA - 4.4%
9,700 Amcor Ltd 35,744
6,000 Australia and New Zealand Banking Group Ltd 36,886
7,500 Bank of Western Australia 19,300
49,600 Boral Ltd * 70,976
6,200 Broken Hill Proprietary Ltd 61,274
30,100 Burswood Ltd 11,276
1,600 Coca Cola Amatil Ltd 3,174
7,500 Commonwealth Bank of Australia 115,116
4,700 Consolidated Rutile Ltd * 1,819
28,200 CSR Ltd 61,483
53,300 Email Ltd 67,432
102,200 MIM Holdings Ltd 64,649
164,800 National Australia Bank Ltd 2,165,925
17,000 News Corp Ltd 247,796
2,800 Normandy NFM Ltd * 6,191
21,800 North Broken Hill Peko Ltd 36,818
5,000 OPSM Protector Ltd 7,830
49,600 Origin Energy Ltd 38,047
16,000 Pioneer International Ltd 42,647
39,300 PMP Communications Ltd 50,927
1,654 Publishing & Broadcasting Ltd 15,432
98,500 QCT Resources Ltd 42,346
82,900 Resolute Ltd 12,728
81,100 Santos Ltd 190,763
120,000 Schroders Property 170,979
283,300 Telstra Corp 1,329,622
1,700 Weston (George) Foods Ltd 6,818
------------
4,913,998
------------
AUSTRIA - 1.0%
300 Austria Tabakwerke AG 11,957
4,400 Bank Austria AG 191,472
1,000 Boehler Uddeholm (Bearer) 37,249
200 Brau Union AG 8,310
150 Oesterreichische Brau Beteiligungs AG 5,791
26,700 Voest-Alpine Stahl AG 822,574
------------
1,077,353
------------
BELGIUM - 0.6%
3,900 Arbed SA 362,331
1,000 Bekaert SA 44,142
See accompanying notes to the financial statements. 1
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
BELGIUM - CONTINUED
2,400 Compagnie Benelux Paribas SA 128,931
2,800 Compagnie Maritime Belge SA 121,307
------------
656,711
------------
BRAZIL - 0.9%
2,940 Embratel Participacoes SA ADR 70,560
4,000,000 Metalurgica Gerdau SA 142,413
9,700 Tele Centro Oeste Celular ADR 87,300
970 Tele Centro Sul Participacoes ADR 69,961
1,000 Tele Leste Celular Participacoes SA ADR 40,500
1,649 Tele Nordeste Celular Participacoes ADR 98,528
5,420 Tele Norte Leste Participacoes ADR 138,210
1,100 Telecomunicacoes de Sao Paulo SA 37,606
530 Telesp Celular Participacoes SA ADR 28,554
4,080 Unibanco GDR 118,830
41,500 Usinas Siderurgicas de Minas Gerais SA (Usiminas) 136,262
------------
968,724
------------
CZECH REPUBLIC - 0.3%
7,800 Komercni Banka AS * 194,216
600 Tabak AS 113,672
------------
307,888
------------
DENMARK - 0.3%
2,700 Aarhus Oliefabrik Class A 60,031
33 Codan A/S * 2,546
100 Codan Forsikring 8,103
2,000 DFDS A/S 81,675
80 Kapital Holding AS 2,945
4,300 Korn-OG Foderstofkomp 94,769
6,900 SAS Danmark A/S 71,116
1,175 Unidanmark AS Class A (Registered) 67,025
------------
388,210
------------
FINLAND - 0.6%
36,300 Finnair Class A 154,120
30,900 Kemira Oyj 193,368
1,100 Partek Oyj 14,403
42,300 Rautaruukki Oyj 232,129
3,300 Stora Enso Oyj Class A 33,518
------------
627,538
------------
2 See accompanying notes to the financial statements.
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
FRANCE - 9.0%
300 Axa SA 37,692
6,444 Banque Nationale de Paris 508,725
520 Bongrain 144,682
2,000 Brocacef Holding 25,032
38 Cap Gemini SA 10,463
5,640 Chargeurs International SA 313,306
3,270 Christian Dior 668,991
40 Colas SA 6,970
445 Compagnie Generale d'Industrie et de Participations 29,883
5,970 Compagnie Parisienne de Reescompte 310,371
1,880 Credit National 118,191
100 Damart SA 6,980
840 Dexia * 114,837
840 Dexia Strip * 40
2,440 Eiffage SA 122,154
2,000 Elf Aquitaine SA 313,857
910 Elf Gabon 81,478
9,300 Eramet 509,458
5,340 Eridania Beghin-Say SA 448,303
4,140 Esso S.A.F. 255,887
5,300 France Telecom SA 854,681
10 Fromageries Bel SA 6,778
4,945 Gaz et Eaux 285,648
10 Guyenne et Gascogne 3,687
1,480 Imetal 175,259
14,500 Michelin SA Class B 452,719
40 Nord-Est 1,010
14,700 Pechiney SA Class A 857,637
850 Pernod Ricard 42,963
5,000 Renault SA 199,289
11,220 Saint-Gobain 1,560,897
8,200 Sommer Allibert 181,575
4,790 Sylea (Bearer) 159,560
65,590 Usinor Sacilor 956,674
7,920 Vallourec 320,249
------------
10,085,926
------------
GERMANY - 6.7%
1,100 Allianz AG 383,579
62,300 Bankgesellschaft Berlin AG * 986,660
17,950 BASF AG 818,273
10,400 Bayer AG 433,045
See accompanying notes to the financial statements. 3
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
GERMANY - CONTINUED
1,150 Bilfinger & Berger 16,607
19,600 DaimlerChrysler AG 1,328,441
21,600 Deutsche Telekom 1,807,120
300 Escada AG 29,316
12,700 FAG Kugelfischer 106,374
800 Heidelberg Port-Zement 45,057
12,800 IWKA AG 213,191
100 Leirheit AG 3,033
1,000 Phoenix AG 9,916
2,700 Schmalbach-Lubeca 332,726
28,080 SKW Trostberg 167,611
3,900 Suedzucker AG 39,425
34,300 Thyssen Krupp AG * 827,209
5,590 Walter Bau AG 34,982
------------
7,582,565
------------
HONG KONG - 3.9%
115,000 Amoy Properties Ltd 64,646
214,000 China Telecom Ltd * 1,972,876
76,100 Chinese Estates Holdings Ltd * 12,809
104,000 Goldlion Holdings Ltd 9,888
54,000 Hang Lung Development Co Ltd 41,977
4,000 Hang Seng Bank 36,105
10,000 Henderson Land Development Co Ltd 42,530
20,000 Hong Kong Land Holdings 25,400
215 Hong Kong Telecommunications 717
9,000 Hutchison Whampoa 141,080
260,000 Jardine International Motor Holdings Ltd 79,342
235,800 Jardine Matheson Holdings Ltd 825,300
417,000 Jardine Strategic Holdings Ltd 658,860
226,000 Kumagai Gumi Ltd 54,011
50,000 Mandarin Oriental ADR 25,750
55,000 New Asia Realty & Trust Class A 56,535
274,000 Oriental Press Group * 103,857
566,000 Regal Hotels International Ltd * 41,453
150,000 San Miguel Brewery Ltd 25,248
84,000 Sime Darby 26,983
212 Sino Land 101
18,000 Swire Pacific Ltd Class A 86,267
107,000 Tai Cheung Holdings Ltd 24,472
111,000 Wheelock and Co Ltd 74,164
------------
4,430,371
------------
4 See accompanying notes to the financial statements.
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
HUNGARY - 0.3%
15,200 Danubius Hotel & Spa * 324,786
------------
INDIA - 0.3%
3,000 Grasim Co 29,625
20,000 Grasim Co (Registered Shares) 197,500
10,000 Indian Rayon & Industries GDR 20,750
30,000 Indo Gulf Fertilizers GDR 50,250
------------
298,125
------------
INDONESIA - 0.7%
236,500 Astra International * 117,056
115,500 Gudang Garam 192,500
1,775,000 Matahari Putra Prima Tbk * 239,057
318,000 PT Daya Guna Samudera * 67,455
151,500 PT Indofood Sukses Makmur Tbk * 125,485
105,000 United Tractors * 91,919
------------
833,472
------------
IRELAND - 0.1%
29,100 Crean (James) * 7,564
16,000 Greencore Group 46,212
29,100 Oakhill Group Plc * 11,206
------------
64,982
------------
ITALY - 4.8%
3,000 Banco Ambrosiano Veneto SPA (Non Convertible) 6,210
5,090 Beni Stabili SPA * 2,739
4,000 Burgo (Cartiere) SPA 23,491
2,000 Buzzi Unicem SPA * 7,413
13,000 Caffaro 13,692
22,400 Danieli and Co SPA (Non Convertible) 50,464
221,000 ENI SPA 1,027,668
13,540 Fiat SPA (Non Convertible) 195,013
3,800 Fila Holding SPA ADR * 32,300
71,100 IFIL Finanziaria di Partecipazioni SPA (Non Convertible) 323,776
4,000 Immsi SPA * 9,165
5,750 Luxottica Group ADR 139,797
10,000 Pirelli & Co 22,288
2,000 Pirelli & Co (Non Convertible) 3,841
280 Reno de Medici SPA 636
5,090 San Paolo IMI SPA 80,367
See accompanying notes to the financial statements. 5
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ITALY - CONTINUED
4,000 Sirti SPA 9,435
5,000 Sorin Biomedica SPA 20,747
252,200 Telecom Italia Mobile SPA 3,435,699
------------
5,404,741
------------
JAPAN - 24.6%
3,000 77 Bank Ltd 22,175
43,000 Aida Engineering 158,136
20,300 Aoki International 63,752
18,000 Atsugi Nylon Industrial * 16,385
9,000 Bandai Co 344,909
103,000 Bank Of Tokyo-Mitsubishi 1,261,071
12,000 Brother Industries Ltd 25,670
409,000 Cosmo Oil Co Ltd 446,771
182,000 Daido Steel Co Ltd 248,509
4,000 Dainippon Pharmaceutical Co Ltd 31,132
79,000 Daio Paper Corp 450,894
13,500 Daito Trust Construction Co Ltd 175,732
7,000 Dowa Mining Co 11,024
67,000 Ezaki Glico Co Ltd 309,827
1,000 Fanuc Co 97,401
18,000 Fuji Bank 140,258
55,000 Fukuyama Transporting Co Ltd 392,017
87,000 Furukawa Co Ltd * 128,296
16,000 Gunze Ltd 40,781
4,000 Heiwa Corp 76,100
111,000 Heiwa Real Estate Co Ltd 230,376
21,000 Hitachi Ltd 286,550
59,000 Hitachi Metals Ltd 317,946
19,000 Hokuriku Bank * 39,261
14,000 Honda Motor Co Ltd 458,787
73,000 Ishikawajima-Harima Heavy Industries 74,425
93,000 Itoham Foods Inc 364,025
23,000 Izumiya Co Ltd 136,717
83,000 JACCS Co 293,150
13,000 Japan Radio Co 134,905
11,000 JGC Corp * 26,535
211,000 Joshin Denki Co Ltd 505,148
66,000 Kamigumi Co Ltd 258,341
68,000 Kandenko Co 245,123
95,000 Kansai Paint Co 211,005
6,000 Kawasaki Heavy Industries Ltd 6,281
6 See accompanying notes to the financial statements.
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
JAPAN - CONTINUED
1,000 Kissei Pharmaceutical Co Ltd 16,840
1,000 Kokusai Denshin Denwa 93,305
78,000 Konica Corp 349,333
18,000 Kubota Corp 52,433
98,000 Kurabo Industries Ltd 115,971
5,000 Kyodo Printing 17,705
66,000 Kyudenko Corp 187,447
26,000 Kyushu Electric Power Co Inc 309,098
56,000 Maeda Road Construction 226,844
124,000 Marubeni Corp 504,556
16,000 Matsushita Electric Industrial Co Ltd 466,069
7,000 Meiji Milk Products 43,967
65,000 Meiji Seika Kaisha Ltd 431,933
55,000 Misawa Homes 170,224
32,000 Mitsubishi Belting 71,658
87,000 Mitsubishi Corp 642,274
8,000 Mitsubishi Gas Chemical Co Inc 14,710
253,000 Mitsubishi Heavy Industries 693,214
140,000 Mitsubishi Material * 465,159
86,000 Mitsubishi Paper Mills Ltd 93,159
28,000 Mitsui OSK Lines Ltd 44,604
30,000 Mitsui Trust & Banking Co Ltd 46,425
80,000 Mizuno Corp 192,253
24,000 MOS Food Services 218,907
22,000 Nachi Fujikoshi Co 29,839
106,000 Nagase & Co 361,841
6,000 Nichirei 15,238
2,000 Nintendo Co Ltd 436,758
76,000 Nippon Beet Sugar 110,000
72,000 Nippon Chemical 169,096
6,000 Nippon Express Co Ltd 40,089
66,000 Nippon Flour Mills Co Ltd 148,996
79,000 Nippon Hodo Co 327,923
273,000 Nippon Oil Co Ltd 959,246
105,000 Nippon Paint Co 253,288
14,000 Nippon Shinpan Co 31,860
185,000 Nippon Suisan Kaisha Ltd 277,866
See accompanying notes to the financial statements. 7
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
JAPAN - CONTINUED
74,000 Nippon Synthetic Chemical 110,473
16,000 Nishimatsu Construction 48,646
300,000 Nissan Motor Co * 1,133,312
3,000 Nisshin Oil Mills Ltd 8,056
445,000 Nisshin Steel Co Ltd 413,181
42,000 Nisshinbo Industries Inc 157,899
667,000 NKK Corp * 364,298
157,000 NOF Corp 354,431
45,000 NTN Corp 98,721
81,000 Okumura Corp 221,201
101,000 Onoda Cement Co Ltd 152,619
202,000 Orient Corp 742,870
1,000 Orix Corp 172,955
1,000 Rohm Co Ltd 324,519
16,000 Ryosan Co 262,018
5,000 Sankyo Co Ltd 103,546
22,000 Sanyo Electric Co 89,718
94,000 Seino Transportation Co Ltd 471,476
48,000 Sekisui Chemical 150,307
5,000 Sekisui House Ltd 37,322
2,000 Seven-Eleven Japan Co 201,356
3,000 Shikoku Electric Power 36,184
28,000 Shimizu Corp 67,544
6,000 Shionogi and Co Ltd 85,749
20,000 Showa Shell Sekiyu 67,726
8,000 Snow Brand Milk Products Co Ltd 33,572
2,400 Sony Corp 710,027
4,000 Stanley Electric Co Ltd 30,877
5,000 Sumitomo Corp 55,437
10,000 Sumitomo Osaka Cement Co Ltd 37,504
9,000 Sumitomo Warehouse 22,939
2,000 Suzuki Motor Corp 32,352
2,000 Takara Standard Co 7,301
3,000 Takeda Chemical Industries Ltd 169,314
69,000 Tanabe Seiyaku Co Ltd 419,571
62,000 Tekken Construction * 64,904
50,000 TOA Corp 56,893
159,000 Toagosei Co Ltd 270,657
8 See accompanying notes to the financial statements.
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
JAPAN - CONTINUED
97,000 Tobishima Corp * 49,447
69,000 Tohoku Electric Power Co Inc 816,531
46,000 Tokai Carbon Co Ltd 74,535
13,000 Tokyo Gas Co 23,904
196,000 Tokyo Ink Manufacturing Co Ltd 360,402
14,000 Tokyo Style Co Ltd 114,697
25,000 Toshiba Tungaloy Co Ltd 46,197
4,000 Toyo Seikan Kaisha 52,251
3,000 Toyo Suisan Kaisha 18,570
30,000 Toyobo Co Ltd 39,598
32,000 Toyota Motor Corp 1,278,777
14,000 Uniden Corp 120,941
5,000 Yakult Honsha Co Ltd 41,919
6,000 Yamaha Motor Co 42,329
69,000 Yodogawa Steel Works 179,009
33,000 Yokogawa Bridge Corp 84,411
20,000 Yokohama Rubber Co 61,900
------------
27,852,436
------------
KOREA - 0.9%
564 Cheil Jedang Corp 36,350
2,340 Chosun Brewery Co Ltd * 57,926
3,300 Dongwon Securities Co 67,394
8,965 Housing & Commercial Bank 159,706
5,558 Hyundai Industrial Development 33,414
4,621 Kookmin Bank 51,476
1,100 Korea Electric Power Corp 27,522
7,500 Korea Electric Terminal Co 84,210
190 Lotte Confectionery Co 22,677
2,100 Pacific Chemical Corp 33,233
660 Pohang Iron & Steel (a) 67,988
183 Samsung Electronics 41,418
550 Shinsegae Department Store 22,611
45 SK Telecom 167,093
3,780 SK Telecom ADR 169,864
------------
1,042,882
------------
MALAYSIA - 2.1%
13,950 APM Automotive Holdings Berhad * 10,279
20,000 Berjaya Group Berhad 5,132
2,000 Cement Industries of Malaysia Berhad 1,632
15,000 Edaran Otomobil Berhad 63,158
See accompanying notes to the financial statements. 9
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
MALAYSIA - CONTINUED
19,000 Genting Berhad 84,000
6,000 Golden Hope Plantations Berhad 5,337
125,000 IJM Corp Berhad Class A 140,132
105,000 Malayan Banking Berhad 472,500
1,000 Oriental Holdings Berhad 2,355
97,000 Resorts World Berhad 352,263
6,990,000 Tan Chong International Ltd 1,059,799
93,000 Tan Chong Motor Holdings Berhad 43,808
4,650 Warisan TC Holdings Berhad * 2,814
84,000 YTL Corp 154,737
------------
2,397,946
------------
MEXICO - 0.1%
13,000 Grupo Industrial Bimbo Class A * 21,454
660 Grupo Televisa SA GDR * 50,696
2,650 TV Azteca SA ADR 36,934
------------
109,084
------------
NETHERLANDS - 3.2%
7,800 Boskalis Westminster NV 173,844
14,780 Buhrmann NV Maastricht 389,175
8,400 DSM NV 275,528
2,600 Gamma Holdings NV 87,110
11,900 Hollandsche Beton Groep NV 164,977
8,175 KLM-Konin Luchtvaart Mij NV 152,294
27,000 Kon Bolswessanen 291,136
2,700 Koninklijke KPN NV 343,254
2,400 Koninklijke Ten Cate 90,113
3,100 Koninklijke Volker Wessels 49,245
7,600 Nedlloyd 174,142
22,100 Royal Dutch Petroleum 1,155,116
5,600 Stork NV 68,740
5,906 Van Ommeren Vopak * 139,023
400 Wereldhave NV 16,232
------------
3,569,929
------------
NEW ZEALAND - 0.3%
83,000 Air New Zealand Class B 84,640
200,000 Brierley Investment Ltd 35,934
105,400 Fletcher Challenge Buildings 118,743
10,000 Telecom Corp of New Zealand 41,276
165,000 Trans Tasman Properties Ltd * 18,429
19,000 Tranz Rail Holdings Ltd 31,370
------------
330,392
------------
10 See accompanying notes to the financial statements.
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
NORWAY - 0.9%
93,100 Christiania Bank OG Kreditkasse 471,687
136,500 Den Norske Bank Class A 494,677
400 Norske Skogindustrier ASA Class B 12,183
------------
978,547
------------
POLAND - 0.6%
1,700 Bank Slaski SA 105,306
11,400 Exbud SA * 107,294
5,900 Prokom Software SA 412,929
------------
625,529
------------
PORTUGAL - 1.1%
912 Cimpor-Cimentos de Portugal SGPS SA (Registered) 13,838
55,300 Electricidade de Portugal 1,103,667
1,400 Inapa-Invest Particip Gesta 10,581
5,000 Mota & Co SA 47,704
2,800 Portucel Industrial Empresa 22,051
500 Salvador Caetano 9,483
------------
1,207,324
------------
RUSSIA - 0.1%
2,600 Lukoil Holding Co ADR 108,550
------------
SINGAPORE - 4.2%
399,900 Asia Food & Properties Ltd * 135,721
525,000 Chuan HUP Holdings Ltd 121,831
1,500 Creative Technology Ltd 32,633
17,000 Cycle & Carriage Ltd 37,478
4,652 DBS Group Holdings Ltd 57,485
43,500 Fraser & Neave 121,135
1,018,000 Goldtron * 233,283
74,000 Hai Sun Hup Group Ltd 31,125
100,000 Haw Par Brothers International Ltd 170,563
278,500 Hotel Properties Ltd 245,588
66,900 Inchcape Berhad 52,008
15,750 Oversea-Chinese Banking Corp 99,597
16,330 Overseas Union Bank 72,475
235,100 Singapore Airlines Ltd (Registered) 2,182,282
456,100 Singapore Telecom 740,895
241,400 Straits Trading Co Ltd 252,086
See accompanying notes to the financial statements. 11
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
SINGAPORE - CONTINUED
9,100 Times Publishing Ltd 18,583
19,008 United Overseas Bank 120,199
208,000 Van Der Horst Ltd * 53,698
------------
4,778,665
------------
SPAIN - 2.6%
61,100 Aceralia SA 714,712
14,700 Acerinox SA (Registered) 529,301
11,100 Azucarera Ebro Agricolas 135,719
3,000 Banco Bilbao Vizcaya SA 43,613
6,200 Cristaleria Espanola SA 216,557
100 Empresa Nacional de Celulosas SA 2,069
20,414 Endesa 431,789
2,000 Europistas Concesionaria Espanola SA * 10,783
200 Fabricacion de Automoviles Renault de Espana SA 8,973
6,600 FENOSA SA 136,614
19,200 Hidro Cantabrico 303,336
17,400 Repsol SA 329,174
11,500 Tableros Defibras Class B 115,145
------------
2,977,785
------------
SWEDEN - 1.0%
1,500 Custos AB 37,128
1,200 Custos AB Class B 29,839
5,100 Gambro AB Class A 35,485
1,600 Gambro AB Class B 11,315
4,400 Mo Och Domsjo AB Class B 124,467
6,400 Skanska AB Class B 220,463
18,900 SSAB Swedish Steel Class A 229,594
9,700 SSAB Swedish Steel Class B 115,621
1,600 Svenska Cellulosa Class B 38,964
42,900 Trelleborg AB Class B 300,941
------------
1,143,817
------------
SWITZERLAND - 3.2%
600 BK Vision AG (Bearer) * 109,686
110 Bobst AG (Bearer) 141,753
200 Bobst AG (Registered) 125,989
100 Financiere Richemont AG Class A 230,760
1,200 Hero AG 136,658
260 Hilti AG (Participating Certificate) 205,706
12 See accompanying notes to the financial statements.
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
SWITZERLAND - CONTINUED
500 Merkur Holding AG (Registered) 143,850
300 Movenpick Holdings (Bearer) 140,254
160 Nestle AG (Registered) 269,767
200 Novartis AG (Registered) 254,615
420 Pargesa Holdings SA (Bearer) 792,975
500 Rieter Holdings AG (Registered) 308,379
200 Schweizerische Industrie-Gesellschaft Holding AG (Registered) 120,235
600 Sika Finanz AG (Bearer) 198,154
50 Societe Generale de Surveillance Holding SA (Registered) * 20,079
360 Swatch Group AG (Bearer) 387,101
20 Swiss Reinsurance (Bearer) 32,151
------------
3,618,112
------------
THAILAND - 1.0%
20,500 Advanced Info Service Public Co Ltd (Foreign Registered) * 318,405
137,000 Bangkok Bank Pcl (Foreign Registered) * 221,055
61,600 CP Feedmill Public Co Ltd (Foreign Registered) * 223,030
1,420,000 Quality House Co Ltd (Foreign Registered)* 134,120
227,500 Thai Farmers Bank Pcl (Foreign Registered) * 214,876
------------
1,111,486
------------
UNITED KINGDOM - 15.3%
40,700 Anglian Water Plc 286,238
15,100 Arcadia Group 12,038
78,200 Arjo Wiggins Appleton Plc 195,052
45,800 Associated British Food 255,769
5,649 AstraZeneca Plc 187,183
30,000 Bass Plc 318,019
45,200 Beazer Holmes Plc 79,204
18,000 Berkley Group 127,160
48,900 BICC Group 45,546
75,900 Billiton Plc 310,333
42,200 BP Amoco Plc 324,768
68,224 British Airways Plc 322,028
33,500 British Telecom Plc 584,906
61,295 BTR Siebe Plc 281,098
17,200 Christian Salvesen Plc 36,385
69,200 Coats Viyella 44,516
622,540 Corus Group Plc 1,031,911
66,900 Courtaulds Textiles Plc 132,543
See accompanying notes to the financial statements. 13
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
UNITED KINGDOM - CONTINUED
118,500 De Vere Group Plc 508,363
91,100 Delta Plc 154,601
234,165 Elementis Plc 266,159
32,400 Glynwed International 110,608
700 Hambros Plc Class A * 1,989
31,100 Hazlewood Foods 37,067
27,500 Hepworth Plc 65,119
167,500 HSBC Holdings Plc 1,950,126
15,300 Hyder Plc 48,609
51,500 Inchcape Plc 197,154
16,500 Johnson Matthey 188,065
41,000 Laird Group 125,242
59,400 Lonrho Plc 637,648
374,300 MFI Furniture Group 338,284
7,200 Morgan Crucible 28,416
11,000 National Power 64,989
47,100 Northern Foods Plc 68,778
227,200 Pilkington 238,515
27,100 Powergen Plc 186,848
18,000 Rank Group Plc 44,897
44,900 Rexam Plc 129,890
3,300 RMC Group 38,030
4,162 Royal Bank of Scotland Group 54,731
66,800 Royal & Sun Alliance Insurance Group 364,870
12,700 Safeway Plc 31,026
28,300 Scottish Power Plc 214,891
23,200 Severn Trent Plc 193,195
8,300 Signet Group Plc 6,650
119,100 Smithkline Beecham Plc 1,333,982
74,891 Smiths Industries Plc 911,528
3,200 Somerfield Plc 2,766
91,100 Storehouse Plc 63,998
5,892 Sun Life & Province Holding 32,322
7,400 Tate & Lyle 29,964
27,100 Taylor Woodrow Plc 57,969
7,700 Tesco 20,847
33,816 Thames Water Plc 371,016
14 See accompanying notes to the financial statements.
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares Description Value ($)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
UNITED KINGDOM - CONTINUED
45,200 Thistle Hotels Plc 103,822
414,100 TI Group Plc 2,201,399
33,600 Unigate 154,619
10,714 Unilever Plc 65,244
3,200 United Biscuits Plc 13,160
69,800 United Utilities 721,192
20,000 Vodafone Group Plc 112,163
37,800 Wilson (Connolly) Holdings 77,277
14,000 Wimpey (George) 22,543
35,100 Yorkshire Water 143,375
------------
17,308,643
------------
VENEZUELA - 0.5%
15,800 Compania Anonima Nacional Telefonos de Venezuela (CANTV) ADR 526,338
------------
TOTAL COMMON STOCKS (Cost $111,795,827) 107,652,855
------------
PREFERRED STOCKS - 2.3%
BRAZIL - 0.4%
3,000,000 Cemig 49,353
995,355 Gerdau SA 27,675
3,540,000 Itaubanco SA (Registered) 281,079
22,000 Usinas Siderurgicas de Minas Gerais SA (Usiminas) 119,356
------------
477,463
------------
GERMANY - 1.3%
6,300 Draegerwerk AG 49,736
17,200 Dyckerhoff AG (Non Voting) 442,961
300 Escada AG 28,796
5,800 Krones AG 161,935
19,800 MAN AG 397,452
25,000 Villeroy & Boch AG (Non Voting) 221,433
4,000 Volkswagen AG 91,269
60 Walter Bau AG 399
------------
1,393,981
------------
ITALY - 0.5%
1,000 Banca Nazionale dell'Agricoltura (BNA) (Non Convertible) 1,261
21,210 Fiat SPA 359,391
10,050 IFI-Istituto Finanziario 254,469
1,000 La Rinascente SPA 3,485
------------
618,606
------------
------------
See accompanying notes to the financial statements. 15
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
<CAPTION>
Shares/
Par Value Description Value ($)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
KOREA - 0.1%
1,300 Samsung Electronics (Non Voting) 118,380
------------
TOTAL PREFERRED STOCKS (Cost $2,663,638) 2,608,430
------------
CONVERTIBLE SECURITIES - 0.1%
POLAND - 0.1%
DEM 140,000 Elektrim SA, 2.00% due 5/30/04 110,263
------------
TOTAL CONVERTIBLE SECURITIES (Cost $96,905) 110,263
------------
RIGHTS & WARRANTS - 0.0%
HONG KONG - 0.0%
5,100 Chinese Estates Holdings Ltd Warrants 11/24/00 * 295
10,000 Mandarin Oriental International Ltd Rights 3/06/00 * 100
1 Mandarin Oriental International Ltd Rights 3/06/00 * -
------------
395
------------
MALAYSIA - 0.0%
21,000 YTL Corp Berhad Warrants 6/26/09 * 16,026
------------
THAILAND - 0.0%
75,000 Quality House Co Ltd Warrants 10/30/02 * -
------------
TOTAL RIGHTS & WARRANTS (Cost $3,285) 16,421
------------
SHORT-TERM INVESTMENTS - 0.3%
CASH EQUIVALENTS - 0.3%
$ 300,000 Banque Nationale Paribas (London) Time Deposit, 5.81% due
3/01/00 300,000
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $300,000) 300,000
------------
TOTAL INVESTMENTS - 98.3%
(Cost $114,859,655) 110,687,969
Other Assets and Liabilities (net) - 1.7% 1,935,281
------------
TOTAL NET ASSETS - 100.0% $112,623,250
------------
------------
</TABLE>
16 See accompanying notes to the financial statements.
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
NOTES TO THE SCHEDULE OF INVESTMENTS:
ADR American Depositary Receipt
GDR Global Depository Receipt
(a) Valued by management (Note 1).
* Non-income producing security.
See accompanying notes to the financial statements. 17
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A SERIES OF GMO TRUST)
Schedule of Investments - continued
(showing percentage of total net assets)
February 29, 2000
- --------------------------------------------------------------------------------
At February 29, 2000, industry sector diversification of the
Fund's equity investments was as follows:
<TABLE>
INDUSTRY SECTOR (UNAUDITED)
<S> <C>
Telecommunications 11.4%
Banking 10.0
Metals and Mining 9.0
Conglomerates 7.3
Consumer Goods 6.9
Automotive 5.8
Machinery 5.6
Construction 5.0
Energy Services 4.9
Chemicals 4.1
Utilities 4.1
Transportation 4.0
Services 3.4
Health Care 2.5
Financial Services 2.4
Textiles 1.6
Retail Trade 1.6
Paper and Allied Products 1.5
Electronic Equipment 1.4
Communications 0.9
Food and Beverage 0.8
Insurance 0.8
Real Estate 0.7
Computers 0.4
Aerospace 0.1
Miscellaneous 3.8
--------
100.0%
--------
--------
</TABLE>
18 See accompanying notes to the financial statements.
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
<TABLE>
Statement of Assets and Liabilities - February 29, 2000
- --------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value (cost $114,859,655) (Note 1) $ 110,687,969
Foreign currency, at value (cost $2,050,929) (Note 1) 1,974,984
Cash 71,564
Receivable for securities sold 26,699
Dividends and interest receivable 75,123
Foreign withholding taxes receivable 40,222
Receivable for expenses waived or borne by Manager (Note 2) 27,784
------------------
Total assets 112,904,345
------------------
LIABILITIES:
Net payable for open forward foreign currency contracts 111,459
Accrued capital gain and repatriation taxes payable (Note 1) 35,505
Payable to affiliate for (Note 2):
Management fee 48,924
Shareholder service fee 13,590
Accrued expenses 71,617
Total liabilities 281,095
------------------
NET ASSETS $ 112,623,250
------------------
------------------
NET ASSETS CONSIST OF:
Paid-in capital $ 117,974,022
Distributions in excess of net investment income (598,543)
Accumulated net realized loss (353,044)
Net unrealized depreciation (4,399,185)
------------------
$ 112,623,250
------------------
------------------
NET ASSETS ATTRIBUTABLE TO:
Class III Shares $ 112,623,250
------------------
------------------
SHARES OUTSTANDING:
Class III 10,802,456
------------------
------------------
NET ASSET VALUE PER SHARE:
Class III $ 10.43
------------------
------------------
</TABLE>
See accompanying notes to the financial statements. 19
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
<TABLE>
Statement of Operations - Year Ended February 29, 2000
- ---------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends (net of foreign tax expense of $154,281) $ 1,450,802
Interest 117,775
-------------------
Total income 1,568,577
-------------------
EXPENSES:
Management fee (Note 2) 411,732
Custodian fees 187,057
Audit fees 38,640
Transfer agent fees 27,446
Registration fees 5,319
Legal fees 1,096
Trustees fees (Note 2) 848
Miscellaneous 3,190
Fees waived or borne by Manager (Note 2) (261,860)
-------------------
413,468
Shareholder service fee - Class III (Note 2) 114,370
-------------------
Net expenses 527,838
-------------------
Net investment income 1,040,739
-------------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (329,830)
Foreign currency, forward contracts and foreign
currency related transactions (301,855)
-------------------
Net realized loss (631,685)
-------------------
Change in net unrealized appreciation (depreciation) on:
Investments (Note 1) (4,234,628)
Foreign currency, forward contracts and foreign
currency related transactions (115,890)
-------------------
Net unrealized loss (4,350,518)
-------------------
Net realized and unrealized loss: (4,982,203)
-------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (3,941,464)
-------------------
-------------------
</TABLE>
20 See accompanying notes to the financial statements.
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM JULY 29, 1998
YEAR ENDED (COMMENCEMENT OF OPERATIONS)
FEBRUARY 29, 2000 THROUGH FEBRUARY 28, 1999
-------------------- ---------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 1,040,739 $ 59,031
Net realized loss (631,685) (44,913)
Change in net unrealized appreciation (depreciation) (4,350,518) (48,667)
-------------------- --------------------
Net decrease in net assets resulting from operations (3,941,464) (34,549)
-------------------- --------------------
Distributions to shareholders from:
Net investment income - Class III (1,040,739) (58,701)
In excess of net investment income - Class III (324,705) (8,556)
-------------------- --------------------
(1,365,444) (67,257)
-------------------- --------------------
Net share transactions - Class III (Note 5) 99,401,085 18,630,879
-------------------- --------------------
Total increase in net assets 94,094,177 18,529,073
NET ASSETS:
Beginning of period 18,529,073 -
-------------------- --------------------
End of period (including distributions in excess
of net investment income of $598,543 and
$27,931, respectively) $ 112,623,250 18,529,073
-------------------- --------------------
-------------------- --------------------
</TABLE>
See accompanying notes to the financial statements. 21
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
Financial Highlights
(For a Class III Share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM JULY 29, 1998
YEAR ENDED (COMMENCEMENT OF OPERATIONS)
FEBRUARY 29, 2000 THROUGH FEBRUARY 28, 1999
----------------- ----------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.71 $ 10.00
---------------- --------------
Income (loss) from investment operations:
Net investment income 0.15(b) 0.04
Net realized and unrealized gain (loss) 0.70 (0.28)
---------------- --------------
Total from investment operations 0.85 (0.24)
---------------- --------------
Less distributions to shareholders:
From net investment income (0.10) (0.04)
In excess of net investment income (0.03) (0.01)
---------------- --------------
Total distributions (0.13) (0.05)
---------------- --------------
NET ASSET VALUE, END OF PERIOD $ 10.43 $ 9.71
---------------- --------------
---------------- --------------
TOTAL RETURN (a) 8.65% (2.44%)**
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 112,623 $ 18,529
Net expenses to average
daily net assets 0.69% 0.69% *
Net investment income to average
daily net assets 1.36% 0.87% *
Portfolio turnover rate 5% 20%
Fees and expenses voluntarily waived or borne
by the Manager consisted of the following
per share amounts: $ 0.04 $ 0.12
</TABLE>
* Annualized
** Not annualized.
(a) Calculation excludes purchase premiums. The total returns would have
been lower had certain expenses not been waived during the periods
shown.
(b) Computed using average shares outstanding throughout the period.
22 See accompanying notes to the financial statements.
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
Notes to Financial Statements
February 29, 2000
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Tax-Managed International Equities Fund (the "Fund"), which commenced
operations on July 29, 1998, is a series of GMO Trust (the "Trust"). The
Fund is registered under the Investment Company Act of 1940, as amended, as
an open-end, non-diversified management investment company. The Fund is
advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager" or "GMO"). The Trust was established as a Massachusetts Business
Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985.
The Declaration of Trust permits the Trustees to create an unlimited number
of series ("Funds"), each of which issues a separate series of shares, and
to subdivide a series of shares into classes.
The Fund seeks high after-tax total return primarily through investment in
non-U.S. equity securities. The Fund's benchmark is the GMO EAFE (After
Tax).
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of financial statements in
accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each business
day, or if there is no such reported sale, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Securities which
are primarily traded on foreign exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges,
and those values are then translated into U.S. dollars at the current
exchange rate. Short-term investments with a remaining maturity of sixty
days or less are valued at amortized cost which approximates market value.
Securities for which quotations are not readily available are valued at
fair value as determined in good faith by the Trustees or other persons
acting at their direction.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the current exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at current exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
gains and losses on disposition of foreign currencies and forward foreign
exchange contracts, currency gains and losses realized between the trade
and settlement dates on securities transactions and the difference between
the amount of investment income and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent amounts actually received
or paid.
23
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts and forward cross
currency contracts in connection with settling planned purchases or sales
of securities or to hedge the currency exposure associated with some or all
of the Fund's portfolio securities. A forward currency contract is an
agreement between two parties to buy and sell a currency at a set price on
a future date. The market value of a forward currency contract fluctuates
with changes in forward currency exchange rates. Forward currency contracts
are marked to market daily and the change in value is recorded by the Fund
as an unrealized gain or loss. Realized gains or losses equal to the
difference between the value of the contract at the time it was opened and
the value at the time it was closed are recorded upon delivery or receipt
of the currency or, if a forward currency contract is offset by entering
into another forward currency contract with the same broker, upon
settlement of the net gain or loss. These contracts may involve market risk
in excess of the unrealized gain or loss reflected in the Fund's Statement
of Assets and Liabilities. In addition, the Fund could be exposed to risk
if the counterparties are unable to meet the terms of the contracts or if
the value of the currency changes unfavorably to the U.S. dollar. The U.S.
dollar value of the currencies the Fund has committed to buy or sell is
shown under Note 6 and represents the currency exposure the Fund has
acquired or hedged through currency contracts as of February 29, 2000.
FUTURES CONTRACTS
The Fund may purchase or sell index futures contracts. Stock index futures
contracts represent commitments for future delivery of cash based upon the
level of a specified index of equity securities at a given date. The Fund
may use futures contracts to manage its exposure to the stock market.
Buying futures tends to increase the Fund's exposure to the underlying
instrument. Selling futures tends to decrease the Fund's exposure to the
underlying instrument or hedge other Fund instruments. Upon entering into a
futures contract, the Fund is required to deposit with its custodian, in a
segregated account in the name of the futures broker, an amount of cash or
U.S. government and agency obligations in accordance with the initial
margin requirements of the broker or exchange. Futures contracts are marked
to market daily and an appropriate payable or receivable for the change in
value ("variation margin") is recorded by the Fund. The payable or
receivable is subsequently settled. Gains or losses are recognized but not
considered realized until the contracts expire or are closed. Futures
contracts involve, to varying degrees, risk of loss in excess of the
variation margin disclosed in the Statement of Assets and Liabilities.
Losses may arise from the changes in the value of the underlying
instrument, if there is an illiquid secondary market for the contracts or
if counterparties do not perform under the contract terms. Futures
contracts are valued at the settlement price established each day by the
board of trade or exchange on which they are traded. At February 29, 2000,
there were no open futures contracts.
SWAP AGREEMENTS
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to the equity markets. The Fund enters into total return swap agreements
which involve a commitment by one party in the agreement to pay interest in
exchange for a market linked return, both based on notional amounts. To the
extent that the total return of the security or index underlying the
transaction exceeds or falls short of the offsetting interest rate
obligation, the Fund will receive a payment from or make a payment to the
counterparty. Total return swaps are marked to
24
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
market daily based upon quotations from market makers and the change, if
any, is recorded as unrealized gain or loss in the Statement of Operations.
Payments received or made at the end of the measurement period are recorded
as realized gain or loss in the Statement of Operations. Entering into
these agreements involves, to varying degrees, elements of credit and
market risk in excess of the amounts recognized on the Statement of Assets
and Liabilities. Such risks involve the possibility that there will be no
liquid market for these agreements, that the counterparty to the agreements
may default on its obligation to perform or that there may be unfavorable
changes in the price of the security or index underlying these
transactions. At February 29, 2000, there were no open swap agreements.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instrument. Writing call
options tends to decrease the Fund's exposure to the underlying instrument.
When the Fund writes a call or put option, an amount equal to the premium
received is recorded as a liability and subsequently marked to market to
reflect the current value of the option written. Premiums received from
writing options which expire are treated as realized gains. Premiums
received from writing options which are exercised or closed are added to
the proceeds or offset against the amounts paid on the future, security, or
currency transaction to determine the realized gain or loss. The Fund as a
writer of an option has no control over whether the underlying future,
security, or currency may be sold (call) or purchased (put) and as a result
bears the market risk of an unfavorable change in the price of the future,
security, or currency underlying the written option. There is the risk the
Fund may not be able to enter into a closing transaction because of an
illiquid market. At February 29, 2000 there were no open written option
contracts.
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purhasing options which expire are treated as realized
losses. Premiums paid for purchasing options which are exercised or closed
are added to the amounts paid or offset against the proceeds on the
transaction to determine gain or loss. The risk associated with purchasing
put and call options is limited to the premium paid.
TAXES
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"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for U.
S. federal income tax purposes. Therefore, no provision for U. S. federal
income or excise tax is necessary. Taxes on foreign interest and dividend
income have been withheld in accordance with the applicable country's tax
treaty with the United States.
Dividends received by shareholders of the Fund which are derived from
foreign source income and foreign taxes paid by the Fund are to be treated,
to the extent allowable under the Code, as if received and paid by the
shareholders of the Fund.
25
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
The Fund may be subject to capital gains and repatriation taxes imposed by
certain countries in which it invests. The Fund has recorded a deferred tax
liability in respect of unrealized appreciation on foreign securities of
$35,505 for potential repatriation taxes at February 29, 2000. The accrual
for repatriation taxes is included in net unrealized gain in the Statement
of Operations.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. Distributions to shareholders are recorded by the fund
on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to foreign currency transactions.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable income and capital gains under U. S.
federal tax rules versus accounting principles generally accepted in the
United States. The calculation of net investment income per share in the
financial highlights table excludes these adjustments.
<TABLE>
<CAPTION>
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
------------------- ------------------------ ---------------------
<S> <C> <C>
$ (301,769) $301,856 $ (87)
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income, net
of applicable withholding taxes, is recorded on the ex-dividend date, or
when the Fund is informed of the ex-dividend date, if later. Interest
income is recorded on the accrual basis and is adjusted for the accretion
of discounts. In determining the net gain or loss on securities sold, the
cost of securities is determined on the identified cost basis.
EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
26
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is .60% of the amount
invested. All purchase premiums are paid to and recorded by the Fund as
paid-in capital. For the year ended February 29, 2000, the Fund received
$450,002 in purchase premiums. There is no premium for cash redemptions or
reinvested distributions. While no purchase premium is normally charged
with respect to in-kind purchases of Fund shares, a purchase premium of up
to .10% may be charged on certain in-kind purchases.
INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .54% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets at the annual rate of .15% for Class III
shares.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding brokerage commissions, certain other transaction costs
(including stamp duties and transfer taxes), shareholder service fees and
extraordinary expenses) exceed the management fee.
Prior to March 1, 1999, GMO earned a management fee at the annual rate of
.75% of average daily net assets. GMO had agreed to waive a portion of its
fee and bear other expenses to the extent that the Fund's annual expenses
(including the management fee but excluding brokerage commissions, certain
other transaction costs (including stamp duties and transfer taxes),
shareholder service fees and extraordinary expenses) exceeded .54% of
average daily net assets.
The Fund's portion of the fee paid by the Trust to the unaffiliated
Trustees during the year ended February 29, 2000, was $848. No remuneration
is paid to any Trustee or officer who is affiliated with the Manager.
27
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 29, 2000, aggregated
$101,716,751 and $3,529,195, respectively.
At February 29, 2000, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in the value of investments held
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Depreciation
---------------------------- -------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
$115,128,793 $13,788,481 $18,229,305 $4,440,824
</TABLE>
4. PRINCIPAL SHAREHOLDERS
At February 29, 2000, 48.52% of the outstanding shares of the Fund were
held by two shareholders, each holding in excess of 10% of the Fund's
outstanding shares.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Period from July 29, 1998
Year Ended (commencement of operations)
February 29, 2000 to February 28, 1999
-------------------------------------------- --------------------------------------------
Class III: Shares Amount Shares Amount
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Shares sold 8,828,580 $ 98,659,192 2,083,735 $ 20,337,787
Shares issued to
shareholders in
reinvestment of
distributions 65,946 741,893 835 8,274
Shares repurchased - - (176,641) (1,715,182)
-------------------- -------------------- -------------------- --------------------
Net increase 8,894,526 $ 99,401,085 1,907,929 $ 18,630,879
==================== ==================== ==================== ====================
</TABLE>
28
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- --------------------------------------------------------------------------------
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 29, 2000 is as
follows:
SHORT FORWARD CURRENCY CONTRACT
<TABLE>
<CAPTION>
Settlement Units Net Unrealized
Date Deliver/Receive of Currency Value Depreciation
---------------------- ------------------------ -------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
10/20/00 HKD 2,949,532 $ 378,679 $ (2,679)
===================
</TABLE>
FORWARD CROSS CURRENCY CONTRACT
<TABLE>
<CAPTION>
Settlement Net Unrealized
Date Deliver/Units of Currency Receive/In Exchange For Depreciation
---------------- ---------------------------------- ---------------------------- -----------------
<S> <C> <C> <C>
4/13/00 JPY 56,398,518 DEM 826,837 $ (108,780)
=================
</TABLE>
Currency Abbreviations:
DEM German Mark
HKD Hong Kong Dollar
JPY Japanese Yen
29
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
February 29, 2000
- --------------------------------------------------------------------------------
The Fund has elected to defer to March 1, 2000 post-October currency losses of
$493,253.
For the fiscal year ended February 29, 2000, all the Fund's distributions are
from investment company taxable income.
At February 29, 2000, the Fund had a capital loss carryforward available to
offset future capital gains, if any, of the following amount:
<TABLE>
<CAPTION>
YEAR OF EXPIRATION AMOUNT
------------------ ------
<S> <C>
2008 $323,163
</TABLE>
30
<PAGE>
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
(A Series of GMO Trust)
PORTFOLIO MANAGERS
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Forrest Berkley are
primarily responsible for the day-to-day management of the Fund's portfolio. Mr.
Grantham and Mr. Darnell have been portfolio managers at Grantham, Mayo, Van
Otterloo & Co. LLC for more than fifteen years. Mr. Berkley has been with GMO
and involved in portfolio management for more than ten years.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The GMO Tax-Managed International Equities Fund returned 8.7% for the fiscal
year ended February 29, 2000, as compared to 25.5% for the MSCI EAFE benchmark
before taxes. On an after-tax basis, the Fund returned 8.2% compared to the
benchmark's 22.2% for the same period. Consistent with the Fund's investment
objectives and policies, the Fund was invested substantially in international
equity securities throughout the period.
In international markets, the fiscal year was characterized by explosive
performance of the technology and telecommunications sectors. This effect was
particularly strong in the fourth quarter of 1999, during which period the MSCI
EAFE Growth Index returned 25.6% versus 8.9% for MSCI EAFE Value. While this
paralleled the run-up in the U.S. NASDAQ Index, the EAFE Index contains
relatively few pure Internet and information technology stocks. The
international rally focused more on the best available approximation, which is
telecommunications stocks. Both fixed line and wireless companies performed very
strongly in the markets, as did the related equipment providers. The optimism
about these companies came despite the failure of many other growth stocks, such
as pharmaceuticals and established software companies, to produce continued
strong earnings growth.
In contrast, many neglected stocks - typically smaller capitalization, value
companies - had lackluster market performance for the fiscal year. Throughout
the bull market of the late 1990's, growth stocks have enjoyed increasing
"multiple expansion" to higher relative levels of price-to-book and
price-to-earnings. As a result the spread, or discount, between the valuations
of the cheaper stocks on such measures and the most expensive stocks has reached
levels unprecedented in history. These wide gaps are considerably beyond what
could possibly be justified by the relatively modest differences in consensus
growth rate estimates. This is true even if no regression of the higher
profitability of telecommunications stocks took place in the next 20 years,
which would be contrary to the entire history of corporate competition.
The fiscal year was marked by strong performance in the Asian markets. Japan
rose by 42% in local currency, while Hong Kong and Singapore returned +66% and
+59%, respectively. These markets benefited both from the dissipation of the
crisis mentality
<PAGE>
and from the underlying recovery in the economic fundamentals of the region. The
only two countries that had higher returns than all the Asian markets were
Finland and Sweden (dominated by the returns of Nokia and Ericsson
respectively). The major European markets showed mixed returns, with Germany and
France leading the way, both with gains of 56% (+37% in U.S. dollars). The
United Kingdom and Switzerland were the worst performing major markets, with
slightly negative returns in local currency and worse in dollar terms.
EFFECT OF COUNTRY ALLOCATION
Country selection detracted from relative performance in the fiscal year. The
Fund's underperfomance is primarily due to underweights in Finland, Sweden and
Japan. The Fund's allocation to emerging markets countries added value during
the period. The Fund was generally underweight in Europe. It suffered from being
overweight in Austria, but benefited from underweights in the United Kingdom and
Switzerland.
EFFECT OF STOCK SELECTION
The poor performance in the fiscal year was entirely a result of stock
selection, and in particular the Fund's tilt towards value. Because of the
opportunities represented by the wide dispersion in price-to-book ratios, the
Fund is heavily concentrated in the cheaper stocks on price-to-book. Those
groups underperformed EAFE by -14.5% and -9.3% respectively for the fiscal year.
The Fund was further hurt by its emphasis on smaller capitalization stocks,
which underperformed significantly even after accounting for their overlap with
value. Small stocks within EAFE underperformed by -17%, and small value stocks
underperformed by -30%.
Value stocks did very poorly whether defined on the basis of book, earnings,
sales or dividend yield, which shows that the Fund's underperformance is not a
consequence of focussing on price-to-book as a valuation measure. The Fund's
more sophisticated value models, which make further adjustments to credit
companies for growth and financial quality, fared equally poorly. In this
overheated environment, reasonable adjustments did not suffice to make the most
expensive price-to-book stocks look attractive.
Much of the size and value underperformance was driven by telecommunications and
technology stocks.
OUTLOOK
Based on a careful analysis of current company fundamentals and valuation, GMO
has decided to retain its substantial overweights in value stocks and small
companies, in order to benefit from the inevitable rebound. While the growth
oriented bull market of the last few years has been a difficult period for the
Fund, it leaves us at a moment of great opportunity. For value investors it is
always darkest before the dawn. Markets overshoot fair value, and it is
difficult to call the turning points. Yet the greater the overshoot past
<PAGE>
fair value, the more certain is the eventual rebound, and greater is the reward
to those that participate.
Furthermore, globalization and monetary union have not eliminated the
significance of country selection. This is apparent in the wide spread of
returns during the last fiscal year and also in a wide spread in valuations
between countries, even when adjusted for industry composition. To take
advantage of these opportunities, the Fund remains underweight in Europe and
particularly in favor of Asia ex-Japan. Despite the strong performance of Asia
in 1999, those markets still are attractively valued relative to the rest of
EAFE. Even within Europe there are attractive opportunities to favor cheaper
markets such as Austria over more expensive ones such as the United Kingdom and
Spain.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO &
CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND CLASS III SHARES AND THE
MSCI EAFE INDEX
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
1yr Since Inception
- --------------------------------------------------------------------------------
<S> <C>
7/29/98
7.99% 3.34%
- --------------------------------------------------------------------------------
</TABLE>
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Date Tax Managed Int'l Equities Fund MSCI EAFE
---- ------------------------------- ---------
<S> <C> <C>
7/29/1998 9940 10000
9/30/1998 8648 8512
12/31/1998 10097 10270
3/31/1999 10057 10412
6/30/1999 11046 10677
9/30/1999 11076 11146
12/31/1999 11637 13039
2/29/2000 10536 12538
</TABLE>
Performance shown is net of all fees after reimbursement from the manager.
Returns and net asset values of fund investments will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost. The total returns would have been lower had certain expenses
not been reimbursed during the periods shown and do not include the effect of
taxes. Each performance figure assumes purchase at the beginning and
redemption at the end of the stated period and reflects a transaction fee of
60 bp on the purchase. Transaction fees are retained by the Fund to cover
trading costs. Past performance is not indicative of future performance.
Information is unaudited.
- --------------------------------------------------------------------------------
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of GMO Trust and the Shareholders of GMO Emerging Markets Fund
(A Series of GMO Trust)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of GMO Emerging Markets Fund at
February 29, 2000, the results of its operations, the changes in its net assets
and the financial highlights for the periods presented, in conformity with
accounting principles generally accepted in the United States. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at February 29, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 18, 2000
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Schedule of Investments
(Showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 78.7%
ARGENTINA - 0.0%
42,993 Nobelza Piccardo 91,159
---------------------
BRAZIL - 4.8%
4,400,000 Belgo Mineira (Registered) 323,230
13,100,000 Cesp-Cia Energetica Sao Paulo 56,264
4,018,000 Cia Saneamento Basico SAO PA * 398,507
1,716,000 Coelba ON 27,153
1,676,280,000 Companhia de Acos Especiais Itabira-Acesita * 1,089,416
212,248,500 Companhia Siderurgica Nacional SA 6,489,203
497,200,000 Electrobras 8,623,378
139,600 Embratel Participacoes SA ADR 3,350,400
144,894 Investimentos Itau SA 123,645
169,200 Souza Cruz (Registered) 1,018,355
277,300 Tele Centro Oeste Celular ADR 2,495,700
35,000 Tele Centro Sul Participacoes ADR 2,524,375
33,600 Tele Leste Celular Participacoes SA ADR 1,360,800
55,300 Tele Nordeste Celular Participacoes ADR 3,304,175
106,000 Tele Norte Leste Participacoes ADR 2,703,000
268,194,000 Telecomunicacoes Brasileiras SA 23,628,960
17,790 Telesp Celular Participacoes SA 206
---------------------
57,516,767
---------------------
CHILE - 0.9%
9,655 Banco de Edward ADR 177,411
55,800 Banco Santander ADR 826,538
37,900 Banco Santiago ADR 758,000
12,500 Chilectra SA ADR 212,500
152,700 Chilquinta ADR 144A 1,557,540
30,800 Compania de Telefones de Chile ADR 616,000
36,000 Cristalerias de Chile SA ADR 756,000
14,148 Empresa Nacional de Electricidad SA ADR 168,008
20,581 Enersis SA ADR 401,330
79,663 Gener SA ADR 1,234,777
18,400 Laboratorio Chile SA ADR 439,300
26,000 Madeco SA ADR 349,375
101,100 Masisa SA ADR 1,529,138
55,490 Quinenco SA ADR 665,880
14,000 Sociedad Quimica y Minera de Chile ADR 412,125
128,200 Telex Chile ADR * 104,163
6,600 Vina Concha y Toro SA ADR 249,150
---------------------
10,457,235
---------------------
CHINA - 5.2%
5,120,000 Beijing Datang Power Generation Co Ltd Class H 618,389
9,878,000 China Eastern Airlines * 951,907
624,832 China International Marine Containers Ltd Class B 381,348
1,760,000 China Merchants Holdings Co Ltd 1,091,124
</TABLE>
See accompanying notes to the financial statements. 1
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CHINA - CONTINUED
10,914,000 China Overseas Land & Investment Ltd * 1,430,370
1,511,000 China Resources Enterprise 1,951,168
1,086,895 China Southern Glass Co Ltd Class B * 153,619
4,638,000 China Telecom Ltd * 42,757,941
2,342,000 Citic Ka Wah Bank Ltd 722,208
1,567,000 Cosco Pacific Ltd 895,969
6,406,000 Guangdong Investment Ltd * 864,252
115,700 Guangshen Railway Co ADR 578,500
14,781,000 Guangshen Railway Co Class H 1,519,350
116,300 Huaneng Power International ADR 835,906
16,018,000 Jilin Chemical Industrial Co 967,320
35,168,000 Maanshan Iron & Steel * 1,536,352
9,926,000 Qingling Motor Co Ltd Class H 1,058,562
3,794,094 Shanghai Chlor-Alkali Chemical Class B * 409,762
597,000 Shanghai Industrial Holdings 1,123,767
5,854,684 Shanghai Lujiazui Finance & Trade Class B * 1,651,021
1,110,501 Shenzhen Seg Co Ltd Class B * 492,269
12,437 SIIC Medical Science and Technology (Group) Ltd * 2,940
3,892,000 Yizheng Chemical Fibre Co Class H * 615,095
4,970,000 Zhejiang Expressway Co 619,430
---------------------
63,228,569
---------------------
COLOMBIA - 0.0%
24,300 Banco Ganadero SA ADR 314,381
---------------------
CZECH REPUBLIC - 0.7%
92,000 Ceska Sporitelna * 524,882
670,178 Ceske Energeticke Zavody AS * 2,230,994
38,283 Ceske Radiokomunikace * 2,339,554
31,100 Komercni Banka AS * 774,375
323,988 SP Vseobecny * 825,129
75,300 SPT Telecom AS * 1,578,613
430 Tabak AS 81,465
---------------------
8,355,012
---------------------
EGYPT - 0.6%
12,000 Al Ahram Beverage Co * 219,761
20,000 Al Ahram Beverage Co GDR 144A * 362,000
98,000 Al Ahram Beverage Co GDR (Registered) * 1,773,800
3,754 Eastern Tobacco Co 84,917
2,000 Egypt Gas Co 72,063
15,800 Egyptian International Pharmaceuticals Industries Co 744,587
16,770 Miraco 215,363
83,685 MobiNil-Egyptian Mobile Services Co * 4,004,762
19,000 Oriental Weavers Co 338,197
---------------------
7,815,450
---------------------
GREECE - 0.0%
8,940 Econ Viomihanies (a) * 5,879
---------------------
</TABLE>
2 See accompanying notes to the financial statements.
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HONG KONG - 0.1%
1,250,000 Founder Holdings Ltd * 1,003,816
---------------------
HUNGARY - 0.0%
28,151 Fotex (Registered) * 14,774
---------------------
INDIA - 8.9%
100 Amara Raja Batteries Ltd * 307
2,510 Aptech Ltd 131,799
190 Aptech Ltd (New Shares) 9,977
530 Arvind Mills Ltd * 210
225,000 Ashok Leyland Ltd 426,667
63,000 Atco Technologies Ltd 678,231
100 Bank of India * 41
299,600 Birla Corp Ltd 159,723
308,737 BSES Ltd 2,179,716
400 Ceat Ltd 614
7,350 Ceat Ltd * 11,275
1,300 Cipla Ltd 32,787
600 Cipla Ltd (New Shares) * 15,132
2,000 Cipla Ltd (New Shares) * 50,441
125,000 Citicorp Securities & Investments 1,389,980
8,200 Citicorp Securities & Investments 91,183
400 CMC Ltd 5,531
56,000 DSQ Software Ltd 2,100,742
206,600 Escorts Ltd 992,940
600 Eveready Industries Ltd * 995
125,000 Fujitsu ICIM * 2,327,954
591 Glaxo India Ltd 6,369
437,292 Global Tele-Systems Ltd 20,796,594
190,288 Global Tele-Systems Ltd (New Shares) * 9,049,656
51,165 Godfrey Phillips India 645,264
1,465 Great Eastern Shipping Co 601
2,990 HCL Infosytems Ltd 53,477
30,000 HCL Technologies Ltd * 1,432,027
353,000 Himachal Futuristic Communications * 14,086,004
28,300 Hughes Software Systems Ltd * 2,068,774
20 India Cements 35
400 ITC Ltd 6,780
100,300 Kale Consultants Ltd * 869,349
861,421 KEC International Ltd 725,896
83,400 Leading Edge Systems Ltd 3,685,769
175,000 Lupin Laboratories Ltd 1,604,890
80,000 Mahindra & Mahindra * 880,507
8,700 Mastek Ltd 810,926
8,700 Mastek Ltd * 810,926
291,800 McDowell & Co Ltd 1,371,641
100,000 Morepen Laboratories Ltd 2,258,592
475 NIIT Ltd 24,097
100 NIIT Ltd (New Shares) 5,064
</TABLE>
See accompanying notes to the financial statements. 3
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INDIA - CONTINUED
50,000 Nirma Ltd * 1,486,199
38,200 PSI Data Systems Ltd * 1,357,677
295,850 Raymond Ltd 468,082
36,529 Reliance Industries 259,239
6,400 Reliance Petroleum Ltd * 9,642
1,600 Sanghi Polyesters Ltd * 128
1,200 Satyam Computer Service 138,432
457,500 Shyam Telecom Ltd * 6,186,196
57,000 Silverline Technologies Ltd * 1,270,668
5,000 Software Solutions Integrated Ltd * 632,469
14,850 SSI Ltd 1,879,624
2 Sterlite Industries Ltd 33
32,400 Sun Pharmaceuticals Industries 1,966,529
175,100 Tata Elxsi Ltd * 760,645
427 Tata Iron & Steel 1,178
290,000 U TV of India (b) * 3,324,830
56,000 United Breweries Ltd 215,724
10 Videocon International Ltd 17
1,105 Videocon International Ltd * 1,898
38,500 Videsh Sanchar Nigam Ltd 1,900,580
436,700 Vikas WSP Ltd 10,094,080
10,100 VisualSoft Ltd * 1,948,843
145,200 Western Hatcheries Ltd 516,060
9,400 Western Hatcheries Ltd * 33,409
3,600 Wockhardt Life Sciences Ltd * 11,231
73,400 Wockhardt Ltd * 1,202,288
---------------------
107,465,184
---------------------
INDONESIA - 5.0%
13,473,100 Astra International * 6,668,504
95,900,000 Bank Internasional Indonesia * 1,291,582
33,328,000 Barito Pacific Timber * 2,356,525
11,300,000 Citra Marga Nusaphala Persad * 1,179,461
1,875,000 Dynaplast * 284,091
12,752,000 Gajah Tunggal Tbk * 1,459,825
7,431,000 Gudang Garam 12,385,000
78,100 Gulf Resources Ltd ADR * 546,700
3,323,900 HM Sampoerna * 5,495,067
3,643,800 Indah Kiat Pulp & Paper * 1,006,032
9,451,000 Indorama Synthetics * 1,463,791
3,072,000 International Nickel * 3,061,657
15,777,500 Kalbe Farma * 2,071,793
23,282,000 Matahari Putra Prima Tbk * 3,135,623
25,051,250 PT Asuransi Lippo Life Tbk * 1,939,996
5,069,000 PT Indofood Sukses Makmur Tbk * 4,198,566
573,000 PT Indosat (Persero) Tbk 1,034,101
64,000,000 PT Lippo Bank Tbk * 1,723,906
17,058,500 PT Multipolar Corp Tbk * 2,527,185
3,072,500 PT Pabrik Kertas Tjiwi Kimia * 724,158
</TABLE>
4 See accompanying notes to the financial statements.
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INDONESIA - CONTINUED
2,973,000 Ramayana Lestari 1,841,859
427,280 Telekomunikasi Indonesia 210,043
138,240 Telekomunikasi Indonesia Class B ADR 1,339,200
2,843,500 United Tractors * 2,489,259
---------------------
60,433,924
---------------------
ISRAEL - 0.2%
440,000 Bank Leumi Le-Israel * 965,838
1,982 Clal Electronics Industries Ltd * 523,745
78,930 Clal Industries Ltd * 1,010,672
1 Machteshim Agan Industries * 2
---------------------
2,500,257
---------------------
KOREA - 9.8%
76,083 Cheil Jedang Corp 4,903,568
49,383 Communication Network Interface Inc 903,743
243,520 Daelim Industrial Co Ltd 1,291,763
1,482,000 Daewoo Corp 537,192
234,000 Daewoo Electronics * 126,195
211,000 Dong-Ah Construction * 572,688
100,198 Dongbu Steel Co 276,383
40,680 Halla Climate Control Corp 1,186,839
126,420 Hankuk Glass 1,508,852
493,948 Hanwha Corp 1,965,128
74,039 Hite Brewery Co Ltd * 1,832,802
49,438 Hyundai Cement Co 236,022
256,734 Hyundai Electronics Industries * 4,062,875
274,148 Hyundai Engineering & Construction * 954,945
100,881 Hyundai Heavy Industries 2,809,422
230,629 Hyundai Industrial Development 1,386,500
6,819 Hyundai Motor Co 72,645
20,650 Keum Kang Ltd 949,337
458,517 Kookmin Bank 5,107,673
280,993 Kookmin Bank GDR (Registered) 3,175,221
18,460 Korea Chemical 1,150,583
6,640 Korea Data Systems 95,100
7,100 Korea Next Education Services Inc * 2,146,750
171,400 Korea Telecommunications ADR 7,455,900
271,815 Korean Air Lines 1,862,397
76,400 LG Ad Inc * 5,065,843
34,880 LG Home Shopping Inc * 4,409,706
69,324 LG Information & Communication 7,691,737
8,700 Lotte Confectionery Co 1,038,365
75,076 Pohang Iron & Steel (b) 7,733,736
3 Sam Yang 40
28,599 Samsung Display Devices 831,848
19,793 Samsung Electro Mechanics 1,200,419
60,230 Samsung Fire & Marine Insurance 1,711,949
143,033 Samsung Securities 4,375,316
</TABLE>
See accompanying notes to the financial statements. 5
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
KOREA - CONTINUED
34,682 Serome Technology Inc * 4,384,673
263,000 Shinhan Bank 2,511,173
48,782 Shinsegae Department Store 2,005,440
3,820 SK Telecom 14,184,360
101,010 SK Telecom ADR 4,539,137
951,643 Ssangyong Cement * 1,901,427
126,770 Ssangyong Oil Refining 2,118,241
341,131 Tai Han Electric Wire 4,192,114
166,954 The Will-Bes & Co 2,044,296
1,760 Wooree Lighting Co Ltd * 42,323
---------------------
118,552,666
---------------------
LEBANON - 0.3%
217,064 Banque Libanaise * 2,371,424
139,000 Solidere GDR (Registered) * 1,216,250
---------------------
3,587,674
---------------------
MALAYSIA - 8.3%
803,000 Affin Holdings Berhad 828,358
1,547,000 Berjaya Sports Toto 3,928,566
52,600 British American Tobacco Berhad 387,579
974,000 Cement Industries of Malaysia Berhad 794,579
2,017,900 Cold Storage 1,550,597
298,000 Commerce Asset Holdings 933,211
769,000 Edaran Otomobil Berhad 3,237,895
605,000 Genting Berhad 2,674,737
53,700 Golden Hope Plantations Berhad 47,765
2,010,000 Highlands and Lowlands Berhad 1,295,921
574,000 Hong Leong Credit Berhad 1,238,632
2,069,000 Hong Leong Properties Berhad 865,713
1,117,000 Hume Industries-Malaysia Berhad 1,587,316
1,440,625 IGB Corp Berhad 640,699
1,328,000 IJM Corp Berhad Class A 1,488,758
2,262,800 IOI Corp Berhad 1,560,141
808,000 Malakoff Berhad 2,190,105
1,380,000 Malayan Banking Berhad 6,210,000
2,004,000 Malayan Cement Berhad 738,316
4,672,000 Malayan United Industries Berhad * 1,131,116
2,117,000 Malaysian International Shipping (Foreign Registered) 3,203,355
940,000 Malaysian Oxygen Berhad 2,943,684
281,000 Malaysian Pacific Industries 3,567,961
7,491,000 Metroplex Berhad 2,129,021
1,634,000 Multi Purpose Holdings * 855,700
290,000 New Straits Times 1,221,053
1,814,600 Nylex Berhad 1,408,703
1,630,900 Oriental Holdings Berhad 3,841,199
600,000 Public Bank Berhad (Alien Market) 813,158
1,591,000 Renong Berhad * 1,314,668
1,947,600 Resorts World Berhad 7,072,863
624,000 RHB Capital Berhad 993,474
</TABLE>
6 See accompanying notes to the financial statements.
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MALAYSIA - CONTINUED
645,000 Sarawak Enterprises Corp 470,171
109,620 Silverstone (b) * 1,298
2,386,000 Sunway Holdings Incorporated Berhad * 1,663,921
14,130,000 Tan Chong International Ltd 2,142,340
1,732,700 Tanjong 4,354,549
9,096,000 Technology Resources Industries 13,045,579
1,355,000 Telekom Malaysia Berhad 5,740,921
600,000 Tenaga Nasional Berhad 1,989,474
383,000 UMW Holdings Berhad 806,316
415,000 Unisem Berhad 3,931,579
809,000 United Engineers * 2,235,395
3,491,700 Westmont Industries Berhad (a) * 9,189
286,000 YTL Corp 526,842
---------------------
99,612,417
---------------------
MEXICO - 5.9%
430,100 Alfa SA Class A * 1,515,083
2,666,415 Altos Hornos de Mexico * 717,268
263,500 Carso Global Telecom Class A * 3,290,937
98,900 Cemex SA de CV ADR (Participating Certificates) * 2,113,988
631,000 Cemex SA de CV CPO 2,727,957
2,251,915 Controladora Comercial Mexicana SA de CV Classes B and C 2,163,454
280,000 Corporacion GEO SA * 690,436
1,601,680 Cydsa SA Class A 1,371,208
203,400 Empresas ICA Sociedad Controladora ADR 508,500
228,000 Empresas La Moderna SA de CV Class A * 1,338,599
879,600 Grupo Carso SA de CV Class A * 3,427,135
1,500,000 Grupo Casa Autrey * 1,200,897
593,705 Grupo Financiero Banamex Acciva Class O * 2,531,865
7,189,795 Grupo Financiero Bancomer SA * 3,545,778
640,000 Grupo Financiero Inbursa SA * 2,958,155
11,275,700 Grupo Financiero Probursa SA de CV Class B * 1,420,295
8,232,755 Grupo Financiero Serfin SA de CV Class B (a) * 8,788
3,797,320 Grupo Gigante SA Class B * 1,661,936
1,350,000 Grupo Industrial Maseca SA 821,413
449,418 Grupo Mexico Class B 2,230,779
80,200 Grupo Mexico Desarollo Class B ADR (b) * 12,531
314,700 Grupo Radio Centro SA ADR 2,733,956
6,255,000 Grupo Situr SA de CV Class B * 120,186
8,300 Grupo Televisa SA GDR * 637,544
670,000 Grupo Televisa SA (Participating Certificates) * 2,574,722
1,997,500 Grupo Tribasa SA ADR * 998,750
1,000,000 Herdez Class BCP * 309,564
500,000 Hylsamex SA * 1,136,849
10,000 Ispat International NV Class A (Registered) 125,625
535,000 Kimberly Clark Class A 1,664,736
303,000 Organizacion Soriana SA de CV Class B * 1,243,633
</TABLE>
See accompanying notes to the financial statements. 7
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MEXICO - CONTINUED
138,000 Pepsi-Gemex SA * 690,000
269,200 Telefonos de Mexico Class L ADR 17,699,900
47,000 Tubos de Acero de Mexico SA ADR 649,188
493,800 Vitro SA ADR 2,098,650
930,000 Wal-Mart de Mexico SA de CV * 2,223,740
---------------------
71,164,045
---------------------
PAKISTAN - 1.0%
1,002,000 Fauji Fertilizer (b) 1,155,597
157,166 Hub Power Co Ltd GDR * 1,925,284
500 Karachi Electric Supply (b) * 113
106,880 Lever Brothers Pakistan Ltd (b) * 2,054,394
598,608 Pakistan State Oil (b) 2,690,247
6,174,600 Pakistan Telecom Corp Ltd Class A (b) 3,628,373
6,600 Pakistan Telecom Corp Ltd GDR * 349,800
341 Sui Southern Gas Pipelines Ltd (b) * 145
---------------------
11,803,953
---------------------
PERU - 0.0%
127,604 Cervecerias 51,531
730 Milpo Minera Class T * 261
---------------------
51,792
---------------------
PHILIPPINES - 1.1%
19,912,000 Aboitiz Equity Ventures Inc 952,355
1,459,000 Alsons Cement * 49,844
7,182,320 Ayala Corp 1,542,323
2,862,000 Digital Telecommunications * 69,839
3,544,297 DMCI Holdings Inc * 74,380
13,139,500 EEI Corp * 192,379
23,602,000 Empire East Land Holding Inc * 201,579
299,890 Equitable Banking Corp 409,806
413,790 Far East Bank & Trust 641,183
5,623,100 Filinvest Land * 356,761
1,814,000 International Container Terminal * 78,793
1,909,543 Ionics Circuits Inc * 605,760
8,925,000 JG Summit Holdings Inc Class B 653,368
807,500 La Tondena Distillers Inc 403,947
9,719,000 Metro Pacific Corp * 187,360
8,723,000 Petron Corp 519,378
200,470 Philippine Long Distance Telephone 4,353,790
59,000 Philippine National Bank * 95,022
823,000 Robinsons Land Corp Class B 54,224
198,440 San Miguel Corp Class B 232,433
371,200 Security Bank Corp * 271,742
3,505,000 SM Prime Holdings 470,412
2,998,000 Universal Robina Corp 490,156
---------------------
12,906,834
---------------------
</TABLE>
8 See accompanying notes to the financial statements.
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
POLAND - 0.3%
92,650 Agora SA GDR 144A * 3,208,006
234,502 Okocimskie Zaklady Piwowarskie SA * 929,000
---------------------
4,137,006
---------------------
RUSSIA - 4.0%
2,649,789 Chelabinsky Tube Work * 26,498
17,100 Dalmoreproduct * 1,368
272,800 Electrocila * 763,840
29,221 Elisb (b) * 10,227
472,700 Irkutskelectrosviaz * 177,263
3,368,100 Irkutskenergo ADR 11,025,139
89,030 Kirovsky Plant 151,351
52,979 Lukoil Holding Co 543,035
221,325 Lukoil Holding Co ADR 9,240,319
2,290,387 Norilsk Nickel (Registered) * 19,559,905
135,000 Russia Petroleum * 108,000
10,000 Seversky Tube Works ADR * 58,728
785,700 St Petersburg Telephone * 644,274
500,000 Sun Interbrew Ltd GDR * 2,250,000
37,000 Trade House GUM ADR 50,320
1,014,240 Uralmash Zavody * 1,277,942
450,000 Uralmash Zavody ADR 144A * 567,000
1,418,180 Uralmash Zavody ADR (Registered) * 1,786,907
---------------------
48,242,116
---------------------
SOUTH AFRICA - 7.6%
657,100 AECI Ltd 1,532,788
857,637 Amalgamated Bank of South Africa 3,311,757
171,718 Anglo American Corp Plc 7,697,227
54,545 Anglo Gold Ltd 2,828,393
2,148,700 Anglovaal Industries Inc 2,048,897
240,600 Anglovaal Ltd 1,715,944
895,700 Barlow Ltd 6,564,542
275,900 Comparex Holding Ltd 1,924,216
6,929,404 Consolidated African Mines * 753,588
243,380 De Beers Centenary Link Units 5,331,981
2,616,200 Del Monte Royal Foods Ltd 1,999,869
401,327 Dimension Data Holdings * 3,731,980
341,500 Genbel Securities Ltd 2,206,803
196 Harmony Gold Mining Co Ltd 1,220
504,016 Illovo Sugar Ltd 460,746
938,679 Iscor Ltd 2,626,058
246,008 Liberty International Plc 1,593,602
527,640 Liberty Life Association of Africa Ltd 5,139,432
2,135,615 Mawenzi Resources Ltd * 104,345
2,669,840 Murray & Roberts Holdings Ltd 1,767,354
917,124 Nampak Ltd 2,370,614
2,793,200 Premier Group Ltd 308,169
164,000 Randgold Resources Ltd GDR 144A * 574,000
</TABLE>
See accompanying notes to the financial statements. 9
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SOUTH AFRICA - CONTINUED
309,500 Randgold & Exploration Co * 290,246
842,470 Rembrandt Group Ltd 7,303,080
5,572,000 Safmarine & Rennies Holdings 2,590,729
14,400 Sage Group Ltd 46,527
268,768 Sappi Ltd 2,223,954
1,744,910 Sasol Ltd 11,165,752
895,306 Standard Bank Investment Corp 3,485,438
16,200,260 Sun International Ltd 3,319,359
457,051 Tiger Brands Ltd 4,740,012
25,900 Western Areas Gold Mining Co Ltd 84,909
---------------------
91,843,531
---------------------
SRI LANKA - 0.1%
4,590,170 Blue Diamonds Jewelry Ltd * 109,312
333,600 Lanka Walltile Ltd 31,778
404,200 Lion Brewery Ceylon Ltd 104,508
311,597 Millenium Information Technology (b) (c) * 685,513
---------------------
931,111
---------------------
TAIWAN - 2.5%
123,000 Acer Inc * 334,217
243,000 Advanced Semiconductor Engineering Inc * 810,527
2,467,290 Ambassador Hotel * 1,148,137
112,000 Asustek Computer Inc 1,395,900
4,703,400 Chia Hsin Food & Synthetic * 2,073,904
978,550 China Steel Corp 757,875
1,372,769 China Trust Commercial Bank * 1,474,174
2,588,330 Chung Shing Textile * 564,328
1,091,130 First Bank * 1,587,163
3,483,680 Formosa Taffeta Co 2,834,103
1,452,650 Great Wall Enterprise Co 569,620
93,000 Hon Hai Precision Industry Co Ltd * 865,539
2,569,000 Hualon Co Ltd * 727,312
173,700 International Commercial Bank Of China 195,010
1,361,350 Megamedia Corp * 770,826
5,916,564 Pacific Construction * 2,445,179
1,116,000 Right Way Industrial Co Ltd * 319,583
468,608 Taipei Business Bank * 539,822
1,597,000 Taiwan Fluorescent Lamp Co * 405,356
2,019,000 Taiwan Pulp and Paper Co * 992,089
815,228 Taiwan Semiconductor * 5,332,276
729,000 United Microelectronics * 2,668,809
637,000 Wan Yu Paper (a) * 207
2,374,000 Yieh Loong Co * 826,612
---------------------
29,638,568
---------------------
THAILAND - 6.4%
95,200 ABN Amro Asia Securities Pcl (Foreign Registered) 101,157
593,900 Advanced Info Service Public Co Ltd (Foreign Registered) * 9,224,421
2,197,000 Ban Pu Coal Public Co Ltd (Foreign Registered) 1,138,417
6,842,700 Bangchak Petroleum Public Co Ltd (Foreign Registered) * 1,202,836
</TABLE>
10 See accompanying notes to the financial statements.
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
THAILAND - CONTINUED
3,778,500 Bangkok Bank Pcl (Foreign Registered) * 6,096,753
90,800 Bangkok Insurance (Foreign Registered) 283,489
4,257,600 Bangkok Rubber Public Co Ltd (Foreign Registered) * 491,498
5,595,000 Bank of Ayudhya Pcl (Foreign Registered) * 1,438,567
275,900 BEC World Public Co Ltd (Foreign Registered) 2,070,245
1,641,277 CP Feedmill Public Co Ltd (Foreign Registered) * 5,942,443
829,760 Delta Electronics Public Co Ltd (Foreign Registered) 9,535,219
3,132,760 Electricity Generating Public Co Ltd (Foreign Registered) 2,815,087
7,668,959 Industrial Finance Corp of Thailand (Foreign Registered) * 2,162,962
154,510 Italian-Thai Development Public Co Ltd (Foreign Registered) * 78,035
881,900 Jasmine International Public Co (Foreign Registered) * 480,111
631,000 Krung Thai Bank Public Co Ltd (Foreign Registered) * 219,356
151,100 Lanna Lignite Pcl (Foreign Registered) 80,277
303,600 National Petrochemical (Foreign Registered) (b) * 321,084
203,519 PTT Exploration and Production Public Co Ltd (Foreign Registered) * 987,827
727,700 Saha Pathana International Holdings Pcl (Foreign Registered) 744,597
2,230,500 Saha Union Public Co Ltd (Foreign Registered) 687,613
1,142,500 Securities One Ltd (Foreign Registered) * 110,908
589,792 Shinawatra Computer Public Co Ltd (Foreign Registered) * 4,673,152
67,087 Siam Cement Pcl (Foreign Registered) * 1,210,963
4,574,300 Siam Commercial Bank Pcl (Foreign Registered) * 3,660,400
399,000 Siam Pulp & Paper (Foreign Registered) * 738,017
201,512 Singer Pcl (Foreign Registered) 163,895
3,108,050 Star Block Co Ltd (Foreign Registered) (b) * 8,154
6,351,413 Telecomasia Corp Public Co Ltd (Foreign Registered) * 8,831,822
961,500 Thai Airways International (Foreign Registered) * 908,146
4,004,600 Thai Farmers Bank Pcl (Foreign Registered) * 3,782,385
1,540,850 Thai German Ceramics Industry (Foreign Registered) * 351,709
5,397,880 Thai Petrochemical (Foreign Registered) * 1,416,209
105,200 Thai Plastic & Chemical (Foreign Registered) 278,767
3,068,400 Thai Telephone & Telecommunications (Foreign Registered) * 825,163
1,878,378 United Broadcasting Pcl (Foreign Registered) * 1,650,942
1,810,400 United Communication Industries (Foreign Registered) * 2,268,047
---------------------
76,980,673
---------------------
TURKEY - 3.2%
19,411,000 Alarko Gayrimenkul Yatirim * 607,860
7,123,000 Anadolu Isuzu Otomotiv Sanay 514,274
10,709,000 Celik Halat ve Tel Sanayii AS 246,858
245,000,000 Dardanel Onentas Gida * 820,503
186,302,000 Doktas Dokumculuk Ticaret * 2,917,046
62,823,000 Eczacibasi Ilac Sanayi * 1,639,431
24,175,000 Eczacibasi Yapi * 946,307
67,816,000 Eczacibasi Yatirim Holding * 1,144,425
81,649,000 Eregli Demir VE Celik Fabrik * 3,515,680
79,143,000 Ford Otomotive Sanayii AS * 3,786,417
87,520,000 Gima * 2,093,598
</TABLE>
See accompanying notes to the financial statements. 11
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TURKEY - CONTINUED
345,450,000 Global Menkul Degerler * 3,425,652
68,613,000 Goltas Cimento 1,880,054
342,000,000 Izmir Demir Celik Sanayi * 2,260,960
14,453,000 KOC Holding AS 2,765,884
48,680,000 Mardin Cimento Sanayii 1,333,873
96,150,000 Medya Holding * 1,589,118
31,779,000 Sabanci Holding 1,465,107
56,314,000 Sarkuysan Elektrolitik Bakir 1,836,965
65,530,000 TAT Konserve * 1,311,056
179,677,000 Tofas Turk Otomobil Fabrik * 2,250,651
---------------------
38,351,719
---------------------
VENEZUELA - 1.8%
2,402,565 Banco Provincial 1,668,826
160,606 Ceramica Carabobo Class B ADR 240,909
395,100 Compania Anonima Nacional Telefonos de Venezuela (CANTV) ADR 13,161,769
10,243,115 Electricidad de Caracas 2,969,691
154,800 Electricidad de Caracas ADR 2,205,900
778 International Briquettes Holding 2,237
40,181 Mantex SA Class A ADR * 286,491
160,000 Manufacturas de Papel CA ADR 108,800
125,000 Mercantil Servicios Financieros ADR 265,625
164,766 Siderurgica Venezolana (Sivensa) Class A ADR (Registered) * 247,149
23 Siderurgica Venezolana (Sivensa) Class B * -
723,926 Venepal SA Class B GDR 144A * 7,239
1,107,354 Venezolana de Cementes 334,422
292,673 Venezolana de Cementes Tipo II 88,387
---------------------
21,587,445
---------------------
TOTAL COMMON STOCKS (Cost $926,131,310) 948,593,957
---------------------
PREFERRED STOCKS - 10.6%
BRAZIL - 8.3%
22,920,000 Alpargatas de Sao Paolo 1,366,522
473,615,231 Banco Bradesco SA 3,401,893
30,753,775 Banco Bradesco SA * 220,899
67,516,200 Banco Estado Sao Paulo * 2,709,042
148,940,000 Banco Nacional (a) * 842
33,080,000 Belgo Mineira (Registered) 2,804,182
431,325,003 Bombril SA 3,168,819
5,108,000 Brahma PN 3,146,493
47,500,000 Caemi Mineracao e Metalurgica SA 4,697,655
60,942,827 Cemig 1,002,569
323,800,000 Cia Energetica de Sao Paolo SA (Registered) 2,177,576
34,000,000 Cia Energetica Perna Class A 157,559
</TABLE>
12 See accompanying notes to the financial statements.
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares Description Value ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BRAZIL - CONTINUED
1,123,059,000 Companhia de Acos Especiais Itabira-Acesita * 748,918
167,200,000 Companhia de Transmissao de Energia Eletrica Paulista * 859,859
13,889,000 Copene-Petroquimica do Nordeste SA Class A 4,772,259
227,248,860 Electrobras Class B (Registered) 4,154,564
162,100,000 Elektro 425,976
594,000,000 Fertilizantes Fosfatados 2,232,326
659,062,710 Gerasul 770,986
840,000 Globo Cabo SA * 1,628,257
1,361,000 Industrias Klabin de Papel e Celulose SA 1,269,087
6,931,459 Investimentos Itau SA 6,424,184
165,836 Investimentos Itau SA * 153,699
559,080,000 Iparanga Brasil de Petroleo 7,263,775
55,850,000 Itaubanco SA (Registered) 4,434,544
379,350,328 Lojas Americanas (Registered) 1,886,568
42,420,000 Mesbla (Registered) (b) * 4,075
335,746,000 Olvebra (b) * 64,512
199,400,000 Petrobras Distribuidora SA 2,704,493
25,796,000 Petroleo Brasileiro SA (Petrobras) 6,705,940
980,000 Sadia Frigobras SA (Registered) 775,360
353,450,328 Sao Carlos Empreendimentos e Participacoes * 802,978
415,600,000 Siderurgica de Tubarao * 6,435,400
220,000 Suzano (Registered) * 522,181
39,500 Telecomunicacoes Brasileiras SA ADR 5,816,375
49,522,000 Telecomunicacoes Brasileiras SA Receipts 7,262,480
56,881,650 Telecomunicacoes de Sao Paulo SA 1,928,093
2,830 Telesp Celular Participacoes SA 61
6,520,152 Unipar 4,200,607
499,000 Varig (Registered) * 1,215,422
13,100,000 Votorantim Celulose e Papel SA 451,522
---------------------
100,768,552
---------------------
KOREA - 1.9%
125,240 Dongbu Steel Co 210,375
236,263 Samsung Electronics (Non Voting) 21,514,439
34,541 Shinsegae Department Store * 1,190,958
---------------------
22,915,772
---------------------
RUSSIA - 0.3%
100,800 Krasny Oktyabr 144A 75,600
129,200 Lukoil Holding Co ADR 1,485,800
30 Rostelecom 28
25,000,000 Unified Energy Systems 1,500,000
---------------------
3,061,428
---------------------
SRI LANKA - 0.1%
11,209,546 Millenium Information Technology (b) (c) * 1,564,516
---------------------
TOTAL PREFERRED STOCKS (Cost $104,914,789) 128,310,268
---------------------
</TABLE>
See accompanying notes to the financial statements. 13
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares/
Par Value ($) Description Value ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT FUNDS - 3.0%
BRAZIL - 0.0%
21,400 Brazil Fund Inc 386,538
---------------------
CHILE - 0.2%
22,000 Chile Fund Inc 250,250
241,900 Five Arrows Chile Investment Trust Ltd 672,482
474,600 Five Arrows Chile Investment Trust Ltd Convertible Units 1,340,745
---------------------
2,263,477
---------------------
INDIA - 0.0%
425,000 TDA India Technology Fund II LP (b) (c) * 425,000
10,400 UTI Masterplus 1991 6,176
100 UTI Masterplus 1991 Unit 59
---------------------
431,235
---------------------
POLAND - 1.8%
6,936,111 CHP Investors (b) (c) * 7,377,941
4,102,132 OBP Investors (b) (c) 7,526,181
5,500,000 Polimex Investment Fund (b) (c) 5,500,000
1,625,202 Templeton Emerging European Fund (b) (c) 1,297,723
---------------------
21,701,845
---------------------
ROMANIA - 0.1%
3,600 Romanian Investment Fund (b) (c) * 1,260,000
---------------------
RUSSIA - 0.7%
450,000 Kazakhstan Investment Fund (b) (c) 283,500
10,000,000 New Century Holdings LP (b) (c) * 6,796,000
16,667 Societe Generale Thalmann Ukraine Fund (b) (c) * 633,346
---------------------
7,712,846
---------------------
THAILAND - 0.1%
1,500,000 Ruam Pattana Fund (Registered) * 192,837
1,859,000 Ruang Khao Fund (Foreign Registered) * 273,131
70 Thailand International Fund IDR 516,600
---------------------
982,568
---------------------
UNITED STATES - 0.1%
71,400 Morgan Stanley Emerging Markets Fund 1,178,100
170 SPG Infinity Technology Fund (b) (c) * 255,000
---------------------
1,433,100
---------------------
TOTAL INVESTMENT FUNDS (Cost $45,974,469) 36,171,609
---------------------
DEBT OBLIGATIONS - 2.5%
U.S. GOVERNMENT - 2.5%
$ 19,545,584 U.S. Treasury Inflation Indexed Note, 3.375% due 1/15/07 (d) 18,488,911
$ 12,519,884 U.S. Treasury Inflation Indexed Note, 3.875% due 1/15/09 (d) 12,120,813
---------------------
30,609,724
---------------------
TOTAL DEBT OBLIGATIONS (Cost $31,196,946) 30,609,724
---------------------
</TABLE>
14 See accompanying notes to the financial statements.
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares/
Par Value ($) Description Value ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
EQUITY LINKED SECURITIES - 1.5%
CHILE - 1.4%
$ 12,779,671 Citibank-Nassau Chilean Equity Time Deposit, 3.50% due 4/03/00 (c) (e) * 13,887,668
$ 3,389,966 Citibank-Nassau Chilean Equity Time Deposit, 3.50% due 4/27/00 (c) (e) * 3,548,277
---------------------
17,435,945
---------------------
RUSSIA - 0.1%
32,787 Renaissance Sberbank Note (c) (f) * 1,521,632
---------------------
TOTAL EQUITY LINKED SECURITIES (Cost $28,360,929) 18,957,577
---------------------
FULLY PAID SWAPS - 0.8%
INDIA - 0.8%
126,000 BSES Swap (g) 875,173
74,150 HCL Industries Swap (g) 3,512,948
11,000 Leading Edge Systems Swap (g) 480,056
150,000 Shyam Telecom Swap (g) 2,002,908
180,453 Sterlite Industries Swap (g) 2,984,035
---------------------
9,855,120
---------------------
TOTAL FULLY PAID SWAPS (Cost $7,077,696) 9,855,120
---------------------
CONVERTIBLE SECURITIES - 0.7%
INDONESIA - 0.4%
$ 26,000,000 APP Finance (VI), 0.00% due 11/18/12 4,680,000
---------------------
KOREA - 0.0%
$ 500,000 Daewoo Corp, 0.00% due 12/31/07 135,000
---------------------
POLAND - 0.0%
DEM 25,000 Elektrim SA, 2.00% due 5/30/04 19,690
---------------------
SOUTH AFRICA - 0.1%
$ 1,100,000 Randgold Finance, 7.00% due 10/03/01 760,320
---------------------
THAILAND - 0.2%
$ 5,030,000 Bangkok Bank Public Co, 3.25% due 3/03/04 2,653,325
$ 358,000 Bangkok Land Cayman Island, 4.50% due 10/13/03 35,800
$ 1,814,000 MDX Public Co Ltd, 4.75% due 9/17/03 163,260
$ 630,000 Somprasong Land Co, 3.88% due 1/21/04 6,300
---------------------
2,858,685
---------------------
TOTAL CONVERTIBLE SECURITIES (Cost $13,231,651) 8,453,695
---------------------
RIGHTS & WARRANTS - 0.1%
BRAZIL - 0.0%
84,234,574 Mesbla Preferred Rights 12/31/25 (b) * -
14,029,849 Tele Leste Celular Participacoes SA Preferred Rights 3/23/00 * -
75,980,803 Tele Leste Celular Participacoes SA Rights 3/23/00 * -
---------------------
-
---------------------
</TABLE>
See accompanying notes to the financial statements. 15
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
<TABLE>
<CAPTION>
Shares/
Par Value ($) Description Value ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INDONESIA - 0.0%
226,076 Indah Kiat Pulp & Paper Warrants 4/13/01 * 30,448
2,558,775 PT Multipolar Corp Tbk Warrants 12/25/49 * -
---------------------
30,448
---------------------
MALAYSIA - 0.0%
288,125 IGB Corp Berhad Warrants 12/29/04 * 49,285
43,600 UMW Holdings Berhad Warrants 1/26/05 * 43,141
247,200 YTL Corp Berhad Warrants 6/26/09 * 188,653
---------------------
281,079
---------------------
MEXICO - 0.0%
38,886 Grupo Mexico Class B Warrants 8/09/01 * 190,943
---------------------
PHILIPPINES - 0.1%
2,523,700 Jolliebee FDS Warrants 3/24/03 * 692,817
---------------------
THAILAND - 0.0%
1,098,500 Banpu Public Co Warrants 1/14/03 * -
550,000 Siam Commercial Bank Ltd Warrants 5/10/02 * 134,199
---------------------
134,199
---------------------
TURKEY - 0.0%
245,000,000 Dardanel Onentas Gida Rights 3/08/00 * 251,479
---------------------
TOTAL RIGHTS & WARRANTS (Cost $1,208,531) 1,580,965
---------------------
SHORT-TERM INVESTMENTS - 2.0%
CASH EQUIVALENTS - 2.0%
$ 7,200,000 Royal Bank of Canada Time Deposit, 5.81% due 3/01/00 7,200,000
16,537,900 The Boston Global Investment Trust (h) 16,537,900
---------------------
23,737,900
---------------------
TOTAL SHORT-TERM INVESTMENTS (Cost $23,737,900) 23,737,900
---------------------
TOTAL INVESTMENTS - 99.9%
(Cost $1,181,834,221) 1,206,270,815
Other Assets and Liabilities (net) - 0.1% 1,134,200
---------------------
TOTAL NET ASSETS - 100.0% $ 1,207,405,015
---------------------
---------------------
</TABLE>
16 See accompanying notes to the financial statements.
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
- -------------------------------------------------------------------------------
NOTES TO THE SCHEDULE OF INVESTMENTS:
ADR American Depositary Receipt
GDR Global Depository Receipt
IDR International Depository Receipt
DEM German Mark
(a) Bankrupt issuer.
(b) Valued by management (Note 1).
(c) Security is restricted as to public
resale. The aggregate market value of
restricted securities is $52,562,297 or
4.35% of net assets.
(d) Security, or a portion thereof, has been
segregated to cover margin requirements
on open swap contracts (Note 6).
(e) A derivative security whose price is
linked to the return on a basket of
Chilean asset investments.
(f) A derivative security whose price is
linked to the return on a basket of
Russian securities.
(g) A derivative security whose price is
linked to the return on the underlying
security.
(h) Represents investment of security
lending collateral (Note 1).
144A Securities exempt from registration
under rule 144A of the Securities Act of
1933. These securities may be resold in
transactions exempt from registration,
normally to qualified institutional
buyers.
* Non-income producing security.
See accompanying notes to the financial statements. 17
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Schedule of Investments - continued
(Showing percentage of total net assets)
February 29, 2000
- -------------------------------------------------------------------------------
At February 29, 2000, industry sector diversification
of the Fund's equity investments was as follows:
<TABLE>
<CAPTION>
Industry Sector (Unaudited)
<S> <C>
Telecommunications 21.8 %
Banking 6.4
Electronic Equipment 6.0
Utilities 5.7
Metals and Mining 5.6
Conglomerates 5.5
Consumer Goods 5.4
Financial Services 4.4
Energy Services 4.4
Construction 3.0
Food and Beverage 2.8
Communications 2.7
Computers 2.6
Paper and Allied Products 2.5
Automotive 2.0
Services 1.4
Retail Trade 1.3
Chemicals 1.3
Real Estate 1.3
Machinery 1.1
Transportation 1.1
Textiles 0.9
Insurance 0.8
Health Care 0.7
Miscellaneous 9.3
-------------
100.0 %
-------------
-------------
</TABLE>
18 See accompanying notes to the financial statements.
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Assets and Liabilities - February 29, 2000
- ----------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value (cost $1,181,834,221) (Note 1) $ 1,206,270,815
Foreign currency, at value (cost $21,322,683) (Note 1) 21,303,896
Cash 64,536
Receivable for investments sold 21,168,871
Receivable for open swap contracts (Notes 1 and 6) 3,821,373
Foreign withholding taxes receivable 1,309,655
Dividends and interest receivable 5,363,771
Receivable for expenses waived or borne by Manager (Note 2) 37,287
-----------------
Total assets 1,259,340,204
-----------------
LIABILITIES:
Payable for investments purchased 21,272,153
Payable upon return of securities loaned (Note 1) 16,537,900
Accrued capital gain and repatriation taxes payable (Note 1) 12,713,070
Payable to affiliate for (Note 2):
Management fee 818,130
Shareholder service fee 133,285
Accrued expenses 460,651
-----------------
Total liabilities 51,935,189
-----------------
NET ASSETS $ 1,207,405,015
-----------------
-----------------
NET ASSETS CONSIST OF:
Paid-in capital $ 1,389,345,769
Distributions in excess of net investment income (2,330,282)
Accumulated net realized loss (202,505,234)
Net unrealized appreciation 22,894,762
-----------------
$ 1,207,405,015
-----------------
-----------------
NET ASSETS ATTRIBUTABLE TO:
Class III Shares $ 727,197,185
-----------------
-----------------
Class IV Shares $ 480,207,830
-----------------
-----------------
SHARES OUTSTANDING:
Class III 65,146,773
-----------------
-----------------
Class IV 43,047,210
-----------------
-----------------
NET ASSET VALUE PER SHARE:
Class III $ 11.16
-----------------
-----------------
Class IV $ 11.16
-----------------
-----------------
</TABLE>
See accompanying notes to the financial statements. 19
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Operations - Year Ended February 29, 2000
- ----------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends (net of foreign tax expense of $2,426,146) $ 23,435,371
Interest (including security lending income of $138,409) 4,492,716
-----------------
Total income 27,928,087
-----------------
EXPENSES:
Management fee (Note 2) 8,754,687
Custodian fees 2,206,847
Legal fees 126,197
Audit fees 108,716
Transfer agent fees 54,459
Trustees fees (Note 2) 11,844
Registration fee 2,645
Miscellaneous 141,741
Fees waived or borne by Manager (Note 2) (296,467)
-----------------
11,110,669
Shareholder service fee (Note 2)
Class III 1,088,963
Class IV 372,593
-----------------
Net expenses 12,572,225
-----------------
Net investment income 15,355,862
-----------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments 98,954,583
Closed swap contracts 41,914,827
Foreign currency, forward contracts and foreign
currency related transactions (4,369,053)
-----------------
Net realized gain 136,500,357
-----------------
Change in net unrealized appreciation (depreciation) on:
Investments (Note 1) 416,047,861
Open swap contracts 3,291,062
Foreign currency, forward contracts and foreign
currency related transactions (222,877)
-----------------
Net unrealized gain 419,116,046
-----------------
Net realized and unrealized gain 555,616,403
-----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 570,972,265
-----------------
-----------------
</TABLE>
20 See accompanying notes to the financial statements.
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- -----------------------------------------------------------------------------------------------------
Year Ended Year Ended
February 29, 2000 February 28, 1999
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 15,355,862 $ 31,085,801
Net realized gain (loss) 136,500,357 (323,752,478)
Change in net unrealized appreciation,(depreciation) 419,116,046 (201,053,937)
----------------- -----------------
Net increase (decrease) in net assets
resulting from operations 570,972,265 (493,720,614)
----------------- -----------------
Distributions to shareholders from:
Net investment income
Class III (1,880,001) (16,087,702)
Class IV (886,390) (9,786,346)
----------------- -----------------
Total distributions from net investment income (2,766,391) (25,874,048)
----------------- -----------------
In excess of net investment income
Class III (1,583,628) -
Class IV (746,654) -
----------------- -----------------
Total distributions in excess of net investment income (2,330,282) -
----------------- -----------------
Net realized gains
Class III - (10,825,261)
Class IV - (8,023,682)
----------------- -----------------
Total distributions from net realized gains - (18,848,943)
----------------- -----------------
In excess of net realized gains
Class III - (49,311)
Class IV - (36,550)
----------------- -----------------
Total distributions in excess of net realized gains - (85,861)
----------------- -----------------
(5,096,673) (44,808,852)
----------------- -----------------
Net share transactions: (Note 5)
Class III (183,418,042) (77,844,893)
Class IV 39,019,272 (183,333,072)
----------------- -----------------
Decrease in net assets resulting from
net share transactions (144,398,770) (261,177,965)
----------------- -----------------
Total increase (decrease) in net assets 421,476,822 (799,707,431)
NET ASSETS:
Beginning of period 785,928,193 1,585,635,624
----------------- -----------------
End of period (including distributions in excess of net
investment income of $2,330,282 and $3,684,069,
respectively) $ 1,207,405,015 $ 785,928,193
----------------- -----------------
----------------- -----------------
</TABLE>
See accompanying notes to the financial statements. 21
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Financial Highlights
(For a Class III share outstanding throughout each period)
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended February 28/29,
------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 6.31 $ 9.56 $ 12.49 $ 10.54 $ 9.52
---------- ---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income 0.13 + 0.25 0.16 + 0.13 0.10
Net realized and unrealized gain (loss) 4.77 (3.19) (1.76) 1.96 1.06
---------- ---------- ---------- ---------- ----------
Total from investment operations 4.90 (2.94) (1.60) 2.09 1.16
---------- ---------- ---------- ---------- ----------
Less distributions to shareholders from:
Net investment income (0.03) (0.19) (0.25) (0.14) (0.01)
In excess of net investment income (0.02) - - - -
Net realized gains - (0.12) (0.71) - (0.13)
In excess of net realized gains - (0.00)(d) (0.37) - -
---------- ---------- ---------- ---------- ----------
Total distributions (0.05) (0.31) (1.33) (0.14) (0.14)
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD $ 11.16 $ 6.31 $ 9.56 $ 12.49 $ 10.54
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
TOTAL RETURN (a) 77.43% (30.96%) (12.94%) 19.98% 12.24%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 727,197 $ 524,741 $ 913,615 $1,725,651 $ 907,180
Net expenses to average
daily net assets 1.18% 1.16% 1.24% (c) 1.24% (c) 1.35%
Net investment income to average
daily net assets 1.41% 2.75% 1.30% 1.40% 1.31%
Portfolio turnover rate 73% 76% 88% 41% 35%
Fees and expenses voluntarily waived
or borne by the Manager consisted of
the following per share amounts: $ 0.00 (b) $ 0.02 $ 0.03 $ 0.02 $ 0.00 (b)
</TABLE>
+ Computed using average shares outstanding throughout the period.
(a) Calculation excludes purchase premiums and redemption fees. The total
returns would have been lower had certain expenses not been waived during
the periods shown.
(b) Fees and expenses voluntarily waived or borne by the Manager were less than
$.01 per share.
(c) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .06% and .035% of average daily net assets for
the years ended February 28, 1997 and 1998, respectively.
(d) The distribution in excess of net realized gains was $0.0005.
22 See accompanying notes to the financial statements.
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
<TABLE>
<CAPTION>
Financial Highlights
(For a Class IV share outstanding throughout each period)
- -------------------------------------------------------------------------------------------------
Year Ended February 28/29,
--------------------------------------------
2000 1999 1998 *
---------- ---------- ----------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 6.31 $ 9.56 $ 8.62
---------- ---------- ----------
Income (loss) from investment operations:
Net investment income 0.13 + 0.28 0.01 +
Net realized and unrealized gain (loss) 4.77 (3.21) 0.93
---------- ---------- ----------
Total from investment operations 4.90 (2.93) 0.94
---------- ---------- ----------
Less distributions to shareholders from:
Net investment income (0.03) (0.20) -
In excess of net investment income (0.02) - -
Net realized gains - (0.12) -
In excess of net realized gains - 0.00 (d) -
---------- ---------- ----------
Total distributions (0.05) (0.32) -
---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD $ 11.16 $ 6.31 $ 9.56
---------- ---------- ----------
---------- ---------- ----------
TOTAL RETURN (a) 77.76% (31.01%) 10.90% ***
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $ 480,208 $ 261,187 $ 672,020
Net expenses to average
daily net assets 1.13% 1.12% 1.22% **(c)
Net investment income to average
daily net assets 1.45% 2.87% 0.65% **
Portfolio turnover rate 73% 76% 88%
Fees and expenses voluntarily waived
or borne by the Manager consisted
of the following per share amounts: $ 0.00 (b) $ 0.02 $ 0.00 (b)
</TABLE>
* Period from January 9, 1998 (commencement of operations) to
February 28, 1998.
** Annualized.
*** Not annualized.
+ Computed using average shares outstanding throughout the period.
(a) Calculation excludes purchase premiums and redemption fees. The total
return would have been lower had certain expenses not been waived during
the period shown.
(b) Fees and expenses voluntarily waived or borne by the Manager were less than
$.01 per share.
(c) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .04% of average daily net assets.
(d) The distribution in excess of net realized gains was $0.0005.
See accompanying notes to the financial statements. 23
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Notes to Financial Statements
February 29, 2000
- -------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
GMO Emerging Markets Fund (the "Fund") is a series of GMO Trust (the
"Trust"). The Fund is registered under the Investment Company Act of 1940,
as amended, as an open-end, non-diversified management investment company.
The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC
(the "Manager" or "GMO"). The Trust was established as a Massachusetts
Business Trust under the laws of the Commonwealth of Massachusetts on June
24, 1985. The Declaration of Trust permits the Trustees to create an
unlimited number of series ("Funds"), each of which issues a separate
series of shares, and to subdivide a series of shares into classes.
The Emerging Markets Fund seeks high total return through investment in
equity securities traded in the securities markets of developing countries
in Asia, Latin America, the Middle East, Africa, and Europe ("Emerging
Markets"). The Fund's benchmark is the IFC Investable Index.
The Fund offers two classes of shares: Class III and Class IV. The
principal economic difference between the classes of shares is the level of
shareholder service fee borne by the classes. Eligibility for and automatic
conversion between the various classes of shares is generally based on the
total amount of assets invested with GMO, as more fully described in the
Trust's prospectus.
The following is a summary of significant accounting policies which are in
conformity with accounting principles generally accepted in the United
States and which are consistently followed by the Fund in the preparation
of its financial statements. The preparation of financial statements in
accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
PORTFOLIO VALUATION
Portfolio securities listed on a securities exchange for which market
quotations are available are valued at the last sale price on each business
day, or if there is no such reported sale, at the most recent quoted bid
price. Unlisted securities for which market quotations are readily
available are valued at the most recent quoted bid price. Securities which
are primarily traded on foreign exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges,
and those values are then translated into U.S. dollars at the current
exchange rate. Short-term investments with a remaining maturity of sixty
days or less are valued at amortized cost which approximates market value.
Securities for which quotations are not readily available are valued at
fair value as determined in good faith by the Trustees or other persons
acting at their direction.
Certain securities held by the Fund were valued on the basis of a price
provided by a principal market maker. These prices may differ from the
value that would have been used had a broader market for the securities
existed and the differences could be material to the financial statements.
24
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- -------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. The
market values of foreign securities, currency holdings and other assets and
liabilities are translated to U.S. dollars based on the current exchange
rates each business day. Income and expenses denominated in foreign
currencies are translated at current exchange rates when accrued or
incurred. The Fund does not isolate realized and unrealized gains and
losses attributable to changes in exchange rates from gains and losses that
arise from changes in the market value of investments. Such fluctuations
are included with net realized and unrealized gain or loss on investments.
Net realized gains and losses on foreign currency transactions represent
gains and losses on disposition of foreign currencies and forward foreign
exchange contracts, currency gains and losses realized between the trade
and settlement dates on securities transactions and the difference between
the amount of investment income and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent amounts actually received
or paid.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts in connection with
settling planned purchases or sales of securities or to hedge the currency
exposure associated with some or all of the Fund's portfolio securities. A
forward currency contract is an agreement between two parties to buy and
sell a currency at a set price on a future date. The market value of a
forward currency contract fluctuates with changes in forward currency
exchange rates. Forward currency contracts are marked to market daily and
the change in value is recorded by the Fund as an unrealized gain or loss.
Realized gains or losses equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed
are recorded upon delivery or receipt of the currency or, if a forward
currency contract is offset by entering into another forward currency
contract with the same broker, upon settlement of the net gain or loss.
These contracts may involve market risk in excess of the unrealized gain or
loss reflected in the Fund's Statement of Assets and Liabilities. In
addition, the Fund could be exposed to risk if the counterparties are
unable to meet the terms of the contracts or if the value of the currency
changes unfavorably to the U.S. dollar. There were no forward foreign
currency contracts outstanding as of February 29, 2000.
OPTIONS
The Fund may write call and put options on futures, securities or
currencies it owns or in which it may invest. Writing put options tends to
increase the Fund's exposure to the underlying instruments. Writing call
options tends to decrease the Fund's exposure to the underlying instrument.
When the Fund writes a call or put option, an amount equal to the premium
received is recorded as a liability and subsequently marked to market to
reflect the current value of the option written. Premiums received from
writing options which expire are treated as realized gains. Premiums
received from writing options which are exercised or closed are added to
the proceeds or offset against the amounts paid on the future, security or
currency transaction to determine the realized gain or loss. The Fund as a
writer of an option has no control over whether the underlying future,
security or currency may be sold (call) or purchased (put) and as a result
bears the market risk of an unfavorable change in the price of the future,
security or currency underlying the written option. There is the risk the
Fund may not be able to enter into a closing transaction because of an
illiquid market. At February 29, 2000 there were no open written option
contracts.
25
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- -------------------------------------------------------------------------------
The Fund may also purchase put and call options. Purchasing call options
tends to increase the Fund's exposure to the underlying instrument.
Purchasing put options tends to decrease the Fund's exposure to the
underlying instrument. The Fund pays a premium which is included in the
Fund's Statement of Assets and Liabilities as an investment and
subsequently marked to market to reflect the current value of the option.
Premiums paid for purchasing options which expire are treated as realized
losses. Premiums paid for purchasing options which are exercised or closed
are added to the amounts paid or offset against the proceeds on the
transaction to determine the realized gain or loss. The risk associated
with purchasing put and call options is limited to the premium paid.
FUTURES CONTRACTS
The Fund may purchase or sell index futures contracts. Stock index futures
contracts represent commitments for future delivery of cash based upon the
level of a specified index of equity securities at a given date. The Fund
may use futures contracts to manage its exposure to the stock and currency
markets. Buying futures tends to increase the Fund's exposure to the
underlying instrument. Selling futures tends to decrease the Fund's
exposure to the underlying instrument or hedge other Fund instruments. Upon
entering into a futures contract, the Fund is required to deposit with its
custodian, in a segregated account in the name of the futures broker, an
amount of cash or U.S. government and agency obligations in accordance with
the initial margin requirements of the broker or exchange. Futures
contracts are marked to market daily and an appropriate payable or
receivable for the change in value ("variation margin") is recorded by the
Fund. The payable or receivable is subsequently settled. Gains or losses
are recognized but not considered realized until the contracts expire or
are closed. Futures contracts involve, to varying degrees, risk of loss in
excess of the variation margin disclosed in the Statement of Assets and
Liabilities. Losses may arise from the changes in the value of the
underlying instrument, if there is an illiquid secondary market for the
contracts or if counterparties do not perform under the contract terms.
Futures contracts are valued at the settlement price established each day
by the board of trade or exchange on which they are traded. As of February
29, 2000, there were no outstanding futures contracts.
INDEXED SECURITIES
The Fund may invest in indexed securities whose redemption values and/or
coupons are linked to the prices of other securities, securities indices,
or other financial indicators. The Fund uses indexed securities to increase
or decrease its exposure to different underlying instruments and to gain
exposure to markets that may be difficult to invest in through conventional
securities. Indexed securities may be more volatile than their underlying
instruments, but any loss is limited to the amount of the original
investment.
SWAP AGREEMENTS
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into swap agreements to manage its exposure
to the equity markets. The Fund enters into total return swap agreements
which involve a commitment by one party in the agreement to pay interest in
exchange for a market linked return, both based on notional amounts. To the
extent that the total return of the security or index underlying the
transaction exceeds or falls short of the offsetting interest rate
obligation, the Fund will receive a payment from or make a payment to the
counterparty. Total return swaps are marked to
26
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- -------------------------------------------------------------------------------
market daily based upon quotations from market makers and the change, if
any, is recorded as unrealized gain or loss in the Statement of Operations.
Payments received or made at the end of the measurement period are recorded
as realized gain or loss in the Statement of Operations. Entering into
these agreements involves, to varying degrees, elements of credit and
market risk in excess of the amounts recognized on the Statement of Assets
and Liabilities. Such risks involve the possibility that there will be no
liquid market for these agreements, that the counterparty to the agreements
may default on its obligation to perform or that there may be unfavorable
changes in the price of the security or index underlying these
transactions. See Note 6 for a summary of all open swap agreements as of
February 29, 2000.
SECURITY LENDING
The Fund may lend its securities to certain qualified brokers. The loans
are collateralized at all times with cash or securities with a market value
at least equal to the market value of the securities on loan. As with other
extensions of credit, the Fund may bear the risk of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. The Fund receives compensation for lending its
securities. At February 29, 2000, the Fund loaned securities having a
market value of $15,930,487 collateralized by cash in the amount of
$16,537,900 which was invested in a short-term instrument.
TAXES
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"). The Fund intends to distribute substantially all of its net
investment income and net realized short-term and long-term capital gains,
if any, after giving effect to any available capital loss carryovers for U.
S. federal income tax purposes. Therefore, no provision for U. S. federal
income or excise tax is necessary. Taxes on foreign interest and dividend
income have been withheld in accordance with the applicable country's tax
treaty with the United States.
Dividends received by shareholders of the Fund which are derived from
foreign source income and foreign taxes paid by the Fund are to be treated,
to the extent allowable under the Code, as if received and paid by the
shareholders of the Fund.
The Fund may be subject to capital gains and repatriation taxes imposed by
certain countries in which it invests. The Fund has recorded a current tax
liability of $7,335,045 for capital gains taxes and a deferred tax
liability in respect of unrealized appreciation on foreign securities of
$5,378,025 for capital gains and repatriation taxes. The Fund has incurred
$15,427,437 related to capital gain taxes which is included in net realized
gain in the Statement of Operations.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund's policy is to declare and pay distributions from net investment
income semi-annually, and from net realized short-term and long-term
capital gains at least annually. All distributions will be paid in shares
of the Fund, at net asset value, unless the shareholder elects to receive
cash distributions. The Fund declares separate dividends from net
investment income on each class of shares. Distributions to shareholders
are recorded by the Fund on the ex-dividend date.
27
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- -------------------------------------------------------------------------------
Income dividends and capital gain distributions are determined in
accordance with U.S. federal income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to foreign currency and passive foreign
investment company transactions, foreign taxes and differing treatments for
redemptions in-kind. Gross gains resulting from such in-kind transactions
amounted to $114,069.
The following reclassification represents the amount necessary to report
the stated components of net assets on a tax basis, excluding certain
temporary differences, as of February 29, 2000. This reclassification has
no impact on net investment income, realized gain/loss or the net asset
value of the Fund and is primarily attributable to certain differences in
the computation of distributable income and capital gains U. S. federal tax
rules versus accounting principles generally accepted in the United States.
The calculation of net investment income per share in the financial
highlights table excludes these adjustments.
<TABLE>
<CAPTION>
Accumulated
Undistributed Net Accumulated Net Realized
Investment Income Gain/(Loss) Paid-in Capital
- --------------------------- ------------------------ -------------------------------
<S> <C> <C>
$(8,905,402) $20,883,858 $(11,978,456)
</TABLE>
Distributions in excess of tax basis earnings and profits, if any, are
reported in the Fund's financial statements as a return of capital.
Differences in the recognition or classification of income for financial
statement and tax purposes which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of
net investment income or accumulated net realized gains.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME
Security transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date, or when the Fund is informed of the
ex-dividend date, if later. Interest income is recorded on the accrual
basis and is adjusted for the accretion of discounts. In determining the
net gain or loss on securities sold, the cost of securities is determined
on the identified cost basis.
ALLOCATION OF OPERATING ACTIVITY
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds. Investment
income, common expenses and realized and unrealized gains and losses are
allocated pro-rata among the classes of shares of the Fund based on the
relative net assets of each class. Shareholder service fees, which are
directly attributable to a class of shares, are charged to that class'
operations.
PURCHASES AND REDEMPTIONS OF FUND SHARES
The premium on cash purchases of Fund shares is 1.60% of the amount
invested. In the case of cash redemptions, the fee is .40% of the amount
redeemed. These fees will be reduced by 50% with respect to any portion of
a purchase or redemption that is offset by a corresponding redemption or
purchase, respectively, occurring on the same day. All purchase premiums
and redemption fees are paid to and recorded by the Fund as paid-in
capital. These fees are allocated relative to each class' net assets on the
28
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- -------------------------------------------------------------------------------
share transaction date. For the year ended February 29, 2000, the Fund
received $948,179 in purchase premiums and $717,169 in redemption fees.
There is no premium for reinvested distributions. While no purchase premium
is normally charged with respect to in-kind purchases of Fund shares, a
purchase premium of up to .20% may be charged on certain in-kind purchases.
INVESTMENT RISK
Investments in securities of emerging countries present certain risks that
are not inherent in many other investments. Many emerging countries present
elements of political and/or economic instability. The securities markets
of emerging countries are generally smaller and less developed than the
securities markets of the U.S. and developed foreign markets. Further,
countries may impose various types of foreign currency regulations or
controls which may impede the Fund's ability to repatriate amounts it
receives. The Fund may acquire interests in securities in anticipation of
improving conditions in the related countries. These factors may result in
significant volatility in the values of its holdings. The markets for
emerging countries are relatively illiquid. Accordingly, the Fund may not
be able to realize in an actual sale amounts approximating those used to
value its holdings.
2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES
GMO earns a management fee paid monthly at the annual rate of .81% of
average daily net assets. The Fund has adopted a Shareholder Service Plan
under which the Fund pays GMO a shareholder service fee for client and
shareholder service, reporting and other support. Pursuant to the
Shareholder Service Plan, the shareholder service fee is calculated based
on the average daily net assets of each class at the annual rate of .15%
for Class III shares and .105% for Class IV shares.
GMO has entered into a binding agreement effective until June 30, 2000 to
reimburse the Fund to the extent that the Fund's total annual operating
expenses (excluding custody fees, brokerage commissions, certain other
transaction costs (including stamp duties and transfer taxes), shareholder
service fees and extraordinary expenses) exceed the management fee.
Prior to March 1, 1999, GMO earned a management fee at the annual rate of
1.00% of average daily net assets. GMO had agreed to waive a portion of its
fee and bear other expenses to the extent that the Fund's annual expenses
(including the management fee but excluding custody fees, brokerage
commissions, certain other transaction costs (including stamp duties and
transfer taxes), shareholder service fees and extraordinary expenses)
exceeded .81% of average daily net assets.
The Manager has entered into a Consulting Agreement with Dancing Elephant,
Ltd. (the "Consultant") with respect to the management of the portfolio.
Payments made by the Manager to the Consultant will not affect the amounts
payable by the Fund to the Manager or the Fund's expense ratio. The Fund's
portion of the fee paid by the Trust to the unaffiliated Trustees during
the year ended February 29, 2000, was $11,844. No remuneration is paid to
any Trustee or officer who is affiliated with the Manager.
29
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- -------------------------------------------------------------------------------\
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended February 29, 2000, were as
follows:
<TABLE>
<CAPTION>
Purchases Proceeds
------------------------- -------------------------
<S> <C> <C>
U.S. Government securities $ 20,620,736 $ 18,586,412
Investments (non-U.S. Government securities) 722,907,036 831,434,667
</TABLE>
At February 29, 2000, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in the value of investments held
were as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Net Unrealized
Aggregate Cost Appreciation Depreciation Appreciation
---------------------------- -------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
$1,185,203,467 $261,656,701 $240,589,353 $21,067,348
</TABLE>
4. PRINCIPAL SHAREHOLDERS
At February 29, 2000, 24.14% of the outstanding shares of the Fund were
held by two shareholders.
5. SHARE TRANSACTIONS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest (without par value). Transactions in Fund
shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
------------------------------------------- -------------------------------------
Class III: Shares Amount Shares Amount
-------------------- ------------------ ------------------ ---------------
<S> <C> <C> <C> <C>
Shares sold 8,250,164 $ 75,191,088 16,151,855 $ 124,491,194
Shares issued to
shareholders in reinvestment
of distributions 238,039 2,615,828 3,383,887 22,834,853
Shares repurchased (26,449,273) (261,224,958) (31,966,910) (225,170,940)
-------------------- ------------------ ------------------ ---------------
Net decrease (17,961,070) $ (183,418,042) (12,431,168) $ (77,844,893)
-------------------- ------------------ ------------------ ---------------
-------------------- ------------------ ------------------ ---------------
</TABLE>
30
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- -------------------------------------------------------------------------------
SHARE TRANSACTIONS - CONTINUED
<TABLE>
<CAPTION>
Year Ended Year Ended
February 29, 2000 February 28, 1999
------------------------------------------ -----------------------------------------
Class IV: Shares Amount Shares Amount
-------------------- -------------------- -------------------- ------------------
<S> <C> <C> <C> <C>
Shares sold 13,191,632 $ 146,997,411 1,052,163 $ 11,220,974
Shares issued to
shareholders in
reinvestment of
distributions 20,982 230,234 1,540,180 10,691,678
Shares repurchased (11,566,413) (108,208,373) (31,493,803) (205,245,724)
-------------------- -------------------- -------------------- ------------------
Net increase (decrease) 1,646,201 $ 39,019,272 (28,901,460) $ (183,333,072)
-------------------- -------------------- -------------------- ------------------
-------------------- -------------------- -------------------- ------------------
</TABLE>
6. FINANCIAL INSTRUMENTS
A summary of outstanding financial instruments at February 29, 2000 is as
follows:
SWAP AGREEMENTS
<TABLE>
<CAPTION>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
------------------ ------------ ------------------------------------------------------- -------------------
<S> <C> <C> <C>
$ 2,686,903 3/13/00 Agreement with Credit Agricole Indosuez (W.I. Carr) $ 556,061
dated 3/12/99 to receive (pay) the
notional amount multiplied by the
return on the MSCI Taiwan Index and to
pay the notional amount multiplied by 3
month LIBOR adjusted by a specified
spread.
3,782,657 3/30/00 Agreement with Credit Agricole Indosuez (W.I. Carr) 906,390
dated 3/16/99 to receive (pay) the
notional amount multiplied by the
return on the MSCI Taiwan Index and to
pay the notional amount multiplied by 3
month LIBOR adjusted by a specified
spread.
</TABLE>
31
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Notes to Financial Statements - continued
February 29, 2000
- -------------------------------------------------------------------------------
SWAP AGREEMENTS - CONTINUED
<TABLE>
<CAPTION>
Net Unrealized
Notional Expiration Appreciation
Amount Date Description (Depreciation)
------------------ ------------ ------------------------------------------------------- -------------------
<S> <C> <C> <C>
$ 3,721,299 3/30/00 Agreement with Credit Agricole Indosuez (W.I. Carr) $ 891,288
dated 3/17/99 to receive (pay) the
notional amount multiplied by the
return on the MSCI Taiwan Index and to
pay the notional amount multiplied by 3
month LIBOR adjusted by a specified
spread.
9,000,763 4/28/00 Agreement with Goldman Sachs International dated (386,129)
4/28/99 to receive (pay) the notional amount
multiplied by the return on the MSCI Taiwan Index and
to pay the notional amount multiplied by 3 month LIBOR
adjusted by a specified spread.
6,050,865 5/02/00 Agreement with Goldman Sachs International dated 2,238,442
4/12/99 to receive (pay) the notional amount
multiplied by the return on the MSCI Taiwan Index and
to pay the notional amount multiplied by 12 month
LIBOR adjusted by a specified spread.
5,234,725 8/30/00 Agreement with Lehman Brothers Finance S.A. dated (384,679)
8/17/99 to receive (pay) the notional
amount multiplied by the return on the
MSCI Taiwan Index and to pay the
notional amount multiplied by 3 month
LIBOR adjusted by a specified spread.
-------------------
$ 3,821,373
-------------------
-------------------
</TABLE>
32
<PAGE>
GMO EMERGING MARKETS FUND
(A Series of GMO Trust)
Federal Tax Information - (Unaudited)
February 29, 2000
- -------------------------------------------------------------------------------
For the fiscal year ended February 29, 2000, all the Fund's distributions are
from investment company taxable income.
At February 29, 2000, the Fund had a capital loss carryforward available to
offset future capital gains, if any, of the following amount:
<TABLE>
<CAPTION>
Year of Expiration Amount
------------------ ------
<S> <C>
2007 $199,563,451
</TABLE>
33
<PAGE>
GMO INTERNATIONAL SMALL COMPANIES FUND
(A Series of GMO Trust)
PORTFOLIO MANAGERS
Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Forrest Berkley are
primarily responsible for the day-to-day management of the Fund's portfolio. Mr.
Grantham and Mr. Darnell have been portfolio managers at Grantham, Mayo, Van
Otterloo & Co. LLC for more than fifteen years. Mr. Berkley has been with GMO
and involved in portfolio management for more than ten years.
MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE
The Class III shares of the GMO International Small Companies Fund returned 9.6%
for the fiscal year ended February 29, 2000 as compared to 25.4% for EAFE and
28.8% for the Salomon EMI World ex-U.S. Index of smaller capitalization stocks.
Consistent with the Fund's investment objective and policies, the Fund was
invested substantially in common stocks that ranked within the smallest 50% by
market capitalization within each country.
In international markets, the fiscal year was characterized by explosive
performance of the technology and telecommunications sectors. This effect was
particularly strong in the fourth quarter of 1999, during which period the MSCI
EAFE Growth Index returned 25.6% versus 8.9% for MSCI EAFE Value. While this
paralleled the run-up in the U.S. NASDAQ Index, the EAFE Index contains
relatively few pure Internet and information technology stocks. The
international rally focused more on the best available approximation, which is
telecommunications stocks. Both fixed line and wireless companies performed very
strongly in the markets, as did the related equipment providers. The optimism
about these companies came despite the failure of many other growth stocks, such
as pharmaceuticals and established software companies, to produce continued
strong earnings growth.
In contrast, many neglected stocks - typically smaller capitalization, value
companies - had lackluster market performance for the fiscal year. Throughout
the bull market of the late 1990's, growth stocks have enjoyed increasing
"multiple expansion" to higher relative levels of price-to-book and
price-to-earnings. As a result the spread, or discount, between the valuations
of the cheaper stocks on such measures and the most expensive stocks has reached
levels unprecedented in history. These wide gaps are considerably beyond what
could possibly be justified by the relatively modest differences in consensus
growth rate estimates. This is true even if no regression of the higher
profitability of telecommunications stocks took place in the next 20 years,
which would be contrary to the entire history of corporate competition.
The Fund's underperformance relative to EAFE and EMI for the fiscal year is
largely a result of benchmark mismatch. The Fund's core buyable universe is the
70% smallest stocks within each EAFE market. The Fund underperformed that
universe by a relatively small (though still disappointing) -3%. However that
universe fared much worse than did the large capitalization EAFE or smaller
capitalization, more growth oriented, EMI Indices. A tilt towards value stocks
within the smaller capitalization universe hurt performance, most notably in the
United Kingdom. Stock selection within small was generally negative in Europe
and positive within Asia.
Country selection was a minor negative impact. The overweight in South East
Asian markets was not as beneficial for smaller capitalization stocks as it was
for larger capitalization firms. And the Fund suffered from being underweight in
Japan earlier in the fiscal year.
<PAGE>
OUTLOOK
The attractive discounts available for smaller capitalization stocks represent
an exceptional opportunity relative to large cap stocks. It would require
relative returns in excess of +50% for smaller capitalization stocks to return
to their historical average relative valuation level (on price-to-earnings or
price-to-book). In addition, valuation techniques are well positioned to add
value in country selection as cheaper countries in South East Asia and elsewhere
are at abnormally large discounts.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO &
CO LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
We believe the rally thus far has been fueled less by earnings growth or
corporate restructuring than it has by revaluing markets and currencies that
were priced for destruction. Empirical research shows that markets after a
collapse tend to have a stronger second year than the first year. This holds
true for both developed and emerging markets. We have long argued that it takes
an economy four to ten quarters to realize the full benefits of currency
devaluation as it takes exporters this long to increase capacity and procure
orders. During this period, the premium price of imports forces a resumption of
local spending, which inevitably benefits local producers. We have seen this
pattern in India (1993), Mexico (1994) and Thailand (1998) and are now starting
to see the same effect in Brazil and Russia.
In the coming year we expect to see most emerging economies grow strongly and
corporate earnings increase sharply in tandem. Additionally, most emerging
countries with undervalued currencies are running large and increasing trade
surpluses. For a few large markets, notably Brazil, Indonesia, Turkey and
Russia, we are likely to see significant decreases in both nominal and real
interest rates as a result of falling inflation. The corporate restructuring in
Korea and India and the resulting benefits have set a pattern for other
countries to follow. In an environment of global growth, each of these factors
supports our continued enthusiasm for this asset class.
Within Asia, we prefer countries that are likely to have economic growth that
will surprise on the upside. These markets, including Indonesia, Malaysia and
Thailand, have not participated in the recent rally. Indonesia, trading at under
five times peak earnings, could be the most explosive market over the next 5
years. On the other hand, we have been reducing our position in Korea as its
double-digit GDP growth and 25% rise in industrial production may soon force
interest rate hikes to cool the economy. India's technology boom mirrors the
Internet hysteria in the U.S., and we continue to reduce our position there,
though parabolic moves in some of these stocks have kept us overweight. We are
cautiously reducing our underweight in Turkey, anticipating it may take several
months to see whether the IMF program will be successful.
In Latin America we are positive about Brazil. The government response to the
January 1999 currency crisis has led to an improved trade balance and controlled
inflation. Earnings growth is likely to be strong in 2000, exceeding current
expectations. Though the Mexican economy has benefited from solid policymaking
and robust exports to the U.S., the peso is the most overvalued of all emerging
currencies. Because the stock market is also expensive, we are underweight by
5.2% relative to the benchmark in Mexico.
The technology and telecommunications mania has continued to make value
investing a challenge in the short term. Nevertheless, we are confident that our
emphasis on buying inexpensive countries and companies will continue to produce
excellent long-term returns.
THE VIEWS EXPRESSED HERE ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO &
CO. LLC MANAGEMENT. THEY ARE NOT MEANT AS INVESTMENT ADVICE.
<PAGE>
- -------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
GMO EMERGING MARKETS FUND CLASS III SHARES AND THE IFC INVESTABLE COMPOSITE
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
-----------------------------------------
Average Annual Total Return
-----------------------------------------
1yr 5yr Since Inception
-----------------------------------------
<S> <C> <C> <C>
12/9/93
Class III 73.89% 7.06% 5.24%
-----------------------------------------
1/9/98
Class IV 74.06% n/a 14.33%
-----------------------------------------
</TABLE>
[Line Graph Appears Here.]
<TABLE>
<CAPTION>
Date GMO Emerging Markets Fund IFC Investable Composite
<S> <C> <C>
12/9/93 9,840 10,000
12/31/93 10,838 11,127
3/31/94 10,946 9,812
6/30/94 10,837 9,500
9/30/94 13,125 11,776
12/31/94 11,519 9,792
3/31/95 9,601 8,352
6/30/95 10,722 9,082
9/30/95 10,808 9,051
12/31/95 10,071 8,967
3/31/96 11,012 9,642
6/30/96 11,790 10,060
9/30/96 11,234 9,834
12/31/96 11,243 9,809
3/31/97 12,466 10,743
6/30/97 14,041 11,392
9/30/97 14,393 10,364
12/31/97 11,232 8,363
3/31/98 11,727 8,950
6/30/98 8,415 7,051
9/30/98 6,692 5,520
12/31/98 7,988 6,521
3/31/99 8,851 7,233
6/30/99 11,895 8,952
9/30/99 10,798 8,671
12/31/99 14,197 10,899
2/29/00 13,746 10,889
</TABLE>
