<PAGE> 1
As filed with the Securities and Exchange Commission on
June 28, 2000. File Nos.2-98772; 811-4347.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 53
[x]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
[x]
Amendment No. 61
(Check appropriate box or boxes)
GMO Trust
(Exact name of registrant as specified in charter)
40 Rowes Wharf, Boston, Massachusetts 02110
(Address of principal executive offices)
(617) 330-7500
(Registrant's Telephone Number, including Area Code)
R. Jeremy Grantham
GMO Trust
40 Rowes Wharf
Boston, Massachusetts 02110
(Name and address of agent for service)
Copy to:
J. B. Kittredge, Jr., Esquire
ROPES & GRAY
One International Place
Boston, Massachusetts 02110
It is intended that this filing become effective on June 30, 2000
pursuant to Rule 485(b) of the Securities Act of 1933, as amended.
<PAGE> 2
THIS FILING RELATES TO ALL SERIES OF GMO TRUST EXCEPT GMO ALPHA LIBOR FUND; IT
IS INTENDED THAT NO INFORMATION RELATING TO GMO ALPHA LIBOR FUND IS AMENDED OR
SUPERSEDED HEREBY.
<PAGE> 3
GMO TRUST Prospectus
June 30, 2000
GMO TRUST OFFERS A BROAD SELECTION
OF INVESTMENT ALTERNATIVES TO INVESTORS.
U.S. EQUITY FUNDS
- U.S. Core Fund
- Tobacco-Free Core Fund
- Value Fund
- Intrinsic Value Fund
- Growth Fund
- Small Cap Value Fund
- Small Cap Growth Fund
- REIT Fund
FIXED INCOME FUNDS
- Domestic Bond Fund
- U.S. Bond/Global Alpha A Fund
- U.S. Bond/Global Alpha B Fund
- International Bond Fund
- Currency Hedged International Bond Fund
- Global Bond Fund
- Emerging Country Debt Fund
- Short-Term Income Fund
- Global Hedged Equity Fund
- Inflation Indexed Bond Fund
- Emerging Country Debt Share Fund
INTERNATIONAL EQUITY FUNDS
- International Core Fund
- Currency Hedged International Core Fund
- Foreign Fund
- International Small Companies Fund
- Japan Fund
- Emerging Markets Fund
- Evolving Countries Fund
- Asia Fund
ASSET ALLOCATION FUNDS
- International Equity Allocation Fund
- World Equity Allocation Fund
- Global (U.S.+) Equity Allocation Fund
- Global Balanced Allocation Fund
- U.S. Sector Fund
Information about other funds offered by GMO Trust is contained in separate
prospectuses.
GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC
40 ROWES WHARF - BOSTON, MASSACHUSETTS 02110
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES......... 3
U.S. Equity Funds......................................... 4
U.S. Core Fund......................................... 4
Tobacco-Free Core Fund................................. 5
Value Fund............................................. 6
Intrinsic Value Fund................................... 7
Growth Fund............................................ 8
Small Cap Value Fund................................... 9
Small Cap Growth Fund.................................. 10
REIT Fund.............................................. 11
International Equity Funds................................ 12
International Core Fund................................ 12
Currency Hedged International Core Fund................ 14
Foreign Fund........................................... 15
International Small Companies Fund..................... 16
Japan Fund............................................. 17
Emerging Markets Fund.................................. 18
Evolving Countries Fund................................ 19
Asia Fund.............................................. 20
Fixed Income Funds........................................ 21
Domestic Bond Fund..................................... 21
U.S. Bond/Global Alpha A Fund.......................... 22
U.S. Bond/Global Alpha B Fund.......................... 23
International Bond Fund................................ 24
Currency Hedged International Bond Fund................ 25
Global Bond Fund....................................... 26
Emerging Country Debt Fund............................. 27
Short-Term Income Fund................................. 28
Global Hedged Equity Fund.............................. 29
Inflation Indexed Bond Fund............................ 30
Emerging Country Debt Share Fund....................... 31
Asset Allocation Funds.................................... 32
International Equity Allocation Fund................... 32
World Equity Allocation Fund........................... 33
Global (U.S.+) Equity Allocation Fund.................. 34
Global Balanced Allocation Fund........................ 35
U.S. Sector Fund....................................... 36
SUMMARY OF PRINCIPAL RISKS.................................. 37
FEES AND EXPENSES........................................... 43
BENCHMARKS AND INDEXES...................................... 50
MANAGEMENT OF THE TRUST..................................... 54
DETERMINATION OF NET ASSET VALUE............................ 56
HOW TO PURCHASE SHARES...................................... 57
HOW TO REDEEM SHARES........................................ 58
MULTIPLE CLASSES............................................ 59
DISTRIBUTIONS AND TAXES..................................... 60
FINANCIAL HIGHLIGHTS........................................ 62
INVESTMENT BY FIXED INCOME FUNDS IN GMO ALPHA LIBOR FUND.... 83
ADDITIONAL INFORMATION..................................back cover
SHAREHOLDER INQUIRIES...................................back cover
DISTRIBUTOR.............................................back cover
</TABLE>
2
<PAGE> 5
SUMMARIES OF
FUND OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES
GMO Trust offers a broad range of investment choices to investors. The
following summaries describe each Fund's investment objective and principal
investment strategies. Each Fund may make other investments and engage in other
investment strategies that are not specifically described in the summaries. More
information about each Fund's possible investments and strategies is set forth
in the Statement of Additional Information. See the back cover of this
Prospectus for information about how to receive the Statement of Additional
Information. Unless described as fundamental in this Prospectus or in the
Statement of Additional Information, each Fund's investment objective and
policies may be changed by the Trustees without shareholder approval. The
investment objectives of the U.S. Core Fund, Value Fund, Growth Fund, Short-Term
Income Fund, International Core Fund and the Japan Fund are fundamental.
In many of the Fund summaries that follow, it is noted that a particular
Fund will "invest primarily in" a particular type of securities or other assets.
Investors should understand that this Prospectus uses the word "invest" to mean
not only direct investment in a particular asset but also indirect investment in
or exposure to the asset through the use of derivatives and related instruments.
Investing in mutual funds involves risk. Each Fund is subject to certain
risks based on the types of investments in the Fund's portfolio and on the
investment strategies the Fund employs. Investors should refer to the SUMMARY OF
PRINCIPAL RISKS in the Prospectus at page 37 for a discussion of the principal
risks of investing in the Funds. See the Statement of Additional Information for
additional information about the risks of specific Fund investments and
strategies. Funds described in this Prospectus may not be available for purchase
in all states. This Prospectus is not an offering in any state where an offering
may not lawfully be made.
It is important for you to note:
- You may lose money on an investment in a Fund.
- An investment in a Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
3
<PAGE> 6
U.S. EQUITY FUNDS
GMO U.S. CORE FUND
Fund Inception Date: 9/18/85
<TABLE>
<CAPTION>
FUND CODES
--------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III GMCTX USCore 362007 88 2
Class II GMTWX USCore 362007 80 9
Class IV GMRFX USCore 362008 84 9
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO U.S. Core Fund seeks high total return
through investment in U.S. equity securities. The Fund's current benchmark is
the S&P 500 Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of at least 125 companies chosen from among the 600 companies with the largest
equity capitalization and whose securities are listed on a United States
national securities exchange. The Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivative instruments and related investment techniques to:
(i) hedge equity exposure; (ii) replace direct investing; and (iii) implement
shifts in investment exposure as a substitute for buying and selling securities.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to provide broad U.S. equity exposure. Using
these principles, the Manager employs a bottom-up approach to select stocks
based on factors such as fair value, earnings and price momentum, cash flow,
book value and neglect (a measure of low analyst coverage and low price
volatility). The Manager then uses a top-down approach to favor sectors that it
believes represent the best long-term values within the U.S. stock market. The
Manager then uses a final optimization process to help control portfolio risk.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk, Leverage Risk and Credit and Counterparty Risk. For more
information about these risks and other principal risks of an investment in the
Fund, see "Summary of Principal Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums in effect
through December 31, 1999 are not reflected in the bar chart; if reflected, the
returns would be lower. The table to the right shows how the Fund's average
annual total returns for different calendar periods compare with those of a
broad-based index. See "Benchmarks and Indexes" for a description of the index.
Performance results in the table reflect payment of Fund expenses; returns for
the comparative index do not reflect payment of any expenses. PAST PERFORMANCE
IS NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
U.S. CORE FUND(%)
-----------------
<S> <C>
1990 -1.34
1991 29.89
1992 5.94
1993 16.28
1994 2.36
1995 43.25
1996 17.61
1997 35.10
1998 24.69
1999 18.59
</TABLE>
Highest Quarter: 19.49% (4Q1998)
Lowest Quarter: -13.53% (3Q1990)
Year-to-Date (as of 3/31/00): 3.97%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
9/18/85
-----------------------------------------------------------------
CLASS III 18.43% 27.42% 18.43% 19.01%
-----------------------------------------------------------------
S&P 500 21.04% 28.54% 18.20% 18.99%
-----------------------------------------------------------------
6/7/96
-----------------------------------------------------------------
CLASS II* 18.55% N/A N/A 24.58%
-----------------------------------------------------------------
S&P 500 21.04% N/A N/A 26.48%
-----------------------------------------------------------------
1/9/98
-----------------------------------------------------------------
CLASS IV 18.62% N/A N/A 24.80%
-----------------------------------------------------------------
S&P 500 21.04% N/A N/A 27.96%
-----------------------------------------------------------------
</TABLE>
* For the period from November 17, 1997 to January 9, 1998, no Class II shares
were outstanding. Performance for that period is that of Class III shares. If
Class II shares had been outstanding, performance would be lower because Class
II expenses are higher.
4
<PAGE> 7
GMO TOBACCO-FREE CORE FUND
Fund Inception Date: 10/31/91
<TABLE>
<CAPTION>
FUND CODES
-----------------------------------------
Ticker Symbol Cusip
------ --------- -----------
<S> <C> <C> <C> <C>
Class III GMTCX TobaccoFr 362007 85 8
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Tobacco-Free Core Fund seeks high total
return through investment in U.S. equity securities. The Fund's current
benchmark is the S&P 500 Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of at least 125 companies chosen from among the 600 companies with the largest
equity capitalization and whose securities are listed on a United States
national securities exchange, and which are not Tobacco Producing Issuers.
Tobacco Producing Issuers are defined as those issuers that are within the
Tobacco Producing Issuer industry classification maintained by Ford Investor
Services. The Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivative instruments and related investment techniques to:
(i) hedge equity exposure; (ii) replace direct investing; and (iii) implement
shifts in investment exposure as a substitute for buying and selling securities.
The Fund will not use derivative instruments to expose on a net basis more than
100% of its assets to equity securities or markets.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to provide broad exposure to equity
securities of non-Tobacco Producing Issuers. Using these principles, the Manager
employs a bottom-up approach to select stocks based on strategies such as fair
value, earnings and price momentum, cash flow, book value and neglect (a measure
of low analyst coverage and low price volatility). The Manager then uses a
top-down approach to favor sectors that it believes represent the best long-term
values within the U.S. stock market. The Manager then uses a final optimization
process to help control portfolio risk.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk, Leverage Risk and Credit and Counterparty Risk. For more
information about these risks and other principal risks of an investment in the
Fund, see "Summary of Principal Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums in effect
through December 31, 1999 are not reflected in the bar chart; if reflected, the
returns would be lower. The table to the right shows how the Fund's average
annual total returns for different calendar periods compare with those of a
broad-based index. See "Benchmarks and Indexes" for a description of the index.
Performance results in the table reflect payment of Fund expenses; returns for
the comparative index do not reflect payment of any expenses. PAST PERFORMANCE
IS NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
TOBACCO FREE CORE FUND %
------------------------
<S> <C>
1992 5.69
1993 17.42
1994 2.40
1995 43.00
1996 18.30
1997 35.60
1998 25.20
1999 21.25
</TABLE>
Highest Quarter: 19.47% (4Q1998)
Lowest Quarter: -10.01% (3Q1998)
Year-to-Date (as of 3/31/00): 4.14%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
10/31/91
-----------------------------------------------------------------
CLASS III 21.08% 28.29% N/A 20.88%
-----------------------------------------------------------------
S&P 500 21.04% 28.54% N/A 20.23%
-----------------------------------------------------------------
</TABLE>
5
<PAGE> 8
GMO VALUE FUND
Fund Inception Date: 11/13/90
<TABLE>
<CAPTION>
FUND CODES
--------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III GMOVX Value 362007 82 5
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Value Fund seeks long-term capital growth
primarily through investment in equity securities. The Fund's current benchmark
is the Russell 1000 Value Index.
INVESTMENT UNIVERSE: The Fund invests primarily in equity securities of
companies chosen from the Russell 1000 Value Index, emphasizing large
capitalization equity securities. The Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund invests primarily in U.S. equity
securities of companies that in the opinion of the Manager represent favorable
values relative to their market prices. The Fund intends to be fully invested,
and will not generally take temporary defensive positions through investment in
cash and high quality money market instruments. The Fund may also invest in
equity securities of foreign issuers.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses traditional investment
principles combining fundamental and quantitative analysis to provide broad U.S.
equity market exposure. Using these principles, the Manager focuses on stock
selection, and primarily selects issuers which it believes represent favorable
values relative to their market prices. The Manager employs a bottom-up approach
to select stocks, and uses various techniques in seeking companies which trade
below fair value, as determined by the value of the earnings stream (using a
proprietary dividend discount model), the asset value or the franchise value.
RISKS: The most significant risks of an investment in the Fund are Market
Risk (including Value Securities Risk) and Derivatives Risk. For more
information about these risks and other principal risks of an investment in the
Fund, see "Summary of Principal Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums in effect
through December 31, 1999 are not reflected in the bar chart; if reflected, the
returns would be lower. The table to the right shows how the Fund's average
annual total returns for different calendar periods compare with those of a
broad-based index. See "Benchmarks and Indexes" for a description of the index.
Performance results in the table reflect payment of Fund expenses; returns for
the comparative index do not reflect payment of any expenses. PAST PERFORMANCE
IS NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
VALUE FUND %
------------
<S> <C>
1991 25.75
1992 9.35
1993 18.67
1994 0.61
1995 38.18
1996 20.73
1997 30.42
1998 11.66
1999 2.70
</TABLE>
Highest Quarter: 18.17% (1Q1991)
Lowest Quarter: -10.89% (3Q1998)
Year to Date (as of 3/31/00): -2.71%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11/13/90
-----------------------------------------------------------------
CLASS III 2.55% 20.02% N/A 17.41%
-----------------------------------------------------------------
RUSSELL 1000 VALUE
INDEX 7.35% 23.06% N/A 18.78%
-----------------------------------------------------------------
</TABLE>
6
<PAGE> 9
GMO INTRINSIC VALUE FUND
Fund Inception Date: 8/2/99
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------------
Ticker Symbol Cusip
------ ------------ -----------
<S> <C> <C> <C> <C>
Class III GMIVX IntrinsicVal 362008 63 3
</TABLE>
OBJECTIVE AND PRINCIPAL STRATEGIES
INVESTMENT OBJECTIVE: The GMO Intrinsic Value Fund seeks long-term capital
growth through investment in equity securities. The Fund's current benchmark is
the Russell 1000 Value Index.
INVESTMENT UNIVERSE: The Fund invests primarily in equity securities of
companies chosen from the 1000 companies with the largest equity capitalization
and whose securities are listed on a United States national securities exchange,
emphasizing large capitalization equity securities. The Fund may also use
derivatives.
PRINCIPAL INVESTMENTS AND STRATEGIES: The Fund invests primarily in U.S.
equity securities of companies that, in the opinion of the Manager, represent
favorable values relative to their market prices. The Fund intends to be fully
invested and will not generally take temporary defensive positions through
investment in cash and high quality money market instruments. The Fund may use
exchange-traded and over-the-counter derivative instruments and related
instruments to: (i) hedge equity exposure; (ii) replace direct investing; and
(iii) implement shifts in investment exposure as a substitute for buying and
selling securities.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager uses quantitative
analytical methods, for example, computer models, to choose approximately 300
stocks from among the companies listed in the Russell 1000 Index for the Fund's
portfolio. Using a bottom-up approach that normally focuses on individual stock
selection, with less emphasis on industry and sector allocation, the Manager
researches and evaluates individual companies. Stocks of companies with price to
book ratios, price to sales ratios, price to fair values and cash flow yields
that meet the Manager's criteria as undervalued or cheap are ranked highly.
Stocks ranked highly by more than one criterion are favored for selection. The
Manager believes that a security with a low price in relation to its fair value
or intrinsic value has opportunity for appreciation. The Manager attempts to
control risk by weighing the trade-off between a stock's expected return and its
potential to contribute to the Fund's overall risk profile.
RISKS: The most significant risks of an investment in the Fund are Market
Risk (including Value Securities Risk) and Derivatives Risk. For more
information about these risks and other principal risks of an investment in the
Fund, see "Summary of Principal Risks" on page 37.
No performance is included in this section because the Fund commenced
operations in 1999.
7
<PAGE> 10
GMO GROWTH FUND
Fund Inception Date: 12/30/88
<TABLE>
<CAPTION>
FUND CODES
--------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III GMOGX Growth 362007 78 3
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Growth Fund seeks long-term growth of
capital. The Fund's current benchmark is the Russell 1000 Growth Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of at least 125 companies chosen from among the 1000 companies with the largest
equity capitalization and whose securities are listed on a United States
national securities exchange. The Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivative instruments and related investment techniques to:
(i) hedge equity exposure; (ii) replace direct investing; and (iii) implement
shifts in investment exposure as a substitute for buying and selling securities.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to provide broad exposure to the large
capitalization growth sector of the U.S. equity market. Using these principles,
the Manager employs a bottom-up approach to select stocks based on factors such
as fair value, earnings and price momentum. The Manager then uses a top-down
approach to favor sectors that it believes represent the best long-term values
within the U.S. stock market. The Manager then uses a final optimization process
to help control portfolio risk.
RISKS: The most significant risks of an investment in the Fund are Market
Risk (including Growth Securities Risk), Derivatives Risk, Leveraging Risk and
Credit and Counterparty Risk. For more information about these risks and other
principal risks of an investment in the Fund, see "Summary of Principal Risks"
on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums in effect
through December 31, 1999 are not reflected in the bar chart; if reflected, the
returns would be lower. The table to the right shows how the Fund's average
annual total returns for different calendar periods compare with those of a
broad-based index. See "Benchmarks and Indexes" for a description of the index.
Performance results in the table reflect payment of Fund expenses; returns for
the comparative index do not reflect payment of any expenses. PAST PERFORMANCE
IS NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
GROWTH FUND (%)
---------------
<S> <C>
1990 2.42
1991 41.27
1992 4.21
1993 4.60
1994 1.70
1995 39.85
1996 20.39
1997 29.35
1998 37.30
1999 39.04
</TABLE>
Highest Quarter: 27.46% (4Q1998)
Lowest Quarter: -17.77% (3Q1990)
Year-to-Date (as of 3/31/00): 11.16%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/30/88
-----------------------------------------------------------------
CLASS III 38.84% 32.92% 20.86% 22.35%
-----------------------------------------------------------------
RUSSELL 1000 GROWTH
INDEX 33.16% 32.40% 20.31% 21.65%
-----------------------------------------------------------------
</TABLE>
8
<PAGE> 11
GMO SMALL CAP VALUE FUND
Fund Inception Date: 12/31/91
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ -------- -----------
<S> <C> <C> <C> <C>
Class III GMSVX SmCapVal 362007 72 6
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Small Cap Value Fund seeks long-term growth
of capital. The Fund's current benchmark is the Russell 2500 Value Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of companies chosen from the Russell 2500 Value Index. The Fund may also use
derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivative instruments and related investment techniques to:
(i) hedge equity exposure; (ii) replace direct investing; and (iii) implement
shifts in investment exposure as a substitute for buying and selling securities.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses quantitative investment
principles to evaluate small capitalization stocks. Using these principles, the
Manager employs a bottom-up approach to select stocks based on factors such as
price to fair value, price to sales ratio, price to book ratio and cash flow
yield. Stocks that are inexpensive based on these factors are ranked highly. The
Manager then purchases stocks ranked highly in each of the four factors,
emphasizing stocks that appear attractive in more than one strategy. The Manager
then uses a final optimization process to help control portfolio risk.
RISKS: The most significant risks of an investment in the Fund are Market
Risk (including Value Securities Risk), Smaller Company Risk, Derivatives Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
SMALL CAP VALUE FUND (%)
------------------------
<S> <C>
1992 24.22
1993 20.15
1994 3.84
1995 27.28
1996 20.16
1997 29.72
1998 0.03
1999 2.95
</TABLE>
Highest Quarter: 18.24% (2Q1999)
Lowest Quarter: -18.31% (3Q1998)
Year-to-Date (as of 3/31/00): 2.76%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/31/91
-----------------------------------------------------------------
CLASS III 1.92% 15.12% N/A 15.34%
-----------------------------------------------------------------
RUSSELL 2500 VALUE
INDEX 1.47% 15.99% N/A 15.13%
-----------------------------------------------------------------
GMO RUSSELL 2500
VALUE + 1.47% 15.72% N/A 13.64%
-----------------------------------------------------------------
</TABLE>
9
<PAGE> 12
GMO SMALL CAP GROWTH FUND
Fund Inception Date: 12/31/96
<TABLE>
<CAPTION>
FUND CODES
---------------------------------------
Ticker Symbol Cusip
------ ------- -----------
<S> <C> <C> <C> <C>
Class III GMSGX SmCapGr 362007 68 4
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Small Cap Growth Fund seeks long-term growth
of capital. The Fund's current benchmark is the Russell 2500 Growth Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of companies chosen from the Russell 2500 Growth Index. The Fund may also use
derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivative instruments and related investment techniques to:
(i) hedge equity exposure; (ii) replace direct investing; and (iii) implement
shifts in investment exposure as a substitute for buying and selling securities.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses quantitative investment
principles to evaluate small capitalization stocks. Using these principles, the
Manager employs a bottom-up approach to select stocks based on factors such as
the trend in consensus analyst estimates, price momentum and an earnings
surprise component. Stocks that demonstrate strong momentum based on these
factors are ranked highly. The Manager then purchases stocks ranked highly in
each of the three factors, emphasizing stocks that appear attractive in more
than one factor. The Manager then uses a final optimization process to help
control risk.
RISKS: The most significant risks of an investment in the Fund are Market
Risk (including Growth Securities Risk) Smaller Company Risk, Derivatives Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
SMALL CAP GROWTH FUND(%)
------------------------
<S> <C>
1997 24.69
1998 5.79
1999 30.38
</TABLE>
Highest Quarter: 26.98% (4Q1999)
Lowest Quarter: -22.08% (3Q1998)
Year-to-Date (as of 3/31/00): 14.20%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/31/96
-----------------------------------------------------------------
CLASS III 29.08% N/A N/A 19.41%
-----------------------------------------------------------------
RUSSELL 2500 GROWTH
INDEX 55.50% N/A N/A 22.53%
-----------------------------------------------------------------
</TABLE>
10
<PAGE> 13
GMO REIT FUND
Fund Inception Date: 5/31/96
<TABLE>
<CAPTION>
FUND CODES
---------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III GMORX REIT 362007 62 7
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO REIT Fund seeks high total return through
investment in or exposure to real estate investment trusts ("REITs"), which are
managed vehicles that invest in real estate or real estate-related assets. The
Fund's current benchmark is the Morgan Stanley REIT Index.
INVESTMENT UNIVERSE: The Fund invests primarily in equity REITs, which own
real estate directly; mortgage REITs, which make construction, development or
long-term mortgage loans; and hybrid REITs, which share characteristics of
equity REITs and mortgage REITs. The Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivatives and related instruments to: (1) hedge equity
exposure; (2) replace direct investing; and (3) implement shifts in investment
exposure as a substitute for buying and selling securities.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to evaluate REITs. Using these principles,
the Manager employs a bottom-up approach to select REITs based on such factors
as valuation, prospects for growth, quality of the balance sheet and management.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivative Risk, Concentration Risk, Leveraging Risk and Credit and
Counterparty Risk. For more information about these risks and other principal
risks of an investment in the Fund, see "Summary of Principal Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left show changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
SMALL CAP GROWTH FUND(%)
------------------------
<S> <C>
1997 19.35
1998 -24.36
1999 -4.66
</TABLE>
Highest Quarter: 11.52% (3Q1997)
Lowest Quarter: -16.27% (3Q1998)
Year-to-Date (as of 3/31/00): 2.48%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
5/31/96
----------------------------------------------------------------
CLASS III -5.61% N/A N/A 2.47%
----------------------------------------------------------------
MORGAN STANLEY REIT
INDEX -4.55% N/A N/A 5.80%
----------------------------------------------------------------
</TABLE>
11
<PAGE> 14
INTERNATIONAL EQUITY FUNDS
The International Equity Funds include Funds that invest in developed
foreign markets only and Funds that invest to varying degrees in emerging
foreign markets. Emerging Markets Fund, Evolving Countries Fund and Asia Fund
(together, the "Emerging Markets Funds") invest primarily in securities of
emerging countries including Asia, Latin America, Southern and Eastern Europe,
the Middle East and Africa. Evolving Countries Fund seeks to invest primarily in
certain emerging market securities (evolving country securities) that in the
Manager's view are more liquid than securities of emerging markets generally.
GMO INTERNATIONAL CORE FUND
Fund Inception Date: 3/31/87
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ -------- -----------
<S> <C> <C> <C> <C>
Class II GMICX IntlCore 362007 20 5
Class III GMOIX IntlCore 362007 30 4
Class IV GMCFX IntlCore 362008 83 1
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The International Core Fund seeks high total return
through investment in equity securities of non-U.S. issuers. The Fund's current
benchmark is the MSCI EAFE Index.
INVESTMENT UNIVERSE: The Fund invests primarily in equity securities of
non-U.S. issuers chosen from among the 3500 companies in developed markets that
are listed in the MSCI Perspective publication, which includes issuers in the
MSCI EAFE universe and Canadian companies. The Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund will generally not invest in
securities of emerging markets issuers. The Fund may use exchange-traded and
over-the-counter derivatives and related instruments to (i) hedge equity
exposure; (ii) replace direct investing; (iii) implement shifts in investment
exposure as a substitute for selling and buying securities; and (iv) adjust its
foreign currency exposure. The Fund will not use derivative instruments to
expose on a net basis more than 100% of its net assets to equity securities or
markets, or to hold net aggregate foreign currency exposure in excess of the net
assets of the Fund. However, the Fund's foreign currency exposure may differ
significantly from the currency exposure represented by its equity investments.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to build an international equity portfolio.
Using these principles, the Manager creates forecasted returns for countries,
sectors, currencies and individual stocks. To forecast returns for countries,
the Manager examines factors such as trends in gross domestic products, market
sentiment and industrial competitiveness. For sectors, the Manager examines
factors such as relative valuations, economic sensitivity, profitability and
size. For currencies, the Manager examines factors such as export and producer
price parity, balance of payments and interest rates. For securities, the
Manager examines factors such as relative valuations in book value, earnings,
cash flow, sales, dividends and forecasted earnings as well as fair value,
neglect, and both price and earnings momentum. The Manager uses an optimization
process to weigh the trade-off between a stock's return forecast and how much
risk the stock adds to the portfolio, the risk and forecasted return of all
active currency positions and the risk of the entire portfolio relative to the
Fund's benchmark. In addition, expected transaction costs are explicitly
considered in the optimization process.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk, Leveraging Risk
and Credit and Counterparty Risk. For more information about these risks and
other principal risks of an investment in the Fund, see "Summary of Principal
Risks" on page 37.
12
<PAGE> 15
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
INTERNATIONAL CORE FUND(%)
--------------------------
<S> <C>
1990 -8.12
1991 14.46
1992 -1.15
1993 39.96
1994 4.14
1995 10.32
1996 9.55
1997 0.92
1998 13.60
1999 14.62
</TABLE>
Highest Quarter: 16.70% (1Q1998)
Lowest Quarter: -15.92% (3Q1990)
Year-to-Date (as of 3/31/00): -5.49%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3/31/87
-----------------------------------------------------------------
CLASS III 13.93% 9.55% 9.11% 10.51%
-----------------------------------------------------------------
MSCI EAFE 26.96% 12.82% 7.01% 8.47%
-----------------------------------------------------------------
9/26/96
-----------------------------------------------------------------
CLASS II 13.79% N/A N/A 10.31%
-----------------------------------------------------------------
MSCI EAFE 26.96% N/A N/A 15.12%
-----------------------------------------------------------------
1/9/98
-----------------------------------------------------------------
CLASS IV 13.96% N/A N/A 15.63%
-----------------------------------------------------------------
MSCI EAFE 26.96% N/A N/A 25.47%
-----------------------------------------------------------------
</TABLE>
13
<PAGE> 16
GMO CURRENCY HEDGED
INTERNATIONAL CORE FUND
Fund Inception Date: 6/30/95
<TABLE>
<CAPTION>
FUND CODES
------------------------------------------
Ticker Symbol Cusip
------ ---------- -----------
<S> <C> <C> <C> <C>
Class III GMOCX CurHgIntCr 362007 58 5
Class IV GMHFX CurHgIntCr 362008 81 5
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Currency Hedged International Core Fund seeks
high total return through investment in equity securities of non-U.S. issuers
and through management of the Fund's foreign currency positions. The Fund's
current benchmark is the MSCI EAFE Index (Hedged).
INVESTMENT UNIVERSE: The Fund invests primarily in equity securities of
non-U.S. issuers chosen from among the 3500 companies in developed markets that
are listed in the MSCI Perspective publication, which includes issuers in the
MSCI EAFE universe index, smaller companies and Canadian companies. The Fund
will also use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund will generally not invest in
securities of emerging markets issuers. The Fund may use exchange-traded and
over-the-counter derivatives and related instruments to (i) hedge equity
exposure; (ii) replace direct investing; (iii) implement shifts in investment
exposure as a substitute for selling and buying securities; and (iv) adjust its
foreign currency exposure. The Fund may also use derivatives to adjust its
foreign currency exposure independently of its exposure to international equity
markets. The Fund will generally attempt to hedge at least 70% of the foreign
currency exposure represented by the securities in the benchmark back to the
U.S. dollar. Consequently, the Fund's actual foreign currency exposure may
differ significantly from the currency exposure represented by its equity
investments. The Fund will not use derivative instruments to expose on a net
basis more than 100% of its net assets to equity securities or markets, nor to
hold net aggregate foreign currency exposure in excess of the net assets of the
Fund.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to build an international equity portfolio.
Using these principles, the Manager creates forecasted returns for countries,
sectors, currencies and individual stocks. To forecast returns for countries,
the Manager examines factors such as trends in gross domestic products, market
sentiment and industrial competitiveness. For sectors, the Manager examines
factors such as economic sensitivity, profitability and size. For currencies,
the Manager examines factors such as relative valuations, export and producer
price parity, balance of payments and interest rates. For securities, the
Manager examines factors such as relative valuations in book value, earnings,
cash flow, sales, dividends and forecasted earnings as well as fair value,
neglect, and both price and earnings momentum. The Manager uses an optimization
process to weigh the trade-off between a stock's return forecast and how much
risk the stock adds to the portfolio, the risk and forecasted return of all
active currency positions and the risk of the entire portfolio relative to the
Fund's benchmark. In addition, expected transaction costs are explicitly
considered in the optimization process.
RISKS. The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk, Leveraging Risk
and Credit and Counterparty Risk. For more information about these risks, and
other principal risks of an investment in the Fund, see "Summary of Principal
Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
CURRENCY HEDGED INTERNATIONAL CORE FUND(%)
------------------------------------------
<S> <C>
1996 15.28
1997 12.90
1998 7.29
1999 20.91
</TABLE>
Highest Quarter: 17.38% (1Q1998)
Lowest Quarter: -19.29% (3Q1998)
Year-to-Date (as of 3/31/00): -1.90%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6/30/95
-----------------------------------------------------------------
CLASS III 20.18% N/A N/A 15.26%
-----------------------------------------------------------------
MSCI EAFE (HEDGED) 36.47% N/A N/A 21.94%
-----------------------------------------------------------------
1/9/98
-----------------------------------------------------------------
CLASS IV 20.39% N/A N/A 14.17%
-----------------------------------------------------------------
MSCI EAFE (HEDGED) 36.47% N/A N/A 26.64%
-----------------------------------------------------------------
</TABLE>
14
<PAGE> 17
GMO FOREIGN FUND
Fund Inception Date: 6/28/96
<TABLE>
<CAPTION>
FUND CODES
--------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class II GMFRX Foreign 362007 56 9
Class III GMOFX Foreign 362007 55 1
Class IV GMFFX Foreign 362008 82 3
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Foreign Fund seeks high total return through
investment in equity securities of non-U.S. issuers. The Fund's current
benchmark is the MSCI EAFE Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of companies chosen from companies listed outside the U.S., including any of the
4000 companies in developed and emerging markets listed in the MSCI database.
The Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund may also use exchange-traded and
over-the-counter derivatives to adjust its foreign currency exposure.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental analysis of
issuers and country economics to build an international equity portfolio. The
Manager evaluates stocks by examining value factors such as price to earnings,
price to book, price to cash flow and yield. The Manager then focuses on the
companies that rank attractively in these four categories and makes selections
based on research including a review of the sector/industry, publicly available
company information, fundamental analysis and discussions with company
management.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk and Credit and
Counterparty Risk. For more information about these risks and other principal
risks of an investment in the Fund, see "Summary of Principal Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. The table to the right shows
how the Fund's average annual total returns for different calendar periods
compare with those of a broad-based index. See "Benchmarks and Indexes" for a
description of the index. Performance results in the table reflect payment of
Fund expenses; returns for the comparative index do not reflect payment of any
expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE PERFORMANCE.
The Fund commenced operations as a registered investment company on June
28, 1996. Prior to that date, the Fund operated as a private investment pool
with investment objectives, policies and guidelines that were substantially the
same as those of the Fund. Performance of Class III Shares prior to June 28,
1996 is that of the private investment pool and reflects the pool's higher
annual operating expenses. The pool was not registered as an investment company
and was not subject to certain restrictions imposed on the Fund under the
Investment Company Act of 1940. Had the pool been subject to these restrictions,
its performance may have been adversely affected.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
FOREIGN FUND(%)
---------------
<S> <C>
1990 -9.81
1991 12.34
1992 -4.61
1993 41.16
1994 6.52
1995 13.85
1996 14.31
1997 6.86
1998 13.95
1999 28.96
</TABLE>
Highest Quarter: 16.90% (4Q1998)
Lowest Quarter: -18.90% (3Q1990)
Year-to-Date (as of 3/31/00): -3.26%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
8/31/84
-----------------------------------------------------------------
CLASS III 28.96% 15.36% 11.49% 18.68%
-----------------------------------------------------------------
MSCI EAFE 26.96% 12.82% 7.01% 15.87%
-----------------------------------------------------------------
9/30/96
-----------------------------------------------------------------
CLASS II 28.84% N/A N/A 17.21%
-----------------------------------------------------------------
MSCI EAFE 26.96% N/A N/A 14.99%
-----------------------------------------------------------------
1/9/98
-----------------------------------------------------------------
CLASS IV 28.95% N/A N/A 22.94%
-----------------------------------------------------------------
MSCI EAFE 26.96% N/A N/A 25.47%
-----------------------------------------------------------------
</TABLE>
15
<PAGE> 18
GMO INTERNATIONAL
SMALL COMPANIES FUND
Fund Inception Date: 10/14/91
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ -------- -----------
<S> <C> <C> <C> <C>
Class III GMISX IntSmCos 362007 52 8
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The International Small Companies Fund seeks high
total return through investment in equity securities of non-U.S. issuers. The
Fund's current benchmark is the SSB EMI World ex-U.S. Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of companies chosen from among the 3500 companies in developed markets,
including issuers in the MSCI EAFE universe and Canadian companies, and that are
among the smallest 50% in terms of market capitalization for each country. The
Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund will generally not invest in
securities of emerging markets issuers. The Fund may use exchange-traded and
over-the-counter derivatives to (i) hedge equity exposure; (ii) replace direct
investing; (iii) implement shifts in investment exposure as a substitute for
selling and buying securities; and (iv) adjust its foreign currency exposure.
The Fund will not use derivative instruments to expose on a net basis more than
100% of its net assets to equity securities or markets, nor to hold net
aggregate foreign currency exposure in excess of the net assets of the Fund.
However, the Fund's foreign currency exposure may differ significantly from the
currency exposure represented by its equity investments.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to build an international equity portfolio.
Using these principles, the Manager creates forecasted returns for countries,
sectors, currencies and individual stocks. To forecast returns for countries,
the Manager examines factors such as trends in gross domestic products, market
sentiment and industrial competitiveness. For sectors, the Manager examines
factors such as relative valuations, economic sensitivity, profitability and
size. For currencies, the Manager examines factors such as export and producer
price parity, balance of payments and interest rates. For securities, the
Manager examines factors such relative valuations in book value, earnings, cash
flows, sales, dividends and forecasted earnings as well as fair value, neglect,
and both price and earnings momentum. The Manager uses an optimization process
to weigh the trade-off between a stock's return forecast and how much risk the
stock adds to the portfolio, the risk and forecasted return of all active
currency positions and the risk of the entire portfolio relative to the Fund's
benchmark. In addition, expected transaction costs are explicitly considered in
the optimization process.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Smaller Company Risk, Derivatives Risk, Foreign Investment Risk, Currency
Risk, Leveraging Risk, Credit and Counterparty Risk and Liquidity Risk. For more
information about these risks and other principal risks of an investment in the
Fund, see "Summary of Principal Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
INTERNATIONAL SMALL COMPANIES FUND (%)
--------------------------------------
<S> <C>
1992 -7.39
1993 54.97
1994 4.74
1995 4.91
1996 9.84
1997 -3.54
1998 8.50
1999 11.00
</TABLE>
Highest Quarter: 17.13% (1Q1998)
Lowest Quarter: -14.71% (3Q1998)
Year-to-Date (as of 3/31/00): -0.50%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
10/14/91
-----------------------------------------------------------------
CLASS III 9.23% 5.67% N/A 7.99%
-----------------------------------------------------------------
SSB EMI WORLD
EX-U.S. 23.96% 7.28% N/A 6.72%
-----------------------------------------------------------------
MSCI EAFE 26.96% 12.82% N/A 10.85%
-----------------------------------------------------------------
</TABLE>
16
<PAGE> 19
GMO JAPAN FUND
Fund Inception Date: 6/8/90
<TABLE>
<CAPTION>
FUND CODES
--------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III GMOJX Japan 362007 48 6
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Japan Fund seeks high total return through
investment in equity securities of Japanese companies. The Fund's current
benchmark is the MSCI Japan Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of companies chosen from the MSCI Japan universe. The Fund may also use
derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund will generally not invest in
securities of emerging markets issuers. The Fund may use exchange-traded and
over-the-counter derivatives to (i) hedge equity exposure; (ii) replace direct
investing; (iii) implement shifts in investment exposure as a substitute for
selling and buying securities; and (iv) adjust its foreign currency exposure.
The Fund will not use derivative instruments to expose on a net basis more than
100% of its net assets to equity securities or markets, nor to hold net
aggregate foreign currency exposure in excess of the net assets of the Fund.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to provide Japanese equity exposure. Using
these principles, the Manager employs a bottom-up approach to select stocks
based on several proprietary valuation factors as well as price and earnings
momentum. The Manager uses a top-down approach to favor sectors that it believes
represent the best long-term values within the Japanese market. The Manager then
uses an optimization process to weigh the trade-off of a stock's return forecast
and how much risk it adds to the portfolio, and to weigh the risk of the entire
portfolio relative to the Fund's benchmark. In addition, expected transaction
costs are explicitly considered in the optimization process.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk, Concentration
Risk, Leveraging Risk and Credit and Counterparty Risk. For more information
about these risks and other principal risks of an investment in the Fund, see
"Summary of Principal Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
JAPAN FUND (%)
--------------
<S> <C>
1991 4.99
1992 -13.99
1993 26.55
1994 25.82
1995 -3.85
1996 -12.80
1997 -23.44
1998 12.11
1999 35.23
</TABLE>
Highest Quarter: 26.32% (4Q1998)
Lowest Quarter: -20.28% (4Q1997)
Year-to-Date (as of 3/31/00): 3.58%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6/8/90
----------------------------------------------------------------
CLASS III 34.69% -0.62% N/A 1.42%
----------------------------------------------------------------
MSCI JAPAN 61.54% 1.96% N/A 1.86%
----------------------------------------------------------------
</TABLE>
17
<PAGE> 20
GMO EMERGING MARKETS FUND
Fund Inception Date: 12/9/93
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ -------- -----------
<S> <C> <C> <C> <C>
Class III GMOEX EmergMkt 362007 60 1
Class IV GMEFX EmergMkt 362008 79 9
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Emerging Markets Fund seeks high total return
through investment in equity securities traded in the securities markets of
developing countries in Asia, Latin America, the Middle East, Africa and Europe
("Emerging Markets"). The Fund's current benchmark is the IFC Investable Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of companies that make up the IFC and MSCI emerging markets databases, and that
are deemed to be emerging or frontier markets by the World Bank. The Fund may
also use derivatives.
PRINCIPAL INVESTMENTS: The Manager has appointed Dancing Elephant, Ltd. to
serve as Consultant to the Fund. The Fund intends to be fully invested, and will
not generally take temporary defensive positions through investment in cash and
high quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivatives and related instruments where available to (i)
hedge equity exposure; (ii) replace direct investing; (iii) implement shifts in
investment exposure as a substitute for selling and buying securities; and (iv)
adjust its foreign currency exposure. The Fund will not use derivative
instruments to expose on a net basis more than 100% of its net assets to equity
securities or markets, nor to hold net aggregate foreign currency exposure in
excess of the net assets of the Fund. However, the Fund's foreign currency
exposure may differ significantly from the currency exposure represented by its
equity investments.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to build a value-biased emerging market
equity portfolio. Using these principles, the Consultant creates forecasted
returns for countries, securities and sectors. To forecast returns for
countries, the Consultant examines factors such as price to earnings ratios,
market momentum, trends in gross domestic products, market conditions, long-term
trends and paradigm shifts, and values currencies based on real effective
exchange rates. For securities, the Consultant examines factors such as fair
value, earnings and price momentum, price to cash flow and measures of neglect
(a measure of low analyst coverage and low price volatility). For sectors, the
Consultant examines factors similar to those used for securities, and also
evaluates economic sensitivity and industrial trends. The Consultant also
monitors the economic and political conditions in these markets and adjusts its
strategies as markets develop or encounter setbacks. The Consultant then uses an
optimization process to weigh the trade-off among a stock's return forecast, how
much risk the stock adds relative to the Fund's benchmark and transaction costs.
RISKS. The most significant risks of an investment in the Fund are Market
Risk, Liquidity Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
EMERGING MARKETS FUND (%)
-------------------------
<S> <C>
1994 6.29
1995 -12.57
1996 11.64
1997 -0.10
1998 -28.88
1999 77.73
</TABLE>
Highest Quarter: 34.40% (2Q1999)
Lowest Quarter: -28.24% (2Q1998)
Year-to-Date (as of 3/31/00): 1.74%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
-------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/9/93
-------------------------------------------------------------------
CLASS III 74.19% 3.85% N/A 5.88%
-------------------------------------------------------------------
IFC INVESTABLE 67.14% 2.16% N/A 1.43%
-------------------------------------------------------------------
1/9/98
-------------------------------------------------------------------
CLASS IV 74.08% N/A N/A 17.28%
-------------------------------------------------------------------
IFC
INVESTABLE 67.14% N/A N/A 20.81%
-------------------------------------------------------------------
</TABLE>
18
<PAGE> 21
GMO EVOLVING COUNTRIES FUND
Fund Inception Date: 8/29/97
<TABLE>
<CAPTION>
FUND CODES
------------------------------------------
Ticker Symbol Cusip
--------- --------- -----------
<S> <C> <C> <C> <C>
Class
III GMCEX EvolvCntr 362008 85 6
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Evolving Countries Fund seeks high total return
through investment in equity securities traded in the securities markets of
developing countries in Asia, Latin America, the Middle East, Africa and Europe
("Emerging Markets"). The Fund's current benchmark is the IFC Investable Index.
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities
of companies that make up the IFC and MSCI emerging markets databases, and that
are deemed to be emerging or frontier markets by the World Bank. The Fund may
also use derivatives.
PRINCIPAL INVESTMENTS: The Manager has appointed Dancing Elephant, Ltd. to
serve as Consultant to the Fund. The Fund attempts to achieve its objective by
focusing its investments in evolving country securities that are more liquid
than emerging market securities generally. The Fund intends to be fully
invested, and will not generally take temporary defensive positions through
investment in cash and high quality money market instruments. The Fund may use
exchange-traded and over-the-counter derivatives and related instruments where
available to (i) hedge equity exposure; (ii) replace direct investing; (iii)
implement shifts in investment exposure as a substitute for selling and buying
securities; and (iv) adjust its foreign currency exposure. The Fund will not use
derivative instruments to expose on a net basis more than 100% of its net assets
to equity securities or markets, nor to hold net aggregate foreign currency
exposure in excess of the net assets of the Fund. However, the Fund's foreign
currency exposure may differ significantly from the currency exposure
represented by its equity investments.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to build a value-biased, relatively liquid
and earnings momentum-biased emerging market equity portfolio. Using these
principles, the Consultant creates forecasted returns for countries, securities
and sectors. To forecast returns for countries, the Consultant examines factors
such as price to earnings ratios, market momentum, trends in gross domestic
products, market conditions, long-term trends and paradigm shifts, and values
currencies based on real effective exchange rates. For securities, the
Consultant examines factors such as fair value, earnings and price momentum,
price to cash flow and measures of neglect (a measure of low analyst coverage
and low price volatility). For sectors, the Consultant examines factors similar
to those used for securities, and also evaluates economic sensitivity and
industrial trends. The Consultant also monitors the economic and political
conditions in these markets and adjusts its strategies as markets develop or
encounter setbacks. The Consultant then uses an optimization process to weigh
the trade-off among a stock's return forecast, how much risk the stock adds
relative to the Fund's benchmark and transaction costs.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Liquidity Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Year Ending December 31
[Graph]
<TABLE>
<CAPTION>
EVOLVING COUNTRIES FUND (%)
---------------------------
<S> <C>
1998 -24.03
1999 94.69
</TABLE>
Highest Quarter: 60.80% (2Q1999)
Lowest Quarter: -28.87% (2Q1998)
Year-to-Date (as of 3/31/00): 0.77%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
8/29/97
------------------------------------------------------------------
CLASS III 90.81% N/A N/A 7.27%
------------------------------------------------------------------
IFC INVESTABLE 67.14% N/A N/A 3.59%
------------------------------------------------------------------
</TABLE>
19
<PAGE> 22
GMO ASIA FUND
Fund Inception Date: 2/18/98
<TABLE>
<CAPTION>
FUND CODES
---------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III GMASX Asia 362008 75 7
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Asia Fund seeks high total return through
investment in equity securities traded in the Asian securities markets. The
Fund's current benchmark is the GMO Asia 7 Index.
INVESTMENT UNIVERSE: The Fund invests primarily in equity securities of
companies traded in Asian countries other than Japan. The Fund may also use
derivatives.
PRINCIPAL INVESTMENTS: The Manager has appointed Dancing Elephant, Ltd. to
serve as Consultant to the Fund. The Fund intends to be fully invested, and will
not generally take temporary defensive positions through investment in cash and
high quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivative instruments and related investment techniques to (i)
hedge equity exposure; (ii) replace direct investing; (iii) implement shifts in
investment exposure as a substitute for selling and buying securities; and (iv)
adjust its foreign currency exposure. The Fund will not use derivative
instruments to expose on a net basis more than 100% of its net assets to equity
securities or markets, nor to hold net aggregate foreign currency exposure in
excess of the net assets of the Fund. However, the Fund's foreign currency
exposure may differ significantly from the currency exposure represented by its
equity investments.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and
quantitative investment principles to provide Asian equity exposure. Using these
principles, the Consultant creates forecasted returns for countries, securities
and sectors. To forecast returns for countries, the Manager examines factors
such as price to earnings ratios, market momentum, trends in gross domestic
products, market conditions, long-term trends and paradigm shifts. For
securities, the Consultant examines factors such as fair value, earnings and
price momentum, price to cash flow and measures of neglect (a measure of low
analyst coverage and low price volatility). For sectors, the Consultant examines
factors similar to those used for securities, and also evaluates economic
sensitivity and industrial trends. The Consultant also monitors the economic and
political conditions in these markets and adjusts its strategies as markets
develop or encounter setbacks. The Consultant then uses an optimization process
to weigh the trade-off among a stock's return forecast, how much risk it adds
relative to the Fund's benchmark and transaction costs.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Liquidity Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk,
Concentration Risk, Leveraging Risk and Credit and Counterparty Risk. For more
information about these risks and other principal risks of an investment in the
Fund, see "Summary of Principal Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
GMO ASIA FUND
-------------
<S> <C>
1999 67.50
</TABLE>
Highest Quarter: 59.86% (2Q1999)
Lowest Quarter: -19.86% (3Q1999)
Year-to-Date (as of 3/31/00): -6.23%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2/18/98
------------------------------------------------------------------
CLASS III 64.83% N/A N/A 20.13%
------------------------------------------------------------------
MSCI
EMF ASIA 70.40% N/A N/A 19.55%
------------------------------------------------------------------
GMO ASIA 7 INDEX 66.87% N/A N/A 29.59%
------------------------------------------------------------------
</TABLE>
20
<PAGE> 23
FIXED INCOME FUNDS
The Funds in this category invest to a substantial extent in fixed income
securities. These are obligations of the issuer to make payments of principal
and/or interest on future dates, and include bonds, notes and asset backed
securities. For these purposes, a bond refers to any fixed income obligation
with an original maturity of two years or more, as well as "synthetic" bonds
created by the Manager by combining a futures contract or option on a fixed
income security with cash, a cash equivalent or another fixed income security.
If the issuer or guarantor of a fixed income security is a foreign government or
an agency or political subdivision, the obligation is often referred to as
sovereign debt. The Manager will employ a variety of techniques to adjust the
sensitivity of a Fund's value to changes in interest rates. This sensitivity is
often measured by, and correlates strongly to, the portfolio's duration. The
duration of a fixed income security is the weighted average maturity, expressed
in years, of the present value of all expected future cash flows, including
interest payments and principal repayments. For example, for a bond with a 6%
coupon that matures in five years with a 6% yield, duration would be 4.39 years.
The Emerging Countries referred to below include less developed countries in
Asia, Latin America, the Middle East, Africa and Europe.
GMO DOMESTIC BOND FUND
Fund Inception Date: 8/18/94
<TABLE>
<CAPTION>
FUND CODES
------------------------------------------
Ticker Symbol Cusip
------ ---------- -----------
<S> <C> <C> <C> <C>
Class III GMDBX DomestBd 362007 41 1
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Domestic Bond Fund seeks high total return
through investment in U.S. investment grade securities. The Fund's current
benchmark is the Lehman Brothers Government Bond Index.
PRINCIPAL INVESTMENTS: The Fund invests primarily in U.S. government
securities, including asset-backed securities issued by U.S. government
agencies, but may also invest in other U.S. dollar denominated fixed income
investments, including investment-grade bonds, convertible bonds and
asset-backed securities of private issuers. The Fund may achieve this exposure
directly, or indirectly by investing a substantial portion of its assets in
shares of the GMO Alpha LIBOR Fund (see "Investment by Certain Fixed Income
Funds in GMO Alpha LIBOR Fund"). The Fund may expose a portion of its assets to
foreign credit, and may invest some of its assets in lower-rated securities. The
Fund may make use of a wide variety of exchange-traded and over-the-counter
derivative instruments to implement its strategy.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager employs fundamental
research techniques to identify bonds which have high relative yield spreads and
which the Manager believes are undervalued. The Manager also considers issue-
specific risk in the selection process. The Manager employs competitive trading
practices to help ensure that the Fund receives the best available prices and
monitors credit risk in the portfolio. The Fund's portfolio will generally have
a duration of four (4) to six (6) years.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk and Leveraging Risk. For more information about these
risks and other principal risks of an investment in the Fund, see "Summary of
Principal Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. The table to the right shows
how the Fund's average annual total returns for different calendar periods
compare with those of a broad-based index. See "Benchmarks and Indexes" for a
description of the index. Performance results in the table reflect payment of
Fund expenses; returns for the comparative index do not reflect payment of any
expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
DOMESTIC BOND FUND (%)
----------------------
<S> <C>
1995 18.57
1996 3.04
1997 9.96
1998 8.05
1999 -1.79
</TABLE>
Highest Quarter: 6.35% (2Q1995)
Lowest Quarter: -2.37% (1Q1996)
Year-to-Date (as of 3/31/00): 3.76%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
8/18/94
-----------------------------------------------------------------
CLASS III -1.79% 7.34% N/A 6.70%
-----------------------------------------------------------------
LEHMAN BROTHERS
GOVERNMENT BOND
INDEX -2.23% 7.43% N/A 6.83%
-----------------------------------------------------------------
</TABLE>
21
<PAGE> 24
GMO U.S. BOND/GLOBAL
ALPHA A FUND
Fund Inception Date: 4/30/97
<TABLE>
<CAPTION>
FUND CODES
-----------------------------------------
Ticker Symbol Cusip
------ --------- -----------
<S> <C> <C> <C> <C>
Class III GUGAX USBdAlfaA 362008 60 9
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO U.S. Bond/Global Alpha A Fund seeks high
total return relative to its performance benchmark through investment in U.S.
investment grade securities. The Fund achieves exposure to international bond
and currency markets by investing in a combination of foreign bond and currency
derivatives, effectively adding to or subtracting from the U.S. bond return the
performance of the Fund's international bond and currency investments. The
Fund's current benchmark is the Lehman Brothers Aggregate Bond Index.
PRINCIPAL INVESTMENTS: The Fund invests primarily in U.S. government
securities, including asset-backed securities issued by U.S. government
agencies, but may also invest in other U.S. dollar denominated fixed income
investments, including investment-grade bonds, convertible bonds and
asset-backed securities of private issuers. The Fund may achieve this exposure
directly, or indirectly by investing a substantial portion of its assets in
shares of the GMO Alpha LIBOR Fund (see "Investment by Certain Fixed Income
Funds in GMO Alpha LIBOR Fund"). The Fund may expose a portion of its assets to
lower-rated securities (also known as "junk bonds"), which may include the
sovereign debt of Emerging Countries. The Fund will generally attempt to hedge
at least 75% of its foreign currency exposure back to the U.S. dollar, and may
use derivatives to adjust its foreign currency exposure independently of its
exposure to bonds and bond markets. The Fund may make use of a wide variety of
exchange-traded and over-the-counter derivative instruments to implement its
strategy.
The Fund's return will depend primarily on 1) the performance of U.S. bond
markets, 2) the Manager's success at outperforming the U.S. bond market, and 3)
the Manager's success in selecting global bond and currency markets to over-and
underweight. A portion of the Fund's net assets may be invested in or exposed to
foreign bonds, bond markets and foreign currencies on an unhedged basis. The
total of the absolute values of all deviations from the benchmark (that is,
without regard to sign and allowing for no netting of positions) will often
exceed 100% of the value of the Fund for both bonds and currencies, which are
generally considered separately.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager employs fundamental
research techniques and quantitative applications to transfer valuation
inefficiencies from the international bond and currency markets to a core U.S.
bond portfolio. The core portfolio seeks to match the duration of, and produce
returns similar to, the Fund's benchmark. The Manager uses these applications to
determine currency and country allocations. Issues are selected by analyzing
such factors as term structures, sector and issuer yield spreads, tracking error
and embedded option features of the security universe. The Manager implements
these allocations by identifying undervalued securities and currencies within
the relevant bond and currency markets.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk, Liquidity Risk, Foreign Investment Risk, Currency Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Year Ending December 31
[GRAPH]
<TABLE>
<CAPTION>
U.S. BOND/GLOBAL ALPHA A FUND (%)
---------------------------------
<S> <C>
1998 3.87
1999 -2.38
</TABLE>
Highest Quarter: 1.51% (3Q1998)
Lowest Quarter: -2.37% (1Q1999)
Year-to-Date (as of 3/31/00): 2.84%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
4/30/97
-----------------------------------------------------------------
CLASS III -2.52% N/A N/A 4.80%
-----------------------------------------------------------------
LEHMAN BROTHERS
AGGREGATE BOND
INDEX -0.82% N/A N/A 6.07%
-----------------------------------------------------------------
</TABLE>
22
<PAGE> 25
GMO U.S. BOND/GLOBAL
ALPHA B FUND
Fund Inception Date: 7/29/97
<TABLE>
<CAPTION>
FUND CODES
-----------------------------------------
Ticker Symbol Cusip
------ --------- -----------
<S> <C> <C> <C> <C>
Class III GUGBX USBdAlfaB 362008 88 0
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO U.S. Bond/Global Alpha B Fund seeks high
total return relative to its performance benchmark through direct or indirect
investment in U.S. investment grade securities. The Fund achieves exposure to
international bond and currency markets by investing in a combination of foreign
bond and currency derivatives, effectively adding to or subtracting from the
U.S. bond return the performance of the Fund's international bond and currency
investments. The Fund's current benchmark is the Lehman Brothers Aggregate Bond
Index.
PRINCIPAL INVESTMENTS: The Fund invests primarily in U.S. government
securities, including asset-backed securities issued by U.S. government
agencies, but may also invest in other U.S. dollar denominated fixed income
investments, including investment-grade bonds, convertible bonds and
asset-backed securities of private issuers. The Fund may achieve this exposure
directly, or indirectly by investing a substantial portion of its assets in
shares of the GMO Alpha LIBOR Fund (see "Investment by Certain Fixed Income
Funds in GMO Alpha LIBOR Fund"). The Fund may expose a portion of its assets to
lower-rated securities (also known as "junk bonds"). The Fund will generally
attempt to hedge at least 75% of its foreign currency exposure back to the U.S.
dollar, and may use derivatives to adjust its foreign currency exposure
independently of its exposure to bonds and bond markets. The Fund may make use
of a wide variety of exchange-traded and over-the-counter derivative instruments
to implement its strategy.
The Fund's return will depend primarily on 1) the performance of U.S. bond
markets, 2) the Manager's success at outperforming the U.S. bond market, and 3)
the Manager's success in selecting global bond and currency markets to over-and
underweight. A portion of the Fund's net assets may be invested in or exposed to
foreign bonds, bond markets and foreign currencies on an unhedged basis. The
total of the absolute values of all deviations from the benchmark (that is,
without regard to sign and allowing for no netting of positions) will often
exceed 100% of the value of the Fund for both bonds and currencies, which are
generally considered separately.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager employs fundamental
research techniques and quantitative applications to transfer valuation
inefficiencies from the international bond and currency markets to a core U.S.
bond portfolio. The core portfolio seeks to match the duration of, and produce
returns similar to, the Fund's benchmark. The Manager uses these applications to
determine currency and country allocations. Issues are selected by analyzing
such factors as term structures, sector and issuer yield spreads, tracking error
and embedded option features of the security universe. The Manager implements
these allocations by identifying undervalued securities and currencies within
the relevant bond and currency markets.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk, Leveraging Risk
and Credit and Counterparty Risk. For more information about these risks and
other principal risks of an investment in the Fund, see "Summary of Principal
Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Year Ending December 31
[GRAPH]
<TABLE>
<CAPTION>
U.S. BOND/GLOBAL ALPHA B FUND (%)
---------------------------------
<S> <C>
1998 7.00
1999 -3.20
</TABLE>
Highest Quarter: 3.91% (3Q1998)
Lowest Quarter: -1.77% (1Q1999)
Year-to-Date (as of 3/31/00): 2.50%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
7/29/97
-----------------------------------------------------------------
CLASS III -3.35% N/A N/A 2.60%
-----------------------------------------------------------------
LEHMAN BROTHERS
AGGREGATE BOND
INDEX -0.82% N/A N/A 4.78%
-----------------------------------------------------------------
</TABLE>
23
<PAGE> 26
GMO INTERNATIONAL BOND FUND
Fund Inception Date: 12/22/93
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ -------- -----------
<S> <C> <C> <C> <C>
Class III GMIBX IntlBond 362007 37 9
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO International Bond Fund seeks high total
return through investment in foreign bond and currency markets. The Fund's
current benchmark is the J.P. Morgan Non-U.S. Government Bond Index.
PRINCIPAL INVESTMENTS: The Fund invests primarily in investment-grade
bonds denominated in various currencies (including U.S. dollars and
multi-currency units), including asset-backed securities issued by foreign
governments, U.S. government agencies and private issuers. The Fund may achieve
this exposure directly, or indirectly by investing a substantial portion of its
assets in shares of the GMO Alpha LIBOR Fund (see "Investment by Certain Fixed
Income Funds in GMO Alpha LIBOR Fund"). By coupling such investments with
various exchange-traded and over-the-counter bond and currency derivative
instruments, the Fund seeks to obtain the return of those primarily
investment-grade international bonds, bond markets and currencies selected by
the Manager. The Fund may use derivatives to adjust its foreign currency
exposure independently of its exposure to bonds and bond markets. The Fund may
invest a portion of its net assets in lower-rated securities (also known as
"junk bonds"), which may include sovereign debt of Emerging Countries. The total
of the absolute values of all deviations from the benchmark (that is, without
regard to sign and allowing for no netting of positions) will often exceed 100%
of the value of the Fund for both bonds and currencies, which are generally
considered separately. The Fund may make use of a wide variety of
exchange-traded and over-the-counter derivative instruments to implement its
strategy
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager employs fundamental
research techniques in quantitative applications to measure the value of the
bond and currency markets. The Manager uses these applications to determine
currency and country allocations. Issues are selected by analyzing such factors
as term structures, sector and issuer yield spreads, tracking error and embedded
option features of the security universe. The Manager implements these
allocations by identifying undervalued securities and currencies within the
relevant bond and currency markets.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Liquidity Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
INTERNATIONAL BOND FUND (%)
---------------------------
<S> <C>
1994 5.16
1995 27.31
1996 16.66
1997 0.88
1998 10.79
1999 -5.48
</TABLE>
Highest Quarter: 10.53% (1Q1995)
Lowest Quarter: -5.78% (1Q1999)
Year-to-Date (as of 3/31/00): -0.42%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/22/93
------------------------------------------------------------------
CLASS III -5.62% 9.39% N/A 8.46%
------------------------------------------------------------------
J.P. MORGAN NON-U.S.
GOVERNMENT BOND
INDEX -6.17% 6.36% N/A 5.92%
------------------------------------------------------------------
</TABLE>
24
<PAGE> 27
GMO CURRENCY HEDGED
INTERNATIONAL BOND FUND
Fund Inception Date: 9/30/94
<TABLE>
<CAPTION>
FUND CODES
------------------------------------------
Ticker Symbol Cusip
------ ---------- -----------
<S> <C> <C> <C> <C>
Class III GMHBX CurHgIntBd 362007 34 6
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: GMO Currency Hedged International Bond Fund seeks
high total return through investment in foreign bond and currency markets. The
Fund's current benchmark is the J.P. Morgan Non-U.S. Government Bond Index
(Hedged).
PRINCIPAL INVESTMENTS: The Fund invests primarily in investment-grade
bonds denominated in various currencies (including U.S. dollars and
multi-currency units), including asset-backed securities issued by foreign
governments, U.S. government agencies and private issuers. The Fund may achieve
this exposure directly, or indirectly by investing a substantial portion of its
assets in shares of the GMO Alpha LIBOR Fund (see "Investment by Certain Fixed
Income Funds in GMO Alpha LIBOR Fund"). By coupling such investments with
various exchange-traded and over-the-counter bond and currency derivative
instruments, the Fund seeks to obtain the return of those primarily
investment-grade international bonds, bond markets and currencies selected by
the Manager. The Fund will retain no more than 25% of its net currency exposure
in the U.S. dollar (allowing for netting of long and short currency positions),
and may use derivatives to adjust its foreign currency exposure independently of
its exposure to bonds and bond markets. The Fund may invest a portion of its net
assets in lower-rated securities (also known as "junk bonds"), which may include
sovereign debt of Emerging Countries. The total of the absolute values of all
deviations from the benchmark (that is, without regard to sign and allowing for
no netting of positions) will often exceed 100% of the value of the Fund for
both bonds and currencies, which are generally considered separately. The Fund
may make use of a wide variety of exchange-traded and over-the-counter
derivative instruments to implement its strategy
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager employs fundamental
research techniques in quantitative applications to measure the value of the
bond and currency markets. The Manager uses these applications to determine
currency and country allocations. Issues are selected by analyzing such factors
as term structures, sector and issuer yield spreads, tracking error and embedded
option features of the security universe. The Manager implements these
allocations by identifying undervalued securities and currencies within the
relevant bond and currency markets. The Manager will make extensive use of a
wide variety of exchange-traded and over-the-counter derivative instruments to
implement the Fund's strategy.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Liquidity Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
CURRENCY HEDGED INTERNATIONAL BOND FUND(%)
------------------------------------------
<S> <C>
1995 27.78
1996 23.86
1997 15.76
1998 5.67
1999 2.65
</TABLE>
Highest Quarter: 8.50% (2Q1995)
Lowest Quarter: -0.47% (2Q1999)
Year-to-Date (as of 3/31/00): 3.03%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
9/30/94
-----------------------------------------------------------------
CLASS III 2.50% 14.68% N/A 13.88%
-----------------------------------------------------------------
J.P. MORGAN NON-U.S.
GOVERNMENT BOND
INDEX (HEDGED) 2.43% 11.20% N/A 10.97%
-----------------------------------------------------------------
</TABLE>
25
<PAGE> 28
GMO GLOBAL BOND FUND
Fund Inception Date: 12/28/95
<TABLE>
<CAPTION>
FUND CODES
-----------------------------------------
Ticker Symbol Cusip
------ --------- -----------
<S> <C> <C> <C> <C>
Class III GMGBX GlobalBd 362007 31 2
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Global Bond Fund seeks high total return
through direct or indirect investment in global bond and currency markets. The
Fund's current benchmark is the J.P. Morgan Global Government Bond Index.
PRINCIPAL INVESTMENTS: The Fund invests primarily in investment-grade
bonds denominated in various currencies (including U.S. dollars and
multi-currency units), including asset-backed securities issued by foreign
governments, U.S. government agencies and private issuers. The Fund may achieve
this exposure directly, or indirectly by investing a substantial portion of its
assets in shares of the GMO Alpha LIBOR Fund (see "Investment by Certain Fixed
Income Funds in GMO Alpha LIBOR Fund"). By coupling such investments with
various exchange-traded and over-the-counter bond and currency derivative
instruments, the Fund seeks to obtain the return of those primarily
investment-grade international bonds, bond markets and currencies selected by
the Manager. The Fund may use derivatives to adjust its foreign currency
exposure independently of its exposure to bonds and bond markets. The Fund may
invest a portion of its net assets in lower-rated securities (also known as
"junk bonds"), which may include sovereign debt of Emerging Countries. The total
of the absolute values of all deviations from the benchmark (that is, without
regard to sign and allowing for no netting of positions) will often exceed 100%
of the value of the Fund for both bonds and currencies, which are generally
considered separately. The Fund may make use of a wide variety of
exchange-traded and over-the-counter derivative instruments to implement its
strategy
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager employs fundamental
research techniques in quantitative applications to measure the value of the
bond and currency markets. The Manager uses these applications to determine
currency and country allocations. Issues are selected by analyzing such factors
as term structures, sector and issuer yield spreads, tracking error and embedded
option features of the security universe. The Manager implements these
allocations by identifying undervalued securities and currencies within the
relevant bond and currency markets.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Liquidity Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums are not
reflected in the bar chart; if reflected, the returns would be lower. The table
to the right shows how the Fund's average annual total returns for different
calendar periods compare with those of a broad-based index. See "Benchmarks and
Indexes" for a description of the index. Performance results in the table
reflect payment of Fund expenses; returns for the comparative index do not
reflect payment of any expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE
PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
GLOBAL BOND FUND %
------------------
<S> <C>
1996 13.07
1997 6.36
1998 10.25
1999 -5.54
</TABLE>
Highest Quarter: 5.18% (3Q1998)
Lowest Quarter: -4.98% (1Q1999)
Year-to-Date (as of 3/31/00): 0.83%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/28/95
------------------------------------------------------------------
CLASS III -5.69% N/A N/A 5.73%
------------------------------------------------------------------
J.P. MORGAN GLOBAL
GOVERNMENT BOND
INDEX -5.08% N/A N/A 3.75%
------------------------------------------------------------------
</TABLE>
26
<PAGE> 29
GMO EMERGING COUNTRY
DEBT FUND
Fund Inception Date: 4/19/94
<TABLE>
<CAPTION>
FUND CODES
-----------------------------------------
Ticker Symbol Cusip
------ --------- -----------
<S> <C> <C> <C> <C>
Class III GMCDX EmgCntrDt 362007 27 0
Class IV GMDFX EmgCntrDt 362008 78 1
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Emerging Country Debt Fund seeks to earn high
total return through investment in sovereign debt of developing countries in
Asia, Latin America, the Middle East, Africa and Europe ("Emerging Countries").
The Fund's current benchmark is the J.P. Morgan Emerging Markets Bond Index
Global.
PRINCIPAL INVESTMENTS: The Fund invests primarily in sovereign debt of
Emerging Countries. The Fund will generally have at least 50% of its assets
denominated in, or hedged into, U.S. dollars. The Fund may achieve this exposure
directly, or indirectly by investing a substantial portion of its assets in
shares of the GMO Alpha LIBOR Fund (see "Investment by Certain Fixed Income
Funds in GMO Alpha LIBOR Fund"). The Fund may make use of a wide variety of
exchange-traded and over-the-counter derivative instruments to implement its
strategy, and may seek to provide some protection against defaults of sovereign
issuers in certain countries through the use of certain derivative instruments.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager employs a bottom-up
approach to examining Emerging Country debt issues, and uses quantitative
applications to take advantage of valuation inefficiencies in Emerging Country
debt markets. In addition to considerations relating to investment restrictions
and tax barriers, allocation of the Fund's investments among selected Emerging
Countries will be based on certain other relevant factors including specific
security valuations, as well as the outlook for economic growth, currency
exchange rates, interest rates and political factors.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Liquidity Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk,
Leveraging Risk and Credit and Counterparty Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
EMERGING COUNTRY DEPT FUND %
----------------------------
<S> <C>
1995 45.10
1996 65.71
1997 31.01
1998 -35.53
1999 32.29
</TABLE>
Highest Quarter: 26.17% (2Q1995)
Lowest Quarter: -34.91% (3Q1998)
Year-to-Date (as of 3/31/00): 14.39%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
4/19/94
-----------------------------------------------------------------
CLASS III 31.30% 23.49% N/A 19.43%
-----------------------------------------------------------------
J.P. MORGAN EMBI+ 25.97% 16.65% N/A 14.59%
-----------------------------------------------------------------
J.P. MORGAN EMBI
GLOBAL+ 25.97% 16.65% N/A 14.59%
-----------------------------------------------------------------
1/9/98
-----------------------------------------------------------------
CLASS IV 31.47% N/A N/A -2.66%
-----------------------------------------------------------------
J.P. MORGAN EMBI+ 25.97% N/A N/A 5.40%
-----------------------------------------------------------------
J.P. MORGAN EMBI
GLOBAL+ 25.97% N/A N/A 5.40%
-----------------------------------------------------------------
</TABLE>
27
<PAGE> 30
GMO SHORT-TERM INCOME FUND
Fund Inception Date: 4/18/90
<TABLE>
<CAPTION>
FUND CODES
---------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III GMSIX STIF 362007 47 8
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Short-Term Income Fund seeks to provide
current income to the extent consistent with the preservation of capital and
liquidity through investment in a portfolio of high-quality fixed income
instruments. The Fund's current benchmark is the SSB 3 Month T-Bill Index.
PRINCIPAL INVESTMENTS: The Fund may invest in high-quality prime
commercial paper and master demand notes, high-quality corporate debt securities
and high-quality debt securities backed by pools of commercial or consumer
finance loans, asset-backed securities issued by U.S. government agencies and
private issuers, repurchase agreements, and certificates of deposit, bankers'
acceptances and other bank obligations. The Fund may achieve this exposure
directly, or indirectly by investing a substantial portion of its assets in
shares of the GMO Alpha LIBOR Fund (see "Investment by Certain Fixed Income
Funds in GMO Alpha LIBOR Fund"). While the Fund intends to invest primarily in
short-term securities, it is NOT a money market fund. The Fund may also use
derivatives.
The Fund may achieve exposure to some or all of these investments directly,
or indirectly by investing a substantial portion of its assets in shares of the
GMO Alpha LIBOR Fund (see "Investment by Certain Fixed Income Funds in GMO Alpha
LIBOR Fund").
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager uses fundamental
investment techniques to purchase bonds with a high relative yield spread. The
Fund seeks to maintain a duration of not greater than two years. While the Fund
invests in high-quality instruments, the Manager may or may not dispose of a
security whose rating is lowered after purchase.
RISKS: The most significant risk of an investment in the Fund is Market
Risk. For more information about this risk, and other principal risks of an
investment in the Fund, see "Summary of Principal Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. The table to the right shows
how the Fund's average annual total returns for different calendar periods
compare with those of a broad-based index. See "Benchmarks and Indexes" for a
description of the index. Performance results in the table reflect payment of
Fund expenses; returns for the comparative index do not reflect payment of any
expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
SHORT-TERM INCOME FUND(%)
-------------------------
<S> <C>
1991 8.23
1992 5.78
1993 5.65
1994 1.60
1995 9.97
1996 5.40
1997 6.11
1998 4.48
1999 5.09
</TABLE>
Highest Quarter: 3.51% (4Q1991)
Lowest Quarter: -0.24% (1Q1992)
Year-to-Date (as of 3/31/00): 1.79%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
4/18/90*
-----------------------------------------------------------------
CLASS III 5.09% 6.19% N/A 5.96%
-----------------------------------------------------------------
SSB 3 MONTH T-BILL
INDEX 4.67% 5.19% N/A 4.96%
-----------------------------------------------------------------
</TABLE>
* For the period from April 18, 1990 until June 30, 1991, the Fund operated as a
money market fund.
28
<PAGE> 31
GMO GLOBAL HEDGED EQUITY FUND
Fund Inception Date: 7/29/94
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III N/A N/A 362007 44 5
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Global Hedged Equity Fund seeks high total
return consistent with minimal exposure to general equity market risk. The
Fund's current benchmark is the SSB 3 Month T-Bill Index.
INVESTMENT UNIVERSE: The Fund invests primarily in shares of the GMO U.S.
Equity Funds and GMO International Equity Funds (including the GMO Emerging
Markets Funds) (the "underlying Funds"), or directly in equity securities of the
type invested in by these Funds. The Fund may also use derivatives, including
the equity hedging investments described below.
PRINCIPAL INVESTMENTS: The Fund invests primarily in a combination of (i)
global equity securities, generally held through the underlying Funds; (ii)
derivative instruments intended to hedge the value of the Fund's equity
positions against general movements in the relevant equity market(s) and against
changes in the value of the foreign currencies represented in the Fund's
non-U.S. positions relative to the U.S. dollar; and (iii) long interest rate
futures contracts intended to extend the duration of the Fund. The Fund expects
to make substantial use of exchange-traded and over-the-counter derivatives and
related instruments.
Investors should understand that, as opposed to conventional portfolios
composed of equity securities, to the extent that the Fund's hedging positions
are effective, the performance of the Fund is not expected to correlate with the
movements of equity markets generally. Rather, the Fund will perform more like a
short-term fixed income fund adjusted by the Manager's outperformance or
underperformance of equity markets generally.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund will implement its strategy
globally with a combination of U.S. equities and international equities. For the
U.S. equity portion of the portfolio, the Fund will invest in a U.S. equity
strategy that will be hedged using exchange-traded S&P 500 futures contracts.
For the international equity portion of the portfolio, the Fund will invest in
an international strategy that will be hedged using foreign exchange-traded
futures contracts and swap contracts in which the Fund is obligated to pay the
return of foreign markets in return for a U.S. dollar-based interest rate.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk and Foreign Investment Risk. For more information about
these risks and other principal risks of an investment in the Fund, see "Summary
of Principal Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[GRAPH]
<TABLE>
<CAPTION>
GLOBAL HEDGED EQUITY FUND (%)
-----------------------------
<S> <C>
1995 8.04
1996 4.09
1997 -1.60
1998 -7.08
1999 1.65
</TABLE>
Highest Quarter: 8.01% (2Q1999)
Lowest Quarter: -4.10% (2Q1998)
Year-to-Date (as of 3/31/00): 1.44%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
7/29/94
-----------------------------------------------------------------
CLASS III -0.29% 0.50% N/A 0.54%
-----------------------------------------------------------------
SSB 3 MONTH T-BILL
INDEX 4.67% 5.19% N/A 5.17%
-----------------------------------------------------------------
</TABLE>
29
<PAGE> 32
GMO INFLATION INDEXED BOND FUND
Fund Inception Date: 3/31/97
<TABLE>
<CAPTION>
FUND CODES
-----------------------------------------
Ticker Symbol Cusip
------ --------- -----------
<S> <C> <C> <C> <C>
Class III GMIIX InfltInBd 362007 247
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Inflation Indexed Bond Fund seeks high total
return through investment in government bonds that are indexed or otherwise
"linked" to general measures of inflation in the country of issue ("inflation
indexed bonds"). The Fund's current benchmark is the Lehman Brothers Treasury
Inflation Notes Index.
PRINCIPAL INVESTMENTS: The Fund invests primarily in inflation indexed (as
defined above) and other fixed income securities of both the United States and
foreign issuers. Inflation indexed securities issued by the U.S. Treasury are
fixed income securities whose principal value is periodically adjusted according
to the rate of inflation. A bond will be deemed to be "linked" to general
measures of inflation if, by such bond's terms, principal or interest components
change with general movements of inflation in the country of issue. The Fund may
achieve this exposure directly, or indirectly by investing a substantial portion
of its assets in shares of the GMO Alpha LIBOR Fund (see "Investment by Certain
Fixed Income Funds in GMO Alpha LIBOR Fund"). The Fund may also invest a portion
of its assets in lower-rated securities (also known as "junk bonds"). The Fund
may also invest in derivatives. The Fund invests in appropriate fixed income
securities that in the opinion of the Manager represent favorable values
relative to their market prices.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager uses fundamental
investment techniques to select issues by matching the Fund's duration to that
of its benchmark. The Manager may use exchange-traded and over-the-counter
derivative instruments to implement the Fund's strategy.
RISKS: The most significant risks of an investment in the Fund are Market
Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk, Leveraging Risk
and Credit and Counterparty Risk. For more information about these risks and
other principal risks of an investment in the Fund, see "Summary of Principal
Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premium and redemption
fee in effect through December 31, 1999 are not reflected in the bar chart; if
reflected, the returns would be lower. The table to the right shows how the
Fund's average annual total returns for different calendar periods compare with
those of a broad-based index. See "Benchmarks and Indexes" for a description of
the index. Performance results in the table reflect payment of Fund expenses;
returns for the comparative index do not reflect payment of any expenses. PAST
PERFORMANCE IS NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Year Ending December 31
[GRAPH]
<TABLE>
<CAPTION>
INFLATION INDEXED BOND FUND(%)
------------------------------
<S> <C>
1998 4.17
1999 2.70
</TABLE>
Highest Quarter: 2.36% (3Q1998)
Lowest Quarter: 0.16% (4Q1998)
Year-to-Date (as of 3/31/00): 4.07%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3/31/97
-----------------------------------------------------------------
CLASS III 2.50% N/A N/A 3.64%
-----------------------------------------------------------------
LEHMAN BROTHERS
TREASURY INFLATION
NOTES INDEX 2.36% N/A N/A N/A*
-----------------------------------------------------------------
LEHMAN BROTHERS
TREASURY INFLATION
NOTES+ 2.36% N/A N/A 3.50%
-----------------------------------------------------------------
</TABLE>
* Index inception date is 10/1/97
30
<PAGE> 33
GMO EMERGING COUNTRY DEBT
SHARE FUND
Fund Inception Date: 7/20/98
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ ------ -----------
<S> <C> <C> <C> <C>
Class III N/A N/A 362008 64 1
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Emerging Country Debt Share Fund seeks high
total return through investment in the GMO Emerging Country Debt Fund ("ECDF"),
a portfolio of the Trust. The Fund's current benchmark is the J.P. Morgan
Emerging Markets Bond Index Global.
PRINCIPAL INVESTMENTS: The Fund invests primarily in ECDF, and will
therefore indirectly employ ECDF's principal strategies. The Fund may also
invest in cash and high quality money market instruments.
For a discussion of the objective, principal investments and strategies and
portfolio construction process for ECDF, please see "Summary of Fund Objectives
and Principal Investment Strategies -- Emerging Country Debt Fund" above.
RISKS: The most significant risks of an investment in the Fund are the
risks the Fund is exposed to through ECDF, which include Market Risk, Liquidity
Risk, Derivatives Risk, Foreign Investment Risk, Currency Risk, Leveraging Risk
and Credit and Counterparty Risk. For more information about these risks and
other principal risks of an investment in the Fund, see "Summary of Principal
Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows the Fund's annual total return for the
period shown. Purchase premiums and redemption fees are not reflected in the bar
chart; if reflected, the returns would be lower. The table to the right shows
how the Fund's average annual total returns for different calendar periods
compare with those of a broad-based index. See "Benchmarks and Indexes" for a
description of the index. Performance results in the table reflect payment of
Fund expenses; returns for the comparative index do not reflect payment of any
expenses. PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
GMO EMERGING COUNTRY DEBT SHARE FUND (%)
----------------------------------------
<S> <C>
1999 32.13
</TABLE>
Highest Quarter: 18.02% (4Q1999)
Lowest Quarter: 1.30% (3Q1999)
Year-to-Date (as of 3/31/00): 14.47%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
7/20/98
-----------------------------------------------------------------
CLASS III 32.13% N/A N/A -5.54%
-----------------------------------------------------------------
J.P. MORGAN EMBI + 25.97% N/A N/A 3.45%
-----------------------------------------------------------------
J.P. MORGAN EMBI
GLOBAL + 25.97% N/A N/A 3.45%
-----------------------------------------------------------------
</TABLE>
31
<PAGE> 34
ASSET ALLOCATION FUNDS ("FUNDS OF FUNDS")
The Asset Allocation Funds invest primarily in other GMO Funds to provide
an investor with exposure to the investments -- and attendant risks -- of the
underlying Funds.
PORTFOLIO CONSTRUCTION
The Manager uses fundamental and quantitative investment principles to
provide broad exposure to asset classes or sectors ("Asset Classes") and to make
optimal allocations among these Asset Classes. The Manager uses top-down
valuation methodologies to allocate Fund assets away from underlying Funds
investing primarily in overvalued Asset Classes and into those underlying Funds
whose Asset Classes the Manager believes are undervalued. The Manager considers
forecasted risk, return, transaction costs and expected value-added for each of
the underlying Funds when implementing the allocation strategy. Each Fund will
consider whether to rebalance when cash flows occur, the investment outlook
changes, or there has been a significant change in market valuation levels.
GMO INTERNATIONAL EQUITY
ALLOCATION FUND
Fund Inception Date: 10/11/96
<TABLE>
<CAPTION>
FUND CODES
---------------------------------------
Ticker Symbol Cusip
------ ------- -----------
<S> <C> <C> <C> <C>
Class III GIEAX IntEqAl 362007 21 3
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The International Equity Allocation Fund seeks total
return greater than the return of the GMO EAFE Extended benchmark through
investment to varying extents in other Funds of the Trust.
INVESTMENT UNIVERSE: The Fund invests primarily in the GMO International
Equity Funds (including the GMO Emerging Markets Funds) and the GMO Fixed Income
Funds (collectively, "underlying Funds").
PRINCIPAL INVESTMENTS: The Fund seeks a total return greater than the GMO
EAFE Extended benchmark. This benchmark modifies the MSCI EAFE index by
including a market capitalization weighting for emerging markets. The Fund will
typically be nearly fully exposed to equity and fixed income securities through
investment in the underlying Funds.
RISKS: The most significant risk of an investment in the Fund is the risk
that one or more underlying Funds will not perform as expected. In addition, the
Fund will indirectly be exposed to all of the risks of an investment in the
underlying Funds. For more information about these risks and other principal
risks of an investment in the Fund, see "Summary of Principal Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years ending December 31
[GRAPH]
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY ALLOCATION FUND(%)
---------------------------------------
<S> <C>
1997 1.74
1998 1.99
1999 26.77
</TABLE>
Highest Quarter: 14.99% (4Q1998)
Lowest Quarter: -15.91% (3Q1998)
Year-to-Date (as of 3/31/00): -2.28%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
10/11/96
-----------------------------------------------------------------
CLASS III 25.61% N/A N/A 9.47%
-----------------------------------------------------------------
MSCI AC WORLD EX US 31.79% N/A N/A 14.99%
-----------------------------------------------------------------
GMO EAFE EXTENDED+ 27.40% N/A N/A 16.03%
-----------------------------------------------------------------
</TABLE>
32
<PAGE> 35
GMO WORLD EQUITY
ALLOCATION FUND
Fund Inception Date: 6/28/96
<TABLE>
<CAPTION>
FUND CODES
-----------------------------------------
Ticker Symbol Cusip
------ --------- -----------
<S> <C> <C> <C> <C>
Class III GMWAX WrldEqAl 362007 17 1
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The World Equity Allocation Fund seeks total return
greater than the return of the GMO World Extended benchmark through investment
to varying extents in other Funds of the Trust.
INVESTMENT UNIVERSE: The Fund invests primarily in the GMO International
Equity Funds (including the GMO Emerging Markets Funds), GMO U.S. Equity Funds,
and the GMO Fixed Income Funds (collectively, "underlying Funds").
PRINCIPAL INVESTMENTS: The Fund seeks a total return greater than the GMO
World Extended benchmark. This benchmark modifies the MSCI World Index including
a market capitalization weighting for emerging markets. The Fund will typically
be nearly fully exposed to equity and fixed income securities through investment
in the underlying Funds.
RISKS: The most significant risk of an investment in the Fund is the risk
that one or more underlying Funds will not perform as expected. In addition, the
Fund will indirectly be exposed to all of the risks of an investment in the
underlying Funds. For more information about these risks and other principal
risks of an investment in the Fund, see "Summary of Principal Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
WORLD EQUITY ALLOCATION FUND (%)
--------------------------------
<S> <C>
1997 10.23
1998 2.73
1999 23.44
</TABLE>
Highest Quarter: 14.30% (4Q1998)
Lowest Quarter: -15.08% (3Q1998)
Year-to-Date (as of 3/31/00): 0.86%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
10/22/96*
-----------------------------------------------------------------
CLASS III 22.45% N/A N/A 12.17%
-----------------------------------------------------------------
MSCI AC WORLD 27.30% N/A N/A 20.77%
-----------------------------------------------------------------
GMO WORLD EXTENDED+ 25.44% N/A N/A 21.71%
-----------------------------------------------------------------
</TABLE>
* The Fund commenced operations on June 28, 1996 with two classes of
shares -- Class I shares and Class II shares. Class I shares converted to
Class III shares on January 9, 1998; Class II shares converted to Class III
shares on October 16, 1996.
33
<PAGE> 36
GMO GLOBAL (U.S.+) EQUITY
ALLOCATION FUND
Fund Inception Date: 11/26/96
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ -------- -----------
<S> <C> <C> <C> <C>
Class III GMGEX GlEqtyAl 362007 14 8
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Global (U.S.+) Equity Allocation Fund seeks
total return greater than the return of the GMO Global (U.S.+) Equity Index
through investment to varying extents in other Funds of the Trust.
INVESTMENT UNIVERSE: The Fund invests primarily in the GMO U.S. Equity
Funds, GMO International Equity Funds (including the GMO Emerging Markets Funds)
and the GMO Fixed Income Funds (collectively, "underlying Funds").
PRINCIPAL INVESTMENTS: The Fund seeks a total return greater than the GMO
Global (U.S.+) Equity Index benchmark, which is comprised 75% of the S&P 500
Index and 25% of GMO EAFE Extended. GMO EAFE Extended modifies the MSCI EAFE
Index by including a market capitalization weighting for emerging markets. The
Fund will typically be nearly fully exposed to equity and fixed income
securities through investment in the underlying Funds.
RISKS: The most significant risk of an investment in the Fund is the risk
that one or more underlying Funds will not perform as expected. In addition, the
Fund will indirectly be exposed to all of the risks of an investment in the
underlying Funds. For more information about these risks, and other principal
risks of an investment in the Fund, see "Summary of Principal Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
GLOBAL (U.S.+) EQUITY ALLOCATION FUND (%)
-----------------------------------------
<S> <C>
1997 19.90
1998 5.97
1999 19.28
</TABLE>
Highest Quarter: 14.22% (4Q1998)
Lowest Quarter: -13.52% (3Q1998)
Year-to-Date (as of 3/31/00): 2.97%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11/26/96
-----------------------------------------------------------------
CLASS III 18.54% N/A N/A 14.40%
-----------------------------------------------------------------
75% S&P 500; 25%
MSCI AC WORLD EX
U.S. 23.74% N/A N/A 22.94%
-----------------------------------------------------------------
GMO GLOBAL (U.S.+)
EQUITY INDEX 22.61% N/A N/A 23.24%
-----------------------------------------------------------------
</TABLE>
34
<PAGE> 37
GMO GLOBAL BALANCED
ALLOCATION FUND
Fund Inception Date: 7/29/96
<TABLE>
<CAPTION>
FUND CODES
---------------------------------------
Ticker Symbol Cusip
------ ------- -----------
<S> <C> <C> <C> <C>
Class III GMGAX GlBalAl 362007 11 4
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The Global Balanced Allocation Fund seeks total
return greater than the return of the GMO Global Balanced Index through
investment to varying extents in other Funds of the Trust.
INVESTMENT UNIVERSE: The Fund invests primarily in the GMO International
Equity Funds (including the GMO Emerging Markets Funds), the GMO Fixed Income
Funds and the GMO U.S. Equity Funds.
PRINCIPAL INVESTMENTS: The Fund seeks a total return greater than the GMO
Global Balanced benchmark, which is comprised 48.75% of the S&P 500 Index,
16.25% of GMO EAFE Extended and 35% of the Lehman Brothers Aggregate Bond Index.
GMO EAFE Extended modifies the MSCI EAFE Index by including a market
capitalization weighting for emerging markets. The Fund will typically be nearly
fully exposed to equity and fixed income securities through investment in the
underlying Funds.
RISKS: The most significant risk of an investment in the Fund is the risk
that one or more underlying Funds will not perform as expected. In addition, the
Fund will indirectly be exposed to all of the risks of an investment in the
underlying Funds. For more information about these risks, and other principal
risks of an investment in the Fund, see "Summary of Principal Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
GLOBAL BALANCED ALLOCATION FUND (%)
-----------------------------------
<S> <C>
1998 4.38
1999 10.97
</TABLE>
Highest Quarter: 7.85% (4Q1998)
Lowest Quarter: -7.89% (3Q1998)
Year-to-Date (as of 3/31/00): 2.85%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6/2/97*
-----------------------------------------------------------------
CLASS III 10.46% N/A N/A 9.27%
-----------------------------------------------------------------
50% S&P 500; 50%
LEHMAN BROTHERS
AGGREGATE BOND
INDEX 9.80% N/A N/A 15.80%
-----------------------------------------------------------------
GMO GLOBAL BALANCED
INDEX 14.04% N/A N/A 17.22%
-----------------------------------------------------------------
</TABLE>
* The Fund commenced operations on July 29, 1996 with a single class of
shares -- Class I Shares. Class I and Class II Shares converted to Class III
Shares on January 9, 1998.
35
<PAGE> 38
GMO U.S. SECTOR FUND
Fund Inception Date: 12/31/92
<TABLE>
<CAPTION>
FUND CODES
----------------------------------------
Ticker Symbol Cusip
------ -------- -----------
<S> <C> <C> <C> <C>
Class III GMUSX USSector 362007 75 9
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The U.S. Sector Fund seeks total return greater than
that of the S&P 500 through investment in common stocks, either directly or
through investment in other GMO Funds ("underlying Funds").
INVESTMENT UNIVERSE: The Fund invests primarily in the U.S. Core Fund,
Growth Fund, Value Fund, Small Cap Growth Fund, Small Cap Value Fund, Intrinsic
Value Fund and REIT Fund.
PRINCIPAL INVESTMENTS: The Fund will typically be nearly fully exposed to
equity securities through investment in the underlying Funds.
RISKS: The most significant risk of an investment in the Fund is the risk
that one or more underlying Funds will not perform as expected. In addition, the
Fund will indirectly be exposed to all of the risks of an investment in the
underlying Funds. For more information about these risks and other principal
risks of an investment in the Fund, see "Summary of Principal Risks" on page 37.
PERFORMANCE
The performance information below helps to show the risks of investing in
the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums and
redemption fees are not reflected in the bar chart; if reflected, the returns
would be lower. The table to the right shows how the Fund's average annual total
returns for different calendar periods compare with those of a broad-based
index. See "Benchmarks and Indexes" for a description of the index. Performance
results in the table reflect payment of Fund expenses; returns for the
comparative index do not reflect payment of any expenses. PAST PERFORMANCE IS
NOT AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/Class III Shares
Years Ending December 31
[Graph]
<TABLE>
<CAPTION>
SECTOR FUND
-----------
<S> <C>
1993 16.88
1994 3.27
1995 43.18
1996 18.24
1997 28.64
1998 11.64
1999 14.31
</TABLE>
Highest Quarter: 16.09% (4Q1998)
Lowest Quarter: -12.52% (3Q1998)
Year to Date (as of 3/31/00): 4.49%
AVERAGE ANNUAL TOTAL RETURN
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS INCEPT.
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/31/92
-----------------------------------------------------------------
CLASS III 13.80% 22.56% N/A 18.79%
-----------------------------------------------------------------
S&P 500 21.04% 28.54% N/A 21.52%
-----------------------------------------------------------------
</TABLE>
36
<PAGE> 39
SUMMARY OF PRINCIPAL RISKS
The following chart identifies the Principal Risks associated with each
Fund. Risks not marked for a particular Fund may, however, still apply to some
extent to that Fund at various times.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
SMALLER FOREIGN NON-
MARKET LIQUIDITY COMPANY DERIVATIVES INVESTMENT CURRENCY DIVERSIFICATION CONCENTRATION
RISK RISK RISK RISK RISK RISK RISK RISK
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DOMESTIC EQUITY FUNDS
-------------------------------------------------------------------------------------------------------------------------------
U.S. Core Fund -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Tobacco-Free Core Fund -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Value Fund -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Intrinsic Value Fund -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Growth Fund -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
REIT Fund -- -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUNDS
-------------------------------------------------------------------------------------------------------------------------------
International Core Fund -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Currency Hedged International
Core Fund -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Foreign Fund -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
International Small Companies
Fund -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Japan Fund -- -- -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund -- -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Evolving Countries Fund -- -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Asia Fund -- -- -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
FIXED INCOME FUNDS
-------------------------------------------------------------------------------------------------------------------------------
Domestic Bond Fund -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
U.S. Bond/Global Alpha A
Fund -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
U.S. Bond/Global Alpha B
Fund -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
International Bond Fund -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Currency Hedged International
Bond Fund -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Global Bond Fund -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Emerging Country Debt Fund -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Short-Term Income Fund -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Global Hedged Equity Fund -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Inflation Indexed Bond Fund -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Emerging Country Debt Share Fund -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
ASSET ALLOCATION FUNDS
-------------------------------------------------------------------------------------------------------------------------------
International Equity Allocation
Fund -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
World Equity Allocation Fund -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Global (U.S.+) Equity Allocation
Fund -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Global Balanced Allocation
Fund -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
U.S. Sector Fund -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
---------------------------------- --------------------------------------
CREDIT AND
LEVERAGING COUNTERPARTY MANAGEMENT
RISK RISK RISK
---------------------------------- --------------------------------------
<S> <C> <C> <C>
DOMESTIC EQUITY FUNDS
----------------------------------------------------------------------------------------
U.S. Core Fund -- -- --
-------------------------------------------------------------------------------------------------------
Tobacco-Free Core Fund -- -- --
----------------------------------------------------------------------------------------------------------------------
Value Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Intrinsic Value Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Growth Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
REIT Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUNDS
-------------------------------------------------------------------------------------------------------------------------------
International Core Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Currency Hedged International
Core Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Foreign Fund -- --
-------------------------------------------------------------------------------------------------------------------------------
International Small Companies
Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Japan Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Evolving Countries Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Asia Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
FIXED INCOME FUNDS
-------------------------------------------------------------------------------------------------------------------------------
Domestic Bond Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
U.S. Bond/Global Alpha A
Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
U.S. Bond/Global Alpha B
Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
International Bond Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Currency Hedged International
Bond Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Global Bond Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Emerging Country Debt Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Short-Term Income Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Global Hedged Equity Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Inflation Indexed Bond Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Emerging Country Debt Share Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
ASSET ALLOCATION FUNDS
-------------------------------------------------------------------------------------------------------------------------------
International Equity Allocation
Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
World Equity Allocation Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Global (U.S.+) Equity Allocation
Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Global Balanced Allocation
Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
U.S. Sector Fund -- -- --
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The value of your investment in a Fund changes with the values of that
Fund's investments. Many factors can affect those values, and you can lose money
by investing in the Funds. Factors that may affect a particular Fund's portfolio
as a whole are called "principal risks" and are summarized in this section. This
summary describes the nature of these risks but is not intended to include every
potential risk. All Funds could be subject to additional risks because the types
of investments made by each Fund change over time. The Statement of Additional
Information includes more information about the Funds and their investments.
37
<PAGE> 40
-- MARKET RISK. All of the Funds are subject to market risk, which is
the risk of unfavorable market-induced changes in the value of the securities
owned by a Fund. General market risks associated with investments in equity and
fixed income securities include the following:
Equity Securities. A principal risk of each Fund that invests a
substantial portion of its assets in equity securities is that those equity
securities will decline in value due to factors affecting the issuing companies,
their industries, or the economy and equity markets generally. The values of
equity securities may decline for a number of reasons which directly relate to
the issuing company, such as management performance, financial leverage and
reduced demand for the issuer's goods or services. They may also decline due to
factors which affect a particular industry or industries, such as labor
shortages or increased production costs and competitive conditions within an
industry. In addition, they may decline due to general market conditions which
are not specifically related to a company or industry, such as real or perceived
adverse economic conditions, changes in the general outlook for corporate
earnings, changes in interest or currency rates or adverse investor sentiment
generally.
The U.S. Equity Funds and the International Equity Funds maintain
substantial exposure to equities and generally do not attempt to time the
market. Because of this exposure, the possibility that stock market prices in
general will decline over short or extended periods subjects these Funds to
unpredictable declines in the value of their shares, as well as periods of poor
performance.
Value Securities Risk. Some equity securities (generally referred to as
"value securities") are purchased primarily because they are selling at a price
lower than what is believed to be their true value and not necessarily because
the issuing companies are expected to experience significant earnings growth.
These securities bear the risk that the companies may not overcome the adverse
business developments or other factors causing their securities to be out of
favor, or that the market does not recognize the value of the company, such that
the price of its securities may decline or may not approach the value that the
Manager anticipates. Since value criteria are used extensively by the Manager
across the Funds, these risks apply to all of the equity funds described in this
Prospectus. The risks are particularly pronounced for the Value Fund, Small Cap
Value Fund and Intrinsic Value Fund, which invest primarily in value securities.
Growth Securities Risk. Certain equity securities (generally known as
"growth securities") are purchased primarily because it is believed that they
will experience relatively rapid earnings growth. Growth securities typically
trade at higher multiples of current earnings than other types of stocks. Growth
securities are often more sensitive to general market movements than other types
of stocks because their market prices tend to place greater emphasis on future
earnings expectations. At times when it appears that these expectations may not
be met, growth stock prices typically fall. All of the Funds that invest in
equity securities are subject to these risks, but these risks are particularly
pronounced for the Growth Fund and the Small Cap Growth Fund, which invest
primarily in growth securities.
FIXED INCOME SECURITIES. The value of the Funds' investments in fixed
income securities (including bonds, notes and asset-backed securities) will
typically change as interest rates fluctuate. During periods of rising interest
rates, the values of fixed income securities generally decline. Conversely,
during periods of falling interest rates, the values of fixed income securities
generally rise.
This kind of market risk, also called interest rate risk, is generally
greater for Funds investing in fixed income securities with longer maturities
and portfolios with longer durations (a measure of the expected cash flows of a
fixed income security). Thus, this risk is greatest for Funds with longer
durations (i.e., that invest in fixed income securities with longer maturities)
and is even present, but to a somewhat lesser extent, in the Short-Term Income
Fund.
While interest rate risk is attendant with all fixed income securities and
tends to depend mostly on the duration of the security, interest rate risk is
generally more pronounced with lower-rated securities and so may be more
significant for the Emerging Country Debt Fund, Emerging Country Debt Share
Fund, Global Bond Fund, International Bond Fund, Inflation Indexed Bond Fund,
Currency Hedged International Bond Fund, U.S. Bond/Global Alpha A Fund, U.S.
Bond/ Global Alpha B Fund, Domestic Bond Fund, REIT Fund, Currency Hedged
International Core Fund and Foreign Fund, each of which may invest a significant
portion of their assets in lower-rated securities (also called "junk bonds") or
comparable unrated securities.
In addition, a related market risk exists for the Domestic Bond Fund,
Global Bond Fund, International Bond Fund, Currency Hedged International Bond
Fund, U.S. Bond/Global Alpha A Fund, U.S. Bond/Global Alpha B Fund and
Short-Term Income Fund, which invest to a material extent in mortgage-related or
other asset-backed securities that may be prepaid. Because prepayments generally
increase when interest rates fall, these Funds are subject to the risk that cash
flows from securities will have to be reinvested at lower rates. Likewise, since
prepayments decrease when interest rates rise, these securities have maturities
that tend to be longer when that is least desirable -- when interest rates are
rising. Most of the Fixed Income Funds may also invest to a material extent in
debt securities paying no interest, such as zero coupon, principal-only and
interest-only securities and, to the extent they make such investments, such
Funds will be exposed to additional market risk.
38
<PAGE> 41
- LIQUIDITY RISK. Liquidity risk exists when particular investments are
difficult to purchase or sell due to a limited market or to legal restrictions,
such that a Fund may be prevented from selling particular securities at the
price at which the Fund values them. All of the Funds are subject to liquidity
risk. Funds with principal investment strategies that involve securities of
companies with smaller market capitalizations, foreign securities, derivatives,
or securities with substantial market and/or credit risk tend to have the
greatest exposure to liquidity risk.
This risk may be particularly pronounced for Funds such as the Emerging
Country Debt Fund, Emerging Country Debt Share Fund, Emerging Markets Fund,
Evolving Countries Fund Asia Fund, International Bond Fund, Currency Hedged
International Bond Fund and U.S. Bond/Global Alpha A Fund, all of which may
invest primarily in emerging market securities and related derivatives that are
not widely traded and that may be subject to purchase and sale restrictions.
- SMALLER COMPANY RISK. Market risk and liquidity risk are particularly
pronounced for securities of companies with smaller market capitalizations.
These companies may have limited product lines, markets or financial resources
or they may depend on a few key employees. Securities of smaller companies may
trade less frequently and in lesser volume than more widely held securities and
their values may fluctuate more sharply than other securities. They may also
trade in the over-the-counter market or on a regional exchange, or may otherwise
have limited liquidity. Investments in smaller, less seasoned companies may
present greater opportunities for growth and capital appreciation, but also
involve greater risks than customarily are associated with larger, more
established companies. These risks apply to all Funds that invest in the
securities of smaller companies, but are particularly pronounced for the Small
Cap Value Fund, Small Cap Growth Fund, International Small Companies Fund and
Emerging Markets Fund, all of which invest primarily in companies with small or
medium-sized market capitalizations.
- DERIVATIVES RISK. All of the Funds may use derivatives, which are
financial contracts whose value depends upon, or is derived from, the value of
an underlying asset, reference rate or index. Derivatives may relate to stocks,
bonds, interest rates, currencies or currency exchange rates, commodities, and
related indexes. The Funds can use derivatives for many purposes, including for
hedging, and as a substitute for direct investment in securities or other
assets. The Funds may also use derivatives as a way to efficiently adjust the
exposure of the Funds to various securities, markets and currencies without the
Funds having to actually sell current assets and purchase different ones. This
is generally done either because the adjustment is expected to be relatively
temporary or in anticipation of effecting the sale and purchase of Fund assets
over time. For a description of the various derivative instruments that may be
utilized by the Funds, refer to the Statement of Additional Information.
The use of derivative instruments involves risks different from, or greater
than, the risks associated with investing directly in securities and other more
traditional investments. Derivatives are subject to a number of risks described
elsewhere in this section, including market risk, liquidity risk and the credit
risk of the counterparty to the derivatives contract. Since their value is
calculated and derived from the value of other assets, instruments or
references, there is greater risk that derivatives will be improperly valued.
Derivatives also involve the risk that changes in the value of the derivative
may not correlate perfectly with relevant assets, rates or indexes they are
designed to hedge or to closely track. Also, suitable derivative transactions
may not be available in all circumstances and there can be no assurance that a
Fund will engage in these transactions to reduce exposure to other risks when
that would be beneficial.
While all the Funds are subject to these risks, the risks of derivatives
are particularly pronounced for the International Bond Fund, Currency Hedged
International Bond Fund, Global Bond Fund, Emerging Country Debt Fund, Emerging
Country Debt Share Fund, Global Hedged Equity Fund, U. S. Bond/Global Alpha A
Fund, U.S. Bond/Global Alpha B Fund, and Inflation Indexed Bond Fund, which use
derivatives as a basic component of their investment strategy to gain exposure
to foreign fixed income securities and currencies.
In addition, the Emerging Country Debt Fund's (and thus indirectly, the
Emerging Country Debt Share Fund's) significant use of credit default swap
contracts also presents derivatives risk. In a credit default swap, a Fund makes
a stream of payments to another party in exchange for the right to receive a
specified return in the event of a default by a third party, typically an
emerging country, on its obligation. However, if the third party does not
default, the Fund loses its investment and recovers nothing. Credit default
swaps involve risk because they are difficult to value, are highly susceptible
to liquidity and credit risk, and generally only generate income in the event of
an actual default by the issuer of the underlying obligation (as opposed to a
credit downgrade or other indication of financial difficulty).
- FOREIGN INVESTMENT RISK. Funds that invest in securities traded
principally in securities markets outside the United States are subject to
additional and more varied risks, and may experience more rapid and extreme
changes in value. The securities markets of many foreign countries are
relatively small, with a limited number of companies representing a small number
of industries. Additionally, issuers of foreign securities may not be subject to
the same degree of regulation as U.S. issuers. Reporting, accounting and
auditing standards of foreign countries differ, in some cases significantly,
from U.S. standards. There are generally higher commission rates on foreign
portfolio transactions, transfer taxes, higher custodial costs and the
possibility that foreign taxes will be charged on dividends and interest payable
on
39
<PAGE> 42
foreign securities. Also, for lesser developed countries, nationalization,
expropriation or confiscatory taxation, adverse changes in investment or
exchange control regulations (which may include suspension of the ability to
transfer currency from a country), political changes or diplomatic developments
could adversely affect a Fund's investments. In the event of nationalization,
expropriation or other confiscation, a Fund could lose its entire investment in
foreign securities.
All Funds that invest in foreign securities are subject to these risks.
These risks will be particularly pronounced for the International Equity Funds,
International Bond Fund, Currency Hedged International Bond Fund, Global Bond
Fund, Emerging Country Debt Fund, Emerging Country Debt Share Fund, Global
Hedged Equity Fund and Inflation Indexed Bond Fund which may invest a
significant portion of their assets in foreign securities. Some of the foreign
risks are also relevant for the Domestic Equity Funds because they may invest a
material portion of their assets in securities of foreign issuers traded in the
U.S.
In addition, Funds such as the Emerging Markets Fund, Evolving Countries
Fund, Asia Fund, International Bond Fund, Currency Hedged International Bond
Fund, Global Bond Fund, U.S. Bond/Global Alpha A Fund, Emerging Country Debt
Fund and Emerging Country Debt Share Fund that invest a significant portion of
their assets in the securities of issuers based in countries with developing or
"emerging market" economies are subject to greater levels of foreign investment
risk than Funds investing primarily in more developed foreign markets, since
emerging market securities may present market, credit, currency, liquidity,
legal, political and other risks greater than, or in addition to, risks of
investing in developed foreign countries. These risks include: high currency
exchange rate fluctuations; greater social, economic and political uncertainty
and instability (including the risk of war); more substantial governmental
involvement in the economy; less governmental supervision and regulation of the
securities markets and participants in those markets; unavailability of currency
hedging techniques in certain emerging market countries; the fact that companies
in emerging market countries may be newly organized and may be smaller and less
seasoned companies; the difference in, or lack of, auditing and financial
reporting standards, which may result in unavailability of material information
about issuers; different clearance and settlement procedures, which may be
unable to keep pace with the volume of securities transactions or otherwise make
it difficult to engage in such transactions; the risk that it may be more
difficult to obtain and/or enforce legal judgments in foreign jurisdictions; and
significantly smaller market capitalizations of emerging market issuers.
- CURRENCY RISK. Currency risk is the risk that fluctuations in exchange
rates may negatively affect the value of a Fund's investments. Currency risk
includes both the risk that currencies in which a Fund's investments are traded
in or currencies in which a Fund has taken on an active investment position will
decline in value relative to the U.S. Dollar and, in the case of hedging
positions, that the U.S. Dollar will decline in value relative to the currency
being hedged. Currency rates in foreign countries may fluctuate significantly
for a number of reasons, including the forces of supply and demand in the
foreign exchange markets, actual or perceived changes in interest rates, and
intervention (or the failure to intervene) by U.S. or foreign governments or
central banks, or by currency controls or political developments in the U.S. or
abroad.
Many of the Funds may engage in proxy hedging of currencies by entering
into derivative transactions with respect to a currency whose value is expected
to correlate to the value of a currency the Fund owns or wants to own. This
presents the risk that the two currencies may not move in relation to one
another as expected. In that case, the Fund could lose money on its investment
and also lose money on the position designed to act as a proxy hedge. Many of
the Funds may also take active currency positions and may cross-hedge currency
exposure represented by its securities into another foreign currency. This may
result in a Fund's currency exposure being substantially different than that
suggested by its securities investments.
All Funds that invest or trade in foreign currencies, securities
denominated in foreign currencies, or related derivative instruments may be
adversely affected by changes in foreign currency exchange rates. Currency risk
is particularly pronounced for the International Equity Funds, International
Bond Fund, Currency Hedged International Bond Fund, Global Bond Fund, Emerging
Country Debt Fund, U.S. Bond/Global Alpha A Fund, U.S. Bond/Global Alpha B Fund
and REIT Fund, which regularly enter into derivative foreign currency
transactions and may take active long and short currency positions through
exchange traded and over-the-counter ("OTC") foreign currency transactions for
investment purposes. Derivative foreign currency transactions (such as futures,
forwards and swaps) may also involve leveraging risk in addition to currency
risk as described below under "Leveraging Risk."
- NON-DIVERSIFICATION RISK. Most analysts believe that overall risk can be
reduced through diversification, while concentration of investments in a small
number of securities increases risk. The Value Fund, Growth Fund, Small Cap
Growth Fund, REIT Fund, U.S. Sector Fund, Currency Hedged International Core
Fund, Foreign Fund , Japan Fund, Emerging Markets Fund, Evolving Countries Fund,
Intrinsic Value Fund and all of the Fixed Income Funds are not "diversified"
within the meaning of the 1940 Act. This means they are allowed to invest in a
relatively small number of issuers and/or foreign currencies with greater
concentration of risk. As a result, credit, market and other risks associated
with a Fund's investment strategies or techniques may be more pronounced for
these Funds.
In addition, each of the Short-Term Income Fund, the Global Bond Fund and
the U.S. Bond/Global Alpha B Fund may invest greater than 25% of their
respective net assets in shares of the GMO Alpha LIBOR Fund, which is not
40
<PAGE> 43
diversified within the meaning of the 1940 Act. Please refer to "Investment by
Certain Fixed Income Funds in GMO Alpha LIBOR Fund" for information regarding
certain risks and other information relating to the GMO Alpha LIBOR Fund.
- CONCENTRATION RISK. Most analysts believe that overall risk is reduced
by industry or geographic diversification, and increased by concentrating
investments in a small number of industries or countries. Therefore, Funds that
are concentrated geographically or with respect to industries or sectors should
only be considered as part of a diversified portfolio including other assets.
This section describes the Funds that present the most significant concentration
risk. Such risks may also exist in other Funds.
The REIT Fund invests primarily in real estate securities. Thus, the value
of this Fund's shares can be expected to change in light of factors affecting
the real estate industry, and may fluctuate more widely than the value of shares
of a portfolio that invests in a broader range of industries. Factors affecting
the performance of real estate may include excess supply of real property in
certain markets, changes in zoning laws, completion of construction, changes in
real estate value and property taxes, sufficient level of occupancy, adequate
rent to cover operating expenses, and local and regional markets for competing
assets. The performance of real estate may also be affected by changes in
interest rates, prudent management of insurance risks and social and economic
trends. REITs are also subject to substantial cash flow dependency, defaults by
borrowers, self-liquidation and the risk of failing to qualify for tax-free
pass-through of income under the Internal Revenue Code and/or to maintain exempt
status under the 1940 Act.
Similarly, Funds that invest significant portions of their assets in
concentrated geographic areas, such as the Japan Fund and the Asia Fund, have
more exposure to regional economic risks than Funds making foreign investments
throughout the world's economies.
The Japan Fund invests almost exclusively in Japanese securities, and no
effort will be made by the Manager to assess the Japanese economic, political or
regulatory developments or changes in currency exchange rates for purposes of
varying the portion of the Fund's assets invested in Japanese securities. This
means that the Fund's performance will be directly affected by political,
economic, market and exchange rate conditions in Japan. Also, since the Japanese
economy is dependent to a significant extent on foreign trade, the relationships
between Japan and its trading partners and between the yen and other currencies
are expected to have a significant impact on particular Japanese companies and
on the Japanese economy generally.
The Asia Fund invests almost exclusively in Asian securities. This regional
concentration makes Asia Fund more susceptible to investment factors affecting
the region than a more geographically diverse fund. The region encompasses
countries at varying levels of economic development -- ranging from emerging
market to more developed economies. Each country provides unique investment
risks, yet the political and economic prospects of one country or group of
countries may impact other countries in the region. For example, some Asian
economies are directly affected by Japanese capital investment in the region and
by Japanese consumer demands. In addition, a recession, a debt-crisis or a
decline in currency valuation in one country can spread to other countries.
- LEVERAGING RISK. Each Fund's portfolio may at times be economically
leveraged when the Fund temporarily borrows money to meet redemption requests
and/or to settle investment transactions. Additionally, all of the Funds may
invest in derivatives and may enter into reverse repurchase agreements. While
none of the Funds intends to use derivatives to create net exposure to
securities, currencies or other assets in amounts greater than the total assets
of the Fund, the Funds will often consider derivative instruments as offsetting
one another or other assets such that only the net difference in value of the
derivatives and/or assets that are offsetting will be considered for these
purposes. While this practice is significant in many of the Funds, it is used
most extensively by the Fixed Income Funds, many of which use derivatives and
offsetting derivatives as their principal means of achieving desired economic
exposure. In these cases, to the extent that the offsetting positions do not
behave in relation to one another as expected, the Funds may perform as if they
were leveraged.
This same compounding of risk can occur in International Equity Funds,
International Bond Fund, Currency Hedged International Bond Fund, Global Bond
Fund, Emerging Country Debt Fund, Emerging Country Debt Share Fund, U.S.
Bond/Global Alpha A Fund, U.S. Bond/Global Alpha B Fund, REIT Fund and Inflation
Indexed Bond Fund, which may take on simultaneous long and short positions in
different currencies. While these long and short positions are managed such that
these Funds' net investment in foreign currency does not exceed the Fund's net
assets, a lack of correlation between currencies (which may or may not be
anticipated by the Manager) may expose more than one hundred percent of the
Fund's assets to currency risk. Similarly, the U.S. Equity and International
Equity Funds may take long and short positions on equity securities and/or
"baskets" of equity securities, including simultaneous positions through the use
of a single derivative instrument such as a swap contract or other
over-the-counter derivative instrument. A lack of correlation between the equity
securities that are the subject of these instruments (which may or may not be
anticipated by the Manager) could expose more than one hundred percent of the
Fund's portfolio to equity securities risk.
41
<PAGE> 44
- CREDIT AND COUNTERPARTY RISK. This is the risk that the issuer or
guarantor of a fixed income security, the counterparty to an OTC derivatives
contract, or a borrower of the Fund's securities, will be unable or unwilling to
make timely principal, interest or settlement payments, or to otherwise honor
its obligations.
Credit risk associated with investments in fixed income securities relates
to the ability of the issuer to make scheduled payments of principal and
interest on an obligation. The Funds that invest in fixed income securities are
subject to varying degrees of risk that the issuers of the securities will have
their credit ratings downgraded or will default, potentially reducing the Fund's
share price and income level. Nearly all fixed income securities are subject to
some credit risk, which may vary depending upon whether the issuers of the
securities are corporations, domestic or foreign governments, or their sub-
divisions or instrumentalities. Even certain U.S. Government securities are
subject to credit risk. Additional risk exists where there is no rating for the
fixed income security and the Manager has to assess the risk subjectively.
Credit risk is particularly acute for Funds which invest in lower-rated
securities (also called junk bonds), which are fixed income securities rated
lower than Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by Standard
& Poor's Ratings Services ("S&P"), or are determined by the Manager to be of
comparable quality to securities so rated. The sovereign debt of many foreign
governments, including their sub-divisions and instrumentalities, falls into
this category. Lower-rated securities offer the potential for higher investment
returns than higher-rated securities, but they carry a high degree of credit
risk and are considered predominantly speculative with respect to the issuer's
continuing ability to meet principal and interest payments. Lower-rated
securities may also be more susceptible to real or perceived adverse economic
and competitive industry conditions and may be less liquid than higher-rated
securities. Accordingly, Funds which may invest a significant portion of their
assets in lower-rated securities (such as those listed in "Market Risk -- Fixed
Income Securities" above) may be subject to substantial credit risk.
In addition, all of the Funds are also exposed to credit risk because they
may generally make use of OTC derivatives (such as forward foreign currency
contracts and/or swap contracts) and because they may engage to a significant
extent in the lending of Fund securities or use of repurchase agreements.
- MANAGEMENT RISK. Each Fund is subject to management risk because it
relies on the Manager's ability to pursue its objective. The Manager (and, in
the case of the Emerging Markets Funds, the Consultant) will apply investment
techniques and risk analyses in making investment decisions for the Funds, but
there can be no guarantee that these will produce the desired results. As noted
above, the Manager or the Consultant may also fail to use derivatives
effectively, for example, choosing to hedge or not to hedge positions precisely
when it is least advantageous to do so. As indicated above, however, the Funds
are generally not subject to the risk of market timing because they generally
stay fully invested in the relevant asset class, such as domestic equities,
foreign equities, or emerging country debt.
- SPECIAL ASSET ALLOCATION FUND CONSIDERATIONS. The Manager does not
charge an investment management fee for asset allocation advice provided to the
Asset Allocation Funds (with the exception of the U.S. Sector Fund, which bears
an investment management fee subject to reduction to the extent investment
management fees are earned by underlying Funds, as described in this Prospectus
under "Fees and Expenses"), but certain other expenses such as custody, transfer
agency and audit fees will be borne directly by the Asset Allocation Funds,
subject to the Manager's agreement to reimburse the Funds (see "Fees and
Expenses"). The Asset Allocation Funds will also indirectly bear a proportionate
share of the Total Operating Expenses (including investment management,
shareholder servicing, custody, transfer agency, audit and other Fund expenses)
of the underlying Funds in which the Asset Allocation Funds invest, as well as
any purchase premiums or redemption fees charged by such underlying Funds. Since
the Manager will receive fees from the underlying Funds, the Manager has a
financial incentive to invest the assets of the Asset Allocation Funds in
underlying Funds with higher fees, despite the investment interests of the Asset
Allocation Funds. The Manager is legally obligated to disregard that incentive
in selecting shares of the underlying Funds.
42
<PAGE> 45
FEES AND EXPENSES
The following tables describe the fees and expenses you may pay if you buy
and hold shares of the Funds. Footnotes to the tables begin on page 46 and are
important to understanding this table.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
PURCHASE AND
REDEMPTION FEES
(FEES PAID DIRECTLY TO FUND AT ANNUAL FUND OPERATING EXPENSES
GMO FUND NAME PURCHASE OR REDEMPTION) (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
----------------------------------------------------------------------------------------------------------
Cash Purchase Redemption Total
Premium (as a Fees (as a Shareholder Annual
% of amount % of amount Management Service Other Operating
invested)(1) redeemed)(1) Fee Fee Expenses Expenses
<S> <C> <C> <C> <C> <C> <C>
U.S. Equity Funds
U.S. CORE FUND
Class II None None 0.33% 0.22% 0.02% 0.57%
Class III None None 0.33% 0.15% 0.02% 0.50%
Class IV None None 0.33% 0.105% 0.02% 0.46%
----------------------------------------------------------------------------------------------------------
TOBACCO-FREE
CORE FUND
Class III None None 0.33% 0.15% 0.05% 0.53%
----------------------------------------------------------------------------------------------------------
VALUE FUND
Class III None None 0.46% 0.15% 0.05% 0.66%
----------------------------------------------------------------------------------------------------------
INTRINSIC VALUE FUND
Class III 0.14%(2) None 0.33% 0.15% 0.25% 0.73%
----------------------------------------------------------------------------------------------------------
GROWTH FUND
Class III None None 0.33% 0.15% 0.06% 0.54%
----------------------------------------------------------------------------------------------------------
SMALL CAP VALUE FUND
Class III 0.50%(2) 0.50%(2) 0.33% 0.15% 0.06% 0.54%
----------------------------------------------------------------------------------------------------------
SMALL CAP GROWTH FUND
Class III 0.50%(2) 0.50%(2) 0.33% 0.15% 0.11% 0.59%
----------------------------------------------------------------------------------------------------------
REIT FUND
Class III 0.50%(2) 0.50%(2) 0.54% 0.15% 0.06% 0.75%
----------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY
FUNDS
INTERNATIONAL CORE
FUND
Class II 0.60%(2) None 0.54% 0.22% 0.09% 0.85%
Class III 0.60%(2) None 0.54% 0.15% 0.09% 0.78%
Class IV 0.60%(2) None 0.54% 0.09% 0.09% 0.72%
----------------------------------------------------------------------------------------------------------
CURRENCY HEDGED
INTERNATIONAL CORE
FUND
Class III 0.60%(2) None 0.54% 0.15% 0.33% 1.02%
Class IV 0.60%(2) None 0.54% 0.09% 0.33% 0.96%
----------------------------------------------------------------------------------------------------------
FOREIGN FUND
Class II None None 0.60% 0.22% 0.10% 0.92%
Class III None None 0.60% 0.15% 0.10% 0.85%
Class IV None None 0.60% 0.09% 0.10% 0.79%
----------------------------------------------------------------------------------------------------------
<CAPTION>
----------------------- -------------------------------
ANNUAL FUND OPERATING EXPENSES
GMO FUND NAME (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
----------------------- -------------------------------
NET
Expense ANNUAL
Reimbursement(3) EXPENSES
<S> <C> <C>
U.S. Equity Funds
U.S. CORE FUND
Class II 0.02% 0.55%
Class III 0.02% 0.48%
Class IV 0.02% 0.435%
---------------------------------------------------------------------
TOBACCO-FREE
CORE FUND
Class III 0.05% 0.48%
-----------------------------------------------------------------------------------
VALUE FUND
Class III 0.05% 0.61%
-------------------------------------------------------------------------------------------------
INTRINSIC VALUE FUND
Class III 0.25% 0.48%
----------------------------------------------------------------------------------------------------------
GROWTH FUND
Class III 0.06% 0.48%
----------------------------------------------------------------------------------------------------------
SMALL CAP VALUE FUND
Class III 0.06% 0.48%
----------------------------------------------------------------------------------------------------------
SMALL CAP GROWTH FUND
Class III 0.11% 0.48%
----------------------------------------------------------------------------------------------------------
REIT FUND
Class III 0.06% 0.69%
----------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY
FUNDS
INTERNATIONAL CORE
FUND
Class II 0.09% 0.76%
Class III 0.09% 0.69%
Class IV 0.09% 0.63%
----------------------------------------------------------------------------------------------------------
CURRENCY HEDGED
INTERNATIONAL CORE
FUND
Class III 0.33% 0.69%
Class IV 0.33% 0.63%
----------------------------------------------------------------------------------------------------------
FOREIGN FUND
Class II 0.10% 0.82%
Class III 0.10% 0.75%
Class IV 0.10% 0.69%
----------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE> 46
<TABLE>
<CAPTION>
-------------------------------------------------------
PURCHASE AND
REDEMPTION FEES
(FEES PAID DIRECTLY TO FUND AT
GMO FUND NAME PURCHASE OR REDEMPTION)
-------------------------------------------------------
Cash Purchase Redemption
Premium (as a Fees (as a
% of amount % of amount
invested)(1) redeemed)(1)
<S> <C> <C>
INTERNATIONAL SMALL
COMPANIES FUND
Class III 1.00%(2) 0.60%(2)
-------------------------------------------------------
JAPAN FUND
Class III 0.20%(2) 0.20%(2)
-------------------------------------------------------
EMERGING MARKETS FUND
Class III 1.60%(4) 0.40%(4,5)
Class IV 1.60%(4) 0.40%(4,5)
-------------------------------------------------------
EVOLVING COUNTRIES
FUND
Class III 1.60%(4) 0.40%(4)
-------------------------------------------------------
ASIA FUND
Class III 1.20%(4) 0.40%(4)
-------------------------------------------------------
FIXED INCOME FUNDS
DOMESTIC BOND FUND
Class III None(15) None
-------------------------------------------------------
U.S. BOND/GLOBAL
ALPHA A FUND
Class III 0.15%(4,15) None
-------------------------------------------------------
U.S. BOND/GLOBAL
ALPHA B FUND
Class III 0.15%(4,15) None
-------------------------------------------------------
INTERNATIONAL BOND
FUND
Class III 0.15%(4,15) None
-------------------------------------------------------
CURRENCY HEDGED
INTERNATIONAL BOND
FUND
Class III 0.15%(4,15) None
-------------------------------------------------------
GLOBAL BOND FUND
Class III 0.15%(4,15) None
-------------------------------------------------------
EMERGING COUNTRY DEBT
FUND
Class III 0.50%(4,15) 0.25%(4,11)
Class IV 0.50%(4,15) 0.25%(4,11)
-------------------------------------------------------
SHORT-TERM INCOME
FUND
Class III None(9,15) None
-------------------------------------------------------
<CAPTION>
----------------------- ----------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
GMO FUND NAME (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
----------------------- ----------------------------------------------------------------------------------
Total
Shareholder Annual NET
Management Service Other Operating Expense ANNUAL
Fee Fee Expenses Expenses Reimbursement(3) EXPENSES
<S> <C> <C> <C> <C> <C> <C>
INTERNATIONAL SMALL
COMPANIES FUND
Class III 0.60% 0.15% 0.24% 0.99% 0.24% 0.75%
-------------------------------------------------------
JAPAN FUND
Class III 0.54% 0.15% 0.40% 1.09% 0.40% 0.69%
-------------------------------------------------------
EMERGING MARKETS FUND
Class III 0.81% 0.15% 0.25% 1.21% 0.03% 1.18%
Class IV 0.81% 0.105% 0.25% 1.17% 0.03% 1.135%
-------------------------------------------------------
EVOLVING COUNTRIES
FUND
Class III 0.65% 0.15% 0.65% 1.45% 0.17% 1.28%
-------------------------------------------------------
ASIA FUND
Class III 0.81% 0.15% 0.36% 1.32% 0.07% 1.25%
-------------------------------------------------------
FIXED INCOME FUNDS
DOMESTIC BOND FUND
Class III 0.10% 0.15% 0.24% 0.49% 0.05% 0.44%(14)
-------------------------------------------------------
U.S. BOND/GLOBAL
ALPHA A FUND
Class III 0.25% 0.15% 0.11% 0.51% 0.10% 0.41%(14)
-------------------------------------------------------
U.S. BOND/GLOBAL
ALPHA B FUND
Class III 0.20% 0.15% 0.09% 0.44% 0.08% 0.36%(14)
-------------------------------------------------------
INTERNATIONAL BOND
FUND
Class III 0.25% 0.15% 0.13% 0.53% 0.10% 0.43%(14)
-------------------------------------------------------
CURRENCY HEDGED
INTERNATIONAL BOND
FUND
Class III 0.25% 0.15% 0.08% 0.48% 0.08% 0.40%
-------------------------------------------------------
GLOBAL BOND FUND
Class III 0.19% 0.15% 0.24% 0.58% 0.08% 0.50%(14)
-------------------------------------------------------
EMERGING COUNTRY DEBT
FUND
Class III 0.35% 0.15% 0.08% 0.58% 0.03% 0.55%
Class IV 0.35% 0.10% 0.08% 0.53% 0.03% 0.50%
-------------------------------------------------------
SHORT-TERM INCOME
FUND
Class III 0.05% 0.15% 0.08% 0.28% 0.08% 0.20%
-------------------------------------------------------
</TABLE>
44
<PAGE> 47
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
PURCHASE AND
REDEMPTION FEES
(FEES PAID DIRECTLY TO FUND AT ANNUAL FUND OPERATING EXPENSES
GMO FUND NAME PURCHASE OR REDEMPTION) (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
------------------------------------------------------------------------------------------------------------
Cash Purchase Redemption Total
Premium (as a Fees (as a Shareholder Annual
% of amount % of amount Management Service Other Operating
invested)(1) redeemed)(1) Fee Fee Expenses Expenses
<S> <C> <C> <C> <C> <C> <C>
GLOBAL HEDGED
EQUITY FUND
Class III 0.51%(2,6) 1.40%(6,10) 0.50%(7) 0.15%(8) 0.23%(7) 0.88%(7)
------------------------------------------------------------------------------------------------------------
INFLATION INDEXED
BOND FUND
Class III None(15) None 0.10% 0.15% 0.58% 0.83%
------------------------------------------------------------------------------------------------------------
EMERGING COUNTRY
DEBT SHARE FUND
Class III *(13) *(13) 0.35%(13) 0.15%(13) 0.12%(13) 0.62%(13)
------------------------------------------------------------------------------------------------------------
ASSET ALLOCATION
FUNDS
INTERNATIONAL
EQUITY
ALLOCATION FUND
Class III 0.83%(2,6) 0.13%(2,6) 0.00%(12) 0.00%(12) 0.04%(12) 0.04%(12)
------------------------------------------------------------------------------------------------------------
WORLD EQUITY
ALLOCATION FUND
Class III 0.64%(2,6) 0.17%(2,6) 0.00%(12) 0.00%(12) 0.19%(12) 0.19%(12)
------------------------------------------------------------------------------------------------------------
GLOBAL (U.S. +)
EQUITY
ALLOCATION FUND
Class III 0.44%(2,6) 0.17%(2,6) 0.00%(12) 0.00%(12) 0.09%(12) 0.09%(12)
------------------------------------------------------------------------------------------------------------
GLOBAL BALANCED
ALLOCATION FUND
Class III 0.35%(2,6) 0.12%(2,6) 0.00%(12) 0.00%(12) 0.04%(12) 0.04%(12)
------------------------------------------------------------------------------------------------------------
U.S. SECTOR FUND
Class III 0.15%(2,6) 0.15%(2,6) 0.33%(7) 0.15%(8) 0.19%(7) 0.67%(7)
------------------------------------------------------------------------------------------------------------
<CAPTION>
--------------------- -------------------------------
ANNUAL FUND OPERATING EXPENSES
GMO FUND NAME (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
--------------------- -------------------------------
Net
Expense Annual
Reimbursement(3) Expenses
<S> <C> <C>
GLOBAL HEDGED
EQUITY FUND
Class III 0.67%(7) 0.21%(7)
------------------------------------------------------------------------------------------------------------
INFLATION INDEXED
BOND FUND
Class III 0.13% 0.70%(14)
------------------------------------------------------------------------------------------------------------
EMERGING COUNTRY
DEBT SHARE FUND
Class III 0.07%(13) 0.55%(13)
------------------------------------------------------------------------------------------------------------
ASSET ALLOCATION
FUNDS
INTERNATIONAL
EQUITY
ALLOCATION FUND
Class III 0.04%(12) 0.00%(12)
------------------------------------------------------------------------------------------------------------
WORLD EQUITY
ALLOCATION FUND
Class III 0.19%(12) 0.00%(12)
------------------------------------------------------------------------------------------------------------
GLOBAL (U.S. +)
EQUITY
ALLOCATION FUND
Class III 0.09%(12) 0.00%(12)
------------------------------------------------------------------------------------------------------------
GLOBAL BALANCED
ALLOCATION FUND
Class III 0.04%(12) 0.00%(12)
------------------------------------------------------------------------------------------------------------
U.S. SECTOR FUND
Class III 0.67%(7) 0.00%(7)
------------------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE> 48
NOTES TO FEES AND EXPENSES
1. Paid to and retained by the Fund to allocate portfolio transaction costs
caused by shareholder activity to the shareholder generating the activity.
Purchase premiums generally apply only to cash purchases. Special rules
apply with respect to certain Funds as described in footnote 4 below.
2. Generally not waived due to offsetting transaction. May be waived only in
rare circumstances: (i) if the purchase or redemption is part of an
exchange from or to another Fund and the Manager is able to transfer
securities among the Funds as part of effecting the transaction, (ii) if
the Fund is either substantially overweighted or underweighted in cash so
that a redemption or purchase will not require a securities transaction, or
(iii) in certain other instances (not including offsetting transactions) if
the Manager determines that the purchase or redemption will not result in
transaction costs to the Fund.
3. The Manager has contractually agreed to reimburse each Fund with respect to
certain Fund expenses through at least June 30, 2001 to the extent that the
Fund's total annual operating expenses (excluding Shareholder Service Fees,
brokerage commissions and other investment-related costs, hedging
transaction fees, extraordinary, non-recurring and certain other unusual
expenses (including taxes), securities lending fees and expenses, interest
expense and transfer taxes; and, in the case of the Emerging Markets Fund,
Evolving Countries Fund, Asia Fund, Emerging Country Debt Fund and Global
Hedged Equity Fund, also excluding custodial fees (collectively, "Excluded
Fund Fees and Expenses")); and, in the case of the Asset Allocation Funds,
Global Hedged Equity Fund and Emerging Country Debt Share Fund, also
excluding expenses indirectly incurred by the investment in other Funds of
the Trust (the "Indirect Fund Expenses") exceed the percentage of that
Fund's daily net assets (the "Post-Reimbursement Expense Limitation") set
forth below:
<TABLE>
<CAPTION>
------------------------------------------------------------ ------------------------------------------------------------
POST- POST-
REIMBURSEMENT REIMBURSEMENT
EXPENSE EXPENSE
FUND LIMITATION FUND LIMITATION
------------------------------------------------------------ ------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Core Fund 0.33% Domestic Bond Fund 0.10%
------------------------------------------------------------ ------------------------------------------------------------
Tobacco-Free Core Fund 0.33% U.S. Bond/Global Alpha A Fund 0.25%
------------------------------------------------------------ ------------------------------------------------------------
Value Fund 0.46% U.S. Bond/Global Alpha B Fund 0.20%
------------------------------------------------------------ ------------------------------------------------------------
Intrinsic Value Fund 0.33% International Bond Fund 0.25%
------------------------------------------------------------ ------------------------------------------------------------
Growth Fund 0.33% Currency Hedged International Bond Fund 0.25%
------------------------------------------------------------ ------------------------------------------------------------
Small Cap Value Fund 0.33% Global Bond Fund 0.19%
------------------------------------------------------------ ------------------------------------------------------------
Small Cap Growth Fund 0.33% Emerging Country Debt Fund 0.35%
------------------------------------------------------------ ------------------------------------------------------------
REIT Fund 0.54% Short-Term Income Fund 0.05%
------------------------------------------------------------ ------------------------------------------------------------
International Core Fund 0.54% Global Hedged Equity Fund 0.50%
------------------------------------------------------------ ------------------------------------------------------------
Currency Hedged International Core Fund 0.54% Inflation Indexed Bond Fund 0.10%
------------------------------------------------------------ ------------------------------------------------------------
Foreign Fund 0.60% Emerging Country Debt Share Fund 0.00%
------------------------------------------------------------ ------------------------------------------------------------
International Small Companies Fund 0.60% International Equity Allocation Fund 0.00%
------------------------------------------------------------ ------------------------------------------------------------
Japan Fund 0.54% World Equity Allocation Fund 0.00%
------------------------------------------------------------ ------------------------------------------------------------
Emerging Markets Fund 0.81% Global (U.S.+) Equity Allocation Fund 0.00%
------------------------------------------------------------ ------------------------------------------------------------
Evolving Countries Fund 0.65% Global Balanced Allocation Fund 0.00%
------------------------------------------------------------ ------------------------------------------------------------
Asia Fund 0.81% U.S. Sector Fund 0.33%
------------------------------------------------------------ ------------------------------------------------------------
</TABLE>
In addition, with respect to each of U.S. Sector Fund and the Global Hedged
Equity Fund, the Manager will reimburse each Fund to the extent that the sum
of (i) the Fund's total annual operating expenses (excluding Excluded Fund
Fees and Expenses and Indirect Fund Expenses), plus (ii) the amount of fees
and expenses (excluding Excluded Fund Fees and Expenses) incurred indirectly
by the Fund through its investment in other GMO Funds, exceeds the Fund's
Post-Reimbursement Expense Limitation, subject to a maximum total
reimbursement to either Fund equal to the Fund's Post-Reimbursement Expense
Limitation.
4. If the Manager determines that any portion of the purchase or redemption is
offset by a corresponding redemption or purchase occurring on the same day,
the purchase premium or redemption fee will be reduced by 50% with respect
to that portion. In addition, except for Emerging Markets Fund, Evolving
Countries Fund and Asia Fund, the purchase premium or redemption fee for
this Fund will be reduced by 50% if the purchaser makes an in-kind purchase
of Fund shares or if the purchase or redemption is part of a securities
transfer from or to another Fund. Offset/reductions not available for
transactions that are executed through brokers or agents, including,
without limitation, intermediary platforms.
5. Applies only to shares acquired on or after June 1, 1995 (including shares
acquired by reinvestment of dividends or other distribution on or after
such date).
6. Purchase premiums and redemption fees of the Asset Allocation Funds (except
U.S. Sector Fund) are a weighted average of the premiums and fees of the
underlying Funds in which these Funds invest. Global Hedged Equity Fund
46
<PAGE> 49
and U.S. Sector Fund invest both in underlying Funds and in other
securities. Purchase premiums and redemption fees for these Funds are a
weighted average of (a) the premiums and fees of the underlying Funds and
(b) transaction costs of investing directly in securities.
7. The Fund may invest in other GMO Funds ("underlying Funds") and/or directly
in securities and other instruments. Therefore, the Fund may incur
additional fees and expenses as a shareholder of the underlying Funds. As
described in note 3 above, the Manager will reimburse the Fund for certain
direct and indirect expenses, although the Manager's maximum total expense
reimbursement to the Fund is equal to the Fund's Post-Reimbursement Expense
Limitation. For the one year period ended February 29, 2000, total
operating expenses borne indirectly by U.S. Sector Fund and Global Hedged
Equity Fund were 0.50% and 0.60% respectively, although indirect expenses
will vary depending upon a number of factors (including the percentage of
the Fund's portfolio invested in underlying Funds, the particular
underlying Funds in which the Fund invests and the size of those
investments).
8. The Fund invests in Class III Shares of the underlying Funds. The
Shareholder Service Fee will be reimbursed to the extent of any indirect
Shareholder Service Fees paid in connection with the Fund's investment in
shares of underlying Funds.
9. The Fund pays a purchase premium when investing in Alpha LIBOR Fund.
Shareholders of Short-Term Income Fund bear that premium indirectly.
10. If there are no costs relating to early termination of hedging transactions
to meet redemption requests, the redemption fee will be reduced to 0.14%.
11. Applies only to shares acquired on or after July 1, 1995 (including shares
acquired by reinvestment of dividends or other distributions on or after
such date).
12. Asset Allocation Funds invest primarily in underlying Funds. Therefore, in
addition to the fees and expenses directly incurred by the Asset Allocation
Funds, the Asset Allocation Funds incur fees and expenses indirectly as
shareholders of the underlying Funds. The table below sets forth the total
net annual operating expenses indirectly incurred by the Asset Allocation
Funds (other than U.S. Sector Fund, information for which appears in note 7
above) for the fiscal year ended February 29, 2000.
<TABLE>
<CAPTION>
---------------------------------------------------------------
TOTAL ANNUAL
CLASS III OPERATING EXPENSES
---------------------------------------------------------------
<S> <C> <C> <C>
International Equity Allocation
Fund 0.81%
---------------------------------------------------------------
World Equity Allocation Fund 0.71%
---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------
TOTAL ANNUAL
FUND OPERATING EXPENSES
---------------------------------------------------------------------
<S> <C> <C> <C>
Global (U.S.+) Equity Allocation Fund 0.64%
---------------------------------------------------------------------
Global Balanced Allocation Fund 0.57%
---------------------------------------------------------------------
</TABLE>
13. The Fund invests substantially all of its assets in Emerging Country Debt
Fund and indirectly bears the purchase premium, redemption fee and
Shareholder Service Fee applicable to that Fund. Total annual operating
expenses represent combined fees and expenses of both funds.
14. Expense ratios reflect the inclusion of interest expense incurred as a
result of entering into reverse repurchase agreements, as set forth in the
table below.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
NET ANNUAL OPERATING EXPENSES INTEREST
CLASS III (BEFORE ADDITION OF INTEREST EXPENSE) EXPENSE
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic Bond Fund .25% .19%
---------------------------------------------------------------------------------------------------------------
US Bond/Global Alpha A Fund .40% .01%
---------------------------------------------------------------------------------------------------------------
US Bond/Global Alpha B Fund .35% .01%
---------------------------------------------------------------------------------------------------------------
International Bond Fund .40% .03%
---------------------------------------------------------------------------------------------------------------
Global Bond Fund .34% .16%
---------------------------------------------------------------------------------------------------------------
Inflation Indexed Bond Fund .25% .45%
---------------------------------------------------------------------------------------------------------------
<CAPTION>
--- ---------------
NET
ANNUAL
EXPENSES
--- ---------------
<S> <C> <C>
.44%
---------------------------------------------------------------------------------------------------------------
.41%
---------------------------------------------------------------------------------------------------------------
.36%
---------------------------------------------------------------------------------------------------------------
.43%
---------------------------------------------------------------------------------------------------------------
.50%
---------------------------------------------------------------------------------------------------------------
.70%
---------------------------------------------------------------------------------------------------------------
</TABLE>
15. This Fund may invest without limitation in shares of GMO Alpha LIBOR Fund.
The purchase premium is an estimate of the weighted average of the direct
and indirect trading costs expected to be incurred by the Fund. Please see
"Investment by Certain Fixed Income Funds in GMO Alpha LIBOR Fund" for
additional information regarding GMO Alpha LIBOR Fund.
47
<PAGE> 50
EXAMPLES
The examples illustrate the expenses you would incur on a $10,000 investment
over the stated periods, assuming your investment had a 5% return each year and
the Fund's operating expenses remained the same. The examples are for
comparative purposes only; they do not represent past or future expenses or
performance, and your actual expenses and performance may be higher or lower.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
EXAMPLE 1: EXAMPLE 2:
ASSUMING YOU REDEEM YOUR SHARES AT THE END OF ASSUMING YOU DO NOT REDEEM YOUR SHARES
GMO FUND NAME EACH PERIOD ----------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
1 YEAR 1 YEAR
(AFTER (AFTER
REIMBURSEMENT) 3 YEAR 5 YEAR 10 YEAR REIMBURSEMENT) 3 YEAR 5 YEAR 10 YEAR
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. EQUITY FUNDS
U.S. CORE FUND
Class II $ 56 $181 $ 316 $ 712 $ 56 $181 $ 316 $ 712
Class III $ 49 $158 $ 278 $ 626 $ 49 $158 $ 278 $ 626
Class IV $ 44 $144 $ 253 $ 571 $ 44 $144 $ 253 $ 571
---------------------------------------------------------------------------------------------------------------------------------
TOBACCO-FREE CORE FUND
Class III $ 49 $165 $ 291 $ 660 $ 49 $165 $ 291 $ 660
---------------------------------------------------------------------------------------------------------------------------------
VALUE FUND
Class III $ 62 $206 $ 363 $ 818 $ 62 $206 $ 363 $ 818
---------------------------------------------------------------------------------------------------------------------------------
INTRINSIC VALUE FUND
Class III $ 63 $222 $ 395 $ 896 $ 63 $222 $ 395 $ 896
---------------------------------------------------------------------------------------------------------------------------------
GROWTH FUND
Class III $ 49 $167 $ 296 $ 671 $ 49 $167 $ 296 $ 671
---------------------------------------------------------------------------------------------------------------------------------
SMALL CAP VALUE FUND
Class III $151 $273 $ 406 $ 795 $ 99 $216 $ 344 $ 718
---------------------------------------------------------------------------------------------------------------------------------
SMALL CAP GROWTH FUND
Class III $151 $284 $ 429 $ 851 $ 99 $227 $ 367 $ 774
---------------------------------------------------------------------------------------------------------------------------------
REIT FUND
Class III $172 $339 $ 520 $1,046 $120 $283 $ 459 $ 970
---------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUNDS
INTERNATIONAL CORE FUND
Class II $137 $321 $ 520 $1,095 $137 $321 $ 520 $1,095
Class III $130 $299 $ 482 $1,012 $130 $299 $ 482 $1,012
Class IV $124 $280 $ 449 $ 941 $124 $280 $ 449 $ 941
---------------------------------------------------------------------------------------------------------------------------------
CURRENCY HEDGED INTERNATIONAL
CORE FUND
Class III $130 $350 $ 588 $1,271 $130 $350 $ 588 $1,271
Class IV $124 $331 $ 556 $1,201 $124 $331 $ 556 $1,201
---------------------------------------------------------------------------------------------------------------------------------
FOREIGN FUND
Class II $ 84 $283 $ 500 $1,122 $ 84 $283 $ 500 $1,122
Class III $ 77 $261 $ 462 $1,040 $ 77 $261 $ 462 $1,040
Class IV $ 70 $242 $ 429 $ 969 $ 70 $242 $ 429 $ 969
---------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL SMALL COMPANIES
FUND
Class III $238 $456 $ 691 $1,368 $176 $389 $ 619 $1,280
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE> 51
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
EXAMPLE 1: EXAMPLE 2:
ASSUMING YOU REDEEM YOUR SHARES AT THE END OF ASSUMING YOU DO NOT REDEEM YOUR SHARES
GMO FUND NAME EACH PERIOD ----------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
1 YEAR 1 YEAR
(AFTER (AFTER
REIMBURSEMENT) 3 YEAR 5 YEAR 10 YEAR REIMBURSEMENT) 3 YEAR 5 YEAR 10 YEAR
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JAPAN FUND
Class III $111 $349 $ 605 $1,340 $ 90 $326 $ 581 $1,310
---------------------------------------------------------------------------------------------------------------------------------
EMERGING MARKETS FUND
Class III $319 $579 $ 859 $1,658 $278 $535 $ 812 $1,601
Class IV $315 $565 $ 836 $1,608 $274 $521 $ 788 $1,550
---------------------------------------------------------------------------------------------------------------------------------
EVOLVING COUNTRIES FUND
Class III $329 $639 $ 971 $1,910 $288 $595 $ 924 $1,854
---------------------------------------------------------------------------------------------------------------------------------
ASIA FUND
Class III $287 $571 $ 876 $1,743 $246 $527 $ 828 $1,686
---------------------------------------------------------------------------------------------------------------------------------
FIXED INCOME FUNDS
DOMESTIC BOND FUND
Class III $ 45 $152 $ 269 $ 611 $ 45 $152 $ 269 $ 611
---------------------------------------------------------------------------------------------------------------------------------
U.S. BOND/GLOBAL ALPHA A FUND
Class III $ 57 $168 $ 290 $ 645 $ 57 $168 $ 290 $ 645
---------------------------------------------------------------------------------------------------------------------------------
U.S. BOND/GLOBAL ALPHA B FUND
Class III $ 52 $148 $ 253 $ 561 $ 52 $148 $ 253 $ 561
---------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL BOND FUND
Class III $ 59 $175 $ 301 $ 669 $ 59 $175 $ 301 $ 669
---------------------------------------------------------------------------------------------------------------------------------
CURRENCY HEDGED INTERNATIONAL
BOND FUND
Class III $ 56 $161 $ 275 $ 610 $ 56 $161 $ 275 $ 610
---------------------------------------------------------------------------------------------------------------------------------
GLOBAL BOND FUND
Class III $ 66 $193 $ 330 $ 732 $ 66 $193 $ 330 $ 732
---------------------------------------------------------------------------------------------------------------------------------
EMERGING COUNTRY DEBT FUND
Class III $132 $260 $ 400 $ 808 $106 $232 $ 369 $ 769
Class IV $127 $244 $ 373 $ 747 $101 $216 $ 342 $ 709
---------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INCOME FUND
Class III $ 20 $ 82 $ 149 $ 348 $ 20 $ 82 $ 149 $ 348
---------------------------------------------------------------------------------------------------------------------------------
GLOBAL HEDGED EQUITY FUND
Class III $218 $422 $ 642 $1,278 $ 72 $264 $ 471 $1,068
---------------------------------------------------------------------------------------------------------------------------------
INFLATION INDEXED BOND FUND
Class III $ 72 $252 $ 448 $1,013 $ 72 $252 $ 448 $1,013
---------------------------------------------------------------------------------------------------------------------------------
EMERGING COUNTRY DEBT SHARE
FUND
Class III $132 $269 $ 418 $ 852 $106 $241 $ 387 $ 814
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE> 52
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
EXAMPLE 1: EXAMPLE 2:
ASSUMING YOU REDEEM YOUR SHARES AT THE END OF ASSUMING YOU DO NOT REDEEM YOUR SHARES
GMO FUND NAME EACH PERIOD ----------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
1 YEAR 1 YEAR
(AFTER (AFTER
REIMBURSEMENT) 3 YEAR 5 YEAR 10 YEAR REIMBURSEMENT) 3 YEAR 5 YEAR 10 YEAR
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSET ALLOCATION FUNDS
INTERNATIONAL EQUITY
ALLOCATION FUND
Class III $ 97 $107 $ 118 $ 151 $ 83 $ 92 $ 101 $ 130
---------------------------------------------------------------------------------------------------------------------------------
WORLD EQUITY ALLOCATION FUND
Class III $ 82 $125 $ 173 $ 313 $ 64 $106 $ 151 $ 286
---------------------------------------------------------------------------------------------------------------------------------
GLOBAL (U.S. +) EQUITY
ALLOCATION FUND
Class III $ 62 $ 83 $ 107 $ 177 $ 44 $ 64 $ 85 $ 150
---------------------------------------------------------------------------------------------------------------------------------
GLOBAL BALANCED ALLOCATION
FUND
Class III $ 48 $ 58 $ 69 $ 102 $ 35 $ 44 $ 53 $ 82
---------------------------------------------------------------------------------------------------------------------------------
U.S. SECTOR FUND
Class III $ 31 $179 $ 340 $ 808 $ 15 $162 $ 321 $ 785
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
BENCHMARKS AND INDEXES
The Manager measures each Fund's performance against a specific benchmark
or index (each, a "GMO Benchmark"), although none of the Funds is managed as an
"index fund" or "index-plus fund," and the actual composition of a Fund's
portfolio may differ substantially from that of its benchmark. Each Fund's GMO
Benchmark is listed under "Investment Objective" in the "Fund Objectives and
Principal Investment Strategies" section of the Prospectus. General information
about each benchmark and index is provided in the table below. In some cases, a
Fund's GMO Benchmark differs from the broad-based index that the SEC requires
each Fund to use in the average annual return table. In addition, the Manager
may change each Fund's index or benchmark from time to time.
Certain indexes--MSCI EAFE (Hedged) and J.P. Morgan Non-U.S. Government
Bond Index (Hedged)--are currency-hedged into U.S. dollars. Investors should be
aware that Funds managed to these benchmarks and other Funds described as
"currency hedged" will take active currency positions relative to the
appropriate benchmark.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
ABBREVIATION FULL NAME SPONSOR OR PUBLISHER DESCRIPTION
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GMO Asia 7 Index GMO Asia 7 Index GMO The GMO Asia 7 is composed of the IFC
Investable Country Indexes, equally
weighted, for seven Asian countries
(China, Indonesia, Korea, Malaysia, the
Philippines, Taiwan and Thailand).
--------------------------------------------------------------------------------------------------------------------
GMO EAFE Extended GMO EAFE Extended GMO A modification of MSCI EAFE where GMO
adds those additional countries
represented in the IFC Investable
Index.
--------------------------------------------------------------------------------------------------------------------
GMO EAFE Extended+ GMO EAFE Extended+ GMO The GMO EAFE Extended+ Index is
Index represented by GMO EAFE-Lite Extended
to 6/30/99 and GMO EAFE Extended
thereafter.
--------------------------------------------------------------------------------------------------------------------
GMO EAFE-Lite GMO EAFE-Lite Index GMO A modification of MSCI EAFE where GMO
reduces the market capitalization of
Japan by 40% relative to EAFE.
--------------------------------------------------------------------------------------------------------------------
GMO EAFE-Lite GMO EAFE-Lite Extended GMO A modification of GMO EAFE-Lite where
Extended Index GMO adds those additional countries
represented in the IFC Investable
Index.
--------------------------------------------------------------------------------------------------------------------
GMO Global Balanced GMO Global Balanced GMO A composite benchmark computed by GMO
Index Index and comprised 48.75% by S&P 500, 16.25%
by GMO EAFE Extended+ and 35% by Lehman
Brothers Aggregate Bond Index.
--------------------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE> 53
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
ABBREVIATION FULL NAME SPONSOR OR PUBLISHER DESCRIPTION
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GMO Global (U.S.+) GMO Global (U.S.+) GMO A composite benchmark computed by GMO
Equity Index Equity Index and comprised 75% by S&P 500 and 25% by
GMO EAFE Extended+.
--------------------------------------------------------------------------------------------------------------------
GMO Russell 2500 GMO Russell 2500 Value GMO Index is comprised of the Russell 2500
Value+ Plus Index from 12/31/91 to 12/31/96, and
the Russell 2500 Value Index from
12/31/96 to present.
--------------------------------------------------------------------------------------------------------------------
GMO World Extended GMO World Extended GMO A modification of MSCI World where GMO
Index adds those additional countries
represented in the IFC Investable
Index.
--------------------------------------------------------------------------------------------------------------------
GMO World Extended+ GMO World Extended+ GMO The GMO World Extended+ Index is
Index represented by GMO World-Lite Extended
to 6/30/99 and GMO World Extended
thereafter.
--------------------------------------------------------------------------------------------------------------------
GMO World-Lite GMO World-Lite Index GMO A modification of MSCI World where GMO
reduced the market capitalization of
Japan by 40% relative to World.
--------------------------------------------------------------------------------------------------------------------
GMO World-Lite GMO World-Lite Extended GMO A modification of GMO World-Lite where
Extended Index GMO adds those additional countries
represented in the IFC Investable
Index.
--------------------------------------------------------------------------------------------------------------------
IFC Investable IFC Investable International Finance Independently maintained and published
Composite Index Corporation emerging market stock index.
--------------------------------------------------------------------------------------------------------------------
J.P. Morgan EMBI J.P. Morgan Emerging J.P. Morgan Independently maintained and published
Markets Bond Index index composed of debt securities of 8
countries, which includes Brady bonds,
sovereign debt, local debt and
Eurodollar debt, all of which are
dollar denominated.
--------------------------------------------------------------------------------------------------------------------
J.P. Morgan EMBI+ J.P. Morgan Emerging J.P. Morgan Independently maintained and published
Market Bond Index index composed of debt securities of 16
Plus countries, which includes Brady bonds,
sovereign debt, local debt and
Eurodollar debt, all of which are
dollar denominated.
--------------------------------------------------------------------------------------------------------------------
J.P. Morgan EMBI J.P. Morgan Emerging J.P. Morgan Independently maintained and published
Global Markets Bond Index index composed of debt securities of 27
Global countries, which includes Brady bonds,
sovereign debt, local debt and
Eurodollar debt, all of which are
dollar denominated.
--------------------------------------------------------------------------------------------------------------------
J.P. Morgan EMBI J.P. Morgan Emerging GMO Represents the J.P. Morgan EMBI prior
Global+ Market Bond Index to 8/95, J.P. Morgan EMBI+ through
Global+ 12/31/99, and the J.P. Morgan EMBI
Global thereafter.
--------------------------------------------------------------------------------------------------------------------
J.P. Morgan Global J.P. Morgan Global J.P. Morgan Independently maintained and published
Government Bond Government Bond index composed of government bonds of
Index Index 14 developed countries, including the
U.S., with maturities of one year or
more.
--------------------------------------------------------------------------------------------------------------------
J.P. Morgan Non-U.S. J.P. Morgan Non-U.S. J.P. Morgan Independently maintained and published
Government Bond Government Bond index composed of non-U.S. government
Index Index bonds with maturities of one year or
more.
--------------------------------------------------------------------------------------------------------------------
J.P. Morgan Non-U.S. J.P. Morgan Non-U.S. J.P. Morgan Independently maintained and published
Government Bond Government Bond Index index composed of non-U.S. government
Index (Hedged) (Hedged) bonds with maturities of one year or
more that are currency-hedged into U.S.
dollars.
--------------------------------------------------------------------------------------------------------------------
Lehman Brothers Lehman Brothers Lehman Brothers Well-known, independently maintained
Aggregate Bond Aggregate Bond Index and published index comprised of U.S.
Index fixed rate debt issues, having a
maturity of at least one year, rated
investment grade or higher by Moody's
Investors Service, Standard & Poor's,
or Fitch IBCA, Inc.
--------------------------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE> 54
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
ABBREVIATION FULL NAME SPONSOR OR PUBLISHER DESCRIPTION
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lehman Brothers Lehman Brothers Lehman Brothers Well-known, independently maintained
Government Bond Government Bond Index and published U.S. government bond
Index index, regularly used as a comparative
fixed income benchmark.
--------------------------------------------------------------------------------------------------------------------
Lehman Brothers Lehman Brothers Lehman Brothers Independently maintained and published
Treasury Inflation Treasury Inflation index of inflation-indexed linked U.S.
Notes Index Notes Index Treasury securities.
--------------------------------------------------------------------------------------------------------------------
Lehman Brothers Lehman Brothers GMO Represents the Merrill Lynch Inflation
Treasury Inflation Treasury Inflation Notes performance through 9/30/97 and
Notes Index+ Notes Index+ the Lehman Brothers Treasury Inflation
Notes performance thereafter.
--------------------------------------------------------------------------------------------------------------------
Merrill Lynch Merrill Lynch Inflation Merrill Lynch Independently maintained and published
Inflation Notes Notes index of inflation-indexed linked U.S.
Treasury securities.
--------------------------------------------------------------------------------------------------------------------
MSCI AC World ex U.S. MSCI All Country World Morgan Stanley Capital An independently maintained and
Ex. U.S. Index International published international (excluding U.S.
and including emerging) equity index.
--------------------------------------------------------------------------------------------------------------------
MSCI AC World MSCI All Country World Morgan Stanley Capital An independently maintained and
Index International published global (including U.S. and
emerging) equity index.
--------------------------------------------------------------------------------------------------------------------
MSCI EAFE Morgan Stanley Capital Morgan Stanley Capital Well-known, independently maintained
International Europe, International and published large capitalization
Australia and Far international stock index.
East Index
--------------------------------------------------------------------------------------------------------------------
MSCI EAFE (Hedged) Morgan Stanley Capital Morgan Stanley Capital Well-known, independently maintained
International Europe, International and published large capitalization
Australia and Far international stock index that is
East Index (Hedged) currency-hedged into U.S. dollars.
--------------------------------------------------------------------------------------------------------------------
MSCI EMF Asia MSCI EMF Asia Morgan Stanley Capital Well-known, independently maintained
International and published Asian component of an
emerging market stock index.
--------------------------------------------------------------------------------------------------------------------
MSCI Japan MSCI Japan Index Morgan Stanley Capital Independently maintained and published
International equity index that attempts to capture
60% of the market capitalization in
Japan.
--------------------------------------------------------------------------------------------------------------------
MSCI World Morgan Stanley Capital Morgan Stanley Capital Well-known, independently maintained
International World International and published large capitalization
Index world stock index.
--------------------------------------------------------------------------------------------------------------------
Morgan Stanley REIT Morgan Stanley REIT Morgan Stanley & Co., Well-known, independently maintained
Index Index Inc. and published equity real estate index.
--------------------------------------------------------------------------------------------------------------------
Russell 1000 Growth Russell 1000 Growth Frank Russell Company Independently maintained and published
Index Index index composed of the 1,000 largest
U.S. companies based on total market
capitalization with higher
price-to-book ratios and higher
forecasted growth values.
--------------------------------------------------------------------------------------------------------------------
Russell 1000 Value Russell 1000 Value Frank Russell Company Independently maintained and published
Index Index index composed of the 1,000 largest
U.S. companies based on total market
capitalization with lower price-to-book
ratios and lower forecasted growth
values.
--------------------------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE> 55
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
ABBREVIATION FULL NAME SPONSOR OR PUBLISHER DESCRIPTION
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Russell 2500 Index Russell 2500 Index Frank Russell Company The Russell 2500 Index is an
independently maintained and published
index composed of the 2,500 smallest
companies in the Russell 3000 Index
(which in turn measures the performance
of the 3,000 largest U.S. companies
based on total market capitalization;
these 3,000 companies represent
approximately 98% of the investable
U.S. equity market), which represents
approximately 22% of the total market
capitalization of the Russell 3000
Index. As of the latest reconstitution,
the average market capitalization was
approximately $931.0 million; the
median market capitalization was
approximately $630.0 million. The
largest company in the index had an
approximate market capitalization of
$3.7 billion.
--------------------------------------------------------------------------------------------------------------------
Russell 2500 Growth Russell 2500 Growth Frank Russell Company Independently maintained and published
Index Index index composed of the bottom 2,500 of
the 3,000 largest U.S. companies based
on total market capitalization with
higher price-to-book ratios and higher
forecasted growth values.
--------------------------------------------------------------------------------------------------------------------
Russell 2500 Value Russell 2500 Value Frank Russell Company Independently maintained and published
Index Index index composed of the bottom 2,500 of
the 3,000 largest U.S. companies based
on total market capitalization with
lower price-to-book ratios and lower
forecasted growth values.
--------------------------------------------------------------------------------------------------------------------
S&P 500 Standard & Poor's 500 Standard & Poor's Well-known, independently maintained
Stock Index Corporation and published U.S. large capitalization
stock index.
--------------------------------------------------------------------------------------------------------------------
SSB EMI World ex-U.S. SSB Extended Market Salomon Smith Barney The SSB EMI World ex-U.S. is the small
Index World ex-U.S. capitalization stock component of the
Index SSB Broad Market Index (BMI). The BMI
is a float-weighted index that spans 22
countries and includes the listed
shares of all companies with an
available market capitalization (float)
of at least $100 million at the end of
May each year. Companies are deleted if
their float falls below $75 million.
Changes are effective before the open
of the first business day of July. The
SSB EMI World ex-U.S. is defined as
those stocks falling in the bottom 20%
of the cumulative available capital in
each country.
--------------------------------------------------------------------------------------------------------------------
SSB 3 Month T-Bill Salomon Smith Barney 3 Salomon Smith Barney Independently maintained and published
Index Month Treasury-Bill short-term bill index.
Index
--------------------------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE> 56
MANAGEMENT OF THE TRUST
Grantham, Mayo, Van Otterloo & Co., LLC, 40 Rowes Wharf, Boston,
Massachusetts 02110 provides investment advisory services to the GMO Funds. GMO
is a private company, founded in 1977. As of May 31, 2000, GMO managed more than
$22 billion for institutional investors such as pension plans, endowments,
foundations and the GMO Funds.
Subject to the approval of the Trust's board of trustees, the Manager
establishes and modifies when necessary the investment strategies of the Funds.
In addition to its management services to the Funds, the Manager administers the
Funds' business affairs.
Each class of shares of each Fund pays the Manager a shareholder service
fee for providing direct client service and reporting, such as performance
information reporting, client account information, personal and electronic
access to Fund information, access to analysis and explanations of Fund reports
and assistance to correct and maintain client-related information.
The Manager has engaged the services of Dancing Elephant, Ltd., 1936
University Avenue, Berkeley, California 94704 ('Dancing Elephant') to provide
consulting services to the Manager with respect to Emerging Markets Fund,
Evolving Countries Fund and Asia Fund. Dancing Elephant is owned by Arjun
Divecha, a member of the Manager's management committee.
For the fiscal year ended February 29, 2000, the Manager received as
compensation for management services rendered in such year (after any applicable
waivers or reimbursements), the percentages of each Fund's average daily net
assets as described in the table below. For the same period, the Manager paid a
consulting fee to Dancing Elephant. No fund has any obligation to pay Dancing
Elephant.
<TABLE>
<CAPTION>
% OF AVERAGE
FUND NET ASSETS
---- ------------
<S> <C>
U.S. Core Fund 0.31%
Tobacco-Free Core Fund 0.28%
Value Fund 0.41%
Growth Fund 0.27%
Small Cap Value Fund 0.27%
Small Cap Growth Fund 0.22%
REIT Fund 0.48%
International Core Fund 0.45%
Currency Hedged International Core
Fund 0.21%
Foreign Fund 0.50%
International Small Companies Fund 0.36%
Japan Fund 0.14%
Emerging Markets Fund 0.78%
Evolving Countries Fund 0.48%
Asia Fund 0.74%
Domestic Bond Fund 0.05%
</TABLE>
<TABLE>
<CAPTION>
% OF AVERAGE
FUND NET ASSETS
---- ------------
<S> <C>
U.S. Bond/Global Alpha A Fund 0.15%
U.S. Bond/Global Alpha B Fund 0.12%
International Bond Fund 0.15%
Currency Hedged International Bond
Fund 0.17%
Global Bond Fund 0.11%
Emerging Country Debt Fund 0.32%
Short-Term Income Fund 0.00%
Global Hedged Equity Fund 0.00%
Inflation Indexed Bond Fund 0.00%
Emerging Country Debt Share Fund 0.00%
International Equity Allocation Fund 0.00%
World Equity Allocation Fund 0.00%
Global (U.S.+) Equity Allocation Fund 0.00%
Global Balanced Allocation Fund 0.00%
U.S. Sector Fund 0.00%
</TABLE>
CUSTODIANS
Investors Bank & Trust Company ("IBT"), 200 Clarendon Street, Boston,
Massachusetts 02116, and Brown Brothers Harriman & Co., 40 Water Street, Boston,
Massachusetts 02109, serve as the Trust's custodians on behalf of the Funds.
TRANSFER AGENT
IBT serves as the Trust's transfer agent on behalf of the Funds.
54
<PAGE> 57
The table below identifies the persons at GMO who are primarily responsible
for the day-to-day management of one or more Funds. Day-to-day management of the
Asset Allocation Funds is the responsibility of a committee, and no person or
persons is primarily responsible for making recommendations to that committee.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
MANAGER PRIMARY RESPONSIBILITY SINCE PROFESSIONAL EXPERIENCE
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
R. Jeremy Grantham U.S. Sector Fund and U.S. Equity Funds >5 years President-Quantitative and
except Value Fund and REIT Fund Partner/Member, GMO since 1979.
--------------------------------------------------------
Currency Hedged International Core Fund, Inception
International Small Companies Fund, Japan
Fund, Global Hedged Equity Fund and
International Core Fund
--------------------------------------------------------
Emerging Markets Fund, Evolving Countries Inception
Fund and Asia Fund
-----------------------------------------------------------------------------------------------------------------------
Christopher Darnell U.S. Sector Fund, International Core Fund >5 years Partner/Member and Investment
and U.S. Equity Funds except Value Fund and Director, GMO since 1984.
REIT Fund
--------------------------------------------------------
Currency Hedged International Core Fund, Inception
International Small Companies Fund, Japan
Fund, Global Hedged Equity Fund
-----------------------------------------------------------------------------------------------------------------------
Richard A. Mayo Value Fund >5 years President-U.S. Active and
Partner/Member, GMO since 1979.
--------------------------------------------------------
REIT Fund 1999
-----------------------------------------------------------------------------------------------------------------------
Forrest C. Berkley Currency Hedged International Core Fund, Inception Partner/Member, GMO since 1986.
International Small Companies Fund, Japan
Fund and Global Hedged Equity Fund
--------------------------------------------------------
International Core Fund >5 years
-----------------------------------------------------------------------------------------------------------------------
Arjun Bhagwan Emerging Markets Fund, Evolving Countries Inception President, Dancing Elephant, Ltd.
Divecha Fund and Asia Fund (Consultant to GMO) since 1993.
-----------------------------------------------------------------------------------------------------------------------
Jui L. Lai Foreign Fund Inception Investment Director since 1988 and
Member since 1996, GMO.
-----------------------------------------------------------------------------------------------------------------------
Ann M. Spruill Foreign Fund Inception Investment Director since 1990 and
Member since 1996, GMO.
-----------------------------------------------------------------------------------------------------------------------
Wilson K. Magee REIT Fund Inception Employee of GMO since 1997. 1994-
1997, principal for Penobscot Group.
-----------------------------------------------------------------------------------------------------------------------
William L. Fixed Income Funds except Short-Term Income Inception Investment Director since 1993 and
Nemerever Fund and Global Hedged Equity Fund Member since 1996, GMO.
--------------------------------------------------------
Short-Term Income Fund 1994
-----------------------------------------------------------------------------------------------------------------------
Thomas F. Cooper Fixed Income Funds except Short-Term Income Inception Investment Director since 1993 and
Fund and Global Hedged Equity Fund Member since 1996, GMO.
--------------------------------------------------------
Short-Term Income Fund 1994
-----------------------------------------------------------------------------------------------------------------------
Steven Edelstein Fixed Income Funds except Global Hedged 1995 Employee of GMO since 1995.
Equity Fund
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
55
<PAGE> 58
DETERMINATION OF NET ASSET VALUE
The net asset value or "NAV" of a share is determined as of the close of
regular trading on the New York Stock Exchange ("NYSE"), generally 4:00 p.m. New
York City time. A Fund may not determine its NAV on days during which no
security is tendered for redemption and no order to purchase or sell such
security is received by that Fund. A Fund's net asset value is determined by
dividing the total market value of the Fund's portfolio investments and other
assets, less any liabilities, by the total outstanding shares of the Fund. The
market value of the Fund's investments is generally determined as follows:
Exchange listed securities
- Last sale price or
- Most recent bid price (if no reported sale) or
- Broker bid (if the private market is more relevant in determining market
value than the exchange), based on where the securities are principally
traded and what their intended disposition is
Unlisted securities (if market quotations are readily available)
- Most recent quoted bid price
Certain debt obligations (if less than sixty days remain until maturity)
- Amortized cost (unless circumstances dictate otherwise; for example, if
the issuer's creditworthiness has become impaired)
All other fixed income securities and options on those securities (includes
bonds, loans, structured notes)
- Closing bid supplied by a primary pricing source chosen by the Manager
All other assets and securities (if no quotations are readily available)
- Fair value as determined in good faith by the Trustees or persons acting
at their direction
The Manager evaluates primary pricing sources on an ongoing basis, and may
change any pricing source at any time. However, the Manager will not normally
evaluate the prices supplied by the pricing sources on a day-to-day basis. The
Manager is kept informed of erratic or unusual movements (including unusual
inactivity) in the prices supplied for a security and may in its discretion
override a price supplied by a source (by taking a price supplied from another)
because of such price activity or because the Manager has other reasons to
believe that a price supplied may not be reliable. Certain securities may be
valued on the basis of a price provided by a principal market maker. Prices
provided by principal market makers may vary from the value that would be
realized if the securities were sold.
The values of foreign securities quoted in foreign currencies are
translated into U.S. dollars at current exchange rates or at such other rates as
the Trustees or persons acting at their direction may determine in computing net
asset value. Fluctuations in the value of foreign currencies in relation to the
U.S. dollar will affect the net asset value of shares of the Funds even though
there has not been any change in the values of such securities and options
measured in terms of the foreign currencies in which they are denominated.
Foreign exchanges and securities markets usually close prior to the time
the NYSE closes and values of foreign options and foreign securities will be
determined as of those earlier closings. Events affecting the values of foreign
securities may occasionally occur between the earlier closings and the closing
of the NYSE which will not be reflected in the computation of the Funds' net
asset value. If an event materially affecting the value of foreign securities
occurs during that period, then those securities may be valued at fair value as
determined in good faith by the Trustees or persons acting at their direction.
In addition, because certain Funds hold portfolio securities listed on foreign
exchanges which may trade on days on which the NYSE is closed, the net asset
value of those Funds' shares may be significantly affected on days when
investors will have no ability to redeem their shares in those Funds.
56
<PAGE> 59
HOW TO PURCHASE SHARES
You may purchase a Fund's shares from the Trust on any day when the NYSE is
open for business. In addition, brokers and agents are authorized to accept
purchase and redemption orders on the Funds' behalf. You may pay a fee if you
effect a transaction through a broker or agent. To obtain a purchase order form,
call the Trust at (617) 346-7646 or your broker or agent.
PURCHASE POLICIES. Before a purchase order will be acted upon by the
Trust, the Trust must determine that the purchase order is in "good order." A
purchase order is in "good order" if:
- a completed purchase order, containing the following information, is
submitted to the Trust or its agent:
- signature exactly in accordance with the form of registration
- the exact name in which the shares are registered
- the investor's account number
- the number of shares or the dollar amount of shares to be purchased
- the purchase order is received and accepted by the Trust or its agent
(the Trust reserves the right to reject any order)
- payment (by check or wire) for the purchase is received before 4:00 p.m.
on the day the purchase order is accepted
- if an investor provides adequate written assurances of intention to
pay, the Trust may extend settlement up to four business days.
The purchase price of a share of any Fund is the net asset value per share
next determined after the purchase order is determined to be in "good order"
PLUS a purchase premium, if any, for the Fund shares to be purchased. Purchase
order forms received by the Trust or its agent after the deadline will be
honored on the next following business day, and the purchase price will be
effected based on the net asset value per share computed on that day.
Minimum investment amounts (by class, if applicable) are set forth in the
table on page 59 of this Prospectus. There is no minimum additional investment
required to purchase additional shares of a Fund. The Trust may waive initial
minimums for certain accounts.
SUBMITTING YOUR PURCHASE ORDER FORM. Completed purchase order forms can be
submitted by MAIL or by FACSIMILE to the Trust at:
GMO Trust
c/o Grantham, Mayo, Van Otterloo & Co. LLC
40 Rowes Wharf
Boston, Massachusetts 02110
Facsimile: (617) 439-4192
Attention: Shareholder Services
Call the Trust at (617) 346-7646 to CONFIRM RECEIPT of your purchase order
form. Do not send cash, checks or securities directly to the Trust.
FUNDING YOUR INVESTMENT. You may purchase shares:
- with cash (via wire transfer or check)
- BY WIRE. Instruct your bank to wire the amount of your investment to:
Investors Bank & Trust, Boston, Massachusetts
ABA#: 011-001-438
Attn: Transfer Agent
Credit: GMO Deposit Account 55555-4444
Further credit: GMO Fund/shareholder name and number
57
<PAGE> 60
- BY CHECK. All checks must be made payable to the appropriate Fund or
to GMO Trust. The Trust will not accept any checks payable to a third
party which have been endorsed by the payee to the Trust. Mail checks
to:
<TABLE>
<S> <C>
By U.S. Postal Service: By Overnight Courier:
Investors Bank & Trust Company Investors Bank & Trust Company
GMO Transfer Agent MFD 23 GMO Transfer Agent MFD 23
P.O. Box 9130 200 Clarendon Street, 16th Floor
200 Clarendon Street, 16th Floor Boston, MA 02116
Boston, MA 02117-9130
</TABLE>
- by exchange (from another GMO product)
- written instruction should be sent to GMO Trust's Shareholder Services
at (617) 439-4192 (facsimile)
- in exchange for securities acceptable to the Manager
- securities must be approved by the Manager prior to transfer to the
Fund
- securities will be valued as set forth under "Determination of Net
Asset Value" on page 56
- by a combination of cash and securities
HOW TO REDEEM SHARES
You may redeem shares of a Fund on any day when the NYSE is open for
business.
REDEMPTION POLICIES. Payment on redemption will be made as promptly as
possible (generally on the next business day) and no later than seven days
(subject to the exceptions noted below) after the request for redemption is
received by the Trust or its agent in "good order."
A redemption request is in "good order" if it:
- is received by the Trust or its agent prior to the close of regular
trading on the NYSE (generally 4:00 p.m. New York City time)
- is signed exactly in accordance with the form of registration
- includes the exact name in which the shares are registered
- includes the investor's account number
- includes the number of shares or the dollar amount of shares to be
redeemed
Redemption requests received by the Trust or its agent after the deadline
will be honored on the next following business day, and the redemption will be
effected based on the net asset value per share computed on that day. The
redemption price is the net asset value per share next determined after the
redemption request is determined to be in "good order" LESS a redemption fee, if
any, for the Fund shares to be redeemed.
If the Manager determines, in its sole discretion, that it would be
detrimental to the best interests of the remaining shareholders to make a
redemption payment wholly or partly in cash, the Fund may pay the redemption
price in whole or in part by a distribution in-kind of securities held by the
Fund instead of cash.
If a redemption is made in cash:
- payment will be made in federal funds transferred to the account
designated in writing by authorized persons
- designation of additional accounts and any change in the accounts
originally designated must be made in writing.
- upon request, payment will be made by check mailed to the registration
address
If a redemption is made in-kind, it is important for you to note:
- securities used to redeem Fund shares will be valued as set forth under
"Determination of Net Asset Value" on page 56
- securities distributed by a Fund will be selected by the Manager in light
of the Fund's objective and will not generally represent a pro rata
distribution of each security held in the Fund's portfolio
- to the extent available, in-kind redemptions will be of readily
marketable securities
58
<PAGE> 61
- you may incur brokerage charges on the sale of any securities received as
a result of an in-kind redemption
- in-kind redemptions will be transferred and delivered by the Trust as
directed by you
Each Fund may suspend the right of redemption and may postpone payment for
more than seven days:
- if the NYSE is closed for other than weekends or holidays
- during periods when trading on the NYSE is restricted
- during an emergency which makes it impracticable for a Fund to dispose of
its securities or to fairly determine the net asset value of the Fund
- during any other period permitted by the Securities and Exchange
Commission for the protection of investors.
SUBMITTING YOUR REDEMPTION REQUEST. Redemption requests can be submitted
by MAIL or by FACSIMILE to the Trust at the address/facsimile number set forth
under "How to Purchase Shares -- Submitting Your Purchase Order Form."
Redemption requests submitted by mail are "received" by the Trust when actually
delivered to the Trust or its agent. Call the Trust at (617) 346-7646 to CONFIRM
RECEIPT of redemption requests.
MULTIPLE CLASSES
Certain Funds offer multiple classes of shares. The sole economic
difference among the various classes of shares described in this Prospectus is
the level of Shareholder Service Fee that the classes bear for client and
shareholder service, reporting and other support, reflecting the fact that, as
the size of a client relationship increases, the cost to service that client
decreases as a percentage of the assets in that account. Thus, the Shareholder
Service Fee is lower for classes where eligibility criteria require greater
total assets under GMO's management.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
MINIMUM TOTAL INVESTMENT/ SHAREHOLDER SERVICE FEE (AS A %
TOTAL FUND INVESTMENT* OF AVERAGE DAILY NET ASSETS)
------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
U.S. Core Fund
FUNDS OFFERING International Core Fund $1 million/NA 0.22%
CLASS II SHARES Foreign Fund
------------------------------------------------------------------------------------------------------------------------
$35 million/NA 0.15%
U.S. Core Fund
International Core Fund
Foreign Fund
-----------------------------------------------------------------------------------------------------
Asset Allocation Funds (except
FUNDS OFFERING U.S. Sector Fund) $1 million/NA 0.00%**
CLASS III SHARES Emerging Country Debt Share Fund
-----------------------------------------------------------------------------------------------------
$1 million/NA 0.15%***
U.S. Sector Fund
Global Hedged Equity Fund
-----------------------------------------------------------------------------------------------------
$1 million/NA 0.15%
All Other Funds
------------------------------------------------------------------------------------------------------------------------
$250 million/$125 million 0.105%
U.S. Core Fund
Emerging Markets Fund
-----------------------------------------------------------------------------------------------------
International Core Fund
FUNDS OFFERING Currency Hedged International $250 million/$125 million 0.09%
CLASS IV SHARES Core Fund
-----------------------------------------------------------------------------------------------------
$250 million/NA 0.09%
Foreign Fund
-----------------------------------------------------------------------------------------------------
$250 million/$125 million 0.10%
Emerging Country Debt Fund
------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The eligibility requirements in the table above are subject to certain
exceptions and special rules for certain plan investors and for certain
clients with continuous client relationships with GMO since May 31, 1996.
** These Funds will indirectly bear an additional SSF of 0.15% by virtue of
their investments in other GMO Funds.
*** The SSF charged to these Funds will be reduced by a corresponding amount for
all SSFs indirectly borne by the relevant Fund by reason of its investments
in Class III Shares of other GMO Funds.
ELIGIBILITY FOR CLASSES
Eligibility for different classes of a Fund depends upon the client meeting
either (i) the minimum "Total Fund Investment" set forth in the above table,
which includes only a client's total investment in a particular Fund, or (ii)
the minimum "Total Investment" set forth in the above table, calculated as
described below.
59
<PAGE> 62
DETERMINATION OF TOTAL INVESTMENT
A client's Total Investment equals the market value of all the client's
assets managed by GMO and its affiliates (1) at the time of initial investment,
(2) at close of business on the last business day of each calendar quarter, or
(3) at other times as determined by the Manager (each, a "Determination Date").
The Manager will monitor the value of the MSCI World Index (computed in U.S.
dollars with net dividends reinvested). On December 31 of any year, the Manager
may increase the Minimum Total Investment/Total Fund Investment amounts by the
same percentage by which the value of the MSCI World Index increased from June
30, 2000 through December 31 of the year being evaluated.
For clients establishing a relationship with GMO on or after June 1,
1996: A client's Total Investment will be determined by GMO at the
Determination Date.
For clients with GMO accounts as of May 31, 1996: Any client whose Total
Investment as of May 31, 1996 (prior to the issuance of multiple classes of
shares) was equal to or greater than $7 million will remain eligible for Class
III Shares indefinitely, provided that such client does not make a withdrawal or
redemption that causes the client's Total Investment to fall below $7 million.
Clients whose Total Investment as of May 31, 1996 was less than $7 million but
greater than $0 will be eligible for conversion to Class II Shares indefinitely.
You should note:
- There is no minimum additional investment required to purchase additional
shares of a Fund for any class of shares.
- The Manager will make all determinations as to the aggregation of client
accounts for purposes of determining eligibility.
- Eligibility requirements for each class of shares are subject to change
upon notice to shareholders.
- Assets invested in GMO's Pelican Fund will not be considered when
determining a client's Total Investment.
CONVERSIONS BETWEEN CLASSES
Client's shares in a Fund will be converted to the class of shares of that
Fund with the lowest Shareholder Service Fee for which the client is eligible,
based on the amount of the client's Total Investment or Total Fund Investment,
on the Determination Date. The conversion will occur within 15 business days
following the Determination Date on a date selected by the Manager.
The Trust has been advised by counsel that the conversion of a client's
investment from one class of shares to another class of shares in the same Fund
should not result in the recognition of gain or loss in the converted Fund's
shares. The client's tax basis in the new class of shares immediately after the
conversion should equal the client's basis in the converted shares immediately
before conversion, and the holding period of the new class of shares should
include the holding period of the converted shares.
DISTRIBUTIONS AND TAXES
The policy of each U.S. Equity Fund (except for the REIT Fund), the
Short-Term Income Fund and the Domestic Bond Fund is to declare and pay
distributions of its dividends and interest quarterly. The policy of each other
Fund is to declare and pay distributions of its dividends, interest and foreign
currency gains semi-annually. Each Fund also intends to distribute net gains
from the sale of securities held for not more than one year ("net short-term
capital gains") and net gains from the sale of securities held for more than one
year ("net long-term capital gains") at least annually. Each Fund is treated as
a separate taxable entity for federal income tax purposes and intends to qualify
each year as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended.
All dividends and/or distributions will be paid in shares of the relevant
Fund, at net asset value, unless the shareholder elects to receive cash. There
is no purchase premium on reinvested dividends or distributions. Shareholders
may make this election by marking the appropriate box on the application or by
writing to the Trust.
It is important for you to note:
- Fund distributions derived from interest, dividends and certain other
income, including in general short-term capital gains, will be taxable as
ordinary income to shareholders subject to federal income tax whether
paid in cash or in shares. Properly designated Fund distributions derived
from net long-term capital gains will be taxable as such (generally at a
20% federal rate for noncorporate shareholders whether paid in cash or in
shares).
- Distributions by a Fund result in a reduction in the net asset value of
the Fund's shares. If a distribution reduces the net asset value of a
shareholder's shares below a shareholder's cost basis in those shares,
such distribution may be taxable to the shareholder, even though, from an
investment standpoint, it may constitute a partial return of capital.
60
<PAGE> 63
In particular, if you buy shares just prior to a taxable distribution by
a Fund, you will pay the full price of the shares (including the value of
the pending distribution) and then receive a portion of the price back as
a taxable distribution.
- A Fund's investment in foreign securities may be subject to foreign
withholding taxes on dividends, interest or capital gains which will
decrease the Fund's yield. In certain instances, shareholders may be
entitled to claim a credit or deduction with respect to foreign taxes.
- A Fund's investment in foreign securities, foreign currencies, debt
obligations issued or purchased at a discount, asset-backed securities,
assets "marked to the market" for federal income tax purposes and,
potentially, so-called "indexed securities" (including inflation indexed
bonds) may increase or accelerate a Fund's recognition of income,
including the recognition of taxable income in excess of the cash
generated by such investments. These investments may, therefore, affect
the timing or amount of a Fund's distributions and may cause a Fund to
liquidate other investments at a time when it is not advantageous to do
so in order to satisfy the distribution requirements that apply to
entities taxed as regulated investment companies.
- Any gain resulting from the sale, exchange or redemption of your shares
will generally also be subject to tax.
- The Asset Allocation Funds' investment in other GMO Funds and the
investment by certain Funds in GMO Alpha LIBOR Fund could affect the
amount, timing and character of distributions. See "Taxes -- Taxation of
Fund Distributions and Sales of Fund Shares" in the Statement of
Additional Information.
The above is a general summary of the principal federal income tax
consequences of investing in a Fund for shareholders who are U.S. citizens,
residents or domestic corporations. You should consult your own tax advisors
about the precise tax consequences of an investment in a Fund in light of your
particular tax situation, including possible foreign, state, local or other
applicable tax laws (including the federal alternative minimum tax).
61
<PAGE> 64
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
The financial highlight tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Except as otherwise noted, this information
has been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Fund's financial statements, is included in the Trust's
Annual Reports, which are incorporated by reference in the Statement of
Additional Information and available upon request. Information is presented for
each Fund, and class of shares thereof, of the Trust which had investment
operations during the reporting periods and is currently being offered.
Information regarding Class III Shares of each Fund reflects the operational
history for each such Fund's sole outstanding class prior to the creation of
multiple classes of such Funds on May 31, 1996.
DOMESTIC EQUITY FUNDS
----------------------------------
U.S. CORE FUND*
<TABLE>
<CAPTION>
CLASS II SHARES
---------------------------------------------------------------------------------------------------
PERIOD FROM
JUNE 7, 1996
YEAR ENDED FEBRUARY 28/29, PERIOD FROM PERIOD FROM (COMMENCEMENT
--------------------------------- JANUARY 9, 1998 MARCH 1, 1997 OF OPERATIONS) TO
2000 1999 TO FEBRUARY 28, 1998 TO NOVEMBER 17, 1997 FEBRUARY 28, 1997
--------------- --------------- -------------------- -------------------- -----------------
<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(2) 0.25(2) 0.04(2) 0.24(2) 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) -- (4.12) (3.19)
------- ------- ------- ------- -------
Net asset value, end of
period.................... $ 16.62 $ 18.57 $ 19.98 $ 20.21 $ 20.10
======= ======= ======= ======= =======
Total Return(1)............. 13.61% 14.99% 13.20%(3) 23.00%(3) 17.46%(3)
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%(4) 0.55%(4) 0.55%(4)
Net investment income to
average daily net
assets.................. 1.21% 1.29% 1.53%(4) 1.66%(4) 1.63%(4)
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................. -- (5) $ 0.04 $ 0.01 $ 0.03 $ 0.03
</TABLE>
(1) Total returns would be lower had certain expenses not been waived during the
periods shown.
(2) Computed using average shares outstanding throughout the period.
(3) Not annualized.
(4) Annualized.
(5) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
* Effective June 30, 1998, the "GMO Core Fund" was renamed the "GMO U.S. Core
Fund."
TOBACCO-FREE CORE FUND
<TABLE>
<CAPTION>
CLASS III SHARES
---------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
---------------------------------------------------------
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(1)............... 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>
(1) Total returns would be lower had certain expenses not been waived during the
periods shown.
62
<PAGE> 65
<TABLE>
<CAPTION>
CLASS III SHARES CLASS IV SHARES
-------------------------------------------------------------- -----------------------------------------------
PERIOD FROM
JANUARY 9, 1998
YEAR ENDED FEBRUARY 28/29, YEAR ENDED FEBRUARY 28/29, (COMMENCEMENT OF
-------------------------------------------------------------- --------------------------- OPERATIONS) TO
2000 1999 1998 1997 1996 2000 1999 FEBRUARY 28, 1998
---------- ---------- ---------- ---------- ---------- ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 18.59 $ 19.99 $ 20.12 $ 19.46 $ 15.45 $ 18.58 $ 19.99 $ 17.65
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
0.24(2) 0.26(2) 0.35 0.36 0.41 0.25(2) 0.27(2) 0.04(2)
2.28 2.55 5.89 3.58 5.49 2.28 2.55 2.30
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
2.52 2.81 6.24 3.94 5.90 2.53 2.82 2.34
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(0.25) (0.29) (0.32) (0.39) (0.42) (0.26) (0.31) --
(4.23) (3.92) (6.05) (2.89) (1.47) (4.23) (3.92) --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(4.48) (4.21) (6.37) (3.28) (1.89) (4.49) (4.23) --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 16.63 $ 18.59 $ 19.99 $ 20.12 $ 19.46 $ 16.62 $ 18.58 $ 19.99
========== ========== ========== ========== ========== ========== ========== ==========
13.66% 15.02% 36.69% 22.05% 39.08% 13.74% 15.07% 13.26%(3)
$1,623,734 $1,780,011 $2,317,103 $3,051,344 $3,179,314 $1,343,460 $1,543,655 $1,370,535
0.48% 0.48% 0.48% 0.48% 0.48% 0.44% 0.44% 0.44%(4)
1.27% 1.36% 1.67% 1.78% 2.25% 1.32% 1.41% 1.67%(4)
90% 71% 60% 107% 77% 90% 71% 60%
--(5) $ 0.04 $ 0.05 $ 0.04 $ 0.01 -- (5) $ 0.04 $ 0.01
</TABLE>
63
<PAGE> 66
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
VALUE FUND
<TABLE>
<CAPTION>
CLASS III SHARES
--------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period... $ 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(1)........................ (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............................ --(2) $ 0.04 $ 0.05 $ 0.04 $ 0.02
</TABLE>
(1) Total returns would be lower had certain expenses not been waived during the
periods shown.
(2) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
INTRINSIC VALUE FUND
<TABLE>
<CAPTION>
CLASS III SHARES
----------------------------
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(2)
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(1)............................................. (11.36)%(3)
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $38,650
Net expenses to average daily net assets.................. 0.48%(4)
Net investment income to average daily net assets......... 1.94%(4)
Portfolio turnover rate................................... 26%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amount..... $ 0.01
</TABLE>
(1) Calculation excludes purchase premiums. Total return would be lower had
certain expenses not been waived during the period shown.
(2) Computed using average shares throughout the period.
(3) Not annualized.
(4) Annualized.
64
<PAGE> 67
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
GROWTH FUND
<TABLE>
<CAPTION>
CLASS III SHARES
------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 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(1)............................................. 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.... --(2) $ 0.01 $ 0.01 $ 0.01 --(2)
</TABLE>
(1) Total returns would be lower had certain expenses not been waived during the
periods shown.
(2) Fees and expenses waived or borne by the Manager were less than $.01 per
share.
SMALL CAP VALUE FUND*
<TABLE>
<CAPTION>
CLASS III SHARES
------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
------------------------------------------------------------
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(1)............................. 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>
(1) Calculation excludes purchase premiums and redemption fees. Total returns
would be lower had certain expenses not been waived during the periods
shown.
* Effective December 1, 1996, the "GMO Core II Secondaries Fund" was renamed the
"GMO Small Cap Value Fund."
65
<PAGE> 68
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
SMALL CAP GROWTH FUND
<TABLE>
<CAPTION>
CLASS III SHARES
----------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, PERIOD FROM DECEMBER 31, 1996
-------------------------------- (COMMENCEMENT OF OPERATIONS)
2000 1999 1998 TO FEBRUARY 28, 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(1)............................................. 67.27% (8.20)% 36.66% (1.80)%(2)
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%(3)
Net investment income to average daily net assets......... 0.09% 0.21% 0.47% 0.70%(3)
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>
(1) Calculation excludes purchase premiums and redemption fees. Total returns
would be lower had certain expenses not been waived during the periods
shown.
(2) Not annualized.
(3) Annualized.
REIT FUND
<TABLE>
<CAPTION>
CLASS III SHARES
---------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, PERIOD FROM MAY 31, 1996
-------------------------------- (COMMENCEMENT OF OPERATIONS)
2000 1999 1998 TO FEBRUARY 28, 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(2) 0.51(2) 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(1)............................................. (4.69)% (23.27)% 14.29% 28.49%(3)
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%(4)
Net investment income to average daily net assets......... 5.64% 4.60% 4.10% 4.72%(4)
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>
(1) Calculation excludes purchase premiums and redemption fees. Total returns
would be lower had certain expenses not been waived during the periods
shown.
(2) Computed using average shares outstanding throughout the period.
(3) Annualized.
(4) Not annualized.
66
<PAGE> 69
INTENTIONALLY LEFT BLANK
67
<PAGE> 70
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
INTERNATIONAL EQUITY FUNDS
INTERNATIONAL CORE FUND
<TABLE>
<CAPTION>
CLASS II SHARES CLASS III SHARES
------------------------------------------------ ------------------------------------
PERIOD FROM
YEAR ENDED FEBRUARY SEPTEMBER 26, 1996 YEAR ENDED FEBRUARY
28/29, (COMMENCEMENT OF 28/29,
--------------------------- OPERATIONS) TO ------------------------------------
2000 1999 1998 FEBRUARY 28, 1997 2000 1999 1998
------- ------- ------- ------------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................ $ 20.33 $ 23.16 $ 24.36 $ 24.60 $ 20.38 $ 23.20 $ 24.37
------- ------- ------- ------- ---------- ---------- ----------
Income (loss) from investment
operations:
Net investment income............. 0.41(2) 0.39(2) 0.52(2) 0.14 0.47(2) 0.42(2) 0.54(2)
Net realized and unrealized gain
(loss).......................... 1.33 (0.46) 1.94 0.96 1.28 (0.47) 1.96
------- ------- ------- ------- ---------- ---------- ----------
Total from investment
operations..................... 1.74 (0.07) 2.46 1.10 1.75 (0.05) 2.50
------- ------- ------- ------- ---------- ---------- ----------
Less distributions to shareholders:
From net investment income........ (0.56) (0.24) (0.74) (0.27) (0.56) (0.25) (0.75)
In excess of net investment
income.......................... -- (0.24) -- -- -- (0.24) --
From net realized gains........... (0.66) (2.28) (2.92) (1.07) (0.66) (2.28) (2.92)
------- ------- ------- ------- ---------- ---------- ----------
Total distributions............. (1.22) (2.76) (3.66) (1.34) (1.22) (2.77) (3.67)
------- ------- ------- ------- ---------- ---------- ----------
Net asset value, end of period..... $ 20.85 $ 20.33 $ 23.16 $ 24.36 $ 20.91 $ 20.38 $ 23.20
======= ======= ======= ======= ========== ========== ==========
Total Return(1).................... 8.09% (0.76)% 11.60% 4.51%(3) 8.20% (0.68)% 11.71%
Ratios/Supplemental Data:
Net assets, end of period
(000's)......................... $21,162 $18,295 $12,500 $25,302 $1,799,929 $1,998,447 $3,046,510
Net expenses to average daily net
assets.......................... 0.76% 0.76% 0.76% 0.80%(4,6) 0.69% 0.69% 0.69%
Net investment income to average
daily net assets................ 1.84% 1.71% 2.14% 0.98%(6) 2.09% 1.84% 2.19%
Portfolio turnover rate........... 53% 60% 68% 97% 53% 60% 68%
Fees and expenses voluntarily
waived or borne by the Manager
consisted of the following per
share amounts................... $ 0.02 $ 0.06 $ 0.07 $ 0.05 $ 0.02 $ 0.06 $ 0.07
<CAPTION>
CLASS III SHARES
-----------------------
YEAR ENDED FEBRUARY
28/29,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Net asset value, beginning of
period............................ $ 24.62 $ 22.32
---------- ----------
Income (loss) from investment
operations:
Net investment income............. 0.59 0.36
Net realized and unrealized gain
(loss).......................... 1.02 3.09
---------- ----------
Total from investment
operations..................... 1.61 3.45
---------- ----------
Less distributions to shareholders:
From net investment income........ (0.33) (0.39)
In excess of net investment
income.......................... -- --
From net realized gains........... (1.53) (0.76)
---------- ----------
Total distributions............. (1.86) (1.15)
---------- ----------
Net asset value, end of period..... $ 24.37 $ 24.62
========== ==========
Total Return(1).................... 6.72% 15.72%
Ratios/Supplemental Data:
Net assets, end of period
(000's)......................... $4,232,937 $4,538,036
Net expenses to average daily net
assets.......................... 0.71%(5) 0.71%(5)
Net investment income to average
daily net assets................ 2.34% 1.93%
Portfolio turnover rate........... 97% 14%
Fees and expenses voluntarily
waived or borne by the Manager
consisted of the following per
share amounts................... $ 0.06 $ 0.03
</TABLE>
(1) Calculation excludes purchase premiums. Total returns would be lower had
certain expenses not been waived during the periods shown.
(2) Computed using average shares outstanding throughout the period.
(3) Not annualized.
(4) Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .04% of average daily net assets.
(5) Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .02% of average daily net assets.
(6) Annualized.
CURRENCY HEDGED INTERNATIONAL CORE FUND
<TABLE>
<CAPTION>
CLASS III SHARES CLASS IV SHARES
------------------------------------------------------------ -------------------
PERIOD FROM
YEAR ENDED JUNE 30, 1995 YEAR ENDED
FEBRUARY 28/29, (COMMENCEMENT OF FEBRUARY 28/29,
--------------------------------------- OPERATIONS) TO -------------------
2000 1999 1998 1997 FEBRUARY 29, 1996 2000 1999
------- ------- -------- -------- ----------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................ $ 9.28 $ 11.92 $ 12.68 $ 11.54 $ 10.00 $ 9.27 $ 11.92
------- ------- -------- -------- -------- ------- --------
Income from investment operations:
Net investment income............. 0.23(2) 0.23(2) 0.27(2) 0.22 0.23 0.29(2) 0.24(2)
Net realized and unrealized gain
(loss).......................... 1.26 (0.36)(3) 1.72 1.63 1.44 1.21 (0.36)(3)
------- ------- -------- -------- -------- ------- --------
Total from investment
operations..................... 1.49 (0.13) 1.99 1.85 1.67 1.50 (0.12)
------- ------- -------- -------- -------- ------- --------
Less distributions to shareholders:
From net investment income........ (0.33) (0.08) (0.27) (0.28) (0.06) (0.34) (0.09)
In excess of net investment
income.......................... (0.09) (0.21) -- -- -- (0.09) (0.22)
From net realized gains........... (0.31) (2.22) (2.48) (0.43) (0.07) (0.31) (2.22)
------- ------- -------- -------- -------- ------- --------
Total distributions............. (0.73) (2.51) (2.75) (0.71) (0.13) (0.74) (2.53)
------- ------- -------- -------- -------- ------- --------
Net asset value, end of period..... $ 10.04 $ 9.28 $ 11.92 $ 12.68 $ 11.54 $ 10.03 $ 9.27
======= ======= ======== ======== ======== ======= ========
Total Return(1).................... 15.86% (1.84)% 17.98% 16.55% 16.66%(4) 15.94% (1.79)%
Ratios/Supplemental Data:
Net assets, end of period
(000's)......................... $75,054 $97,450 $207,653 $581,099 $407,227 $52,526 $108,956
Net expenses to average daily net
assets.......................... 0.69% 0.69% 0.69% 0.72%(5) 0.69%(6) 0.63% 0.63%
Net investment income to average
daily net assets................ 2.25% 2.07% 2.15% 2.25% 1.89%(6) 2.81% 2.17%
Portfolio turnover rate........... 68% 68% 96% 84% 7% 68% 68%
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 $ 0.03 $ 0.05
<CAPTION>
CLASS IV SHARES
-----------------
PERIOD FROM
JANUARY 9, 1998
(COMMENCEMENT OF
OPERATIONS) TO
FEBRUARY 28, 1998
-----------------
<S> <C>
Net asset value, beginning of
period............................ $ 10.87
--------
Income from investment operations:
Net investment income............. 0.01(2)
Net realized and unrealized gain
(loss).......................... 1.04
--------
Total from investment
operations..................... 1.05
--------
Less distributions to shareholders:
From net investment income........ --
In excess of net investment
income.......................... --
From net realized gains........... --
--------
Total distributions............. --
--------
Net asset value, end of period..... $ 11.92
========
Total Return(1).................... 9.66%(4)
Ratios/Supplemental Data:
Net assets, end of period
(000's)......................... $362,829
Net expenses to average daily net
assets.......................... 0.63%(6)
Net investment income to average
daily net assets................ 0.72%(6)
Portfolio turnover rate........... 96%
Fees and expenses voluntarily
waived or borne by the Manager
consisted of the following per
share amounts................... $ 0.01
</TABLE>
(1) Calculation excludes purchase premiums. Total returns would be lower had
certain expenses not been waived during the periods shown.
(2) Computed using average shares outstanding throughout the period.
(3) The 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.
(4) Not annualized.
(5) Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .03% of average daily net assets.
(6) Annualized.
68
<PAGE> 71
<TABLE>
<CAPTION>
CLASS IV SHARES
---------------------------------------------
PERIOD FROM
YEAR ENDED JANUARY 9, 1998
FEBRUARY 28/29, (COMMENCEMENT OF
---------------------- OPERATIONS) TO
2000 1999 FEBRUARY 28, 1998
-------- -------- -----------------
<S> <C> <C> <C>
$ 20.37 $ 23.19 $ 20.61
-------- -------- --------
0.55(2) 0.42(2) 0.02(2)
1.21 (0.46) 2.56
-------- -------- --------
1.76 (0.04) 2.58
-------- -------- --------
(0.57) (0.25) --
-- (0.25) --
(0.66) (2.28) --
-------- -------- --------
(1.23) (2.78) --
-------- -------- --------
$ 20.90 $ 20.37 $ 23.19
======== ======== ========
8.18% (0.60)% 12.52%(3)
$291,894 $567,219 $682,952
0.63% 0.63% 0.63%(6)
2.47% 1.85% 0.68%(6)
53% 60% 68%
$ 0.02 $ 0.06 $ 0.01
</TABLE>
69
<PAGE> 72
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
FOREIGN FUND*
<TABLE>
<CAPTION>
CLASS II SHARES CLASS III SHARES
------------------------------------------------ --------------------------------
PERIOD FROM
SEPTEMBER 30, 1996
YEAR ENDED FEBRUARY 28/29, (COMMENCEMENT OF YEAR ENDED FEBRUARY 28/29,
--------------------------- OPERATIONS) TO --------------------------------
2000 1999 1998 FEBRUARY 28, 1997 2000 1999 1998
------- ------- ------- ------------------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period.............................. 11.79 $ 12.09 $ 10.65 $ 10.02 $ 11.81 $ 12.10 $ 10.66
------- ------- ------- ------- ---------- -------- --------
Income from investment operations:
Net investment income............... 0.17(2) 0.20(2) 0.18(2) 0.06 0.20(2) 0.20(2) 0.21(2)
Net realized and unrealized gain
(loss)............................ 2.89 (0.14) 1.48 0.65 2.86 (0.12) 1.45
------- ------- ------- ------- ---------- -------- --------
Total from investment
operations...................... 3.06 0.06 1.66 0.71 3.06 0.08 1.66
------- ------- ------- ------- ---------- -------- --------
Less distributions to shareholders:
From net investment income.......... (0.21) (0.25) (0.22) (0.08) (0.21) (0.26) (0.22)
From net realized gains............. (1.50) (0.11) (0.00)(3) -- (1.50) (0.11) (0.00)(3)
------- ------- ------- ------- ---------- -------- --------
Total distributions............... (1.71) (0.36) (0.22) (0.08) (1.71) (0.37) (0.22)
------- ------- ------- ------- ---------- -------- --------
Net asset value, end of period........ $ 13.14 $ 11.79 $ 12.09 $ 10.65 $ 13.16 $ 11.81 $ 12.10
======= ======= ======= ======= ========== ======== ========
Total Return(1)....................... 25.63% 0.36% 15.94% 7.08%(4) 25.65% 0.48% 15.95%
Ratios/Supplemental Data:
Net assets, end of period (000's)... $60,278 $33,780 $53,949 $21,957 $1,022,498 $927,108 $847,427
Net expenses to average daily net
assets............................ 0.82% 0.82% 0.82% 0.84%(5,6) 0.75% 0.75% 0.75%
Net investment income to average
daily net assets.................. 1.28% 1.64% 1.60% 0.83%(5) 1.48% 1.60% 1.80%
Portfolio turnover rate............. 35% 27% 19% 13% 35% 27% 19%
Fees and expenses voluntarily waived
or borne by the Manager consisted
of the following per share
amounts........................... $ 0.01 $ 0.03 $ 0.03 $ 0.02 $ 0.01 $ 0.03 $ 0.03
<CAPTION>
CLASS III SHARES
-----------------
PERIOD FROM
JUNE 28, 1996
(COMMENCEMENT OF
OPERATIONS) TO
FEBRUARY 28, 1997
-----------------
<S> <C>
Net asset value, beginning of
period.............................. $ 10.00
--------
Income from investment operations:
Net investment income............... 0.08
Net realized and unrealized gain
(loss)............................ 0.66
--------
Total from investment
operations...................... 0.74
--------
Less distributions to shareholders:
From net investment income.......... (0.08)
From net realized gains............. --
--------
Total distributions............... (0.08)
--------
Net asset value, end of period........ $ 10.66
========
Total Return(1)....................... 7.37%(4)
Ratios/Supplemental Data:
Net assets, end of period (000's)... $671,829
Net expenses to average daily net
assets............................ 0.76%(5,7)
Net investment income to average
daily net assets.................. 1.24%(5)
Portfolio turnover rate............. 13%
Fees and expenses voluntarily waived
or borne by the Manager consisted
of the following per share
amounts........................... $ 0.02
</TABLE>
<TABLE>
<C> <S>
(1) Total returns would be lower had certain expenses not been
waived during the periods shown.
(2) Computed using average shares outstanding throughout the
period.
(3) The per share realized gain distribution was $0.004.
(4) Not annualized.
(5) Annualized.
(6) Includes stamp duties and transfer taxes not waived or borne
by the Manager, which approximate .02% of average daily net
assets.
(7) Includes stamp duties and transfer taxes not waived or borne
by the Manager, which approximate .01%.
(8) Net investment income earned was less than $.01 per share.
Computed using average shares outstanding throughout the
period.
(9) Fees or expenses voluntarily waived or borne by the manager
were less than $.01 per share.
(a) The fiscal year end of the GMO Pool was June 30.
(b) Expenses for the GMO Pool were paid directly by its
unitholders.
(c) Net of annual total GMO Pool expenses of 0.83% paid directly
by unitholders.
* The GMO Foreign Fund (the "Foreign Fund") commenced
operations on June 28, 1996 subsequent to a transaction
involving, in essence, the reorganization of the GMO
International Equities Pool of The Common Fund for Nonprofit
Organizations (the "GMO Pool") as the Foreign Fund.
** All information relating to the time periods prior to June
28, 1996 relates to the GMO Pool. Total return figures are
based on historical earnings but past performance data is
not necessarily indicative of future performance of the
Foreign Fund. The per unit information for the GMO Pool has
been restated to conform to the Foreign Fund's initial net
asset value of $10.00 per share on such date. The GMO Pool
was not a registered investment company as it was exempt
from registration under the 1940 Act and therefore was not
subject to certain investment restrictions imposed by the
1940 Act. If the GMO Pool had been registered under the 1940
Act, its performance may have been adversely affected. The
GMO Pool's performance information is also presented as the
performance of the Foreign Fund for periods prior to June
28, 1996 by including the total return of the GMO Pool; such
information does not constitute the financial highlights of
the Foreign Fund.
</TABLE>
The information relating to the periods ended February 28/29, 1997, 1998, 1999
and 2000 should be read in conjunction with the financial statements and related
notes which are included in the Foreign Fund's Annual Report, and which are
incorporated by reference in the Trust's Statement of Additional Information.
The GMO Pool had only one class of outstanding units. Expenses charged to GMO
Pool unitholders were fixed at a level above that of the Foreign Fund's Class II
and Class III Shares.
70
<PAGE> 73
<TABLE>
<CAPTION>
GMO POOL
PERFORMANCE INFORMATION**
CLASS IV SHARES (UNAUDITED)
------------------------------------------------------ --------------------------
PERIOD FROM
JANUARY 9, 1998
YEAR ENDED (COMMENCEMENT OF YEAR ENDED JUNE 30,(a)
FEBRUARY 28/29, YEAR ENDED OPERATIONS) TO --------------------------
2000 FEBRUARY 28, 1999 FEBRUARY 28, 1998 1996 1995
--------------- ----------------- ----------------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 11.81 $ 12.11 $ 10.90 $ 8.90 $ 8.52
-------- -------- -------- ------ ------
0.21(2) 0.22(2) -- (8) 0.27(b) 0.27(b)
2.86 (0.15) 1.21 1.07 0.37
-------- -------- -------- ------ ------
3.07 0.07 1.21 1.34 0.64
-------- -------- -------- ------ ------
(0.22) (0.26) -- (0.24) (0.26)
(1.50) (0.11) -- -- --
-------- -------- -------- ------ ------
(1.72) (0.37) -- (0.24) (0.26)
-------- -------- -------- ------ ------
$ 13.16 $ 11.81 $ 12.11 $10.00 $ 8.90
======== ======== ======== ====== ======
25.74% 0.53% 11.10%(4) 14.25%(c) 6.82%(c)
$141,175 $130,760 $219,785 N/A N/A
0.69% 0.69% 0.69%(5) N/A N/A
1.55% 1.81% 0.26%(5) N/A N/A
35% 27% 19% N/A N/A
$ 0.01 $ 0.03 $-- (9) N/A N/A
</TABLE>
71
<PAGE> 74
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
INTERNATIONAL SMALL COMPANIES FUND
<TABLE>
<CAPTION>
CLASS III SHARES
--------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
--------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 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)
From net realized gains................................... (0.41) (0.39) (1.67) (0.20) (0.15)
In excess of net realized gains........................... -- -- -- -- --
-------- -------- -------- -------- --------
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(1)............................................. 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%(2) 0.76%(2)
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>
(1) Calculation excludes purchase premiums and redemption fees. Total returns
would be lower had certain expenses not been waived during the periods
shown.
(2) Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .01% of average daily net assets.
JAPAN FUND
<TABLE>
<CAPTION>
CLASS III SHARES
--------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
--------------------------------------------------------
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:
0.07(2,3
Net investment income (loss).............................. ) 0.01 0.01 --(2) (0.01)(2)
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(1)............................................. 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%(4) 0.92%
Net investment income (loss) to average daily net
assets.................................................. 0.89%(3) 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>
(1) Calculation excludes purchase premiums and redemption fees. Total returns
would be lower had certain expenses not been waived during the periods
shown.
(2) Based on average month-end shares outstanding.
(3) Net investment income is affected by the timing of dividends earned and
purchases and redemptions of Fund shares.
(4) Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .01% of average daily net assets.
72
<PAGE> 75
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
EMERGING MARKETS FUND
<TABLE>
<CAPTION>
CLASS III SHARES CLASS IV SHARES
-------------------------------------------------------- ---------------------------------------
PERIOD FROM
YEAR ENDED FEBRUARY JANUARY 9, 1998
YEAR ENDED FEBRUARY 28/29, 28/29, (COMMENCEMENT OF
-------------------------------------------------------- ------------------- OPERATIONS) TO
2000 1999 1998 1997 1996 2000 1999 FEBRUARY 28, 1998
-------- -------- ---------- ---------- -------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $ 6.31 $ 9.56 $ 12.49 $ 10.54 $ 9.52 $ 6.31 $ 9.56 $ 8.62
-------- -------- ---------- ---------- -------- -------- -------- --------
Income (loss) from investment
operations:
Net investment income....... 0.13(2) 0.25 0.16(2) 0.13 0.10 0.13(2) 0.28 0.01(2)
Net realized and unrealized
gain (loss)............... 4.77 (3.19) (1.76) 1.96 1.06 4.77 (3.21) 0.93
-------- -------- ---------- ---------- -------- -------- -------- --------
Total from investment
operations.............. 4.90 (2.94) (1.60) 2.09 1.16 4.90 (2.93) 0.94
-------- -------- ---------- ---------- -------- -------- -------- --------
Less distributions to
shareholders from:
Net investment income....... (0.03) (0.19) (0.25) (0.14) (0.01) (0.03) (0.20) --
In excess of net investment
income.................... (0.02) (0.02)
Net realized gains.......... -- (0.12) (0.71) -- (0.13) -- (0.12) --
In excess of net realized
gains..................... -- (0.00)(3) (0.37) -- -- -- (0.00)(3) --
-------- -------- ---------- ---------- -------- -------- -------- --------
Total distributions....... (0.05) (0.31) (1.33) (0.14) (0.14) (0.05) (0.32) --
-------- -------- ---------- ---------- -------- -------- -------- --------
Net asset value, end of
period...................... $ 11.16 $ 6.31 $ 9.56 $ 12.49 $ 10.54 $ 11.16 $ 6.31 $ 9.56
======== ======== ========== ========== ======== ======== ======== ========
Total Return(1).............. 77.43% (30.96)% (12.94)% 19.98% 12.24% 77.76% (31.01)% 10.90%(4)
Ratios/Supplemental Data:
Net assets, end of period
(000's)................... $727,197 $524,741 $ 913,615 $1,725,651 $907,180 $480,208 $261,187 $672,020
Net expenses to average
daily net assets.......... 1.18% 1.16% 1.24%(5) 1.24%(5) 1.35% 1.13% 1.12% 1.22%(6,7)
Net investment income to
average daily net
assets.................... 1.41% 2.75% 1.30% 1.40% 1.31% 1.45% 2.87% 0.65%(6)
Portfolio turnover rate..... 73% 76% 88% 41% 35% 73% 76% 88%
Fees and expenses voluntarily
waived or borne by the
Manager consisted of the
following per share
amounts..................... $ 0.00(8) $ 0.02 $ 0.03 $ 0.02 $ --(8) $ 0.00(8) $ 0.02 $ --(8)
</TABLE>
(1) Calculation excludes purchase premiums and redemption fees. Total returns
would be lower had certain expenses not been waived during the periods
shown.
(2) Computed using average shares outstanding throughout the period.
(3) The distribution in excess of net realized gains was $0.0005.
(4) Not annualized.
(5) 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.
(6) Annualized.
(7) Includes stamp duties and transfer taxes not waived or borne by the
Manager, which approximate .04% of average daily net assets.
(8) Fees and expenses voluntarily waived or borne by the Manager were less than
$.01 per share.
EVOLVING COUNTRIES FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-----------------------------------------------------
YEAR ENDED FEBRUARY
28/29, PERIOD FROM AUGUST 29, 1997
-------------------- (COMMENCEMENT OF OPERATIONS)
2000 1999 TO FEBRUARY 28, 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(2)
Net realized and unrealized 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(1)............................................. 98.96% (31.60)% (13.90)%(3)
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%(4,5)
Net investment income to average daily net assets.......... 0.54% 3.65% 0.78%(4)
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>
(1) Calculation excludes purchase premiums and redemption fees. Total returns
would be lower had certain expenses not been waived during the periods
shown.
(2) Computed using average shares outstanding throughout the period.
(3) Not annualized.
(4) Annualized.
(5) Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .16% of average daily net assets.
73
<PAGE> 76
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
ASIA FUND
<TABLE>
<CAPTION>
CLASS III SHARES
--------------------------------------------------------
YEAR ENDED
FEBRUARY 28/29, PERIOD FROM FEBRUARY 18, 1998
----------------------- (COMMENCEMENT OF OPERATIONS)
2000 1999 TO FEBRUARY 28, 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(2) 0.01(2)
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) -- --
-------- ------- -------
Total Distributions..................................... (0.36) (0.16) --
-------- ------- -------
Net asset value, end of period.............................. $ 12.35 $ 7.67 $ 10.44
======== ======= =======
Total Return(1)............................................. 65.57% (25.03)% 4.40%(3)
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%(4)
Net investment income to average daily net assets......... 0.22% 1.04% 2.86%(4)
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>
(1) Calculation excludes purchase premiums and redemption fees. Total returns
would be lower had certain expenses not been waived during the periods
shown.
(2) Computed using average shares outstanding throughout the period.
(3) Not annualized.
(4) Annualized.
74
<PAGE> 77
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
FIXED INCOME FUNDS
-----------------------------
DOMESTIC BOND FUND
<TABLE>
<CAPTION>
CLASS III SHARES
--------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 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........................... --(2) (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(1)............................................. 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%(3) 0.27%(3) 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.... --(4) $ 0.02 $ 0.02 $ 0.02 $ 0.01
</TABLE>
(1) Total returns would be lower had certain expenses not been waived during the
periods shown.
(2) The per share distribution in excess of net realized gains was less than
$0.001.
(3) 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.
(4) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
75
<PAGE> 78
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
U.S. BOND/GLOBAL ALPHA A FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-------------------------------------------------------
YEAR ENDED
FEBRUARY 28/29, PERIOD FROM APRIL 30, 1997
------------------------ (COMMENCEMENT OF OPERATIONS)
2000 1999 TO FEBRUARY 28, 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(2) 0.64(2) 0.55(2)
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(1)............................................. 2.26% 0.44% 12.16%(3)
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%(4)
Interest expense to average daily net assets............... 0.01% -- --
Total net expenses to average daily net assets............. 0.41%(5) -- --
Net investment income to average daily net assets.......... 6.19% 5.97% 6.05%(4)
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>
(1) Calculation excludes purchase premiums. Total returns would be lower had
certain expenses not been waived during the periods shown.
(2) Computed using average shares outstanding throughout the period.
(3) Not annualized.
(4) Annualized.
(5) 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.
U.S. BOND/GLOBAL ALPHA B FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-------------------------------------------------------
YEAR ENDED
FEBRUARY 28/29, PERIOD FROM JULY 29, 1997
------------------------ (COMMENCEMENT OF OPERATIONS)
2000 1999 TO FEBRUARY 28, 1998
-------- -------- ----------------------------
<S> <C> <C> <C>
Net asset value, beginning of period........................ $ 7.18 $ 10.14 $ 10.00
-------- -------- --------
Income from investment operations:
Net investment income...................................... 0.35(1,3) 0.59(3) 0.35(3)
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)(4) (0.21)
In excess of net investment income......................... -- (0.59)(4) --
From net realized gains.................................... -- (0.18) (0.06)
In excess of net realized gains............................ -- (0.23) --
-------- -------- --------
Total distributions...................................... (0.29) (3.36) (0.27)
-------- -------- --------
Net asset value, end of period.............................. $ 6.90 $ 7.18 $ 10.14
======== ======== ========
Total Return(2)............................................. 0.27% 3.42% 4.15%(5)
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%(6)
Interest expense to average daily net assets............... 0.01% -- --
Total net expenses to average daily net assets............. 0.36%(7) 0.35% 0.35%(6)
Net investment income to average daily net assets(1)....... 4.98% 5.96% 5.88%(6)
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>
(1) Net investment income is affected by the timing of the declaration of
dividends by other Funds of the Trust in which the Fund invests.
(2) Calculation excludes purchase premiums. Total returns would be lower had
certain expenses not been waived during the periods shown.
(3) Computed using average shares outstanding throughout the period.
(4) The amount shown for a share outstanding does not correspond with the
aggregate distributions to shareholders for the year ended February 28, 1999
due to the timing of purchases and redemptions of Fund shares in relation to
the declaration of distributions to shareholders.
(5) Not annualized.
(6) Annualized.
(7) 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.
76
<PAGE> 79
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
INTERNATIONAL BOND FUND
<TABLE>
<CAPTION>
CLASS III SHARES
----------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
----------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 10.06 $ 10.45 $ 10.78 $ 10.92 $ 9.64
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income(1).................................. 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(2)............................................. (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%(3) 0.40% 0.40% 0.40% 0.40%
Net investment income to average daily net assets(1)...... 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>
(1) Net investment income is affected by the timing of the declaration of
dividends by other Funds of the Trust in which the Fund invests.
(2) Calculation excludes purchase premiums. Total returns would be lower had
certain expenses not been waived during the periods shown.
(3) 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 is included in interest income.
CURRENCY HEDGED INTERNATIONAL BOND FUND
<TABLE>
<CAPTION>
CLASS III SHARES
----------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
----------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 10.47 $ 10.66 $ 12.16 $ 10.92 $ 9.99
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income..................................... 0.65(2) 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 realized gains........................... -- -- -- (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(1)............................................. 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>
(1) Calculation excludes purchase premiums. Total returns would be lower had
certain expenses not been waived during the periods shown.
(2) Computed using average shares outstanding throughout the period.
77
<PAGE> 80
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
GLOBAL BOND FUND
<TABLE>
<CAPTION>
CLASS III SHARES
------------------------------------------------------------------------
PERIOD FROM
DECEMBER 28, 1995
YEAR ENDED FEBRUARY 28, (COMMENCEMENT OF
------------------------------------------------- OPERATIONS) TO
2000 1999 1998 1997 FEBRUARY 29, 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................................. 0.51(1) 0.55 0.65(3) 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(2)........................................ (2.07)% 2.69% 10.19% 12.01% (1.10)%(4)
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%(5)
Interest expense to average daily net assets.......... 0.16% -- -- -- --
Total net expenses to average daily net assets........ 0.50%(6) 0.34% 0.34% 0.34% 0.34%(5)
Net investment income to average daily net
assets(1)........................................... 5.09% 5.86% 6.21% 6.31% 6.16%(5)
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>
(1) Net investment income is affected by the timing of the declaration of
dividends by other Funds of the Trust in which the Fund invests.
(2)Calculation excludes purchase premiums. Total returns would be lower had
certain expenses not been waived during the periods shown.
(3) Computed using average shares outstanding throughout the period.
(4) Not annualized.
(5) Annualized.
(6)Interest expense incurred as a result of entering into repurchase agreements
is included in the Fund's net expenses. Income earned on investing proceeds
from reverse repurchase agreements is included in interest income.
EMERGING COUNTRY DEBT FUND
<TABLE>
<CAPTION>
CLASS III SHARES CLASS IV SHARES
---------------------------------------------------- ------------------- PERIOD FROM
YEAR ENDED JANUARY 9, 1998
YEAR ENDED FEBRUARY 28/29, FEBRUARY 28/29, (COMMENCEMENT OF
---------------------------------------------------- ------------------- OPERATIONS) TO
2000 1999 1998 1997 1996 2000 1999 FEBRUARY 28, 1998
-------- -------- -------- -------- -------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period.......................... $ 6.89 $ 11.64 $ 14.09 $ 11.76 $ 8.39 $ 6.90 $ 11.63 $ 10.99
-------- -------- -------- -------- -------- -------- -------- --------
Income from investment
operations:
Net investment income......... 0.84(2) 0.92(2) 1.13(2) 1.48 1.35 0.84(2) 0.91(2) 0.10(2)
Net realized and unrealized
gain (loss)................. 2.20 (4.41) 1.51 6.40 3.84 2.20 (4.37) 0.54
-------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations.............. 3.04 (3.49) 2.64 7.88 5.19 3.04 (3.46) 0.64
-------- -------- -------- -------- -------- -------- -------- --------
Less distributions to
shareholders:
From net investment income.... (1.07) (0.23) (0.84) (1.58) (1.17) (1.08) (0.24) --
From net realized gains....... (0.12) (1.03) (4.25) (3.97) (0.65) (0.12) (1.03) --
In excess of net realized
gains....................... --(3) --(3) -- -- -- --(3) --(3) --
-------- -------- -------- -------- -------- -------- -------- --------
Total distributions....... (1.19) (1.26) (5.09) (5.55) (1.82) (1.20) (1.27) --
-------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of period... $ 8.74 $ 6.89 $ 11.64 $ 14.09 $ 11.76 $ 8.74 $ 6.90 $ 11.63
======== ======== ======== ======== ======== ======== ======== ========
Total Return(1).................. 46.81% (32.94)% 22.27% 74.32% 63.78% 47.00% (32.82)% 5.82%
Ratios/Supplemental Data:
Net assets, end of period
(000's)..................... $378,593 $450,336 $460,387 $555,452 $615,485 $545,869 $323,285 $310,580
Net expenses to average daily
net assets.................. 0.55% 0.56% 0.53% 0.57% 0.50% 0.50% 0.51% 0.50%(5)
Net investment income to
average daily net assets.... 10.82% 10.99% 8.62% 8.35% 12.97% 10.87% 10.87% 7.17%(5)
Portfolio turnover rate....... 123% 272% 255% 152% 158% 123% 272% 255%
Fees and expenses voluntarily
waived or borne by the
Manager consisted of the
following per share
amounts..................... --(4) $ 0.02 $ 0.03 $ 0.03 $ 0.02 --(4) $ 0.02 --(4)
</TABLE>
(1) Calculation excludes purchase premiums and redemption fees. Total returns
would be lower had certain expenses not been waived during the periods
shown.
(2) Computed using average shares outstanding throughout the period.
(3) The distribution in excess of net realized gains was less than $.001.
(4) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
(5) Annualized.
78
<PAGE> 81
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
SHORT-TERM INCOME FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-----------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
-----------------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 9.63 $ 9.81 $ 9.78 $ 9.77 $ 9.56
------- ------- ------- ------- -------
Income from investment operations:
Net investment income................................... 0.46(1,3) 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(2)............................................. 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(1).... 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>
(1) Net investment income is affected by the timing of the declaration of
dividends by other Funds of the Trust in which the Fund invests.
(2) Total returns would be lower had certain expenses not been waived during the
periods shown.
(3) Computed using average shares outstanding throughout the period.
GLOBAL HEDGED EQUITY FUND
<TABLE>
<CAPTION>
CLASS III SHARES
---------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
---------------------------------------------------------------
2000 1999 1998 1997 1996
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 7.59 $ 8.72 $ 10.69 $ 10.64 $ 10.12
------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income(1).................................. 0.16 0.17(4) 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(2)............................................. 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(3)............... 0.21% 0.17% 0.58% 0.91%(5) 0.78%
Net investment income to average daily net assets(1)...... 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>
(1) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
(2) Calculation excludes purchase premiums and redemption fees. Total returns
would be lower had certain expenses not been waived during the periods
shown.
(3) On August 20, 1997, the Fund began to invest a substantial portion of its
assets in other funds of GMO Trust and revised its voluntary waiver. Net
expenses exclude expenses incurred indirectly through investment in
underlying funds.
(4) Computed using average shares outstanding throughout the period.
(5) Includes stamp duties and transfer taxes not waived or borne by the Manager,
which approximate .02% of average daily net assets.
79
<PAGE> 82
INFLATION INDEXED BOND FUND
<TABLE>
<CAPTION>
CLASS III SHARES
------------------------------------------------------
YEAR ENDED
FEBRUARY 28/29, PERIOD FROM MARCH 31, 1997
---------------------- (COMMENCEMENT OF OPERATIONS)
2000 1999 TO FEBRUARY 28, 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(2) 0.61 0.42(2)
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................................... -- -- --(3)
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(1)............................................. 3.57% 4.28% 3.77%(4)
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%(5)
Interest expense to average daily net assets.............. 0.45% -- --
Total net expenses to average daily net assets............ 0.70%(6) 0.25% 0.25%(5)
Net investment income to average daily net assets......... 6.49% 4.93% 4.48%(5)
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>
(1) Total returns would be lower had certain expenses not been waived during the
periods shown.
(2) Computed using average shares outstanding throughout the period.
(3) The per share distributions from net realized gains was $0.002.
(4) Not annualized.
(5) Annualized.
(6) 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.
EMERGING COUNTRY DEBT SHARE FUND
<TABLE>
<CAPTION>
CLASS III SHARES
-----------------------------------------------
YEAR ENDED PERIOD FROM JULY 20, 1998
FEBRUARY 29, (COMMENCEMENT OF OPERATIONS)
2000 THROUGH FEBRUARY 28, 1999
---------------- ----------------------------
<S> <C> <C>
Net asset value, beginning of period........................ $ 6.84 $ 10.00
------- -------
Income from investment operations:
Net investment income(1).................................. 1.10 0.03
Net realized and unrealized 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(2)............................................. 46.71% (31.32)%(5)
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $86,280 $41,216
Net expenses to average daily net assets(3)............... 0.00% 0.00%(6)
Net investment income to average daily net assets(1)...... 14.22% 0.64%(6)
Portfolio turnover rate................................... 0% 0%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amount:.... --(4) --(4)
</TABLE>
(1) Recognition of net investment income is affected by the timing of the
declaration of dividends by GMO Emerging Country Debt Fund.
(2) Total returns would be lower had certain expenses not been waived during the
periods shown.
(3) Net expenses exclude expenses incurred indirectly through investment in
underlying fund.
(4) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
(5) Not annualized.
(6) Annualized.
80
<PAGE> 83
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
ASSET ALLOCATION FUNDS
INTERNATIONAL EQUITY ALLOCATION FUND
<TABLE>
<CAPTION>
CLASS III SHARES
--------------------------------------------------
PERIOD FROM
OCTOBER 11, 1996
YEAR ENDED FEBRUARY 28/29, (COMMENCEMENT OF
----------------------------- OPERATIONS) TO
2000 1999 1998 FEBRUARY 28, 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(1).................................. 0.22(4) 0.19(4) 0.33(4) 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) --(5) --
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(2)............................................. 23.58% (8.77)% 6.73% 5.11%(6)
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(3)............... 0.00% 0.00% 0.00% 0.01%(7)
Net investment income to average daily net assets(1)...... 2.24% 2.06% 3.13% 3.60%(7)
Portfolio turnover rate................................... 8% 36% 16% 0%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts.... --(8) $ 0.01 $ 0.01 $ 0.01
</TABLE>
(1) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
(2) Calculation excludes purchase premiums and redemption fees. Total return
would be lower had certain expenses not been waived during the period shown.
(3) Net expenses exclude expenses incurred indirectly through investment in
underlying funds.
(4) Computed using average shares outstanding throughout the period.
(5) The per share distribution in excess of net investment income was $0.001.
(6) Not annualized.
(7) Annualized.
(8) Fees and expenses waived or borne by the Manager were less than $0.01 per
share.
WORLD EQUITY ALLOCATION FUND
<TABLE>
<CAPTION>
CLASS III SHARES
--------------------------------------------------
PERIOD FROM
OCTOBER 22, 1996
YEAR ENDED FEBRUARY 28/29, (COMMENCEMENT OF
----------------------------- OPERATIONS) TO
2000 1999 1998 FEBRUARY 28, 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(1).................................. 0.20(4) 0.18(4) 0.29(4) 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) --(5) --
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(2)............................................. 22.45% (6.67)% 13.56% 7.51%(6,7)
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(3)............... 0.00% 0.00% 0.00% 0.00%(8)
Net investment income to average daily net assets(1)...... 2.24% 1.91% 2.65% 0.91%(8)
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>
(1) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
(2) Calculation excludes purchase premiums and redemption fees. Total return
would be lower had certain expenses not been waived during the periods
shown.
(3) Net expenses exclude expenses incurred indirectly through investment in
underlying funds.
(4) Computed using average shares outstanding throughout the period.
(5) The per share distribution in excess of net investment income was $0.0004.
(6) Not annualized.
(7) The earliest class of shares of this Fund, Class I Shares, commenced
operations on June 28, 1996. For the period from June 28, 1996 to February
28, 1997, Class I Shares of this Fund had a Total Return equal to 8.23%.
Total operating expenses for Class I shares were 0.13% higher than expected
total operating expenses for Class III Shares.
(8) Annualized.
81
<PAGE> 84
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
GLOBAL (U.S.+) EQUITY ALLOCATION FUND
<TABLE>
<CAPTION>
CLASS III SHARES
--------------------------------------------------
PERIOD FROM
NOVEMBER 26, 1996
YEAR ENDED FEBRUARY 28/29 (COMMENCEMENT OF
----------------------------- OPERATIONS) TO
2000 1999 1998 FEBRUARY 28, 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(1).................................. 0.25 0.16(4) 0.26(4) 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) --(5) --
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(2)............................................. 19.14% (2.84)% 21.86% 5.09%(6)
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(3)............... 0.00% 0.00% 0.00% 0.00%(7)
Net investment income to average daily net assets(1)...... 2.63% 1.64% 2.39% 3.21%(7)
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>
(1) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
(2) Calculation excludes purchase premiums and redemption fees. Total returns
would be lower had certain expenses not been waived during the periods
shown.
(3) Net expenses exclude expenses incurred indirectly through investment in
underlying funds.
(4) Computed using average shares outstanding throughout the period.
(5) The per share distribution in excess of net investment income was $0.0009.
(6) Not annualized.
(7) Annualized.
GLOBAL BALANCED ALLOCATION FUND
<TABLE>
<CAPTION>
CLASS III SHARES
---------------------------------------------------
PERIOD FROM
JUNE 2, 1997
YEAR ENDED FEBRUARY 28/29, (COMMENCEMENT OF
-------------------------- OPERATIONS) TO
2000 1999 FEBRUARY 28, 1998
--------- --------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period........................ $ 10.51 $ 11.87 $ 11.56
-------- -------- --------
Income from investment operations:
Net investment income(1).................................. 0.44 0.31 0.17(4)
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) --(5)
From net realized gains................................... (0.65) (0.56) (0.83)
In excess of net realized gains........................... --(6) -- --
-------- -------- --------
Total distributions..................................... (1.08) (1.13) (1.16)
-------- -------- --------
Net asset value, end of period.............................. $ 10.78 $ 10.51 $ 11.87
======== ======== ========
Total Return(2)............................................. 12.77% (2.27)% 13.31%(7,8)
Ratios/Supplemental Data:
Net assets, end of period (000's)......................... $119,075 $127,600 $115,280
Net expenses to average daily net assets(3)............... 0.00% 0.00% 0.00%(9)
Net investment income to average daily net assets(1)...... 4.18% 2.50% 1.91%(9)
Portfolio turnover rate................................... 26% 10% 18%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts.... --(10) $ 0.01 $ 0.01
</TABLE>
(1) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
(2) Calculation excludes purchase premiums and redemption fees. Total returns
would be lower had certain expenses not been waived during the periods
shown.
(3) Net expenses excludes expenses incurred indirectly through investment in
underlying funds.
(4) Computed using average shares outstanding throughout the period.
(5) The per share distribution in excess of net investment income is $0.001.
(6) The per share distribution in excess of net realized gains was $0.001.
(7) Not annualized.
(8) The earliest class of shares of this Fund, Class I Shares, commenced
operations on July 29, 1996. For the period from July 29, 1996 to February
28, 1997, Class I Shares of this Fund had a Total Return equal to 15.85%.
For the period from March 1, 1997 to August 31, 1997, Class I Shares of
this Fund had a Total Return equal to 8.86%. Total operating expenses for
Class I shares were 0.13% higher than expected total operating expenses for
Class III Shares.
(9) Annualized.
(10) Fees and expenses waved or borne by the Manager were less than $0.01 per
share.
82
<PAGE> 85
FINANCIAL HIGHLIGHTS
(For a Share outstanding throughout each period)
U.S. SECTOR FUND
<TABLE>
<CAPTION>
CLASS III SHARES
----------------------------------------------------------
YEAR ENDED FEBRUARY 28/29,
----------------------------------------------------------
2000 1999 1998 1997 1996
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 4.63 $ 8.53 $ 13.03 $ 13.63 $ 11.06
------- ------- -------- -------- --------
Income from investment operations:
Net investment income(1).................................. 0.09(4) 0.10(4) 0.29(4) 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(2)............................................. 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(3)............... 0.00% 0.00% 0.27% 0.48% 0.48%
Net investment income to average daily net assets(1)...... 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>
(1) Recognition of net investment income is affected by the timing of the
declaration of dividends by the underlying funds in which the fund invests.
(2) Calculation excludes purchase premiums and redemption fees. Total returns
would be lower had certain expenses not been waived during the periods
shown.
(3) On August 20, 1997, the Fund began to invest a substantial portion of its
assets in other funds of GMO Trust and revised its voluntary expense waiver.
Net expenses exclude expenses incurred indirectly through investment in
underlying funds.
(4) Computed using average shares outstanding throughout the period.
INVESTMENT BY FIXED INCOME FUNDS IN
GMO ALPHA LIBOR FUND
The Fixed Income Funds may each invest without limitation in shares of GMO
Alpha LIBOR Fund (the "Alpha LIBOR Fund"). Shares of the Alpha LIBOR Fund are
not publicly offered, are not available for direct purchase by investors, and
are currently available only to other GMO Funds. The Alpha LIBOR Fund is managed
by GMO, and is intended to provide an efficient means for other GMO Funds to
achieve exposure to assets that each Fund might otherwise acquire directly.
The Alpha LIBOR Fund does not pay any investment management or shareholder
service fees to GMO. In addition, the Manager has agreed to bear all of the
Alpha LIBOR Fund's expenses (excluding brokerage commissions and other
investment-related costs, hedging transaction fees, extraordinary, non-recurring
and certain other unusual expenses (including taxes), securities lending fees
and expenses, interest expense and transfer taxes) to the extent such expenses
exceed 0.00% through at least June 30, 2001. The Alpha LIBOR Fund charges a
purchase premium of 0.05% on cash purchases of Fund shares.
The Alpha LIBOR Fund's investment objective is high total return. The Fund
seeks to achieve its objective by investing primarily in relatively high
quality, low volatility fixed income instruments. The Alpha LIBOR Fund's
benchmark is the 3-month London Inter Bank Offer Rate ("LIBOR"). The Alpha LIBOR
Fund is a non-diversified investment company.
The Alpha LIBOR Fund may invest in a wide range of government securities
(including securities issued by federal, state, local and foreign governments),
corporate debt securities, mortgage-related and asset-backed securities, money
market instruments, reverse repurchase agreements, and repurchase agreements.
The Alpha LIBOR Fund's fixed income investments may have all types of interest
rate, payment and reset terms, including fixed rate, adjustable rate, zero
coupon, contingent deferred, payment-in-kind, and auction rate features. The
Alpha LIBOR Fund will generally have a dollar-weighted portfolio duration of
zero to two years (excluding short-term investments). The Alpha LIBOR Fund may
invest up to 5% of its total assets in lower rated securities (also called "junk
bonds"). The Alpha LIBOR Fund may also use derivative instruments, including
options, futures, options on futures and swap contracts.
83
<PAGE> 86
The Funds' investments in the Alpha LIBOR Fund will be subject to the risks
associated with an investment in fixed income securities and related derivative
instruments. The principal risks of an investment in the Alpha LIBOR Fund
include Market Risk, Liquidity Risk, Derivatives Risk, Non-Diversification Risk,
Leveraging Risk, Credit and Counterparty Risk and Management Risk (as such terms
are used in "Summary of Principal Risks" in this Prospectus). As a result,
shareholders of each Fund investing in the Alpha LIBOR Fund will be indirectly
exposed to these risks, in addition to all risks associated with an investment
in the relevant Fund.
84
<PAGE> 87
GMO TRUST
ADDITIONAL INFORMATION
Each Fund's annual and semi-annual reports to shareholders contain
additional information about the Fund's investments. Each Fund's annual report
contains a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. The
Funds' annual and semi-annual reports, and the Funds' Statement of Additional
Information are available free of charge by writing to GMO, 40 Rowes Wharf,
Boston, Massachusetts 02110 or by calling collect (617) 346-7646. The Statement
contains more detailed information about each Fund and is incorporated by
reference into this Prospectus.
Investors can review and copy the Prospectus, Statement and reports at the
SEC's Public Reference Room in Washington, D.C. Information regarding the
operation of the Public Reference Room may be obtained by calling the SEC at
1-202-942-8090. Reports and other information about the Funds are available on
the Commission's Internet site at http://www.sec.gov. Copies of this information
may be obtained, upon payment of a duplicating fee, by writing the Public
Reference Section of the SEC, Washington, D.C. 20549-0102.
SHAREHOLDER INQUIRIES
Shareholders may request additional
information from and direct inquiries to:
Shareholder Services at
Grantham, Mayo, Van Otterloo & Co. LLC,
40 Rowes Wharf, Boston, MA 02110
1-617-346-7646 (CALL COLLECT)
1-617-439-4192 (FAX)
DISTRIBUTOR
Funds Distributor, Inc.
60 State Street
Boston, Massachusetts 02109
INVESTMENT COMPANY ACT FILE NO. 811-4347
<PAGE> 88
GMO TRUST
Prospectus
June 30, 2000
- TAX-MANAGED U.S. EQUITIES FUND
- TAX-MANAGED INTERNATIONAL EQUITIES FUND
- TAX-MANAGED SMALL COMPANIES FUND
-------------------------------
- GMO TRUST OFFERS A BROAD
SELECTION OF INVESTMENT
ALTERNATIVES TO INVESTORS.
- INFORMATION ABOUT OTHER FUNDS
OFFERED BY GMO TRUST IS
CONTAINED IN SEPARATE
PROSPECTUSES.
GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC
40 ROWES WHARF - BOSTON, MASSACHUSETTS 02110
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
<PAGE> 89
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
SUMMARIES OF FUND OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES....... 1
SUMMARY OF PRINCIPAL RISKS............................................. 5
FEES AND EXPENSES...................................................... 8
BENCHMARKS AND INDEXES................................................. 9
MANAGEMENT OF THE TRUST................................................ 10
DETERMINATION OF NET ASSET VALUE....................................... 11
HOW TO PURCHASE SHARES................................................. 12
HOW TO REDEEM SHARES................................................... 13
DISTRIBUTIONS AND TAXES................................................ 15
FINANCIAL HIGHLIGHTS................................................... 16
ADDITIONAL INFORMATION................................................. BACK COVER
SHAREHOLDER INQUIRIES.................................................. BACK COVER
DISTRIBUTOR............................................................ BACK COVER
</TABLE>
-i-
<PAGE> 90
SUMMARIES OF
FUND OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES
The following summaries describe each Fund's investment objective and
principal investment strategies. Each Fund may make other investments and engage
in other investment strategies that are not specifically described in the
summaries. More information about each Fund's possible investments and
strategies is set forth in the Statement of Additional Information. See the back
cover of this Prospectus for information about how to receive the Statement of
Additional Information. Unless described as fundamental in this Prospectus or in
the Statement of Additional Information, each Fund's investment objective and
policies may be changed by the Trustees without shareholder approval.
In many of the Fund summaries that follow, it is noted that a
particular Fund will "invest primarily in" a particular type of securities or
other assets. Investors should understand that this Prospectus uses the word
"invest" to mean not only direct investment in a particular asset but also
indirect investment in or exposure to the asset through the use of derivatives
and related instruments.
Investing in mutual funds involves risk. Each Fund is subject to
certain risks based on the types of investments in the Fund's portfolio and on
the investment strategies the Fund employs. Investors should refer to the
SUMMARY OF PRINCIPAL RISKS in the Prospectus at page 5 for a discussion of the
principal risks of investing in the Funds. See the Statement of Additional
Information for additional information about the risks of specific Fund
investments and strategies. Funds described in this Prospectus may not be
available for purchase in all states. This Prospectus is not an offering in any
state where an offering may not lawfully be made.
It is important for you to note:
- You may lose money on an investment in a Fund.
- An investment in the Funds is not a deposit of a bank and is
not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
<PAGE> 91
GMO TAX-MANAGED U.S. EQUITIES FUND
Fund Inception Date: 7/23/98
FUND CODES
------------------------------------------
Ticker Symbol Cusip
------ ------ -----
Class III GTMUX n/a 362008 71 6
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Tax-Managed U.S. Equities Fund seeks high
after-tax total return primarily through investment in U.S. equity securities.
The Fund's current benchmark is the GMO S&P 500 (After Tax).
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities of
companies chosen from among the 1000 companies with the largest equity
capitalization and whose securities are listed on a United States national
securities exchange. The Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivative instruments and related investment techniques to:
(i) hedge equity exposure; (ii) replace direct investing; and (iii) implement
shifts in investment exposure as a substitute for buying and selling securities.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and quantitative
investment principles to provide broad U.S. equity exposure. Using these
principles, the Manager employs a bottom-up approach to select stocks based on
factors such as fair value, earnings and price momentum, cash flow, book value,
and neglect (a measure of low analyst coverage and low price volatility). The
Manager then uses a top-down approach to favor sectors that it believes
represent the best long-term values within the U.S. stock market. The Manager
then uses a tax-sensitive optimization process to evaluate a stock's return
forecast and how much risk the stock adds to the portfolio, and to weigh the
risk of the entire portfolio relative to the Fund's benchmark. In addition, the
Manager explicitly considers expected transaction costs in the tax-sensitive
portfolio optimization.
RISKS: The most significant risks of an investment in the Fund are Market Risk,
Derivatives Risk, Leveraging Risk and Credit and Counterparty Risk. For more
information about these risks and other principal risks of an investment in the
Fund, see "Summary of Principal Risks" on page 5.
PERFORMANCE
The performance information below helps to show the risks of investing
in the Fund. The bar chart to the left shows the Fund's annual total return for
the period shown. Purchase premiums are not reflected in the bar chart; if
reflected, the returns would be lower. The table to the right shows how the
Fund's average annual total returns for different calendar periods compare with
those of a broad-based index. See "Benchmarks and Indexes" for a description of
the index. Performance results in the table reflect payment of Fund expenses;
returns for the comparative index do not reflect payment of any expenses. PAST
PERFORMANCE IS NOT NECESSARILY AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/CLASS III SHARES (BEFORE TAX)
Year Ending December 31, 1999
[BAR GRAPH}
1999 16.96%
Highest Quarter: 15.80% (4Q1999)
Lowest Quarter: -7.69% (3Q1999)
Year-to-Date (as of 3/31/00): 6.68%
AVERAGE ANNUAL TOTAL RETURN (BEFORE TAX)
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years Incept.
------ ------- -------- -------
<S> <C> <C> <C> <C>
7/23/98
Class III 16.80% N/A N/A 18.69%
S&P 500 21.04% N/A N/A 20.88%
</TABLE>
-2-
<PAGE> 92
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
Fund Inception Date: 7/29/98
<TABLE>
<CAPTION>
FUND CODES
-------------------------------------------
Ticker Symbol Cusip
------ ------ -----
<S> <C> <C> <C>
Class III GTMIX TxMngIntEq 362008 66 6
</TABLE>
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Tax-Managed International Equities Fund seeks high
after-tax total return primarily through investment in non-U.S. equity
securities. The Fund's current benchmark is the GMO EAFE (After Tax).
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities of
companies in developed markets in the MSCI Perspectives universe, which includes
issuers in the MSCI EAFE index, small companies and Canadian companies. The Fund
may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund will generally not invest in
securities of emerging markets issuers. The Fund may use exchange-traded and
over-the-counter derivatives and related instruments to: (i) hedge equity
exposure; (ii) replace direct investing; (iii) implement shifts in investment
exposure as a substitute for selling and buying securities; and (iv) adjust its
foreign currency exposure. The Fund's foreign currency exposure may differ
significantly from the currency exposure represented by its equity investments.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental and quantitative
investment principles to build an international equity portfolio. Using these
principles, the Manager creates forecasted returns for countries, sectors,
currencies and individual stocks. To forecast returns for countries, the Manager
examines factors such as trends in gross domestic products, market sentiment and
industrial competitiveness. For sectors, the Manager examines factors such as
relative valuations, economic sensitivity, profitability and size. For
currencies, the Manager examines factors such as export and producer price
parity, balance of payments and interest rates. For securities, the Manager
examines factors such as relative valuations in book value, earnings, cash flow,
sales, dividends and forecasted earnings as well as fair value, neglect, and
both price and earnings momentum. The Manager then uses a tax-sensitive
optimization process to weigh the trade off between a stock's return forecast
and how much risk the stock adds to the portfolio, the risk and forecasted
return of all active currency positions and the risk of the entire portfolio
relative to the Fund's benchmark. In addition, the Manager explicitly considers
expected transaction costs in the tax-sensitive portfolio optimization.
RISKS: The most significant risks of an investment in the Fund are Market Risk,
Derivatives Risk, Foreign Investment Risk, Currency Risk, Leveraging Risk and
Credit and Counterparty Risk. For more information about these risks and other
principal risks of an investment in the Fund, see "Summary of Principal Risks"
on page 5.
PERFORMANCE
The performance information below helps to show the risks of investing
in the Fund. The bar chart to the left shows the Fund's annual total return for
the period shown. Purchase premiums are not reflected in the bar chart; if
reflected, the returns would be lower. The table to the right shows how the
Fund's average annual total returns for different calendar periods compare with
those of a broad-based index. See "Benchmarks and Indexes" for a description of
the index. Performance results in the table reflect payment of Fund expenses;
returns for the comparative index do not reflect payment of any expenses. PAST
PERFORMANCE IS NOT NECESSARILY AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN/CLASS III SHARES (BEFORE TAX)
Year Ending December 31, 1999
[BAR GRAPH]
1999 15.25%
Highest Quarter: 9.83% (2Q1999)
Lowest Quarter: -0.40% (1Q1999)
Year-to-Date (as of 3/31/00): -5.38%
AVERAGE ANNUAL TOTAL RETURN (BEFORE TAX)
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years Incept.
------ ------- -------- -------
<S> <C> <C> <C> <C>
7/29/98
Class III 14.56% N/A N/A 11.23%
MSCI 26.96% N/A N/A 20.48%
EAFE
</TABLE>
-3-
<PAGE> 93
GMO TAX-MANAGED SMALL COMPANIES FUND
Fund Inception Date: 6/1/99
FUND CODES
---------------------------------------------
Ticker Symbol Cusip
------ ------ -----
Class III GTMSX TxMngSmCo 362008625
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Tax-Managed Small Companies Fund seeks to maximize
after-tax total return through investment in a portfolio of common stocks of
smaller companies primarily traded in the U.S. The Fund's current benchmark is
the GMO Russell 2500 Index (After Tax).
INVESTMENT UNIVERSE: The Fund invests primarily in the equity securities of
companies included in, or with total market capitalizations similar to those
companies included in, the Russell 2500 Index ("small companies"). The Russell
2500 Index is comprised of the smaller companies among the largest U.S.
companies. These small companies have average market capitalizations of less
than $1 billion. Companies in the Fund's portfolio may have market
capitalizations that are larger or smaller. The Fund may also use derivatives.
PRINCIPAL INVESTMENTS: The Fund intends to be fully invested, and will not
generally take temporary defensive positions through investment in cash and high
quality money market instruments. The Fund may use exchange-traded and
over-the-counter derivative instruments and related techniques to: (i) hedge
equity exposure; (ii) replace direct investing; and (iii) implement shifts in
investment exposure as a substitute for buying and selling securities.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses quantitative investment
principles to evaluate small capitalization stocks. Using these principles, the
Manager employs a bottom-up approach to select stocks based on factors such as
price to fair value, price to sales ratio, price to book ratio and cash flow
yield. Stocks that are inexpensive based on these factors are ranked highly. The
Manager then purchases stocks ranked highly in each of four factors, emphasizing
stocks that appear attractive in more than one strategy. The Manager then uses a
tax-sensitive optimization process to weigh the trade off between a stock's
return forecast and how much risk the stock adds to the portfolio, the risk and
forecasted return of all active currency positions and the risk of the entire
portfolio relative to the Fund's benchmark. In addition, the Manager explicitly
considers expected transaction costs in the tax-sensitive portfolio
optimization.
RISKS: The most significant risks of an investment in the Fund are Market Risk,
Derivatives Risk, Smaller Company Risk, Leveraging Risk and Credit and
Counterparty Risk. For more information about these risks and other principal
risks of an investment in the Fund, see "Summary of Principal Risks" on page 5.
No performance is included in this section because the Fund commenced operations
in 1999.
-4-
<PAGE> 94
SUMMARY OF PRINCIPAL RISKS
The value of your investment in a Fund changes with the values of that
Fund's investments. Many factors can affect those values, and you can lose money
by investing in the Funds. Factors that may affect a particular Fund's portfolio
as a whole are called "principal risks" and are summarized in this section. This
summary describes the nature of these risks but is not intended to include every
potential risk. The Funds could be subject to additional risks because the types
of investments made by each Fund change over time. The Statement of Additional
Information includes more information about the Funds and their investments.
- MARKET RISK. All of the Funds are subject to market risk, which is
the risk of unfavorable market-induced changes in the value of the securities
owned by a Fund. General market risks associated with investments in equity
securities include the following:
Equity Securities. A principal risk of each Fund is that the equity
securities held by the Fund will decline in value due to factors affecting the
issuing companies, their industries, or the economy and equity markets
generally. The values of equity securities may decline for a number of reasons
that directly relate to the issuing company, such as management performance,
financial leverage and reduced demand for the issuer's goods or services. They
may also decline due to factors that affect a particular industry or industries,
such as labor shortages or increased production costs and competitive conditions
within an industry. In addition, they may decline due to general market
conditions which are not specifically related to a company or industry, such as
real or perceived adverse economic conditions, changes in the general outlook
for corporate earnings, changes in interest or currency rates or adverse
investor sentiment generally.
The Funds maintain substantial exposure to equities and generally do
not attempt to time the market. Because of this exposure, the possibility that
stock market prices in general will decline over short or extended periods
subjects the Funds to unpredictable declines in the value of their shares, as
well as periods of poor performance.
Value Securities Risk. Some equity securities (generally referred to as
"value securities") are purchased primarily because they are selling at a price
lower than what is believed to be their true value and not necessarily because
the issuing companies are expected to experience significant earnings growth.
These securities bear the risk that the companies may not overcome the adverse
business developments or other factors causing their securities to be out of
favor, or that the market does not recognize the value of the company, such that
the price of the securities may decline or may not approach the value that the
Manager anticipates. Since value criteria are used extensively by the Manager
with each Fund, each Fund will be exposed to these risks.
Growth Securities Risk. Some equity securities (generally known as
"growth securities") are purchased primarily because it is believed that the
companies issuing the securities will experience relatively rapid earnings
growth. Growth securities typically trade at higher multiples of current
earnings than other types of stocks. Growth securities are often more sensitive
to general market movements than other types of stocks because their market
prices tend to place greater emphasis on future earnings expectations. At times
when it appears that these expectations may not be met, growth stock prices
typically fall. Each of the Funds may invest to a significant extent in growth
securities, and therefore each Fund is subject to these risks.
- LIQUIDITY RISK. Liquidity risk exists when particular investments are
difficult to purchase or sell due to a limited market or to legal restrictions,
such that a Fund may be prevented from selling particular securities at the
price at which the Fund values them. All of the Funds are subject to liquidity
risk. Funds with principal investment strategies that involve securities of
companies with smaller market capitalizations, foreign securities, derivatives
or securities with substantial market and/or credit risk tend to have the
greatest exposure to liquidity risk.
- SMALLER COMPANY RISK. Market risk and liquidity risk are particularly
pronounced for securities of companies with smaller market capitalizations.
These companies may have limited product lines, markets or financial resources
or they may depend on a few key employees. Securities of smaller companies may
trade less frequently and in lesser volume than more widely held securities and
their values may fluctuate more sharply than other securities. They may also
trade in the over-the-counter market or on a regional exchange, or may otherwise
have limited liquidity. Investments in smaller, less seasoned companies may
present greater opportunities for growth and capital appreciation, but also
involve greater risks than customarily are associated with larger, more
established companies. Each Fund may invest to a significant extent in the
securities of smaller companies. The Tax-Managed
-5-
<PAGE> 95
Small Companies Fund invests primarily in the securities of smaller companies
and therefore these risks may be particularly pronounced for this Fund.
- DERIVATIVES RISK. The Funds may use derivatives, which are financial
contracts whose value depends upon, or is derived from, the value of an
underlying asset, reference rate or index. Derivatives may relate to stocks,
bonds, interest rates, currencies or currency exchange rates, commodities, and
related indexes. The Funds may use derivatives for many purposes, including for
hedging and as a substitute for direct investment in securities or other assets.
The Funds may also use derivatives as a way to efficiently adjust the exposure
of the Funds to various securities, indexes and currencies without actually
selling current assets and purchasing different assets. This is generally done
either because the adjustment is expected to be relatively temporary or in
anticipation of effecting the sales and purchases of Fund assets over time. For
a description of the various derivative instruments that may be utilized by the
Funds, refer to the Statement of Additional Information.
The use of derivative instruments involves risks different from, or
greater than, the risks associated with investing directly in securities and
other more traditional investments. Derivatives are subject to a number of risks
described elsewhere in this section, including market risk, liquidity risk and
the credit risk of the counterparty to the derivatives contract. Since their
value is calculated and derived from the value of other assets, instruments or
references, there is greater risk that derivatives will be improperly valued.
Derivatives also involve the risk that changes in the value of the derivative
may not correlate perfectly with relevant assets, rates or indexes they are
designed to hedge or to closely track. Also, suitable derivative transactions
may not be available in all circumstances and there can be no assurance that a
Fund will engage in these transactions to reduce exposure to other risks when
that would be beneficial.
- FOREIGN INVESTMENT RISK. Funds that invest in securities traded
principally in securities markets outside the United States are subject to
additional and more varied risks, and may experience more rapid and extreme
changes in value. The securities markets of many foreign countries are
relatively small, with a limited number of companies representing a small number
of industries. Additionally, issuers of foreign securities may not be subject to
the same degree of regulation as U.S. issuers. Reporting, accounting and
auditing standards of foreign countries differ, in some cases significantly,
from U.S. standards. There are generally higher commission rates on foreign
portfolio transactions, transfer taxes, higher custodial costs and the
possibility that foreign taxes will be charged on dividends and interest payable
on foreign securities. Also, for lesser developed countries, nationalization,
expropriation or confiscatory taxation, adverse changes in investment or
exchange control regulations (which may include suspension of the ability to
transfer currency from a country), political changes or diplomatic developments
could adversely affect a Fund's investments. In the event of nationalization,
expropriation or other confiscation, a Fund could lose its entire investment in
foreign securities.
While all of the Funds are exposed to these risks to some extent, these
risks will be particularly pronounced for the Tax-Managed International Equities
Fund, which expects to invest a significant portion of its assets in foreign
securities.
- CURRENCY RISK. Currency risk is the risk that fluctuations in
exchange rates may negatively affect the value of a Fund's investments. Currency
risk includes both the risk that currencies in which a Fund's investments are
denominated or currencies in which a Fund has taken an active investment
position will decline in value relative to the U.S. Dollar and, in the case of
hedging positions, that the U.S. Dollar will decline in value relative to the
currency being hedged. Currency rates in foreign countries may fluctuate
significantly for a number of reasons, including the forces of supply and demand
in the foreign exchange markets, actual or perceived changes in interest rates,
and intervention (or the failure to intervene) by U.S. or foreign governments or
central banks, or by currency controls or political developments in the U.S. or
abroad.
The Tax-Managed International Equity Fund may engage in proxy hedging
of currencies by entering into derivative transactions with respect to a
currency whose value is expected to correlate to the value of a currency the
Fund owns or wants to own. In the case of cross-hedging positions, currency risk
also includes the risk that the two currencies may not move in relation to one
another as expected. In that case, the Fund could lose money on its
-6-
<PAGE> 96
investment and also lose money on the position designed to act as a proxy-hedge.
This Fund may also take active currency positions and may cross-hedge currency
exposure represented by its securities exposure into another foreign currency.
This may result in the Fund's currency exposure being substantially different
than that suggested by its securities investments.
All Funds that invest or trade in foreign currencies or in securities
denominated in foreign currencies or related derivative instruments may be
adversely affected by changes in foreign currency exchange rates. Currency risk
is particularly pronounced for the Tax-Managed International Equities Fund,
which regularly enters into derivative foreign currency transactions and may
take active long and short currency positions through exchange traded and
over-the-counter ("OTC") foreign currency transactions for investment purposes.
Derivative foreign currency transactions (such as futures, forwards and swaps)
may also involve leveraging risk in addition to currency risk as described below
under "Leveraging Risk."
- NON-DIVERSIFICATION RISK. Most analysts believe that overall risk can
be reduced through diversification, while concentration of investments in a
small number of securities increases risk. None of the Funds are "diversified"
within the meaning of the 1940 Act. This means they are permitted to invest in a
relatively small number of issuers and/or foreign currencies with greater
concentration of risk.
- LEVERAGING RISK. Each Fund's portfolio may at times be economically
leveraged when the Fund temporarily borrows money to meet redemption requests
and/or to settle investment transactions.
Additionally, the Funds may invest in derivatives and may enter into
reverse repurchase agreements. While none of the Funds intend to use derivatives
to create net exposure to securities, currencies or other assets in amounts
greater than the total assets of the relevant Fund, the Funds will often
consider derivative instruments as offsetting one another or other assets such
that only the net difference in the value of the derivatives and/or assets that
are offsetting will be considered for these purposes. In these cases, to the
extent that the offsetting positions do not behave in relation to one another as
expected, the Funds may perform as if they were leveraged.
This same compounding of risks can occur in the Tax-Managed
International Equities Fund, which may take on simultaneous long and short
positions in different currencies. While these long and short positions are
managed such that the Fund's net investment in foreign currency does not exceed
the Fund's net assets, a lack of correlation between currencies (which may or
may not be anticipated by the Manager) may expose more than one hundred percent
of the Fund's assets to currency risk. Similarly, the Funds may take long and
short positions on equity securities and/or "baskets" of equity securities,
including simultaneous positions through the use of a single derivative
instrument such as a swap contract or other over-the-counter derivative
instrument. A lack of correlation between the equity securities that are the
subject of these instruments (which may or may not be anticipated by the
Manager) could expose more than 100% of the Fund's portfolio to equity
securities risk.
- CREDIT AND COUNTERPARTY RISK. This is the risk that the issuer or
guarantor of a fixed income security, the counterparty to an OTC derivatives
contract, or a borrower of the Fund's securities, will be unable or unwilling to
make timely principal, interest or settlement payments, or to otherwise honor
its obligations.
Although the Funds do not expect to have a significant portion of their
portfolios invested in fixed income securities, the Funds are nonetheless
exposed to credit risk because they may make substantial use of OTC derivatives
(such as forward foreign currency contracts and swap contracts) and because they
may engage to a significant extent in the lending of Fund securities or use of
repurchase agreements.
- MANAGEMENT RISK. Each Fund is subject to management risk because it
relies on the Manager's ability to pursue its objective. The Manager will apply
investment techniques and risk analyses in making investment decisions for the
Funds, but there can be no guarantee that these will produce the desired
results. As noted above, the Manager may also fail to use derivatives
effectively, for example, choosing to hedge or not to hedge positions precisely
when it is least advantageous to do so. As indicated above, however, the Funds
are generally not subject to the risk of market timing because they generally
stay fully invested in the relevant asset class, such as domestic equities and
foreign equities.
-7-
<PAGE> 97
FEES AND EXPENSES
This table describes the fees and expenses you may pay if you buy and
hold shares of a Fund.
<TABLE>
<CAPTION>
GMO FUND NAME PURCHASE AND REDEMPTION ANNUAL FUND OPERATING EXPENSES
----------------------- ------------------------------
FEES (expenses that are deducted from Fund assets)
---
(fees paid directly to
Fund at purchase or
redemption)
-----------------------------------------------------------------------------------------------------------------------------
Cash
Purchase Redemption
Premium Fees
(as a % (as a % of Total
of amount amount Management Shareholder Other Operating Expense NET
invested)(1) redeemed)(4) Fee Service Fee Expenses Expenses Reimbursement(3) EXPENSES
----------- ---------- --- ----------- -------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax-Managed U.S.
Equities Fund -
Class III 0.14%(2) None 0.33% 0.15% 0.44% 0.92% 0.44% 0.48%
-----------------------------------------------------------------------------------------------------------------------------
Tax-Managed
International
Equities Fund -
Class III 0.60%(2) None 0.54% 0.15% 0.34% 1.03% 0.34% 0.69%
-----------------------------------------------------------------------------------------------------------------------------
Tax-Managed Small
Companies Fund -
Class III 0.50%(2) None 0.55% 0.15% 0.21% 0.91% 0.21% 0.70%
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES TO FEES AND EXPENSES:
1. Paid to and retained by the Fund to allocate portfolio transactions
costs caused by shareholder activity to the shareholder generating the
activity. Purchase premiums generally apply only to cash purchases.
2. Generally not waived due to offsetting transaction. May be waived only
in rare circumstances (i) if the purchase is part of an exchange from
or to another Fund and the Manager is able to transfer securities among
the Funds as part of effecting the transaction, (ii) if the Fund is
either substantially overweighted or underweighted in cash so that a
purchase will not require a securities transaction or (iii) in certain
other instances (not including offsetting transactions) if the Manager
determines that the purchase will not result in transaction costs to
the Fund.
3. The Manager has contractually agreed to reimburse each Fund with
respect to certain Fund expenses through at least June 30, 2001 to the
extent that the Fund's total annual operating expenses (excluding
Shareholder Service Fees, brokerage commissions and other
investment-related costs, hedging transaction fees, extraordinary,
non-recurring and certain other unusual expenses (including taxes),
securities lending fees and expenses and transfer taxes) would
otherwise exceed the percentage of that Fund's daily net assets set
forth under the heading "Management Fee" for each Fund.
4. Most redemption requests honored in whole or part by a distribution
in-kind of securities instead of cash, at the sole discretion of the
Manager.
EXAMPLES:
The examples illustrate the expenses you would incur on a $10,000
investment over the stated periods, assuming your investment had a 5% return
each year and the Fund's operating expenses remained the same (with or without
redemption at the end of each time period). The examples are for comparative
purposes only; they do not represent past or future expenses or performance, and
your actual expenses and performance may be higher or lower. Except as otherwise
noted, the expenses shown assume no reimbursement of expenses by the Manager.
<TABLE>
<CAPTION>
GMO FUND NAME 1 Year 3 5 Years 10 Years
(after Years
reimbursement)
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax-Managed U.S Equities Fund -
Class III $63 $263 $480 $1,103
------------------------------------------------------------------------------------------------
Tax-Managed International
Equities Fund - Class III $130 $352 $592 $1,282
------------------------------------------------------------------------------------------------
Tax-Managed Small Companies
Fund - Class III $121 $318 $531 $1,145
------------------------------------------------------------------------------------------------
</TABLE>
-8-
<PAGE> 98
BENCHMARKS AND INDEXES
The Manager measures each Fund's performance against a specific
benchmark or index (each, a "GMO Benchmark"), although none of the Funds is
managed as an "index fund" or "index-plus fund," and the actual composition of a
Fund's portfolio may differ substantially from that of its benchmark. Each
Fund's GMO Benchmark is listed under "Investment Objective" in the "Fund
Objectives and Principal Investment Strategies" section of the Prospectus. For
each of the Funds, the GMO benchmark differs from the broad-based index that the
SEC requires each Fund to use in the average annual return table because it is
measured on an "after tax" basis. This means that the Manager measures the
relevant Fund's after tax performance against the Manager's calculation of the
after tax performance of the relevant benchmark. Some general information about
each benchmark and index referred to in this Prospectus is provided in the table
below.
<TABLE>
<CAPTION>
ABBREVIATION FULL NAME SPONSOR OR DESCRIPTION
PUBLISHER
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GMO S&P 500 (After Tax) GMO S&P 500 Index (After GMO GMO calculates this index by applying a 40% tax
Tax) (credit) on short-term realized capital gains
(losses), a 40% tax on income, and a 20% tax (credit)
on long-term realized capital gains (losses) on the
securities comprising the S&P 500 Index.
----------------------------------------------------------------------------------------------------------------------------------
GMO EAFE (After Tax) GMO EAFE Index (After Tax) GMO GMO calculates this index by applying a 40% tax
(credit) on short-term realized capital gains
(losses), a 40% tax on income, and a 20% tax (credit)
on long-term realized capital gains (losses) on the
securities comprising the MSCI EAFE Index.
----------------------------------------------------------------------------------------------------------------------------------
GMO Russell 2500 Index GMO Russell 2500 Index GMO GMO calculates this index by applying a 40% tax on
(After Tax) (After Tax) income on the securities comprising the Russell 2500
Index.
----------------------------------------------------------------------------------------------------------------------------------
MSCI EAFE Morgan Stanley Capital Morgan Stanley Well-known, independently maintained and published
International Europe, Capital large capitalization international stock index.
Australia and Far East International
Index
----------------------------------------------------------------------------------------------------------------------------------
Russell 2500 Index Russell 2500 Index Frank Russell The Russell 2500 Index is an independently maintained
Company and published index composed of the 2,500 smallest
companies in the Russell 3000 Index (which in turn
measures the performance of the 3,000 largest U.S.
companies based on total market capitalization; these
3,000 companies represent approximately 98% of the
investable U.S. equity market), which represents
approximately 22% of the total market capitalization
of the Russell 3000 Index. As of the latest
reconstitution, the average market capitalization was
approximately $931.0 million; the median market
capitalization was approximately $630.0 million. The
largest company in the index had an approximate
market capitalization of $3.7 billion.
----------------------------------------------------------------------------------------------------------------------------------
S&P 500 Standard & Poor's 500 Standard & Well-known, independently maintained and published
Stock Index Poor's U.S. large capitalization stock index.
Corporation
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-9-
<PAGE> 99
MANAGEMENT OF THE TRUST
Grantham, Mayo, Van Otterloo & Co., LLC, 40 Rowes Wharf, Boston,
Massachusetts 02110 provides investment advisory services to the GMO Funds. GMO
is a private company, founded in 1977. As of May 31, 2000, GMO managed more than
$22 billion for institutional investors such as pension plans, endowments,
foundations and the GMO Funds.
Subject to the approval of the Trust's Board of Trustees, the Manager
establishes and modifies when necessary the investment strategies of the Funds.
In addition to its management services to the Funds, the Manager administers the
Fund's business affairs. During the fiscal year ended February 29, 2000, the
Manager received as compensation for management services rendered in such year
(after any applicable waivers or reimbursements), 0.00% of the Tax-Managed U.S.
Equities Fund that Fund's average daily net assets, 0.20% of the Tax-Managed
International Equities Fund average daily net assets and 0.34% of the
Tax-Managed Small Companies Fund's average daily net assets.
Each Fund pays the Manager a shareholder service fee for providing
direct client service and reporting, such as performance information reporting,
client account information, personal and electronic access to Fund information,
access to analysis and explanations of Fund reports and assistance to correct
and maintain client-related information.
Mr. R. Jeremy Grantham and Mr. Christopher Darnell have been primarily
responsible for the day-to-day management of each Fund since its inception. Mr.
Grantham is a founding partner and member of the Manager, and has been engaged
by the Manager in portfolio management since the Manager's inception in 1977.
Mr. Darnell joined the Manager in 1984. He is a member of the Manager, and has
been engaged by the Manager in portfolio management since 1984.
CUSTODIANS
Investors Bank & Trust Company ("IBT"), 200 Clarendon Street, Boston,
Massachusetts 02116, and Brown Brothers Harriman & Co., 40 Water Street, Boston,
Massachusetts 02109, serve as the Trust's custodians on behalf of the Funds.
TRANSFER AGENT
IBT serves as the transfer agent on behalf of the Funds.
-10-
<PAGE> 100
DETERMINATION OF NET ASSET VALUE
The net asset value or "NAV" of a share is determined as of the close
of regular trading on the New York Stock Exchange ("NYSE"), generally 4:00 p.m.
New York City time. A Fund may not determine its NAV on days during which no
security is tendered for redemption and no order to purchase or sell such
security is received by that Fund. A Fund's net asset value is determined by
dividing the total market value of the Fund's portfolio investments and other
assets, less any liabilities, by the total outstanding shares of the Fund. The
market value of the Fund's investments is generally determined as follows:
Exchange listed securities
- Last sale price or
- Most recent bid price (if no reported sale) or
- Broker bid (if the private market is more relevant in
determining market value than the exchange), based on where
the securities are principally traded and what their intended
disposition is
Unlisted securities (if market quotations are readily available)
- Most recent quoted bid price
Certain debt obligations (if less than sixty days remain until maturity)
- Amortized cost (unless circumstances dictate otherwise; for
example, if the issuer's creditworthiness has become impaired)
All other fixed income securities and options on those securities (includes
bonds, loans, structured notes)
- Closing bid supplied by a primary pricing source chosen by the
Manager
All other assets and securities (if no quotations are readily available)
- Fair value as determined in good faith by the Trustees or
persons acting at their direction
The Manager evaluates primary pricing sources on an ongoing basis, and
may change any pricing source at any time. However, the Manager will not
normally evaluate the prices supplied by the pricing sources on a day-to-day
basis. The Manager is kept informed of erratic or unusual movements (including
unusual inactivity) in the prices supplied for a security and may in its
discretion override any price supplied by a source (by taking a price supplied
from another) because of such price activity or because the Manager has other
reasons to believe that a price supplied may not be reliable. Certain securities
may be valued on the basis of a price provided by a principal market maker.
Prices provided by principal market makers may vary from the value that would be
realized if the securities were sold.
The values of foreign securities quoted in foreign currencies are
translated into U.S. dollars at current exchange rates or at such other rates as
the Trustees or persons acting at their direction may determine in computing net
asset value. Fluctuations in the value of foreign currencies in relation to the
U.S. dollar will affect the net asset value of shares of the Funds even though
there has not been any change in the values of such securities and options
measured in terms of the foreign currencies in which they are denominated.
Foreign exchanges and securities markets usually close prior to the
time the NYSE closes and values of foreign options and foreign securities will
be determined as of those earlier closings. Events affecting the values of
foreign securities may occasionally occur between the earlier closings and the
closing of the NYSE which will not be
-11-
<PAGE> 101
reflected in the computation of the Funds' net asset value. If an event
materially affecting the value of foreign securities occurs during that period,
then those securities may be valued at fair value as determined in good faith by
the Trustees or persons acting at their direction. In addition, because certain
Funds hold portfolio securities listed on foreign exchanges which may trade on
days on which the NYSE is closed, the net asset value of those Funds' shares may
be significantly affected on days when investors will have no ability to redeem
their shares in those Funds.
HOW TO PURCHASE SHARES
You may purchase a Fund's shares from the Trust on any day when the
NYSE is open for business. In addition, brokers and agents are authorized to
accept purchase and redemption orders on the Funds' behalf. Investors may be
charged a fee to effect a transaction through a broker or agent. To obtain a
purchase order form, call the Trust at (617) 346-7646 or your broker or agent.
Investors must have a minimum total investment of $1 million with the Manager to
invest in a Fund. There is no minimum additional investment required to purchase
additional shares of a Fund. The Trust may waive the minimum initial investment
amount for certain accounts.
PURCHASE POLICIES. Before a purchase order will be acted upon by the
Trust, the Trust must determine that the purchase order is in "good order." A
purchase order is in "good order" if:
- a completed purchase order, containing the following
information, is submitted to the Trust or its agent:
- signature exactly in accordance with the form of
registration
- the exact name in which the shares are registered
- the investor's account number
- the number of shares or the dollar amount of shares
to be purchased
- the purchase order is received and accepted by the Trust or
its agent (the Trust reserves the right to reject any order)
- payment (by check or wire) for the purchase is received before
4:00 p.m. on the day the purchase order is accepted
- if an investor provides adequate written assurances
of intention to pay, the Trust may extend settlement
up to four business days.
The purchase price of a share of any Fund is the net asset value per
share next determined after the purchase order is determined to be in "good
order" PLUS a purchase premium, if any, for the Fund shares to be purchased.
Purchase order forms received by the Trust or its agent after the deadline will
be honored on the next following business day, and the purchase price will be
effected based on the net asset value per share computed on that day. See "Fees
and Expenses" on page 8 to determine if shares of the Fund you want to purchase
are subject to a purchase premium.
SUBMITTING YOUR PURCHASE ORDER FORM. Completed purchase order forms can
be submitted by MAIL or by FACSIMILE to the Trust at:
GMO Trust
c/o Grantham, Mayo, Van Otterloo & Co. LLC
40 Rowes Wharf
Boston, Massachusetts 02110
Facsimile: (617) 439-4192
Attention: Shareholder Services
Call the Trust at (617) 346-7646 to CONFIRM RECEIPT of your purchase
order form. Do not send cash, checks or securities directly to the Trust.
-12-
<PAGE> 102
FUNDING YOUR INVESTMENT. You may purchase shares:
- with cash (via wire transfer or check)
- BY WIRE. Instruct your bank to wire the amount of
your investment to:
Investors Bank & Trust, Boston, Massachusetts
ABA#: 011-001-438
Attn: Transfer Agent
Credit: GMO Deposit Account 55555-4444
Further credit: GMO Fund/shareholder name and number
- BY CHECK. All checks must be made payable to the
appropriate Fund or to GMO Trust. The Trust will NOT
accept any checks payable to a third party which have
been endorsed by the payee to the Trust. Mail checks
to:
By U.S. postal service: By overnight courier:
----------------------- ---------------------
Investors Bank & Trust Company Investors Bank & Trust Company
GMO Transfer Agent MFD 23 GMO Transfer Agent MFD 23
P.O. Box 9130 200 Clarendon Street, 16th Floor
200 Clarendon Street, 16th Floor Boston, MA 02117-9130
Boston, MA 02117-9130
- by exchange (from another GMO product)
- written instruction should be sent to GMO Trust's
Shareholder Services at (617) 439-4192 (facsimile).
- in exchange for securities acceptable to the Manager
- securities must be approved by the Manager prior to
transfer to the Fund
- securities will be valued as set forth under
"Determination of Net Asset Value" on page 11
- by a combination of cash and securities.
HOW TO REDEEM SHARES
You may redeem shares of a Fund on any day when the NYSE is open for
business.
REDEMPTION POLICIES. Payment on redemption will be made as promptly as
possible (generally on the next business day) and no later than seven days
(subject to the exceptions noted below) after the request for redemption is
received by the Trust or its agent in "good order."
A redemption request is in "good order" if it:
- is received by the Trust or its agent prior to the close of
regular trading on the NYSE (generally 4:00 p.m. New York City
time)
- is signed exactly in accordance with the form of registration
- includes the exact name in which the shares are registered
- includes the investor's account number
- includes the number of shares or the dollar amount of shares
to be redeemed
Redemption requests received by the Trust or its agent after the
deadline will be honored on the next following business day, and the redemption
will be effected based on the net asset value per share computed on that
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<PAGE> 103
day. The redemption price is the net asset value per share next determined after
the redemption request is determined to be in "good order."
If the Manager determines, in its sole discretion, that it would be
detrimental to the best interests of the remaining shareholders to make a
redemption payment wholly or partly in cash, the Fund may pay the redemption
price in whole or in part by a distribution in-kind of securities held by the
Fund instead of cash. Investors in the Tax-Managed Funds should be aware that
they may be more likely to have a redemption request honored "in kind" than
shareholders in other funds.
If a redemption is made in cash:
- payment will be made in federal funds transferred to the
account designated in writing by authorized persons
- designation of additional accounts and any change in
the accounts originally designated must be made in
writing.
- upon request, payment will be made by check mailed to the
registration address
If a redemption is made in-kind, it is important for you to note:
- securities used to redeem Fund shares will be valued as set
forth under "Determination of Net Asset Value" on page 11
- securities distributed by a Fund will be selected by the
Manager in light of the Fund's objective and will not
generally represent a pro rata distribution of each security
held in the Fund's portfolio
- to the extent available, in-kind redemptions will be of
readily marketable securities
- you may incur brokerage charges on the sale of any securities
received as a result of an in-kind redemption
- in-kind redemptions will be transferred and delivered by the
Trust as directed by you
Each Fund may suspend the right of redemption and may postpone payment
for more than seven days:
- if the NYSE is closed for other than weekends or holidays
- during periods when trading on the NYSE is restricted
- during an emergency which makes it impracticable for a Fund to
dispose of its securities or to fairly determine the net asset
value of the Fund
- during any other period permitted by the Securities and
Exchange Commission for the protection of investors.
SUBMITTING YOUR REDEMPTION REQUEST. Redemption requests can be
submitted by MAIL or by FACSIMILE to the Trust at the address/facsimile number
set forth under "How to Purchase Shares -- Submitting Your Purchase Order Form."
Redemption requests submitted by mail are "received" by the Trust when actually
delivered to the Trust or its agent. Call the Trust at (617) 346-7646 to CONFIRM
RECEIPT of redemption requests.
-14-
<PAGE> 104
DISTRIBUTIONS AND TAXES
The policy of the Tax-Managed U.S. Equities Fund and the Tax-Managed
Small Companies Fund is to declare and pay distributions of their dividends and
interest quarterly. The policy of the Tax-Managed International Equities Fund is
to declare and pay distributions of its dividends, interest and foreign currency
gains semi-annually. Each Fund also intends to distribute net gains from the
sale of securities held for not more than one year ("net short-term capital
gains") and net gains from the sale of securities held for one year or more
("net long-term capital gains") at least annually. Each Fund is treated as a
separate taxable entity for federal income tax purposes and intends to qualify
each year as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended.
All dividends and/or distributions will be paid in shares of the
relevant Fund, at net asset value, unless the shareholder elects to receive
cash. There is no purchase premium on reinvested dividends or distributions.
Shareholders may make this election by marking the appropriate box on the
application or by writing to the Trust.
It is important for you to note:
- Fund distributions derived from interest, dividends and certain other
income, including in general short-term capital gains, will be taxable
as ordinary income to shareholders subject to federal income tax
whether paid in cash or in shares. Properly designated Fund
distributions derived from net long-term capital gains will be taxable
as such (generally at a 20% federal rate for noncorporate shareholders
whether paid in cash or in shares).
- Distributions by a Fund result in a reduction in the net asset value of
the Fund's shares. If a distribution reduces the net asset value of a
shareholder's shares below a shareholder's cost basis in those shares,
such distribution may be taxable to the shareholder, even though, from
an investment standpoint, it may constitute a partial return of
capital. In particular, if you buy shares just prior to a taxable
distribution by a Fund, you will pay the full price of the shares
(including the value of the pending distribution) and then receive a
portion of the price back as a taxable distribution.
- A Fund's investment in foreign securities may be subject to foreign
withholding taxes on dividends, interest or capital gains which will
decrease the Fund's yield. In certain instances, shareholders may be
entitled to claim a credit or deduction with respect to foreign taxes.
- A Fund's investment in foreign securities, foreign currencies, debt
obligations issued or purchased at a discount, asset-backed securities,
assets "marked to the market" for federal income tax purposes and,
potentially, so-called "indexed securities" (including inflation
indexed bonds) may increase or accelerate a Fund's recognition of
income, including the recognition of taxable income in excess of the
cash generated by such investments. These investments may, therefore,
affect the timing or amount of a Fund's distributions and may cause a
Fund to liquidate other investments at a time when it is not
advantageous to do so in order to satisfy the distribution requirements
that apply to entities taxed as regulated investment companies.
- Any gain resulting from the sale, exchange or redemption of your
shares, including a redemption in kind, will generally also be subject
to tax.
- A Fund's hedging transactions and investments in derivatives, including
investments in options, futures and swaps, will be subject to special
tax rules (including constructive sale, mark-to-market, straddle, wash
sale and short sale rules) which could accelerate income, defer losses,
or otherwise affect the amount, timing or character of distributions to
shareholders.
The above is a general summary of the principal federal income tax
consequences of investing in a Fund for shareholders who are U.S. citizens,
residents or domestic corporations. You should consult your own tax advisors
about the precise tax consequences of an investment in a Fund in light of your
particular tax situation, including possible foreign, state, local or other
applicable tax laws (including the federal alternative minimum tax).
-15-
<PAGE> 105
FINANCIAL HIGHLIGHTS
The financial highlight tables are intended to help you understand each
Fund's financial performance for the past five years (or, if shorter, the period
of the Fund's operations). Certain information reflects financial results for a
single Fund share. The total returns in the tables represent the rate that an
investor would have earned (or lost) on an investment in the Fund (assuming
reinvestment of all dividends and distributions). Except as otherwise noted,
this information has been audited by PricewaterhouseCoopers LLP, independent
accountants, whose report, along with the Fund's financial statements, is
included in the Trust's Annual Reports, which are incorporated by reference in
the Statement of Additional Information and available upon request.
Information is presented for each Fund, and class of shares thereof, of the
Trust which had investment operations during the reporting periods and is
currently being offered.
TAX-MANAGED U.S. EQUITIES FUND
<TABLE>
<CAPTION>
Year Ended Period from July 23, 1998
February 29, (commencement of operations)
2000 through 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 Return1 ............................................. 19.83% 7.48%(2)
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%(3)
Net investment income to average daily net assets .... 1.11% 1.30%(3)
Portfolio turnover rate .............................. 19% 33%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amount: $ 0.05 $ 0.10
</TABLE>
(1) Calculation excludes purchase premiums. Total returns would be lower
had certain expenses not been waived during the period shown.
(2) Not annualized.
(3) Annualized.
-16-
<PAGE> 106
TAX-MANAGED INTERNATIONAL EQUITIES FUND
<TABLE>
<CAPTION>
Year Ended Period from July 29, 1998
February 29, (commencement of operations)
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(2) 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(1) ................................................. 8.65% (2.44%)(3)
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%(4)
Net investment income to average daily net assets .......... 1.36% 0.87%(4)
Portfolio turnover rate .................................... 5% 20%
Fees and expenses voluntarily waived or borne by the Manager
Consisted of the following per share amount: ............. $ 0.04 $ 0.12
</TABLE>
(1) Calculation excludes purchase premiums. Total returns would be lower
had certain expenses not been waived during the period shown.
(2) Computed using average shares outstanding throughout the period.
(3) Not annualized.
(4) Annualized.
TAX-MANAGED SMALL COMPANIES FUND
<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 gain (less)..................................... (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(1).................................................................. (4.25%)(2)
Ratios/Supplemental Data:........................................................
Net assets, end of period (000's)............................................ $39,000
Net expenses to average daily net assets..................................... 0.70%(3)
Net investment income to average daily net assets............................ 1.08%(3)
Portfolio turnover rate...................................................... 18%
Fees and expenses voluntarily waived or borne by the Manager
Consisted of the following per share amount:.............................. $ 0.01
</TABLE>
(1) Calculation excludes purchase premiums. Total returns would be lower
had certain expenses not been waived during the period shown.
(2) Not annualized.
(3) Annualized.
-17-
<PAGE> 107
GMO TRUST
ADDITIONAL INFORMATION
Each Fund's annual and semi-annual reports to shareholders contain
additional information about the Fund's investments. Each Fund's annual report
contains a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. The
Funds' annual and semi-annual reports, and the Funds' Statement of Additional
Information are available free of charge by writing to GMO, 40 Rowes Wharf,
Boston, Massachusetts 02110 or by calling collect (617) 346-7646. The Statement
contains more detailed information about each Fund and is incorporated by
reference into this Prospectus.
Investors can review and copy the Prospectus, Statement and reports at
the SEC's Public Reference Room in Washington, D.C. Information regarding the
operation of the Public Reference Room may be obtained by calling the SEC at
1-202-942-8090. Reports and other information about the Funds are available on
the SEC's Internet site at http://www.sec.gov. Copies of this information may be
obtained, upon payment of a duplicating fee, by writing the Public Reference
Section of the SEC, Washington, D.C. 20549-0102.
SHAREHOLDER INQUIRIES
Shareholders may request additional
information from and direct inquiries to:
Shareholder Services at
Grantham, Mayo, Van Otterloo & Co. LLC,
40 Rowes Wharf, Boston, MA, 02110
1-617-346-7646 (CALL COLLECT)
DISTRIBUTOR
Funds Distributor, Inc.
60 State Street
Boston, Massachusetts 02109
INVESTMENT COMPANY ACT FILE NO. 811-4347
<PAGE> 108
GMO
PELICAN FUND
40 ROWES WHARF, BOSTON, MASSACHUSETTS 02110
(617) 346-7600
--------------------------------------------------------------------------------
Pelican Fund (the "Fund") is one of thirty-eight separate investment
portfolios currently offered by GMO Trust (the "Trust"), an open-end management
investment company. The Fund's investment manager is Grantham, Mayo, Van
Otterloo & Co. LLC (the "Manager").
Pelican Fund is a diversified portfolio that seeks long-term capital growth
primarily through investment in equity securities.
INVESTMENT MANAGER &
CLIENT SERVICE PROVIDER
GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC
("GMO")
Tel: (617) 330-7500 (call collect)
Fax: (617) 439-4132
--------------------------------------------------------------------------------
These securities have not been approved or disapproved by the Securities and
Exchange Commission or any state securities commission nor has the Securities
and Exchange Commission or any state securities commission passed on the
accuracy or adequacy of this Prospectus. Any representation to the contrary is a
criminal offense.
--------------------------------------------------------------------------------
Prospectus June 30, 2000
<PAGE> 109
TABLE OF CONTENTS
<TABLE>
<S> <C>
Fund Objective and Principal Investment Strategies ........ 1
Performance ............................................... 2
Summary of Principal Risks ................................ 3
Fees and Expenses ......................................... 6
Management ................................................ 7
Distributions, Reinvestment and Taxes ..................... 7
How to Purchase Shares .................................... 9
How to Redeem Shares ...................................... 10
How Shares are Priced ..................................... 12
Financial Highlights ...................................... 14
Additional Information .................................... Back Cover
Distributor ............................................... Back Cover
Shareholder Inquiries ..................................... Back Cover
</TABLE>
<PAGE> 110
FUND OBJECTIVE AND SUMMARY OF PRINCIPAL
INVESTMENT STRATEGIES
THE SUMMARY BELOW DESCRIBES THE FUND'S INVESTMENT OBJECTIVE AND PRINCIPAL
INVESTMENT STRATEGIES. A "Summary of Principal Risks" describing the principal
risks of investing in the Fund begins on page 3. Except for certain policies
that are explicitly described as fundamental in this Prospectus or in the
Statement of Additional Information, the investment policies of the Fund and the
Fund's investment objective may be changed by the Trustees without shareholder
approval.
<TABLE>
<CAPTION>
FUND CODES
TICKER SYMBOL CUSIP
------ ------ -----
<S> <C> <C> <C>
Fund Inception Date: 5/31/89 PELFX Pelican 705807 10 5
</TABLE>
INVESTMENT OBJECTIVE: The Fund seeks long-term growth of capital primarily
through investment in equity securities. The Fund's current benchmark is the
Standard & Poor's 500 Composite Stock Market Index ("S&P 500").
INVESTMENT UNIVERSE: The Fund invests primarily in U.S. equity securities and,
to a lesser extent, in foreign equity securities and debt securities.
PRINCIPAL INVESTMENTS: The Fund invests primarily in equity securities traded in
the United States but may invest a portion of its assets in equity securities
traded outside of the United States. The Fund may invest in equity securities of
companies of any market capitalization. The Fund may also invest without
limitation in debt securities, and may take temporary defensive positions
through investment in cash and high quality money market instruments. The Fund
seeks to maximize risk-adjusted portfolio returns by maintaining an average
historical volatility (beta) that is lower than that of the S&P 500 Index.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Fund uses fundamental investment
principles and traditional portfolio analysis to obtain broad market exposure
for the U.S. equity portion of the portfolio. Using these principles, the
Manager focuses on selecting stocks of issuers with financial, business and
valuation characteristics that it believes will produce above-average returns,
and emphasizes established, financially secure companies. The Manager employs a
bottom-up approach to select stocks, and uses various techniques in seeking
companies which trade below fair value, as determined by the value of the
issuer's earnings stream (using a proprietary dividend discount model), asset
value and/or franchise value. The Fund's portfolio generally consists of 100-125
stocks.
================================================================================
PELICAN FUND 1
<PAGE> 111
PERFORMANCE
THE TWO FIGURES BELOW HELP TO ILLUSTRATE THE RISKS OF INVESTING IN THE
FUND. The annual total return bar chart shows how the returns of the Fund's
shares have varied from year to year, and the average annual total return table
compares the Fund's performance to the S&P 500, a broad-based index. The S&P 500
is a well-known U.S. large capitalization stock index that is independently
maintained and published by Standard & Poor's. PAST PERFORMANCE IS NOT
NECESSARILY AN INDICATION OF FUTURE PERFORMANCE.
ANNUAL TOTAL RETURN
Years ended December 31
[ANNUAL TOTAL BARGRAPH]
<TABLE>
<CAPTION>
Years ended
December 31 Annual Total Return
----------- -------------------
<S> <C>
1999 2.76%
1998 11.67%
1997 26.53%
1996 20.69%
1995 29.82%
1994 3.08%
1993 20.10%
1992 12.74%
1991 24.90%
1990 -8.82%
</TABLE>
Highest quarter: 15.54% (1Q1991) Lowest Quarter -14.23% (3Q1990)
Year-to-Date (as of 3/31/00): -0.96%
AVERAGE ANNUAL TOTAL RETURN
Periods ended December 31
<TABLE>
<CAPTION>
Since
Inception
1 Year 5 Year 10 Year 5/31/89
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pelican Fund 2.76% 17.86% 13.71% 13.27%
S&P 500 21.04% 28.54% 18.20% 18.41%
</TABLE>
================================================================================
2 PELICAN FUND
<PAGE> 112
SUMMARY OF PRINCIPAL RISKS
THE VALUE OF YOUR INVESTMENT IN THE FUND CHANGES WITH THE VALUES OF THE
FUND'S INVESTMENTS. Many factors can affect those values. Factors that may
affect a particular Fund's portfolio as a whole are called "principal risks" and
are summarized in this section. This summary describes the nature of these risks
but is not intended to include every potential risk. The Fund could be subject
to additional risks because the types of investments made by the Fund change
over time. It is possible to lose money on an investment in the Fund. An
investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. For additional detailed information regarding the Fund's investment
strategies and risks, see "Description and Risks of Fund Investments" and
"Investment Guidelines" in the Statement of Additional Information. The
Statement of Additional Information is available free of charge by contacting
the Manager.
- MARKET RISK. The Fund is subject to market risk, which is the risk of
unfavorable market-induced changes in the value of the securities owned by the
Fund. General market risks associated with investments in equity and fixed
income securities include the following:
Equity Securities. A principal risk of the Fund is that the equity
securities in which it invests will decline in value due to factors affecting
the issuing companies, their industries,or the economy and equity markets
generally. The values of equity securities may decline for a number of reasons
which directly relate to the issuing company, such as management performance,
financial leverage and reduced demand for the issuer's goods or services. They
may also decline due to factors which affect a particular industry or
industries, such as labor shortages or increased production costs and
competitive conditions within an industry. In addition, they may decline due to
general market conditions which are not specifically related to a company or
industry, such as real or perceived adverse economic conditions, changes in the
general outlook for corporate earnings, changes in interest or currency rates or
adverse investor sentiment generally.
Some equity securities, generally referred to as value securities, are
purchased primarily because they are selling at a price lower than what is
believed to be their true value and not necessarily because the issuing
companies are expected to experience significant earnings growth. These
securities bear the risk that the companies may not overcome the adverse
business developments or other factors causing these securities to be out of
favor, or that the market does not recognize the value of the company, such that
the price of its securities may decline or may not approach the value that the
Manager anticipates.
The Fund maintains substantial exposure to equities and generally does not
attempt to
================================================================================
PELICAN FUND 3
<PAGE> 113
time the market. Because of this exposure, the possibility that stock market
prices in general will decline over short or even extended periods subjects the
Fund to unpredictable declines in the value of its shares, as well as periods of
poor performance.
Fixed Income Securities. The value of the Fund's investments in fixed
income securities (including bonds and notes) will typically change as interest
rates fluctuate. During periods of rising interest rates, the values of fixed
income securities generally decline. Conversely, during periods of falling
interest rates, the values of fixed income securities generally rise. This kind
of market risk, also called interest rate risk, will generally increase to the
extent the Fund invests in fixed income securities with longer durations (i.e.,
with longer maturities).
- SMALLER COMPANY RISK. Market risk and liquidity risk are particularly
pronounced for securities of companies with smaller market capitalizations.
These companies may have limited product lines, markets or financial resources
or they may depend on a few key employees. Securities of smaller companies may
trade less frequently and in lesser volume than more widely held securities and
their values may fluctuate more sharply than other securities. They may also
trade in the over-the-counter market or on a regional exchange, or may otherwise
have limited liquidity. Investments in smaller, less seasoned companies may
present greater opportunities for growth and capital appreciation, but also
involve greater risks than customarily are associated with larger, more
established companies.
- FOREIGN INVESTMENT RISK. The Fund may invest in securities traded
principally in securities markets outside the United States that are subject to
additional and more varied risks and may experience more rapid and extreme
changes in value. The securities markets of many foreign countries are
relatively small, with a limited number of companies representing a small number
of industries. Additionally, issuers of foreign securities may not be subject to
the same degree of regulation as U.S. issuers. Reporting, accounting and
auditing standards of foreign countries differ, in some cases significantly,
from U.S. standards. There are generally higher commission rates on foreign
portfolio transactions, transfer taxes, higher custodial costs and the
possibility that foreign taxes will be charged on dividends and interest payable
on foreign securities. Also, for lesser developed countries, nationalization,
expropriation or confiscatory taxation, adverse changes in investment or
exchange control regulations (which may include suspension of the ability to
transfer currency from a country), political changes or diplomatic developments
could adversely affect the Fund's investments. In the event of nationalization,
expropriation or other confiscation, the Fund could lose its entire investment
in foreign securities.
- CURRENCY RISK. Currency risk is the risk that fluctuations in the
exchange rates may negatively affect the value of the Fund's investments.
Currency risk means that
================================================================================
4 PELICAN FUND
<PAGE> 114
currencies in which the Fund's investments are denominated or currencies in
which the Fund has taken on an active investment position will decline in value
relative to the U.S. Dollar. Currency rates in foreign countries may fluctuate
significantly for a number of reasons, including the forces of supply and demand
in the foreign exchange markets, actual or perceived changes in interest rates,
and intervention (or the failure to intervene) by U.S. or foreign governments or
central banks, or by currency controls or political developments in the U.S. or
abroad.
- CREDIT RISK. This is the risk that the issuer or guarantor of a fixed
income security, the counterparty to an OTC derivatives contract, or a borrower
of the Fund's securities, will be unable or unwilling to make timely principal,
interest or settlement payments, or to otherwise honor its obligations.
- MANAGEMENT RISK. The Fund is subject to management risk because it
relies on the Manager's ability to pursue its objective. The Manager will apply
investment techniques and risk analyses in making investment decisions for the
Fund, but there can be no guarantee that these will produce the desired results.
As noted above, the Manager may also fail to use derivatives effectively, for
example, choosing to hedge or not to hedge positions precisely when it is least
advantageous to do so. As indicated above, however, the Fund is generally not
subject to the risk of market timing because it generally stays fully invested
in the relevant asset class, such as domestic equities and foreign equities.
================================================================================
PELICAN FUND 5
<PAGE> 115
FEES AND EXPENSES
THE FOLLOWING TABLE DESCRIBES THE FEES AND EXPENSES YOU MAY PAY IF YOU BUY AND
HOLD SHARES OF THE FUND:
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS):
(as a percentage of average net assets)
<TABLE>
<S> <C>
Investment Management Fee ................................................. 0.75%
Other Operating Expenses .................................................. 0.14%
----
Total Fund Operating Expenses.............................................. 0.89%
Expense Reimbursement(1)................................................... 0.14%
----
NET EXPENSES............................................................... 0.75%
</TABLE>
(1) The Manager has contractually agreed to reimburse the Fund with respect
to certain Fund expenses through at least June 30, 2001 to the extent that
the Fund's total annual operating expenses (excluding brokerage commissions
and other investment-related costs, hedging transaction fees,
extraordinary, non-recurring and certain other unusual expenses (including
taxes), and transfer taxes) would otherwise exceed 0.75% of the Fund's
average daily net assets.
EXAMPLE:
The example below illustrates the expenses you would incur on a $10,000
investment over the stated periods, assuming your investment had a 5% return
each year and the Fund's operating expenses remained the same (with or without a
redemption at the end of each time period). The examples are for comparative
purposes only; they do not represent past or future expenses or performance, and
your actual expenses and performance may be higher or lower.
<TABLE>
<S> <C>
One Year (after waiver)........... $ 77
Three Years....................... $ 270
Five Years........................ $ 479
Ten Years......................... $1,083
</TABLE>
================================================================================
6 PELICAN FUND
<PAGE> 116
MANAGEMENT
MANAGER. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co.
LLC, 40 Rowes Wharf, Boston, Massachusetts 02110 (the "Manager"), which provides
investment advisory services to a substantial number of institutional and other
investors. The Manager also advises each of the other GMO Funds.
Under a Management Contract with the Trust, the Manager selects and reviews
the Fund's investments and provides executive and other personnel for the
management of the Trust. Pursuant to the Trust's Agreement and Declaration of
Trust, the Board of Trustees supervises the affairs of the Trust as conducted by
the Manager. The Manager received 0.80% of the average net assets of the Fund
during the fiscal year ended February 29, 2000 as compensation for advisory
services rendered during that year. Effective February 1, 2000, the Manager
agreed to reduce the management fee to the annual rate of 0.75% of the Fund's
average daily net assets.
Mr. Richard Mayo is primarily responsible for the day-to-day management of
the Fund's portfolio. Mr. Mayo serves as President - Domestic Active of the
Trust and is a founding member of the Manager. He has been a portfolio manager
for more than twenty-five years and has been employed by the Manager in such
capacity since its inception in 1977.
CUSTODIAN, TRANSFER, AND DIVIDEND PAYING AGENT. State Street Bank and
Trust Company ("State Street Bank"), 225 Franklin Street, Boston, Massachusetts,
serves as custodian for the Fund. Boston Financial Data Services, Inc. (BFDS),
Two Heritage Drive, Quincy, Massachusetts, serves as transfer agent and dividend
paying agent for the Fund.
DISTRIBUTIONS, REINVESTMENT AND TAXES
THE FUND INTENDS TO PAY DIVIDENDS QUARTERLY FROM NET INVESTMENT INCOME AND TO
DISTRIBUTE ANNUALLY ANY NET REALIZED CAPITAL GAINS. Unless a shareholder
otherwise requests, all dividends and distributions are credited to a
shareholder's account as full and fractional shares of the Fund at the net asset
value in effect as of the dividend or distribution date. Shareholders may elect
to receive in cash all of their future dividends and distributions on shares of
the Fund by so notifying the Trust in writing. Such an election may be changed
at any time by subsequent written notice to the Trust.
It is the policy of the Fund each year to distribute to shareholders
substantially all of its net investment income and gains and to meet all
applicable requirements of the Internal Revenue Code of 1986, as amended (the
================================================================================
PELICAN FUND 7
<PAGE> 117
"Code"), for qualifying as a regulated investment company in order for the Fund
to be relieved of liability for federal income taxes.
For those shareholders subject to federal income tax, dividends and
capital gain distributions are taxable whether credited in shares or paid in
cash.
Dividends from net investment income and distributions of net short-term
gains (i.e., net gains from securities held for not more than a year) are
taxable as ordinary income to shareholders subject to tax. Distributions
properly designated by the Fund as deriving from net gains on securities held
for more than 12 months will generally be taxable for federal income tax
purposes as such to shareholders subject to tax (generally at a 20% rate for
noncorporate shareholders), regardless of how long they have held their shares.
The fund will provide federal tax information annually, including information
about dividends paid during the preceding year.
Dividends and distributions on the Fund's shares are generally subject to
federal income tax as described herein to the extent they do not exceed the
Fund's realized income and gains, even though such dividends and distributions
may economically represent a return of a particular shareholder's investment.
Such distributions are likely to occur in respect of shares purchased at a time
when the Fund's net asset value reflects gains that are either unrealized or
realized but not distributed.
The Fund's investments in foreign securities may be subject to foreign
withholding taxes. In that case, the Fund's yield on those securities would be
decreased.
In addition, the Fund's investment in foreign securities, foreign
currencies, debt obligations issued or purchased at a discount, assets "marked
to the market" for federal income tax purposes and, potentially, so-called
"indexed securities" (including inflation indexed bonds) may increase or
accelerate the Fund's recognition of taxable income, including the recognition
of taxable income in excess of the cash generated by such investments. These
investments may, therefore, affect the timing or amount of the Fund's
distributions and may cause the Fund to liquidate other investments at a time
when it is not advantageous to do so to satisfy the requirements to be a
regulated investment company.
Any gain resulting from the sale or exchange of your shares will generally
also be subject to tax.
The foregoing is a general summary of the federal income tax consequences
for shareholders who are U.S. citizens, residents or domestic corporations.
Shareholders should consult their own tax advisers about the precise tax
consequences of an investment in the Fund in light of each shareholder's
particular tax situation. Shareholders should also consult their own tax
advisers about consequences under foreign, state, local or other applicable tax
laws (including possible liability for federal alternative minimum tax). The
Fund will report the federal income tax status of all distributions to
shareholders annually.
================================================================================
8 PELICAN FUND
<PAGE> 118
HOW TO PURCHASE SHARES
SHARES OF THE FUND MAY BE PURCHASED DIRECTLY FROM THE TRUST OR ITS AGENT WITHOUT
ANY SALES CHARGE OR UNDERWRITING COMMISSIONS ON ANY DAY WHEN THE NEW YORK STOCK
EXCHANGE IS OPEN FOR BUSINESS.
To buy shares: Complete an account application and mail with your check to
the address below. Call the Fund at 1-800-447-3167 between 9:00 a.m. and 5:00
p.m. Boston time for instructions or to request an account application.
Pelican Fund
Boston Financial Data Services
P.O. Box 8120
Boston, MA 02266-8120
To buy shares by wire, call the Fund at 1-800-447-3167 for instructions. You
must complete an account application before your initial purchase of shares.
Send the wire to:
State Street Bank and Trust Company
Boston, Massachusetts
ABA# 011 000 028
Attn: Mutual Fund Division, Pelican Fund
Include your shareholder account number.
The Fund reserves the right to refuse additional investments at any time
and may limit the size of individual accounts. Shareholders of the Fund will
continue to be able to reinvest dividend and capital gain distributions without
limitation. The minimum initial investment in the Fund is $5,000; there is no
required minimum for additional purchases of Fund shares. An initial investment
of at least $1,000 must be made in connection with the establishment of a Keogh
plan; there is no minimum in connection with an individual retirement account
(IRA). The minimum initial investment amount may be changed by the Trustees at
any time.
The price at which a purchase order is filled in full and fractional
shares of the Fund is the net asset value per share of the Fund next determined
after a properly completed application and payment are received at the Fund's
office. See "How Shares Are Priced" below.
Subject to limitations described in the Statement of Additional
Information, the Fund may accept securities as payment for shares of the Fund
(in lieu of payment by check or wire). An investor should not under any
circumstances send cash to the Fund as payment for Fund shares.
Shares of the Fund are maintained under an open account arrangement, and
no share certificates are expected to be issued. After each transaction that
affects the number of shares in an open account, a confirmation will be mailed
to the address in which the account is registered that discloses the current
balance of shares owned. The Fund reserves the right
================================================================================
PELICAN FUND 9
<PAGE> 119
to charge a fee for providing duplicate information.
Shares of the Fund may be purchased for tax-sheltered retirement plans,
including Keogh plans for self-employed individuals and partnerships (if the
investor has a relationship with a plan trustee), employer defined-contribution
plans, individual retirement accounts (IRAs), and Simplified Employee Pension
Plans (SEPPs). Further details and prototype plans are available from the Fund.
An investor should consult a competent tax or other adviser as to the
suitability of shares of the Fund as a vehicle for funding a plan, in whole or
in part, under the Employee Retirement Income Security Act of 1974 and as to the
eligibility requirements for a specific plan and its state tax as well as
federal tax aspects.
All purchase orders are subject to acceptance by the Fund, which may
refuse any purchase order or suspend the offering of shares of the Fund at any
time. Brokers and agents may be authorized to accept orders on the Fund's behalf
and investors may be charged a fee to effect a transaction through a broker or
agent.
Reminders to make regularly scheduled investments will be sent to
shareholders upon their request, with no obligation to invest at any time.
HOW TO REDEEM SHARES
SHAREHOLDERS HAVE THE RIGHT TO REDEEM THEIR SHARES AT THE NET ASSET VALUE PER
SHARE NEXT DETERMINED AFTER RECEIPT BY STATE STREET BANK ON THE FUND'S BEHALF OF
AN APPROPRIATE WRITTEN REQUEST FOR REDEMPTION TOGETHER WITH SHARE CERTIFICATES,
IF ANY, PROPERLY ENDORSED WITH SIGNATURES GUARANTEED (SEE BELOW). Shareholders
may also redeem shares by telephone, as further described below. The value of
shares at redemption depends upon the market value of the Fund's portfolio at
the time of redemption and may be more or less than the cost to the shareholder.
A written request for redemption should specify the shareholder's account
number and the number of shares to be redeemed and should normally be signed by
the person or persons in whose name or names the account is registered or, in
the case of the death of a shareholder, by the legal successor of the
shareholder. Written redemption requests for shares held by tax-sheltered
retirement plans must be submitted by the trustees or custodians of such plans
rather than by the plan participants. The Fund will require proof of the
authenticity of signatures and in certain cases proof of authority of the
signers.
================================================================================
10 PELICAN FUND
<PAGE> 120
For shareholder protection, all signatures on written requests for
redemption or transfer of ownership and endorsements of any issued share
certificates or stock powers that accompany such certificates must be guaranteed
by a national bank or trust company, a member of the Federal Reserve System, a
savings bank or savings and loan association, or a member of the National
Association of Securities Dealers, Inc. or of the New York, American, Boston,
Midwest, or Pacific Stock Exchanges. A signature "verification" by a savings
bank or savings and loan association or notarization by a notary public is not
acceptable.
A signature guarantee is required to establish telephone redemption on any
account after it has been opened. A signature guarantee will not be required to
establish the telephone redemption option so long as this option is selected at
the time of an initial account application; election of the privilege at a later
date will require completion of an appropriate form accompanied by a signature
guarantee.
Shareholders who elect the telephone redemption option on their
application may redeem, without extra charge, $5,000 or more from their account
by telephone, and the proceeds will be sent by wire transfer to the
shareholder's previously designated bank account within the United States. The
account must be with a bank that is a member of the Federal Reserve System or
that has a correspondent banking relationship with a member bank. All telephone
redemption requests will be recorded.
For telephone redemptions,
call 1-800-447-3167
between 9:00 a.m. and 5:00 p.m.
Boston time.
Please specify the Pelican Fund.
A redemption request received by telephone in proper form by the Fund
before 4:00 p.m. Boston time on any business day will become effective at 4:00
p.m. that day and the proceeds of such redemption will be wired on the next
business day, but if making immediate payment could adversely affect the Fund,
it may take up to seven days for payment to be made.
The shareholder is solely responsible for the authenticity of redemption
instructions received by telephone that the Fund reasonably believes to be
genuine. The Fund will accept such instructions from anyone able to provide
information on an account. The Fund is not responsible for losses due to
unauthorized or fraudulent telephone instructions unless it fails to employ
reasonable procedures to assure the genuine nature of the redemption request,
such as recording the redemption request.
When shares are redeemed, a check in payment will normally be mailed
within seven days. However, a redemption check will not be mailed until all
checks received by the Fund in payment for shares to be redeemed have cleared
(check clearance may take up to 15 days). A shareholder may avoid this delay by
paying for shares with a certified check or by making investments by wire as
described above.
================================================================================
PELICAN FUND 11
<PAGE> 121
The Fund and State Street Bank each reserve the right at any time to
terminate, suspend or change the terms of any redemption method, except
redemption by mail.
If a request for redemption would reduce a shareholder's shares in the
Fund to a value of $1,000 or less, the Fund will treat the request as a request
for redemption of all the shares of the Fund in the shareholder's account. Upon
sixty days advance written notice, the Fund also has the right to redeem shares
in a shareholder's account which is valued at less than $2,500 for sixty days or
more due to redemptions. During such sixty day period, the shareholder may avoid
such redemption by increasing his or her account to the $2,500 minimum.
SYSTEMATIC WITHDRAWAL PLAN. Eligible shareholders who wish to receive a
fixed amount periodically may elect to participate in the Systematic Withdrawal
Plan. A shareholder whose account contains shares of the Fund worth $5,000 or
more may elect to receive automatic payments of $100 or more each quarter. A
shareholder whose account contains shares of the Fund worth at least $10,000 may
elect to receive monthly payments of $100 or more. Please contact the Fund for
further information about and application materials for
HOW SHARES ARE PRICED
THE NET ASSET VALUE OF A SHARE IS DETERMINED FOR THE FUND ONCE ON EACH DAY ON
WHICH THE NEW YORK STOCK EXCHANGE IS OPEN. THE FUND MAY NOT DETERMINE ITS NET
ASSET VALUE ON DAYS DURING WHICH NO SECURITY IS TENDERED FOR REDEMPTION AND NO
ORDER TO PURCHASE OR SELL SUCH SECURITY IS RECEIVED BY THE FUND. The Fund's net
asset value is determined as of 4:00 p.m., New York City time. The Fund's net
asset value is determined by dividing the total market value of the Fund's
portfolio investments and other assets, less any liabilities, by the total
outstanding shares of the Fund. Portfolio securities listed on a securities
exchange for which market quotations are available are valued at the last quoted
sale price on each business day or, if there is no such reported sale, at the
most recent quoted bid price. However, for those securities that are listed on
an exchange but that exchange is less relevant in determining the market value
of such securities than is the private market, a broker bid will be used.
Criteria for relevance include where the securities are principally traded and
what their intended market for disposition is. Price information on listed
securities is generally taken from the closing price on the exchange where the
security is primarily traded. Unlisted securities for which market quotations
are readily available are valued at the most recent quoted bid price, except
that debt obligations with sixty days or less remaining until maturity may be
valued at their amortized cost, unless circumstances dictate otherwise.
Circumstances may dictate otherwise, among other times, when the issuer's
creditworthiness has become impaired.
================================================================================
12 PELICAN FUND
<PAGE> 122
All other fixed income securities (which include bonds, loans and structured
notes) and options thereon are valued at the closing bid for such securities as
supplied by a primary pricing source chosen by the Manager. While the Manager
evaluates such primary pricing sources on an ongoing basis, and may change any
pricing source at any time, the Manager will not normally evaluate the prices
supplied by the pricing sources on a day-to-day basis. However, the Manager is
kept informed of erratic or unusual movements (including unusual inactivity) in
the prices supplied for a security and has the power to override any price
supplied by a source (by taking a price supplied from another) because of such
price activity or because the Manager has other reasons to suspect that a price
supplied may not be reliable.
Other assets and securities for which no quotations are readily available
are valued at fair value as determined in good faith by the Trustees or persons
acting at their direction. The values of foreign securities quoted in foreign
currencies are translated into U.S. dollars at current exchange rates or at such
other rates as the Trustees may determine in computing net asset value.
================================================================================
PELICAN FUND 13
<PAGE> 123
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% 18.60% 25.58%
Ratios/Supplementary 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.
The financial highlights table is designed to help you understand the
Fund's financial performance for the past five years. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers LLP,
independent accountants, whose report, along with the Fund's financial
statements, is included in the Fund's Annual Report, which is incorporated by
reference in the Fund's Statement of Additional Information and available upon
request.
================================================================================
14 PELICAN FUND
<PAGE> 124
NOTES
================================================================================
PELICAN FUND 15
<PAGE> 125
NOTES
================================================================================
16 PELICAN FUND
<PAGE> 126
NOTES
================================================================================
PELICAN FUND 17
<PAGE> 127
ADDITIONAL INFORMATION
Additional information about the Fund's investments is available in the
Fund's annual and semi-annual reports to shareholders. In the Fund's annual
report, you will find a discussion of the market conditions and investment
strategies that significantly affected the Fund's performance during its last
fiscal year. The Fund's annual and semi-annual reports, and the Fund's Statement
of Additional Information dated June 30, 2000, as revised from time to time, are
available free of charge by writing to GMO, 40 Rowes Wharf, Boston,
Massachusetts 02110 or by calling collect (617) 346-7600. The Statement, which
contains more detailed information about the Fund, has been filed with the
Securities and Exchange Commission ("SEC") and is incorporated by reference into
this Prospectus.
Information about the Fund (including the Statement) can be reviewed and
copied at the SEC's Public Reference Room in Washington, D.C. Information
regarding the operation of the Public Reference Room may be obtained by calling
the SEC at 1-800-SEC-0330. Reports and other information about the Funds are
available on the Commission's Internet site at http://www.sec.gov. Copies of
this information may be obtained, upon payment of a duplicating fee, by writing
the Public Reference Section of the SEC, Washington, D.C. 20549-6009.
DISTRIBUTOR
Funds Distributor, Inc.
60 State Street
Boston, Massachusetts 02109
SHAREHOLDER INQUIRIES
Shareholders may direct inquiries to:
Pelican Fund
c/o Grantham, Mayo, Van Otterloo & Co. LLC
40 Rowes Wharf
Boston, Massachusetts 02110
(1-617-346-7600) (CALL COLLECT)
For price, share position, or information on account activity, please
call: 1-800-447-3167
INVESTMENT COMPANY ACT FILE NO. 811-1347
<PAGE> 128
GMO TRUST Prospectus
June 30, 2000
* FUNDAMENTAL VALUE FUND
____________________________________
* GMO TRUST OFFERS A BROAD
SELECTION OF INVESTMENT
ALTERNATIVES TO INVESTORS.
* INFORMATION ABOUT OTHER FUNDS
OFFERED BY GMO TRUST IS
CONTAINED IN SEPARATE
PROSPECTUSES.
GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC
40 ROWES WHARF * BOSTON, MASSACHUSETTS 02110
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
<PAGE> 129
TABLE OF CONTENTS
SUMMARY OF FUND OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES................ 1
SUMMARY OF PRINCIPAL RISKS.................................................... 3
FEES AND EXPENSES............................................................. 5
BENCHMARKS AND INDEXES........................................................ 5
MANAGEMENT OF THE FUND........................................................ 5
DETERMINATION OF NET ASSET VALUE.............................................. 6
HOW TO PURCHASE SHARES........................................................ 7
HOW TO REDEEM SHARES.......................................................... 8
DISTRIBUTIONS AND TAXES....................................................... 9
FINANCIAL HIGHLIGHTS..........................................................10
ADDITIONAL INFORMATION............................................... BACK COVER
SHAREHOLDER INQUIRIES................................................ BACK COVER
DISTRIBUTOR.......................................................... BACK COVER
<PAGE> 130
SUMMARY OF
FUND OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES
The following summary describes the Fundamental Value Fund's investment
objective and principal investment strategies. The Fund may make other
investments and engage in other investment strategies that are not specifically
described in the summary. More information about the Fund's possible investments
and strategies is set forth in the Statement of Additional Information. See the
back cover of this Prospectus for information about how to receive the Statement
of Additional Information. Unless described as fundamental in this Prospectus or
in the Statement of Additional Information, the Fund's investment objective and
policies may be changed by the Trustees without shareholder approval.
In the Fund summary that follows, it is noted that the Fund will
"invest primarily in" a particular type of securities or other assets. Investors
should understand that this Prospectus uses the word "invest" to mean not only
direct investment in a particular asset but also indirect investment in or
exposure to the asset through the use of derivatives and related instruments.
Investing in mutual funds involves risk. The Fund is subject to certain
risks based on the types of investments in the Fund's portfolio and on the
investment strategies the Fund employs. Investors should refer to the SUMMARY OF
PRINCIPAL RISKS in the Prospectus at page 3 for a discussion of the principal
risks of investing in the Fund. See the Statement of Additional Information for
additional information about the risks of Fund investments and strategies. The
Fund's shares described herein may not be available for purchase in all states.
This Prospectus is not an offering in any state where an offering may not
lawfully be made.
It is important for you to note:
* You may lose money on an investment in the Fund.
* An investment in the Fund is not a deposit of a bank and is not
insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
-1-
<PAGE> 131
--------------------------------------------------------------------------------
GMO FUNDAMENTAL VALUE FUND Fund Codes
--------------------------------------------------------------------------------
Ticker Symbol Cusip
------ ------ -----
Class III N/A N/A 362007 65 0
--------------------------------------------------------------------------------
Fund Inception Date: 10/31/91
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE: The GMO Fundamental Value Fund seeks long term
capital growth primarily through investments in stocks of approximately 20-30
companies. The Fund's current benchmark is the S&P 500 Index.
INVESTMENT UNIVERSE: The Fund invests primarily in companies chosen
from the Russell 3000 Index.
PRINCIPAL INVESTMENTS: The Fund normally invests in stocks of U.S.
companies the Manager believes represent favorable values relative to their
market prices. The Fund's portfolio will normally consist of approximately 20-25
stocks and the Fund generally limits investment in any one stock to 10% of the
Fund's total assets. Occasionally, the Fund may hold up to 30 stocks. Although
the Fund intends to be fully invested, transactions in stocks may require the
Fund to hold a portion of its assets in cash for short periods of time pending
reinvestment. The Fund does not take temporary defensive positions by holding
cash or investing in money market instruments.
METHODOLOGY/PORTFOLIO CONSTRUCTION: The Manager uses a bottom-up
approach to select stocks for the Fund. The Manager employs fundamental
investment principals and traditional portfolio analysis to analyze the
companies in the Russell 3000 Index that the Manager believes represent
favorable value relative to their price. Companies whose stocks trade below fair
value are candidates for selection for the Fund's portfolio. Fair value is
determined by evaluating the company's earnings stream, its asset value or
franchise value.
RISKS: The most significant risks of an investment in the Fund are
Market Risk (including Value Securities Risk) and Non-Diversification Risk. For
more information about these risks and other principal risks of an investment in
the Fund, see "Summary of Principal Risks" on page 3.
PERFORMANCE
The performance information below helps to show the risks of investing
in the Fund. The bar chart to the left shows changes in the Fund's annual total
returns from year to year for the periods shown. Purchase premiums in effect
through December 31, 1999 are not reflected in the bar chart; if reflected, the
returns would be lower. The table to the right shows how the Fund's average
annual total returns for different calendar periods compare with those of a
broad-based index. See "Benchmarks and Indexes" for a description of the index.
Performance results in the table reflect payment of Fund expenses; returns for
the comparative index do not reflect payment of any expenses. The Fund's current
operating policies and investment strategies differ substantially from those in
effect during the periods represented in the chart and the table. PAST
PERFORMANCE IS NOT AN INDICATION OF FUTURE PERFORMANCE.
[GRAPH PERFORMANCE]
<TABLE>
Total Annual Return/Class III Shares
Years Ended December 31
<S> <C>
1992 13.92%
1993 22.46%
1994 3.56%
1995 30.58%
1996 22.79%
1997 28.75%
1998 10.11%
1999 37.23%
</TABLE>
Highest Quarter: 18.10% (4Q1999)
Lowest Quarter: -9.99% (3Q1998)
Year to Date (as of 3/31/00): 15.59%
Average Annual Total Return
Periods Ending December 31, 1999
---------------------------------------------------------
1 Year 5 Years 10 Years Incept.
10/31/91
---------------------------------------------------------
Class III 37.03%* 25.50% N/A 20.72%
---------------------------------------------------------
S&P 500 21.04% 28.54% N/A 20.23%
---------------------------------------------------------
* Since July 17, 1999, the Fund's asset level has been less than $1,000,000.
Prior to that date, and during the period from July 17 to November 3, 1999, the
Fund had operating policies different from current policies. These factors
contributed to the Fund's outperforming its benchmark during the period from
July 17 to December 31, 1999. The Fund's outperformance during these periods is
not representative of the Fund's prior performance and is not an indication of
future performance.
-2-
<PAGE> 132
SUMMARY OF PRINCIPAL RISKS
The value of your investment in the Fund changes with the values of the
Fund's investment. Many factors can affect those values, and you can lose money
by investing in the Fund. Factors that may affect the portfolio as a whole are
called "principal risks" and are summarized in this section. This summary
describes the nature of these risks but is not intended to include every
potential risk. The Fund could be subject to additional risks because types of
investments made by the Fund change over time. The Statement of Additional
Information includes more information about the Fund and its investments.
* MARKET RISK. The Fund is subject to market risk, which is the risk of
unfavorable market-induced changes in the value of the securities owned by the
Fund. General market risks associated with investments in equity and fixed
income securities include the following:
Equity Securities. A principal risk of a Fund that invests a
substantial portion of its assets in equity securities is that those equity
securities will decline in value due to factors affecting the issuing companies,
their industries, or the economy and equity markets generally. The values of
equity securities may decline for a number of reasons which directly relate to
the issuing company, such as management performance, financial leverage and
reduced demand for the issuer's goods or services. They may also decline due to
factors which affect a particular industry or industries, such as labor
shortages or increased production costs and competitive conditions within an
industry. In addition, they may decline due to general market conditions which
are not specifically related to a company or industry, such as real or perceived
adverse economic conditions, changes in the general outlook for corporate
earnings, changes in interest or currency rates or adverse investor sentiment
generally.
The Fundamental Value Fund maintains substantial exposure to equities
and generally does not attempt to time the market. Because of this exposure, the
possibility that stock market prices in general will decline over short or
extended periods subjects the Fund to unpredictable declines in the value of its
shares, as well as periods of poor performance.
Value Securities Risk. Some equity securities (generally referred to as
"value securities") are purchased primarily because they are selling at a price
lower than what is believed to be their true value and not necessarily because
the issuing companies are expected to experience significant earnings growth.
These securities bear the risk that the companies may not overcome the adverse
business developments or other factors causing their securities to be out of
favor, or that the market does not recognize the value of the company, such that
the price of its securities may decline or may not approach the value that the
Manager anticipates. Since value criteria are used extensively by the Manager,
these risks are particularly pronounced for the Fundamental Value Fund, which
invests primarily in value securities.
Growth Securities Risk. Certain equity securities (generally known as
"growth securities") are purchased primarily because it is believed that they
will experience relatively rapid earnings growth. Growth securities typically
trade at higher multiples of current earnings than other types of stocks. Growth
securities are often more sensitive to general market movements than other types
of stocks because their market prices tend to place greater emphasis on future
earnings expectations. At times when it appears that these expectations may not
be met, growth stock prices typically fall. The Fundamental Value Fund, which
may invest to a limited extent in growth securities is subject to these risks.
* LIQUIDITY RISK. Liquidity risk exists when particular investments are
difficult to purchase or sell due to a limited market or to legal restrictions,
such that the Fund may be prevented from selling particular securities at the
price at which the Fund values them. The Fundamental Value Fund, like nearly all
mutual funds, is subject to some liquidity risk.
* NON-DIVERSIFICATION RISK. Most analysts believe that overall risk can
be reduced through diversification, while concentration of investments in a
small number of securities increases risk. The Fundamental Value Fund is not
"diversified" within the meaning of the 1940 Act. This means that the Fund is
allowed to invest in a relatively small number of issuers and/or foreign
currencies with greater concentration of risk. As a result, credit, market and
other risks associated with the Fund's investment strategies or techniques may
be more pronounced for the Fund.
-3-
<PAGE> 133
* MANAGEMENT RISK. The Fundamental Value Fund is subject to management
risk because it relies on the Manager's ability to pursue its objective. The
Manager will apply investment techniques and risk analyses in making investment
decisions for the Fund, but there can be no guarantee that these will produce
the desired results. As noted above, the Manager may also fail to use
derivatives effectively, for example, choosing to hedge or not to hedge
positions precisely when it is least advantageous to do so. As indicated above,
however, the Fund is generally not subject to the risk of market timing because
it generally stays fully invested in the stocks and other permitted investments
described above.
-4-
<PAGE> 134
FEES AND EXPENSES
This table describes the fees and expenses you may pay if you buy and hold
shares of the Fund:
<TABLE>
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
(as a percentage of average net assets)
<S> <C>
Management Fee................................................ 0.60%
Shareholder Service Fee....................................... 0.15%
Other Expenses................................................ 3.52%
----
Total Annual Operating Expenses............................... 4.27%
Expense Reimbursement(1)...................................... 3.52%
----
NET ANNUAL EXPENSES........................................... 0.75%
</TABLE>
(1) The Manager has contractually agreed to reimburse the Fund with respect to
certain Fund expenses through at least June 30, 2001 to the extent that the
Fund's total annual operating expenses (excluding Shareholder Service Fees,
brokerage commissions and other investment-related costs, hedging
transaction fees, extraordinary, non-recurring and certain other unusual
expenses (including taxes), securities lending fees and expenses and
transfer taxes) would otherwise exceed 0.60% of the Fund's daily net
assets.
EXAMPLE:
The example below illustrates the expenses you would incur on a $10,000
investment in the Fund over the stated periods, assuming your investment had a
5% return each year and the Fund's operating expenses remained the same (with or
without redemption at the end of each time period). The example is for
comparative purposes only and does not represent past or future expenses or
performance. Actual expenses and performance may be higher or lower. Except as
otherwise noted, the expenses shown assume no reimbursement of expenses by the
Manager.
<TABLE>
<S> <C>
1 Year (after reimbursement).......... $ 77
3 Years............................... $ 973
5 Years............................... $1,883
10 Years.............................. $4,217
</TABLE>
BENCHMARKS AND INDEXES
The Fund's benchmark is the Standard & Poor's 500 Stock Index (the "S&P
500"), a well-known U.S. large capitalization stock index maintained and
published by Standard & Poor's. The Manager may change the Fund's benchmark from
time to time. The Fund is not an "index" fund and the composition of the Fund's
portfolio may differ from the benchmark.
MANAGEMENT OF THE FUND
Grantham, Mayo, Van Otterloo & Co., LLC, 40 Rowes Wharf, Boston,
Massachusetts 02110 provides investment advisory services to the GMO Funds. GMO
is a private company, founded in 1977. As of May 31, 2000, GMO managed more than
$22 billion for institutional investors such as pension plans, endowments,
foundations and the GMO Funds.
Subject to the approval of the Trust's board of trustees, the Manager
establishes and modifies when necessary the investment strategies of the Fund.
In addition to its management services to the Fund, the Manager administers the
Fund's business affairs. For the fiscal year ended February 29, 2000, the
Manager received as compensation for management services rendered in that year
(after any applicable waivers or reimbursements), 0.49% of the Fund's average
daily net assets.
The Fund pays the Manager a shareholder service fee for providing
direct client service and reporting, such as performance information reporting,
client account information, personal and electronic access to Fund information,
access to analysis and explanations of Fund reports and assistance to correct
and maintain client-related information.
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<PAGE> 135
Mr. Richard A. Mayo has been primarily responsible for the day-to-day
management of the Fund since its inception. Mr. Mayo is President of the U.S.
Active division of the Trust and is a founding member of the Manager. He has
been a portfolio manager for more than twenty-five years and has been employed
by the Manager in such capacity since its inception in 1977.
CUSTODIAN AND TRANSFER AGENT
Investors Bank & Trust Company, 200 Clarendon Street, Boston,
Massachusetts 02116, serves as the Fund's custodian and transfer agent.
DETERMINATION OF NET ASSET VALUE
The net asset value or "NAV" of a share is determined as of the close
of regular trading on the New York Stock Exchange ("NYSE"), generally 4:00 p.m.
New York City time. The Fund may not determine its NAV on days during which no
security is tendered for redemption and no order to purchase or sell such
security is received by the Fund. The Fund's net asset value is determined by
dividing the total market value of the Fund's portfolio investments and other
assets, less any liabilities, by the total outstanding shares of the Fund. The
market value of the Fund's investments is generally determined as follows:
Exchange listed securities
* Last sale price or
* Most recent bid price (if no reported sale) or
* Broker bid (if the private market is more relevant in determining
market value than the exchange), based on where the securities are
principally traded and what their intended disposition is
Unlisted securities (if market quotations are readily available)
* Most recent quoted bid price
Certain debt obligations (if less than sixty days remain until maturity)
* Amortized cost (unless circumstances dictate otherwise; for
example, if the issuer's creditworthiness has become impaired)
All other assets and securities (if no quotations are readily available)
* Fair value as determined in good faith by the Trustees or persons
acting at their direction
The Manager evaluates primary pricing sources on an ongoing basis, and
may change any pricing source at any time. However, the Manager will not
normally evaluate the prices supplied by the pricing sources on a day-to-day
basis. The Manager is kept informed of erratic or unusual movements (including
unusual inactivity) in the prices supplied for a security and may in its
discretion override any price supplied by a source (by taking a price supplied
from another) because of such price activity or because the Manager has other
reasons to believe that a price supplied may not be reliable. Certain securities
may be valued on the basis of a price provided by a principal market maker.
Prices provided by principal market makers may vary from the value that would be
realized if the securities were sold.
The values of foreign securities quoted in foreign currencies are
translated into U.S. dollars at current exchange rates or at such other rates as
the Trustees or persons acting in their direction may determine in computing net
asset value. Fluctuations in the value of foreign currencies in relation to the
U.S. dollar will affect the net asset value of shares of the Fund even though
there has not been any change in the values of such securities and options
measured in terms of the foreign currencies in which they are denominated.
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<PAGE> 136
Foreign exchanges and securities markets usually close prior to the
time the NYSE closes and values of foreign options and foreign securities will
be determined as of those earlier closings. Events affecting the values of
foreign securities may occasionally occur between the earlier closings and the
closing of the NYSE which will not be reflected in the computation of the Fund's
net asset value. If an event materially affecting the value of foreign
securities occurs during that period, then those securities may be valued at
fair value as determined in good faith by the Trustees or persons acting at
their direction. In addition, because the Fund may hold portfolio securities
listed on foreign exchanges which may trade on days on which the NYSE is closed,
the net asset value of the Fund's shares may be significantly affected on days
when investors will have no ability to redeem their shares in the Fund.
HOW TO PURCHASE SHARES
You may purchase the Fund's shares from the Trust on any day when the
NYSE is open for business. In addition, brokers and agents are authorized to
accept purchase and redemption orders on the Fund's behalf. To obtain a purchase
order form, call the Trust at (617) 346-7646 or your broker or agent. Investors
may be charged a fee to effect transactions through a broker or agent. The
minimum initial investment in the Fund is $1 million. There is no minimum amount
for subsequent purchases. The Fund may waive the initial minimum investment
amount for certain accounts.
PURCHASE POLICIES. Before a purchase order will be acted upon by the
Trust, the Trust must determine that the purchase order is in "good order." A
purchase order is in "good order" if:
* a completed purchase order, containing the following information,
is submitted to the Trust or its agent:
- signature exactly in accordance with the form of
registration
- the exact name in which the shares are registered
- the investor's account number
- the number of shares or the dollar amount of shares to be
purchased
* the purchase order is received and accepted by the Trust or its
agent (the Trust reserves the right to reject any order)
* payment (by check or wire) for the purchase is received before
4:00 p.m. on the day the purchase order is accepted
- if an investor provides adequate written assurances of
intention to pay, the Trust may extend settlement up to four
business days.
The purchase price of a share of the Fund is the net asset value per
share next determined after the purchase order is determined to be in "good
order." Purchase order forms received by the Trust or its agent after the
deadline will be honored on the next following business day, and the purchase
price will be effected based on the net asset value per share computed on that
day.
SUBMITTING YOUR PURCHASE ORDER FORM. Completed purchase order forms can
be submitted by MAIL or by FACSIMILE to the Trust at:
GMO Trust
c/o Grantham, Mayo, Van Otterloo & Co. LLC
40 Rowes Wharf
Boston, Massachusetts 02110
Facsimile: (617) 439-4192
Attention: Shareholder Services
Call the Trust at (617) 346-7646 to CONFIRM RECEIPT of your purchase
order form. Do not send cash, checks or securities directly to the Trust.
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<PAGE> 137
FUNDING YOUR INVESTMENT. You may purchase shares:
* with cash (via check or wire transfer)
- BY WIRE. Instruct your bank to wire the amount of your
investment to:
Investors Bank & Trust Company, Boston, Massachusetts
ABA#: 011-001-438
Attn: Transfer Agent
Credit: GMO Deposit Account 55555-4444
Further credit: GMO Fund/shareholder name and number
- BY CHECK. All checks must be made payable to the Fund or to
GMO Trust. The Trust will NOT accept any checks payable to a
third party which have been endorsed by the payee to the
Trust. Mail the check to:
<TABLE>
<CAPTION>
By U.S. postal service: By overnight courier:
---------------------- --------------------
<S> <C>
Investors Bank & Trust Company Investors Bank & Trust Company
GMO Transfer Agent MFD 23 GMO Transfer Agent MFD 23
P.O. Box 9130 200 Clarendon Street, 16th Floor
200 Clarendon Street, 16th Floor Boston, MA 02117-9130
Boston, MA 02117-9130
</TABLE>
* by exchange (from another GMO product)
- written instruction should be sent to GMO Trust's
Shareholder Services at (617) 439-4192 (facsimile)
* in exchange for securities acceptable to the Manager
- securities must be approved by the Manager prior to transfer
to the Fund
- securities will be valued as set forth under "Determination
of Net Asset Value" on page 6
* by a combination of cash and securities
HOW TO REDEEM SHARES
You may redeem shares of the Fund on any day when the NYSE is open for
business.
REDEMPTION POLICIES. Payment on redemption will be made as promptly as
possible (generally on the next business day) and no later than seven days
(subject to the exceptions noted below) after the request for redemption is
received by the Trust or its agent in "good order."
A redemption request is in "good order" if it:
* is received by the Trust or its agent prior to the close of
regular trading on the NYSE (generally 4:00 p.m. New York City
time)
* is signed exactly in accordance with the form of registration
* includes the exact name in which the shares are registered
* includes the investor's account number
* includes the number of shares or the dollar amount of shares to
be redeemed
Redemption requests received by the Trust or its agent after the
deadline will be honored on the next following business day, and the redemption
will be effected based on the net asset value per share computed on that day.
The redemption price is the net asset value per share next determined after the
redemption request is determined to be in "good order. "
If the Manager determines, in its sole discretion, that it would be
detrimental to the best interests of the remaining shareholders to make a
redemption payment wholly or partly in cash, the Fund may pay the redemption
price in whole or in part by a distribution in-kind of securities held by the
Fund instead of cash.
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<PAGE> 138
If a redemption is made in cash:
* payment will be made in federal funds transferred to the account
designated in writing by authorized persons
- designation of additional accounts and any change in the
accounts originally designated must be made in writing.
* upon request, payment will be made by check mailed to the
registration address
If a redemption is made in-kind, it is important for you to note:
* securities used to redeem Fund shares will be valued as set forth
under "Determination of Net Asset Value" on page 6
* securities distributed by the Fund will be selected by the
Manager in light of the Fund's objective and will not generally
represent a pro rata distribution of each security held in the
Fund's portfolio
* to the extent available, in-kind redemptions will be of readily
marketable securities
* you may incur brokerage charges on the sale of any securities
received as a result of an in-kind redemption
* in-kind redemptions will be transferred and delivered by the
Trust as directed by you
The Fund may suspend the right of redemption and may postpone payment
for more than seven days:
* if the NYSE is closed for other than weekends or holidays
* during periods when trading on the NYSE is restricted
* during an emergency which makes it impracticable for the Fund to
dispose of its securities or to fairly determine the net asset
value of the Fund
* during any other period permitted by the Securities and Exchange
Commission for the protection of investors.
SUBMITTING YOUR REDEMPTION REQUEST. Redemption requests can be
submitted by MAIL or by FACSIMILE to the Trust at the address/facsimile number
set forth under "How to Purchase Shares -- Submitting Your Purchase Order Form."
Redemption requests submitted by mail are "received" by the Trust when actually
delivered to the Trust or its agent. Call the Trust at (617) 346-7646 to CONFIRM
RECEIPT of redemption requests.
DISTRIBUTIONS AND TAXES
The Fund's policy is to declare and pay distributions of its dividends
and interest quarterly. The Fund also intends to distribute net gains from the
sale of securities held for not more than one year ("net short-term capital
gains") and net gains from the sale of securities held for more than one year
("net long-term capital gains") at least annually. The Fund is treated as a
taxable entity for federal income tax purposes and intends to qualify each year
as a regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended.
All dividends and/or distributions will be paid in shares of the Fund,
at net asset value, unless the shareholder elects to receive cash. There is no
purchase premium on reinvested dividends or distributions. Shareholders may make
this election by marking the appropriate box on the application or by writing to
the Trust.
It is important for you to note:
* Fund distributions derived from interest, dividends and certain
other income, including in general short-term capital gains, will
be taxable as ordinary income to shareholders subject to federal
income tax whether paid in cash or in shares. Properly designated
Fund distributions derived from net long-term capital gains will
be taxable as such (generally at a 20% federal rate for
noncorporate shareholders whether paid in cash or in shares).
* Distributions by the Fund result in a reduction in the net asset
value of the Fund's shares. If a distribution reduces the net
asset value of a shareholder's shares below a shareholder's cost
basis in those shares, such distribution may be taxable to the
shareholder, even though, from an investment standpoint, it may
constitute a partial return of capital. In particular, if you buy
shares just prior to a
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<PAGE> 139
taxable distribution by the Fund, you will pay the full price of
the shares (including the value of the pending distribution) and
then receive a portion of the price back as a taxable
distribution.
* Any gain resulting from the sale, exchange or redemption of your
shares will generally also be subject to tax.
The above is a general summary of the principal federal income tax
consequences of investing in the Fund for shareholders who are U.S. citizens,
residents or domestic corporations. You should consult your own tax advisors
about the precise tax consequences of an investment in the Fund in light of your
particular tax situation, including possible foreign, state, local or other
applicable tax laws (including the federal alternative minimum tax).
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The financial highlight table is intended to help you understand the
Fund's financial performance for the past five years. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers LLP,
independent accountants, whose report, along with the Fund's financial
statements, is included in the Trust's Annual Reports, which are incorporated by
reference in the Statement of Additional Information and available upon request.
<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(2) 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) b (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(1)........ ................................. 33.16% 2.30% 30.43% 20.03% 29.95%
Ratios/Supplemental Data:
Net assets, end of period (000s)...................... $ 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>
(1) Total returns would be lower had certain expenses not been waived during the
periods shown.
(2) Computed using average shares outstanding through out the period.
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<PAGE> 140
GMO TRUST
ADDITIONAL INFORMATION
The Fund's annual and semi-annual reports to shareholders contain
additional information about the Fund's investments. The Fund's annual report
contains a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. The
Fund's annual and semi-annual reports, and the Fund's Statement of Additional
Information are available free of charge by writing to GMO, 40 Rowes Wharf,
Boston, Massachusetts 02110 or by calling collect (617) 346-7646. The Statement
contains more detailed information about the Fund and is incorporated by
reference into this Prospectus.
Investors can review and copy the Prospectus, Statement and reports at
the SEC's Public Reference in Washington, D.C. Information regarding the
operation of the Public Reference Room may be obtained by calling the SEC at
1-202-942-8090. Reports and other information about the Fund are available on
the SEC's Internet site at http://www/sec/gpv. Copies of this information may be
obtained, upon payment of a duplicating fee, by writing the Public Reference
Section of the SEC, Washington, D.C. 20549-0102.
SHAREHOLDER INQUIRIES
Shareholders may request additional
information from and direct inquiries to:
Shareholder Services at
Grantham, Mayo, Van Otterloo & Co. LLC,
40 Rowes Wharf, Boston, MA 02110
1-617-346-7646 (CALL COLLECT)
1-617-439-4192 (FACSIMILE)
DISTRIBUTOR
Funds Distributor, Inc.
60 State Street
Boston, Massachusetts 02109
INVESTMENT COMPANY ACT FILE NO. 811-4347
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<PAGE> 141
GMO TRUST
STATEMENT OF ADDITIONAL INFORMATION
June 30, 2000
This Statement of Additional Information is not a prospectus. It relates to the
GMO Trust Prospectus dated June 30, 2000, as amended from time to time
thereafter (the "Prospectus"), and should be read in conjunction therewith.
Information from the Prospectus is incorporated by reference into this Statement
of Additional Information. The Prospectus may be obtained free of charge from
GMO Trust, 40 Rowes Wharf, Boston, Massachusetts 02110, or by calling the Trust
collect at (617) 346-7646.
<PAGE> 142
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES ..................................... 1
DESCRIPTIONS AND RISKS OF FUND INVESTMENTS ............................. 1
INVESTMENT RESTRICTIONS ................................................ 30
MANAGEMENT OF THE TRUST ................................................ 34
INVESTMENT ADVISORY AND OTHER SERVICES ................................. 36
PORTFOLIO TRANSACTIONS ................................................. 44
DETERMINATION OF NET ASSET VALUE ....................................... 46
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES ....................... 46
VOTING RIGHTS .......................................................... 48
SHAREHOLDER AND TRUSTEE LIABILITY ...................................... 49
BENEFICIAL OWNERS OF 5% OR MORE OF THE FUND'S SHARES ................... 50
DISTRIBUTIONS .......................................................... 69
TAXES .................................................................. 69
PERFORMANCE INFORMATION ................................................ 74
INVESTMENT GUIDELINES .................................................. 77
U. S. EQUITY FUNDS ................................................... 77
INTERNATIONAL EQUITY FUNDS ........................................... 108
FIXED INCOME FUNDS ................................................... 147
ASSET ALLOCATION FUND ................................................ 183
COMMERCIAL PAPER AND CORPORATE DEBT RATINGS ............................ 187
FINANCIAL STATEMENTS ................................................... 189
SPECIMEN PRICE MAKE-UP SHEETS .......................................... 190
</TABLE>
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<PAGE> 143
INVESTMENT OBJECTIVES AND POLICIES
The principal strategies and risks of investing in each Fund are described
in the Prospectus. Unless otherwise indicated in the Prospectus or this
Statement of Additional Information, the investment objective and policies of
the Funds may be changed without shareholder approval.
DESCRIPTIONS AND RISKS OF FUND INVESTMENTS
The following is a detailed description of the various investment
practices in which the Funds may engage and the risks associated with their use.
Not all Funds may engage in all practices described below. Please refer to "Fund
Objectives and Principal Investment Strategies" in the Prospectus and
"Investment Guidelines" in this Statement of Additional Information for
determination of which practices a particular Fund may engage in. Investors in
Asset Allocation Funds should be aware that the Asset Allocation Funds will
indirectly participate in the practices engaged in by the underlying Funds in
which the Asset Allocation Funds invest, and will therefore be indirectly
subject to all risks associated with those practices.
PORTFOLIO TURNOVER
Portfolio turnover is not a limiting factor with respect to investment decisions
for the Funds. The historical portfolio turnover rate for each Fund is shown
under the heading "Financial Highlights" in the Prospectus.
In any particular year, market conditions may well result in greater rates of
portfolio turnover than are presently anticipated. High portfolio turnover
involves correspondingly greater brokerage commissions and other transaction
costs, which will be borne directly by the relevant Fund, and may involve
realization of capital gains that would be taxable when distributed to
shareholders of the relevant Fund unless such shareholders are themselves
exempt. See "Distributions and Taxes" in the Prospectus and "Distributions" and
"Taxes" in this Statement of Additional Information.
DIVERSIFIED AND NON-DIVERSIFIED PORTFOLIOS
It is a fundamental policy of each of the U.S. Core Fund, the Tobacco-Free Core
Fund, the Small Cap Value Fund, the International Core Fund, the International
Small Companies Fund, the International Equity Allocation Fund, the World Equity
Allocation Fund, the Global (U.S.+) Equity Allocation Fund, and the Global
Balanced Allocation Fund, which may not be changed without shareholder approval,
that at least 75% of the value of each such Fund's total assets are represented
by cash and cash items (including receivables), Government securities,
securities of other investment companies, and other securities for the purposes
of this calculation limited in respect of any one issuer to an amount not
greater than 5% of the value of the relevant Fund's total assets and to not more
than 10% of the outstanding voting securities of any single issuer. Each such
Fund is referred to herein as a "diversified" fund.
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<PAGE> 144
All other Funds are "non-diversified" funds under the Investment Company Act of
1940, as amended (the "1940 Act"), and as such are not required to satisfy the
"diversified" requirements stated above. As non-diversified funds, each of these
Funds is permitted to (but is not required to) invest a higher percentage of its
assets in the securities of fewer issuers. Such concentration could increase the
risk of loss to such Funds should there be a decline in the market value of any
one portfolio security. Investment in a non-diversified fund may therefore
entail greater risks than investment in a diversified fund. All Funds, however,
must meet certain diversification standards to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986.
CERTAIN RISKS OF FOREIGN INVESTMENTS
GENERAL. Investment in foreign issuers or securities principally traded overseas
may involve certain special risks due to foreign economic, political and legal
developments, including favorable or unfavorable changes in currency exchange
rates, exchange control regulations (including currency blockage), expropriation
or nationalization of assets, imposition of withholding taxes on dividend or
interest payments, and possible difficulty in obtaining and enforcing judgments
against foreign entities. Furthermore, issuers of foreign securities are subject
to different, often less comprehensive, accounting, reporting and disclosure
requirements than domestic issuers. The securities of some foreign governments
and companies and foreign securities markets are less liquid and at times more
volatile than comparable U.S. securities and securities markets. Foreign
brokerage commissions and other fees are also generally higher than in the
United States. The laws of some foreign countries may limit a Fund's ability to
invest in securities of certain issuers located in these foreign countries.
There are also special tax considerations which apply to securities of foreign
issuers and securities principally traded overseas. Investors should also be
aware that under certain circumstances, markets which are perceived to have
similar characteristics to troubled markets may be adversely affected whether or
not similarities actually exist.
EMERGING MARKETS. The risks described above apply to an even greater extent to
investments in emerging markets. The securities markets of emerging countries
are generally smaller, less developed, less liquid, and more volatile than the
securities markets of the U.S. and developed foreign markets. Disclosure and
regulatory standards in many respects are less stringent than in the U.S. and
developed foreign markets. There also may be a lower level of monitoring and
regulation of securities markets in emerging market countries and the activities
of investors in such markets, and enforcement of existing regulations has been
extremely limited. Many emerging countries have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have very
negative effects on the economies and securities markets of certain emerging
countries. Economies in emerging markets generally are heavily dependent upon
international trade and, accordingly, have been and may continue to be affected
adversely by trade barriers, exchange controls, managed adjustments in relative
currency values, and other protectionist measures imposed or negotiated by the
countries with which they trade. These economies also have been and may continue
to be adversely affected by economic conditions in the countries with which they
trade. The economies of countries with emerging markets may also be
predominantly based on only a few industries or dependent on revenues from
particular
2
<PAGE> 145
commodities. In addition, custodial services and other costs relating to
investment in foreign markets may be more expensive in emerging markets than in
many developed foreign markets, which could reduce a Fund's income from such
securities. Finally, because publicly traded debt instruments of emerging
markets represent a relatively recent innovation in the world debt markets,
there is little historical data or related market experience concerning the
attributes of such instruments under all economic, market and political
conditions.
In many cases, governments of emerging countries continue to exercise
significant control over their economies, and government actions relative to the
economy, as well as economic developments generally, may affect the capacity of
issuers of emerging country debt instruments to make payments on their debt
obligations, regardless of their financial condition. In addition, there is a
heightened possibility of expropriation or confiscatory taxation, imposition of
withholding taxes on interest payments, or other similar developments that could
affect investments in those countries. There can be no assurance that adverse
political changes will not cause a Fund to suffer a loss of any or all of its
investments or, in the case of fixed-income securities, interest thereon.
INVESTMENTS IN ASIA. In addition to the foregoing risks of foreign investments
and risks specific to emerging markets, investments by the Trust's International
Funds in Asia involve additional risks specific to investment in the region. The
region encompasses countries at varying levels of economic development ranging
from emerging markets to more developed economies. Each country provides unique
investment risks, yet the political and economic prospects of one country or
group of countries may impact other countries in the region. For example, some
Asian economies are directly affected by Japanese capital investment in the
region and by Japanese consumer demands. In addition, a recession, a debt crisis
or a decline in currency valuation in one country can spread to other countries.
Investments in Asia are susceptible to political and social factors affecting
issuers in Asian countries. Some countries have authoritarian or relatively
unstable governments. Certain governments in the region provide less supervision
and regulation of financial markets than is typical of other emerging markets,
and less financial information is available. Restrictions on direct foreign
investments in securities markets also exist in some countries. For example,
Taiwan permits foreign investment only through authorized qualified foreign
institutional investors. The return of Hong Kong to China in 1997 continues to
affect the region.
Some countries in the region are heavily dependent upon foreign trade. The
economies of some Asian countries are not diversified and are based upon only a
few commodities or industries. Markets in some of these countries are in the
early stages of development, exhibit a high concentration of market
capitalization, have less trading volume, lower liquidity and more volatility
than more developed markets.
The region periodically experiences increased market volatility and declines in
foreign currency exchange rates. Fluctuation in currency exchange rates can
affect a country's ability to service its debt. Currency fluctuation will affect
the value of the securities in the Fund's portfolio because the prices of these
securities are generally denominated or quoted in currencies other than the U.S.
dollar.
3
<PAGE> 146
While the foregoing risks are applicable to any Fund investing in Asia, they
will be particularly acute for the Asia Fund and the Japan Fund, which invest
primarily in this region.
DIRECT INVESTMENT IN RUSSIAN SECURITIES. Each of the Emerging Markets Fund,
Evolving Countries Fund, Foreign Fund, Global Bond Fund, International Bond
Fund, Currency Hedged International Bond Fund, International Core Fund, Currency
Hedged International Core Fund, Emerging Country Debt Fund and U.S. Bond/Global
Alpha A Fund may invest directly in securities of Russian issuers. Investment in
securities of such issuers presents many of the same risks as investing in
securities of issuers in other emerging market economies, as described in the
immediately preceding section. However, the political, legal and operational
risks of investing in Russian issuers, and of having assets custodied within
Russia, may be particularly acute.
A risk of particular note with respect to direct investment in Russian
securities is the way in which ownership of shares of private companies is
recorded. When a Fund invests in a Russian issuer, it will receive a "share
extract," but that extract is not legally determinative of ownership. The
official record of ownership of a company's share is maintained by the company's
share registrar. Such share registrars are completely under the control of the
issuer, and investors are provided with few legal rights against such
registrars.
SECURITIES LENDING
All of the Funds (except for the Asset Allocation Funds) may make secured loans
of portfolio securities amounting to not more than one-third of the relevant
Fund's total assets, except for the International Core and Currency Hedged
International Core Funds, each of which may make loans of portfolio securities
amounting to not more than 25% of their respective total assets. The risks in
lending portfolio securities, as with other extensions of credit, consist of
possible delay in recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. However, such loans will be
made only to broker-dealers that are believed by the Manager to be of relatively
high credit standing. Securities loans are made to broker-dealers pursuant to
agreements requiring that loans be continuously secured by collateral in cash or
liquid securities at least equal at all times to the market value of the
securities lent. Collateral may be held in shares of other investment companies.
The borrower pays to the lending Fund an amount equal to any dividends or
interest the Fund would have received had the securities not been lent. If the
loan is collateralized by U.S. Government Securities, the Fund will receive a
fee from the borrower. In the case of loans collateralized by cash, the Fund
typically invests the cash collateral for its own account in interest-bearing,
short-term securities and pays a fee to the borrower. Although voting rights or
rights to consent with respect to the loaned securities pass to the borrower,
the Fund retains the right to call the loans at any time on reasonable notice,
and it will do so in order that the securities may be voted by the Fund if the
holders of such securities are asked to vote upon or consent to matters
materially affecting the investment. The Fund may also call such loans in order
to sell the securities involved. The Manager has retained lending agents on
behalf of several of the Funds that are compensated based on a percentage of a
Fund's return on the securities lending activity. The Fund also pays various
fees in connection with such loans including shipping fees and reasonable
custodian fees approved by the Trustees of the Trust or persons acting pursuant
to direction of the Board.
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DEPOSITORY RECEIPTS
Many of the Funds may invest in American Depositary Receipts (ADRs), Global
Depository Receipts (GDRs) and European Depository Receipts (EDRs)
(collectively, "Depository Receipts") if issues of such Depository Receipts are
available that are consistent with a Fund's investment objective. Depository
Receipts generally evidence an ownership interest in a corresponding foreign
security on deposit with a financial institution. Transactions in Depository
Receipts usually do not settle in the same currency in which the underlying
securities are denominated or traded. Generally, ADRs, in registered form, are
designed for use in the U.S. securities markets and EDRs, in bearer form, are
designed for use in European securities markets. GDRs may be traded in any
public or private securities markets and may represent securities held by
institutions located anywhere in the world.
DOMESTIC EQUITY DEPOSITARY RECEIPTS
Many of the Funds may invest in Domestic Equity Depositary Receipts. These
instruments represent interests in a unit investment trust ("UIT") that holds a
portfolio of common stocks that is intended to track the price and dividend
performance of a particular index. Common examples of Domestic Equity
Depositary Receipts include S&P Depositary Receipts ("SPDRs") and Nasdaq 100
Shares, which may be obtained from the UIT issuing the securities or purchased
in the secondary market (SPDRs and Nasdaq 100 Shares are listed on the American
Stock Exchange).
Domestic Equity Depositary Receipts are not individually redeemable, except upon
termination of the UIT that issued them. The liquidity of small holdings of
Domestic Equity Depositary Receipts depends upon the existence of a secondary
market.
The redemption price (and therefore the sale price) of Domestic Equity
Depositary Receipts is derived from and based upon the securities held by the
UIT that issued them. Accordingly, the level of risk involved in the purchase
or redemption or sale of a Domestic Equity Depositary Receipt is similar to the
risk involved in the purchase or sale of traditional common stock, with the
exception that the price of Domestic Equity Depositary Receipts is based on the
value of a basket of stocks. Disruptions in the markets for the securities
underlying Domestic Equity Depositary Receipts purchased or sold by a Series
could result in losses on Domestic Equity Depositary Receipts.
CONVERTIBLE SECURITIES
A convertible security is a fixed income security (a bond or preferred stock)
which may be converted at a stated price within a specified period of time into
a certain quantity of the common stock of the same or a different issuer.
Convertible securities are senior to common stock in a corporation's capital
structure, but are usually subordinated to similar non-convertible securities.
Convertible securities provide, through their conversion feature, an opportunity
to participate in capital appreciation resulting from a market price advance in
a convertible security's underlying common stock. The price of a convertible
security is influenced by the market value of the underlying common stock and
tends to increase as the market value of the underlying stock rises, whereas it
tends to decrease as the market value of the underlying stock declines. The
Manager regards convertible securities as a form of equity security.
FUTURES AND OPTIONS
Many of the Funds may use futures and options for various purposes. Such
transactions may involve options, futures and related options on futures
contracts, and those instruments may relate to particular equity and fixed
income securities, equity and fixed income indexes, and foreign currencies. The
Funds may also enter into a combination of long and short positions (including
spreads and straddles) for a variety of investment strategies, including
protecting against changes in certain yield relationships.
The use of futures contracts, options contracts and options on futures contracts
involves risk. Thus, while a Fund may benefit from the use of futures, options
and options on futures, unanticipated changes in interest rates, securities
prices, or currency exchange rates may result in poorer overall performance for
the Fund than if it had not entered into any futures contracts or options
transactions. Losses incurred in transactions in futures, options and options on
futures and the costs of these transactions will affect a Fund's performance.
OPTIONS. Many Funds which may use options (1) may enter into contracts giving
third parties the right to buy the Fund's portfolio securities for a fixed price
at a future date (writing "covered call options"); (2) may enter into contracts
giving third parties the right to sell securities to the
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Fund for a fixed price at a future date (writing "covered put options"); and (3)
may buy the right to purchase securities from third parties ("call options") or
the right to sell securities to third parties ("put options") for a fixed price
at a future date.
WRITING COVERED OPTIONS. Each Fund may seek to increase its return by writing
covered call or put options on optionable securities or indexes. A call option
written by a Fund on a security gives the holder the right to buy the underlying
security from the Fund at a stated exercise price; a put option gives the holder
the right to sell the underlying security to the Fund at a stated exercise
price. In the case of options on indexes, the options are usually cash settled
based on the difference between the strike price and the value of the index.
Each such Fund will receive a premium for writing a put or call option, which
increases the Fund's return in the event the option expires unexercised or is
closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price and volatility of the underlying
security or securities index to the exercise price of the option, the remaining
term of the option, supply and demand and interest rates. By writing a call
option on a security, the Fund limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise price
of the option. By writing a put option on a security, the Fund assumes the risk
that it may be required to purchase the underlying security for an exercise
price higher than its then current market value, resulting in a potential
capital loss unless the security subsequently appreciates in value. In the case
of options on an index, if a Fund writes a call, any profit by the Fund in
respect of portfolio securities expected to correlate with the index will be
limited by an increase in the index above the exercise price of the option. If
the Fund writes a put on an index, the Fund may be required to make a cash
settlement greater than the premium received if the index declines.
A call option on a security is "covered" if a Fund owns the underlying security
or has an absolute and immediate right to acquire that security without
additional cash consideration (or for additional cash consideration earmarked
and maintained by the Fund's custodian on the custodian's books and records)
upon conversion or exchange of other securities held in its portfolio. A call
option on a security is also covered if the Fund holds on a share-for-share
basis a call on the same security as the call written where the exercise price
of the call held is equal to or less than the exercise price of the call written
or greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, U.S. Government Securities or other liquid
securities earmarked on the Custodian's books and records. A call option on an
index is "covered" if a Fund maintains cash, U.S. Government Securities or other
liquid securities with a value equal to the exercise price in a segregated
account with its custodian. A put option is "covered" if the Fund's custodian
earmarks and maintains cash, U.S. Government Securities or other liquid
securities with a value equal to the exercise price, or else holds on a
share-for-share basis a put on the same security as the put written where the
exercise price of the put held is equal to or greater than the exercise price of
the put written.
If the writer of an option wishes to terminate its obligation, it may effect a
"closing purchase transaction." This is accomplished, in the case of exchange
traded options, by buying an option of the same series as the option previously
written. The effect of the purchase is that the writer's position will be
canceled by the clearing corporation. The writer of an option may not effect a
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closing purchase transaction after it has been notified of the exercise of an
option. Likewise, an investor who is the holder of an option may liquidate its
position by effecting a "closing sale transaction." This is accomplished by
selling an option of the same series as the option previously purchased. There
is no guarantee that a Fund will be able to effect a closing purchase or a
closing sale transaction at any particular time. Also, an over-the-counter
option may be closed out only with the other party to the option transaction.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a written
put option will permit the Fund to write another put option to the extent that
the exercise price thereof is secured by deposited cash or liquid securities.
Also, effecting a closing transaction will permit the cash or proceeds from the
concurrent sale of any securities subject to the option to be used for other
Fund investments. If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or concurrent with the sale of the security.
A Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to purchase the option; the Fund will realize a loss from
a closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to purchase
the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security or
index of securities, any loss resulting from the repurchase of a written call
option is likely to be offset in whole or in part by appreciation of the
underlying security or securities owned by the Fund.
A Fund may write options in connection with buy-and-write transactions; that is,
a Fund may purchase a security and then write a call option against that
security. The exercise price of the call the Fund determines to write will
depend upon the expected price movement of the underlying security. The exercise
price of a call option may be below ("in-the-money"), equal to ("at-the-money")
or above ("out-of-the-money") the current value of the underlying security at
the time the option is written. Buy-and-write transactions using in-the-money
call options may be used when it is expected that the price of the underlying
security will remain flat or decline moderately during the option period.
Buy-and-write transactions using at-the-money call options may be used when it
is expected that the price of the underlying security will remain fixed or
advance moderately during the option period. Buy-and-write transactions using
out-of-the-money call options may be used when it is expected that the premiums
received from writing the call option plus the appreciation in the market price
of the underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If the call options
are exercised in such transactions, the Fund's maximum gain will be the premium
received by it for writing the option, adjusted upward or downward by the
difference between the Fund's purchase price of the security and the exercise
price. If the options are not exercised and the price of the underlying security
declines, the amount of such decline will be offset in part, or entirely, by the
premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the
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exercise price, the put option will expire worthless and the Fund's gain will be
limited to the premium received. If the market price of the underlying security
declines or otherwise is below the exercise price, the Fund may elect to close
the position or take delivery of the security at the exercise price. In that
event, the Fund's return will be the premium received from the put option minus
the cost of closing the position or, if it chooses to take delivery of the
security, the premium received from the put option minus the amount by which the
market price of the security is below the exercise price. Out-of-the-money,
at-the-money and in-the-money put options may be used by the Fund in market
environments analogous to those in which call options are used in buy-and-write
transactions.
The extent to which a Fund will be able to write and purchase call and put
options may be restricted by the Fund's intention to qualify as a regulated
investment company under the Internal Revenue Code.
RISK FACTORS IN OPTIONS TRANSACTIONS. The option writer has no control over when
the underlying securities or futures contract must be sold, in the case of a
call option, or purchased, in the case of a put option, since the writer may be
assigned an exercise notice at any time prior to the termination of the
obligation. If an option expires unexercised, the writer realizes a gain in the
amount of the premium. Such a gain, of course, may, in the case of a covered
call option, be offset by a decline in the market value of the underlying
security or futures contract during the option period. If a call option is
exercised, the writer realizes a gain or loss from the sale of the underlying
security or futures contract. If a put option is exercised, the writer must
fulfill the obligation to purchase the underlying security or futures contract
at the exercise price, which will usually exceed the then market value of the
underlying security or futures contract.
An exchange-traded option may be closed out only on a national securities
exchange ("Exchange") which generally provides a liquid secondary market for an
option of the same series. An over-the-counter option may be closed out only
with the other party to the option transaction. If a liquid secondary market for
an exchange-traded option does not exist, it might not be possible to effect a
closing transaction with respect to a particular option with the result that the
Fund holding the option would have to exercise the option in order to realize
any profit. For example, in the case of a written call option, if the Fund is
unable to effect a closing purchase transaction in a secondary market (in the
case of a listed option) or with the purchaser of the option (in the case of an
over-the-counter option), the Fund will not be able to sell the underlying
security (or futures contract) until the option expires or it delivers the
underlying security (or futures contract) upon exercise. Reasons for the absence
of a liquid secondary market on an Exchange include the following: (i) there may
be insufficient trading interest in certain options; (ii) restrictions may be
imposed by an Exchange on opening transactions or closing transactions or both;
(iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options or underlying securities;
(iv) unusual or unforeseen circumstances may interrupt normal operations on an
Exchange; (v) the facilities of an Exchange or the Options Clearing Corporation
may not at all times be adequate to handle current trading volume; or (vi) one
or more Exchanges could, for economic or other reasons, decide or be compelled
at some future date to discontinue the trading of options (or a particular class
or series of options), in which event the secondary market on that Exchange (or
in that class or series of options) would cease to exist, although outstanding
options on that Exchange that
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had been issued by the Options Clearing Corporation as a result of trades on
that Exchange should continue to be exercisable in accordance with their terms.
The Exchanges have established limitations governing the maximum number of
options which may be written by an investor or group of investors acting in
concert. It is possible that the Funds, the Manager and other clients of the
Manager may be considered to be such a group. These position limits may restrict
a Fund's ability to purchase or sell options on a particular security.
The amount of risk a Fund assumes when it purchases an option is the premium
paid for the option plus related transaction costs. In addition to the
correlation risks discussed below, the purchase of an option also entails the
risk that changes in the value of the underlying security or futures contract
will not be fully reflected in the value of the option purchased.
FUTURES. A financial futures contract sale creates an obligation by the seller
to deliver the type of financial instrument called for in the contract in a
specified delivery month for a stated price. A financial futures contract
purchase creates an obligation by the purchaser to pay for and take delivery of
the type of financial instrument called for in the contract in a specified
delivery month, at a stated price. In some cases, the specific instruments
delivered or taken, respectively, at settlement date are not determined until on
or near that date. The determination is made in accordance with the rules of the
exchange on which the futures contract sale or purchase was made. Some futures
contracts are "cash settled" (rather than "physically settled," as described
above) which means that the purchase price is subtracted from the current market
value of the instrument and the net amount if positive is paid to the purchaser,
and if negative is paid by the purchaser. Futures contracts are traded in the
United States only on commodity exchanges or boards of trade -- known as
"contract markets" -- approved for such trading by the Commodity Futures Trading
Commission ("CFTC"), and must be executed through a futures commission merchant
or brokerage firm that is a member of the relevant contract market. Under U.S.
law, futures contracts on individual equity securities are not permitted.
The purchase or sale of a futures contract differs from the purchase or sale of
a security or option in that no price or premium is paid or received. Instead,
an amount of cash, U.S. Government Securities or other liquid assets generally
not exceeding 5% of the face amount of the futures contract must be deposited
with the broker. This amount is known as initial margin. Subsequent payments to
and from the broker, known as variation margin, are made on a daily basis as the
price of the underlying futures contract fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
"marking to market." Prior to the settlement date of the futures contract, the
position may be closed out by taking an opposite position which will operate to
terminate the position in the futures contract. A final determination of
variation margin is then made, additional cash is required to be paid to or
released by the broker, and the purchaser realizes a loss or gain. In addition,
a commission is paid on each completed purchase and sale transaction.
In most cases futures contracts are closed out before the settlement date
without the making or taking of delivery. Closing out a futures contract sale is
effected by purchasing a futures contract for the same aggregate amount of the
specific type of financial instrument or commodity and the
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same delivery date. If the price of the initial sale of the futures contract
exceeds the price of the offsetting purchase, the seller is paid the difference
and realizes a gain. Conversely, if the price of the offsetting purchase exceeds
the price of the initial sale, the seller realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by the purchaser entering
into a futures contract sale. If the offsetting sale price exceeds the purchase
price, the purchaser realizes a gain, and if the purchase price exceeds the
offsetting sale price, a loss will be realized.
The ability to establish and close out positions on options on futures will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop or be maintained.
INDEX FUTURES. Each of the Funds may purchase futures contracts on various
securities indexes ("Index Futures"). For example, each of the U.S. Equity Funds
may purchase Index Futures on the S&P 500 and on such other domestic stock
indexes as the Manager may deem appropriate. The Japan Fund may purchase Index
Futures on the Nikkei 225 Stock Average and on the Tokyo Stock Price Index. The
International Core Fund, Currency Hedged International Core Fund, Evolving
Countries Fund, Foreign Fund, International Small Companies Fund, Asia Fund and
Emerging Markets Fund, among others, may each purchase Index Futures on foreign
stock indexes, including those which may trade outside the United States. The
Domestic Bond Fund, International Bond Fund, Currency Hedged International Bond
Fund, Global Bond Fund, Emerging Country Debt Fund, U.S. Bond/Global Alpha A
Fund, U.S. Bond/Global Alpha B Fund and Inflation Indexed Bond Fund, among
others, may each purchase Index Futures on domestic and (except for the Domestic
Bond Fund) foreign fixed income securities indexes, including those which may
trade outside the United States. A Fund's purchase and sale of Index Futures is
limited to contracts and exchanges approved by the CFTC.
An Index Future may call for "physical delivery" or be "cash settled." An Index
Future that calls for physical delivery is a contract to buy an integral number
of units of the particular securities index at a specified future date at a
price agreed upon when the contract is made. A unit is the value from time to
time of the relevant index. While a Fund that purchases an Index Future that
calls for physical delivery is obligated to pay the face amount on the stated
date, such an Index Future may be closed out on that date or any earlier date by
selling an Index Future with the same face amount and contract date. This will
terminate the Fund's position and the Fund will realize a profit or a loss based
on the difference between the cost of purchasing the original Index Future and
the price obtained from selling the closing Index Future. The amount of the
profit or loss is determined by the change in the value of the relevant index
while the Index Future was held.
For example, if the value of a unit of a particular index were $1,000, a
contract to purchase 500 units would be worth $500,000 (500 units x $1,000). The
Index Futures contract specifies that no delivery of the actual stocks making up
the index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the relevant index at the expiration
of the contract. For example, if a Fund enters into one futures contract to buy
500 units of an index at a specified future date at a contract price of $1,000
per unit and the index is at $1,010 on that future date, the Fund will gain
$5,000 (500 units x gain of $10).
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Index Futures that are "cash settled" provide by their terms for settlement on a
net basis reflecting changes in the value of the underlying index. Thus, the
purchaser of such an Index Future is never obligated to pay the face amount of
the contract. The net payment obligation may in fact be very small in relation
to the face amount.
A Fund may close open positions on the futures exchange on which Index Futures
are then traded at any time up to and including the expiration day. All
positions which remain open at the close of the last business day of the
contract's life are required to settle on the next business day (based upon the
value of the relevant index on the expiration day) with settlement made, in the
case of Index Futures on the S&P 500, with the Commodities Clearing House.
Additional or different margin requirements as well as settlement procedures may
be applicable to foreign stock Index Futures at the time a Fund purchases
foreign stock Index Futures.
The price of Index Futures may not correlate perfectly with movement in the
relevant index due to certain market distortions. First, all participants in the
futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions which could distort the normal
relationship between the Index and futures markets. Secondly, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities market, and as a result the futures market may attract more
speculators than does the securities market. Increased participation by
speculators in the futures market may also cause temporary price distortions. In
addition, trading hours for foreign stock Index Futures may not correspond
perfectly to hours of trading on the foreign exchange to which a particular
foreign stock Index Futures relates. This may result in a disparity between the
price of Index Futures and the value of the relevant index due to the lack of
continuous arbitrage between the Index Futures price and the value of the
underlying index.
INTEREST RATE FUTURES. For the purposes previously described, the
Fixed Income Funds may engage in a variety of transactions involving
the use of futures with respect to U.S. Government Securities and
other fixed income securities.
OPTIONS ON FUTURES CONTRACTS. Options on futures contracts give the purchaser
the right in return for the premium paid to assume a position in a futures
contract at the specified option-exercise price at any time during the period of
the option. Funds may use options on futures contracts in lieu of writing or
buying options directly on the underlying securities or purchasing and selling
the underlying futures contracts. For example, to hedge against a possible
decrease in the value of its portfolio securities, a Fund may purchase put
options or write call options on futures contracts rather than selling futures
contracts. Similarly, a Fund may purchase call options or write put options on
futures contracts as a substitute for the purchase of futures contracts to hedge
against a possible increase in the price of securities the Fund expects to
purchase. Such options generally operate in the same manner as options purchased
or written directly on the underlying investments. See "Foreign Currency
Transactions" below for a description of the Funds' use of options on currency
futures.
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RISK FACTORS IN FUTURES TRANSACTIONS. Investment in futures contracts involves
risk. If the futures are used for hedging, some of that risk may be caused by an
imperfect correlation between movements in the price of the futures contract and
the price of the security or currency being hedged. The correlation is higher
between price movements of futures contracts and the instrument underlying that
futures contract. The correlation is lower when futures are used to hedge
securities other than such underlying instrument, such as when a futures
contract on an index of securities is used to hedge a single security, a futures
contract on one security (e.g., U.S. Treasury bonds) is used to hedge a
different security (e.g., a mortgage-backed security) or when a futures contract
in one currency is used to hedge a security denominated in another currency. In
the event of an imperfect correlation between a futures position and a portfolio
position (or anticipated position) which is intended to be protected, the
desired protection may not be obtained and a Fund may be exposed to risk of
loss. In addition, it is not always possible to hedge fully or perfectly against
currency fluctuations affecting the value of the securities denominated in
foreign currencies because the value of such securities also is likely to
fluctuate as a result of independent factors not related to currency
fluctuations. The risk of imperfect correlation generally tends to diminish as
the maturity date of the futures contract approaches.
A hedge will not be fully effective where there is such imperfect correlation.
To compensate for imperfect correlations, a Fund may purchase or sell futures
contracts in a greater amount than the hedged securities if the volatility of
the hedged securities is historically greater than the volatility of the futures
contracts. Conversely, a Fund may purchase or sell fewer contracts if the
volatility of the price of the hedged securities is historically less than that
of the futures contract.
A Fund may also purchase futures contracts (or options thereon) as an
anticipatory hedge against a possible increase in the price of currency in which
is denominated the securities the Fund anticipates purchasing. In such
instances, it is possible that the currency may instead decline. If the Fund
does not then invest in such securities because of concern as to possible
further market and/or currency decline or for other reasons, the Fund may
realize a loss on the futures contract that is not offset by a reduction in the
price of the securities purchased.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by commodity exchanges
which limit the amount of fluctuation in a futures contract price during a
single trading day. Once the daily limit has been reached in the contract, no
trades may be entered into at a price beyond the limit, thus preventing the
liquidation of open futures positions. Prices have in the past exceeded the
daily limit on a number of consecutive trading days. Short positions in index
futures may be closed out only by entering into a futures contract purchase on
the futures exchange on which the index futures are traded.
The successful use of transactions in futures and related options for hedging
and risk management also depends on the ability of the Manager to forecast
correctly the direction and extent of exchange rate, interest rate and stock
price movements within a given time frame. For example, to the extent interest
rates remain stable during the period in which a futures contract or option is
held by a Fund investing in fixed income securities (or such rates move in a
direction opposite to that anticipated), the Fund may realize a loss on the
futures transaction which is not fully or partially offset by an increase in the
value of its portfolio securities. As a result, the
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Fund's total return for such period may be less than if it had not engaged in
the hedging transaction.
Unlike trading on domestic commodity exchanges, trading on foreign commodity
exchanges is not regulated by the CFTC and may be subject to greater risks than
trading on domestic exchanges. For example, some foreign exchanges may be
principal markets so that no common clearing facility exists and a trader may
look only to the broker for performance of the contract. In addition, unless a
Fund hedges against fluctuations in the exchange rate between the U.S. dollar
and the currencies in which trading is done on foreign exchanges, any profits
that a Fund might realize in trading could be eliminated by adverse changes in
the exchange rate, or the Fund could incur losses as a result of those changes.
USES OF OPTIONS, FUTURES AND OPTIONS ON FUTURES
RISK MANAGEMENT. When futures and options on futures are used for risk
management, a Fund will generally take long positions (e.g., purchase call
options, futures contracts or options thereon) in order to increase the Fund's
exposure to a particular market, market segment or foreign currency. For
example, if a Fixed Income Fund wants to increase its exposure to a particular
fixed income security, the Fund may take long positions in futures contracts on
that security. Likewise, if an Equity Fund holds a portfolio of stocks with an
average volatility (beta) lower than that of the Fund's benchmark securities
index as a whole (deemed to be 1.00), the Fund may purchase Index Futures to
increase its average volatility to 1.00. In the case of futures and options on
futures, a Fund is only required to deposit the initial and variation margin as
required by relevant CFTC regulations and the rules of the contract markets.
Because the Fund will then be obligated to purchase the security or index at a
set price on a future date, the Fund's net asset value will fluctuate with the
value of the security as if it were already included in the Fund's portfolio.
Risk management transactions have the effect of providing a degree of investment
leverage, particularly when the Fund does not earmark assets equal to the face
amount of the contract (i.e., in cash settled futures contracts) since the
futures contract (and related options) will increase or decrease in value at a
rate which is a multiple of the rate of increase or decrease in the value of the
initial and variation margin that the Fund is required to deposit. As a result,
the value of the Fund's portfolio will generally be more volatile than the value
of comparable portfolios which do not engage in risk management transactions. A
Fund will not, however, use futures and options on futures to obtain greater
volatility than it could obtain through direct investment in securities; that
is, a Fund will not normally engage in risk management to increase the average
volatility (beta) of that Fund's portfolio above 1.00, the level of risk (as
measured by volatility) that would be present if the Fund were fully invested in
the securities comprising the relevant index. However, a Fund may invest in
futures and options on futures without regard to this limitation if the face
value of such investments, when aggregated with the Index Futures, equity swaps
and contracts for differences as described below does not exceed 10% of a Fund's
assets.
HEDGING. To the extent indicated elsewhere, a Fund may also enter into options
and futures contracts and buy and sell options on futures for hedging. For
example, if a Fund wants to hedge certain of its fixed income securities against
a decline in value resulting from a general increase in market rates of
interest, it might sell futures contracts with respect to fixed income
securities
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or indexes of fixed income securities. If the hedge is effective, then should
the anticipated change in market rates cause a decline in the value of the
Fund's fixed income security, the value of the futures contract should increase.
Likewise, a Fund may sell equity index futures if the Fund wants to hedge its
equity securities against a general decline in the relevant equity market(s).
The Funds may also use futures contracts in anticipatory hedge transactions by
taking a long position in a futures contract with respect to a security, index
or foreign currency that a Fund intends to purchase (or whose value is expected
to correlate closely with the security or currency to be purchased) pending
receipt of cash from other transactions to be used for the actual purchase. Then
if the cost of the security or foreign currency to be purchased by the Fund
increases and if the anticipatory hedge is effective, that increased cost should
be offset, at least in part, by the value of the futures contract. Options on
futures contracts may be used for hedging as well. For example, if the value of
a fixed-income security in a Fund's portfolio is expected to decline as a result
of an increase in rates, the Fund might purchase put options or write call
options on futures contracts rather than selling futures contracts. Similarly,
for anticipatory hedging, the Fund may purchase call options or write put
options as a substitute for the purchase of futures contracts. See "Foreign
Currency Transactions" below for more information regarding the currency hedging
practices of certain Funds.
INVESTMENT PURPOSES. To the extent indicated elsewhere, a Fund may also enter
into futures contracts and buy and sell options thereon for investment. For
example, a Fund may invest in futures when its Manager believes that there are
not enough attractive securities available to maintain the standards of
diversity and liquidity set for a Fund pending investment in such securities if
or when they do become available. Through this use of futures and related
options, a Fund may diversify risk in its portfolio without incurring the
substantial brokerage costs which may be associated with investment in the
securities of multiple issuers. This use may also permit a Fund to avoid
potential market and liquidity problems (e.g., driving up the price of a
security by purchasing additional shares of a portfolio security or owning so
much of a particular issuer's stock that the sale of such stock depresses that
stock's price) which may result from increases in positions already held by the
Fund.
When any Fund purchases futures contracts for investment, the Fund's custodian
will earmark and maintain cash, U.S. Government Securities or other liquid
securities in an amount which, together with the initial and variation margin
deposited on the futures contracts, is equal to the face value of the futures
contracts at all times while the futures contracts are held.
Incidental to other transactions in fixed income securities, for investment
purposes a Fund may also combine futures contracts or options on fixed income
securities with cash, cash equivalent investments or other fixed income
securities in order to create "synthetic" bonds which approximate desired risk
and return profiles. This may be done where a "non-synthetic" security having
the desired risk/return profile either is unavailable (e.g., short-term
securities of certain foreign governments) or possesses undesirable
characteristics (e.g., interest payments on the security would be subject to
foreign withholding taxes). A Fund may also purchase forward foreign exchange
contracts in conjunction with U.S. dollar-denominated securities in order to
create a synthetic foreign currency denominated security which approximates
desired risk and return characteristics where the non-synthetic securities
either are not available in foreign markets or possess undesirable
characteristics. For greater detail, see "Foreign Currency
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Transactions" below. When a Fund creates a "synthetic" bond with a futures
contract, the Fund's custodian will earmark and maintain cash, U.S. Government
Securities or other liquid securities with a value at least equal to the face
amount of the futures contract (less the amount of any initial or variation
margin on deposit).
SYNTHETIC SALES AND PURCHASES. Futures contracts may also be used to reduce
transaction costs associated with short-term restructuring of a Fund's
portfolio. For example, if a Fund's portfolio includes stocks of companies with
medium-sized equity capitalization and, in the opinion of the Manager, such
stocks are likely to underperform larger capitalization stocks, the Fund might
sell some or all of its mid-capitalization stocks, buy large capitalization
stocks with the proceeds and then, when the expected trend had played out, sell
the large capitalization stocks and repurchase the mid-capitalization stocks
with the proceeds. In the alternative, the Fund may use futures to achieve a
similar result with reduced transaction costs. In that case, the Fund might
simultaneously enter into short futures positions on an appropriate index (e.g.,
the S&P Mid Cap 400 Index) (to synthetically "sell" the stocks in the Fund) and
long futures positions on another index (e.g., the S&P 500) (to synthetically
"buy" the larger capitalization stocks). When the expected trend has played out,
the Fund would then close out both futures contract positions. A Fund will only
enter into these combined positions if (1) the short position (adjusted for
historic volatility) operates as a hedge of existing portfolio holdings, (2) the
face amount of the long futures position is less than or equal to the value of
the portfolio securities that the Fund would like to dispose of, (3) the
contract settlement date for the short futures position is approximately the
same as that for the long futures position and (4) the Fund's custodian earmarks
and maintains an amount of cash, U.S. Government Securities or other liquid
assets whose value, marked-to-market daily, is equal to the Fund's current
obligations in respect of the long futures contract positions. If a Fund uses
such combined short and long positions, in addition to possible declines in the
values of its investment securities, the Fund may also suffer losses associated
with a securities index underlying the long futures position underperforming the
securities index underlying the short futures position. However, the Manager
will enter into these combined positions only if the Manager expects that,
overall, the Fund will perform as if it had sold the securities hedged by the
short position and purchased the securities underlying the long position. A Fund
may also use swaps and options on futures to achieve the same objective.
Limitations on the Use of Options and Futures Portfolio Strategies. As noted
above, the Funds may use futures contracts and related options for hedging and,
in some circumstances, for risk management or investment but not for
speculation. Thus, except when used for risk management or investment, each such
Fund's long futures contract positions (less its short positions) together with
the Fund's cash (i.e., equity or fixed income) positions will not exceed the
Fund's total net assets.
The Funds' ability to engage in the options and futures strategies described
above will depend on the availability of liquid markets in such instruments.
Markets in options and futures with respect to currencies are relatively new and
still developing. It is impossible to predict the amount of trading interest
that may exist in various types of options or futures. Therefore no assurance
can be given that a Fund will be able to utilize these instruments effectively
for the purposes set forth above. Furthermore, each Fund's ability to engage in
options and futures transactions may be limited by tax considerations.
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SWAP CONTRACTS AND OTHER TWO-PARTY CONTRACTS
Many of the Funds may use swap contracts and other two-party contracts for the
same or similar purposes as they may use options, futures and related options.
SWAP CONTRACTS. Swap agreements are two-party contracts entered into primarily
by institutional investors for periods ranging from a few weeks to more than one
year. In a standard "swap" transaction, two parties agree to exchange returns
(or differentials in rates of return) calculated with respect to a "notional
amount," e.g., the return on or increase in value of a particular dollar amount
invested at a particular interest rate, in a particular foreign currency, or in
a "basket" of securities representing a particular index. A Fund will usually
enter into swaps on a net basis, i.e., the two returns are netted out, with the
Fund receiving or paying, as the case may be, only the net amount of the two
returns.
INTEREST RATE AND CURRENCY SWAP CONTRACTS. Interest rate swaps involve the
exchange of the two parties' respective commitments to pay or receive interest
on a notional principal amount (e.g. an exchange of floating rate payments for
fixed rate payments). Currency swaps involve the exchange of the two parties'
respective commitments to pay or receive fluctuations with respect to a notional
amount of two different currencies (e.g., an exchange of payments with respect
to fluctuations in the value of the U.S. dollar relative to the Japanese yen).
CREDIT DEFAULT SWAPS. Credit default swaps are used to limit or reduce risk
exposure of the GMO Funds (primarily GMO Emerging Country Debt Fund and other
Fixed Income Funds that invest a portion of their assets in emerging market
debt) against events of default by issuers of emerging market debt. With these
instruments, GMO Funds pay what is, in effect, an insurance premium and, in
return, have the right to put forth certain bonds or loans upon issuer default
(or similar events) and to receive in return the par value of those bonds or
loans.
EQUITY SWAP CONTRACTS AND CONTRACTS FOR DIFFERENCES. Equity swap contracts
involve the exchange of one party's obligation to pay the loss, if any, with
respect to a notional amount of a particular equity index (e.g., the S&P 500
Index) plus interest on such notional amount at a designated rate (e.g., the
London Inter-Bank Offered Rate) in exchange for the other party's obligation to
pay the gain, if any, with respect to the notional amount of such index.
If a Fund enters into a long equity swap contract, the Fund's net asset value
will fluctuate as a result of changes in the value of the equity index on which
the equity swap is based as if it had purchased the notional amount of
securities comprising the index. The Funds will not use long equity swap
contracts to obtain greater volatility than it could obtain through direct
investment in securities; that is, a Fund will not normally enter into an equity
swap contract to increase the volatility (beta) of the Fund's portfolio above
1.00, the volatility that would be present in the stocks comprising the Fund's
benchmark index. However, a Fund may invest in long equity swap contracts
without regard to this limitation if the notional amount of such equity swap
contracts, when aggregated with the Index Futures as described above and the
contracts for differences as described below, does not exceed 10% of a Fund's
net assets.
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Contracts for differences are swap arrangements in which a Fund may agree with a
counterparty that its return (or loss) will be based on the relative performance
of two different groups or "baskets" of securities. As to one of the baskets,
the Fund's return is based on theoretical, long futures positions in the
securities comprising that basket (with an aggregate face value equal to the
notional amount of the contract for differences) and as to the other basket, the
Fund's return is based on theoretical short futures positions in the securities
comprising the basket. The Fund may also use actual long and short futures
positions to achieve the same market exposure(s) as contracts for differences
where payment obligations of the two legs of the contract are netted and thus
based on changes in the relative value of the baskets of securities rather than
on the aggregate change in the value of the two legs. The Funds will only enter
into contracts for differences (and analogous futures positions) when the
Manager believes that the basket of securities constituting the long leg will
outperform the basket constituting the short leg. However, it is possible that
the short basket will outperform the long basket -- resulting in a loss to the
Fund, even in circumstances when the securities in both the long and short
baskets appreciate in value.
Except for instances in which a Fund elects to obtain leverage up to the 10%
limitation mentioned above, a Fund's custodian will earmark and maintain cash,
U.S. Government Securities or other liquid securities in an amount equal to the
aggregate of net payment obligations on its swap contracts and contracts for
differences, marked to market daily.
A Fund may enter into swaps and contracts for differences for hedging,
investment and risk management. When using swaps for hedging, a Fund may enter
into an interest rate, currency or equity swap, as the case may be, on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities. For risk management or investment purposes a Fund may
also enter into a contract for differences in which the notional amount of the
theoretical long position is greater than the notional amount of the theoretical
short position. A Fund will not normally enter into a contract for differences
to increase the volatility (beta) of the Fund's portfolio above 1.00. However, a
Fund may invest in contracts for differences without regard to this limitation
if the aggregate amount by which the theoretical long positions of such
contracts exceed the theoretical short positions of such contracts, when
aggregated with the Index Futures and equity swap contracts as described above,
does not exceed 10% of a Fund's net assets.
INTEREST RATE CAPS, FLOORS AND COLLARS. The Funds may use interest rate caps,
floors and collars for the same purposes or similar purposes as they use
interest rate futures contracts and related options. Interest rate caps, floors
and collars are similar to interest rate swap contracts because the payment
obligations are measured by changes in interest rates as applied to a notional
amount and because they are individually negotiated with a specific
counterparty. The purchase of an interest rate cap entitles the purchaser, to
the extent that a specific index exceeds a specified interest rate, to receive
payments of interest on a notional principal amount from the party selling the
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below specified interest
rates, to receive payments of interest on a notional principal amount from the
party selling the interest rate floor. The purchase of an interest rate collar
entitles the purchaser, to the extent that a specified index exceeds or falls
below two specified interest rates, to receive payments of interest on a
notional
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principal amount from the party selling the interest rate collar. Except when
using such contracts for risk management, each Fund's custodian will earmark and
maintain cash, U.S. Government Securities or other liquid securities in an
amount at least equal to its obligations, if any, under interest rate cap, floor
and collar arrangements. As with futures contracts, when a Fund uses notional
amount contracts for risk management it is only required to earmark and maintain
on the custodian's books and records assets equal to its net payment obligation,
not the notional amount of the contract. In those cases, the notional amount
contract will have the effect of providing a degree of investment leverage
similar to the leverage associated with non-earmarked futures contracts. The
Funds' use of interest rate caps, floors and collars for the same or similar
purposes as those for which they use futures contracts and related options
presents the same risks and similar opportunities as those associated with
futures and related options. Because caps, floors and collars are recent
innovations for which standardized documentation has not yet been developed they
are deemed by the SEC to be relatively illiquid investments which are subject to
a Fund's limitation on investment in illiquid securities. See "Illiquid
Securities" below.
RISK FACTORS IN SWAP CONTRACTS, OTC OPTIONS AND OTHER TWO-PARTY CONTRACTS. A
Fund may only close out a swap, contract for differences, cap, floor or collar
or OTC option with the particular counterparty. Also, if the counterparty
defaults, a Fund will have contractual remedies pursuant to the agreement
related to the transaction, but there is no assurance that contract
counterparties will be able to meet their obligations pursuant to such contracts
or that, in the event of default, a Fund will succeed in pursuing contractual
remedies. The Fund thus assumes the risk that it may be delayed or prevented
from obtaining payments owed to it pursuant to swap contracts. The Manager will
closely monitor, subject to the oversight of the Trustees, the creditworthiness
of contract counterparties, and a Fund will not enter into any swaps, caps,
floors or collars, unless the unsecured senior debt or the claims-paying ability
of the other party thereto is rated at least A by Moody's Investors Service,
Inc. ("Moody's") or Standard & Poor's Rating Services, a division of The
McGraw-Hill Companies, Inc. ("Standard & Poor's") at the time of entering into
such transaction or if the counterparty has comparable credit as determined by
the Manager. However, the credit of the counterparty may be adversely affected
by larger-than-average volatility in the markets, even if the counterparty's net
market exposure is small relative to its capital. The management of caps,
floors, collars and swaps may involve certain difficulties because the
characteristics of many derivatives have not been observed under all market
conditions or through a full market cycle.
ADDITIONAL REGULATORY LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS,
INTEREST RATE FLOORS, CAPS AND COLLARS AND INTEREST RATE AND CURRENCY SWAP
CONTRACTS. In accordance with CFTC regulations, investments by any Fund in
futures contracts and related options for purposes other than bona fide hedging
are limited such that the aggregate amount that a Fund may commit to initial
margin on such contracts or time premiums on such options may not exceed 5% of
that Fund's net assets.
The Manager and the Trust do not believe that the Fund's respective obligations
under equity swap contracts, reverse equity swap contracts or Index Futures are
senior securities and, accordingly, the Fund will not treat them as being
subject to its borrowing restrictions. However, the net amount of the excess, if
any, of the Fund's obligations over its entitlements with respect to each equity
swap contract will be accrued on a daily basis and an amount of cash, U.S.
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Government Securities or other liquid obligations having an aggregate market
value at least equal to the accrued excess will be earmarked and maintained on
the books and records of the Fund's custodian. Likewise, when a Fund takes a
short position with respect to an Index Futures contract the position must be
covered or the Fund's custodian must earmark and maintain at all times while
that position is held, cash, U.S. Government Securities or other liquid
obligations in an amount which, together with the initial margin deposit on the
futures contract, is equal to the current delivery or cash settlement value.
If, for risk management purposes, a Fund uses futures contracts, related written
options, interest rate floors, caps and collars and interest rate and currency
swap contracts that have not been earmarked on the books and records of the
Fund's custodian, the Fund's use of any or all of such practices is limited to
no more than 10% of a Fund's total net assets when aggregated with such Fund's
traditional borrowings in accordance with SEC pronouncements. This 10%
limitation applies to the face amount of futures contracts and related options
that are not earmarked and to the amount of a Fund's net payment obligation that
is not earmarked in the case of interest rate floors, caps and collars and
interest rate and currency swap contracts.
FOREIGN CURRENCY TRANSACTIONS
Foreign currency exchange rates may fluctuate significantly over short periods
of time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or perceived changes in interest rates and other complex
factors. Currency exchange rates also can be affected unpredictably by
intervention (or the failure to intervene) by U.S. or foreign governments or
central banks, or by currency controls or political developments in the U.S. or
abroad. For example, uncertainty surrounds the introduction of the "euro" (a
common currency unit for the European Union) which occurred in January 1999.
These and other currencies in which the Funds' assets are denominated may be
devalued against the U.S. dollar, resulting in a loss to the Funds.
Funds that are permitted to invest in securities denominated in foreign
currencies may buy or sell foreign currencies, deal in forward foreign currency
contracts, currency futures contracts and related options and options on
currencies. These Funds may use such currency instruments for hedging,
investment or currency risk management. Currency risk management may include
taking active currency positions relative to both the securities portfolio of
the Fund and the Fund's performance benchmark.
Forward foreign currency contracts are contracts between two parties to purchase
and sell a specific quantity of a particular currency at a specified price, with
delivery and settlement to take place on a specified future date. Currency
futures contracts are contracts to buy or sell a standard quantity of a
particular currency at a specified future date and price. Options on currency
futures contracts give their owner the right, but not the obligation, to buy (in
the case of a call option) or sell (in the case of a put option) a specified
currency futures contract at a fixed price during a specified period. Options on
currencies give their owner the right, but not the obligation, to buy (in the
case of a call option) or sell (in the case of a put option) a specified
quantity of a particular currency at a fixed price during a specified period.
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The Funds may enter into forward contracts for hedging under three
circumstances. First, when a Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transaction, the Fund will be able
to protect itself against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and the subject foreign currency during
the period between the date on which the security is purchased or sold and the
date on which payment is made or received.
Second, when the Manager of a Fund believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell, for a fixed amount of dollars, the amount
of foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. Maintaining a match
between the forward contract amounts and the value of the securities involved
will not generally be possible since the future value of such securities in
foreign currencies will change as a consequence of market movements in the value
of those securities between the date the forward contract is entered into and
the date it matures.
Third, the Funds may engage in currency "cross hedging" when, in the opinion of
the Manager, the historical relationship among foreign currencies suggests that
the Funds may achieve the same protection for a foreign security at reduced cost
through the use of a forward foreign currency contract relating to a currency
other than the U.S. dollar or the foreign currency in which the security is
denominated. By engaging in cross hedging transactions, the Funds assume the
risk of imperfect correlation between the subject currencies. These practices
may present risks different from or in addition to the risks associated with
investments in foreign currencies.
A Fund is not required to enter into hedging transactions with regard to its
foreign currency-denominated securities and will not do so unless deemed
appropriate by the Manager. By entering into the above hedging transactions, the
Funds may be required to forego the benefits of advantageous changes in the
exchange rates.
Each of these Funds may also enter into foreign currency forward contracts for
investment and currency risk management. When a Fund uses currency instruments
for such purposes, the foreign currency exposure of the Fund may differ
substantially from the currencies in which the Fund's investment securities are
denominated. However, a Fund's aggregate foreign currency exposure will not
normally exceed 100% of the value of the Fund's securities, except that a Fund
may use currency instruments without regard to this limitation if the amount of
such excess, when aggregated with futures contracts, equity swap contracts and
contracts for differences used in similar ways, does not exceed 10% of a Fund's
net assets. The U.S. Bond/Global Alpha A Fund, U.S. Bond/Global Alpha B Fund,
International Bond Fund, the Currency Hedged International Bond Fund, the Global
Bond Fund and the Emerging Country Debt Fund, among others, may each also enter
into foreign currency forward contracts to give fixed income securities
denominated in one currency (generally the U.S. dollar) the risk characteristics
of similar securities denominated in another currency as described above under
"Uses of Options,
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Futures and Options on Futures -- Investment Purposes" or for risk management in
a manner similar to such Funds' use of futures contracts and related options.
Except to the extent that the Funds may use such contracts for risk management,
whenever a Fund enters into a foreign currency forward contract, other than a
forward contract entered into for hedging, the Fund's custodian will earmark and
maintain cash, U.S. Government Securities or other liquid securities with a
value, marked to market daily, equal to the amount of the currency required to
be delivered. A Fund's ability to engage in forward contracts may be limited by
tax considerations.
A Fund may use currency futures contracts and related options and options on
currencies for the same reasons for which it uses currency forwards. Except to
the extent that the Funds may use futures contracts and related options for risk
management, a Fund will, so long as it is obligated as the writer of a call
option on currency futures, own on a contract-for-contract basis an equal long
position in currency futures with the same delivery date or a call option on
currency futures with the difference, if any, between the market value of the
call written and the market value of the call or long currency futures purchased
and maintained by the Fund in cash or other liquid assets earmarked on the books
and records of the Fund's custodian. If at the close of business on any day the
market value of the call purchased by a Fund falls below 100% of the market
value of the call written by the Fund, the Fund's custodian will earmark and
maintain an amount of cash or other liquid assets equal in value to the
difference. Alternatively, the Fund may cover the call option by owning
securities denominated in the currency with a value equal to the face amount of
the contract(s) or through earmarking and maintaining with the custodian an
amount of the particular foreign currency equal to the amount of foreign
currency per futures contract option times the number of options written by the
Fund.
REPURCHASE AGREEMENTS
A Fund may enter into repurchase agreements with banks and broker-dealers by
which the Fund acquires a security (usually an obligation of the Government
where the transaction is initiated or in whose currency the agreement is
denominated) for a relatively short period (usually not more than a week) for
cash and obtains a simultaneous commitment from the seller to repurchase the
security at an agreed-on price and date. The resale price is in excess of the
acquisition price and reflects an agreed-upon market rate unrelated to the
coupon rate on the purchased security. Such transactions afford an opportunity
for the Fund to earn a return on temporarily available cash at no market risk,
although there is a risk that the seller may default in its obligation to pay
the agreed-upon sum on the redelivery date. Such a default may subject the
relevant Fund to expenses, delays and risks of loss including: (a) possible
declines in the value of the underlying security during the period while the
Fund seeks to enforce its rights thereto, (b) possible reduced levels of income
and lack of access to income during this period and (c) inability to enforce
rights and the expenses involved in attempted enforcement.
DEBT AND OTHER FIXED INCOME SECURITIES GENERALLY
Debt and Other Fixed Income Securities include fixed income securities of any
maturity, although, under normal circumstances, a Fixed Income Fund (other than
the Short-Term Income
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Fund) will only invest in a security if, at the time of such investment, at
least 65% of its total assets will be comprised of bonds, as defined in the
Prospectus. Fixed income securities pay a specified rate of interest or
dividends, or a rate that is adjusted periodically by reference to some
specified index or market rate. Fixed income securities include securities
issued by federal, state, local and foreign governments and related agencies,
and by a wide range of private issuers.
Fixed income securities are subject to market and credit risk. Market risk
relates to changes in a security's value as a result of changes in interest
rates generally. In general, the values of fixed income securities increase when
prevailing interest rates fall and decrease when interest rates rise. Credit
risk relates to the ability of the issuer to make payments of principal and
interest. Obligations of issuers are subject to the provisions of bankruptcy,
insolvency and other laws, such as the Federal Bankruptcy Reform Act of 1978,
affecting the rights and remedies of creditors. Fixed income securities
denominated in foreign currencies are also subject to the risk of a decline in
the value of the denominating currency.
Because interest rates vary, it is impossible to predict the future income of a
Fund investing in such securities. The net asset value of each Fund's shares
will vary as a result of changes in the value of the securities in its portfolio
and will be affected by the absence and/or success of hedging strategies.
TEMPORARY HIGH QUALITY CASH ITEMS
Many of the Funds may temporarily invest a portion of their assets in cash or
cash items pending other investments or in connection with the earmarking and
maintenance of such assets on the custodian's books and records. These cash
items must be of high quality and may include a number of money market
instruments such as securities issued by the United States government and
agencies thereof, bankers' acceptances, commercial paper, and bank certificates
of deposit. By investing only in high quality money market securities a Fund may
seek to minimize credit risk with respect to such investments. The Short-Term
Income Fund may invest a substantial portion of its assets in these instruments,
but is not subject to the quality, duration and other requirements of money
market funds.
U.S. GOVERNMENT SECURITIES AND FOREIGN GOVERNMENT SECURITIES
U.S. Government Securities include securities issued or guaranteed by the U.S.
government or its authorities, agencies or instrumentalities. Foreign Government
Securities include securities issued or guaranteed by foreign governments
(including political subdivisions) or their authorities, agencies or
instrumentalities or by supra-national agencies. U.S. Government Securities and
Foreign Government Securities have different kinds of government support. For
example, some U.S. Government Securities, such as U.S. Treasury bonds, are
supported by the full faith and credit of the United States, whereas certain
other U.S. Government Securities issued or guaranteed by federal agencies or
government-sponsored enterprises are not supported by the full faith and credit
of the United States. Similarly, some Foreign Government Securities are
supported by the full faith and credit of a foreign national government or
political subdivision and some are not. In the case of certain countries,
Foreign Government Securities may involve
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varying degrees of credit risk as a result of financial or political inability
of a Fund to enforce its rights against the foreign government issuer.
Supra-national agencies are agencies whose member nations make capital
contributions to support the agencies' activities, and include such entities as
the International Bank for Reconstruction and Development (the World Bank), the
Asian Development Bank, the European Coal and Steel Community and the
Inter-American Development Bank.
Like other fixed income securities, U.S. Government Securities and Foreign
Government Securities are subject to market risk and their market values
fluctuate as interest rates change. Thus, for example, the value of an
investment in a Fund which holds U.S. Government Securities or Foreign
Government Securities may fall during times of rising interest rates. Yields on
U.S. Government Securities and Foreign Government Securities tend to be lower
than those of corporate securities of comparable maturities.
In addition to investing directly in U.S. Government Securities and Foreign
Government Securities, a Fund may purchase certificates of accrual or similar
instruments evidencing undivided ownership interests in interest payments or
principal payments, or both, in U.S. Government Securities and Foreign
Government Securities. These certificates of accrual and similar instruments may
be more volatile than other government securities.
MORTGAGE-BACKED AND OTHER ASSET-BACKED SECURITIES
Mortgage-backed and other asset-backed securities may be issued by the U.S.
government, its agencies or instrumentalities, or by non-governmental issuers.
Interest and principal payments (including prepayments) on the mortgages
underlying mortgage-backed securities are passed through to the holders of the
mortgage-backed securities. Prepayments occur when the mortgagor on an
individual mortgage prepays the remaining principal before the mortgage's
scheduled maturity date. As a result of the pass-through of prepayments of
principal on the underlying mortgages, mortgage-backed securities are often
subject to more rapid prepayment of principal than their stated maturity would
indicate. Because the prepayment characteristics of the underlying mortgages
vary, there can be no certainty as to the predicted yield or average life of a
particular issue of pass-through certificates. Prepayments are important because
of their effect on the yield and price of the securities. During periods of
declining interest rates, such prepayments can be expected to accelerate and a
Fund would be required to reinvest the proceeds at the lower interest rates then
available. In addition, prepayments of mortgages which underlie securities
purchased at a premium could result in capital loss because the premium may not
have been fully amortized at the time the obligation was prepaid. As a result of
these principal prepayment features, the values of mortgage-backed securities
generally fall when interest rates rise, but their potential for capital
appreciation in periods of falling interest rates is limited because of the
prepayment feature. The mortgage-backed securities purchased by a Fund may
include Adjustable Rate Securities as such term is defined in "Adjustable Rate
Securities" below.
Other "asset-backed securities" include securities backed by pools of automobile
loans, educational loans and credit card receivables. Mortgage-backed and
asset-backed securities of non-governmental issuers involve prepayment risks
similar to those of U.S. government
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guaranteed mortgage-backed securities and also involve risk of loss of principal
if the obligors of the underlying obligations default in payment of the
obligations.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"): STRIPS AND RESIDUALS. A CMO is a
security backed by a portfolio of mortgages or mortgage-backed securities held
under an indenture. The issuer's obligation to make interest and principal
payments is secured by the underlying portfolio of mortgages or mortgage-backed
securities. CMOs are issued in multiple classes or series which have different
maturities representing interests in some or all of the interest or principal on
the underlying collateral or a combination thereof. CMOs of different classes
are generally retired in sequence as the underlying mortgage loans in the
mortgage pool are repaid. In the event of sufficient early prepayments on such
mortgages, the class or series of CMO first to mature generally will be retired
prior to its stated maturity. Thus, the early retirement of a particular class
or series of CMO held by a Fund would have the same effect as the prepayment of
mortgages underlying a mortgage-backed pass-through security.
CMOs include securities ("Residuals") representing the interest in any excess
cash flow and/or the value of any collateral remaining on mortgages or
mortgage-backed securities from the payment of principal of and interest on all
other CMOs and the administrative expenses of the issuer. Residuals have value
only to the extent income from such underlying mortgages or mortgage-backed
securities exceeds the amount necessary to satisfy the issuer's debt obligations
represented by all other outstanding CMOs.
CMOs also include certificates representing undivided interests in payments of
interest-only or principal-only ("IO/PO Strips") on the underlying mortgages.
IO/PO Strips and Residuals tend to be more volatile than other types of
securities. IO Strips and Residuals also involve the additional risk of loss of
a substantial portion of or the entire value of the investment if the underlying
securities are prepaid. In addition, if a CMO bears interest at an adjustable
rate, the cash flows on the related Residual will also be extremely sensitive to
the level of the index upon which the rate adjustments are based.
ADJUSTABLE RATE SECURITIES
Adjustable rate securities are securities that have interest rates that are
reset at periodic intervals, usually by reference to some interest rate index or
market interest rate. They may be U.S. Government Securities or securities of
other issuers. Some adjustable rate securities are backed by pools of mortgage
loans. Although the rate adjustment feature may act as a buffer to reduce sharp
changes in the value of adjustable rate securities, these securities are still
subject to changes in value based on changes in market interest rates or changes
in the issuer's creditworthiness. Because the interest rate is reset only
periodically, changes in the interest rates on adjustable rate securities may
lag changes in prevailing market interest rates. Also, some adjustable rate
securities (or, in the case of securities backed by mortgage loans, the
underlying mortgages) are subject to caps or floors that limit the maximum
change in interest rate during a specified period or over the life of the
security. Because of the resetting of interest rates, adjustable rate securities
are less likely than non-adjustable rate securities of comparable quality and
maturity to increase significantly in value when market interest rates fall.
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LOWER RATED SECURITIES
Certain Funds may invest some or all of their assets in securities rated below
investment grade (that is, rated below BBB by Standard & Poor's or below Baa by
Moody's) at the time of purchase, including securities in the lowest rating
categories, and comparable unrated securities ("Lower Rated Securities"). A Fund
will not necessarily dispose of a security when its rating is reduced below its
rating at the time of purchase, although the Manager will monitor the investment
to determine whether continued investment in the security will assist in meeting
the Fund's investment objective.
Lower Rated Securities generally provide higher yields, but are subject to
greater credit and market risk, than higher quality fixed income securities.
Lower Rated Securities are considered predominantly speculative with respect to
the ability of the issuer to meet principal and interest payments. Achievement
of the investment objective of a Fund investing in Lower Rated Securities may be
more dependent on the Manager's own credit analysis than is the case with higher
quality bonds. The market for Lower Rated Securities may be more severely
affected than some other financial markets by economic recession or substantial
interest rate increases, by changing public perceptions of this market or by
legislation that limits the ability of certain categories of financial
institutions to invest in these securities. In addition, the secondary market
may be less liquid for Lower Rated Securities. This reduced liquidity at certain
times may affect the values of these securities and may make the valuation and
sale or these securities more difficult. Securities of below investment grade
quality are commonly referred to as "junk bonds." Securities in the lowest
rating categories may be in poor standing or in default. Securities in the
lowest investment grade category (BBB or Baa) have some speculative
characteristics. See "Commercial Paper and Corporate Debt Ratings" below for
more information concerning commercial paper and corporate debt ratings.
BRADY BONDS
Brady Bonds are securities created through the exchange of existing commercial
bank loans to public and private entities in certain emerging markets for new
bonds in connection with debt restructuring under a debt restructuring plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the
"Brady Plan"). Brady Plan debt restructurings have been implemented in Mexico,
Uruguay, Venezuela, Costa Rica, Argentina, Nigeria, the Philippines and other
countries.
Brady Bonds may be collateralized, are issued in various currencies (but
primarily the dollar) and are actively traded in over-the-counter secondary
markets. Dollar-denominated, collateralized Brady Bonds, which may be fixed-rate
bonds or floating-rate bonds, are generally collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds.
Brady Bonds are often viewed as having three or four valuation components: any
collateralized repayment of principal at final maturity; any collateralized
interest payments; the uncollateralized interest payments; and any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
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Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
ZERO COUPON SECURITIES
A Fund investing in "zero coupon" fixed income securities is required to accrue
interest income on these securities at a fixed rate based on the initial
purchase price and the length to maturity, but these securities do not pay
interest in cash on a current basis. Each Fund is required to distribute the
income on these securities to its shareholders as the income accrues, even
though that Fund is not receiving the income in cash on a current basis. Thus,
each Fund may have to sell other investments to obtain cash to make income
distributions. The market value of zero coupon securities is often more volatile
than that of non-zero coupon fixed income securities of comparable quality and
maturity. Zero coupon securities include IO and PO strips.
INDEXED SECURITIES
Indexed Securities are securities the redemption values and/or the coupons of
which are indexed to the prices of a specific instrument or statistic. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity or coupon rate is determined by reference to other securities,
securities indexes, currencies, precious metals or other commodities, or other
financial indicators. Gold-indexed securities, for example, typically provide
for a maturity value that depends on the price of gold, resulting in a security
whose price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
Indexed securities in which each Fund may invest include so-called "inverse
floating obligations" or "residual interest bonds" on which the interest rates
typically decline as short-term market interest rates increase and increase as
short-term market rates decline. Such securities have the effect of providing a
degree of investment leverage, since they will generally increase or decrease in
value in response to changes in market interest rates at a rate which is a
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multiple of the rate at which fixed-rate long-term securities increase or
decrease in response to such changes. As a result, the market values of such
securities will generally be more volatile than the market values of fixed rate
securities.
Certain Funds may invest in inflation indexed securities issued by the U.S.
Treasury, which are fixed income securities whose principal value is
periodically adjusted according to the rate of inflation. The interest rate on
these bonds is fixed at issuance, but over the life of the bond this interest
may be paid on an increasing or decreasing principal value which has been
adjusted for inflation.
Repayment of the original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury inflation indexed bonds,
even during a period of deflation. However, the current market value of the
bonds is not guaranteed, and will fluctuate. Certain Funds may also invest in
other bonds which may or may not provide a similar guarantee. If a guarantee of
principal is not provided, the adjusted principal value of the bond repaid at
maturity may be less than the original principal.
The value of inflation indexed bonds is expected to fluctuate in response to
changes in real interest rates, which are in turn tied to the relationship
between nominal interest rates and the rate of inflation. Therefore, if
inflation were to rise at a faster rate than nominal interest rates, real
interest rates might decline, leading to an increase in value of inflation
indexed bonds. In contrast, if nominal interest rates increased at a faster rate
than inflation, real interest rates might rise, leading to a decrease in value
of inflation indexed bonds.
Although these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may result in a decline
in value. If interest rates rise due to reasons other than inflation (such as
changes in currency exchange rates), investors in these securities may not be
protected to the extent that the increase is not reflected in the bond's
inflation measure.
The U.S. Treasury has a relatively brief history of issuing inflation indexed
bonds. As such, there is no trading history of these securities, and there can
be no assurance that a liquid market in these instruments will develop. Certain
foreign governments, such as the United Kingdom, Canada and Australia, have a
longer history of issuing inflation indexed bonds, and there may be a more
liquid market in certain of these countries for these securities.
The periodic adjustment of U.S. inflation indexed bonds is tied to the Consumer
Price Index for Urban Consumers ("CPI-U"), which is calculated monthly by the
U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in the
cost of living, made up of components such as housing, food, transportation and
energy. Inflation-indexed bonds issued by a foreign government are generally
adjusted to reflect a comparable inflation index, calculated by that government.
There can be no assurance that the CPI-U or any foreign inflation index will
accurately measure the real rate of inflation in the prices of goods and
services. In addition, there can be no assurance that the rate of inflation in a
foreign country will be correlated to the rate of inflation in the United
States.
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Coupon payments received by a Fund from inflation indexed bonds will be
includable in the Fund's gross income in the period in which they accrue. In
addition, any increase in the principal amount of an inflation indexed bond will
be considered taxable ordinary income, even though investors do not receive
their principal until maturity.
The Fund may invest in fixed income securities (including convertible
securities) of any maturity, although under normal market conditions at least
65% of the Fund's total assets will be comprised of inflation indexed "bonds" as
such term is defined above. Fixed income securities include securities issued by
federal, state, local and foreign governments, and a wide range of private
issuers.
A Fund's investments in indexed securities, including inflation indexed
securities, may create taxable income in excess of the cash they generate. In
such cases, a Fund may be required to sell assets to generate the cash necessary
to distribute as dividends to its shareholders all of its income and gains and
therefore to eliminate any tax liability at the Fund level. See "Distributions
and Taxes in the Prospectus" and "Distributions" and "Taxes" in this Statement
of Additional Information.
FIRM COMMITMENTS
A firm commitment agreement is an agreement with a bank or broker-dealer for the
purchase of securities at an agreed-upon price on a specified future date. A
fund may enter into firm commitment agreements with such banks and
broker-dealers with respect to any of the instruments eligible for purchase by
the Fund. A Fund will only enter into firm commitment arrangements with banks
and broker-dealers which the Manager determines present minimal credit risks.
Each such Fund's custodian will earmark and maintain cash, U.S. Government
Securities or other liquid securities in an amount equal to the Fund's
obligations under firm commitment agreements.
LOANS, LOAN PARTICIPATIONS AND ASSIGNMENTS
Certain Funds may invest in direct debt instruments which are interests in
amounts owed by a corporate, governmental, or other borrower to lenders or
lending syndicates (loans and loan participations), to suppliers of goods or
services (trade claims or other receivables), or to other parties. Direct debt
instruments are subject to a Fund's policies regarding the quality of debt
securities.
Purchasers of loans and other forms of direct indebtedness depend primarily upon
the creditworthiness of the borrower for payment of principal and interest.
Direct debt instruments may not be rated by any nationally recognized rating
agency and yield could be adversely affected. Loans that are fully secured offer
the Fund more protections than an unsecured loan in the event of non-payment of
scheduled interest or principal. However, there is no assurance that the
liquidation of collateral from a secured loan would satisfy the borrower's
obligation or that the collateral can be liquidated. Indebtedness of borrowers
whose creditworthiness is poor involves substantially greater risks, and may be
highly speculative. Borrowers that are in bankruptcy or restructuring may never
pay off their indebtedness, or may pay only a small
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fraction of the amount owed. Direct indebtedness of emerging countries will also
involve a risk that the governmental entities responsible for repayment of the
debt may be unable, or unwilling, to pay interest and repay principal when due.
When investing in a loan participation, a Fund will typically have the right to
receive payments only from the lender to the extent the lender receives payments
from the borrower, and not from the borrower itself. Likewise, a Fund typically
will be able to enforce its rights only through the lender, and not directly
against the borrower. As a result, a Fund will assume the credit risk of both
the borrower and the lender that is selling the participation.
Investments in loans through direct assignment of a financial institution's
interests with respect to a loan may involve additional risks to the Fund. For
example, if a loan is foreclosed, a Fund could become part owner of any
collateral, and would bear the costs and liabilities associated with owning and
disposing of the collateral. In addition, it is conceivable that under emerging
legal theories of lender liability, a Fund could be held liable as a co-lender.
In the case of a loan participation, direct debt instruments may also involve a
risk of insolvency of the lending bank or other intermediary. Direct debt
instruments that are not in the form of securities may offer less legal
protection to a Fund in the event of fraud or misrepresentation. In the absence
of definitive regulatory guidance, a Fund may rely on the Manager's research to
attempt to avoid situations where fraud or misrepresentation could adversely
affect the Fund.
A loan is often administered by a bank or other financial institution that acts
as agent for all holders. The agent administers the terms of the loan, as
specified in the loan agreement. Unless, under the terms of the loan or other
indebtedness, a Fund has direct recourse against the borrower, it may have to
rely on the agent to apply appropriate credit remedies against a borrower.
Direct indebtedness purchased by a Fund may include letters of credit, revolving
credit facilities, or other standby financing commitments obligating the Fund to
pay additional cash on demand. These commitments may have the effect of
requiring the Fund to increase its investment in a borrower at a time when it
would not otherwise have done so. A Fund's custodian will earmark and maintain
appropriate liquid assets to cover the Fund's potential obligations under
standby financing commitments.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS
Certain Funds may enter into reverse repurchase agreements and dollar roll
agreements with banks and brokers to enhance return. Reverse repurchase
agreements involve sales by a Fund of portfolio assets concurrently with an
agreement by the Fund to repurchase the same assets at a later date at a fixed
price. During the reverse repurchase agreement period, the Fund continues to
receive principal and interest payments on these securities and also has the
opportunity to earn a return on the collateral furnished by the counterparty to
secure its obligation to redeliver the securities.
Dollar rolls are transactions in which a Fund sells securities for delivery in
the current month and simultaneously contracts to repurchase substantially
similar (same type and coupon) securities on
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a specified future date. During the roll period, the Fund forgoes principal and
interest paid on the securities. The Fund is compensated by the difference
between the current sales price and the forward price for the future purchase
(often referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale.
A Fund which makes such investments will earmark and maintain on its custodian's
books and records cash, U.S. Government Securities or other liquid assets equal
in value to its obligations in respect of reverse repurchase agreements and
dollar rolls. Reverse repurchase agreements and dollar rolls involve the risk
that the market value of the securities retained by a Fund may decline below the
price of the securities the Fund has sold but is obligated to repurchase under
the agreement. In the event the buyer of securities under a reverse repurchase
agreement or dollar roll files for bankruptcy or becomes insolvent, a Fund's use
of the proceeds of the agreement may be restricted pending a determination by
the other party or its trustee or receiver whether to enforce the Fund's
obligation to repurchase the securities. Reverse repurchase agreements and
dollar rolls are not considered borrowings by a Fund for purposes of a Fund's
fundamental investment restriction with respect to borrowings.
ILLIQUID SECURITIES
Each Fund may purchase (or in the case of the Asset Allocation Funds, gain
exposure through investment in underlying Funds) "illiquid securities," i.e.,
securities which may not be sold or disposed of in the ordinary course of
business within seven days at approximately the value at which the Fund has
valued the investment, which include securities whose disposition is restricted
by securities laws, so long as no more than 15% (or, in the case of the Foreign
Fund only, 10%) of net assets would be invested in such illiquid securities.
Each Fund currently intends to invest in accordance with the SEC staff view that
repurchase agreements maturing in more than seven days are illiquid securities.
It is possible that certain over-the-counter options and securities serving as
cover for over-the-counter options may be deemed, under certain circumstances,
to be illiquid securities. While the Trust does not agree with this view, it
will operate in accordance with any relevant formal guidelines adopted by the
SEC.
In addition, the SEC staff may, under certain circumstances, consider equity
swap contracts, caps, floors and collars to be illiquid securities.
Consequently, to the extent the SEC staff maintains this position, the Fund will
not enter into an equity swap contract or a reverse equity swap contract or
purchase a cap, floor or collar if, as a result of the investment, the total
value (i.e., marked-to-market value) of such investments (without regard to
their notional amount) together with that of all other illiquid securities which
the Fund owns would exceed 15% (or, in the case of the Foreign Fund only, 10%)
of the Fund's net assets.
INVESTMENT RESTRICTIONS
Fundamental Restrictions:
Without a vote of the majority of the outstanding voting securities of the
relevant Fund, the Trust will not take any of the following actions with respect
to any Fund as indicated:
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(1) Borrow money except under the following circumstances: (i) Each Fund may
borrow money from banks so long as after such a transaction, the total assets
(including the amount borrowed) less liabilities other than debt obligations,
represent at least 300% of outstanding debt obligations; (ii) Each Fund may also
borrow amounts equal to an additional 5% of its total assets without regard to
the foregoing limitation for temporary purposes, such as for the clearance and
settlement of portfolio transactions and to meet shareholder redemption
requests; (iii) Each Fund may enter into transactions that are technically
borrowings under the 1940 Act because they involve the sale of a security
coupled with an agreement to repurchase that security (e.g., reverse repurchase
agreements, dollar rolls and other similar investment techniques) without regard
to the asset coverage restriction described in (i) above, so long as and to the
extent that a Fund's custodian earmarks and maintains cash and/or high grade
debt securities equal in value to its obligations in respect of these
transactions. Under current pronouncements of the SEC staff, such transactions
are not treated as senior securities so long as and to the extent that the
Fund's custodian earmarks and maintains liquid assets, such as cash, U.S.
Government Securities or other appropriate assets equal in value to its
obligations in respect of these transactions; notwithstanding the foregoing, the
Japan Fund may not borrow money in excess of 10% of the value (taken at the
lower of cost or current value) of the Fund's total assets (not including the
amount borrowed) at the time the borrowing is made, and then only from banks as
a temporary measure to facilitate the meeting of redemption requests (not for
leverage) which might otherwise require the untimely disposition of portfolio
investments or for extraordinary or emergency purposes, and which borrowings
will be repaid before any additional investments are purchased.
(2) Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of purchases and sales of securities. (For this
purpose, the deposit or payment of initial or variation margin in connection
with futures contracts or related options transactions is not considered the
purchase of a security on margin.)
(3) Make short sales of securities or maintain a short position for the Fund's
account unless at all times when a short position is open the Fund owns an equal
amount of such securities or owns securities which, without payment of any
further consideration, are convertible into or exchangeable for securities of
the same issue as, and equal in amount to, the securities sold short.
(4) Underwrite securities issued by other persons except to the extent that, in
connection with the disposition of its portfolio investments, it may be deemed
to be an underwriter under federal securities laws.
(5) Purchase or sell real estate, although it may purchase securities of issuers
which deal in real estate, including securities of real estate investment
trusts, and may purchase securities which are secured by interests in real
estate.
(6) Make loans, except by purchase of debt obligations or by entering into
repurchase agreements or through the lending of the Fund's portfolio securities.
Loans of portfolio securities may be made with respect to up to 100% of a Fund's
total assets in the case of each Fund (except the International Core and
Currency Hedged International Core Funds), and with respect to not
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more than 25% of total assets in the case of each of the International Core and
Currency Hedged International Core Funds.
(7) With respect to all Funds except for the Intrinsic Value Fund, invest in
securities of any issuer if, to the knowledge of the Trust, officers and
Trustees of the Trust and officers and members of Grantham, Mayo, Van Otterloo &
Co. LLC (the "Manager") who beneficially own more than 1/2 of 1% of the
securities of that issuer together beneficially own more than 5%.
(8) Concentrate more than 25% of the value of its total assets in any one
industry (except that the Short-Term Income Fund may invest up to 100% of its
assets in obligations issued by banks, and the REIT Fund may invest more than
25% of its assets in real estate-related securities).
(9) Purchase or sell commodities or commodity contracts, except that the Funds
(other than the Short-Term Income Fund) may purchase and sell financial futures
contracts and options thereon.
(10) Issue senior securities, as defined in the 1940 Act and as amplified by
rules, regulations and pronouncements of the SEC. The SEC has concluded that
even though reverse repurchase agreements, firm commitment agreements and
standby commitment agreements fall within the functional meaning of the term
"evidence of indebtedness," the issue of compliance with Section 18 of the 1940
Act will not be raised with the SEC by the Division of Investment Management if
a Fund covers such securities by earmarking and maintaining certain assets on
the books and records of the Fund's custodian. Similarly, so long as such
earmarked assets are maintained, the issue of compliance with Section 18 will
not be raised with respect to any of the following: any swap contract or
contract for differences; any pledge or encumbrance of assets permitted by
Non-Fundamental Restriction (4) below; any borrowing permitted by Fundamental
Restriction (1) above; any collateral arrangements with respect to initial and
variation margin permitted by Non-Fundamental Restriction (4) below; and the
purchase or sale of options, forward contracts, futures contracts or options on
futures contracts.
(11) With respect to the Tobacco-Free Core Fund only, invest in (a) securities
which at the time of such investment are not readily marketable, (b) securities
the disposition of which is restricted under federal securities laws, and (c)
repurchase agreements maturing in more than seven days if, as a result, more
than 10% of the Fund's total assets (taken at current value) would then be
invested in securities described in (a), (b) and (c) above.
(12) With respect to the Japan Fund only, (i) own greater than 10% of the
outstanding voting securities of any single issuer; or (ii) pledge, hypothecate,
mortgage or otherwise encumber its assets in excess of 10% of the Fund's total
assets (taken at cost) and then only to secure permitted borrowings (for
purposes of this restriction, collateral arrangements with respect to the
writing of options, stock index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with respect to initial
and variation margin are not deemed to be a pledge or other encumbrance of
assets).
Non-Fundamental Restrictions:
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It is contrary to the present policy of all the Funds, which may be changed by
the Trustee without shareholder approval, to:
(1) Buy or sell oil, gas or other mineral leases, rights or royalty contracts.
(2) Make investments for the purpose of gaining control of a company's
management.
(3) Invest more than 15% of net assets in illiquid securities. The securities
currently thought to be included as "illiquid securities" are restricted
securities under the Federal securities laws (including illiquid securities
traded under Rule 144A), repurchase agreements and securities that are not
readily marketable. To the extent the Trustees determine that restricted
securities traded under Section 4(2) or Rule 144A under the Securities Act of
1933 are in fact liquid, they will not be included in the 15% limit on
investment in illiquid securities.
(4) Pledge, hypothecate, mortgage or otherwise encumber its assets in excess of
33-1/3% of the Fund's total assets (taken at cost). (For the purposes of this
restriction, collateral arrangements with respect to swap agreements, the
writing of options, stock index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with respect to initial
and variation margin are not deemed to be a pledge or other encumbrance of
assets. The deposit of securities or cash or cash equivalents in escrow in
connection with the writing of covered call or put options, respectively, is not
deemed to be a pledge or encumbrance.)
(5) With respect to the Foreign Fund only, to (i) invest in interests of any
general partnership, (ii) utilize margin or other borrowings to increase market
exposure (such prohibition shall extend to the use of cash collateral obtained
in exchange for loaned securities but does not prohibit the use of margin
accounts for permissible futures trading; further, the Fund may borrow an amount
equal to cash receivable from sales of stocks or securities the settlement of
which is deferred under standard practice in the country of sale), (iii) pledge
or otherwise encumber its assets, and (iv) invest more than 5% of its assets in
any one issuer (except Government securities and bank certificates of deposit).
Except as indicated above in Fundamental Restriction (1), all percentage
limitations on investments set forth herein and in the Prospectus will apply at
the time of the making of an investment and shall not be considered violated
unless an excess or deficiency occurs or exists immediately after and as a
result of such investment.
The phrase "shareholder approval," as used in the Prospectus and in this
Statement of Additional Information, and the phrase "vote of a majority of the
outstanding voting securities," as used herein with respect to a Fund, means the
affirmative vote of the lesser of (1) more than 50% of the outstanding shares of
that Fund, or (2) 67% or more of the shares of that Fund present at a meeting if
more than 50% of the outstanding shares are represented at the meeting in person
or by proxy. Except for policies that are explicitly described as fundamental in
the Prospectus or this Statement of Additional Information, the investment
policies of each Fund (including all policies, restrictions and limitations set
forth in the "Investment Guidelines") may be changed by the Trust's Trustees
without the approval of shareholders.
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MANAGEMENT OF THE TRUST
Subject to the provisions of the GMO Declaration of Trust, the business
of the GMO Trust (the "Trust"), an open-end management investment company, shall
be managed by the Trustees, and they shall have all powers necessary or
convenient to carry out that responsibility including the power to engage in
securities transactions of all kinds on behalf of the Trust. Without limiting
the foregoing, the Trustees may: adopt By-Laws not inconsistent with the
Declaration of Trust providing for the regulation and management of the affairs
of the Trust and may amend and repeal them to the extent that such By-Laws do
not reserve that right to the Shareholders; fill vacancies in or remove from
their number (including any vacancies created by an increase in the number of
Trustees); remove from their number with or without cause; elect and remove such
officers and appoint and terminate such agents as they consider appropriate;
appoint from their own number and terminate one or more committees consisting of
two or more Trustees which may exercise the powers and authority of the Trustees
to the extent that the Trustees determine; employ one or more custodians of the
assets of the Trust and authorize such custodians to employ subcustodians and to
deposit all or any part of such assets in a system or systems for the central
handling of securities or with a Federal Reserve Bank; retain a transfer agent
or a shareholder servicing agent, or both; provide for the distribution of
Shares by the Trust, through one or more principal underwriters or otherwise;
set record dates for the determination of Shareholders with respect to various
matters; and in general delegate such authority as they consider desirable to
any officer of the Trust, to any committee of the Trustees and to any agent or
employee of the Trust or to any such custodian or underwriter.
The Trustees and officers of the Trust and their principal occupations
during the past five years are as follows:
R. JEREMY GRANTHAM* (D.O.B. 10/6/38). President-Quantitative and
Chairman of the Trustees of the Trust. Member, Grantham, Mayo, Van
Otterloo & Co. LLC.
JAY O. LIGHT (D.O.B. 10/3/41). Trustee of the Trust. Professor of
Business Administration, Harvard University; Senior Associate Dean,
Harvard University (1988-1992).
EYK DEL MOL VAN OTTERLOO (D.O.B. 2/27/37). President-International of
the Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC.
RICHARD MAYO (D.O.B. 6/18/42). President-U.S. Active of the Trust.
Member, Grantham, Mayo, Van Otterloo & Co. LLC.
SUSAN RANDALL HARBERT (D.O.B. 4/25/57). Chief Financial Officer and
Treasurer of the Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC.
WILLIAM R. ROYER, ESQ. (D.O.B. 7/20/65). Vice President of the Trust.
General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
34
<PAGE> 177
ROBERT V. BROKAW, JR. (D.O.B. 10/7/43). Secretary of the Trust.
Member, Grantham, Mayo, Van Otterloo & Co. LLC. Research Analyst, GMO
Renewable Resources LLC (July 1999 - present).
SCOTT ESTON (D.O.B. 1/20/56). Vice President of the Trust. Chief
Financial Officer, Member, Grantham, Mayo, Van Otterloo & Co. LLC
(September 1997 - present). Senior Partner, Coopers & Lybrand
(1987-1997).
ANNE STETSON (D.O.B. 8/7/62) Vice President of the Trust. Associate
General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (May
1998-present). Legal Counsel, Fidelity Investments (January 1995-April
1998).
ELAINE M. HARTNETT, ESQ. (D.O.B. 2/18/45). Vice President and Clerk of
the Trust. Associate General Counsel, Grantham, Mayo, Van Otterloo &
Co. LLC (June 1999-present). Associate/Junior Partner, Hale and Dorr
LLP, Boston, Massachusetts (1991-1999).
BRENT ARVIDSON (D.O.B. 6/26/69). Assistant Treasurer of the Trust.
Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC
(September 1997-present). Senior Financial Reporting Analyst, John
Hancock Funds (August 1996-September 1997). Account Supervisor/Senior
Account Specialist, Investors Bank and Company (June 1993-August 1996).
ANNE STETSON (D.O.B. 8/7/62) Vice President of the Trust. Associate
General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (May
1998-present). Legal Counsel, Fidelity Investments (January 1995-April
1998).
*Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo,
Van Otterloo & Co. LLC ("GMO" or the "Manager"), as defined by the 1940 Act.
The mailing address of each of the officers and Trustees is c/o GMO
Trust, 40 Rowes Wharf, Boston, Massachusetts 02110. Except as set forth below,
as of June 6, 2000, the Trustees and officers of the Trust as a group owned less
than 1% of the outstanding shares of each class of shares of each Fund of the
Trust.
<TABLE>
<CAPTION>
AGGREGATE
FUND CLASS OWNERSHIP INTEREST
---- ----- ------------------
<S> <C> <C>
Asia Fund III 3.83%
Small Cap Value Fund III 1.28%
Emerging Country Debt Fund III 1.20%
Emerging Markets Fund III 1.09%
Evolving Countries Fund III 3.34%
</TABLE>
35
<PAGE> 178
<TABLE>
<S> <C> <C>
Global Hedged Equity Fund III 6.11%
Growth Fund III 1.16%
Inflation Indexed Bond Fund III 2.34%
Japan Fund III 1.67%
REIT Fund III 2.98%
Small Cap Growth Fund III 2.01%
Short Term Income Fund III 5.87%
</TABLE>
Except as stated above, the principal occupations of the officers and
Trustees for the last five years have been with the employers as shown above,
although in some cases they have held different positions with such employers.
Other than as set forth in the table below, no Trustee or officer of
the Trust receives any direct compensation from the Trust or any series thereof:
<TABLE>
<CAPTION>
NAME OF PERSON, TOTAL ANNUAL COMPENSATION
POSITION FROM THE TRUST
-------- --------------
<S> <C>
Harvey R. Margolis, Trustee(1) $80,000
Jay O. Light, Trustee $80,000
</TABLE>
Messrs. Grantham, Mayo, Van Otterloo, Brokaw and Eston, and Ms.
Harbert, as members of the Manager, will benefit from the management fees paid
by each Fund of the Trust.
INVESTMENT ADVISORY AND OTHER SERVICES
Management Contracts
As disclosed in the Prospectus under the heading "Management of the
Trust," under separate Management Contracts (each a "Management Contract")
between the Trust and the Manager, subject to such policies as the Trustees of
the Trust may determine, the Manager will furnish continuously an investment
program for each Fund and will make investment decisions on behalf of the Fund
and place all orders for the purchase and sale of portfolio securities. Subject
to the control of the Trustees, the Manager also manages, supervises and
conducts the other affairs and business of the Trust, furnishes office space and
equipment, provides bookkeeping and certain clerical services and pays all
salaries, fees and expenses of officers and Trustees of the Trust who are
affiliated with the Manager. As indicated under "Portfolio
-----------
(1) Mr. Margolis served as a Trustee of the Trust until his death in June 2000.
36
<PAGE> 179
Transactions--Brokerage and Research Services," the Trust's portfolio
transactions may be placed with broker-dealers who furnish the Manager, at no
cost, certain research, statistical and quotation services of value to the
Manager in advising the Trust or its other clients.
As is disclosed in the Prospectus, the Manager has contractually agreed
to reimburse each Fund with respect to certain Fund expenses through June 30,
2001 to the extent that a Fund's total annual operating expenses (excluding
Shareholder Service Fees, brokerage commissions and other investment-related
costs, hedging transaction fees, extraordinary, non-recurring and certain other
unusual expenses (including taxes), securities lending fees and expenses and
transfer taxes; and, in the case of the Emerging Markets Fund, Evolving
Countries Fund, Asia Fund, Emerging Country Debt Fund and Global Hedged Equity
Fund, also excluding custodial fees; and, in the case of the Asset Allocation
Funds, U.S. Sector Fund, Global Hedged Equity Fund and Emerging Country Debt
Share Fund, also excluding expenses indirectly incurred by the investment in
other Funds of the Trust), would otherwise exceed a specified percentage of that
Fund's daily net assets.
Each Management Contract provides that the Manager shall not be subject
to any liability in connection with the performance of its services thereunder
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
Each Management Contract was approved by the Trustees of the Trust
(including a majority of the Trustees who were not "interested persons" of the
Manager) and by the relevant Fund's sole shareholder in connection with the
organization of the Trust and the establishment of the Funds. Each Management
Contract will continue in effect for a period more than two years from the date
of its execution only so long as its continuance is approved at least annually
by (i) the vote, cast in person at a meeting called for that purpose, of a
majority of those Trustees who are not "interested persons" of the Manager or
the Trust, and by (ii) the majority vote of either the full Board of Trustees or
the vote of a majority of the outstanding shares of the relevant Fund. Each
Management Contract automatically terminates on assignment, and is terminable on
not more than 60 days' notice by the Trust to the Manager. In addition, each
Management Contract may be terminated on not more than 60 days' written notice
by the Manager to the Trust.
For each Fund, the Management Fee is calculated based on a fixed
percentage of the Fund's average daily net assets. In the last three fiscal
years the Funds have paid the following amounts as Management Fees to the
Manager pursuant to the relevant Management Contract:
37
<PAGE> 180
<TABLE>
<CAPTION>
GROSS REDUCTION NET
----- --------- ---
<S> <C> <C> <C>
U.S. CORE FUND
--------------
Year ended 2/29/00 $11,161,595 $ 738,607 $10,422,988
Year ended 2/28/99 18,661,431 7,700,727 10,960,704
Year ended 2/28/98 17,753,329 7,220,779 10,532,550
TOBACCO-FREE CORE FUND
----------------------
Year ended 2/29/00 $ 855,754 $ 135,558 $ 720,196
Year ended 2/28/99 666,206 330,580 335,626
Year ended 2/28/98 394,815 218,695 176,120
VALUE FUND
----------
Year ended 2/29/00 $ 996,644 $ 102,057 $ 894,587
Year ended 2/28/99 1,839,261 778,954 1,060,307
Year ended 2/28/98 2,742,196 1,134,088 1,608,108
INTRINSIC VALUE FUND
--------------------
Commencement of Operations $ 76,163 $ 57,918 $ 18,245
(8/2/99) - 2/29/00
GROWTH FUND
-----------
Year ended 2/29/00 $ 579,315 $ 101,280 $ 478,035
Year ended 2/28/99 857,030 396,124 460,906
Year ended 2/28/98 1,008,998 463,468 545,530
SMALL CAP VALUE FUND
--------------------
Year ended 2/29/00 $ 1,119,033 $ 196,165 $ 922,868
Year ended 2/28/99 2,529,395 1,060,654 1,468,741
Year ended 2/28/98 3,650,580 1,603,440 2,047,140
SMALL CAP GROWTH FUND
---------------------
Year ended 2/29/00 $ 430,598 $ 142,477 $ 288,121
Year ended 2/28/99 1,527,491 699,892 827,599
Year ended 2/28/98 1,537,995 725,457 812,538
REIT FUND
---------
Year ended 2/29/00 $ 705,890 $ 73,067 $ 632,823
</TABLE>
38
<PAGE> 181
<TABLE>
<CAPTION>
GROSS REDUCTION NET
----- --------- ---
<S> <C> <C> <C>
Year ended 2/28/99 1,748,325 614,047 1,134,278
Year ended 2/28/98 2,765,300 961,297 1,804,003
INTERNATIONAL CORE FUND
-----------------------
Year ended 2/29/00 $13,366,668 $ 2,144,089 $11,222,579
Year ended 2/28/99 25,130,562 9,237,518 15,893,044
Year ended 2/28/98 30,572,502 12,093,211 18,479,291
CURRENCY HEDGED INTERNATIONAL CORE FUND
---------------------------------------
Year ended 2/29/00 $ 886,758 $ 536,312 $ 350,446
Year ended 2/28/99 2,606,569 1,442,434 1,164,135
Year ended 2/28/98 4,457,931 2,255,760 2,202,171
FOREIGN FUND
------------
Year ended 2/29/00 $ 7,261,054 $ 1,196,212 $ 6,064,842
Year ended 2/28/99 8,363,703 2,741,305 5,622,398
Year ended 2/28/98 7,035,104 2,369,507 4,665,597
INTERNATIONAL SMALL COMPANIES FUND
----------------------------------
Year ended 2/29/00 $ 1,000,168 $ 395,818 $ 604,350
Year ended 2/28/99 2,608,681 1,686,651 922,030
Year ended 2/28/98 2,912,080 2,004,718 907,362
JAPAN FUND
----------
Year ended 2/29/00 $ 225,115 $ 165,728 $ 59,387
Year ended 2/28/99 1,071,652 558,538 513,114
Year ended 2/28/98 1,540,113 803,953 736,160
EMERGING MARKETS FUND
---------------------
Year ended 2/29/00 $ 8,754,687 $ 296,467 $ 8,458,220
Year ended 2/28/99 11,112,844 2,342,168 8,770,676
Year ended 2/28/98 17,396,168 3,619,369 13,776,799
EVOLVING COUNTRIES FUND
-----------------------
Year ended 2/29/00 $ 336,947 $ 86,122 $ 250,825
Year ended 2/28/99 343,836 145,463 198,373
</TABLE>
39
<PAGE> 182
<TABLE>
<CAPTION>
GROSS REDUCTION NET
----- --------- ---
<S> <C> <C> <C>
Commencement of Operations
(8/29/97) - 2/28/98 94,952 77,826 17,126
ASIA FUND
---------
Year ended 2/29/00 $ 28,350 $ 84,198 $ 844,152
Year ended 2/28/99 740,141 221,148 518,993
Commencement of Operations
(2/18/98) - 2/28/98 3,209 3,209 0
GLOBAL HEDGED EQUITY FUND
-------------------------
Year ended 2/29/00 $ 253,727 $ 53,727 $ 0
Year ended 2/28/99 892,689 837,881 54,808
Year ended 2/28/98 1,509,937 850,401 659,536
DOMESTIC BOND FUND
------------------
Year ended 2/29/00 $ 170,540 $ 80,033 $ 90,507
Year ended 2/28/99 678,052 516,760 161,292
Year ended 2/28/98 1,311,252 932,631 378,621
U.S. BOND/GLOBAL ALPHA A FUND
-----------------------------
Year ended 2/29/00 $ 309,352 $ 22,918 $ 86,434
Year ended 2/28/99 932,468 588,202 344,266
Commencement of Operations
(4/30/97) - 2/28/98 571,318 361,139 210,179
U.S. BOND/GLOBAL ALPHA B FUND
-----------------------------
Year ended 2/29/00 $ 17,901 $ 133,162 $ 184,739
Year ended 2/28/99 711,308 568,011 143,297
Commencement of Operations (7/29/97) -
2/28/98 865,631 609,605 256,026
INTERNATIONAL BOND FUND
-----------------------
Year ended 2/29/00 $ 417,278 $ 65,415 $ 51,863
Year ended 2/28/99 1,061,185 642,536 418,649
Year ended 2/28/98 1,090,298 692,754 397,544
CURRENCY HEDGED INTERNATIONAL BOND FUND
---------------------------------------
Year ended 2/29/00 $ 781,487 $ 238,584 $ 542,903
Year ended 2/28/99 1,920,646 1,273,399 647,247
</TABLE>
40
<PAGE> 183
<TABLE>
<CAPTION>
GROSS REDUCTION NET
----- --------- ---
<S> <C> <C> <C>
Year ended 2/28/98 1,895,291 1,316,764 578,527
GLOBAL BOND FUND
----------------
Year ended 2/29/00 $ 65,979 $ 44,660 $ 221,319
Year ended 2/28/99 486,743 392,034 94,709
Year ended 2/28/98 297,447 297,447 0
EMERGING COUNTRY DEBT FUND
--------------------------
Year ended 2/29/00 $2,943,719 $ 252,112 $2,691,607
Year ended 2/28/99 3,666,332 1,314,674 2,351,658
Year ended 2/28/98 2,823,080 1,087,585 1,735,495
SHORT-TERM INCOME FUND
----------------------
Year ended 2/29/00 $ 25,341 $ 25,341 $ 0
Year ended 2/28/99 82,642 82,642 0
Year ended 2/28/98 117,159 117,159 0
INFLATION INDEXED BOND FUND
---------------------------
Year ended 2/29/00 $ 41,797 $ 41,797 $ 0
Year ended 2/28/99 75,976 75,976 0
Commencement of Operations
(3/31/97) - 2/28/98 36,237 36,237 0
EMERGING COUNTRY DEBT SHARE FUND
--------------------------------
Year ended 2/29/00 $ 0 $ 0 $ 0
Commencement of Operations
(7/20/98) - 2/28/99 0 0 0
INTERNATIONAL EQUITY ALLOCATION FUND
------------------------------------
Year ended 2/29/00 $ 0 $ 0 $ 0
Year ended 2/28/99 0 0 0
Year ended 2/28/98 0 0 0
WORLD EQUITY ALLOCATION FUND
----------------------------
Year ended 2/29/00 $ 0 $ 0 $ 0
Year ended 2/28/99 0 0 0
Year ended 2/28/98 0 0 0
</TABLE>
41
<PAGE> 184
<TABLE>
<CAPTION>
GROSS REDUCTION NET
----- --------- ---
<S> <C> <C> <C>
GLOBAL (U.S.+) EQUITY ALLOCATION FUND
-------------------------------------
Year ended 2/29/00 $ 0 $ 0 $ 0
Year ended 2/28/99 0 0 0
Year ended 2/28/98 0 0 0
GLOBAL BALANCED ALLOCATION FUND
-------------------------------
Year ended 2/29/00 $ 0 $ 0 $ 0
Year ended 2/28/99 0 0 0
Year ended 2/28/98 0 0 0
U.S. SECTOR FUND
----------------
Year ended 2/29/00 $ 46,391 $ 46,391 $ 0
Year ended 2/28/99 118,652 118,652 0
Year ended 2/28/98 853,670 635,351 218,319
</TABLE>
Each of the Trust and the Manager has adopted a Code of Ethics pursuant
to the requirement of the 1940 Act. Under the Code of Ethics, personnel are
permitted to engage in personal securities transactions only in accordance with
certain conditions relating to such persons' position, the identity of the
security, the timing of the transaction and similar factors. Transactions in
securities that may be held by the Funds are permitted, subject to compliance
with applicable provisions of the Code. Personal securities transactions must be
reported quarterly and broker confirmations of such transactions must be
provided for review.
Custodial Arrangements. Investors Bank & Trust Company ("IBT"), 200
Clarendon Street, Boston, Massachusetts 02116, and Brown Brothers Harriman & Co.
("BBH"), 40 Water Street, Boston, Massachusetts 02109, serve as the Trust's
custodians on behalf of the Funds. As such, IBT or BBH holds in safekeeping
certificated securities and cash belonging to a Fund and, in such capacity, is
the registered owner of securities in book-entry form belonging to a Fund. Upon
instruction, IBT or BBH receives and delivers cash and securities of a Fund in
connection with Fund transactions and collects all dividends and other
distributions made with respect to Fund portfolio securities. Each of IBT and
BBH also maintains certain accounts and records of the Trust and calculates the
total net asset value, total net income and net asset value per share of each
Fund on a daily basis.
Shareholder Service Arrangements. As disclosed in the Prospectus,
pursuant to the terms of a single Servicing Agreement with each Fund of the
Trust, GMO provides direct client service, maintenance and reporting to
shareholders of the Funds. The Servicing Agreement was approved by the Trustees
of the Trust (including a majority of the Trustees who are not "interested
persons" of the Manager or the Trust). The Servicing Agreement will continue in
effect for a period of more than one year from the date of its execution only so
long as its continuance is approved at least annually by (i) the vote, cast in
person at a meeting called for the purpose, of a majority of those Trustees who
are not "interested persons" of the Manager or
42
<PAGE> 185
the Trust, and (ii) the majority vote of the full Board of Trustees. The
Servicing Agreement automatically terminates on assignment (except as
specifically provided in the Servicing Agreement) and is terminable by either
party upon not more than 60 days' written notice to the other party.
The Trust entered into the Servicing Agreement with GMO on May 30,
1996. Pursuant to the terms of the Servicing Agreement, in the last three fiscal
years each Fund paid GMO the amounts set forth in the table that follows:
<TABLE>
<CAPTION>
March 1, 1997 March 1, 1998 March 1, 1999
Through Through Through
February 28, 1998 February 28, 1999 February 29, 2000
----------------- ----------------- -----------------
<S> <C> <C> <C>
U.S. Core Fund $5,028,001 $4,754,395 $4,407,831
Tobacco-Free Core Fund 118,083 199,862 388,979
Value Fund 586,036 394,127 324,993
Intrinsic Value Fund -- -- 34,620
Growth Fund 302,285 257,109 263,325
Small Cap Value Fund 1,093,550 758,820 508,651
Small Cap Growth Fund 459,765 458,247 195,726
REIT Fund 552,026 349,665 196,081
International Core Fund 6,088,152 4,603,105 3,478,692
Currency Hedged International 864,408 404,263 198,588
Core Fund
Foreign Fund 1,421,888 1,602,553 1,768,087
International Small Companies Fund 349,448 313,042 250,044
Japan Fund 308,029 214,330 62,532
Emerging Markets Fund 2,579,392 1,466,558 1,461,556
Evolving Countries Fund 17,804 64,403 77,765
Asia Fund -- 111,021 171,917
Global Hedged Equity Fund 217,705 27,988 8,662
Domestic Bond Fund 790,254 406,832 255,809
U.S. Bond/Global Alpha A Fund 213,529 349,675 185,609
U.S. Bond/Global Alpha B Fund 323,124 266,738 238,423
International Bond Fund 407,680 397,948 250,367
Currency Hedged International Bond Fund 568,775 576,196 468,892
Global Bond Fund 133,633 208,607 288,931
Emerging Country Debt Fund 836,348 914,886 1,061,617
Short-Term Income Fund 70,313 49,567 76,023
Inflation Indexed Bond Fund 21,641 45,586 62,695
Emerging Country Debt Share Fund -- 0 --
International Equity Allocation Fund 13,569 0 --
World Equity Allocation Fund 11,172 0 --
Global (U.S.+) Equity Allocation Fund 1,099 0 --
</TABLE>
43
<PAGE> 186
<TABLE>
<CAPTION>
March 1, 1997 March 1, 1998 March 1, 1999
Through Through Through
February 28, 1998 February 28, 1999 February 29, 2000
----------------- ----------------- -----------------
<S> <C> <C> <C>
Global Balanced Allocation Fund 36,399 0 --
U.S. Sector Fund 150,583 90 --
</TABLE>
Independent Accountants. The Trust's independent accountants are
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110.
PricewaterhouseCoopers LLP conducts annual audits of the Trust's financial
statements, assists in the preparation of each Fund's federal and state income
tax returns, consults with the Trust as to matters of accounting and federal and
state income taxation and provides assistance in connection with the preparation
of various Securities and Exchange Commission filings.
Distributor. Funds Distributor, Inc. ("FDI"), 60 State Street, Boston,
Massachusetts 02109, serves as the Trust's distributor on behalf of the Funds.
GMO has undertaken to reimburse the Trust for any fees that the Trust is
obligated to pay FDI until further notice.
PORTFOLIO TRANSACTIONS
The purchase and sale of portfolio securities for each Fund and for the
other investment advisory clients of the Manager are made by the Manager with a
view to achieving their respective investment objectives. For example, a
particular security may be bought or sold for certain clients of the Manager
even though it could have been bought or sold for other clients at the same
time. Likewise, a particular security may be bought for one or more clients when
one or more other clients are selling the security. In some instances,
therefore, one client may indirectly sell a particular security to another
client. It also happens that two or more clients may simultaneously buy or sell
the same security, in which event purchases or sales are effected on a pro rata,
rotating or other equitable basis so as to avoid any one account being preferred
over any other account.
Transactions involving the issuance of Fund shares for securities or
assets other than cash will be limited to a bona fide reorganization or
statutory merger and to other acquisitions of portfolio securities that meet all
of the following conditions: (a) such securities meet the investment objectives
and policies of the Fund; (b) such securities are acquired for investment and
not for resale; (c) such securities are liquid securities which are not
restricted as to transfer either by law or liquidity of market; and (d) such
securities have a value which is readily ascertainable as evidenced by a listing
on the American Stock Exchange, the New York Stock Exchange, NASDAQ or a
recognized foreign exchange.
Brokerage and Research Services. In placing orders for the portfolio
transactions of each Fund, the Manager will seek the best price and execution
available, except to the extent it may be permitted to pay higher brokerage
commissions for brokerage and research services as described below. The
determination of what may constitute best price and execution by a broker-dealer
in effecting a securities transaction involves a number of considerations,
including, without limitation, the overall net economic result to the Fund
(involving price paid or received and any commissions and other costs paid), the
efficiency with which the transaction is effected, the
44
<PAGE> 187
ability to effect the transaction at all where a large block is involved,
availability of the broker to stand ready to execute possibly difficult
transactions in the future and the financial strength and stability of the
broker. Because of such factors, a broker-dealer effecting a transaction may be
paid a commission higher than that charged by another broker-dealer. Most of the
foregoing are subjective considerations.
Over-the-counter transactions often involve dealers acting for their
own account. It is the Manager's policy to place over-the-counter market orders
for the U.S. Funds with primary market makers unless better prices or executions
are available elsewhere.
Although the Manager does not consider the receipt of research services
as a factor in selecting brokers to effect portfolio transactions for a Fund,
the Manager will receive such services from brokers who are expected to handle a
substantial amount of the Funds' portfolio transactions. Research services may
include a wide variety of analyses, reviews and reports on such matters as
economic and political developments, industries, companies, securities and
portfolio strategy. The Manager uses such research in servicing other clients as
well as the Funds.
As permitted by Section 28(e) of the Securities Exchange Act of 1934
and subject to such policies as the Trustees of the Trust may determine, the
Manager may pay an unaffiliated broker or dealer that provides "brokerage and
research services" (as defined in the Act) to the Manager an amount of
commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction.
During the three most recent fiscal years, the Trust paid, on behalf of
the Funds, the following amounts in brokerage commissions:
<TABLE>
<CAPTION>
March 1, 1997 March 1, 1998 March 1, 1999
Through Through Through
February 28, 1998 February 28, 1999 February 29, 2000
----------------- ----------------- -----------------
<S> <C> <C> <C>
U.S. Core Fund $2,561,392 $3,313,708 $3,385,122
Tobacco-Free Core Fund 50,119 98,094 293,723
Value Fund 666,871 461,481 728,107
Intrinsic Value Fund -- -- 16,196
Growth Fund 170,370 121,146 81,237
Small Cap Value Fund 903,916 848,094 690,450
Small Cap Growth Fund 880,229 886,921 409,182
REIT Fund 911,700 581,181 95,220
International Core Fund 7,059,863 5,725,781 3,416,885
Currency Hedged International
Core Fund 27,976 750,836 269,798
Foreign Fund 1,294,686 1,399,711 2,242,126
International Small Companies
Fund 413,290 101,284 195,830
Japan Fund 289,271 201,850 53,507
Emerging Markets Fund 7,790,713 6,397,437 7,151,287
Evolving Countries Fund 153,610 410,530 600,235
</TABLE>
45
<PAGE> 188
<TABLE>
<CAPTION>
March 1, 1997 March 1, 1998 March 1, 1999
Through Through Through
February 28, 1998 February 28, 1999 February 29, 2000
----------------- ----------------- -----------------
<S> <C> <C> <C>
Asia Fund 154,375 758,563 1,188,954
Global Hedged Equity Fund 244,119 76,040 23,883
Domestic Bond Fund 43,754 43,364 25,903
U.S. Bond/Global Alpha A Fund 20,476 26,967 33,858
U.S. Bond/Global Alpha B Fund 48,310 38,933 32,280
International Bond Fund 40,399 38,185 31,558
Currency Hedged International
Bond Fund 27,976 40,930 62,086
Global Bond Fund 4,123 19,098 33,865
Emerging Country Debt Fund 34,908 57,860 53,772
Short-Term Income Fund -- 702 --
U.S. Sector Fund 278,180 74 --
</TABLE>
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund of GMO Trust will be
determined on each day the New York Stock Exchange (the "Exchange") is open for
regular business as of the close of regular trading on the Exchange, generally
4:00 p.m. New York City time. However, equity options held by the Funds are
priced as of the close of trading at 4:10 p.m., and futures contracts on U.S.
government and other fixed-income securities and index options held by the Funds
are priced as of their close of trading at 4:15 p.m. Events affecting the values
of foreign securities may occur between the earlier closings of foreign
exchanges and securities markets and the closing of the New York Stock Exchange
which will not be reflected in the computation of the Funds' net asset value.
Please refer to "Determination of Net Asset Value" in the Prospectus for
additional information.
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES
The Trust is organized as a Massachusetts business trust under the laws
of Massachusetts by an Agreement and Declaration of Trust ("Declaration of
Trust") dated June 24, 1985. A copy of the Declaration of Trust is on file with
the Secretary of The Commonwealth of Massachusetts. The fiscal year for each
Fund ends on February 28/29.
Pursuant to the Declaration of Trust, the Trustees have currently
authorized the issuance of an unlimited number of full and fractional shares of
thirty-nine series: U.S. Core Fund; Tobacco-Free Core Fund; Value Fund; Growth
Fund; U.S. Sector Fund; Small Cap Value Fund; Small Cap Growth Fund; Fundamental
Value Fund; REIT Fund; International Core Fund; Currency Hedged International
Core Fund; Foreign Fund; International Small Companies Fund; Japan Fund;
Emerging Markets Fund; Evolving Countries Fund; Domestic Bond Fund; U.S.
Bond/Global Alpha A Fund; U.S. Bond/Global Alpha B Fund; International Bond
Fund; Currency Hedged International Bond Fund; Global Bond Fund; Emerging
Country Debt Fund; Short-Term Income Fund; Global Hedged Equity Fund; Inflation
Indexed Bond Fund; International Equity Allocation Fund; World Equity Allocation
Fund; Global (U.S.+) Equity Allocation Fund; Global Balanced Allocation Fund;
Emerging Country Debt Share Fund; Pelican Fund; Asia Fund; Tax-Managed U.S.
Equities Fund; Tax-Managed International Equities Fund; Tax-Managed Small
Companies Fund; Intrinsic Value Fund; Alpha LIBOR Fund and
46
<PAGE> 189
International Core Plus Allocation Fund. Interests in each portfolio (Fund) are
represented by shares of the corresponding series. Each share of each series
represents an equal proportionate interest, together with each other share, in
the corresponding Fund. The shares of such series do not have any preemptive
rights. Upon liquidation of a Fund, shareholders of the corresponding series are
entitled to share pro rata in the net assets of the Fund available for
distribution to shareholders. The Declaration of Trust also permits the Trustees
to charge shareholders directly for custodial and transfer agency expenses, but
there is no present intention to make such charges.
The Declaration of Trust also permits the Trustees, without shareholder
approval, to subdivide any series of shares into various sub-series or classes
of shares with such dividend preferences and other rights as the Trustees may
designate. This power is intended to allow the Trustees to provide for an
equitable allocation of the impact of any future regulatory requirements which
might affect various classes of shareholders differently. The Trustees have
currently authorized the establishment and designation of up to eight classes of
shares for each series of the Trust (except for the Pelican Fund): Class I
Shares, Class II Shares, Class III Shares, Class IV Shares, Class V Shares,
Class VI Shares, Class VII Shares and Class VIII Shares.
The Trustees may also, without shareholder approval, establish one or
more additional separate portfolios for investments in the Trust or merge two or
more existing portfolios (i.e., a new fund). Shareholders' investments in such a
portfolio would be evidenced by a separate series of shares.
The Declaration of Trust provides for the perpetual existence of the
Trust. The Trust, however, may be terminated at any time by vote of at least
two-thirds of the outstanding shares of the Trust. While the Declaration of
Trust further provides that the Trustees may also terminate the Trust upon
written notice to the shareholders, the 1940 Act requires that the Trust receive
the authorization of a majority of its outstanding shares in order to change the
nature of its business so as to cease to be an investment company.
On June 1, 2000 the following shareholders held greater than 25% of the
outstanding shares of a series of the Trust:
<TABLE>
<CAPTION>
FUND SHAREHOLDERS
---- ------------
<S> <C>
Value Fund Leland Stanford Junior University II
U.S. Sector Fund The Herb Society of America Inc.
Intrinsic Value Fund Princeton University
Growth Fund Surdna Foundation, Inc.; The Northern Trust Company,
Trustee of The Aerospace Corporation Employees
Retirement Plan Trust
Small Cap Growth Fund Bost & Co. FBO the Hewlett Foundation; Princeton University
</TABLE>
47
<PAGE> 190
<TABLE>
<CAPTION>
FUND SHAREHOLDERS
---- ------------
<S> <C>
U. S. Bond/Global Alpha B Fund Bost & Co. FBO Bell Atlantic -- Fixed Income
Currency Hedged International Bond Fund Bost & Co. FBO Bell Atlantic -- Fixed Income
Currency Hedged International Core Fund Trustees of Columbia University in the City of New York-Global
International Small Companies Fund Princeton University
Global Hedged Equity Fund Partners Healthcare System Pooled Investment Accounts
Global Bond Fund Fresno County Employees' Retirement Association
International Bond Fund Saturn & Co. A/C 4600712 c/o Investors Bank & Trust Company TR - FBO The
John Hancock Mutual Life Insurance Company Pension Plan
Short-Term Income Fund Bankers Trust Company as Trustee for GTE Service Corp. Master Pension
Trust
World Equity Allocation Fund Mars & Co.; Longwood College Foundation, Inc.
Japan Fund SIM International Equity Trust
Asia Fund Princeton University
Emerging Country Debt Share Fund Sprint Corporate Master Trust
Global (U.S.+) Equity Allocation Fund Bost & Co. Yale Trusts
</TABLE>
As a result, such shareholders may be deemed to "control" their
respective series as such term is defined in the 1940 Act.
VOTING RIGHTS
Shareholders are entitled to one vote for each full share held (with
fractional votes for fractional shares held) and will vote (to the extent
provided herein) in the election of Trustees and the termination of the Trust
and on other matters submitted to the vote of shareholders. Shareholders vote by
individual Fund on all matters except (i) when required by the Investment
Company Act of 1940, shares shall be voted in the aggregate and not by
individual Fund, and (ii) when the Trustees have determined that the matter
affects only the interests of one or more Funds, then only shareholders of such
affected Funds shall be entitled to vote thereon. Shareholders of one Fund shall
not be entitled to vote on matters exclusively affecting another
48
<PAGE> 191
Fund, such matters including, without limitation, the adoption of or change in
the investment objectives, policies or restrictions of the other Fund and the
approval of the investment advisory contracts of the other Fund. Shareholders of
a particular class of shares do not have separate class voting rights except
with respect to matters that affect only that class of shares and as otherwise
required by law.
There will normally be no meetings of shareholders for the purpose of
electing Trustees except that in accordance with the 1940 Act (i) the Trust will
hold a shareholders' meeting for the election of Trustees at such time as less
than a majority of the Trustees holding office have been elected by
shareholders, and (ii) if, as a result of a vacancy in the Board of Trustees,
less than two-thirds of the Trustees holding office have been elected by the
shareholders, that vacancy may only be filled by a vote of the shareholders. In
addition, Trustees may be removed from office by a written consent signed by the
holders of two-thirds of the outstanding shares and filed with the Trust's
custodian or by a vote of the holders of two-thirds of the outstanding shares at
a meeting duly called for the purpose, which meeting shall be held upon the
written request of the holders of not less than 10% of the outstanding shares.
Upon written request by the holders of at least 1% of the outstanding shares
stating that such shareholders wish to communicate with the other shareholders
for the purpose of obtaining the signatures necessary to demand a meeting to
consider removal of a Trustee, the Trust has undertaken to provide a list of
shareholders or to disseminate appropriate materials (at the expense of the
requesting shareholders). Except as set forth above, the Trustees shall continue
to hold office and may appoint successor Trustees. Voting rights are not
cumulative.
No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the Trust except (i)
to change the Trust's name or to cure technical problems in the Declaration of
Trust and (ii) to establish, designate or modify new and existing series or
sub-series of Trust shares or other provisions relating to Trust shares in
response to applicable laws or regulations.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Declaration of Trust provides for indemnification out of
all the property of the relevant Fund for all loss and expense of any
shareholder of that Fund held personally liable for the obligations of the
Trust. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is considered remote since it is limited to circumstances
in which the disclaimer is inoperative and the Fund of which he is or was a
shareholder would be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing in
the Declaration of Trust protects a Trustee against any liability to which the
Trustee would otherwise be subject to by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in
49
<PAGE> 192
the conduct of his office. The By-Laws of the Trust provide for indemnification
by the Trust of the Trustees and the officers of the Trust except with respect
to any matter as to which any such person did not act in good faith in the
reasonable belief that his action was in or not opposed to the best interests of
the Trust. Such person may not be indemnified against any liability to the Trust
or the Trust shareholders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
BENEFICIAL OWNERS OF 5% OR MORE OF THE FUND'S SHARES
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class II Shares of the U.S. Core Fund as of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Wheeler & Co. Hutchins Wheeler & Dittmar 32.70
FBO The Hyams Foundation, Inc. Attn: Mr. James T. Robinson
101 Federal Street
Boston, MA 02110
The Trustees of Reservations General Endowment 572 Essex Street 18.81
Beverly, MA 01915
Presbyterian Homes & Family Services, Inc. 150 Linden Avenue 7.01
Lynchburg, VA 24503
First Union National Bank Trustee FBO Attn: Mutual Funds 6.62
Gibbs Wire and Steel A/C #9546000156 1525 W. Wt. Harris Blvd.
CMG 1151
Charlotte, NC 28288-1151
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class IV Shares of the U.S. Core Fund as of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
NRECA Attn: Patricia A. Murphy 33.29
Investments Division
4301 Wilson Blvd.
RS18-305
Arlington, VA 22203-1860
Employee Retirement Plan of 5918 Stoneridge Mall Road 13.67
Safeway Inc. Pleasanton, CA 94588-3229
Boston & Co. A/C WFHF6202002 Attn: Mutual Funds Operations 11.99
FBO the Hewlett Foundation P.O. Box 3198
Pittsburgh, PA 15230-3198
</TABLE>
50
<PAGE> 193
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
University Of Rochester Attn: Joyce A. Johnson 10.83
Wallis Hall, Suite 263
River Campus, Box 270012
Rochester, NY 14627-0012
Corning Retirement Master Trust Attn: Lindsay W. Brown 10.47
Director Investment Services
Corning Incorporated
One Riverfront Plaza IIQ-E2-34
Corning, NY 14831-0001
Duke University Long Term 2200 West Main Street 8.47
Endowment PO Suite 1000
Attn: Portfolio Accounting
Durham, NC 27705
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Tobacco-Free Core Fund as of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Dewitt Wallace-Reader's Digest Attn: Rob D. Nagel 22.33
Fund, Inc. Two Park Avenue
23rd Floor
New York, NY 10016
Lila Wallace-Reader's Digest Fund, Attn: Rob D. Nagel 19.30
Inc. Two Park Avenue
23rd Floor
New York, NY 10016
The Flinn Foundation Attn: Don Shider 17.73
1802 N. Central Avenue
Phoenix, AZ 85004-1506
Tufts Associated Health 353 Wyman Street 8.66
Maintenance Organization Inc. Waltham, MA 02454
The Boston Foundation, Inc. One Boston Place 7.68
24th Floor
Boston, MA 02108
Trustee of Columbia University in Columbia University 6.85
the City of New York -- Global 475 Riverside Drive, Suite 401
New York, NY 10115
</TABLE>
51
<PAGE> 194
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Value Fund as of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Leland Stanford Junior Stanford Management Company 60.65
University II 2770 Sand Hill Road
Menlo Park, CA 94025
Leland Stanford Junior Stanford Management Company 8.80
University I 2770 Sand Hill Road
Menlo Park, CA 94025
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Intrinsic Value Fund as of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Princeton University Attn: John D. Sweeney 86.14
P.O. Box 35
Princeton, NJ 08544
Claremont Graduate University Attn: Jennifer Stockton 10.93
150 East 10th
Harper 161
Claremont, CA 91711
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Growth Fund as of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Surdna Foundation, Inc. Attn: Mark De Venoge 45.28
330 Madison Avenue
30th Floor
New York, NY 10017-5001
The Northern Trust Company, Attn: Mutual Funds 39.71
Trustee of the Aerospace P.O. Box 92956
Corporation Employees Retirement Chicago, IL 60675
Plan Trust
</TABLE>
52
<PAGE> 195
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Small Cap Value Fund as of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Bost & Co. A/C WFHF6202002 Attn: Mutual Funds Operations 14.86
FBO The Hewlett Foundation P.O. Box 3198
Pittsburgh, PA 15230-3198
Princeton University TR Attn: John D. Sweeney 9.22
PO Box 35
Princeton, NJ 08544
Trustees of Columbia University in Columbia University 6.35
the City of New York - Global 475 Riverside Drive, Suite 401
New York, NY 10115
Berea College Attn: Barry Poynter, Assoc. 6.08
Controller
PO Box 2214
Berea, KY 40404
Conrad N. Hilton Foundation 100 West Liberty Street 5.82
Suite 840
Reno, NV 89501
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Small Cap Growth Fund as of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Bost & Co. A/C WFHF6202002 Attn: Mutual Funds Operations 36.74
FBO The Hewlett Foundation P.O. Box 3198
Pittsburgh, PA 15230-3198
Princeton University TR Attn: John Sweeney 25.08
P.O. Box 35
Princeton, NJ 08544
Schering Plough Retirement Trust Attn: Gary Karlin 5.98
Global AA One Giralda Farms
Madison, NJ 07940
Surdna Foundation Inc. Global AA Attn: Mark De Venoge 5.40
330 Madison Avenue
30th Floor
New York, NY 10017-50001
</TABLE>
53
<PAGE> 196
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the REIT Fund as of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Bost & Co. A/C WFHF6202002 Attn: Mutual Funds Operations 12.65
FBO The Hewlett Foundation P.O. Box 3198
Pittsburgh, PA 15230-3198
Schering Plough Retirement Trust Global AA Attn: Gary Karlin 9.64
One Giralda Farms
Madison, NJ 07940
Trustees of Columbia University in the City of Columbia University 8.24
New York-Global 475 Riverside Drive
Suite 401
New York, NY 10115
Conrad N. Hilton Foundation 100 West Liberty Street 6.55
Suite 840
Reno, NV 89501
Bank of America 9336 Civic Center Drive 6.29
FBO William Barron Hilton Beverly Hills, CA 90210
Charitable Remainder Trust
GMO Global Balanced Allocation Attn: Rick Okerman 5.79
Fund c/o GMO
40 Rowes Wharf
Boston, MA 02110
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class II Shares of the International Core Fund as of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Sisters of the Holy Cross, Inc c/o Sister Mary Eliza Martin CSC 61.90
General Treasurer
313 Bertrand Hall Saint Mary's
Notre Dame, IN 46556-5000
Bost. & Co A/C WERF1968002 Attn: Mutual Funds Operations 18.44
P.O. Box 3198
Pittsburgh, PA 15230-3198
Saturn & Co. c/o Investors Bank & Trust 8.36
FBO Providence Washington Ins. P.O. Box 9130 FPG 90
Boston, MA 02117-9130
</TABLE>
54
<PAGE> 197
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the International Core Fund as of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
State Street Bank as Trustee for the State Street Bank & Trust Co. 6.54
Electronic Data Systems Attn: Laura Mears
Corporation PO Box 1992
Boston, MA 02105-1992
BASF Corporation Pension Master Attn: Christopher P. Krauss 5.97
Trust 3000 Continental Drive North
Mount Olive, NJ 07828-1234
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class IV Shares of the International Core Fund as of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Bost & Co. A/C NYXF1783862 Attn: Mutual Funds Operations 72.64
FBO Bell Atlantic-ISF P.O. Box 3198
Pittsburgh, PA 15230-3198
RJ Reynolds Tobacco Company 1301 Avenue of the Americas 19.36
Defined Benefit Master Trust - Intl 33rd Floor
New York, NY 10019-6013
Trustees of Columbia University in Columbia University 5.08
the City of New York-Global 475 Riverside Drive, Suite 401
New York, NY 10115
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Currency Hedged International Core Fund as
of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
The Edna McConnell Clark Attn: Laura Kielczewski 31.04
Foundation Asst. Financial Officer
250 Park Avenue
New York, NY 10177-0026
The Edna McConnel Clark Attn: Mr. Ralph Stefano 14.39
Foundation Inc. Director of Finance
250 Park Avenue
New York, NY 10177-0026
</TABLE>
55
<PAGE> 198
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Trustees of Trinity College Treasurer's Office 9.87
300 Summit Street
Hartford, CT 06106
Vassar College Attn: Jay A. Yoder 8.35
Investment Analyst
P.O. Box 2
Poughkeepsie, NY 12601
GMO Global Balanced Allocation Attn: Rick Okerman 8.14
Fund c/o GMO
40 Rowes Wharf
Boston, MA 02110
Schering Plough Retirement Trust, Attn: Gary Karlin 5.57
Global AA One Giralda Farms
Madison, NJ 07940
Phillips Exeter Academy Attn: Joseph E. Fellows 5.36
20 Main Street
Exeter, NH 03833-2460
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class IV Shares of the Currency Hedged International Core Fund as of
June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Trustees of Columbia University in Columbia University 100.00
the City of New York-Global 475 Riverside Drive, Suite 401
New York, NY 10115
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class II Shares of the Foreign Fund as of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
American Committee for the Attn: Mr. Henry Pavony 29.08
Weizmann Institute of Science Inc. 130 East 59th Street, 10th Floor
New York, NY 10022
Strafe & Co. for the Account of Attn: Carl E. Sealander 26.26
Owensbo Mercy Health System for P.O. Box 0160
Grantham Mayo Account Westerville, OH 43086-0160
3402815000
Northern Trust Custodian Attn: Special Assets CB1S 12.37
FBO Phoenix Childrens Hospital P.O. Box 92956
A/C 26 00849 Chicago, IL 60675-2956
</TABLE>
56
<PAGE> 199
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Bowen David & Co. FBO Attn: Daniel J. Boissonneault 12.02
Wentworth Institute of Technology PO Box 1647
Boston, MA 02105-1647
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Foreign Fund as of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
University of Pennsylvania Attn: Roberta Bell 11.64
3535 Market Street
Suite 500
Philadelphia, PA 19104-3309
University of Minnesota Foundation Attn: Douglas J Gorence 10.05
Chief Investment Officer
1300 S. 2nd St. Suite 200
Minneapolis, MN 55454-1029
Hershey Trust Company P.O. Box 445 9.70
Trustee for Milton Hershey School 100 Mansion Road East
Hershey, PA 17033
Metropolitan Museum of Art Attn: Mr. Steve Berstler 8.73
Chief Investment Officer
Fifth Avenue at 82nd Street
New York, NY 10028-0198
President and Fellows of Harvard c/o Harvard Management 8.45
College Company
600 Atlantic Avenue
Boston, MA 02210
Swarthmore College - Foreign 500 College Ave. 6.93
Swarthmore, PA 19081-1397
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class IV Shares of the Foreign Fund as of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Princeton University TR Attn: John D. Sweeney 36.89
P.O. Box 35
Princeton, NJ 08544
The Rector and Visitors of the UVA Investment Management 24.14
University of Virginia Company
PO Box 400215
Charlottesville, VA 22904-4215
</TABLE>
57
<PAGE> 200
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Dewitt Wallace-Reader's Digest Attn: Rob D. Nagel 17.13
Fund-Intl, Inc. Two Park Avenue 23rd Floor
New York, NY 10016
Lila Wallace-Reader's Digest Attn: Rob D. Nagel 14.75
Fund-Intl, Inc. Two Park Avenue 23rd Floor
New York, NY 10016
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the International Small Companies Fund as of
June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Princeton University TR Attn: John D. Sweeney 33.57
PO Box 35
Princeton, NJ 08544
Yale University Attn: Theodore D. Seides 19.88
230 Prospect Street
New Haven, CT 06511
Bankers Trust Company as trustee Attn: Geoffrey Mullen 7.57
for GTE Service Corp Master 280 Park Avenue 15 East
Pension Trust New York, NY 10017
Bost & Co. A/C NYXF1783962 Attn: Mutual Funds Operations 5.45
FBO Bell Atlantic-SCAP P.O. Box 3198
Pittsburgh, PA 15230-3198
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Japan Fund as of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
SIM International Equity Trust Attn: Kay Franz 45.19
1001 19th Street North 16th Floor
Arlington, VA 22209-1722
Spelman College Attn: Mahesh Mehrota 10.19
350 Spelman Lane SW
Box 589
Atlanta, GA 30314-4399
</TABLE>
58
<PAGE> 201
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Richard H. Gabel 1957 Trust Attn: H. Ober Hess, Ballard Spahr 6.36
For H. Landis Gabel Andrews & Ingersoll
1735 Market Street
51st Floor
Philadelphia, PA 19182
Saxon & Co. FBO Gabel H. Landis Attn: Dori Miller 6.01
Family Trust PO Box 7780-1888
Acct. 35-35-001-0318536 Philadelphia, PA 19182
Richard H. Gabel 1957 Trust for Attn: H. Ober Hess, Ballard Spahr 5.65
Caroline D. Gabel Andrews & Ingersoll
1735 Market Street
51st Floor
Philadelphia, PA 19182
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Emerging Markets Fund as of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
State Street Bank as Trustee for the State Street Bank & Trust Co. 8.29
Electronic Data Systems Attn: Laura Mears
Corporation P.O. Box 1992
Boston, MA 02105-1992
Bankers Trust Company Master Attn: Barbara Gleason Asst. VP 6.82
Custody FBO Mayo Foundation 34 Exchange Place 4th Floor
Pension Plan Mail Stop 3046
Jersey City, NJ 07302
BASF Corporation Pension Master 3000 Continental Drive North 6.17
Trust-Emerging Mount Olive, NJ 07828-1234
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class IV Shares of the Emerging Markets Fund as of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Princeton University TR Attn: John D. Sweeney 38.82
P.O. Box 35
Princeton, NJ 08544
Washington State Investment Board Attn: Helen Small 24.91
PO Box 40916
2424 Heritage Court SW
Olympia, WA 98504-0916
</TABLE>
59
<PAGE> 202
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Leland Stanford Junior University II- Stanford Management Company 12.62
AA 2770 Sand Hill Road
Menlo Park, CA 94025
Bost & Co. A/C NYXF1783862 Attn: Mutual Funds Operations 9.33
FBO Bell Atlantic-EMF P.O. Box 3198
Pittsburgh, PA 15230-3198
Trustees of Columbia University in the City of Columbia University 7.30
New York-Global 475 Riverside Drive, Suite 401
New York, NY 10115
The Rector and Visitors of the University of UVA Investment Management Company 7.03
Virginia PO Box 400215
Charlottesville, VA 22904-4215
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Evolving Countries Fund as of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Duke University Long-Term c/o Duke Management Company 23.66
(Endowment) Pool -- Emerging 2200 W. Main St.
Suite 1000
Durham, NC 27705
GMO International Equity c/o GMO 19.01
Allocation Fund Attn: Rick Okerman
40 Rowes Wharf
Boston, MA 02110
First Union National Bank c/o First Union National Bank 11.08
FBO Alexander & Margaret Stewart 1525 West WT Harris Blvd
Trust A/C 7013243085 NC 1151
Charlotte, NC 28262-1151
The Stupski 1999-1 Attn: Lawrence J. Stupski 10.43
Charitable Remainder Unitrust 9 Via Paraiso East
Tinburn, CA 94920
GMO Global Balanced c/o GMO 8.93
Allocation Fund Attn: Rick Okerman
40 Rowes Wharf
Boston, MA 02110
Employees' Retirement Plan of c/o Duke Management Company 5.03
Duke University - Emerging 2200 W. Main Street, Suite 1000
Durham, NC 27705
</TABLE>
60
<PAGE> 203
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Asia Fund as of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Princeton University TR Attn: John D. Sweeney 25.52
P.O. Box 35
Princeton, NJ 08544
Bankers Trust Company as Trustee Attn: Geoffrrey Mullen 21.95
for GTE Service Corp. Master 280 Park Avenue 15 East
Pension Trust New York, NY 10017
The Trustees of Columbia Columbia University 13.94
University in the City of New York 475 Riverside Drive, Suite 401
- Dedicated Asia New York, NY 10115
Leland Stanford Junior Stanford Management Company 10.74
University II-AA 2770 Sand Hill Road
Menlo Park, CA 94025
Bankers Trust Company Master Attn: Barbara Gleason, Ass't. VP 9.31
Custody FBO Mayo Foundation 34 Exchange Place - 4th Floor
General Fund Mail Stop 3046
Jersey City, NJ 07302
Bankers Trust Company Master Attn: Barbara Gleason, Ass't. VP 9.31
Custody FBO Mayo Foundation 34 Exchange Place - 4th Floor
Pension Plan Mail Stop 3046
Jersey City, NJ 07302
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Global Hedged Equity Fund as of June 1,
2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Partners Healthcare System Pooled Partners Healthcare System Inc. 48.49
Investment Accounts 101 Merrimac Street 4th Floor
Boston, MA 02114
The Edna McConnell Clark Attn: Laura Kielczewski 11.59
Foundation Asst Financial Officer
250 Park Avenue
New York, NY 10177-0026
Phillips Exeter Academy Attn: Joseph E. Fellows 7.76
20 Main Street
Exeter, NH 038332-2460
Conrad N. Hilton Foundation 100 West Liberty Street Suite 840 6.27
Reno, NV 89501
</TABLE>
61
<PAGE> 204
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Cormorant Fund c/o GMO 6.11
40 Rowes Wharf
Boston, MA 02110
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Domestic Bond Fund as of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Trust for Millipore Corporation Attn: Sandra Silvestro 17.47
Invested Employee Plans - DBF 80 Ashby Road M/S E4H
Bedford, MA 01730
The Edna McConnell Clark Attn: Laura Kielczewski 12.83
Foundation Asst. Financial Officer
250 Park Avenue
New York, NY 10177-0026
GMO Global Balanced Allocation Attn: Rick Okerman 11.38
Fund c/o GMO
40 Rowes Wharf
Boston, MA 02110
Phillips Exeter Academy Attn: Joseph E. Fellows 9.10
20 Main Street
Exeter, NH 03833
Schering Plough Retirement Trust Attn: Gary Karlin 8.09
Global AA One Giralda Farms
Madison, NJ 07940
Trinity Church in the City of Boston Attn: Sarah W. Wilcox, Parish 7.57
General Trust Fund Administrator
Copley Square
Boston, MA 02116
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the U.S. Bond/Global Alpha A Fund as of June 1,
2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
GMO Global Balanced Allocation Attn: Rick Okerman 23.49
Fund c/o GMO
40 Rowes Wharf
Boston, MA 02110
Phillips Exeter Academy Attn: Joseph E. Fellows 23.30
20 Main Street
Exeter, NH 03833-2460
</TABLE>
62
<PAGE> 205
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
The Edna McConnell Clark Attn: Laura Kielczewski 9.29
Foundation Asst. Financial Officer
250 Park Avenue
New York, NY 10177-0026
World Wildlife Fund Attn. Mr. David Rada 8.63
Financial Officer
1250 24th Street NW, Suite 500
Washington, DC 20037-1175
Schering Plough Retirement Trust Attn: Gary Karlin 8.18
Global AA One Giralda Farms
Madison, NJ 07940
Bank of America FBO William 9336 Civic Center Drive 7.45
Barron Hilton Charitable Remainder Beverly Hills, CA 90210
Trust
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the U.S. Bond/Global Alpha B Fund as of June 1,
2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Bost & Co A/C NYXF1783842 Attn: Mutual Funds Operations 49.36
FBO Bell Atlantic-Fixed Income P. O. Box 3198
Pittsburgh, PA 15230-3198
Bankers Trust Company Master Attn: Barbara Gleason, Asst. VP 24.51
Custody FBO Mayo Foundation 34 Exchange Place, 4th Floor
General Fund Mail Stop 3046
Jersey City, NJ 07293
Bankers Trust Company Master Custody Attn: Barbara Gleason, Asst. VP 24.44
FBO Mayo Foundation Pension Fund 34 Exchange Place, 4th Floor
Plan Mail Stop 3046
Jersey City, NJ 07302
</TABLE>
63
<PAGE> 206
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the International Bond Fund as of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Saturn & Co. A/C 4600712 P.O. Box 9130 FPG90 35.98
c/o Investors Bank & Trust Boston, MA 02117-9130
Company TR FBO The John
Hancock Mutual Life Insurance
Company Pension Plan
Princeton University TR Attn: John D. Sweeney 19.81
P.O. Box 35
Princeton, NJ 08544
Woods Hole Oceanographic Attn: Paul Clemente 7.41
Institution CFO & Assoc. Director of Finance
& Administration
Mail Stop 39
Woods Hole, MA 02543
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Currency Hedged International Bond Fund as
of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Bost & Co A/C NYXF 1783842 Attn: Mutual Funds Operations 74.35
FBO Bell Atlantic-Fixed Income P.O. Box 3198
Pittsburgh, PA 15230-3198
Bankers Trust Company as trustee Attn: Geoffrey Mullen 17.36
for GTE Service Corp Master Trust 280 Park Avenue 15 East
New York, NY 10017
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Global Bond Fund as of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Fresno County Employees' Attn: Gary W. Peterson 26.12
Retirement Association P.O. Box 1247
2281 Tulare Street
Fresno, CA 93715
Tufts Associated Health 353 Wyman Street 24.44
Maintenance Organization, Inc. Waltham, MA 02454
</TABLE>
64
<PAGE> 207
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
The University of North Carolina at Investment Office 18.58
Chapel Hill Foundation Investment 1512 E. Franklin Street, Suite 106
Fund, Inc., Global Fixed Income Chapel Hill, NC 27599-1000
Account
Marine Midland Bank as Agent for Attn: Thomas E. Baker, 5.79
The John R. Oishei Foundation Executive Director
One HSBC Center, Suite 3650
Buffalo, NY 14203-2805
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Emerging Country Debt Fund as of June 1,
2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
GMO Emerging Country Debt Attn: Rick Okerman 23.96
Share Fund 40 Rowes Wharf
Boston, MA 02110
Saturn & Co. A/C 4600712 P.O. Box 9130 FPG90 11.79
c/o Investors Bank & Trust Boston, MA 02117-9130
Company Trust FBO The John
Hancock Mutual Life Insurance
Company Pension Plan
Northwestern University Dedicated Investment Department 5.29
ECDF Ms. Dhvani Patel
633 Clark Street, Suite 1-209
Evanston, IL 60208-1122
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class IV Shares of the Emerging Country Debt Fund as of June 1,
2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
San Francisco County & Retirement Attn: Ted Wong 33.70
System Head Accountant
30 Van Ness Avenue
Suite 3000
San Francisco, CA 94102
Chase Manhattan Bank, Trustee Attn: Norma Duckson 31.81
For General Motors Employees 4 Chase Metrotech Center
Global Pension Trust 18th Floor
Brooklyn, NY 11245
Bost & Co. A/C NYXF 1783852 Attn: Mutual Funds Operations 14.01
FBO Bell Atlantic Dedicated ECDF P.O. Box 3198
Pittsburgh, PA 15230-3198
</TABLE>
65
<PAGE> 208
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Bankers Trust Company as Trustee Attn: Geoffrey Mullen 9.56
for GTE Service Corp. Master 280 Park Avenue 15 East
Pension Trust New York, NY 10017
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Short-Term Income Fund as of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Bankers Trust Company as trustee for GTE Attn: Geoffrey Mullen 67.84
Service Corp. Master Pension Trust 280 Park Avenue 15 East
New York, NY 10017
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Inflation Indexed Bond Fund as of June 1,
2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
GMO Global Balanced Allocation Attn: Rick Okerman 10.60
Fund c/o GMO
40 Rowes Wharf
Boston, MA 02110
Schering Plough Retirement Trust Attn: Gary Karlin 9.08
Global AA One Giralda Farms
Madison, NJ 07940
Bank of America 9336 Civic Center Drive 8.60
FBO William Barron Hilton Beverly Hills, CA 90210
Charitable Remainder Trust
Conrad N. Hilton Foundation 100 West Liberty Street 8.35
Suite 840
Reno, NV 89501
The Jeremy and Hannelore c/o GMO 8.20
Grantham Charitable Trust 40 Rowes Wharf
Boston, MA 02110
The Edna McConnell Clark Attn: Laura Kielczewski 7.11
Foundation Asst. Financial Officer
250 Park Avenue
New York, NY 10177-0026
</TABLE>
66
<PAGE> 209
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Employees Retirement Plan of Boston Safe Deposit & Trust Co. 6.62
Agway, Inc. Attn: Craig O. Thomas
PO Box 4933
Syracuse, NY 13221-4933
Phillips Exeter Academy Attn: Joseph E. Fellows 6.17
20 Main St.
Exeter, NH 03833-2460
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Emerging Country Debt Share Fund as of June
1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Sprint Corporate Master Trust Attn: William N. Searcy Jr. 100.00
2320 Shawnee Mission Pkwy
Westwood, KS 66205
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the International Equity Allocation Fund as of
June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
MD Co. FBO Memorial Drive Trust Attn: Kelly Corwin 23.79
c/o MDT Advisors, Inc. 125 Cambridge Park Dr.
Cambridge, MA 02140-2314
Regenstrief Foundation, Inc. Global 1001 West Tenth Street 16.65
Equity Fund Indianapolis, IN 46202
Wenner-Gren Foundation Attn: Maugha Kenny 15.41
220 Fifth Avenue
New York, NY 10001-7780
The Raymond and Gertrude R. Suite 105 East Cooper River Plaza 8.07
Saltzman Foundation 2400 McClellan Avenue
Pennsauken, NJ 08109
Saturn & Co. c/o Investors Bank & Trust 5.04
FBO Retirement Plan of Lawrence PO Box 9130 FPG90
Memorial Hospital Boston, MA 02117-9130
</TABLE>
67
<PAGE> 210
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the World Equity Allocation Fund as of June 1,
2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Mars & Co. c/o Investors Bank & Trust 65.45
P.O. Box 9130 FPG 90
Boston, MA 02117
Longwood College Foundation, Inc. Attn: L. Darlene Selz 34.49
201 High Street
Farmville, VA 23909-1895
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Global (U.S.+) Equity Allocation Fund as of
June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Bost & Co. PO Box 534005 85.19
Yale Trusts Pittsburgh, PA 15253-4005
Helen Benedict Foundation, Inc. Attn: Mr. Marc Devenoge 8.55
Chief Financial Officer Surdna FDN
330 Madison Avenue, 30th Floor
New York, NY 10017-5001
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Global Balanced Allocation Fund as of June
1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
Escuela Agricola Panamericana, Inc. Attn: James S. Hughes 15.22
88 Broad Street
Boston, MA 02110
Presbyterian Homes & Family 150 Linden Avenue 11.92
Services, Inc. Lynchburg, VA 24503
Appalachian Mountain Club Attn: Mr. Henry Isaacson 10.91
5 Joy Street
Boston, MA 02108
Clipper Ship Foundation Inc. 77 Summer Street, 8th Floor 10.56
Boston, MA 02110
Japan International Christian Attn: Laura Sellers 8.87
University Foundation 475 Riverside Drive
Suite 439
New York, NY 10115
</TABLE>
68
<PAGE> 211
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
American Society of Hematology Attn: Martha Liggett 8.14
Unrestricted Account Executive Director
1900 M Street NW
Suite 200
Washington, DC 20036
New Cycle Foundation c/o Eleanor Rosenthal 7.86
Peregrine Financial Corporation
84 State Street, Suite 900
Boston, MA 02109
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the U.S. Sector Fund as of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
The Herb Society of America, Inc. Attn: David Pauer 100.00
Executive Director
9019 Kirtland Chardon Road
Kirtland, OH 44094
</TABLE>
DISTRIBUTIONS
The Prospectus describes the distribution policies of each Fund under
the heading "Distributions". It is the policy of each Fund in all cases to pay
its shareholders, as dividends, substantially all net investment income and to
distribute annually all net realized capital gains, if any, after offsetting any
capital loss carryovers. For distribution and federal income tax purposes, a
portion of the premiums from certain expired call or put options written by a
Fund, net gains from certain closing purchase and sale transactions with respect
to such options and a portion of net gains from other options and futures
transactions are treated as short-term capital gain (i.e., gain from the sale of
securities held for 12 months or less). It is the policy of each Fund to make
distributions at least annually, sufficient to avoid the imposition of a
nondeductible 4% excise tax on certain undistributed amounts of taxable
investment income and capital gains.
TAXES
TAX STATUS AND TAXATION OF EACH FUND
Each Fund is treated as a separate taxable entity for federal income
tax purposes. Each Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). In order to qualify for the special tax treatment accorded regulated
investment companies and their shareholders, each Fund must, among other things:
69
<PAGE> 212
(a) derive at least 90% of its gross income from dividends, interest, payments
with respect to certain securities loans, and gains from the sale of stock,
securities and foreign currencies, or other income (including but not
limited to gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities, or
currencies;
(b) distribute with respect to each taxable year at least 90% of the sum of its
taxable net investment income, its net tax-exempt income, and the excess,
if any, of net short-term capital gains over net long-term capital losses
for such year; and
(c) diversify its holdings so that at the end of each fiscal quarter, (i) at
least 50% of the market value of the Fund's assets is represented by cash
and cash items, U.S. Government Securities, securities of other regulated
investment companies, and other securities limited in respect of any one
issuer to a value not greater than 5% of the value of the Fund's total net
assets and to not more than 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its assets is
invested in the securities (other than those of the U.S. Government or
other regulated investment companies) of any one issuer or of two or more
issuers which the Fund controls and which are engaged in the same, similar,
or related trades or businesses.
If a Fund qualifies as a regulated investment company that is accorded
special tax treatment, the Fund will not be subject to federal income tax on
income paid to its shareholders in the form of dividends (including capital gain
dividends).
If a Fund fails to distribute in a calendar year substantially all of
its ordinary income for such year and substantially all of its capital gain net
income for the one-year period ending October 31 (or later if a Fund is
permitted so to elect and so elects), plus any retained amount from the prior
year, such Fund will be subject to a 4% excise tax on the undistributed amounts.
A dividend paid to shareholders by a Fund in January of a year generally is
deemed to have been paid by the Fund on December 31 of the preceding year if the
dividend was declared and payable to shareholders of record on a date in
October, November or December of that preceding year. Each Fund intends
generally to make distributions sufficient to avoid imposition of the 4% excise
tax, although each Fund reserves the right to pay an excise tax rather than make
an additional distribution when circumstances warrant (e.g., payment of excise
tax amounts deemed by the Fund to be de minimus).
TAXATION OF FUND DISTRIBUTIONS AND SALES OF FUND SHARES
Fund distributions derived from interest, dividends and certain other
income, including in general short-term capital gains, will be taxable as
ordinary income to shareholders subject to federal income tax whether received
in cash or reinvested in shares. Properly designated Fund distributions derived
from net long-term capital gains (i.e., net gains derived from the sale of
securities held for more than 12 months) will generally be taxable as such
(generally at a 20% rate for noncorporate shareholders), regardless of how long
a shareholder has held the shares in the Fund.
70
<PAGE> 213
Dividends and distributions on each Fund's shares are generally subject
to federal income tax as described herein to the extent they do not exceed the
Fund's realized income and gains, even though such dividends and distributions
may economically represent a return of a particular shareholder's investment.
Such distributions are likely to occur in respect of shares purchased at a time
when the Fund's net asset value reflects gains that are either unrealized, or
realized but not distributed.
The sale, exchange or redemption of Fund shares may give rise to a gain
or loss. In general, any gain or loss realized upon a taxable disposition of
shares will be treated as long-term capital gains if the shares have been held
for more than 12 months and as short-term capital gains if the shares have been
held for not more than 12 months.
Any loss realized upon a taxable disposition of shares held for six
months or less will be treated as long-term capital loss to the extent of any
long-term capital gain distributions received by a shareholder with respect to
those shares. All or a portion of any loss realized upon a taxable disposition
of Fund shares will be disallowed if other shares of the same Fund are purchased
within 30 days before or after the disposition. In such a case, the basis of the
newly purchased shares will be adjusted to reflect the disallowed loss.
A distribution paid to shareholders by a Fund in January of a year
generally is deemed to have been received by shareholders on December 31 of the
preceding year, if the distribution was declared and payable to shareholders of
record on a date in October, November or December of that preceding year. The
Trust will provide federal tax information annually, including information about
dividends and distributions paid during the preceding year to taxable investors
and others requesting such information.
If a Fund makes a distribution to you in excess of its current and
accumulated "earnings and profits" in any taxable year, the excess distribution
will be treated as a return of capital to the extent of your tax basis in your
shares, and thereafter as capital gain. A return of capital is not taxable, but
it reduces your tax basis in your shares, thus reducing any loss or increasing
any gain on a subsequent taxable disposition by you of your shares.
For corporate shareholders, the dividends-received deduction will
generally apply (subject to a holding period requirement imposed by the Code) to
a Fund's dividends paid from investment income to the extent derived from
dividends received from U.S. corporations. However, any distributions received
by a Fund from REITs will not qualify for the corporate dividends-received
deduction. A Fund's investments in REIT equity securities may require such Fund
to accrue and distribute income not yet received. In order to generate
sufficient cash to make the requisite distributions, the Fund may be required to
sell securities in its portfolio that it otherwise would have continued to hold
(including when it is not advantageous to do so). A Fund's investments in REIT
equity securities may at other times result in the Fund's receipt of cash in
excess of the REIT's earnings; if the Fund distributes such amounts, such
distribution could constitute a return of capital to Fund shareholders for
federal income tax purposes.
The backup withholding rules do not apply to certain exempt entities
(including corporations and tax-exempt organizations) so long as each such
entity furnishes the Trust with
71
<PAGE> 214
an appropriate certification. However, other shareholders are subject to backup
withholding at a rate of 31% on all distributions of net investment income and
capital gain, whether received in cash or reinvested in shares of the relevant
Fund, and on the amount of the proceeds of any redemption of Fund shares, where
such distributions or redemption proceeds are paid or credited to any
shareholder account for which an incorrect or no taxpayer identification number
has been provided, where appropriate certification has not been provided for a
foreign shareholder, or where the Trust is notified that the shareholder has
underreported income in the past (or the shareholder fails to certify that he is
not subject to such withholding). A "taxpayer identification number" is either
the Social Security number or employer identification number of the record owner
of the account.
WITHHOLDING ON DISTRIBUTIONS TO FOREIGN INVESTORS
Dividend distributions (including distributions derived from short-term
capital gains) are in general subject to a U.S. withholding tax of 30% when paid
to a nonresident alien individual, foreign estate or trust, a foreign
corporation, or a foreign partnership ("foreign shareholder"). Persons who are
resident in a country, such as the U.K., that has an income tax treaty with the
U.S. may be eligible for a reduced withholding rate (upon filing of appropriate
forms), and are urged to consult their tax advisors regarding the applicability
and effect of such a treaty. Distributions of net realized long-term capital
gains paid by a Fund to a foreign shareholder, and any gain realized upon the
sale of Fund shares by such a shareholder, will ordinarily not be subject to
U.S. taxation, unless the recipient or seller is a nonresident alien individual
who is present in the United States for more than 182 days during the taxable
year. However, such distributions and sale proceeds may be subject to backup
withholding, unless the foreign investor certifies his non-U.S. residency
status. Foreign investors are subject to the backup withholding rules described
above. Any tax withheld as a result of backup withholding does not constitute an
additional tax imposed on the record owner of the account, and may be claimed as
a credit on the record owner's Federal income tax return. Also, foreign
shareholders with respect to whom income from a Fund is "effectively connected"
with a U.S. trade or business carried on by such shareholder will in general be
subject to U.S. federal income tax on the income derived from the Fund at the
graduated rates applicable to U.S. citizens, residents or domestic corporations,
whether such income is received in cash or reinvested in shares, and, in the
case of a foreign corporation, may also be subject to a branch profits tax.
Again, foreign shareholders who are resident in a country with an income tax
treaty with the United States may obtain different tax results, and are urged to
consult their tax advisors.
FOREIGN TAX CREDITS
If, at the end of the fiscal year, more than 50% of the value of the
total assets of any Fund is represented by stock or securities of foreign
corporations, the Fund intends to make an election with respect to the relevant
Fund which allows shareholders whose income from the Fund is subject to U.S.
taxation at the graduated rates applicable to U.S. citizens, residents or
domestic corporations to claim a foreign tax credit or deduction (but not both)
on their U.S. income tax return. In such case, the amounts of foreign income
taxes paid by the Fund would be treated as additional income to Fund
shareholders from non-U.S. sources and as foreign taxes paid by Fund
shareholders. Investors should consult their tax advisors for further
information relating to the
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<PAGE> 215
foreign tax credit and deduction, which are subject to certain restrictions and
limitations (including a holding period requirement applied at both the Fund and
shareholder level imposed by the Code). Shareholders of any of the International
Funds whose income from the Fund is not subject to U.S. taxation at the
graduated rates applicable to U.S. citizens, residents or domestic corporations
may receive substantially different tax treatment of distributions by the
relevant Fund, and may be disadvantaged as a result of the election described in
this paragraph.
TAX IMPLICATIONS OF CERTAIN INVESTMENTS
Certain of the Funds' investments, including assets "marked to the
market" for federal income tax purposes, debt obligations issued or purchased at
a discount and potentially so-called "index securities" (including inflation
indexed bonds), will create taxable income in excess of the cash they generate.
In such cases, a Fund may be required to sell assets (including when it is not
advantageous to do so) to generate the cash necessary to distribute as dividends
to its shareholders all of its income and gains and therefore to eliminate any
tax liability at the Fund level.
The Funds' transactions in options, futures contracts, hedging
transactions, forward contracts, straddles and foreign currencies may accelerate
income, defer losses, cause adjustments in the holding periods of the Funds'
securities and convert long-term capital gains into short-term capital gains and
short-term capital losses into long-term capital losses. These transactions may
affect the amount, timing and character of distributions to shareholders.
Investment by the Fund in certain passive foreign investment companies
("PFICs") could subject the Fund to a U.S. federal income tax (including
interest charges) on distributions received from the company or on proceeds
received from the disposition of shares in the company, which tax cannot be
eliminated by making distributions to Fund shareholders. However, the Fund may
elect to treat a passive foreign investment company as a "qualified electing
fund," in which case the Fund will be required to include its share of the
company's income and net capital gain annually, regardless of whether it
receives any distribution from the company. The Fund also may make an election
to mark the gains (and to a limited extent losses) in such holdings "to the
market" as though it had sold and repurchased its holdings in those PFICs on the
last day of the Fund's taxable year. Such gains and losses are treated as
ordinary income and loss. The QEF and mark-to-market elections may have the
effect of accelerating the recognition of income (without the receipt of cash)
and increasing the amount required to be distributed for the Fund to avoid
taxation. Making either of these elections therefore may require a Fund to
liquidate other investments (including when it is not advantageous to do so) to
meet its distribution requirement, which also may accelerate the recognition of
gain and affect a Fund's total return.
A PFIC is any foreign corporation in which (i) 75% or more of the
income for the taxable year is passive income, or (ii) the average percentage of
the assets (generally by value, but by adjusted tax basis in certain cases) that
produce or are held for the production of passive income is at least 50%.
Generally, passive income for this purpose means dividends, interest (including
income equivalent to interest), royalties, rents, annuities, the excess of gains
over losses from certain property transactions and commodities transactions, and
foreign currency gains. Passive
73
<PAGE> 216
income for this purpose does not include rents and royalties received by the
foreign corporation from active business and certain income received from
related persons.
An Asset Allocation Fund will not be able to offset gains realized by
one underlying Fund in which such Asset Allocation Fund invests against losses
realized by another underlying Fund in which such Asset Allocation Fund invests.
In addition, Funds that invest in other investment companies will not be able to
offset gains realized by one underlying investment company against losses
realized by another underlying investment company. Similarly, a Fund which
invests in GMO Alpha LIBOR Fund will not be able to offset losses realized by
the GMO Alpha LIBOR Fund against other income realized by the Fund. Also,
depending on a Fund's percentage ownership in an underlying Fund, a redemption
of shares of an underlying Fund by the investing Fund may cause the investing
Fund to be treated as not receiving capital gain income on such redemption but
instead as receiving a dividend taxable as ordinary income in an amount equal to
the full amount of the distribution. Accordingly, the investment of a Fund in
underlying Funds could affect the amount, timing and character of distributions
to shareholders of such Fund.
LOSS OF REGULATED INVESTMENT COMPANY STATUS
A Fund may experience particular difficulty qualifying as a regulated
investment company in the case of highly unusual market movements, in the case
of high redemption levels and/or during the first year of its operations. If the
Fund does not qualify for taxation as a regulated investment company for any
taxable year, the Fund's income will be taxed at the Fund level at regular
corporate rates, and all distributions from earnings and profits, including
distributions of net long-term capital gains, will be taxable to shareholders as
ordinary income and subject to withholding in the case of non-U.S. shareholders.
In addition, in order to requalify for taxation as a regulated investment
company that is accorded special tax treatment, the Fund may be required to
recognize unrealized gains, pay substantial taxes and interest on such gains,
and make certain substantial distributions.
PERFORMANCE INFORMATION
Each Fund may from time to time include its total return in
advertisements or in information furnished to present or prospective
shareholders.
Quotations of average annual total return for a Fund will be expressed
in terms of the average annual compounded rate of return of a hypothetical
investment in the Fund or class over periods of one, three, five, and ten years
(or for such shorter or longer periods as shares of the Fund have been offered),
calculated pursuant to the following formula: P (1 + T)(n) = ERV (where P = a
hypothetical initial payment of $10,000, T = the average annual total return, n
= the number of years, and ERV = the ending redeemable value of a hypothetical
$10,000 payment made at the beginning of the period). Except as noted below, all
total return figures reflect the deduction of a proportional share of Fund
expenses on an annual basis, and assume that (i) the maximum purchase premium,
if any, is deducted from the initial $10,000 payment, (ii) all dividends and
distributions are reinvested when paid and (iii) the maximum redemption fee, if
any, is charged at the end of the relevant period. Quotations of total return
may also be shown for other periods. The Funds may also, with respect to certain
periods of less than one year,
74
<PAGE> 217
provide total return information for that period that is unannualized. Any such
information would be accompanied by standardized total return information.
The table below sets forth the average annual total return for Class
III Shares of each Fund for the one, three, five and ten year periods ending
February 29, 2000 and for the period from the commencement of the Funds'
operations until February 29, 2000:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
INCEPTION 1 YEAR 3 YEARS 5 YEARS 10 YEARS SINCE
FUND DATE (%) (%) (%) (%) INCEPTION (%)
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Core 9/18/85 13.50 21.27 24.78 18.35 18.41
-----------------------------------------------------------------------------------------------------------------------------------
Tobacco-Free Core 10/31/91 14.94 22.56 25.64 N/A 19.80
-----------------------------------------------------------------------------------------------------------------------------------
Value 11/13/90 -8.58 7.12 15.09 N/A 15.29
-----------------------------------------------------------------------------------------------------------------------------------
Intrinsic Value 8/2/99 N/A N/A N/A N/A -11.48
-----------------------------------------------------------------------------------------------------------------------------------
Growth 12/30/88 45.04 34.42 32.39 21.97 22.44
-----------------------------------------------------------------------------------------------------------------------------------
Small Cap Value 12/31/91 9.56 7.88 13.71 N/A 14.69
-----------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth 12/31/96 65.61 27.57 N/A N/A 25.27
-----------------------------------------------------------------------------------------------------------------------------------
REIT 5/31/96 -5.64 -6.12 N/A N/A 1.64
-----------------------------------------------------------------------------------------------------------------------------------
International Core 3/31/87 7.55 6.06 8.06 8.31 9.51
-----------------------------------------------------------------------------------------------------------------------------------
Currency Hedged International Core 6/30/95 15.16 10.07 N/A N/A 13.59
-----------------------------------------------------------------------------------------------------------------------------------
Foreign 8/31/84 25.65 13.54 14.31 10.97 17.94
-----------------------------------------------------------------------------------------------------------------------------------
International Small Companies 10/14/91 7.88 3.07 5.27 N/A 7.20
-----------------------------------------------------------------------------------------------------------------------------------
Japan 6/8/90 31.02 4.98 0.64 N/A 0.65
-----------------------------------------------------------------------------------------------------------------------------------
Emerging Markets 12/9/93 73.89 1.48 7.06 N/A 5.24
-----------------------------------------------------------------------------------------------------------------------------------
Evolving Countries 8/29/97 94.99 N/A N/A N/A 5.68
-----------------------------------------------------------------------------------------------------------------------------------
Asia 2/18/98 62.93 N/A N/A N/A 12.67
-----------------------------------------------------------------------------------------------------------------------------------
Global Hedged Equity 7/29/94 2.75 -2.44 0.44 N/A 0.73
-----------------------------------------------------------------------------------------------------------------------------------
Domestic Bond 8/18/94 2.03 5.86 6.96 N/A 6.87
-----------------------------------------------------------------------------------------------------------------------------------
U.S. Bond/Global Alpha A 4/30/97 2.10 N/A N/A N/A 5.06
-----------------------------------------------------------------------------------------------------------------------------------
U.S. Bond/Global Alpha B 7/29/97 0.12 N/A N/A N/A 2.96
-----------------------------------------------------------------------------------------------------------------------------------
International Bond 12/22/93 -3.13 1.82 7.79 N/A 7.55
-----------------------------------------------------------------------------------------------------------------------------------
Currency Hedged International Bond 9/30/94 4.79 7.36 14.61 N/A 13.74
-----------------------------------------------------------------------------------------------------------------------------------
Global Bond 12/28/95 -2.21 3.43 N/A N/A 5.00
-----------------------------------------------------------------------------------------------------------------------------------
Emerging Country Debt 4/19/94 45.71 6.10 27.76 N/A 20.67
-----------------------------------------------------------------------------------------------------------------------------------
Short-Term Income 4/18/90 5.43 5.26 5.94 N/A 5.98
-----------------------------------------------------------------------------------------------------------------------------------
Inflation Indexed Bond 3/31/97 3.36 N/A N/A N/A 3.91
-----------------------------------------------------------------------------------------------------------------------------------
Emerging Country Debt Share 7/20/98 46.71 N/A N/A N/A 0.47
-----------------------------------------------------------------------------------------------------------------------------------
International Equity Allocation 10/11/96 22.46 6.04 N/A N/A 6.90
-----------------------------------------------------------------------------------------------------------------------------------
World Equity Allocation 6/28/96 21.46 8.77 N/A N/A 9.10
-----------------------------------------------------------------------------------------------------------------------------------
Global (U.S.+) Equity Allocation 11/26/96 18.40 11.91 N/A N/A 12.62
-----------------------------------------------------------------------------------------------------------------------------------
Global Balanced Allocation 7/29/96 12.25 8.63 N/A N/A 11.65
-----------------------------------------------------------------------------------------------------------------------------------
U.S. Sector 12/31/92 12.84 14.67 20.40 N/A 17.83
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 218
Each Fund may also from time to time advertise net return and gross
return data for each month and calendar quarter since the Fund's inception.
Monthly and quarterly return data is calculated by linking daily performance for
a Fund (current net asset value divided by prior net asset value), and assumes
reinvestment of all dividends and gains. Monthly and quarterly performance data
does not reflect payment of any applicable purchase premiums or redemption fees.
All quotations of monthly and quarterly returns would be accompanied by
standardized total return information. Information relating to a Fund's return
for a particular month or calendar quarter is provided to permit evaluation of
the Fund's performance and volatility in different market conditions, and should
not be considered in isolation.
From time to time, in advertisements, in sales literature, or in
reports to shareholders, a Fund may compare its respective performance to that
of other mutual funds with similar investment objectives and to stock or other
relevant indices. For example, the Fund may compare its total return to rankings
prepared by Lipper Analytical Services, Inc. or Morningstar, Inc., widely
recognized independent services that monitor mutual fund performance; the
Standard & Poor's 500 Stock Index ("S&P 500"), an index of unmanaged groups of
common stock; or the Dow Jones Industrial Average, a recognized unmanaged index
of common stocks of 30 industrial companies listed on the New York Stock
Exchange.
Performance rankings and listings reported in national financial
publications, such as Money Magazine, Barron's and Changing Times, may also be
cited (if the Fund is listed in any such publication) or used for comparison, as
well as performance listings and rankings from various other sources including
No Load Fund X, CDA Investment Technologies, Inc., Weisenberger Investment
Companies Service, and Donoghue's Mutual Fund Almanac.
Quotations of a Fund's gross return do not reflect any reduction for
any Fund fees or expenses unless otherwise noted; if the gross return data
reflected the estimated fees and expenses of the Fund, the returns would be
lower than those shown. Quotations of gross return for a Fund for a particular
month or quarter will be calculated in accordance with the following formula:
Gross Return =
Net Return + (Total Annual Operating Expense Ratio) (# of days in relevant
period/365)
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<PAGE> 219
INVESTMENT GUIDELINES
U. S. EQUITY FUNDS
GMO U.S. CORE FUND
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
EQUITY SECURITIES: - At least 65% of the Fund's total assets will be invested in or
domestic common stocks exposed to(1) domestic common stocks.
convertible securities
securities of foreign issuers (traded on
U.S. Exchanges)
OTHER EQUITY SECURITIES:
depository receipts
illiquid securities
144A securities
restricted securities
futures and related options on
securities indexes
REITs
exchange-traded and OTC options on
securities and indexes
(including writing covered options)
equity swap contracts
contracts for differences
warrants or rights
repurchase agreements
investment companies (open & closed end)
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have greater than 5% of its net
Any short-term assets will be invested in assets exposed to cash and money market instruments. This
cash or high quality money market limitation does not include cash and money market instruments in
instruments including securities issued by margin accounts or otherwise covering exposure achieved through
the U.S. government and agencies thereof, derivative instruments ("equitized cash").
bankers' acceptances, commercial paper,
bank certificates of deposit and repurchase
agreements
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following
practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its
net assets from banks for the payment of redemptions or
settlement of securities transactions, but not as a leveraged
investment strategy.
</TABLE>
-----------------------
(1) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the Fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
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<PAGE> 220
<TABLE>
<S> <C>
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of
portfolio investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase agreements
and engaging in securities lending will not be considered making
loans for this purpose. The Fund may loan securities valued at up to
one-third of its total assets.
PLEDGING, HYPOTHECATING OR - Except that collateral arrangements with respect to swap
MORTGAGING FUND ASSETS agreements, the writing of options, stock index, interest rate,
currency or other futures contracts, options on futures contracts and
collateral arrangements with respect to initial and variation margin are
not deemed to be a pledge or other encumbrance of assets. The deposit of
securities or cash or cash equivalents in escrow in connection with the
writing of covered call or put options, respectively, is also not deemed
to be a pledge or encumbrance.
</TABLE>
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
MAKING SHORT SALES OF SECURITIES
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
OPTIONS ON SECURITIES - No more than 5% of the Fund's net assets will be invested in
time premiums on options on particular securities (as opposed to
options on indexes).
OTHER INVESTMENT COMPANIES - The Fund will not own more than 3% of the outstanding voting
securities of any investment company.
- No more than 5% of the Fund's net assets will be invested in any single
investment company.
- No more than 10% of the Fund's net assets will be
invested in securities of investment companies in the
aggregate.
ILLIQUID SECURITIES - No more than 15% of the Fund's net assets will be invested in
illiquid securities.
INVESTMENT IN INSURANCE COMPANIES - The Fund will not purchase more than 10% of the total
outstanding voting stock of any insurance company
(including foreign insurance companies).
INVESTMENT IN SECURITIES ISSUED BY - Equity: The Fund will not purchase more than 5% of any class
BROKERS, DEALERS, UNDERWRITERS AND of stock of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such company's
total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total
assets will be invested in the securities of a single broker, dealer,
underwriter or investment adviser. The net payment obligation of swap
contracts where one of these types of companies is the counterparty
also counts for purposes of this restriction.
This policy does not apply to companies that derived less than 15%
of revenues from "securities-related businesses" during the most
recent fiscal year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - Except for U.S. government securities, cash, and money market instruments,
the Fund will not invest in any one security to an extent greater than 5
percentage points over that security's weighting in the
</TABLE>
78
<PAGE> 221
<TABLE>
<S> <C>
Fund's benchmark.
- The Fund will not purchase more than 10% of the outstanding securities of any
issuer.
- The Fund will be invested in the securities of at least 125 issuers.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in securities of
issuers in any one industry.
DERIVATIVE INSTRUMENTS
TYPES OF DERIVATIVES - Options, futures contracts and related options on securities indexes.
- Long equity swap contracts: where the Fund pays a fixed
rate plus the negative performance, if any, and receives the positive
performance, if any, of an index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed rate plus
the negative performance, if any, and pays the positive performance of an
index or basket of securities.
- Contracts for differences: equity swaps that contain both a long and short
equity component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity futures, related options and
short equity swap contracts used to hedge against an equity risk
already generally present in the Fund.(2)
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the Fund may hedge market
risk (risk of not being invested in the market) by purchasing
long futures contracts or entering into long equity swap
contracts to obtain market exposure until such time as direct
investments can be made efficiently. Conversely, if the Fund
receives or anticipates a significant demand for cash
redemptions, the Fund may sell futures contracts or enter into
short equity swap contracts, to allow the Fund to dispose of
securities in a more orderly fashion without the Fund being
exposed to leveraged loss exposure in the interim.
INVESTMENT - The Fund may use derivative instruments (particularly long
futures contracts, related options and long equity swap
contracts) in place of investing directly in securities. This
will include using equity derivatives to "equitize" cash balances
held by the Fund. The Fund may also use long derivatives for
investment in conjunction with short hedging transactions to
adjust the weights of the Fund's underlying equity portfolio to a
level the Manager believes is the optimal exposure to individual
markets, sectors and equities.
RISK MANAGEMENT - - The Fund may use equity futures, related options and equity
SYNTHETIC SALES AND PURCHASES swap contracts to adjust the weight of the Fund to a level the
manager believes is the optimal exposure to individual markets, sectors
and equities. Sometimes, such transactions are used as a precursor to actual
sales and purchases. For example, if the Fund held a large proportion of stocks
of a particular market and the Manager believed that stocks of another market
would outperform such stocks, the Fund might use a short futures contract on an
appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in
combination with a long futures contract on another index (to
</TABLE>
-------------------------
(2) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g., a single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund.
79
<PAGE> 222
<TABLE>
<S> <C>
synthetically "buy" exposure to that index). Long and short equity swap
contracts and contracts for differences may also be used for these purposes.
Equity derivatives (and corresponding currency forwards) used to effect
synthetic sales and purchases will generally be unwound as actual portfolio
securities are sold and purchased.
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging purposes.
- When long futures contracts and long swaps are used for investment, the
Fund will maintain an amount of cash or liquid securities equal to the face
value of all such long derivative positions. However, for purposes of this
restriction, if an existing long equity exposure is reduced or eliminated by a
short derivative position, the combination of the long and short position will
be considered as cash available to cover a new long derivative exposure.
- The net long equity exposure of the Fund, including direct investment in
securities and long derivative positions, will not exceed 100% of the Fund's net
assets.
- Except when such instruments are used for bona fide hedging, no more
than 5% of the Fund's net assets will be committed to initial margin on futures
contracts and time premiums on related options.
- Counterparties used for OTC derivatives must have a long-term debt rating of A
or higher when the derivative is entered into. Occasionally, short-term
derivatives will be entered into with counterparties that have only high
short-term debt ratings.
</TABLE>
80
<PAGE> 223
GMO TOBACCO-FREE CORE FUND
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
EQUITY SECURITIES: - At least 65% of the Fund's total assets will be invested
common stocks in or exposed to(3) domestic common stocks.
convertible securities
- The Fund invests primarily in the equity securities of at
OTHER EQUITY SECURITIES: least 125 companies chosen from among the 600 companies with the
depository receipts (ADRs, GDRs, EDRs) largest equity capitalization and whose securities are listed on
foreign issues traded principally in the U.S. a U.S. national securities exchange, and which are not Tobacco
Producing Issuers.
illiquid securities
144A securities
restricted securities
futures and related options on
securities indexes
REITs
exchange-traded and OTC options on
securities and indexes
(including writing covered options)
equity swap contracts
contracts for differences
warrants or rights
repurchase agreements
investment companies (open & closed end)
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have greater than 5% of its net
Any short-term assets will be invested in assets exposed to cash and money market instruments. This
cash or high quality money market limitation does not include cash and money market instruments in
instruments including securities issued by margin accounts or otherwise covering exposure achieved through
the U.S. government and agencies thereof, derivative instruments ("equitized cash").
bankers' acceptances, commercial paper,
bank certificates of deposit and repurchase
agreements.
</TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
<TABLE>
<S> <C>
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of
its net assets from banks for the payment of redemptions or
settlement of securities transactions, but not as a leveraged
investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for securities law
purposes in connection with disposition of portfolio investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase agreements and engaging in
securities lending will not be considered making loans for this
purpose. The Fund may loan securities valued at up to one-third of its
total assets.
PLEDGING, HYPOTHECATING OR - Except that collateral arrangements with respect to swap agreements, the
</TABLE>
(3) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the Fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
81
<PAGE> 224
<TABLE>
<S> <C>
MORTGAGING FUND ASSETS writing of options, stock index, interest rate, currency or other
futures contracts, options on futures contracts and collateral
arrangements with respect to initial and variation margin are not
deemed to be a pledge or other encumbrance of assets. The deposit of
securities or cash or cash equivalents in escrow in connection with the
writing of covered call or put options, respectively, is also not
deemed to be a pledge or encumbrance.
</TABLE>
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A
COMPANY'S MANAGEMENT
MAKING SHORT SALES OF SECURITIES
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
OPTIONS ON SECURITIES - No more than 5% of the Fund's net assets will be invested in time
premiums on options on particular securities (as opposed to options on
indexes)
OTHER INVESTMENT COMPANIES - The Fund will not own more than 3% of the outstanding voting
securities of any investment company.
- No more than 5% of the Fund's net assets will be invested in any
single investment company.
- No more than 10% of the Fund's net assets will be invested in securities of
investment companies in the aggregate.
ILLIQUID SECURITIES - No more than 10% of the Fund's net assets will be invested in
illiquid securities.
INVESTMENT IN INSURANCE COMPANIES - The Fund will not purchase more than 10% of the total outstanding voting
stock of any insurance company (including foreign insurance companies).
INVESTMENT IN SECURITIES ISSUED BY - Equity: The Fund will not purchase more than 5% of any class of
BROKERS, DEALERS, UNDERWRITERS AND stock of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such company's total
outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets will be
invested in the securities of a single broker, dealer, underwriter
or investment adviser. The net payment obligation of swap contracts where one of
these types of companies is the counterparty also counts for purposes of this
restriction.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - Except for U.S. government securities, cash, and money market instruments,
the Fund will not invest in any one security to an extent greater than 5
percentage points over that security's weighting in the Fund's benchmark.
- The Fund will not purchase more than 10% of the outstanding securities of
any issuer.
- The Fund will be invested in the securities of at least 125 issuers.
</TABLE>
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<PAGE> 225
<TABLE>
<S> <C>
CONCENTRATION - The Fund will not invest more than 25% of its total assets in securities of
issuers in any one industry.
DERIVATIVE INSTRUMENTS
TYPES OF DERIVATIVES - Options, futures contracts and related options on securities indexes.
- Long equity swap contracts: where the Fund pays a fixed rate plus the negative
performance, if any, and receives the positive performance, if any, of an
index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed rate plus the
negative performance, if any, and pays the positive performance of an
index or basket of securities.
- Contracts for differences: equity swaps that contain both a long and short
equity component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity futures, related options and
short equity swap contracts used to hedge against an equity risk
already generally present in the Fund.(4)
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the Fund may hedge market
risk (risk of not being invested in the market) by purchasing long
futures contracts or entering into long equity swap contracts to
obtain market exposure until such time as direct investments can be
made efficiently. Conversely, if the Fund receives or anticipates a
significant demand for cash redemptions, the Fund may sell futures
contracts or enter into short equity swap contracts, to allow the
Fund to dispose of securities in a more orderly fashion without the
Fund being exposed to leveraged loss exposure in the interim.
INVESTMENT - The Fund may use derivative instruments (particularly long
futures contracts, related options and long equity swap contracts) in
place of investing directly in securities. This will include using
equity derivatives to "equitize" cash balances held by the Fund. The
Fund may also use long derivatives for investment in conjunction with
short hedging transactions to adjust the weights of the Fund's
underlying equity portfolio to a level the Manager believes is the
optimal exposure to individual markets, sectors and equities.
RISK MANAGEMENT - - The Fund may use equity futures, related options and equity
SYNTHETIC SALES AND PURCHASES swap contracts to adjust the weight of the Fund to a level the
manager believes is the optimal exposure to individual markets, sectors
and equities. Sometimes, such transactions are used as a precursor to
actual sales and purchases. For example, if the Fund held a large
proportion of stocks of a particular market and the Manager believed
that stocks of another market would outperform such stocks, the Fund
might use a short futures contract on an appropriate index (to
synthetically "sell" a portion of the Fund's portfolio) in combination
with a long futures contract on another index (to synthetically "buy"
exposure to that index). Long and short equity swap contracts and
contracts for differences may also be used for these purposes. Equity
derivatives (and corresponding currency forwards) used to effect
synthetic sales and purchases will generally be unwound as actual
portfolio securities are sold and purchased.
</TABLE>
----------------------
(4) The Fund may use such hedging to remove or reduce general market
exposure (e.g. , an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g., a single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund.
83
<PAGE> 226
<TABLE>
<S> <C>
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging
purposes.
- When long futures contracts and long equity swaps are used for investment,
the Fund will maintain an amount of cash or liquid securities equal to
the face value of all such long derivative positions. However, for
purposes of this restriction, if an existing long equity exposure is
reduced or eliminated by a short derivative position, the combination
of the long and short position will be considered as cash available to
cover a new long derivative exposure.
- The net long equity exposure of the Fund, including direct investment in
securities and long derivative positions, will not exceed 100% of the
Fund's net assets.
- Except when such instruments are used for bona fide hedging, no more
than 5% of the Fund's net assets will be committed to initial margin on futures
contracts and time premiums on related options.
- Counterparties used for OTC derivatives must have a long-term debt rating of A
or higher when the derivative is entered into. Occasionally, short-term
derivatives will be entered into with counterparties that have only
high short-term debt ratings.
</TABLE>
84
<PAGE> 227
GMO VALUE FUND
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
EQUITY SECURITIES: - At least 65% of the Fund's total assets will be invested in or
domestic common stocks exposed to(5) domestic common stocks.
convertible securities
securities of foreign issuers (traded on
U.S. Exchanges)
OTHER EQUITY SECURITIES:
depository receipts
illiquid securities
144A securities
restricted securities
futures and related options on
securities indexes
REITs
exchange-traded and OTC options on
securities and indexes
(including writing covered options)
equity swap contracts
contracts for differences
warrants
repurchase agreements
investment companies (open & closed end)
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have greater than 5% of its net
Any short-term assets will be invested in assets exposed to cash and money market instruments. This limitation
cash or high quality money market does not include cash and money market instruments in margin accounts
instruments including securities issued by or otherwise covering exposure achieved through derivative
the U.S. government and agencies thereof, instruments ("equitized cash").
bankers' acceptances, commercial paper,
bank certificates of deposit and repurchase
agreements
</TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
<TABLE>
<S> <C>
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its net assets
from banks for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for securities
law purposes in connection with disposition of portfolio investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase agreements and
engaging in securities lending will not be considered
making loans for this purpose. The Fund may loan securities valued at
up to one-third of its total assets.
</TABLE>
---------------------
(5) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the Fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
85
<PAGE> 228
<TABLE>
<S> <C>
PLEDGING, HYPOTHECATING OR MORTGAGING - Except that collateral arrangements with respect to swap
FUND ASSETS agreements, the writing of options, stock index, interest rate, currency
or other futures contracts, options on futures contracts and collateral
arrangements with respect to initial and variation margin are not
deemed to be a pledge or other encumbrance of assets. The deposit of
securities or cash or cash equivalents in escrow in connection with the
writing of covered call or put options, respectively, is also not
deemed to be a pledge or encumbrance.
</TABLE>
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
MAKING SHORT SALES OF SECURITIES
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
OPTIONS ON SECURITIES - No more than 5% of the Fund's net assets will be invested in time
premiums on options on particular securities (as opposed to options on
indexes).
OTHER INVESTMENT COMPANIES - The Fund will not own more than 3% of the outstanding voting
securities of any investment company.
- No more than 5% of the Fund's net assets will be invested in any single
investment company.
- No more than 10% of the Fund's net assets will be invested in securities of
investment companies in the aggregate.
ILLIQUID SECURITIES - No more than 15% of the Fund's net assets will be invested in
illiquid securities.
INVESTMENT IN INSURANCE COMPANIES - The Fund will not purchase more than 10% of the total
outstanding voting stock of any insurance company (including foreign
insurance companies).
INVESTMENT IN SECURITIES ISSUED BY - Equity: The Fund will not purchase more than 5% of any class of
BROKERS, DEALERS, UNDERWRITERS AND stock of a broker, dealer, underwriter or adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such company's total
outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets will be
invested in the securities of a single broker, dealer,
underwriter or investment adviser. The net payment obligation
of swap contracts where one of these types of companies is the
counterparty also counts for purposes of this restriction.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
CONCENTRATION - The Fund will not invest more than 25% of its total
assets in securities of issuers in any one industry.
DERIVATIVE INSTRUMENTS
TYPES OF DERIVATIVES - Options, futures contracts and related options on securities indexes.
USES OF DERIVATIVES - Traditional Hedging: Short equity futures and related options
contracts used to hedge against an equity risk already generally
HEDGING present in the Fund.
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the Fund may hedge market
risk (risk of not being
</TABLE>
86
<PAGE> 229
<TABLE>
<S> <C>
invested in the market) by purchasing long futures contracts to obtain
market exposure until such time as direct investments can be made efficiently.
Conversely, if the Fund receives or anticipates a significant demand for cash
redemptions, the Fund may sell futures contracts to allow the Fund to dispose
of securities in a more orderly fashion without the Fund being exposed to
leveraged loss exposure in the interim.
INVESTMENT - The Fund may use derivative instruments (particularly long futures
contracts and related options) in place of investing directly
in securities. This will include using equity derivatives to
"equitize" cash balances held by the Fund.
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging purposes.
- When long futures contracts and long equity swaps are used for investment, the
Fund will maintain an amount of cash or liquid securities
equal to the face value of all such long derivative positions.
- The net long equity exposure of the Fund, including direct investment in
securities and long futures positions, will not exceed 100% of
the Fund's net assets.
- Except when such instruments are used for bona fide hedging, no more than 5% of
the Fund's net assets will be committed to initial margin on
futures contracts and time premiums on related options.
- Counterparties used for OTC derivatives must have a long-term
debt rating of A or higher when the derivative is entered
into. Occasionally, short-term derivatives will be entered
into with counterparties that have only high short-term debt
ratings.
</TABLE>
87
<PAGE> 230
GMO INTRINSIC VALUE FUND
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
EQUITY SECURITIES: - At least 65% of the Fund's total assets will be
domestic common stocks invested in or exposed to(6) domestic common stocks
convertible securities
OTHER EQUITY SECURITIES:
depository receipts
illiquid securities
144A securities
restricted securities
futures and related options on
securities indexes
REITs
exchange-traded and OTC options on
securities and indexes (including
writing covered options)
equity swap contracts
contracts for differences
warrants or rights
securities of foreign issuers (traded on U.S.
exchanges)
investment companies
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have greater than 5% of
Any short-term assets will be invested in cash or high its net assets exposed to cash and money market
quality money market instruments including securities instruments. This limitation does not include cash and
issued by the U.S. government and agencies thereof, money market instruments in margin accounts or otherwise
bankers' acceptances, commercial paper, covering exposure achieved through derivative instruments
bank certificates of deposit and repurchase agreements. ("equitized cash").
</TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
<TABLE>
<S> <C>
PURCHASING SECURITIES ON MARGIN Except for short-term credits necessary for clearance of transactions.
Except that the Fund may borrow up to 20% of its net assets from banks
BORROWING MONEY temporarily for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of portfolio
investments.
MAKING LOANS Except that purchasing of debt obligations, repurchase agreements and
engaging in securities lending will not be considered making loans for
this purpose. The Fund may loan securities valued at up to one-third
of its total assets.
PLEDGING, HYPOTHECATING OR Except that collateral arrangements with respect swap agreements, the
</TABLE>
-----------------------
(6) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the Fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
88
<PAGE> 231
<TABLE>
<S> <C>
MORTGAGING FUND ASSETS writing of options, stock index, rate, currency or other futures contracts,
options on futures contracts and collateral arrangements with
respect to initial and variation margin are not deemed to be a
pledge or other encumbrance of assets. The deposit of
securities or cash or cash equivalents in escrow in connection
with the writing of covered call or put options, respectively
is also not deemed to be a pledge or encumbrance.
</TABLE>
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
MAKING SHORT SALES OF SECURITIES
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
OPTIONS ON SECURITIES - No more than 5% of the Fund's net assets will be invested in time
premiums on options on particular securities (as opposed to options on
indexes).
ILLIQUID SECURITIES - No more than 15% of the Fund's net assets will be invested in illiquid
securities.
OTHER INVESTMENT COMPANIES - The Fund will not own more than 3% of the outstanding voting
securities of any investment company.
- No more than 5% of the Fund's net assets will be invested in any single investment
company.
- No more than 10% of the Fund's net assets will be invested in securities of
investment companies in the aggregate.
INVESTMENT IN INSURANCE COMPANIES - The Fund will not purchase more than 10% of the total outstanding
voting stock of any insurance company (including foreign insurance
companies).
INVESTMENT IN SECURITIES ISSUED BY - Equity: The Fund will not purchase more than 5% of any class of
BROKERS, DEALERS, UNDERWRITERS AND stock of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such company's total
outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets will be invested in
the securities of a single broker, dealer, underwriter or investment adviser. The
net payment obligation of swap contracts where one of these types of companies is
the counterparty also counts for purposes of this restriction.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
DIVERSIFICATION/CONCENTRATION
- Except for U.S. Government securities,
cash, and money market instruments, the
Fund will not invest in any one security
to an extent greater than 5 percentage
points over that security's weighting in
the Fund's benchmark.
- The Fund will not purchase more than 10%
of the outstanding securities of
any issuer.
CONCENTRATION - The Fund will not invest more than 25% of its assets in securities
of issuers in any one industry.
DERIVATIVE INSTRUMENTS
TYPES OF DERIVATIVES - Futures contracts and related options on securities indexes.
</TABLE>
89
<PAGE> 232
<TABLE>
<S> <C>
- Long equity swap contracts: where the Fund pays a fixed rate plus
the negative performance, if any, and receives the positive
performance, if any, of an index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed
rate plus the negative performance, if any, and pays
the positive performance of an index or basket of securities.
- Contracts for differences: equity swaps that contain both a long
and short equity component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity futures, related options and
short equity swap contracts used to hedge against an equity risk already
generally present in the Fund.(7)
- Anticipatory Hedging: If the Fund receives or anticipates significant cash purchase
transactions, the Fund may hedge market risk (risk of not being invested in the
market) by purchasing long futures contracts or entering long equity swap
contracts to obtain market exposure until such time as direct investments can be
made efficiently. Conversely, if the Fund receives or anticipates a significant
demand for cash redemptions, the Fund may sell futures contracts or enter into
short equity swap contracts, to allow the Fund to dispose of securities in a
more orderly fashion without the Fund being exposed to leveraged loss exposure
in the interim.
INVESTMENT - The Fund may use derivative instruments (particularly long futures
contracts, related options and long equity swap contracts) in place of
investing directly in securities. This will include using equity
derivatives to "equitize" cash balances held by the Fund. The Fund may
also use long derivatives for investment in conjunction with short
hedging transactions to adjust the weights of the Fund's underlying
equity portfolio to a level the Manager believes is the optimal exposure
to individual markets, sectors and equities.
</TABLE>
------------------------
(7) The Fund may use such hedging to remove or reduce general market
exposure (e.g. an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g. a single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund.
90
<PAGE> 233
<TABLE>
<S> <C>
RISK MANAGEMENT - - The Fund may use equity futures, related
SYNTHETIC SALES AND PURCHASES options and equity swap contracts to adjust
the weight of the Fund to a level the
manager believes is the optimal exposure to
individual markets, sectors and equities.
Sometimes, such transactions are used as a
precursor to actual sales and purchases.
For example, if the Fund held a large
proportion of stocks of a particular market
and the Manager believed that stocks of
another market would outperform such
stocks, the Fund might use a short futures
contract on an appropriate index (to
synthetically "sell" a portion of the
Fund's portfolio) in combination with a
long futures contract on another index (to
synthetically "buy" exposure to that
index). Long and short equity swap
contracts and contracts for differences may
also be used for these purposes. Equity
derivatives (and corresponding currency
forwards) used to effect synthetic sales
and purchases will generally be unwound as
actual portfolio securities are sold and
purchased.
LIMITATIONS ON THE USE OF
DERIVATIVES - There is no limit on the use of
derivatives for hedging purposes.
- When long futures contracts and long
equity swaps are used for investment, the
Fund will maintain an amount of cash or
liquid securities equal to the face value
of all such long derivative positions.
However, for purposes of this restriction,
if an existing long equity exposure is
reduced or eliminated by a short derivative
position, the combination of the long and
short position will be considered as cash
available to cover a new long derivative
exposure.
- The net long equity exposure of the Fund,
including direct investment in securities
and long derivative positions, will not
exceed 100% of the Fund's net assets.
- Except when such instruments are used for
bona-fide hedging, no more than 5% of the
Fund's net assets will be committed to
initial margin on futures contracts and
time premiums on related options.
- Counterparties used for OTC derivatives
must have a long-term debt rating of A or
higher when the derivative is entered into.
Occasionally, short-term derivatives will
be entered into with counterparties that
have only high short-term debt ratings.
</TABLE>
91
<PAGE> 234
GMO GROWTH FUND
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
EQUITY SECURITIES: - At least 65% of the Fund's total assets will be invested in or
domestic common stocks exposed to(8) domestic common stocks.
convertible securities
securities of foreign issuers (traded on
U.S. Exchanges)
OTHER EQUITY SECURITIES:
depository receipts
illiquid securities
144A securities
restricted securities
futures and related options on
securities indexes
REITs
exchange-traded and OTC options on
securities and indexes
(including writing covered options)
equity swap contracts
contracts for differences
warrants or rights
repurchase agreements
investment companies (open & closed end)
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have greater than 5% of its net assets
Any short-term assets will be invested in exposed to cash and money market instruments. This limitation does
cash or high quality money market not include cash and money market instruments in margin accounts or
instruments including securities issued by otherwise covering exposure achieved through derivative instruments
the U.S. government and agencies thereof, ("equitized cash").
bankers' acceptances, commercial paper,
bank certificates of deposit and repurchase
agreements
</TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
<TABLE>
<S> <C>
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its net
assets from banks for the payment of redemptions or settlement of
securities transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of portfolio
investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase agreements and
engaging in securities lending will not be considered making loans
for this purpose. The Fund may loan securities valued at up to
one-third of its total assets.
</TABLE>
----------
(8) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the Fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
92
<PAGE> 235
<TABLE>
<S> <C>
PLEDGING, HYPOTHECATING OR - Except that collateral arrangements with respect to swap
MORTGAGING FUND ASSETS agreements, the writing of options, stock index, interest rate,
currency or other futures contracts, options on futures contracts
and collateral arrangements with respect to initial and variation
margin are not deemed to be a pledge or other encumbrance of
assets. The deposit of securities or cash or cash equivalents in
escrow in connection with the writing of covered call or put
options, respectively, is also not deemed to be a pledge or
encumbrance.
</TABLE>
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
MAKING SHORT SALES OF SECURITIES
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
OPTIONS ON SECURITIES - No more than 5% of the Fund's net assets will be invested in time
premiums on options on particular securities (as opposed to options
on indexes).
OTHER INVESTMENT COMPANIES - The Fund will not own more than 3% of the outstanding voting
securities of any investment company.
- No more than 5% of the Fund's net assets will be invested in any
single investment company.
- No more than 10% of the Fund's net assets will be invested in
securities of investment companies in the aggregate.
ILLIQUID SECURITIES - No more than 15% of the Fund's net assets will be invested in
illiquid securities.
INVESTMENT IN INSURANCE COMPANIES - The Fund will not purchase more than 10% of the total outstanding
voting stock of any insurance company (including foreign insurance
companies).
INVESTMENT IN SECURITIES ISSUED BY - Equity: The Fund will not purchase more than 5% of any class of
BROKERS, DEALERS, UNDERWRITERS AND stock of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such company's
total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets will
be invested in the securities of a single broker, dealer,
underwriter or investment adviser. The net payment obligation of
swap contracts where one of these types of companies is the
counterparty also counts for purposes of this restriction.
This policy does not apply to companies that derived less than
15% of revenues from "securities-related businesses" during the
most recent fiscal year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - Except for U.S. government securities, cash, and money market
instruments, the Fund will not invest in any one security to an
extent greater than 5 percentage points over that security's
weighting in the Fund's benchmark.
- The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
- The Fund will be invested in the securities of at least 125 issuers.
- The Fund will not invest more than 25% of its total assets in
CONCENTRATION securities of issuers in any one industry.
</TABLE>
93
<PAGE> 236
DERIVATIVE INSTRUMENTS
<TABLE>
<S> <C>
TYPES OF DERIVATIVES - Options, futures contracts and related options on securities
indexes.
- Long equity swap contracts: where the Fund pays a fixed rate plus
the negative performance, if any, and receives the positive
performance, if any, of an index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed rate
plus the negative performance, if any, and pays the positive
performance of an index or basket of securities.
Contracts for differences: equity swaps that contain both a long and
short equity component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity futures, related options and
short equity swap contracts used to hedge against an equity risk
already generally present in the Fund.(9)
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the Fund may hedge market
risk (risk of not being invested in the market) by purchasing long
futures contracts or entering into long equity swap contracts to
obtain market exposure until such time as direct investments can be
made efficiently. Conversely, if the Fund receives or anticipates
a significant demand for cash redemptions, the Fund may sell
futures contracts or enter into short equity swap contracts, to
allow the Fund to dispose of securities in a more orderly fashion
without the Fund being exposed to leveraged loss exposure in the
interim.
RISK MANAGEMENT -
SYNTHETIC SALES AND PURCHASES - The Fund may use equity futures, related options and equity swap
contracts to adjust the weight of the Fund to a level the manager
believes is the optimal exposure to individual markets, sectors and
equities. Sometimes, such transactions are used as a precursor to
actual sales and purchases. For example, if the Fund held a large
proportion of stocks of a particular market and the Manager
believed that stocks of another market would outperform such
stocks, the Fund might use a short futures contract on an
appropriate index (to synthetically "sell" a portion of the Fund's
portfolio) in combination with a long futures contract on another
index (to synthetically "buy" exposure to that index). Long and
short equity swap contracts and contracts for differences may also
be used for these purposes. Equity derivatives (and corresponding
currency forwards) used to effect synthetic sales and purchases
will generally be unwound as actual portfolio securities are sold
and purchased.
</TABLE>
----------
(9) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g., single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund.
94
<PAGE> 237
<TABLE>
<S> <C>
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging purposes.
- When long futures contracts and long equity swaps are used for
investment, the Fund will maintain an amount of cash or liquid
securities equal to the face value of all such long derivative
positions. However, for purposes of this restriction, if an
existing long equity exposure is reduced or eliminated by a short
derivative position, the combination of the long and short position
will be considered as cash available to cover a new long derivative
exposure.
- The net long equity exposure of the Fund, including direct
investment in securities and long derivative positions, will not
exceed 100% of the Fund's net assets.
- Except when such instruments are used for bona fide hedging, no
more than 5% of the Fund's net assets will be committed to initial
margin on futures contracts and time premiums on related options.
- Counterparties used for OTC derivatives must have a long-term debt
rating of A or higher when the derivative is entered into.
Occasionally, short-term derivatives will be entered into with
counterparties that have only high short-term debt ratings.
</TABLE>
95
<PAGE> 238
GMO SMALL CAP VALUE FUND
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
EQUITY SECURITIES: - At least 65% of the Fund's total assets will be invested in or
domestic common stocks exposed to(10) domestic common stocks.
convertible securities - Under normal market conditions, at least 65% of the Fund's total
securities of foreign issuers (traded on assets will be invested in or exposed to Russell 2500 Value Index
U.S. Exchanges) securities.
OTHER EQUITY SECURITIES:
depository receipts
illiquid securities
144A securities
restricted securities
futures and related options on
securities indexes
REITs
exchange-traded and OTC options on
securities and indexes
(including writing covered options)
equity swap contracts
contracts for differences
convertible bonds
convertible preferred stocks
warrants or rights
repurchase agreements
investment companies (open & closed end)
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have greater than 5% of its net assets
Any short-term assets will be invested in exposed to cash and money market instruments. This limitation does
cash or high quality money market not include cash and money market instruments in margin accounts or
instruments including securities issued by otherwise covering exposure achieved through derivative instruments
the U.S. government and agencies thereof, ("equitized cash").
bankers' acceptances, commercial paper,
bank certificates of deposit and repurchase
agreements
</TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
<TABLE>
<S> <C>
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its net
assets from banks for the payment of redemptions or settlement of
securities transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for
securities law.
</TABLE>
(10) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the Fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
96
<PAGE> 239
<TABLE>
<S> <C>
purposes in connection with disposition of portfolio
investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase agreements and
engaging in securities lending will not be considered making loans
for this purpose. The Fund may loan securities valued at up to
one-third of its total assets.
- Except that collateral arrangements with respect to swap agreements,
PLEDGING, HYPOTHECATING OR the writing of options, stock index, interest rate, currency or other
MORTGAGING FUND ASSETS futures contracts, options on futures contracts and collateral
arrangements with respect to initial and variation margin are not
deemed to be a pledge or other encumbrance of assets. The deposit of
securities or cash or cash equivalents in escrow in connection with
the writing of covered call or put options, respectively, is also not
deemed to be a pledge or encumbrance.
</TABLE>
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
MAKING SHORT SALES OF SECURITIES
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
OPTIONS ON SECURITIES - No more than 5% of the Fund's net assets will be invested in time
premiums on options on particular securities (as opposed to
options on indexes).
OTHER INVESTMENT COMPANIES - The Fund will not own more than 3% of the outstanding voting
securities of any investment company.
- No more than 5% of the Fund's net assets will be invested in any
single investment company.
- No more than 10% of the Fund's net assets will be invested in
securities of investment companies in the aggregate.
ILLIQUID SECURITIES - No more than 15% of the Fund's net assets will be invested in
illiquid securities.
INVESTMENT IN INSURANCE COMPANIES - The Fund will not purchase more than 10% of the total outstanding
voting stock of any insurance company (including foreign insurance
companies).
INVESTMENT IN SECURITIES ISSUED BY - Equity: The Fund will not purchase more than 5% of any class of stock
BROKERS, DEALERS, UNDERWRITERS AND of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such company's
total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets will be
invested in the securities of a single broker, dealer, underwriter or
investment adviser. The net payment obligation of swap contracts
where one of these types of companies is the counterparty also counts
for purposes of this restriction.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - Except for U.S. government securities, cash, and money market
instruments, the Fund will not invest in any one security to an
extent greater than 5 percentage points over that security's
weighting in the Fund's benchmark.
- The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
- The Fund will be invested in the securities of at least 125 issuers.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in
securities of issuers in any one industry.
</TABLE>
97
<PAGE> 240
DERIVATIVE INSTRUMENTS
<TABLE>
<S> <C>
TYPES OF DERIVATIVES - Options, futures contracts and related options on securities indexes.
- Long equity swap contracts: where the Fund pays a fixed rate plus the
negative performance, if any, and receives the positive performance,
if any, of an index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed rate
plus the negative performance, if any, and pays the positive
performance of an index or basket of securities.
- Contracts for differences: equity swaps that contain both a long and
short equity component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity futures, related options and short
equity swap contracts used to hedge against an equity risk already
generally present in the Fund.(11)
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the Fund may hedge market
risk (risk of not being invested in the market) by purchasing long
futures contracts or entering into long equity swap contracts to
obtain market exposure until such time as direct investments can be
made efficiently. Conversely, if the Fund receives or anticipates a
significant demand for cash redemptions, the Fund may sell futures
contracts or enter into short equity swap contracts, to allow the
Fund to dispose of securities in a more orderly fashion without the
Fund being exposed to leveraged loss exposure in the interim.
INVESTMENT - The Fund may use derivative instruments (particularly long futures
contracts, related options and long equity swap contracts) in place
of investing directly in securities. This will include using equity
derivatives to "equitize" cash balances held by the Fund. The Fund
may also use long derivatives for investment in conjunction with
short hedging transactions to adjust the weights of the Fund's
underlying equity portfolio to a level the Manager believes is the
optimal exposure to individual markets, sectors and equities.
RISK MANAGEMENT - - The Fund may use equity futures, related options and equity swap
SYNTHETIC SALES AND PURCHASES contracts to adjust the weight of the Fund to a level the manager
believes is the optimal exposure to individual markets, sectors and
equities. Sometimes, such transactions are used as a precursor to
actual sales and purchases. For example, if the Fund held a large
proportion of stocks of a particular market and the Manager believed
that stocks of another market would outperform such stocks, the Fund
might use a short futures contract on an appropriate index (to
synthetically "sell" a portion of the Fund's portfolio) in
combination with a long futures contract on another index (to
synthetically "buy" exposure to that index). Long and short equity
swap contracts and contracts for differences may also be used for
these purposes. Equity derivatives (and corresponding currency
forwards) used to effect synthetic sales and purchases will generally
be unwound as actual portfolio securities are sold and purchased.
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging purposes.
- When long futures contracts and long equity swaps are used for
investment, the Fund will maintain an amount of cash or liquid
securities equal to the face value of all such long derivative
positions. However, for purposes of this restriction, if an existing
long equity exposure is reduced or eliminated by a short derivative
position, the combination of the long and short position will be
</TABLE>
----------
(11) The Fund may use such hedging to remove or reduce general
market exposure (e.g., an index or broad basket of securities) relative
to specific exposure existing in the Fund (the specific stocks of that
market actually owned by the Fund). The Fund may also seek to remove
specific exposure (e.g., a single stock, small basket or more focused
index of securities expected to do poorly in an otherwise promising
market) relative to general or broad market exposure that exists in the
Fund.
98
<PAGE> 241
<TABLE>
<S> <C>
considered as cash available to cover a new long derivative exposure.
- The net long equity exposure of the Fund, including direct investment
in securities and long derivative positions, will not exceed 100% of
the Fund's net assets.
- Except when such instruments are used for bona fide hedging, no more
than 5% of the Fund's net assets will be committed to initial margin
on futures contracts and time premiums on related options.
- Counterparties used for OTC derivatives must have a long-term debt
rating of A or higher when the derivative is entered into.
Occasionally, short-term derivatives will be entered into with
counterparties that have only high short-term debt ratings.
</TABLE>
99
<PAGE> 242
GMO SMALL CAP GROWTH FUND
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
EQUITY SECURITIES:
domestic common stocks - At least 65% of the Fund's total assets will be invested in or exposed to(12)
convertible securities domestic common stocks.
securities of foreign issuers (traded on - Under normal market conditions, at least 65% of the Fund's total
U.S. Exchanges) assets will be invested in or exposed to Russell 2500 Growth Index securities.
OTHER EQUITY SECURITIES:
depository receipts
illiquid securities
144A securities
restricted securities
futures and related options on
securities indexes
REITs
exchange-traded and OTC options on
securities and indexes
(including writing covered options)
equity swap contracts
contracts for differences
convertible bonds
convertible preferred stocks
warrants or rights
repurchase agreements
investment companies (open & closed end)
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have greater than 5% of its net assets
Any short-term assets will be invested in exposed to cash and money market instruments. This limitation does
cash or high quality money market not include cash and money market instruments in margin accounts or
instruments including securities issued by otherwise covering exposure achieved through derivative instruments
the U.S. Government and agencies thereof, ("equitized cash").
bankers' acceptances, commercial paper,
bank certificates of deposit and repurchase
agreements.
</TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
<TABLE>
<S> <C>
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its net
assets from banks for the payment of redemptions or settlement of
securities transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for securities law
</TABLE>
----------
(12) The words "exposed to" as used in these guidelines mean
that, for purposes of the relevant requirement or restriction, the
total of the Fund's exposure to the relevant market or security through
direct investments and through derivative instruments will be
considered.
100
<PAGE> 243
<TABLE>
<S> <C>
purposes in connection with disposition of portfolio
investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase agreements and
engaging in securities lending will not be considered making loans
for this purpose. The Fund may loan securities valued at up to
one-third of its total assets.
PLEDGING, HYPOTHECATING OR - Except that collateral arrangements with respect to swap agreements,
MORTGAGING FUND ASSETS the writing of options, stock index, interest rate, currency or other
futures contracts, options on futures contracts and collateral
arrangements with respect to initial and variation margin are not
deemed to be a pledge or other encumbrance of assets. The deposit of
securities or cash or cash equivalents in escrow in connection with
the writing of covered call or put options, respectively, is also not
deemed to be a pledge or encumbrance.
</TABLE>
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
MAKING SHORT SALES OF SECURITIES
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
OPTIONS ON SECURITIES - No more than 5% of the Fund's net assets will be invested in time
premiums on options on particular securities (as opposed to options
on indexes).
OTHER INVESTMENT COMPANIES - The Fund will not own more than 3% of the outstanding voting
securities of any investment company.
- No more than 5% of the Fund's net assets will be invested in any
single investment company.
- No more than 10% of the Fund's net assets will be invested in
securities of investment companies in the aggregate.
ILLIQUID SECURITIES - No more than 15% of the Fund's net assets will be invested in
illiquid securities.
INVESTMENT IN INSURANCE COMPANIES - The Fund will not purchase more than 10% of the total outstanding
voting stock of any insurance company (including foreign insurance
companies).
INVESTMENT IN SECURITIES ISSUED BY - Equity: The Fund will not purchase more than 5% of any class of stock
BROKERS, DEALERS, UNDERWRITERS AND of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such company's
total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets will be
invested in the securities of a single broker, dealer, underwriter or
investment adviser. The net payment obligation of swap contracts
where one of these types of companies is the counterparty also counts
for purposes of this restriction.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
</TABLE>
DIVERSIFICATION/CONCENTRATION
<TABLE>
<S> <C>
DIVERSIFICATION - Except for U.S. government securities, cash, and money market
instruments, the Fund will not invest in any one security to an
extent greater than 5 percentage points over that security's
weighting in the Fund's benchmark.
- The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
- The Fund will be invested in the securities of at least 125 issuers.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in
securities of
</TABLE>
101
<PAGE> 244
<TABLE>
<S> <C>
issuers in any one industry.
</TABLE>
DERIVATIVE INSTRUMENTS
<TABLE>
<S> <C>
TYPES OF DERIVATIVES - Options, futures contracts and related options on securities indexes.
- Long equity swap contracts: where the Fund pays a fixed rate plus the
negative performance, if any, and receives the positive performance,
if any, of an index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed rate
plus the negative performance, if any, and pays the positive
performance of an index or basket of securities.
- Contracts for differences: equity swaps that contain both a long and
short equity component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity futures, related options and short
equity swap contracts used to hedge against an equity risk already
generally present in the Fund.(13)
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the Fund may hedge market
risk (risk of not being invested in the market) by purchasing long
futures contracts or entering into long equity swap contracts to
obtain market exposure until such time as direct investments can be
made efficiently. Conversely, if the Fund receives or anticipates a
significant demand for cash redemptions, the Fund may sell futures
contracts or enter into short equity swap contracts, to allow the
Fund to dispose of securities in a more orderly fashion without the
Fund being exposed to leveraged loss exposure in the interim.
RISK MANAGEMENT - - The Fund may use equity futures, related options and equity swap
SYNTHETIC SALES AND PURCHASES contracts to adjust the weight of the Fund to a level the Manager
believes is the optimal exposure to individual markets, sectors and
equities. Sometimes, such transactions are used as a precursor to
actual sales and purchases. For example, if the Fund held a large
proportion of stocks of a particular market and the Manager believed
that stocks of another market would outperform such stocks, the Fund
might use a short futures contract on an appropriate index (to
synthetically "sell" a portion of the Fund's portfolio) in
combination with a long futures contract on another index (to
synthetically "buy" exposure to that index). Long and short equity
swap contracts and contracts for differences may also be used for
these purposes. Equity derivatives (and corresponding currency
forwards) used to effect synthetic sales and purchases will generally
be unwound as actual portfolio securities are sold and purchased.
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging purposes.
- When long futures contracts and long equity swaps are used for
investment, the Fund will maintain an amount of cash or liquid
securities equal to the face value of all such long derivative
positions. However, for purposes of this restriction, if an existing
long equity exposure is reduced or eliminated by a short derivative
position, the combination of the long and short position will be
considered as cash available to cover a new long derivative exposure.
- The net long equity exposure of the Fund, including direct investment
in securities and long derivative positions, will not exceed 100% of
the Fund's net assets.
- Except when such instruments are used for bona-fide hedging, no more
than
</TABLE>
---------------
(13) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g., a single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund.
102
<PAGE> 245
<TABLE>
<S> <C>
5% of the Fund's net assets will be committed to initial margin
on futures contracts and time premiums on related options.
- Counterparties used for OTC derivatives must have a long-term debt
rating of A or higher when the derivative is entered into.
Occasionally, short-term derivatives will be entered into with
counterparties that have only high short-term debt ratings.
</TABLE>
103
<PAGE> 246
GMO REIT FUND
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
REITS (REAL ESTATE INVESTMENT TRUSTS): - At least 65% of the Fund's
equity REITs total assets will be invested
mortgage REITs in or exposed to(14) securities
hybrid REITs of REITs, although the Fund
generally intends to invest a
greater portion of its assets
in REIT securities.
EQUITY SECURITIES: OTHER SECURITIES:
common stock asset-backed securities
preferred stock mortgage backed, CMO's,
depository receipts: ADRs, GDRs, EDRs strips and residuals
illiquid securities adjustable rate securities
144A securities lower rated fixed income
restricted securities securities (junk bonds)
futures and related options on zero coupon securities
securities indexes and interest rates indexed securities
exchange-traded and OTC-options on firm commitments (with banks
securities and indexes (including writing or broker dealers)
covered options) reverse repurchase agreements
REIT and other equity swap contracts dollar roll agreements
interest rate and currency swap contracts
contracts for differences
interest rate caps, floors and collars
warrants
repurchase agreements
investment companies (open & closed end)
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have
Any short-term assets will be invested in greater than 5% of its net assets
cash or high quality money market exposed to cash and money market
instruments including securities issued by instruments. This limitation does
the U.S. government and agencies thereof, not include cash and money market
bankers' acceptances, commercial paper, instruments in margin accounts or
bank certificates of deposit and repurchase otherwise covering exposure achieved
agreements. through derivative instruments
("equitized cash").
</TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
<TABLE>
<S> <C>
PURCHASING SECURITIES ON MARGIN - Except for short-term
credits necessary for
clearance of transactions.
BORROWING MONEY - Except that the Fund
may temporarily borrow up to
20% of its net assets from
banks for the payment of
redemptions or settlement of
securities transactions, but
not as a leveraged
investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund
is deemed an underwriter for
securities law
</TABLE>
(14) The words "exposed to" as used in these guideline mean that, for purposes
of the relevant requirement or restriction, the total of the Fund's exposure to
the relevant market or security through direct investments and through
derivative instruments will be considered.
104
<PAGE> 247
<TABLE>
<S> <C>
purposes in connection with
disposition of portfolio
investments.
MAKING LOANS - Except that purchasing debt
obligations, repurchase agreements
and engaging in securities
lending will not be considered
making loans for this purpose.
The Fund may loan securities valued
at up to one-third of its total
assets.
PLEDGING, HYPOTHECATING OR - Except that collateral arrangements
MORTGAGING FUND ASSETS with respect to swap agreements,
the writing of options, stock
index, interest rate, currency or
other futures contracts, options
on futures contracts and collateral
arrangements with respect to
initial and variation margin are
not deemed to be a pledge or
other encumbrance of assets. The
deposit of securities or cash or
cash equivalents in escrow in
connection with the writing of
covered call or put options,
respectively, is also not deemed
to be a pledge or encumbrance.
</TABLE>
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
MAKING SHORT SALES OF SECURITIES
<TABLE>
RESTRICTIONS AND LIMITATIONS
<S> <C>
OPTIONS ON SECURITIES - No more than 5% of the Fund's net assets will be invested in time
premiums on options on particular securities (as opposed to options on
indexes).
OTHER INVESTMENT COMPANIES - The Fund will not own more than 3% of the outstanding voting
securities of any investment company.
- No more than 5% of the Fund's net assets will be invested in any single
investment company.
- No more than 10% of the Fund's net assets will be invested in securities
of investment companies in the aggregate.
ILLIQUID SECURITIES - No more than 15% of the Fund's net assets will be invested in
illiquid securities.
INVESTMENT IN INSURANCE COMPANIES - The Fund will not purchase more than 10% of the total
outstanding voting stock of any insurance company (including foreign
insurance companies).
INVESTMENT IN SECURITIES ISSUED BY - Equity: The Fund will not purchase more than 5% of any class of
BROKERS, DEALERS, UNDERWRITERS AND stock of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such company's total
outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets will be invested in
the securities of a single broker, dealer, underwriter or investment adviser.
The net payment obligation of swap contracts where one of these types of
companies is the counterparty also counts for purposes of this restriction.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
INVESTMENT IN LOWER-RATED BONDS - The Fund will not invest more than 5% of its assets in
lower-rated bonds.
</TABLE>
105
<PAGE> 248
<TABLE>
DIVERSIFICATION/CONCENTRATION
<S> <C>
DIVERSIFICATION - Except for U.S. government securities, cash, and money market
instruments, the Fund will not invest in any one security to an
extent greater than 5 percentage points over that security's
weighting in the Fund's benchmark.
- The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
</TABLE>
<TABLE>
DERIVATIVE INSTRUMENTS
<S> <C>
TYPES OF DERIVATIVES - Options, futures contracts and related options on securities indexes.
- Long equity swap contracts: where the Fund pays a fixed rate plus
the negative performance, if any, and receives the positive performance,
if any, of an index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed rate
plus the negative performance, if any, and pays the positive
performance of an index or basket of securities.
- Contracts for differences: equity swaps that contain
both a long and short equity component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity futures, related options and
short equity swap contracts used to hedge against an equity risk
already generally present in the Fund.(15)
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the Fund may hedge market
risk (risk of not being invested in the market) by purchasing long
futures contracts or entering into long equity swap contracts to
obtain market exposure until such time as direct investments can be
made efficiently. Conversely, if the Fund receives or anticipates a
significant demand for cash redemptions, the Fund may sell futures
contracts or enter into short equity swap contracts, to allow the
Fund to dispose of securities in a more orderly fashion without the
Fund being exposed to leveraged loss exposure in the interim.
INVESTMENT - The Fund may use derivative instruments (particularly long
futures contracts, related options and long equity swap contracts)
in place of investing directly in securities. This will include
using equity derivatives to "equitize" cash balances held by the
Fund. The Fund may also use long derivatives for investment in
conjunction with short hedging transactions to adjust the weights of
the Fund's underlying equity portfolio to a level the Manager
believes is the optimal exposure to individual markets, sectors and
equities.
RISK MANAGEMENT - - The Fund may use equity futures, related options and equity
SYNTHETIC SALES AND PURCHASES swap contracts to adjust the weight of the Fund to a level the
manager believes is the optimal exposure to individual markets,
sectors and equities. Sometimes, such transactions are used as a
precursor to actual sales and purchases. For example, if the Fund
held a large proportion of stocks of a particular market and the
Manager believed that stocks of another market would outperform such
stocks, the Fund might use a short futures contract on an
appropriate index (to synthetically "sell" a portion of the Fund's
portfolio) in combination with a long futures contract on another
index (to synthetically "buy" exposure
</TABLE>
(15) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g., a single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund.
106
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<TABLE>
<S> <C>
to that index). Long and short equity swap contracts and contracts
for differences may also be used for these purposes. Equity derivatives
(and corresponding currency forwards) used to effect synthetic sales and
purchases will generally be unwound as actual portfolio securities are sold and
purchased.
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging purposes.
- When long futures contracts and long equity swaps are used for
investment, the Fund will maintain an amount of cash or liquid
securities equal to the face value of all such long derivative
positions. However, for purposes of this restriction, if an
existing long equity exposure is reduced or eliminated by a short
derivative position, the combination of the long and short position
will be considered as cash available to cover a new long derivative
exposure.
- The net long equity exposure of the Fund, including direct investment in
securities and long derivative positions, will not exceed 100% of the
Fund's net assets.
- Except when such instruments are used for bona fide hedging, no more than 5% of
the Fund's net assets will be committed to initial margin on futures contracts
and time premiums on related options.
- Counterparties used for OTC derivatives must have a long-term debt rating of A
or higher when the derivative is entered into. Occasionally, short-term
derivatives will be entered into with counterparties that have only high
short-term debt ratings.
</TABLE>
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INTERNATIONAL EQUITY FUNDS
GMO INTERNATIONAL CORE FUND
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
<TABLE>
PERMITTED INVESTMENTS
<S> <C>
EQUITY SECURITIES: - The Fund will have greater than 65% of its total assets
common stocks invested in or exposed to(16) Equity Securities and Other Equity
convertible bonds Securities.
preferred stocks
warrants or rights - The Fund invests primarily in equity securities chosen from
among the 3500 companies in developed markets that are listed in
OTHER EQUITY SECURITIES: the MSCI Perspective Publication, which includes issuers in the
depository receipts: ADRs, GDRs, EDRs MSCI EAFE Index, smaller companies and Canadian companies.
foreign issues traded in the U.S. and
abroad
investment companies (open & closed-end)
illiquid securities
144A securities
restricted securities
equity futures and related options
exchange-traded and OTC options on
securities and indexes
(including writing covered options)
equity swap contracts
contracts for differences
repurchase agreements
FIXED INCOME SECURITIES:
long and medium-term corporate and
government bonds
non-convertible preferred stock
FOREIGN CURRENCY TRANSACTIONS - Fund may invest in spot currency transactions, forward foreign currency
contracts, currency swap contracts, options on currencies, currency futures and
related options.
CASH AND MONEY MARKET INSTRUMENTS
Any short-term assets will be invested in - The Fund will not normally have greater than 5% of its net
cash or high quality money market assets exposed to cash and money market instruments. This
instruments including securities issued by the limitation does not include cash and money market instruments in
U.S. government and agencies thereof, margin accounts or otherwise covering exposure achieved through
bankers' acceptances, commercial paper, derivative instruments ("equitized cash").
bank certificates of deposit, time deposits
and repurchase agreements
</TABLE>
<TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
<S> <C>
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its
net assets from banks for the payment of redemptions or settlement
of securities transactions, but not as a leveraged investment
strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for
securities
</TABLE>
(16) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
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<S> <C>
law purposes in connection with disposition of
portfolio investments.
MAKING LOANS - Except that purchasing of debt obligations, repurchase
agreements and engaging in securities lending will not be
considered making loans for this purpose. The Fund may loan
securities valued at up to 25% of its total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING - Except that collateral arrangements with respect to swap
FUND ASSETS agreements, the writing of options, stock index, interest rate,
currency or other futures contracts, options on futures contracts
and collateral arrangements with respect to initial and variation
margin are not deemed to be a pledge or other encumbrance of
assets. The deposit of securities or cash or cash equivalents in
escrow in connection with the writing of covered call or put
options, respectively, is also not deemed to be a pledge or
encumbrance.
EMERGING MARKET ISSUERS
SELLING UNCOVERED PUT OR CALL OPTIONS
ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY
CONTRACTS
PARTICIPATING IN DIRECTED
BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF
GAINING CONTROL OF A COMPANY'S MANAGEMENT
MAKING SHORT SALES OF SECURITIES
</TABLE>
<TABLE>
RESTRICTIONS AND LIMITATIONS
<S> <C>
OPTIONS ON SECURITIES No more than 5% of the Fund's net assets will be invested in time
premiums on options on particular securities (as opposed to options on
indexes).
OTHER INVESTMENT COMPANIES - The Fund will not own more than 3% of the outstanding voting
securities of any investment company.
- No more than 5% of the Fund's net assets will be invested in
any single investment company.
- No more than 10% of the Fund's net assets will be invested in
securities of investment companies in the aggregate.
ILLIQUID SECURITIES - No more than 15% of the Fund's net assets will be invested in
illiquid securities.
INVESTMENT IN INSURANCE COMPANIES - The Fund will not purchase more than 10% of the total
outstanding voting stock of any insurance company (including foreign
insurance companies).
INVESTMENT IN SECURITIES ISSUED BY - Equity: The Fund will not purchase more than 5% of any class of
BROKERS, DEALERS, UNDERWRITERS AND stock of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such
company's total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets
will be invested in the securities of a single broker, dealer,
underwriter or investment adviser. The net payment obligation of
swap contracts where one of these types of companies is the
counterparty also counts for purposes of this restriction.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - Except for U.S. government securities, cash, and money market
instruments, the Fund will not invest in any one security to an
extent greater than 5 percentage points over that security's
weighting in the Fund's benchmark.
- The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in
securities of issuers in any one industry.
</TABLE>
109
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<TABLE>
DERIVATIVE INSTRUMENTS (OTHER THAN FOREIGN CURRENCY TRANSACTIONS)
<S> <C>
TYPES OF DERIVATIVES - Options, futures contracts and related options on securities
indexes.
- Long equity swap contracts: where the Fund pays a fixed rate
plus the negative performance, if any, and receives the positive
performance, if any, of an index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed
rate plus the negative performance, if any, and pays the positive
performance of an index or basket of securities.
- Contracts for differences: equity swaps that contain both long
and short equity components.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity futures, related options and
short equity swap contracts used to hedge against an equity risk
already generally present in the Fund.(17)
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the Fund may hedge market
risk (risk of not being invested in the market) by purchasing long
futures contracts or entering into long equity swap contracts to
obtain market exposure until such time as direct investments can be
made efficiently. Conversely, if the Fund receives or anticipates a
significant demand for cash redemptions, the Fund may sell futures
contracts or enter into short equity swap contracts, to allow the
Fund to dispose of securities in a more orderly fashion without the
Fund being exposed to leveraged loss exposure in the interim.
INVESTMENT - The Fund may use derivative instruments (particularly long
futures contracts, related options and long equity swap contracts) in
place of investing directly in securities. This will include using
equity derivatives to "equitize" cash balances held by the Fund.
Because a foreign equity derivative generally only provides the
return of a foreign market in local currency terms, the Fund will
often purchase a foreign currency forward in conjunction with using
equity derivatives to give the effect of investing directly. The
Fund may also use long derivatives for investment in conjunction with
short hedging transactions to adjust the weights of the Fund's
underlying equity portfolio to a level the Manager believes is the
optimal exposure to individual countries and equities. For example,
if the Manager expects a positive return forecast for a select group
of UK companies, but a negative return for the UK market as a whole,
then this Fund may overweight the select group of equities and reduce
exposure to the UK market by selling UK equity futures or enter into
a swap contract that is long a specific basket of securities and
short the UK market generally.
RISK MANAGEMENT - - The Fund may use equity futures, related options and equity
SYNTHETIC SALES AND PURCHASES swap contracts to adjust the weight of the Fund to a level the
manager believes is the optimal exposure to individual countries and
equities. Sometimes, such transactions are used as a precursor to
actual sales and purchases. For example, if the Fund held a large
proportion of stocks of a particular market and the Manager believed
that stocks of another market would outperform such stocks, the Fund
might use a short futures contract on an appropriate index (to
synthetically "sell" a portion of the Fund's portfolio) in
combination with a long futures contract on another index (to
synthetically "buy" exposure to that index). Long and short equity
swap contracts and contracts for differences may also be used for
these purposes. Often, a foreign currency forward will be used in
</TABLE>
(17) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to
specific exposure existing in the Fund (the specific stocks of that market
actually owned by the Fund). The Fund may also seek to remove specific exposure
(e.g., a single stock, small basket or more focused index of securities expected
to do poorly in an otherwise promising market) relative to general or broad
market exposure that exists in the Fund.
110
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<TABLE>
<S> <C>
conjunction with the long derivative position to create the effect of
investing directly. Equity derivatives (and corresponding currency
forwards) used to effect synthetic sales and purchases will generally
be unwound as actual portfolio securities are sold and purchased.
</TABLE>
<TABLE>
<S> <C>
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging
purposes.
- When long futures contracts and long equity swaps are used for
investment, the Fund will maintain an amount of cash or liquid
securities equal to the face value of all such long derivative
positions. However, for purposes of this restriction, if an existing
long equity exposure is reduced or eliminated by a short derivative
position, the combination of the long and short position will be
considered as cash available to cover a new long derivative exposure.
- The net long equity exposure of the Fund, including direct
investment in securities and long derivative positions, will not
exceed 100% of the Fund's net assets.
- Except when such instruments are used for bona fide hedging, no
more than 5% of the Fund's net assets will be committed to initial
margin on futures contracts and time premiums on related options.
- Counterparties used for OTC derivatives must have a long-term
debt rating of A or higher when the derivative is entered into.
Occasionally, short-term derivatives will be entered into with
counterparties that have only high short-term debt ratings.
</TABLE>
<TABLE>
FOREIGN CURRENCY TRANSACTIONS
<S> <C>
TYPES OF FOREIGN CURRENCY TRANSACTIONS - Buying and selling spot currencies.
- Forward foreign currency contracts.
- Currency futures contracts and related options.
- Options on currencies.
- Currency swap contracts.
USES OF FOREIGN CURRENCY
TRANSACTIONS
HEDGING - Traditional Hedging: The Fund may effect foreign currency
transactions - generally short forward or futures contracts -- to
hedge the risk of foreign currencies represented by its securities
investments back into the U.S. dollar. The Fund is not required to
hedge any of the currency risk obtained by investing in securities
denominated in foreign currencies.
- Anticipatory Hedging: When the Fund enters into a contract for
the purchase or anticipates the need to purchase a security
denominated in a foreign currency, it may "lock in" the U.S. dollar
price of the security by buying the foreign currency or through
currency forwards or futures.
- Proxy Hedging: The Fund may hedge the exposure of a given
foreign currency by using an instrument relating to a different
currency, which the Manager believes is highly correlated to the
currency being hedged.
INVESTMENT - The Fund may enter into currency forwards or futures contracts
in conjunction with entering into a futures contract on a foreign
index in order to create synthetic foreign currency denominated
securities.
</TABLE>
111
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<TABLE>
<S> <C>
RISK MANAGEMENT - Subject to the limitations described below, the Fund may use
foreign currency transactions for risk management, which will permit
the Fund to have foreign currency exposure that is significantly
different than the currency exposure represented by its portfolio
investments. This may include long exposure to particular currencies
beyond the amount of the Fund's investment in securities denominated
in that currency.
LIMITATIONS OF FOREIGN CURRENCY TRANSACTIONS - The Fund will typically hedge less than 30% of the foreign
currency exposure represented by its investments in foreign-currency
denominated securities.
- The Fund's aggregate net foreign currency exposure, assuming
full offset of long and short positions, will not exceed 100% of the
Fund's net assets denominated in foreign currencies, though the
currency exposure of the Fund may differ substantially from the
currencies in which the Fund's securities are denominated.
- The Fund will not be net short in any foreign currency, except
that, when the Fund is attempting to hedge all or nearly all of its
exposure to a particular currency, changes in the market value of
foreign equities may cause the Fund to be temporarily net short in
the currency. Such temporary net short positions will not exceed 1%
of the Fund's assets.
</TABLE>
112
<PAGE> 255
GMO CURRENCY HEDGED INTERNATIONAL CORE FUND
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
<TABLE>
PERMITTED INVESTMENTS
<S> <C>
EQUITY SECURITIES: - The Fund will have more than 65% of its total assets invested
common stocks in or exposed to(18) Equity Securities and Other Equity Securities.
convertible bonds - The Fund invests primarily in equity securities chosen from
preferred stocks among the 3500 companies in developed markets that are listed in
warrants or rights the MSCI Perspective Publication, which includes issuers in the
MSCI EAFE Index, smaller companies and Canadian companies.
OTHER EQUITY SECURITIES:
depository receipts: ADRs, GDRs, EDRs
foreign issues traded in the U.S. and abroad
investment companies (open & closed end)
illiquid securities
144A securities
restricted securities
equity futures and related options
exchange-traded and OTC options
equity swap contracts
contracts for differences
repurchase agreements
FIXED INCOME SECURITIES:
long and medium-term corporate
and government bonds
non-convertible preferred stock
FOREIGN CURRENCY TRANSACTIONS - Fund may invest in spot currency transactions, forward foreign
currency contracts, currency swap contracts, options on currencies,
currency futures and related options.
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have greater than 5% of its net
Any short-term assets will be invested in assets exposed to cash and money market instruments. This
cash or high quality money market limitation does not include cash and money market instruments in
instruments including securities issued by margin accounts or otherwise covering exposure achieved through
the U.S. government and agencies thereof, derivative instruments ("equitized cash").
bankers' acceptances, commercial paper,
bank certificates of deposit and repurchase
agreements
</TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
<TABLE>
<S> <C>
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its net
assets from banks for the payment of redemptions or settlement of
securities transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of portfolio
investments.
</TABLE>
(18) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
113
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<TABLE>
<S> <C>
MAKING LOANS - Except that purchasing of debt obligations, repurchase agreements
and engaging in securities lending will not be considered making loans
for this purpose. The Fund may loan securities valued at up to 25% of
its total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING FUND - Except that collateral arrangements with respect to swap
ASSETS agreements, the writing of options, stock index, interest rate, currency
or other futures contracts, options on futures contracts and collateral
arrangements with respect to initial and variation margin are not deemed
to be a pledge or other encumbrance of assets. The deposit of securities
or cash or cash equivalents in escrow in connection with the writing of
covered call or put options, respectively, is also not deemed to be a
pledge or encumbrance.
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S MANAGEMENT
MAKING SHORT SALES OF SECURITIES
EMERGING MARKET ISSUERS
</TABLE>
<TABLE>
RESTRICTIONS AND LIMITATIONS
<S> <C>
OPTIONS ON SECURITIES - No more than 5% of the Fund's net assets will be invested in
time premiums on options on particular securities (as opposed to
options on indexes).
OTHER INVESTMENT COMPANIES - The Fund will not own more than 3% of the outstanding voting
securities of any investment company.
- No more than 5% of the Fund's net assets will be invested in
any single investment company.
- No more than 10% of the Fund's net assets will be invested in
securities of investment companies in the aggregate.
ILLIQUID SECURITIES - No more than 15% of the Funds net assets will be invested in
illiquid securities.
INVESTMENT IN INSURANCE COMPANIES - The Fund will not purchase more than 10% of the total
outstanding voting stock of any insurance company (including foreign
insurance companies).
INVESTMENT IN SECURITIES ISSUED BY - Equity: The Fund will not purchase more than 5% of any class of
BROKERS, DEALERS, UNDERWRITERS AND stock of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such
company's total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets
will be invested in the securities of a single broker, dealer,
underwriter or investment adviser. The net payment obligation of
swap contracts where one of these types of companies is the
counterparty also counts for purposes of this restriction.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
</TABLE>
<TABLE>
DIVERSIFICATION/CONCENTRATION
<S> <C>
DIVERSIFICATION - Except for U.S. government securities, cash, and money market
instruments, the Fund will not invest in any one security to an
extent greater than 5 percentage points over that security's
weighting in the Fund's benchmark.
- The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in
securities of issuers in any one industry.
</TABLE>
DERIVATIVE INSTRUMENTS (OTHER THAN FOREIGN CURRENCY TRANSACTIONS)
114
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<TABLE>
<S> <C>
TYPES OF DERIVATIVES - Options, futures contracts and related options on
securities indexes.
- Long equity swap contracts: where the Fund pays a fixed
rate plus the negative performance, if any, and receives the
positive performance, if any, of an index or basket of
securities.
- Short equity swap contracts: where the Fund receives a
fixed rate plus the negative performance, if any, and pays the
positive performance of an index or basket of securities.
- Contracts for differences: equity swaps that contain both
a long and short equity component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity futures, related
options and short equity swap contracts used to hedge against
an equity risk already generally present in the Fund.(19)
- Anticipatory Hedging: If the Fund receives or
anticipates significant cash purchase transactions, the Fund
may hedge market risk (risk of not being invested in the
market) by purchasing long futures contracts or entering into
long equity swap contracts to obtain market exposure until such
time as direct investments can be made efficiently.
Conversely, if the Fund receives or anticipates a significant
demand for cash redemptions, the Fund may sell futures
contracts or enter into short equity swap contracts, to allow
the Fund to dispose of securities in a more orderly fashion
without the Fund being exposed to leveraged loss exposure in
the interim.
</TABLE>
(19) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to
specific exposure existing in the Fund (the specific stocks of that market
actually owned by the Fund). The Fund may also seek to remove specific exposure
(e.g., a single stock, small basket or more focused index of securities expected
to do poorly in an otherwise promising market) relative to general or broad
market exposure that exists in the Fund.
115
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<TABLE>
<S> <C>
INVESTMENT - The Fund may use derivative instruments (particularly
long futures contracts, related options and long equity swap
contracts) in place of investing directly in securities. This
will include using equity derivatives to "equitize" cash
balances held by the Fund. Because a foreign equity derivative
generally only provides the return of a foreign market in local
currency terms, the Fund will often purchase a foreign currency
forward in conjunction with using equity derivatives to give
the effect of investing directly. The Fund may also use long
derivatives for investment in conjunction with short hedging
transactions to adjust the weights of the Fund's underlying
equity portfolio to a level the Manager believes is the optimal
exposure to individual countries and equities. For example, if
the Manager expects a positive return forecast for a select
group of UK companies, but a negative return for the UK market
as a whole, then this Fund may overweight the select group of
equities and reduce exposure to the UK market by selling UK
equity futures or enter into a swap contract that is long a
specific basket of securities and short the UK market generally.
RISK MANAGEMENT - - The Fund may use equity futures, related options and
SYNTHETIC SALES AND PURCHASES equity swap contracts to adjust the weight of the Fund to a
level the manager believes is the optimal exposure to
individual countries and equities. Sometimes, such
transactions are used as a precursor to actual sales and
purchases. For example, if the Fund held a large proportion of
stocks of a particular market and the Manager believed that
stocks of another market would outperform such stocks, the Fund
might use a short futures contract on an appropriate index (to
synthetically "sell" a portion of the Fund's portfolio) in
combination with a long futures contract on another index (to
synthetically "buy" exposure to that index). Long and short
equity swap contracts and contracts for differences may also be
used for these purposes. Often, a foreign currency forward
will be used in conjunction with the long derivative position
to create the effect of investing directly. Equity derivatives
(and corresponding currency forwards) used to effect synthetic
sales and purchases will generally be unwound as actual
portfolio securities are sold and purchased.
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging
purposes.
- When long futures contracts and long equity swaps are
used for investment, the Fund will maintain an amount of cash
or liquid securities equal to the face value of all such long
derivative positions. However, for purposes of this
restriction, if an existing long equity exposure is reduced or
eliminated by a short derivative position, the combination of
the long and short position will be considered as cash
available to cover a new long derivative exposure.
- The net long equity exposure of the Fund, including
direct investment in securities and long derivative positions,
will not exceed 100% of the Fund's net assets.
- Except when such instruments are used for bona fide
hedging, no more than 5% of the Fund's net assets will be
committed to initial margin on futures contracts and time
premiums on related options.
Counterparties used for OTC-derivatives must have a long-term
debt rating of A or higher when the derivative is entered
into. Occasionally, short-term derivatives will be entered
into with counterparties that have only high short-term debt
ratings.
</TABLE>
116
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<TABLE>
FOREIGN CURRENCY TRANSACTIONS
<S> <C>
FOREIGN CURRENCY STRATEGY - The essential currency strategy of the Fund is to
replicate the stock and currency selection of GMO International
Core Fund and to layer upon that a hedge (i.e. short positions)
with respect to each currency represented in the EAFE index, at
the level that such currencies are represented in the index.
This means that, if the Fund is under-weighted relative to EAFE
with respect to securities denominated in a particular
currency, the index currency hedging will result in a net short
position with respect to that currency. Generally, such net
short positions will be largely offset by net long positions in
other highly correlated currencies or an over-weight in
securities denominated in such correlated currencies. As set
forth under "Limitations on Foreign Currency Transactions"
below, the aggregate amount of "true" net short currency
positions (i.e., those not offset by positions in highly
correlated currencies) will not exceed 10% of the Fund's assets.
- The Fund's currency hedging strategy will also mean that,
despite the Fund's name, the Fund will not generally hedge all
of the foreign currency exposure represented by the portfolio
securities it owns. In a case where the Fund is over-weighted
relative to EAFE with respect to securities denominated in a
particular currency - or if GMO's international core currency
strategy is utilizing an active exposure to a particular
currency beyond that represented by securities denominated in
that currency - the Fund's index currency hedge will not
completely eliminate exposure to the currency. Because of its
name, the Fund is required to hedge at least 65% of the
currency exposure represented by portfolio securities it owns.
TYPES OF FOREIGN CURRENCY TRANSACTIONS - Buying and selling spot currencies.
- Forward foreign currency contracts.
- Currency futures contracts and related options.
- Options on currencies.
- Currency swap contracts.
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING - Traditional Hedging: The Fund may effect foreign currency
transactions - generally short forward or futures contracts -
to hedge the risk of foreign currencies represented by its
securities investments back into the U.S. dollar. The Fund is
not required to hedge any of the currency risk obtained by
investing in securities denominated in foreign currencies.
- Anticipatory Hedging: When the Fund enters into a
contract for the purchase or anticipates the need to purchase a
security denominated in a foreign currency, it may "lock in"
the U.S. dollar price of the security by buying the foreign
currency or through currency forwards or futures.
- Proxy Hedging: The Fund may hedge the exposure of a given
foreign currency by using an instrument relating to a different
currency, which the Manager believes is highly correlated to
the currency being hedged.
INVESTMENT - The Fund may enter into currency forwards or futures
contracts in conjunction with entering into a futures contract
on a foreign index in order to create synthetic foreign
currency denominated securities.
RISK MANAGEMENT - Subject to the limitations described below, the Fund may
use foreign currency transactions for risk management, which
will permit the Fund to have foreign currency exposure that is
significantly different than the currency exposure represented
by its portfolio investments. This may include long exposure
to particular currencies beyond the amount of the Fund's
investment in securities denominated in that currency.
</TABLE>
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<TABLE>
<S> <C>
LIMITATIONS OF FOREIGN CURRENCY TRANSACTIONS - The Fund will maintain short currency positions with
respect to at least 65% of the foreign currency exposure
represented by the common stocks owned by the Fund.
- The Fund's aggregate net foreign currency exposure,
assuming full offset of long and short positions, will not
exceed 100% of the Fund's net assets denominated in foreign
currencies, though the currency exposure of the Fund may
differ substantially from the currencies in which the Fund's
securities are denominated.
- The Fund will generally hedge currency based on benchmark
weightings (rather than Fund investments), and thus will
sometimes have a net short position with respect to certain
foreign currencies. Such net short positions in the aggregate
will not exceed 10% of the Fund's assets.
</TABLE>
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GMO FOREIGN FUND
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
<TABLE>
PERMITTED INVESTMENTS
<S> <C>
EQUITY SECURITIES: - At least 65% of total assets will be invested in common stocks
common stocks (including dividend paying) and securities convertible into common stocks, warrants and rights
convertible bonds of non-U.S. issuers.
convertible preferred stocks
warrants or rights
OTHER EQUITY SECURITIES:
depository receipts: ADRs, GDRs, EDRs
foreign issues traded in the U.S. and abroad
investment companies (open & closed end)
illiquid securities
144A securities
private placements and other restricted
securities
equity futures and related options
exchange-traded and OTC-options on
securities and indexes (including
writing covered options)
emerging market issuers
repurchase agreements
FIXED INCOME SECURITIES: - Fund will not invest more than 10% of its assets invested in
long and medium-term corporate and Fixed Income Securities.
government bonds
preferred stock
lower-rated bonds
- For hedging purposes, the Fund may invest in spot currency
FOREIGN CURRENCY TRANSACTIONS transactions, forward foreign currency contracts, options on
currencies, currency futures and related options.
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have greater than 5% of its net
assets exposed to cash and money market instruments. This
limitation does not include cash and money market instruments in
margin accounts or otherwise covering exposure achieved through
derivative instruments ("equitized cash").
</TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
<TABLE>
<S> <C>
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its
net assets from banks for the payment of redemptions or settlement of
securities transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of portfolio
investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase agreements
and engaging in securities lending will not be considered making
loans for this purpose. The Fund may loan securities valued at up to
one-third of its total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING FUND - Except that collateral arrangements with respect to swap
ASSETS agreements, the writing of options, stock index, interest rate, currency
or other futures contracts, options on futures contracts and collateral
arrangements with respect to initial and variation margin are not deemed
to be a pledge or other encumbrance of assets. The deposit
</TABLE>
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<TABLE>
<S> <C>
of securities or cash or cash equivalents in escrow in connection with the
writing of covered call or put options, respectively, is also not deemed to
be a pledge or encumbrance.
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING DIRECTLY IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S MANAGEMENT
MAKING SHORT SALES OF SECURITIES
</TABLE>
<TABLE>
RESTRICTIONS AND LIMITATIONS
<S> <C>
OTHER INVESTMENT COMPANIES - The Fund will not own more than 3% of the outstanding voting
securities of any investment company.
- No more than 5% of the Fund's net assets will be invested in any
single investment company.
- No more than 10% of the Fund's net assets will be invested in
securities of investment companies in the aggregate.
ILLIQUID SECURITIES - No more than 10% of the Fund's net assets will be invested in
illiquid securities.
EMERGING MARKET ISSUERS - The Fund will not invest more than 20% of its assets in securities
of issuers in newly industrialized countries of the type invested in by
the Emerging Markets Fund.
LOWER-RATED SECURITIES - The Fund will not invest more than 5% of its assets in lower-rated
securities (junk bonds).
INVESTMENT IN INSURANCE COMPANIES - The Fund will not purchase more than 10% of the total outstanding
voting stock of any insurance company (including foreign insurance
companies).
INVESTMENT IN SECURITIES ISSUED BY - Equity: The Fund will not purchase more than 5% of any class of
BROKERS, DEALERS, UNDERWRITERS AND stock of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such company's
total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets will
be invested in the securities of a single broker, dealer, underwriter or
investment adviser.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent fiscal
year.
</TABLE>
<TABLE>
DIVERSIFICATION/CONCENTRATION
<S> <C>
DIVERSIFICATION - Except for U.S. government securities, cash, and money market
instruments, the Fund will not invest in any one security to an extent
greater than 5 percentage points over that security's weighting in the
Fund's benchmark.
- The Fund will be invested in the securities of at least 125 issuers.
CONCENTRATION - At least 65% of the Fund's total assets will be invested in
securities principally traded in the securities markets of at least three
countries other than the United States.
- The Fund will not invest more than 25% of its total assets in securities
of issuers in any one industry.
</TABLE>
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GMO INTERNATIONAL SMALL COMPANIES FUND
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
<TABLE>
<S> <C>
PERMITTED INVESTMENTS
- At least 65% of the Fund's assets will be invested in or
EQUITY SECURITIES: exposed to(20) common stocks of small capitalization foreign
common stocks companies.
convertible securities
preferred stocks
warrants or rights
OTHER EQUITY SECURITIES:
depository receipts: ADRs, GDRs, EDRs
foreign issues traded in the U.S. and abroad
investment companies (open & closed-end)
illiquid securities
144A securities
restricted securities
equity futures and related options
exchange-traded and OTC options on
securities and indexes (including
writing covered options)
equity swap contracts
contracts for differences
repurchase agreements
FIXED INCOME SECURITIES:
long and medium-term corporate
and government bonds
non-convertible preferred stock
FOREIGN CURRENCY TRANSACTIONS - Fund may invest in spot currency transactions, forward
foreign currency contracts, currency swap contracts, options on
currencies, currency futures and related options.
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have greater than 5% of its net
Any short-term assets will be invested in assets exposed to cash and money market instruments. This
cash or high quality money market instruments limitation does not include cash and money market instruments
including securities issued by the U.S. in margin accounts or otherwise held against exposure achieved
government and agencies thereof, bankers' through derivative instruments ("equitized cash").
acceptances, commercial paper, bank
certificates of deposit, time deposits and
repurchase agreements
</TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
<TABLE>
<S> <C>
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its net
assets from banks for the payment of redemptions or settlement of
securities transactions, but not as a leveraged investment strategy.
</TABLE>
--------------
(20) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
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<TABLE>
<S> <C>
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of
portfolio investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase agreements
and engaging in securities lending will not be considered making
loans for this purpose. The Fund may loan securities valued at up
to one-third of its total assets.
PLEDGING, HYPOTHECATING OR MORTGAGING - Except that collateral arrangements with respect to swap
FUND ASSETS agreements, the writing of options, stock index, interest rate,
currency or other futures contracts, options on futures contracts
and collateral arrangements with respect to initial and variation
margin are not deemed to be a pledge or other encumbrance of
assets. The deposit of securities or cash or cash equivalents in
escrow in connection with the writing of covered call or put
options, respectively, is also not deemed to be a pledge or
encumbrance.
EMERGING MARKET ISSUERS
SELLING UNCOVERED PUT OR CALL OPTIONS
ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY
CONTRACTS PARTICIPATING IN DIRECTED
BROKERAGE ARRANGEMENTS MAKING
INVESTMENTS FOR THE PURPOSE OF GAINING
CONTROL OF A COMPANY'S MANAGEMENT
MAKING SHORT SALES OF SECURITIES
</TABLE>
<TABLE>
RESTRICTIONS AND LIMITATIONS
<S> <C>
OPTIONS ON SECURITIES - No more than 5% of the Fund's net assets will be invested in
time premiums on options on particular securities (as opposed to
options on indexes)
OTHER INVESTMENT COMPANIES - The Fund will not own more than 3% of the outstanding voting
securities of any investment company.
- No more than 5% of the Fund's net assets will be invested in
any single investment company.
- No more than 10% of the Fund's net assets will be invested in
securities of investment companies in the aggregate.
ILLIQUID SECURITIES - No more than 15% of the Fund's net assets will be invested in
illiquid securities.
INVESTMENT IN INSURANCE COMPANIES - The Fund will not purchase more than 10% of the total
outstanding voting stock of any insurance company (including foreign
insurance companies).
INVESTMENT IN SECURITIES ISSUED BY
BROKERS, DEALERS, UNDERWRITERS AND - Equity: The Fund will not purchase more than 5% of any class of
INVESTMENT ADVISERS stock of a broker, dealer, underwriter or investment adviser.
- Debt: The Fund may not purchase more than 10% of any such
company's total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets
will be invested in the securities of a single broker, dealer,
underwriter or investment adviser. The net payment obligation of
swap contracts where one of these types of companies is the
counterparty also counts for purposes of this restriction.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
</TABLE>
<TABLE>
DIVERSIFICATION/CONCENTRATION
<S> <C>
DIVERSIFICATION - Except for U.S. government securities, cash, and money market
instruments, the Fund will not invest in any one security to an extent
greater than 5 percentage points over that security's weighting in the
Fund's benchmark.
- The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in
securities of issuers in any one industry.
</TABLE>
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DERIVATIVE INSTRUMENTS (OTHER THAN FOREIGN CURRENCY TRANSACTIONS)
<TABLE>
<S> <C>
TYPES OF DERIVATIVES - Options, futures contracts and related options on securities
indexes.
- Long equity swap contracts: where the Fund pays a fixed rate
plus the negative performance, if any, and receives the positive
performance, if any, of an index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed
rate plus the negative performance, if any, and pays the positive
performance of an index or basket of securities.
- Contracts for differences: equity swaps that contain both a
long and short equity component.
</TABLE>
<TABLE>
<S> <C>
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity futures, related options and
short equity swap contracts used to hedge against an equity risk
already generally present in the Fund.(21)
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the Fund may hedge market
risk (risk of not being invested in the market) by purchasing long
futures contracts or entering into long equity swap contracts to
obtain market exposure until such time as direct investments can be
made efficiently. Conversely, if the Fund receives or anticipates a
significant demand for cash redemptions, the Fund may sell futures
contracts or enter into short equity swap contracts, to allow the
Fund to dispose of securities in a more orderly fashion without the
Fund being exposed to leveraged loss exposure in the interim.
</TABLE>
<TABLE>
<S> <C>
INVESTMENT - The Fund may use derivative instruments (particularly long
futures contracts, related options and long equity swap contracts) in
place of investing directly in securities. This will include using
equity derivatives to "equitize" cash balances held by the Fund.
Because a foreign equity derivative generally only provides the
return of a foreign market in local currency terms, the Fund will
often purchase a foreign currency forward in conjunction with using
equity derivatives to give the effect of investing directly. The
Fund may also use long derivatives for investment in conjunction with
short hedging transactions to adjust the weights of the Fund's
underlying equity portfolio to a level the Manager believes is the
optimal exposure to individual countries and equities. For example,
if the Manager expects a positive return forecast for a select group
of UK companies, but a negative return for the UK market as a whole,
then this Fund may overweight the select group of equities and reduce
exposure to the UK market by selling UK equity futures or enter a
swap contract that is long a specific basket of securities and short
the UK market generally.
RISK MANAGEMENT - - The Fund may use equity futures, related options and equity
SYNTHETIC SALES AND PURCHASES swap contracts to adjust the weight of the Fund to a level the
manager believes is the optimal exposure to individual countries and
equities. Sometimes, such transactions are used as a precursor to
actual sales and purchases. For example, if the Fund held a large
proportion of stocks of a particular market and the Manager believed
that stocks of another market would outperform such stocks, the Fund
might use a short futures contract on an appropriate index (to
synthetically "sell" a portion of the Fund's portfolio) in
combination with a long futures contract on another index (to
synthetically "buy" exposure to that index). Long and short equity
swap contracts and contracts for differences may also be used for
these purposes. Often, a foreign currency forward will be used in
</TABLE>
--------------
(21) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to
specific exposure existing in the Fund (the specific stocks of that market
actually owned by the Fund). The Fund may also seek to remove specific exposure
(e.g., a single stock, small basket or more focused index of securities expected
to do poorly in an otherwise promising market) relative to general or broad
market exposure that exists in the Fund.
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<TABLE>
<S> <C>
conjunction with the long derivative position to create the effect of
investing directly. Equity derivatives (and corresponding currency
forwards) used to effect synthetic sales and purchases will generally
be unwound as actual portfolio securities are sold and purchased.
</TABLE>
<TABLE>
<S> <C>
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging
purposes.
- When long futures contracts and long equity swaps are used for
investment, the Fund will maintain an amount of cash or liquid
securities equal to the face value of all such long derivative
positions. However, for purposes of this restriction, if an existing
long equity exposure is reduced or eliminated by a short derivative
position, the combination of the long and short position will be
considered as cash available to cover a new long derivative exposure.
- The net long equity exposure of the Fund, including direct
investment in securities and long derivative positions, will not
exceed 100% of the Fund's net assets.
- Except when such instruments are used for bona fide hedging, no
more than 5% of the Fund's net assets will be committed to initial
margin on futures contracts and time premiums on related options.
- Counterparties used for OTC derivatives must have a long-term
debt rating of A or higher when the derivative is entered into.
Occasionally, short-term derivatives will be entered into with
counterparties that have only high short-term debt ratings.
</TABLE>
<TABLE>
<S> <C>
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS - Buying and selling spot currencies.
- Forward foreign currency contracts.
- Currency futures contracts and related options.
- Options on currencies.
- Currency swap contracts.
USES OF FOREIGN CURRENCY
TRANSACTIONS
HEDGING - Traditional Hedging: The Fund may effect foreign currency
transactions - generally short forward or futures contracts - to
hedge the risk of foreign currencies represented by its securities
investments back into the U.S. dollar. The Fund is not required to
hedge any of the currency risk obtained by investing in securities
denominated in foreign currencies.
- Anticipatory Hedging: When the Fund enters into a contract for
the purchase or anticipates the need to purchase a security
denominated in a foreign currency, it may "lock in" the U.S. dollar
price of the security by buying the foreign currency or through
currency forwards or futures.
- Proxy Hedging: The Fund may hedge the exposure of a given
foreign currency by using an instrument relating to a different
currency, which the Manager believes is highly correlated to the
currency being hedged.
</TABLE>
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<TABLE>
<S> <C>
INVESTMENT - The Fund may enter into currency forwards or futures contracts
in conjunction with entering into a futures contract on a foreign
index in order to create synthetic foreign currency denominated
securities.
RISK MANAGEMENT - Subject to the limitations described below, the Fund may use
foreign currency transactions for risk management, which will permit
the Fund to have foreign currency exposure that is significantly
different than the currency exposure represented by its portfolio
investments. This may include long exposure to particular currencies
beyond the amount of the Fund's investment in securities denominated
in that currency.
LIMITATIONS OF FOREIGN CURRENCY - The Fund's aggregate net foreign currency exposure, assuming
TRANSACTIONS full offset of long and short positions, will not exceed 100% of the
Fund's net assets denominated in foreign currencies, though the
currency exposure of the Fund may differ substantially from the
currencies in which the Fund's securities are denominated.
- The Fund will not be net short in any foreign currency, except
that, when the Fund is attempting to hedge all or nearly all of its
exposure to a particular currency, changes in the market value of
foreign equities may cause the Fund to be temporarily net short in
the currency. Such temporary net short positions will not exceed 1%
of the Fund's assets.
</TABLE>
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GMO JAPAN FUND
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
PERMITTED INVESTMENTS
EQUITY SECURITIES: - At least 90% of the net
common stocks assets of the Fund will be
convertible securities invested in or exposed to(22)
preferred stock Japanese Securities.(23)
warrants or rights
OTHER EQUITY SECURITIES:
depository receipts: ADRs, GDRs, EDRs
foreign issues traded in the U.S. and
abroad
investment companies (open & closed-end)
illiquid securities
144A securities
restricted securities
equity futures and related options
exchange-traded and OTC options on
securities and indexes (including
writing covered options)
equity swap contracts
contracts for differences
repurchase agreements
FIXED INCOME SECURITIES:
long and medium-term corporate and
government bonds
non-convertible preferred stock
short-term Japanese government debt
securities (or other short term prime
obligations)
FOREIGN CURRENCY TRANSACTIONS - Fund may invest in spot
currency transactions,
forward foreign currency
contracts, currency swap
contracts, options on
currencies, currency futures
and related options.
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally
Any short-term assets will be invested in have greater than 5% of its
cash or high quality money market net assets exposed to cash
instruments including securities issued and money market instruments.
by the U.S. government and agencies This limitation does not
thereof, bankers' acceptances, include cash and money market
commercial paper, bank certificates of instruments in margin
deposit and repurchase agreements accounts or otherwise
covering exposure achieved
through derivative
instruments ("equitized
cash").
--------------
(22) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
(23) Japanese Securities are securities issued by entities that are
organized under the laws of Japan and that either have 50% or more of their
assets in Japan or derive 50% or more of their revenues from Japan ("Japanese
Companies").
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PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term
credits necessary for
clearance of transactions.
BORROWING MONEY - Except that the Fund may
temporarily borrow up to 10%
of its net assets from banks
for the payment of
redemptions or settlement of
securities transactions, but
not as a leveraged investment
strategy.
UNDERWRITING SECURITIES - Except to the extent that
the Fund is deemed an
underwriter for securities
law purposes in connection
with disposition of portfolio
investments.
MAKING LOANS - Except that purchasing debt
obligations, repurchase
agreements and engaging in
securities lending will not
be considered making loans
for this purpose. The Fund
may loan securities valued at
up to 25% of its total
assets.
PLEDGING, HYPOTHECATING OR - Except that collateral
MORTGAGING FUND ASSETS arrangements with respect to
swap agreements, the writing
of options, stock index,
interest rate, currency or
other futures contracts,
options on futures contracts
and collateral arrangements
with respect to initial and
variation margin are not
deemed to be a pledge or
other encumbrance of assets.
The deposit of securities or
cash or cash equivalents in
escrow in connection with the
writing of covered call or
put options, respectively, is
also not deemed to be a
pledge or encumbrance.
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
MAKING SHORT SALES OF SECURITIES
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES - No more than 5% of the
Fund's net assets will be
invested in time premiums on
options on particular
securities (as opposed to
options on indexes).
OTHER INVESTMENT COMPANIES - The Fund will not own more
than 3% of the outstanding
voting securities of any
investment company.
- No more than 5% of the
Fund's net assets will be
invested in any single
investment company.
- No more than 10% of the
Fund's net assets will be
invested in securities of
investment companies in the
aggregate.
ILLIQUID SECURITIES - No more than 15% of the
Fund's net assets will be
invested in illiquid
securities.
INVESTMENT IN INSURANCE COMPANIES - The Fund will not purchase
more than 10% of the total
outstanding voting stock of
any insurance company
(including foreign insurance
companies).
INVESTMENT IN SECURITIES ISSUED BY
BROKERS, DEALERS, UNDERWRITERS AND - Equity: The Fund will not
INVESTMENT ADVISERS purchase more than 5% of any
class of stock of a broker,
dealer, underwriter or
investment adviser.
- Debt: The Fund may not
purchase more than 10% of any
such company's total
outstanding debt in the
aggregate.
- Investment Limits: No more
than 5% of the Fund's net
assets will be invested in
the securities of a single
broker, dealer, underwriter
or investment adviser. The
net payment obligation of
swap contracts where one of
these types of companies is
the counterparty also counts
for purposes of this
restriction.
This policy does not apply to
companies that derived less
than 15% of revenues from
"securities-related
businesses" during the most
recent fiscal year.
DIVERSIFICATION/CONCENTRATION
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<PAGE> 270
DIVERSIFICATION - Except for U.S. government
securities, cash, and money
market instruments, the Fund
will not invest in any one
security to an extent greater
than 5 percentage points over
that security's weighting in
the Fund's benchmark.
- The Fund will not purchase
more than 10% of the
outstanding securities of any
issuer.
CONCENTRATION - The Fund will not invest
more than 25% of its total
assets in securities of
issuers in any one industry.
DERIVATIVE INSTRUMENTS (OTHER THAN FOREIGN CURRENCY TRANSACTIONS)
TYPES OF DERIVATIVES - Options, futures contracts
and related options on
securities indexes.
- Long equity swap contracts:
where the Fund pays a fixed
rate plus the negative
performance, if any, and
receives the positive
performance, if any, of an
index or basket of
securities.
- Short equity swap
contracts: where the Fund
receives a fixed rate plus
the negative performance, if
any, and pays the positive
performance of an index or
basket of securities.
- Contracts for differences:
equity swaps that contain
both a long and short equity
component.
USES OF DERIVATIVES
128
<PAGE> 271
HEDGING - Traditional Hedging: Short
equity futures, related
options and short equity swap
contracts used to hedge
against an equity risk
already generally present in
the Fund.(24)
- Anticipatory Hedging: If
the Fund receives or
anticipates significant cash
purchase transactions, the
Fund may hedge market risk
(risk of not being invested
in the market) by purchasing
long futures contracts or
entering into long equity
swap contracts to obtain
market exposure until such
time as direct investments
can be made efficiently.
Conversely, if the Fund
receives or anticipates a
significant demand for cash
redemptions, the Fund may
sell futures contracts or
enter into short equity swap
contracts, to allow the Fund
to dispose of securities in a
more orderly fashion without
the Fund being exposed to
leveraged loss exposure in
the interim.
INVESTMENT - The Fund may use derivative
instruments (particularly
long futures contracts,
related options and long
equity swap contracts) in
place of investing directly
in securities. This will
include using equity
derivatives to "equitize"
cash balances held by the
Fund. Because a foreign
equity derivative generally
only provides the return of a
foreign market in local
currency terms, the Fund will
often purchase a foreign
currency forward in
conjunction with using equity
derivatives to give the
effect of investing directly.
RISK MANAGEMENT - - The Fund may use equity
SYNTHETIC SALES AND PURCHASES futures, related options and
equity swap contracts to
adjust the weight of the Fund
to a level the manager
believes is the optimal
exposure to individual
equities or groups of
equities. Sometimes, such
transactions are used as a
precursor to actual sales and
purchases. For example, if
the Fund held a large
proportion of stocks of a
particular type and the
Manager believed that stocks
of another type would
outperform such stocks, the
Fund might use a short
futures contract on an
appropriate index (to
synthetically "sell" a
portion of the Fund's
portfolio) in combination
with a long futures contract
on another index (to
synthetically "buy" exposure
to that index). Long and
short equity swap contracts
and contracts for differences
may also be used for these
purposes. Often, a foreign
currency forward will be used
in conjunction with the long
derivative position to create
the effect of investing
directly. Equity derivatives
(and corresponding currency
forwards) used to effect
synthetic sales and purchases
will generally be unwound as
actual portfolio securities
are sold and purchased.
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the
use of derivatives for
hedging purposes.
- When long futures contracts
and long equity swaps are
used for investment, the Fund
will maintain an amount of
cash or liquid securities
equal to the face value of
all such long derivative
positions. However, for
purposes of this restriction,
if an existing long equity
exposure is reduced or
eliminated by a short
derivative position, the
combination of the long and
short position will be
considered as cash available
to cover a new long
derivative exposure.
- The net long equity
exposure of the Fund,
including direct investment
in securities and long
derivative positions, will
not exceed 100% of the Fund's
net assets.
- Except when such
instruments are used for bona
fide hedging, no more than 5%
of the Fund's net assets will
be committed to initial
margin on futures contracts
and time premiums on related
options.
- Counterparties used for OTC
derivatives must have a
long-term debt rating of A or
higher when the derivative is
entered into. Occasionally,
short-term derivatives will
be entered into with
counterparties that have only
high short-term debt ratings.
------------------
(24) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to
specific exposure existing in the Fund (the specific stocks of that
market actually owned by the Fund). The Fund may also seek to remove
specific exposure (e.g., a single stock, small basket or more focused
index of securities expected to do poorly in an otherwise promising
market) relative to general or broad market exposure that exists in the
Fund.
129
<PAGE> 272
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY
TRANSACTIONS - Buying and selling spot
currencies.
- Forward foreign currency
contracts.
- Currency futures contracts
and related options.
- Options on currencies.
- Currency swap contracts.
USES OF FOREIGN CURRENCY
TRANSACTIONS
HEDGING - Traditional Hedging: The
Fund may effect foreign
currency transactions -
generally short forward or
futures contracts - to hedge
the risk of foreign
currencies represented by its
securities investments back
into the U.S. dollar. The
Fund is not required to hedge
any of the currency risk
obtained by investing in
securities denominated in
foreign currencies.
- Anticipatory Hedging: When
the Fund enters into a
contract for the purchase or
anticipates the need to
purchase a security
denominated in a foreign
currency, it may "lock in"
the U.S. dollar price of the
security by buying the
foreign currency or through
currency forwards or futures.
- Proxy Hedging: The Fund may
hedge the exposure of a given
foreign currency by using an
instrument relating to a
different currency, which the
Manager believes is highly
correlated to the currency
being hedged.
INVESTMENT - The Fund may enter into
currency forwards or futures
contracts in conjunction with
entering into a futures
contract on a foreign index
in order to create synthetic
foreign currency denominated
securities.
RISK MANAGEMENT - Subject to the limitations
described below, the Fund may
use foreign currency
transactions for risk
management, which will permit
the Fund to have foreign
currency exposure that is
significantly different than
the currency exposure
represented by its portfolio
investments. This may include
long exposure to particular
currencies beyond the amount
of the Fund's investment in
securities denominated in
that currency.
LIMITATIONS OF FOREIGN CURRENCY - The Fund's aggregate net
TRANSACTIONS foreign currency exposure,
assuming full offset of long
and short positions, will not
exceed 100% of the Fund's net
assets denominated in foreign
currencies, though the
currency exposure of the Fund
may differ substantially from
the currencies in which the
Fund's securities are
denominated.
- The Fund will not be net
short in any foreign
currency, except that when
the Fund is attempting to
hedge all or nearly all of
its exposure to a particular
currency, changes in the
market value of foreign
equities may cause the Fund
to be temporarily net short
in the currency. Such
temporary net short positions
will not exceed 1% of the
Fund's assets.
130
<PAGE> 273
GMO EMERGING MARKETS FUND
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
PERMITTED INVESTMENTS
EQUITY SECURITIES:
securities listed on emerging market - The Fund will have greater
stock exchanges and related depository than 65% of its total assets
receipts invested in or exposed to(26)
preferred stock equity securities that are
warrants or rights predominantly traded on
Emerging Market exchanges.
OTHER EQUITY SECURITIES:
convertible securities - The Fund may also invest
depository receipts: ADRs, GDRs, EDRs, through investment Funds,
IDRs foreign issues traded in the U.S. pooled accounts or other
and abroad investment companies investment vehicles designed
(open & closed-end) to permit investments in a
unlisted securities portfolio of stocks listed in
illiquid securities a particular developing
144A securities country or region subject to
restricted securities obtaining any necessary local
securities traded in unregulated regulatory approvals,
securities markets particularly in the case of
indexed securities countries in which such an
equity futures and related options investment vehicle is the
exchange-traded and OTC options on exclusive or main vehicle for
securities and indexes (including foreign portfolio investment.
writing covered options)
equity swap contracts
contracts for differences
private investment funds, vehicles or
structures
debt-equity conversion funds (25)
country funds
initial public offerings
private placements
index swaps
FIXED INCOME SECURITIES
bonds and money market instruments in - The Fund may also invest in
Canada, the U.S, and other debt securities issued by
industrialized nations and emerging companies or governments in
securities markets. developing countries or money
market securities of
high-grade issuers in
industrialized countries
denominated in various
currencies.
-----------------
(25) Debt-equity Conversion Funds may be established to exchange foreign
bank debt of countries whose principal repayments are in arrears, into
a portfolio of listed and unlisted equities, subject to certain
repatriation restrictions.
(26) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the
Fund's exposure to the relevant market or security through direct
investments and through derivative instruments will be considered.
131
<PAGE> 274
CASH AND MONEY MARKET INSTRUMENTS
Any short-term assets will be invested - The Fund will not normally
in cash or high quality money market have greater than 10% of its
instruments including securities issued net assets exposed to cash
by the U.S. government and agencies and money market instruments.
thereof, bankers' acceptances, This limitation does not
commercial paper, bank certificates of include cash and money market
deposit and repurchase agreements instruments in margin
accounts or otherwise
covering exposure achieved
through derivative
instruments ("equitized
cash").
FOREIGN CURRENCY TRANSACTIONS
- Fund may invest in spot
currency transactions,
forward foreign currency
contracts, currency swap
contracts, options on
currencies, currency futures
and related options.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the
following practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term
credits necessary for
clearance of transactions.
BORROWING MONEY - Except that the Fund may
temporarily borrow up to 20%
of its net assets from banks
for the payment of
redemptions or settlement of
securities transactions, but
not as a leveraged investment
strategy.
UNDERWRITING SECURITIES - Except to the extent that
the Fund is deemed an
underwriter for securities
law purposes in connection
with disposition of portfolio
investments.
MAKING LOANS - Except that purchasing debt
obligations, repurchase
agreements and engaging in
securities lending will not
be considered making loans
for this purpose. The Fund
may loan securities valued at
up to one-third of its total
assets.
PLEDGING, HYPOTHECATING OR
MORTGAGING FUND ASSETS - Except that collateral
arrangements with respect to
swap agreements, the writing
of options, stock index,
interest rate, currency or
other futures contracts,
options on futures contracts
and collateral arrangements
with respect to initial and
variation margin are not
deemed to be a pledge or
other encumbrance of assets.
The deposit of securities or
cash or cash equivalents in
escrow in connection with the
writing of covered call or
put options, respectively, is
also not deemed to be a
pledge or encumbrance.
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
MAKING SHORT SALES OF SECURITIES
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES - No more than 5% of the
Fund's net assets will be
invested in time premiums on
options on particular
securities (as opposed to
options on indexes).
132
<PAGE> 275
OTHER INVESTMENT COMPANIES - The Fund will not own more
than 3% of the outstanding
voting securities of any
investment company.
- No more than 5% of the
Fund's net assets will be
invested in any single
investment company.
- No more than 10% of the
Fund's net assets will be
invested in securities of
investment companies in the
aggregate.
ILLIQUID SECURITIES - No more than 15% of the
Fund's net assets will be
invested in illiquid
securities.
INVESTMENT IN INSURANCE COMPANIES - The Fund will not purchase
more than 10% of the total
outstanding voting stock of
any insurance company
(including foreign insurance
companies).
INVESTMENT IN SECURITIES ISSUED BY - Equity: The Fund will not
BROKERS, DEALERS, UNDERWRITERS AND purchase more than 5% of any
INVESTMENT ADVISERS class of stock of a broker,
dealer, underwriter or
investment adviser.
- Debt: The Fund may not
purchase more than 10% of any
such company's total
outstanding debt in the
aggregate.
- Investment Limits: No more
than 5% of the Fund's total
assets will be invested in
the securities of a single
broker, dealer, underwriter
or investment adviser. The
net payment obligation of
swap contracts where one of
these types of companies is
the counterparty also counts
for purposes of this
restriction.
This policy does not apply to
companies that derived less
than 15% of revenues from
"securities-related
businesses" during the most
recent fiscal year.
UNLISTED SECURITIES/UNREGULATED - No more than 25% of the
SECURITIES MARKETS Fund's total assets will be
invested in shares of
companies that are traded in
unregulated over-the-counter
markets or other types of
unlisted securities markets.
CONCENTRATION
CONCENTRATION - The Fund will not invest
more than 25% of its total
assets in securities of
issuers in any one industry.
DERIVATIVE INSTRUMENTS (OTHER THAN FOREIGN CURRENCY TRANSACTIONS)
TYPES OF DERIVATIVES - Options, futures contracts
and related options on
securities indexes
- Long equity swap contracts:
where the Fund pays a fixed
rate plus the negative
performance, if any, and
receives the positive
performance, if any, of an
index or basket of
securities.
- Short equity swap
contracts: where the Fund
receives a fixed rate plus
the negative performance, if
any, and pays the positive
performance of an index or
basket of securities
- Contracts for differences:
equity swaps that contain
both a long and short equity
component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short
equity futures, related
options and short equity swap
contracts used to hedge
against an equity risk
already generally present in
the Fund.(27)
----------------------
(27) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to
specific exposure existing in the Fund (the specific stocks of that
market actually owned by the Fund). The Fund may also seek to remove
specific exposure (e.g., a single stock, small basket or more focused
index of securities expected to do poorly in an otherwise promising
market) relative to general or broad market exposure that exists in the
Fund.
133
<PAGE> 276
- Anticipatory Hedging: If
the Fund receives or
anticipates significant cash
purchase transactions, the
Fund may hedge market risk
(risk of not being invested
in the market) by purchasing
long futures contracts or
entering into long equity
swap contracts to obtain
market exposure until such
time as direct investments
can be made efficiently.
Conversely, if the Fund
receives or anticipates a
significant demand for cash
redemptions, the Fund may
sell futures contracts or
enter into short equity swap
contracts, to allow the Fund
to dispose of securities in a
more orderly fashion without
the Fund being exposed to
leveraged loss exposure in
the interim.
INVESTMENT - The Fund may use derivative
instruments (particularly
long futures contracts,
related options and long
equity swap contracts) in
place of investing directly
in securities. This will
include using equity
derivatives to "equitize"
cash balances held by the
Fund. Because a foreign
equity derivative generally
only provides the return of a
foreign market in local
currency terms, the Fund will
often purchase a foreign
currency forward in
conjunction with using equity
derivatives to give the
effect of investing directly.
The Fund may also use long
derivatives for investment in
conjunction with short
hedging transactions to
adjust the weights of the
Fund's underlying equity
portfolio to a level the
Manager believes is the
optimal exposure to
individual countries and
equities. For example, if the
Manager expects a positive
return forecast for a select
group of companies in a
particular market, but a
negative return for that
market as a whole, then this
Fund may overweight the
select group of equities and
reduce exposure to the market
generally by selling equity
futures or enter into a swap
contract that is long a
specific basket of securities
and short the market
generally.
RISK MANAGEMENT - - The Fund may use equity
SYNTHETIC SALES AND PURCHASES futures, related options and
equity swap contracts to
adjust the weight of the Fund
to a level the manager
believes is the optimal
exposure to individual
countries and equities.
Sometimes, such transactions
are used as a precursor to
actual sales and purchases.
For example, if the Fund held
a large proportion of stocks
of a particular market and
the Manager believed that
stocks of another market
would outperform such stocks,
the Fund might use a short
futures contract on an
appropriate index (to
synthetically "sell" a
portion of the Fund's
portfolio) in combination
with a long futures contract
on another index (to
synthetically "buy" exposure
to that index). Long and
short equity swap contracts
and contracts for differences
may also be used for these
purposes. Often, a foreign
currency forward will be used
in conjunction with the long
derivative position to create
the effect of investing
directly. Equity derivatives
(and corresponding currency
forwards) used to effect
synthetic sales and purchases
will generally be unwound as
actual portfolio securities
are sold and purchased.
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the
use of derivatives for
hedging purposes.
- When long futures contracts
and long equity swaps are
used for investment, the Fund
will maintain an amount of
cash or liquid securities
equal to the face value of
all such long derivative
positions. However, for
purposes of this restriction,
if an existing long equity
exposure is reduced or
eliminated by a short
derivative position, the
combination of the long and
short position will be
considered as cash available
to cover a new long
derivative exposure.
- The net long equity
exposure of the Fund,
including direct investment
in securities and long
derivative positions, will
not exceed 100% of the Fund's
net assets.
- Except when such
instruments are used for bona
fide hedging, no more than 5%
of the Fund's net assets will
be committed to initial
margin on futures contracts
and time premiums on related
options.
- Counterparties used for OTC
derivatives must have a
long-term debt rating of A or
higher when the derivative is
entered into. Occasionally,
short-term derivatives will
be entered into with
counterparties that have only
high short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
134
<PAGE> 277
TYPES OF FOREIGN CURRENCY TRANSACTIONS - Buying and selling spot
currencies.
- Forward foreign currency
contracts.
- Currency futures contracts
and related options.
- Options on currencies.
- Currency swap contracts.
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING - Traditional Hedging: The
Fund may effect foreign
currency transactions -
generally short forward or
futures contracts - to hedge
the risk of foreign
currencies represented by its
securities investments back
into the U.S. dollar. The
Fund is not required to hedge
any of the currency risk
obtained by investing in
securities denominated in
foreign currencies.
- Anticipatory Hedging: When
the Fund enters into a
contract for the purchase or
anticipates the need to
purchase a security
denominated in a foreign
currency, it may "lock in"
the U.S. dollar price of the
security by buying the
foreign currency or through
currency forwards or futures.
- Proxy Hedging: The Fund may
hedge the exposure of a given
foreign currency by using an
instrument relating to a
different currency which the
Manager believes is highly
correlated to the currency
being hedged.
INVESTMENT - The Fund may enter into
currency forwards or futures
contracts in conjunction with
entering into a futures
contract on a foreign index
in order to create synthetic
foreign currency denominated
securities.
RISK MANAGEMENT - Subject to the limitations
described below, the Fund may
use foreign currency
transactions for risk
management, which will permit
the Fund to have foreign
currency exposure that is
significantly different than
the currency exposure
represented by its portfolio
investments. This may include
long exposure to particular
currencies beyond the amount
of the Fund's investment in
securities denominated in
that currency.
LIMITATIONS OF FOREIGN CURRENCY - The Fund's aggregate net
TRANSACTIONS foreign currency exposure,
assuming full offset of long
and short positions, will not
exceed 100% of the Fund's net
assets denominated in foreign
currencies, though the
currency exposure of the Fund
may differ substantially from
the currencies in which the
Fund's securities are
denominated.
- The Fund will not be net
short in any foreign
currency, except that, when
the Fund is attempting to
hedge all or nearly all of
its exposure to a particular
currency, changes in the
market value of foreign
equities may cause the Fund
to be temporarily net short
in the currency. Such
temporary net short positions
will not exceed 1% of the
Fund's assets
135
<PAGE> 278
GMO EVOLVING COUNTRIES FUND
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
PERMITTED INVESTMENTS
EQUITY SECURITIES:
securities listed on evolving country stock - The Fund will have greater
exchanges and related depository than 65% of its total assets
receipts invested in or exposed to(29)
preferred stocks equity securities that are
warrants or rights predominantly traded on
Evolving Country exchanges.
OTHER EQUITY SECURITIES:
convertible securities
depository receipts: ADRs, GDRs, EDRs, IDRs
foreign issues traded in the U.S. and abroad
investment companies (open & closed-end)
unlisted securities
illiquid securities
144A securities
restricted securities - The Fund may also invest
securities traded in unregulated securities through investments funds,
markets pooled accounts or other
indexed securities investment vehicles designed
equity futures and related options to permit investments in a
exchange-traded and OTC options on securities portfolio of stocks listed in
and indexes (including writing covered a particular developing
options) country or region subject to
equity swap contracts obtaining any necessary local
contracts for differences regulatory approvals,
private investment funds, vehicles or particularly in the case of
structures countries in which such an
debt-equity conversion funds(28) investment vehicle is the
country funds exclusive or main vehicle for
repurchase agreements foreign portfolio investment.
initial public offerings
private placements
index swaps
FIXED INCOME SECURITIES
Bonds and money market instruments in - The Fund may also invest in
Canada, the U.S., and other industrialized debt securities issued by
nations and emerging securities markets. companies or governments in
developing countries or money
market securities of
high-grade issuers in
industrialized countries
denominated in various
currencies.
-----------------------------
(28) Debt-equity Conversion Funds may be established to exchange foreign
bank debt of countries whose principal repayments are in arrears, into
a portfolio of listed and unlisted equities, subject to certain
repatriation restrictions.
(29) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the
fund's exposure to the relevant market or security through direct
investments and through derivative instruments will be considered.
136
<PAGE> 279
CASH AND MONEY MARKET INSTRUMENTS
Any short-term assets will be invested in - The Fund will not normally
cash or high quality money market have greater than 10% of its
instruments including securities issued net assets exposed to cash
by the U.S. government and agencies and money market instruments.
thereof, bankers' acceptances, This limitation does not
commercial paper, bank certificates of include cash and money market
deposit and repurchase agreements instruments in margin
accounts or otherwise
covering exposure achieved
through derivative
instruments ("equitized
cash").
FOREIGN CURRENCY TRANSACTIONS - Fund may invest in spot
currency transactions,
forward foreign currency
contracts, currency swap
contracts, options on
currencies, currency futures
and related options.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term credits
necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may
temporarily borrow up to 20%
of its net assets from banks
for the payment of
redemptions or settlement of
securities transactions, but
not as a leveraged investment
strategy.
UNDERWRITING SECURITIES - Except to the extent that
the Fund is deemed an
underwriter for securities
law purposes in connection
with disposition of portfolio
investments.
MAKING LOANS - Except that purchasing debt
obligations, repurchase
agreements and engaging in
securities lending will not
be considered making loans
for this purpose. The Fund
may loan securities valued at
up to one-third of its total
assets.
PLEDGING, HYPOTHECATING OR - Except that collateral
MORTGAGING FUND ASSETS arrangements with respect to
swap agreements, the writing
of options, stock index,
interest rate, currency or
other futures contracts,
options on futures contracts
and collateral arrangements
with respect to initial and
variation margin are not
deemed to be a pledge or
other encumbrance of assets.
The deposit of securities or
cash or cash equivalents in
escrow in connection with the
writing of covered call or
put options, respectively, is
also not deemed to be a
pledge or encumbrance.
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
MAKING SHORT SALES OF SECURITIES
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES - No more than 5% of the Fund's
net assets will be invested
in time premiums on options
on particular securities (as
opposed to options on
indexes).
137
<PAGE> 280
OTHER INVESTMENT COMPANIES - The Fund will not own more
than 3% of the outstanding
voting securities of any
investment company.
- No more than 5% of the
Fund's net assets will be
invested in any single
investment company.
- No more than 10% of the
Fund's net assets will be
invested in securities of
investment companies in the
aggregate.
ILLIQUID SECURITIES - No more than 15% of the
Fund's net assets will be
invested in illiquid
securities.
INVESTMENT IN INSURANCE COMPANIES - The Fund will not purchase
more than 10% of the total
outstanding voting stock of
any insurance company
(including foreign insurance
companies).
INVESTMENT IN SECURITIES ISSUED BY - Equity: The Fund will not
BROKERS, DEALERS, UNDERWRITERS AND purchase more than 5% of any
INVESTMENT ADVISERS class of stock of a broker,
dealer, underwriter or
investment adviser.
- Debt: The Fund may not
purchase more than 10% of any
such company's total
outstanding debt in the
aggregate.
- Investment Limits: No more
than 5% of the Fund's total
assets will be invested in
the securities of a single
broker, dealer, underwriter
or investment adviser. The
net payment obligation of
swap contracts where one of
these types of companies is
the counterparty also counts
for purposes of this
restriction.
This policy does not apply to
companies that derived less
than 15% of revenues from
"securities-related
businesses" during the most
recent fiscal year.
UNLISTED SECURITIES/UNREGULATED - No more than 25% of the
SECURITIES MARKETS Fund's total assets will be
invested in shares of
companies that are traded in
unregulated over-the-counter
markets or other types of
unlisted securities markets.
CONCENTRATION
CONCENTRATION - The Fund will not invest
more than 25% of its total
assets in securities of
issuers in any one industry.
DERIVATIVE INSTRUMENTS (OTHER THAN FOREIGN CURRENCY TRANSACTIONS)
TYPES OF DERIVATIVES - Options, futures contracts
and related options on
securities indexes.
- Long equity swap contracts:
where the Fund pays a fixed
rate plus the negative
performance, if any, and
receives the positive
performance, if any, of an
index or basket of
securities.
- Short equity swap
contracts: where the Fund
receives a fixed rate plus
the negative performance, if
any, and pays the positive
performance of an index or
basket of securities.
- Contracts for differences:
equity swaps that contain
both a long and short equity
component.
USES OF DERIVATIVES
138
<PAGE> 281
HEDGING - Traditional Hedging: Short
equity futures, related
options and short equity swap
contracts used to hedge
against an equity risk
already generally present in
the Fund.(30)
- Anticipatory Hedging: If
the Fund receives or
anticipates significant cash
purchase transactions, the
Fund may hedge market risk
(risk of not being invested
in the market) by purchasing
long futures contracts or
entering into long equity
swap contracts to obtain
market exposure until such
time as direct investments
can be made efficiently.
Conversely, if the Fund
receives or anticipates a
significant demand for cash
redemptions, the Fund may
sell futures contracts or
enter into short equity swap
contracts, to allow the Fund
to dispose of securities in a
more orderly fashion without
the Fund being exposed to
leveraged loss exposure in
the interim.
INVESTMENT - The Fund may use derivative
instruments (particularly
long futures contracts,
related options and long
equity swap contracts) in
place of investing directly
in securities. This will
include using equity
derivatives to "equitize"
cash balances held by the
Fund. Because a foreign
equity derivative generally
only provides the return of a
foreign market in local
currency terms, the Fund will
often purchase a foreign
currency forward in
conjunction with using equity
derivatives to give the
effect of investing directly.
The Fund may also use long
derivatives for investment in
conjunction with short
hedging transactions to
adjust the weights of the
Fund's underlying equity
portfolio to a level the
Manager believes is the
optimal exposure to
individual countries and
equities. For example, if the
Manager expects a positive
return forecast for a select
group of companies in a
particular market, but a
negative return for that
market as a whole, then this
Fund may overweight the
select group of equities and
reduce exposure to the market
generally by selling equity
futures or enter into a swap
contract that is long a
specific basket of securities
and short the market
generally.
RISK MANAGEMENT - - The Fund may use equity
SYNTHETIC SALES AND PURCHASES futures, related options and
equity swap contracts to
adjust the weight of the Fund
to a level the manager
believes is the optimal
exposure to individual
countries and equities.
Sometimes, such transactions
are used as a precursor to
actual sales and purchases.
For example, if the Fund held
a large proportion of stocks
of a particular market and
the Manager believed that
stocks of another market
would outperform such stocks,
the Fund might use a short
futures contract on an
appropriate index (to
synthetically "sell" a
portion of the Fund's
portfolio) in combination
with a long futures contract
on another index (to
synthetically "buy" exposure
to that index). Long and
short equity swap contracts
and contracts for differences
may also be used for these
purposes. Often, a foreign
currency forward will be used
in conjunction with the long
derivative position to create
the effect of investing
directly. Equity derivatives
(and corresponding currency
forwards) used to effect
synthetic sales and purchases
will generally be unwound as
actual portfolio securities
are sold and purchased.
---------------------
(30) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to
specific exposure existing in the Fund (the specific stocks of that
market actually owned by the Fund). The Fund may also seek to remove
specific exposure (e.g., a single stock, small basket or more focused
index of securities expected to do poorly in an otherwise promising
market) relative to general or broad market exposure that exists in the
Fund.
139
<PAGE> 282
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the
use of derivatives for
hedging purposes.
- When long futures contracts
and long equity swaps are
used for investment, the Fund
will maintain an amount of
cash or liquid securities
equal to the face value of
all such long derivative
positions. However, for
purposes of this restriction,
if an existing long equity
exposure is reduced or
eliminated by a short
derivative position, the
combination of the long and
short position will be
considered as cash available
to cover a new long
derivative exposure.
- The net long equity
exposure of the Fund,
including direct investment
in securities and long
derivative positions, will
not exceed 100% of the Fund's
net assets.
- Except when such
instruments are used for bona
fide hedging, no more than 5%
of the Fund's net assets will
be committed to initial
margin on futures contracts
and time premiums on related
options.
- Counterparties used for OTC
derivatives must have a
long-term debt rating of A or
higher when the derivative is
entered into. Occasionally,
short-term derivatives will
be entered into with
counterparties that have only
high short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS - Buying and selling spot
currencies.
- Forward foreign currency
contracts.
- Currency futures contracts
and related options.
- Options on currencies.
- Currency swap contracts.
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING - Traditional Hedging: The
Fund may effect foreign
currency transactions -
generally short forward or
futures contracts - to hedge
the risk of foreign
currencies represented by its
securities investments back
into the U.S. dollar. The
Fund is not required to hedge
any of the currency risk
obtained by investing in
securities denominated in
foreign currencies.
- Anticipatory Hedging: When
the Fund enters into a
contract for the purchase or
anticipates the need to
purchase a security
denominated in a foreign
currency, it may "lock in"
the U.S. dollar price of the
security by buying the
foreign currency or through
currency forwards or futures.
- Proxy Hedging: The Fund may
hedge the exposure of a given
foreign currency by using an
instrument relating to a
different currency, which the
Manager believes is highly
correlated to the currency
being hedged.
INVESTMENT - The Fund may enter into
currency forwards or futures
contracts in conjunction with
entering into a futures
contract on a foreign index
in order to create synthetic
foreign currency denominated
securities.
RISK MANAGEMENT - Subject to the limitations
described below, the Fund may
use foreign currency
transactions for risk
management, which will permit
the Fund to have foreign
currency exposure that is
significantly different than
the currency exposure
represented by its portfolio
investments. This may include
long exposure to particular
currencies beyond the amount
of the Fund's investment in
securities denominated in
that currency.
140
<PAGE> 283
LIMITATIONS OF FOREIGN CURRENCY - The Fund's aggregate net
TRANSACTIONS foreign currency exposure,
assuming full offset of long
and short positions, will not
exceed 100% of the Fund's net
assets denominated in foreign
currencies, though the
currency exposure of the Fund
may differ substantially from
the currencies in which the
Fund's securities are
denominated.
- The Fund will not be net
short in any foreign
currency, except that, when
the Fund is attempting to
hedge all or nearly all of
its exposure to a particular
currency, changes in the
market value of foreign
equities may cause the Fund
to be temporarily net short
in the currency. Such
temporary net short positions
will not exceed 1% of the
Fund's assets.
141
<PAGE> 284
GMO ASIA FUND
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
PERMITTED INVESTMENTS:
securities listed on emerging market stock
exchanges and related depository - The Fund will have greater
receipts than 65% of its total assets
convertible securities invested in or exposed to(32)
depository receipts: ADRs, GDRs, EDRs, IDRs equity securities that are
foreign issues traded in the U.S. and abroad organized under the laws of
investment companies (open & closed-end) an Asian country, that have a
unlisted securities principal office in an Asian
illiquid securities country, or whose securities
144A securities are predominantly traded on
restricted securities Asian market exchanges
securities traded in unregulated securities (excluding Japan).
markets
indexed securities
equity futures and related options
exchange-traded and OTC options on
securities and indexes (including
writing covered options)
equity swap contracts
contracts for differences
private investment funds, vehicles or
structures
debt-equity conversion funds (31)
country funds
repurchase agreements
initial public offerings
private placements
index swaps
FIXED INCOME SECURITIES
bonds and money market instruments in - The Fund may also invest,
Canada, the U.S, and other industrialized on a temporary basis, in debt
nations and emerging securities markets. securities issued by
companies or governments in
developing countries or money
market securities of
high-grade issuers in
industrialized countries
denominated in various
currencies.
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally
Any short-term assets will be invested in have greater than 10% of its
cash or high quality money market net assets exposed to cash
instruments including securities issued and money market instruments.
by the U.S. government and agencies This limitation does not
thereof, bankers' acceptances, commercial include cash and money market
paper, bank certificates of deposit and instruments in margin
repurchase agreements accounts or otherwise
covering exposure achieved
through derivative
instruments ("equitized
cash").
----------------------
(31) Debt-equity Conversion Funds may be established to exchange foreign
bank debt of countries whose principal repayments are in arrears, into
a portfolio of listed and unlisted equities, subject to certain
repatriation restrictions.
(32) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the
fund's exposure to the relevant market or security through direct
investments and through derivative instruments will be considered.
142
<PAGE> 285
FOREIGN CURRENCY TRANSACTIONS - Fund may invest in spot
currency transactions,
forward foreign currency
contracts, currency swap
contracts, options on
currencies, currency futures
and related options.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term
credits necessary for
clearance of transactions.
BORROWING MONEY - Except that the Fund may
temporarily borrow up to 20%
of its net assets from banks
for the payment of
redemptions or settlement of
securities transactions, but
not as a leveraged investment
strategy.
PLEDGING, HYPOTHECATING OR - Except that collateral
MORTGAGING FUND ASSETS arrangements with respect to
swap agreements, the writing
of options, stock index,
interest rate, currency or
other futures contracts,
options on futures contracts
and collateral arrangements
with respect to initial and
variation margin are not
deemed to be a pledge or
other encumbrance of assets.
The deposit of securities or
cash or cash equivalents in
escrow in connection with the
writing of covered call or
put options, respectively, is
also not deemed to be a
pledge or encumbrance.
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
MAKING SHORT SALES OF SECURITIES
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES - No more than 5% of the
Fund's net assets will be
invested in time premiums on
options on particular
securities (as opposed to
options on indexes)
OTHER INVESTMENT COMPANIES - The Fund will not own more
than 3% of the outstanding
voting securities of any
investment company
- No more than 5% of the
Fund's net assets will be
invested in any single
investment company
- No more than 10% of the
Fund's net assets will be
invested in securities of
investment companies in the
aggregate
ILLIQUID SECURITIES - No more than 15% of the
Fund's net assets will be
invested in illiquid
securities.
INVESTMENT IN INSURANCE COMPANIES - The Fund will not purchase
more than 10% of the total
outstanding voting stock of
any insurance company
(including foreign insurance
companies).
143
<PAGE> 286
INVESTMENT IN SECURITIES ISSUED BY - Equity: The Fund will not
BROKERS, DEALERS, UNDERWRITERS AND purchase more than 5% of any
INVESTMENT ADVISERS class of stock of a broker,
dealer, underwriter or
investment adviser.
- Debt: The Fund may not
purchase more than 10% of any
such company's total
outstanding debt in the
aggregate.
- Investment Limits: No more
than 5% of the Fund's total
assets will be invested in
the securities of a single
broker, dealer, underwriter
or investment adviser. The
net payment obligation of
swap contracts where one of
these types of companies is
the counterparty also counts
for purposes of this
restriction.
This policy does not apply to
companies that derived less
than 15% of revenues from
"securities-related
businesses" during the most
recent fiscal year.
UNLISTED SECURITIES/UNREGULATED - No more than 25% of the
SECURITIES MARKETS Fund's total assets will be
invested in shares of
companies that are traded in
unregulated over-the-counter
markets or other types of
unlisted securities markets.
CONCENTRATION
CONCENTRATION - The Fund will not invest
more than 25% of its total
assets in securities of
issuers in any one industry.
DERIVATIVE INSTRUMENTS (OTHER THAN FOREIGN CURRENCY TRANSACTIONS)
TYPES OF DERIVATIVES - Options, futures contracts
and related options on
securities indexes
- Long equity swap contracts:
where the Fund pays a fixed
rate plus the negative
performance, if any, and
receives the positive
performance, if any, of an
index or basket of
securities.
- Short equity swap
contracts: where the Fund
receives a fixed rate plus
the negative performance, if
any, and pays the positive
performance of an index or
basket of securities
- Contracts for differences:
equity swaps that contain
both a long and short equity
component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short
equity futures, related
options and short equity swap
contracts used to hedge
against an equity risk
already generally present in
the Fund.(33)
- Anticipatory Hedging: If
the Fund receives or
anticipates significant cash
purchase transactions, the
Fund may hedge market risk
(risk of not being invested
in the market) by purchasing
long futures contracts or
entering long equity swap
contracts to obtain market
exposure until such time as
direct investments can be
made efficiently. Conversely,
if the Fund receives or
anticipates a significant
demand for cash redemptions,
the Fund may sell futures
contracts or enter into short
equity swap contracts, to
allow the Fund to dispose of
securities in a more orderly
fashion without the Fund
being exposed to leveraged
loss exposure in the interim.
---------------------
(33) The Fund may use such hedging to remove or reduce general market
exposure (e.g. an index or broad basket of securities) relative to
specific exposure existing in the Fund (the specific stocks of that
market actually owned by the Fund). The Fund may also seek to remove
specific exposure (e.g. a single stock, small basket or more focused
index of securities expected to do poorly in an otherwise promising
market) relative to general or broad market exposure that exists in the
Fund.
144
<PAGE> 287
INVESTMENT - The Fund may use derivative
instruments (particularly
long futures contracts,
related options and long
equity swap contracts) in
place of investing directly
in securities. This will
include using equity
derivatives to "equitize"
cash balances held by the
Fund. Because a foreign
equity derivative generally
only provides the return of a
foreign market in local
currency terms, the Fund will
often purchase a foreign
currency forward in
conjunction with using equity
derivatives to give the
effect of investing directly.
The Fund may also use long
derivatives for investment in
conjunction with short
hedging transactions to
adjust the weights of the
Fund's underlying equity
portfolio to a level the
Manager believes is the
optimal exposure to
individual countries and
equities. For example, if the
Manager expects a positive
return forecast for a select
group of companies in a
particular market, but a
negative return for that
market as a whole, then this
Fund may overweight the
select group of equities and
reduce exposure to the market
generally by selling equity
futures or enter a swap
contract that is long a
specific basket of securities
and short the market
generally.
RISK MANAGEMENT - - The Fund may use equity
SYNTHETIC SALES AND PURCHASES futures, related options and
equity swap contracts to
adjust the weight of the Fund
to a level the manager
believes is the optimal
exposure to individual
countries and equities.
Sometimes, such transactions
are used as a precursor to
actual sales and purchases.
For example, if the Fund held
a large proportion of stocks
of a particular market and
the Manager believed that
stocks of another market
would outperform such stocks,
the Fund might use a short
futures contract on an
appropriate index (to
synthetically "sell" a
portion of the Fund's
portfolio) in combination
with a long futures contract
on another index (to
synthetically "buy" exposure
to that index). Long and
short equity swap contracts
and contracts for differences
may also be used for these
purposes. Often, a foreign
currency forward will be used
in conjunction with the long
derivative position to create
the effect of investing
directly. Equity derivatives
(and corresponding currency
forwards) used to effect
synthetic sales and purchases
will generally be unwound as
actual portfolio securities
are sold and purchased.
LIMITATIONS ON THE USE OF - There is no limit on the
DERIVATIVES use of derivatives for
hedging purposes.
- When long futures contracts
and long equity swaps are
used for investment, the Fund
will maintain an amount of
cash or liquid securities
equal to the face value of
all such long derivative
positions. However, for
purposes of this
restriction, if an existing
long equity exposure is
reduced or eliminated by a
short derivative position,
the combination of the long
and short position will be
considered as cash available
to cover a new long
derivative exposure.
- The net long equity
exposure of the Fund,
including direct investment
in securities and long
derivative positions, will
not exceed 100% of the Fund's
net assets.
- Except when such
instruments are used for
bona-fide hedging, no more
than 5% of the Fund's net
assets will be committed to
initial margin on futures
contracts and time premiums
on related options.
- Counterparties used for OTC
derivatives must have a
long-term debt rating of A or
higher when the derivative is
entered into. Occasionally,
short-term derivatives will
be entered into with
counterparties that have only
high short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS - Buying and selling spot
currencies
- Forward foreign currency
contracts
- Currency futures contracts
and related options
- Options on currencies
- Currency swap contracts
145
<PAGE> 288
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING - Traditional Hedging: The
Fund may effect foreign
currency transactions --
generally short forward or
futures contracts - to hedge
the risk of foreign
currencies represented by its
securities investments back
into the U.S. dollar. The
Fund is not required to hedge
any of the currency risk
obtained by investing in
securities denominated in
foreign currencies.
- Anticipatory Hedging: When
the Fund enters into a
contract for the purchase or
anticipates the need to
purchase a security
denominated in a foreign
currency, it may "lock in"
the U.S. dollar price of the
security by buying the
foreign currency or through
currency forwards or futures.
- Proxy Hedging: The Fund may
hedge the exposure of a given
foreign currency by using an
instrument relating to a
different currency which the
Manager believes is highly
correlated to the currency
being hedged.
INVESTMENT - The Fund may enter into
currency forwards or futures
contracts in conjunction with
entering into a futures
contract on a foreign index
in order to create synthetic
foreign currency denominated
securities.
RISK MANAGEMENT - Subject to the limitations
described below, the Fund may
use foreign currency
transactions for risk
management, which will permit
the Fund to have foreign
currency exposure that is
significantly different than
the currency exposure
represented by its portfolio
investments. This may include
long exposure to particular
currencies beyond the amount
of the Fund's investment in
securities denominated in
that currency.
LIMITATIONS OF FOREIGN CURRENCY - The Fund's aggregate net
TRANSACTIONS foreign currency exposure,
assuming full offset of long
and short positions, will not
exceed 100% of the Fund's net
assets denominated in foreign
currencies, though the
currency exposure of the Fund
may differ substantially from
the currencies in which the
Fund's securities are
denominated
- The Fund will not be net
short in any foreign
currency, except that, when
the Fund is attempting to
hedge all or nearly all of
its exposure to a particular
currency, changes in the
market value of foreign
equities may cause the Fund
to be temporarily net short
in the currency. Such
temporary net short positions
will not exceed 1% of the
Fund's assets.
146
<PAGE> 289
FIXED INCOME FUNDS
GMO DOMESTIC BOND FUND
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
PERMITTED INVESTMENTS
At least 65% of the Fund's total assets will be invested in or exposed to
(34) "bonds" of U.S. issuers. "Bonds" mean any fixed income obligations with an
original maturity of two years or more, as well as "synthetic" bonds created by
combining a futures contract or option on a fixed income security with cash, a
cash equivalent investment or another fixed income security. The Fund invests
directly in securities or indirectly in securities through investment in GMO
Alpha LIBOR Fund. You may obtain information about Alpha LIBOR Fund by calling
the Trust collect at 617-346-7646.
securities issued by federal, state, local securities purchased and sold
and foreign governments (traded in U.S. on a when-issued or delayed
and abroad) delivery basis
convertible bonds
fixed income securities of private issuers indexed securities
depository receipts: ADRs, GDRs, EDRs
foreign issues traded in the U.S. and abroad firm commitments (with banks
investment companies (open & closed end) or broker-dealers)
preferred stock
illiquid securities interest rate/bond futures
144A securities and related options
restricted securities
repurchase agreements exchange-traded and OTC
reverse repurchase agreements options on securities and
indexes (including writing
covered options)
interest rate swap contracts
total return swap contracts
contracts for differences
interest rate caps, floors
and collars
asset-backed securities
including mortgage-backed,
CMOs, strips and residuals
loan participations (and
other direct debt)
adjustable rate securities
zero coupon securities
dollar roll transactions
warrants
GMO Alpha LIBOR Fund
Commercial paper and other
high quality cash equivalents
and money market instruments
of the type invested in by
GMO Short-Term Income Fund.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term
credits necessary for
clearance of transactions.
BORROWING MONEY - Except that the Fund may
temporarily borrow up to 20%
of its net assets from banks
for the payment of
redemptions or settlement of
securities transactions, but
not as a leveraged investment
strategy.
UNDERWRITING SECURITIES - Except to the extent that
the Fund is deemed an
underwriter for securities
law purposes in connection
with disposition of portfolio
investments.
MAKING LOANS - Except that purchasing debt
obligations, repurchase
agreements and engaging in
securities lending will not
be considered making loans
for this purpose. The Fund
may loan securities valued at
up to one-third of its total
assets.
--------------------
(34) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the
Fund's exposure to the relevant market or security through direct
investments and through derivative instruments will be considered.
147
<PAGE> 290
PLEDGING, HYPOTHECATING OR MORTGAGING FUND - Except that collateral
ASSETS arrangements with respect to
swap agreements, the writing
of options, index, interest
rate, currency or other
futures contracts, options on
futures contracts and
collateral arrangements with
respect to initial and
variation margin are not
deemed to be a pledge or
other encumbrance of assets.
The deposit of securities or
cash or cash equivalents in
escrow in connection with the
writing of covered call or
put options, respectively, is
also not deemed to be a
pledge or encumbrance.
INVESTMENT IN BANKRUPT CORPORATE SECURITIES
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
MAKING SHORT SALES OF SECURITIES
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES - No more than 10% of the
Fund's net assets will be
invested in time premiums on
options on particular
securities (as opposed to
options on indexes).
ILLIQUID SECURITIES - No more than 15% of the
Fund's net assets will be
invested in illiquid
securities.
INVESTMENT IN LOWER RATED SECURITIES - The Fund will invest less
than 5% of its assets in
securities rated BBB-/Baa3 or
less (or equivalent, as
determined by the Manager).
CONCENTRATION
CONCENTRATION - The Fund will not invest
more than 25% of its total
assets in a single industry.
DERIVATIVE INSTRUMENTS (OTHER THAN FOREIGN CURRENCY TRANSACTIONS)
TYPES OF DERIVATIVES - Options, futures contracts
and related options on bonds
or baskets or indexes of
securities.
- Options on bonds and other
securities.
- Swap contracts, including
interest rate swaps, total
return swaps, credit default
swaps and contracts for
differences.
- Structured notes.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Bond
futures, related options,
Bond options and swap
contracts used to hedge
against a market or credit
risk already generally
present in the Fund.
- Anticipatory Hedging: If
the Fund receives or
anticipates significant cash
purchase transactions, the
fund may hedge market risk
(risk of not being invested
in the market) by purchasing
long futures contracts or
entering into long swap
contracts to obtain market
exposure until such time as
direct investments can be
made efficiently. Conversely,
if the Fund receives or
anticipates a significant
demand for cash redemptions,
the Fund may sell futures
contracts or enter into short
swap contracts while the Fund
disposes of securities in an
orderly fashion.
INVESTMENT - The Fund may use derivative
instruments (particularly
long futures contracts,
related options and long swap
contracts) in place of
investing directly in
securities.
RISK MANAGEMENT - The Fund may use options,
futures, related options and
swap contracts to adjust the
weight of the Fund to a level
the Manager believes is the
optimal exposure to
individual countries and
issuers. Sometimes, such
transactions are used as a
precursor to actual sales and
purchases.
148
<PAGE> 291
LIMITATIONS ON THE USE OF - Counterparties used for OTC
DERIVATIVES derivatives must have a
long-term debt rating of A or
higher when the derivative is
entered into. Occasionally,
short-term derivatives will
be entered into with
counterparties that have only
high short-term debt ratings.
149
<PAGE> 292
GMO U.S. BOND/GLOBAL ALPHA A FUND
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
While the Fund seeks to outperform a U.S. fixed income benchmark, the
Fund will also invest in foreign bond markets and foreign currencies and may
hedge some or all of its exposure to domestic or foreign markets and currencies.
The Fund will also invest in debt securities (bonds, including convertible bonds
and loans) of Emerging Countries. The Fund generally will be managed to have no
more than 25% of the Fund's net asset value exposed to foreign bond markets and
no more than 25% of the Fund's net asset value exposed to foreign currencies.
However, aggregate long and short positions in foreign bond markets and foreign
currencies may equal up to 100% of the Fund's net asset value in each case.
PERMITTED INVESTMENTS
At least 65% of the Fund's total assets will be invested in or exposed to(35)
"bonds." "Bonds" mean any fixed income obligations with an original maturity of
two years or more, as well as "synthetic" bonds created by combining a futures
contract or option on a fixed income security with cash, a cash equivalent
investment or another fixed income security. The Fund invests directly in
securities or indirectly in securities through investment in GMO Alpha LIBOR
Fund. You may obtain information about Alpha LIBOR Fund by calling the Trust
collect at 617-346-7646.
securities issued by federal, state, local and
foreign governments
convertible bonds
fixed income securities of private issuers
depository receipts: ADRs, GDRs, EDRs
foreign issues traded in the U.S. and abroad
investment companies (open & closed end)
preferred stock
illiquid securities
144A securities
restricted securities
reverse repurchase agreements
zero coupon securities
repurchase agreements
warrants
securities purchased and sold on a when-issued or delayed delivery basis
indexed securities
firm commitments (with banks or broker-dealers)
interest rate/bond futures and related options
exchange-traded and OTC options on securities and indexes (including
writing covered options)
interest rate swap contracts
total return swap contracts
contracts for differences
credit default swaps
interest rate caps, floors and collars
asset-backed securities including mortgage-backed, CMOs, strips and
residuals
loan participations (and other direct debt)
sovereign debt of emerging countries
GMO Alpha LIBOR Fund
Commercial paper and other high quality cash equivalents and money
market instruments of the type invested in by GMO Short-Term Income
Fund.
FOREIGN CURRENCY TRANSACTIONS - The Fund may invest in spot currency
transactions, forward currency contracts,
currency swap contracts, options on
currencies, currency futures and related
options.
- The Fund may also use synthetic bonds
and synthetic foreign currency denominated
securities(36) to approximate desired
risk/return profiles.
----------
(35) The words "exposed to" as used in these guidelines mean
that, for purposes of the relevant requirement or restriction, the
total of the Fund's exposure to the relevant market or security through
direct investments and through derivative instruments will be
considered.
(36) The Fund may purchase forward foreign exchange contracts
in conjunction with U.S. dollar-denominated securities in order to
create a synthetic foreign currency denominated security.
150
<PAGE> 293
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary
for clearance of transactions.
BORROWING MONEY - Except that the Fund may temporarily
borrow up to 20% of its net assets from
banks for the payment of redemptions or
settlement of securities transactions,
but not as a leveraged investment
strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is
deemed an underwriter for securities law
purposes in connection with disposition
of portfolio investments.
MAKING LOANS - Except that purchasing debt obligations,
repurchase agreements and engaging in
securities lending will not be
considered making loans for this
purpose. The Fund may loan securities
valued at up to one-third of its total
assets.
PLEDGING, HYPOTHECATING OR - Except that collateral arrangements with
MORTGAGING FUND ASSETS respect to swap agreements, the writing
of options, index, interest rate,
currency or other futures contracts,
options on futures contracts and
collateral arrangements with respect to
initial and variation margin are not
deemed to be a pledge or other
encumbrance of assets. The deposit of
securities or cash or cash equivalents
in escrow in connection with the writing
of covered call or put options,
respectively, is also not deemed to be a
pledge or encumbrance.
MAKING SHORT SALES OF SECURITIES
INVESTMENT IN BANKRUPT CORPORATE SECURITIES
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES - No more than 10% of the Fund's net
assets will be invested in time premiums
on options on particular securities (as
opposed to options on indexes).
ILLIQUID SECURITIES - No more than 15% of the Fund's net
assets will be invested in illiquid
securities.
INVESTMENT IN LOWER RATED
SECURITIES - The Fund will invest less than 25% of
its assets in securities rated BBB-/Baa3
or less (or equivalent, as determined by
the Manager).
CONCENTRATION
CONCENTRATION - The Fund will not invest more than 25%
of its total assets in a single
industry.
151
<PAGE> 294
DERIVATIVE INSTRUMENTS
DERIVATIVES AND GMO'S GLOBAL BOND
STRATEGY - The fundamental strategy of the Fund
requires that the Fund take active
over-weighted and under-weighted
positions with respect to particular
bond markets and currencies relative to
the Fund's performance benchmark. Often
these active positions will be achieved
using long and short derivative
positions and combinations of such
positions to create synthetic
securities. The Fund is not specifically
limited with respect to the extent to
which derivatives may be used, or with
respect to the absolute face value of
the derivative positions employed.
Instead, effective market exposure is
controlled by controlling the projected
tracking error relative to the Fund's
benchmark. However, this will mean that
the Fund may be leveraged if measured in
terms of aggregate exposure of the
Fund's assets.
- Options, futures contracts and related
options on bonds or baskets or indexes
of securities.
- Options on bonds and other securities.
- Swap contracts, including interest rate
swaps, total return swaps, credit
default swaps and contracts for
differences.
- Structured notes.
TYPES OF DERIVATIVES
USES OF DERIVATIVES
(OTHER THAN FOREIGN CURRENCY)
HEDGING - Traditional Hedging: Bond futures,
related options, bond options and swap
contracts used to hedge against a market
or credit risk already generally present
in the Fund.
- Anticipatory Hedging: If the Fund
receives or anticipates significant cash
purchase transactions, the fund may
hedge market risk (risk of not being
invested in the market) by purchasing
long futures contracts or entering into
long swap contracts to obtain market
exposure until such time as direct
investments can be made efficiently.
Conversely, if the Fund receives or
anticipates a significant demand for
cash redemptions, the Fund may sell
futures contracts or enter into short
swap contracts while the Fund disposes
of securities in an orderly fashion.
INVESTMENT - The Fund may use derivative instruments
(particularly long futures contracts,
related options and long swap contracts)
in place of investing directly in
securities. Because a foreign derivative
generally only provides the return of a
foreign market in local currency terms,
the Fund will often purchase a foreign
currency forward in conjunction with
using derivatives to give the effect of
investing directly.
RISK MANAGEMENT - The Fund may use options, futures,
related options and swap contracts to
adjust the weight of the Fund to a level
the Manager believes is the optimal
exposure to individual countries and
issuers. Sometimes, such transactions
are used as a precursor to actual sales
and purchases.
LIMITATIONS ON THE USE OF
DERIVATIVES - Counterparties used for OTC
derivatives must have a long-term debt
rating of A or higher when the
derivative is entered into.
Occasionally, short-term derivatives
will be entered into with counterparties
that have only high short-term debt
ratings.
152
<PAGE> 295
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY
TRANSACTIONS - Buying and selling spot currencies.
- Forward foreign currency contracts.
- Currency futures contracts and related
options.
- Options on currencies.
- Currency swap contracts.
USES OF FOREIGN CURRENCY
TRANSACTIONS
HEDGING - Traditional Hedging: The Fund may
effect foreign currency transactions -
generally short forward or futures
contracts - to hedge the risk of foreign
currencies represented by its securities
investments back into the U.S. dollar.
The Fund is not required to hedge any of
the currency risk obtained by investing
in securities denominated in foreign
currencies.
- Anticipatory Hedging: When the Fund
enters into a contract for the purchase
or anticipates the need to purchase a
security denominated in a foreign
currency, it may "lock in" the U.S.
dollar price of the security by buying
the foreign currency or through currency
forwards or futures.
- Proxy Hedging: The Fund may hedge the
exposure of a given foreign currency by
using an instrument relating to a
different currency which the Manager
believes is highly correlated to the
currency being hedged.
INVESTMENT - The Fund may enter into currency
forwards or futures contracts in
conjunction with entering into a futures
contract on a foreign index in order to
create synthetic foreign currency
denominated securities.
RISK MANAGEMENT - The Fund may use foreign currency
transactions for risk management, which
will permit the Fund to have foreign
currency exposure that is significantly
different than the currency exposure
represented by its portfolio
investments. This may include long and
short exposure to particular currencies
beyond the amount of the Fund's
investment in securities denominated in
that currency.
153
<PAGE> 296
GMO U.S. BOND/GLOBAL ALPHA B FUND
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
While the Fund seeks to outperform a U.S. fixed income benchmark, the
Fund will also invest in foreign bond markets and foreign currencies and may
hedge some or all of its exposure to domestic or foreign markets and currencies.
The Fund generally will be managed to have no more than 25% of the Fund's net
asset value exposed to foreign bond markets and no more than 25% of the Fund's
net asset value exposed to foreign currencies. However, aggregate long and short
positions in foreign bond markets and foreign currencies may equal up to 100% of
the Fund's net asset value in each case.
PERMITTED INVESTMENTS
The Fund invests directly in securities or indirectly in securities through
investment in GMO Alpha LIBOR Fund. You may obtain information about Alpha LIBOR
Fund by calling the Trust at 617-346-7646.
At least 65% of the Fund's total assets will be invested in or exposed to(37)
"bonds", either directly, or indirectly through investment in the GMO Alpha
LIBOR Fund. "Bonds" mean any fixed income obligations with an original maturity
of two years or more, as well as "synthetic" bonds created by combining a
futures contract or option on a fixed income security with cash, a cash
equivalent investment or another fixed income security.
GMO Alpha LIBOR Fund
securities issued by federal, state, local and
foreign governments
asset-backed securities including mortgage-
backed, CMOs, strips and residuals
convertible bonds
fixed income securities of private issuers
depository receipts: ADRs, GDRs, EDRs
foreign issues traded in the U.S. and abroad
investment companies (open & closed-end)
preferred stock
illiquid securities
144A securities
restricted securities
reverse repurchase agreements
zero coupon securities
repurchase agreements
securities purchased and sold on a when-issued or delayed delivery basis
indexed securities
firm commitments (with banks or broker-dealers)
interest rate/bond futures and related options
exchange-traded and OTC options on securities and indexes (including
writing covered options)
interest rate swap contracts
total return swap contracts
contracts for differences
credit default swaps
interest rate caps, floors and collars
warrants
commercial paper and other high quality cash equivalents and money
market instruments of the type invested in by the Short-term Income Fund
FOREIGN CURRENCY TRANSACTIONS - The Fund may invest in spot currency
transactions, forward currency
contracts, currency swap contracts,
options on currencies, currency futures
and related options.
- The Fund may also use synthetic bonds
and synthetic foreign currency
denominated securities(38) to
approximate desired risk/return
profiles.
----------
(37) The words "exposed to" as used in these guidelines mean
that, for purposes of the relevant requirement or restriction, the
total of the Fund's exposure to the relevant market or security through
direct investments, investments in other investment companies and
derivative instruments will be considered.
(38) The Fund may purchase forward foreign exchange contracts
in conjunction with U.S. dollar-denominated securities in order to
create a synthetic foreign currency denominated security.
154
<PAGE> 297
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary
for clearance of transactions.
BORROWING MONEY - Except that the Fund may temporarily
borrow up to 20% of its net assets from
banks for the payment of redemptions or
settlement of securities transactions,
but not as a leveraged investment
strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is
deemed an underwriter for securities law
purposes in connection with disposition
of portfolio investments.
MAKING LOANS - Except that purchasing debt obligations,
repurchase agreements and engaging in
securities lending will not be
considered making loans for this
purpose. The Fund may loan securities
valued at up to one-third of its total
assets.
PLEDGING, HYPOTHECATING OR
MORTGAGING FUND ASSETS - Except that collateral arrangements with
respect to swap agreements, the writing
of options, index, interest rate,
currency or other futures contracts,
options on futures contracts and
collateral arrangements with respect to
initial and variation margin are not
deemed to be a pledge or other
encumbrance of assets. The deposit of
securities, cash or cash equivalents in
escrow in connection with the writing of
covered call or put options,
respectively, is also not deemed to be a
pledge or encumbrance.
MAKING SHORT SALES OF SECURITIES
DEBT SECURITIES OF EMERGING COUNTRIES
INVESTMENT IN BANKRUPT CORPORATE SECURITIES
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES - No more than 10% of the Fund's net
assets will be invested in time premiums
on options on particular securities (as
opposed to options on indexes).
ILLIQUID SECURITIES - No more than 15% of the Fund's net
assets will be invested in illiquid
securities.
INVESTMENT IN LOWER-RATED
SECURITIES - The Fund will invest less than 5% of
its assets in securities rated BBB-/Baa3
or less (or equivalent, as determined by
Manager).
CONCENTRATION
CONCENTRATION - The Fund will not invest more than 25%
of its total assets in a single
industry.
DERIVATIVE INSTRUMENTS
DERIVATIVES AND GMO'S GLOBAL BOND
STRATEGY - The fundamental strategy of the Fund
requires that the Fund take active
over-weighted and under-weighted
positions with respect to particular
bond markets and currencies relative to
the Fund's performance benchmark. Often
these active positions will be achieved
using long and short derivative
positions and combinations of such
positions to create synthetic
securities. The Fund is not specifically
limited with respect to the extent to
which derivatives may be used, or with
respect to the absolute face value of
the derivative positions employed.
Instead, effective market exposure is
controlled by controlling the projected
tracking error relative to the Fund's
benchmark. However, this will mean that
the
155
<PAGE> 298
Fund may be leveraged if measured in
terms of aggregate exposure of the
Fund's assets.
USES OF DERIVATIVES
(OTHER THAN FOREIGN CURRENCY)
TYPES OF DERIVATIVES - Options, futures contracts and related
options on bonds or baskets or indexes
of securities
- Options on bonds and other securities
- Swap contracts, including interest rate
swaps, total return swaps, credit
default swaps and contracts for
differences
- Structured notes
HEDGING - Traditional Hedging: Bond futures,
related options, bond options and swap
contracts used to hedge against a market
or credit risk already generally present
in the Fund.
- Anticipatory Hedging: If the Fund
receives or anticipates significant cash
purchase transactions, the fund may
hedge market risk (risk of not being
invested in the market) by purchasing
long futures contracts or entering into
long swap contracts to obtain market
exposure until such time as direct
investments can be made efficiently.
Conversely, if the Fund receives or
anticipates a significant demand for
cash redemptions, the Fund may sell
futures contracts or enter into short
swap contracts while the Fund disposes
of securities in an orderly fashion.
INVESTMENT - The Fund may use derivative instruments
(particularly long futures contracts,
related options and long swap contracts)
in place of investing directly in
securities. Because a foreign derivative
generally only provides the return of a
foreign market in local currency terms,
the Fund will often purchase a foreign
currency forward in conjunction with
using derivatives to give the effect of
investing directly.
RISK MANAGEMENT - The Fund may use options, futures,
related options and swap contracts to
adjust the weight of the Fund to a level
the Manager believes is the optimal
exposure to individual countries and
issuers. Sometimes, such transactions
are used as a precursor to actual sales
and purchases.
LIMITATIONS ON THE USE OF
DERIVATIVES - Counterparties used for OTC derivatives
must have a long-term debt rating of A
or higher when the derivative is entered
into. Occasionally, short-term
derivatives will be entered into with
counterparties that have only high
short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY - Buying and selling spot currencies
TRANSACTIONS - Forward foreign currency contracts
- Currency futures contracts and related
options
- Options on currencies
- Currency swap contracts
USES OF FOREIGN CURRENCY
TRANSACTIONS
HEDGING - Traditional Hedging: The Fund may effect
foreign currency transactions -
generally short forward or futures
contracts - to hedge the risk of foreign
currencies represented by its securities
investments back into the U.S. dollar.
The Fund is not required to hedge any of
the currency risk obtained by investing
in securities denominated in foreign
currencies.
- Anticipatory Hedging: When the Fund
enters into a contract for the purchase
or anticipates the need to purchase a
security denominated in a foreign
currency, it
156
<PAGE> 299
may "lock in" the U.S. dollar price of
the security by buying the foreign
currency or through currency forwards or
futures.
- Proxy Hedging: The Fund may hedge the
exposure of a given foreign currency by
using an instrument relating to a
different currency, which the Manager
believes is highly correlated to the
currency being hedged.
INVESTMENT - The Fund may enter into currency
forwards or futures contracts in
conjunction with entering into a futures
contract on a foreign index in order to
create synthetic foreign currency
denominated securities.
RISK MANAGEMENT - The Fund may use foreign currency
transactions for risk management, which
will permit the Fund to have foreign
currency exposure that is significantly
different than the currency exposure
represented by its portfolio
investments. This may include long and
short exposure to particular currencies
beyond the amount of the Fund's
investment in securities denominated in
that currency.
157
<PAGE> 300
GMO INTERNATIONAL BOND FUND
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
PERMITTED INVESTMENTS
At least 65% of the Fund's total assets will be invested in or exposed to(39)
"bonds." "Bonds" mean any fixed income obligations with an original maturity of
two years or more, as well as "synthetic" bonds created by combining a futures
contract or option on a fixed income security with cash, a cash equivalent
investment or another fixed income security. The Fund invests directly in
securities or indirectly in securities through investment in GMO Alpha LIBOR
Fund. You may obtain information about Alpha LIBOR Fund by calling the Trust
collect at 617-346-7646.
securities issued by federal, state, local and
foreign governments
convertible bonds
fixed income securities of private issuers
depository receipts: ADRs, GDRs, EDRs
foreign issues traded in the U.S. and abroad
investment companies (open & closed end)
preferred stock
illiquid securities
144A securities
restricted securities
repurchase agreements
reverse repurchase agreements
zero coupon securities
warrants
securities purchased and sold on a when-issued or delayed delivery basis
indexed securities
firm commitments (with banks or broker-dealers)
interest rate/bond futures and related options
exchange-traded and OTC options on securities and indexes (including
writing covered options)
interest rate swap contracts
total return swap contracts
contracts for differences
credit default swap
interest rate caps, floors and collars
asset-backed securities including mortgage-backed, CMOs, strips and
residuals
loan participations (and other direct debt)
sovereign debt of emerging countries
GMO Alpha LIBOR Fund
Commercial paper and other high quality cash equivalents and money
market instruments of the type invested in by GMO Short-Term Income
Fund.
FOREIGN CURRENCY TRANSACTIONS - The Fund may invest in spot currency
transactions, forward currency
contracts, currency swap contracts,
options on currencies, currency futures
and related options.
- The Fund may also use synthetic bonds
and synthetic foreign currency
denominated securities(40) to
approximate desired risk/return
profiles.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary
for clearance of transactions.
BORROWING MONEY - Except that the Fund may temporarily
borrow up to 20% of its net assets from
banks for the payment of redemptions or
settlement of securities transactions,
but not as a leveraged investment
strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is
deemed an underwriter for securities law
purposes in connection with disposition
of portfolio investments.
----------
(39) The words "exposed to" as used in these guidelines mean
that, for purposes of the relevant requirement or restriction, the
total of the Fund's exposure to the relevant market or security through
direct investments and through derivative instruments will be
considered.
(40) The Fund may purchase forward foreign exchange contracts
in conjunction with U.S. dollar-denominated securities in order to
create a synthetic foreign currency denominated security.
158
<PAGE> 301
MAKING LOANS - Except that purchasing debt obligations,
repurchase agreements and engaging in
securities lending will not be
considered making loans for this
purpose. The Fund may loan securities
valued at up to one-third of its total
assets.
PLEDGING, HYPOTHECATING OR
MORTGAGING FUND ASSETS - Except that collateral arrangements with
respect to swap agreements, the writing
of options, index, interest rate,
currency or other futures contracts,
options on futures contracts and
collateral arrangements with respect to
initial and variation margin are not
deemed to be a pledge or other
encumbrance of assets. The deposit of
securities or cash or cash equivalents
in escrow in connection with the writing
of covered call or put options,
respectively, is also not deemed to be a
pledge or encumbrance.
MAKING SHORT SALES OF SECURITIES
INVESTMENT IN BANKRUPT CORPORATE SECURITIES
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES - No more than 10% of the Fund's net
assets will be invested in time premiums
on options on particular securities (as
opposed to options on indexes).
ILLIQUID SECURITIES No more than 15% of the Fund's net
assets will be invested in illiquid
securities.
INVESTMENT IN LOWER-RATED
SECURITIES - The Fund will invest less than 25% of
its assets in securities rated BBB-/Baa3
or less (or equivalent, as determined by
the Manager).
CONCENTRATION
CONCENTRATION - The Fund will not invest more than 25%
of its total assets in a single
industry.
DERIVATIVE INSTRUMENTS
DERIVATIVES AND GMO'S GLOBAL BOND
STRATEGY - The Fund is not specifically limited
with respect to the extent to which
derivatives may be used, or with respect
to the absolute face value of the
derivative positions employed. Instead,
effective market exposure is controlled
by controlling the projected tracking
error relative to the Fund's benchmark.
However, this will mean that the Fund
may be leveraged if measured in terms of
aggregate exposure of the Fund's assets.
- Options, futures contracts and related
options on bonds or baskets or indexes
of securities.
- Options on bonds and other securities.
- Swap contracts, including interest rate
swaps, total return swaps, credit
default swaps and contracts for
differences.
- Structured notes.
USES OF DERIVATIVES
(OTHER THAN FOREIGN CURRENCY)
TYPES OF DERIVATIVES
HEDGING - Traditional Hedging: Bond futures,
related options, bond options and swap
contracts used to hedge against a market
or credit risk already generally present
in the Fund.
159
<PAGE> 302
- Anticipatory Hedging: If the Fund
receives or anticipates significant cash
purchase transactions, the fund may
hedge market risk (risk of not being
invested in the market) by purchasing
long futures contracts or entering into
long swap contracts to obtain market
exposure until such time as direct
investments can be made efficiently.
Conversely, if the Fund receives or
anticipates a significant demand for
cash redemptions, the Fund may sell
futures contracts or enter into short
swap contracts while the Fund disposes
of securities in an orderly fashion.
INVESTMENT - The Fund may use derivative instruments
(particularly long futures contracts,
related options and long swap contracts)
in place of investing directly in
securities. Because a foreign derivative
generally only provides the return of a
foreign market in local currency terms,
the Fund will often purchase a foreign
currency forward in conjunction with
using derivatives to give the effect of
investing directly.
RISK MANAGEMENT - The Fund may use options, futures,
related options and swap contracts to
adjust the weight of the Fund to a level
the Manager believes is the optimal
exposure to individual countries and
issuers. Sometimes, such transactions
are used as a precursor to actual sales
and purchases.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY
TRANSACTIONS - Buying and selling spot currencies.
- Forward foreign currency contracts.
- Currency futures contracts and related
options.
- Options on currencies.
- Currency swap contracts.
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING - Traditional Hedging: The Fund may effect
foreign currency transactions -
generally short forward or futures
contracts - to hedge the risk of foreign
currencies represented by its securities
investments back into the U.S. dollar.
The Fund is not required to hedge any of
the currency risk obtained by investing
in securities denominated in foreign
currencies.
- Anticipatory Hedging: When the Fund
enters into a contract for the purchase
or anticipates the need to purchase a
security denominated in a foreign
currency, it may "lock in" the U.S.
dollar price of the security by buying
the foreign currency or through currency
forwards or futures.
- Proxy Hedging: The Fund may hedge the
exposure of a given foreign currency by
using an instrument relating to a
different currency, which the Manager
believes is highly correlated to the
currency being hedged.
INVESTMENT - The Fund may enter into currency
forwards or futures contracts in
conjunction with entering into a futures
contract on a foreign index in order to
create synthetic foreign currency
denominated securities.
160
<PAGE> 303
RISK MANAGEMENT - The Fund may use foreign currency
transactions for risk management, which
will permit the Fund to have foreign
currency exposure that is significantly
different than the currency exposure
represented by its portfolio
investments. This may include long and
short exposure to particular currencies
beyond the amount of the Fund's
investment in securities denominated in
that currency.
161
<PAGE> 304
GMO CURRENCY HEDGED INTERNATIONAL BOND FUND
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
PERMITTED INVESTMENTS
At least 65% of the Fund's total assets will be invested in or exposed
to(41) "bonds." "Bonds" mean any fixed income obligations with an original
maturity of two years or more, as well as "synthetic" bonds created by combining
a futures contract or option on a fixed income security with cash, a cash
equivalent investment or another fixed income security. While the Fund invests
primarily in obligations denominated in foreign currencies, the Fund will employ
currency transactions so that, under normal conditions, at least 75% of the
Fund's net exposure to currencies will be to the U.S. dollar. The Fund invests
directly in securities or indirectly in securities through investment in GMO
Alpha LIBOR Fund. You may obtain information about Alpha LIBOR Fund by calling
the Trust collect at 617-346-7646.
securities issued by federal, state, local and
foreign governments
convertible bonds
fixed income securities of private issuers
depository receipts: ADRs, GDRs, EDRs
foreign issues traded in the U.S. and abroad
investment companies (including closed-end
funds)
preferred stock
illiquid securities
144A securities
restricted securities
reverse repurchase agreements
zero coupon securities
repurchase agreements
securities purchased and sold on a when-issued or delayed delivery basis
indexed securities
firm commitments (with banks or broker-dealers)
interest rate/bond futures and related options
exchange-traded and OTC options on securities and indexes (including
writing covered options)
interest rate swap contracts
total return swap contracts
contracts for differences
credit default swaps
interest rate caps, floors and collars
asset-backed securities including mortgage-backed, cmos, strips and
residuals
loan participations (and other direct debt)
sovereign debt of emerging countries
warrants
GMO Alpha LIBOR Fund
Commercial paper and other high quality cash equivalents and money
market instruments of the type invested in by GMO Short-Term Income Fund.
FOREIGN CURRENCY TRANSACTIONS - The Fund may invest in spot currency
transactions, forward currency
contracts, currency swap contracts,
options on currencies, currency futures
and related options.
- The Fund may also use synthetic bonds
and synthetic foreign currency
denominated securities(42) to
approximate desired risk/return
profiles.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term credits
necessary for clearance of transactions.
BORROWING MONEY - Except that the Fund may temporarily
borrow up to 20% of its net assets from
banks for the payment of redemptions or
settlement of securities transactions,
but not as a leveraged investment
strategy.
----------
(41) The words "exposed to" as used in these guidelines mean
that, for purposes of the relevant requirement or restriction, the
total of the Fund's exposure to the relevant market or security through
direct investments and through derivative instruments will be
considered.
(42) The Fund may purchase forward foreign exchange contracts
in conjunction with U.S. dollar-denominated securities in order to
create a synthetic foreign currency denominated security.
162
<PAGE> 305
UNDERWRITING SECURITIES - Except to the extent that the Fund is
deemed an underwriter for securities law
purposes in connection with disposition
of portfolio investments.
MAKING LOANS - Except that purchasing debt obligations,
repurchase agreements and engaging in
securities lending will not be
considered making loans for this
purpose. The Fund may loan securities
valued at up to one-third of its total
assets.
PLEDGING, HYPOTHECATING OR - Except that collateral arrangements with
MORTGAGING FUND ASSETS respect to swap agreements, the writing
of options, index, interest rate,
currency or other futures contracts,
options on futures contracts and
collateral arrangements with respect to
initial and variation margin are not
deemed to be a pledge or other
encumbrance of assets. The deposit of
securities or cash or cash equivalents
in escrow in connection with the writing
of covered call or put options,
respectively, is also not deemed to be a
pledge or encumbrance.
MAKING SHORT SALES OF SECURITIES
INVESTMENT IN BANKRUPT CORPORATE SECURITIES
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES - No more than 10% of the Fund's net
assets will be invested in time premiums
on options on particular securities (as
opposed to options on indexes).
ILLIQUID SECURITIES - No more than 15% of the Fund's net
assets will be invested in illiquid
securities.
INVESTMENT IN LOWER-RATED
SECURITIES - The Fund will invest less than 25% of
its assets in securities rated BBB-/Baa3
or less (or equivalent, as determined by
the Manager).
CONCENTRATION
CONCENTRATION - The Fund will not invest more than 25%
of its total assets in a single
industry.
DERIVATIVE INSTRUMENTS
DERIVATIVES AND GMO'S GLOBAL BOND - The Fund is not specifically limited
STRATEGY with respect to the extent to which
derivatives may be used, or with respect
to the absolute face value of the
derivative positions employed. Instead,
effective market exposure is controlled
by controlling the projected tracking
error relative to the Fund's benchmark.
However, this will mean that the Fund
may be leveraged if measured in terms of
aggregate exposure of the Fund's assets.
Note: The Fund is a currency-hedged fund
in that it seeks to limit its aggregate
net exposure to foreign currencies
(assuming complete offset of
overweighted and underweighted positions
across all currency markets) to not more
than 25% of the Fund's net asset value.
However, the Fund will not specifically
hedge the currency exposure represented
by the Fund's investments in foreign
bonds and synthetic foreign currency
denominated fixed income securities.
TYPES OF DERIVATIVES - Options, futures contracts and related
options on bonds or baskets or indexes
of securities.
- Options on bonds and other securities.
- Swap contracts, including interest rate
swaps, total return swaps, credit
default swaps and contracts for
differences.
- Structured notes.
USES OF DERIVATIVES
(OTHER THAN FOREIGN CURRENCY)
163
<PAGE> 306
HEDGING - Traditional Hedging: Bond futures,
related options, bond options and swap
contracts used to hedge against a market
or credit risk already generally present
in the Fund.
- Anticipatory Hedging: If the Fund
receives or anticipates significant cash
purchase transactions, the fund may
hedge market risk (risk of not being
invested in the market) by purchasing
long futures contracts or entering into
long swap contracts to obtain market
exposure until such time as direct
investments can be made efficiently.
Conversely, if the Fund receives or
anticipates a significant demand for
cash redemptions, the Fund may sell
futures contracts or enter into short
swap contracts while the Fund disposes
of securities in an orderly fashion.
INVESTMENT - The Fund may use derivative instruments
(particularly long futures contracts,
related options and long swap contracts)
in place of investing directly in
securities. Because a foreign derivative
generally only provides the return of a
foreign market in local currency terms,
the Fund will often purchase a foreign
currency forward in conjunction with
using derivatives to give the effect of
investing directly.
RISK MANAGEMENT - The Fund may use options, futures,
related options and swap contracts to
adjust the weight of the Fund to a level
the Manager believes is the optimal
exposure to individual countries and
issuers. Sometimes, such transactions
are used as a precursor to actual sales
and purchases.
LIMITATIONS ON THE USE OF
DERIVATIVES - Counterparties used for OTC derivatives
must have a long-term debt rating of A
or higher when the derivative is entered
into. Occasionally, short-term
derivatives will be entered into with
counterparties that have only high
short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY
TRANSACTIONS - Buying and selling spot currencies.
- Forward foreign currency contracts.
- Currency futures contracts and related
options.
- Options on currencies.
- Currency swap contracts.
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING - Traditional Hedging: The Fund may
effect foreign currency transactions -
generally short forward or futures
contracts - to hedge the risk of foreign
currencies represented by its securities
investments back into the U.S. dollar.
The Fund is not required to hedge any of
the currency risk obtained by investing
in securities denominated in foreign
currencies.
- Anticipatory Hedging: When the Fund
enters into a contract to purchase or
anticipates the need to purchase a
security denominated in a foreign
currency, it may "lock in" the U.S.
dollar price of the security by buying
the foreign currency or through currency
forwards or futures
- Proxy Hedging: The Fund may hedge the
exposure of a particular foreign
currency by using an instrument relating
to a different currency, which the
Manager believes is highly correlated to
the currency being hedged.
INVESTMENT - The Fund may enter into currency
forwards or futures contracts in
conjunction with entering into a futures
contract on a foreign index in order to
create synthetic foreign currency
denominated securities.
RISK MANAGEMENT - The Fund may use foreign currency
transactions for risk management, which
will permit the Fund to have foreign
currency exposure that is significantly
different than the currency exposure
represented by its portfolio
investments. This may include long and
short exposure to particular currencies
beyond the amount of the Fund's
investment in securities denominated in
that currency.
164
<PAGE> 307
GMO GLOBAL BOND FUND
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
PERMITTED INVESTMENTS
At least 65% of the Fund's total assets will be invested in or exposed to(43)
"bonds", either directly, or indirectly through investment in the GMO Alpha
LIBOR Fund. "Bonds" mean any fixed income obligations with an original maturity
of two years or more, as well as "synthetic" bonds created by combining a
futures contract or option on a fixed income security with cash, a cash
equivalent investment or another fixed income security. The Fund invests
directly in securities or indirectly in securities through investment in GMO
Alpha LIBOR Fund. You may obtain information about Alpha LIBOR Fund by calling
the Trust collect at 617-346-7646.
GMO Alpha LIBOR Fund
securities issued by federal, state, local and foreign governments
asset-backed securities including mortgage-
backed, CMOs, strips and residuals
convertible bonds
fixed income securities of private issuers
depository receipts: ADRs, GDRs, EDRs
foreign issues traded in the U.S. and abroad
investment companies (open & closed end)
preferred stock
illiquid securities
144A securities
restricted securities
repurchase agreements
reverse repurchase agreements
dollar roll transactions
adjustable rate securities
zero coupon securities
securities purchased and sold on a when-issued or delayed delivery basis
indexed securities
firm commitments (with banks or broker-dealers)
interest rate/bond futures and related options
exchange-traded and OTC options on securities and indexes (including
writing covered options)
interest rate swap contracts
total return swap contracts
contracts for differences
credit default swaps
interest rate caps, floors and collars
loan participations (and other direct debt)
sovereign debt of emerging countries
warrants
commercial paper and other high quality cash equivalents and money
market instruments of the type invested in by the GMO Short-Term
Income Fund
GMO Alpha LIBOR Fund
Commercial paper and other
high quality cash
equivalents and money market
instruments of the type
invested in by GMO
Short-Term Income Fund.
FOREIGN CURRENCY TRANSACTIONS - The Fund may invest in spot currency
transactions, forward currency
contracts, currency swap contracts,
options on currencies, currency futures
and related options.
- The Fund may also use synthetic bonds
and synthetic foreign currency
denominated securities(44) to
approximate desired risk/return
profiles.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary
for clearance of transactions.
----------
(43) The words "exposed to" as used in these guidelines mean
that, for purposes of the relevant requirement or restriction, the
total of the Fund's exposure to the relevant market or security through
direct investments, investments in other investment companies and
through derivative instruments will be considered.
(44) The Fund may purchase forward foreign exchange contracts
in conjunction with U.S. dollar-denominated securities in order to
create a synthetic foreign currency denominated security.
165
<PAGE> 308
BORROWING MONEY - Except that the Fund may temporarily
borrow up to 20% of its net assets from
banks for the payment of redemptions or
settlement of securities transactions,
but not as a leveraged investment
strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is
deemed an underwriter for securities law
purposes in connection with disposition
of portfolio investments.
MAKING LOANS - Except that purchasing debt obligations,
repurchase agreements and engaging in
securities lending will not be
considered making loans for this
purpose. The Fund may loan securities
valued at up to one-third of its total
assets.
PLEDGING, HYPOTHECATING OR
MORTGAGING FUND ASSETS - Except that collateral arrangements with
respect to swap agreements, the writing
of options, index, interest rate,
currency or other futures contracts,
options on futures contracts and
collateral arrangements with respect to
initial and variation margin are not
deemed to be a pledge or other
encumbrance of assets. The deposit of
securities, cash or cash equivalents in
escrow in connection with the writing of
covered call or put options,
respectively, is also not deemed to be a
pledge or encumbrance.
MAKING SHORT SALES OF SECURITIES
INVESTMENT IN BANKRUPT CORPORATE SECURITIES
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES - No more than 10% of the Fund's net
assets will be invested in time premiums
on options on particular securities (as
opposed to options on indexes).
ILLIQUID SECURITIES - No more than 15% of the Fund's net
assets will be invested in illiquid
securities.
CONCENTRATION
CONCENTRATION - The Fund will not invest more than 25%
of its total assets in a single
industry.
166
<PAGE> 309
DERIVATIVE INSTRUMENTS
DERIVATIVES AND GMO'S GLOBAL BOND
STRATEGY - The fundamental strategy of the Fund
requires that the Fund take active
over-weighted and under-weighted
positions with respect to particular
bond markets and currencies relative to
the Fund's performance benchmark. Often
these active positions will be achieved
using long and short derivative
positions and combinations of such
positions to create synthetic
securities. The Fund is not specifically
limited with respect to the extent to
which derivatives may be used, or with
respect to the absolute face value of
the derivative positions employed.
Instead, effective market exposure is
controlled by controlling the projected
tracking error relative to the Fund's
benchmark. However, this will mean that
the Fund may be leveraged if measured in
terms of aggregate exposure of the
Fund's assets.
TYPES OF DERIVATIVES - Options, futures contracts and related
options on bonds or baskets or indexes
of securities
- Options on bonds and other securities
- Swap contracts, including interest
rate swaps, total return swaps, credit
default swaps and contracts for
differences
- Structured notes
USES OF DERIVATIVES
(OTHER THAN FOREIGN CURRENCY)
HEDGING - Traditional Hedging: Bond futures,
related options, bond options and swap
contracts used to hedge against a market
or credit risk already generally present
in the Fund.
- Anticipatory Hedging: If the Fund
receives or anticipates significant cash
purchase transactions, the fund may
hedge market risk (risk of not being
invested in the market) by purchasing
long futures contracts or entering into
long swap contracts to obtain market
exposure until such time as direct
investments can be made efficiently.
Conversely, if the Fund receives or
anticipates a significant demand for
cash redemptions, the Fund may sell
futures contracts or enter into short
swap contracts while the Fund disposes
of securities in an orderly fashion.
INVESTMENT - The Fund may use derivative instruments
(particularly long futures contracts,
related options and long swap contracts)
in place of investing directly in
securities. Because a foreign derivative
generally only provides the return of a
foreign market in local currency terms,
the Fund will often purchase a foreign
currency forward in conjunction with
using derivatives to give the effect of
investing directly.
RISK MANAGEMENT - The Fund may use options, futures,
related options and swap contracts to
adjust the weight of the Fund to a level
the Manager believes is the optimal
exposure to individual countries and
issuers. Sometimes, such transactions
are used as a precursor to actual sales
and purchases.
LIMITATIONS ON THE USE OF
DERIVATIVES - Counterparties used for OTC derivatives
must have a long-term debt rating of A
or higher when the derivative is entered
into. Occasionally, short-term
derivatives will be entered into with
counterparties that have only high
short-term debt ratings.
167
<PAGE> 310
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY
TRANSACTIONS - Buying and selling spot currencies
- Forward foreign currency contracts
- Currency futures contracts and related
options
- Options on currencies
- Currency swap contracts
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING - Traditional Hedging: The Fund may
effect foreign currency transactions -
generally short forward or futures
contracts - to hedge the risk of foreign
currencies represented by its securities
investments back into the U.S. dollar.
The Fund is not required to hedge any of
the currency risk obtained by investing
in securities denominated in foreign
currencies.
- Anticipatory Hedging: When the Fund
enters into a contract for the purchase
or anticipates the need to purchase a
security denominated in a foreign
currency, it may "lock in" the U.S.
dollar price of the security by buying
the foreign currency or through currency
forwards or futures.
- Proxy Hedging: The Fund may hedge the
exposure of a given foreign currency by
using an instrument relating to a
different currency, which the Manager
believes is highly correlated to the
currency being hedged.
INVESTMENT - The Fund may enter into currency
forwards or futures contracts in
conjunction with entering into a futures
contract on a foreign index in order to
create synthetic foreign currency
denominated securities.
RISK MANAGEMENT - The Fund may use foreign currency
transactions for risk management, which
will permit the Fund to have foreign
currency exposure that is significantly
different than the currency exposure
represented by its portfolio
investments. This may include long and
short exposure to particular currencies
beyond the amount of the Fund's
investment in securities denominated in
that currency.
168
<PAGE> 311
GMO EMERGING COUNTRY DEBT FUND
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
PERMITTED INVESTMENTS
The Fund invests directly in securities or indirectly in securities through
investment in GMO Alpha LIBOR Fund. You may obtain information about Alpha LIBOR
Fund by calling the Trust collect at 617-346-764.
FIXED INCOME SECURITIES:
<TABLE>
<S> <C>
securities issued by federal, state, local - At least 65% of the Fund's total assets will be invested
and foreign governments in or exposed to(45) bonds.
convertible bonds, brady bonds
sovereign debt
private issues - At least 50% of the Fund's total assets will be
loan participations (and other direct debt) denominated in, or hedged into, U.S. dollars.
OTHER INVESTMENTS: - At least 65% of the Fund's total assets will be invested
foreign issues traded in the U.S. and abroad in debt securities of Emerging Countries.
investment companies (open and closed-end)
preferred stock
illiquid securities
144A securities
restricted securities
reverse repurchase agreements
securities purchased and sold on a
when-issued or delayed delivery basis
indexed securities
firm commitments (with banks or
broker-dealers)
exchange-traded and OTC options on
securities and indexes (including writing
covered options)
interest rate swap contracts
total return swap contracts
contracts for differences
credit default swaps
interest rate caps, floors and collars
asset-backed securities including
mortgage-backed, CMOs, strips
and residuals
warrants
repurchase agreements
lower-rated securities
GMP Alpha LIBOR Fund
commercial paper and other high quality
cash equivalents and money market
instruments of the type invested in by GMO
Short-Term Income Fund.
</TABLE>
----------
(45) The words "exposed to" as used in these guidelines mean
that, for purposes of the relevant requirement or restriction, the
total of the Fund's exposure to the relevant market or security through
direct investments and through derivative instruments will be
considered.
169
<PAGE> 312
FOREIGN CURRENCY TRANSACTIONS - The Fund may invest in spot currency
transactions, forward currency
contracts, currency swap contracts,
options on currencies, currency futures
and related options.
- The Fund may also use synthetic
bonds(46) and synthetic foreign currency
denominated securities(47) to
approximate desired risk/return
profiles.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term credits
necessary for clearance of transactions.
BORROWING MONEY - Except that the Fund may temporarily
borrow up to 20% of its net assets from
banks for the payment of redemptions or
settlement of securities transactions,
but not as a leveraged investment
strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is
deemed an underwriter for securities law
purposes in connection with disposition
of portfolio investments.
MAKING LOANS - Except that purchasing debt obligations,
repurchase agreements and engaging in
securities lending will not be
considered making loans for this
purpose. The Fund may loan securities
valued at up to one-third of its total
assets.
PLEDGING, HYPOTHECATING OR MORTGAGING - Except that collateral arrangements with
respect to swap FUND ASSETS agreements,
the writing of options, index, interest
rate, currency or other futures
contracts, options on futures contracts
and collateral arrangements with respect
to initial and variation margin are not
deemed to be a pledge or other
encumbrance of assets. The deposit of
securities or cash or cash equivalents
in escrow in connection with the writing
of covered call or put options,
respectively, is also not deemed to be a
pledge or encumbrance.
INVESTING IN SECURITIES ISSUED BY NORTHERN IRELAND COMPANIES
INVESTING IN SECURITIES ISSUED BY IRANIAN COMPANIES
INVESTING IN BANKRUPT CORPORATE SECURITIES
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
MAKING SHORT SALES OF SECURITIES
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES - No more than 10% of the Fund's net
assets will be invested in time premiums
on options on particular securities (as
opposed to options on indexes).
ILLIQUID SECURITIES - No more than 15% of the Fund's net
assets will be invested in illiquid
securities.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - Except for U.S. government securities,
cash, and money market instruments, the
Fund will not invest more than 25% of
its assets in the securities of a single
issuer.
CONCENTRATION - The Fund will not invest more than 25%
of its total assets in a single
industry.
DERIVATIVE INSTRUMENTS (OTHER THAN FOREIGN CURRENCY)
TYPES OF DERIVATIVES - Options, futures contracts and related
options on bonds or baskets or indexes
of
----------
(46) For investment purposes, the Fund may combine futures
contracts or options on fixed income securities with cash, cash
equivalent investments or other fixed income securities to create
"synthetic" bonds.
(47) The Fund may purchase forward foreign exchange contracts
in conjunction with U.S. dollar-denominated securities in order to
create a synthetic foreign currency-denominated security.
170
<PAGE> 313
securities.
- Options on bonds and other securities.
- Swap contracts, including interest rate
swaps, total return swaps, credit
default swaps and contracts for
differences.
- Structured notes.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Bond futures,
related options, Bond options and swap
contracts used to hedge against a market
or credit risk already generally present
in the Fund.
- Anticipatory Hedging: If the Fund
receives or anticipates significant cash
purchase transactions, the fund may
hedge market risk (risk of not being
invested in the market) by purchasing
long futures contracts or entering into
long swap contracts to obtain market
exposure until such time as direct
investments can be made efficiently.
Conversely, if the Fund receives or
anticipates a significant demand for
cash redemptions, the Fund may sell
futures contracts or enter into short
swap contracts while the Fund disposes
of securities in an orderly fashion.
INVESTMENT - The Fund may use derivative instruments
(particularly long futures contracts,
related options and long swap contracts)
in place of investing directly in
securities. Because a foreign derivative
generally only provides the return of a
foreign market in local currency terms,
the Fund will often purchase a foreign
currency forward in conjunction with
using derivatives to give the effect of
investing directly.
RISK MANAGEMENT - - The Fund may use options, futures,
SYNTHETIC SALES AND PURCHASES related options and swap contracts to
adjust the weight of the Fund to a level
the Manager believes is the optimal
exposure to individual countries and
issuers. Sometimes, such transactions
are used as a precursor to actual sales
and purchases.
LIMITATIONS ON THE USE OF
DERIVATIVES - There is no limit on the use of
derivatives for hedging purposes.
- Except when such instruments are used
for bona fide hedging, no more than 5%
of the Fund's net assets will be
committed to initial margin on futures
contracts and time premiums on related
options.
- Counterparties used for OTC derivatives
must have a long-term debt rating of A
or higher when the derivative is entered
into. Occasionally, short-term
derivatives will be entered into with
counterparties that have only high
short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY
TRANSACTIONS - Buying and selling spot currencies.
- Forward foreign currency contracts.
- Currency futures contracts and related
options.
- Options on currencies.
- Currency swap contracts.
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING - Traditional Hedging: The Fund may effect
foreign currency transactions -
generally short forward or futures
contracts - to hedge the risk of foreign
currencies represented by its securities
investments back into the U.S. dollar.
The Fund is not required to hedge any of
the currency risk obtained by investing
in securities denominated in foreign
currencies.
- Anticipatory Hedging: When the Fund
enters into a contract for the purchase
or anticipates the need to purchase a
security denominated in a foreign
currency, it may "lock in" the U.S.
dollar price of the security by buying
the foreign currency or through currency
forwards or futures.
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- Proxy Hedging: The Fund may hedge the
exposure of a given foreign currency by
using an instrument relating to a
different currency, which the Manager
believes is highly correlated to the
currency being hedged.
INVESTMENT - The Fund may enter into currency
forwards or futures contracts in
conjunction with entering into a futures
contract on a foreign index in order to
create synthetic foreign
currency-denominated securities.
RISK MANAGEMENT - The Fund may use foreign currency
transactions for risk management, which
will permit the Fund to have foreign
currency exposure that is significantly
different than the currency exposure
represented by its portfolio
investments. This may include long and
short exposure to particular currencies
beyond the amount of the Fund's
investment in securities denominated in
that currency.
LIMITATIONS OF FOREIGN CURRENCY
TRANSACTIONS - The aggregate absolute face value of all
currency forward, currency futures and
currency swap contracts (without regard
to sign and assuming no offset of long
and short positions, and counting both
components of any contract for
differences) will not exceed 50% of the
Fund's total assets.
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GMO SHORT-TERM INCOME FUND
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
The Fund invests directly in securities or indirectly in securities through
investment in GMO Alpha LIBOR Fund. You may obtain information about Alpha LIBOR
Fund by calling the Trust collect at 617-346-7646.
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
GMO Alpha LIBOR Fund - The Fund seeks to maintain a duration of not greater
U.S. government securities than two years.
prime commercial paper
master demand notes
certificates of deposit
bankers' acceptances
other bank obligations (including foreign
branches of domestic banks)
foreign securities
repurchase agreements
adjustable rate securities
asset backed securities including mortgage-
backed, CMO's, strips and residuals
high quality corporate debt securities
(including those backed by pools of
commercial or consumer finance loans)
warrants
lower-rated securities
investment companies
firm commitments (with banks or broker-dealers)
interest rate/bond futures and related options
exchange-traded and OTC options on securities
and indexes (including writing covered options)
interest rate swap contracts
total return swap contracts
contracts for differences
interest rate caps, floors and collars
indexed securities
securities purchased and sold on a
when-issued or delayed delivery basis
</TABLE>
The Fund may purchase any of the above instruments through firm commitment
arrangements with domestic commercial banks and registered
broker-dealers. The Fund may enter into repurchase agreements with such
banks and broker-dealers with respect to any of the above instruments and
with respect to longer term U.S. Government Securities or corporate debt
securities rated at least "AA" by S&P or at least "Aa" by Moody's. When
the Fund has purchased a security subject to a repurchase agreement, the
amount and maturity of the Fund's investment will be determined by
reference to the amount and term of the repurchase agreement, not by
reference to the underlying security.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
INVEST IN BANKRUPT CORPORATE SECURITIES
<TABLE>
<S> <C>
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 5% of its net
assets from
</TABLE>
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<TABLE>
<S> <C>
banks for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of
portfolio investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase agreements and
engaging in securities lending will not be considered making loans
for this purpose. The Fund may loan securities valued at up to
one-third of its total assets.
PLEDGING, HYPOTHECATING OR - Except regarding collateral arrangements with respect to swap
MORTGAGING FUND ASSETS agreements, the writing of options, index, interest rate, currency
or other futures contracts, options on futures contracts and collateral
arrangements with respect to initial and variation margin are not deemed to be
a pledge or other encumbrance of assets. The deposit of securities, cash or
cash equivalents in escrow in connection with the writing of covered call or
put options, respectively, is also not deemed to be a pledge or encumbrance.
</TABLE>
INVESTING IN BANKRUPT CORPORATE SECURITIES
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING SHORT SALES OF SECURITIES
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING DIRECTLY IN REAL ESTATE
MAKING INVESTMENT FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
ILLIQUID SECURITIES - No more than 15% of the Fund's net assets will be invested in
illiquid securities.
PRIME COMMERCIAL PAPER/ - At the time of direct investment, prime commercial paper and
DEMAND NOTES master demand notes must be rated "A-1" by S&P or "Prime-1" by
Moody's or, if unrated, issued by companies having an outstanding debt issue
rated at least "AA" by S&P or at least "Aa" by Moody's.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in securities of
issuers in any one industry, except that up to 100% of the Fund's assets may
be invested in obligations issued by banks.
</TABLE>
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<TABLE>
<S> <C>
DERIVATIVE INSTRUMENTS
TYPES OF DERIVATIVES - Options, futures contracts and related options on bonds or baskets or indexes
of securities
- Options on bonds and other securities
- Swap contracts, including interest rate swaps, total return swaps, credit
default swaps and contracts for differences
- Structured notes
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Bond futures, related options, Bond
options and swap contracts used to hedge against a market or credit risk
already generally present in the Fund.
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the fund may hedge market
risk (risk of not being invested in the market) by purchasing long
futures contracts or entering into long swap contracts to obtain
market exposure until such time as direct investments can be made
efficiently. Conversely, if the Fund receives or anticipates a
significant demand for cash redemptions, the Fund may sell futures
contracts or enter into short swap contracts while the Fund disposes
of securities in an orderly fashion.
INVESTMENT - The Fund may use derivative instruments (particularly long futures
contracts, related options and long swap contracts) in place of
investing directly in securities.
RISK MANAGEMENT - The Fund may use options,futures, related options and swap
contracts to adjust the weight of the Fund to a level the
Manager believes is the optimal exposure to individual countries
and issuers. Sometimes, such transactions are used as a
precursor to actual sales and purchases.
LIMITATIONS ON THE USE OF - Counterparties used for OTC derivatives must have a long-term
DERIVATIVES debt rating of A or higher when the derivative is entered into.
Occasionally, short-term derivatives will be entered into with counterparties
that have only high short-term debt ratings.
</TABLE>
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GMO GLOBAL HEDGED EQUITY FUND
The Global Hedged Equity Fund seeks high total return consistent with minimal
exposure to general equity market risk. Although at least 65% of the Fund's
total assets will be invested in equity securities either directly or indirectly
through investment in other Funds of the Trust as described below ("underlying
Funds"), as a result of the Fund's hedging techniques, the Fund expects to
create a return more similar to that received by an investment in fixed income
securities. The Fund will pursue its investment objective by investing
substantially all of its assets in a combination of (i) equity securities, (ii)
GMO Domestic Equity Funds and GMO International Equity Funds (including the GMO
Emerging Markets Funds) (iii) derivative instruments intended to hedge the value
of the Fund's equity securities held directly or through investment in
underlying Funds against substantially all of the general movements in the
relevant equity market(s), including hedges against substantially all of the
changes in the value of the U.S. dollar relative to the currencies represented
in the indexes used to hedge general equity market risk and (iv) long interest
rate futures contracts intended to adjust the duration of the theoretical fixed
income security embedded in the pricing of the derivatives used for hedging the
Fund's equity exposure (the "Theoretical Fixed Income Security"). To the extent
that the Fund's portfolio strategy is successful, the Fund is expected to
achieve a total return consisting of (i) the performance of the Fund's equity
securities held directly or through in investment in underlying Funds, relative
to the relevant equity market indexes (including appreciation or depreciation of
any overweighted currency relative to the currency weighting of the equity
hedge), plus or minus (ii) short-term capital gains or losses approximately
equal to the total return on the Theoretical Fixed Income Security, plus or
minus (iii) capital gains or losses on the Fund's interest rate futures
positions, minus (iv) transaction costs and other Fund expenses.
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
PERMITTED INVESTMENTS
LONG POSITIONS:
<TABLE>
<S> <C>
EQUITY SECURITIES: OTHER EQUITY SECURITIES:
common stocks depository receipts: ADRs, GDRs, EDRs
convertible bonds foreign issues traded in the U.S. and abroad
preferred stocks investment companies (open and closed-end)
warrants or rights illiquid securities
144A Securities
GMO FUNDS:(48) restricted securities
U. S. Core Fund equity futures and related options
Tobacco-Free Core Fund exchange-traded and OTC Options on securities and Indexes
Value Fund (including writing covered options)
Intrinsic Value Fund equity swap contracts
Growth Fund contracts for differences
Small Cap Value Fund interest rate futures contracts
Small Cap Growth Fund repurchase agreements
REIT Fund
International Core Fund
Currency Hedged International Core Fund
Foreign Fund
International Small Companies Fund
Japan Fund
Emerging Markets Fund
Evolving Countries Fund
Asia Fund
Global Properties Fund
</TABLE>
----------
(48) Investors should review the Summary of Investment Guidelines for
each of these underlying Funds in considering investment in the Global Hedged
Equity Fund.
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<PAGE> 319
PERMITTED INVESTMENTS - CONTINUED
- At least 65% of the Fund's total assets will be invested in or exposed to
(49) equity securities.
- The Fund will generally invest in at least 125 different common stocks
chosen from among the U.S. stocks in which the GMO Core Fund is permitted
to invest and stocks traded primarily outside of the United States in which
the GMO International Core Fund is permitted to invest. To the extent that
the Underlying Funds are used, this requirement is intended to apply to the
securities in which the Underlying Funds invest.
- The Fund may invest up to 20% of its total assets in securities of issuers
in newly industrialized countries of the type invested in by the GMO
Emerging Markets Fund.
- The Fund may invest in the securities identified in this Summary directly
or through investment in other Funds of GMO Trust ("Underlying Funds") as
set forth above. Thus, the Fund may operate as a Fund of Funds.
<TABLE>
<S> <C>
SHORT POSITIONS: - The Fund will enter into short EAFE futures contracts or swap contracts where
the Fund pays to the counterparty the positive return of EAFE (or EAFE with a
reduced weight in Japan) as a notional invested value, and receives an
interest payment and the negative return of the index on such notional amount
- The Fund will enter into short futures contracts and/or short swap contracts
on the S&P 500 Index or other established U.S. market indexes.
- The face value of the futures and swaps will be less than or equal to the
value of stocks held long at the time the futures and swaps are implemented.
- The Fund may use futures or options to raise the underlying short-term
interest rate return up to the return of a 2-year U.S. Treasury note.
- Each of the Underlying Funds may make use of derivatives, as described in the
Investment Guidelines applicable to each such Fund.
FOREIGN CURRENCY TRANSACTIONS - The Fund may invest in spot currency transactions, forward foreign currency
contracts, currency swap contracts, options on currencies, currency futures
and related options for hedging purposes only.
CASH AND MONEY MARKET INSTRUMENTS - Any short-term assets held directly will be invested in cash or high quality
money market instruments including securities issued by the U.S. government
and agencies thereof, bankers' acceptances, commercial paper, bank
certificates of deposit and repurchase agreements
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
</TABLE>
----------
(49) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
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<PAGE> 320
<TABLE>
<S> <C>
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its assets from banks
for the payment of redemptions or settlement of securities transactions, but
not as a leveraged investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for securities law
purposes in connection with disposition of portfolio investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase agreements and engaging in
securities lending will not be considered making loans for this purpose. The
Fund may loan securities valued at up to one-third of its total assets.
PLEDGING, HYPOTHECATING OR
MORTGAGING FUND ASSETS - Except that collateral arrangements with respect to swap agreements, the
writing of options, stock index, interest rate, currency or other futures
contracts, options on futures contracts and collateral arrangements with
respect to initial and variation margin are not deemed to be a pledge or other
encumbrance of assets. The deposit of securities or cash or cash equivalents
in escrow in connection with the writing of covered call or put options,
respectively, is also not deemed to be a pledge or encumbrance.
</TABLE>
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
MAKING SHORT SALES OF SECURITIES
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDICES
INVEST IN BANKRUPT CORPORATE SECURITIES
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
OPTIONS ON SECURITIES - No more than 5% of the Fund's net assets will be invested
in time premiums on options on particular securities
(as opposed to options on indexes).
ILLIQUID SECURITIES - No more than 15% of the Fund's net assets will be
invested in illiquid securities.
INVESTMENT IN INSURANCE COMPANIES - The Fund will not purchase more than 10% of the total
outstanding voting stock of any insurance company
(including foreign insurance companies).
INVESTMENT IN SECURITIES ISSUED - Equity: The Fund will not purchase more than 5% of any
BY BROKERS, DEALERS, UNDERWRITERS class of stock of a broker, dealer, underwriter or
AND INVESTMENT ADVISERS investment adviser.
- Debt: The Fund may not purchase more than 10% of any such company's total
outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets will be invested
in the securities of a single broker, dealer, underwriter or investment
adviser. The net payment obligation of swap contracts where one of these types
of companies is the counterparty also counts for purposes of this restriction.
This policy does not apply to companies that derived less than 15% of revenues
from "securities-related businesses" during the most recent fiscal year.
</TABLE>
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DIVERSIFICATION/CONCENTRATION
<TABLE>
<S> <C>
DIVERSIFICATION - Except for U.S. government securities, shares of other investment companies,
cash, money market instruments and shares of the Underlying Funds, the Fund
will not invest in any one security to an extent greater than 5 percentage
points over that security's weighting in the Fund's benchmark.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in securities of
issuers in any one industry.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS - Buying and selling spot currencies
- Forward foreign currency contracts
- Currency futures contracts and related options
- Options on currencies
- Currency swap contracts
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING - Traditional Hedging: The Fund may effect foreign currency transactions -
generally short forward or futures contracts - to hedge the risk of foreign
currencies represented by its securities investments back into the U.S.
dollar. The Fund is not required to hedge any of the currency risk obtained by
investing in securities denominated in foreign currencies.
- Proxy Hedging: The Fund may hedge the exposure of a given foreign currency by
using an instrument relating to a different currency which the Manager
believes is highly correlated to the currency being hedged.
INVESTMENT - The Fund may enter into currency forwards or futures contracts in conjunction
with entering into a futures contract on a foreign index in order to create
synthetic foreign currency denominated securities.
RISK MANAGEMENT - Subject to the limitations described below, the Fund may use foreign currency
transactions for risk management, which will permit the Fund to have foreign
currency exposure that is significantly different than the currency exposure
represented by its portfolio investments. This may include long exposure to
particular currencies beyond the amount of the Fund's investment in securities
denominated in that currency.
LIMITATIONS OF FOREIGN CURRENCY - The Fund's aggregate net foreign currency exposure, assuming full offset
TRANSACTIONS of long and short positions, will not exceed 100% of the Fund's net assets
denominated in foreign currencies, though the currency exposure of the Fund
may differ substantially from the currencies in which the Fund's securities
are denominated.
- The Fund will not be net short in any foreign currency, except that, when the
Fund is attempting to hedge all or nearly all of its exposure to a particular
currency, changes in the market value of foreign equities may cause the Fund
to be temporarily net short in the currency. Such temporary net short
positions will not exceed 1% of the Fund's assets.
</TABLE>
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GMO INFLATION INDEXED BOND FUND
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
PERMITTED INVESTMENTS
At least 65% of the Fund's total assets will be comprised of inflation
indexed bonds. A bond is "linked" to general measures of inflation if, by the
bond's terms, principal or interest components change with general movements of
inflation in the country of issue. The fund may invest in the following types of
securities. The Fund invests directly in securities or indirectly in securities
through investment in GMO Alpha LIBOR Fund. You may obtain information about
Alpha LIBOR Fund by calling the Trust collect at 617-346-7646.
<TABLE>
<S> <C>
securities issued by federal, state, local securities purchased and sold on a when-issued or delayed delivery basis
and foreign governments indexed securities
convertible bonds firm commitments (with banks or broker-dealers)
fixed income securities of private issuers interest rate/bond futures and related options
depository receipts: ADRs, GDRs, EDRs exchange-traded and OTC Options on securities and indexes
foreign issues traded in the U.S. and abroad (including writing covered options)
investment companies (open & closed-end) interest rate swap contracts
preferred stock total return swap contracts
illiquid securities contracts for differences
144A securities credit default swaps
restricted securities interest rate caps, floors and collars
repurchase agreements asset-backed securities including mortgage-backed, CMOs, strips
reverse repurchase agreements and residuals
adjustable rate securities loan participations (and other direct debt)
zero coupon securities lower-rated securities
GMO Alpha LIBOR Fund warrants
Commercial paper and other high quality cash equivalents and money market
instruments of the type invested in by GMO Short-Term Income Fund.
</TABLE>
<TABLE>
<S> <C>
FOREIGN CURRENCY TRANSACTIONS - The Fund may invest in spot currency transactions, forward
currency contracts, currency swap contracts, options on
currencies, currency futures and related options.
- The Fund may also use synthetic bonds (50) and synthetic foreign currency
denominated securities (51) to approximate desired risk/return profiles.
</TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
<TABLE>
<S> <C>
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its net assets from
banks for the payment of redemptions or settlement of securities transactions,
but not as a leveraged investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for securities law
purposes in connection with disposition of portfolio investments.
</TABLE>
----------
(50) For investment purposes, the Fund may combine futures contracts or
options on fixed income securities with cash, cash equivalent investments or
other fixed income securities to create "synthetic" bonds.
(51) The Fund may purchase forward foreign exchange contracts in
conjunction with U.S. dollar-denominated securities in order to create a
synthetic foreign currency denominated security.
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<TABLE>
<S> <C>
MAKING LOANS - Except that purchasing debt obligations, repurchase agreements and engaging in
securities lending will not be considered making loans for this purpose. The
Fund may loan securities valued at up to one-third of its total assets.
PLEDGING, HYPOTHECATING OR - Except regarding collateral arrangements with respect to
MORTGAGING FUND ASSETS swap agreements, the writing of options, index, interest rate,
currency or other futures contracts, options on futures contracts and
collateral arrangements with respect to initial and variation margin are not
deemed to be a pledge or other encumbrance of assets. The deposit of
securities or cash or cash equivalents in escrow in connection with the
writing of covered call or put options, respectively, is also not deemed to be
a pledge or encumbrance.
</TABLE>
DEBT SECURITIES OF EMERGING COUNTRIES
INVESTMENT IN BANKRUPT CORPORATE SECURITIES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
MAKING SHORT SALES ON SECURITIES
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDICES
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
OPTIONS ON SECURITIES - No more than 10% of the Fund's net assets will be invested in time premiums on
options on particular securities (as opposed to options on indexes)
ILLIQUID SECURITIES - No more than 15% of the Fund's net assets will be invested
in illiquid securities.
CONCENTRATION
CONCENTRATION - The Fund will not invest more than 25% of its total assets in securities of
issuers in a single industry.
DERIVATIVE INSTRUMENTS
TYPES OF DERIVATIVES - Options, futures contracts and related options on bonds or
baskets or indexes of securities
- Options on bonds and other securities
- Swap contracts, including interest rate swaps, total return swaps, credit
default swaps and contracts for differences
- Structured notes
USES OF DERIVATIVES (OTHER THAN
FOREIGN CURRENCY)
HEDGING - Traditional Hedging: Bond futures, related options, Bond options and swap
contracts used to hedge against a market or credit risk already generally
present in the Fund.
- Anticipatory Hedging: If the Fund receives or anticipates significant cash
purchase transactions, the fund may hedge market risk (risk of not being
invested in the market) by purchasing long futures contracts or entering into
long swap contracts to obtain market exposure until such time as direct
investments can be made efficiently. Conversely, if the Fund receives or
anticipates a significant demand for cash redemptions, the Fund may sell
futures contracts or enter into short swap contracts while the Fund disposes
of securities in an orderly fashion.
RISK MANAGEMENT - The Fund may use options, futures, related options and swap contracts to
adjust the weight of the Fund to a level the Manager believes is the optimal
exposure to individual countries and issuers. Sometimes, such transactions are
used as a precursor to actual sales and purchases.
</TABLE>
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<TABLE>
<S> <C>
LIMITATIONS ON THE USE OF DERIVATIVES - Counterparties used for OTC derivatives must have a long-term debt rating of A
or higher when the derivative is entered into. Occasionally, short-term
derivatives will be entered into with counterparties that have only high
short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS - Buying and selling spot currencies
- Forward foreign currency contracts
- Currency futures contracts and related options
- Options on currencies
- Currency swap contracts
USES OF FOREIGN CURRENCY
TRANSACTIONS
HEDGING - Traditional Hedging: The Fund may effect foreign currency transactions -
generally short forward or futures contracts - to hedge the risk of foreign
currencies represented by its securities investments back into the U.S.
dollar. The Fund is not required to hedge any of the currency risk obtained by
investing in securities denominated in foreign currencies.
- Anticipatory Hedging: When the Fund enters into a contract for the purchase or
anticipates the need to purchase a security denominated in a foreign currency,
it may "lock in" the U.S. dollar price of the security by buying the foreign
currency or through currency forwards or futures.
- Proxy Hedging: The Fund may hedge the exposure of a given foreign currency by
using an instrument relating to a different currency which the Manager
believes is highly correlated to the currency being hedged.
INVESTMENT - The Fund may enter into currency forwards or futures contracts in conjunction
with entering into a futures contract on a foreign index in order to create
synthetic foreign currency denominated securities
RISK MANAGEMENT - The Fund may use foreign currency transactions for risk management, which will
permit the Fund to have foreign currency exposure that is significantly
different than the currency exposure represented by its portfolio investments.
This may include long and short exposure to particular currencies beyond the
amount of the Fund's investment in securities denominated in that currency.
</TABLE>
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<PAGE> 325
ASSET ALLOCATION FUND
GMO U.S. SECTOR FUND
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
EQUITY SECURITIES: - At least 65% of the Fund's total assets will be
domestic common stocks invested in or exposed to (52) domestic common stocks.
convertible securities - The U.S. Sector Fund may invest in the securities
securities of foreign issuers (traded on identified in this document directly or through investment in
U.S. exchanges) other Funds of GMO Trust ("Underlying Funds"). Thus, the
Fund may operate as a Fund-of-Funds. The Fund may invest in
any of the following underlying Funds:
OTHER EQUITY SECURITIES:
depository receipts
illiquid securities GMO U.S. Core Fund
144A securities GMO Growth Fund
restricted securities GMO Value Fund
futures and related options on GMO Intrinsic Value Fund
securities and indexes GMO Small Cap Growth Fund
REITs GMO REIT Fund
exchange-traded and OTC options on
securities and indexes
(including writing covered options)
equity swap contracts Investors should review the Investment Guidelines for each of
contracts for differences these underlying Funds in considering investment in the U.S.
warrants or rights Sector Fund.
repurchase agreements
investment companies (open and closed end)
CASH AND MONEY MARKET INSTRUMENTS - The Fund will not normally have greater than 5% of its net
Any short-term assets will be invested in assets exposed to cash and money market instruments. This
cash or high quality money market limitation does not include cash and money market instruments in
instruments including securities issued by margin accounts or otherwise covering exposure achieved through
the U.S. government and agencies thereof, derivative instruments ("equitized cash").
bankers' acceptances, commercial paper, bank
certificates of deposit and repurchase
agreements
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its
net assets from banks for the payment of redemptions or settlement
of securities transactions, but not as a leveraged investment
strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for securities law
purposes in connection with disposition of portfolio investments.
</TABLE>
----------
(52) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the Fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
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<PAGE> 326
<TABLE>
<S> <C>
MAKING LOANS - Except that purchasing debt obligations, repurchase agreements and engaging in
securities lending will not be considered making loans for this purpose. The
Fund may loan securities valued at up to one-third of its total assets.
PLEDGING, HYPOTHECATING OR - Except that collateral arrangements with respect to swap agreements, the
MORTGAGING FUND ASSETS writing of options, stock index, interest rate, currency or other futures
contracts, options on futures contracts and collateral arrangements with
respect to initial and variation margin are not deemed to be a pledge or other
encumbrance of assets. The deposit of securities or cash or cash equivalents
in escrow in connection with the writing of covered call or put options,
respectively, is also not deemed to be a pledge or encumbrance.
</TABLE>
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
MAKING SHORT SALES OF SECURITIES
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
OPTIONS ON SECURITIES - No more than 5% of the Fund's net assets will be invested in time premiums on
options on particular securities (as opposed to options on indexes).
ILLIQUID SECURITIES - No more than 15% of the Fund's net assets will be invested in illiquid
securities.
INVESTMENT IN INSURANCE COMPANIES - The Fund will not purchase more than 10% of the total outstanding voting stock
of any insurance company (including foreign insurance companies).
INVESTMENT IN SECURITIES ISSUED BY - Equity: The Fund will not purchase more than 5% of any class
BROKERS, DEALERS, UNDERWRITERS AND of stock of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such company's total
outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets will be invested
in the securities of a single broker, dealer, underwriter or investment
adviser. The net payment obligation of swap contracts where one of these types
of companies is the counterparty also counts for purposes of this restriction.
- This policy does not apply to companies that derived less than 15% of revenues
from "securities-related businesses" during the most recent fiscal year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - Except for U.S. Government securities, cash, and money market instruments, the
Fund will not invest in any one security to an extent greater than 5
percentage points over that security's weighting in the Fund's benchmark.
- The Fund will not purchase more than 10% of the outstanding securities of any
issuer.
- The Fund will be invested in the securities of at least 125 issuers, when the
securities held by the Underlying Funds are counted for this purpose.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in securities of
issuers in any one industry.
</TABLE>
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<PAGE> 327
DERIVATIVE INSTRUMENTS
<TABLE>
<S> <C>
TYPES OF DERIVATIVES - Options, futures contracts and related options on
securities indexes.
- Long equity swap contracts: where the Fund pays a fixed rate plus the negative
performance, if any, and receives the positive performance, if any, of an
index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed rate plus the
negative performance, if any, and pays the positive performance of an index or
basket of securities.
- Contracts for differences:equity swaps that contain both a long and short
equity component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity futures, related options and short equity
swap contracts used to hedge against an equity risk already generally present
in the Fund. (53)
- Anticipatory Hedging: If the Fund receives or anticipates significant cash
purchase transactions, the Fund may hedge market risk (risk of not being
invested in the market) by purchasing long futures contracts or entering long
equity swap contracts to obtain market exposure until such time as direct
investments can be made efficiently. Conversely, if the Fund receives or
anticipates a significant demand for cash redemptions, the Fund may sell
futures contracts or enter into short equity swap contracts, to allow the Fund
to dispose of securities in a more orderly fashion without the Fund being
exposed to leveraged loss exposure in the interim.
INVESTMENT - The Fund may use derivative instruments (particularly long futures contracts,
related options and long equity swap contracts) in place of investing directly
in securities. This will include using equity derivatives to "equitize" cash
balances held by the Fund. The Fund may also use long derivatives for
investment in conjunction with short hedging transactions to adjust the
weights of the Fund's underlying equity portfolio to a level the Manager
believes is the optimal exposure to individual markets, sectors and equities.
RISK MANAGEMENT - - The Fund may use equity futures, related options and equity
SYNTHETIC SALES AND PURCHASES swap contracts to adjust the weight of the Fund to a level the manager
believes is the optimal exposure to individual markets, sectors and equities.
Sometimes, such transactions are used as a precursor to actual sales and
purchases. For example, if the Fund held a large proportion of stocks of a
particular market and the Manager believed that stocks of another market would
outperform such stocks, the Fund might use a short futures contract on an
appropriate index (to synthetically "sell" a portion of the Fund's portfolio)
in combination with a long futures contract on another index (to synthetically
"buy" exposure to that index). Long and short equity swap contracts and
contracts for differences may also be used for these purposes. Equity
derivatives (and corresponding currency forwards) used to effect synthetic
sales and purchases will generally be unwound as actual portfolio securities
are sold and purchased.
</TABLE>
----------
(53) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g., a single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund.
185
<PAGE> 328
<TABLE>
<S> <C>
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging
purposes.
- When long futures contracts and long equity swaps are used for investment, the
Fund will maintain an amount of cash or liquid securities equal to the face
value of all such long derivative positions. However, for purposes of this
restriction, if an existing long equity exposure is reduced or eliminated by a
short derivative position, the combination of the long and short position will
be considered as cash available to cover a new long derivative exposure.
- The net long equity exposure of the Fund, including direct investment in
securities and long derivative positions, will not exceed 100% of the Fund's
net assets.
- Except when such instruments are used for bona fide hedging, no more than 5%
of the Fund's net assets will be committed to initial margin on futures
contracts and time premiums on related options.
- Counterparties used for OTC derivatives must have a long-term debt rating of A
or higher when the derivative is entered into. Occasionally, short-term
derivatives will be entered into with counterparties that have only high
short-term debt ratings.
</TABLE>
186
<PAGE> 329
COMMERCIAL PAPER AND CORPORATE DEBT RATINGS
COMMERCIAL PAPER RATINGS
Commercial paper ratings of Standard & Poor's are current assessments of the
likelihood of timely payment of debts having original maturities of no more than
365 days. Commercial paper rated A-1 by Standard & Poor's indicates that the
degree of safety regarding timely payment is either overwhelming or very strong.
Those issues determined to possess overwhelming safety characteristics are
denoted A-1+. Commercial paper rated A-2 by Standard & Poor's indicates that
capacity for timely payment on issues is strong. However, the relative degree of
safety is not as high as for issues designated A-1. Commercial paper rated A-3
indicates capacity for timely payment. It is, however, somewhat more vulnerable
to the adverse effects of changes in circumstances than obligations carrying the
higher designations.
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated Prime-1 (or related supporting institutions) are considered to
have a superior capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics of Prime-1 rated issuers, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variations. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained. Issuers rated Prime-3 have an acceptable capacity for repayment of
short-term promissory obligations. The effect of industry characteristics and
market composition may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection measurements
and the requirement of relatively high financial leverage. Adequate alternative
liquidity is maintained.
CORPORATE DEBT RATINGS
Standard & Poor's. A Standard & Poor's corporate debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. The following is a summary of the ratings used by Standard & Poor's
for corporate debt:
AAA -- This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA -- Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay interest and repay principal is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic
187
<PAGE> 330
conditions or changing circumstances are more likely to lead to a weakened
capacity to repay principal and pay interest for bonds in this category than for
bonds in higher rated categories.
BB, B, CCC, CC -- Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C -- The rating C is reserved for income bonds on which no interest is being
paid.
D -- Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Moody's. The following is a summary of the ratings used by Moody's for corporate
debt:
Aaa -- Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large, or by an exceptionally
stable, margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds that are rated Aa are judged to be high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds that are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
188
<PAGE> 331
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often, the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Should no rating be assigned by Moody's, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.
3. There is lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1 and B1.
FINANCIAL STATEMENTS
The Trust's audited financial statements for the fiscal year ended
February 29, 2000 included in the Trust's Annual Reports and filed with the
Securities and Exchange Commission pursuant to Section 30(d) of the 1940 Act and
the rules promulgated thereunder, are (with the exception of the financial
statements relating to the Pelican Fund, the Fundamental Value Fund, the GMO
Tax-Managed U.S. Equities Fund, the GMO Tax-Managed International Equities Fund,
the GMO Tax-Managed Small Companies Fund and the Alpha LIBOR Fund) hereby
incorporated in this Statement of Additional Information by reference.
189
<PAGE> 332
GMO TRUST
SPECIMEN PRICE-MAKE-UP SHEETS
Following are computations of the total offering price per share for
each class of shares of each Fund of the Trust (except for the Pelican Fund,
Fundamental Value Fund, the Alpha LIBOR Fund and the Tax-Managed Funds) offering
shares of beneficial interest as of February 29, 2000, in each case based upon
their respective net asset values and shares of beneficial interest outstanding
at the close of business on February 29, 2000.
<TABLE>
<S> <C>
---------------------------------------------------------------------------------------------------------------------
U.S. Core Fund-Class II
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $16.62 per share based on 5,720,143 shares of $95,041,041
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($16.62 x 100/99.86) * $16.64
---------------------------------------------------------------------------------------------------------------------
U.S. Core Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $16.63 per share based on 97,625,347 shares of $1,623,733,870
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($16.63 x 100/99.86)* $16.65
---------------------------------------------------------------------------------------------------------------------
U.S. Core Fund-Class IV
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $16.62 per share based on 80,829,331 shares of $1,343,460,468
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($16.62 x 100/99.86)* $16.64
---------------------------------------------------------------------------------------------------------------------
Tobacco-Free Core Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $14.35 per share based on 22,424,824 shares of $321,785,694
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($14.35 x 100/99.86)* $14.37
---------------------------------------------------------------------------------------------------------------------
Value Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $7.98 per share based on 22,348,335 shares of $178,329,485
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($7.98 x 100/99.86) * $7.99
---------------------------------------------------------------------------------------------------------------------
Intrinsic Value Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $8.79 per share based on 4,396,330 shares of $38,649,888
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($8.79 x 100/99.86) $8.80
---------------------------------------------------------------------------------------------------------------------
Growth Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $4.95 per share based on 41,348,373 shares of $204,661,796
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($4.95 x 100/99.86)* $4.96
---------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $12.41 per share based on 21,422,932 shares of $265,777,543
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($12.41 x 100/99.50)* $12.47
---------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $16.87 per share based on $137,289,809
---------------------------------------------------------------------------------------------------------------------
</TABLE>
--------
* Represents maximum offering price charged on certain cash purchases.
See "How to Purchase Shares" in the Prospectus.
190
<PAGE> 333
<TABLE>
<S> <C>
---------------------------------------------------------------------------------------------------------------------
8,138,248 shares of beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($16.87 x 100/99.50) * $16.95
---------------------------------------------------------------------------------------------------------------------
REIT Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $8.26 per share based on 14,581,930 shares of $120,507,582
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($8.26 x 100/99.50) * $8.30
---------------------------------------------------------------------------------------------------------------------
International Core Fund-Class II
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $20.85 per share based on 1,015,155 shares of $21,162,422
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($20.85 x 100/99.40)* $20.98
---------------------------------------------------------------------------------------------------------------------
International Core Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $20.91 per share based on 86,087,007 shares of $1,799,928,594
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($20.91 x 100/99.40)* $21.04
---------------------------------------------------------------------------------------------------------------------
International Core Fund-Class IV
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $20.90 per share based on 13,968,183 shares of $291,894,074
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($20.90 x 100/99.40)* $21.03
---------------------------------------------------------------------------------------------------------------------
Currency Hedged International Core Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $10.04 per share based on 7,474,417 shares of $75,053,739
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($10.04 x 100/99.40)* $10.10
---------------------------------------------------------------------------------------------------------------------
Currency Hedged International Core Fund-Class IV
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $10.03 per share based on 5,235,942 shares of $52,526,345
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($10.03 x 100/99.40)* $10.09
---------------------------------------------------------------------------------------------------------------------
Foreign Fund-Class II
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $13.14 per share based on 4,586,703 shares of $60,278,431
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price $13.14
---------------------------------------------------------------------------------------------------------------------
Foreign Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $13.16 per share based on 77,702,492 shares of $1,022,498,368
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price $13.16
---------------------------------------------------------------------------------------------------------------------
Foreign Fund-Class IV
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $13.16 per share based on 10,726,851 shares of $141,175,192
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price $13.16
---------------------------------------------------------------------------------------------------------------------
International Small Companies Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $11.54 per share based on 15,022,947 shares of $173,361,762
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($11.54 x 100/99.00)* $11.66
---------------------------------------------------------------------------------------------------------------------
Japan Fund-Class III
---------------------------------------------------------------------------------------------------------------------
</TABLE>
--------
* Represents maximum offering price charged on certain cash purchases.
See "How to Purchase Shares" in the Prospectus.
191
<PAGE> 334
<TABLE>
<S> <C>
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $7.79 per share based on 1,766,891 shares of $13,768,335
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($7.79 x 100/99.80)* $7.81
---------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $11.16 per share based on 65,146,733 shares of $727,197,185
beneficial interest outstanding
---------------------------------------------------------------------------------------------------------------------
Offering Price ($11.16 x 100/98.40) * $11.34
---------------------------------------------------------------------------------------------------------------------
Emerging Markets Fund-Class IV
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $11.16 per share based on 43,047,210 shares of $480,207,830
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($11.16 x 100/98.40)* $11.34
---------------------------------------------------------------------------------------------------------------------
Evolving Countries Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $11.41 per share based on 5,714,403 shares of $65,190,871
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($11.41 x 100/98.40) * $11.60
---------------------------------------------------------------------------------------------------------------------
Asia Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $12.35 per share based on 9,650,804 shares of $119,218,049
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($12.35 x 100/98.80) * $12.50
---------------------------------------------------------------------------------------------------------------------
Global Hedged Equity Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $7.72 per share based on 6,051,274 shares of $46,718,431
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($7.72 x 100/99.49) * $7.76
---------------------------------------------------------------------------------------------------------------------
Domestic Bond Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $9.23 per share based on 17,825,718 shares of $164,457,231
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price $9.23
---------------------------------------------------------------------------------------------------------------------
U.S. Bond/Global Alpha A Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $9.64 per share based on 12,472,150 shares of $120,276,173
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($9.64 x 100/99.85) * $9.65
---------------------------------------------------------------------------------------------------------------------
U.S. Bond/Global Alpha B Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $6.90 per share based on 22,907,101 shares of $158,153,534
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($6.90 x 100/99.85) * $6.91
---------------------------------------------------------------------------------------------------------------------
International Bond Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $9.19 per share based on 15,816,518 shares of $145,373,188
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($9.19 x 100/99.85)* $9.20
---------------------------------------------------------------------------------------------------------------------
Currency Hedged International Bond Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $9.70 per share based on 29,210,729 shares of $283,339,666
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($9.70 x 100/99.85) * $9.71
---------------------------------------------------------------------------------------------------------------------
</TABLE>
--------
* Represents maximum offering price charged on certain cash purchases.
See "How to Purchase Shares" in the Prospectus.
192
<PAGE> 335
<TABLE>
<S> <C>
---------------------------------------------------------------------------------------------------------------------
Global Bond Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $9.41 per share based on 19,426,265 shares of $182,730,115
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($9.41 x 100/99.85)* $9.42
---------------------------------------------------------------------------------------------------------------------
Emerging Country Debt Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $8.74 per share based on 43,309,512 shares of $378,593,292
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($8.74 x 100/99.50)* $8.78
---------------------------------------------------------------------------------------------------------------------
Emerging Country Debt Fund-Class IV
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $8.74 per share based on 62,483,099 shares of $545,868,702
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($8.74 x 100/99.50)* $8.78
---------------------------------------------------------------------------------------------------------------------
Short-Term Income Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $9.62 per share based on 4,520,663 shares of $43,491,163
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price $9.62
---------------------------------------------------------------------------------------------------------------------
Inflation Indexed Bond Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $9.72 per share based on 5,344,578 shares of $51,950,841
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($9.72 x 100/99.90) * $9.73
---------------------------------------------------------------------------------------------------------------------
Emerging Country Debt Share Fund - Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $8.70 per share based on 9,918,037 shares of $86,280,076
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price $8.70
---------------------------------------------------------------------------------------------------------------------
International Equity Allocation Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $9.87 per share based on 7,703,655 shares of $76,046,848
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($9.87 x 100/99.17) * $9.95
---------------------------------------------------------------------------------------------------------------------
World Equity Allocation Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $8.96 per share based on 1,209,140 shares of $10,834,129
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($8.96 x 100/99.36)* $9.02
---------------------------------------------------------------------------------------------------------------------
Global (U.S.+) Equity Allocation Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $9.49 per share based on 3,863,392 shares of $36,668,844
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($9.49 x 100/99.56) * $9.53
---------------------------------------------------------------------------------------------------------------------
Global Balanced Allocation Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $10.78 per share based on 11,050,953 shares of $119,074,589
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($10.78 x 100/99.65)* $10.82
---------------------------------------------------------------------------------------------------------------------
U.S. Sector Fund-Class III
---------------------------------------------------------------------------------------------------------------------
Net Assets at Value (Equivalent to $4.84 per share based on 330,928 shares of $1,602,492
beneficial interest outstanding)
---------------------------------------------------------------------------------------------------------------------
Offering Price ($4.84 x 100/99.85)* $4.85
---------------------------------------------------------------------------------------------------------------------
</TABLE>
--------
* Represents maximum offering price charged on certain cash purchases.
See "How to Purchase Shares" in the Prospectus.
193
<PAGE> 336
GMO TAX-MANAGED U.S. EQUITIES FUND
GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND
GMO TAX-MANAGED SMALL COMPANIES FUND
STATEMENT OF ADDITIONAL INFORMATION
June 30, 2000
This Statement of Additional Information is not a prospectus. It relates to the
combined GMO Tax-Managed U.S. Equities Fund, GMO Tax-Managed International
Equities Fund and GMO Tax-Managed Small Companies Fund Prospectus dated June 30,
2000, as amended from time to time (the "Prospectus"), and should be read in
conjunction therewith. Each of the Funds is a series of GMO Trust (the "Trust").
Information from the Prospectus is incorporated by reference into this Statement
of Additional Information. The Prospectus may be obtained free of charge from
GMO Trust, 40 Rowes Wharf, Boston, Massachusetts 02110, or by calling the Trust
collect at (617) 346-7646.
<PAGE> 337
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES....................................... 1
DESCRIPTIONS AND RISKS OF FUND INVESTMENTS............................... 1
INVESTMENT RESTRICTIONS.................................................. 25
MANAGEMENT OF THE TRUST.................................................. 27
INVESTMENT ADVISORY AND OTHER SERVICES................................... 30
PORTFOLIO TRANSACTIONS................................................... 32
DETERMINATION OF NET ASSET VALUE......................................... 34
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES......................... 34
VOTING RIGHTS............................................................ 35
SHAREHOLDER AND TRUSTEE LIABILITY........................................ 36
BENEFICIAL OWNERS OF 5% OR MORE OF THE FUND'S SHARES..................... 37
DISTRIBUTIONS............................................................ 39
TAXES.................................................................... 39
PERFORMANCE INFORMATION.................................................. 43
INVESTMENT GUIDELINES.................................................... 46
FINANCIAL STATEMENTS..................................................... 60
SPECIMEN PRICE MAKE-UP SHEET............................................. 60
</TABLE>
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INVESTMENT OBJECTIVES AND POLICIES
The principal strategies and risks of investing in the GMO Tax-Managed
U.S. Equities Fund, GMO Tax-Managed Equities International Equities Fund and GMO
Tax-Managed Small Companies Fund (each a "Fund" and together the "Funds") are
described in the Prospectus. Unless otherwise indicated in the Prospectus or
this Statement of Additional Information, the investment objective and policies
of the Funds may be changed without shareholder approval.
DESCRIPTIONS AND RISKS OF FUND INVESTMENTS
The following is a detailed description of the various investment
practices in which the Funds may engage and the risks associated with their use.
Each Fund may not necessarily engage in all practices described below. Please
refer to "Fund Objectives and Principal Investment Strategies" in the Prospectus
and "Investment Guidelines" in this Statement of Additional Information for
additional information regarding which practices a particular Fund may engage
in.
PORTFOLIO TURNOVER
The after-tax impact of portfolio turnover will be considered when
making investment decisions for the Funds. The historical portfolio turnover
rates for each Fund are shown under the heading "Financial Highlights" in the
Prospectus.
In any particular year, market conditions may well result in greater
rates than are presently anticipated. High portfolio turnover involves
correspondingly greater brokerage commissions and other transaction costs, which
will be borne directly by the relevant Fund, and may involve realization of
capital gains that would be taxable when distributed to shareholders of the
relevant Fund unless such shareholders are themselves exempt. See "Distributions
and Taxes" in the Prospectus and "Distributions" and "Taxes" in this Statement
of Additional Information. To the extent that portfolio turnover results in the
recognition of short-term capital gains, such gains are typically taxed to
shareholders at ordinary income tax rates.
DIVERSIFIED AND NON-DIVERSIFIED PORTFOLIOS
The Funds are "non-diversified" funds under the Investment Company Act
of 1940, as amended (the "1940 Act"), and as such are not required to satisfy
the "diversified" fund requirement set forth in the 1940 Act. As non-diversified
funds, each of the Funds is permitted to (but not required to) invest a higher
percentage of its assets in the securities of fewer issuers, relative to
diversified funds. Such concentration could increase the risk of loss to each
Fund should there be a decline in the market value of any one portfolio
security, relative to diversified funds. Investment in a non-diversified fund
may therefore entail greater risks than investment in a diversified fund. Each
Fund, however, must meet certain diversification standards to qualify as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended.
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<PAGE> 339
CERTAIN RISKS OF FOREIGN INVESTMENTS
GENERAL. Investment in foreign issuers or securities principally traded
overseas may involve certain special risks due to foreign economic, political
and legal developments, including favorable or unfavorable changes in currency
exchange rates, exchange control regulations (including currency blockage),
expropriation or nationalization of assets, imposition of withholding taxes on
dividend or interest payments, and possible difficulty in obtaining and
enforcing judgments against foreign entities. Furthermore, issuers of foreign
securities are subject to different, often less comprehensive, accounting,
reporting and disclosure requirements than domestic issuers. The securities of
some foreign governments and companies and foreign securities markets are less
liquid and at times more volatile than comparable U.S. securities and securities
markets. Foreign brokerage commissions and other fees are also generally higher
than in the United States. The laws of some foreign countries may limit a Fund's
ability to invest in securities of certain issuers located in these foreign
countries. There are also special tax considerations which apply to securities
of foreign issuers and securities principally traded overseas. Investors should
also be aware that under certain circumstances, markets which are perceived to
have similar characteristics to troubled markets may be adversely affected
whether or not similarities actually exist.
EMERGING MARKETS. The risks described above apply to an even greater
extent to investments in emerging markets. The securities markets of emerging
countries are generally smaller, less developed, less liquid, and more volatile
than the U.S. and developed foreign securities markets. Disclosure and
regulatory standards in many respects are less stringent than in the U.S. and
developed foreign securities markets. There also may be a lower level of
monitoring and regulation of securities markets in emerging market countries and
the activities of investors in such markets, and enforcement of existing
regulations has been extremely limited. Many emerging countries have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have very negative effects on the economies and securities markets
of certain emerging countries. Economies in emerging markets generally are
heavily dependent upon international trade and, accordingly, have been and may
continue to be affected adversely by trade barriers, exchange controls, managed
adjustments in relative currency values, and other protectionist measures
imposed or negotiated by the countries with which they trade. These economies
also have been and may continue to be adversely affected by economic conditions
in the countries in which they trade. The economies of countries with emerging
markets may also be predominantly based on only a few industries or dependent on
revenues from particular commodities. In addition, custodial services and other
costs relating to investment in foreign markets may be more expensive in
emerging markets than in many developed foreign markets, which could reduce a
Fund's income from such securities. Finally, because publicly traded debt
instruments of emerging markets represent a relatively recent innovation in the
world debt markets, there is little historical data or related market experience
concerning the attributes of such instruments under all economic, market and
political conditions.
In many cases, governments of emerging countries continue to exercise
significant control over their economies, and government actions relative to the
economy, as well as economic developments generally, may affect the capacity of
issuers of emerging country debt
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instruments to make payments on their debt obligations, regardless of their
financial condition. In addition, there is a heightened possibility of
expropriation or confiscatory taxation, imposition of withholding taxes on
interest payments, or other similar developments that could affect investments
in those countries. There can be no assurance that adverse political changes
will not cause a Fund to suffer a loss of any or all of its investments or, in
the case of fixed-income securities, interest thereon.
INVESTMENTS IN ASIA. In addition to the foregoing risks of foreign
investments and risks specific to emerging markets, investments by the
Tax-Managed International Equities Fund in Asia involve additional risks
specific to investment in the region. The region encompasses countries at
varying levels of economic development ranging from emerging markets to more
developed economies. Each country provides unique investment risks, yet the
political and economic prospects of one country or group of countries may impact
other countries in the region. For example, some Asian economies are directly
affected by Japanese capital investment in the region and by Japanese consumer
demands. In addition, a recession, a debt-crisis or a decline in currency
valuation in one country can spread to other countries.
Investments in Asia are susceptible to political and social factors
affecting issuers in Asian countries. Some countries have authoritarian or
relatively unstable governments. Certain governments in the region provide less
supervision and regulation of financial markets than is typical of other
emerging markets, and less financial information is available. Restrictions on
direct foreign investments in securities markets also exist in some countries.
For example, Taiwan permits foreign investment only through authorized qualified
foreign institutional investors. The return of Hong Kong to China in 1997 will
continue to affect the region.
Some countries in the region are heavily dependent upon foreign trade.
The economies of some Asian countries are not diversified and are based upon
only a few commodities or industries. Markets in some of these countries are in
the early stages of development, exhibit a high concentration of market
capitalization, have less trading volume, lower liquidity and more volatility
than more developed markets.
The region periodically experiences increased market volatility and
declines in foreign currency exchange rates. Fluctuation in currency exchange
rates can affect a country's ability to service its debt. Currency fluctuation
will affect the value of the securities in the Fund's portfolio because the
prices of these securities are generally denominated or quoted in currencies
other than the U.S. dollar.
DIRECT INVESTMENT IN RUSSIAN SECURITIES. The Tax-Managed International
Equities Fund may invest directly in securities of Russian issuers. Investment
in securities of such issuers presents many of the same risks as investing in
securities of issuers in other emerging market economies, as described in the
immediately preceding section. However, the political, legal and operational
risks of investing in Russian issuers, and of having assets custodied within
Russia, may be particularly acute.
A risk of particular note with respect to direct investment in Russian
securities is the way in which ownership of shares of private companies is
recorded. When the Fund invests in a
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<PAGE> 341
Russian issuer, it will receive a "share extract," but that extract is not
legally determinative of ownership. The official record of ownership of a
company's share is maintained by the company's share registrar. Such share
registrars are completely under the control of the issuer, and investors are
provided with few legal rights against such registrars.
SECURITIES LENDING
A Fund may make secured loans of portfolio securities amounting to not more
than one-third of the Fund's total assets. The risks in lending portfolio
securities, as with other extensions of credit, consist of possible delay in
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. However, such loans will be made only to
broker-dealers that are believed by the Manager to be of relatively high credit
standing. Securities loans are made to broker-dealers pursuant to agreements
requiring that loans be continuously secured by collateral in cash or liquid
securities at least equal at all times to the market value of the securities
lent. The borrower pays to the lending Fund an amount equal to any dividends or
interest the Fund would have received had the securities not been lent. If the
loan is collateralized by liquid securities, the Fund will receive a fee from
the borrower. In the case of loans collateralized by cash, the Fund typically
invests the cash collateral for its own account in interest-bearing, short-term
securities and pays a fee to the borrower. Although voting rights or rights to
consent with respect to the loaned securities pass to the borrower, the Fund
retains the right to call the loans at any time on reasonable notice, and it
will do so in order that the securities may be voted by the Fund if the holders
of such securities are asked to vote upon or consent to matters materially
affecting the investment. A Fund may also call such loans in order to sell the
securities involved. The Manager has retained lending agents on behalf of the
Funds that are compensated based on a percentage of each Fund's return on the
securities lending activity. The Funds also pay various fees in connection with
such loans including shipping fees and reasonable custodian fees approved by the
Trustees of the Trust or persons acting pursuant to direction of the Board.
DEPOSITORY RECEIPTS
A Fund may invest in American Depositary Receipts (ADRs), Global Depository
Receipts (GDRs) and European Depository Receipts (EDRs) (collectively,
"Depository Receipts") if issues of such Depository Receipts are available that
are consistent with the Fund's investment objective. Depository Receipts
generally evidence an ownership interest in a corresponding foreign security on
deposit with a financial institution. Transactions in Depository Receipts
usually do not settle in the same currency in which the underlying securities
are denominated or traded. Generally, ADRs, in registered form, are designed for
use in the U.S. securities markets and EDRs, in bearer form, are designed for
use in European securities markets. GDRs may be traded in any public or private
securities markets and may represent securities held by institutions located
anywhere in the world.
DOMESTIC EQUITY DEPOSITARY RECEIPTS
The Funds may invest in Domestic Equity Depositary Receipts. These
instruments represent interests in a unit investment trust ("UIT") that holds a
portfolio of common stocks that is intended to track the price and dividend
performance of a particular index. Common examples of Domestic Equity Depositary
Receipts include S&P Depositary Receipts ("SPDRs") and Nasdaq 100 Shares, which
may be obtained from the UIT issuing the securities or purchased in the
secondary market (SPDRs and Nasdaq 100 Shares are listed on the American Stock
Exchange).
Domestic Equity Depositary Receipts are not individually redeemable, except
upon termination of the UIT that issued them. The liquidity of small holdings of
Domestic Equity Depositary Receipts depends upon the existence of a secondary
market.
The redemption price (and therefore the sale price) of Domestic Equity
Depositary Receipts is derived from and based upon the securities held by the
UIT that issued them. Accordingly, the level of risk involved in the purchase or
redemption or sale of a Domestic Equity Depositary Receipt is similar to the
risk involved in the purchase or sale of traditional common stock, with the
exception that the price of Domestic Equity Depositary Receipts purchased or
sold by a Series could result in losses on Domestic Equity Depositary Receipts.
CONVERTIBLE SECURITIES
A convertible security is a fixed-income security (a bond or preferred
stock) which may be converted at a stated price within a specified period of
time into a certain quantity of the
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<PAGE> 342
common stock of the same or a different issuer. Convertible securities are
senior to common stock in a corporation's capital structure, but are usually
subordinated to similar non-convertible securities. Convertible securities
provide, through their conversion feature, an opportunity to participate in
capital appreciation resulting from a market price advance in a convertible
security's underlying common stock. The price of a convertible security is
influenced by the market value of the underlying common stock and tends to
increase as the market value of the underlying stock rises, whereas it tends to
decrease as the market value of the underlying stock declines. The Manager
regards convertible securities as a form of equity security.
FUTURES AND OPTIONS
The Funds may use futures and options for various purposes. Such
transactions may involve options, futures and related options on futures
contracts, and those instruments may relate to particular equity and fixed
income securities, equity and fixed income indexes, and foreign currencies. The
Funds may also enter into a combination of long and short positions (including
spreads and straddles) for a variety of investment strategies, including
protecting against changes in certain yield relationships.
The use of futures contracts, option contracts and options on futures
contracts involves risk. Thus, while a Fund may benefit from the use of futures,
options and options on futures, unanticipated changes in interest rates,
securities prices, or currency exchange rates may result in poorer overall
performance for the Fund than if it had not entered into any futures contracts
or options transactions. Losses incurred in transactions in futures, options and
options on futures and the costs of these transactions will affect a Fund's
performance.
OPTIONS. As has been noted above, the Funds (1) may enter into contracts giving
third parties the right to buy the Fund's portfolio securities for a fixed price
at a future date (writing "covered call options"); (2) may enter into contracts
giving third parties the right to sell securities to the Fund for a fixed price
at a future date (writing "covered put options"); and (3) may buy the right to
purchase securities from third parties ("call options") or the right to sell
securities to third parties ("put options") for a fixed price at a future date.
WRITING COVERED OPTIONS. A Fund may seek to increase its return by writing
covered call or put options on optionable securities or indexes. A call option
written by a Fund on a security gives the holder the right to buy the underlying
security from the Fund at a stated exercise price; a put option gives the holder
the right to sell the underlying security to the Fund at a stated exercise
price. In the case of options on indexes, the options are usually cash settled
based on the difference between the strike price and the value of the index.
Each such Fund will receive a premium for writing a put or call option,
which increases the Fund's return in the event the option expires unexercised or
is closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price and volatility of the underlying
security or securities index to the exercise price of the option, the remaining
term of the option, supply and demand and interest rates. By writing a call
option on a security,
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<PAGE> 343
the Fund limits its opportunity to profit from any increase in the market value
of the underlying security above the exercise price of the option. By writing a
put option on a security, the Fund assumes the risk that it may be required to
purchase the underlying security for an exercise price higher than its then
current market value, resulting in a potential capital loss unless the security
subsequently appreciates in value. In the case of options on an index, if a Fund
writes a call, any profit by the Fund in respect of portfolio securities
expected to correlate with the index will be limited by an increase in the index
above the exercise price of the option. If the Fund writes a put on an index,
the Fund may be required to make a cash settlement greater than the premium
received if the index declines.
A call option on a security is "covered" if the relevant Fund owns the
underlying security or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration earmarked and maintained by the Fund's custodian on the
custodian's books and records) upon conversion or exchange of other securities
held in its portfolio. A call option on a security is also covered if the Fund
holds on a share-for-share basis a call on the same security as the call written
where the exercise price of the call held is equal to or less than the exercise
price of the call written or greater than the exercise price of the call written
if the difference is maintained by the Fund in cash, U.S. Government Securities
or other high grade debt obligations earmarked on the Custodian's books and
records. A call option on an index is "covered" if a Fund maintains cash, U.S.
Government Securities or other liquid assets with a value equal to the exercise
price in a segregated account with its custodian. A put option is "covered" if
the Fund's custodian earmarks and maintains cash, U.S. Government Securities or
other liquid assets with a value equal to the exercise price, or else holds on a
share-for-share basis a put on the same security as the put written where the
exercise price of the put held is equal to or greater than the exercise price of
the put written.
If the writer of an option wishes to terminate its obligation, it may
effect a "closing purchase transaction." This is accomplished, in the case of
exchange traded options, by buying an option of the same series as the option
previously written. The effect of the purchase is that the writer's position
will be canceled by the clearing corporation. The writer of an option may not
effect a closing purchase transaction after it has been notified of the exercise
of an option. Likewise, an investor who is the holder of an option may liquidate
its position by effecting a "closing sale transaction." This is accomplished by
selling an option of the same series as the option previously purchased. There
is no guarantee that a Fund will be able to effect a closing purchase or a
closing sale transaction at any particular time. Also, an over-the-counter
option may be closed out only with the other party to the option transaction.
Effecting a closing transaction in the case of a written call option
will permit a Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case of
a written put option will permit a Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or high
grade debt obligations. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If a Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
A Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to
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<PAGE> 344
purchase the option; the Fund will realize a loss from a closing transaction if
the price of the transaction is more than the premium received from writing the
option or is less than the premium paid to purchase the option. Because
increases in the market price of a call option will generally reflect increases
in the market price of the underlying security or index of securities, any loss
resulting from the repurchase of a written call option is likely to be offset in
whole or in part by appreciation of the underlying security or securities owned
by the Fund.
A Fund may write options in connection with buy-and-write transactions;
that is, a Fund may purchase a security and then write a call option against
that security. The exercise price of the call the Fund determines to write will
depend upon the expected price movement of the underlying security. The exercise
price of a call option may be below ("in-the-money"), equal to ("at-the-money")
or above ("out-of-the-money") the current value of the underlying security at
the time the option is written. Buy-and-write transactions using in-the-money
call options may be used when it is expected that the price of the underlying
security will remain flat or decline moderately during the option period.
Buy-and-write transactions using at-the-money call options may be used when it
is expected that the price of the underlying security will remain fixed or
advance moderately during the option period. Buy-and-write transactions using
out-of-the-money call options may be used when it is expected that the premiums
received from writing the call option plus the appreciation in the market price
of the underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If the call options
are exercised in such transactions, the Fund's maximum gain will be the premium
received by it for writing the option, adjusted upward or downward by the
difference between the Fund's purchase price of the security and the exercise
price. If the options are not exercised and the price of the underlying security
declines, the amount of such decline will be offset in part, or entirely, by the
premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund may elect to close the position or take
delivery of the security at the exercise price. In that event, the Fund's return
will be the premium received from the put option minus the cost of closing the
position or, if it chooses to take delivery of the security, the premium
received from the put option minus the amount by which the market price of the
security is below the exercise price. Out-of-the-money, at-the-money and
in-the-money put options may be used by the Fund in market environments
analogous to those in which call options are used in buy-and-write transactions.
The extent to which a Fund will be able to write and purchase call and
put options may be restricted by the Fund's intention to qualify as a regulated
investment company under the Internal Revenue Code.
RISK FACTORS IN OPTIONS TRANSACTIONS. The option writer has no control over when
the underlying securities or futures contract must be sold, in the case of a
call option, or purchased, in the case of a put option, since the writer may be
assigned an exercise notice at any time prior to the termination of the
obligation. If an option expires unexercised, the writer realizes a gain in
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<PAGE> 345
the amount of the premium. Such a gain, of course, may, in the case of a covered
call option, be offset by a decline in the market value of the underlying
security or futures contract during the option period. If a call option is
exercised, the writer realizes a gain or loss from the sale of the underlying
security or futures contract. If a put option is exercised, the writer must
fulfill the obligation to purchase the underlying security or futures contract
at the exercise price, which will usually exceed the then market value of the
underlying security or futures contract.
An exchange-traded option may be closed out only on a national
securities exchange ("Exchange") which generally provides a liquid secondary
market for an option of the same series. An over-the-counter option may be
closed out only with the other party to the option transaction. If a liquid
secondary market for an exchange-traded option does not exist, it might not be
possible to effect a closing transaction with respect to a particular option
with the result that the Fund holding the option would have to exercise the
option in order to realize any profit. For example, in the case of a written
call option, if a Fund is unable to effect a closing purchase transaction in a
secondary market (in the case of a listed option) or with the purchaser of the
option (in the case of an over-the-counter option), the Fund will not be able to
sell the underlying security (or futures contract) until the option expires or
it delivers the underlying security (or futures contract) upon exercise. Reasons
for the absence of a liquid secondary market on an Exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an Exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an Exchange; (v) the facilities of an Exchange or
the Options Clearing Corporation may not at all times be adequate to handle
current trading volume; or (vi) one or more Exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that Exchange (or in that class or series of options)
would cease to exist, although outstanding options on that Exchange that had
been issued by the Options Clearing Corporation as a result of trades on that
Exchange should continue to be exercisable in accordance with their terms.
The Exchanges have established limitations governing the maximum number
of options which may be written by an investor or group of investors acting in
concert. It is possible that the Funds, the Manager and other clients of the
Manager may be considered to be such a group. These position limits may restrict
a Fund's ability to purchase or sell options on a particular security.
The amount of risk a Fund assumes when it purchases an option is the
premium paid for the option plus related transaction costs. In addition to the
correlation risks discussed below, the purchase of an option also entails the
risk that changes in the value of the underlying security or futures contract
will not be fully reflected in the value of the option purchased.
FUTURES. A financial futures contract sale creates an obligation by the seller
to deliver the type of financial instrument called for in the contract in a
specified delivery month for a stated price. A financial futures contract
purchase creates an obligation by the purchaser to pay for and take delivery of
the type of financial instrument called for in the contract in a specified
delivery
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month, at a stated price. In some cases, the specific instruments delivered or
taken, respectively, at settlement date are not determined until on or near that
date. The determination is made in accordance with the rules of the exchange on
which the futures contract sale or purchase was made. Some futures contracts are
"cash settled" (rather than "physically settled," as described above) which
means that the purchase price is subtracted from the current market value of the
instrument and the net amount if positive is paid to the purchaser, and if
negative is paid by the purchaser. Futures contracts are traded in the United
States only on commodity exchanges or boards of trade -- known as "contract
markets" -- approved for such trading by the Commodity Futures Trading
Commission ("CFTC"), and must be executed through a futures commission merchant
or brokerage firm which is a member of the relevant contract market. Under U.S.
law, futures contracts on individual equity securities are not permitted.
The purchase or sale of a futures contract differs from the purchase or
sale of a security or option in that no price or premium is paid or received.
Instead, an amount of cash, U.S. Government Securities or other liquid assets
generally not exceeding 5% of the face amount of the futures contract must be
deposited with the broker. This amount is known as initial margin. Subsequent
payments to and from the broker, known as variation margin, are made on a daily
basis as the price of the underlying futures contract fluctuates making the long
and short positions in the futures contract more or less valuable, a process
known as "marking to market." Prior to the settlement date of the futures
contract, the position may be closed out by taking an opposite position which
will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker, and the purchaser realizes a loss or gain.
In addition, a commission is paid on each completed purchase and sale
transaction.
In most cases futures contracts are closed out before the settlement
date without the making or taking of delivery. Closing out a futures contract
sale is effected by purchasing a futures contract for the same aggregate amount
of the specific type of financial instrument or commodity and the same delivery
date. If the price of the initial sale of the futures contract exceeds the price
of the offsetting purchase, the seller is paid the difference and realizes a
gain. Conversely, if the price of the offsetting purchase exceeds the price of
the initial sale, the seller realizes a loss. Similarly, the closing out of a
futures contract purchase is effected by the purchaser entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the
purchaser realizes a gain, and if the purchase price exceeds the offsetting sale
price, a loss will be realized.
The ability to establish and close out positions on options on futures
will be subject to the development and maintenance of a liquid secondary market.
It is not certain that this market will develop or be maintained.
INDEX FUTURES. Each of the Funds may purchase futures contracts on various
securities indexes ("Index Futures"). For example, the Tax-Managed U.S. Equities
Fund and the Tax-Managed Small Companies Fund may purchase Index Futures on such
domestic stock indexes as the Manager may deem appropriate, and the The
Tax-Managed International Equities Fund may purchase Index Futures on such
foreign stock indexes as the Manager may deem appropriate,
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including those which trade outside the United States. A Fund's purchase and
sale of Index Futures is limited to contracts and exchanges which have been
approved by the CFTC.
An Index Future may call for "physical delivery" or be "cash settled."
An Index Future that calls for physical delivery is a contract to buy an
integral number of units of the particular securities index at a specified
future date at a price agreed upon when the contract is made. A unit is the
value from time to time of the relevant index. While a Fund that purchases an
Index Future that calls for physical delivery is obligated to pay the face
amount on the stated date, such an Index Future may be closed out on that date
or any earlier date by selling an Index Future with the same face amount and
contract date. This will terminate the Fund's position and the Fund will realize
a profit or a loss based on the difference between the cost of purchasing the
original Index Future and the price obtained from selling the closing Index
Future. The amount of the profit or loss is determined by the change in the
value of the relevant index while the Index Future was held.
For example, if the value of a unit of a particular index were $1,000,
a contract to purchase 500 units would be worth $500,000 (500 units x $1,000).
The Index Futures contract specifies that no delivery of the actual stocks
making up the index will take place. Instead, settlement in cash must occur upon
the termination of the contract, with the settlement being the difference
between the contract price and the actual level of the relevant index at the
expiration of the contract. For example, if a Fund enters into one futures
contract to buy 500 units of an index at a specified future date at a contract
price of $1,000 per unit and the index is at $1,010 on that future date, the
Fund will gain $5,000 (500 units x gain of $10).
Index Futures that are "cash settled" provide by their terms for
settlement on a net basis reflecting changes in the value of the underlying
index. Thus, the purchaser of such an Index Future is never obligated to pay the
face amount of the contract. The net payment obligation may in fact be very
small in relation to the face amount.
A Fund may close open positions on the futures exchange on which Index
Futures are then traded at any time up to and including the expiration day. All
positions which remain open at the close of the last business day of the
contract's life are required to settle on the next business day (based upon the
value of the relevant index on the expiration day) with settlement made, in the
case of S&P 500 Index Futures, with the Commodities Clearing House. Additional
or different margin requirements as well as settlement procedures may be
applicable to foreign stock Index Futures at the time a Fund purchases foreign
stock Index Futures.
The price of Index Futures may not correlate perfectly with movement in
the relevant index due to certain market distortions. First, all participants in
the futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions which could distort the normal
relationship between the Index and futures markets. Secondly, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities market, and as a result the futures market may attract more
speculators than does the securities market. Increased participation by
speculators in the futures market may also cause temporary price distortions. In
addition, trading hours for foreign stock Index Futures may not correspond
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perfectly to hours of trading on the foreign exchange to which a particular
foreign stock Index Futures relates. This may result in a disparity between the
price of Index Futures and the value of the relevant index due to the lack of
continuous arbitrage between the Index Futures price and the value of the
underlying index.
OPTIONS ON FUTURES CONTRACTS. Options on futures contracts give the purchaser
the right in return for the premium paid to assume a position in a futures
contract at the specified option-exercise price at any time during the period of
the option. Funds may use options on futures contracts in lieu of writing or
buying options directly on the underlying securities or purchasing and selling
the underlying futures contracts. For example, to hedge against a possible
decrease in the value of its portfolio securities, a Fund may purchase put
options or write call options on futures contracts rather than selling futures
contracts. Similarly, a Fund may purchase call options or write put options on
futures contracts as a substitute for the purchase of futures contracts to hedge
against a possible increase in the price of securities which the Fund expects to
purchase. Such options generally operate in the same manner as options purchased
or written directly on the underlying investments. See "Foreign Currency
Transactions" below for a description of the Funds' use of options on currency
futures.
RISK FACTORS IN FUTURES TRANSACTIONS. Investment in futures contracts involves
risk. If the futures are used for hedging, some of that risk may be caused by an
imperfect correlation between movements in the price of the futures contract and
the price of the security or currency being hedged. The correlation is higher
between price movements of futures contracts and the instrument underlying that
futures contract. The correlation is lower when futures are used to hedge
securities other than such underlying instrument, such as when a futures
contract on an index of securities is used to hedge a single security, a futures
contract on one security (e.g., U.S. Treasury bonds) is used to hedge a
different security (e.g., a mortgage-backed security) or when a futures contract
in one currency is used to hedge a security denominated in another currency. In
the event of an imperfect correlation between a futures position and a portfolio
position (or anticipated position) which is intended to be protected, the
desired protection may not be obtained and a Fund may be exposed to risk of
loss. In addition, it is not always possible to hedge fully or perfectly against
currency fluctuations affecting the value of the securities denominated in
foreign currencies because the value of such securities also is likely to
fluctuate as a result of independent factors not related to currency
fluctuations. The risk of imperfect correlation generally tends to diminish as
the maturity date of the futures contract approaches.
A hedge will not be fully effective where there is such imperfect
correlation. To compensate for imperfect correlations, a Fund may purchase or
sell futures contracts in a greater amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the futures contracts. Conversely, a Fund may purchase or sell fewer
contracts if the volatility of the price of the hedged securities is
historically less than that of the futures contract.
A Fund may also purchase futures contracts (or options thereon) as an
anticipatory hedge against a possible increase in the price of currency in which
is denominated the securities the Fund anticipates purchasing. In such
instances, it is possible that the currency may instead decline. If the Fund
does not then invest in such securities because of concern as to possible
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further market and/or currency decline or for other reasons, the Fund may
realize a loss on the futures contract that is not offset by a reduction in the
price of the securities purchased.
The liquidity of a secondary market in a futures contract may be
adversely affected by "daily price fluctuation limits" established by commodity
exchanges which limit the amount of fluctuation in a futures contract price
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions. Prices have in the past
exceeded the daily limit on a number of consecutive trading days. Short
positions in index futures may be closed out only by entering into a futures
contract purchase on the futures exchange on which the index futures are traded.
The successful use of transactions in futures and related options for
hedging and risk management also depends on the ability of the Manager to
forecast correctly the direction and extent of exchange rate, interest rate and
stock price movements within a given time frame. For example, to the extent
interest rates remain stable during the period in which a futures contract or
option is held by a Fund investing in fixed income securities (or such rates
move in a direction opposite to that anticipated), the Fund may realize a loss
on the futures transaction which is not fully or partially offset by an increase
in the value of its portfolio securities. As a result, the Fund's total return
for such period may be less than if it had not engaged in the hedging
transaction.
Unlike trading on domestic commodity exchanges, trading on foreign
commodity exchanges is not regulated by the CFTC and may be subject to greater
risks than trading on domestic exchanges. For example, some foreign exchanges
may be principal markets so that no common clearing facility exists and a trader
may look only to the broker for performance of the contract. In addition, unless
a Fund hedges against fluctuations in the exchange rate between the U.S. dollar
and the currencies in which trading is done on foreign exchanges, any profits
that a Fund might realize in trading could be eliminated by adverse changes in
the exchange rate, or the Fund could incur losses as a result of those changes.
USES OF OPTIONS, FUTURES AND OPTIONS ON FUTURES
RISK MANAGEMENT. When futures and options on futures are used for risk
management, a Fund will generally take long positions (e.g., purchase call
options, futures contracts or options thereon) in order to increase the Fund's
exposure to a particular market, market segment or foreign currency. For
example, if a Fund holds a portfolio of stocks with an average volatility (beta)
lower than that of the Fund's benchmark securities index as a whole (deemed to
be 1.00), the Fund may purchase Index Futures to increase its average volatility
to 1.00. In the case of futures and options on futures, a Fund is only required
to deposit the initial and variation margin as required by relevant CFTC
regulations and the rules of the contract markets. Because the Fund will then be
obligated to purchase the security or index at a set price on a future date, the
Fund's net asset value will fluctuate with the value of the security as if it
were already included in the Fund's portfolio. Risk management transactions have
the effect of providing a degree of investment leverage, particularly when a
Fund does not earmark assets equal to the face amount of the contract (i.e., in
cash settled futures contracts) since the futures contract (and related
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options) will increase or decrease in value at a rate which is a multiple of the
rate of increase or decrease in the value of the initial and variation margin
that the Fund is required to deposit. As a result, the value of the Fund's
portfolio will generally be more volatile than the value of comparable
portfolios which do not engage in risk management transactions. A Fund will not,
however, use futures and options on futures to obtain greater volatility than it
could obtain through direct investment in securities; that is, a Fund will not
normally engage in risk management to increase the average volatility (beta) of
that Fund's portfolio above 1.00, the level of risk (as measured by volatility)
that would be present if the Fund were fully invested in the securities
comprising the relevant index. However, a Fund may invest in futures and options
on futures without regard to this limitation if the face value of such
investments, when aggregated with the Index Futures, equity swaps and contracts
for differences as described below does not exceed 10% of a Fund's assets.
HEDGING. To the extent indicated elsewhere, a Fund may also enter into options
and futures contracts and buy and sell options on futures for hedging. For
example, a Fund may sell equity index futures if it wants to hedge its equity
securities against a general decline in the relevant equity market(s). The Funds
may also use futures contracts in anticipatory hedge transactions by taking a
long position in a futures contract with respect to a security, index or foreign
currency that a Fund intends to purchase (or whose value is expected to
correlate closely with the security or currency to be purchased) pending receipt
of cash from other transactions to be used for the actual purchase. Then if the
cost of the security or foreign currency to be purchased by the Fund increases
and if the anticipatory hedge is effective, that increased cost should be
offset, at least in part, by the value of the futures contract. Options on
futures contracts may be used for hedging as well. For example, if the value of
a fixed-income security in a Fund's portfolio is expected to decline as a result
of an increase in rates, the Fund might purchase put options or write call
options on futures contracts rather than selling futures contracts. Similarly,
for anticipatory hedging, a Fund may purchase call options or write put options
as a substitute for the purchase of futures contracts. See "Foreign Currency
Transactions" below for more information regarding the currency hedging
practices of the Funds.
INVESTMENT PURPOSES. To the extent indicated elsewhere, a Fund may also enter
into futures contracts and buy and sell options thereon for investment. For
example, a Fund may invest in futures when its Manager believes that there are
not enough attractive securities available to maintain the standards of
diversity and liquidity set for a Fund pending investment in such securities if
or when they do become available. Through this use of futures and related
options, a Fund may diversify risk in its portfolio without incurring the
substantial brokerage costs which may be associated with investment in the
securities of multiple issuers. This use may also permit a Fund to avoid
potential market and liquidity problems (e.g., driving up the price of a
security by purchasing additional shares of a portfolio security or owning so
much of a particular issuer's stock that the sale of such stock depresses that
stock's price) which may result from increases in positions already held by the
Fund.
When any Fund purchases futures contracts for investment, the Fund's
custodian will earmark and maintain cash, U.S. Government Securities or other
liquid assets in an amount which, together with the initial and variation margin
deposited on the futures contracts, is equal to the face value of the futures
contracts at all times while the futures contracts are held.
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Incidental to other transactions in fixed income securities, for
investment purposes a Fund may also combine futures contracts or options on
fixed income securities with cash, cash equivalent investments or other fixed
income securities in order to create "synthetic" bonds which approximate desired
risk and return profiles. This may be done where a "non-synthetic" security
having the desired risk/return profile either is unavailable (e.g., short-term
securities of certain foreign governments) or possesses undesirable
characteristics (e.g., interest payments on the security would be subject to
foreign withholding taxes). A Fund may also purchase forward foreign exchange
contracts in conjunction with U.S. dollar-denominated securities in order to
create a synthetic foreign currency denominated security which approximates
desired risk and return characteristics where the non-synthetic securities
either are not available in foreign markets or possess undesirable
characteristics. For greater detail, see "Foreign Currency Transactions" below.
When a Fund creates a "synthetic" bond with a futures contract, the Fund's
custodian will earmark and maintain cash, U.S. Government Securities or other
liquid assets with a value at least equal to the face amount of the futures
contract (less the amount of any initial or variation margin on deposit).
SYNTHETIC SALES AND PURCHASES. Futures contracts may also be used to reduce
transaction costs associated with short-term restructuring of a Fund's
portfolio. For example, if a Fund's portfolio includes stocks of companies with
medium-sized equity capitalization and, in the opinion of the Manager, such
stocks are likely to underperform larger capitalization stocks, the Fund might
sell some or all of its mid-capitalization stocks, buy large capitalization
stocks with the proceeds and then, when the expected trend had played out, sell
the large capitalization stocks and repurchase the mid-capitalization stocks
with the proceeds. In the alternative, a Fund may use futures to achieve a
similar result with reduced transaction costs. In that case, the Fund might
simultaneously enter into short futures positions on an appropriate index (e.g.,
the S&P Mid Cap 400 Index) (to synthetically "sell" the stocks in the Fund) and
long futures positions on another index (e.g., the S&P 500) (to synthetically
"buy" the larger capitalization stocks). When the expected trend has played out,
the Fund would then close out both futures contract positions. A Fund will only
enter into these combined positions if (1) the short position (adjusted for
historic volatility) operates as a hedge of existing portfolio holdings, (2) the
face amount of the long futures position is less than or equal to the value of
the portfolio securities that the Fund would like to dispose of, (3) the
contract settlement date for the short futures position is approximately the
same as that for the long futures position and (4) the Fund's custodian earmarks
and maintains an amount of cash, U.S. Government Securities and other liquid
assets whose value, marked-to-market daily, is equal to the Fund's current
obligations in respect of the long futures contract positions. If a Fund uses
such combined short and long positions, in addition to possible declines in the
values of its investment securities, the Fund may also suffer losses associated
with a securities index underlying the long futures position underperforming the
securities index underlying the short futures position. However, the Manager
will enter into these combined positions only if the Manager expects that,
overall, the Fund will perform as if it had sold the securities hedged by the
short position and purchased the securities underlying the long position. A Fund
may also use swaps and options on futures to achieve the same objective.
LIMITATIONS ON THE USE OF OPTIONS AND FUTURES PORTFOLIO STRATEGIES. As noted
above, the Funds may use futures contracts and related options for hedging and,
in some circumstances, for risk
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management or investment but not for speculation. Thus, except when used for
risk management or investment, a Fund's long futures contract positions (less
its short positions) together with the Fund's cash (i.e., equity or fixed
income) positions will not exceed the Fund's total net assets.
The Funds' ability to engage in the options and futures strategies
described above will depend on the availability of liquid markets in such
instruments. Markets in options and futures with respect to currencies are
relatively new and still developing. It is impossible to predict the amount of
trading interest that may exist in various types of options or futures.
Therefore no assurance can be given that a Fund will be able to utilize these
instruments effectively for the purposes set forth above. Furthermore, each
Fund's ability to engage in options and futures transactions may be limited by
tax considerations.
SWAP CONTRACTS AND OTHER TWO-PARTY CONTRACTS
A Fund may use swap contracts and other two-party contracts for the
same or similar purposes as they may use options, futures and related options.
The use of swap contracts and other two-party contracts involves risk.
SWAP CONTRACTS. Swap agreements are two-party contracts entered into
primarily by institutional investors for periods ranging from a few weeks to
more than one year. In a standard "swap" transaction, two parties agree to
exchange returns (or differentials in rates of return) calculated with respect
to a "notional amount," e.g., the return on or increase in value of a particular
dollar amount invested at a particular interest rate, in a particular foreign
currency, or in a "basket" of securities representing a particular index. A Fund
will usually enter into swaps on a net basis, i.e., the two returns are netted
out, with the Fund receiving or paying, as the case may be, only the net amount
of the two returns.
INTEREST RATE AND CURRENCY SWAPS. Interest rate swaps involve the
exchange of the two parties' respective commitments to pay or receive interest
on a notional principal amount (e.g., an exchange of floating rate payments for
fixed rate payments). Currency swaps involve the exchange of the two parties'
respective commitments to pay or receive fluctuations with respect to a notional
amount of two different currencies (e.g., an exchange of payments with respect
to fluctuations in the value of the U.S. dollar relative to the Japanese yen).
EQUITY SWAP CONTRACTS AND CONTRACTS FOR DIFFERENCES. Equity swap
contracts involve the exchange of one party's obligation to pay the loss, if
any, with respect to a notional amount of a particular equity index (e.g., the
S&P 500 Index) plus interest on such notional amount at a designated rate (e.g.,
the London Inter-Bank Offered Rate) in exchange for the other party's obligation
to pay the gain, if any, with respect to the notional amount of such index.
If a Fund enters into a long equity swap contract, the Fund's net asset
value will fluctuate as a result of changes in the value of the equity index on
which the equity swap is based as if it had purchased the notional amount of
securities comprising the index. A Fund will not use long equity swap contracts
to obtain greater volatility than it could obtain through direct investment in
securities; that is, a Fund will not normally enter into an equity swap contract
to increase the volatility (beta) of the Fund's portfolio above 1.00, the
volatility that would be present in the
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stocks comprising the Fund's benchmark index. However, a Fund may invest in long
equity swap contracts without regard to this limitation if the notional amount
of such equity swap contracts, when aggregated with the Index Futures as
described above and the contracts for differences as described below, does not
exceed 10% of the Fund's net assets.
Contracts for differences are swap arrangements in which a Fund may
agree with a counterparty that its return (or loss) will be based on the
relative performance of two different groups or "baskets" of securities. As to
one of the baskets, the Fund's return is based on theoretical long futures
positions in the securities comprising that basket (with an aggregate face value
equal to the notional amount of the contract for differences) and as to the
other basket, the Fund's return is based on theoretical short futures positions
in the securities comprising the basket. A Fund may also use actual long and
short futures positions to achieve the same market exposure(s) as contracts for
differences. A Fund will only enter into contracts for differences where payment
obligations of the two legs of the contract are netted and thus based on changes
in the relative value of the baskets of securities rather than on the aggregate
change in the value of the two legs. A Fund will only enter into contracts for
differences (and analogous futures positions) when the Manager believes that the
basket of securities constituting the long leg will outperform the basket
constituting the short leg. However, it is possible that the short basket will
outperform the long basket resulting in a loss to a Fund, even in circumstances
where the securities in both the long and short baskets appreciate in value.
Except for instances in which a Fund elects to obtain leverage up to
the 10% limitation mentioned above, the Fund's custodian will earmark and
maintain cash, U.S. Government Securities or liquid assets in an amount equal to
the aggregate of net payment obligations on its swap contracts and contracts for
differences, marked to market daily.
A Fund may enter into swaps and contracts for differences for hedging,
investment and risk management. When using swaps for hedging, a Fund may enter
into an interest rate, currency or equity swap, as the case may be, on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities. For risk management or investment purposes a Fund may
also enter into a contract for differences in which the notional amount of the
theoretical long position is greater than the notional amount of the theoretical
short position. A Fund will not normally enter into a contract for differences
to increase the volatility (beta) of the Fund's portfolio above 1.00. However, a
Fund may invest in contracts for differences without regard to this limitation
if the aggregate amount by which the theoretical long positions of such
contracts exceed the theoretical short positions of such contracts, when
aggregated with the Index Futures and equity swaps contracts as described above,
does not exceed 10% of the Fund's net assets.
INTEREST RATE CAPS, FLOORS AND COLLARS. A Fund may use interest rate
caps, floors and collars for the same purposes or similar purposes as they use
interest rate futures contracts and related options. Interest rate caps, floors
and collars are similar to interest rate swap contracts because the payment
obligations are measured by changes in interest rates as applied to a notional
amount and because they are individually negotiated with a specific
counterparty. The purchase of an interest rate cap entitles the purchaser, to
the extent that a specific index exceeds a specified interest rate, to receive
payments of interest on a notional principal amount from the
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party selling the interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below
specified interest rates, to receive payments of interest on a notional
principal amount from the party selling the interest rate floor. The purchase of
an interest rate collar entitles the purchaser, to the extent that a specified
index exceeds or falls below two specified interest rates, to receive payments
of interest on a notional principal amount from the party selling the interest
rate collar. Except when using such contracts for risk management, a Fund's
custodian will earmark and maintain cash, U.S. Government Securities or other
liquid assets in an amount at least equal to its obligations, if any, under
interest rate cap, floor and collar arrangements. As with futures contracts,
when a Fund uses notional amount contracts for risk management it is only
required to earmark and maintain on the custodian's books and records assets
equal to its net payment obligation, not the notional amount of the contract. In
those cases, the notional amount contract will have the effect of providing a
degree of investment leverage similar to the leverage associated with
non-earmarked futures contracts. A Fund's use of interest rate caps, floors and
collars for the same or similar purposes as those for which they use futures
contracts and related options presents the same risks and similar opportunities
as those associated with futures and related options. Because caps, floors and
collars are recent innovations for which standardized documentation has not yet
been developed they are deemed by the SEC to be relatively illiquid investments
which are subject to each Fund's limitation on investment in illiquid
securities.
FOREIGN CURRENCY TRANSACTIONS
Foreign currency exchange rates may fluctuate significantly over short
periods of time. They generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries, actual or perceived changes in interest rates and other
complex factors. Currency exchange rates also can be affected unpredictably by
intervention (or the failure to intervene) by U.S. or foreign governments or
central banks, or by currency controls or political developments in the U.S. or
abroad. For example, uncertainty surrounds the introduction of the "euro" (a
common currency unit for the European Union) which occurred in January 1999.
These and other currencies in which a Fund's assets are denominated may be
devalued against the U.S. dollar, resulting in a loss to the Fund.
A Fund may be permitted to invest in securities denominated in foreign
currencies and may buy or sell foreign currencies, deal in forward foreign
currency contracts, currency futures contracts and related options and options
on currencies. A Fund may use such currency instruments for hedging, investment
or currency risk management. Currency risk management may include taking active
currency positions relative to both the securities portfolio of a Fund and a
Fund's performance benchmark.
Forward foreign currency contracts are contracts between two parties to
purchase and sell a specific quantity of a particular currency at a specified
price, with delivery and settlement to take place on a specified future date.
Currency futures contracts are contracts to buy or sell a standard quantity of a
particular currency at a specified future date and price. Options on currency
futures contracts give their owner the right, but not the obligation, to buy (in
the case of a call option) or sell (in the case of a put option) a specified
currency futures contract at a fixed price during a specified period. Options on
currencies give their owner the right, but not the
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obligation, to buy (in the case of a call option) or sell (in the case of a put
option) a specified quantity of a particular currency at a fixed price during a
specified period.
A Fund may enter into forward contracts for hedging under three
circumstances. First, when a Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transaction, a Fund will be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date on which the security is purchased or sold and the date
on which payment is made or received.
Second, when the Manager of a Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of the Fund's portfolio securities denominated in such foreign currency.
Maintaining a match between the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures.
Third, a Fund may engage in currency "cross hedging" when, in the
opinion of the Manager, the historical relationship among foreign currencies
suggests that the Fund may achieve the same protection for a foreign security at
reduced cost through the use of a forward foreign currency contract relating to
a currency other than the U.S. dollar or the foreign currency in which the
security is denominated. By engaging in cross hedging transactions, a Fund
assumes the risk of imperfect correlation between the subject currencies. These
practices may present risks different from or in addition to the risks
associated with investments in foreign currencies.
A Fund is not required to enter into hedging transactions with regard
to its foreign currency-denominated securities and will not do so unless deemed
appropriate by the Manager. By entering into the above hedging transactions, a
Fund may be required to forego the benefits of advantageous changes in the
exchange rates.
A Fund may also enter foreign currency forward contracts for investment
and currency risk management. When a Fund uses currency instruments for such
purposes, the foreign currency exposure of the Fund may differ substantially
from the currencies in which the Fund's investment securities are denominated.
However, a Fund's aggregate foreign currency exposure will not normally exceed
100% of the value of the Fund's securities, except that a Fund may use currency
instruments without regard to this limitation if the amount of such excess, when
aggregated with futures contracts, equity swap contracts and contracts for
differences used in similar ways, does not exceed 10% of the Fund's net assets.
Except to the extent that a Fund may use such contracts for risk
management, whenever a Fund enters into a foreign currency forward contract,
other than a forward contract entered into
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for hedging, the Fund's custodian will earmark and maintain cash, U.S.
Government Securities or other liquid assets with a value, marked to market
daily, equal to the amount of the currency required to be delivered. A Fund's
ability to engage in forward contracts may be limited by tax considerations.
A Fund may use currency futures contracts and related options and
options on currencies for the same reasons for which it uses currency forwards.
Except to the extent that a Fund may use futures contracts and related options
for risk management, a Fund will, so long as it is obligated as the writer of a
call option on currency futures, own on a contract-for-contract basis an equal
long position in currency futures with the same delivery date or a call option
on currency futures with the difference, if any, between the market value of the
call written and the market value of the call or long currency futures purchased
and maintained by the Fund in cash or other liquid assets earmarked on the books
and records of the Fund's custodian. If at the close of business on any day the
market value of the call purchased by a Fund falls below 100% of the market
value of the call written by the Fund, the Fund's custodian will earmark and
maintain an amount of cash or other liquid assets equal in value to the
difference. Alternatively, a Fund may cover the call option by owning securities
denominated in the currency with a value equal to the face amount of the
contract(s) or through earmarking and maintaining with the custodian an amount
of the particular foreign currency equal to the amount of foreign currency per
futures contract option times the number of options written by the Fund.
REPURCHASE AGREEMENTS
A Fund may enter into repurchase agreements with banks and
broker-dealers by which it acquires a security (usually an obligation of the
Government where the transaction is initiated or in whose currency the agreement
is denominated) for a relatively short period (usually not more than a week) for
cash and obtains a simultaneous commitment from the seller to repurchase the
security at an agreed-on price and date. The resale price is in excess of the
acquisition price and reflects an agreed-upon market rate unrelated to the
coupon rate on the purchased security. Such transactions afford an opportunity
for a Fund to earn a return on temporarily available cash at no market risk,
although there is a risk that the seller may default in its obligation to pay
the agreed-upon sum on the redelivery date. Such a default may subject a Fund to
expenses, delays and risks of loss including: (a) possible declines in the value
of the underlying security during the period while the Fund seeks to enforce its
rights thereto, (b) possible reduced levels of income and lack of access to
income during this period and (c) inability to enforce rights and the expenses
involved in attempted enforcement.
DEBT AND OTHER FIXED INCOME SECURITIES GENERALLY
Debt and Other Fixed Income Securities include fixed income securities
of any maturity. Fixed income securities pay a specified rate of interest or
dividends, or a rate that is adjusted periodically by reference to some
specified index or market rate. Fixed income securities include securities
issued by federal, state, local and foreign governments and related agencies,
and by a wide range of private issuers.
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Fixed income securities are subject to market and credit risk. Market
risk relates to changes in a security's value as a result of changes in interest
rates generally. In general, the values of fixed income securities increase when
prevailing interest rates fall and decrease when interest rates rise. Credit
risk relates to the ability of the issuer to make payments of principal and
interest. Obligations of issuers are subject to the provisions of bankruptcy,
insolvency and other laws, such as the Federal Bankruptcy Reform Act of 1978,
affecting the rights and remedies of creditors. Fixed income securities
denominated in foreign currencies are also subject to the risk of a decline in
the value of the denominating currency.
Because interest rates vary, it is impossible to predict the future
income of a Fund investing in such securities. The net asset value of a Fund's
shares will vary as a result of changes in the value of the securities in its
portfolio and will be affected by the absence and/or success of hedging
strategies.
TEMPORARY HIGH QUALITY CASH ITEMS
To the extent noted under "Investment Guidelines," a Fund may
temporarily invest a portion of its assets in cash or cash items pending other
investments or in connection with the earmarking and maintenance of such assets
on the custodian's books and records. These cash items must be of high quality
and may include a number of money market instruments such as securities issued
by the United States government and agencies thereof, bankers' acceptances,
commercial paper, and bank certificates of deposit. By investing in high quality
money market securities a Fund may seek to minimize credit risk with respect to
such investments.
U.S. GOVERNMENT SECURITIES AND FOREIGN GOVERNMENT SECURITIES
U.S. Government Securities include securities issued or guaranteed by
the U.S. government or its authorities, agencies or instrumentalities. Foreign
Government Securities include securities issued or guaranteed by foreign
governments (including political subdivisions) or their authorities, agencies or
instrumentalities or by supra-national agencies. U.S. Government Securities and
Foreign Government Securities have different kinds of government support. For
example, some U.S. Government Securities, such as U.S. Treasury bonds, are
supported by the full faith and credit of the United States, whereas certain
other U.S. Government Securities issued or guaranteed by federal agencies or
government-sponsored enterprises are not supported by the full faith and credit
of the United States. Similarly, some Foreign Government Securities are
supported by the full faith and credit of a foreign national government or
political subdivision and some are not. In the case of certain countries,
Foreign Government Securities may involve varying degrees of credit risk as a
result of financial or political instability in such countries and the possible
inability of a Fund to enforce its rights against the foreign government issuer.
Supra-national agencies are agencies whose member nations make capital
contributions to support the agencies' activities, and include such entities as
the International Bank for Reconstruction and Development (the World Bank), the
Asian Development Bank, the European Coal and Steel Community and the
Inter-American Development Bank.
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Like other fixed income securities, U.S. Government Securities and
Foreign Government Securities are subject to market risk and their market values
fluctuate as interest rates change. Thus, for example, the value of an
investment in a Fund which holds U.S. Government Securities or Foreign
Government Securities may fall during times of rising interest rates. Yields on
U.S. Government Securities and Foreign Government Securities tend to be lower
than those of corporate securities of comparable maturities.
In addition to investing directly in U.S. Government Securities and
Foreign Government Securities, a Fund may purchase certificates of accrual or
similar instruments evidencing undivided ownership interests in interest
payments or principal payments, or both, in U.S. Government Securities and
Foreign Government Securities. These certificates of accrual and similar
instruments may be more volatile than other government securities.
ADJUSTABLE RATE SECURITIES
Adjustable rate securities are securities that have interest rates that
are reset at periodic intervals, usually by reference to some interest rate
index or market interest rate. They may be U.S. Government Securities or
securities of other issuers. Some adjustable rate securities are backed by pools
of mortgage loans. Although the rate adjustment feature may act as a buffer to
reduce sharp changes in the value of adjustable rate securities, these
securities are still subject to changes in value based on changes in market
interest rates or changes in the issuer's creditworthiness. Because the interest
rate is reset only periodically, changes in the interest rates on adjustable
rate securities may lag changes in prevailing market interest rates. Also, some
adjustable rate securities (or, in the case of securities backed by mortgage
loans, the underlying mortgages) are subject to caps or floors that limit the
maximum change in interest rate during a specified period or over the life of
the security. Because of the resetting of interest rates, adjustable rate
securities are less likely than non-adjustable rate securities of comparable
quality and maturity to increase significantly in value when market interest
rates fall.
LOWER RATED SECURITIES
A Fund may invest some or all of its assets in securities rated below
investment grade (that is, rated below BBB by Standard & Poor's or below Baa by
Moody's) at the time of purchase, including securities in the lowest rating
categories, and comparable unrated securities ("Lower Rated Securities"). A Fund
will not necessarily dispose of a security when its rating is reduced below its
rating at the time of purchase, although the Manager will monitor the investment
to determine whether continued investment in the security will assist in meeting
the Fund's investment objective.
Lower Rated Securities generally provide higher yields, but are subject
to greater credit and market risk, than higher quality fixed income securities.
Lower Rated Securities are considered predominantly speculative with respect to
the ability of the issuer to meet principal and interest payments. Achievement
of the investment objective of a Fund investing in Lower Rated Securities may be
more dependent on the Manager's own credit analysis than is the case with higher
quality bonds. The market for Lower Rated Securities may be more severely
affected than some other financial markets by economic recession or substantial
interest rate
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increases, by changing public perceptions of this market or by legislation that
limits the ability of certain categories of financial institutions to invest in
these securities. In addition, the secondary market may be less liquid for Lower
Rated Securities. This reduced liquidity at certain times may affect the values
of these securities and may make the valuation and sale of these securities more
difficult. Securities of below investment grade quality are commonly referred to
as "junk bonds." Securities in the lowest rating categories may be in poor
standing or in default. Securities in the lowest investment grade category (BBB
or Baa) have some speculative characteristics.
INDEXED SECURITIES
Indexed securities are securities the redemption values and/or the
coupons of which are indexed to the prices of a specific instrument or
statistic. Indexed securities typically, but not always, are debt securities or
deposits whose value at maturity or coupon rate is determined by reference to
other securities, securities indexes, currencies, precious metals or other
commodities, or other financial indicators. Gold-indexed securities, for
example, typically provide for a maturity value that depends on the price of
gold, resulting in a security whose price tends to rise and fall together with
gold prices. Currency-indexed securities typically are short-term to
intermediate-term debt securities whose maturity values or interest rates are
determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated securities
of equivalent issuers. Currency-indexed securities may be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
Indexed securities in which a Fund may invest include so-called
"inverse floating obligations" or "residual interest bonds" on which the
interest rates typically decline as short-term market interest rates increase
and increase as short-term market rates decline. Such securities have the effect
of providing a degree of investment leverage, since they will generally increase
or decrease in value in response to changes in market interest rates at a rate
which is a multiple of the rate at which fixed-rate long-term securities
increase or decrease in response to such changes. As a result, the market values
of such securities will generally be more volatile than the market values of
fixed rate securities.
Certain Funds may invest in inflation indexed securities issued by the
U.S. Treasury, which are fixed income securities whose principal value is
periodically adjusted according to the
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rate of inflation. The interest rate on these bonds is fixed at issuance, but
over the life of the bond this interest may be paid on an increasing or
decreasing principal value which has been adjusted for inflation.
Repayment of the original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury inflation indexed bonds,
even during a period of deflation. However, the current market value of the
bonds is not guaranteed, and will fluctuate. Certain Funds may also invest in
other bonds which may or may not provide a similar guarantee. If a guarantee of
principal is not provided, the adjusted principal value of the bond repaid at
maturity may be less than the original principal.
The value of inflation indexed bonds is expected to fluctuate in
response to changes in real interest rates, which are in turn tied to the
relationship between nominal interest rates and the rate of inflation.
Therefore, if inflation were to rise at a faster rate than nominal interest
rates, real interest rates might decline, leading to an increase in value of
inflation indexed bonds. In contrast, if nominal interest rates increased at a
faster rate than inflation, real interest rates might rise, leading to a
decrease in value of inflation indexed bonds.
Although these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may result in a decline
in value. If interest rates rise due to reasons other than inflation (such as
changes in currency exchange rates), investors in these securities may not be
protected to the extent that the increase is not reflected in the bond's
inflation measure.
The U.S. Treasury has a relatively brief history of issuing inflation
indexed bonds. As such, there is no trading history of these securities, and
there can be no assurance that a liquid market in these instruments will
develop. Certain foreign governments, such as the United Kingdom, Canada and
Australia, have a longer history of issuing inflation indexed bonds, and there
may be a more liquid market in certain of these countries for these securities.
The periodic adjustment of U.S. inflation indexed bonds is tied to the
Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated monthly
by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in
the cost of living, made up of components such as housing, food, transportation
and energy. Inflation-indexed bonds issued by a foreign government are generally
adjusted to reflect a comparable inflation index, calculated by that government.
There can be no assurance that the CPI-U or any foreign inflation index will
accurately measure the real rate of inflation in the prices of goods and
services. In addition, there can be no assurance that the rate of inflation in a
foreign country will be correlated to the rate of inflation in the United
States.
Coupon payments received by a Fund from inflation indexed bonds will be
includable in the Fund's gross income in the period in which they accrue. In
addition, any increase in the principal amount of an inflation indexed bond will
be considered taxable ordinary income, even though investors do not receive
their principal until maturity.
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The Fund may invest in fixed income securities (including convertible
securities) of any maturity.
A Fund's investments in indexed securities, including inflation indexed
securities, may create taxable income in excess of the cash they generate. In
such cases, a Fund may be required to sell assets to generate the cash necessary
to distribute as dividends to its shareholders all of its income and gains and
therefore to eliminate any tax liability at the Fund level. See "Distributions
and Taxes in the Prospectus" and "Distributions" and "Taxes" in this Statement
of Additional Information.
FIRM COMMITMENTS
A firm commitment agreement is an agreement with a bank or
broker-dealer for the purchase of securities at an agreed-upon price on a
specified future date. A Fund may enter into firm commitment agreements with
such banks and broker-dealers with respect to any of the instruments eligible
for purchase by the Fund. A Fund will only enter into firm commitment
arrangements with banks and broker-dealers which the Manager determines present
minimal credit risks. A Fund's custodian will earmark and maintain cash, U.S.
Government Securities or other liquid assets in an amount equal to the Fund's
obligations under firm commitment agreements.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS
A Fund may enter into reverse repurchase agreements and dollar roll
agreements with banks and brokers to enhance return. Reverse repurchase
agreements involve sales by a Fund of portfolio assets concurrently with an
agreement by the Fund to repurchase the same assets at a later date at a fixed
price. During the reverse repurchase agreement period, the Fund continues to
receive principal and interest payments on these securities and also has the
opportunity to earn a return on the collateral furnished by the counterparty to
secure its obligation to redeliver the securities.
Dollar rolls are transactions in which a Fund sells securities for
delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date. During the roll period, the Fund forgoes principal and interest paid on
the securities. The Fund is compensated by the difference between the current
sales price and the forward price for the future purchase (often referred to as
the "drop") as well as by the interest earned on the cash proceeds of the
initial sale.
A Fund which makes such investments will earmark and maintain on its
custodian's books and records cash, U.S. Government Securities or other liquid
assets equal in value to its obligations in respect of reverse repurchase
agreements and dollar rolls. Reverse repurchase agreements and dollar rolls
involve the risk that the market value of the securities retained by a Fund may
decline below the price of the securities the Fund has sold but is obligated to
repurchase under the agreement. In the event the buyer of securities under a
reverse repurchase agreement or dollar roll files for bankruptcy or becomes
insolvent, the Fund's use of the proceeds of the agreement may be restricted
pending a determination by the other party or its trustee or
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receiver whether to enforce the Fund's obligation to repurchase the securities.
Reverse repurchase agreements and dollar rolls are not considered borrowings by
a Fund for purposes of a Fund's fundamental investment restriction with respect
to borrowings.
ILLIQUID SECURITIES
A Fund may purchase "illiquid securities," i.e., securities which may
not be sold or disposed of in the ordinary course of business within seven days
at approximately the value at which the Fund has valued the investment, which
include securities whose disposition is restricted by securities laws, so long
as no more than 15% of net assets would be invested in such illiquid securities.
The Funds currently intend to invest in accordance with the SEC staff view that
repurchase agreements maturing in more than seven days are illiquid securities.
It is possible that certain over-the-counter options and securities serving as
cover for over-the-counter options may be deemed, under certain circumstances,
to be illiquid securities. While the Trust does not agree with this view, it
will operate in accordance with any relevant formal guidelines adopted by the
SEC.
In addition, the SEC staff may, under certain circumstances, consider
equity swap contracts, caps, floors and collars to be illiquid securities.
Consequently, to the extent the SEC staff maintains this position, a Fund will
not enter into an equity swap contract or a reverse equity swap contract or
purchase a cap, floor or collar if, as a result of the investment, the total
value (i.e., marked-to-market value) of such investments (without regard to
their notional amount) together with that of all other illiquid securities which
the Fund owns would exceed 15% of the Fund's total assets.
INVESTMENT RESTRICTIONS
Fundamental Restrictions:
Without a vote of the majority of the outstanding voting securities of
the relevant Fund, the Trust will not take any of the following actions with
respect to such Fund as indicated:
(1) Borrow money except under the following circumstances: (i) A Fund
may borrow money from banks so long as after such a transaction, the total
assets (including the amount borrowed) less liabilities other than debt
obligations, represent at least 300% of outstanding debt obligations; (ii) A
Fund may also borrow amounts equal to an additional 5% of its total assets
without regard to the foregoing limitation for temporary purposes, such as for
the clearance and settlement of portfolio transactions and to meet shareholder
redemption requests; (iii) A Fund may enter into transactions that are
technically borrowings under the 1940 Act because they involve the sale of a
security coupled with an agreement to repurchase that security (e.g., reverse
repurchase agreements, dollar rolls and other similar investment techniques)
without regard to the asset coverage restriction described in (i) above, so long
as and to the extent that the Fund's custodian earmarks and maintains cash
and/or high grade debt securities equal in value to its obligations in respect
of these transactions. Under current pronouncements of the SEC staff, such
transactions are not treated as senior securities so long as and to the extent
that the Fund's
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custodian earmarks and maintains liquid assets, such as cash, U.S. Government
Securities or other appropriate assets equal in value to its obligations in
respect of these transactions.
(2) Purchase securities on margin, except such short-term credits as
may be necessary for the clearance of purchases and sales of securities. (For
this purpose, the deposit or payment of initial or variation margin in
connection with futures contracts or related options transactions is not
considered the purchase of a security on margin.)
(3) Make short sales of securities or maintain a short position for a
Fund's account unless at all times when a short position is open the Fund owns
an equal amount of such securities or owns securities which, without payment of
any further consideration, are convertible into or exchangeable for securities
of the same issue as, and equal in amount to, the securities sold short.
(4) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under federal securities laws.
(5) Purchase or sell real estate, although it may purchase securities
of issuers which deal in real estate, including securities of real estate
investment trusts, and may purchase securities which are secured by interests in
real estate.
(6) Make loans, except by purchase of debt obligations or by entering
into repurchase agreements or through the lending of a Fund's portfolio
securities. Loans of portfolio securities may be made with respect to up to 100%
of a Fund's total assets.
(7) Concentrate more than 25% of the value of its total assets in any
one industry.
(8) Purchase or sell commodities or commodity contracts, except that a
Fund may purchase and sell financial futures contracts and options thereon.
(9) Issue senior securities, as defined in the 1940 Act and as
amplified by rules, regulations and pronouncements of the SEC. The SEC has
concluded that even though reverse repurchase agreements, firm commitment
agreements and standby commitment agreements fall within the functional meaning
of the term "evidence of indebtedness", the issue of compliance with Section 18
of the 1940 Act will not be raised with the SEC by the Division of Investment
Management if a Fund covers such securities by earmarking and maintaining
certain assets on the books and records of the Fund's custodian. Similarly, so
long as such earmarked assets are maintained, the issue of compliance with
Section 18 will not be raised with respect to any of the following: any swap
contract or contract for differences; any pledge or encumbrance of assets
permitted by Non-Fundamental Restriction (4) below; any borrowing permitted by
Fundamental Restriction (1) above; any collateral arrangements with respect to
initial and variation margin permitted by Non-Fundamental Restriction (4) below;
and the purchase or sale of options, forward contracts, futures contracts or
options on futures contracts.
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Non-Fundamental Restrictions:
It is contrary to the present policies of each Fund which may be changed by
the Trustees without shareholder approval, to:
(1) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts.
(2) Make investments for the purpose of gaining control of a company's
management.
(3) Invest more than 15% of net assets in illiquid securities. The
securities currently thought to be included as "illiquid securities" are
restricted securities under the Federal securities laws (including illiquid
securities traded under Rule 144A), repurchase agreements and securities that
are not readily marketable. To the extent the Trustees determine that restricted
securities traded under Section 4(2) or Rule 144A under the Securities Act of
1933 are in fact liquid, they will not be included in the 15% limit on
investment in illiquid securities.
(4) Pledge, hypothecate, mortgage or otherwise encumber its assets in
excess of 33 1/3% of a Fund's total assets (taken at cost). (For the purposes of
this restriction, collateral arrangements with respect to swap agreements, the
writing of options, stock index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with respect to initial
and variation margin are not deemed to be a pledge or other encumbrance of
assets. The deposit of securities or cash or cash equivalents in escrow in
connection with the writing of covered call or put options, respectively is not
deemed to be a pledge or encumbrance.)
Except as indicated above in Fundamental Restriction No. 1, all percentage
limitations on investments set forth herein and in the Prospectus will apply at
the time of the making of an investment and shall not be considered violated
unless an excess or deficiency occurs or exists immediately after and as a
result of such investment.
The phrase "shareholder approval," as used in the Prospectus, and the
phrase "vote of a majority of the outstanding voting securities," as used herein
with respect to a Fund, means the affirmative vote of the lesser of (1) more
than 50% of the outstanding shares of the Fund, or (2) 67% or more of the shares
of the Fund present at a meeting if more than 50% of the outstanding shares are
represented at the meeting in person or by proxy. Except for policies that are
explicitly described as fundamental in the Prospectus or this Statement of
Additional Information, the investment policies of each Fund (including all
policies, restrictions and limitations set forth under "Investment Guidelines")
may be changed by the Trust's Trustees without the approval of shareholders.
MANAGEMENT OF THE TRUST
Subject to the provisions of the GMO Declaration of Trust, the business of
the GMO Trust (the "Trust"), an open-end management investment company, shall be
managed by the Trustees, and they shall have all powers necessary or convenient
to carry out that responsibility including the power to engage in securities
transactions of all kinds on behalf of the Trust. Without limiting the
foregoing, the Trustees may: adopt By-Laws not inconsistent with the Declaration
of Trust providing for the regulation
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and management of the affairs of the Trust and may amend and repeal them to the
extent that such By-Laws do not reserve that right to the Shareholders; fill
vacancies in or remove from their number (including any vacancies created by an
increase in the number of Trustees); remove from their number with or without
cause; elect and remove such officers and appoint and terminate such agents as
they consider appropriate; appoint from their own number and terminate one or
more committees consisting of two or more Trustees which may exercise the powers
and authority of the Trustees to the extent that the Trustees determine; employ
one or more custodians of the assets of the Trust and authorize such custodians
to employ subcustodians and to deposit all or any part of such assets in a
system or systems for the central handling of securities or with a Federal
Reserve Bank,; retain a transfer agent or a shareholder servicing agent, or
both; provide for the distribution of Shares by the Trust, through one or more
principal underwriters or otherwise; set record dates for the determination of
Shareholders with respect to various matters; and in general delegate such
authority as they consider desirable to any officer of the Trust, to any
committee of the Trustees and to any agent or employee of the Trust or to any
such custodian or underwriter.
The Trustees and officers of the Trust and their principal occupations
during the past five years are as follows:
R. JEREMY GRANTHAM* (D.O.B. 10/6/38). President-Quantitative and
Chairman of the Trustees of the Trust. Member, Grantham, Mayo, Van
Otterloo & Co. LLC.
JAY O. LIGHT (D.O.B. 10/3/41). Trustee of the Trust. Professor of
Business Administration, Harvard University; Senior Associate Dean,
Harvard University (1988-1992).
EYK DEL MOL VAN OTTERLOO (D.O.B. 2/27/37). President-International of
the Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC.
RICHARD MAYO (D.O.B. 6/18/42). President-U.S. Active of the Trust.
Member, Grantham, Mayo, Van Otterloo & Co. LLC.
SUSAN RANDALL HARBERT (D.O.B. 4/25/57). Chief Financial Officer and
Treasurer of the Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC.
WILLIAM R. ROYER, ESQ. (D.O.B. 7/20/65). Vice President of the Trust.
General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
ROBERT V. BROKAW, JR. (D.O.B. 10/7/43). Secretary of the Trust. Member,
Grantham, Mayo, Van Otterloo & Co. LLC. Research Analyst, GMO
Renewable Resources LLC (July 1999 - present).
SCOTT ESTON (D.O.B. 1/20/56). Vice President of the Trust. Chief
Financial Officer and Member, Grantham, Mayo, Van Otterloo & Co. LLC
(September 1997 - present). Senior Partner, Coopers & Lybrand (1987 -
1997).
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ANNE STETSON (D.O.B. 8/7/62) Vice President of the Trust. Associate
General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (May
1998-present). Legal Counsel, Fidelity Investments (January 1995-April
1998).
ELAINE M. HARTNETT, ESQ. (D.O.B. 2/18/45). Vice President and Clerk of
the Trust. Associate General Counsel, Grantham, Mayo, Van Otterloo &
Co. LLC (June 1999-Present). Associate/Junior Partner, Hale and Dorr
LLP, Boston, Massachusetts (1991-1999).
BRENT ARVIDSON (D.O.B. 6/26/69). Assistant Treasurer of the Trust.
Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC
(September 1997 - present). Senior Financial Reporting Analyst, John
Hancock Funds (August 1996 - September 1997). Account Supervisor/Senior
Account Specialist, Investors Bank and Company (June 1993 - August
1996).
*Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo,
Van Otterloo & Co. LLC ("GMO" or the "Manager"), as defined by the 1940 Act.
The mailing address of each of the officers and Trustees is c/o GMO
Trust, 40 Rowes Wharf, Boston, Massachusetts 02110. As of June 6, 2000, the
Trustees and officers of the Trust as a group owned less than 1% of the
outstanding shares of each class of shares of the Tax-Managed U.S. Equities Fund
and the Tax-Managed International Equities Fund. As of June 6, 2000, the
Trustees and officers of the Trust as a group owned 2.35% of the outstanding
shares of Class III of the Tax-Managed Small Companies Fund.
Except as stated above, the principal occupations of the officers and
Trustees for the last five years have been with the employers as shown above,
although in some cases they have held different positions with such employers.
Other than as set forth in the table below, no Trustee or officer of
the Trust receives any direct compensation from the Trust or any series thereof:
<TABLE>
<CAPTION>
NAME OF PERSON, TOTAL ANNUAL COMPENSATION
POSITION FROM THE TRUST
--------------- -------------------------
<S> <C>
Harvey R. Margolis, Trustee(1) $80,000
Jay O. Light, Trustee $80,000
</TABLE>
Messrs. Grantham, Mayo, Van Otterloo, Brokaw and Eston, and Ms.
Harbert, as members of the Manager, will benefit from the management fees paid
by each Fund of the Trust.
----------------------
(1) Mr. Margolis served as a Trustee of the Trust until his death in June
2000.
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<PAGE> 367
INVESTMENT ADVISORY AND OTHER SERVICES
Management Contracts
As disclosed in the Prospectus under the heading "Management of the
Trust," under separate Management Contracts (each a "Management Contract")
between the Trust and the Manager, subject to such policies as the Trustees of
the Trust may determine, the Manager will furnish continuously an investment
program for each Fund and will make investment decisions on behalf of the Funds
and place all orders for the purchase and sale of portfolio securities. Subject
to the control of the Trustees, the Manager also manages, supervises and
conducts the other affairs and business of the Trust, furnishes office space and
equipment, provides bookkeeping and certain clerical services and pays all
salaries, fees and expenses of officers and Trustees of the Trust who are
affiliated with the Manager. As indicated under "Portfolio
Transactions--Brokerage and Research Services," the Trust's portfolio
transactions may be placed with broker-dealers which furnish the Manager, at no
cost, certain research, statistical and quotation services of value to the
Manager in advising the Trust or its other clients.
As is disclosed in the Prospectus, the Manager has contractually agreed
to reimburse each Fund with respect to certain Fund expenses through June 30,
2001 to the extent that a Fund's total annual operating expenses (excluding
Shareholder Service Fees, brokerage commissions and other investment-related
costs, interest expenses, hedging transaction fees, extraordinary, non-recurring
and certain other unusual expenses (including taxes), securities lending fees
and expenses and transfer taxes) would otherwise exceed a specified percentage
of that Fund's daily net assets.
Each Management Contract provides that the Manager shall not be subject
to any liability in connection with the performance of its services thereunder
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
Each Management Contract was approved by the Trustees of the Trust
(including a majority of the Trustees who are not "interested persons" of the
Manager) and by the relevant Fund's sole shareholder in connection with the
organization of the Trust and the establishment of the Funds. Each Management
Contract will continue in effect for a period more than two years from the date
of its execution only so long as its continuance is approved at least annually
by (i) vote, cast in person at a meeting called for that purpose, of a majority
of those Trustees who are not "interested persons" of the Manager or the Trust,
and by (ii) the majority vote of either the full Board of Trustees or the vote
of a majority of the outstanding shares of the relevant Fund. Each Management
Contract automatically terminates on assignment, and is terminable on not more
than 60 days' notice by the Trust to the Manager. In addition, each Management
Contract may be terminated on not more than 60 days' written notice by the
Manager to the Trust.
For each Fund, the Management Fee is calculated based on a fixed
percentage of the Fund's average daily net assets. Since the commencement of
their operations, the Funds paid the following amounts as Management Fees to the
Manager pursuant to the relevant Management Contract:
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<PAGE> 368
<TABLE>
<CAPTION>
Gross Reduction Net
----- --------- ---
<S> <C> <C> <C>
TAX-MANAGED
U.S. EQUITIES FUND
Year Ended 2/29/00 $36,665 $36,665 $0
Commencement of Operations
(7/23/98) through 2/28/99 $16,961 $16,961 $0
TAX-MANAGED INTERNATIONAL
EQUITIES FUND
Year Ended 2/29/00 $411,732 $261,860 $149,872
Commencement of Operations
(7/29/98) through 2/28/99 $50,861 $50,861 $0
TAX-MANAGED SMALL
COMPANIES FUND
Commencement of Operations
(6/01/99) through 2/29/00 $148,043 $55,780 $92,263
</TABLE>
Each of the Trust and the Manager has adopted a Code of Ethics pursuant
to the requirement of the 1940 Act. Under the Code of Ethics, personnel are only
permitted to engage in personal securities transactions in accordance with
certain conditions relating to such persons' position, the identity of the
security, the timing of the transaction and similar factors. Transactions in
securities that may be held by the Funds are permitted, subject to compliance
with applicable provisions of the Code. Personal securities transactions must be
reported quarterly and broker confirmations of such transactions must be
provided for review.
Custodial Arrangements. Investors Bank & Trust Company ("IBT"), 200
Clarendon Street, Boston, Massachusetts 02116, serves as the Trust's custodian
on behalf of the Tax-Managed U.S. Equities Fund and the Tax-Managed Small
Companies Fund. Brown Brothers Harriman & Co. ("BBH"), 40 Water Street, Boston,
Massachusetts 02109, serves as the Trust's custodian on behalf of the
Tax-Managed International Equities Fund. As such, IBT or BBH holds in
safekeeping certificated securities and cash belonging to the relevant Fund and,
in such capacity, is the registered owner of securities in book-entry form
belonging to the relevant Fund. Upon instruction, IBT or BBH receives and
delivers cash and securities of the relevant Fund in connection with Fund
transactions and collects all dividends and other distributions made with
respect to Fund portfolio securities. Each of IBT and BBH also maintains certain
accounts and records of the Trust and calculates the total net asset value,
total net income and net asset value per share of each Fund for which it acts as
custodian on a daily basis.
Shareholder Service Arrangements. As disclosed in the Prospectus,
pursuant to the terms of a single Servicing Agreement with each Fund of the
Trust, GMO provides direct client service, maintenance and reporting to
shareholders of the Funds. The Servicing Agreement was
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<PAGE> 369
approved by the Trustees of the Trust (including a majority of the Trustees who
are not "interested persons" of the Manager or the Trust). The Servicing
Agreement will continue in effect for a period of more than one year from the
date of its execution only so long as its continuance is approved at least
annually by (i) the vote, cast in person at a meeting called for the purpose, of
a majority of those Trustees who are not "interested persons" of the Manager or
the Trust, and (ii) the majority vote of the full Board of Trustees. The
Servicing Agreement automatically terminates on assignment (except as
specifically provided in the Servicing Agreement) and is terminable by either
party upon not more than 60 days' written notice to the other party.
The Trust entered into the Servicing Agreement with GMO on May 30,
1996. Pursuant to the terms of the Servicing Agreement, in the last three fiscal
years, each Fund paid GMO the amounts set forth in the table below:
<TABLE>
<CAPTION>
March 1, 1997 March 1, 1998 March 1, 1999
Through Through Through
February 28, 1998 February 28, 1999 February 29, 2000
----------------- ----------------- -----------------
<S> <C> <C> <C>
Tax-Managed U.S. Equities Fund N/A $ 4,846 $ 16,666
Tax-Managed International Equities Fund N/A $ 10,172 $ 114,370
Tax-Managed Small Companies Fund N/A N/A $ 40,375
</TABLE>
Independent Accountants. The Trust's independent accountants are
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110.
PricewaterhouseCoopers LLP conducts annual audits of the Trust's financial
statements, assists in the preparation of each Fund's federal and state income
tax returns, consults with the Trust as to matters of accounting and federal and
state income taxation and provides assistance in connection with the preparation
of various Securities and Exchange Commission filings.
Distributor. Funds Distributor, Inc. ("FDI"), 60 State Street, Boston,
Massachusetts 02109, serves as the Trust's distributor on behalf of the Funds.
GMO has undertaken to reimburse the Trust for any fees that the Trust is
obligated to pay FDI.
PORTFOLIO TRANSACTIONS
The purchase and sale of portfolio securities for each Fund and for the
other investment advisory clients of the Manager are made by the Manager with a
view to achieving their respective investment objectives. For example, a
particular security may be bought or sold for certain clients of the Manager
even though it could have been bought or sold for other clients at the same
time. Likewise, a particular security may be bought for one or more clients when
one or more other clients are selling the security. In some instances,
therefore, one client may sell indirectly a particular security to another
client. It also happens that two or more clients may simultaneously buy or sell
the same security, in which event purchases or sales are effected on a pro rata,
rotating or other equitable basis so as to avoid any one account being preferred
over any other account.
Transactions involving the issuance of Fund shares for securities or
assets other than cash will be limited to a bona fide reorganization or
statutory merger and to other acquisitions of
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<PAGE> 370
portfolio securities that meet all of the following conditions: (a) such
securities meet the investment objectives and policies of the Fund; (b) such
securities are acquired for investment and not for resale; (c) such securities
are liquid securities which are not restricted as to transfer either by law or
liquidity of market; and (d) such securities have a value which is readily
ascertainable as evidenced by a listing on the American Stock Exchange, the New
York Stock Exchange, NASDAQ or a recognized foreign exchange.
Brokerage and Research Services. In placing orders for the portfolio
transactions of each Fund, the Manager will seek the best price and execution
available, except to the extent it may be permitted to pay higher brokerage
commissions for brokerage and research services as described below. The
determination of what may constitute best price and execution by a broker-dealer
in effecting a securities transaction involves a number of considerations,
including, without limitation, the overall net economic result to the Fund
(involving price paid or received and any commissions and other costs paid), the
efficiency with which the transaction is effected, the ability to effect the
transaction at all where a large block is involved, availability of the broker
to stand ready to execute possibly difficult transactions in the future and the
financial strength and stability of the broker. Because of such factors, a
broker-dealer effecting a transaction may be paid a commission higher than that
charged by another broker-dealer. Most of the foregoing are subjective
considerations.
Over-the-counter transactions often involve dealers acting for their
own account. It is the Manager's policy to place over-the-counter market orders
for the U.S. Funds with primary market makers unless better prices or executions
are available elsewhere.
Although the Manager does not consider the receipt of research services
as a factor in selecting brokers to effect portfolio transactions for a Fund,
the Manager will receive such services from brokers who are expected to handle a
substantial amount of the Funds' portfolio transactions. Research services may
include a wide variety of analyses, reviews and reports on such matters as
economic and political developments, industries, companies, securities and
portfolio strategy. The Manager uses such research in servicing other clients as
well as the Funds.
As permitted by Section 28(e) of the Securities Exchange Act of 1934
and subject to such policies as the Trustees of the Trust may determine, the
Manager may pay an unaffiliated broker or dealer that provides "brokerage and
research services" (as defined in the Act) to the Manager an amount of
commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction.
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<PAGE> 371
During the last three fiscal years, the Trust paid, on behalf of the
Funds, the following amounts in brokerage commissions:
<TABLE>
<CAPTION>
March 1, 1997 March 1, 1998 March 1, 1999
Through Through Through
February 28, 1997 February 28, 1998 February 29, 2000
----------------- ----------------- -----------------
<S> <C> <C> <C>
Tax-Managed U.S. Equities Fund N/A $ 5,964 $ 5,617
Tax-Managed International Equities Fund N/A $ 27,729 $ 105,176
Tax-Managed Small Companies Fund N/A N/A $ 96,276
</TABLE>
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund of GMO Trust will be
determined on each day the New York Stock Exchange (the "Exchange") is open for
regular business as of the close of regular trading on the Exchange, generally
4:00 p.m. New York City time. However, equity options held by the Funds are
priced as of the close of trading at 4:10 p.m., and futures contracts on U.S.
government and other fixed-income securities and index options held by the Funds
are priced as of their close of trading at 4:15 p.m. Events affecting the values
of foreign securities may occur between the earlier closings of foreign
exchanges and securities markets and the closing of the New York Stock Exchange
which will not be reflected in the computation of the Funds' net asset value.
Please refer to "Determination of Net Asset Value" in the Prospectus for
additional information.
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES
The Trust is organized as a Massachusetts business trust under the laws
of Massachusetts by an Agreement and Declaration of Trust ("Declaration of
Trust") dated June 24, 1985. A copy of the Declaration of Trust is on file with
the Secretary of The Commonwealth of Massachusetts. The fiscal year for each
Fund ends on February 28/29.
Pursuant to the Declaration of Trust, the Trustees have currently
authorized the issuance of an unlimited number of full and fractional shares of
thirty-nine series, one for each of the Funds described in this Statement of
Additional Information, and for each of U.S. Core Fund; Tobacco-Free Core Fund;
Value Fund; Growth Fund; U.S. Sector Fund; Small Cap Value Fund; Small Cap
Growth Fund; Fundamental Value Fund; REIT Fund; International Core Fund;
Currency Hedged International Core Fund; Foreign Fund; International Small
Companies Fund; Japan Fund; Emerging Markets Fund; Evolving Countries Fund;
Domestic Bond Fund; U.S. Bond/Global Alpha A Fund; U.S. Bond/Global Alpha B
Fund; International Bond Fund; Currency Hedged International Bond Fund; Global
Bond Fund; Emerging Country Debt Fund; Short-Term Income Fund; Global Hedged
Equity Fund; Inflation Indexed Bond Fund; International Equity Allocation Fund;
World Equity Allocation Fund; Global (U.S.+) Equity Allocation Fund; Global
Balanced Allocation Fund; Emerging Country Debt Share Fund; Pelican Fund; Asia
Fund; Alpha LIBOR Fund; International Core Plus Allocation Fund; and Intrinsic
Value Fund. Interests in each portfolio (Fund) are represented by shares of the
corresponding series. Each share of each series represents an equal
proportionate interest, together with each other share, in the corresponding
Fund. The shares of such series do not have any preemptive rights. Upon
liquidation of a Fund, shareholders of the corresponding series are
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<PAGE> 372
entitled to share pro rata in the net assets of the Fund available for
distribution to shareholders. The Declaration of Trust also permits the Trustees
to charge shareholders directly for custodial and transfer agency expenses, but
there is no present intention to make such charges.
The Declaration of Trust also permits the Trustees, without shareholder
approval, to subdivide any series of shares into various sub-series or classes
of shares with such dividend preferences and other rights as the Trustees may
designate. This power is intended to allow the Trustees to provide for an
equitable allocation of the impact of any future regulatory requirements which
might affect various classes of shareholders differently. The Trustees have
currently authorized the establishment and designation of up to eight classes of
shares for each series of the Trust (except for the Pelican Fund): Class I
Shares, Class II Shares, Class III Shares, Class IV Shares, Class V Shares,
Class VI Shares, Class VII Shares and Class VIII Shares.
The Trustees may also, without shareholder approval, establish one or
more additional separate portfolios for investments in the Trust or merge two or
more existing portfolios (i.e., a new fund). Shareholders' investments in such a
portfolio would be evidenced by a separate series of shares.
The Declaration of Trust provides for the perpetual existence of the
Trust. The Trust, however, may be terminated at any time by vote of at least
two-thirds of the outstanding shares of the Trust. While the Declaration of
Trust further provides that the Trustees may also terminate the Trust upon
written notice to the shareholders, the 1940 Act requires that the Trust receive
the authorization of a majority of its outstanding shares in order to change the
nature of its business so as to cease to be an investment company.
On June 1, 2000 the following shareholders held greater than 25% of the
outstanding shares of a series of the Trust:
<TABLE>
<CAPTION>
FUND SHAREHOLDERS
---- ------------
<S> <C>
Tax-Managed U.S. Equities Fund Bob & Co. FBO Metcalf; Janet H. Geary
Tax-Managed Small Companies Fund MAC & Co. A/C10260102934 Symax Ltd.
Tax-Managed International Equities Fund Gordon Family Trust
</TABLE>
As a result, such shareholders may be deemed to "control" their
respective series as such term is defined in the 1940 Act.
Shareholders could, under certain circumstances, be held personally
liable for the obligations of the Trust. However, the risk of a shareholder
incurring financial loss on account of that liability is considered remote since
it may arise only in very limited circumstances.
VOTING RIGHTS
Shareholders are entitled to one vote for each full share held (with
fractional votes for fractional shares held) and will vote (to the extent
provided herein) in the election of Trustees and the termination of the Trust
and on other matters submitted to the vote of shareholders.
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<PAGE> 373
Shareholders vote by individual Fund on all matters except (i) when required by
the Investment Company Act of 1940, shares shall be voted in the aggregate and
not by individual Fund, and (ii) when the Trustees have determined that the
matter affects only the interests of one or more Funds, then only shareholders
of such affected Funds shall be entitled to vote thereon. Shareholders of one
Fund shall not be entitled to vote on matters exclusively affecting another
Fund, such matters including, without limitation, the adoption of or change in
the investment objectives, policies or restrictions of the other Fund and the
approval of the investment advisory contracts of the other Fund. Shareholders of
a particular class of shares do not have separate class voting rights except
with respect to matters that affect only that class of shares and as otherwise
required by law.
There will normally be no meetings of shareholders for the purpose of
electing Trustees except that in accordance with the 1940 Act (i) the Trust will
hold a shareholders' meeting for the election of Trustees at such time as less
than a majority of the Trustees holding office have been elected by
shareholders, and (ii) if, as a result of a vacancy in the Board of Trustees,
less than two-thirds of the Trustees holding office have been elected by the
shareholders, that vacancy may only be filled by a vote of the shareholders. In
addition, Trustees may be removed from office by a written consent signed by the
holders of two-thirds of the outstanding shares and filed with the Trust's
custodian or by a vote of the holders of two-thirds of the outstanding shares at
a meeting duly called for the purpose, which meeting shall be held upon the
written request of the holders of not less than 10% of the outstanding shares.
Upon written request by the holders of at least 1% of the outstanding shares
stating that such shareholders wish to communicate with the other shareholders
for the purpose of obtaining the signatures necessary to demand a meeting to
consider removal of a Trustee, the Trust has undertaken to provide a list of
shareholders or to disseminate appropriate materials (at the expense of the
requesting shareholders). Except as set forth above, the Trustees shall continue
to hold office and may appoint successor Trustees. Voting rights are not
cumulative.
No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the Trust except (i)
to change the Trust's name or to cure technical problems in the Declaration of
Trust and (ii) to establish, designate or modify new and existing series or
sub-series of Trust shares or other provisions relating to Trust shares in
response to applicable laws or regulations.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Declaration of Trust provides for indemnification out of
all the property of the relevant Fund for all loss and expense of any
shareholder of that Fund held personally liable for the obligations of the
Trust. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is considered remote since it is limited to
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<PAGE> 374
circumstances in which the disclaimer is inoperative and the Fund of which he is
or was a shareholder would be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing in
the Declaration of Trust protects a Trustee against any liability to which the
Trustee would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office. The By-laws of the Trust provide for indemnification by the Trust of
the Trustees and the officers of the Trust except with respect to any matter as
to which any such person did not act in good faith in the reasonable belief that
his action was in or not opposed to the best interests of the Trust. Such person
may not be indemnified against any liability to the Trust or the Trust
shareholders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
BENEFICIAL OWNERS OF 5% OR MORE OF THE FUND'S SHARES
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Tax-Managed U.S. Equities Fund as of June 1,
2000:
<TABLE>
<CAPTION>
NAME ADDRESS % OWNERSHIP
---- ------- -----------
<S> <C> <C>
Bob & Co. c/o BankBoston 69.95
FBO Metcalf Attn: Mutual Fund Department 45-02-93
P.O. Box 1809
Boston, MA 02105-1809
Janet H. Geary 1211 SW 5th Avenue, Suite 2980 27.49
Portland, OR 97204
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Tax-Managed International Equities Fund as
of June 1, 2000:
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<PAGE> 375
<TABLE>
<CAPTION>
NAME ADDRESS % OWNERSHIP
---- ------- -----------
<S> <C> <C>
Gordon Family Trust 1325 Airmotive Way, Suite 264 27.75
Reno, NV 89502
The Northern Trust TR P.O. Box 92956 21.76
Mars Benefit Trust Chicago, IL 60675
Dumaines Trust c/o Gerard Sarnie, CPA 8.51
201 Devonshire Street, 4th Floor
Boston, MA 02110
Francis W. Hatch, S. Parker Gilbert & Sullivan & Cromwell 8.33
Robert M. Pennoyer Trust U/I 12/11/39 Attn: Lois B. Wetzel
FBO John H.C. Merck 125 Broad Street, 26th Floor
New York, NY 10004
Francis W. Hatch, S. Parker Gilbert & Sullivan & Cromwell 8.33
Robert M. Pennoyer Trust U/ART 11F Attn: Lois B. Wetzel
FBO John H.C. Merck 125 Broad Street, 26th Floor
New York, NY 10004
</TABLE>
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Tax-Managed Small Companies Fund as of June
1, 2000:
<TABLE>
<CAPTION>
NAME ADDRESS % OWNERSHIP
---- ------- -----------
<S> <C> <C>
MAC & Co. A/C10260102934 Mellon Private Asset Management 28.89
Symax Ltd. Attn: Mutual Fund Processing
P.O. Box 534005
Pittsburgh, PA 15253-4005
Bank of America 9336 Civic Center Drive 22.19
FBO William Barron Hilton Beverly Hills, CA 90210
Charitable Remainder Trust
Francis W. Hatch, S. Parker Gilbert & Sullivan & Cromwell 12.93
Robert M. Pennoyer Trust U/I 12/11/39 Attn: Lois B. Wetzel
FBO John H.C. Merck 125 Broad Street, 26th Floor
New York, NY 10004
Francis W. Hatch, S. Parker Gilbert & Sullivan & Cromwell 10.51
Robert M. Pennoyer Trust U/ART 11 Attn: Lois B. Wetzel
FBO John H.C. Merck 125 Broad Street, 26th Floor
New York, NY 10004
S. Parker Gilbert & Robert M. Pennoyer Patterson, Belknap, Webb & Tyler 6.04
Trust U/ART 11(G) Attn: Janet Blakeman
FBO George W. Merck 1133 Avenue of the Americas
New York, NY 10036
</TABLE>
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<PAGE> 376
DISTRIBUTIONS
The Prospectus describes the distribution policies of each Fund under
the heading "Distributions". It is the policy of each Fund in all cases to pay
its shareholders, as dividends, substantially all net investment income and to
distribute annually all net realized capital gains, if any, after offsetting any
capital loss carryovers. For distribution and federal income tax purposes, a
portion of the premiums from certain expired call or put options written by a
Fund, net gains from certain closing purchase and sale transactions with respect
to such options and a portion of net gains from other options and futures
transactions are treated as short-term capital gain (i.e., gain from the sale of
securities held for 12 months or less). It is the policy of each Fund to make
distributions at least annually, sufficient to avoid the imposition of a
nondeductible 4% excise tax on certain undistributed amounts of taxable
investment income and capital gains.
TAXES
TAX STATUS AND TAXATION OF EACH FUND
Each Fund is treated as a separate taxable entity for federal income
tax purposes. Each Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). In order to qualify for the special tax treatment accorded regulated
investment companies and their shareholders, each Fund must, among other things:
(a) derive at least 90% of its gross income from dividends, interest, payments
with respect to certain securities loans, and gains from the sale of stock,
securities and foreign currencies, or other income (including but not
limited to gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities, or
currencies;
(b) distribute with respect to each taxable year at least 90% of the sum of its
taxable net investment income, its net tax-exempt income, and the excess,
if any, of net short-term capital gains over net long-term capital losses
for such year; and
(c) diversify its holdings so that at the end of each fiscal quarter, (i) at
least 50% of the market value of the Fund's assets is represented by cash
and cash items, U.S. Government Securities, securities of other regulated
investment companies, and other securities limited in respect of any one
issuer to a value not greater than 5% of the value of the Fund's total net
assets and to not more than 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its assets is
invested in the securities (other than those of the U.S. Government or
other regulated investment companies) of any one issuer or of two or more
issuers which the Fund controls and which are engaged in the same, similar,
or related trades or businesses.
If a Fund qualifies as a regulated investment company that is accorded
special tax treatment, the Fund will not be subject to federal income tax on
income paid to its shareholders in the form of dividends (including capital gain
dividends).
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<PAGE> 377
If a Fund fails to distribute in a calendar year substantially all of
its ordinary income for such year and substantially all of its capital gain net
income for the one-year period ending October 31 (or later if a Fund is
permitted so to elect and so elects), plus any retained amount from the prior
year, such Fund will be subject to a 4% excise tax on the undistributed amounts.
A dividend paid to shareholders by a Fund in January of a year generally is
deemed to have been paid by the Fund on December 31 of the preceding year if the
dividend was declared and payable to shareholders of record on a date in
October, November or December of that preceding year. Each Fund intends
generally to make distributions sufficient to avoid imposition of the 4% excise
tax, although each Fund reserves the right to pay an excise tax rather than make
an additional distribution when circumstances warrant (e.g., payment of excise
tax amounts deemed by the Fund to be de minimis).
TAXATION OF FUND DISTRIBUTIONS AND SALES OF FUND SHARES
Fund distributions derived from interest, dividends and certain other
income, including in general short-term capital gains, will be taxable as
ordinary income to shareholders subject to federal income tax whether received
in cash or reinvested in shares. Properly designated Fund distributions derived
from net long-term capital gains (i.e., net gains derived from the sale of
securities held for more than 12 months) will generally be taxable as such
(generally at a 20% rate for noncorporate shareholders), regardless of how long
a shareholder has held the shares in the Fund.
Dividends and distributions on each Fund's shares are generally subject
to federal income tax as described herein to the extent they do not exceed the
Fund's realized income and gains, even though such dividends and distributions
may economically represent a return of a particular shareholder's investment.
Such distributions are likely to occur in respect of shares purchased at a time
when the Fund's net asset value reflects gains that are either unrealized, or
realized but not distributed.
The sale, exchange or redemption of Fund shares, including a redemption
in kind, may give rise to a gain or loss. In general, any gain or loss realized
upon a taxable disposition of shares will be treated as long-term capital gains
if the shares have been held for more than 12 months and as short-term capital
gains if the shares have been held for not more than 12 months.
Any loss realized upon a taxable disposition of shares held for six
months or less will be treated as long-term capital loss to the extent of any
long-term capital gain distributions received by a shareholder with respect to
those shares. All or a portion of any loss realized upon a taxable disposition
of Fund shares will be disallowed if other shares of the same Fund are purchased
within 30 days before or after the disposition. In such a case, the basis of the
newly purchased shares will be adjusted to reflect the disallowed loss.
A distribution paid to shareholders by a Fund in January of a year
generally is deemed to have been received by shareholders on December 31 of the
preceding year, if the distribution was declared and payable to shareholders of
record on a date in October, November or December of that preceding year. The
Trust will provide federal tax information annually, including
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<PAGE> 378
information about dividends and distributions paid during the preceding year to
taxable investors and others requesting such information.
If a Fund makes a distribution to you in excess of its current and
accumulated "earnings and profits" in any taxable year, the excess distribution
will be treated as a return of capital to the extent of your tax basis in your
shares, and thereafter as capital gain. A return of capital is not taxable, but
it reduces your tax basis in your shares, thus reducing any loss or increasing
any gain on a subsequent taxable disposition by you of your shares.
For corporate shareholders, the dividends-received deduction will
generally apply (subject to a holding period requirement imposed by the Code) to
a Fund's dividends paid from investment income to the extent derived from
dividends received from U.S. corporations. However, any distributions received
by a Fund from REITs will not qualify for the corporate dividends-received
deduction. A Fund's investments in REIT equity securities may require such Fund
to accrue and distribute income not yet received. In order to generate
sufficient cash to make the requisite distributions, the Fund may be required to
sell securities in its portfolio that it otherwise would have continued to hold
(including when it is not advantageous to do so). A Fund's investments in REIT
equity securities may at other times result in the Fund's receipt of cash in
excess of the REIT's earnings; if the Fund distributes such amounts, such
distribution could constitute a return of capital to Fund shareholders for
federal income tax purposes.
The backup withholding rules do not apply to certain exempt entities
(including corporations and tax-exempt organizations) so long as each such
entity furnishes the Trust with an appropriate certification. However, other
shareholders are subject to backup withholding at a rate of 31% on all
distributions of net investment income and capital gain, whether received in
cash or reinvested in shares of the relevant Fund, and on the amount of the
proceeds of any redemption of Fund shares, where such distributions or
redemption proceeds paid or credited to any shareholder account for which an
incorrect or no taxpayer identification number has been provided, where
appropriate certification has not been provided for a foreign shareholder, or
where the Trust is notified that the shareholder has underreported income in the
past (or the shareholder fails to certify that he is not subject to such
withholding). A "taxpayer identification number" is either the Social Security
number or employer identification number of the record owner of the account.
WITHHOLDING ON DISTRIBUTIONS TO FOREIGN INVESTORS
Dividend distributions (including distributions derived from short-term
capital gains) are in general subject to a U.S. withholding tax of 30% when paid
to a nonresident alien individual, foreign estate or trust, a foreign
corporation, or a foreign partnership ("foreign shareholder"). Persons who are
resident in a country, such as the U.K., that has an income tax treaty with the
U.S. may be eligible for a reduced withholding rate (upon filing of appropriate
forms), and are urged to consult their tax advisors regarding the applicability
and effect of such a treaty. Distributions of net realized long-term capital
gains paid by a Fund to a foreign shareholder, and any gain realized upon the
sale of Fund shares by such a shareholder, will ordinarily not be subject to
U.S. taxation, unless the recipient or seller is a nonresident alien individual
who is present in the United States for more than 182 days during the taxable
year. However, such
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<PAGE> 379
distributions and sale proceeds may be subject to backup withholding, unless the
foreign investor certifies his non-U.S. residency status. Foreign investors are
subject to the backup withholding rules described above. Any tax withheld as a
result of backup withholding does not constitute an additional tax imposed on
the record owner of the account, and may be claimed as a credit on the record
owner's Federal income tax return. Also, foreign shareholders with respect to
whom income from a Fund is "effectively connected" with a U.S. trade or business
carried on by such shareholder will in general be subject to U.S. federal income
tax on the income derived from the Fund at the graduated rates applicable to
U.S. citizens, residents or domestic corporations, whether such income is
received in cash or reinvested in shares, and, in the case of a foreign
corporation, may also be subject to a branch profits tax. Again, foreign
shareholders who are resident in a country with an income tax treaty with the
United States may obtain different tax results, and are urged to consult their
tax advisors.
FOREIGN TAX CREDITS
If, at the end of the fiscal year, more than 50% of the value of the
total assets of a Fund is represented by stock or securities of foreign
corporations, the Fund may make an election which allows shareholders whose
income from the Fund is subject to U.S. taxation at the graduated rates
applicable to U.S. citizens, residents or domestic corporations to claim a
foreign tax credit or deduction (but not both) on their U.S. income tax return.
The Tax-Managed U.S. Equities Fund and the Tax-Managed Small Companies Fund do
not expect to be entitled to make this election. The Tax-Managed International
Equities Fund expects that it will be entitled to make this election each year
and it intends to make this election for each year in which it is entitled to do
so. If such an election is made, the amounts of foreign income taxes paid by the
Fund would be treated as additional income to Fund shareholders from non-U.S.
sources and as foreign taxes paid by Fund shareholders. Investors should consult
their tax advisors for further information relating to the foreign tax credit
and deduction, which are subject to certain restrictions and limitations
(including a holding period requirement applied at both the Fund and shareholder
level imposed by the Code). Shareholders of the Tax-Managed International
Equities Fund whose income from the Fund is not subject to U.S. taxation at the
graduated rates applicable to U.S. citizens, residents or domestic corporations
may receive substantially different tax treatment of distributions by the
relevant Fund, and may be disadvantaged as a result of the election described in
this paragraph.
TAX IMPLICATIONS OF CERTAIN INVESTMENTS
Certain of the Funds' investments, including assets "marked to the
market" for federal income tax purposes, debt obligations issued or purchased at
a discount and potentially so-called "index securities" (including inflation
indexed bonds), will create taxable income in excess of the cash they generate.
In such cases, a Fund may be required to sell assets (including when it is not
advantageous to do so) to generate the cash necessary to distribute as dividends
to its shareholders all of its income and gains and therefore to eliminate any
tax liability at the Fund level.
The Funds' transactions in options, other derivatives, futures
contracts, hedging transactions, forward contracts, straddles and foreign
currencies may accelerate income, defer
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<PAGE> 380
losses, cause adjustments in the holding periods of the Funds' securities and
convert long-term capital gains into short-term capital gains and short-term
capital losses into long-term capital losses. These transactions may affect the
amount, timing and character of distributions to shareholders.
Investment by the Fund in certain passive foreign investment companies
("PFICs") could subject the Fund to a U.S. federal income tax (including
interest charges) on distributions received from the company or on proceeds
received from the disposition of shares in the company, which tax cannot be
eliminated by making distributions to Fund shareholders. However, the Fund may
elect to treat a passive foreign investment company as a "qualified electing
fund," in which case the Fund will be required to include its share of the
company's income and net capital gain annually, regardless of whether it
receives any distribution from the company. The Fund also may make an election
to mark the gains (and to a limited extent losses) in such holdings "to the
market" as though it had sold and repurchased its holdings in those PFICs on the
last day of the Fund's taxable year. Such gains and losses are treated as
ordinary income and loss. The QEF and mark-to-market elections may have the
effect of accelerating the recognition of income (without the receipt of cash)
and increasing the amount required to be distributed for the Fund to avoid
taxation. Making either of these elections therefore may require a Fund to
liquidate other investments (including when it is not advantageous to do so) to
meet its distribution requirement, which also may accelerate the recognition of
gain and affect a Fund's total return.
A PFIC is any foreign corporation (i) 75% or more of the income of
which for the taxable year is passive income, or (ii) the average percentage of
the assets of which (generally by value, but by adjusted tax basis in certain
cases) that produce or are held for the production of passive income is at least
50%. Generally, passive income for this purpose means dividends, interest
(including income equivalent to interest), royalties, rents, annuities, the
excess of gains over losses from certain property transactions and commodities
transactions, and foreign currency gains. Passive income for this purpose does
not include rents and royalties received by the foreign corporation from active
business and certain income received from related persons.
LOSS OF REGULATED INVESTMENT COMPANY STATUS
A Fund may experience particular difficulty qualifying as a regulated
investment company in the case of highly unusual market movements, in the case
of high redemption levels and/or during the first year of its operations. If the
Fund does not qualify for taxation as a regulated investment company for any
taxable year, the Fund's income will be taxed at the Fund level at regular
corporate rates, and all distributions from earnings and profits, including
distributions of net long-term capital gains, will be taxable to shareholders as
ordinary income and subject to withholding in the case of non-U.S. shareholders.
In addition, in order to requalify for taxation as a regulated investment
company that is accorded special tax treatment, the Fund may be required to
recognize unrealized gains, pay substantial taxes and interest on such gains,
and make certain substantial distributions.
PERFORMANCE INFORMATION
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<PAGE> 381
Each Fund may from time to time include its total return in
advertisements or in information furnished to present or prospective
shareholders.
Quotations of average annual total return for a Fund will be expressed
in terms of the average annual compounded rate of return of a hypothetical
investment in the Fund or class over periods of one, three, five, and ten years
(or for such shorter or longer periods as shares of the Fund have been offered),
calculated pursuant to the following formula: P (1 + T)(n) = ERV (where P = a
hypothetical initial payment of $10,000, T = the average annual total return, n
= the number of years, and ERV = the ending redeemable value of a hypothetical
$10,000 payment made at the beginning of the period). Except as noted below, all
total return figures reflect the deduction of a proportional share of Fund
expenses on an annual basis, and assume that (i) the maximum purchase premium is
deducted from the initial $10,000 payment, (ii) all dividends and distributions
are reinvested when paid and (iii) the maximum redemption fee is charged at the
end of the relevant period. Quotations of total return may also be shown for
other periods. The Funds may also, with respect to certain periods of less than
one year, provide total return information for that period that is unannualized.
Any such information would be accompanied by standardized total return
information.
The table below sets forth the average annual total return for Class
III Shares of the Funds for the one, three, five and ten year periods ending
February 29, 2000 and for the period from the commencement of the Fund's
operations until February 29, 2000:
<TABLE>
<CAPTION>
FUND INCEPTION 1 YEAR 3 YEARS 5 YEARS 10 YEARS SINCE
DATE (%) (%) (%) (%) INCEPTION
(%)
<S> <C> <C> <C> <C> <C> <C>
Tax-Managed US Equities Fund 7/23/98 19.67 N/A N/A N/A 16.97
Tax-Managed International Equities 7/29/98 7.99 N/A N/A N/A 3.34
Fund
Tax-Managed Small Companies Fund 6/01/99 N/A N/A N/A N/A -4.73
</TABLE>
Each Fund may also from time to time advertise net return and gross
return data for each month and calendar quarter since the Fund's inception.
Monthly and quarterly return data is calculated by linking daily performance for
a Fund (current net asset value divided by prior net asset value), and assumes
reinvestment of all dividends and gains. Monthly and quarterly performance data
does not reflect payment of any applicable purchase premiums or redemption fees.
All quotations of monthly and quarterly returns would be accompanied by
standardized total return information.
From time to time, in advertisements, in sales literature, or in
reports to shareholders, a Fund may compare its respective performance to that
of other mutual funds with similar investment objectives and to stock or other
relevant indices. For example, a Fund may compare its total return to rankings
prepared by Lipper Analytical Services, Inc. or Morningstar, Inc., widely
recognized independent services, that monitor mutual fund performance; the
Standard & Poor's 500 Stock Index ("S&P 500"), MSCI EAFE or the Russell 2500
Index, indices of unmanaged groups of common stock; or the Dow Jones Industrial
Average, a recognized
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<PAGE> 382
unmanaged index of common stocks of 30 industrial companies listed on the New
York Stock Exchange.
Performance rankings and listings reported in national financial
publications, such as Money Magazine, Barron's and Changing Times, may also be
cited (if the Fund is listed in any such publication) or used for comparison, as
well as performance listings and rankings from various other sources including
No Load Fund X, CDA Investment Technologies, Inc., Weisenberger Investment
Companies Services, and Donoghue's Mutual Fund Almanac.
Quotations of a Fund's gross return do not reflect any reduction for
any Fund fees or expenses unless otherwise noted; if the gross return data
reflected the estimated fees and expenses of the Fund, the returns would be
lower than those shown. Quotations of gross return for a Fund for a particular
month or quarter will be calculated in accordance with the following formula:
Gross Return = Net Return + (Total Annual Operating Expense Ratio) (# of days
in relevant period/365)
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<PAGE> 383
INVESTMENT GUIDELINES
GMO TAX-MANAGED U. S. EQUITIES FUND
TAX-SENSITIVE STRATEGIES THAT MAY BE EMPLOYED(2)
- Manager may control portfolio turnover in order to defer the realization
and minimize the distributions of capital gains.
- Manager may, when appropriate, sell securities in order to realize capital
losses. Losses may be used to offset realized capital gains, thus reducing
net capital gains distributions.
- When making sales of specific securities, the Manager considers strategies,
such as selling securities with the highest cost basis, to minimize capital
gains.
- In lieu of redeeming in cash, the Manager may meet redemption requests
through in-kind redemptions in whole or in part by a distribution of
appreciated securities held by the Fund, so that the Fund will generally
not be required to distribute the capital gains in those securities to the
remaining shareholders in the Fund. The effect to the redeeming shareholder
is the same for federal income tax purposes as a redemption in cash.
Shareholders receiving the redemption in kind would pay tax on the capital
gains realized, if any, on the Fund shares redeemed.
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENT LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL
ASSETS.
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
SECURITIES/INSTRUMENTS: - At least 65% of the Fund's total assets will be invested in or
Domestic common stocks exposed to U.S. equity securities.(3)
Convertible securities
Securities of foreign issuers (traded
principally on U.S. exchanges)
Depository receipts
Illiquid securities
144A securities
restricted securities
futures and related options on
securities indexes
REITs
Exchange-traded and OTC options on
securities and indexes (including
writing covered options)
Equity swap contracts
Contracts for differences
Index futures
Repurchase agreements
Warrants or rights
Investment companies (open and closed-end)
</TABLE>
--------------------
(2) There can be no assurance that the Manager will be successful in
employing these strategies.
(3) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the Fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
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<PAGE> 384
<TABLE>
<S> <C>
CASH AND MONEY MARKET INSTRUMENTS - The Fund expects that normally less than 5% of its net assets
Any short-term assets will be invested in will be exposed to cash and money market instruments. This
cash or high quality money market limitation does not include cash and money market instruments
instruments including securities issued by in margin accounts or otherwise covering exposure achieved
the U.S. government and agencies thereof, through derivative instruments ("equitized cash").
bankers' acceptances, commercial paper,
Bank certificates of deposit and repurchase
agreements
</TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
<TABLE>
<S> <C>
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its
net assets from banks for the payment of redemptions or
settlement of securities transactions, but not as a leveraged
investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of
portfolio investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase agreements
and engaging in securities lending will not be considered making
loans for this purpose. The Fund may loan securities valued at
up to one-third of its total assets.
PLEDGING, HYPOTHECATING OR - Except that collateral arrangements with respect to swap
MORTGAGING FUND ASSETS agreements, the writing of options, stock index, interest rate,
currency or other futures contracts, options on futures
contracts and collateral arrangements with respect to initial
and variation margin are not deemed to be a pledge or other
encumbrance of assets.
- The deposit of securities or cash or cash equivalents in escrow
in connection with the writing of covered call or put options,
respectively is also not deemed to be a pledge or encumbrance.
</TABLE>
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
MAKING SHORT SALES OF SECURITIES
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S MANAGEMENT
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
OPTIONS ON SECURITIES - No more than 5% of the Fund's net assets will be invested in
time premiums on options on particular securities (as opposed to
options on indexes).
OTHER INVESTMENT COMPANIES - The Fund will not own more than 3% of the outstanding voting
securities of any investment company.
- No more than 5% of the Fund's net assets will be invested in any
single investment company.
- No more than 10% of the Funds net assets will be invested in
securities of investment companies in the aggregate.
ILLIQUID SECURITIES - No more than 15% of the Fund's net assets will be invested in
illiquid securities.
- The Fund will not purchase more than 10% of the total
INVESTMENT IN INSURANCE COMPANIES outstanding voting stock of any insurance company (including
foreign insurance companies).
</TABLE>
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<PAGE> 385
<TABLE>
<S> <C>
INVESTMENT IN SECURITIES ISSUED BY - Equity: The Fund will not purchase more than 5% of any class of
BROKERS, DEALERS, UNDERWRITERS AND stock of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Debt: The Fund may not purchase more than 10% of any such
company's total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets
will be invested in the securities of a single broker, dealer,
underwriter or investment adviser. the net payment obligation of
swap contracts where one of these types of companies is the
counterparty also counts for purposes of this restriction.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - Except for U.S. government securities, cash, and money market
instruments, the Fund will not invest in any one security to an
extent greater than 5 percentage points over that security's
weighting in the Fund's benchmark.
- The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in
securities of issuers in any one industry.
DERIVATIVE INSTRUMENTS
TYPES OF DERIVATIVES - Futures contracts and related options on securities indexes
- Long equity swap contracts: where the Fund pays a fixed rate
plus the negative performance, if any, and receives the positive
performance, if any, of an index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed
rate plus the negative performance, if any, and pays the
positive performance of an index or basket of securities
- Contracts for differences: equity swaps that contain both a
long and short equity component.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity futures, related options and
short equity swap contracts used to hedge against an equity risk
already generally present in the Fund.(4)
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the Fund may hedge
market risk (risk of not being invested in the market) by
purchasing long futures contracts or entering long equity swap
contracts to obtain market exposure until such time as direct
investments can be made efficiently. Conversely, if the Fund
receives or anticipates a significant demand for cash
redemptions, the Fund may sell futures contracts or enter into
short equity swap contracts, to allow the Fund to dispose of
securities in a more orderly fashion without the Fund being
exposed to leveraged loss exposure in the interim.
</TABLE>
--------------------
(4) The Fund may use such hedging to remove or reduce general market
exposure (e.g. an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g. a single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund.
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<PAGE> 386
<TABLE>
<S> <C>
INVESTMENT - The Fund may use derivative instruments (particularly long
futures contracts, related options and long equity swap
contracts) in place of investing directly in securities. This
will include using equity derivatives to "equitize" cash
balances held by the Fund. The Fund may also use long
derivatives for investment in conjunction with short hedging
transactions to adjust the weights of the Fund's underlying
equity portfolio to a level the Manager believes is the optimal
exposure to individual markets, sectors and equities.
RISK MANAGEMENT - - The Fund may use equity futures, related options and equity
SYNTHETIC SALES AND PURCHASES swap contracts to adjust the weight of the Fund to a level the
manager believes is the optimal exposure to individual markets,
sectors and equities. Sometimes, such transactions are used as
a precursor to actual sales and purchases. For example, if the
Fund held a large proportion of stocks of a particular market
and the Manager believed that stocks of another market would
outperform such stocks, the Fund might use a short futures
contract on an appropriate index (to synthetically "sell" a
portion of the Fund's portfolio) in combination with a long
futures contract on another index (to synthetically "buy"
exposure to that index). Long and short equity swap contracts
and contracts for differences may also be used for these
purposes. Equity derivatives (and corresponding currency
forwards) used to effect synthetic sales and purchases will
generally be unwound as actual portfolio securities are sold and
purchased.
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging
purposes.
- When long futures contracts and long equity swaps are used for
investment, the Fund will maintain an amount of cash or liquid
securities equal to the face value of all such long derivative
positions. However, for purposes of this restriction, if an
existing long equity exposure is reduced or eliminated by a
short derivative position, the combination of the long and short
position will be considered as cash available to cover a new
long derivative exposure.
- The net long equity exposure of the Fund, including direct
investment in securities and long derivative positions, will not
exceed 100% of the Fund's net assets.
- Except when such instruments are used for bona-fide hedging, no
more than 5% of the Fund's net assets will be committed to
initial margin on futures contracts and time premiums on related
options.
- Counterparties used for OTC derivatives must have a long-term
debt rating of A or higher when the derivative is entered into.
Occasionally, short-term derivatives will be entered into with
counterparties that have only high short-term debt ratings.
</TABLE>
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<PAGE> 387
GMO TAX MANAGED INTERNATIONAL EQUITIES FUND
TAX-SENSITIVE STRATEGIES THAT MAY BE EMPLOYED(5)
- Manager may control portfolio turnover in order to defer the realization
and minimize the distributions of capital gains.
- Manager may, when appropriate, sell securities in order to realize capital
losses. Losses may be used to offset realized capital gains, thus reducing
net capital gains distributions.
- When making sales of specific securities, the Manager considers strategies,
such as selling securities with the highest cost basis, to minimize capital
gains.
- In lieu of redeeming in cash, the Manager may meet redemption requests
through in-kind redemptions in whole or in part by a distribution of
appreciated securities held by the Fund, so that the Fund will generally
not be required to distribute the capital gains in those securities to the
remaining shareholders in the Fund. The effect to the redeeming shareholder
is the same for federal income tax purposes as a redemption in cash.
Shareholders receiving the redemption in kind would pay tax on the capital
gains realized, if any, on the Fund shares redeemed.
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENT LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL
ASSETS.
<TABLE>
<S> <C>
- At least 65% of the Fund's total assets will be invested in or
EQUITY SECURITIES: exposed to non-U.S. securities.
common stocks (non-US issuers)
convertible bonds
convertible preferred stocks
OTHER EQUITY SECURITIES:
depository receipts: ADRs, GDRs, EDRs
foreign issues traded in the U.S. and
abroad
investment companies (open & closed-end)
Illiquid securities
144A securities
restricted securities
equity futures and related options
exchange-traded and OTC Options on
securities and indexes (including
writing covered options)
equity swap contracts
contracts for differences
repurchase agreements
securities of emerging market countries
warrants or rights
investment companies (open and closed end)
</TABLE>
PERMITTED INVESTMENTS
<TABLE>
<S> <C>
- At least 65% of the Fund's total assets will be invested in or
EQUITY SECURITIES: exposed to non-U.S. securities.
common stocks (non-US issuers)
convertible bonds
convertible preferred stocks
</TABLE>
-------------------------
(5) There can be no assurance that the Manager will be successful in
employing these strategies.
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<PAGE> 388
<TABLE>
<S> <C>
OTHER EQUITY SECURITIES:
depository receipts: ADRs, GDRs, EDRs
foreign issues traded in the U.S. and abroad
investment companies (open & closed-end)
Illiquid securities
144A securities
restricted securities
equity futures and related options
exchange-traded and OTC Options on
securities and indexes (including
writing covered options)
equity swap contracts
contracts for differences
repurchase agreements
securities of emerging market countries
warrants or rights
investment companies (open and closed end)
FIXED INCOME SECURITIES:
long and medium-term corporate and
government bonds
non-convertible preferred stock
FOREIGN CURRENCY TRANSACTIONS - Fund may invest in spot currency transactions, forward foreign
currency contracts, currency swap contracts, options on currencies,
currency futures and related options.
CASH AND MONEY MARKET INSTRUMENTS - The Fund expects that normally less than 5% of its total assets
Any short-term assets will be invested in will be invested in or exposed to cash and money market instruments.
cash or high quality money market This limitation does not include cash and money market instruments in
instruments including securities issued by margin accounts or otherwise covering exposure achieved through
the U.S. government and agencies thereof, derivative instruments ("equitized cash").
bankers' acceptances, commercial paper,
Bank certificates of deposit and repurchase
agreements
</TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
<TABLE>
<S> <C>
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions.
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its
net assets from banks for the payment of redemptions or
settlement of securities transactions, but not as a leveraged
investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of
portfolio investments.
- Except that purchasing debt obligations, repurchase agreements
MAKING LOANS and engaging in securities lending will not be considered making
loans for this purpose. The Fund may loan securities valued at
up to one-third of its total assets.
PLEDGING, HYPOTHECATING OR - Except that collateral arrangements with respect to swap
MORTGAGING FUND ASSETS agreements, the writing of options, stock index, interest rate,
currency or other futures
</TABLE>
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<PAGE> 389
<TABLE>
<S> <C>
contracts, options on futures contracts and collateral
arrangements with respect to initial and variation margin
are not deemed to be a pledge or other encumbrance of assets.
The deposit of securities or cash or cash equivalents in
escrow in connection with the writing of covered call or put
options, respectively, is also not deemed to be a pledge or
encumbrance.
</TABLE>
INVESTING DIRECTLY IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S MANAGEMENT
MAKING SHORT SALES OF SECURITIES
RESTRICTIONS AND LIMITATIONS
<TABLE>
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OPTIONS ON SECURITIES - No more than 5% of the Fund's net assets will be invested in
time premiums on options on particular securities (as opposed to
options on indexes)
OTHER INVESTMENT COMPANIES - The Fund will not own more than 3% of the outstanding voting
securities of any investment company
- No more than 5% of the Fund's net assets will be invested in
any single investment company
- No more than 10% of the Fund's net assets will be invested in
securities of investment companies in the aggregate
ILLIQUID SECURITIES - No more than 15% of the Fund's net assets will be invested in
illiquid securities.
- The Fund will not purchase more than the extent limited by the
INVESTMENT IN INSURANCE COMPANIES 1940 Act of the total outstanding voting stock of any insurance
company (including foreign insurance companies).
- Equity: The Fund will not purchase more than 5% of any class of
INVESTMENT IN SECURITIES ISSUED BY stock of a broker, dealer, underwriter or investment adviser.
BROKERS, DEALERS, UNDERWRITERS AND
INVESTMENT ADVISERS - Debt: The Fund may not purchase more than 10% of any such
company's total outstanding debt in the aggregate.
- Investment Limits: No more than 5% of the Fund's total assets
will be invested in the securities of a single broker, dealer,
underwriter or investment adviser. The net payment obligation of
swap contracts where one of these types of companies is the
counterparty also counts for purposes of this restriction.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent
fiscal year.
INVESTMENT IN "EMERGING COUNTRIES" - The Fund may invest up to 15% of its net assets in securities
of issuers in newly industrializing countries in Asia, Latin
America, the Middle East, Southern Europe, Eastern Europe and
Africa.
DIVERSIFICATION/CONCENTRATION
- Except for U.S. government securities, cash, and money market
DIVERSIFICATION instruments, the Fund will not invest in any one security to an
extent greater than 5 percentage points over that security's
weighting in the Fund's benchmark.
- The Fund will not purchase more than 10% of the outstanding
securities of any issuer.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in
securities of
</TABLE>
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issuers in any one industry.
- The Fund will have greater than 65% of its total assets
invested in or exposed to (6) securities principally traded in the
securities market of at least three countries.
</TABLE>
DERIVATIVE INSTRUMENTS (OTHER THAN FOREIGN CURRENCY TRANSACTIONS)
<TABLE>
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TYPES OF DERIVATIVES - Futures contracts and related options on securities indexes
- Long equity swap contracts: where the Fund pays a fixed rate
plus the negative performance, if any, and receives the positive
performance, if any, of an index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed
rate plus the negative performance, if any, and pays the positive
performance of an index or basket of securities
- Contracts for differences: equity swaps that contain both long
and short equity components.
USES OF DERIVATIVES
HEDGING - Traditional Hedging: Short equity futures, related options and
short equity swap contracts used to hedge against an equity risk
already generally present in the Fund.(7)
- Anticipatory Hedging: If the Fund receives or anticipates
significant cash purchase transactions, the Fund may hedge market
risk (risk of not being invested in the market) by purchasing long
futures contracts or entering long equity swap contracts to obtain
market exposure until such time as direct investments can be made
efficiently. Conversely, if the Fund receives or anticipates a
significant demand for cash redemptions, the Fund may sell futures
contracts or enter into short equity swap contracts, to allow the
Fund to dispose of securities in a more orderly fashion without the
Fund being exposed to leveraged loss exposure in the interim.
INVESTMENT
- The Fund may use derivative instruments (particularly long
futures contracts, related options and long equity swap contracts)
in place of investing directly in securities. This will include
using equity derivatives to "equitize" cash balances held by the
Fund. Because a foreign equity derivative generally only provides
the return of a foreign market in local currency terms, the Fund
will often purchase a foreign currency forward in conjunction with
using equity derivatives to give the effect of investing directly.
The Fund may also use long derivatives for investment in
conjunction with short hedging transactions to adjust the weights
of the Fund's underlying equity portfolio to a level the Manager
believes is the optimal exposure to individual countries and
equities. For example, if the Manager expects a positive return
forecast for a select group of UK companies, but a negative return
for the UK market as a whole, then this Fund may overweight the
select group of equities and reduce exposure to the UK market by
selling UK equity futures or enter a swap contract that is long a
specific basket of securities and short the UK market generally.
</TABLE>
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(6) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
(7) The Fund may use such hedging to remove or reduce general market
exposure (e.g. an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g. a single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund
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RISK MANAGEMENT - - The Fund may use equity futures, related options and equity
SYNTHETIC SALES AND PURCHASES swap contracts to adjust the weight of the Fund to a level the
manager believes is the optimal exposure to individual countries
and equities. Sometimes, such transactions are used as a precursor
to actual sales and purchases. For example, if the Fund held a
large proportion of stocks of a particular market and the Manager
believed that stocks of another market would outperform such
stocks, the Fund might use a short futures contract on an
appropriate index (to synthetically "sell" a portion of the Fund's
portfolio) in combination with a long futures contract on another
index (to synthetically "buy" exposure to that index). Long and
short equity swap contracts and contracts for differences may also
be used for these purposes. Often, a foreign currency forward will
be used in conjunction with the long derivative position to create
the effect of investing directly. Equity derivatives (and
corresponding currency forwards) used to effect synthetic sales and
purchases will generally be unwound as actual portfolio securities
are sold and purchased.
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging
purposes.
- When long futures contracts and long equity swaps are used for
investment, the Fund will maintain an amount of cash or liquid
securities equal to the face value of all such long derivative
positions. However, for purposes of this restriction, if an
existing long equity exposure is reduced or eliminated by a short
derivative position, the combination of the long and short position
will be considered as cash available to cover a new long derivative
exposure.
- The net long equity exposure of the Fund, including direct
investment in securities and long derivative positions, will not
exceed 100% of the Fund's net assets.
- Except when such instruments are used for bona-fide hedging, no
more than 5% of the Fund's net assets will be committed to initial
margin on futures contracts and time premiums on related options.
- Counterparties used for OTC derivatives must have a long-term
debt rating of A or higher when the derivative is entered into.
Occasionally, short-term derivatives will be entered into with
counterparties that have only high short-term debt ratings.
FOREIGN CURRENCY TRANSACTIONS
TYPES OF FOREIGN CURRENCY TRANSACTIONS - Buying and selling spot currencies
- Forward foreign currency contracts
- Currency futures contracts and related options
- Options on currencies
- Currency swap contracts
USES OF FOREIGN CURRENCY TRANSACTIONS
HEDGING - Traditional Hedging: The Fund may effect foreign currency transactions -
generally short forward or futures contracts -- to hedge the risk
of foreign currencies represented by its securities investments back
into the U.S. dollar. The Fund is not required to hedge any of the
currency risk obtained by investing in securities denominated in foreign
currencies.
- Anticipatory Hedging: When the Fund enters into a contract for the
purchase or anticipates the need to purchase a security denominated in a
foreign currency, it may "lock in" the U.S. dollar price of the security
by buying the foreign currency or through currency forwards or futures.
- Proxy Hedging: The Fund may hedge the exposure of a given foreign
currency by using an instrument relating to a different currency which
the Manager believes is highly correlated to the currency being hedged.
INVESTMENT - The Fund may enter into currency forwards or futures contracts in
conjunction with entering into a futures contract on a foreign index in
order to create synthetic foreign currency denominated securities
</TABLE>
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RISK MANAGEMENT - Subject to the limitations described below, the Fund will permit the
Fund to have foreign currency exposure that is significantly different
than the currency exposure represented by its portfolio investments.
This may include long exposure to particular currencies beyond the
amount of the Fund's investment in securities denominated in that
currency.
LIMITATIONS OF FOREIGN CURRENCY - The Fund will typically hedge less than 30% of the foreign currency
TRANSACTIONS exposure represented by its investments in foreign-currency denominated
securities.
- The Fund's aggregate net foreign currency exposure, assuming full
offset of long and short positions, will not exceed 100% of the Fund's
net assets denominated in foreign currencies, though the currency
exposure of the Fund may differ substantially from the currencies in
which the Fund's securities are denominated.
- The Fund will not be net short in any foreign currency, except that,
when the Fund is attempting to hedge all or nearly all of its exposure
to a particular currency, changes in the market value of foreign
equities may cause the Fund to be temporarily net short in the
currency. Such temporary net short positions will not exceed 1% of the
Fund's assets.
</TABLE>
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GMO TAX-MANAGED SMALL COMPANIES FUND
TAX-SENSITIVE STRATEGIES THAT MAY BE EMPLOYED(8)
- Manager may control portfolio turnover in order to defer the realization
and minimize the distributions of capital gains.
- Manager may, when appropriate, sell securities in order to realize capital
losses. Losses may be used at various times to offset realized capital
gains, thus reducing net capital gains distributions.
- When making sales of specific securities, the Manager considers strategies,
such as selling securities with the highest cost basis, to minimize capital
gains.
- In lieu of redeeming in cash, the Manager may meet redemption requests
through in-kind redemptions in whole or in part by a distribution of
appreciated securities held by the Fund, so that the Fund will generally
not be required to distribute the capital gains in those securities to the
remaining shareholders in the Fund. The effect to the redeeming shareholder
is the same for federal income tax purposes as a redemption in cash.
Shareholders receiving the redemption in kind would pay tax on the capital
gains realized, if any, on the Fund shares redeemed.
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
PERMITTED INVESTMENTS
<TABLE>
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SECURITIES/INSTRUMENTS: - Under normal market conditions, at least 65% of the Fund's total
domestic common stocks assets will be invested in or exposed to (9) the equity securities of
convertible securities small companies.
securities of foreign issuers (traded
principally on U.S. Exchanges) - Any short-term assets will be invested in cash or High Quality
depository receipts Money Market Instruments including securities issued by the U.S.
investment companies (open & closed end) government and agencies thereof, bankers' acceptances, commercial
illiquid securities paper, bank certificates of deposit and repurchase agreements. The
144A Securities Fund expects that normally less than 5% of its net assets will be
restricted securities exposed to cash and money market instruments. This limitation does
futures and related options on not include cash and money market instruments in margin accounts or
securities indexes otherwise covering exposure achieved through derivative instruments
REITs ("equitized cash").
exchange-traded and OTC options on
securities and indexes (including
writing covered options)
equity swap contracts
contracts for differences
index futures
repurchase agreements
cash and money market instruments
warrants or rights
</TABLE>
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will not engage in the following practices except as indicated:
-------------------------------
(8) There can be no assurance that the Manager will be successful in
employing these strategies.
(9) The words "exposed to" as used in these guidelines mean that, for
purposes of the relevant requirement or restriction, the total of the Fund's
exposure to the relevant market or security through direct investments and
through derivative instruments will be considered.
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PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of transactions.
BORROWING MONEY - Except that the Fund may borrow up to 20% of its net assets from banks
temporarily for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy.
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of portfolio
investments.
MAKING LOANS - Except that purchasing debt obligations, repurchase agreements and
engaging in securities lending will not be considered making loans for this
purpose. Fund may loan securities valued at up to one-third of its total
assets.
PLEDGING, HYPOTHECATING OR - Except that collateral arrangements with respect to swap agreements, the
MORTGAGING FUND ASSETS writing of options, stock index, interest rate, currency or other futures
contracts, options on futures contracts and collateral arrangements with
respect to initial and variation margin are not deemed to be a pledge or
other encumbrance of assets. The deposit of securities or cash or cash
equivalents in escrow in connection with the writing of covered call or put
options, respectively is also not deemed to be a pledge or encumbrance.
</TABLE>
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S MANAGEMENT
MAKING SHORT SALES OF SECURITIES
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
RESTRICTIONS AND LIMITATIONS
<TABLE>
<S> <C>
OPTIONS ON SECURITIES - No more than 5% of the Fund's net assets will be invested in time
premiums on options on particular securities (as opposed to options on
indexes).
OTHER INVESTMENT COMPANIES - The Fund will not own more than 3% of the outstanding voting securities
of any investment company.
- No more than 5% of the Fund's net assets will be invested in any single
investment company.
- No more than 10% of the Fund's net assets will be invested in
securities of investment companies in the aggregate.
ILLIQUID SECURITIES - No more than 15% of the Fund's net assets will be invested in illiquid
securities.
INVESTMENT IN INSURANCE COMPANIES - The Fund will not purchase more than 10% of the total outstanding voting
stock of any insurance company (including foreign insurance companies).
INVESTMENT IN SECURITIES ISSUED BY - Equity: The Fund will not purchase more than 5% of any class of stock of a
BROKERS, DEALERS, UNDERWRITERS AND broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- Investment Limits: No more than 5% of the Fund's total assets will be
invested in the securities of a single broker, dealer, underwriter or
investment adviser. The net payment obligation of swap contracts where one
of these types of companies is the counterparty also counts for purposes of
this restriction.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent fiscal
year.
DIVERSIFICATION/CONCENTRATION
</TABLE>
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<TABLE>
<S> <C>
DIVERSIFICATION - Except for U.S. government securities, cash, and money market
instruments, the Fund will not invest in any one security to an extent
greater than 5 percentage points over that security's weighting in the Fund's
benchmark.
- The Fund will not purchase more than 10% of the outstanding securities
of any issuer.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in securities of
issuers in any one industry.
DERIVATIVE INSTRUMENTS
TYPES OF DERIVATIVES - Futures contracts and related options on securities indexes
- Long equity swap contracts: where the Fund pays a fixed rate plus the
negative performance, if any, and receives the positive performance, if any,
of an index or basket of securities.
- Short equity swap contracts: where the Fund receives a fixed rate plus the
negative performance, if any, and pays the positive performance of an index
or basket of securities
- Contracts for differences: equity swaps that contain both a long and short
equity component.
USES OF DERIVATIVES - Traditional Hedging: Short equity futures, related options and short equity
swap contracts used to hedge against an equity risk already generally present
HEDGING in the Fund.(10)
- Anticipatory Hedging: If the Fund receives or anticipates significant cash
purchase transactions, the Fund may hedge market risk (risk of not being
invested in the market) by purchasing long futures contracts or entering into
long equity swap contracts to obtain market exposure until such time as
direct investments can be made efficiently. Conversely, if the Fund receives
or anticipates a significant demand for cash redemptions, the Fund may sell
futures contracts or enter into short equity swap contracts to allow the Fund
to dispose of securities in a more orderly fashion without the Fund being
exposed to leveraged loss exposure in the interim.
INVESTMENT - The Fund may use derivative instruments (particularly long futures contracts,
related options and long equity swap contracts) in place of investing
directly in securities. This will include using equity derivatives to
"equitize" cash balances held by the Fund. The Fund may also use long
derivatives for investment in conjunction with short hedging transactions to
adjust the weights of the Fund's underlying equity portfolio to a level the
Manager believes is the optimal exposure to individual markets, sectors and
equities.
RISK MANAGEMENT - - The Fund may use equity futures, related options and equity swap contracts to
SYNTHETIC SALES AND PURCHASES adjust the weight of the Fund to a level the Manager believes is the optimal
exposure to individual markets, sectors and equities. Sometimes, such
transactions are used as a precursor to actual sales and purchases. For
example, if the Fund held a large proportion of stocks of a particular market
and the Manager believed that stocks of another market would outperform such
stocks, the Fund might use a short futures contract on an appropriate index
(to synthetically "sell" a portion of the Fund's portfolio) in combination
with a long futures contract on another index (to synthetically "buy"
exposure to that index). Long and short equity swap contracts and contracts
for differences may also be used for these purposes. Equity derivatives (and
corresponding currency forwards) used to effect synthetic sales and purchases
will generally be unwound as actual portfolio securities are sold and
purchased.
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging purposes.
- When long futures contracts and long equity swaps are used for investment,
</TABLE>
--------------------
(10) The Fund may use such hedging to remove or reduce general market
exposure (e.g., an index or broad basket of securities) relative to specific
exposure existing in the Fund (the specific stocks of that market actually owned
by the Fund). The Fund may also seek to remove specific exposure (e.g., a single
stock, small basket or more focused index of securities expected to do poorly in
an otherwise promising market) relative to general or broad market exposure that
exists in the Fund.
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the Fund will maintain an amount of cash or liquid securities equal to the
face value of all such long derivative positions. However, for purposes of
this restriction, if an existing long equity exposure is reduced or
eliminated by a short derivative position, the combination of the long and
short position will be considered as cash available to cover a new long
derivative exposure.
- The net long equity exposure of the Fund, including direct investment in
securities and long derivative positions, will not exceed 100% of the Fund's
net assets.
- Except when such instruments are used for bona-fide hedging, no more than 5%
of the Fund's net assets will be committed to initial margin on futures
contracts and time premiums on related options.
- Counterparties used for OTC derivatives must have a long-term debt rating of
A or higher when the derivative is entered into. Occasionally, short-term
derivatives will be entered into with counterparties that have only high
short-term debt ratings.
</TABLE>
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FINANCIAL STATEMENTS
The audited financial statements for the Tax-Managed U.S. Equities Fund,
the Tax-Managed International Equities Fund, and the Tax-Managed Small Companies
Fund for the fiscal year ended February 29, 2000 included in the Trust's Annual
Reports and filed with the Securities and Exchange Commission pursuant to
Section 30(d) of the 1940 Act, and the rules promulgated thereunder, are hereby
incorporated in this Statement of Additional Information by reference.
GMO TRUST
SPECIMEN PRICE-MAKE-UP SHEET
Following are computations of the total offering price per share for the
Class III shares of the Tax-Managed U.S. Equities Fund, the Tax-Managed
International Equities Fund, and the Tax-Managed Small Companies Fund, in each
case based upon their respective net asset values and shares of beneficial
interest outstanding at the close of business on February 29, 2000.
<TABLE>
<S> <C>
Tax-Managed U.S. Equities Fund - Class III
Net Assets at Value (Equivalent of $12.64 per share based
on 1,050,117 shares of beneficial interest outstanding) .......... $ 13,275,095
Offering Price ($12.64 x 100/99.86)*............................. $ 12.66
Tax-Managed International Equities Fund --Class III
Net Assets at Value (Equivalent of $10.43 per share based
on 10,802,456 shares of beneficial interest outstanding) ......... $112,623,250
Offering Price ($10.43 x 100/99.40)* ............................ $ 10.49
Tax-Managed Small Companies Fund - Class III
Net Assets at Value (Equivalent of $9.52 per shared based
on 4,098,174 shares of beneficial interest outstanding) .......... $ 38,999,959
Offering Price ($9.52 x 100/99.50)* .............................. $ 9.57
</TABLE>
-----------------------
* Represents maximum offering price charged on certain cash purchases. See "How
to Purchase Shares" in the Prospectus.
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<PAGE> 398
PELICAN FUND
STATEMENT OF ADDITIONAL INFORMATION
June 30, 2000
This Statement of Additional Information is not a prospectus. It relates to the
Pelican Fund Prospectus dated June 30, 2000, as amended from time to time (the
"Prospectus"), and should be read in conjunction therewith. The Pelican Fund
(the "Fund") is a series of GMO Trust (the "Trust"). Information from the
Prospectus and from the Pelican Fund Annual Report dated February 29, 2000 is
incorporated by reference into this Statement of Additional Information.
Investors may obtain a free copy of the Prospectus and the Annual Report from
the Trust, 40 Rowes Wharf, Boston, Massachusetts 02110 (call collect:
617-346-7600 - ask for Shareholder Services).
<PAGE> 399
TABLE OF CONTENTS
-----------------
PAGE
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DESCRIPTIONS AND RISKS OF FUND INVESTMENTS................................... 1
INVESTMENT RESTRICTIONS...................................................... 5
TRUSTEES AND OFFICERS........................................................ 6
MANAGEMENT ARRANGEMENTS...................................................... 8
PORTFOLIO TRANSACTIONS....................................................... 10
PRICING OF SHARES............................................................ 11
TAX STATUS................................................................... 11
REDEMPTION OF SHARES......................................................... 13
SYSTEMATIC WITHDRAWAL PLANS.................................................. 13
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES............................. 14
VOTING RIGHTS................................................................ 15
SHAREHOLDER AND TRUSTEE LIABILITY............................................ 16
PERFORMANCE INFORMATION...................................................... 16
INVESTMENT GUIDELINES........................................................ 18
FINANCIAL STATEMENTS......................................................... 20
SPECIMEN PRICE MAKE-UP....................................................... 20
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The Pelican Fund (the "Fund") is a series of GMO Trust (the "Trust").
The Trust is a "series investment company" that consists of a separate series of
investment portfolios (the "Series"), each of which is represented by a separate
series of shares of beneficial interest. The Trust currently offers thirty-eight
Series. Each Series' manager is Grantham, Mayo, Van Otterloo & Co. LLC (the
"Manager"). Shares of the other Series of the Trust are offered pursuant to
separate prospectuses and statements of additional information.
DESCRIPTIONS AND RISKS OF FUND INVESTMENTS
The principal strategies and risks of investing in the Fund are
described in the Prospectus. Unless otherwise indicated in the Prospectus or
this Statement of Additional Information, the investment objective and policies
of the Fund may be changed by the Trustees without shareholder approval.
The Fund invests primarily in common stocks of domestic corporations.
It seeks to invest in companies that represent outstanding values relative to
their market prices. Under normal conditions, the Fund generally, but not
exclusively, looks for companies with low price/earnings ratios and rising
earnings. The Fund focuses on established, financially secure firms and
generally does not buy issues of companies with less than three years of
operating history. The Fund seeks to maintain lower than average risk levels
relative to the potential for return through a portfolio with an average
volatility (beta) below 1.0. The average volatility (beta) of the Standard &
Poor's 500 Stock Market Index, which serves as a standard for measuring
volatility, is always 1.0. The Fund's beta may change with market conditions.
The Fund's Manager analyzes key economic variables to identify general
trends in the stock markets. World economic indicators, which are tracked
regularly, include U.S. industry and trade indicators, interest rates,
international stock market indices, and currency levels.
The Manager also analyzes each company considered for investment. The
analysis includes its source of earnings, competitive edge, management strength,
and level of industry dominance as measured by market share. At the same time,
the Manager analyzes the financial condition of each company. The Manager
examines current and historical measures of relative value to find corporations
that are selling at discounts relative to both underlying asset values and
market pricing. The Manager then selects those undervalued companies with
financial and business characteristics that it believes will produce
above-average growth in earnings.
The Manager generally selects equities that normally trade in
sufficient volume to provide liquidity. Domestic equities are usually traded on
the New York Stock Exchange or the American Stock Exchange or in the
over-the-counter markets. Foreign securities in the portfolio are generally
listed on principal over-seas exchanges.
Sell decisions are triggered when the stock price and other fundamental
considerations no longer signal further appreciation. The Manager monitors
returns on domestic and international equity securities, returns on fixed income
securities, and the performance of industry sectors.
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<PAGE> 401
PORTFOLIO TURNOVER
The rate of portfolio turnover will not be a limiting factor when
portfolio changes are deemed appropriate. In any given year, turnover may be
greater than anticipated in response to market conditions. The rate of the
Fund's turnover may also vary significantly from time to time in response to
market volatility and economic conditions. High portfolio turnover involves
correspondingly greater brokerage commissions and other transaction costs, which
will be borne directly by the Fund.
Because the Fund is directed primarily to institutions and other
tax-exempt investors, it is expected that the tax consequences of portfolio
transactions may be of secondary consideration.
DIVERSIFICATION
It is a fundamental policy of the Fund, which may not be changed
without shareholder approval, that at least 75% of the value the Fund's total
assets are represented by cash and cash items (including receivables),
Government securities, securities of other investment companies, and other
securities for the purposes of this calculation limited in respect of any one
issuer to an amount not greater in value than 5% of the value of the relevant
Fund's total assets and to not more than 10% of the outstanding voting
securities of any single issuer.
SELECTION OF INVESTMENTS FOR THE FUND
There is no single, specific formula or technique for the successful
pursuit of long-term capital growth. The investment philosophy of the Fund is to
select investments with excellent growth and, secondarily, income potential.
Under normal conditions, investments are made in a variety of economic sectors,
industry segments, and individual securities to reduce the effects of price
volatility in any one area. Shares of the Fund are not intended to represent a
complete investment program. There can be no assurance that the Fund will attain
its investment objective.
Questions of whether to be fully invested in common stocks, or of
whether to be in one type of common stock or another, cannot be answered
categorically. It is anticipated, in view of the Fund's investment objectives,
that at least 65 percent of the asset value of the Fund's portfolio will be
invested principally in common stocks and securities convertible into common
stocks. However, the Fund may invest part or all of its portfolio in debt
securities, preferred stocks, or short-term notes, or it may convert part or all
of its portfolio to cash, when economic or market conditions appear to make such
action or actions desirable. For example, a more defensive or conservative
position may seem temporarily justified by prevailing market conditions, or,
securities other than common stocks offer a better opportunity for capital
growth based upon relative values at a particular time. Debt securities
purchased by the Fund may include obligations of the U.S. Government, its
agencies and instrumentalities and other investment-grade obligations. Equity
securities and debt securities, including debt securities issued or guaranteed
by the U.S. Government, are subject to significant price variations from time to
time. The Fund does not engage in aggressive market timing techniques.
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The Fund may invest up to 25 percent of its assets in foreign
securities, generally equity securities traded in principal European and Pacific
Basin markets. The Manager evaluates the economic strength of a country, which
includes its resources, markets, and growth rate. In addition, it examines the
political climate of a country as to its stability and business policies. The
Manager then assesses the strength of the country's currency and considers
foreign exchange issues in general. The Fund aims for diversification not only
among countries but also among industries in order to enable shareholders to
participate in markets that do not necessarily move in concert with U.S.
markets.
The Fund seeks to identify rapidly expanding foreign economies and then
searches out growing industries and corporations. It focuses on companies with
established records. Individual securities are selected based on value
indicators, such as low price to earnings ratio. They are reviewed for
fundamental financial strength. Selected companies will generally have at least
a $100 million market capitalization and a solid history of operations.
ADDITIONAL INFORMATION REGARDING FOREIGN INVESTMENTS
Foreign investments involve certain special risks. Securities prices in
different countries are subject to different economic, financial, political, and
social factors. Changes in currency exchange rates will affect the value of
portfolio securities to U.S. investors. With respect to certain countries, there
is the possibility of expropriation of assets, confiscatory taxation, imposition
of exchange controls, social instability, and political developments which could
affect investments in those countries. Assets of the Fund held by custodians in
foreign countries may also be subject to these risks. There may be less publicly
available information about foreign companies than U.S. companies. Foreign
companies may not be subject to accounting, auditing, and financial reporting
standards comparable to those of U.S. companies. The trading volume of foreign
securities markets is growing, but they generally have substantially smaller
trading volume than U.S. markets. Consequently, foreign securities may be less
liquid and their prices more volatile than those of comparable U.S. companies.
Brokerage commissions abroad are generally fixed, and other transaction costs on
foreign securities exchanges are generally higher than in the U.S.
In order to reduce risks of fluctuations in currency exchange rates,
the Fund may purchase and sell foreign currencies for forward deliveries. Such
transactions may be utilized in connection with the settlement of portfolio
transactions or for the purpose of hedging specific portfolio positions. Hedging
against a decline in the value of a currency does not eliminate fluctuations in
the prices of portfolio securities, and it precludes the opportunity to benefit
if the value of the hedged currency should rise. The Fund will not engage in
foreign currency transactions for speculative purposes.
DOMESTIC EQUITY DEPOSITARY RECEIPTS
The Fund may invest in Domestic Equity Depositary Receipts. These
instruments represent interests in a unit investment trust ("UIT") that holds a
portfolio of common stocks that is intended to track the price and dividend
performance of a particular index. Common examples of Domestic Equity
Depositary Receipts include S&P Depositary Receipts ("SPDRs") and Nasdaq 100
Shares, which may be obtained from the UIT issuing the securities or purchased
in the secondary market (SPDRs and Nasdaq 100 Shares are listed on the American
Stock Exchange).
Domestic Equity Depositary Receipts are not individually redeemable,
except upon termination of the UIT that issued them. The liquidity of small
holdings of Domestic Equity Depositary Receipts depends upon the existence of a
secondary market.
The redemption price (and therefore the sale price) of Domestic Equity
Depositary Receipts is derived from and based upon the securities held by the
UIT that issued them. Accordingly, the level of risk involved in the purchase
or redemption or sale of a Domestic Equity Depositary Receipt is similar to the
risk involved in the purchase or sale of traditional common stock, with the
exception that the price of Domestic Equity Depositary Receipts is based on the
value of a basket of stocks. Disruptions in the markets for the securities
underlying Domestic Equity Depositary Receipts purchased or sold by a Series
could result in losses on Domestic Equity Depositary Receipts.
WRITING COVERED CALL OPTIONS
The Fund may write call options which are traded on national securities
exchanges with respect to not more than 25% of its assets. The Fund must at all
times have in its portfolio the securities which it may be obligated to deliver
if the option is exercised. Options purchased or
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written by the Fund will be limited to options traded on national exchanges or
in the over-the-counter market (such over-the-counter options shall not exceed
10 percent of the Fund's assets).
The Fund may write call options on the Fund's securities in an attempt
to realize a greater current return than would be realized on the securities
alone. The Fund may also sell (write) call options to hedge a possible stock or
bond market decline (only to the extent of the premium paid to the Fund for the
options). In view of the investment objectives of the Fund, the Fund generally
would write call options only in circumstances where the Manager to the Fund
does not anticipate significant appreciation of the underlying security in the
near future or has otherwise determined to dispose of the security.
As the writer of a call option, the Fund receives a premium for
undertaking the obligation to sell the underlying security at a fixed price
during the option period, if the option is exercised. So long as the Fund
remains obligated as a writer of a call option, it forgoes the opportunity to
profit from increases in the market price of the underlying security above the
exercise price of the option, except insofar as the premium represents such a
profit (and retains the risk of loss should the value of the underlying security
decline).
The Fund may also enter into "closing purchase transactions" in order
to terminate its obligation as a writer of a call option prior to the expiration
of the option. Although the writing of call options only on national securities
exchanges increases the likelihood of the Fund's being able to make closing
purchase transactions, there is no assurance that the Fund will be able to
effect such transactions at any particular time or at any acceptable price.
The writing of call options could result in increases in the Fund's
portfolio turnover rate, especially during periods when market prices of the
underlying securities appreciate.
PURCHASING PUT OPTIONS
The Fund may invest up to 5% of its total assets at market value in the
purchase of put options. As the holder of a put option, the Fund has the right
to sell the underlying security at the exercise price at any time during the
option period. The Fund may enter into closing sale transactions with respect to
such options, exercise them or permit them to expire.
The Fund may purchase a put option on an underlying security owned by
the Fund as a defensive technique in order to protect against an anticipated
decline in the value of the security. The premium paid for the put option would
reduce any capital gain otherwise available for distribution when the security
is eventually sold. The purchase of put options will not be used by the Fund for
leverage purposes.
The Fund may also purchase a put option on an underlying security which
it owns and at the same time write a call option on the same security with the
same exercise price and expiration date. Depending on whether the underlying
security appreciates or depreciates in value, the Fund would sell the underlying
security for the exercise price either upon exercise of the call option written
by it or by exercising the put option held by it. The Fund would enter into such
transactions in order to profit from the difference between the premium received
by the Fund for
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the writing of the call option and the premium paid by the Fund for the purchase
of the put option, thereby increasing the Fund's current return.
INVESTMENT RESTRICTIONS
Except when specifically indicated to the contrary, the investment
policies described in this Statement of Additional Information are not
fundamental, and the Trustees of the Trust may change such policies without
first obtaining shareholder approval. As used in this paragraph, "shareholder
approval" means the vote of a majority of the outstanding voting securities of
the Fund and "majority" means the lessor of (1) 67 percent or more of the
outstanding shares of the Fund present at a meeting if more than 50 percent of
the shares are represented at the meeting in person or by proxy, or (2) more
than 50 percent of the outstanding shares of the Fund.
Except as identified in the Prospectus and this Statement of Additional
Information, there are no specific limitations on the extent to which the Fund
may engage in the investment policies described in the Prospectus and this
Statement of Additional Information.
Investment Restrictions. The Fund is subject to the following
investment restrictions (A-L below) which may not be changed without shareholder
approval. The Fund may not:
A. Borrow money except for temporary purposes where investment
transactions might advantageously require it. Any such loan
may not be for a period in excess of 60 days, and the
aggregate amount of all outstanding loans may not at any time
exceed 10% of the value of the total assets of the Fund at the
time any such loan is made.
B. Purchase securities on margin.
C. Sell securities short.
D. Lend any funds or other assets (the Fund may enter into
repurchase agreements and purchase publicly distributed bonds,
debentures and other securities of a similar type, or
privately placed municipal or corporate bonds, debentures and
other securities which are of a type customarily purchased by
institutional investors or publicly traded in the securities
markets).
E. Participate in an underwriting or selling group in connection
with the public distribution of securities except for its own
capital stock.
F. Invest more than 5% of the value of its total assets in the
securities of any one issuer (except obligations of domestic
banks or the U.S. Government, its agencies, authorities and
instrumentalities).
G. Hold more than 10% of the voting securities of any one issuer
(except obligations of domestic banks or the U.S. Government,
its agencies, authorities and instrumentalities).
H. Purchase from or sell to any of its officers or trustees, or
firms of which any of them are members or which they control,
any securities (other than capital stock of the
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<PAGE> 405
Fund), but such persons or firms may act as brokers for the
Fund for customary commissions to the extent permitted by the
Investment Company Act of 1940.
I. Purchase and sell real estate or commodities and commodity
contracts.
J. Purchase the securities of any other open-end investment
company, except as part of a plan of merger or consolidation.
K. Make an investment in securities of companies in any one
industry (except obligations of domestic banks or the U.S.
Government, its agencies, authorities, or instrumentalities)
if such investment would cause investments in such industry to
exceed 25% of the market value of the Fund's total assets at
the time of such investment.
L. Issue senior securities, as defined in the 1940 Act and as
amplified by rules, regulations and pronouncements of the SEC.
The SEC has concluded that even though reverse repurchase
agreements, firm commitments and standby commitment agreements
fall within the functional meaning of "evidence of
indebtedness," the issue of compliance with Section 18 of the
1940 Act will not be raised with the SEC by the Division of
Investment Management if the Fund covers such securities by
earmarking and maintaining certain assets on the books and
records of the Fund's custodian. Similarly, so long as such
earmarked assets are maintained, the issue of compliance with
Section 18 will not be raised with respect to any of the
following: any swap contract or contract for differences; any
pledge or encumbrance of assets; any borrowing permitted by
Restriction A above; any collateral arrangements with respect
to initial and variational margin permitted by Restriction B
above; and the purchase or sale of options, forward contracts
or options on future contracts.
Under the Investment Company Act of 1940 (the "1940 Act"), the Fund is
permitted, subject to the above investment restrictions, to borrow money only
from banks. (The Trust has no current intention of borrowing amounts in excess
of 5% of the Fund's assets.)
It is, moreover, the expressed policy of the Fund not to engage in the
purchase and sale of puts, calls, straddles or spreads (except to the extent
described in the Prospectus and in this Statement of Additional Information),
not to invest in companies for the purpose of exercising control of management,
and not to purchase any security which it is restricted from selling to the
public without registration under the Securities Act of 1933. The Fund may not
invest in oil, gas or other mineral exploration or development programs. The
policies set forth in this paragraph may be changed by vote of the Trustees of
the Trust.
All percentage limitations on investments will apply at the time of the
making of an investment and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of such
investment.
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust and their principal occupations
during the past five years are as follows:
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R. JEREMY GRANTHAM* (D.O.B. 10/6/38). President-Quantitative and
Chairman of the Trustees of the Trust. Member, Grantham, Mayo, Van
Otterloo & Co. LLC.
JAY O. LIGHT (D.O.B. 10/3/41). Trustee of the Trust. Professor of
Business Administration, Harvard University; Senior Associate Dean,
Harvard University (1988-1992).
EYK DEL MOL VAN OTTERLOO (D.O.B. 2/27/37). President-International of
the Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC.
RICHARD MAYO (D.O.B. 6/18/42). President-U.S. Active of the Trust.
Member, Grantham, Mayo, Van Otterloo & Co. LLC.
SUSAN RANDALL HARBERT (D.O.B. 4/25/57). Chief Financial Officer and
Treasurer of the Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC.
WILLIAM R. ROYER, ESQ. (D.O.B. 7/20/65). Vice President of the Trust.
General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
ROBERT V. BROKAW, JR. (D.O.B. 10/7/43). Secretary of the Trust. Member,
Grantham, Mayo, Van Otterloo & Co. LLC. Research Analyst, GMO Renewable
Resources LLC (July 1999 - present).
SCOTT ESTON (D.O.B. 1/20/56). Vice President of the Trust. Chief
Financial Officer and Member, Grantham, Mayo, Van Otterloo & Co. LLC
(September 1997 - present). Senior Partner, Coopers & Lybrand (1987 -
1997).
ANNE STETSON (D.O.B. 8/7/62) Vice President of the Trust. Associate
General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (May
1998-present). Legal Counsel, Fidelity Investments (January 1995-April
1998).
ELAINE M. HARTNETT, ESQ. (D.O.B. 2/18/45). Vice President and Clerk of
the Trust. Associate General Counsel, Grantham, Mayo, Van Otterloo &
Co. LLC (June 1999-present). Associate/Junior Partner, Hale and Dorr
LLP, Boston, Massachusetts (1991-1999).
BRENT ARVIDSON (D.O.B. 6/26/69). Assistant Treasurer of the Trust.
Senior Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC
(September 1997 - present). Senior Financial Reporting Analyst, John
Hancock Funds (August 1996 - September 1997). Account Supervisor/Senior
Account Specialist, Investors Bank and Company (June 1993 - August
1996).
*Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo,
Van Otterloo & Co. LLC ("GMO" or the "Manager"), as defined by the 1940 Act.
As of June 6, 2000, the Trustees and officers of the Trust as a group
owned less than 1% of the Pelican Fund.
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<PAGE> 407
Except as stated above, the principal occupations of the officers and
Trustees for the last five years have been with the employers as shown above,
although in some cases they have held different positions with such employers.
The Trustees other than those who are interested persons of the Trust
receive an annual fee of $80,000 from the Trust. In the fiscal year ended
February 29, 2000, Harvey R. Margolis(1) and Mr. Light were the only Trustees
who were not interested persons, and thus the only Trustees compensated
directly by the Trust. No other Trustee receives any direct compensation from
the Trust or any series thereof.
Messrs. Grantham, Mayo, Van Otterloo, Brokaw and Eston, and Ms.
Harbert, as Members of the Manager, will benefit from the management fee paid by
the Fund.
MANAGEMENT ARRANGEMENTS
As disclosed in the Prospectus under the heading "MANAGEMENT," under a
Management Contract between the Trust on behalf of the Fund and Grantham, Mayo,
Van Otterloo & Co. LLC (the "Manager"), subject to such policies as the Trustees
of the Trust may determine, the Manager will furnish continuously an investment
program for the Fund and will make investment decisions on behalf of the Fund
and place all orders for the purchase and sale of portfolio securities. Each of
the following three Members of the Manager hold a greater than 5% interest in
the Manager: R. Jeremy Grantham, Richard A. Mayo and Eyk H.A. Van Otterloo.
Subject to the control of the Trustees, the Manager also manages, supervises and
conducts the other affairs and business of the Trust, furnishes office space and
equipment, provides bookkeeping and certain clerical services and pays all
salaries, fees and expenses of officers and Trustees of the Trust who are
affiliated with the Manager. As indicated under "Portfolio Transaction -
Brokerage and Research Services," the Fund's portfolio transactions may be
placed with broker-dealers which furnish the Manager, at no cost, certain
research, statistical and quotation services of value to the Manager in advising
the Fund or its other clients.
The Management Contract provides that the Manager shall not be subject
to any liability in connection with the performance of its services thereunder
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
Under the Management Contract, the Manager is compensated by the Fund
at the annual rate of 0.75% of average daily net assets of the Fund's portfolio,
subject to the Manager's agreement to reimburse the Fund for certain expenses,
as described in the Prospectus. The Management Contract was approved by the
Trustees of the Trust (including all of the Trustees who are not "interested
persons" of the Manager) and by the relevant Fund's sole shareholder in
connection with the organization of the Trust and the establishment of the Fund.
The Management Contract will continue in effect for a period more than two years
from the date of its execution only so long as its continuance is approved at
least annually by (i) vote, cast in person at a meeting called for that purpose,
of a majority (or one, if there is only one) of those Trustees who are not
"interested persons" of the Manager or the Trust, and by (ii) the majority vote
of either the full Board of Trustees or the vote of a majority of the
outstanding shares of the Fund. The
--------
(1) Mr. Margolis served as a Trustee of the Trust until his death in June 2000.
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<PAGE> 408
Management Contract automatically terminates on assignment, and is terminable on
not more than 60 days' notice by the Trust to the Manager. In addition, the
Management Contract may be terminated on not more than 60 days' written notice
by the Manager.
In the last three fiscal years the Fund paid the following amount as a
Management Fee to the Manager pursuant to the Management Contract:
<TABLE>
<CAPTION>
Gross Reduction Net
----- --------- ---
<S> <C> <C> <C>
Year Ended 2/29/00 $1,582,393 $156,849 $1,425,544
Year Ended 2/28/99 2,078,258 127,155 1,951,103
Year Ended 2/28/98 1,967,796 108,905 1,858,891
</TABLE>
In the event that the Manager ceases to be the manager of the Fund, the
right of the Trust to use the identifying name "GMO" may be withdrawn.
Each of the Trust and the Manager has adopted a Code of Ethics pursuant
to the requirement of the 1940 Act. Under the Code of Ethics, personnel are only
permitted to engage in personal securities transactions in accordance with
certain conditions relating to such persons' position, the identity of the
security, the timing of the transaction and similar factors. Transactions in
securities that may be held by the Funds are permitted, subject to compliance
with applicable provisions of the Code. Personal securities transactions must be
reported quarterly and broker confirmations of such transactions must be
provided for review.
CUSTODIAL ARRANGEMENTS. State Street Bank and Trust Company ("State
Street Bank"), 225 Franklin Street, Boston, Massachusetts 02110, is the Fund's
custodian. As such, State Street Bank holds in safekeeping certificated
securities and cash belonging to the Fund and, in such capacity, is the
registered owner of securities in book-entry form belonging to the Fund. Upon
instruction, State Street Bank receives and delivers cash and securities of the
Fund in connection with Fund transactions and collects all dividends and other
distributions made with respect to Fund portfolio securities. State Street Bank
also maintains certain accounts and records of the Trust and calculates the
total net asset value, total net income and net asset value per share of the
Fund on a daily basis.
INDEPENDENT ACCOUNTANTS. The Trust's independent accountants are
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110.
PricewaterhouseCoopers LLP conducts an annual audit of the Trust's financial
statements, assists in the preparation of the Trust's federal and state income
tax returns, consults with the Trust as to matters of accounting and federal and
state income taxation and provides assistance in connection with the preparation
of various Securities and Exchange Commission filings.
DISTRIBUTOR. Funds Distributor, Inc. ("FDI"), 60 State Street, Boston,
Massachusetts 02109, serves as the Trust's distributor on behalf of the Funds.
GMO has undertaken to reimburse the Trust for any fees that the Trust is
obligated to pay FDI.
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PORTFOLIO TRANSACTIONS
The purchase and sale of portfolio securities for the Fund and for the
other investment advisory clients of the Manager are made by the Manager with a
view to achieving their respective investment objectives. For example, a
particular security may be bought or sold for certain clients of the Manager
even though it could have been bought or sold for other clients at the same
time. Likewise, a particular security may be bought for one or more clients when
one or more other clients are selling the security. In some instances,
therefore, one client may sell indirectly a particular security to another
client. It also happens that two or more clients may simultaneously buy or sell
the same security, in which event purchases or sales are effected on a pro rata,
rotating or other equitable basis so as to avoid any one account being preferred
over any other account.
BROKERAGE AND RESEARCH SERVICES. In placing orders for the portfolio
transactions of the Fund, the Manager will seek the best price and execution
available, except to the extent it may be permitted to pay higher brokerage
commissions for brokerage and research services as described below. The
determination of what may constitute best price and execution by a broker-dealer
in effecting a securities transaction involves a number of considerations,
including without limitation, the overall net economic result to the Fund
(involving price paid or received and any commissions and other costs paid), the
efficiency with which the transaction is effected, the ability to effect the
transaction at all where a large block is involved, availability of the broker
to stand ready to execute possibly difficult transactions in the future and the
financial strength and stability of the broker. Because of such factors, a
broker-dealer effecting a transaction may be paid a commission higher than that
charged by another broker-dealer. Most of the foregoing are subjective
considerations.
Over-the-counter transactions often involve dealers acting for their
own account. It is the Manager's policy to place over-the-counter market orders
for the Fund with primary market makers unless better prices or executions are
available elsewhere.
Although the Manager does not consider the receipt of research services
as a factor in selecting brokers to effect portfolio transactions for the Fund,
the Manager will receive such services from brokers who are expected to handle a
substantial amount of the Fund's portfolio transactions. Research services may
include a wide variety of analyses, reviews and reports on such matters as
economic and political developments, industries, companies, securities and
portfolio strategy. The Manager uses such research in servicing other clients as
well as the Fund.
As permitted by Section 28(e) of the Securities Exchange Act of 1934
(the "1934 Act") and subject to such policies as the Trustees of the Trust may
determine, the Manager may pay an unaffiliated broker or dealer that provides
"brokerage and research services" (as defined in the 1934 Act) to the Manager an
amount of commission for effecting a portfolio investment transaction in excess
of the amount of commission another broker or dealer would have charged for
effecting that transaction.
The Fund may, under some circumstances, accept securities in lieu of
cash as payment for Fund shares. The Manager will not approve the acceptance of
securities in exchange for Fund shares unless (1) the Manager, in its sole
discretion, believes the securities are appropriate investments for the Fund;
(2) the investor represents and agrees that all securities offered to the Fund
are not subject to any restrictions upon their sale by the Fund under the
Securities Act of
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1933, or otherwise; (3) the securities may be acquired under the investment
restrictions applicable to the Fund; and (4) the securities are listed on the
New York Stock Exchange, American Stock Exchange or National Association of
Securities Dealers Automated Quotation System (NASDAQ). For federal income tax
purposes, an exchange of securities for Fund shares is treated as a sale of the
exchanged securities and generally results in a capital gain or loss. Investors
interested in purchases through exchange should telephone the Manager at (617)
346-7600.
During the last three fiscal years, the Trust paid, on behalf of the
Fund, the following amounts in brokerage commissions:
<TABLE>
<CAPTION>
March 1, 1997 March 1, 1998 March 1, 1999
Through Through Through
February 28, 1998 February 28, 1999 February 29, 2000
----------------- ----------------- -----------------
<S> <C> <C>
$263,007 $254,824 $370,323
</TABLE>
PRICING OF SHARES
The net asset value per share of the Fund is computed as of 4:00 p.m.
New York City time on each day on which the New York Stock Exchange is open. The
Prospectus contains a description of the methods used to compute net asset
value.
The portfolio securities of the Fund may include equity securities
which are listed on foreign exchanges. Certain foreign exchanges may be open on
Saturdays and customary United States business holidays. As a consequence, the
portfolio securities of the Fund may be traded, and the net asset value of
shares of the Fund may be significantly affected, on days on which shares of the
Fund may not be purchased or redeemed.
TAX STATUS
It is the Fund's policy to meet the requirements to be taxed as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended from time to time (the "Code"), which requires, among other
things, that at least 90% of the Fund's gross income be derived from dividends,
interest and gains from the sale or other disposition of securities or foreign
currencies, or other income derived with respect to its business of investing in
such stock, securities or currencies. The Code also requires the Fund to
diversify its holdings so that at the end of each fiscal quarter (i) at least 50
percent of the market value of the Fund's assets is represented by cash items,
U.S. Government Securities, securities of other regulated investment companies,
and other securities, limited in respect of any one issuer to a value not
greater than 5 percent of the value of the Fund's total assets and 10 percent of
the outstanding voting securities of such issuer, and (ii) not more than 25
percent of the value of its assets is invested in the securities (other than
those of the U.S. government or other regulated investment companies) of any one
issuer or of two or more issuers which the Fund controls and which are engaged
in the same, similar or related trades or businesses. If the Fund meets all such
requirements and distributes to its shareholders all of its ordinary income and
capital gain net income, the Fund will not be required to pay federal income
tax. Shareholders of the Fund that are not exempt from federal income taxes will
be subject to income taxes on dividends and capital gains distributions received
from the Fund.
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<PAGE> 411
The Code also requires the Fund, in general, to distribute, prior to
the calendar year end, virtually all of its ordinary income for the calendar
year and virtually all of the capital gain net income realized by the Fund in
the one-year period ending October 31 in order to avoid the imposition of a 4
percent excise tax on undistributed income. Dividends declared in October,
November, or December to shareholders of record on a specified date in such a
month and paid in the following January will be treated as distributed by the
Fund and received by the Fund shareholders on December 31 of such calendar year.
A portion of the dividends paid by the Fund may be eligible (subject to
a holding period requirement imposed pursuant to the Code) for the
dividends-received deduction for the Fund's corporate shareholders.
Dividends and interest received by the Fund may be subject to income
withholding or other taxes imposed by foreign countries and the U.S. which may
reduce the yield of the Fund. Tax conventions between certain countries and the
U.S. may reduce or eliminate these foreign taxes.
Distributions designated by the Fund as deriving from net gains on
securities held for more than 12 months, whether received in cash or additional
shares, are taxable to the Fund's shareholders that are not exempt from federal
income taxes as such (generally at a 20% rate for noncorporate shareholders) for
federal income tax purposes without regard to the length of time shares of the
Fund have been held. If a shareholder receives a dividend that is taxed as
long-term capital gain on shares held for six months or less and sells those
shares at a loss, the loss will be treated as a long-term capital loss to the
extent of such dividend. The federal income tax status of all distributions will
be reported to shareholders annually.
Special rules (including mark-to-market, constructive sale, short sale,
straddle and wash-sale rules) exist for determining the timing of the
recognition of income or loss, the character of such income or loss, and the
holding periods of certain of the Fund's assets in the case of certain
transactions, including transactions involving futures contracts, forward
contracts and options. The Fund will endeavor to make any available elections
pertaining to such transactions in a manner believed to be in the best interest
of the Fund.
The Trust is required by federal law to withhold 31 percent of
reportable payments (which may include Fund dividends, capital gain
distributions and redemptions) paid to shareholders who have under-reported
dividend or interest income or who have not certified on their applications, or
on separate W-9 Forms, that their Social Security or Taxpayer Identification
Numbers are correct and that they are not currently subject to backup
withholding, or that they are exempt from backup withholding. Payments reported
to the Internal Revenue Service by the Trust that omit your social security
number or tax identification number will subject the Trust to charges and
penalties of $50 or more each year, all of which will be charged against your
account if you fail to provide the certification by the time the report is
filed. Such amounts charged against your account are not refundable.
Payees specifically exempted from backup withholding on dividends and
other distributions include: (i) a corporation; (ii) a financial institution;
(iii) an organization exempt from tax under Section 501(a) of the code or an
individual retirement plan; (iv) the United States or any
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<PAGE> 412
agency or instrumentality thereof; (v) a state, the District of Columbia, a
possession of the United States, or political subdivision instrumentality
thereof; (vi) a foreign government, a political subdivision of a foreign
government or any agency or instrumentality thereof; (vii) an international
organization or any agency or instrumentality thereof; (viii) a registered
dealer in securities or commodities in the U.S. or a possession of the U.S.;
(ix) a real estate investment trust; (x) a common trust fund operated by a bank
under Section 584(a) of the Code; (xi) an exempt charitable remainder trust or a
non-exempt trust described in Section 4947(a)(1) of the Code; (xii) an entity
registered at all times under the Investment Company Act of 1940; (xiii) a
foreign central bank of issue; and (xiv) a middleman known in the investment
community as a nominee or listed in the most recent publication of the American
Society of Corporate Secretaries, Inc. Nominee List.
The Internal Revenue Service recently revised its regulations affecting
the application to foreign investors of the back-up withholding and withholding
tax rules described above. The new regulations will generally be effective for
payments made after December 31, 2000. In some circumstances, the new rules will
increase the certification and filing requirements imposed on foreign investors
in order to qualify for exemption from the 31% back-up withholding tax and for
reduced withholding tax rates under income tax treaties. Foreign investors in
the Fund should consult their tax advisors with respect to the potential
application of these new regulations.
If the Fund does not qualify for taxation as a regulated investment
company for any taxable year, the Fund's income will be taxed at the Fund level
at regular corporate rates, and all distributions from earnings and profits,
including distributions of net long-term capital gains, will be taxable to
shareholders as ordinary income and subject to withholding in the case of
non-U.S. shareholders. In addition, in order to requalify for taxation as a
regulated investment company that is accorded special tax treatment, the Fund
may be required to recognize unrealized gains, pay substantial taxes and
interest on such gains, and make certain substantial distributions.
REDEMPTION OF SHARES
The right of redemption is generally described in the Prospectus. The
Trust may suspend the right of redemption during any period when (a) the New
York Stock Exchange is closed for other than weekends or holidays or trading
thereon is restricted under conditions set forth by the Securities and Exchange
Commission ("SEC"); (b) the SEC has by order permitted such suspension; or (c)
an emergency as defined by the rules of the SEC exists making disposal of
portfolio securities or valuation of the net assets of the Fund not reasonably
practicable.
SYSTEMATIC WITHDRAWAL PLANS
Eligible shareholders who wish to receive a fixed amount periodically
may elect to participate in a Systematic Withdrawal Plan. A shareholder whose
account in the Fund contains shares worth $5,000 or more may elect to receive
automatic payments of $100 or more each quarter. A shareholder whose account in
the Fund contains at least $10,000 worth of shares may elect to receive monthly
payments of $100 or more.
Amounts paid under the plan are derived from the proceeds of redemption
of shares held in the shareholder's account. Under the plan, all dividends and
capital gains distributions must be reinvested in shares of the Fund. All shares
obtained through reinvestment and all shares held
-13-
<PAGE> 413
under the plan must remain on deposit with the Fund. If redemptions for these
periodic payments exceed distributions reinvested in an account, such
redemptions will reduce or possibly exhaust the number of shares in the account.
The minimum withdrawal amounts have been established for administrative
convenience and should not be considered as recommended for all investors. For
tax purposes, shareholders may realize a capital gain or loss on each payment.
The plan is administered by the Trust without separate charge to the
participating shareholders and may be terminated at any time by a shareholder or
the Trust.
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES
The Trust is organized as a Massachusetts business trust under the laws
of Massachusetts by an Agreement and Declaration of Trust ("Declaration of
Trust") dated June 24, 1985. A copy of the Declaration of Trust is on file with
the Secretary of The Commonwealth of Massachusetts. The Fund commenced
operations on May 31, 1989. The fiscal year for the Fund ends on the last day of
February.
Pursuant to the Declaration of Trust, the Trustees have currently
authorized the issuance of an unlimited number of full and fractional shares of
thirty-nine series: U.S. Core Fund; Tobacco-Free Core Fund; Value Fund; Growth
Fund; U.S. Sector Fund; Small Cap Value Fund; Small Cap Growth Fund; Fundamental
Value Fund; REIT Fund; International Core Fund; Currency Hedged International
Core Fund; Foreign Fund; International Small Companies Fund; Japan Fund;
Emerging Markets Fund; Evolving Countries Fund; Domestic Bond Fund; U.S.
Bond/Global Alpha A Fund; U.S. Bond/Global Alpha B Fund; International Bond
Fund; Currency Hedged International Bond Fund; Global Bond Fund; Emerging
Country Debt Fund; Short-Term Income Fund; Global Hedged Equity Fund; Inflation
Indexed Bond Fund; International Equity Allocation Fund; World Equity Allocation
Fund; Global (U.S.+) Equity Allocation Fund; Global Balanced Allocation Fund;
Emerging Country Debt Share Fund; Pelican Fund; Asia Fund; Alpha LIBOR Fund;
Tax-Managed U.S. Equities Fund; Tax-Managed International Equities Fund;
Tax-Managed Small Companies Fund, Intrinsic Value Fund and International
Core Plus Allocation Fund. The Trustees have further authorized the issuance of
up to eight classes of shares of the foregoing series, Class I, Class II, Class
III, Class IV, Class V, Class VI, Class VII and Class VIII Shares. Interests in
each portfolio are represented by shares of the corresponding series. Each share
of each series represents an equal proportionate interest, together with each
other share, in the corresponding series. The shares of such series do not have
any preemptive rights. Upon liquidation of a series, shareholders of the
corresponding series are entitled to share pro rata in the net assets of the
series available for distribution to shareholders. The Declaration of Trust also
permits the Trustees to charge shareholders directly for custodial, transfer
agency and servicing expenses, but there is no present intention to make such
charges.
The Declaration of Trust also permits the Trustees, without shareholder
approval, to subdivide any series of shares into various sub-series of shares
with such dividend preferences and other rights as the Trustees may designate.
While the Trustees have no current intention to exercise this power, it is
intended to allow them to provide for an equitable allocation of the impact of
any future regulatory requirements which might affect various classes of
shareholders differently. The Trustees may also, without shareholder approval,
establish one or more additional separate portfolios for investments in the
Trust or merge two or more existing portfolios. Shareholders' investments in
such a portfolio would be evidenced by a separate series of shares.
-14-
<PAGE> 414
The Declaration of Trust provides for the perpetual existence of the
Trust. The Trust, however, may be terminated at any time by vote of at least
two-thirds of the outstanding shares of the Trust. While the Declaration of
Trust further provides that the Trustees may also terminate the Trust upon
written notice to the shareholders, the 1940 Act requires that the Trust receive
the authorization of a majority of its outstanding shares in order to change the
nature of its business so as to cease to be an investment company.
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding shares of the Fund as of June 1, 2000:
<TABLE>
<CAPTION>
Name Address % Ownership
---- ------- -----------
<S> <C> <C>
The Chase Manhattan Bank, as Attn: Domenica Mascia 50.41
Trustee, Corning 4 New York Plaza, 2nd Floor
Investment Plan Trust New York, NY 10004-2413
Nabank & Co. Attn: Trust Securities 11.32
P.O. Box 2180
Tulsa, OK 74101-2180
Hartwick College Oyaron Hill 7.60
Oneonta, NY 13820
</TABLE>
As depicted in the above chart, certain shareholder(s) may hold greater
than 25% of the outstanding shares of the Pelican Fund. As a result, such
shareholders could be deemed to "control" the Fund as such term is defined in
the 1940 Act.
VOTING RIGHTS
Shareholders are entitled to one vote for each full share held (with
fractional votes for fractional shares held) and will vote (to the extent
provided herein) in the election of Trustees and the termination of the Trust
and on other matters submitted to the vote of shareholders. Shareholders vote by
individual Fund on all matters except (i) when required by the 1940 Act, shares
shall be voted in the aggregate and not by individual Fund and (ii) when the
Trustees have determined that the matter affects only the interests of one or
more Fund, then only shareholders of such Fund shall be entitled to vote
thereon. Shareholders of one Fund shall not be entitled to vote on matters
exclusively affecting another Fund, such matters including, without limitation,
the adoption of or change in the investment objectives, policies or restrictions
of the other Fund and the approval of the investment advisory contracts of the
other Fund.
There will normally be no meetings of shareholders for the purpose of
electing Trustees except that in accordance with the 1940 Act (i) the Trust will
hold a shareholders' meeting for the election of Trustees at such time as less
than a majority of the Trustees holding office have been
-15-
<PAGE> 415
elected by shareholders, and (ii) if, as a result of a vacancy in the Board of
Trustees, less than two-thirds of the Trustees holding office have been elected
by the shareholders, that vacancy may only be filled by a vote of the
shareholders. In addition, Trustees may be removed from office by a written
consent signed by the holders of two-thirds of the outstanding shares and filed
with the Trust's custodian or by a vote of the holders of two-thirds of the
outstanding shares at a meeting duly called for the purpose, which meeting shall
be held upon the written request of the holders of not less than 10% of the
outstanding shares. Upon written request by the holders of at least 1% of the
outstanding shares stating that such shareholders wish to communicate with the
other shareholders for the purpose of obtaining the signatures necessary to
demand a meeting to consider removal of a Trustee, the Trust has undertaken to
provide a list of shareholders or to disseminate appropriate materials (at the
expense of the requesting shareholders). Except as set forth above, the Trustees
shall continue to hold office and may appoint successor Trustees. Voting rights
are not cumulative.
No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the Trust except (i)
to change the Trust's name or to cure technical problems in the Declaration of
Trust and (ii) to establish, designate or modify new and existing series or
sub-series of Trust shares or other provisions relating to Trust shares in
response to applicable laws or regulations.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Declaration of Trust provides for indemnification out of
all the property of the relevant Fund for all loss and expense of any
shareholder of that Fund held personally liable for the obligations of the
Trust. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is considered remote since it is limited to circumstances
in which the disclaimer is inoperative and the Fund of which he is or was a
shareholder would be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing in
the Declaration of Trust protects a Trustee against any liability to which the
Trustee would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office. The By-laws of the Trust provide for indemnification by the Trust of
the Trustees and the officers of the Trust except with respect to any matter as
to which any such person did not act in good faith in the reasonable belief that
his action was in or not opposed to the best interests of the Trust. Such person
may not be indemnified against any liability to the Trust or the Trust
shareholders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
PERFORMANCE INFORMATION
The Fund may from time to time include its total return in
advertisements or in information furnished to present or prospective
shareholders.
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<PAGE> 416
Quotations of average annual total return for the Fund will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Fund over periods of one, three, five, and ten
years (or for such shorter period as shares of the Fund have been offered),
calculated pursuant to the following formula: P (1 + T)n = ERV (where P = a
hypothetical initial payment of $10,000, T = the average annual total return, n
= the number of years, and ERV = the ending redeemable value of a hypothetical
$10,000 payment made at the beginning of the period). All total return figures
reflect the deduction of a proportional share of Fund expenses on an annual
basis, and assume that all dividends and distributions are reinvested when paid.
Quotations of total return may also be shown for other periods. The Fund may
also, with respect to certain periods of less than one year, provide total
return information for that period that is unannualized. Any such information
would be accompanied by standardized total return information. The Fund's total
return is not fixed or guaranteed and the Fund's principal is not insured.
Investment performance quotations should not be considered to be representations
of the performance for any period in the future.
The table below sets forth the average annual total return for the
Pelican Fund for the one, three, five and ten year periods ending February 29,
2000, and for the period from the commencement of the Fund's operations until
February 29, 2000:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
INCEPTION 1 YEAR 3 YEAR 5 YEAR 10 YEAR INCEPTION TO
FUND DATE (%) (%) (%) (%) DATE (%)
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Pelican Fund 5/31/89 -5.80% 8.04% 13.96% 12.93% 11.90%
-------------------------------------------------------------------------------------------------
</TABLE>
The Fund may also from time to time advertise net return data for each
month and calendar quarter since the Fund's inception. Monthly and quarterly
return data is calculated by linking daily performance for the Fund (current net
asset value divided by prior net asset value), and assumes reinvestment of all
dividends and gains. All quotations of monthly and quarterly returns would be
accompanied by standardized total return information. Information relating to
the Pelican Fund's return for a particular month or calendar quarter is provided
to permit evaluation of the Fund's performance and volatility in different
market conditions, and should not be considered in isolation.
From time to time, in advertisements, in sales literature, or in
reports to shareholders, the Fund may compare its respective performance to that
of other mutual funds with similar investment objectives and to stock or other
relevant indices. For example, the Fund may compare its total return to rankings
prepared by Morningstar, Inc. , Lipper Analytical Services, Inc., widely
recognized independent services which monitor mutual fund performance; the
Standard & Poor's 500 Stock Index ("S&P 500"), an index of unmanaged groups of
common stock; or the Dow Jones Industrial Average, a recognized unmanaged index
of common stocks of 30 industrial companies listed on the New York Stock
Exchange.
Performance rankings and listings reported in national financial
publications, such as Money Magazine, Barron's and Changing Times, may also be
cited (if the Fund is listed in any such publication) or used for comparison, as
well as performance listings and rankings from various other sources including
NO LOAD FUND X, CDA Investment Technologies, Inc., Weisenberger Investment
Companies Service, and DONOGHUE'S MUTUAL FUND ALMANAC.
-17-
<PAGE> 417
INVESTMENT GUIDELINES
The Pelican Fund (the "Fund") is a series of GMO Trust, a registered open-end
investment company. Fund policies are set forth in and governed by the Fund's
prospectus as amended from time to time.
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND PERCENT
LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
PERMITTED INVESTMENTS
EQUITY SECURITIES:
common stocks
preferred stocks
convertible securities
warrants or rights
* At least 65% of total assets will be invested in common stocks and
securities convertible into common stocks.
* Up to 25% of total assets may be invested in foreign securities
(generally equity securities traded in principal European and Pacific
Basin markets).
OTHER SECURITIES:
depository receipts: ADRs, GDRs, EDRs
foreign issues traded in the U.S. and abroad
illiquid securities
144A securities
equity futures and related options
exchange-traded and OTC Options on securities and indexes (including writing
covered options)
debt securities
short-term notes
repurchase agreements
CASH AND MONEY MARKET INSTRUMENTS
* Any short-term assets will be invested in cash or high quality money
market instruments including securities issued by the U.S. government
and agencies thereof, bankers' acceptances, commercial paper, bank
certificates of deposit and repurchase agreements.
FOREIGN CURRENCY TRANSACTIONS
* For hedging purposes or in connection with the settlement of portfolio
transactions, the Fund may purchase and sell foreign currencies and
forward foreign currency contracts.
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will NOT engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN
* Except for short-term credits necessary for clearance of transactions.
BORROWING MONEY
* Except that the Fund may temporarily borrow up to 10% of its total
assets from banks for the payment of redemptions or settlement of
securities transactions, but not as a leveraged investment strategy.
The Fund may not purchase securities if borrowing exceeds 5% of total
assets.
INVESTING IN OTHER OPEN-END INVESTMENT COMPANIES
* Except as part of a plan of merger or consolidation.
UNDERWRITING SECURITIES
* Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of portfolio
investments.
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<PAGE> 418
SELLING UNCOVERED PUT OR CALL OPTIONS ON SECURITIES OR INDEXES
SELLING SECURITIES SHORT
LENDING FUNDS OR OTHER ASSETS
PURCHASING SECURITIES ON MARGIN
ENGAGING IN FOREIGN CURRENCY TRANSACTIONS FOR SPECULATIVE PURPOSES
INVESTING DIRECTLY IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S
MANAGEMENT
PRIVATE PLACEMENTS
INVESTING IN OIL, GAS OR OTHER MINERAL OR EXPLORATION DEVELOPMENT PROGRAMS
RESTRICTIONS AND LIMITATIONS
ILLIQUID SECURITIES
* No more than 15% of the Fund's net assets will be invested in illiquid
securities.
PUT AND CALL OPTIONs
* The Fund will not invest more than 5% of its assets in put options.
* The Fund will not write covered call options on more than 25% of total
assets.
* Options purchased or written will be limited to options traded on
national exchanges or in the OTC market (OTC options shall not exceed
10% of the Fund's assets).
LOWER-RATED SECURITIES
* The Fund will not invest more than 5% of its assets in lower-rated
securities (junk bonds).
INVESTMENT IN INSURANCE COMPANIES
* The Fund will not purchase more than 10% of the total outstanding
voting stock of any insurance company (including foreign insurance
companies).
INVESTMENT IN SECURITIES ISSUED BY BROKERS, DEALERS, UNDERWRITERS AND
INVESTMENT ADVISERS
* EQUITY: The Fund will not purchase more than 5% of any class of stock
of a broker, dealer, underwriter or investment adviser.
* DEBT: The Fund may not purchase more than 10% of any such company's
total outstanding debt in the aggregate.
* INVESTMENT LIMITS: No more than 5% of the Fund's total assets will be
invested in the securities of a SINGLE broker, dealer, underwriter or
investment adviser.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent fiscal
year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION
* Except for U.S. government securities, cash obligations of domestic
banks, and money market instruments, the Fund will not invest in any
one security to an extent greater than 5 percentage points over that
security's weighting in the Fund's benchmark.
* The Fund will not hold more than 10% of the voting securities of any
issuer.
CONCENTRATION
* The Fund will not invest more than 25% of its assets in securities of
issuers in any one industry (except obligations of domestic banks or
the U. S. government, its agencies, authorities and
instrumentalities).
-19-
<PAGE> 419
FINANCIAL STATEMENTS
The report of PricewaterhouseCoopers LLP and the Fund's audited
Financial Statements for the year ended February 29, 2000 are incorporated by
reference to the Fund's Annual Report filed with the Securities and Exchange
Commission pursuant to Section 30(d) of the Investment Company Act of 1940, as
amended, and the rules promulgated thereunder.
SPECIMEN PRICE MAKE-UP
Following is a computation of the total offering price per share for
the Pelican Fund based upon its net asset value and shares of beneficial
interest outstanding at the close of business on February 29, 2000:
<TABLE>
<S> <C>
Net Assets at Value (Equivalent to $11.15
per share based on 10,493,566 shares) ................ $117,032,712
Offering Price.......................................... $ 11.15
</TABLE>
-20-
<PAGE> 420
GMO FUNDAMENTAL VALUE FUND
STATEMENT OF ADDITIONAL INFORMATION
June 30, 2000
This Statement of Additional Information is not a prospectus. It relates to the
GMO Fundamental Value Fund Prospectus dated June 30, 2000, as amended from time
to time thereafter (the "Prospectus"), and should be read in conjunction
therewith. The GMO Fundamental Value Fund (the "Fund") is a series of GMO Trust
(the "Trust"). Information from the Prospectus is incorporated by reference into
this Statement of Additional Information. The Prospectus may be obtained free of
charge from GMO Trust, 40 Rowes Wharf, Boston, Massachusetts 02110, or by
calling the Trust collect at (617) 346-7646.
<PAGE> 421
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES................................................................................1
DESCRIPTIONS AND RISKS OF FUND INVESTMENTS........................................................................1
INVESTMENT RESTRICTIONS..........................................................................................28
MANAGEMENT OF THE TRUST..........................................................................................30
INVESTMENT ADVISORY AND OTHER SERVICES...........................................................................32
PORTFOLIO TRANSACTIONS...........................................................................................35
DETERMINATION OF NET ASSET VALUE.................................................................................36
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES.................................................................36
VOTING RIGHTS....................................................................................................38
SHAREHOLDER AND TRUSTEE LIABILITY................................................................................38
BENEFICIAL OWNERS OF 5% OR MORE OF THE FUND'S SHARES.............................................................39
DISTRIBUTIONS....................................................................................................39
TAXES............................................................................................................40
PERFORMANCE INFORMATION..........................................................................................44
COMMERCIAL PAPER AND CORPORATE DEBT RATINGS......................................................................46
INVESTMENT GUIDELINES............................................................................................49
FINANCIAL STATEMENTS.............................................................................................52
SPECIMEN PRICE MAKE-UP SHEETS....................................................................................52
</TABLE>
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<PAGE> 422
INVESTMENT OBJECTIVES AND POLICIES
The principal strategies and risks of investing in the Fund are described
in the Prospectus. Unless otherwise indicated in the Prospectus or this
Statement of Additional Information, the investment objective and policies of
the Fund may be changed without shareholder approval.
DESCRIPTIONS AND RISKS OF FUND INVESTMENTS
The following is a detailed description of the various investment practices
in which the Fund may engage and the risks associated with their use. Please
refer to "Fund Objectives and Principal Investment Strategies" in the Prospectus
and "Investment Guidelines" in this Statement of Additional Information for
determination of which practices the Fund may engage in.
PORTFOLIO TURNOVER
Portfolio turnover is not a limiting factor with respect to investment decisions
for the Fund. The historical portfolio turnover rate for the Fund is shown under
the heading "Financial Highlights" in the Prospectus.
In any particular year, market conditions may well result in greater rates of
portfolio turnover than are presently anticipated. High portfolio turnover
involves correspondingly greater brokerage commissions and other transaction
costs, which will be borne directly by the Fund, and may involve realization of
capital gains that would be taxable when distributed to shareholders of the Fund
unless such shareholders are themselves exempt. The Fund experienced a marked
increase in portfolio turnover from fiscal 1998 to fiscal 1999, primarily as a
result of significant redemptions and portfolio realignment. See "Distributions
and Taxes" in the Prospectus and "Distributions" and "Taxes" in this Statement
of Additional Information.
DIVERSIFIED AND NON-DIVERSIFIED PORTFOLIOS
The Fundamental Value Fund is a "non-diversified" fund under the Investment
Company Act of 1940, as amended (the "1940 Act"), and as such is not required to
satisfy the "diversified" requirements. As a non-diversified fund, the Fund is
permitted to (but is not required to) invest a higher percentage of its assets
in the securities of fewer issuers. Such concentration could increase the risk
of loss to the Fund should there be a decline in the market value of any one
portfolio security. Investment in a non-diversified fund may therefore entail
greater risks than investment in a diversified fund. The Fund, however, must
meet certain diversification standards to qualify as a "regulated investment
company" under the Internal Revenue Code of 1986.
CERTAIN RISKS OF FOREIGN INVESTMENTS
GENERAL. Investment in foreign issuers or securities principally traded overseas
may involve certain special risks due to foreign economic, political and legal
developments, including favorable or unfavorable changes in currency exchange
rates, exchange control regulations (including currency blockage), expropriation
or nationalization of assets, imposition of withholding taxes on dividend or
interest payments, and possible difficulty in obtaining and enforcing judgments
against foreign entities. Furthermore, issuers of foreign securities are
<PAGE> 423
subject to different, often less comprehensive, accounting, reporting and
disclosure requirements than domestic issuers. The securities of some foreign
governments and companies and foreign securities markets are less liquid and at
times more volatile than comparable U.S. securities and securities markets.
Foreign brokerage commissions and other fees are also generally higher than in
the United States. The laws of some foreign countries may limit the Fund's
ability to invest in securities of certain issuers located in these foreign
countries. There are also special tax considerations which apply to securities
of foreign issuers and securities principally traded overseas. Investors should
also be aware that under certain circumstances, markets which are perceived to
have similar characteristics to troubled markets may be adversely affected
whether or not similarities actually exist.
EMERGING MARKETS. The risks described above apply to an even greater extent to
investments in emerging markets. The securities markets of emerging countries
are generally smaller, less developed, less liquid, and more volatile than the
securities markets of the U.S. and developed foreign markets. Disclosure and
regulatory standards in many respects are less stringent than in the U.S. and
developed foreign markets. There also may be a lower level of monitoring and
regulation of securities markets in emerging market countries and the activities
of investors in such markets, and enforcement of existing regulations has been
extremely limited. Many emerging countries have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have very
negative effects on the economies and securities markets of certain emerging
countries. Economies in emerging markets generally are heavily dependent upon
international trade and, accordingly, have been and may continue to be affected
adversely by trade barriers, exchange controls, managed adjustments in relative
currency values, and other protectionist measures imposed or negotiated by the
countries with which they trade. These economies also have been and may continue
to be adversely affected by economic conditions in the countries with which they
trade. The economies of countries with emerging markets may also be
predominantly based on only a few industries or dependent on revenues from
particular commodities. In addition, custodial services and other costs relating
to investment in foreign markets may be more expensive in emerging markets than
in many developed foreign markets, which could reduce the Fund's income from
such securities. Finally, because publicly traded debt instruments of emerging
markets represent a relatively recent innovation in the world debt markets,
there is little historical data or related market experience concerning the
attributes of such instruments under all economic, market and political
conditions.
In many cases, governments of emerging countries continue to exercise
significant control over their economies, and government actions relative to the
economy, as well as economic developments generally, may affect the capacity of
issuers of emerging country debt instruments to make payments on their debt
obligations, regardless of their financial condition. In addition, there is a
heightened possibility of expropriation or confiscatory taxation, imposition of
withholding taxes on interest payments, or other similar developments that could
affect investments in those countries. There can be no assurance that adverse
political changes will not cause the Fund to suffer a loss of any or all of its
investments or, in the case of fixed-income securities, interest thereon.
-2-
<PAGE> 424
INVESTMENTS IN ASIA. In addition to the foregoing risks of foreign investments
and risks specific to emerging markets, investments by the Fund in Asia involve
additional risks specific to investment in the region. The region encompasses
countries at varying levels of economic development ranging from emerging
markets to more developed economies. Each country provides unique investment
risks, yet the political and economic prospects of one country or group of
countries may impact other countries in the region. For example, some Asian
economies are directly affected by Japanese capital investment in the region and
by Japanese consumer demands. In addition, a recession, a debt crisis or a
decline in currency valuation in one country can spread to other countries.
Investments in Asia are susceptible to political and social factors affecting
issuers in Asian countries. Some countries have authoritarian or relatively
unstable governments. Certain governments in the region provide less supervision
and regulation of financial markets than is typical of other emerging markets,
and less financial information is available. Restrictions on direct foreign
investments in securities markets also exist in some countries. For example,
Taiwan permits foreign investment only through authorized qualified foreign
institutional investors. The return of Hong Kong to China in 1997 will continue
to affect the region.
Some countries in the region are heavily dependent upon foreign trade. The
economies of some Asian countries are not diversified and are based upon only a
few commodities or industries. Markets in some of these countries are in the
early stages of development, exhibit a high concentration of market
capitalization, have less trading volume, lower liquidity and more volatility
than more developed markets.
The region periodically experiences increased market volatility and declines in
foreign currency exchange rates. Fluctuation in currency exchange rates can
affect a country's ability to service its debt. Currency fluctuation will affect
the value of the securities in the Fund's portfolio because the prices of these
securities are generally denominated or quoted in currencies other than the U.S.
dollar.
DIRECT INVESTMENT IN RUSSIAN SECURITIES. The fund may invest directly in
securities of Russian issuers. Investment in securities of such issuers presents
many of the same risks as investing in securities of issuers in other emerging
market economies, as described in the immediately preceding section. However,
the political, legal and operational risks of investing in Russian issuers, and
of having assets custodied within Russia, may be particularly acute.
A risk of particular note with respect to direct investment in Russian
securities is the way in which ownership of shares of private companies is
recorded. When the Fund invests in a Russian issuer, it will receive a "share
extract," but that extract is not legally determinative of ownership. The
official record of ownership of a company's share is maintained by the company's
share registrar. Such share registrars are completely under the control of the
issuer, and investors are provided with few legal rights against such
registrars.
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SECURITIES LENDING
The Fundamental Value Fund may make secured loans of portfolio securities
amounting to not more than one-third of the Fund's total assets. The risks in
lending portfolio securities, as with other extensions of credit, consist of
possible delay in recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. However, such loans will be
made only to broker-dealers that are believed by the Manager to be of relatively
high credit standing. Securities loans are made to broker-dealers pursuant to
agreements requiring that loans be continuously secured by collateral in cash or
liquid securities at least equal at all times to the market value of the
securities lent. Collateral may be held in shares of other investment companies.
The borrower pays to the lending Fund an amount equal to any dividends or
interest the Fund would have received had the securities not been lent. If the
loan is collateralized by U.S. Government Securities, the Fund will receive a
fee from the borrower. In the case of loans collateralized by cash, the Fund
typically invests the cash collateral for its own account in interest-bearing,
short-term securities and pays a fee to the borrower. Although voting rights or
rights to consent with respect to the loaned securities pass to the borrower,
the Fund retains the right to call the loans at any time on reasonable notice,
and it will do so in order that the securities may be voted by the Fund if the
holders of such securities are asked to vote upon or consent to matters
materially affecting the investment. The Fund may also call such loans in order
to sell the securities involved. The Manager has retained lending agents on
behalf of the Fund that are compensated based on a percentage of the Fund's
return on the securities lending activity. The Fund also pays various fees in
connection with such loans including shipping fees and reasonable custodian fees
approved by the Trustees of the Trust or persons acting pursuant to direction of
the Board.
DEPOSITORY RECEIPTS
The Fund may invest in American Depositary Receipts (ADRs), Global Depository
Receipts (GDRs) and European Depository Receipts (EDRs) (collectively,
"Depository Receipts") if issues of such Depository Receipts are available that
are consistent with the Fund's investment objective. Depository Receipts
generally evidence an ownership interest in a corresponding foreign security on
deposit with a financial institution. Transactions in Depository Receipts
usually do not settle in the same currency in which the underlying securities
are denominated or traded. Generally, ADRs, in registered form, are designed for
use in the U.S. securities markets and EDRs, in bearer form, are designed for
use in European securities markets. GDRs may be traded in any public or private
securities markets and may represent securities held by institutions located
anywhere in the world.
DOMESTIC EQUITY DEPOSITARY RECEIPTS
The Fund may invest in Domestic Equity Depositary Receipts. These instruments
represent interests in a unit investment trust ("UIT") that holds a portfolio of
common stocks that is intended to track the price and dividend performance of a
particular index. Common examples of Domestic Equity Depositary Receipts include
S&P Depositary Receipts ("SPDRs") and Nasdaq 100 Shares, which may be obtained
from the UIT issuing the securities or purchased in the secondary market (SPDRs
and Nasdaq 100 Shares are listed on the American Stock Exchange).
Domestic Equity Depositary Receipts are not individually redeemable, except upon
termination of the UIT that issued them. The liquidity of small holdings of
Domestic Equity Depositary Receipts depends upon the existence of a secondary
market.
The redemption price (and therefore the sale price) of Domestic Equity
Depositary Receipts is derived from and based upon the securities held by the
UIT that issued them. Accordingly, the level of risk involved in the purchase or
redemption or sale of a Domestic Equity Depositary Receipt is similar to the
risk involved in the purchase or sale of traditional common stock, with the
exception that the price of Domestic Equity Depositary Receipts is based on the
value of a basket of stocks. Disruptions in the markets for securities
underlying Domestic Equity Depositary Receipts purchased or sold by a Series
could result in losses on Domestic Equity Depositary Receipts.
CONVERTIBLE SECURITIES
A convertible security is a fixed income security (a bond or preferred stock)
which may be converted at a stated price within a specified period of time into
a certain quantity of the common stock of the same or a different issuer.
Convertible securities are senior to common stock in a corporation's capital
structure, but are usually subordinated to similar non-convertible securities.
Convertible securities provide, through their conversion feature, an opportunity
to participate in capital appreciation resulting from a market price advance in
a convertible
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security's underlying common stock. The price of a convertible security is
influenced by the market value of the underlying common stock and tends to
increase as the market value of the underlying stock rises, whereas it tends to
decrease as the market value of the underlying stock declines. The Manager
regards convertible securities as a form of equity security.
FUTURES AND OPTIONS
The Fund may use futures and options for various purposes. Such transactions may
involve options, futures and related options on futures contracts, and those
instruments may relate to particular equity and fixed income securities, equity
and fixed income indexes, and foreign currencies. The Fund may also enter into a
combination of long and short positions (including spreads and straddles) for a
variety of investment strategies, including protecting against changes in
certain yield relationships.
The use of futures contracts, options contracts and options on futures contracts
involves risk. Thus, while the Fund may benefit from the use of futures, options
and options on futures, unanticipated changes in interest rates, securities
prices, or currency exchange rates may result in poorer overall performance for
the Fund than if it had not entered into any futures contracts or options
transactions. Losses incurred in transactions in futures, options and options on
futures and the costs of these transactions will affect the Fund's performance.
OPTIONS. The Fund (1) may enter into contracts giving third parties the right to
buy the Fund's portfolio securities for a fixed price at a future date (writing
"covered call options"); (2) may enter into contracts giving third parties the
right to sell securities to the Fund for a fixed price at a future date (writing
"covered put options"); and (3) may buy the right to purchase securities from
third parties ("call options") or the right to sell securities to third parties
("put options") for a fixed price at a future date.
WRITING COVERED OPTIONS. The Fund may seek to increase its return by writing
covered call or put options on optionable securities or indexes. A call option
written by the Fund on a security gives the holder the right to buy the
underlying security from the Fund at a stated exercise price; a put option gives
the holder the right to sell the underlying security to the Fund at a stated
exercise price. In the case of options on indexes, the options are usually cash
settled based on the difference between the strike price and the value of the
index.
The Fund will receive a premium for writing a put or call option, which
increases the Fund's return in the event the option expires unexercised or is
closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price and volatility of the underlying
security or securities index to the exercise price of the option, the remaining
term of the option, supply and demand and interest rates. By writing a call
option on a security, the Fund limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise price
of the option. By writing a put option on a security, the Fund assumes the risk
that it may be required to purchase the underlying security for an exercise
price higher than its then current market value, resulting in a potential
capital loss unless the security subsequently appreciates in value. In the case
of options on an index, if the Fund writes a call, any profit by the Fund in
respect of portfolio securities expected to correlate with the index will
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be limited by an increase in the index above the exercise price of the option.
If the Fund writes a put on an index, the Fund may be required to make a cash
settlement greater than the premium received if the index declines.
A call option on a security is "covered" if the Fund owns the underlying
security or has an absolute and immediate right to acquire that security without
additional cash consideration (or for additional cash consideration earmarked
and maintained by the Fund's custodian on the custodian's books and records)
upon conversion or exchange of other securities held in its portfolio. A call
option on a security is also covered if the Fund holds on a share-for-share
basis a call on the same security as the call written where the exercise price
of the call held is equal to or less than the exercise price of the call written
or greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, U.S. Government Securities or other liquid
securities earmarked on the Custodian's books and records. A call option on an
index is "covered" if the Fund maintains cash, U.S. Government Securities or
other liquid securities with a value equal to the exercise price in a segregated
account with its custodian. A put option is "covered" if the Fund's custodian
earmarks and maintains cash, U.S. Government Securities or other liquid
securities with a value equal to the exercise price, or else holds on a
share-for-share basis a put on the same security as the put written where the
exercise price of the put held is equal to or greater than the exercise price of
the put written.
If the writer of an option wishes to terminate its obligation, it may effect a
"closing purchase transaction." This is accomplished, in the case of exchange
traded options, by buying an option of the same series as the option previously
written. The effect of the purchase is that the writer's position will be
canceled by the clearing corporation. The writer of an option may not effect a
closing purchase transaction after it has been notified of the exercise of an
option. Likewise, an investor who is the holder of an option may liquidate its
position by effecting a "closing sale transaction." This is accomplished by
selling an option of the same series as the option previously purchased. There
is no guarantee that the Fund will be able to effect a closing purchase or a
closing sale transaction at any particular time. Also, an over-the-counter
option may be closed out only with the other party to the option transaction.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a written
put option will permit the Fund to write another put option to the extent that
the exercise price thereof is secured by deposited cash or liquid securities.
Also, effecting a closing transaction will permit the cash or proceeds from the
concurrent sale of any securities subject to the option to be used for other
Fund investments. If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to purchase the option; the Fund will realize a loss from
a closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to purchase
the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security or
index of securities, any loss resulting
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from the repurchase of a written call option is likely to be offset in whole or
in part by appreciation of the underlying security or securities owned by the
Fund.
The Fund may write options in connection with buy-and-write transactions; that
is, the Fund may purchase a security and then write a call option against that
security. The exercise price of the call the Fund determines to write will
depend upon the expected price movement of the underlying security. The exercise
price of a call option may be below ("in-the-money"), equal to ("at-the-money")
or above ("out-of-the-money") the current value of the underlying security at
the time the option is written. Buy-and-write transactions using in-the-money
call options may be used when it is expected that the price of the underlying
security will remain flat or decline moderately during the option period.
Buy-and-write transactions using at-the-money call options may be used when it
is expected that the price of the underlying security will remain fixed or
advance moderately during the option period. Buy-and-write transactions using
out-of-the-money call options may be used when it is expected that the premiums
received from writing the call option plus the appreciation in the market price
of the underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If the call options
are exercised in such transactions, the Fund's maximum gain will be the premium
received by it for writing the option, adjusted upward or downward by the
difference between the Fund's purchase price of the security and the exercise
price. If the options are not exercised and the price of the underlying security
declines, the amount of such decline will be offset in part, or entirely, by the
premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund may elect to close the position or take
delivery of the security at the exercise price. In that event, the Fund's return
will be the premium received from the put option minus the cost of closing the
position or, if it chooses to take delivery of the security, the premium
received from the put option minus the amount by which the market price of the
security is below the exercise price. Out-of-the-money, at-the-money and
in-the-money put options may be used by the Fund in market environments
analogous to those in which call options are used in buy-and-write transactions.
The extent to which the Fund will be able to write and purchase call and put
options may be restricted by the Fund's intention to qualify as a regulated
investment company under the Internal Revenue Code.
RISK FACTORS IN OPTIONS TRANSACTIONS. The option writer has no control over when
the underlying securities or futures contract must be sold, in the case of a
call option, or purchased, in the case of a put option, since the writer may be
assigned an exercise notice at any time prior to the termination of the
obligation. If an option expires unexercised, the writer realizes a gain in the
amount of the premium. Such a gain, of course, may, in the case of a covered
call option, be offset by a decline in the market value of the underlying
security or futures contract during the option period. If a call option is
exercised, the writer realizes a gain or loss from the sale of the underlying
security or futures contract. If a put option is exercised, the writer must
fulfill the
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obligation to purchase the underlying security or futures contract at the
exercise price, which will usually exceed the then market value of the
underlying security or futures contract.
An exchange-traded option may be closed out only on a national securities
exchange ("Exchange") which generally provides a liquid secondary market for an
option of the same series. An over-the-counter option may be closed out only
with the other party to the option transaction. If a liquid secondary market for
an exchange-traded option does not exist, it might not be possible to effect a
closing transaction with respect to a particular option with the result that the
Fund holding the option would have to exercise the option in order to realize
any profit. For example, in the case of a written call option, if the Fund is
unable to effect a closing purchase transaction in a secondary market (in the
case of a listed option) or with the purchaser of the option (in the case of an
over-the-counter option), the Fund will not be able to sell the underlying
security (or futures contract) until the option expires or it delivers the
underlying security (or futures contract) upon exercise. Reasons for the absence
of a liquid secondary market on an Exchange include the following: (i) there may
be insufficient trading interest in certain options; (ii) restrictions may be
imposed by an Exchange on opening transactions or closing transactions or both;
(iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options or underlying securities;
(iv) unusual or unforeseen circumstances may interrupt normal operations on an
Exchange; (v) the facilities of an Exchange or the Options Clearing Corporation
may not at all times be adequate to handle current trading volume; or (vi) one
or more Exchanges could, for economic or other reasons, decide or be compelled
at some future date to discontinue the trading of options (or a particular class
or series of options), in which event the secondary market on that Exchange (or
in that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange should continue to be
exercisable in accordance with their terms.
The Exchanges have established limitations governing the maximum number of
options which may be written by an investor or group of investors acting in
concert. It is possible that the Fund, the Manager and other clients of the
Manager may be considered to be such a group. These position limits may restrict
the Fund's ability to purchase or sell options on a particular security.
The amount of risk the Fund assumes when it purchases an option is the premium
paid for the option plus related transaction costs. In addition to the
correlation risks discussed below, the purchase of an option also entails the
risk that changes in the value of the underlying security or futures contract
will not be fully reflected in the value of the option purchased.
FUTURES. A financial futures contract sale creates an obligation by the seller
to deliver the type of financial instrument called for in the contract in a
specified delivery month for a stated price. A financial futures contract
purchase creates an obligation by the purchaser to pay for and take delivery of
the type of financial instrument called for in the contract in a specified
delivery month, at a stated price. In some cases, the specific instruments
delivered or taken, respectively, at settlement date are not determined until on
or near that date. The determination is made in accordance with the rules of the
exchange on which the futures contract sale or purchase was made. Some futures
contracts are "cash settled" (rather than "physically settled," as described
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above) which means that the purchase price is subtracted from the current market
value of the instrument and the net amount if positive is paid to the purchaser,
and if negative is paid by the purchaser. Futures contracts are traded in the
United States only on commodity exchanges or boards of trade -- known as
"contract markets" -- approved for such trading by the Commodity Futures Trading
Commission ("CFTC"), and must be executed through a futures commission merchant
or brokerage firm that is a member of the relevant contract market. Under U.S.
law, futures contracts on individual equity securities are not permitted.
The purchase or sale of a futures contract differs from the purchase or sale of
a security or option in that no price or premium is paid or received. Instead,
an amount of cash or U.S. Government Securities or other liquid assets generally
not exceeding 5% of the face amount of the futures contract must be deposited
with the broker. This amount is known as initial margin. Subsequent payments to
and from the broker, known as variation margin, are made on a daily basis as the
price of the underlying futures contract fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
"marking to market." Prior to the settlement date of the futures contract, the
position may be closed out by taking an opposite position which will operate to
terminate the position in the futures contract. A final determination of
variation margin is then made, additional cash is required to be paid to or
released by the broker, and the purchaser realizes a loss or gain. In addition,
a commission is paid on each completed purchase and sale transaction.
In most cases futures contracts are closed out before the settlement date
without the making or taking of delivery. Closing out a futures contract sale is
effected by purchasing a futures contract for the same aggregate amount of the
specific type of financial instrument or commodity and the same delivery date.
If the price of the initial sale of the futures contract exceeds the price of
the offsetting purchase, the seller is paid the difference and realizes a gain.
Conversely, if the price of the offsetting purchase exceeds the price of the
initial sale, the seller realizes a loss. Similarly, the closing out of a
futures contract purchase is effected by the purchaser entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the
purchaser realizes a gain, and if the purchase price exceeds the offsetting sale
price, a loss will be realized.
The ability to establish and close out positions on options on futures will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop or be maintained.
INDEX FUTURES. The Fund may purchase futures contracts on various securities
indexes ("Index Futures"). For example, the Fund may purchase Index Futures on
the S&P 500 and on such other domestic stock indexes as the Manager may deem
appropriate. The Fund's purchase and sale of Index Futures is limited to
contracts and exchanges approved by the CFTC.
An Index Future may call for "physical delivery" or be "cash settled." An Index
Future that calls for physical delivery is a contract to buy an integral number
of units of the particular securities index at a specified future date at a
price agreed upon when the contract is made. A unit is the value from time to
time of the relevant index. While the Fund that purchases an Index Future that
calls for physical delivery is obligated to pay the face amount on the stated
date, such an Index Future may be closed out on that date or any earlier date by
selling an Index Future with
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the same face amount and contract date. This will terminate the Fund's position
and the Fund will realize a profit or a loss based on the difference between the
cost of purchasing the original Index Future and the price obtained from selling
the closing Index Future. The amount of the profit or loss is determined by the
change in the value of the relevant index while the Index Future was held.
For example, if the value of a unit of a particular index were $1,000, a
contract to purchase 500 units would be worth $500,000 (500 units x $1,000). The
Index Futures contract specifies that no delivery of the actual stocks making up
the index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the relevant index at the expiration
of the contract. For example, if the Fund enters into one futures contract to
buy 500 units of an index at a specified future date at a contract price of
$1,000 per unit and the index is at $1,010 on that future date, the Fund will
gain $5,000 (500 units x gain of $10).
Index Futures that are "cash settled" provide by their terms for settlement on a
net basis reflecting changes in the value of the underlying index. Thus, the
purchaser of such an Index Future is never obligated to pay the face amount of
the contract. The net payment obligation may in fact be very small in relation
to the face amount.
A Fund may close open positions on the futures exchange on which Index Futures
are then traded at any time up to and including the expiration day. All
positions which remain open at the close of the last business day of the
contract's life are required to settle on the next business day (based upon the
value of the relevant index on the expiration day) with settlement made, in the
case of Index Futures on the S&P 500, with the Commodities Clearing House.
Additional or different margin requirements as well as settlement procedures may
be applicable to foreign stock Index Futures at the time the Fund purchases
foreign stock Index Futures.
The price of Index Futures may not correlate perfectly with movement in the
relevant index due to certain market distortions. First, all participants in the
futures market are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
futures contracts through offsetting transactions which could distort the normal
relationship between the Index and futures markets. Secondly, the deposit
requirements in the futures market are less onerous than margin requirements in
the securities market, and as a result the futures market may attract more
speculators than does the securities market. Increased participation by
speculators in the futures market may also cause temporary price distortions. In
addition, trading hours for foreign stock Index Futures may not correspond
perfectly to hours of trading on the foreign exchange to which a particular
foreign stock Index Futures relates. This may result in a disparity between the
price of Index Futures and the value of the relevant index due to the lack of
continuous arbitrage between the Index Futures price and the value of the
underlying index.
OPTIONS ON FUTURES CONTRACTS. Options on futures contracts give the purchaser
the right in return for the premium paid to assume a position in a futures
contract at the specified option-exercise price at any time during the period of
the option. The Fund may use options on futures contracts in lieu of writing or
buying options directly on the underlying securities or purchasing
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and selling the underlying futures contracts. For example, to hedge against a
possible decrease in the value of its portfolio securities, the Fund may
purchase put options or write call options on futures contracts rather than
selling futures contracts. Similarly, the Fund may purchase call options or
write put options on futures contracts as a substitute for the purchase of
futures contracts to hedge against a possible increase in the price of
securities the Fund expects to purchase. Such options generally operate in the
same manner as options purchased or written directly on the underlying
investments. See "Foreign Currency Transactions" below for a description of the
Fund's use of options on currency futures.
RISK FACTORS IN FUTURES TRANSACTIONS. Investment in futures contracts involves
risk. If the futures are used for hedging, some of that risk may be caused by an
imperfect correlation between movements in the price of the futures contract and
the price of the security or currency being hedged. The correlation is higher
between price movements of futures contracts and the instrument underlying that
futures contract. The correlation is lower when futures are used to hedge
securities other than such underlying instrument, such as when a futures
contract on an index of securities is used to hedge a single security, a futures
contract on one security (e.g., U.S. Treasury bonds) is used to hedge a
different security (e.g., a mortgage-backed security) or when a futures contract
in one currency is used to hedge a security denominated in another currency. In
the event of an imperfect correlation between a futures position and a portfolio
position (or anticipated position) which is intended to be protected, the
desired protection may not be obtained and the Fund may be exposed to risk of
loss. In addition, it is not always possible to hedge fully or perfectly against
currency fluctuations affecting the value of the securities denominated in
foreign currencies because the value of such securities also is likely to
fluctuate as a result of independent factors not related to currency
fluctuations. The risk of imperfect correlation generally tends to diminish as
the maturity date of the futures contract approaches.
A hedge will not be fully effective where there is such imperfect correlation.
To compensate for imperfect correlations, the Fund may purchase or sell futures
contracts in a greater amount than the hedged securities if the volatility of
the hedged securities is historically greater than the volatility of the futures
contracts. Conversely, the Fund may purchase or sell fewer contracts if the
volatility of the price of the hedged securities is historically less than that
of the futures contract.
The Fund may also purchase futures contracts (or options thereon) as an
anticipatory hedge against a possible increase in the price of currency in which
is denominated the securities the Fund anticipates purchasing. In such
instances, it is possible that the currency may instead decline. If the Fund
does not then invest in such securities because of concern as to possible
further market and/or currency decline or for other reasons, the Fund may
realize a loss on the futures contract that is not offset by a reduction in the
price of the securities purchased.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by commodity exchanges
which limit the amount of fluctuation in a futures contract price during a
single trading day. Once the daily limit has been reached in the contract, no
trades may be entered into at a price beyond the limit, thus preventing the
liquidation of open futures positions. Prices have in the past exceeded the
daily limit on a number of consecutive trading days. Short positions in index
futures may be closed out only by
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entering into a futures contract purchase on the futures exchange on which the
index futures are traded.
The successful use of transactions in futures and related options for hedging
and risk management also depends on the ability of the Manager to forecast
correctly the direction and extent of exchange rate, interest rate and stock
price movements within a given time frame. For example, to the extent interest
rates remain stable during the period in which a futures contract or option is
held by the Fund investing in fixed income securities (or such rates move in a
direction opposite to that anticipated), the Fund may realize a loss on the
futures transaction which is not fully or partially offset by an increase in the
value of its portfolio securities. As a result, the Fund's total return for such
period may be less than if it had not engaged in the hedging transaction.
Unlike trading on domestic commodity exchanges, trading on foreign commodity
exchanges is not regulated by the CFTC and may be subject to greater risks than
trading on domestic exchanges. For example, some foreign exchanges may be
principal markets so that no common clearing facility exists and a trader may
look only to the broker for performance of the contract. In addition, unless the
Fund hedges against fluctuations in the exchange rate between the U.S. dollar
and the currencies in which trading is done on foreign exchanges, any profits
that the Fund might realize in trading could be eliminated by adverse changes in
the exchange rate, or the Fund could incur losses as a result of those changes.
USES OF OPTIONS, FUTURES AND OPTIONS ON FUTURES
RISK MANAGEMENT. When futures and options on futures are used for risk
management, the Fund will generally take long positions (e.g., purchase call
options, futures contracts or options thereon) in order to increase the Fund's
exposure to a particular market, market segment or foreign currency. Likewise,
if the Fund holds a portfolio of stocks with an average volatility (beta) lower
than that of the Fund's benchmark securities index as a whole (deemed to be
1.00), the Fund may purchase Index Futures to increase its average volatility to
1.00. In the case of futures and options on futures, the Fund is only required
to deposit the initial and variation margin as required by relevant CFTC
regulations and the rules of the contract markets. Because the Fund will then be
obligated to purchase the security or index at a set price on a future date, the
Fund's net asset value will fluctuate with the value of the security as if it
were already included in the Fund's portfolio. Risk management transactions have
the effect of providing a degree of investment leverage, particularly when the
Fund does not earmark assets equal to the face amount of the contract (i.e., in
cash settled futures contracts) since the futures contract (and related options)
will increase or decrease in value at a rate which is a multiple of the rate of
increase or decrease in the value of the initial and variation margin that the
Fund is required to deposit. As a result, the value of the Fund's portfolio will
generally be more volatile than the value of comparable portfolios which do not
engage in risk management transactions. The Fund will not, however, use futures
and options on futures to obtain greater volatility than it could obtain through
direct investment in securities; that is, the Fund will not normally engage in
risk management to increase the average volatility (beta) of that Fund's
portfolio above 1.00, the level of risk (as measured by volatility) that would
be present if the Fund were fully invested in the securities comprising the
relevant index. However, the Fund may invest in futures and options
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on futures without regard to this limitation if the face value of such
investments, when aggregated with the Index Futures, equity swaps and contracts
for differences as described below does not exceed 10% of the Fund's assets.
HEDGING. To the extent indicated elsewhere, the Fund may also enter into options
and futures contracts and buy and sell options on futures for hedging. For
example, if the Fund wants to hedge certain of its fixed income securities
against a decline in value resulting from a general increase in market rates of
interest, it might sell futures contracts with respect to fixed income
securities or indexes of fixed income securities. If the hedge is effective,
then should the anticipated change in market rates cause a decline in the value
of the Fund's fixed income security, the value of the futures contract should
increase. Likewise, the Fund may sell equity index futures if the Fund wants to
hedge its equity securities against a general decline in the relevant equity
market(s). The Fund may also use futures contracts in anticipatory hedge
transactions by taking a long position in a futures contract with respect to a
security, index or foreign currency that the Fund intends to purchase (or whose
value is expected to correlate closely with the security or currency to be
purchased) pending receipt of cash from other transactions to be used for the
actual purchase. Then if the cost of the security or foreign currency to be
purchased by the Fund increases and if the anticipatory hedge is effective, that
increased cost should be offset, at least in part, by the value of the futures
contract. Options on futures contracts may be used for hedging as well. For
example, if the value of a fixed-income security in the Fund's portfolio is
expected to decline as a result of an increase in rates, the Fund might purchase
put options or write call options on futures contracts rather than selling
futures contracts. Similarly, for anticipatory hedging, the Fund may purchase
call options or write put options as a substitute for the purchase of futures
contracts. See "Foreign Currency Transactions" below for more information
regarding the currency hedging practices of certain Funds.
INVESTMENT PURPOSES. To the extent indicated elsewhere, the Fund may also enter
into futures contracts and buy and sell options thereon for investment. For
example, the Fund may invest in futures when its Manager believes that there are
not enough attractive securities available to maintain the standards of
diversity and liquidity set for the Fund pending investment in such securities
if or when they do become available. Through this use of futures and related
options, the Fund may diversify risk in its portfolio without incurring the
substantial brokerage costs which may be associated with investment in the
securities of multiple issuers. This use may also permit the Fund to avoid
potential market and liquidity problems (e.g., driving up the price of a
security by purchasing additional shares of a portfolio security or owning so
much of a particular issuer's stock that the sale of such stock depresses that
stock's price) which may result from increases in positions already held by the
Fund.
When the Fund purchases futures contracts for investment, the Fund's custodian
will earmark and maintain cash, U.S. Government Securities or other liquid
securities in an amount which, together with the initial and variation margin
deposited on the futures contracts, is equal to the face value of the futures
contracts at all times while the futures contracts are held.
Incidental to other transactions in fixed income securities, for investment
purposes the Fund may also combine futures contracts or options on fixed income
securities with cash, cash equivalent
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investments or other fixed income securities in order to create "synthetic"
bonds which approximate desired risk and return profiles. This may be done where
a "non-synthetic" security having the desired risk/return profile either is
unavailable (e.g., short-term securities of certain foreign governments) or
possesses undesirable characteristics (e.g., interest payments on the security
would be subject to foreign withholding taxes). The Fund may also purchase
forward foreign exchange contracts in conjunction with U.S. dollar-denominated
securities in order to create a synthetic foreign currency denominated security
which approximates desired risk and return characteristics where the
non-synthetic securities either are not available in foreign markets or possess
undesirable characteristics. For greater detail, see "Foreign Currency
Transactions" below. When the Fund creates a "synthetic" bond with a futures
contract, the Fund's custodian will earmark and maintain cash, U.S. Government
Securities or other liquid securities with a value at least equal to the face
amount of the futures contract (less the amount of any initial or variation
margin on deposit).
SYNTHETIC SALES AND PURCHASES. Futures contracts may also be used to reduce
transaction costs associated with short-term restructuring of the Fund's
portfolio. For example, if the Fund's portfolio includes stocks of companies
with medium-sized equity capitalization and, in the opinion of the Manager, such
stocks are likely to underperform larger capitalization stocks, the Fund might
sell some or all of its mid-capitalization stocks, buy large capitalization
stocks with the proceeds and then, when the expected trend had played out, sell
the large capitalization stocks and repurchase the mid-capitalization stocks
with the proceeds. In the alternative, the Fund may use futures to achieve a
similar result with reduced transaction costs. In that case, the Fund might
simultaneously enter into short futures positions on an appropriate index (e.g.,
the S&P Mid Cap 400 Index) (to synthetically "sell" the stocks in the Fund) and
long futures positions on another index (e.g., the S&P 500) (to synthetically
"buy" the larger capitalization stocks). When the expected trend has played out,
the Fund would then close out both futures contract positions. The Fund will
only enter into these combined positions if (1) the short position (adjusted for
historic volatility) operates as a hedge of existing portfolio holdings, (2) the
face amount of the long futures position is less than or equal to the value of
the portfolio securities that the Fund would like to dispose of, (3) the
contract settlement date for the short futures position is approximately the
same as that for the long futures position and (4) the Fund's custodian earmarks
and maintains an amount of cash, U.S. Government Securities or other liquid
assets whose value, marked-to-market daily, is equal to the Fund's current
obligations in respect of the long futures contract positions. If the Fund uses
such combined short and long positions, in addition to possible declines in the
values of its investment securities, the Fund may also suffer losses associated
with a securities index underlying the long futures position underperforming the
securities index underlying the short futures position. However, the Manager
will enter into these combined positions only if the Manager expects that,
overall, the Fund will perform as if it had sold the securities hedged by the
short position and purchased the securities underlying the long position. The
Fund may also use swaps and options on futures to achieve the same objective.
Limitations on the Use of Options and Futures Portfolio Strategies. As noted
above, the Fund may use futures contracts and related options for hedging and,
in some circumstances, for risk management or investment but not for
speculation. Thus, except when used for risk management
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or investment, the Fund's long futures contract positions (less its short
positions) together with the Fund's cash (i.e., equity or fixed income)
positions will not exceed the Fund's total net assets.
The Fund's ability to engage in the options and futures strategies described
above will depend on the availability of liquid markets in such instruments.
Markets in options and futures with respect to currencies are relatively new and
still developing. It is impossible to predict the amount of trading interest
that may exist in various types of options or futures. Therefore no assurance
can be given that the Fund will be able to utilize these instruments effectively
for the purposes set forth above. Furthermore, the Fund's ability to engage in
options and futures transactions may be limited by tax considerations.
SWAP CONTRACTS AND OTHER TWO-PARTY CONTRACTS
The Fund may use swap contracts and other two-party contracts for the same or
similar purposes as they may use options, futures and related options.
SWAP CONTRACTS. Swap agreements are two-party contracts entered into primarily
by institutional investors for periods ranging from a few weeks to more than one
year. In a standard "swap" transaction, two parties agree to exchange returns
(or differentials in rates of return) calculated with respect to a "notional
amount," e.g., the return on or increase in value of a particular dollar amount
invested at a particular interest rate, in a particular foreign currency, or in
a "basket" of securities representing a particular index. The Fund will usually
enter into swaps on a net basis, i.e., the two returns are netted out, with the
Fund receiving or paying, as the case may be, only the net amount of the two
returns.
INTEREST RATE AND CURRENCY SWAP CONTRACTS. Interest rate swaps involve the
exchange of the two parties' respective commitments to pay or receive interest
on a notional principal amount (e.g. an exchange of floating rate payments for
fixed rate payments). Currency swaps involve the exchange of the two parties'
respective commitments to pay or receive fluctuations with respect to a notional
amount of two different currencies (e.g., an exchange of payments with respect
to fluctuations in the value of the U.S. dollar relative to the Japanese yen).
EQUITY SWAP CONTRACTS AND CONTRACTS FOR DIFFERENCES. Equity swap contracts
involve the exchange of one party's obligation to pay the loss, if any, with
respect to a notional amount of a particular equity index (e.g., the S&P 500
Index) plus interest on such notional amount at a designated rate (e.g., the
London Inter-Bank Offered Rate) in exchange for the other party's obligation to
pay the gain, if any, with respect to the notional amount of such index.
If the Fund enters into a long equity swap contract, the Fund's net asset value
will fluctuate as a result of changes in the value of the equity index on which
the equity swap is based as if it had purchased the notional amount of
securities comprising the index. The Fund will not use long equity swap
contracts to obtain greater volatility than it could obtain through direct
investment in securities; that is, the Fund will not normally enter into an
equity swap contract to increase the volatility (beta) of the Fund's portfolio
above 1.00, the volatility that would be present in the stocks comprising the
Fund's benchmark index. However, the Fund may invest in long equity swap
contracts without regard to this limitation if the notional amount of such
equity swap
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contracts, when aggregated with the Index Futures as described above and the
contracts for differences as described below, does not exceed 10% of the Fund's
net assets.
Contracts for differences are swap arrangements in which the Fund may agree with
a counterparty that its return (or loss) will be based on the relative
performance of two different groups or "baskets" of securities. As to one of the
baskets, the Fund's return is based on theoretical, long futures positions in
the securities comprising that basket (with an aggregate face value equal to the
notional amount of the contract for differences) and as to the other basket, the
Fund's return is based on theoretical short futures positions in the securities
comprising the basket. The Fund may also use actual long and short futures
positions to achieve the same market exposure(s) as contracts for differences
where payment obligations of the two legs of the contract are netted and thus
based on changes in the relative value of the baskets of securities rather than
on the aggregate change in the value of the two legs. The Fund will only enter
into contracts for differences (and analogous futures positions) when the
Manager believes that the basket of securities constituting the long leg will
outperform the basket constituting the short leg. However, it is possible that
the short basket will outperform the long basket -- resulting in a loss to the
Fund, even in circumstances when the securities in both the long and short
baskets appreciate in value.
Except for instances in which the Fund elects to obtain leverage up to the 10%
limitation mentioned above, the Fund's custodian will earmark and maintain cash,
U.S. Government Securities or other liquid securities in an amount equal to the
aggregate of net payment obligations on its swap contracts and contracts for
differences, marked to market daily.
The Fund may enter into swaps and contracts for differences for hedging,
investment and risk management. When using swaps for hedging, the Fund may enter
into an interest rate, currency or equity swap, as the case may be, on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities. For risk management or investment purposes the Fund
may also enter into a contract for differences in which the notional amount of
the theoretical long position is greater than the notional amount of the
theoretical short position. The Fund will not normally enter into a contract for
differences to increase the volatility (beta) of the Fund's portfolio above
1.00. However, the Fund may invest in contracts for differences without regard
to this limitation if the aggregate amount by which the theoretical long
positions of such contracts exceed the theoretical short positions of such
contracts, when aggregated with the Index Futures and equity swap contracts as
described above, does not exceed 10% of the Fund's net assets.
INTEREST RATE CAPS, FLOORS AND COLLARS. The Fund may use interest rate caps,
floors and collars for the same purposes or similar purposes as they use
interest rate futures contracts and related options. Interest rate caps, floors
and collars are similar to interest rate swap contracts because the payment
obligations are measured by changes in interest rates as applied to a notional
amount and because they are individually negotiated with a specific
counterparty. The purchase of an interest rate cap entitles the purchaser, to
the extent that a specific index exceeds a specified interest rate, to receive
payments of interest on a notional principal amount from the party selling the
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below specified interest
rates, to receive payments of
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interest on a notional principal amount from the party selling the interest rate
floor. The purchase of an interest rate collar entitles the purchaser, to the
extent that a specified index exceeds or falls below two specified interest
rates, to receive payments of interest on a notional principal amount from the
party selling the interest rate collar. Except when using such contracts for
risk management, the Fund's custodian will earmark and maintain cash, U.S.
Government Securities or other liquid securities in an amount at least equal to
its obligations, if any, under interest rate cap, floor and collar arrangements.
As with futures contracts, when the Fund uses notional amount contracts for risk
management it is only required to earmark and maintain on the custodian's books
and records assets equal to its net payment obligation, not the notional amount
of the contract. In those cases, the notional amount contract will have the
effect of providing a degree of investment leverage similar to the leverage
associated with non-earmarked futures contracts. The Fund's use of interest rate
caps, floors and collars for the same or similar purposes as those for which
they use futures contracts and related options presents the same risks and
similar opportunities as those associated with futures and related options.
Because caps, floors and collars are recent innovations for which standardized
documentation has not yet been developed they are deemed by the SEC to be
relatively illiquid investments which are subject to the Fund's limitation on
investment in illiquid securities. See "Illiquid Securities" below.
RISK FACTORS IN SWAP CONTRACTS, OTC OPTIONS AND OTHER TWO-PARTY CONTRACTS. The
Fund may only close out a swap, contract for differences, cap, floor or collar
or OTC option with the particular counterparty. Also, if the counterparty
defaults, the Fund will have contractual remedies pursuant to the agreement
related to the transaction, but there is no assurance that contract
counterparties will be able to meet their obligations pursuant to such contracts
or that, in the event of default, the Fund will succeed in pursuing contractual
remedies. The Fund thus assumes the risk that it may be delayed or prevented
from obtaining payments owed to it pursuant to swap contracts. The Manager will
closely monitor, subject to the oversight of the Trustees, the creditworthiness
of contract counterparties, and the Fund will not enter into any swaps, caps,
floors or collars, unless the unsecured senior debt or the claims-paying ability
of the other party thereto is rated at least A by Moody's Investors Service,
Inc. ("Moody's") or Standard & Poor's Rating Services, a division of The
McGraw-Hill Companies, Inc. ("Standard & Poor's") at the time of entering into
such transaction or if the counterparty has comparable credit as determined by
the Manager. However, the credit of the counterparty may be adversely affected
by larger-than-average volatility in the markets, even if the counterparty's net
market exposure is small relative to its capital. The management of caps,
floors, collars and swaps may involve certain difficulties because the
characteristics of many derivatives have not been observed under all market
conditions or through a full market cycle.
ADDITIONAL REGULATORY LIMITATIONS ON THE USE OF FUTURES AND RELATED OPTIONS,
INTEREST RATE FLOORS, CAPS AND COLLARS AND INTEREST RATE AND CURRENCY SWAP
CONTRACTS. In accordance with CFTC regulations, investments by the Fund in
futures contracts and related options for purposes other than bona fide hedging
are limited such that the aggregate amount that the Fund may commit to initial
margin on such contracts or time premiums on such options may not exceed 5% of
that Fund's net assets.
The Manager and the Trust do not believe that the Fund's respective obligations
under equity swap contracts, reverse equity swap contracts or Index Futures are
senior securities and,
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accordingly, the Fund will not treat them as being subject to its borrowing
restrictions. However, the net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each equity swap contract will
be accrued on a daily basis and an amount of cash, U.S. Government Securities or
other liquid obligations having an aggregate market value at least equal to the
accrued excess will be earmarked and maintained on the books and records of the
Fund's custodian. Likewise, when the Fund takes a short position with respect to
an Index Futures contract the position must be covered or the Fund's custodian
must earmark and maintain at all times while that position is held, cash, U.S.
Government Securities or other liquid obligations in an amount which, together
with the initial margin deposit on the futures contract, is equal to the current
delivery or cash settlement value.
If, for risk management purposes, the Fund uses futures contracts, related
written options, interest rate floors, caps and collars and interest rate and
currency swap contracts that have been earmarked on the books and records of the
Fund's custodian, the Fund's use of any or all of such practices is limited to
no more than 10% of the Fund's total net assets when aggregated with the Fund's
traditional borrowings in accordance with SEC pronouncements. This 10%
limitation applies to the face amount of futures contracts and related options
that are not earmarked and to the amount of the Fund's net payment obligation
that is not earmarked in the case of interest rate floors, caps and collars and
interest rate and currency swap contracts.
FOREIGN CURRENCY TRANSACTIONS
Foreign currency exchange rates may fluctuate significantly over short periods
of time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or perceived changes in interest rates and other complex
factors. Currency exchange rates also can be affected unpredictably by
intervention (or the failure to intervene) by U.S. or foreign governments or
central banks, or by currency controls or political developments in the U.S. or
abroad. For example, uncertainty surrounds the introduction of the "euro" (a
common currency unit for the European Union) which occurred in January 1999.
These and other currencies in which the Fund's assets are denominated may be
devalued against the U.S. dollar, resulting in a loss to the Fund.
The Fund is permitted to invest in securities denominated in foreign currencies
may buy or sell foreign currencies, deal in forward foreign currency contracts,
currency futures contracts and related options and options on currencies. The
Fund may use such currency instruments for hedging, investment or currency risk
management. Currency risk management may include taking active currency
positions relative to both the securities portfolio of the Fund and the Fund's
performance benchmark.
Forward foreign currency contracts are contracts between two parties to purchase
and sell a specific quantity of a particular currency at a specified price, with
delivery and settlement to take place on a specified future date. Currency
futures contracts are contracts to buy or sell a standard quantity of a
particular currency at a specified future date and price. Options on currency
futures contracts give their owner the right, but not the obligation, to buy (in
the case of a call option) or sell (in the case of a put option) a specified
currency futures contract at a fixed price during a
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specified period. Options on currencies give their owner the right, but not the
obligation, to buy (in the case of a call option) or sell (in the case of a put
option) a specified quantity of a particular currency at a fixed price during a
specified period.
The Fund may enter into forward contracts for hedging under three circumstances.
First, when the Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may desire to "lock in" the U.S.
dollar price of the security. By entering into a forward contract for the
purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transaction, the Fund will be able
to protect itself against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and the subject foreign currency during
the period between the date on which the security is purchased or sold and the
date on which payment is made or received.
Second, when the Manager of the Fund believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell, for a fixed amount of dollars, the amount
of foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. Maintaining a match
between the forward contract amounts and the value of the securities involved
will not generally be possible since the future value of such securities in
foreign currencies will change as a consequence of market movements in the value
of those securities between the date the forward contract is entered into and
the date it matures.
Third, the Fund may engage in currency "cross hedging" when, in the opinion of
the Manager, the historical relationship among foreign currencies suggests that
the Fund may achieve the same protection for a foreign security at reduced cost
through the use of a forward foreign currency contract relating to a currency
other than the U.S. dollar or the foreign currency in which the security is
denominated. By engaging in cross hedging transactions, the Fund assumes the
risk of imperfect correlation between the subject currencies. These practices
may present risks different from or in addition to the risks associated with
investments in foreign currencies.
The Fund is not required to enter into hedging transactions with regard to its
foreign currency-denominated securities and will not do so unless deemed
appropriate by the Manager. By entering into the above hedging transactions, the
Fund may be required to forego the benefits of advantageous changes in the
exchange rates.
The Fund may also enter into foreign currency forward contracts for investment
and currency risk management. When the Fund uses currency instruments for such
purposes, the foreign currency exposure of the Fund may differ substantially
from the currencies in which the Fund's investment securities are denominated.
However, the Fund's aggregate foreign currency exposure will not normally exceed
100% of the value of the Fund's securities, except that the Fund may use
currency instruments without regard to this limitation if the amount of such
excess, when aggregated with futures contracts, equity swap contracts and
contracts for differences used in similar ways, does not exceed 10% of the
Fund's net assets.
Except to the extent that the Fund may use such contracts for risk management,
whenever the Fund enters into a foreign currency forward contract, other than a
forward contract entered into
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for hedging, the Fund's custodian will earmark and maintain cash, U.S.
Government Securities or other liquid securities with a value, marked to market
daily, equal to the amount of the currency required to be delivered. The Fund's
ability to engage in forward contracts may be limited by tax considerations.
The Fund may use currency futures contracts and related options and options on
currencies for the same reasons for which it uses currency forwards. Except to
the extent that the Fund may use futures contracts and related options for risk
management, the Fund will, so long as it is obligated as the writer of a call
option on currency futures, own on a contract-for-contract basis an equal long
position in currency futures with the same delivery date or a call option on
currency futures with the difference, if any, between the market value of the
call written and the market value of the call or long currency futures purchased
and maintained by the Fund in cash or other liquid assets earmarked on the books
and records of the Fund's custodian. If at the close of business on any day the
market value of the call purchased by the Fund falls below 100% of the market
value of the call written by the Fund, the Fund's custodian will earmark and
maintain an amount of cash or other liquid assets equal in value to the
difference. Alternatively, the Fund may cover the call option by owning
securities denominated in the currency with a value equal to the face amount of
the contract(s) or through earmarking and maintaining with the custodian an
amount of the particular foreign currency equal to the amount of foreign
currency per futures contract option times the number of options written by the
Fund.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with banks and broker-dealers by
which the Fund acquires a security (usually an obligation of the Government
where the transaction is initiated or in whose currency the agreement is
denominated) for a relatively short period (usually not more than a week) for
cash and obtains a simultaneous commitment from the seller to repurchase the
security at an agreed-on price and date. The resale price is in excess of the
acquisition price and reflects an agreed-upon market rate unrelated to the
coupon rate on the purchased security. Such transactions afford an opportunity
for the Fund to earn a return on temporarily available cash at no market risk,
although there is a risk that the seller may default in its obligation to pay
the agreed-upon sum on the redelivery date. Such a default may subject the
relevant Fund to expenses, delays and risks of loss including: (a) possible
declines in the value of the underlying security during the period while the
Fund seeks to enforce its rights thereto, (b) possible reduced levels of income
and lack of access to income during this period and (c) inability to enforce
rights and the expenses involved in attempted enforcement.
TEMPORARY HIGH QUALITY CASH ITEMS
The Fund may temporarily invest a portion of their assets in cash or cash items
pending other investments or in connection with the earmarking and maintenance
of such assets on the custodian's books and records. These cash items must be of
high quality and may include a number of money market instruments such as
securities issued by the United States government and agencies thereof, bankers'
acceptances, commercial paper, and bank certificates of deposit. By investing
only in high quality money market securities the Fund may seek to minimize
credit risk with respect to such investments.
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U.S. GOVERNMENT SECURITIES AND FOREIGN GOVERNMENT SECURITIES
U.S. Government Securities include securities issued or guaranteed by the U.S.
government or its authorities, agencies or instrumentalities. Foreign Government
Securities include securities issued or guaranteed by foreign governments
(including political subdivisions) or their authorities, agencies or
instrumentalities or by supra-national agencies. U.S. Government Securities and
Foreign Government Securities have different kinds of government support. For
example, some U.S. Government Securities, such as U.S. Treasury bonds, are
supported by the full faith and credit of the United States, whereas certain
other U.S. Government Securities issued or guaranteed by federal agencies or
government-sponsored enterprises are not supported by the full faith and credit
of the United States. Similarly, some Foreign Government Securities are
supported by the full faith and credit of a foreign national government or
political subdivision and some are not. In the case of certain countries,
Foreign Government Securities may involve varying degrees of credit risk as a
result of financial or political inability of the Fund to enforce its rights
against the foreign government issuer.
Supra-national agencies are agencies whose member nations make capital
contributions to support the agencies' activities, and include such entities as
the International Bank for Reconstruction and Development (the World Bank), the
Asian Development Bank, the European Coal and Steel Community and the
Inter-American Development Bank.
Like other fixed income securities, U.S. Government Securities and Foreign
Government Securities are subject to market risk and their market values
fluctuate as interest rates change. Thus, for example, the value of an
investment in the Fund which holds U.S. Government Securities or Foreign
Government Securities may fall during times of rising interest rates. Yields on
U.S. Government Securities and Foreign Government Securities tend to be lower
than those of corporate securities of comparable maturities.
In addition to investing directly in U.S. Government Securities and Foreign
Government Securities, the Fund may purchase certificates of accrual or similar
instruments evidencing undivided ownership interests in interest payments or
principal payments, or both, in U.S. Government Securities and Foreign
Government Securities. These certificates of accrual and similar instruments may
be more volatile than other government securities.
MORTGAGE-BACKED AND OTHER ASSET-BACKED SECURITIES
Mortgage-backed and other asset-backed securities may be issued by the U.S.
government, its agencies or instrumentalities, or by non-governmental issuers.
Interest and principal payments (including prepayments) on the mortgages
underlying mortgage-backed securities are passed through to the holders of the
mortgage-backed securities. Prepayments occur when the mortgagor on an
individual mortgage prepays the remaining principal before the mortgage's
scheduled maturity date. As a result of the pass-through of prepayments of
principal on the underlying mortgages, mortgage-backed securities are often
subject to more rapid prepayment of principal than their stated maturity would
indicate. Because the prepayment characteristics of the underlying mortgages
vary, there can be no certainty as to the predicted yield or average life
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of a particular issue of pass-through certificates. Prepayments are important
because of their effect on the yield and price of the securities. During periods
of declining interest rates, such prepayments can be expected to accelerate and
the Fund would be required to reinvest the proceeds at the lower interest rates
then available. In addition, prepayments of mortgages which underlie securities
purchased at a premium could result in capital loss because the premium may not
have been fully amortized at the time the obligation was prepaid. As a result of
these principal prepayment features, the values of mortgage-backed securities
generally fall when interest rates rise, but their potential for capital
appreciation in periods of falling interest rates is limited because of the
prepayment feature. The mortgage-backed securities purchased by the Fund may
include Adjustable Rate Securities as such term is defined in "Adjustable Rate
Securities" below.
Other "asset-backed securities" include securities backed by pools of automobile
loans, educational loans and credit card receivables. Mortgage-backed and
asset-backed securities of non-governmental issuers involve prepayment risks
similar to those of U.S. government guaranteed mortgage-backed securities and
also involve risk of loss of principal if the obligors of the underlying
obligations default in payment of the obligations.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"): STRIPS AND RESIDUALS. A CMO is a
security backed by a portfolio of mortgages or mortgage-backed securities held
under an indenture. The issuer's obligation to make interest and principal
payments is secured by the underlying portfolio of mortgages or mortgage-backed
securities. CMOs are issued in multiple classes or series which have different
maturities representing interests in some or all of the interest or principal on
the underlying collateral or a combination thereof. CMOs of different classes
are generally retired in sequence as the underlying mortgage loans in the
mortgage pool are repaid. In the event of sufficient early prepayments on such
mortgages, the class or series of CMO first to mature generally will be retired
prior to its stated maturity. Thus, the early retirement of a particular class
or series of CMO held by the Fund would have the same effect as the prepayment
of mortgages underlying a mortgage-backed pass-through security.
CMOs include securities ("Residuals") representing the interest in any excess
cash flow and/or the value of any collateral remaining on mortgages or
mortgage-backed securities from the payment of principal of and interest on all
other CMOs and the administrative expenses of the issuer. Residuals have value
only to the extent income from such underlying mortgages or mortgage-backed
securities exceeds the amount necessary to satisfy the issuer's debt obligations
represented by all other outstanding CMOs.
CMOs also include certificates representing undivided interests in payments of
interest-only or principal-only ("IO/PO Strips") on the underlying mortgages.
IO/PO Strips and Residuals tend to be more volatile than other types of
securities. IO Strips and Residuals also involve the additional risk of loss of
a substantial portion of or the entire value of the investment if the underlying
securities are prepaid. In addition, if a CMO bears interest at an adjustable
rate, the cash flows on the related Residual will also be extremely sensitive to
the level of the index upon which the rate adjustments are based.
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ADJUSTABLE RATE SECURITIES
Adjustable rate securities are securities that have interest rates that are
reset at periodic intervals, usually by reference to some interest rate index or
market interest rate. They may be U.S. Government Securities or securities of
other issuers. Some adjustable rate securities are backed by pools of mortgage
loans. Although the rate adjustment feature may act as a buffer to reduce sharp
changes in the value of adjustable rate securities, these securities are still
subject to changes in value based on changes in market interest rates or changes
in the issuer's creditworthiness. Because the interest rate is reset only
periodically, changes in the interest rates on adjustable rate securities may
lag changes in prevailing market interest rates. Also, some adjustable rate
securities (or, in the case of securities backed by mortgage loans, the
underlying mortgages) are subject to caps or floors that limit the maximum
change in interest rate during a specified period or over the life of the
security. Because of the resetting of interest rates, adjustable rate securities
are less likely than non-adjustable rate securities of comparable quality and
maturity to increase significantly in value when market interest rates fall.
LOWER RATED SECURITIES
The Fund may invest some or all of its assets in securities rated below
investment grade (that is, rated below BBB by Standard & Poor's or below Baa by
Moody's) at the time of purchase, including securities in the lowest rating
categories, and comparable unrated securities ("Lower Rated Securities"). A Fund
will not necessarily dispose of a security when its rating is reduced below its
rating at the time of purchase, although the Manager will monitor the investment
to determine whether continued investment in the security will assist in meeting
the Fund's investment objective.
Lower Rated Securities generally provide higher yields, but are subject to
greater credit and market risk, than higher quality fixed income securities.
Lower Rated Securities are considered predominantly speculative with respect to
the ability of the issuer to meet principal and interest payments. Achievement
of the investment objective of the Fund investing in Lower Rated Securities may
be more dependent on the Manager's own credit analysis than is the case with
higher quality bonds. The market for Lower Rated Securities may be more severely
affected than some other financial markets by economic recession or substantial
interest rate increases, by changing public perceptions of this market or by
legislation that limits the ability of certain categories of financial
institutions to invest in these securities. In addition, the secondary market
may be less liquid for Lower Rated Securities. This reduced liquidity at certain
times may affect the values of these securities and may make the valuation and
sale or these securities more difficult. Securities of below investment grade
quality are commonly referred to as "junk bonds." Securities in the lowest
rating categories may be in poor standing or in default. Securities in the
lowest investment grade category (BBB or Baa) have some speculative
characteristics. See "Commercial Paper and Corporate Debt Ratings" below for
more information concerning commercial paper and corporate debt ratings.
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BRADY BONDS
Brady Bonds are securities created through the exchange of existing commercial
bank loans to public and private entities in certain emerging markets for new
bonds in connection with debt restructuring under a debt restructuring plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the
"Brady Plan"). Brady Plan debt restructurings have been implemented in Mexico,
Uruguay, Venezuela, Costa Rica, Argentina, Nigeria, the Philippines and other
countries.
Brady Bonds may be collateralized, are issued in various currencies (but
primarily the dollar) and are actively traded in over-the-counter secondary
markets. Dollar-denominated, collateralized Brady Bonds, which may be fixed-rate
bonds or floating-rate bonds, are generally collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds.
Brady Bonds are often viewed as having three or four valuation components: any
collateralized repayment of principal at final maturity; any collateralized
interest payments; the uncollateralized interest payments; and any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
ZERO COUPON SECURITIES
A Fund investing in "zero coupon" fixed income securities is required to accrue
interest income on these securities at a fixed rate based on the initial
purchase price and the length to maturity, but these securities do not pay
interest in cash on a current basis. The Fund is required to distribute the
income on these securities to its shareholders as the income accrues, even
though that Fund is not receiving the income in cash on a current basis. Thus,
the Fund may have to sell other investments to obtain cash to make income
distributions. The market value of zero coupon securities is often more volatile
than that of non-zero coupon fixed income securities of comparable quality and
maturity. Zero coupon securities include IO and PO strips.
INDEXED SECURITIES
Indexed Securities are securities the redemption values and/or the coupons of
which are indexed to the prices of a specific instrument or statistic. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity or coupon rate is determined by reference to other securities,
securities indexes, currencies, precious metals or other commodities, or other
financial indicators. Gold-indexed securities, for example, typically provide
for a maturity value that depends on the price of gold, resulting in a security
whose price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or
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<PAGE> 446
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
Indexed securities in which the Fund may invest include so-called "inverse
floating obligations" or "residual interest bonds" on which the interest rates
typically decline as short-term market interest rates increase and increase as
short-term market rates decline. Such securities have the effect of providing a
degree of investment leverage, since they will generally increase or decrease in
value in response to changes in market interest rates at a rate which is a
multiple of the rate at which fixed-rate long-term securities increase or
decrease in response to such changes. As a result, the market values of such
securities will generally be more volatile than the market values of fixed rate
securities.
The Fund may invest in fixed income securities (including convertible
securities) of any maturity. Fixed income securities include securities issued
by federal, state, local and foreign governments, and a wide range of private
issuers.
The Fund's investments in indexed securities may create taxable income in excess
of the cash they generate. In such cases, the Fund may be required to sell
assets to generate the cash necessary to distribute as dividends to its
shareholders all of its income and gains and therefore to eliminate any tax
liability at the Fund level. See "Distributions and Taxes in the Prospectus" and
"Distributions" and "Taxes" in this Statement of Additional Information.
FIRM COMMITMENTS
A firm commitment agreement is an agreement with a bank or broker-dealer for the
purchase of securities at an agreed-upon price on a specified future date. The
Fund may enter into firm commitment agreements with such banks and
broker-dealers with respect to any of the instruments eligible for purchase by
the Fund. The Fund will only enter into firm commitment arrangements with banks
and broker-dealers which the Manager determines present minimal credit risks.
The Fund's custodian will earmark and maintain cash, U.S. Government Securities
or other liquid securities in an amount equal to the Fund's obligations under
firm commitment agreements.
LOANS, LOAN PARTICIPATIONS AND ASSIGNMENTS
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The Fund may invest in direct debt instruments which are interests in amounts
owed by a corporate, governmental, or other borrower to lenders or lending
syndicates (loans and loan participations), to suppliers of goods or services
(trade claims or other receivables), or to other parties. Direct debt
instruments are subject to the Fund's policies regarding the quality of debt
securities.
Purchasers of loans and other forms of direct indebtedness depend primarily upon
the creditworthiness of the borrower for payment of principal and interest.
Direct debt instruments may not be rated by any nationally recognized rating
agency and yield could be adversely affected. Loans that are fully secured offer
the Fund more protections than an unsecured loan in the event of non-payment of
scheduled interest or principal. However, there is no assurance that the
liquidation of collateral from a secured loan would satisfy the borrower's
obligation or that the collateral can be liquidated. Indebtedness of borrowers
whose creditworthiness is poor involves substantially greater risks, and may be
highly speculative. Borrowers that are in bankruptcy or restructuring may never
pay off their indebtedness, or may pay only a small fraction of the amount owed.
Direct indebtedness of emerging countries will also involve a risk that the
governmental entities responsible for repayment of the debt may be unable, or
unwilling, to pay interest and repay principal when due.
When investing in a loan participation, the Fund will typically have the right
to receive payments only from the lender to the extent the lender receives
payments from the borrower, and not from the borrower itself. Likewise, the Fund
typically will be able to enforce its rights only through the lender, and not
directly against the borrower. As a result, the Fund will assume the credit risk
of both the borrower and the lender that is selling the participation.
Investments in loans through direct assignment of a financial institution's
interests with respect to a loan may involve additional risks to the Fund. For
example, if a loan is foreclosed, the Fund could become part owner of any
collateral, and would bear the costs and liabilities associated with owning and
disposing of the collateral. In addition, it is conceivable that under emerging
legal theories of lender liability, the Fund could be held liable as a
co-lender. In the case of a loan participation, direct debt instruments may also
involve a risk of insolvency of the lending bank or other intermediary. Direct
debt instruments that are not in the form of securities may offer less legal
protection to the Fund in the event of fraud or misrepresentation. In the
absence of definitive regulatory guidance, the Fund may rely on the Manager's
research to attempt to avoid situations where fraud or misrepresentation could
adversely affect the Fund.
A loan is often administered by a bank or other financial institution that acts
as agent for all holders. The agent administers the terms of the loan, as
specified in the loan agreement. Unless, under the terms of the loan or other
indebtedness, the Fund has direct recourse against the borrower, it may have to
rely on the agent to apply appropriate credit remedies against a borrower.
Direct indebtedness purchased by the Fund may include letters of credit,
revolving credit facilities, or other standby financing commitments obligating
the Fund to pay additional cash on demand. These commitments may have the effect
of requiring the Fund to increase its investment in a borrower at a time when it
would not otherwise have done so. The Fund's
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custodian will earmark and maintain appropriate liquid assets to cover the
Fund's potential obligations under standby financing commitments.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS
The Fund may enter into reverse repurchase agreements and dollar roll agreements
with banks and brokers to enhance return. Reverse repurchase agreements involve
sales by the Fund of portfolio assets concurrently with an agreement by the Fund
to repurchase the same assets at a later date at a fixed price. During the
reverse repurchase agreement period, the Fund continues to receive principal and
interest payments on these securities and also has the opportunity to earn a
return on the collateral furnished by the counterparty to secure its obligation
to redeliver the securities.
Dollar rolls are transactions in which the Fund sells securities for delivery in
the current month and simultaneously contracts to repurchase substantially
similar (same type and coupon) securities on a specified future date. During the
roll period, the Fund forgoes principal and interest paid on the securities. The
Fund is compensated by the difference between the current sales price and the
forward price for the future purchase (often referred to as the "drop") as well
as by the interest earned on the cash proceeds of the initial sale.
The Fund which makes such investments will earmark and maintain on its
custodian's books and records cash, U.S. Government Securities or other liquid
assets equal in value to its obligations in respect of reverse repurchase
agreements and dollar rolls. Reverse repurchase agreements and dollar rolls
involve the risk that the market value of the securities retained by the Fund
may decline below the price of the securities the Fund has sold but is obligated
to repurchase under the agreement. In the event the buyer of securities under a
reverse repurchase agreement or dollar roll files for bankruptcy or becomes
insolvent, the Fund's use of the proceeds of the agreement may be restricted
pending a determination by the other party or its trustee or receiver whether to
enforce the Fund's obligation to repurchase the securities. Reverse repurchase
agreements and dollar rolls are not considered borrowings by the Fund for
purposes of the Fund's fundamental investment restriction with respect to
borrowings.
ILLIQUID SECURITIES
The Fund may purchase "illiquid securities," i.e., securities which may not be
sold or disposed of in the ordinary course of business within seven days at
approximately the value at which the Fund has valued the investment, which
include securities whose disposition is restricted by securities laws, so long
as no more than 15% of net assets would be invested in such illiquid securities.
The Fund currently intends to invest in accordance with the SEC staff view that
repurchase agreements maturing in more than seven days are illiquid securities.
It is possible that certain over-the-counter options and securities serving as
cover for over-the-counter options may be deemed, under certain circumstances,
to be illiquid securities. While the Trust does not agree with this view, it
will operate in accordance with any relevant formal guidelines adopted by the
SEC.
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In addition, the SEC staff may, under certain circumstances, consider equity
swap contracts, caps, floors and collars to be illiquid securities.
Consequently, to the extent the SEC staff maintains this position, the Fund will
not enter into an equity swap contract or a reverse equity swap contract or
purchase a cap, floor or collar if, as a result of the investment, the total
value (i.e., marked-to-market value) of such investments (without regard to
their notional amount) together with that of all other illiquid securities which
the Fund owns would exceed 15% (or, in the case of the Foreign Fund only, 10%)
of the Fund's net assets.
INVESTMENT RESTRICTIONS
Fundamental Restrictions:
Without a vote of the majority of the outstanding voting securities of the Fund,
the Trust will not take any of the following actions with respect to the Fund as
indicated:
(1) Borrow money except under the following circumstances: (i) The Fund may
borrow money from banks so long as after such a transaction, the total assets
(including the amount borrowed) less liabilities other than debt obligations,
represent at least 300% of outstanding debt obligations; (ii) the Fund may also
borrow amounts equal to an additional 5% of its total assets without regard to
the foregoing limitation for temporary purposes, such as for the clearance and
settlement of portfolio transactions and to meet shareholder redemption
requests; (iii) The Fund may enter into transactions that are technically
borrowings under the 1940 Act because they involve the sale of a security
coupled with an agreement to repurchase that security (e.g., reverse repurchase
agreements, dollar rolls and other similar investment techniques) without regard
to the asset coverage restriction described in (i) above, so long as and to the
extent that the Fund's custodian earmarks and maintains cash and/or high grade
debt securities equal in value to its obligations in respect of these
transactions. Under current pronouncements of the SEC staff, such transactions
are not treated as senior securities so long as and to the extent that the
Fund's custodian earmarks and maintains liquid assets, such as cash, U.S.
Government Securities or other appropriate assets equal in value to its
obligations in respect of these transactions.
(2) Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of purchases and sales of securities. (For this
purpose, the deposit or payment of initial or variation margin in connection
with futures contracts or related options transactions is not considered the
purchase of a security on margin.)
(3) Make short sales of securities or maintain a short position for the Fund's
account unless at all times when a short position is open the Fund owns an equal
amount of such securities or owns securities which, without payment of any
further consideration, are convertible into or exchangeable for securities of
the same issue as, and equal in amount to, the securities sold short.
(4) Underwrite securities issued by other persons except to the extent that, in
connection with the disposition of its portfolio investments, it may be deemed
to be an underwriter under federal securities laws.
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(5) Purchase or sell real estate, although it may purchase securities of issuers
which deal in real estate, including securities of real estate investment
trusts, and may purchase securities which are secured by interests in real
estate.
(6) Make loans, except by purchase of debt obligations or by entering into
repurchase agreements or through the lending of the Fund's portfolio securities.
Loans of portfolio securities may be made with respect to up to 100% of the
Fund's total assets.
(7) Invest in securities of any issuer if, to the knowledge of the Trust,
officers and Trustees of the Trust and officers and members of Grantham, Mayo,
Van Otterloo & Co. LLC (the "Manager") who beneficially own more than 1/2 of 1%
of the securities of that issuer together beneficially own more than 5%.
(8) Concentrate more than 25% of the value of its total assets in any one
industry.
(9) Purchase or sell commodities or commodity contracts, except that the Fund
may purchase and sell financial futures contracts and options thereon.
(10) Issue senior securities, as defined in the 1940 Act and as amplified by
rules, regulations and pronouncements of the SEC. The SEC has concluded that
even though reverse repurchase agreements, firm commitment agreements and
standby commitment agreements fall within the functional meaning of the term
"evidence of indebtedness," the issue of compliance with Section 18 of the 1940
Act will not be raised with the SEC by the Division of Investment Management if
the Fund covers such securities by earmarking and maintaining certain assets on
the books and records of the Fund's custodian. Similarly, so long as such
earmarked assets are maintained, the issue of compliance with Section 18 will
not be raised with respect to any of the following: any swap contract or
contract for differences; any pledge or encumbrance of assets permitted by
Non-Fundamental Restriction (4) below; any borrowing permitted by Fundamental
Restriction (1) above; any collateral arrangements with respect to initial and
variation margin permitted by Non-Fundamental Restriction (4) below; and the
purchase or sale of options, forward contracts, futures contracts or options on
futures contracts.
Non-Fundamental Restrictions:
It is contrary to the present policy of the Fund, which may be changed by the
Trustee without shareholder approval, to:
(1) Buy or sell oil, gas or other mineral leases, rights or royalty contracts.
(2) Make investments for the purpose of gaining control of a company's
management.
(3) Invest more than 15% of net assets in illiquid securities. The securities
currently thought to be included as "illiquid securities" are restricted
securities under the Federal securities laws (including illiquid securities
traded under Rule 144A), repurchase agreements and securities that are not
readily marketable. To the extent the Trustees determine that restricted
securities traded
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under Section 4(2) or Rule 144A under the Securities Act of 1933 are in fact
liquid, they will not be included in the 15% limit on investment in illiquid
securities.
(4) Pledge, hypothecate, mortgage or otherwise encumber its assets in excess of
33 1/3% of the Fund's total assets (taken at cost). (For the purposes of this
restriction, collateral arrangements with respect to swap agreements, the
writing of options, stock index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with respect to initial
and variation margin are not deemed to be a pledge or other encumbrance of
assets. The deposit of securities or cash or cash equivalents in escrow in
connection with the writing of covered call or put options, respectively, is not
deemed to be a pledge or encumbrance.)
Except as indicated above in Fundamental Restriction (1), all percentage
limitations on investments set forth herein and in the Prospectus will apply at
the time of the making of an investment and shall not be considered violated
unless an excess or deficiency occurs or exists immediately after and as a
result of such investment.
The phrase "shareholder approval," as used in the Prospectus and in this
Statement of Additional Information, and the phrase "vote of a majority of the
outstanding voting securities," as used herein with respect to the Fund, means
the affirmative vote of the lesser of (1) more than 50% of the outstanding
shares of the Fund, or (2) 67% or more of the shares of that Fund present at a
meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy. Except for policies that are explicitly described
as fundamental in the Prospectus or this Statement of Additional Information,
the investment policies of the Fund (including all policies, restrictions and
limitations set forth in the "Investment Guidelines") may be changed by the
Trust's Trustees without the approval of shareholders.
MANAGEMENT OF THE TRUST
Subject to the provisions of the GMO Declaration of Trust, the business of
the GMO Trust (the "Trust"), an open-end management investment company, shall be
managed by the Trustees, and they shall have all powers necessary or convenient
to carry out that responsibility including the power to engage in securities
transactions of all kinds on behalf of the Trust. Without limiting the
foregoing, the Trustees may: adopt By-Laws not inconsistent with the Declaration
of Trust providing for the regulation and management of the affairs of the Trust
and may amend and repeal them to the extent that such By-Laws do not reserve
that right to the Shareholders; fill vacancies in or remove from their number
(including any vacancies created by an increase in the number of Trustees);
remove from their number with or without cause; elect and remove such officers
and appoint and terminate such agents as they consider appropriate; appoint from
their own number and terminate one or more committees consisting of two or more
Trustees which may exercise the powers and authority of the Trustees to the
extent that the Trustees determine; employ one or more custodians of the assets
of the Trust and authorize such custodians to employ subcustodians and to
deposit all or any part of such assets in a system or systems for the central
handling of securities or with a Federal Reserve Bank; retain a transfer agent
or a shareholder servicing agent, or both; provide for the distribution of
Shares by the Trust, through one or more principal underwriters or otherwise;
set record dates for the determination of Shareholders with respect to
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various matters; and in general delegate such authority as they consider
desirable to any officer of the Trust, to any committee of the Trustees and to
any agent or employee of the Trust or to any such custodian or underwriter.
The Trustees and officers of the Trust and their principal occupations
during the past five years are as follows:
R. JEREMY GRANTHAM* (D.O.B. 10/6/38). President-Quantitative and Chairman
of the Trustees of the Trust. Member, Grantham, Mayo, Van Otterloo & Co.
LLC.
JAY O. LIGHT (D.O.B. 10/3/41). Trustee of the Trust. Professor of Business
Administration, Harvard University; Senior Associate Dean, Harvard
University (1988-1992).
EYK DEL MOL VAN OTTERLOO (D.O.B. 2/27/37). President-International of the
Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC.
RICHARD MAYO (D.O.B. 6/18/42). President-U.S. Active of the Trust. Member,
Grantham, Mayo, Van Otterloo & Co. LLC.
SUSAN RANDALL HARBERT (D.O.B. 4/25/57). Chief Financial Officer and
Treasurer of the Trust. Member, Grantham, Mayo, Van Otterloo & Co. LLC.
WILLIAM R. ROYER, ESQ. (D.O.B. 7/20/65). Vice President of the Trust.
General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
ROBERT V. BROKAW, JR. (D.O.B. 10/7/43). Secretary of the Trust. Member,
Grantham, Mayo, Van Otterloo & Co. LLC. Research Analyst, GMO Renewable
Resources LLC (July 1999 -- present).
SCOTT ESTON (D.O.B. 1/20/56). Vice President of the Trust. Chief Financial
Officer, Member, Grantham, Mayo, Van Otterloo & Co. LLC (September 1997 -
present). Senior Partner, Coopers & Lybrand (1987 - 1997).
ANNE STETSON (D.O.B. 8/7/62) Vice President of the Trust. Associate General
Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (May 1998-present). Legal
Counsel, Fidelity Investments (January 1995 - April 1998).
ELAINE M. HARTNETT, ESQ. (D.O.B. 2/18/45). Vice President and Clerk of the
Trust. Associate General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC
(June 1999 - present). Associate/Junior Partner, Hale and Dorr LLP, Boston,
Massachusetts (1991 - 1999).
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BRENT ARVIDSON (D.O.B. 6/26/69). Assistant Treasurer of the Trust. Senior
Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 1997
- present). Senior Financial Reporting Analyst, John Hancock Funds (August
1996 - September 1997). Account Supervisor/Senior Account Specialist,
Investors Bank and Company (June 1993 - August 1996).
*Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo,
Van Otterloo & Co. LLC ("GMO" or the "Manager"), as defined by the 1940 Act.
The mailing address of each of the officers and Trustees is c/o GMO Trust,
40 Rowes Wharf, Boston, Massachusetts 02110. As of June 6, 2000, the Trustees
and officers of the Trust as a group owned less than 1% of the outstanding
shares of each class of shares of the Fund.
Except as stated above, the principal occupations of the officers and
Trustees for the last five years have been with the employers as shown above,
although in some cases they have held different positions with such employers.
Other than as set forth in the table below, no Trustee or officer of the
Trust receives any direct compensation from the Trust or any series thereof:
<TABLE>
<CAPTION>
NAME OF PERSON, TOTAL ANNUAL COMPENSATION
POSITION FROM THE TRUST
--------------- --------------------------
<S> <C>
Harvey R. Margolis, Trustee(1) $80,000
Jay O. Light, Trustee $80,000
</TABLE>
Messrs. Grantham, Mayo, Van Otterloo, Brokaw and Eston, and Ms. Harbert, as
members of the Manager, will benefit from the management fees paid by the Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
MANAGEMENT CONTRACTS
As disclosed in the Prospectus under the heading "Management of the Trust,"
under a Management Contract (the "Management Contract") between the Trust and
the Manager, subject to such policies as the Trustees of the Trust may
determine, the Manager will furnish continuously an investment program for the
Fund and will make investment decisions on behalf of the Fund and place all
orders for the purchase and sale of portfolio securities. Subject to the control
of the Trustees, the Manager also manages, supervises and conducts the other
affairs and business of the Trust, furnishes office space and equipment,
provides bookkeeping and certain clerical services and pays all salaries, fees
and expenses of officers and Trustees of the Trust who are affiliated with the
Manager. As indicated under "Portfolio Transactions--Brokerage and Research
Services," the Trust's portfolio transactions may be placed with broker-dealers
who
--------
(1) Mr. Margolis served as a Trustee of the Trust until his death in June
2000.
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furnish the Manager, at no cost, certain research, statistical and quotation
services of value to the Manager in advising the Trust or its other clients.
As is disclosed in the Prospectus, the Manager has contractually agreed to
reimburse the Fund with respect to certain Fund expenses through June 30, 2001
to the extent that the Fund's total annual operating expenses (excluding
Shareholder Service Fees, brokerage commissions and other investment-related
costs, hedging transaction fees, extraordinary, non-recurring and certain other
unusual expenses (including taxes), securities lending fees and expenses and
transfer taxes.
The Management Contract provides that the Manager shall not be subject to
any liability in connection with the performance of its services thereunder in
the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
The Management Contract was approved by the Trustees of the Trust
(including a majority of the Trustees who were not "interested persons" of the
Manager) and by the relevant Fund's sole shareholder in connection with the
organization of the Trust and the establishment of the Fund. The Management
Contract will continue in effect for a period more than two years from the date
of its execution only so long as its continuance is approved at least annually
by (i) the vote, cast in person at a meeting called for that purpose, of a
majority of those Trustees who are not "interested persons" of the Manager or
the Trust, and by (ii) the majority vote of either the full Board of Trustees or
the vote of a majority of the outstanding shares of the relevant Fund. The
Management Contract automatically terminates on assignment, and is terminable on
not more than 60 days' notice by the Trust to the Manager. In addition, the
Management Contract may be terminated on not more than 60 days' written notice
by the Manager to the Trust.
The Management Fee is calculated based on a fixed percentage of the Fund's
average daily net assets. In the last three fiscal years the Fundamental Value
Fund has paid the following amounts as Management Fees to the Manager pursuant
to the relevant Management Contract:
<TABLE>
<CAPTION>
Gross Reduction Net
----- --------- ---
<S> <C> <C> <C>
Year ended 2/29/00 $ 183,059 $ 32,911 $ 150,148
Year ended 2/28/99 $ 742,814 $ 207,233 $ 535,581
Year ended 2/28/98 $1,425,989 $ 381,705 $1,044,284
</TABLE>
Each of the Trust and the Manager has adopted a Code of Ethics pursuant to
the requirement of the 1940 Act. Under the Code of Ethics, personnel are only
permitted to engage in personal securities transactions in accordance with
certain conditions relating to such persons' position, the identity of the
security, the timing of the transaction and similar factors. Transactions in
securities that may be held by the Fund are permitted, subject to compliance
with applicable provisions of the Code. Personal securities transactions must be
reported quarterly and broker confirmations of such transactions must be
provided for review.
-33-
<PAGE> 455
CUSTODIAL ARRANGEMENTS. Investors Bank & Trust Company ("IBT"), 200
Clarendon Street, Boston, Massachusetts 02116 serves as the Funds's custodian.
As such, IBT holds in safekeeping certificated securities and cash belonging to
the Fund and, in such capacity, is the registered owner of securities in
book-entry form belonging to the Fund. Upon instruction, IBT receives and
delivers cash and securities of the Fund in connection with Fund transactions
and collects all dividends and other distributions made with respect to Fund
portfolio securities. IBT also maintains certain accounts and records of the
Trust and calculates the total net asset value, total net income and net asset
value per share of the Fund on a daily basis.
SHAREHOLDER SERVICE ARRANGEMENTS. As disclosed in the Prospectus, pursuant
to the terms of a single Servicing Agreement with the Fund, GMO provides direct
client service, maintenance and reporting to shareholders of the Fund. The
Servicing Agreement was approved by the Trustees of the Trust (including a
majority of the Trustees who are not "interested persons" of the Manager or the
Trust). The Servicing Agreement will continue in effect for a period of more
than one year from the date of its execution only so long as its continuance is
approved at least annually by (i) the vote, cast in person at a meeting called
for the purpose, of a majority of those Trustees who are not "interested
persons" of the Manager or the Trust, and (ii) the majority vote of the full
Board of Trustees. The Servicing Agreement automatically terminates on
assignment (except as specifically provided in the Servicing Agreement) and is
terminable by either party upon not more than 60 days' written notice to the
other party.
The Trust entered into the Servicing Agreement with GMO on May 30, 1996.
Pursuant to the terms of the Servicing Agreement, in the last three fiscal years
the Fund paid GMO the amounts set forth in the table that follows:
<TABLE>
<CAPTION>
March 1, 1997 March 1, 1998 March 1, 1999
Through Through Through
February 28, 1998 February 28, 1999 February 29, 2000
----------------- ----------------- -----------------
<S> <C> <C>
$284,344 $148,563 $45,765
</TABLE>
INDEPENDENT ACCOUNTANTS. The Trust's independent accountants are
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110.
PricewaterhouseCoopers LLP conducts annual audits of the Trust's financial
statements, assists in the preparation of the Fund's federal and state income
tax returns, consults with the Trust as to matters of accounting and federal and
state income taxation and provides assistance in connection with the preparation
of various Securities and Exchange Commission filings.
DISTRIBUTOR. Funds Distributor, Inc. ("FDI"), 60 State Street, Boston,
Massachusetts 02109, serves as the Trust's distributor on behalf of the Fund.
GMO has undertaken to reimburse the Trust for any fees that the Trust is
obligated to pay FDI.
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<PAGE> 456
PORTFOLIO TRANSACTIONS
The purchase and sale of portfolio securities for the Fund and for the
other investment advisory clients of the Manager are made by the Manager with a
view to achieving their respective investment objectives. For example, a
particular security may be bought or sold for certain clients of the Manager
even though it could have been bought or sold for other clients at the same
time. Likewise, a particular security may be bought for one or more clients when
one or more other clients are selling the security. In some instances,
therefore, one client may indirectly sell a particular security to another
client. It also happens that two or more clients may simultaneously buy or sell
the same security, in which event purchases or sales are effected on a pro rata,
rotating or other equitable basis so as to avoid any one account being preferred
over any other account.
Transactions involving the issuance of Fund shares for securities or assets
other than cash will be limited to a bona fide reorganization or statutory
merger and to other acquisitions of portfolio securities that meet all of the
following conditions: (a) such securities meet the investment objectives and
policies of the Fund; (b) such securities are acquired for investment and not
for resale; (c) such securities are liquid securities which are not restricted
as to transfer either by law or liquidity of market; and (d) such securities
have a value which is readily ascertainable as evidenced by a listing on the
American Stock Exchange, the New York Stock Exchange, NASDAQ or a recognized
foreign exchange.
BROKERAGE AND RESEARCH SERVICES. In placing orders for the portfolio
transactions of the Fund, the Manager will seek the best price and execution
available, except to the extent it may be permitted to pay higher brokerage
commissions for brokerage and research services as described below. The
determination of what may constitute best price and execution by a broker-dealer
in effecting a securities transaction involves a number of considerations,
including, without limitation, the overall net economic result to the Fund
(involving price paid or received and any commissions and other costs paid), the
efficiency with which the transaction is effected, the ability to effect the
transaction at all where a large block is involved, availability of the broker
to stand ready to execute possibly difficult transactions in the future and the
financial strength and stability of the broker. Because of such factors, a
broker-dealer effecting a transaction may be paid a commission higher than that
charged by another broker-dealer. Most of the foregoing are subjective
considerations.
Over-the-counter transactions often involve dealers acting for their own
account. It is the Manager's policy to place over-the-counter market orders for
the Fund with primary market makers unless better prices or executions are
available elsewhere.
Although the Manager does not consider the receipt of research services as
a factor in selecting brokers to effect portfolio transactions for the Fund, the
Manager will receive such services from brokers who are expected to handle a
substantial amount of the Fund's portfolio transactions. Research services may
include a wide variety of analyses, reviews and reports on
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<PAGE> 457
such matters as economic and political developments, industries, companies,
securities and portfolio strategy. The Manager uses such research in servicing
other clients as well as the Fund.
As permitted by Section 28(e) of the Securities Exchange Act of 1934 and
subject to such policies as the Trustees of the Trust may determine, the Manager
may pay an unaffiliated broker or dealer that provides "brokerage and research
services" (as defined in the Act) to the Manager an amount of commission for
effecting a portfolio investment transaction in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction.
During the three most recent fiscal years, the Trust paid, on behalf of the
Fundamental Value Fund, the following amounts in brokerage commissions:
<TABLE>
<CAPTION>
March 1, 1997 March 1, 1998 March 1, 1999
Through Through Through
February 28, 1998 February 28, 1999 February 29, 2000
----------------- ----------------- -----------------
<S> <C> <C>
$441,587 $205,843 $141,776
</TABLE>
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Fund will be determined on each day
the New York Stock Exchange (the "Exchange") is open for regular business as of
the close of regular trading on the Exchange, generally 4:00 p.m. New York City
time. However, equity options held by the Fund are priced as of the close of
trading at 4:10 p.m., and futures contracts on U.S. government and other
fixed-income securities and index options held by the Fund are priced as of
their close of trading at 4:15 p.m. Events affecting the values of foreign
securities may occur between the earlier closings of foreign exchanges and
securities markets and the closing of the New York Stock Exchange which will not
be reflected in the computation of the Fund's net asset value. Please refer to
"Determination of Net Asset Value" in the Prospectus for additional information.
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES
The Trust is organized as a Massachusetts business trust under the laws of
Massachusetts by an Agreement and Declaration of Trust ("Declaration of Trust")
dated June 24, 1985. A copy of the Declaration of Trust is on file with the
Secretary of The Commonwealth of Massachusetts. The fiscal year for the Fund
ends on February 28/29.
Pursuant to the Declaration of Trust, the Trustees have currently
authorized the issuance of an unlimited number of full and fractional shares of
thirty-nine series: U.S. Core Fund; Tobacco-Free Core Fund; Value Fund; Growth
Fund; U.S. Sector Fund; Small Cap Value Fund; Small Cap Growth Fund; Fundamental
Value Fund; REIT Fund; International Core Fund; Currency Hedged International
Core Fund; Foreign Fund; International Small Companies Fund; Japan Fund;
Emerging Markets Fund; Evolving Countries Fund; Domestic Bond Fund; U.S.
Bond/Global Alpha A Fund; U.S. Bond/Global Alpha B Fund; International Bond
Fund; Currency Hedged International Bond Fund; Global Bond Fund; Emerging
Country Debt Fund;
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<PAGE> 458
Short-Term Income Fund; Global Hedged Equity Fund; Inflation Indexed Bond Fund;
International Equity Allocation Fund; World Equity Allocation Fund; Global
(U.S.+) Equity Allocation Fund; Global Balanced Allocation Fund; Emerging
Country Debt Share Fund; Pelican Fund; Asia Fund; Tax-Managed U.S. Equities
Fund; Tax-Managed International Equities Fund; Tax-Managed Small Companies
Fund; International Core Plus Allocation Fund; Intrinsic Value Fund and Alpha
LIBOR Fund. Interests in each portfolio (Fund) are represented by shares of the
corresponding series. Each share of each series represents an equal
proportionate interest, together with each other share, in the corresponding
Fund. The shares of such series do not have any preemptive rights. Upon
liquidation of the Fund, shareholders of the corresponding series are entitled
to share pro rata in the net assets of the Fund available for distribution to
shareholders. The Declaration of Trust also permits the Trustees to charge
shareholders directly for custodial and transfer agency expenses, but there is
no present intention to make such charges.
The Declaration of Trust also permits the Trustees, without shareholder
approval, to subdivide any series of shares into various sub-series or classes
of shares with such dividend preferences and other rights as the Trustees may
designate. This power is intended to allow the Trustees to provide for an
equitable allocation of the impact of any future regulatory requirements which
might affect various classes of shareholders differently. The Trustees have
currently authorized the establishment and designation of up to eight classes of
shares for each series of the Trust (except for the Pelican Fund): Class I
Shares, Class II Shares, Class III Shares, Class IV Shares, Class V Shares,
Class VI Shares, Class VII Shares and Class VIII Shares.
The Trustees may also, without shareholder approval, establish one or more
additional separate portfolios for investments in the Trust or merge two or more
existing portfolios (i.e., a new fund). Shareholders' investments in such a
portfolio would be evidenced by a separate series of shares.
The Declaration of Trust provides for the perpetual existence of the Trust.
The Trust, however, may be terminated at any time by vote of at least two-thirds
of the outstanding shares of the Trust. While the Declaration of Trust further
provides that the Trustees may also terminate the Trust upon written notice to
the shareholders, the 1940 Act requires that the Trust receive the authorization
of a majority of its outstanding shares in order to change the nature of its
business so as to cease to be an investment company.
On June 1, 2000, Spelman College and Spelman College - FVAF each held
greater than 25% of the outstanding shares of the Fund. As a result, such
shareholders may be deemed to "control" the Fund as such term is defined in the
1940 Act.
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<PAGE> 459
Shareholders could, under certain circumstances, be held personally liable
for the obligations of the Trust. However, the risk of a shareholder incurring
financial loss on account of that liability is considered remote since it may
arise only in very limited circumstances.
VOTING RIGHTS
Shareholders are entitled to one vote for each full share held (with
fractional votes for fractional shares held) and will vote (to the extent
provided herein) in the election of Trustees and the termination of the Trust
and on other matters submitted to the vote of shareholders. Shareholders vote by
individual Fund on all matters except (i) when required by the Investment
Company Act of 1940, shares shall be voted in the aggregate and not by
individual Fund, and (ii) when the Trustees have determined that the matter
affects only the interests of one or more Funds, then only shareholders of such
affected Funds shall be entitled to vote thereon. Shareholders of one Fund shall
not be entitled to vote on matters exclusively affecting another Fund, such
matters including, without limitation, the adoption of or change in the
investment objectives, policies or restrictions of the other Fund and the
approval of the investment advisory contracts of the other Fund. Shareholders of
a particular class of shares do not have separate class voting rights except
with respect to matters that affect only that class of shares and as otherwise
required by law.
There will normally be no meetings of shareholders for the purpose of
electing Trustees except that in accordance with the 1940 Act (i) the Trust will
hold a shareholders' meeting for the election of Trustees at such time as less
than a majority of the Trustees holding office have been elected by
shareholders, and (ii) if, as a result of a vacancy in the Board of Trustees,
less than two-thirds of the Trustees holding office have been elected by the
shareholders, that vacancy may only be filled by a vote of the shareholders. In
addition, Trustees may be removed from office by a written consent signed by the
holders of two-thirds of the outstanding shares and filed with the Trust's
custodian or by a vote of the holders of two-thirds of the outstanding shares at
a meeting duly called for the purpose, which meeting shall be held upon the
written request of the holders of not less than 10% of the outstanding shares.
Upon written request by the holders of at least 1% of the outstanding shares
stating that such shareholders wish to communicate with the other shareholders
for the purpose of obtaining the signatures necessary to demand a meeting to
consider removal of a Trustee, the Trust has undertaken to provide a list of
shareholders or to disseminate appropriate materials (at the expense of the
requesting shareholders). Except as set forth above, the Trustees shall continue
to hold office and may appoint successor Trustees. Voting rights are not
cumulative.
No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the Trust except (i)
to change the Trust's name or to cure technical problems in the Declaration of
Trust and (ii) to establish, designate or modify new and existing series or
sub-series of Trust shares or other provisions relating to Trust shares in
response to applicable laws or regulations.
SHAREHOLDER AND TRUSTEE LIABILITY
<PAGE> 460
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims shareholder liability for acts or obligations of
the Trust and requires that notice of such disclaimer be given in each
agreement, obligation, or instrument entered into or executed by the Trust or
the Trustees. The Declaration of Trust provides for indemnification out of all
the property of the relevant Fund for all loss and expense of any shareholder of
that Fund held personally liable for the obligations of the Trust. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is considered remote since it is limited to circumstances in which the
disclaimer is inoperative and the Fund of which he is or was a shareholder would
be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing in
the Declaration of Trust protects a Trustee against any liability to which the
Trustee would otherwise be subject to by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office. The By-Laws of the Trust provide for indemnification by
the Trust of the Trustees and the officers of the Trust except with respect to
any matter as to which any such person did not act in good faith in the
reasonable belief that his action was in or not opposed to the best interests of
the Trust. Such person may not be indemnified against any liability to the Trust
or the Trust shareholders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
BENEFICIAL OWNERS OF 5% OR MORE OF THE FUND'S SHARES
The following chart sets forth the names, addresses and percentage
ownership of those shareholders owning beneficially 5% or more of the
outstanding Class III Shares of the Fundamental Value Fund as of June 1, 2000:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Name Address % Ownership
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Spelman College Attn: Mahesh Mehrota 50.73%
350 Spelman Lane SW
Box 589
Atlanta, GA 30314-4399
------------------------------------------------------------------------------------------------------------------
Spelman College - FVAF Attn: Mahesh Mehrota 49.27%
350 Spelman Lane SW
Box 589
Atlanta, GA 30314-4399
------------------------------------------------------------------------------------------------------------------
</TABLE>
DISTRIBUTIONS
The Prospectus describes the distribution policies of the Fund under the
heading "Distributions and Taxes". It is the policy of the Fund in all cases to
pay its shareholders, as dividends, substantially all net investment income and
to distribute annually all net realized capital gains, if any, after offsetting
any capital loss carryovers. For distribution and federal income tax purposes, a
portion of the premiums from certain expired call or put options written
-39-
<PAGE> 461
by the Fund, net gains from certain closing purchase and sale transactions with
respect to such options and a portion of net gains from other options and
futures transactions are treated as short-term capital gain (I.E., gain from the
sale of securities held for 12 months or less). It is the policy of the Fund to
make distributions at least annually, sufficient to avoid the imposition of a
nondeductible 4% excise tax on certain undistributed amounts of taxable
investment income and capital gains.
TAXES
TAX STATUS AND TAXATION OF THE FUND
The Fund is treated as a separate taxable entity for federal income tax
purposes. The Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). In order to qualify for the special tax treatment accorded regulated
investment companies and their shareholders, the Fund must, among other things:
(a) derive at least 90% of its gross income from dividends, interest, payments
with respect to certain securities loans, and gains from the sale of stock,
securities and foreign currencies, or other income (including but not
limited to gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities, or
currencies;
(b) distribute with respect to each taxable year at least 90% of the sum of its
taxable net investment income, its net tax-exempt income, and the excess,
if any, of net short-term capital gains over net long-term capital losses
for such year; and
(c) diversify its holdings so that at the end of each fiscal quarter, (i) at
least 50% of the market value of the Fund's assets is represented by cash
and cash items, U.S. Government Securities, securities of other regulated
investment companies, and other securities limited in respect of any one
issuer to a value not greater than 5% of the value of the Fund's total net
assets and to not more than 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its assets is
invested in the securities (other than those of the U.S. Government or
other regulated investment companies) of any one issuer or of two or more
issuers which the Fund controls and which are engaged in the same, similar,
or related trades or businesses.
If the Fund qualifies as a regulated investment company that is accorded
special tax treatment, the Fund will not be subject to federal income tax on
income paid to its shareholders in the form of dividends (including capital gain
dividends).
If the Fund fails to distribute in a calendar year substantially all of its
ordinary income for such year and substantially all of its capital gain net
income for the one-year period ending October 31 (or later if the Fund is
permitted so to elect and so elects), plus any retained amount from the prior
year, then the Fund will be subject to a 4% excise tax on the undistributed
amounts. A dividend paid to shareholders by the Fund in January of a year
generally is deemed to have been paid by the Fund on December 31 of the
preceding year if the dividend was
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<PAGE> 462
declared and payable to shareholders of record on a date in October, November or
December of that preceding year. The Fund intends generally to make
distributions sufficient to avoid imposition of the 4% excise tax, although the
Fund reserves the right to pay an excise tax rather than make an additional
distribution when circumstances warrant (e.g., payment of excise tax amounts
deemed by the Fund to be de minimus).
TAXATION OF FUND DISTRIBUTIONS AND SALES OF FUND SHARES
Fund distributions derived from interest, dividends and certain other
income, including in general short-term capital gains, will be taxable as
ordinary income to shareholders subject to federal income tax whether received
in cash or reinvested in shares. Properly designated Fund distributions derived
from net long-term capital gains (i.e., net gains derived from the sale of
securities held for more than 12 months) will generally be taxable as such
(generally at a 20% rate for noncorporate shareholders), regardless of how long
a shareholder has held the shares in the Fund.
Dividends and distributions on the Fund's shares are generally subject to
federal income tax as described herein to the extent they do not exceed the
Fund's realized income and gains, even though such dividends and distributions
may economically represent a return of a particular shareholder's investment.
Such distributions are likely to occur in respect of shares purchased at a time
when the Fund's net asset value reflects gains that are either unrealized, or
realized but not distributed.
The sale, exchange or redemption of Fund shares may give rise to a gain or
loss. In general, any gain or loss realized upon a taxable disposition of shares
will be treated as long-term capital gains if the shares have been held for more
than 12 months and as short-term capital gains if the shares have been held for
not more than 12 months.
Any loss realized upon a taxable disposition of shares held for six months
or less will be treated as long-term capital loss to the extent of any long-term
capital gain distributions received by a shareholder with respect to those
shares. All or a portion of any loss realized upon a taxable disposition of Fund
shares will be disallowed if other shares of the same Fund are purchased within
30 days before or after the disposition. In such a case, the basis of the newly
purchased shares will be adjusted to reflect the disallowed loss.
A distribution paid to shareholders by the Fund in January of a year
generally is deemed to have been received by shareholders on December 31 of the
preceding year, if the distribution was declared and payable to shareholders of
record on a date in October, November or December of that preceding year. The
Trust will provide federal tax information annually, including information about
dividends and distributions paid during the preceding year to taxable investors
and others requesting such information.
If the Fund makes a distribution to you in excess of its current and
accumulated "earnings and profits" in any taxable year, the excess distribution
will be treated as a return of capital to the extent of your tax basis in your
shares, and thereafter as capital gain. A return of capital is not
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<PAGE> 463
taxable, but it reduces your tax basis in your shares, thus reducing any loss or
increasing any gain on a subsequent taxable disposition by you of your shares.
For corporate shareholders, the dividends-received deduction will generally
apply (subject to a holding period requirement imposed by the Code) to the
Fund's dividends paid from investment income to the extent derived from
dividends received from U.S. corporations. However, any distributions received
by the Fund from REITs will not qualify for the corporate dividends-received
deduction. A Fund's investments in REIT equity securities may require such Fund
to accrue and distribute income not yet received. In order to generate
sufficient cash to make the requisite distributions, the Fund may be required to
sell securities in its portfolio that it otherwise would have continued to hold
(including when it is not advantageous to do so). A Fund's investments in REIT
equity securities may at other times result in the Fund's receipt of cash in
excess of the REIT's earnings; if the Fund distributes such amounts, such
distribution could constitute a return of capital to Fund shareholders for
federal income tax purposes.
The backup withholding rules do not apply to certain exempt entities
(including corporations and tax-exempt organizations) so long as each such
entity furnishes the Trust with an appropriate certification. However, other
shareholders are subject to backup withholding at a rate of 31% on all
distributions of net investment income and capital gain, whether received in
cash or reinvested in shares of the Fund, and on the amount of the proceeds of
any redemption of Fund shares, where such distributions or redemption proceeds
are paid or credited to any shareholder account for which an incorrect or no
taxpayer identification number has been provided, where appropriate
certification has not been provided for a foreign shareholder, or where the
Trust is notified that the shareholder has underreported income in the past (or
the shareholder fails to certify that he is not subject to such withholding). A
"taxpayer identification number" is either the Social Security number or
employer identification number of the record owner of the account.
WITHHOLDING ON DISTRIBUTIONS TO FOREIGN INVESTORS
Dividend distributions (including distributions derived from short-term
capital gains) are in general subject to a U.S. withholding tax of 30% when paid
to a nonresident alien individual, foreign estate or trust, a foreign
corporation, or a foreign partnership ("foreign shareholder"). Persons who are
resident in a country, such as the U.K., that has an income tax treaty with the
U.S. may be eligible for a reduced withholding rate (upon filing of appropriate
forms), and are urged to consult their tax advisors regarding the applicability
and effect of such a treaty. Distributions of net realized long-term capital
gains paid by the Fund to a foreign shareholder, and any gain realized upon the
sale of Fund shares by such a shareholder, will ordinarily not be subject to
U.S. taxation, unless the recipient or seller is a nonresident alien individual
who is present in the United States for more than 182 days during the taxable
year. However, such distributions and sale proceeds may be subject to backup
withholding, unless the foreign investor certifies his non-U.S. residency
status. Foreign investors are subject to the backup withholding rules described
above. Any tax withheld as a result of backup withholding does not constitute an
additional tax imposed on the record owner of the account, and may be claimed as
a credit on the record owner's Federal income tax return. Also, foreign
shareholders with respect to whom income from the Fund is "effectively
connected" with a U.S. trade or business carried on by such
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<PAGE> 464
shareholder will in general be subject to U.S. federal income tax on the income
derived from the Fund at the graduated rates applicable to U.S. citizens,
residents or domestic corporations, whether such income is received in cash or
reinvested in shares, and, in the case of a foreign corporation, may also be
subject to a branch profits tax. Again, foreign shareholders who are resident in
a country with an income tax treaty with the United States may obtain different
tax results, and are urged to consult their tax advisors.
FOREIGN TAX CREDITS
If, at the end of the fiscal year, more than 50% of the value of the total
assets of the Fund is represented by stock or securities of foreign
corporations, the Fund intends to make an election with respect to the relevant
Fund which allows shareholders whose income from the Fund is subject to U.S.
taxation at the graduated rates applicable to U.S. citizens, residents or
domestic corporations to claim a foreign tax credit or deduction (but not both)
on their U.S. income tax return. In such case, the amounts of foreign income
taxes paid by the Fund would be treated as additional income to Fund
shareholders from non-U.S. sources and as foreign taxes paid by Fund
shareholders. Investors should consult their tax advisors for further
information relating to the foreign tax credit and deduction, which are subject
to certain restrictions and limitations (including a holding period requirement
applied at both the Fund and shareholder level imposed by the Code).
Shareholders of the Fund whose income from the Fund is not subject to U.S.
taxation at the graduated rates applicable to U.S. citizens, residents or
domestic corporations may receive substantially different tax treatment of
distributions by the relevant Fund, and may be disadvantaged as a result of the
election described in this paragraph.
TAX IMPLICATIONS OF CERTAIN INVESTMENTS
Certain of the Fund's investments, including assets "marked to the market"
for federal income tax purposes, debt obligations issued or purchased at a
discount and potentially so-called "index securities" (including inflation
indexed bonds), will create taxable income in excess of the cash they generate.
In such cases, the Fund may be required to sell assets (including when it is not
advantageous to do so) to generate the cash necessary to distribute as dividends
to its shareholders all of its income and gains and therefore to eliminate any
tax liability at the Fund level.
The Fund's transactions in options, futures contracts, hedging
transactions, forward contracts, straddles and foreign currencies may accelerate
income, defer losses, cause adjustments in the holding periods of the Fund's
securities and convert long-term capital gains into short-term capital gains and
short-term capital losses into long-term capital losses. These transactions may
affect the amount, timing and character of distributions to shareholders.
Investment by the Fund in certain passive foreign investment companies
("PFICs") could subject the Fund to a U.S. federal income tax (including
interest charges) on distributions received from the company or on proceeds
received from the disposition of shares in the company, which tax cannot be
eliminated by making distributions to Fund shareholders. However, the Fund may
elect to treat a passive foreign investment company as a "qualified electing
fund," in which case the Fund will be required to include its share of the
company's
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<PAGE> 465
income and net capital gain annually, regardless of whether it receives any
distribution from the company. The Fund also may make an election to mark the
gains (and to a limited extent losses) in such holdings "to the market" as
though it had sold and repurchased its holdings in those PFICs on the last day
of the Fund's taxable year. Such gains and losses are treated as ordinary income
and loss. The QEF and mark-to-market elections may have the effect of
accelerating the recognition of income (without the receipt of cash) and
increasing the amount required to be distributed for the Fund to avoid taxation.
Making either of these elections therefore may require the Fund to liquidate
other investments (including when it is not advantageous to do so) to meet its
distribution requirement, which also may accelerate the recognition of gain and
affect the Fund's total return.
A PFIC is any foreign corporation in which (i) 75% or more of the income
for the taxable year is passive income, or (ii) the average percentage of the
assets (generally by value, but by adjusted tax basis in certain cases) that
produce or are held for the production of passive income is at least 50%.
Generally, passive income for this purpose means dividends, interest (including
income equivalent to interest), royalties, rents, annuities, the excess of gains
over losses from certain property transactions and commodities transactions, and
foreign currency gains. Passive income for this purpose does not include rents
and royalties received by the foreign corporation from active business and
certain income received from related persons.
LOSS OF REGULATED INVESTMENT COMPANY STATUS
The Fund may experience particular difficulty qualifying as a regulated
investment company in the case of highly unusual market movements, in the case
of high redemption levels and/or during the first year of its operations. If the
Fund does not qualify for taxation as a regulated investment company for any
taxable year, the Fund's income will be taxed at the Fund level at regular
corporate rates, and all distributions from earnings and profits, including
distributions of net long-term capital gains, will be taxable to shareholders as
ordinary income and subject to withholding in the case of non-U.S. shareholders.
In addition, in order to requalify for taxation as a regulated investment
company that is accorded special tax treatment, the Fund may be required to
recognize unrealized gains, pay substantial taxes and interest on such gains,
and make certain substantial distributions.
PERFORMANCE INFORMATION
The Fund may from time to time include its total return in advertisements
or in information furnished to present or prospective shareholders.
Quotations of average annual total return for the Fund will be expressed in
terms of the average annual compounded rate of return of a hypothetical
investment in the Fund or class over periods of one, three, five, and ten years
(or for such shorter or longer periods as shares of the Fund have been offered),
calculated pursuant to the following formula: P (1 + T)n = ERV (where P = a
hypothetical initial payment of $10,000, T = the average annual total return, n
= the number of years, and ERV = the ending redeemable value of a hypothetical
$10,000 payment made at the beginning of the period). Except as noted below, all
total return figures reflect the
-44-
<PAGE> 466
deduction of a proportional share of Fund expenses on an annual basis, and
assume that (i) the maximum purchase premium is deducted from the initial
$10,000 payment, (ii) all dividends and distributions are reinvested when paid
and (iii) the maximum redemption fee is charged at the end of the relevant
period. Quotations of total return may also be shown for other periods. The
Funds may also, with respect to certain periods of less than one year, provide
total return information for that period that is unannualized. Any such
information would be accompanied by standardized total return information.
The table below sets forth the average annual total return for Class III
Shares of the Fund for the one, three, five and ten year periods ending February
29, 2000 and for the period from the commencement of the Fund's operations until
February 29, 2000:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
SINCE
INCEPTION DATE 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION
(%) (%) (%) (%) (%)
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
10/31/91 32.96 21.04 22.55 N/A 19.40
---------------------------------------------------------------------------------------------------------
</TABLE>
The Fund may also from time to time advertise net return and gross return
data for each month and calendar quarter since the Fund's inception. Monthly and
quarterly return data is calculated by linking daily performance for the Fund
(current net asset value divided by prior net asset value), and assumes
reinvestment of all dividends and gains. Monthly and quarterly performance data
does not reflect payment of any applicable purchase premiums or redemption fees.
All quotations of monthly and quarterly returns would be accompanied by
standardized total return information. Information relating to the Fund's return
for a particular month or calendar quarter is provided to permit evaluation of
the Fund's performance and volatility in different market conditions, and should
not be considered in isolation.
From time to time, in advertisements, in sales literature, or in reports to
shareholders, the Fund may compare its respective performance to that of other
mutual funds with similar investment objectives and to stock or other relevant
indices. For example, the Fund may compare its total return to rankings prepared
by Lipper Analytical Services, Inc. or Morningstar, Inc., widely recognized
independent services that monitor mutual fund performance; the Standard & Poor's
500 Stock Index ("S&P 500"), an index of unmanaged groups of common stock; or
the Dow Jones Industrial Average, a recognized unmanaged index of common stocks
of 30 industrial companies listed on the New York Stock Exchange.
Performance rankings and listings reported in national financial
publications, such as MONEY MAGAZINE, BARRON'S and CHANGING TIMES, may also be
cited (if the Fund is listed in any such publication) or used for comparison, as
well as performance listings and rankings from various other sources including
NO LOAD FUND X, CDA Investment Technologies, Inc., Weisenberger Investment
Companies Service, and DONOGHUE'S MUTUAL FUND ALMANAC.
Quotations of the Fund's gross return do not reflect any reduction for any
Fund fees or expenses unless otherwise noted; if the gross return data reflected
the estimated fees and expenses of the Fund, the returns would be lower than
those shown. Quotations of gross return
-45-
<PAGE> 467
for the Fund for a particular month or quarter will be calculated in accordance
with the following formula:
Gross Return =
Net Return + (Total Annual Operating Expense Ratio) (# of days in relevant
period/365)
COMMERCIAL PAPER AND CORPORATE DEBT RATINGS
COMMERCIAL PAPER RATINGS
Commercial paper ratings of Standard & Poor's are current assessments of the
likelihood of timely payment of debts having original maturities of no more than
365 days. Commercial paper rated A-1 by Standard & Poor's indicates that the
degree of safety regarding timely payment is either overwhelming or very strong.
Those issues determined to possess overwhelming safety characteristics are
denoted A-1+. Commercial paper rated A-2 by Standard & Poor's indicates that
capacity for timely payment on issues is strong. However, the relative degree of
safety is not as high as for issues designated A-1. Commercial paper rated A-3
indicates capacity for timely payment. It is, however, somewhat more vulnerable
to the adverse effects of changes in circumstances than obligations carrying the
higher designations.
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated Prime-1 (or related supporting institutions) are considered to
have a superior capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics of Prime-1 rated issuers, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variations. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained. Issuers rated Prime-3 have an acceptable capacity for repayment of
short-term promissory obligations. The effect of industry characteristics and
market composition may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection measurements
and the requirement of relatively high financial leverage. Adequate alternative
liquidity is maintained.
CORPORATE DEBT RATINGS
Standard & Poor's. A Standard & Poor's corporate debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. The following is a summary of the ratings used by Standard & Poor's
for corporate debt:
AAA -- This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
-46-
<PAGE> 468
AA -- Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay interest and repay principal is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC -- Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C -- The rating C is reserved for income bonds on which no interest is being
paid.
D -- Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Moody's. The following is a summary of the ratings used by Moody's for corporate
debt:
Aaa -- Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large, or by an exceptionally
stable, margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds that are rated Aa are judged to be high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment sometime in the future.
-47-
<PAGE> 469
Baa -- Bonds that are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often, the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Should no rating be assigned by Moody's, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.
3. There is lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1 and B1.
-48-
<PAGE> 470
INVESTMENT GUIDELINES
--------------------------------------------------------------------------------
GMO FUNDAMENTAL VALUE FUND
--------------------------------------------------------------------------------
ANY NUMERICAL OR PERCENTAGE LIMITATION SET FORTH IN THIS DOCUMENT WILL BE
APPLIED ONLY AT THE TIME OF INITIAL INVESTMENT IN A SECURITY OR OTHER
INVESTMENT. THE FUND DOES NOT UNDERTAKE TO ADJUST ITS PORTFOLIO IN THE CASE
WHERE MARKET MOVEMENTS, CASH FLOWS OR OTHER FACTORS CAUSE ANY OF SUCH
LIMITATIONS TO BE EXCEEDED. EXCEPT AS OTHERWISE INDICATED, NUMERICAL AND
PERCENTAGE LIMITATIONS ARE EXPRESSED AS A PERCENTAGE OF THE FUND'S TOTAL ASSETS.
<TABLE>
<CAPTION>
PERMITTED INVESTMENTS
<S> <C>
EQUITY SECURITIES: - At least 65% of the Fund's total assets will be invested in
common stocks common stocks and securities convertible into common stocks.
convertible securities
- The Fund may invest up to 15% of its assets in securities of
OTHER EQUITY SECURITIES: foreign issuers and securities traded principally outside of the
depository receipts (ADRs, GDRs, EDRs) United States. The Fund's investments in foreign securities will
illiquid securities generally consist of equity securities traded in principal European
144A securities and Pacific Basin markets.
restricted securities
futures contracts and related options - The Fund's portfolio will not normally include more than 30
(including index futures on domestic issuers. Each issuer will generally be limited to 10% or less of
indexes) the Fund's total assets.
exchange-traded and OTC options on
(including writing covered options)
equity swap contracts
contracts for differences
repurchase agreements
warrants
investment companies (open & closed end)
CASH AND MONEY MARKET INSTRUMENTS
Any short-term assets will be invested in
cash or high quality money market
instruments including securities issued by the
U.S. government and agencies thereof,
bankers' acceptances, commercial paper,
bank certificates of deposit and repurchase
agreements
PROHIBITED INVESTMENTS AND PRACTICES
The Fund will NOT engage in the following practices except as indicated:
PURCHASING SECURITIES ON MARGIN - Except for short-term credits necessary for clearance of
transactions
BORROWING MONEY - Except that the Fund may temporarily borrow up to 20% of its net assets
from banks for the payment of redemptions or settlement of securities
transactions, but not as a leveraged investment strategy
UNDERWRITING SECURITIES - Except to the extent that the Fund is deemed an underwriter for
securities law purposes in connection with disposition of
portfolio investments
MAKING LOANS - Except that purchasing debt obligations, repurchase agreements and
engaging in securities lending will not be considered making loans for this
purpose. The Fund may loan securities valued at up to one-third of its
total assets.
</TABLE>
-49-
<PAGE> 471
<TABLE>
<CAPTION>
<S> <C>
PLEDGING, HYPOTHECATING OR - Except that collateral arrangements with respect to swap agreements, the
MORTGAGING FUND ASSETS writing of options, stock index, interest rate, currency or other futures
contracts, options on futures contracts and collateral arrangements with
respect to initial and variation margin are not deemed to be a pledge or
other encumbrance of assets. The deposit of securities or cash or cash
equivalents in escrow in connection with the writing of covered call or put
options, respectively is also not deemed to be a pledge or encumbrance.
INVESTING IN REAL ESTATE
INVESTING IN NON-FINANCIAL COMMODITY CONTRACTS -
PARTICIPATING IN DIRECTED BROKERAGE ARRANGEMENTS
MAKING INVESTMENTS FOR THE PURPOSE OF GAINING CONTROL OF A COMPANY'S MANAGEMENT
MAKING SHORT SALES OF SECURITIES
RESTRICTIONS AND LIMITATIONS
OPTIONS ON SECURITIES - No more than 5% of the Fund's net assets will be invested in
time premiums on options on particular securities (as opposed to
options on indexes)
OTHER INVESTMENT COMPANIES - The Fund will not own more than 3% of the outstanding voting securities
of any investment company.
- No more than 5% of the Fund's net assets will be invested in any single
investment company.
- No more than 10% of the Fund's net assets will be invested in securities of
investment companies in the aggregate.
ILLIQUID SECURITIES - No more than 15% of the Fund's net assets will be invested in
illiquid securities.
INVESTMENT IN INSURANCE COMPANIES - The Fund will not purchase more than 10% of the total outstanding voting
stock of any insurance company (including foreign insurance companies).
INVESTMENT IN SECURITIES ISSUED BY - EQUITY: The Fund will not purchase more than 5% of any class of
BROKERS, DEALERS, UNDERWRITERS AND stock of a broker, dealer, underwriter or investment adviser.
INVESTMENT ADVISERS
- DEBT: The Fund may not purchase more than 10% of any such company's
total outstanding debt in the aggregate.
- INVESTMENT LIMITS: No more than 5% of the Fund's total assets will be
invested in the securities of a SINGLE broker, dealer, underwriter or
investment adviser. The net payment obligation of swap contracts where one
of these types of companies is the counterparty also counts for purposes
of this restriction.
This policy does not apply to companies that derived less than 15% of
revenues from "securities-related businesses" during the most recent fiscal
year.
DIVERSIFICATION/CONCENTRATION
DIVERSIFICATION - The Fund has elected to be treated as a non-diversified company under the
Investment Company Act of 1940.
CONCENTRATION - The Fund will not invest more than 25% of its total assets in securities of
issuers in any one industry.
DERIVATIVE INSTRUMENTS
</TABLE>
-50-
<PAGE> 472
<TABLE>
<CAPTION>
<S> <C>
TYPES OF DERIVATIVES - Options, futures contracts and related options on securities indexes.
USES OF DERIVATIVES
HEDGING - TRADITIONAL HEDGING: Short equity futures and related options
contracts used to hedge against an equity risk already generally
present in the Fund.
- ANTICIPATORY HEDGING: If the Fund receives or anticipates
significant cash purchase transactions, the Fund may hedge market
risk (risk of not being invested in the market) by purchasing long
futures contracts to obtain market exposure until such time as
direct investments can be made efficiently. Conversely, if the
Fund receives or anticipates a significant demand for cash
redemptions, the Fund may sell futures contracts to allow the Fund
to dispose of securities in a more orderly fashion without the Fund
being exposed to leveraged loss exposure in the interim.
INVESTMENT - The Fund may use derivative instruments (particularly long futures contracts
and related options) in place of investing directly in securities. This will
include using equity derivatives to "equitize" cash balances held by the Fund.
LIMITATIONS ON THE USE OF DERIVATIVES - There is no limit on the use of derivatives for hedging purposes.
- When long futures contracts are used for investment, the Fund will maintain
an amount of cash or liquid securities equal to the face value of all such
long derivative positions.
- Except when such instruments are used for bona-fide hedging, no more than
5% of the Fund's net assets will be committed to initial margin on futures
contracts and time premiums on related options.
- Counterparties used for OTC derivatives must have a long-term debt rating of
A or higher when the derivative is entered into. Occasionally, short-term
derivatives will be entered into with counterparties that have only high
short-term debt ratings.
</TABLE>
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<PAGE> 473
FINANCIAL STATEMENTS
The Trust's audited financial statements for the fiscal year ended February
29, 2000 included in the Trust's Annual Reports and filed with the Securities
and Exchange Commission pursuant to Section 30(d) of the 1940 Act and the rules
promulgated thereunder, are hereby incorporated in this Statement of Additional
Information by reference.
GMO TRUST
SPECIMEN PRICE MAKE-UP SHEETS
Following are computations of the total offering price per share for each
class of shares of the Fundamental Value Fund as of February 29, 2000, based
upon its net asset values and shares of beneficial interest outstanding at the
close of business on February 29, 2000.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Fundamental Value Fund (Class III)
-------------------------------------------------------------------------------------------------------------
<S> <C>
Net Assets at Value (Equivalent to $6.73 per share based on 81,855 $550,489
shares of beneficial interest outstanding)
-------------------------------------------------------------------------------------------------------------
Offering Price ($6.73 x 100/99.85) * $6.74
-------------------------------------------------------------------------------------------------------------
</TABLE>
------------------------
* Represents maximum offering price charged on certain cash purchases. See
"How to Purchase Shares" in the Prospectus.
-52-
<PAGE> 474
GMO TRUST
SUPPLEMENT TO GMO TRUST PROSPECTUS DATED JUNE 30, 2000 AND
GMO TAX-MANAGED PROSPECTUS DATED JUNE 30, 2000
GMO International Core Plus Allocation Fund
In addition to those Funds identified in the Trust's Prospectus dated
June 30, 2000, the Trust is also authorized to issue shares of an additional
series, the GMO International Core Plus Allocation Fund ("ICPA"). A
Post-Effective Amendment to the Trust's registration statement relating to the
creation of ICPA was initially filed with the Securities and Exchange Commission
on December 5, 1997, and became effective on February 18, 1998. The ICPA has not
yet commenced operations.
ICPA is a "fund of funds" that will invest primarily in other Funds of
the Trust ("underlying Funds"). ICPA will be managed by Grantham, Mayo, Van
Otterloo & Co. LLC ("GMO"). Although GMO will not receive any fees for providing
investment management services to ICPA, it will receive investment management
fees from the underlying GMO Trust Funds in which ICPA invests. The fees and
expenses associated with an investment in ICPA are as follows:
<TABLE>
<CAPTION>
---------------- --------------------------- -------------------------------------------------------- -----------------------------
GMO Purchase and Redemption
Fund Name Fees Annual Operating Expenses Examples
(fees paid directly to (expenses that are deducted from Fund assets)
Fund at purchase or
redemption)
---------------- ------------- ------------- --------- --------- -------- ----------- -------- -------- -------------- -------------
Cash Redemption Inv. Share- Other Total Expense Net You would You would
Purchase Fees (as a Mgmt. holder Expenses Operating Reim- Expenses pay the pay the
Premium (as percentage Fees Service (3) Expenses Burse- following following
a of amount after Fee(2) (3) ment expenses on expenses on
percentage redeemed(1)) Fee a $10,000 the same
of amount Waiver(3) investment investment
invested(1)) assuming 5% assuming no
annual redemption:
return with
redemption
at the end
of each
time period:
---------------- ------------- ------------- --------- --------- -------- ----------- -------- -------- ------- ------ ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ICPA FUND(6) 1 Yr. 3 Yr. 1 Yr. 3 Yr.
---------------- ------------- ------------- --------- --------- -------- ----------- -------- ------- -------- ------ ----- -------
Class I .65%(7) .11%(5) .00%(6) .13%(6) .05%(4)(6) .18%(6) .05% 0.13% $90 $120 $80 $110
---------------- ------------- ------------- --------- --------- -------- ----------- -------- ------- -------- ------ ----- -------
Class II .65%(7) .11%(5) .00%(6) .07%(6) .05%(4)(6) .12%(6) .05% 0.07% $80 $100 $70 $90
---------------- ------------- ------------- --------- --------- -------- ----------- -------- ------- -------- ------ ----- -------
Class III .65%(7) .11%(5) .00%(6) .00%(6) .05%(4)(6) .05%(6) .05% 0.00% $80 $80 $70 $70
---------------- ------------- ------------- --------- --------- -------- ----------- -------- ------- -------- ------ ----- -------
</TABLE>
NOTES TO SCHEDULE OF FEES AND EXPENSES
1. Purchase premiums and redemption fees apply only to cash transactions
as set forth under "Purchase of Shares" and "Redemption of Shares"
respectively. These fees are paid to and retained by the Fund itself
and are designed to allocate transaction costs caused by shareholder
activity to the shareholder generating the activity, rather than to the
Fund as a whole.
2. Shareholder Service Fee ("SSF") paid to GMO for providing client
services and reporting services.
<PAGE> 475
The level of SSF is the sole economic distinction between the various
classes of Fund shares. A lower SSF for larger investments reflects
that the cost of servicing client accounts is lower for larger accounts
when expressed as a percentage of the account.
3. The Manager has contractually agreed to reimburse ICPA for certain Fund
expenses through June 30, 2001 to the extent that ICPA's total annual
operating expenses (excluding Shareholder Service Fees, brokerage
commissions and other investment-related costs, hedging transaction
fees, extraordinary, non-recurring and certain other unusual expenses
(including taxes), securities lending fees and expenses, transfer
taxes, and expenses indirectly incurred by investment in other Funds of
the Trust) would otherwise exceed 0.00% of ICPA's average daily net
assets.
4. Based on estimated amounts for the Fund's first fiscal year.
5. ICPA invests in various other Funds with different levels of purchase
premiums and redemption fees, which reflect the trading costs of
different asset classes. Therefore, ICPA's purchase premium and
redemption fee has been set as the weighted average of the premiums and
fees, respectively, of the underlying Funds in which ICPA expects to
invest. The amount of purchase premium and redemption fee for ICPA will
be adjusted approximately annually based on underlying Funds owned by
ICPA during the prior year. The Manager may, but is not obligated to,
adjust the purchase premium and/or redemption fee for ICPA more
frequently if the Manager believes in its discretion that circumstances
warrant.
6. ICPA invests primarily in other Funds of the Trust (referred to here as
"underlying Funds"). Therefore, in addition to the fees and expenses
directly incurred by ICPA (which are shown in the Schedule of Fees and
Expenses), ICPA will also incur fees and expenses indirectly as a
shareholder of the underlying Funds. Because the underlying Funds have
varied expense and fee levels and ICPA may own different proportions of
underlying Funds at different times, the amount of fees and expenses
indirectly incurred by ICPA will vary. The Manager believes that, under
normal market conditions, the total amount of fees and expenses that
will be indirectly incurred by ICPA because of investment in underlying
Funds will fall within the ranges set forth below:
<TABLE>
<CAPTION>
------------------------------- ----------- ------------- ---------------
FUND LOW TYPICAL HIGH
------------------------------- ----------- ------------- ---------------
<S> <C> <C> <C>
ICPA .71% .74% .77%
------------------------------- ----------- ------------- ---------------
</TABLE>
ICPA is a diversified portfolio that seeks high total return. The
principal strategy ICPA will employ in pursuit of its objective will be to
invest in Class III Shares of other Funds of the Trust, particularly the GMO
International Core Fund and the GMO Evolving Countries Fund. The principal risks
of an investment in ICPA include all of the principal risks of a direct
investment in each underlying Fund in which ICPA invests. For a discussion of
the principal risks of each underlying Fund, please see "Principal Risks" in the
Trust's Prospectus.
-2-
<PAGE> 476
MULTIPLE CLASSES - SUPPLEMENTAL INFORMATION
CLASS DESIGNATIONS
In addition to the classes of shares identified in the Prospectus as
being currently offered by each Fund of the Trust, each Fund of the Trust may
also from time to time issue one or more of the following classes of shares:
Class I Shares, Class II Shares, Class III Shares, Class IV Shares, Class V
Shares, Class VI Shares, Class VII Shares and Class VIII Shares. Exhibit A to
this Prospectus Supplement identifies the classes each Fund may offer. Each
class of shares of a Fund will represent interests in the same portfolio of
investments and, except as described herein, shall have the same rights and
obligations as each other class of shares of such Fund. The sole economic
difference among the various classes of shares is the level of Shareholder
Service Fee that the classes bear for client and shareholder service, reporting
and other support. The existence of multiple classes reflects the fact that, as
the size of a client relationship increases, the cost to service that client
decreases as a percentage of the assets in that account. Thus, the Shareholder
Service Fee is lower for classes where eligibility criteria require greater
total assets under GMO's management.
Each class of shares that is not presently being offered shall be
subject to such investment minimums and other eligibility requirements as shall
be set forth in the Trust's prospectus or statement of additional information
prior to the commencement of sale of such shares (the "Prospectus"). Each such
class will bear the same purchase premium and redemption fees, if any, assessed
by the class(es) of shares of the relevant Fund currently being offered.
CLASS ELIGIBILITY
Class eligibility is generally dependent on the size of the client's
total account under the management of Grantham, Mayo, Van Otterloo & Co. LLC,
the Trust's investment adviser (referred to herein as "GMO" or the "Adviser"),
as described from time to time in the Prospectus.
Eligibility requirements for classes of shares currently offered by the
Trust are set forth in the Prospectus. Eligibility requirements for classes of
shares not currently being offered will be established and disclosed in the
Prospectus prior to the offering of such shares. The Manager will make all
determinations as to aggregation of client accounts for purposes of determining
eligibility.
CLASS CHARACTERISTICS
The sole difference among the various classes of shares is the level of
shareholder service fee ("Shareholder Service Fee") borne by the class for
client and shareholder service, reporting and other support provided to such
class by GMO. The Shareholder Service Fee borne by each class of shares of each
Fund is set forth in Exhibit A hereto. The expenses associated with an
investment in any of the classes currently being offered by a Fund are described
in detail in the Prospectus under "Fees and Expenses."
-3-
<PAGE> 477
Investors should be aware that, because of the different Shareholder
Service Fee borne by each class of shares of a particular Fund, the net annual
fund operating expenses associated with an investment in Class I Shares or Class
II Shares of a Fund will typically be 0.13% higher and 0.07% higher,
respectively, than an investment in Class III Shares of the same Fund. As a
result, the total return earned by an investment in Class I or Class II Shares
of a Fund will always be lower than the total return earned by Class III Shares
of the same Fund. Similarly, an investor in Class IV, Class V, Class VI, Class
VII and Class VIII Shares can expect to pay lower net annual fund operating
expenses and earn correspondingly higher returns than an investor in Class III
Shares of the same Fund over the same period.
The multiple class structure reflects the fact that, as the size of the
client relationship increases, the cost to service that relationship is expected
to decrease as a percentage of the account. Thus, the Shareholder Service Fee is
lower for classes for which eligibility criteria generally require greater
assets under GMO's management.
All classes of shares of a Fund bear the same level of purchase premium
and/or redemption fee, if any.
CONVERSION AND EXCHANGE FEATURES
Conversion and exchange features for classes of shares currently
offered by the Trust are set forth in the Prospectus. Conversion and Exchange
features for classes of shares not currently being offered will be established
and disclosed in the Prospectus prior to the offering of such shares.
-4-
<PAGE> 478
<TABLE>
<CAPTION>
SERVICE FEE SCHEDULE
CLASS I SHARES
FUND SERVICE FEE
----------------------------------------------------------------------------------- --------------------------------
<S> <C>
GMO U.S. Core Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO Tobacco-Free Core Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO Value Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO Growth Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO U.S. Sector Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO Small Cap Value Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO Fundamental Value Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO Small Cap Growth Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO REIT Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO International Core Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO Currency Hedged International Core Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO Foreign Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO U.S. Bond/Global Alpha B Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO U.S. Bond/Global Alpha A Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO International Small Companies Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO Japan Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO Emerging Markets Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO Global Properties Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO Domestic Bond Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO Global Hedged Equity Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO International Bond Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO Currency Hedged International Bond Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO Global Bond Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO Emerging Country Debt Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO Inflation Indexed Bond Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO Evolving Countries Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO Asia Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO Tax-Managed U.S. Equities Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
GMO Tax-Managed International Equities Fund 0.28%
----------------------------------------------------------------------------------- --------------------------------
</TABLE>
-5-
<PAGE> 479
<TABLE>
<S> <C>
GMO International Equity Allocation Fund 0.13%
----------------------------------------------------------------------------------- --------------------------------
GMO Global (U.S.+) Equity Allocation Fund 0.13%
----------------------------------------------------------------------------------- --------------------------------
GMO World Equity Allocation Fund 0.13%
----------------------------------------------------------------------------------- --------------------------------
GMO Global Balanced Allocation Fund 0.13%
----------------------------------------------------------------------------------- --------------------------------
GMO International Core Plus Allocation Fund 0.13%
----------------------------------------------------------------------------------- --------------------------------
GMO Tax-Managed Global Allocation Fund 0.13%
----------------------------------------------------------------------------------- --------------------------------
</TABLE>
<TABLE>
<CAPTION>
SERVICE FEE SCHEDULE EXHIBIT II (cont'd)
CLASS II SHARES
FUND SERVICE FEE
----------------------------------------------------------------------------------- --------------------------------
<S> <C>
GMO U.S. Core Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO Tobacco-Free Core Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO Value Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO Growth Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO U.S. Sector Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO Small Cap Value Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO Fundamental Value Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO Small Cap Growth Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO REIT Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO International Core Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO Currency Hedged International Core Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO Foreign Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO U.S. Bond/Global Alpha B Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO U.S. Bond/Global Alpha A Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO International Small Companies Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO Japan Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO Emerging Markets Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO Global Properties Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO Domestic Bond Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO Global Hedged Equity Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO International Bond Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO Currency Hedged International Bond Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO Global Bond Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
</TABLE>
-6-
<PAGE> 480
<TABLE>
<S> <C>
----------------------------------------------------------------------------------- --------------------------------
GMO Emerging Country Debt Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO Inflation Indexed Bond Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO Evolving Countries Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO Asia Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO Tax-Managed U.S. Equities Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO Tax-Managed International Equities Fund 0.22%
----------------------------------------------------------------------------------- --------------------------------
GMO International Equity Allocation Fund 0.07%
----------------------------------------------------------------------------------- --------------------------------
GMO Global (U.S.+) Equity Allocation Fund 0.07%
----------------------------------------------------------------------------------- --------------------------------
GMO World Equity Allocation Fund 0.07%
----------------------------------------------------------------------------------- --------------------------------
GMO Global Balanced Allocation Fund 0.07%
----------------------------------------------------------------------------------- --------------------------------
GMO International Core Plus Allocation Fund 0.07%
----------------------------------------------------------------------------------- --------------------------------
GMO Tax-Managed Global Allocation Fund 0.07%
----------------------------------------------------------------------------------- --------------------------------
</TABLE>
<TABLE>
<CAPTION>
SERVICE FEE SCHEDULE EXHIBIT II (cont'd)
CLASS III SHARES
FUND SERVICE FEE
----------------------------------------------------------------------------------- --------------------------------
<S> <C>
GMO U.S. Core Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO Tobacco-Free Core Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO Value Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO Growth Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO U.S. Sector Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO Small Cap Value Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO Fundamental Value Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO Small Cap Growth Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO REIT Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO International Core Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO Currency Hedged International Core Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO Foreign Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO U.S. Bond/Global Alpha B Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO U.S. Bond/Global Alpha A Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO International Small Companies Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO Japan Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
</TABLE>
-7-
<PAGE> 481
<TABLE>
<S> <C>
----------------------------------------------------------------------------------- --------------------------------
GMO Emerging Markets Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO Global Properties Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO Domestic Bond Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO Short-Term Income Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO Global Hedged Equity Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO International Bond Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO Currency Hedged International Bond Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO Global Bond Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO Emerging Country Debt Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO Evolving Countries Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO Inflation Indexed Bond Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO Asia Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO Tax-Managed U.S. Equities Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
GMO Tax-Managed International Equities Fund 0.15%
----------------------------------------------------------------------------------- --------------------------------
</TABLE>
-8-
<PAGE> 482
<TABLE>
<CAPTION>
CLASS III SHARES (CONT'D)
<S> <C>
----------------------------------------------------------------------------------- --------------------------------
GMO International Equity Allocation Fund 0.00%
----------------------------------------------------------------------------------- --------------------------------
GMO Global (U.S.+) Equity Allocation Fund 0.00%
----------------------------------------------------------------------------------- --------------------------------
GMO World Equity Allocation Fund 0.00%
----------------------------------------------------------------------------------- --------------------------------
GMO Global Balanced Allocation Fund 0.00%
----------------------------------------------------------------------------------- --------------------------------
GMO International Core Plus Allocation Fund 0.00%
----------------------------------------------------------------------------------- --------------------------------
GMO Tax-Managed Global Allocation Fund 0.00%
----------------------------------------------------------------------------------- --------------------------------
GMO Emerging Country Debt Share Fund 0.00%
----------------------------------------------------------------------------------- --------------------------------
</TABLE>
-9-
<PAGE> 483
<TABLE>
<CAPTION>
SERVICE FEE SCHEDULE EXHIBIT II (cont'd)
CLASS IV SHARES
FUND SERVICE FEE
----------------------------------------------------------------------------------- ----------------------------------------
<S> <C>
GMO U.S. Core Fund 0.105%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Tax-Managed U.S. Equities Fund 0.105%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Tobacco-Free Core Fund 0.12%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Value Fund 0.095%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Growth Fund 0.12%
----------------------------------------------------------------------------------- ----------------------------------------
GMO U.S. Sector Fund 0.12%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Small Cap Value Fund 0.12%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Small Cap Growth Fund 0.12%
----------------------------------------------------------------------------------- ----------------------------------------
GMO REIT Fund 0.12%
----------------------------------------------------------------------------------- ----------------------------------------
GMO International Core Fund 0.09%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Tax-Managed International Equities Fund 0.09%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Currency Hedged International Core Fund 0.09%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Foreign Fund 0.09%
----------------------------------------------------------------------------------- ----------------------------------------
GMO International Small Companies Fund 0.11%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Japan Fund 0.11%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Emerging Markets Fund 0.105%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Global Properties Fund 0.11%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Domestic Bond Fund 0.13%
----------------------------------------------------------------------------------- ----------------------------------------
GMO U.S. Bond/Global Alpha A Fund 0.13%
----------------------------------------------------------------------------------- ----------------------------------------
GMO International Bond Fund 0.13%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Currency Hedged International Bond Fund 0.13%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Global Bond Fund 0.13%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Emerging Country Debt Fund 0.10%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Global Hedged Equity Fund 0.13%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Inflation Indexed Bond Fund 0.13%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Evolving Countries Fund 0.10%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Fundamental Value Fund 0.13%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Asia Fund 0.105%
----------------------------------------------------------------------------------- ----------------------------------------
</TABLE>
-10-
<PAGE> 484
<TABLE>
<CAPTION>
SERVICE FEE SCHEDULE EXHIBIT II (cont'd)
CLASS V SHARES
FUND SERVICE FEE
----------------------------------------------------------------------------------- ----------------------------------------
<S> <C>
GMO U.S. Core Fund 0.09%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Tobacco-Free Core Fund 0.09%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Value Fund 0.09%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Growth Fund 0.09%
----------------------------------------------------------------------------------- ----------------------------------------
GMO U.S. Sector Fund 0.09%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Small Cap Value Fund 0.09%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Small Cap Growth Fund 0.09%
----------------------------------------------------------------------------------- ----------------------------------------
GMO REIT Fund 0.09%
----------------------------------------------------------------------------------- ----------------------------------------
GMO International Core Fund 0.07%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Currency Hedged International Core Fund 0.07%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Foreign Fund 0.10%
----------------------------------------------------------------------------------- ----------------------------------------
GMO International Small Companies Fund 0.07%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Japan Fund 0.07%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Emerging Markets Fund 0.05%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Global Properties Fund 0.07%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Domestic Bond Fund 0.12%
----------------------------------------------------------------------------------- ----------------------------------------
GMO U.S. Bond/Global Alpha A Fund 0.12%
----------------------------------------------------------------------------------- ----------------------------------------
GMO International Bond Fund 0.12%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Currency Hedged International Bond Fund 0.12%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Global Bond Fund 0.12%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Emerging Country Debt Fund 0.12%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Global Hedged Equity Fund 0.12%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Inflation Indexed Bond Fund 0.12%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Evolving Countries Fund 0.05%
----------------------------------------------------------------------------------- ----------------------------------------
</TABLE>
-11-
<PAGE> 485
<TABLE>
<CAPTION>
SERVICE FEE SCHEDULE EXHIBIT II (cont'd)
CLASS VI SHARES
FUND SERVICE FEE
----------------------------------------------------------------------------------- ----------------------------------------
<S> <C>
GMO U.S. Core Fund 0.07%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Tobacco-Free Core Fund 0.07%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Value Fund 0.07%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Growth Fund 0.07%
----------------------------------------------------------------------------------- ----------------------------------------
GMO U.S. Sector Fund 0.07%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Small Cap Value Fund 0.07%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Small Cap Growth Fund 0.07%
----------------------------------------------------------------------------------- ----------------------------------------
GMO REIT Fund 0.07%
----------------------------------------------------------------------------------- ----------------------------------------
GMO International Core Fund 0.04%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Currency Hedged International Core Fund 0.04%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Foreign Fund 0.08%
----------------------------------------------------------------------------------- ----------------------------------------
GMO International Small Companies Fund 0.04%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Japan Fund 0.04%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Emerging Markets Fund 0.02%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Global Properties Fund 0.04%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Domestic Bond Fund 0.10%
----------------------------------------------------------------------------------- ----------------------------------------
GMO U.S. Bond/Global Alpha A Fund 0.10%
----------------------------------------------------------------------------------- ----------------------------------------
GMO International Bond Fund 0.10%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Currency Hedged International Bond Fund 0.10%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Global Bond Fund 0.10%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Emerging Country Debt Fund 0.10%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Global Hedged Equity Fund 0.10%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Inflation Indexed Bond Fund 0.10%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Evolving Countries Fund 0.02%
----------------------------------------------------------------------------------- ----------------------------------------
</TABLE>
-12-
<PAGE> 486
<TABLE>
<CAPTION>
SERVICE FEE SCHEDULE EXHIBIT II (cont'd)
CLASS VII SHARES
FUND SERVICE FEE
----------------------------------------------------------------------------------- ----------------------------------------
<S> <C>
GMO U.S. Bond/Global Alpha A Fund 0.06%
----------------------------------------------------------------------------------- ----------------------------------------
GMO International Bond Fund 0.06%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Currency Hedged International Bond Fund 0.06%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Global Bond Fund 0.06%
----------------------------------------------------------------------------------- ----------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS VIII SHARES
FUND SERVICE FEE
----------------------------------------------------------------------------------- ----------------------------------------
<S> <C>
GMO U.S. Bond/Global Alpha A Fund 0.01%
----------------------------------------------------------------------------------- ----------------------------------------
GMO International Bond Fund 0.01%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Currency Hedged International Bond Fund 0.01%
----------------------------------------------------------------------------------- ----------------------------------------
GMO Global Bond Fund 0.01%
----------------------------------------------------------------------------------- ----------------------------------------
</TABLE>
-13-
<PAGE> 487
GMO TRUST
PART C. OTHER INFORMATION
Item 23. Exhibits
(a). Amended and Restated Agreement and Declaration of Trust.(1)
(b). Amended and Restated By-laws of the Trust.(1)
(c). Please refer to Article 5 of the Trust's Amended and Restated
Declaration of Trust, which is hereby incorporated by reference.
(d). 1. Form of Management Contracts between the Trust, on behalf of each
of its GMO U.S. Core Fund (formerly "GMO Core Fund"), GMO Tobacco-Free
Core Fund, GMO Value Fund (formerly "GMO Value Allocation Fund"), GMO
Fundamental Value Fund, GMO Growth Fund (formerly "GMO Growth
Allocation Fund"), GMO Small Cap Value Fund (formerly "GMO Core II
Secondaries Fund"), GMO Small Cap Growth Fund, GMO REIT Fund, GMO
International Core Fund, GMO Currency Hedged International Core Fund,
GMO Foreign Fund, GMO International Small Companies Fund, GMO Japan
Fund, GMO Emerging Markets Fund, GMO Evolving Countries Fund, GMO Asia
Fund, GMO Global Hedged Equity Fund, GMO Domestic Bond Fund, GMO U.S.
Bond/Global Alpha A Fund (formerly "GMO Global Fund"), GMO U.S.
Bond/Global Alpha B Fund, GMO International Bond Fund, GMO Currency
Hedged International Bond Fund (formerly "GMO SAF Core Fund"), GMO
Global Bond Fund, GMO Emerging Country Debt Fund, GMO Short-Term
Income Fund, GMO Inflation Indexed Bond Fund, GMO Intrinsic Value
Fund; GMO Tax-Managed Small Companies Fund (formerly "GMO U.S. Small
Cap Fund"); GMO International Equity Allocation Fund, GMO World Equity
Allocation Fund, GMO Global (U.S.+) Equity Allocation Fund, GMO Global
Balanced Allocation Fund, GMO U.S. Sector Fund (formerly "GMO U.S.
Sector Allocation Fund"), GMO International Core Plus Allocation Fund,
Pelican Fund, GMO Tax-Managed U.S. Equities Fund and GMO Tax-Managed
International Equities Fund, and Grantham, Mayo, Van Otterloo & Co.
("GMO");(1)
2. Form of Consulting Agreements between GMO, on behalf of each of its
GMO Emerging Markets Fund, GMO Evolving Countries Fund and GMO Asia
Fund, and Dancing Elephant, Ltd.;(1)
--------------------
1= Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
<PAGE> 488
3. Form of Management Contract between the Trust, on behalf of its GMO
Alpha LIBOR Fund, and GMO.(1)
(e). Distribution Agreement between the Trust on behalf of each of U.S.
Core Fund, Tobacco-Free Core Fund, Value Fund, Fundamental Value Fund,
Growth Fund, Small Cap Value Fund, Small Cap Growth Fund, REIT Fund,
International Core Fund, Currency Hedged International Core Fund,
Foreign Fund, International Small Companies Fund, Japan Fund, Emerging
Markets Fund, Evolving Countries Fund, Asia Fund, Domestic Bond Fund,
U.S. Bond/Global Alpha A Fund, U.S. Bond/Global Alpha B Fund,
International Bond Fund, Currency Hedged International Bond Fund,
Global Bond Fund, Emerging Country Debt Fund, Short-Term Income Fund,
Global Hedged Equity Fund, Inflation Indexed Bond Fund, Emerging
Country Debt Share Fund, Intrinsic Value Fund; Tax- Managed Small
Companies Fund; International Equity Allocation Fund, World Equity
Allocation Fund, Global (U.S.+) Equity Allocation Fund, Global
Balanced Allocation Fund, U.S. Sector Fund, Pelican Fund, Tax-Managed
U.S. Equities Fund, Tax-Managed International Equities Fund and Funds
Distributor, Inc. -- Exhibit 1.
(f). None.
(g). 1. Custodian Agreement (the "IBT Custodian Agreement") among the
Trust, on behalf of its GMO U.S. Core Fund (formerly "GMO Core Fund"),
GMO Currency Hedged International Bond Fund (formerly "GMO SAF Core
Fund"), GMO Value Fund (formerly "GMO Value Allocation Fund"), GMO
Growth Fund (formerly "GMO Growth Allocation Fund"), and GMO
Short-Term Income Fund, GMO and Investors Bank & Trust Company
("IBT");(1)
2. Custodian Agreement (the "BBH Custodian Agreement") among the
Trust, on behalf of its GMO International Core Fund and GMO Japan
Fund, GMO and Brown Brothers Harriman & Co. ("BBH");(1)
3. Custodian Agreement (the "SSB Custodian Agreement") among the
Trust, on behalf of its Pelican Fund, GMO and State Street Bank and
Trust Company ("SSB");(1)
4. Forms of Letter Agreements with respect to the IBT Custodian
Agreement among the Trust, on behalf of its GMO U.S. Bond/Global Alpha
B Fund, GMO Tobacco-Free Core Fund, GMO Fundamental Value Fund, GMO
U.S. Sector Fund (formerly "GMO U.S. Sector Allocation Fund"), GMO
International Bond Fund, GMO Small Cap Value Fund (formerly "GMO Core
II Secondaries Fund"), GMO Emerging Country Debt Fund, GMO Domestic
Bond Fund, GMO REIT
--------------------
1= Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
-2-
<PAGE> 489
Fund, GMO Global Bond Fund, GMO International Equity Allocation Fund,
GMO Global (U.S.+) Equity Allocation Fund, GMO World Equity Allocation
Fund, GMO Global Balanced Allocation Fund, GMO International Core Plus
Allocation Fund, GMO Emerging Country Debt Share Fund, GMO Small Cap
Growth Fund, GMO U.S. Bond/Global Alpha A Fund (formerly "GMO Global
Fund"), GMO Tax-Managed U.S. Equities Fund, GMO Inflation Indexed Bond
Fund, GMO Intrinsic Value Fund and GMO Tax-Managed U.S. Small Cap
Fund, GMO and IBT;(1)
5. Forms of Letter Agreements with respect to the BBH Custodian
Agreement among the Trust, on behalf of its GMO Emerging Markets Fund,
GMO Currency Hedged International Core Fund, GMO Evolving Countries
Fund, GMO Global Hedged Equity Fund, GMO International Small Companies
Fund, GMO Foreign Fund, GMO Asia Fund, GMO Tax-Managed International
Equities Fund and GMO and BBH;(1)
6. Form of Letter Agreement with respect to the IBT Custodian
Agreement among the Trust, on behalf of its GMO Alpha LIBOR Fund, GMO
and IBT.(1)
(h). 1. Transfer Agency Agreement among the Trust, on behalf of its GMO
U.S. Core Fund (formerly "GMO Core Fund"), GMO Currency Hedged
International Bond Fund, GMO Growth Fund (formerly "GMO Growth
Allocation Fund"), GMO Value Fund (formerly "GMO Growth Allocation
Fund"), GMO Short-Term Income Fund, GMO International Core Fund and
GMO Japan Fund, GMO and IBT;(1)
2. Forms of Letter Agreements to the Transfer Agency Agreement among
the Trust, on behalf of each of its GMO Tobacco-Free Core Fund, GMO
Fundamental Value Fund, GMO Small Cap Value Fund (formerly "GMO Core
II Secondaries Fund"), GMO Small Cap Growth Fund, GMO REIT Fund, GMO
Currency Hedged International Core Fund, GMO Foreign Fund, GMO
International Small Companies Fund, GMO Emerging Markets Fund, GMO
Evolving Countries Fund, GMO Asia Fund, GMO Global Hedged Equity Fund,
GMO Domestic Bond Fund, GMO U.S. Bond/Global Alpha A Fund (formerly
"GMO Global Fund"), GMO U.S. Bond/Global Alpha B Fund, GMO
International Bond Fund, GMO Global Bond Fund, GMO Emerging Country
Debt Fund, GMO Inflation Indexed Bond Fund, GMO Emerging Country Debt
Share Fund, Pelican Fund, GMO International Equity Allocation Fund,
GMO World Equity Allocation Fund, GMO Global (U.S.+) Equity Allocation
Fund, GMO Global Balanced Allocation Fund, GMO U.S. Sector Fund
(formerly "GMO U.S. Sector Allocation Fund"), GMO International Core
Plus Allocation Fund, GMO Tax-Managed U.S. Equities Fund, GMO
Tax-Managed International
--------------------
1= Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
-3-
<PAGE> 490
Equities Fund, GMO Intrinsic Value Fund and GMO Tax-Managed U.S. Small
Cap Fund, GMO and IBT.(1)
3. Form of Letter Agreement to the Transfer Agency Agreement among the
Trust, on behalf of its GMO Alpha LIBOR Fund, GMO and IBT.(1)
4. Form of Notification of Obligation to Reimburse Certain Fund
Expenses by Grantham, Mayo, Van Otterloo & Co. LLC to the Trust.(1)
5. Form of Amended and Restated Servicing Agreement between the Trust,
on behalf of certain Funds, and Grantham, Mayo, Van Otterloo & Co.
LLC.(1)
(i). Opinion and Consent of Ropes & Gray.(1)
(j). Consent of PricewaterhouseCoopers LLP -- Exhibit 2.
(k). Financial Statements - Not applicable.
(l). None.
(m). None.
(n). Financial Data Schedules -- Not Applicable.
(o). Form of Rule 18f-3 Multiclass Plan (1).
(p). Code of Ethics adopted by GMO Trust, Grantham, Mayo, Van Otterloo &
Co. LLC, Dancing Elephant, Ltd., GMO Australia Ltd., GMO Australia
LLC, GMO Renewable Resources LLC, GMO Woolley Ltd. -- Exhibit 3.
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
Item 25. INDEMNIFICATION
See Item 27 of Pre-Effective Amendment No. 1 which is hereby
incorporated by reference.
--------------------
1= Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
-4-
<PAGE> 491
Item 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
See Item 28 of Pre-Effective Amendment No. 1 which is hereby
incorporated by reference.
Item 27. PRINCIPAL UNDERWRITERS
(a) Funds Distributor, Inc. ("Funds Distributor") acts as principal underwriter
for the following other investment companies:
American Century California Tax-Free and Municipal Funds American Century
Capital Portfolios, Inc. American Century Government Income Trust American
Century International Bond Funds American Century Investment Trust American
Century Municipal Trust American Century Mutual Funds, Inc.
American Century Premium Reserves, Inc.
American Century Quantitative Equity Funds
American Century Strategic Asset Allocations, Inc.
American Century Target Maturities Trust
American Century Variable Portfolios, Inc.
American Century World Mutual Funds, Inc.
The Brinson Funds
CDC MPT+ Funds
Dresdner RCM Capital Funds, Inc.
Dresdner RCM Global Funds, Inc.
Dresdner RCM Investment Funds Inc.
J.P. Morgan Institutional Funds
J.P. Morgan Funds
JPM Series Trust
JPM Series Trust II
LaSalle Partners Funds, Inc.
Merrimac Series
Monetta Fund, Inc.
Monetta Trust
The Montgomery Funds I
The Montgomery Funds II
The Munder Framlington Funds Trust
The Munder Funds Trust
The Munder Funds, Inc.
National Investors Cash Management Fund, Inc.
Nomura Pacific Basin Fund, Inc.
Orbitex Group of Funds
The Saratoga Advantage Trust
-5-
<PAGE> 492
SG Cowen Funds, Inc.
SG Cowen Income + Growth Fund, Inc.
SG Cowen Standby Reserve Fund, Inc.
SG Cowen Standby Tax-Exempt Reserve Fund, Inc.
SG Cowen Series Funds, Inc.
The Skyline Funds
St. Clair Funds, Inc.
TD Waterhouse Family of Funds, Inc.
TD Waterhouse Trust
Funds Distributor is registered with the Securities and Exchange Commission
as a broker-dealer and is a member of the National Association of Securities
Dealers. Funds Distributor is located at 60 State Street, Suite 1300, Boston,
Massachusetts 02109. Funds Distributor is an indirect wholly-owned subsidiary of
Boston Institutional Group, Inc., a holding company all of whose outstanding
shares are owned by key employees.
(b) The following is a list of the executive officers, directors and partners
of Funds Distributor:
<TABLE>
<CAPTION>
<S> <C>
Director, President and Chief - Marie E. Connolly
Executive Officer
Director and Executive Vice President - George A. Rio
Executive Vice President and Chief - Gary S. MacDonald
Administrative Officer
Executive Vice President - William S. Nichols
Executive Vice President - Charles W. Carr
Senior Vice President, General - Margaret W. Chambers
Counsel, Chief Compliance Officer,
Secretary and Clerk
Senior Vice Presid - Joseph F. Tower III
Senior Vice President and Chief - William J. Stetter
Financial Officer
Senior Vice President - Mary A. Nelson
Senior Vice President - Eric A. Liik
Senior Vice President - John Lehning
Senior Vice President - John Prosperi
Chairman and Director - William J. Nutt
</TABLE>
(c) Not applicable.
Item 28. LOCATION OF ACCOUNTS AND RECORDS
See Item 30 of Pre-Effective Amendment No. 1 which is hereby
incorporated by reference.
-6-
<PAGE> 493
Item 29. MANAGEMENT SERVICES
Not Applicable.
Item 30. UNDERTAKINGS
None.
-7-
<PAGE> 494
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 (the "Securities
Act") and the Investment Company Act of 1940 (the "1940 Act"), the Registrant,
GMO Trust, certifies that this Post-Effective Amendment No. 53 under the
Securities Act and Post-Effective Amendment No. 61 under the 1940 Act meets all
of the requirements for effectiveness under Rule 485(b) under the Securities Act
and has duly caused this Post-Effective Amendment to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Boston and The
Commonwealth of Massachusetts, on the 28th day of June, 2000.
GMO Trust
By: R. JEREMY GRANTHAM*
-----------------------------------
R. Jeremy Grantham
Title: President - Quantitative;
Principal Executive Officer; Trustee
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 53 to the Trust's Registration Statement under the
Securities Act has been signed below by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
R. JEREMY GRANTHAM* President - Quantitative; Principal June 28, 2000
-------------------
R. Jeremy Grantham Executive Officer; Trustee
SUSAN RANDALL HARBERT* Chief Financial Officer and Treasurer; June 28, 2000
---------------------- Principal Financial and Accounting
Susan Randall Harbert Officer
JAY O. LIGHT* Trustee June 28, 2000
-------------
Jay O. Light
</TABLE>
*By: /s/ WILLIAM R. ROYER
--------------------------
William R. Royer
Attorney-in-Fact
-8-
<PAGE> 495
POWER OF ATTORNEY
We, the undersigned officers and trustees of GMO Trust, a Massachusetts
business trust, hereby severally constitute and appoint William R. Royer our
true and lawful attorney, with full power to him to sign for us, and in our
names and in the capacities indicated below, any and all amendments to the
Registration Statement filed with the Securities and Exchange Commission for the
purpose of registering shares of beneficial interest of GMO Trust, hereby
ratifying and confirming our signatures as they may be signed by our said
attorneys on said Registration Statement.
Witness our hands and common seal on the date set forth below.
(Seal)
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ R. Jeremy Grantham President-Domestic; March 12, 1996
----------------------------- Principal Executive
R. Jeremy Grantham Officer; Trustee
/s/ Eyk H.A. Van Otterloo President-International March 12, 1996
-----------------------------
Eyk H.A. Van Otterloo
/s/ Kingsley Durant Treasurer; Principal March 12, 1996
----------------------------- Financial and
Kingsley Durant Accounting Officer
</TABLE>
-9-
<PAGE> 496
POWER OF ATTORNEY
I, the undersigned trustee of GMO Trust, a Massachusetts business trust,
hereby constitute and appoint William R. Royer my true and lawful attorney, with
full power to him to sign for me, and in my names and in the capacity indicated
below, any and all amendments to the Registration Statement filed with the
Securities and Exchange Commission for the purpose of registering shares of
beneficial interest of GMO Trust, hereby ratifying and confirming my signature
as it may be signed by my said attorney on said Registration Statement.
Witness my hand and common seal on the date set forth below.
(Seal)
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jay O. Light Trustee May 23, 1996
--------------------
Jay O. Light
</TABLE>
-10-
<PAGE> 497
POWER OF ATTORNEY
I, the undersigned officer of GMO Trust, a Massachusetts business trust,
hereby constitute and appoint William R. Royer my true and lawful attorney, with
full power to him to sign for me, and in my name and in the capacity indicated
below, any and all amendments to the Registration Statement filed with the
Securities and Exchange Commission for the purpose of registering shares of
beneficial interest of GMO Trust, hereby ratifying and confirming my signature
as it may be signed by my said attorney on said Registration Statement.
Witness my hand and common seal on the date set forth below.
(Seal)
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Susan Randall Harbert Treasurer; Principal April 29, 1999
------------------------- Financial and Accounting
Susan Randall Harbert Officer
</TABLE>
-11-
<PAGE> 498
EXHIBIT INDEX
-------------
GMO TRUST
Exhibit No. Title of Exhibit
----------- ----------------
1 Distribution Agreement between GMO Trust and Funds Distributor,
Inc.
2 Consent of PricewaterhouseCoopers LLP
3 Code of Ethics adopted by GMO Trust, Grantham Mayo, Van Otterloo
& Co. LLC, Dancing Elephant, Ltd., GMO Australia Ltd., GMO
Australia, LLC, GMO Renewable Resources LLC, GMO Woolley Ltd.
-12-
