<PAGE> 1
As filed with the Securities and Exchange Commission on
October 27, 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. 55
[x]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
[x]
Amendment No. 67
(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 October 31, 2000
pursuant to Rule 485(b) of the Securities Act of 1933, as amended.
<PAGE> 2
THIS FILING RELATES SOLELY TO THE GMO FUNDAMENTAL VALUE FUND; IT IS INTENDED
THAT NO INFORMATION RELATING TO ANY OTHER SERIES OF GMO TRUST IS AMENDED OR
SUPERSEDED HEREBY.
<PAGE> 3
GMO TRUST Prospectus
October 31, 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.
Shares of the Fund may not be available for purchase in all states. This
prospectus is not an offering in any state where an offering may not lawfully be
made.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<S> <C>
OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES....................................1
SUMMARY OF PRINCIPAL RISKS........................................................3
FEES AND EXPENSES.................................................................5
BENCHMARK AND INDEXES.............................................................5
MANAGEMENT OF THE FUND............................................................5
DETERMINATION OF NET ASSET VALUE..................................................6
HOW TO PURCHASE SHARES............................................................7
HOW TO REDEEM SHARES..............................................................9
DISTRIBUTIONS AND TAXES..........................................................10
FINANCIAL HIGHLIGHTS.............................................................11
ADDITIONAL INFORMATION...................................................BACK COVER
SHAREHOLDER INQUIRIES....................................................BACK COVER
DISTRIBUTOR..............................................................BACK COVER
</TABLE>
-i-
<PAGE> 5
--------------------------------
GMO FUNDAMENTAL VALUE FUND
--------------------------------
<TABLE>
<CAPTION>
Fund Codes
Ticker Symbol Cusip
------ ------ -----
<S> <C> <C> <C>
Class III N/A N/A 362007 65 0
</TABLE>
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. For a description
of the S&P 500 Index, see "Benchmark and Indexes" on page 5.
INVESTMENT UNIVERSE: The Fund invests primarily in companies chosen from
the Russell 3000 Index. For a description of the Russell 3000 Index, see
"Benchmark and Indexes" on page 5.
PRINCIPAL INVESTMENTS: The Fund normally invests in stocks of U.S.
companies that Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO")
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
principles 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. The Fund engages
in active and frequent trading to achieve its principal investment strategies.
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.
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.
PRINCIPAL 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.
The Fund may make other investments and engage in other investment
strategies that are not specifically described in the preceding summary.
-1-
<PAGE> 6
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 total annual
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.
[BAR GRAPH]
<TABLE>
<CAPTION>
-----------------------------------------------------
Total Annual Return/Class III Shares Years Ending
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 9/30/00): 34.27%
Average Annual Total Return
Periods Ending December 31, 1999
<TABLE>
<CAPTION>
-------------------------------------------------------------
1 Year 5 Years 10 Years Incept.
-------------------------------------------------------------
10/31/91
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Class III 37.03%* 25.50% N/A 20.72%
-------------------------------------------------------------
S&P 500 21.04% 28.54% N/A 20.23%
-------------------------------------------------------------
</TABLE>
*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> 7
SUMMARY OF PRINCIPAL RISKS
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. See the Statement of Additional
Information for additional information about the risks of Fund investments and
strategies.
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.
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 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 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 Fund, which may invest to a
limited extent in growth securities, is subject to these risks.
-3-
<PAGE> 8
- 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 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 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.
- 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.
The Manager may also fail to use derivatives effectively, for example, choosing
to hedge or not to hedge positions when it is least advantageous to do so. 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> 9
FEES AND EXPENSES
This table describes the fees and expenses you may pay if you buy and hold
shares of the Fund(1):
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
(as a percentage of average net assets)
<TABLE>
<S> <C>
Management Fee............................................................0.60%
Shareholder Service Fee...................................................0.15%
Other Expenses............................................................3.35%
Total Annual Operating Expenses(1)........................................4.10%
Expense Reimbursement(2)..................................................3.35%
NET ANNUAL EXPENSES.......................................................0.75%
</TABLE>
(1) Based on the fiscal period from March 1, 2000 to June 30, 2000.
(2) The Manager has contractually agreed to reimburse the Fund with respect to
certain Fund expenses through at least October 31, 2001 to the extent that the
Fund's total annual operating expenses (excluding Shareholder Service Fees,
brokerage commissions and other investment-related costs, interest expenses,
hedging transaction fees, extraordinary, non-recurring and certain other unusual
expenses (including taxes), securities lending fees and expenses and transfer
taxes) would otherwise exceed 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...............................$ 939
5 Years...............................$1,817
10 Years..............................$4,083
</TABLE>
BENCHMARK 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 Russell 3000 Index is an independently maintained index
published by the Frank Russell Company and is composed of the 3000 largest U.S.
companies based on total market capitalization. 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 Fund. GMO is a
private company, founded in 1977. As of September 29, 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 GMO Trust 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 and for the
fiscal period ended
----------------------------
-5-
<PAGE> 10
June 30, 2000, the Manager received as compensation for management services
rendered in such periods (after any applicable waivers or reimbursements), 0.49%
and 0.00%, respectively, 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.
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 GMO 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
-6-
<PAGE> 11
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.
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.
-7-
<PAGE> 12
SUBMITTING YOUR PURCHASE ORDER FORM. Completed purchase order forms can be
submitted by MAIL or by FACSIMILE to the Trust at:
GMO Trust
c/o Grantham, Mayo, Van Otterloo & Co. LLC
40 Rowes Wharf
Boston, Massachusetts 02110
Facsimile: (617) 439-4192
Attention: Shareholder Services
Call the Trust at (617) 346-7646 to CONFIRM RECEIPT of your purchase order
form. Do not send cash, checks or securities directly to the Trust
FUNDING YOUR INVESTMENT. You may purchase shares:
- with cash (via wire transfer or check)
> BY WIRE. Instruct your bank to wire the amount of your investment
to:
Investors Bank & Trust Company, Boston, Massachusetts
ABA#: 011-001-438
Attn: Transfer Agent
Credit: GMO Deposit Account 55555-4444
Further credit: GMO Fund/shareholder name and number
> 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 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 6
- by a combination of cash and securities
-8-
<PAGE> 13
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 received in "good order. "
If the Manager determines, in its sole discretion, that it would be
detrimental to the best interests of the remaining shareholders to make a
redemption payment wholly or partly in cash, the Fund may pay the redemption
price in whole or in part by a distribution in-kind of securities held by the
Fund instead of cash.
If a redemption is made in cash:
- payment will be made in federal funds transferred to the account
designated in writing by authorized persons
> designation of additional accounts and any change in the accounts
originally designated must be made in writing.
- upon request, payment will be made by check mailed to the registration
address
If a redemption is made in-kind, it is important for you to note:
- securities used to redeem Fund shares will be valued as set forth
under "Determination of Net Asset Value" on page 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.
-9-
<PAGE> 14
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
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).
-10-
<PAGE> 15
FINANCIAL HIGHLIGHTS
(FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The financial highlights table is intended to help you understand the
Fund's financial performance for the past five years. 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 Reports, which are incorporated by
reference in the Statement of Additional Information and available upon request.
<TABLE>
<CAPTION>
For the period
March 1, 2000
through Year Ended February 28/29,
June 30, 2000(3) 2000 1999 1998 1997 1996
---------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ..................... $ 6.73 $ 7.07 $ 11.92 $ 16.33 $ 15.04 $ 12.54
------ ------ ------- -------- -------- --------
Income from investment operations:
Net investment income ................................. 0.04(2) 0.13(2) 0.18 0.35 0.33 0.37
Net realized and unrealized gain ...................... 2.34 1.92 0.19 3.90 2.53 3.26
------ ------ ------- -------- -------- --------
Total from investment operations .................. 2.38 2.05 0.37 4.25 2.86 3.63
------ ------ ------- -------- -------- --------
Less distributions to shareholders:
From net investment income ............................ -- (1.35) (0.20) (0.38) (0.32) (0.37)
In excess of net investment income ....................... -- (0.14) -- -- -- --
From net realized gains .................................. -- (0.90) (5.02) (8.28) (1.25) (0.76)
------ ------ ------- -------- -------- --------
Total distributions ................................... -- (2.39) (5.22) (8.66) (1.57) (1.13)
------ ------ ------- -------- -------- --------
Net asset value, end of period ........................... $ 9.11 $ 6.73 $ 7.07 $ 11.92 $ 16.33 $ 15.04
====== ====== ======= ======== ======== ========
Total Return(1) .......................................... 35.36%(4) 33.16% 2.30% 30.43% 20.03% 29.95%
Ratios/Supplemental Data:
Net assets, end of period (000s) ...................... $ 746 $ 550 $82,062 $127,036 $232,583 $212,428
Net expenses to average daily net assets .............. 0.75%(5) 0.75% 0.75% 0.75% 0.75% 0.75%
Net investment income to average daily net assets ..... 1.43%(5) 1.72% 1.67% 1.84% 2.15% 2.61%
Portfolio turnover rate ............................... 388% 54% 34% 21% 25% 34%
Fees and expenses voluntarily waived or borne by the
Manager consisted of the following per share amounts... $ 0.10 $ 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 throughout the period.
(3) The Fund's fiscal year end changed from February 28/29 to June 30.
(4) Not annualized.
(5) Annualized.
-11-
<PAGE> 16
GMO FUNDAMENTAL VALUE FUND
STATEMENT OF ADDITIONAL INFORMATION
October 31, 2000
This Statement of Additional Information is not a prospectus. It relates to the
GMO Fundamental Value Fund Prospectus dated October 31, 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> 17
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES................................................................................1
DESCRIPTIONS AND RISKS OF FUND INVESTMENTS........................................................................1
INVESTMENT RESTRICTIONS..........................................................................................19
MANAGEMENT OF THE TRUST..........................................................................................21
PORTFOLIO TRANSACTIONS...........................................................................................25
DETERMINATION OF NET ASSET VALUE.................................................................................27
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES.................................................................27
VOTING RIGHTS....................................................................................................28
SHAREHOLDER AND TRUSTEE LIABILITY................................................................................29
BENEFICIAL OWNERS OF 5% OR MORE OF THE FUND'S SHARES.............................................................30
DISTRIBUTIONS....................................................................................................30
TAXES............................................................................................................30
PERFORMANCE INFORMATION..........................................................................................34
COMMERCIAL PAPER AND CORPORATE DEBT RATINGS......................................................................36
INVESTMENT GUIDELINES............................................................................................39
FINANCIAL STATEMENTS.............................................................................................42
SPECIMEN PRICE MAKE-UP SHEETS....................................................................................42
</TABLE>
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<PAGE> 18
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, which engages in active and frequent trading to achieve its
principal investment strategies. The historical portfolio turnover rate for the
Fund is shown under the heading "Financial Highlights" in the Prospectus. For
the fiscal period ended June 30, 2000, the Fund's portfolio turnover rate of
388% varied significantly from the rate shown in prior periods. This variation
is due to the Fund's strategy of engaging in active and frequent trading to
achieve its objective.
In any particular year, market conditions and active and frequent trading may
result in greater rates of portfolio turnover than are currently reported in the
Financial Highlights in the Prospectus. High portfolio turnover involves
correspondingly greater brokerage commissions and other transaction costs, which
will be borne directly by the Fund and could detract from performance, and may
involve realization of capital gains that would be taxable when distributed to
shareholders of the Fund unless such shareholders are themselves exempt. See
"Distributions and Taxes" in the Prospectus and "Distributions" and "Taxes" in
this Statement of Additional Information.
DIVERSIFIED AND NON-DIVERSIFIED PORTFOLIOS
The 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
<PAGE> 19
favorable or unfavorable changes in currency exchange rates, exchange control
regulations (including currency blockage), expropriation or nationalization of
assets, imposition of withholding taxes on dividend or interest payments, and
possible difficulty in obtaining and enforcing judgments against foreign
entities. Furthermore, issuers of foreign securities are subject to different,
often less comprehensive, accounting, reporting and disclosure requirements than
domestic issuers. The securities of some foreign governments and companies and
foreign securities markets are less liquid and at times more volatile than
comparable U.S. securities and securities markets. Foreign brokerage commissions
and other fees are also generally higher than in the United States. The laws of
some foreign countries may limit the Fund's ability to invest in securities of
certain issuers located in these foreign countries. There are also special tax
considerations which apply to securities of foreign issuers and securities
principally traded overseas. Investors should also be aware that under certain
circumstances, markets which are perceived to have similar characteristics to
troubled markets may be adversely affected whether or not similarities actually
exist.
EMERGING MARKETS. The risks described above apply to an even greater extent to
investments in emerging markets. The securities markets of emerging countries
are generally smaller, less developed, less liquid, and more volatile than the
securities markets of 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
-2-
<PAGE> 20
cause the Fund to suffer a loss of any or all of its investments or, in the case
of fixed-income securities, interest thereon.
SECURITIES LENDING
The 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
-3-
<PAGE> 21
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.
FIXED INCOME 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.
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.
-4-
<PAGE> 22
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 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
-5-
<PAGE> 23
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 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
-6-
<PAGE> 24
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 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
-7-
<PAGE> 25
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
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
-8-
<PAGE> 26
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 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).
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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 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 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
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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 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.
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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 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
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<PAGE> 30
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 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).
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<PAGE> 31
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 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.
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<PAGE> 32
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 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
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<PAGE> 33
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 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
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<PAGE> 34
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.
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.
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Supra-national agencies are agencies whose member nations make capital
contributions to support the agencies' activities, and include such entities as
the International Bank for Reconstruction and Development (the World Bank), the
Asian Development Bank, the European Coal and Steel Community and the
Inter-American Development Bank.
Like other fixed income securities, U.S. Government Securities and Foreign
Government Securities are subject to market risk and their market values
fluctuate as interest rates change. Thus, for example, the value of an
investment in the Fund which holds U.S. Government Securities or Foreign
Government Securities may fall during times of rising interest rates. Yields on
U.S. Government Securities and Foreign Government Securities tend to be lower
than those of corporate securities of comparable maturities.
In addition to investing directly in U.S. Government Securities and Foreign
Government Securities, the Fund may purchase certificates of accrual or similar
instruments evidencing undivided ownership interests in interest payments or
principal payments, or both, in U.S. Government Securities and Foreign
Government Securities. These certificates of accrual and similar instruments may
be more volatile than other government securities.
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.
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
unless an agreement can be terminated after a notice period of seven days or
less. For so long as the SEC maintains the position that most equity swap
contracts, reverse equity swap contracts, caps, floors and collars are illiquid,
the Fund will continue to designate these instruments as illiquid for purposes
of its 15% illiquid limitation unless the instrument includes a termination
clause or has been determined to be liquid based on a case-by-case analysis
pursuant to procedures approved by the Trustees.
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<PAGE> 36
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.
(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.
-19-
<PAGE> 37
(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 under Section 4(2) or Rule 144A under the Securities Act of
1933, repurchase agreements and securities that are not readily marketable, 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
-20-
<PAGE> 38
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 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.
-21-
<PAGE> 39
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, Chief Operating 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).
*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 October 1, 2000, the Trustees
and officers of the
-22-
<PAGE> 40
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.
As disclosed in the Prospectus under the heading "Management of the Fund,"
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 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 October 31,
2001 to the extent that the Fund's total annual operating expenses (excluding
Shareholder Service Fees, brokerage commissions and other investment-related
costs, interest expenses, hedging transaction fees, extraordinary, non-recurring
and certain other unusual expenses (including taxes), securities lending fees
and expenses and transfer taxes) would otherwise exceed 0.60% of the Fund's
daily net assets.
The Management Contract provides that the Manager shall not be subject to
any liability in connection with the performance of its services thereunder in
the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.
-------------------
(1) Mr. Margolis served as a Trustee of the Trust until his death in June 2000.
-23-
<PAGE> 41
The Management Contract was approved by the Trustees of the Trust
(including a majority of the Trustees who were not "interested persons" of the
Manager) and by the Fund's sole shareholder in connection with the establishment
of the Fund. The Management Contract will continue in effect for a period more
than two years from the date of its execution only so long as its continuance is
approved at least annually by (i) the vote, cast in person at a meeting called
for that purpose, of a majority of those Trustees who are not "interested
persons" of the Manager or the Trust, and by (ii) the majority vote of either
the full Board of Trustees or the vote of a majority of the outstanding shares
of the Fund. The Management Contract automatically terminates on assignment, and
is terminable on not more 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 full fiscal years and in the fiscal
period ended June 30, 2000,(2) the Fund has paid the following amounts as
Management Fee to the Manager pursuant to the Management Contract:
<TABLE>
<CAPTION>
Gross Reduction Net
----- --------- ---
<S> <C> <C> <C>
Period ended 6/30/00 $ 1,391 $ 1,391 $ 0
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.
CUSTODIAL ARRANGEMENTS. Investors Bank & Trust Company ("IBT"), 200
Clarendon Street, Boston, Massachusetts 02116 serves as the Fund'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
------------------------
(2) The Fund's fiscal year has changed from February 28/29 to June 30.
-24-
<PAGE> 42
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 full fiscal
years and in the fiscal period ended June 30, 2000,(3) the Fund paid GMO the
amounts set forth in the table that follows:
<TABLE>
<CAPTION>
March 1, 1997 March 1, 1998 March 1, 1999 March 1, 2000
Through Through Through Through
February 28, 1998 February 28, 1999 February 29, 2000 June 30, 2000
----------------- ----------------- ----------------- -------------
<S> <C> <C> <C>
$284,344 $148,563 $45,765 $348
</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.
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.
---------------------
(3) The Fund's fiscal year has changed from February 28/29 to June 30.
-25-
<PAGE> 43
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 not restricted as to transfer either by law
or liquidity of market; and (d) such securities are valued in accordance with
the Fund's valuation procedures as described in the Prospectus.
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 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.
-26-
<PAGE> 44
During the three most recent full fiscal years and in the fiscal period
ended June 30, 2000,(4) 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 March 1, 2000
Through Through Through Through
February 28, 1998 February 28, 1999 February 29, 2000 June 30, 2000
----------------- ----------------- ----------------- -------------
<S> <C> <C> <C>
$441,587 $205,843 $141,776 $6,102
</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 June 30.
Pursuant to the Declaration of Trust, the Trustees have currently
authorized the issuance of an unlimited number of full and fractional shares of
forty series: 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;
International Core Plus Allocation Fund; Intrinsic Value Fund; Alpha LIBOR Fund
and Foreign Small Companies Fund. Interests in each portfolio (Fund) are
represented by shares of the corresponding series. Each share of each series
represents
-------------------------
(4) The Fund's fiscal year has changed from February 28/29 to June 30.
-27-
<PAGE> 45
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 September 29, 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.
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
-28-
<PAGE> 46
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 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
-29-
<PAGE> 47
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 September 29,
2000:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Name Address % Ownership
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Spelman College Attn: Mahesh Mehrota 50.60%
350 Spelman Lane SW
Box 589
Atlanta, GA 30314-4399
---------------------------------------------------------------------------------------------------------
Spelman College - FVAF Attn: Mahesh Mehrota 49.40%
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 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:
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<PAGE> 48
(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 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.
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<PAGE> 49
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 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
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<PAGE> 50
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 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
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<PAGE> 51
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.
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
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<PAGE> 52
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 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 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 June 30,
2000 and for the period from the commencement of the Fund's operations until
June 30, 2000:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
INCEPTION DATE 1 YEAR 3 YEARS 5 YEARS 10 YEARS SINCE
(%) (%) (%) (%) INCEPTION
(%)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
10/31/91 59.36 30.22 27.57 N/A 22.88
-----------------------------------------------------------------------------------------------------------
</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.
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<PAGE> 53
Quotations of the Fund's gross return do not reflect any reduction for any
Fund fees or expenses unless otherwise noted; if the gross return data reflected
the estimated fees and expenses of the Fund, the returns would be lower than
those shown. Quotations of gross return for the Fund for a particular month or
quarter will be calculated in accordance with the following formula:
Gross Return =
Net Return + (Total Annual Operating Expense Ratio) (# of days in relevant
period/365)
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.
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<PAGE> 54
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.
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<PAGE> 55
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.
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<PAGE> 56
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.
PERMITTED INVESTMENTS
<TABLE>
<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
</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>
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<PAGE> 57
<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.
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>
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.
</TABLE>
DIVERSIFICATION/CONCENTRATION
<TABLE>
<S> <C>
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.
</TABLE>
DERIVATIVE INSTRUMENTS
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<PAGE> 58
<TABLE>
<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>
-41-
<PAGE> 59
FINANCIAL STATEMENTS
The Fund's audited financial statements for the fiscal year ended June 30,
2000 included in the Fund's Annual Report 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 June 30, 2000, based upon
its net asset values and shares of beneficial interest outstanding at the close
of business on June 30, 2000.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Fundamental Value Fund (Class III)
--------------------------------------------------------------------------------------------------
<S> <C>
Net Assets at Value (Equivalent to $9.11 per share based on 81,855
shares of beneficial interest outstanding) $745,527
--------------------------------------------------------------------------------------------------
Offering Price $ 9.11
--------------------------------------------------------------------------------------------------
</TABLE>
-42-
<PAGE> 60
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)
3. Form of Management Contract between the Trust, on behalf of its GMO
Alpha LIBOR Fund, and GMO.(1)
------------
1= Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
<PAGE> 61
4. Form of Management Contract between the Trust, on behalf of its GMO
Foreign Small Companies 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.(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 Fund, GMO Global Bond Fund, GMO International
Equity Allocation Fund, GMO Global
------------
1= Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
-2-
<PAGE> 62
(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, GMO Foreign Small Companies 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, GMO
Japan Fund, GMO and IBT;(1)
2. Forms of Letter Agreements to the Transfer Agency Agreement among
the Trust, on behalf of each of its GMO Tobacco-Free Core Fund, GMO
Fundamental Value Fund, GMO Small Cap Value Fund (formerly "GMO Core
II Secondaries Fund"), GMO Small Cap Growth Fund, GMO REIT Fund, GMO
Currency Hedged International Core Fund, GMO Foreign Fund, GMO
International Small Companies Fund, GMO Emerging Markets Fund, GMO
Evolving Countries Fund, GMO Asia Fund, GMO Global Hedged Equity Fund,
GMO Domestic Bond Fund, GMO U.S. Bond/Global Alpha A Fund (formerly
"GMO Global Fund"), GMO U.S. Bond/Global Alpha B Fund, GMO
International Bond Fund, GMO Global Bond Fund, GMO Emerging Country
Debt Fund, GMO Inflation Indexed Bond Fund, GMO Emerging Country Debt
Share Fund, Pelican Fund, GMO International Equity Allocation Fund,
GMO World Equity Allocation Fund, GMO Global (U.S.+) Equity Allocation
Fund, GMO Global Balanced Allocation Fund, GMO U.S. Sector Fund
(formerly "GMO U.S. Sector Allocation Fund"), GMO International Core
Plus Allocation Fund, GMO Tax-Managed U.S. Equities Fund, GMO
Tax-Managed International Equities Fund, GMO Intrinsic Value Fund, GMO
Tax-Managed U.S. Small Cap Fund, GMO Foreign Small Companies Fund, GMO
and IBT.(1)
3. Form of Letter Agreement to the Transfer Agency Agreement among the
Trust,
------------
1= Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
-3-
<PAGE> 63
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 --
Exhibit 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). 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.(1)
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
Item 25. INDEMNIFICATION
See Item 27 of Pre-Effective Amendment No. 1 which is hereby
incorporated by reference.
Item 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
See Item 28 of Pre-Effective Amendment No. 1 which is hereby
incorporated by reference.
Item 27. PRINCIPAL UNDERWRITERS
(a) Funds Distributor, Inc. ("Funds Distributor") acts as principal underwriter
for the following other investment companies:
------------
1= Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
-4-
<PAGE> 64
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
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
-5-
<PAGE> 65
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>
<S> <C>
Director, President and Chief Executive Officer - Marie E. Connolly
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 Counsel, Chief - Margaret W. Chambers
Compliance Officer, Secretary and Clerk
Senior Vice President and Treasurer - Joseph F. Tower III
Senior Vice President and Chief Financial Officer - William J. Stetter
Senior Vice President, Deputy General - Christopher J. Kelley
Counsel
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.
Item 29. MANAGEMENT SERVICES
Not Applicable.
Item 30. UNDERTAKINGS
None.
-6-
<PAGE> 66
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. 55 under the
Securities Act and Post-Effective Amendment No. 67 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 27th day of October, 2000.
GMO Trust
By: /s/ 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. 55 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>
/s/ R. JEREMY GRANTHAM* President - Quantitative; Principal Executive October 27, 2000
----------------------- Officer; Trustee
R. Jeremy Grantham
/s/ SUSAN RANDALL HARBERT* Chief Financial Officer and Treasurer; Principal October 27, 2000
-------------------------- Financial and Accounting Officer
Susan Randall Harbert
/s/ JAY O. LIGHT* Trustee October 27, 2000
-----------------
Jay O. Light
* By: /s/ William R. Royer
------------------------
William R. Royer
Attorney-in-Fact
</TABLE>
-7-
<PAGE> 67
POWER OF ATTORNEY
We, the undersigned officers and trustees of GMO Trust, a Massachusetts
business trust, hereby severally constitute and appoint William R. Royer our
true and lawful attorney, with full power to him to sign for us, and in our
names and in the capacities indicated below, any and all amendments to the
Registration Statement filed with the Securities and Exchange Commission for the
purpose of registering shares of beneficial interest of GMO Trust, hereby
ratifying and confirming our signatures as they may be signed by our said
attorneys on said Registration Statement.
Witness our hands and common seal on the date set forth below.
(Seal)
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
President-Domestic;
Principal Executive
/s/ R. Jeremy Grantham Officer; Trustee March 12, 1996
--------------------------
R. Jeremy Grantham
/s/ Eyk H.A. Van Otterloo President-International March 12, 1996
--------------------------
Eyk H.A. Van Otterloo
Treasurer; Principal
Financial and
/s/ Kingsley Durant Accounting Officer March 12, 1996
-----------------------------
Kingsley Durant
</TABLE>
-8-
<PAGE> 68
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>
-9-
<PAGE> 69
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>
-10-
<PAGE> 70
EXHIBIT INDEX
GMO TRUST
<TABLE>
<CAPTION>
Exhibit No. Title of Exhibit
----------- ----------------
<S> <C>
1 Form of Notification of Obligation to Reimburse Certain Fund
Expenses by Grantham, Mayo, Van Otterloo & Co. LLC to the
Trust
2 Consent of PricewaterhouseCoopers LLP
</TABLE>
-11-
