SUPPLEMENT Dated December 27, 1995
TO THE PROSPECTUS OF
STANDISH SECURITIZED FUND
Dated May 1, 1995
EXCHANGE OF SHARES
Effective immediately, shares of the Fund may be exchanged for shares
of one or more other funds in the Standish, Ayer & Wood family of funds. Shares
of the Fund redeemed in an exchange transaction are valued at their net asset
value next determined after the exchange request is received by the Trust.
Shares of a fund purchased in an exchange transaction are sold at their net
asset value next determined after the exchange request is received by the Trust
and payment for the shares is received by the fund into which your shares are to
be exchanged. Until receipt of the purchase price by the fund into which your
shares are to be exchanged (which may take up to three business days), your
money will not be invested. To obtain a current prospectus for any of the other
funds in the Standish, Ayer & Wood family of funds, please call the Trust at
(800) 221-4795. Please consider the differences in investment objectives and
expenses of a fund as described in its prospectus before making an exchange.
Written Exchanges
Shares of a Fund may be exchanged by written order to: "Standish, Ayer
& Wood Investment Trust, One Financial Center, Boston, Massachusetts 02111". A
written exchange request must (a) state the name of the current Fund, (b) state
the name of the fund into which the current Fund shares will be exchanged, (c)
state the number of shares or the dollar amount to be exchanged, (d) identify
the shareholder's account numbers in both funds and (e) be signed by each
registered owner exactly as the shares are registered. Signature(s) must be
guaranteed as listed under "Written Redemption" below.
Telephonic Exchanges
Shareholders who complete the telephonic privileges portion of the
Fund's account application or who have previously elected telephonic redemption
privileges may exchange shares by calling (800) 221- 4795. The telephonic
privileges are not available to shareholders automatically; they must first
elect the privilege. Proper identification will be required for each telephonic
exchange. Please see "Telephonic Redemption" in the attached Prospectus for more
information regarding telephonic transactions.
General Exchange Information
All exchanges are subject to the following exchange restrictions: (i)
the fund into which shares are being exchanged must be registered for sale in
your state; (ii) exchanges may be made only between funds that are registered in
the same name, address and, if applicable, taxpayer identification number; and
(iii) unless waived by the Trust, the amount to be exchanged must satisfy the
minimum account size of the fund to be exchanged into. Exchange requests will
not be processed until payment for the shares of the current Fund have been
received. The exchange privilege may be changed or discontinued and may be
subject to additional limitations upon sixty (60) days' notice to shareholders,
including certain restrictions on purchases by market-timer accounts.
---------------------
The following revises and replaces the first paragraph under the
caption "Purchase of Shares" in the attached Prospectus:
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PURCHASE OF SHARES
Shares of the Fund may be purchased directly from the Trust, which
offers shares of the Fund to the public on a continuous basis. Shares are sold
at the net asset value per share next computed after the purchase order is
received by the Trust and payment for the shares is received by the Fund. Unless
waived by the Trust, the minimum initial investment is $1,000,000. Additional
investments may be made in amounts of at least $50,000.
---------------------
The following revises and replaces the information under the caption
"Written Redemption" in the attached Prospectus:
WRITTEN REDEMPTION
Shares of the Fund may be redeemed by written order to: "Standish, Ayer
& Wood Investment Trust, One Financial Center, Boston, Massachusetts 02111". A
written redemption request must (a) state the name of the Fund, (b) state the
number of shares or the dollar amount to be redeemed, (c) identify the
shareholder's account number and (d) be signed by each registered owner exactly
as the shares are registered. Signature(s) must be guaranteed by a member of
either the Securities Transfer Association's STAMP program or the New York Stock
Exchange's Medallion Signature Program, or by any one of the following
institutions, provided that such institution meets credit standards established
by Investors Bank & Trust Company, the Fund's transfer agent: (i) a bank; (ii) a
securities broker or dealer, including a government or municipal securities
broker or dealer, that is a member of a clearing corporation or has net capital
of at least $100,000; (iii) a credit union having authority to issue signature
guarantees; (iv) a savings and loan association, a building and loan
association, a cooperative bank, or a federal savings bank or association; or
(v) a national securities exchange, a registered securities exchange or a
clearing agency. Additional supporting documents may be required in the case of
estates, trusts, corporations, partnerships and other shareholders which are not
individuals. Redemption proceeds will normally be paid by check mailed within
seven days of receipt of a written redemption request in proper form. If shares
of the Fund to be redeemed were recently purchased by check, the Fund may delay
transmittal of redemption proceeds until such time as it has assured itself that
good funds have been collected for the purchase of such shares.
This may take up to fifteen (15) days.
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Prospectus dated May 1, 1995
PROSPECTUS
STANDISH SECURITIZED FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
Standish Securitized Fund (the "Fund") is one fund in the Standish, Ayer &
Wood family of funds. The Fund is organized as a separate diversified investment
series of Standish, Ayer & Wood Investment Trust (the "Trust"), an open-end
management investment company.
The Fund's investment objective is to maximize total return, consistent
with preserving principal and liquidity, through both capital appreciation and
the generation of current income. In pursuing its objective, the Fund will seek
capital appreciation when market factors, such as declining interest rates,
indicate that capital appreciation may be available without significant risk to
principal. The Fund will seek to achieve its investment objective primarily
through investing in a diversified portfolio of mortgage-related and
asset-backed securities. (A "securitized" asset refers to a security
collateralized by a pool of mortgages, credit card or automobile receivables or
other assets.) See "Investment Policies." Standish, Ayer & Wood, Inc., Boston,
Massachusetts, is the Fund's investment adviser (the "Adviser").
Investors may purchase shares from the Fund without a sales commission or
other transaction charges. Unless waived by the Fund, the minimum initial
investment is $1,000,000. Additional investments may be made in amounts of at
least $50,000.
This Prospectus is intended to set forth concisely the information about
the Fund and the Trust that a prospective investor should know before investing.
Investors are encouraged to read this Prospectus and retain it for future
reference. Additional information about the Fund and the Trust is contained in a
Statement of Additional Information which has been filed with the Securities and
Exchange Commission and is available upon request and without charge by calling
or writing the Trust at the telephone number or address listed above. The
Statement of Additional Information bears the same date as this Prospectus and
is incorporated by reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Expense Information 2
Financial Highlights 3
Highlights of this Prospectus 4
Investment Objective and Policies 5
Risk Factors and Suitability 11
Calculation of Performance Data 12
Dividends and Distributions 12
Purchase of Shares 12
Redemption of Shares 12
Management 13
Federal Income Taxes 14
The Fund and Its Shares 15
Custodian, Transfer Agent and Dividend Disbursing Agent 16
Independent Accountants 16
Legal Counsel 16
Appendix A 17
Tax Certification Instructions 18
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EXPENSE INFORMATION
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees (after expense limitation) 0.22%
12b-1 Fees None
Other Expenses 0.23%
Total Fund Operating Expenses (after expense limitation) 0.45%
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Example 1 year 3 years 5 years 10 years
- -------------------------------------------------------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period: $5 $14 $25 $57
You would pay the following expenses on the same investment,
assuming no redemption: $5 $14 $25 $57
</TABLE>
The purpose of the above table is to assist the investor in understanding
the various costs and expenses of the Fund that an investor in the Fund will
bear directly or indirectly. See "Management -- Investment Adviser" and
"Management -- Expenses." The figure shown in the caption "Other Expenses" is
based upon the Fund's expenses for the fiscal year ended December 31, 1994
during which the Adviser did not impose a portion of its fee.
The Adviser has voluntarily agreed to limit Total Fund Operating Expenses
of the Fund (excluding brokerage commissions, taxes, litigation,
indemnification, and other extraordinary expenses) to 0.45% of the Fund's
average daily net assets. This agreement is voluntary and temporary and may be
discontinued or revised by the Adviser at any time. In the absence of such
agreement, the Management Fees and Total Fund Operating Expenses would have been
0.25% and 0.49%, respectively, of the Fund's average daily net assets for the
fiscal year ended December 31, 1994.
THE INFORMATION IN THE TABLE AND HYPOTHETICAL EXAMPLE ABOVE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY
BE GREATER OR LESSER THAN THOSE SHOWN. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5%
ANNUAL RETURN, THE FUND'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN
ACTUAL RETURN GREATER OR LESSER THAN 5%.
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<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
The financial highlights for the years ended December 31, 1993 and 1994
have been audited by Coopers & Lybrand L.L.P., independent accountants, whose
report, together with the financial statements of the Fund, is incorporated into
the Statement of Additional Information.
Per Share Data
(for a share outstanding throughout each period): Year Ended December 31,
1994 1993 1992* 1991*
<S> <C> <C> <C> <C>
Net asset value - beginning of period $20.24 $20.14 $20.97 $20.48
Income from investment operations:
Net investment income $1.42 $1.45 $1.43 $1.71
Net realized and unrealized gain (loss)
on investments (1.86) 0.54 (0.61) 1.37
Total from investment operations ($0.44) $1.99 $0.82 $3.08
Less distributions declared to shareholders:
From net investment income ($1.19) ($1.48) ($1.57) ($1.55)
In excess of net investment income - (0.05) - -
From net realized gain - (0.36) (0.07) (1.04)
From Paid-in capital - - - -
In excess of net realized gain - - (0.01) -
Total distributions declared to shareholders ($1.19) ($1.89) ($1.65) ($2.59)
------- ------- ------- -------
Net asset value - end of period $18.61 $20.24 $20.14 $20.97
======= ======= ======= =======
Total return -2.16% 10.02% 4.07% 15.57%
Ratios (to average net assets)/Supplemental Data:
Expenses** 0.45% 0.45% 0.45% 0.45%
Net investment income** 6.79% 6.75% 6.94% 8.03%
Portfolio turnover 138% 130% 301% 324%
Net assets at end of period (000 omitted) $53,779 $78,054 $90,460 $78,570
Net investment income per share $1.41 $1.77 $1.42 $1.70
Ratios (to average net assets):
Expenses 0.49% 0.48% 0.51% 0.49%
Net investment income 6.76% 6.72% 6.88% 7.99%
- ------------------------------------------------------------------------------------------------------------------------------------
(table continued)
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Per Share Data
(for a share outstanding throughout each period): Year Ended December 31,
1990* 1989*+
Net asset value - beginning of period $20.15 $20.00
Income from investment operations:
Net investment income $1.80 $0.60
Net realized and unrealized gain (loss)
on investments 0.40 0.20
Total from investment operations $2.20 $0.80
Less distributions declared to shareholders:
From net investment income ($1.70) $0.60
In excess of net investment income - -
From net realized gain (0.17) -
From Paid-in capital - (0.05)
In excess of net realized gain - -
Total distributions declared to shareholders ($1.87) ($0.65)
------- -------
Net asset value - end of period $20.48 $20.15
======= =======
Total return 11.47% 11.90%t
Ratios (to average net assets)/Supplemental Data:
Expenses** 0.45% 0.45%t
Net investment income** 8.88% 8.46%t
Portfolio turnover 146% 1%
Net assets at end of period (000 omitted) $67,278 $31,427
Net investment income per share $1.79 $0.59
Ratios (to average net assets):
Expenses 0.51% 0.59%t
Net investment income 8.82% 8.32%t
t Computed on an annualized basis.
* Audited by other auditors.
+ For the period from August 31, 1989 (start of business) to December 31, 1989.
**The investment adviser did not impose a portion of its advisory fee. If this
voluntary reduction had not been undertaken, the net investment income per share
and the ratios would have been:
Further information about the performance of the Fund is contained in the
Fund's Annual Report, which may be obtained from the Fund without charge.
</TABLE>
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HIGHLIGHTS OF THIS PROSPECTUS
The Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, a Massachusetts business trust. See "The Fund and Its Shares"
in this Prospectus.
The Trust has established thirteen series and may establish additional
series at any time. Each series is a separate taxpayer, eligible to qualify as a
separate regulated investment company for federal tax purposes. The calculation
of the net asset value of a series and the determination of the tax consequences
of investing in a series will be determined separately for each series.
Investment Objective and Policies
The Fund's investment objective is to maximize total return, consistent
with preserving principal and liquidity, through both capital appreciation and
the generation of current income. In pursuing its objective, the Fund will seek
capital appreciation when market factors, such as declining interest rates,
indicate that capital appreciation may be available without significant risk to
principal. Under normal market conditions, at least 65% of the total value of
the Fund's assets will be invested in mortgage-related and asset-backed
securities.
Although mortgage-related securities may have stated maturities of up to 40
years, in practice, prepayments of the principal of and interest on the
mortgages underlying the securities will make the effective maturity of the
securities shorter. Unscheduled prepayments are likely to increase in periods
when interest rates are declining. Because the Fund may be able to invest
amounts received as a result of such prepayments only at a lower interest rate,
some high-yielding mortgage-related securities may have less potential for
return and value than conventional bonds with comparable maturities. Conversely,
in a rising interest rate environment, a declining prepayment rate will extend
the average life of many mortgage-related securities. Extending the average life
of a mortgage-related security increases the risk of depreciation due to future
increases in market interest rates. The Fund may engage in a variety of options
and futures transactions. These investment strategies and policies involve
certain special risks. See "Special Investment Practices" and "Investment
Objective and Policies" in this Prospectus.
Securitized Assets Generally
The Fund will invest in securities which are collateralized by a pool of
mortgages, credit card or automobile receivables or other assets (collectively,
"Securitized Assets"). Securitized Assets arise through the grouping by
governmental, government-related and private organizations of loans, receivables
and other assets originated by various lenders. Interests in pools of these
assets differ from other forms of debt securities, which normally provide for
periodic payment of interest in fixed amounts with principal paid at maturity or
specified call dates. Instead, these Securitized Assets provide periodic
payments which generally consist of both interest and principal payments. The
estimated life of a Securitized Asset and the average maturity of a portfolio
including such assets varies with the prepayment experience with respect to the
underlying debt instruments.
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<PAGE>
Investment in a mutual fund holding Securitized Assets, such as the Fund,
involves special risk considerations. These include the fact that the Fund's net
asset value per share will fluctuate as the value of its portfolio securities
changes in response to changing market rates of interest, principal prepayments
and other factors. Prepayment rates can vary widely, generally in response to
changes in the prevailing level of interest rates, although other economic and
demographic factors also may be involved. For example, falling interest rates
generally result in a faster rate of prepayments of mortgage loans while rising
interest rates generally slow the rate of prepayments. An acceleration in
prepayments in response to sharply falling interest rates will shorten the
security's average maturity and limit the potential appreciation in the
security's value relative to a conventional debt security. As a result,
Securitized Assets are not as effective in locking in high long-term yields.
Conversely, in periods of sharply rising rates, prepayments generally slow,
increasing the security's average life and its potential for price depreciation.
Securitized Assets purchased at either premiums or discounts have an
additional element of uncertainty which may impact their performance.
Acceleration of prepayments will have an adverse effect upon the total return of
securities purchased at a premium while a slowing of prepayments will have a
positive effect. Acceleration of prepayments will have a positive effect upon
the total return of securities purchased at a discount, while a slowing of
prepayments will have a negative effect.
The credit characteristics of Securitized Assets differ in a number of
respects from those of traditional debt securities. The credit quality of most
Securitized Assets depends primarily upon the credit quality of the assets
underlying such securities, how well the entity issuing the securities is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit support provided to such
securities. Securitized Assets purchased by the Fund generally will consist of
obligations issued or guaranteed as to principal and interest by the U.S.
Government or by agencies or instrumentalities thereof or rated, at the date of
investment, A or better by Moody's Investors Service, Inc. ("Moody's") or by
Standard & Poor's Ratings Group ("Standard & Poor's") or, if not rated,
determined to be of comparable credit quality by the Adviser. See "Ratings."
Subsequent to its purchase, a rated Securitized Asset may be assigned a lower
rating or may cease to be rated which may result in a loss of value and
liquidity. An adverse change in or cessation of a rating would not require the
disposition of the instrument, but the Adviser will consider such an event in
determining whether the Fund should continue to hold the security.
Because the Fund generally will be investing in mortgage-related securities
and other types of Securitized Assets, it may be affected by risks or problems
peculiar to mortgage finance, such as the effects of government regulation and
tax policy, as well as those peculiar to the financing of the instruments
underlying other types of Securitized Assets.
6
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Investment Adviser
Standish, Ayer & Wood, Inc. (the "Adviser") serves as an investment adviser
to the Fund and to the other series of the Trust. The Fund pays the Adviser for
its services a monthly fee at the annual rate of 0.25% of the first $500,000,000
of average daily net asset value and 0.20% of average daily net asset value in
excess of $500,000,000. See "Management -- Investment Adviser" in this
Prospectus.
Purchase of Shares
The Fund offers its shares of beneficial interest which are sold at net
asset value. Unless waived by the Fund, the minimum initial investment is
$1,000,000. Additional investments may be made in amounts of at least $50,000.
No sales load is imposed on the purchase of the Fund's shares. See "Purchase of
Shares" in this Prospectus.
Redemption of Shares
The Fund's shares may be redeemed, at the net asset value per share next
determined after receipt of a redemption request in proper form, by (1) written,
wire or telephone order to the Fund or (2) wire or telephone order from brokers
or dealers for the repurchase of the Fund's shares. Upon 30 days' notice to a
shareholder, the Fund may redeem, at net asset value, the shares in any account
which has a value of less than $50,000. See "Redemption of Shares" in this
Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective
The Fund's investment objective is to maximize total return, consistent
with preserving principal and liquidity, through both capital appreciation and
the generation of current income. In pursuing its objective, the Fund will seek
capital appreciation when market factors, such as declining interest rates,
indicate that capital appreciation may be available without significant risk to
principal. Such capital appreciation may result from a change in the yield
spread of an issuer whose securities are held by the Fund or from a decline in
interest rates or from a combination of both factors. The Fund will seek to
achieve its investment objective primarily through investing in a diversified
portfolio of mortgage-related and asset-backed securities, including securities
issued by governmental, government-related and private organizations. The Fund
may purchase and sell options and may use futures contracts and put and call
options on such contracts. See "Strategic Transactions."
Because interest yields on securities and opportunities to realize net
gains from option and futures transactions may vary from time to time because of
general economic and market conditions, and many other factors, it is
anticipated that the Fund's current return will fluctuate. Fluctuations in the
value of portfolio securities will have a minimal effect on interest income on
existing portfolio securities but will be reflected in the Fund's net asset
value. Thus, a decrease in interest rates will generally result in an increase
in the value of the Fund's shares. Conversely, during periods of rising interest
rates, the value of the Fund's shares will generally decline. The magnitude of
7
<PAGE>
these fluctuations will generally be greater at times when the Fund's average
maturity is longer. Because of the uncertainty inherent in all investments, no
assurance can be given that the Fund will achieve its investment objective. The
investment objective and policies of the Fund may be changed by the Trustees
without the approval of shareholders. The Fund's investment policies are
described further in the Statement of Additional Information.
Investment Policies
Under normal market conditions, at least 65% of the total value of the
Fund's assets will be invested in mortgage-related and asset-backed securities.
The Fund may invest in a broad range of mortgage-backed securities of the
"pass-through" type, including GNMA Certificates, FHLMC Participation
Certificates and FNMA Mortgage-Backed Certificates. The Fund may also purchase
collateralized mortgage obligations, mortgage-backed securities, whole loans,
other pass-through securities and mortgage derivatives (such as mortgage
STRIPs), all of which may be issued by governmental or non-governmental entities
such as banks and other mortgage lenders. Non-government securities may offer a
higher yield but may also be subject to greater price fluctuation than
government securities. Other types of mortgage-related securities can be
expected to be developed in the future, and the Fund may invest in them if the
Adviser determines that the investment is consistent with the Fund's investment
objective and policies. In that case, the Fund will supplement this Prospectus
and, if appropriate, the related Statement of Additional Information. The Fund
also intends to invest in asset-backed securities, which represent
participations in, or are secured by and payable from, assets such as motor
vehicle installment sale contracts, installment loan contracts, leases of
various types of real and personal property, receivables from revolving credit
(credit card) agreements and other categories of receivables.
The balance of the Fund's assets will normally be invested in U.S. Treasury
and agency notes and bonds, certificates of deposit, money market instruments
and repurchase agreements, in furtherance of the Fund's objective to preserve
liquidity and principal. The Fund may adopt a temporary defensive position when
the Adviser considers market conditions to be adverse by investing substantially
all of its assets in money market instruments, including short-term U.S.
Government securities, negotiable certificates of deposit, non-negotiable fixed
time deposits, bankers' acceptances, floating-rate notes, repurchase agreements
and prime commercial paper.
The average maturity of the Fund's portfolio will vary depending upon the
maturity of its investments. Mortgage-related securities, when they are issued,
have stated maturities of up to 40 years, depending on the length of the
mortgages underlying the securities. In practice, scheduled or unscheduled early
prepayments of principal and interest on the underlying mortgages will make the
effective maturity of the securities shorter. A security based on a pool of 40
year mortgages may have an average life as short as two years. The relationship
between mortgage prepayments and interest rates may give some high-yielding
mortgage-related securities less potential for return and value than
conventional bonds with comparable maturities.
8
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Mortgage-Backed Pass-Through Securities
Mortgage-backed "pass-through" securities are subject to regular payments
of principal and early prepayments of principal, which will affect the Fund's
current and total returns. While it is not possible to predict accurately the
life of a particular issue of a mortgage-backed "pass-through" security held by
the Fund, the actual life of any such security is likely to be substantially
less than the original average maturity of the mortgage pool underlying the
security because unscheduled early prepayments of principal on the security
owned by the Fund will result from the prepayment, refinancing or foreclosure of
the underlying mortgage loans in the mortgage pool. For example, mortgagors may
speed up the rate at which they prepay their mortgages when interest rates
decline sufficiently to encourage refinancing. When the monthly payments (which
may include unscheduled prepayments) on such a security are passed through to
the Fund, the Fund may be able to reinvest them only at a lower rate of
interest. Because of the regular scheduled payments of principal and the early
unscheduled prepayments of principal, the mortgage-backed "pass-through"
security is less effective than other types of obligations as a means of
"locking-in" attractive long-term interest rates. As a result, this type of
security may have less potential for capital appreciation during periods of
declining interest rates than other U.S. Government securities of comparable
maturities, although many issues of mortgage-backed "pass-through" securities
may have a comparable risk of decline in market value during periods of rising
interest rates. Although a security purchased at a premium above its par value
may carry a higher stated rate of return, both a scheduled payment of principal,
which will be made at par, and an unscheduled prepayment of principal generally
will decrease current and total returns and will accelerate the recognition of
income, distributions from which will be taxable to shareholders as ordinary
income.
GNMA Certificates
GNMA Certificates are mortgage-backed securities representing an undivided
interest in a pool of mortgage loans. These loans, which are issued by lenders
such as mortgage bankers, commercial banks and savings and loan associations,
are either insured by the Federal Housing Administration or the Farmers Home
Administration or guaranteed by the Veterans Administration. A "pool" or group
of such mortgages is assembled and, after being approved by the Government
National Mortgage Association ("GNMA"), interests in the pool are offered to
investors through securities dealers. Once such a pool is approved by GNMA, the
timely payment of interest and principal on the Certificates issued representing
such pool is guaranteed by the full faith and credit of the U.S. Government. As
mortgage-backed securities, GNMA Certificates differ from bonds in that the
principal is paid back by the borrower over the length of the loan rather than
returned in a lump sum at maturity. GNMA Certificates are called "pass-through"
securities because a pro-rata share of both regular interest and principal
payments, as well as unscheduled early prepayments, on the underlying mortgage
pool is passed through monthly to the holder of the Certificate (i.e., the
Fund). Since the unscheduled prepayment rate of the underlying mortgage pool
covered by a "pass-through" security cannot be predicted with certainty, the
average life of a particular issue of GNMA Certificates cannot be accurately
predicted, although the Fund expects that the average life of the GNMA
Certificates held by the Fund will be approximately twelve years.
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FHLMC Participation Certificates
The Federal Home Loan Mortgage Corporation ("FHLMC"), a corporate
instrumentality of the U.S. Government which was created for the purpose of
increasing the availability of mortgage credit for residential housing, issues
participation certificates ("PCs") representing undivided interests in FHLMC's
mortgage portfolio. While FHLMC guarantees the timely payment of interest and
ultimate collection of the principal of its PCs, its PCs are not backed by the
full faith and credit of the U.S. Government. FHLMC PCs differ from GNMA
Certificates in that mortgages underlying the PCs are mostly "conventional"
mortgages rather than mortgages insured or guaranteed by a federal agency or
instrumentality. However, in several other respects, such as the monthly
pass-through of interest and principal (including unscheduled prepayments) and
the unpredictability of future unscheduled prepayments on the underlying
mortgage pools, FHLMC PCs are similar to GNMA Certificates.
FNMA Mortgage-Backed Certificates
The Federal National Mortgage Association ("FNMA"), a federally chartered
corporation owned entirely by private stockholders, (i) purchases both
conventional and federally insured or guaranteed residential mortgages secured
by properties consisting of one-family to four-family dwelling units from
various entities, including savings and loan associations, savings banks,
commercial banks, credit unions and mortgage banks, and (ii) packages pools of
such mortgages in the form of pass-through securities generally called FNMA
Mortgage-Backed Certificates, which are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and credit
of the U.S. Government. Like GNMA Certificates and FHLMC PCs, these pass-through
securities are subject to the unpredictability of unscheduled prepayments on the
underlying mortgage pools.
Collateralized Mortgage Obligations (CMOs)
The issuer of a CMO effectively transforms a mortgage pool into obligations
comprised of several different maturities, thus creating mortgage securities
that appeal to short and intermediate term investors as well as the more
traditional long-term mortgage investor. CMOs are debt securities issued by
FHLMC, FNMA and by non-governmental financial institutions and other mortgage
lenders which are generally fully collateralized by a pool of mortgages held
under an indenture. CMOs are issued in a number of classes or series which have
different maturities and are generally retired in sequence. CMOs are designed to
be retired as the underlying mortgage loans in the mortgage pool are repaid. In
the event of sufficient early prepayments on such mortgages, the class or series
of CMO first to mature generally will be retired prior to its maturity. Thus,
the early retirement of a particular class or series of a CMO held by the Fund
would affect the Fund's current and total returns in the manner indicated above.
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Real Estate Mortgage Investment Conduits (REMICs)
The Tax Reform Act of 1986 has authorized a mortgage-backed securities
vehicle known as a real estate mortgage investment conduit, or REMIC. The
purpose of the REMIC amendments to the federal tax law was to remove tax
obstacles which prevented issuers and investors in residential and commercial
mortgage-backed securities from achieving optimum economic, regulatory and
accounting results. A REMIC is a non-governmental entity formed for the purpose
of holding a fixed pool of mortgages secured by an interest in real property,
and of issuing multiple classes of interests therein to investors such as the
Fund. See "Investment Restrictions."
Stripped Mortgage-Backed Securities (STRIPs)
STRIPs are types of mortgage-backed securities issued by certain government
agencies, such as FNMA and FHLMC, and by investment banks. They are created by
dividing the cash flows from a pool of mortgages or mortgage securities and
allocating specified portions of the monthly interest and principal to two or
more new STRIP securities. For example, a FNMA 9% pass-through security can be
"stripped" to produce two new securities, one with a 6% coupon and the other
with a 12% coupon, by directing more interest from the underlying collateral to
the security with the higher coupon and less to the security with the lower
coupon. The Fund would invest in the security with the lower coupon if it
expected interest rates to decline and in the security with the higher coupon if
it expected interest rates to rise. The ratio of interest to principal can be
varied to create a wide range of securities.
In some cases, a STRIP security will receive all of the interest and none
of the principal payments, while another will receive all of the principal
payments and none of the interest payments. These types of STRIPs are known as
interest-only and principal-only STRIPs (IO and PO STRIPs, respectively). A PO
STRIP bears some resemblance to a zero coupon bond. It sells at a discount and
pays no interest. If the underlying obligation is prepaid, no interest is
received at all. IO and PO STRIPs are very sensitive to interest rate changes.
IO STRIPs rise and PO STRIPs fall in price when interest rates are rising; IO
STRIPs fall and PO STRIPs rise in price when interest rates are declining. The
reason for this is that declining interest rates lead to faster mortgage
prepayments as homeowners buy new homes or refinance their mortgages, while
rising rates result in slower prepayment rates. Faster prepayments reduce the
principal balance of the underlying collateral more rapidly, resulting in
smaller interest payments in the future but returning principal at a faster rate
and hence enhancing the value of a PO STRIP. Conversely, slower prepayments mean
that interest payments will be greater in future periods because of the greater
size of unpaid principal, thus enhancing the value of the IO STRIP.
The Staff of the SEC currently considers that the Board of Trustees may
determine whether or not a particular government issued IO or PO STRIP backed by
fixed rate mortgages is liquid and considers that private IO and PO STRIPs are
illiquid for purposes of the Fund's investment restrictions.
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Direct Investments in Mortgages
The Fund may invest directly in mortgages securing commercial and
residential real estate. When the Fund invests directly in mortgages, the Fund,
rather than a financial intermediary, becomes the mortgagee with respect to such
mortgage loans. Direct investments in mortgages are available from lending
institutions which group together a number of mortgages for resale (usually from
10 to 50 mortgages) and which act as servicing agent for the purchaser with
respect to, among other things, the receipt of principal and interest payments.
The seller generally does not provide any insurance covering the payment of
interest on or repayment of principal of the mortgages, but such insurance may
be purchased by the mortgagor. However, the payment of any such insurance
premiums would reduce the Fund's yield. At present, direct investments in
mortgages are considered to be illiquid by the Adviser and are subject to the
Fund's policy of not investing more than 15% of its net assets in illiquid
investments.
Investing directly in mortgages may involve certain risks and
characteristics not applicable to investments in other securities. Such risks
include delays and difficulties in recovering and reselling the collateral
securing the mortgage loan during foreclosure proceedings, limitations pursuant
to Federal bankruptcy and state insolvency laws and other state laws in
enforcing a personal judgment against a borrower following foreclosure to make
up any deficiency not realized on sale of the collateral, and the application of
Federal and state laws limiting interest rates that may be charged by the lender
and the lender's ability to accelerate the maturity of the mortgage loan.
Asset-Backed Securities
The Fund may invest in asset-backed securities, which represent
participations in, or are secured by and payable from, assets such as motor
vehicle installment sale contracts, installment loan contracts, leases of
various types of real and personal property, receivables from revolving credit
(credit card) agreements and other categories of receivables. Asset-backed
securities may also be collateralized by a portfolio of U.S. Government
securities, but are not direct obligations of the U.S. Government, its agencies
or instrumentalities. Payments or distributions of principal and interest on
asset-backed securities may be guaranteed up to certain amounts and for a
certain time period by a letter of credit or a pool insurance policy issued by a
financial institution, or other credit enhancements may be present; however,
privately issued obligations collateralized by a portfolio of privately issued
asset-backed securities do not involve any government-related guaranty or
insurance. Such securities are like mortgage-related securities in that they
represent an interest in the cash flow from a pool of underlying receivables.
However, unlike mortgage-related securities, the collateral underlying the
security consists of debt incurred to purchase personal property rather than
real property. In addition, the maturity of the debt involved is much shorter in
duration than that of conventional mortgages and involves less likelihood of
refinancing and unscheduled prepayments.
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Such securities can be structured in several ways, the most common of which
has been a "pass-through" model similar to that of GNMA Certificates. A
certificate representing a fractional undivided beneficial interest in a trust
or corporation created solely for the purpose of holding the trust assets is
issued to the security holder. The certificate entitles the holder thereof the
right to receive a percentage of the interest and principal payments on the
terms and according to the schedule established by the trust instrument. A
servicing agent collects amounts due on the sales contracts or credit card
receivables for the account of the trust, which distributes such amounts to the
security holders.
An alternative structure for such securities is similar to that of the
collateralized mortgage obligations described above. Instead of holding an
undivided interest in trust assets, the purchaser of the security holds a bond
collateralized by the underlying assets. The bonds are serviced by cash flows
from the underlying assets, a specified fraction of all cash received (less a
servicing fee) being allocated first to pay interest and then to retire
principal. Unlike the "pass-through" certificates, payments of principal and
interest to security holders is not dependent on prepayments, although
prepayments alter the yield and average life of the bonds.
Restricted and Illiquid Securities
The Fund may invest up to 15% of its net assets in "restricted"
mortgage-related and other securities that are subject to restrictions on resale
(i.e., private placements) under the Securities Act of 1933 ("restricted
securities") and in illiquid investments. Illiquid investments include
securities that are not readily marketable, repurchase agreements maturing in
more than seven days, certain over-the-counter options, certain restricted
securities, direct investments in mortgages and certain STRIPs. Normally, at the
time of purchase the Fund will seek to obtain the agreement of the issuer or
seller of restricted securities to effect at least one registration of the
securities without expense to the Fund. The necessity for effecting registration
under the Securities Act of 1933 means that substantial delays and expenses are
usually incurred in the disposition of restricted securities. The Fund's
holdings would, accordingly, be subject, for an extended period, to any adverse
market conditions, including those that may develop after a decision to dispose
of the securities is made.
Inverse Floating Rate Securities
The Fund may invest in inverse floating rate securities. The interest rate
on an inverse floater resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher the degree of leverage of an inverse floater, the greater
the volatility of its market value.
Ratings
The Fund will generally invest in mortgage-related or other securities
which are rated, at the time of investment, A or better by Moody's or by
Standard & Poor's, indicating that the securities exhibit adequate protection of
principal and interest payments, or which, if not rated, determined to be of
comparable investment quality by the Adviser; however, the Fund may invest up to
15% of its net assets in securities which are rated, at the time of investment,
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as low as Baa by Moody's or BBB by Standard & Poor's, or which, if not rated are
judged by the Adviser to be of equivalent credit quality to the securities so
rated. Securities rated Baa by Moody's or BBB by Standard & Poor's may have some
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to weakened capacity to make principal and
interest payments than is the case with higher grade securities. It is
anticipated that the average dollar-weighted quality of the Fund's portfolio
will normally be Aa or AA according to Moody's and Standard & Poor's ratings,
respectively, or of comparable quality as determined by the Adviser. Appendix A
sets forth excerpts from the descriptions of ratings of debt securities. The
Fund expects that substantially all of the publicly traded securities in which
it expects to invest will be rated by one or both of the rating agencies. In the
case of a security that is rated differently by the two rating services, the
higher rating is used in applying the 15% limit set forth above and in computing
the Fund's average dollar weighted credit quality. In the event, however, that
the rating on a security held in the Fund's portfolio is downgraded below
investment grade by a rating service, such action will be considered by the
Adviser in its evaluation of the overall investment merits of that security, but
will not necessarily result in the sale of the security.
Maturities
Although the average life of a particular mortgage-related or asset-backed
security cannot be predicted because of the possibility of prepayment, the Fund
expects that the average life of securities held by it will be from three to
fifteen years.
Foreign Securities
The Fund will normally invest in U.S. dollar denominated securities, but
may invest up to 10% of its total assets in mortgage-related and other
securities (such as government and asset-backed securities) denominated in other
currencies. The Fund expects that its foreign securities portfolio will contain
primarily Canadian and European securities. Investing in securities denominated
in foreign currencies involves additional risks such as changes in currency
exchange rates and exchange control regulations, costs related to conversion
between currencies, differences between foreign and domestic auditing and
accounting standards and practices, and less publicly-available information
about a foreign issuer.
The Fund may enter into foreign currency forward contracts with banks or
other foreign currency brokers or dealers to purchase or sell foreign currencies
at a future date, and may purchase and sell foreign currency futures contracts
to hedge against changes in foreign currency exchange rates. A foreign currency
forward contract is a negotiated agreement between the contracting parties to
exchange a specified amount of currency at a specified future time at a
specified rate. See "Strategic Transactions."
Portfolio Turnover and Short-Term Trading
Securities may be sold in anticipation of a market decline (a rise in
interest rates) or purchased in anticipation of a market rise (a decline in
interest rates) and later sold. In addition, a security may be sold and another
purchased at approximately the same time to take advantage of what the Fund
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believes to be a temporary disparity in the normal yield relationship between
the two securities. Yield disparities may occur for reasons not directly related
to the investment quality of particular issues or the general movement of
interest rates, such as changes in the overall demand for or supply of various
types of fixed-income securities or changes in the investment objectives of
investors. Portfolio turnover is not expected to be in excess of 200% on an
annual basis. However, in periods when the markets for mortgage securities are
volatile and during periods of interest rate fluctuations, such as the fiscal
years 1991 and 1992, the Fund may have a higher turnover rate, which was 324%
and 301%, respectively, in those years. A rate of turnover of 100% would occur,
for example, if the value of the lesser of purchases and sales of portfolio
securities for a particular year equaled the average monthly value of portfolio
securities (excluding short-term securities) owned during the year. A high rate
of portfolio turnover involves a correspondingly greater amount of brokerage
commissions and other costs which must be borne directly by the Fund and thus
indirectly by its shareholders. It may also result in the realization of larger
amounts of net short-term capital gains, distributions from which are taxable to
shareholders as ordinary income and may, under certain circumstances, make it
more difficult for the Fund to qualify as a regulated investment company under
the Internal Revenue Code of 1986, as amended (the "Code").
Strategic Transactions
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates, and broad or specific equity or fixed-income
market movements), to manage the effective maturity or duration of fixed-income
securities, or to enhance potential gain. Such strategies are generally accepted
as part of modern portfolio management and are regularly utilized by many mutual
funds and other institutional investors. Techniques and instruments used by the
Fund may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing its investment objective, the Fund may purchase
and sell (write) exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other financial instruments;
purchase and sell financial futures contracts and options thereon; enter into
various interest rate transactions such as swaps, caps, floors or collars; and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used in an attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
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for purchasing or selling particular securities. In addition to the hedging
transactions referred to in the preceding sentence, Strategic Transactions may
also be used to enhance potential gain in circumstances where hedging is not
involved although the Fund's net loss exposure resulting from Strategic
Transactions entered into for such purposes will not exceed 3% of the Fund's net
assets at any one time and, to the extent necessary, the Fund will close out
transactions in order to comply with this limitation. (Transactions such as
writing covered call options are considered to involve hedging for the purposes
of this limitation.) In calculating the Fund's net loss exposure from such
Strategic Transactions, an unrealized gain from a particular Strategic
Transaction position would be netted against an unrealized loss from a related
Strategic Transaction position. For example, if the Adviser anticipates that the
Belgian franc will appreciate relative to the French franc, the Fund may take a
long forward currency position in the Belgian franc and a short foreign currency
position in the French franc. Under such circumstances, any unrealized loss in
the Belgian franc position would be netted against any unrealized gain in the
French franc position (and vice versa) for purposes of calculating the Fund's
net loss exposure. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. The Fund's activities involving Strategic
Transactions may be limited by the requirements of Subchapter M of the Code for
qualification as a regulated investment company.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. The writing of put and call options may result in losses
to the Fund, force the purchase or sale, respectively, of portfolio securities
at inopportune times or for prices higher than (in the case of purchases due to
the exercise of put options) or lower than (in the case of sales due to the
exercise of call options) current market values, limit the amount of
appreciation the Fund can realize on its investments or cause the Fund to hold a
security it might otherwise sell. The use of currency transactions can result in
the Fund incurring losses as a result of a number of factors, including the
imposition of exchange controls, suspension of settlements, or the inability to
deliver or receive a specified currency. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of the Fund creates the possibility that losses
on the hedging instrument may be greater than gains in the value of the Fund's
position. The writing of options could significantly increase the Fund's
portfolio turnover rate and, therefore, associated brokerage commissions or
spreads. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
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futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time, in
certain circumstances, these transactions tend to limit any potential gain which
might result from an increase in value of such position. The loss incurred by
the Fund in writing options on futures and entering into futures transactions is
potentially unlimited; however, as described above, the Fund will limit its net
loss exposure resulting from Strategic Transactions entered into for non-hedging
purposes to 3% of its net assets at any one time. Futures markets are highly
volatile and the use of futures may increase the volatility of the Fund's net
asset value. Finally, entering into futures contracts would create a greater
ongoing potential financial risk than would purchases of options where the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of Strategic Transactions would reduce net asset value and the net
result may be less favorable than if the Strategic Transactions had not been
utilized. Further information concerning the Fund's Strategic Transactions is
set forth in the Statement of Additional Information.
Short-Selling
The Fund may make short sales, which are transactions in which the Fund
sells a security it does not own in anticipation of a decline in the market
value of that security. To complete such a transaction, the Fund must borrow the
security to make delivery to the buyer. The Fund then is obligated to replace
the security borrowed by purchasing it at the market price at the time of
replacement. The price at such time may be more or less than the price at which
the security was sold by the Fund. Until the security is replaced, the Fund is
required to pay to the lender amounts equal to any dividends or interest which
accrue during the period of the loan. To borrow the security, the Fund also may
be required to pay a premium, which would increase the cost of the security
sold. The proceeds of the short sale will be retained by the broker, to the
extent necessary to meet margin requirements, until the short position is closed
out.
Until the Fund replaces a borrowed security in connection with a short
sale, the Fund will: (a) maintain daily a segregated account not with the
broker, containing cash or U.S. Government securities, at such a level that (i)
the amount deposited in the account plus the amount deposited with the broker as
collateral will equal the current value of the security sold short and (ii) the
amount deposited in the segregated account plus the amount deposited with the
broker as collateral will not be less than the market value of the security at
the time it was sold short; or (b) otherwise cover its short position.
The Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security. The Fund will realize a gain if the
security declines in price between those dates by an amount greater than premium
and transaction costs. This result is the opposite of what one would expect from
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a cash purchase of a long position in a security. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of any premium or
amounts in lieu of dividends or interest the Fund may be required to pay in
connection with a short sale.
The Fund's loss on a short sale as a result of an increase in the price of
a security sold short is potentially unlimited. The Fund may purchase call
options to provide a hedge against an increase in the price of a security sold
short by the Fund. When the Fund purchases a call option it has to pay a premium
to the person writing the option and a commission to the broker selling the
option. If the option is exercised by the Fund, the premium and the commission
paid may be more than the amount of the brokerage commission charged if the
security were to be purchased directly. See "Strategic Transactions" above.
The Fund anticipates that the frequency of short sales will vary
substantially in different periods, and it does not intend that any specified
portion of its assets, as a matter of practice, will be in short sales. However,
no securities will be sold short if, after giving effect to any such short sale,
the total market value of all securities sold short would exceed 5% of the value
of the Fund's net assets.
In addition to the short sales discussed above, the Fund may make short
sales "against the box," a transaction in which the Fund enters into a short
sale of a security which the Fund owns. The proceeds of the short sale are held
by a broker until the settlement date at which time the Fund delivers the
security to close the short position. The Fund receives the net proceeds from
the short sale.
Forward Roll Transactions
In order to enhance current income, the Fund may enter into forward roll
transactions with respect to mortgage-backed securities. In a forward roll
transaction, the Fund sells a mortgage-backed security to a financial
institution, such as a bank or broker-dealer, and simultaneously agrees to
repurchase a similar security from the institution at a later date at an
agreed-upon price. The mortgage-backed securities that are repurchased will bear
the same interest rate as those sold, but generally will be collateralized by
different pools of mortgages with different prepayment histories than those
sold. During the period between the sale and repurchase, the Fund will not be
entitled to receive interest and principal payments on the securities sold.
Proceeds of the sale will be invested in short-term instruments, such as
repurchase agreements or other short term securities, and the income from these
investments, together with any additional fee income received on the sale and
the amount gained by repurchasing the securities in the future at a lower
purchase price, will generate income and gain for the Fund which is intended to
exceed the yield on the securities sold. Forward roll transactions involve the
risk that the market value of the securities sold by the Fund may decline below
the repurchase price of those securities. At the time the Fund enters into a
forward roll transaction, it will place in a segregated custodial account cash,
or liquid, high quality debt obligations having a value equal to the repurchase
price (including accrued interest) and will subsequently monitor the account to
insure that the equivalent value is maintained. The Fund may commit up to 25% of
its net assets to forward roll transactions, when-issued securities and forward
commitments.
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The use of forward roll transactions involves leverage. Leverage allows any
investment gains made with the additional monies received (in excess of the
costs of the forward roll transaction) to increase the net asset value of the
Fund's shares faster than would otherwise be the case. On the other hand, if the
additional monies received are invested in ways that do not fully recover the
costs of such transactions to the Fund, the net asset value of the Fund would
fall faster than would otherwise be the case.
When-Issued Securities and Forward Commitments
The Fund may purchase securities on a "when-issued" basis, which means that
delivery and payment for the securities will normally take place 15 to 60 days
after the date of the transaction. The payment obligation and interest rate on
the securities are fixed at the time the Fund enters into the commitment, but
interest will not accrue to the Fund until delivery of and payment for the
securities. Although the Fund will only make commitments to purchase
"when-issued" securities with the intention of actually acquiring the
securities, the Fund may sell the securities before the settlement date if
deemed advisable by the Adviser. Unless the Fund has entered into an offsetting
agreement to sell the securities, cash or liquid high-grade debt obligations
with a market value equal to the amount of the Fund's commitment will be
segregated with the Fund's custodian bank. If the market value of these
securities declines, additional cash or securities will be segregated daily so
that their aggregate market value equals the amount of the Fund's commitment.
Securities purchased on a "when-issued" basis may have a market value on
delivery which is less than the amount paid by the Fund. Changes in market value
may be based upon the public's perception of the creditworthiness of the issuer
or changes in the level of interest rates. Generally, the value of "when-issued"
securities will fluctuate inversely to changes in interest rates, i.e., they
will appreciate in value when interest rates fall and will depreciate in value
when interest rates rise.
The Fund may also enter into contracts to purchase securities for a fixed
price at a future date beyond the customary settlement time if the Fund holds
and maintains until the settlement date in a segregated account cash or liquid,
high-grade debt obligations in an amount sufficient to meet the purchase price,
or if the Fund enters into offsetting contracts for the forward sale of other
securities it owns. Such contracts are customarily referred to as "forward
commitments" and involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date.
The Fund may commit up to 25% of its net assets to forward roll
transactions, when-issued securities and forward commitments.
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Repurchase Agreements
The Fund may invest up to 15% of its net assets in repurchase agreements
under normal circumstances. The Fund's repurchase transactions are usually
overnight. In no event will more than 15% of the Fund's net assets be invested
in repurchase transactions of more than seven days' duration together with other
illiquid assets. Repurchase agreements acquired by the Fund will always be fully
collateralized as to principal and interest by money market instruments and will
be entered only into with commercial banks, brokers and dealers considered
creditworthy by the Adviser. Investing in repurchase agreements involves the
risk of default by or the insolvency of the other party to the repurchase
agreement.
Investment Restrictions
The Fund has adopted certain fundamental policies which may not be changed
without the approval of the Fund's shareholders. These policies provide, among
other things, that the Fund may not: (i) invest, with respect to at least 75% of
its total assets, more than 5% in the securities of any one issuer (other than
the U.S. Government, its agencies or instrumentalities) or acquire more than 10%
of the outstanding voting securities of any issuer; (ii) issue senior
securities, borrow money or securities or pledge or mortgage its assets, except
that the Fund may (a) borrow money from banks as a temporary measure for
extraordinary or emergency purposes (but not for investment purposes) in an
amount up to 15% of the current value of its total assets, (b) enter into
forward roll transactions and (c) pledge its assets to an extent not greater
than 15% of the current value of its total assets to secure such borrowings;
however, the Fund may not make any additional investments while its outstanding
bank borrowings exceed 5% of the current value of its total assets; (iii) lend
portfolio securities, except that the Fund may enter into repurchase agreements
with respect to 15% of the value of its net assets.
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the Fund's assets will not constitute a violation of the
restriction. Additional fundamental policies adopted by the Fund are described
in the Statement of Additional Information.
RISK FACTORS AND SUITABILITY
The Fund is not intended to provide an investment program meeting all of
the requirements of an investor. Notwithstanding the Fund's ability to diversify
and spread risk by holding securities of a number of issuers, shareholders
should be able and prepared to bear the risk of investment losses which may
accompany the investments contemplated by the Fund.
The Fund's net asset value per share can generally be expected to fluctuate
inversely with fluctuations in interest rates.
The Fund's investments in STRIPs, direct investments in mortgages,
restricted and illiquid securities, foreign securities and the utilization of
Strategic Transactions and short selling involve special risks, as discussed
above in the correspondingly captioned sections.
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CALCULATION OF PERFORMANCE DATA
From time to time the Fund may advertise its total return and yield. Both
total return and yield figures are based on historical earnings and are not
intended to indicate future performance. The "total return" of the Fund refers
to the average annual compounded rates of return over 1, 5 and 10 year periods
that would equate an initial amount invested at the beginning of a stated period
to the ending redeemable value of the investment. The calculation assumes the
reinvestment of all dividends and distributions, includes all recurring fees
that are charged to all shareholder accounts and deducts all nonrecurring
charges at the end of each period. If the Fund has been operating less than 1, 5
or 10 years, the time period during which the Fund has been operating is
substituted.
The "yield" of the Fund is computed by dividing the net investment income
per share earned during the period stated in the advertisement by the maximum
offering price per share on the last day of the period (using the average number
of shares entitled to receive dividends). For the purpose of determining net
investment income the calculation includes among expenses of the Fund all
recurring fees that are charged to all shareholder accounts and any nonrecurring
charges for the period stated.
DIVIDENDS AND DISTRIBUTIONS
Dividends on shares of the Fund from net investment income will be declared
and distributed quarterly. Dividends from short-term and long-term capital
gains, if any, after reduction by capital losses, will be declared and
distributed at least annually. Dividends from net investment income and capital
gains distributions, if any, are automatically reinvested in additional shares
of the Fund unless the shareholder elects to receive them in cash.
PURCHASE OF SHARES
Shares of the Fund may be purchased directly from the Fund, which offers
its shares to the public on a continuous basis. Shares are sold at the net asset
value per share next computed after the purchase order is received by the Fund.
Unless waived by the Fund, the minimum initial investment is $1,000,000.
Additional investments may be made in amounts of at least $50,000.
Orders for the purchase of Fund shares received by dealers by the close of
regular trading on the New York Stock Exchange on any business day and
transmitted to the Fund by the close of its business day (normally 4:00 p.m.,
New York City time) will be effected as of the close of regular trading on the
New York Stock Exchange on that day. Otherwise, orders will be effected at the
net asset value per share determined on the next business day. It is the
responsibility of dealers to transmit orders so that they will be received by
the Fund before the close of its business day. Shares of the Fund purchased
through dealers may be subject to transaction fees, no part of which will be
received by the Fund or the Adviser.
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The Fund's net asset value per share is computed each day on which the New
York Stock Exchange is open as of the close of regular trading (currently 4:00
p.m., New York City time). The net asset value per share is calculated by
determining the value of all the Fund's assets, subtracting all liabilities and
dividing the result by the total number of shares outstanding. Portfolio
securities are valued at the last sale prices, on the valuation day, on the
exchange or national securities market on which they are primarily traded.
Securities not listed on an exchange or national securities market, or
securities for which there were no reported transactions, are valued at the last
quoted bid prices. Securities for which quotations are not readily available and
all other assets are valued at fair value as determined in good faith by the
Adviser in accordance with procedures approved by the Trustees. Money market
instruments with less than sixty days remaining to maturity when acquired by the
Fund are valued on an amortized cost basis unless the Trustees determine that
amortized cost does not represent fair value. If the Fund acquires a money
market instrument with more than sixty days remaining to its maturity, it is
valued at current market value until the sixtieth day prior to maturity and will
then be valued at amortized cost based upon the value on such date unless the
Trustees determine during such sixty-day period that amortized cost does not
represent fair value.
In the sole discretion of the Adviser, the Fund may accept securities
instead of cash for the purchase of shares of the Fund. The Adviser will
determine that any securities acquired in this manner are consistent with the
investment objective, policies and restrictions of the Fund. The securities will
be valued in the manner stated above. The purchase of shares of the Fund for
securities instead of cash may cause an investor who contributed them to realize
a taxable gain or loss with respect to the securities transferred to the Fund.
The Trust reserves the right in its sole discretion (i) to suspend the
offering of the Fund's shares, (ii) to reject purchase orders when in the best
interest of the Fund and (iii) to modify or eliminate the minimum initial
investment in Fund shares.
REDEMPTION OF SHARES
Shares of the Fund may be redeemed by any of the methods described below at
the net asset value per share next determined after receipt of a redemption
request in proper form. Redemptions will not be processed until a completed
Share Purchase Application and payment for the shares to be redeemed have been
received.
Written Redemption
Shares of the Fund may be redeemed by written order to Standish Securitized
Fund, One Financial Center, Boston, Massachusetts 02111. A written redemption
request must (a) state the number of shares or the dollar amount to be redeemed,
(b) identify the shareholder's account number and (c) be signed by each
registered owner exactly as the shares are registered. Signature guarantees,
when required, must be obtained from any one of the following institutions,
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provided that such institution meets credit standards established by the Fund's
Transfer Agent: (i) a bank; (ii) a securities broker or dealer, including a
government or municipal securities broker or dealer, that is a member of a
clearing corporation or has net capital of at least $100,000; (iii) a credit
union having authority to issue signature guarantees; (iv) a savings and loan
association, a building and loan association, a cooperative bank, or a federal
savings bank or association; or (v) a national securities exchange, a registered
securities exchange or a clearing agency. Additional supporting documents may be
required in the case of estates, trusts, corporations, partnerships and other
shareholders which are not individuals. Redemption proceeds will normally be
paid by check mailed within seven days of receipt of a written redemption
request in proper form. If shares to be redeemed were recently purchased by
check, the Fund may delay transmittal of redemption proceeds until such time as
it has assured itself that good funds have been collected for the purchase of
such shares. This may take up to fifteen (15) days.
Telephonic Redemption
Shareholders who complete the telephonic redemption portion of the Fund's
account application may redeem shares by calling (800) 221-4795. Such privilege
is not available to shareholders automatically; they must first elect the
privilege. Redemption proceeds will be mailed or wired in accordance with the
shareholder's instruction on the account application to a pre-designated
account. Wire charges, if any, will be deducted from redemption proceeds. By
maintaining an account that is eligible for redemption by telephone, the
shareholder authorizes the Adviser, the Trust and the Fund's custodian to act
upon instructions of any person to redeem shares from the shareholder's account.
Redemption proceeds will be sent only by check payable to the shareholder of
record at the address of record, unless the shareholder has indicated, in the
initial application for the purchase of shares, a commercial bank to which
redemption proceeds may be sent by wire. These instructions may be changed
subsequently only in writing, accompanied by a signature guarantee, and
additional documentation in the case of shares held by a corporation or other
entity or by a fiduciary such as a trustee or executor.
By maintaining a telephonic redemption account, the shareholder
acknowledges that, as long as the Fund employs reasonable procedures to confirm
that telephonic instructions are genuine, and follows telephonic instructions
that it reasonably believes to be genuine, neither the Adviser, nor the Trust,
nor the Fund's custodian, nor their respective officers or employees, will be
liable for any loss, expense or cost arising out of any request for a telephonic
redemption, even if such transaction results from any fraudulent or unauthorized
instructions. Depending upon the circumstances, the Fund intends to employ
personal identification or written confirmation of transactions procedures, and
if it does not, the Fund may be liable for any losses due to unauthorized or
fraudulent instructions. Redemption proceeds will normally be paid promptly
after receipt of telephonic instructions, but no later than seven days
thereafter, except as described above. Shareholders may experience delays in
exercising telephone redemption privileges during periods of abnormal market
activity. Accordingly, during periods of volatile economic and market
conditions, shareholders may wish to consider transmitting redemption requests
in writing.
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Repurchase Order
In addition to written redemption of Fund shares, the Fund may accept wire
or telephone orders from brokers or dealers for the repurchase of Fund shares,
or from the Adviser with respect to accounts over which it has investment
discretion. The repurchase price is the net asset value per share next
determined after receipt of an order by a broker or dealer, which is obligated
to transmit the order to the Fund prior to the close of the Fund's business day
(normally 4:00 p.m.). Brokers or dealers may charge for their services in
connection with a repurchase of Fund shares, but the Fund imposes no charge for
share repurchases.
* * * *
The proceeds paid upon redemption or repurchase may be more or less than
the cost of the shares, depending upon the market value of the Fund's portfolio
investments at the time of redemption or repurchase. The Fund intends to pay
cash for all shares redeemed, but under certain conditions, the Fund may make
payments wholly or partially in portfolio securities.
Because of the cost of maintaining shareholder accounts, the Fund may
redeem, at net asset value, the shares in any account which has a value of less
than $50,000 as a result of redemptions or transfers. Before doing so, the Fund
will notify the shareholder that the value of the shares in the account is less
than the specified minimum and will allow the shareholder 30 days to make an
additional investment in an amount which will increase the value of the account
to at least $50,000.
MANAGEMENT
Trustees
The Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, a Massachusetts business trust. Under the terms of the
Agreement and Declaration of Trust establishing the Trust, which is governed by
the laws of The Commonwealth of Massachusetts, the Trustees of the Trust are
ultimately responsible for the management of its business and affairs.
Investment Adviser
Standish, Ayer & Wood, Inc. ("the Adviser"), One Financial Center, Boston,
Massachusetts 02111, serves as investment adviser to the Fund pursuant to an
investment advisory agreement and manages the Fund's investments and affairs
subject to the supervision of the Trustees of the Trust. The Adviser is a
Massachusetts corporation incorporated in 1933 and is a registered investment
adviser under the Investment Advisers Act of 1940.
The Adviser provides fully discretionary management services and counseling
and advisory services to a broad range of clients throughout the United States.
The Adviser also provides investment services to certain other funds of the
Trust, acting as sole investment adviser to Standish Small Capitalization Equity
Fund, Standish Equity Fund, Standish Intermediate Tax Exempt Bond Fund, Standish
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Massachusetts Intermediate Tax Exempt Bond Fund and Standish Fixed Income Fund,
which had net assets of $121 million, $94 million, $28 million, $31 million and
$1.8 billion, respectively, at March 31, 1995, and as co-investment adviser to
Consolidated Standish Short-Term Asset Reserve Fund, which had net assets of
$258 million at March 31, 1995. The Adviser is the managing general partner of
Standish International Management Company, L.P. ("SIMCO"), which is the
investment adviser to Standish International Equity Fund, Standish International
Fixed Income Fund, and Standish Global Fixed Income Fund, which had net assets
of $89 million, $1.1 billion, and $135 million, respectively, at March 31, 1995.
Corporate pension funds are the largest asset under active management by the
Adviser. The Adviser's clients also include charitable and educational endowment
funds, financial institutions, trusts and individual investors. As of March 31,
1995, the Adviser managed approximately $24 billion of assets.
The Fund's portfolio managers are Dolores S. Driscoll and James J. Sweeney,
who have been primarily responsible for the day-to-day management of the Fund's
portfolio since its inception in August, 1989. During the past five years, Ms.
Driscoll, who is also President of the Fund, has served as a Managing Director
of the Adviser. Mr. Sweeney has served as a Director (since 1992) and Vice
President of the Adviser during this period.
Subject to the supervision and direction of the Trustees of the Trust, the
Adviser manages the Fund's portfolio in accordance with its stated investment
objective and policies, recommends investment decisions for the Fund, places
orders to purchase and sell securities on behalf of the Fund, administers the
affairs of the Fund and permits the Fund to use the name "Standish." For these
services, the Fund pays a fee monthly at the annual rate of 0.25% of the first
$500,000,000 of average daily net asset value and 0.20% of such average daily
net asset value in excess of $500,000,000. For the fiscal year ending December
31, 1995, the Adviser has voluntarily agreed to limit the Fund's aggregate
annual operating expenses (excluding brokerage commissions, taxes, litigation,
indemnification and other extraordinary expenses) to the lower of (a) 0.45% of
average daily net assets or (b) the permissible limit applicable in any state in
which shares of the Fund are then qualified for sale. If the expense limit is
exceeded, the compensation due the Adviser in such fiscal year shall be
proportionately reduced by the amount of such excess by a reduction or refund
thereof at the time such compensation is payable after the end of each calendar
month, subject to readjustment during the fiscal year. For the fiscal year ended
December 31, 1994, the Fund paid advisory fees in the amount of $149,253 which
represented 0.22% of the Fund's average net assets, after a fee waiver of
$24,168.
Expenses
The Fund bears all expenses of its operations other than those incurred by
the Adviser under the investment advisory agreement. Among other expenses, the
Fund will pay investment advisory fees; bookkeeping, share pricing and
shareholder servicing fees and expenses; custodian fees and expenses; legal and
auditing fees; expenses of prospectuses, statements of additional information
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and shareholder reports which are furnished to shareholders; registration and
reporting fees and expenses; and Trustees' fees and expenses. The Adviser bears
without subsequent reimbursement the distribution expenses attributable to the
offering and sale of Fund shares. Expenses of the Trust which relate to more
than one series are allocated among such series by the Adviser and SIMCO in an
equitable manner. For the fiscal year ended December 31, 1994, expenses borne by
the Fund amounted to $313,261, which represented 0.45% of average net assets,
after an expense reduction of $24,168.
Portfolio Transactions
Subject to the supervision of the Trustees of the Trust, the Adviser
selects the brokers and dealers that execute orders to purchase and sell
portfolio securities for the Fund. The Adviser will seek to obtain the best
available price and most favorable execution with respect to all transactions
for the Fund.
Subject to the consideration of best price and execution and to applicable
regulations, the receipt of research and sales of Fund shares may also be
considered factors in the selection of brokers and dealers that execute orders
to purchase and sell portfolio securities for the Fund.
FEDERAL INCOME TAXES
The Fund presently qualifies and intends to continue to qualify for
taxation as a "regulated investment company" under the Code. If it qualifies for
treatment as a regulated investment company, the Fund will not be subject to
federal income tax on income (including capital gains) distributed to
shareholders in the form of dividends or capital gain distributions in
accordance with certain timing requirements of the Code.
The Fund will be subject to nondeductible 4% excise tax under the Code to
the extent that it fails to meet certain distribution requirements with respect
to each calendar year. Certain distributions made in order to satisfy the Code's
distribution requirements may be declared by the Fund during October, November
or December of the year but paid during the following January. Such
distributions will be taxable to taxable shareholders as if received on December
31 of the year the distributions are declared, rather than the year in which the
distributions are received.
Shareholders which are taxable entities or persons will be subject to
federal income tax on dividends and capital gain distributions made by the Fund.
Dividends paid by the Fund from net investment income, certain net foreign
currency gains, and any excess of net short-term capital gain over net long-term
capital loss will be taxable to shareholders as ordinary income, whether
received in cash or Fund shares. No portion of such dividends is expected to
qualify for the 70% corporate dividends received deduction under the Code.
Dividends paid by the Fund from net capital gain (the excess of net long-term
capital gain over net short-term capital loss), called "capital gain
distributions," will be taxable to shareholders as long-term capital gains,
whether received in cash or Fund shares and without regard to how long the
shareholder has held shares of the Fund. Capital gain distributions do not
qualify for the corporate dividends received deduction. Dividends and capital
gain distributions may also be subject to state and local or foreign taxes.
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The Fund anticipates that it may be subject to foreign withholding taxes or
other foreign taxes on income (possibly including capital gains) on certain
foreign investments (if any), which will reduce the yield on those investments.
Such taxes may be reduced or eliminated pursuant to an income tax treaty in some
cases. The Fund does not expect to qualify to pass such foreign taxes and any
associated tax deductions or credits through to its shareholders.
Redemptions and repurchases of shares are taxable events on which a
shareholder may recognize a gain or loss. Special rules recharacterize as
long-term any losses on the sale or exchange of Fund shares with a tax holding
period of six months or less, to the extent the shareholder received a capital
gain distribution with respect to such shares.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on dividends, capital gain
distributions, and the proceeds of redemptions or repurchases of shares, if they
fail to furnish the Fund with their correct taxpayer identification number and
certain certifications or if they are otherwise subject to backup withholding.
Individuals, corporations and other shareholders that are not U.S. persons under
the Code are subject to different tax rules and may be subject to nonresident
alien withholding at the rate of 30% (or a lower rate provided by an applicable
tax treaty) on amounts treated as ordinary dividends from the Fund and, unless a
current IRS Form W-8 or an acceptable substitute is furnished to the Fund, to
backup withholding on certain payments from the Fund.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent the Fund's distributions are
derived from interest on (or, in the case of intangibles taxes, the value of its
assets is attributable to) certain U.S. Government obligations, provided in some
states that certain thresholds for holdings of such obligations and/or reporting
requirements are satisfied.
After the close of each calendar year, the Fund will send a notice to
shareholders that provides information about the federal tax status of
distributions to shareholders for such calendar year.
THE FUND AND ITS SHARES
The Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, an unincorporated business trust organized under the laws of
The Commonwealth of Massachusetts pursuant to an Agreement and Declaration of
Trust dated August 13, 1986. Under the Agreement and Declaration of Trust, the
Trustees have authority to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, of the Fund. Each share of the Fund is
entitled to one vote. All Fund shares have equal rights with regard to voting,
redemption, dividends, distributions and liquidation, and shareholders of the
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Fund have the right to vote as a separate class with respect to certain matters
under the Investment Company Act of 1940 and the Agreement and Declaration of
Trust. Shares of the Fund do not have cumulative voting rights. Fractional
shares have proportional voting rights and participate in any distributions and
dividends. When issued, each Fund share will be fully paid and nonassessable.
Shareholders of the Fund do not have preemptive or conversion rights.
Certificates representing shares of the Fund will not be issued.
At March 31, 1995, Allendale Mutual Insurance Company, Allendale Park,
Johnston, Rhode Island 02919, had sole voting and investment power with respect
to more than 25% of the then outstanding shares of the Fund, and was deemed to
beneficially own such shares and to control the Fund.
The Trust has established thirteen series and may establish additional
series at any time. Each series is a separate taxpayer, eligible to qualify as a
separate regulated investment company for federal income tax purposes. The
calculation of the net asset value of a series and the determination of the tax
consequences of investing in a series will be determined separately for each
series.
The Trust is not required to hold annual meetings of shareholders. Special
meetings of shareholders may be called from time to time for purposes such as
electing or removing Trustees, changing a fundamental policy, or approving an
investment advisory agreement.
If less than two-thirds of the Trustees holding office have been elected by
shareholders, a special meeting of shareholders of the Trust will be called to
elect Trustees. Under the Agreement and Declaration of Trust and the Investment
Company Act of 1940, the record holders of not less than two-thirds of the
outstanding shares of the Trust may remove a Trustee by votes cast in person or
by proxy at a meeting called for the purpose or by a written declaration filed
with each of the Trust's custodian banks. Except as described above, the
Trustees will continue to hold office and may appoint successor Trustees.
Whenever ten or more shareholders of the Trust who have been such for at least
six months, and who hold in the aggregate shares having a net asset value of at
least $25,000 or at least 1% of the outstanding shares, whichever is less, apply
to the Trustees in writing stating that they wish to communicate with other
shareholders with a view to obtaining signatures to request a meeting, and such
application is accompanied by a form of communication and request which they
wish to transmit, the Trustees shall within five (5) business days after receipt
of such application either (1) afford to such applicants access to a list of the
names and addresses of all shareholders as recorded on the books of the Trust;
or (2) inform such applicants as to the approximate number of shareholders of
record and the approximate cost of mailing to them the proposed communication or
form of request.
Inquiries concerning the Fund should be made by contacting the Fund at the
Fund's address and telephone number listed on the cover of this Prospectus.
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CUSTODIAN, TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 24 Federal Street, Boston, Massachusetts
02110, serves as the Fund's transfer agent and dividend disbursing agent and as
custodian of all cash and securities of the Fund.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109, serves as independent accountants for the Trust and will audit the Fund's
financial statements annually.
LEGAL COUNSEL
Hale and Dorr, 60 State Street, Boston, Massachusetts 02109, is legal
counsel to the Trust and to the Adviser.
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No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or in the Statement of Additional Information, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Trust. This Prospectus does not constitute an offering in any
jurisdiction in which such offering may not be lawfully made.
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APPENDIX A
KEY TO MOODY'S CORPORATE BOND RATINGS
Aaa -Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa -Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities.
A -Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa -Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
STANDARD & POOR'S RATINGS DEFINITIONS
AAA -Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A -Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
BBB -Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
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TAX CERTIFICATION INSTRUCTIONS
Federal law requires that taxable distributions and proceeds of
redemptions and exchanges be reported to the IRS and that 31% be withheld if you
fail to provide your correct Taxpayer Identification Number (TIN) and the
certifications contained in the Account Purchase Application (Application) or
you are otherwise subject to backup withholding. Amounts withheld and forwarded
to the IRS can be credited as a payment of tax when completing your Federal
income tax return.
For most individual taxpayers, the TIN is the social security number.
Special rules apply for certain accounts. For example, for an account
established under the Uniform Gift to Minors Act, the TIN of the minor should be
furnished. If you do not have a TIN, you may apply for one using forms available
at local offices of the Social Security Administration or the IRS, and you
should write "Applied For" in the space for a TIN on the Application.
Recipients exempt from backup withholding, including corporations and
certain other entities, should provide their TIN and underline "exempt" in
section 2(a) of the TIN section of the Application to avoid possible erroneous
withholding. Non-resident aliens and foreign entities may be subject to
withholding of up to 30% on certain distributions received from the Fund and
must provide certain certifications on IRS Form W-8 to avoid backup withholding
with respect to other payments. For further information, see Code Sections 1441,
1442 and 3406 and/or consult your tax adviser.
31
