PROSPECTUS
EMERGING MARKETS GROWTH FUND, INC.
Common Stock
=================================
Emerging Markets Growth Fund, Inc. (the "Fund") was established in
March, 1986 in the United States under the laws of the State of Maryland. The
Fund is a diversified, closed-end management investment company. The
investment objective of the Fund is to seek long-term capital growth through
investment in developing country equity securities. Investment in developing
country securities involves certain risks and other considerations which are
not normally involved in investment in securities of U.S. companies. See
"Investment Objective and Policies" and "RISK FACTORS AND OTHER
CONSIDERATIONS." The address of the Fund is 11100 Santa Monica Boulevard, Los
Angeles, California USA 90025. Telephone: (310) 996-6000.
The Fund's investment adviser is Capital International, Inc. (the
"Manager").
The Fund is offering an additional 9,731,412 shares of its common
stock, par value $.01 per share (the "Shares"), pursuant to this Prospectus
(the "Offering"). The Shares will be offered by the Fund on a continuous basis
until all Shares have been sold; provided, however, the Fund will not sell
Shares unless the Fund is sufficiently invested in developing country
securities as determined by the Board. Currently the Fund's management has
been directed by the Board not to sell any Shares in any month following a
month-end on which the Fund is not at least approximately 90% invested in
developing country securities,as described in this Prospectus. There has been
no public trading market for any outstanding Shares of the Fund and none is
expected to develop for the Shares. Accordingly, the Shares should not be
considered readily marketable. In addition, the Fund imposes certain
limitations and restrictions on the transfer of Shares. See "Restrictions on
Transfer."
This Prospectus sets forth concisely the information an investor
should know before investing and should be retained for future reference.
Additional information about the Fund has been filed with the U.S. Securities
and Exchange Commission ("SEC") and is available from the Fund upon written or
oral request and without charge.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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Price to Sales Proceeds to
Public(1) Load (1) The Fund(3)
Per Share $70.87 $ N/A $70.87
Total (2) $70.87 $ N/A $689,665,168
</TABLE>
(1) The Shares are offered on a best efforts basis by the Officers and
Directors of the Fund. No commission or remuneration will be paid to such
persons in connection with the sale of Shares. The Shares being sold include
9,731,412 Shares currently being registered and 12,505,814 Shares previously
registered by the Fund that remained unsold as of June 30, 1997. The price to
the public is equal to the net asset value, next determined after the order to
purchase Shares has been received by the Fund. As of June 30, 1997 the net
asset value and price per Share was $70.87.
(2) Assuming all Shares currently registered are sold pursuant to
continuous offering.
(3) Before deducting expenses of the Offering borne by the Fund
estimated to be $218,357.78
The date of this Prospectus is August 29, 1997
===================================================
T A B L E O F C O N T E N T S
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Item Page No.
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SUMMARY OF FUND EXPENSES 4
PROSPECTUS SUMMARY 5
FINANCIAL HIGHLIGHTS 9
THE FUND 12
USE OF PROCEEDS 13
RISK FACTORS AND OTHER CONSIDERATIONS 14
INVESTMENT OBJECTIVE AND POLICIES 11
MANAGEMENT 29
COMMON STOCK 39
PRINCIPAL SHAREHOLDERS 40
THE OFFERING 41
SHARES ELIGIBLE FOR FUTURE SALE 42
VALUATION 43
DIVIDENDS AND DISTRIBUTIONS 43
REPURCHASE OF SHARES 44
RESTRICTIONS ON TRANSFER 46
PORTFOLIO TRANSACTIONS AND BROKERAGE 47
REPORTS, LISTING AND PUBLICATION OF VALUE 47
TAX CONSIDERATIONS 49
CUSTODIAN, DIVIDEND PAYING AGENT, TRANSFER AGENT AND REGISTRAR 55
INDEPENDENT ACCOUNTANTS AND LEGAL COUNSEL 55
AVAILABLE INFORMATION 55
</TABLE>
SUMMARY OF FUND EXPENSES
Shareholder Transaction Expenses
<TABLE>
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Sales Load (as a percentage of offering price) None
Dividend Reinvestment and Cash Purchase Plan Fees None
Annual Fund Operating Expenses (as a percentage of net assets)
Management Fees* 0.62%
Other Expenses**
0.14%
Total Annual Fund Operating Expenses*** 0.76%
</TABLE>
The purpose of the table above is to help you understand all fees and expenses
that you, as a Fund Shareholder, would bear directly or indirectly.
* The Manager's fee, which is payable monthly, is assessed at the annual rates
of 0.90% of the first $400 million of aggregate net assets; 0.80% of aggregate
net assets from $400 million to $1 billion; 0.70% of aggregate net assets from
$1 billion to $2 billion; 0.65% of aggregate net assets from $2 billion to $4
billion; 0.625% of aggregate net assets from $4 billion to $6 billion; 0.60% of
aggregate net assets from $6 billion to $8 billion; 0.58% of aggregate net
assets from $8 billion to $11 billion; and 0.56% of aggregate net assets in
excess of $11 billion.
** "Other Expenses" are estimated and include non-U.S. taxes paid or accrued
on net investment income as a result of investing in certain foreign countries.
*** The expenses shown in the table are for the current fiscal year and are
based upon the net assets of the Fund after giving effect to the anticipated
net proceeds from sales of Shares being offered by this Prospectus. Total
expenses excluding non-U.S. taxes (as a percentage of net assets) are
anticipated to be 0.76% for the current fiscal year.
Example
An investor would directly or indirectly pay the following expenses on a $1,000
investment in the Fund, assuming a 5% annual return:
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One Year Three Years Five Years Ten Years
$9 $27 $47 $104
</TABLE>
This "Example" assumes that all dividends and other distributions are
reinvested at net asset value and that the percentage amounts listed under
Annual Fund Operating Expenses remain the same in the years shown. The above
tables and the assumption in the Example of a 5% annual return are required by
regulation of the SEC applicable to all investment companies; the assumed 5%
annual return is not a prediction of, and does not represent, the projected or
actual performance of the Fund's Shares.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES, AND THE FUND'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE
SHOWN.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus.
THE FUND
Emerging Markets Growth Fund, Inc. (the "Fund") was established in March, 1986
as a corporation in the United States under the laws of the State of Maryland.
The Fund is registered with the SEC as a closed-end diversified management
investment company under the Investment Company Act of 1940 (the "1940 Act").
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek long-term capital growth
through investment in developing country equity securities. A developing
country security is a security of an issuer that is domiciled and has its
principal place of business in a country which, in the opinion of the Fund's
Board of Directors, is generally considered to be a developing country by the
international financial community, including the International Bank for
Reconstruction and Development ("The World Bank") and the International
Monetary Fund. The Fund intends to invest principally in developing country
securities that are listed on a bona fide securities exchange or are actively
traded in an over-the-counter ("OTC") market and whose issuers are domiciled in
countries that have securities markets approved for investment by the Fund's
Board of Directors ("qualified markets"). In determining whether to approve
markets for investment, the Board of Directors will take into account, among
other things, market liquidity, investor information and government regulation,
including fiscal and foreign exchange repatriation rules. The following
countries currently have qualified markets: Argentina, Brazil, Chile,
Colombia, Greece, Hungary, India, Indonesia, Jordan, Malaysia, Mexico,
Pakistan, the People's Republic of China, Peru, the Philippines, Poland,
Portugal, Republic of China (Taiwan), Russia, South Africa, South Korea, Sri
Lanka, Thailand, Turkey and Venezuela. Consistent with the Fund's investment
objective, the Fund also engages in foreign currency hedging transactions. See
"Investment Objective and Policies." The Fund may also enter into transactions
in derivative instruments for risk management, investment and other purposes
including options on securities and securities indexes, futures contracts with
respect to securities, securities indexes, or currencies, swap agreements, and
equity-linked notes. These instruments may be more volatile than other
portfolio instruments held by the Fund, and there can be no assurance that use
of any such instrument will be successful in reducing portfolio risk or
increasing portfolio returns. Successful use of these instruments by the Fund
depends on the ability of Capital International, Inc., the investment adviser
of the Fund (the "Manager") to correctly predict future movements in interest
rates, security prices, or other market indicators.
THE OFFERING
The Shares will be offered by the Fund on a continuous basis until all Shares
offered hereunder have been sold; provided, however, the Fund will not sell
Shares unless the Fund is sufficiently invested in developing country
securities as determined by the Board. Currently, the Fund's management has
been directed by the Board not to sell any Shares in any month following a
month end on which the Fund is not at least approximately 90% invested in
developing country securities. This limitation may be modified at any time by
the Board of Directors of the Fund. The Shares offered under this Prospectus
include 9,731,412 Shares currently registered as well as the unsold portion of
38,700,000 Shares that were previously registered (a total of 12,505,814 Shares
were unsold as of June 30, 1997). Shares may be purchased by notifying Abbe
Shapiro by telephone (310-996-6153) or telecopy (310-996-6200). Assuming the
investor suitability and minimum purchase requirements described herein have
been met and the order has been accepted, the price of Shares will be the net
asset value per Share next determined (on the last business day of each week
and month). Payment, which may be in the form of check or by wire, must be
received on or prior to the third business day following the date on which the
price is determined at the direction of the Fund's Officers. At the sole
discretion of the Manager, investors may be permitted to purchase Shares by
tendering to the Fund developing country securities which are determined by the
Manager to be appropriate for the Fund's investment portfolio. See "The
Offering."
INVESTOR SUITABILITY REQUIREMENTS AND MINIMUM PURCHASES
The Fund has established suitability standards which require that each investor
that is a "company" (as that term is defined in the 1940 Act) must have total
assets in excess of U.S. $5 million. A prospective investor that is a natural
person must be an "accredited investor" within the meaning of Regulation D
under the Securities Act of 1933, as amended (the "1933 Act"). For example, an
individual with a net worth in excess of U.S. $1 million or an individual
income in excess of U.S. $200,000 during each of the two most recent years with
a reasonable expectation of reaching the same income level in the current year
qualify as "accredited investors." The minimum initial purchase pursuant to
this Offering (for companies and natural persons) is $100,000 (approximately
1,411 Shares based on the offering price at the date of this Prospectus) and
$25,000 thereafter. No investor may purchase or otherwise acquire an amount of
Shares that would result in its owning, together with affiliates (as such term
is defined under the Securities Exchange Act of 1934, as amended (the "1934
Act")), more than 15% of the Fund's outstanding Shares (provided that this
limitation shall not apply to the acquisition of Shares by reinvestment of
dividends or capital gain distributions; and provided further, that any
Shareholder of the Fund may purchase its pro rata portion of all Shares
authorized for issuance and sale by the Fund without regard to this
limitation).
BOARD OF DIRECTORS
The Fund's Board of Directors is responsible for the overall supervision of the
operations of the Fund. See "Management."
INVESTMENT ADVISER
Capital International, Inc. manages the investment portfolio and business
affairs of the Fund subject to policies established by the Fund's Board of
Directors. See "Management."
MANAGER'S FEES AND OTHER EXPENSES
The Fund pays the Manager monthly a fee at the annual rate of 0.90% of the
first $400 million of the aggregate net assets of the Fund. The annual rate is
reduced to .80% of the aggregate net assets from $400 million to $1 billion;
and to 0.70% of such aggregate net assets from $1 billion to $2 billion; 0.65%
of aggregate net assets from $2 billion to $4 billion; 0.625% of aggregate net
assets from $4 billion to $6 billion; 0.60% of aggregate net assets from $6
billion to $8 billion; 0.58% of aggregate net assets from $8 billion to $11
billion; and 0.56% of aggregate net assets in excess of $11 billion. The
Manager's fee is higher than that paid by most other U.S. investment companies
primarily because of the additional time and expense required of the Manager in
pursuing the Fund's investment objective of seeking long-term capital growth
through investment in developing country equity securities. In addition, other
Fund expenses are borne by the Fund.
RESTRICTIONS ON TRANSFER
All Shares of the Fund--including the Shares to be issued in this
Offering--rank pari passu with all other Shares with respect to dividends,
voting rights, liquidation rights and other matters. See "Management" and
"Common Stock."
There are significant restrictions placed on transfers of Shares in secondary
transactions. Purchasers must meet suitability standards that generally
require the purchaser to be an "accredited investor" within the meaning of
Regulation D under the 1933 Act, own less than 15% of the Fund's outstanding
Shares, and have an account balance with the Fund of at least $100,000. All
investors purchasing Shares pursuant to this Offering are required to make this
representation and to agree to this restriction. See "Restrictions on
Transfer."
In light of the risks involved in an investment in the Fund and the limited
market for the Shares, Shares should not be purchased unless the purchaser is
capable of bearing the significant risk of maintaining such an investment for
an indefinite period.
TENDER OFFERS
As a closed-end fund, the Fund's Board of Directors presently intends to
consider, on approximately a quarterly basis, whether to authorize the
repurchase by the Fund of up to 5% of the Fund's issued and outstanding Shares
at the then net asset value of such Shares. There is no guarantee that the
Fund will repurchase any Shares or that Shares tendered pursuant to a tender
offer made by the Fund will in fact be purchased. The Fund has received an
exemptive order from the SEC permitting the Fund to repurchase Shares in
connection with tender offers while it is engaged in a continuous distribution
of Shares. However, pursuant to that exemptive order the Fund has agreed to
discontinue the offer and sale of Shares during the last five business days
prior to termination of any tender offer. See "Repurchase of Shares."
RISK FACTORS AND OTHER CONSIDERATIONS
Investing in equity securities of issuers in a variety of developing countries
involves certain special risk considerations, which may include (1) investment
and repatriation restrictions, (2) currency fluctuations, (3) potential unusual
market volatility, (4) government involvement in the private sector, (5)
limited investor information, (6) shallow securities markets, (7) certain local
tax laws,(8) limited regulation of the securities markets, (9) limitations on
obtaining and enforcing judgment against non-U.S. residents, (10) risks
associated with investments in loan participations, (11) settlement risks, and
(12) the risks associated with ownership of Russian securities. Although the
foregoing considerations also may be present in the case of investments in
securities of issuers located in the U.S. or other countries that are members
of the Organization for Economic Cooperation and Development ("OECD"), they are
present to a greater degree in connection with the Fund's investments in equity
securities of issuers in developing countries. See "Risk Factors and Other
Considerations." In addition, to the extent a secondary market for the Shares
develops, investors should be aware that shares of closed-end investment
companies frequently trade at a discount from net asset value. Accordingly,
Shares of the Fund are designed primarily for long-term investors and should
not be considered a vehicle for trading purposes. The net asset value of the
Fund's Shares will fluctuate with price changes of the Fund's portfolio
securities.
FINANCIAL HIGHLIGHTS
The table below provides per share data and ratios for one share of
the Fund for each of the periods shown. This information is supplemented by
the financial statements and accompanying notes which appear elsewhere in this
Prospectus. The financial statements and notes and the financial information
in the table below have been audited by Price Waterhouse LLP, independent
accountants, whose report thereon is also included elsewhere in this
Prospectus. The semi-annual financials for the period ended December 31, 1996
are unaudited.
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Per-Share Data and Ratios
Six Months Years Ended June 30
Ended 1996 1995 1994 1993 1992 1991 1990
---- ----- ----- ----- ------ ------ ----
12/31/96(1)
Net Asset Value, Beginning of Period $57.57 $52.36 $58.75 $44.95 $38.64 $32.73 $32.81 $25.51
------ ------ ------ ------ ------ ------ ------ ------
Income from Investment
Operations:
Net investment income... .75 1.30 .87 .53 .62 .55 .83 .83
Net realized and (.88) 6.49 (.79) 15.29 7.33 8.87 3.89 10.46
unrealized gain (loss)
on investments before
non-U.S. taxes........
Non-U.S. taxes .07 (.01) (.03) (.39) (.06) (.28) (.38) (.02)
------ ------ ------ ----- ----- ----- ----- -----
Total income from (.06) 7.78 .05 15.43 8.01 9.14 4.34 11.27
investment operations.. ------ ------ ------ ----- ----- ----- ----- -----
LESS DISTRIBUTIONS:
Dividends from net (1.03) (1.30) (.63) (.49) (.56) (.56) (.92) (.85)
investment income....
Distributions from net (1.02) (1.27) (5.81) (1.14) (1.14) (2.67) (3.50) (3.12)
realized gain....... ------ ------- ------ ------ ------ ------ ------ ------
Total distributions... (2.05) (2.57) (6.44) (1.63) (1.70) (3.23) 4.42 (3.97)
------ ------ ------ ------ ------ ------ ----- ------
Net Asset Value, End of $55.46 $57.57 $52.36 $58.75 $44.95 $38.64 $32.73 $32.81
Period........... ====== ======= ====== ====== ====== ====== ====== ======
Total Return ......... .01% (2) 15.49% (1.22)% 34.33% 21.55% 29.73% 18.08% 45.52%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year $9,042 $8,451 $5,572 $4,170 $2,574 $1,561 $703 $666
(in millions)...........
Ratio of expenses to average .40% (2) .84% .91% 1.00% 1.01% 1.11% 1.18% 1.25%
net assets...............
Ratio of expenses and non-U.S.
taxes to average net assets....40% (2) .85% .94% 1.04% 1.07% 1.18% 1.31% 1.25%
Ratio of net income to
average net assets........ 1.34% (2) 2.54% 1.70% .91% 1.82% 1.84% 2.78% 3.21%
Average commissions paid
per shares (3) .12 .10 .02 .01 .02 .02 N/A N/A
Portfolio turnover rate... 11.68% 17.78% 23.75% 18.13% 11.97% 16.03% 26.38% 28.45%
</TABLE>
(1) Unaudited.
(2) Based on operations for the period shown and, accordingly, not
representative of a full year's operations.
(3) Brokerage commissions paid on portfolio transactions increase the cost of
securiteis purchased or reduce the proceeds of securities sold and are not
separately reflected in the Fund's statement of operations. Shares traded on a
principal basis (without commissions), such as fixed-income transactions, are
excluded. Generally, non-U.S. commissions are lower than U.S. commissions when
expressed as cents per share but higher when expressed as a percentage of
transactions because of the lower per-share prices of many non-U.S. securities.
THE FUND
Emerging Markets Growth Fund, Inc. (the "Fund") is a corporation
organized under Maryland law on March 10, 1986 for the purpose of investing in
developing country securities (as that term is defined below). The Fund is
designed for institutional investors and "accredited investors" (see "Investor
Suitability Requirements and Minimum Purchases," above) desiring to achieve
international diversification by participating in the economies of various
countries with emerging securities markets. By investing in the securities of
several such markets, the Fund is intended to complement and provide an
alternative to certain other investment companies which invest exclusively in
the securities of issuers in a single country.
The Fund was created to take advantage of a perceived growing
potential for foreign portfolio investment in emerging securities markets.
While the management of the Fund believes there may be regulatory, financial,
technical and other barriers to the development of this potential, in the
opinion of Fund management, substantial investment opportunities exist in these
markets. The management of the Fund believes that the existence of these
opportunities is supported by, among other things:
1) the performance in certain periods of a number of actively traded stocks of
certain issuers in these markets;
2) the relatively low valuations, from time to time, of certain securities in
these markets;
3) a growing desire for and knowledge concerning international diversification
among portfolio investors; and
4) a growing receptiveness to foreign portfolio investment among policy makers
in many developing countries, based on their growing appreciation for the
important role of equity capital and the contribution of securities markets to
a strong financial sector.
The Fund will seek access to securities markets in certain developing
countries that are currently effectively closed to foreigners (non-residents).
It is hoped that the Fund's activities will result in improvement in the terms
of access to various markets.
The management of the Fund believes that the Fund may provide
investors with an opportunity to participate in the price appreciation of
developing country securities. The management of the Fund also believes that
the Fund will allow investors to diversify their portfolios by country and
industry, thus reducing the risks associated with downturns in any one industry
or market. Additionally, the Fund will allow for international diversification
away from the more well-known securities of issuers located in countries that
are members of OECD. HOWEVER, THERE CAN BE NO ASSURANCE THAT THESE OBJECTIVES
WILL BE MET.
CAPITALIZATION
To obtain its initial capitalization of $50,000,000, the Fund in June
1986 sold 5,000,000 Shares at a price of $10.00 each in a private offering to a
limited number of institutional investors. Since that time, the Fund has
issued additional Shares in several private offerings and several public
offerings and pursuant to reinvestment of dividends and capital gain
distributions to its Shareholders.
As of June 30, 1997, there were 625 holders of Shares, and
191,671,413 Shares outstanding. The Fund's aggregate net assets were
approximately $13.5 billion. If all Shares offered by the Fund pursuant to
this Prospectus are sold, the Fund would have 213,908,639 Shares outstanding
and approximately $15 billion in aggregate net assets (assuming all Shares had
been sold at prices based on the net asset value per Share as of June 30,
1997).
Currently, there are no outstanding warrants, rights, options or
similar features relating to the purchase of the Fund's Shares (see "Common
Stock"). The Board of Directors may from time to time permit the issuance of
Shares for reinvestment of dividends or capital gain distributions or in
additional private or public offerings. The Fund reserves the right to make
additional private or public offerings in the future if it believes that such
offerings would be in the best interests of the Fund and the Fund's
Shareholders. In addition, the Fund expects to continue its current practice
of issuing additional Shares for purposes of reinvestment of dividends and
capital gain distributions.
USE OF PROCEEDS
The net proceeds to be paid to the Fund (estimated to be
approximately $1.4 billion based on the price per Share as of June 30, 1997 if
the 22,237,226 Shares being offered in this Prospectus are sold) will be
invested in accordance with the policies set forth under "Investment Objective
and Polices." Pending investment in developing country equity securities, it
is expected that the proceeds will be invested in money market instruments or
other highly liquid debt instruments denominated in U.S. dollars or other
freely convertible currencies. See "Investment Objective and Policies." The
Fund expects that substantially all of the proceeds will be invested in
accordance with its investment objective within three months after receipt
thereof and, in any case, no more than six months after receipt.
RISK FACTORS AND OTHER CONSIDERATIONS
The Fund faces a number of investment risks greater than those
normally associated with international investments in securities.
1) Investment and Repatriation Restrictions. A number of attractive
emerging securities markets restrict, to varying degrees, foreign investment in
stocks. Repatriation of investment income, capital and the proceeds of sales
by foreign investors may require governmental registration and/or approval in
some emerging market countries. While the Fund will only invest in markets
where these restrictions are considered acceptable, new or additional
repatriation restrictions might be imposed subsequent to the Fund's investment.
If such restrictions were imposed subsequent to the Fund's investment in the
securities of a particular country, the Fund's response might include, among
other things, applying to the appropriate authorities for a waiver of the
restrictions or engaging in transactions in other markets designed to offset
the risks of decline in that country. Such restrictions will be considered in
relation to the Fund's liquidity needs and all other acceptable positive and
negative factors. Further, some attractive equity securities may not be
available to the Fund because foreign shareholders hold the maximum amount
permissible under current laws.
2) Currency Fluctuations. In accordance with its investment
objective, the Fund's assets will be invested in securities of companies in
developing countries and substantially all income will be received by the Fund
in foreign currencies. A number of the currencies of developing countries have
experienced significant declines against the U.S. dollar in recent years, and
devaluation may occur subsequent to investments in these currencies by the
Fund. The value of the assets of the Fund as measured in U.S. dollars would be
adversely affected by devaluations in foreign currencies. Consistent with its
investment objective, the Fund can engage in certain currency hedging
transactions. These transactions involve certain special risks. See
"Investment Objective and Policies--Foreign Currency Hedging Transactions."
3) Potential Market Volatility. Many of the emerging securities
markets are relatively small, have low trading volumes, suffer periods of
illiquidity and are characterized by significant price volatility.
4) Government in the Private Sector. Government involvement in the
private sector varies in degree among the emerging securities markets in which
the Fund may invest. Such involvement may, in some cases, include government
ownership of companies in certain sectors, wage and price controls or
imposition of trade barriers and other protectionist measures. With respect to
any developing country, there is no guarantee that some future economic or
political crisis will not lead to price controls, forced mergers of companies,
expropriation or creation of government monopolies, to the possible detriment
of the Fund's investments.
5) Investor Information. The Fund may encounter problems in
assessing investment opportunities in certain emerging securities markets in
light of limitations on available information and different accounting,
auditing and financial reporting standards. In such circumstances, the Manager
will seek alternative sources of information, and to the extent the Manager may
not be satisfied with the sufficiency of the information obtained with respect
to a particular market or security, the Fund will not invest in such market or
security.
6) Taxation. Taxation of dividends and capital gains received by
non-residents varies among developing countries and, in some cases, is
comparatively high. In addition, developing countries typically have less
well-defined tax laws and procedures and such laws may permit retroactive
taxation so that the Fund could in the future become subject to local tax
liability that it had not reasonably anticipated in conducting its investment
activities or valuing its assets.
7) Net Asset Value Discount. To the extent an active secondary
market for the Shares develops, investors should be aware that shares of
closed-end investment companies frequently trade at a discount from net asset
value. It is anticipated that the tender offer policy adopted by the Fund's
Board of Directors will restrict the development of a secondary market with
shares trading at a discount (See "Repurchase of Shares"). The net asset value
of the Fund's Shares will fluctuate with price changes of the Fund's portfolio
securities.
8) Litigation. The Fund and its Shareholders may encounter
substantial difficulties in obtaining and enforcing judgments against non-U.S.
resident individuals and companies.
9) Fraudulent Securities. It is possible, particularly in emerging
markets, that securities purchased by the Fund may subsequently be found to be
fraudulent or counterfeit and as a consequence the Fund could suffer a loss.
10) Loan Participations. The Fund may invest, subject to its overall
limitation in debt securities, in loan participations, typically made by a
syndicate of banks to governmental or corporate borrowers for a variety of
purposes. The underlying loans to emerging market governmental borrowers may
be in default and may be subject to restructuring under the Brady Plan. The
underlying loans may be secured or unsecured, and will vary in term and legal
structure. When purchasing such instruments the Fund may assume the credit
risks associated with the original bank lender as well as the credit risks
associated with the borrower. Investments in loan participations present the
possibility that in the U.S., the Fund could be held liable as a co-lender
under emerging legal theories of lender liability. In addition, if the loan is
foreclosed, the Fund could be part owner of any collateral, and could bear the
costs and liabilities of owning and disposing of the collateral. Loan
participations are generally not rated by major rating agencies and may not be
protected by securities laws. Also, loan participations are often considered
to be illiquid.
11) Settlement Risks. Settlement systems in emerging markets are
generally less well organized than in developed markets. Supervisory
authorities may also be unable to apply standards which are comparable with
those in developed markets. Thus, there may be risks that settlement may be
delayed and that cash or securities belonging to the Fund may be in jeopardy
because of failures of or defects in the systems. In particular, market
practice may require that payment shall be made prior to receipt of the
security which is being purchased or that delivery of a security must be made
before payment is received. In such cases, default by a broker or bank (the
"Counterparty") through whom the relevant transaction is effected might result
in a loss being suffered by the Fund. The Fund will seek, where possible, to
use Counterparties whose financial status is such that this risk is reduced.
However, there can be no certainty that the Fund will be successful in
eliminating this risk, particularly as Counterparties operating in emerging
markets frequently lack the substance or financial resources of those in
developed countries. There may also be a danger that, because of uncertainties
in the operation of settlement systems in individual markets, competing claims
may arise in respect of securities held by or to be transferred to the Fund.
12. Russia. The Russian market is one of the newer emerging
markets, and in certain respects one of the least developed emerging markets.
Investments in Russia will be subject to the risks set forth above as well as
certain heightened risks with regard to the ownership and custody of
securities. Ownership of securities in Russia is evidenced by entries in the
books of a company or its registrar. No certificates representing ownership of
Russian companies will be held by the Fund's custodian or subcustodian or in an
effective central depository system, which would be the case in most emerging
and developed markets. As a result of this system and the lack of effective
state regulation and enforcement, the Fund could lose its registration and
ownership of Russian securities through fraud, negligence or even mere
oversight. The Fund will attempt to ensure that its interest in securities
continues to be recorded by having its custodian obtain extracts of share
registers through regular confirmations, however, such extracts are not legally
enforceable and would not prevent loss or dilution of the Fund's ownership
rights from fraudulent or negligent acts or mere oversights. In certain
situations, management of a company may be able to exert considerable influence
over who can purchase and sell the company's shares by illegally instructing
the registrar to refuse to record transactions in the share register. The
acquisition of ADRs, as defined below, depositary receipts and other securities
convertible or exchangeable into Russian securities will not reduce this risk.
The Fund seeks, as feasible, to reduce these risks by careful
management of its assets. However, there can be no assurance that these
efforts will be successful.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek long-term capital
growth through investment in developing country equity securities. Developing
country securities are securities whose issuers are domiciled and conduct their
principal business in those countries which, in the opinion of the Board of
Directors, are generally considered to be developing countries by the
international financial community, including The World Bank and the
International Monetary Fund. The Fund invests its assets primarily in
developing country equity securities of issuers that are domiciled and have
their principal places of business in developing countries that have qualified
markets and where the securities are listed on bona fide securities exchanges
or actively traded on over-the-counter ("OTC") markets. These exchanges or OTC
markets may be either within or outside the issuer's domicile country, and the
securities may be listed or traded in the form of International Depositary
Receipts ("IDR's"), American Depositary Receipts ("ADR's") or other types of
depositary receipts. The Fund may invest a portion of its assets (not to
exceed 10%) in securities of issuers that are not domiciled and/or do not have
their principal places of business in developing countries, but that have or
will have substantial assets in developing countries; and/or derive or expect
to derive a substantial proportion of their total revenues from either goods
and services produced in, or sales made in, developing countries.
The Fund may invest, with prior approval of the Board of Directors,
in developing country securities that are not readily marketable due to
contractual or other restrictions on resale or because of the absence of a
secondary market ("illiquid securities") and in securities of issuers that are
not domiciled and/or do not have their principal place of business in
developing countries that have qualified markets ("non-qualified market
developing country securities"). The Fund's Board of Directors currently has
authorized investments by the Fund of up to 10% of the Fund's assets in
aggregate (taken at the time of purchase) (i) in developing country securities
that are not readily marketable due to contractual or other restrictions on
resale or because of the absence of a secondary market ("illiquid securities"),
and (ii) in securities of issuers that are not domiciled and/or do not have
their principal places of business in developing countries that have qualified
markets ("non-qualified market developing country")(or investment companies
that invest solely in issuers described in clause (ii)). The Fund's
investments in securities of issuers described in clause (ii) shall also be
limited to 1% of the Fund's assets (taken at the time of purchase) in any one
issuer and 2% of the Fund's assets (taken at the time of purchase) in the
aggregate in issuers located and having their principal places of business in
any one country. Subject to these considerations and the restrictions set
forth below under "Investment Restrictions," the particular mix of securities
held by the Fund at any time will be determined by the Manager under the
supervision of, and within any guidelines established by, the Board of
Directors.
The Fund seeks a portfolio that is diversified both geographically
and by industry sector. A variety of issuers are evaluated by the Fund's
Manager, and such evaluations generally focus on past performance and
comparisons of the issuer with appropriate market indices, detailed
investigation into the current operations and future plans of the issuer, and
other relevant factors.
Pending the Fund's investment of new money in developing country
equity securities, it typically invests in money market instruments or other
highly liquid debt instruments denominated in U.S. dollars or other freely
convertible currencies. In addition, the Fund may, for liquidity, or for
temporary defensive purposes during periods in which market or economic or
political conditions warrant, invest 100% of the Fund's assets in highly liquid
debt instruments or freely convertible currencies, although the Fund does not
expect the aggregate of all such amounts to exceed 20% of its net assets under
normal circumstances. The Fund may invest a portion of its portfolio (not to
exceed 15% of total assets) in long and short-term debt instruments for other
than these purposes, where the investment is consistent with the Fund's
objective of long-term capital growth. Such an investment could involve, for
example, the purchase of bonds issued at a high rate of interest in
circumstances where the government of a developing country employs programs to
reduce inflation, resulting in a decline in interest rates and an increase in
the market value of such bonds. Debt instruments include "loan
participations," which involve the purchase of a "portion" of one or more loans
advanced by a lender (such as a bank) to a corporate or sovereign borrower.
The Fund also may invest in shares of other investment companies that
invest in one or more qualified markets. If the Fund invests in such
investment companies, the Fund's Shareholders will bear not only their
proportionate share of expenses of the Fund (including operating expenses and
the fees of the Manager), but also will bear indirectly similar expenses of the
underlying investment companies.
The Fund may also invest in shares of investment companies for which
the Manager or an affiliate of the Manager serves as investment adviser. The
Fund has received an SEC exemptive order permitting the Fund to invest up to
21/2% of the Fund's total assets in New Europe East Investment Fund, a
closed-end, Luxembourg investment fund organized by the Manager for the purpose
of investing in securities of companies or commercial operations domiciled in
the countries of East Central Europe and the former Soviet Republics. The Fund
has also received an SEC exemptive order permitting the Fund to invest up to 1%
of the Fund's total assets in New Asia East Investment Fund, a closed-end,
Singapore investment fund organized by the Manager for the purpose of investing
in the South East Asia and China regions. The Board of Directors has recently
approved a proposed investment by the Fund in a global private equity fund to
be organized by the Manager and for which investment a SEC exemptive order will
be sought. There can be no assurance that this exemptive relief will be
granted. With respect to any such investments in investment companies advised
by the Manager or an affiliate thereof, the Manager will waive all fees
attributable to the Fund's holdings in such investment companies. To
effectuate this waiver, the Fund's holdings in any such investment company
would be excluded from the net assets of the Fund in the calculation of the
Manager's fee.
The Fund may invest up to 35% of its assets in a single country. As
of June 30, 1997, the Fund had invested approximately 16.8% of its assets in
Brazil. The Manager is not aware of any types of investment risks associated
with investment in Brazil other than those types of risks discussed in this
Prospectus. See, for example, "Risk Factors And Other Considerations."
However, investors should be aware that, given the extent of the Fund's
investment in Brazil, adverse developments in that country could substantially
affect the Fund's investment results.
QUALIFIED MARKETS
The Fund's Board of Directors will, in its discretion and in
consultation with the Manager, select markets for primary investment by the
Fund ("qualified markets") taking into account, among other things, market
liquidity, availability of information and official regulation, including
fiscal and foreign exchange repatriation rules. Currently, the number of
qualified markets is limited. As of the date of this Prospectus, the markets
in the following countries had been approved by the Board of Directors as
qualified markets: Argentina, Brazil, Chile, Colombia, Greece, Hungary, India,
Indonesia, Jordan, Malaysia, Mexico, Pakistan, the People's Republic of China,
Peru, the Philippines, Poland, Portugal, Republic of China (Taiwan), Russia,
South Africa, South Korea, Sri Lanka, Thailand, Turkey and Venezuela. The
Board of Directors will revise its selection of qualified markets as additional
markets are determined by the Board of Directors as being appropriate, or as
existing markets may no longer be deemed qualified for investment by the Fund
based on the foregoing factors.
FOREIGN CURRENCY HEDGING TRANSACTIONS
For the purpose of hedging foreign currency exchange rate risks, the
Fund may enter into forward foreign exchange contracts and foreign currency
futures contracts. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are
traded in the interbank market conducted directly between currency traders
(usually large commercial banks).
A foreign currency futures contract is a standardized contract for
the future delivery of a specified amount of a foreign currency at a future
date at a price set at the time of the contract. Foreign currency futures
contracts traded in the United States are traded on regulated exchanges.
Parties to futures contracts must make initial "margin" deposits to secure
performance of the contract, which generally range from 2% to 5% of the
contract price. The parties also pay or receive daily "variation" margin
payments as the value of the futures contract fluctuates thereafter.
At the maturity of a forward or futures contract, the Fund may either
accept or make delivery of the currency specified in the contract or, prior to
maturity, enter into a closing transaction involving the purchase or sale of an
offsetting contract. Closing transactions with respect to forward contracts
are usually effected with the currency trader who is a party to the original
contract. Closing transactions with respect to futures contracts are effected
on an exchange. The Fund will only enter into such a forward or futures
contract if it is expected that the Fund will be able readily to close out such
contract. There can, however, be no assurance that it will be able in any
particular case to do so, in which case the Fund may suffer a loss.
The Fund intends to engage in foreign currency hedging transactions
to a very limited extent, and only in extraordinary circumstances and for
temporary defensive purposes would it attempt to hedge all the risks involved
in holding assets denominated in a particular currency. To date, the Fund has
engaged in a limited number of foreign currency hedging transactions. Among
other things, it is the Manager's view that the cost of engaging in hedging
transactions frequently equals or exceeds the expected benefits from the
potential reduction in exchange risk. Moreover, even if it were to attempt to
do so, the Fund could not through hedging transactions eliminate all the risks
of holding assets denominated in a currency, as there may be an imperfect
correlation between price movements in the futures or forward contracts and
those of the underlying currency in which the Fund's assets are denominated.
Also, where the Fund enters into a hedging transaction in anticipation of a
currency movement in a particular direction but the currency moves in the
opposite direction, the transaction would result in a poorer overall investment
result than if the Fund had not engaged in any such transaction. In addition,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the
currency at a price above the devaluation level it anticipates.
Under regulations of the Commodity Futures Trading Commission
("CFTC"), the futures trading activities described herein will not result in
the Fund being deemed a "commodity pool," as defined under such regulations,
provided that the Fund adheres to certain restrictions. In particular, the
Fund may purchase and sell futures contracts and options thereon only for bona
fide hedging purposes, as defined under CFTC regulations, and may not purchase
or sell any such futures contracts or options, if, immediately thereafter, the
sum of the amount of initial margin deposits on the Fund's existing futures
positions and premiums paid for outstanding options would exceed 5% of the fair
market value of its net assets. Margin deposits may consist of cash or
securities acceptable to the broker and in accordance with the rules governing
the relevant contract market.
The Fund will not enter into forward or futures contracts or maintain
an exposure to such contracts where the consummation of such contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's portfolio securities or other assets denominated in that
currency. Where the Fund is obligated to make deliveries under futures or
forward contracts, to avoid leverage it will "cover" its obligation by
segregating liquid assets such as cash, U.S. Government securities or other
approporate high grade debt obligations in an amount sufficient to meet its
obligations.
Certain provisions of the Internal Revenue Code may limit the extent
to which the Fund may enter into forward or futures contracts. Such
transactions may also affect for U.S. Federal income tax purposes the character
and timing of income, gain, or loss recognized by the Fund.
OPTIONS ON SECURITIES AND SECURITIES INDEXES
The Fund may purchase and sell call and put options on individual
securities or on indexes of securities. One purpose of purchasing put options
is to protect holdings in an underlying or related security against a
substantial decline in market value. One purpose of purchasing call options is
to protect against substantial increases in prices of securities the Fund
intends to purchase pending its ability to invest in such securities in an
orderly manner. The Fund may sell put or call options it has previously
purchased, which could result in a net gain or loss depending on whether the
amount realized on the sale is more or less than the premium and other
transaction costs paid on the put or call option which is sold. The Fund may
write a call or put option only if the option is "covered" by the Fund holding
a position in the underlying securities or by other means which would permit
satisfaction of the Fund's obligations as writer of the option. Prior to
exercise or expiration, an option may be closed out by an offsetting purchase
or sale of an option of the same series.
The purchase and writing of options involves certain risks. During
the option period, the covered call writer has, in return for the premium paid,
given up the opportunity to profit from a price increase in the underlying
securities above the exercise price, but, as long as its obligations as a
writer continues, has retained the risk of loss should the price of the
underlying security decline. The writer of an option has no control over the
time when it may required to fulfill its obligation as a writer of the option.
Once an option writer has received an exercise notice, it cannot effect a
closing purchase transaction in order to terminate its obligation under the
option and must deliver the underlying securities at the exercise price. If a
put or call option purchased by the Fund is not sold when it has remaining
value, and if the market price of the underlying security, in the case of a
put, remains equal to or greater than the exercise price or, in the case of a
call, remains less than or equal to the exercise price, the Fund will lose its
entire investment in the option. Also, where a put or call option on a
particular security is purchased to hedge against price movements in a related
security, the price of the put or call option may move more or less than the
price of the related security. There can be no assurance that a liquid market
will exist when the Fund seeks to close out an option position. Furthermore,
if trading restrictions or suspensions are imposed on the options, the Fund may
be unable to close out a position.
Options on non-U.S. securities indexes generally may not be offered
or sold to U.S. persons unless the options have been approved by the CFTC. The
Fund intends to include non-U.S. index options as a part of its investment
strategy as such investments become available for its use.
FINANCIAL FUTURES AND RELATED OPTIONS
In addition to foreign currency futures and related options, the Fund
may enter into other financial futures contracts and purchase and sell related
options thereon. Such investments may be standardized and traded on a U.S. or
foreign exchange or board of trade, or similar entity, or quoted on an
automated quotation system. Under applicable CFTC rules, the Fund may enter
into financial futures contracts traded on non-U.S. exchanges, including
related options, only if the contracts have been approved by the CFTC for offer
and sale to U.S. persons. The Fund intends to make relevant futures and
related options part of its investment strategy as such investments are
approved for use by U.S. persons. The Fund may enter into futures and options
thereon that relate to indexes or other baskets of securities.
The Fund will maintain a segregated account consisting of liquid
assets such as cash, U.S. Government securities, or other high-grade debt
obligations(or, as permitted by applicable regulation, enter into certain
offsetting positions) to cover its obligations under futures contracts and
related options. Under applicable CFTC regulations, the Fund generally may use
futures and related options only for bona fide hedging purposes (as defined in
applicable regulations) and, subject to certain limits, other investment and
speculative purposes (as discussed above under "Foreign Currency Hedging
Transactions").
There are several risks associated with the use of futures and
futures options. There can be no guarantee that there will be a correlation
between price movements in the hedging vehicle and in the portfolio securities
being hedged. An incorrect correlation would result in a loss on both the
hedged securities in the Fund and the hedging vehicle so that portfolio return
might have been greater had hedging not been attempted. There can be no
assurance that a liquid market will exist at a time when the Fund seeks to
close out a futures contract or a futures option position. Most futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single day; once the daily limit has been
reached on a particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain of these instruments are relatively
new and without a significant trading history. As a result, there is no
assurance that an active secondary market will develop or continue to exist.
Lack of a liquid market for any reason may prevent the Fund from liquidating an
unfavorable position and the Fund would remain obligated to meet margin
requirements until the position is closed.
SWAP AGREEMENTS
The Fund may enter into interest rate, equity and currency exchange
rate swap agreements. These transactions would be entered into in an attempt
to obtain a particular return when it is considered desirable to do so,
possibly at a lower cost to the Fund than if the Fund had invested directly in
the asset that yielded the desired return, or when regulatory or other
restrictions limit or prohibit the Fund from investing in the asset directly.
Swap agreements are two party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard swap transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular
predetermined investments or instruments, which may be adjusted for an interest
factor. The gross returns to be exchanged, or "swapped" between the parties
are generally calculated with respect to a "notional amount," i.e., the return
on or increase in value of a particular dollar amount invested at a particular
interest rate, in a particular foreign currency, or in a "basket" of securities
representing a particular index.
The Fund intends to enter into swap agreements that would calculate
the obligations of the parties to the agreement on a "net basis."
Consequently, the Fund's current obligations (or rights) under a swap agreement
would be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to
the agreement (the "net amount"). In the case of interest rate or currency
exchange rate swap agreements, the Fund's current obligations will be accrued
daily (offset against amounts owed to the Fund) and any accrued but unpaid net
amounts owed to a swap counterparty will be covered by the maintenance of a
segregated account consisting of liquid assets such as cash, U.S. Government
securities, or high grade debt obligations, to avoid any potential leveraging
of the Fund's portfolio. Any swap agreement so covered will not be construed
to be "senior securities" for purposes of the Fund's investment restriction
concerning senior securities.
In a typical equity swap transaction involving a foreign security (or
index of securities), the Fund would agree to pay to a counterparty the
negative return, if any, on the security (or index of securities), plus an
interest factor, in exchange for an amount equal to any positive return on the
same security or index, with both negative and positive returns calculated with
respect to an agreed reference price. The Fund intends to segregate assets
equal to the maximum potential exposure under an equity swap agreement, plus
any net amount owed with respect to the agreement. As such, the Fund does not
believe that its commitments under equity swap agreements constitute senior
securities for purposes of the Fund's investment restrictions concerning senior
securities.
Whether a fund's use of swap agreements will be successful in
furthering its investment objective will depend on the manager's ability to
predict correctly whether certain types of investments are likely to produce
greater returns than other investments. Because they are two-party contracts
and because they may have terms of greater than seven days, swap agreements may
be considered to be illiquid investments. Moreover, the Fund bears the risk of
loss of the amount expected to be received under a swap agreement in the event
of the default or bankruptcy of a swap agreement counterparty. The Fund will
enter into swap agreements only with counterparties that meet certain standards
for creditworthiness adopted by the Manager. Certain restrictions imposed on
the Fund by the Internal Revenue Code may limit the Fund's ability to use swap
agreements. The swaps market is a relatively new market and is largely
unregulated. It is possible that developments in the swaps market, including
potential government regulation, could adversely affect the Fund's ability to
terminate existing swap agreements or to realize amounts to be received under
such agreements.
EQUITY LINKED NOTES
The Fund may, subject to compliance with applicable regulatory
guidelines, purchase equity linked notes.
An equity linked note is a note whose performance is tied to a single
stock, a stock index or a basket of stocks. Upon maturity of the note,
generally the holder receives a return of principal based on the capital
appreciation of the linked securities. Depending on the terms of the issuance,
equity linked notes may also have a "cap" or "floor" on the maximum principal
amount to be repaid to holders. For example, a note may guarantee the
repayment of the original principal amount, but may cap the maximum payment at
maturity at a certain percentage of the issuance price. Alternatively, the
note may not guarantee a full return on the original principal, but may offer a
greater participation in any capital appreciation of the underlying linked
securities. The terms of an equity linked note may also provide for periodic
interest payments to holders at either a fixed or floating rate. Equity linked
notes will be considered equity securities for purposes of the Fund's
investment objective and policies.
The price of an equity linked note is derived from the value of the
underlying linked securities. The level and type of risk involved in the
purchase of an equity linked note by the Fund is similar to the risk involved
in the purchase of the underlying Latin America or other emerging market
securities. Such notes therefore may be considered to have speculative
elements. However, equity linked notes are also dependent on the individual
credit of the issuer of the note, which will generally be a trust or other
special purpose vehicle or finance subsidiary established by a major financial
institution for the limited purpose of issuing the note. Like other structured
products, equity linked notes are frequently secured by collateral consisting
of a combination of debt or related equity securities to which payments under
the notes are linked. If so secured, the Fund would look to this underlying
collateral for satisfaction of claims in the event that the issuer of an equity
linked note defaulted under the terms of the note.
Equity linked notes are often privately placed and may not be rated,
in which case the Fund will be more dependent on the ability of the Adviser to
evaluate the creditworthiness of the issuer, the underlying security, any
collateral features of the note, and the potential for loss due to market and
other factors. Ratings of issuers of equity linked notes refer only to the
creditworthiness of the issuer and strength of related collateral arrangements
or other credit supports, and do not take into account, or attempt to rate, any
potential risks of the underlying equity securities. The Fund has no
restrictions on investing in equity linked notes whose issuers are rated below
investment grade (e.g., rated below Baa by Moody's Investors Service, Inc. or
BBB by Standard & Poor's Corporation), or, if unrated, or equivalent quality.
Because rating agencies have not currently rated any issuer higher than the
rating of the country in which it is domiciled, and no Latin American country
other than Colombia is rated investment grade, equity linked notes related to
securities of issuers in such emerging market countries will be considered to
be below investment grade. Depending on the law of the jurisdiction in which
an issuer is organized and the note is issued, in the event of default, the
Fund may incur additional expenses in seeking recovery under an equity linked
note, and may have less legal recourse in attempting to do so.
As with any investment, the Fund can lose the entire amount it has
invested in an equity linked note. The secondary market for equity linked
notes may be limited. The lack of a liquid secondary market may have an
adverse effect on the ability of the Fund to accurately value the equity linked
notes in its portfolio, and may make disposal of such securities more difficult
for the Fund.
The ability of the Fund to invest in equity linked notes may be
limited by the provisions of the U.S. Commodity Exchange Act. Because the
return on equity linked notes is linked to the value of the underlying
securities, the notes may be viewed as having some of the characteristics of
futures contracts with respect to securities, the trading of which by U.S.
persons other than on designated commodity exchanges is prohibited absent an
applicable exclusion or exemption. The CFTC has adopted a statutory
interpretation exempting certain so-called "hybrid instruments" from this
prohibition under certain circumstances.
POSSIBLE BENEFITS FOR HOST COUNTRIES
The Fund expects that it could become an effective conduit for
foreign portfolio investment on terms favorable to both the investor and the
host country. There are several possible benefits to the host countries from
the Fund's investment activities.
First, the Fund may stimulate the measured flow of funds into these
securities markets from institutional investors representing, in the aggregate,
a vast pool of available equity capital.
Second, the additional demand for stocks represented by the Fund's
investments may contribute to improved stock prices and market liquidity, and
thus encourage more issuers to offer shares to the public (including foreign
investors) in their respective national securities markets. Accordingly, the
Fund may contribute to the achievement of national policy goals such as
widening ownership of the corporate sector, increasing the selection of
financial instruments available to investors, and improving the operation of
local capital markets.
Third, the Fund's investment activities may be useful in balancing
any speculative influences in these markets, and the Fund's need for a
continuous flow of business and economic information and analysis may
contribute to improved standards in these areas.
Fourth, The Fund's investments may bring equity capital to emerging
securities markets in a way that does not interfere with local control over
domestic business, as is often the case with direct investment. The Fund's
ability to affect or control any particular firm, sector or market not only is
restricted by the Fund's policies concerning diversification and avoidance of
management involvement, but also may be limited by government regulation (e.g.,
limitations on maximum percentages of foreign ownership or requirements that
foreign investors hold only non-voting shares).
Finally, the Fund may represent a pioneering effort in linking
emerging securities markets to international capital markets, thus enhancing
future access by issuers in these countries to international markets.
There can, of course, be no assurance that any of the foregoing
expectations will be realized.
INVESTMENT RESTRICTIONS
As a matter of fundamental policy the Fund will not, unless
authorized by a vote of a majority of its outstanding Shares:
1) invest in securities having unlimited liability;
2) issue senior securities (except warrants issued to the Fund's
Shareholders and except as may arise in connection with certain security
purchases, all subject to limits imposed by the 1940 Act), borrow money (except
that the Fund may borrow (a) in connection with hedging a particular currency
exposure and (b) from banks for temporary or emergency purposes, such
borrowings not to exceed 5% of the value of its total assets (excluding the
amount borrowed)), and pledge its assets (except to secure such borrowings);
3) invest in commodities, commodity contracts or land, although it
may purchase and sell securities which are secured by real estate or
commodities and securities of companies which invest or deal in real estate or
commodities, and it may purchase and sell spot or forward currency contracts or
currency futures contracts for hedging purposes or to minimize currency
conversion costs in connection with specific securities transactions;
4) make investments for the purpose of exercising control or
management;
5) engage in short sales or maintain a short position, although for
tax purposes it may sell securities short against the box;
6) purchase any security (other than marketable obligations of a
national government or its agencies or instrumentalities) if as a result: (i)
more than 35% of its assets would be invested in the securities of companies
domiciled in any one country, or (ii) more than 5% of its total assets would be
invested in the securities of any single issuer, or (iii) 25% or more of its
total assets would be invested in issuers whose primary business is in a single
industry;
7) act as underwriter except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an underwriter
under applicable securities laws;
8) make loans, except through repurchase agreements fully
collateralized, and further it may purchase debt securities usually purchased
by financial institutions and it may purchase loan participations; and
9) purchase any securities if as a result the Fund would own more
than 10% of the outstanding voting securities of any one issuer.
In addition to the above restrictions, the Fund also is subject to
certain diversification requirements based on its status as a "diversified"
investment company under the 1940 Act, which also may not be changed without a
majority vote of the Fund's outstanding Shares. Under these requirements, at
least 75% of the value of the Fund's total assets must consist of cash and cash
items, U.S. Government securities, securities of other investment companies,
and other securities limited in respect of any one issuer to an amount not
greater in value than 5% of the value of the Fund's total assets. Thus, with
respect to 75% of the Fund's total assets, the Fund may not invest more than 5%
of its assets in marketable obligations of a foreign national government or its
agencies or instrumentalities.
With respect to item (iii) of investment restriction 6, it is the
position of the staff of the SEC that only obligations of the U.S. Government
and its agencies and instrumentalities may be excluded for purposes of
determining compliance with that restriction and the Fund will only exclude
such U.S. Government securities for this purpose.
Although the Fund is not prohibited under its investment restrictions
from selling securities short against the box or engaging in repurchase
agreements, the Fund has not, since its inception, entered into any of these
transactions and it has no present intent to do so during the coming year.
Also, the Fund's limitation on borrowing does not prohibit "borrowing in
connection with hedging a particular currency exposure;" the only type of
borrowing contemplated thereby is the use of a letter of credit issued on the
Fund's behalf in lieu of depositing initial margin in connection with currency
futures contracts, and the Fund has no present intent to engage in any other
types of borrowing transactions under this authority.
The Fund interprets its fundamental policies on issuing senior
securities, investing in commodities, and effecting short sales as not
prohibiting it from entering into transactions in swap agreements, options and
futures on securities or securities indexes, provided any such positions are
covered by the maintenance of a segregated account consisting of liquid assets,
or by maintenance of an appropriate offsetting position.
Consistent with rules relating to the determination of beneficial
ownership under the 1934 Act, a conversion feature or right to acquire a
security shall be considered to be ownership of the underlying security by the
Fund for the purposes of investment restrictions 6 and 9. With respect to the
limits described in investment restrictions 6 and 9 above, the Fund may make
purchases of securities in excess of such limits pursuant to the exercise of
warrants or rights that would maintain the Fund's pro rata interest in an
issuer or a class of an issuer's securities and provided the Manager has
determined that such exercise is in the best interests of the Fund. The Fund
will dispose of the securities so acquired within a reasonable time after
acquisition (presumptively, within approximately 90 days), unless compliance
with the limits otherwise has been restored.
Notwithstanding any of the above investment restrictions, the Fund
may establish wholly-owned subsidiaries or other similar vehicles for the
purpose of conducting its investment operations in qualified markets, where
such subsidiaries or vehicles are required by local laws or regulations
governing foreign investors such as the Fund. The Fund would "look through"
any such vehicle to determine compliance with its investment restrictions.
MANAGEMENT
The Board of Directors, which is elected by the Shareholders, sets
the overall investment policies and generally oversees the investment
activities and management of the Fund. The By-laws of the Fund, as amended,
(the "By-laws") provide that Shareholders are required to elect members of the
Board of Directors only to the extent required by the 1940 Act. The Fund does
not intend to hold annual Shareholder meetings, although it will do so whenever
it is required to under the 1940 Act or state law or when it is otherwise
deemed necessary or appropriate by the Board. The Manager has the
responsibility of implementing the policies set by the Board and is responsible
for the Fund's day-to-day operations and investment activities. It is expected
that both the Board of Directors and the Manager will cooperate in the effort
to achieve the investment objective, policies and purposes of the Fund. The
Manager and the Shareholders recognize that the main purpose of the Fund is to
invest in those companies domiciled in developing countries which will result
in a favorable financial record for the Fund and which, at the same time, will
assist in expanding the respective securities markets and increasing their
liquidity.
The Fund does not currently pay any compensation to its Directors or
Officers. In the future, however, the Fund may determine that compensation to
its Directors or Officers is warranted. The Fund pays the expenses of
attendance at Board and Committee meetings for the Directors who are not
affiliated with the Manager, and for a former Director who regularly attends
Board meetings. Six Directors own Fund Shares, four of whom are affiliated with
the Manager. The majority of the non-affiliated Directors have a business
affiliation with an investor that owns Shares of the Fund. For the Fund's
Directors, the minimum initial purchase and subsequent investment requirements
have been waived. Directors and certain of their family members are permitted
to purchase shares of mutual funds advised by an affiliate of the Manager
without paying a sales charge.
<TABLE>
<CAPTION>
Name, Address and Age Position with Registrant Principal Occupation During
- --------------------- -------------- Past Five Years
---------------------------
<S> <C> <C>
DIRECTORS
Nancy Englander* President and Director Senior Vice President,
11100 Santa Monica Blvd. Capital International, Inc.
Los Angeles, CA 90025
Age: 53
David I. Fisher* Vice Chairman of the Board Chairman of the Board,
11100 Santa Monica Blvd. The Capital Group Companies,
Los Angeles, CA 90025 Inc.
Age: 57
Khalil Foulathi Director Executive Director,
P.O. Box 3600 Abu Dhabi Investment Authority
Abu Dhabi, U.A.E.
Age: 46
Beverly L. Hamilton Director President, ARCO Investment
555 Flower Street Management Company
Los Angeles, CA 90071
Age: 51
Raymond Kanner Director Senior Investment Manager,
IBM Retirement Funds IBM Retirement Funds
3001 Summer Street (previously Manager, IBM Credit
Stamford, CT 06905 Corporation)
Age: 44
Marinus W. Keijzer Director Chief Economist & Strategist,
Kroostweg-Noord 149 Pensioenfonds PGGM
P.O. Box 117, 3700 AC Zeist
The Netherlands
Age: 58
Hugh G. Lynch Director Managing Director,
767 Fifth Avenue International Investments,
New York, NY 10153 General Motors Investment
Age: 59 Management Corporation
Helmut Mader Director Director,
Taunusanlage 12 Deutsche Bank AG
60325 Frankfurt
Germany
Age: 55
Teresa E. Martini Director Vice President,
One Oak Way International Equity,
Berkeley Heights, NJ 07922 AT&T Investment Management
Age: 41 Corporatioin
John G. McDonald** Director The IBJ Professor of Finance,
Graduate School of Business Graduate School of Business,
Stanford University Stanford University
Stanford, CA 94305
Age: 60
William Robinson Director Director, Aga Khan Fund for
Aiglemont Economic Development
60270 Gouvieux
France
Age: 59
Patricia A. Small Director The Associate Treasurer, The
300 Lakeside Drive Regents of the University of
Oakland, CA 94612 California
Age: 51
Walter P. Stern* Chairman of the Board and Director Chairman of the Board,
630 Fifth Avenue Capital Group International,
New York, NY 10111 Inc.
Age: 68
Shaw B. Wagener* Executive Vice President and Director Executive Vice President and
333 South Hope Street Director,
Los Angeles, CA 90071 Capital International, Inc.
Age: 38
OTHER OFFICERS
Roberta A. Conroy Senior Vice President and Secretary Assistant General Counsel,
11100 Santa Monica Blvd. The Capital Group Companies,
Los Angeles, CA 90025 Inc.
Age: 43
Michael A. Felix Vice President and Treasurer Vice President,
135 S. State College Blvd. Capital International, Inc.
Brea, CA 92621
Age: 36
Hartmut Giesecke Vice President Chairman and Director,
1 Raffles Place Capital International K.K.
#24-00 OUB Centre and Senior Vice President
Singapore 0104 and Director, Capital
Age: 59 International, Inc.
Peter C. Kelly Vice President Senior Vice President,
11100 Santa Monica Blvd. Capital International, Inc.
Los Angeles, CA 90025
Age: 38
Victor D. Kohn Vice President Executive Vice President,
11100 Santa Monica Blvd. Capital International, Inc.
Los Angeles, CA 90025
Age: 39
Nancy J. Kyle Vice President Senior Vice President -
630 Fifth Avenue International, Capital
New York, NY 10111 Guardian Trust Company
Age: 47
Abbe Shapiro Vice President Assistant Vice President,
11100 Santa Monica Blvd. Capital International, Inc.
Los Angeles, CA 90025
Age: 37
Jennifer L. Butler Assistant Secretary Fund Administrative and
11100 Santa Monica Blvd. Compliance Associate
Los Angeles, CA 90025 (previously Assistant
Age: 31 Secretary, Washington
Management Corporation)
</TABLE>
The occupations shown reflect the principal employment of each
individual during the past five years. Corporate positions, in some instances,
may have changed during this period.
* Interested persons within the definition of Section 2(a)(19) of the 1940 Act
due to their affiliations with the Manager.
** Professor McDonald received $153,800 in total compensation (all of which
was voluntary deferred compensation) from six funds managed by an affiliate of
Capital International, Inc. for the calendar year ended December 31, 1996.
THE MANAGER
The Fund's Manager is Capital International, Inc. ("CII"), 11100
Santa Monica Boulevard, 15th Floor, Los Angeles, California 90025. The Manager
was organized under the laws of California in 1988 and is registered with the
SEC under the Investment Advisers Act of 1940. The Capital Group Companies,
Inc., 333 South Hope Street, 52nd Floor, Los Angeles, CA 90071, owns
(indirectly through another wholly-owned subsidiary) all of the Manager's
outstanding shares of common stock.
The Manager has full access to the research of other companies
affiliated with The Capital Group Companies, Inc. Affiliates of The Capital
Group Companies, Inc. manage over $282 billion of portfolio investments for a
wide range of domestic and international clients, including over $111 billion
invested for accounts with global or international investment policies. These
portfolios are invested world-wide in equity and fixed-income securities,
including investments in emerging countries. The investment management and
research staffs of the companies affiliated with The Capital Group Companies,
Inc. operate from offices in Los Angeles, San Francisco, Atlanta, Washington,
New York, Geneva, London, Hong Kong, Singapore and Tokyo. In addition, one of
its affiliates originated and publishes Morgan Stanley Capital International
Perspective, a monthly and quarterly statistical service which presents
extensive data and analyses relating to worldwide investments and securities
markets. The affiliates of The Capital Group Companies, Inc. gather extensive
information on emerging countries and potential investments through a number of
sources, including investigations of the operations of particular issuers.
These generally include personal discussions with the issuer's management and
on-site examination of its manufacturing and production facilities.
Under the Investment Advisory and Service Agreement between the Fund
and the Manager (the "Agreement"), the Manager makes investment decisions and
supervises the acquisition and disposition of securities by the Fund, all in
accordance with the Fund's investment objective and policies and under the
general supervision of the Fund's Board of Directors. In addition, the Manager
provides information to the Fund's Board of Directors to assist the Board in
identifying and selecting qualified markets. The Manager also provides and
pays the compensation and travel expenses of the Fund's Officers and of the
Directors of the Fund who are affiliated with the Manager; maintains or causes
to be maintained for the Fund all required books and records and furnishes or
causes to be furnished all required reports or other information (to the extent
such books, records, reports and other information are not maintained or
furnished by the Fund's custodian or other agents); determines the net asset
value of the Fund's Shares as required; and supplies the Fund with office
space. The Fund pays all its expenses of operation including, without
limitation, custodian, stock transfer and dividend disbursing fees and expenses
(including fees or taxes relating to stock exchange listing); costs of
preparing, printing and mailing reports, prospectuses, proxy statements and
notices to its Shareholders; taxes; expenses of the issuance, sale or
repurchase of Shares (including registration and qualification expenses); legal
and auditing fees and expenses and fees of legal representatives; compensation;
fees and expenses (including travel expenses) of Directors of the Fund who are
not affiliated with the Manager; costs of insurance, including any directors
and officers liability insurance and fidelity bonding; and costs of stationery
and forms prepared exclusively for the Fund.
For its services, the Manager receives from the Fund a fee, payable
monthly in U.S. dollars, at the annual rate of 0.90% of the first $400 million
of aggregate net assets of the Fund. The annual rate is reduced to 0.80% of
the aggregate net assets from $400 million to $1 billion; to 0.70% of the
aggregate net assets from $1 billion to $2 billion; to 0.65% of the aggregate
net assets from $2 billion to $4 billion; to 0.625% of the aggregate net assets
from $4 billion to $6 billion; to 0.60% of the aggregate net assets from $6
billion to $8 billion; to 0.58% of the aggregate net assets from $8 billion to
$11 billion; to 0.56% of such aggregate net assets in excess of $11 billion as
determined on the last business day of every week and month. In addition, other
Fund expenses are borne by the Fund. During the fiscal years ended June 30,
1996, 1995 and 1994 the management fees amounted to $44,167,000, $34,286,000
and $26,662,000, respectively. Under the Agreement, the Manager and its
affiliates are permitted to provide investment advisory services to other
clients, including clients which may invest in developing country securities.
In addition, under the Agreement, when the Manager deems the purchase or sale
of a security or other asset to be in the best interests of the Fund as well as
other accounts managed by it or its affiliates, it may, to the extent permitted
by applicable laws and regulations, aggregate the securities or other assets to
be sold or purchased for the Fund with those to be sold or purchased for such
other accounts. In that event, allocation of the securities or other assets
purchased or sold, as well as the expense incurred in the transaction, will be
made by the Manager in the manner it considers to be most equitable and
consistent with its obligations to the Fund under the Agreement and to such
other accounts. The Fund recognizes that in some cases this procedure may
adversely affect the size or price of the position obtainable for the Fund's
portfolio or its sale price of securities sold.
The Agreement is effective for a two-year period from the date of
Shareholder approval and will continue in effect from year-to-year thereafter
if approved annually (a) by the Board of Directors of the Fund or by a majority
vote of the outstanding Shares of the Fund, and (b) by a majority of the
Directors who are not parties to the Agreement or "interested persons" (as
defined in the 1940 Act) of any such party. The Agreement may be terminated
without penalty on 60 days written notice at the option of either party or by a
majority vote of the outstanding Shares of the Fund. For this purpose, a
majority vote of the outstanding Shares of the Fund means the lesser of (a) 67%
or more of the outstanding Shares present at a meeting at which more than 50%
of the outstanding Shares are present or represented by proxy or (b) more than
50% of the outstanding Shares.
While the Fund is a Maryland corporation, certain of its Directors
and Officers are not U.S. residents and substantially all of the assets of such
persons are generally located outside the U.S. As a result, it will be
difficult for U.S. investors to effect service of process upon such Directors
or Officers within the U.S., or to enforce judgments of courts of the U.S.
predicated upon civil liabilities of such Directors or Officers under the
federal securities laws of the U.S. In management's view, it is unlikely that
foreign courts would enforce judgments of U.S. courts predicated upon the civil
liability provisions of the federal securities laws, or, that such courts would
enforce such civil liabilities against foreign Directors or Officers in
original actions. The following Directors of the Fund are non-U.S. residents:
Khalil Foulathi, Marinus W. Keijzer, Helmut Mader and William Robinson. The
following Officer of the Fund is a non-U.S. resident: Hartmut Giesecke.
PERSONAL INVESTING POLICY
Capital International, Inc. and its affiliated companies have adopted a
personal investing policy that is consistent with the recommendations contained
in the report dated May 9, 1994 issued by the Investment Company Institute's
Advisory Group on Personal Investing. This policy includes: a ban on
acquisitions of securities pursuant to an initial public offering; restrictions
on acquisitions of private placement securities; pre-clearance and reporting
requirements; review of duplicate confirmation statements; annual
recertification of compliance with codes of ethics; disclosure of personal
holdings by certain investment personnel prior to recommendation for purchase
for the Fund; blackout periods on personal investing for certain investment
personnel; ban on short-term trading profits for investment personnel;
limitations on service as a director of publicly traded companies; and
disclosure of personal securities transactions. This policy has also been
incorporated into the Fund's "code of ethics" which is available from the
Fund's Secretary upon request.
PORTFOLIO MANAGEMENT
The Manager uses a system of multiple portfolio counselors in
managing assets. Under this system the portfolio of the Fund is divided into
segments, and each segment is assigned to an individual counselor, who decides
how the assets in that segment will be invested (within the limits provided by
the Fund's objectives and the Manager's investment committee). In addition,
one segment is designated as a "research portfolio" and is managed by a number
of research professionals. The following individuals serve as portfolio
counselors for the Fund:
MARK E. DENNING
Mr. Denning has served as a Director of the Manager since 1997 and served as a
Vice President from 1989 to 1997. He has also served as a Senior Vice
President of Capital Research International since 1992, a Director of Capital
Research International since 1991, and an Investment Research Analyst for
Capital Research International since 1985. Mr. Denning joined the Capital
organization in 1982. He has served as a portfolio counselor for the Fund
since 1990. He also has investment management responsibilities for
international and global accounts, as well as emerging markets.
DAVID I. FISHER
Mr. Fisher has served as President and a Director of the Manager since 1988 and
serves as Vice Chairman of the Board and a Director of the Fund. In addition,
he served as Executive Vice President-International from 1985 to 1991, and
Chairman of the Board since 1991, of The Capital Group Companies, Inc., the
Manager's parent company. Mr. Fisher joined The Capital Group organization in
1969. Mr. Fisher has served as lead portfolio counselor for the Fund since the
Fund's inception in 1986. He also has investment management responsibilities
for international and global accounts, as well as emerging markets.
KOENRAAD FOULON
Mr. Foulon has served as a Director of the Manager since 1997. In addition, he
has served as a Senior Vice President for Capital International Limited, the
Manager's London-based affiliate, since 1996, and for Capital International,
S.A., the Manager's Geneva-based affiliate, since 1994. He has also served as
a Vice President for Capital Research International, an international research
affiliate of the Manager, since 1992. Mr. Foulon's primary responsibility is
portfolio management for Europe, global emerging markets and private equity.
He has served as a portfolio manager for the Fund since 1994. Mr. Foulon
joined the Capital organization in 1990.
HARTMUT GIESECKE
Mr. Giesecke has served as a Senior Vice President of the Manager since 1992
and a Director of the Manager since 1991. He is also Vice President of the
Fund. He has also served as Senior Vice President and a Director of Capital
Research International, Inc., an international research affiliate of the
Manager, since 1985 and as President of the Manager's Tokyo-based affiliate
Capital International K.K. from 1986 to 1994, as a Director since 1986 and as
Chairman since 1994. Mr. Giesecke joined Geneva-based Capital International
S.A. in 1972. Mr. Giesecke has served as a portfolio counselor for the Fund
since the Fund's inception in 1986. He also has investment management
responsibilities for international and global accounts, as well as emerging
markets.
VICTOR D. KOHN
Mr. Kohn has served as a Senior Vice President and Director of the Manager
since 1997, and served as a Vice President of the Manager from 1992 to 1997.
He has also served as a Vice President of the Fund since 1996. In addition, he
has served as Executive Vice President and a Director of Capital Research
International since 1995, and as a portfolio manager for the Fund since 1994.
Mr. Kohn serves as the Emerging Markets Research Manager for the Manager, and
has research responsibilities for South American markets and companies. Mr.
Kohn joined the Capital organization in 1986.
NANCY J. KYLE
Ms. Kyle has served as a Senior Vice President - International, a Director and
an international portfolio manager of Capital Guardian Trust Company ("CGTC")
since 1992. She has served as a portfolio manager for the Fund since 1994 and
as a Vice President of the Fund since 1996. She is also responsible for the
coordination of asset allocation decisions for global balanced portfolios at
CGTC. Prior to joining the Capital organization in 1991, she was a Managing
Director at J.P. Morgan Investment Management Inc. where she was head of the
international equity business in the U.S. and chief international equity
strategist.
SHAW B. WAGENER
Mr. Wagener has served as an Executive Vice President of the Manager since 1993
and a Director of the Manager since 1991. He is also an Executive Vice
President and a Director of the Fund. In addition, he served as Vice
President-Investment Division of Capital Research and Management Company from
1986 to 1993. Mr. Wagener is also a regional portfolio counselor investing in
Latin American equity and fixed income securities. He joined the Capital
organization 1981. Mr. Wagener has served as a portfolio counselor for the
Fund since 1990.
THOMAS WOLF
Mr. Wolf has served as a Vice President and a portfolio manager for the Manager
since 1995, for Capital International Limited since 1993, and for Capital
International, S.A. since 1994. He has also served as a portfolio manager for
the Fund since 1994. Prior to joining the Capital organization, Mr. Wolf
served as a vice president and portfolio manager with Pictet International Ltd.
in London from 1987 to 1993.
EXPENSES
The Fund's ratios of expenses (excluding non-U.S. taxes) to average
net assets for the fiscal years ended June 30, 1996, 1995 and 1994 were 0.84%,
0.91% and 1.00%, respectively. The Fund's normal operating expenses may be
higher than those of other investment companies of comparable size. This is
because the fees and expenses generally charged by certain of the Fund's agents
are higher than those charged to investment companies investing exclusively in
the U.S. There are added custodial, communications and other costs associated
with the Fund's activities, and the advisory fees generally are higher due to
the increased advisory effort required in light of the specialized nature of
the Fund's investment activities.
COMMON STOCK
The authorized capital stock of the Fund is 400,000,000 Shares of
common stock ($.01 par value). Shares of the Fund are fully paid and
non-assessable. All Shares of the Fund are equal as to earnings, assets and
voting privileges. The Shares currently have no conversion, pre-emptive or
other subscription rights; rights to purchase Shares may be issued in the
future but any such rights would be subject to certain restrictions under the
1940 Act, including that they be issued exclusively and ratably to all holders
of Shares and that they expire after not more than 120 days. In the event of
liquidation, each Share is entitled to its proportion of the Fund's assets
after debts and expenses. See "Risk Factors and Other Considerations." There
are no cumulative voting rights for the election of Directors. See
"Management." The Shares are issued in registered form, and ownership and
transfers of the Shares are recorded by the Fund's transfer agent.
Under Maryland law, and in accordance with the By-Laws of the Fund,
the Fund is not required to hold an annual meeting of its Shareholders in any
year in which the election of directors is not required to be acted upon under
the 1940 Act. The By-Laws also provide that each Director will serve as a
Director for the duration of the existence of the Fund or until such Director
sooner dies, resigns or is removed in the manner provided by the By-Laws or as
otherwise provided by statute or the Fund's Articles of Incorporation, as
amended (the "Articles of Incorporation"). Consistent with the foregoing, in
addition to the provisions of the By-Laws, the Fund shall undertake to call a
special meeting of Shareholders for the purpose of voting upon the question of
removal of a Director or Directors when requested in writing to do so by the
holders of at least 10% of the outstanding Shares of the Fund, and, in
connection with such meeting, to comply with the provisions of Section 16(c) of
the 1940 Act relating to shareholder communications. Holders of a majority of
the outstanding Shares will constitute a quorum for the transaction of business
at such meetings. Attendance and voting at Shareholders meetings may be by
proxy, and Shareholders may take action by unanimous written consent in lieu of
holding a meeting.
The Fund's Board of Directors may, in the future, modify the terms of
the Offering. See "The Offering." In addition, the Board has approved a
proposal to seek exemptive relief from the SEC to convert to a fund with
limited redeemability. The holders of a majority of the Fund's Shares approved
the conversion of the Fund at their meeting held June 27, 1997. The conversion
of the Fund is conditional on receiving exemptive relief from the SEC.
As a closed-end investment company registered with the SEC, the Fund
is required in any offering of its Shares to sell such Shares at a price which
is not less than the current net asset value per Share (see "Valuation,"
below), except that sales at a price less than the current net asset value per
Share may be made: (i) in connection with an offering to all current holders
of Shares, (ii) with the consent of the holders of a majority of the Shares, or
(iii) as may be permitted by an order of the SEC. Any issuance or sale of
additional Shares by the Fund at a price less than the current net asset value
per Share would dilute the pro rata interests in the Fund's assets represented
by the Shares outstanding at that time. If the Fund were to convert to an
"open-end" investment company or to a fund with limited redeemability, it would
be required under the 1940 Act to sell Shares only at a price based on the
current net asset value per Share.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of Shares of common stock of the Shareholders which own
beneficially more than 5% of the outstanding Shares of the Fund as of June 30,
1997:
Beneficial Ownership
<TABLE>
<CAPTION>
Name & Address Number Percentage
of Shares of Outstanding
Common Stock
<S> <C> <C>
The Chase Manhattan Bank, N.A. 17,012,072 8.8%
as Trustee for the General Motors
Employees Global Group Pension Trust
General Motors Corporation
767 Fifth Avenue
New York, NY 10153
The Chase Manhattan Bank, N.A 12,040,847 6.3%
as Trustee for the
IBM Retirement Plan Trust
262 Harbor Drive
Stamford, CT 06904
Pensioenfonds PGGM 9,693,847 5.1%
Kroostweg-Noord 149
P.O. Box 117, 3700
AC Zeist
The Netherlands
</TABLE>
THE OFFERING
The Shares will be offered on a continuous basis until all Shares
being offered pursuant to this Prospectus have been sold; provided, however,
the Fund will not sell shares unless the Fund is sufficiently invested in
developing country securities as determined by the Board. Currently the Fund's
management has been directed by the Board not to sell any Shares in any month
following a month end on which the Fund is not at least approximately 90%
invested in developing country securities. The current authorization for the
issuance of Shares imposes a limitation on the number of Shares that may be
sold by the Fund in any one calendar year. This limitation is 30% of the
outstanding and subscribed/reserved Shares as of the prior calendar year-end
for calendar year 1997, and 25% of the outstanding and subscribed/reserved
Shares as of the prior calendar year-end for subsequent calendar years. The 90%
invested and 25% maximum offering limitations may be modified at any time by
the Board of Directors of the Fund. Shares may be purchased by notifying Abbe
Shapiro by telephone (310-996-6000) or telecopy (310-996-6200). Assuming the
investor suitability and minimum purchase requirements described herein have
been met and the order has been accepted, the price of Shares will be the net
asset value per Share next determined (on the last business day of each week
and month). Upon receipt of a purchase order, the Fund will send a
confirmation letter to the investor indicating the name of the purchaser, the
dollar amount of the purchase, the trade date on which the order will be priced
and settlement instructions. On the trade date, once the net asset value has
been calculated, the Fund will notify the purchaser of the purchase price per
Share and total dollar amount of the purchase. Payment must be received on or
prior to the third business day following the date on which the price is
determined at the direction of a Fund Officer. Payment for Shares to be sold
by the Fund may be made in the following manner:
Wire: Emerging Markets Growth Fund, Inc.
c/o Wells Fargo Bank (ABA 121000248)
155 Fifth Street
San Francisco, CA 94103
For credit to the account of:
American Funds Service Company
a/c #4600-076178
Emerging Markets Growth Fund, Inc.
Check: Emerging Markets Growth Fund, Inc.
Attn: Abbe Shapiro
11100 Santa Monica Blvd., 15th Floor
Los Angeles, CA 90025-3302
In addition, at the sole discretion of the Manager, investors may be
permitted to purchase Shares by tendering to the Fund developing country
securities which are determined by the Manager to be appropriate for the Fund's
investment portfolio. In determining whether particular securities are
suitable for the Fund's investment portfolio, the Manager will consider the
following factors, among others: the type, quality and value of the securities
being tendered; the extent to which the Fund is already invested in such
securities or in similar securities in terms of industry, geography or other
criteria; the effect the tendered securities would have on the liquidity of the
Fund's investment portfolio and other operational considerations; the Fund's
cash position; and whether the Manager believes that issuing Shares in exchange
for the tendered securities would be in the best interests of the Fund and its
Shareholders. The Manager may, out of its own resources, pay compensation to
financial intermediaries or other third parties whose customers or clients
become Shareholders of the Fund. Such compensation may be in the form of fees
for services provided or responsibilities assumed by such entities with respect
to the servicing of certain Shareholder accounts.
Investors who wish to purchase Shares with securities should send by
telecopy (310-996-6200) to Abbe Shapiro a list of all such securities and the
amount of each security being offered in exchange for Shares. The Fund may
accept all, a portion or none of the tendered securities and will notify
investors as to which, if any, of the securities will be accepted. Investors
will be notified by written communication within five business days as to
whether the Fund will issue Shares in exchange for any of the tendered
securities. If any tendered securities are accepted, investors will receive
Shares based on the market value of the tendered securities and the net asset
value of the Fund's Shares next determined after the decision has been made to
accept securities in exchange for Shares. The tendered securities must be
received on or prior to the fifth business day following the date on which the
price is determined at the direction of the Fund's Officers. An investor
should consult with its own tax adviser on the consequences of exchanging
securities for Fund Shares.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Fund would have outstanding
213,908,639 Shares of common stock (if all Shares offered in this Prospectus
are sold). The Shares sold in this Offering may be freely traded without
restriction under the 1933 Act. Shareholders are, however, subject to certain
restrictions on transfer. See "Restrictions on Transfer."
The Fund is unable to predict the effect that sales or resales made
pursuant to future registration statements, or otherwise may have on the
prevailing market price for the Fund's Shares, although it is likely that sales
of a large number of Shares would depress such market price.
VALUATION
The net asset value per Share is calculated in U.S. Dollars on the
last business day of each week and each month, and may be calculated at such
other times as the Board of Directors may determine, in the following manner:
1. Equity securities, including depositary receipts, are valued at
the last reported sale price on the exchange or market on which such securities
are traded, as of the close of business on the day the securities are being
valued or, lacking any sales, at the last available bid price. In cases where
equity securities are traded on more than one exchange, the securities are
valued on the exchange or market determined by the Manager to be the broadest
and most representative market, which may be either a securities exchange or
the over-the-counter market. Fixed-income securities are valued at prices
obtained from a pricing service, when such prices are available; however, in
circumstances where the Manager deems it appropriate to do so, such securities
will be valued at the mean quoted bid and asked prices or at prices for
securities of comparable maturity, quality and type.
Securities with original maturities of one year or less having 60 days
or less to maturity are amortized to maturity based on their cost if acquired
within 60 days of maturity or, if already held on the 60th day, based on the
value determined on the 61st day. Forward currency contracts are valued at the
mean of representative quoted bid and asked prices.
Assets or liabilities initially expressed in terms of foreign
currencies are translated prior to the next determination of the net asset
value of the Fund's Shares into U.S. dollars at the prevailing market rates.
Securities and assets for which representative market quotations are
not readily available are valued at fair value as determined in good faith
under policies approved by the Fund's Board. The fair value of all other
assets is added to the value of securities to arrive at the total assets;
2. Liabilities, including accruals of taxes and other expense items,
are deducted from total assets; and
3. Net assets so obtained are then divided by the total number of
Shares outstanding (excluding treasury shares), and the results, rounded to the
nearest cent, is the net asset value per Share.
DIVIDENDS AND DISTRIBUTIONS
The Fund will, from time to time, distribute dividends and realized
net capital gains to Shareholders. See "Tax Considerations". Shareholders
will receive all distributions in cash paid by check in U.S. Dollars mailed
directly to the Shareholder by the Fund's dividend paying agent or, as
permitted by the Board of Directors, may elect to invest distributions in
additional Shares issued by the Fund for this purpose. Shareholders, as
permitted by the Board of Directors, will be given the option to reinvest such
distribution in additional Shares of the Fund or receive cash. In any case,
where Shareholders are permitted to choose between a cash dividend or a stock
dividend, Shareholders will be required, before the declaration of any such
dividend, to provide their election to the Fund in writing. No fees are
charged in connection with a Shareholder's election to receive a stock dividend
or in connection with any other stock dividend.
Shares that are purchased in this Offering will be entitled to any
dividends that are declared on Shares of record beginning on the day following
the date on which the net asset value is determined. If requested, Share
certificates will be sent to Shareholders immediately following the date on
which payment for the Shares has been received (the "settlement date").
REPURCHASE OF SHARES
The Fund's Board of Directors currently intends, approximately each
quarter, to consider authorizing the Fund to make tender offers for up to 5% of
the Fund's then outstanding Shares at the then current net asset value of the
Shares. Although such tender offers, if undertaken and completed, will provide
some liquidity for Shareholders, there can be no assurance that such tender
offers will in fact be undertaken or completed or, if completed, that they will
provide sufficient liquidity for all Shareholders who may desire to sell such
Shares. As such, investment in the Shares should be considered illiquid
notwithstanding the possibility that one or more tender offers may be
consummated. The Fund has completed one tender offer for 1,979,192 Shares
(8.5% of the then outstanding Shares) in accordance with a Board authorization
of January 10, 1991, permitting the Fund to tender for up to 10% of its then
outstanding Shares.
Commencement by the Fund of such a tender offer during a period in
which it is simultaneously engaged in a continuous offering of its Shares may
be a violation of rules designed to prevent price manipulation promulgated by
the SEC under the 1934 Act. Accordingly, the Fund applied for and was granted
an exemption by the SEC exempting the Fund from such rules to permit the Fund
to make tender offers for its Shares while simultaneously engaged in the
continuous offering of Shares. Pursuant to that exemptive order the Fund has
agreed to discontinue the offer and sale of Shares during the last five
business days prior to termination of any tender offer. No assurance can be
given that the Fund will be able to maintain such exemption indefinitely. If
the Board of Directors authorizes the Fund to make a tender offer at such time,
if any, that the Fund is unable to rely on such exemption, the Fund intends to
suspend the continuous offering of its Shares during the term of such tender
offer in the manner prescribed by the 1934 Act (or in such other manner as may
be permitted by the staff of the SEC).
In connection with any tender offer, Shareholders will be furnished
with a notice describing the tender offer. Such notice will contain
information Shareholders should consider in deciding whether or not to tender
their Shares and detailed instructions on how to tender their Shares. A tender
offer would be funded by the disposition of portfolio investments. The Fund
does not intend to borrow money to finance a tender offer. The price the Fund
will pay to repurchase its Shares will be equal to the Fund's net asset value
on the day the tender offer expires. During the period that the tender offer
is open, Shareholders may ascertain the net asset value (which is calculated on
the last business day of each week and month) by calling Abbe Shapiro at (310)
996-6000.
Although the Board of Directors believes that tender offers for the
Shares generally would increase the liquidity of the Shares, the acquisition of
Shares by the Fund will decrease the total assets of the Fund and, therefore,
could have the effect of increasing the Fund's expense ratio. Because of the
nature of the Fund's investment objective and policies and the Fund's
portfolio, the Manager may encounter some difficulty in disposing of portfolio
securities in order to consummate tender offers. In considering whether to
make a tender offer the Board of Directors would consider, among other things,
how many (if any) Shareholders have indicated an interest in selling their
Shares, the current cash position of the Fund, any potential effect of the
repurchase on the Fund's investment management operations, and whether a tender
offer would be in the best interests of all Shareholders of the Fund.
Shareholders interested in selling Shares pursuant to a prospective tender
offer should notify Abbe Shapiro, 11100 Santa Monica Boulevard, 15th Floor, Los
Angeles, California 90025. Such notification should be in writing and should
specify the number of Shares to be tendered. This information will be
considered by the Board of Directors in considering whether to make a tender
offer.
Even if a tender offer has been made, the Directors' current policy
(which may be changed in the future), is that the Fund will not make a tender
offer if (1) in the judgment of the Directors, there is not sufficient
liquidity of Fund assets; (2) such transactions, if consummated, would impair
the Fund's status as a regulated investment company under the Internal Revenue
Code (which would make the Fund a taxable entity, causing the Fund's income to
be taxed at the corporate level in addition to the taxation of Shareholders who
receive dividends from the Fund); or (3) there is, in the judgment of the
Directors, any (a) material legal action or proceeding instituted or threatened
challenging such transactions or otherwise materially adversely affecting the
Fund, (b) declaration of a banking moratorium by federal or state authorities
or any suspension of payment by banks in the United States, (c) limitations
affecting the Fund or the issuers of its portfolio instruments imposed by
federal, state or foreign authorities on the extension of credit by lending
institutions or on the exchange of foreign currency, or (d) other events or
conditions that would have a material adverse effect on the Fund or its
Shareholders if tendered Shares were purchased.
RESTRICTIONS ON TRANSFER
At the time it becomes a Shareholder of the Fund, each Shareholder agrees
with respect to transfers of Shares that it will not transfer any Shares to a
third party unless the prospective purchaser meets the suitability standards
set by the Fund, which are currently: (i) each transferee that is a "company"
(as defined in the 1940 Act) must have total assets in excess of U.S. $5
million; (ii) each transferee that is a natural person must be an "accredited
investor" within the meaning of Regulation D under the 1933 Act; (iii) the
transferee must be purchasing at least $25,000 worth of shares; (iv) after
transfer, the transferee must have an account balance with the Fund of at least
U.S. $100,000; and (v) the transferee must not own upon the transfer of Shares,
either alone or together with any affiliate, more than 15% of the Fund's Shares
(provided that this limitation shall not apply to the acquisition of Shares by
reinvestment of dividends or capital gain distributions; and provided further,
that any Shareholder of the Fund may purchase its pro rata portion of all
Shares authorized for issuance and sale by the Fund without regard to this
limitation). "Transfer" includes any sale, assignment, transfer, encumbrance,
hypothecation, pledge or other disposition of any nature, voluntary or
involuntary, by operation of law or otherwise, of any Shares or of any interest
therein. The Fund and its transfer agent will not effect any transfer of Shares
unless sufficient evidence of compliance with the above requirements has been
provided to the Fund.
With respect to individuals, the term "accredited investor" under Regulation D
includes a person whose net worth exceeds U.S. $1,000,000, a Director or
certain executive Officers of the Fund, and persons who have had, and expect to
continue to have, certain levels of income (U.S. $ 200,000 per year, or U.S.
$300,000 per year with that person's spouse).
The Board of Directors of the Fund may from time to time and without
Shareholder approval modify the standards that prospective purchasers must
meet. Those changes could further limit the liquidity of an investment in the
Fund. In light of the limited market for the Shares and the restrictions on
transfers of the Shares, investors should not purchase Shares unless the
investor has no need for access to the assets so invested and is capable of
bearing the significant risk of maintaining that investment for an indefinite
period.
PORTFOLIO TRANSACTIONS AND BROKERAGE
In placing orders for the purchase and sale of securities for the
Fund, the Manager will use its best efforts to obtain the most favorable net
results and execution of the Fund's orders, taking into account all appropriate
factors, including price, dealer spread or commission, if any, size of the
transaction, and difficulty of the transaction. The Manager is authorized to
pay spreads or commissions to brokers or dealers furnishing brokerage and
research services in excess of spreads or commissions which another broker or
dealer may charge for the same transaction. The type of services the Manager
may consider when selecting brokers to effect transactions includes advice as
to the value of securities, the advisability of investing in, purchasing or
selling securities, the availability of securities or purchasers or sellers of
securities, and the furnishing of analyses and reports concerning issues,
industries, securities, economic factors and trends, portfolio strategy and the
performance of accounts. There is no intention to place portfolio transactions
with particular brokers or dealers or groups thereof.
Although certain research, market and statistical information from
brokers and dealers can be useful to the Fund and to the Manager, it is the
opinion of the Manager that such information is only supplementary to its own
research efforts, since the information must still be analyzed, weighed and
reviewed by the Manager in connection with the Fund. Such information may be
useful to the Manager in providing services to clients other than the Fund, and
not all such information may be used by the Manager in connection with the
Fund. Conversely, such information provided to the Manager by brokers and
dealers through whom other clients of the Manager effect securities
transactions may be useful to the Manager in providing services to the Fund.
The Fund's portfolio turnover rates for the fiscal years ended June
30, 1996, 1995 and 1994 were 17.78%, 23.75% and 18.13%, respectively. The
portfolio turnover rate is expected to be less than 100% each fiscal year.
Brokerage commissions paid on the Fund's portfolio transactions for
the fiscal years ended June 30, 1996, 1995 and 1994 amounted to $15,787,242,
$10,079,926 and $8,003,000, respectively.
REPORTS, LISTING AND PUBLICATION OF VALUE
The Fund does not currently believe there will be an active secondary
market for the Shares. To the extent a secondary market does develop,
investors should be aware that the shares of closed-end investment companies
typically trade at a discount from or premium to their net asset value and
frequently trade at a discount from net asset value. Should there ever be a
secondary market for Fund Shares, it cannot be predicted whether the Shares
would sell at a discount from or premium to net asset value.
Shares of the Fund are listed on the Luxembourg Stock Exchange. A
legal notice and the Articles of Incorporation and By-Laws of the Fund are
lodged with the Chief Registrar of the District Court of Luxembourg where such
documents are available for inspection and where copies thereof are available
upon request. While the restrictions on transfer described above under
"Restrictions on Transfer" remain in effect there may be little (if any)
trading in the Fund's Shares on the Luxembourg Stock Exchange or elsewhere.
Since the Fund's inception, there has been no public trading of the Fund's
Shares.
Financial statements of the Fund are sent to the Shareholders at
least semiannually. At least one of these reports will be audited annually.
Reports will be made available at the office of the Fund's Luxembourg transfer
agent, Banque Internationale a' Luxembourg, S.A. In addition, notices to
Shareholders are published in a Luxembourg newspaper, the Luxemburger Wort.
Attached as Appendix A to this Prospectus are the audited finacial
statements for the fiscal year ended June 30, 1996 and the unaudited financial
statements for the six-months ended December 31, 1996.
The Fund's net asset value per Share on June 30, 1997 was $70.87.
The total investment return, assuming dividend and capital gain distributions
were reinvested, from May 30, 1986 (the commencement of operations) through
June 30, 1997 was +1,416%.
Total return for the period is computed as follows:
An initial investment is divided by the net asset value per Share as
of the first day of the period in order to determine the initial number of
Shares purchased. Subsequent dividends and capital gain distributions are
reinvested at net asset value on the reinvestment date determined by the Board
of Directors. The sum of the initial Shares purchased and Shares acquired
through reinvestment is multiplied by the net asset value per Share as of the
end of the period in order to determine ending value. The ending value is
divided by the initial investment converted to a percentage which equals total
return.
TAX CONSIDERATIONS
The Fund is registered as an investment company under the 1940 Act
and intends to qualify and to elect to be taxed as a "regulated investment
company" (or "RIC") under the Internal Revenue Code of 1986, as amended (the
"Code"). If the Fund is to qualify for the special tax treatment afforded RICs
under the Code, it must meet various requirements, including (i) that at least
90% of the Fund's gross income for the taxable year must be derived from
dividends, interest, and gains from the sale or other disposition of stocks,
securities or foreign currencies or from other income derived with respect to
its business of investing in stock, securities or currencies; (ii) that less
than 30% of its gross income must be derived from the sale or disposition of
stock, securities, options, futures, and certain foreign currencies (including
certain options, futures or forward contracts on foreign currencies) held for
less than three months; (iii) that at the end of each quarter of its taxable
year, it meets certain asset diversification requirements, including that not
more than 25% of the value of its assets be invested in the securities of any
one issuer and at least 50% of its assets be represented by cash, U.S.
Government securities or other securities limited in the case of any one issuer
to not more than 5% of the Fund's total assets and to not more than 10% of the
outstanding voting securities of each such issuer; and (iv) that it distribute
each year at least 90% of its investment company taxable income (including
interest, dividends and net short-term capital gains in excess of net long-term
capital losses).
As a RIC, the Fund generally will not be subject to U.S. federal
income tax on its investment company taxable income and net capital gains (net
long-term capital gains in excess of the sum of net short-term capital losses
and capital loss carryovers from prior years), if any, that it distributes to
Shareholders. The Fund intends to distribute to its Shareholders, at least
annually, substantially all of its investment company taxable income and net
capital gains. Amounts not distributed on a timely basis in accordance with a
calendar-year distribution requirement are subject to a non-deductible 4%
excise tax. To prevent imposition of the excise tax, the Fund must distribute
during each calendar year an amount equal to the sum of (i) at least 98% of its
ordinary income (not taking into account any capital gains or losses) for the
calendar year, (ii) at least 98% of its capital gains in excess of its capital
losses (adjusted for certain ordinary losses) for the twelve-month period
ending on October 31 of the calendar year, and (iii) any ordinary income and
capital gains for previous years that were not distributed during those years.
A distribution will be treated as paid on December 31 of the current calendar
year if it is declared by the Fund in October, November or December with a
record date in such a month and paid by the Fund during January of the
following calendar year. Such distributions will be taxable to Shareholders in
the calendar year in which the distributions are declared, rather than the year
in which the distributions are received. To prevent application of the excise
tax, the Fund intends to make its distributions in accordance with the calendar
year distribution requirement.
If it qualifies for regulated investment company status, the Fund
will send written notices to Shareholders annually regarding the tax status of
all distributions made during such year, the amount of undistributed net
capital gains, if any, and any applicable tax credits.
DISTRIBUTIONS
Dividends of investment company taxable income are taxable to a
Shareholder as ordinary income whether paid in cash or reinvested in additional
Shares. It is anticipated that the dividends will not qualify for the
dividends-received deduction for a U.S. corporation.
Distributions of net capital gains, if any, which are designated by
the Fund as capital gain dividends are taxable to Shareholders as long-term
capital gains, regardless of how long the Shareholder has held the Fund's
Shares, and are not eligible for the dividends-received deduction. The Board
of Directors of the Fund generally intends to distribute any net capital gains.
If the Fund should retain net capital gains, it will be subject to a tax of 35%
of the amount retained. The Fund expects to designate amounts retained, if
any, as undistributed capital gains in a notice to its Shareholders who, if
subject to U.S. federal income taxation on long-term capital gains, (i) would
be required to include in income for U.S. federal income tax purposes, as
long-term capital gains, their proportionate Shares of the undistributed
amount, and (ii) would be entitled to credit against their U.S. federal income
tax liabilities for their proportionate Shares of the tax paid by the Fund on
the undistributed amount and to claim refunds to the extent that their credits
exceed their liabilities. For U.S. federal income tax purposes, the adjusted
basis of the Fund Shares owned by a Shareholder of the Fund would be increased
by an amount equal to 65% of the amount of undistributed capital gains included
in the Shareholder's income.
CURRENCY FLUCTUATIONS -- "SECTION 988" GAINS OR LOSSES
Under the Code, the Fund will account for its income and deduction in
U.S. dollars and thus may realize gains or losses attributable to fluctuations
in exchange rates which occur between the time the Fund accrues interest or
other receivables, including security purchases and sales, or accrues expenses
or other liabilities denominated in a foreign currency and the time the Fund
actually collects such receivables or pays such liabilities. Any such gains or
losses generally are treated as ordinary income or ordinary loss. Similarly,
on disposition of debt securities denominated in a foreign currency and on
disposition of forward contracts and certain futures contracts and options,
gains or losses attributable to fluctuations in the value of foreign currency
between the date of acquisition of the security or contract and the date of
disposition also are treated as ordinary gain or loss. These gains or losses
are referred to under the Code as "Section 988" gains or losses. Section 988
gains may increase the amount of income that the Fund must distribute in order
to qualify for treatment as a RIC and to prevent application of an excise tax
on undistributed income. Alternatively, Section 988 losses may decrease or
eliminate income available for distribution. For example, if foreign exchange
losses of the Fund were to exceed the Fund's other investment company taxable
income during a taxable year, the Fund would not be able to make ordinary
dividend distributions, and distributions made before the losses were realized
would be recharacterized as a return of capital to Shareholders for federal
income tax purposes, rather than as an ordinary dividend, thus reducing each
Shareholder's basis in his or her Fund Shares, or if no remaining basis, as
gain from the sale of Fund Shares.
HEDGING TRANSACTIONS
The taxation of equity options (including options on narrow-based
stock indices) and over-the-counter options on debt securities is governed by
Code Section 1234. Pursuant to Code Section 1234, the premium received by the
Fund for selling a put or call option is not included in income at the time of
receipt. If the option expires, the premium is short-term capital gain to the
Fund. If the Fund enters into a closing transaction, the difference between
the amount paid to close out its position and the premium received is
short-term capital gain or loss. If a call option written by the Fund is
exercised, thereby requiring the Fund to sell the underlying security, the
premium will increase the amount realized upon the sale of such security and
any resulting gain or loss will be long-term or short-term depending upon the
holding period of the security. With respect to a put or call option that is
purchased by the Fund, if the option is sold, any resulting gain or loss will
be a capital gain or loss, and will be short-term or long-term, depending upon
the holding period of the option. If the option expires, the resulting loss is
a capital loss and is short-term or long term, depending upon the holding
period of the option. If the option is exercised, the cost of the option, in
the case of a call option, is added to the basis of the purchased security and,
in the case of a put option, reduces the amount realized on the underlying
security in determining gain or loss.
In the case of Fund transactions involving many futures contracts,
certain foreign currency contracts and listed options on debt securities,
currencies and certain futures contracts and broad-based stock indices, Code
Section 1256 generally will require any gain or loss arising from the lapse,
closing out or exercise of such positions to be treated as 60% long-term and
40% short-term capital gain or loss, regardless of the holding period,
although foreign currency gains and losses (as discussed above) arising from
certain of these positions may be treated as ordinary income and loss. In
addition, the Fund generally will be required to mark to market (i.e., treat as
sold for fair market value) each such position which it holds at the close of
each taxable year (and, for excise tax purposes, on October 31 of each calendar
year).
Generally, certain hedging transactions which the Fund may undertake
may result in "straddles" for U.S. federal income tax purposes. The straddle
rules under the Code may affect the character of gains (or losses) realized by
the Fund. In addition, losses realized by the Fund on positions that are part
of a straddle may be deferred under the straddle rules, rather than being taken
into account in calculating the taxable income for the taxable year in which
the losses are realized. Because only a few regulations implementing the
straddle rules have been promulgated, the tax consequences to the Fund of
hedging transactions are not entirely clear. The hedging transactions may
increase the amount of ordinary income and short-term capital gain realized by
the Fund which is taxed as ordinary income when distributed to Shareholders.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed by the Fund to its Shareholders and which will be taxed to
Shareholders of the Fund as ordinary income or long-term capital gain, may be
increased or decreased by such hedging transactions.
Certain requirements under the regulated investment company
provisions of the Code may limit the extent to which the Fund will be able to
engage in transactions in options, futures contracts and forward contracts.
SALE OF SHARES
In general, upon the sale or other disposition of Shares of the Fund,
a Shareholder may realize a capital gain or loss which will be long-term or
short-term, depending upon the Shareholder's holding period for the Shares.
However, if the Shareholder sells Fund Shares to the Fund (in a tender offer by
the Fund, for example), proceeds received by the Shareholder may, in some
cases, be characterized for tax purposes as dividends. Any loss realized on a
sale or exchange will be disallowed to the extent the Shares disposed of are
replaced within a period of 61 days beginning 30 days before and ending 30 days
after disposition of the Shares. In such a case, the basis of the Shares
acquired will be adjusted to reflect the disallowed loss. Any loss realized by
a Shareholder on a disposition of Fund Shares held by the Shareholder for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of capital gain dividends received by the Shareholder with
respect to such Shares.
FOREIGN WITHHOLDING TAXES
Income received by the Fund from sources within countries other than
the United States ("foreign countries") may be subject to withholding and other
taxes imposed by such countries. If more than 50% of the value of the Fund's
total assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible and intends to elect to "pass-through"
to Shareholders the amount of foreign income and similar taxes it has paid.
Pursuant to this election, each of the Fund's Shareholders will be required to
include in gross income (in addition to the full amount of the taxable
dividends actually received) its pro rata share of the foreign taxes paid by
the Fund. Each such Shareholder will also be entitled either to deduct (as an
itemized deduction) its pro rata share of foreign taxes in computing its
taxable income or to claim a foreign tax credit against its U.S. Federal income
tax liability, subject to limitations. No deduction for foreign taxes may be
claimed by a Shareholder who does not itemize deductions, but such a
Shareholder may be eligible to claim the foreign tax credit (see below). The
deduction for foreign taxes is not allowable in computing alternative minimum
taxable income. Each Shareholder will be notified with 60 days after the close
of the Fund's taxable year whether the foreign taxes paid by the Fund will
"pass-through" for that year.
Generally, a credit for foreign taxes is subject to the limitation
that it may not exceed the Shareholder's U.S. tax attributable to his or her
foreign source taxable income. For this purpose, if the pass-through election
is made, the source of the Fund's income flows through to its Shareholders.
Any gains from the sale of securities by the Fund will be treated as derived
from U.S. sources and certain currency fluctuation gains, including fluctuation
gains from foreign currency-denominated debt securities, receivables and
payables, will be treated as ordinary income derived from U.S. sources. The
limitation on the foreign tax credit is applied separately to foreign source
passive income (as defined for purposes of the foreign tax credit), including
the foreign source passive income passed through by the Fund. Because of the
limitation, Shareholders taxable in the United States may be unable to claim a
credit for the full amount of their proportionate share of the foreign taxes
paid by the Fund. The foreign tax credit also cannot be used to offset more
than 90% of the alternative minimum tax (as computed under the Code for
purposes of this limitation) imposed on corporations and individuals. If the
Fund is not eligible to elect to "pass through" to its Shareholders its foreign
taxes, the foreign taxes it pays generally will reduce investment company
taxable income.
BACKUP WITHHOLDING
The Fund may be required to withhold U.S. Federal income tax at the
rate of 31% of all taxable distributions payable to Shareholders who fail to
provide the Fund with their correct taxpayer identification number or to make
required certifications, or where the Fund or the Shareholder has been notified
by the Internal Revenue Service that the Shareholder is subject to backup
withholding. Corporate shareholders and certain other shareholders specified
in the Code generally are exempt from such backup withholding. Backup
withholding is not an additional tax. Any amounts withheld may be credited
against the Shareholder's U.S. federal income tax liability.
FOREIGN SHAREHOLDERS
The tax consequences to a foreign shareholder of an investment in the
Fund may be different from those described herein. Foreign Shareholders are
advised to consult their own tax advisers with respect to the particular tax
consequences to them of an investment in the Fund.
INVESTMENT IN FOREIGN INVESTMENT COMPANIES
The Fund currently invests in Chile and may in the future invest in
one or more other countries through vehicles organized under local laws. For
U.S. Federal income tax purposes, the vehicle used may be treated as a
controlled foreign corporation ("CFC"). The income and net capital gains of a
CFC will be includable in the investment company taxable income of the Fund,
which the Fund must distribute to its Shareholders. The Fund's investment in
any CFC (or in two or more CFC's in which the Fund owns 20% or more of the
voting stock) may be treated as the security of one issuer for purposes of the
5% and 25% limits of the diversification requirement.
The Fund may also invest in securities of investment companies which
it does not control which are organized under the laws of a country in which it
may invest. For U.S. federal income tax purposes, these investment companies
will be treated as passive foreign investment companies ("PFIC"). Gain on sale
of PFIC shares, and certain excess distributions received from a PFIC, will be
treated as ordinary income allocable ratably over the Fund's holding period for
its PFIC shares. To the extent attributable to prior taxable years of the
Fund, the gains or income will be taxable to the Fund, rather than its
Shareholders, and tax payable by the Fund will be increased by an interest
charge. The Fund may be able to elect with respect to a PFIC to be taxed
currently on the PFIC's income and gains. If its election were made it would
avoid taxation of the income to the Fund and imposition of any interest charge,
and enable the character of the PFIC's income (as net capital gain or ordinary
income) to pass through to the Fund.
Other elections also may become available to the Fund, including one
under which the Fund would treat appreciation in value of PFIC shares as gain
realized at the end of a taxable year, but treated as ordinary income, such
gain, if distributed by the Fund, would not be taxable to the Fund and no
interest charge would be imposed. The specific consequences of one election
normally will differ from the consequences arising under another election. As
a result, the Fund will consider the ramifications of the election(s) available
to it and will make these elections only as deemed appropriate.
CUSTODIAN, DIVIDEND PAYING AGENT, TRANSFER AGENT AND REGISTRAR
The Chase Manhattan Bank, One Chase Manhattan Plaza, New York, NY
10081, acts as Custodian for the Fund pursuant to a Custodian Agreement. The
Custodian employs sub-custodians located in countries where the Fund's
portfolio securities are traded.
American Funds Service Company, 135 South State College Blvd., Brea,
CA 92621, acts as the Fund's dividend paying agent, transfer agent and
registrar for the Shares. The Fund's Luxembourg transfer agent is Banque
Internationale a' Luxembourg, S.A.
INDEPENDENT ACCOUNTANTS AND LEGAL COUNSEL
The accounting firm of Price Waterhouse LLP, 400 South Hope Street,
Los Angeles, CA 90071, acts as independent accountants for the Fund. The
financial statements for the year ended June 30, 1996 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
Dechert Price & Rhoads, 1500 K Street, N.W., Suite 500, Washington,
D.C. 20005, serves as legal counsel to the Fund.
At the date of this Prospectus, the Fund was not subject to any
pending litigation and was not aware of any threatened litigation.
AVAILABLE INFORMATION
A Registration Statement on Form N-2, including amendments thereto,
relating to the Shares offered hereby, has been filed by the Fund with the SEC.
This Prospectus does not contain all of the information set forth in the
Registration Statement, including any exhibits and schedules thereto. For
further information with respect to the Fund and the Shares offered hereby,
reference is made to the Registration Statement. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement may be inspected without
charge at the SEC's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from the SEC upon the payment of certain fees
prescribed by the SEC.
APPENDIX A TO PROSPECTUS*
AUDITED FINANCIAL STATEMENTS AS OF JUNE 30, 1996:
Statement of Assets and Liabilities as of June 30, 1996 (including investment
portfolio as of June 30, 1996).
Statement of Operations for the fiscal year ended June 30, 1996.
Statement of Changes in Net Assets for the fiscal years ended June 30, 1996 and
June 30, 1995.
Per-Share Data and Ratios for the fiscal years ended June 30, 1991 through June
30, 1996.
Notes to Financial Statements for the fiscal year ended June 30, 1996.
Report of Independent Accountants dated August 12, 1996.
UNAUDITED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996:
Statement of Assets and Liabilities at December 31, 1996 (including investment
portfolio at December 31, 1996) (Unaudited).
Statement of Operations for the six-months ended December 31, 1996 (Unaudited).
Statement of Changes in Net assets for the six-months ended December 31, 1996
(Unaudited) and for the fiscal year ended June 30, 1996.
Per Share Data and Ratios for the six-months ended December 31, 1996
(Unaudited), and for the fiscal years ended June 30, 1990 through June 30,
1996.
Notes to Financial Statements for the six-months ended December 31, 1996.
*Incorporated by reference. See SEC File 811-4692.
