As filed with the Securities and Exchange Commission on February 29, 1996
Registration Nos. 33-8214
811-4813
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 72 /X/
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 75 /X/
(Check appropriate box or boxes.)
---------------
Standish, Ayer & Wood Investment Trust
(Exact Name of Registrant as Specified in Charter)
One Financial Center, Boston, Massachusetts 02111
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (617) 375-1760
ERNEST V. KLEIN, Esq.
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
/ / Immediately upon filing pursuant to Rule 485(b)
/ / On (date) pursuant to Rule 485(b)
/ / 60 days after filing pursuant to Rule 485(a)(1)
/X/ 0n May 1, 1996 pursuant to Rule 485(a)(1)
/ / 75 days after filing pursuant to Rule 485(a)(2)
/ / 0n (date) pursuant to Rule 485(a)(2)
The Registrant has registered an indefinite number of shares under the
Securities Act of 1933, as amended, pursuant to Rule 24f-2 under the Investment
Company Act of 1940, as amended. The Rule 24f-2 Notice for the fiscal year ended
December 31, 1994 was filed on or about February 27, 1996.
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST*
Standish Controlled Maturity Fund
Standish Fixed Income Fund II
Standish Intermediate Tax Exempt Bond Fund
Standish International Fixed Income Fund
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Standish Securitized FundStandish Short-Term Asset Reserve Fund
Standish Small Cap Tax-Sensitive Equity Fund
Standish Tax-Sensitive Equity Fund
Cross-Reference Sheet Pursuant to Rule 495(a)
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Part A Prospectus
Form Item Cross-Reference
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Item 1. Cover Page Cover Page
Item 2. Synopsis "Expense Information"
Item 3. Condensed Financial "Financial Highlights"
Information
Item 4. General Description Cover Page, "The Fund
of Registrant and Its Shares" and "Investment
Objective and Policies"
Item 5. Management of the Fund "Management" and "Custodian,
Transfer Agent and Dividend Disbursing Agent"
Item 6. Capital Stock and "The Fund and Its Shares",
Other Securities "Purchase of Shares",
"Redemption of Shares", "Dividends and Distributions"
and "Federal Income Taxes"
Item 7. Purchase of Securities Cover Page and "Purchase of
Being Offered Shares"
Item 8. Redemption or "Redemption of Shares"
Repurchase
Item 9. Pending Legal Not Applicable
Proceedings
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* This Post-Effective Amendment to the Registrant's Registration Statement is
being filed with respect to the series of the Registrant set forth above and
does not affect the Prospectuses and Statements of Additional Information of any
additional series of the Registrant. Statement of Additional Part B Information
Cross- Form Item Reference
<PAGE>
Part B Statement of Additional
Form Item Information Cross-Reference
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Item 10. Cover Page Cover Page
Item 11. Table of Contents "Contents"
Item 12. General Information
and History Not Applicable
Item 13. Investment Objectives "Investment Objective
and Policies and Policies" and "Investment
Restrictions"
Item 14. Management of the Fund "Management"
Item 15. Control Persons and "Management"
Principal Holders
of Securities
Item 16. Investment Advisory and "Management"
Other Services
Item 17. Brokerage Allocation "Portfolio Transactions"
Item 18. Capital Stock and "The Fund and Its Shares"
Other Securities
Item 19. Purchase, Redemption "Redemption of Shares" and
and Pricing of "Determination of Net Asset
Securities Being Value"
Offered
Item 20. Tax Status "Taxation"
Item 21. Underwriters Not Applicable
Item 22. Calculation of "Calculation of Performance
Performance Data Data"
Item 23. Financial Statements "Experts and Financial Statements"
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<PAGE>
Prospectus dated May 6, 1996
PROSPECTUS
STANDISH CONTROLLED MATURITY FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
Standish Controlled Maturity 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 is designed primarily, but not
exclusively, for tax-exempt institutional investors, such as pension and
profit-sharing plans, foundations and endowments.
The Fund's investment objective is to maximize total return, consistent
with preserving principal and liquidity. As a component of this objective, the
Fund seeks a relatively high level of current income. The Fund seeks to achieve
its investment objective primarily through investing in an actively managed
portfolio of investment grade fixed-income securities. Under normal market
conditions, the Fund maintains an average dollar-weighted effective portfolio
maturity not exceeding five years. Standish, Ayer & Wood, Inc., Boston,
Massachusetts, is the Fund's investment adviser (the "Adviser").
Investors may purchase shares of the Fund from the Trust's principal
underwriter, Standish Fund Distributors, L.P. (the "Principal Underwriter"), at
the address and phone number listed above without a sales commission or other
transaction charges. Unless waived by the Fund, the minimum initial investment
is $100,000. Additional investments may be made in amounts of at least $5,000.
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 Principal Underwriter
is contained in a Statement of Additional Information which has been filed with
the Securities and Exchange Commission (the "SEC") and is available upon request
and without charge by calling or writing the Principal Underwriter 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.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN SHARES OF THE FUND INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
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.
Contents
Expense Information...........................................2
Investment Objective and Policies.............................3
Risk Factors and Suitability..................................7
Calculation of Performance Data...............................8
Dividends and Distributions...................................8
Purchase of Shares............................................8
Redemption of Shares..........................................9
Management...................................................10
Federal Income Taxes.........................................10
The Fund and Its Shares......................................11
Custodian, Transfer Agent and Dividend-Disbursing Agent......12
Independent Accountants......................................12
Legal Counsel................................................12
Tax Certification Instructions...............................12
1
<PAGE>
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) 0.00%
12b-1 Fees None
Other Expenses 0.45%
Total Fund Operating Expenses (after expense limitation) 0.45%
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Example: 1 year 3 years
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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
</TABLE>
The purpose of the above table is to assist investors 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 figures shown in the caption "Other Expenses," which
includes, among other things, custodian and transfer agent fees, registration
costs and payments for insurance and audit and legal services, and in the
hypothetical example are based on estimates of the Fund's expenses for its first
full fiscal year ending December 31, 1996.
* The Adviser has voluntarily agreed to limit Total Fund Operating Expenses
of the Fund (excluding litigation, indemnification and other extraordinary
expenses) to 0.45% of the Fund's average daily net assets. In the absence of
such agreement, Management Fees, Other Expenses and Total Fund Operating
Expenses are estimated to be approximately 0.35%, 2.16% and 2.51%, respectively,
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.
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 LESS 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 LESS THAN 5%.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights for the period ended December 31, 1995 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.
Further information about the performance of the Fund is contained in the
Fund's Annual Report, which may be obtained from the Principal Underwriter
without charge.
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to maximize total return, consistent
with preserving principal and liquidity. As a component of this objective, the
Fund seeks a relatively high level of current income. The Fund seeks to achieve
its investment objective primarily through investing in an actively managed
portfolio of investment grade fixed-income securities. Under normal market
conditions, the Fund maintains an average dollar-weighted effective portfolio
maturity not exceeding five years. Because of the uncertainty inherent in all
investments, no assurance can be given that the Fund will achieve its investment
objective. The Fund's investment policies are described further in the Statement
of Additional Information.
The Fund may invest in a broad range of fixed-income securities, including
bonds, notes, mortgage-backed and asset-backed securities, preferred stock and
convertible debt securities issued by U.S. corporations or other entities or by
the U.S. Government or its agencies, authorities, instrumentalities or sponsored
enterprises. Under normal market conditions, at least 65% of the Fund's total
assets will be invested in such securities. The Fund may purchase securities
that pay interest on a fixed, variable, floating (including inverse floating),
contingent, in-kind or deferred basis.
Although the Fund is intended primarily for tax-exempt institutional
investors and will be managed without regard to potential tax considerations,
the Fund may invest up to 5% of its net assets in tax-exempt securities, such as
state and municipal bonds, if the Adviser believes they will provide competitive
returns. The Fund's distributions of the interest it earns from such securities
will not be tax-exempt. The Fund may adopt a temporary defensive position during
adverse market conditions by investing without limit in high quality money
market instruments, including short-term U.S. Government securities, negotiable
certificates of deposit, non-negotiable fixed time deposits, bankers'
acceptances, floating-rate notes and repurchase agreements.
The Fund invests exclusively in investment grade fixed-income securities,
i.e., securities which, at the date of investment, are rated within the four
highest grades as determined by Moody's Investors Service, Inc. ("Moody's")
(Aaa, Aa, A or Baa) or by Standard & Poor's Ratings Group ("Standard & Poor's"),
Duff & Phelps, Inc. ("Duff") or Fitch Investors Service, Inc. ("Fitch") (AAA,
AA, A or BBB) or their respective equivalent ratings or, if not rated,
determined by the Adviser to be of equivalent credit quality to securities so
rated. Securities rated Baa by Moody's or BBB by Standard & Poor's, Duff or
Fitch and unrated securities of equivalent credit quality are considered medium
grade obligations with speculative characteristics. Adverse changes in economic
conditions or other circumstances are more likely to weaken the issuer's
capacity to pay interest and repay principal on these securities than is the
case for issuers of higher rated securities. It is anticipated that the average
dollar-weighted rated credit quality of the securities in the Fund's portfolio
will be Aa or AA according to Moody's and Standard & Poor's, Duff or Fitch
ratings, respectively, or comparable credit quality as determined by the
Adviser. In the case of a security that is rated differently by two or more
rating services, the higher rating is used in computing the Fund's average
dollar-weighted credit quality. In the event 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.
4
<PAGE>
In order to achieve its investment objective, the Fund seeks to add value
by selecting undervalued investments, thus taking advantage of lower prices and
higher yields, rather than by varying the average maturity of its portfolio to
reflect interest rate forecasts. Under normal market conditions, the maximum
average-dollar weighted effective maturity of the Fund's portfolio will not
exceed five years. Although there is no limit on the maturity of any individual
security purchased by the Fund, the Fund will normally invest in securities with
final maturities, average lives or interest rate reset frequencies of ten years
or less.
Corporate Debt Obligations
The Fund may invest in corporate debt obligations, including obligations of
industrial, utility and financial issuers. In addition to obligations of
corporations, corporate debt obligations include bank obligations and zero
coupon securities, issued by financial institutions and corporations. The Fund's
investments in corporate debt securities will be rated, at the date of
investment, investment grade. Corporate debt obligations are subject to the risk
of an issuer's inability to meet principal and interest payments on the
obligations and may also be subject to price volatility due to such factors as
market interest rates, market perception of the creditworthiness of the issuer
and general market liquidity. See "Risk Factors and Suitability" for a further
discussion of the risks associated with investments in corporate debt
securities.
U.S. Government Securities
The Fund may invest in all types of U.S. Government securities, including
obligations issued or guaranteed by the U.S. Government or its agencies,
authorities, instrumentalities or sponsored enterprises. Some U.S. Government
securities, such as Treasury bills, notes and bonds, which differ only in their
interest rates, maturities and times of issuance, are supported by the full
faith and credit of the United States of America. Others, such as obligations
issued or guaranteed by U.S. Government agencies, authorities, instrumentalities
or sponsored enterprises are supported either by (a) the full faith and credit
of the U.S. Government (such as securities of the Small Business
Administration), (b) the right of the issuer to borrow from the U.S. Treasury
(such as securities of the Federal Home Loan Banks), (c) the discretionary
authority of the U.S. Government to purchase the agency's obligations (such as
securities of the Federal National Mortgage Association), or (d) only the credit
of the issuer.
The Fund may also invest in separately traded principal and interest
components of securities guaranteed or issued by the U.S. Government or its
agencies, instrumentalities or sponsored enterprises if such components are
traded independently under the Separate Trading of Registered Interest and
Principal of Securities program ("STRIPS") or any similar program sponsored by
the U.S. Government. The Fund may invest in U.S. Government securities which are
zero coupon or deferred interest securities.
5
<PAGE>
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.
Asset-backed securities can be structured in several ways, the most common
of which has been a "pass-through" model. A certificate representing a
fractional undivided beneficial interest in a trust or corporation created
solely for the purpose of holding the trust's assets is issued to the
asset-backed 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 underlying assets for the account of
the trust, which distributes such amounts to the security holders.
As an alternative structure, the issuer of asset-backed securities
effectively transforms an asset-backed pool into obligations consisting of
several different maturities. Instead of holding an undivided interest in trust
assets, the purchaser of the asset-backed 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 fixed
servicing fee) being allocated first to pay interest and then to retire
principal.
Asset-backed securities present certain risks similar to (as discussed
below) and in addition to those presented by mortgage-backed securities.
Asset-backed securities generally do not have the benefit of a security interest
in collateral that is comparable to mortgage assets and there is the possibility
that, in some cases, recoveries on repossessed collateral may not be available
to support payments on these securities. Asset-backed securities, however, are
not generally subject to the risks associated with prepayments of principal on
the underlying loans.
Mortgage-Backed Securities
The Fund may invest in mortgage-backed securities. Mortgage-backed
securities represent direct or indirect participations in or obligations
collateralized by and payable from mortgage loans secured by real property. Each
mortgage pool underlying mortgage-backed securities will consist of mortgage
loans evidenced by promissory notes secured by first mortgages or first deeds of
trust or other similar security instruments creating a first lien on real
property. An investment in mortgage-backed securities involves certain risks.
Mortgage-backed securities are often subject to more rapid repayment than their
stated maturity dates would indicate as a result of the pass-through or
prepayments of principal on the underlying loans which may increase the
6
<PAGE>
volatility of such investments relative to similarly rated debt securities.
During periods of declining interest rates, prepayment of loans underlying
mortgage-backed securities can be expected to accelerate and thus impair the
Fund's ability to reinvest the returns of principal at comparable yields. During
periods of rising interest rates, reduced prepayment rates may extend the
average life of mortgage-backed securities and increase the Fund's exposure to
rising interest rates. Accordingly, the market values of such securities will
vary with changes in market interest rates generally and in yield differentials
among various kinds of U.S. Government securities and other mortgage-backed
securities.
Mortgage Pass-Through Securities
The Fund may invest in mortgage pass-through securities, which are fixed or
adjustable rate mortgage-backed securities that provide for monthly payments
that are a "pass-through" of the monthly interest and principal payments
(including any prepayments) made by the individual borrowers on the pooled
mortgage loans, net of any fees or other amounts paid to any guarantor,
administrator and/or servicer of the underlying mortgage loans.
Multiple Class Mortgage-Backed Securities and Collateralized Mortgage
Obligations
The Fund may invest in collateralized mortgage obligations ("CMOs"), which
are multiple class mortgage-backed securities. CMOs provide an investor with a
specified interest in the cash flow from a pool of underlying mortgages or of
other mortgage-backed securities. CMOs are issued in multiple classes, each with
a specified fixed or adjustable interest rate and a final distribution date. In
most cases, payments of principal are applied to the CMO classes in the order of
their respective stated maturities, so that no principal payments will be made
on a CMO class until all other classes having an earlier stated maturity date
are paid in full. Sometimes, however, CMO classes are "parallel pay" (i.e.,
payments of principal are made to two or more classes concurrently).
Eurodollar and Yankee Dollar Investments
The Fund may invest in Eurodollar and Yankee Dollar instruments. Eurodollar
instruments are bonds that pay interest and principal in U.S. dollars held in
banks outside the United States, primarily in Europe. Eurodollar instruments are
usually issued on behalf of multinational companies and foreign governments by
large underwriting groups composed of banks and issuing houses from many
countries. Yankee dollar instruments are U.S. dollar denominated bonds typically
issued in the U.S. by, among others, foreign governments and their agencies and
foreign banks and corporations. These investments involve risks that are
different from investments in securities issued by U.S. issuers, including
potential unfavorable political and economic developments, different tax
provisions, seizure of foreign deposits, currency controls, interest limitations
or other governmental restrictions which might affect payment of principal or
interest.
7
<PAGE>
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 and broad or specific 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, indices and other financial instruments; purchase and sell financial
futures contracts and options thereon; and enter into various interest rate
transactions such as swaps, caps, floors or collars (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 interest 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 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 will attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for such purposes to not more than 1% 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 believes that short-term interest rates as indicated in
the forward yield curve are too high, the Fund may take a short position in a
near-term Eurodollar futures contract and a long position in a longer-dated
Eurodollar futures contract. Under such circumstances, any unrealized loss in
the near-term Eurodollar futures position would be netted against any unrealized
gain in the longer-dated Eurodollar futures 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 and interest rate 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 Internal Revenue Code of 1986, as amended (the "Code"), for
qualification as a regulated investment company.
8
<PAGE>
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 or interest rate 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 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
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, they 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 attempt to limit its net
loss exposure resulting from Strategic Transactions entered into for non-hedging
purposes to not more than 1% 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. See the Statement of Additional Information for further information
regarding the Fund's use of Strategic Transactions.
When-Issued Securities and "Delayed Delivery" Securities
The Fund may commit up to 15% of its net assets to purchase securities on a
"when-issued" or "delayed delivery" basis. Although the Fund would generally
purchase securities on a when-issued or delayed delivery basis with the
intention of actually acquiring the securities, the Fund may dispose of a
when-issued or delayed delivery security prior to settlement if the Adviser
deems it appropriate to do so. The payment obligation and the interest rate on
these securities will be fixed at the time the Fund enters into the commitment,
but no income will accrue to the Fund until they are delivered and paid for.
Unless the Fund has entered into an offsetting agreement to sell the securities,
cash or liquid, high grade debt securities equal to the amount of the Fund's
commitment will be segregated and maintained with the custodian for the Fund to
secure the Fund's obligation and in order to partially offset the leverage
inherent in these securities. The market value of the securities when they are
delivered may be less than the amount paid by the Fund.
9
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Repurchase Agreements
The Fund may invest up to 25% of its net assets in repurchase agreements
under normal circumstances. Repurchase agreements acquired by the Fund will
always be fully collateralized as to principal and interest by money market
instruments and will be entered into only with commercial banks, brokers and
dealers considered creditworthy by the Adviser.
If the other party or "seller" of a repurchase agreement defaults, the Fund
might suffer a loss to the extent that the proceeds from the sale of the
underlying securities and other collateral held by the Fund in connection with
the related repurchase agreement are less than the repurchase price. In
addition, in the event of bankruptcy of the seller or failure of the seller to
repurchase the securities as agreed, the Fund could suffer losses, including
loss of interest on or principal of the security and costs associated with delay
and enforcement of the repurchase agreement.
Forward Roll Transactions
In order to enhance current income, the Fund may enter into forward roll
transactions with respect to mortgage-backed securities to the extent of 10% of
its net assets. 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 grade debt securities 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.
10
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Illiquid and Restricted Securities
The Fund may not invest more than 15% of its total assets in securities
that are subject to restrictions on resale ("restricted securities") under the
Securities Act of 1933, as amended ("1933 Act"), including securities eligible
for resale in reliance on Rule 144A under the 1933 Act. In addition, the Fund
will not invest more than 15% of its net assets in illiquid investments, which
include securities that are not readily marketable, repurchase agreements
maturing in more than seven days, time deposits with a notice or demand period
of more than seven days, swap transactions, certain over-the-counter options,
and restricted securities, unless it is determined, based upon continuing review
of the trading markets for the specific restricted security, that such
restricted security is eligible for resale under Rule 144A and is liquid. The
Board of Trustees has adopted guidelines and delegated to the Adviser the daily
function of determining and monitoring the liquidity of restricted securities.
The Board of Trustees, however, retains oversight focusing on factors such as
valuation, liquidity and availability of information and is ultimately
responsible for such determinations. Investing in restricted securities eligible
for resale pursuant to Rule 144A could have the effect of increasing the level
of illiquidity in the Fund to the extent that qualified institutional buyers
become for a time uninterested in purchasing these restricted securities. The
purchase price and subsequent valuation of restricted and illiquid securities
normally reflect a discount, which may be significant, from the market price of
comparable securities for which a liquid market exists.
Portfolio Turnover
It is expected that the portfolio turnover rate of the Fund will not exceed
200% in the coming year. A rate of turnover of 100% would occur 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 owned during the year
(excluding short-term securities). A high rate of portfolio turnover (100% or
more) 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 Code.
Investment Restrictions
The foregoing investment policies, including the Fund's investment
objective, are non-fundamental policies which may be changed by the Trust's
Board of Trustees without the approval of shareholders. If there is a change in
the Fund's investment objective, shareholders should consider whether the Fund
remains an appropriate investment in light of their then current financial
positions and needs. The Fund has adopted certain fundamental policies which may
not be changed without the approval of the Fund's shareholders. See "Investment
Restrictions" in the Statement of Additional Information.
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.
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RISK FACTORS AND SUITABILITY
The Fund is designed primarily for tax-exempt institutional investors such
as pension or profit-sharing plans, foundations and endowments which seek to
maximize total return and, secondarily, seek a relatively high level of current
income, consistent with preserving principal and liquidity and whose
beneficiaries are in a position to benefit from the tax-deferred reinvestment of
the quarterly income dividends and any capital gains distributions paid by the
Fund. The Fund may also be suitable for other investors, depending upon their
investment goals and financial and tax positions. Although the price of the
Fund's shares may fluctuate more than short-term money market instruments, the
Fund will seek to keep such volatility below that of longer-term debt securities
by limiting its average portfolio maturity. Because of the uncertainty inherent
in all investments, no assurance can be given that the Fund will achieve its
investment objective.
Yields on debt securities depend on a variety of factors, such as general
conditions in the money and bond markets, and the size, maturity and rating of a
particular issue. Debt securities with longer maturities tend to produce higher
yields and are generally subject to greater potential capital appreciation and
depreciation. The market prices of debt securities in which the Fund invests,
and therefore the Fund's net asset value, usually vary depending upon available
yields, rising when interest rates decline and declining when interest rates
rise.
Because the Fund's investments are interest rate sensitive, the Fund's
performance will depend in large part upon the ability of the Fund to respond to
fluctuations in market prices and interest rates and to utilize appropriate
strategies to maximize returns to the Fund, while attempting to minimize the
risks associated with its invested capital. Operating results will also depend
upon the availability of opportunities for the investment of the Fund's assets,
including purchases and sales of suitable securities. The Fund's use of
Strategic Transactions (including options, futures, options on futures and
swaps) involves certain risks, including a possible lack of correlation between
changes in the value of hedging instruments and the portfolio assets being
hedged, the potential illiquidity of the markets for derivative instruments, the
risks arising from the margin requirements and related leverage factors
associated with such transactions. The use of these management techniques to
increase total return involves the risk of loss if the Adviser is incorrect in
its expectation of fluctuations in securities prices or interest rates. See
"Strategic Transactions."
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
(or any shorter period since inception) 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.
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 (net asset value) 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.
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The Fund may from time to time advertise one or more additional
measurements of performance, including but not limited to historical total
returns, distribution returns, non-standardized yield, results of actual or
hypothetical investments, changes in dividends, distributions or share values,
or any graphic illustration of such data. In addition, the Fund may from time to
time compare its performance with that of other mutual funds with similar
investment objectives, to relevant indices, and to performance rankings prepared
by recognized mutual fund statistical services and may its performance to
alternative investment or savings vehicles and/or to indices or indicators of
economic activity. This data may cover any period of the Fund's operations and
may or may not include the impact of taxes or other factors.
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 Principal
Underwriter, which offers the Fund's shares to the public on a continuous basis.
Shares are sold at the net asset value per share next computed after the
purchase order and payment for the shares is received in good order by the
Principal Underwriter and payment for the shares is received by the Fund's
custodian. Please see the Fund's account application or call the Principal
Underwriter for instructions on how to make payment of shares to the Fund's
custodian. Unless waived by the Fund, the minimum initial investment is
$100,000. Additional investments may be made in amounts of at least $5,000.
Shares of the fund may also be purhased through securities dealers. 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 trading on the New York Stock Exchange
on that day, provided that payment for the shares is also received by the Fund's
custodian 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 Principal
Underwriter 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 on the exchange
(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
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. The Fund's investment minimums do not apply to
accounts for which the Adviser or any of its affiliates serves as investment
adviser or to employees of the Adviser or any of its affiliates or to members of
such persons' immediate families. The Fund's investment minimums apply to the
aggregate value invested in omnibus accounts rather than to the investment of
underlying participants in such omnibus accounts.
EXCHANGE OF SHARES
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 Principal Underwriter. 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 Principal Underwriter
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 Principal
Underwriter 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.
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Written Exchanges
Shares of the Fund may be exchanged by written order to the Principal
Underwriter, 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 elected telephonic privileges may exchange shares by
calling the Principal Underwriter at (800) 221-4795. Telephonic privileges are
not available to shareholders automatically. Proper identification will be
required for each telephonic exchange. Please see "Telephone Transactions" below
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 by
the Fund's custodian. 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.
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 by the Principal
Underwriter 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 the Principal
Underwriter, One Financial Center, 26th Floor, Boston, Massachusetts 02111. A
written redemption request must (a) state the name of the Fund and 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(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
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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 that are not
individuals. Redemption proceeds will normally be paid by check mailed within
three business days of receipt by the Principal Underwriter 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 in the case of
payments made by check.
Telephonic Redemption
Shareholders who elect telephonic privileges may redeem shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to shareholders automatically. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instruction on the account
application to a pre-designated account. Redemption proceeds will normally be
paid promptly after receipt of telephonic instructions, but no later than three
business days thereafter, except as described above for shares purchased by
check. 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. Wire charges, if any,
will be deducted from redemption proceeds. Proper identification will be
required for each telephonic redemption.
Repurchase Order
In addition to telephonic and written redemption of Fund shares, the
Principal Underwriter may accept telephone orders from brokers or dealers for
the repurchase of Fund shares. The repurchase price is the net asset value per
share next determined after receipt of the repurchase order by the Principal
Underwriter and the payment for the shares by the Fund's custodian. Brokers and
dealers are obligated to transmit repurchase orders to the Principal Underwriter
prior to the close of the Principal Underwriter's business day (normally 4:00
p.m.). Brokers and dealers may charge for their services in connection with a
repurchase of Fund shares, but neither the Fund nor the Principal Underwriter
imposes a charge for share repurchases.
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Telephone Transactions
By maintaining an account that is eligible for telephonic exchange and
redemption privileges, the shareholder authorizes the Adviser, the Principal
Underwriter, the Fund and the Fund's custodian to act upon instructions of any
person to redeem and/or exchange shares from the shareholder's account. Further,
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 Principal Underwriter, nor the Trust, nor the Fund, 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
or exchange, 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. All telephone transaction requests will
be recorded. Shareholders may experience delays in exercising telephone
transaction privileges during periods of abnormal market activity. Accordingly,
during periods of volatile economic and market conditions, shareholders may wish
to consider transmitting redemption and exchange requests in writing.
* * * *
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. The Fund may eliminate duplicate mailings of Fund materials
to shareholders that have the same address of record.
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.
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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 provides fully discretionary management services and counseling
and advisory services to a broad range of clients throughout the United States
and abroad. In addition, the Adviser or its affiliate, Standish International
Management Company, L.P. ("SIMCO"), serves as the investment adviser to each of
the following fourteen funds in the Standish, Ayer & Wood family of funds:
Net Assets
Funds (March 31, 1996)
- --------------------------------------------------------------------------------
Standish Controlled Maturity Fund
Standish Equity Portfolio
Standish Fixed Income Portfolio
Standish Fixed Income Fund II
Standish Global Fixed Income Portfolio
Standish Intermediate Tax Exempt Bond Fund
Standish International Equity Fund
Standish International Fixed Income Fund
Standish Massachusetts Intermediate
Tax Exempt Bond Fund
Standish Securitized Fund
Standish Short-Term Asset Reserve Fund
Standish Small Capitalization Equity Portfolio
Standish Small Cap Tax-Sensitive Equity Fund
Standish Tax-Sensitive Equity Fund
Corporate pension funds are the largest asset under active management by
Standish. Standish's clients also include charitable and educational endowment
funds, financial institutions, trusts and individual investors. As of March 31,
1996, Standish managed approximately $__ billion in assets.
The Fund's portfolio manager is Howard B. Rubin. During the past five
years, Mr. Rubin has served as Director and Vice President of the Adviser.
Subject to the supervision and direction of the Trustees, the adviser
manages the Fund's portfolio in accordance with its stated investment objective
and polices, 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 0.35% of the Fund's average daily
net assets. For the period from July 3, 1995 (commencement of operations)
through December 31, 1995, the Adviser voluntarily agreed not to impose its
advisory fee which would have amounted to $11,617.
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Expenses
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, primarily on
the basis of relative net asset values. The Principal Underwriter 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 and shareholder
reports which are furnished to shareholders; registration and reporting fees and
expenses; and Trustees' fees and expenses. The Principal Underwriter bears
without subsequent reimbursement the distribution expenses attributable to the
offering and sale of Fund shares. The Adviser has voluntarily agreed to limit
Total Fund Operating Expenses of the Fund (excluding 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. The Adviser has also agreed to limit the
Fund's total operating expenses (excluding brokerage commissions, taxes and
extraordinary expenses) to the permissible limit applicable in any state in
which shares of the Fund are then qualified for sale. For the period from July
3, 1995 (commencement of operations) through December 31, 1995, expenses borne
by the Fund totalled $13,277 which represented .40% of the Fund's average daily
net assets after an expense reduction of $71,911.
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 generally 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 intends to elect to be treated and to qualify for taxation as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (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 shareholders as if received on December 31 of
the year the distributions are declared, rather than the year in which the
distributions are received.
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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 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. Only
the portion of such dividends, if any, attributable to certain dividends the
Fund receives with respect to its preferred stock investments is expected to
qualify, subject to satisfaction of applicable holding period and other
requirements, for the 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.
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,
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redemption, dividends, distributions and liquidation, and shareholders of the
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 February 1, 1996, more than 25% of the then outstanding shares of the
Fund were held by Essex County Gas Company, 7 North Hunt Road, Amesbury, MA,
which were deemed to control the Fund.
The Trust has established fourteen series that currently offer their shares
to the public 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 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 a request for 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. Immediately prior to the effectiveness of this
Prospectus, the Adviser owned all of the outstanding shares of the Fund.
Inquiries concerning the Fund should be made by contacting the Principal
Underwriter at the 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, the Principal Underwriter and the Adviser.
- --------------------------------------------------------------------------------
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.
22
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TAX CERTIFICATION INSTRUCTIONS
Federal law requires that taxable distributions an 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 certificates 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 Secuiryt 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 sction 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 144,
1442 and 3406 and/or consult your tax adviser.
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STANDISH CONTROLLED MATURITY FUND
Investment Adviser
Standish, Ayer & Wood, Inc.
One Financial Center
Boston, Massachusetts 02111
Principal Underwriter
Standish Fund Distributors, L.P.
One Financial Center
Boston, Massachusetts 02111
Custodian
Investors Bank & Trust Company
24 Federal Street
Boston, Massachusetts 02110
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
Legal Counsel
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
24
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May 1, 1996
STANDISH CONTROLLED MATURITY FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus, but expands
upon and supplements the information contained in the Prospectus dated May 1,
1996, as amended and/or supplemented from time to time (the "Prospectus"), of
Standish Controlled Maturity Fund (the "Fund"), a separate investment series of
Standish, Ayer & Wood Investment Trust (the "Trust"). This Statement of
Additional Information should be read in conjunction with the Prospectus which
may be obtained without charge from Standish Fund Distributors, L.P., the
Trust's principal underwriter (the "Principal Underwriter"), by calling the
telephone number or writing to the address listed above.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
Contents
Investment Objectives and Policies............................2
Investment Restrictions.......................................7
Calculation of Performance Data...............................8
Management...................................................10
Redemption of Shares.........................................15
Portfolio Transactions.......................................15
Federal Income Taxes.........................................16
Determination of Net Asset Value.............................17
The Fund and Its Shares......................................18
Additional Information.......................................18
Financial Statments.........................................18
1
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INVESTMENT OBJECTIVES AND POLICIES
The Fund's Prospectus describes the investment objectives of the Fund and
summarizes the investment policies it will follow. The following discussion
supplements the description of the Fund's investment policies in the Prospectus.
Maturity and Duration
The effective maturity of an individual portfolio security in which the
Fund invests is defined as the period remaining until the earliest date when the
Fund can recover the principal amount of such security through mandatory
redemption or prepayment by the issuer, the exercise by the Fund of a put
option, demand feature or tender option granted by the issuer or a third party
or the payment of the principal on the stated maturity date. The effective
maturity of variable rate securities is calculated by reference to their coupon
resent dates. Thus, the effective maturity of a security may be substantially
shorter than its final stated maturity. Unscheduled prepayments of principal
have the effect of shortening the effective maturities of securities in general
and mortgage-backed securities in particular. Prepayment rates are influenced by
changes in current interest rates and a variety of economic, geographic, social
and other factors and cannot be predicted with certainty. In general,
securities, such as mortgage-backed securities, may be subject to greater
prepayment rates in a declining interest rate environment. Conversely, in an
increasing interest rate environment, the rate of prepayment may be expected to
decrease. A higher than anticipated rate of unscheduled principal prepayments on
securities purchased at a premium or a lower than anticipated rate of
unscheduled payments on securities purchased at a discount may result in a lower
yield (and total return) to the Fund than was anticipated at the time the
securities were purchased. The Fund's reinvestment of unscheduled prepayments
may be made at rates higher or lower than the rate payable on such security,
thus affecting the return realized by the Fund.
Under normal market conditions, the Fund will maintain an option-adjusted
duration in the range of plus or minus 25% of the duration of the Merril Lynch
1-3 Year U.S. Treasury Index. Duration of an individual portfolio security is a
measure of the security's price sensitivity taking into account expected cash
flow and prepayments under a wide range of interest rate scenarios. In computing
the duration of its portfolio, the Fund will have to estimate the duration of
obligations that are subject to prepayment or redemption by the issuer taking
into account the influence of interest rates on prepayments and coupon flows.
The Fund may use various techniques to shorten or lengthen the option-adjusted
duration of its portfolio, including the acquisition of debt obligations at a
premium or discount, and the use of mortgage and interest rate swaps, caps,
floors and collars.
Money Market Instruments and Repurchase Agreements
Money market instruments include short-term U.S. Government securities,
commercial paper (promissory notes issued by corporations to finance their
short-term credit needs), negotiable certificates of deposit, non-negotiable
fixed time deposits, bankers' acceptances and repurchase agreements
collateralized by such instruments.
2
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U.S. Government securities include securities which are direct obligations
of the U.S. Government backed by the full faith and credit of the United States,
and securities issued by agencies and instrumentalities of the U.S. Government,
which may be guaranteed by the U.S. Treasury or supported by the issuer's right
to borrow from the Treasury or may be backed by the credit of the federal agency
or instrumentality itself. Agencies and instrumentalities of the U.S. Government
include, but are not limited to, Federal Land Banks, the Federal Farm Credit
Bank, the Central Bank for Cooperatives, Federal Intermediate Credit Banks,
Federal Home Loan Banks and the Federal National Mortgage Association.
Investments in commercial paper will be rated Prime-1 by Moody's Investors
Service, Inc. ("Moody's") or A-1 by Standard & Poor's Ratings Group ("Standard &
Poor's") or Duff 1+ by Duff & Phelps, which are the highest ratings assigned by
these rating services (even if rated lower by one or more of the other
agencies), or which, if not rated or rated lower by one or more of the agencies
and not rated by the other agency or agencies, are judged by the Adviser to be
of equivalent credit quality to the securities so rated.
A repurchase agreement is an agreement under which the Fund acquires money
market instruments (generally U.S. Government securities) from a commercial
bank, broker or dealer, subject to resale to the seller at an agreed-upon price
and date (normally the next business day). The resale price reflects an
agreed-upon interest rate effective for the period the instruments are held by
the Fund and is unrelated to the interest rate on the instruments. The
instruments acquired by the Fund (including accrued interest) must have an
aggregate market value in excess of the resale price and will be held by the
custodian bank for the Fund until they are repurchased. In evaluating whether to
enter a repurchase agreement, the investment adviser, Standish, Ayer & Wood,
Inc. (the "Adviser"), will carefully consider the creditworthiness of the seller
pursuant to procedures reviewed and approved by the Trust's Board of Trustees.
The use of repurchase agreements involves certain risks. For example, if
the seller defaults on its obligation to repurchase the instruments acquired by
the Fund at a time when their market value has declined, the Fund may incur a
loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by the Fund are collateral for a loan by the Fund and
therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that the Fund may not be able to substantiate its interest in the
instruments it acquires. While the Trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
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 and broad or specific fixed-income market movements), to manage the
effective maturity 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.
3
<PAGE>
In the course of pursuing its investment objectives, the Fund may purchase
and sell (write) exchange-listed and over-the-counter put and call options on
securities, 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 (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 interest 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 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 will attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for such purposes to not more than 1% 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 believes that short-term interest rates as indicated in
the forward yield curve are too high, the Fund may take a short position in a
near-term Eurodollar futures contract and a long position in a longer-dated
Eurodollar futures contract. Under such circumstances, any unrealized loss in
the near-term Eurodollar futures position would be netted against any unrealized
gain in the longer-dated Eurodollar futures 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 and interest rate 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 Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"), for qualification as a regulated investment company.
Risks of Strategic Transactions
The use of Strategic Transactions has associated risks including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market or interest rate 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 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
4
<PAGE>
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
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, they 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 attempt to limit its net
loss exposure resulting from Strategic Transactions entered into for non-hedging
purposes to not more than 1% 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.
General Characteristics of Options
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving options
require segregation of the Fund's assets in special accounts, as described below
under "Use of Segregated Accounts."
A put option gives the purchaser of the option, in consideration for the
payment of a premium, the right to sell, and the writer the obligation to buy
(if the option is exercised), the underlying security, commodity, index or other
instrument at the exercise price. For instance, the Fund's purchase of a put
option on a security might be designed to protect its holdings in the underlying
instrument (or, in some cases, a similar instrument) against a substantial
decline in the market value by giving the Fund the right to sell such instrument
at the option exercise price. A call option, in consideration for the payment of
a premium, gives the purchaser of the option the right to buy, and the seller
the obligation to sell (if the option is exercised), the underlying instrument
at the exercise price. The Fund may purchase a call option on a security,
futures contract, index or other instrument to seek to protect the Fund against
an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC" options). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example but is also applicable to other
financial intermediaries.
5
<PAGE>
With certain exceptions, exchange listed options generally settle by
physical delivery of the underlying security, although in the future cash
settlement may become available. Index options and Eurodollar instruments are
cash settled for the net amount, if any, by which the option is in-the-money
(i.e., where the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
The Fund's ability to close out its position as a purchaser or seller of an
exchange listed put or call option is dependent, in part, upon the liquidity of
the option market. There is no assurance that a liquid option market on an
exchange will exist. In the event that the relevant market for an option on an
exchange ceases to exist, outstanding options on that exchange would generally
continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct agreement with
the Counterparty. In contrast to exchange listed options, which generally have
standardized terms and performance mechanics, all the terms of an OTC option,
including such terms as method of settlement, term, exercise price, premium,
guarantees and security, are set by negotiation of the parties. The Fund will
generally sell (write) OTC options that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. (To the extent that the Fund does not
do so, the OTC options are subject to the Fund's restriction on investments in
illiquid securities.) The Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.
6
<PAGE>
Unless the parties provide for it, there is no central clearing or guaranty
function in the OTC option market. As a result, if the Counterparty fails to
make delivery of the security or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York as
"Primary dealers," or broker dealers, domestic banks or other financial
institutions which have received, combined with any credit enhancements, a
long-term debt rating of A from Standard & Poor's or Moody's or an equivalent
rating from any other nationally recognized statistical rating organization
("NRSRO") or which issue debt that is determined to be of equivalent credit
quality by the Adviser. The staff of the Securities and Exchange Commission
("SEC") currently takes the position that, absent the buy-back provisions
discussed above, OTC options purchased by the Fund, and portfolio securities
"covering" the amount of the Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Fund's limitation on investing no more than 15%
of its assets in illiquid securities. However, for options written with "primary
dealers" pursuant to an agreement requiring a closing purchase transaction at a
formula price, the amount which is considered to be illiquid may be calculated
by reference to a formula price.
If the Fund sells (writes) a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Fund's income. The sale (writing) of put options
can also provide income.
The Fund may purchase and sell (write) call options on securities including
U.S. Treasury and agency securities, mortgage-backed and asset-backed
securities, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices and futures contracts. All calls sold by the Fund must be "covered"
(i.e., the Fund must own the securities or the futures contract subject to the
call) or must meet the asset segregation requirements described below as long as
the call is outstanding. In addition, the Fund may cover a written call option
or put option by entering into an offsetting forward contract and/or by
purchasing an offsetting option or any other option which, by virtue of its
exercise price or otherwise, reduces the Fund's net exposure on its written
option position.
Even though the Fund will receive the option premium to help offset any
loss, the Fund may incur a loss if the exercise price is below the market price
for the security subject to the call at the time of exercise. A call sold by the
Fund also exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold.
7
<PAGE>
The Fund may purchase and sell (write) put options on securities including
U.S. Treasury and agency securities, mortgage-backed and asset-backed
securities, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments (whether or not it holds the above
securities in its portfolio), and on securities indices and futures contracts.
The Fund will not sell put options if, as a result, more than 50% of the Fund's
assets would be required to be segregated to cover its potential obligations
under such put options other than those with respect to futures and options
thereon. In selling put options, there is a risk that the Fund may be required
to buy the underlying security at a price above the market price.
Options on Securities Indices and Other Financial Indices
The Fund may also purchase and sell (write) call and put options on
securities indices and other financial indices. Options on securities indices
and other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement. For example, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the differential between
the closing price of the index and the exercise price of the option, which also
may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount. In addition to
the methods described above, the Fund may cover call options on a securities
index by owning securities whose price changes are expected to be similar to
those of the underlying index, or by having an absolute and immediate right to
acquire such securities without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other securities in its portfolio.
General Characteristics of Futures
The Fund may enter into financial futures contracts or purchase or sell put
and call options on such futures. Futures are generally bought and sold on the
commodities exchanges where they are listed and involve payment of initial and
variation margin as described below. All futures contracts entered into by the
Fund are traded on U.S. exchanges or boards of trade that are licensed and
regulated by the Commodity Futures Trading Commission ("CFTC") or on certain
foreign exchanges.
The sale of futures contracts creates a firm obligation by the Fund, as
seller, to deliver to the buyer the specific type of financial instrument called
for in the contract at a specific future time for a specified price (or, with
respect to index futures and Eurodollar instruments, the net cash amount). The
purchase of futures contracts creates a corresponding obligation by the Fund, as
purchaser to purchase a financial instrument at a specified time and price.
Options on futures contracts are similar to options on securities except that an
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract and obligates the
seller to deliver such position, if the option is exercised.
8
<PAGE>
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
regulations of the CFTC relating to exclusions from regulation as a commodity
pool operator. Those regulations currently provide that the Fund may use
commodity futures and option positions (i) for bona fide hedging purposes
without regard to the percentage of assets committed to margin and option
premiums, or (ii) for other purposes permitted by the CTFC to the extent that
the aggregate initial margin and option premiums required to establish such
non-hedging positions (net of the amount that the positions were "in the money"
at the time of purchase) do not exceed 5% of the liquidation value (i.e., the
net asset value) of the Fund's portfolio, after taking into account unrealized
profits and losses on such positions. Typically, maintaining a futures contract
or selling an option thereon requires the Fund to deposit, with a financial
intermediary for the benefit of a futures commission merchant, as security for
its obligations an amount of cash or other specified assets (initial margin)
which initially is typically 1% to 10% of the face amount of the contract (but
may be higher in some circumstances). Additional cash or assets (variation
margin) may be required to be deposited directly with the futures commission
merchant thereafter on a daily basis as the value of the contract fluctuates.
The purchase of an option on financial futures involves payment of a premium for
the option without any further obligation on the part of the Fund. If the Fund
exercises an option on a futures contract it will be obligated to post initial
margin (and potential subsequent variation margin) for the resulting futures
position just it would for any position. Futures contracts and options thereon
are generally settled by entering into an offsetting transaction but there can
be no assurance that the position can be offset prior to settlement at an
advantageous price, nor that delivery will occur. The segregation requirements
with respect to futures contracts and options thereon are described below.
Combined Transactions
The Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, and multiple interest rate
transactions, structured notes and any combination of futures, options, and
interest rate transactions (component transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars
Among the Strategic Transactions into which the Fund may enter are interest
rate and index swaps and the purchase or sale of related caps, floors and
collars. The Fund expects to enter into these transactions primarily for hedging
purposes, including, but not limited to, preserving a return or spread on a
particular investment or portion of its portfolio, as a duration management
9
<PAGE>
technique or protecting against an increase in the price of securities the Fund
anticipates purchasing at a later date. Swaps, caps, floors and collars may also
be used to enhance potential gain in circumstances where hedging is not involved
although, as described above, the Fund will attempt to limit its net loss
exposure resulting from swaps, caps, floors and collars and other Strategic
Transactions entered into for such purposes to not more than 1% of the Fund's
net assets at any one time. The Fund will not sell interest rate caps or floors
where it does not own securities or other instruments providing the income
stream the Fund may be obligated to pay. Interest rate swaps involve the
exchange by the Fund with another party of their respective commitments to pay
or receive interest (e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal). An index swap is an
agreement to swap cash flows on a notional amount based on changes in the values
of the reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling such cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain rate of return
within a predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis (i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments). The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by Standard & Poor's or Moody's or has
an equivalent rating from an NRSRO or which issue debt that is determined to be
of equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed. Swaps, caps, floors and collars are considered illiquid for purposes
of the Fund's policy regarding illiquid securities, unless it is determined,
based upon continuing review of the trading markets for the specific security,
that such security is liquid. The Board of Trustees has adopted guidelines and
delegated to the Adviser the daily function of determining and monitoring the
liquidity of swaps, caps, floors and collars. The Board of Trustees, however,
retains oversight focusing on factors such as valuation, liquidity and
availability of information and is ultimately responsible for such
determinations. The staff of the SEC currently takes the position that swaps,
caps, floors and collars are illiquid, and are subject to the Fund's limitation
on investing in illiquid securities.
10
<PAGE>
Eurodollar Contracts
The Fund may make investments in Eurodollar contracts. Eurodollar contracts
are U.S. dollar-denominated futures contracts or options thereon which are
linked to the London Interbank Offered Rate ("LIBOR"), although foreign
currency-denominated instruments are available from time to time. Eurodollar
futures contracts enable purchasers to obtain a fixed rate for the lending of
funds and sellers to obtain a fixed rate for borrowings. The Fund might use
Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many interest rate swaps and fixed income instruments are
linked.
Use of Segregated Accounts
The Fund will hold securities or other instruments whose values are
expected to offset its obligations under the Strategic Transactions. The Fund
will not enter into Strategic Transactions that expose the Fund to an obligation
to another party unless it owns either (i) an offsetting position in securities
or other options, futures contracts or other instruments or (ii) cash,
receivables or liquid, high grade debt securities with a value sufficient to
cover its potential obligations. The Fund may have to comply with any applicable
regulatory requirements designed to make sure that mutual funds do not use
leverage in Strategic Transactions, and if required, will set aside cash and
other assets in a segregated account with its custodian bank in the amount
prescribed. In that case, the Fund's custodian would maintain the value of such
segregated account equal to the prescribed amount by adding or removing
additional cash or other assets to account for fluctuations in the value of the
account and the Fund's obligations on the related Strategic Transactions. Assets
held in a segregated account would not be sold while the Strategic Transaction
is outstanding, unless they are replaced with similar assets. As a result, there
is a possibility that segregation of a large percentage of the Fund's assets
could impede portfolio management or the Fund's ability to meet redemption
requests or other current obligations.
"When-Issued" and "Delayed Delivery" Securities
The Fund may commit up to 15% of its net assets to purchase securities on a
"when-issued" and "delayed delivery" basis, which means that delivery and
payment for the securities will normally take place 15 to 45 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" and "delayed
delivery" 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
custodian bank for the Fund. If the market value of these securities declines,
additional cash or securities will be segregated daily so that the aggregate
market value of the segregated securities equals the amount of the Fund's
commitment.
Securities purchased on a "when-issued" and "delayed delivery" 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.
11
<PAGE>
Portfolio Turnover
It is not the policy of the Fund to purchase or sell securities for trading
purposes. However, the Fund places no restrictions on portfolio turnover and it
may sell any portfolio security without regard to the period of time it has been
held, except as may be necessary to maintain its status as a regulated
investment company under the Internal Revenue Code. The Fund may therefore
generally change its portfolio investments at any time in accordance with the
Adviser's appraisal of factors affecting any particular issuer or market, or the
economy in general.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental policies in addition to
those described under "Investment Objectives and Policies-Investment
Restrictions" in the Prospectus. The Fund's fundamental policies cannot be
changed unless the change is approved by the lesser of (i) 67% or more of the
voting securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy,
or (ii) more than 50% of the outstanding voting securities of the Fund. The Fund
may not:
1. Invest more than 25% of the current value of its total assets in any
single industry, provided that this restriction shall not apply to U.S.
Government securities or mortgage-backed securities issued or guaranteed
as to principal or interest by the U.S. Government, its agencies or
instrumentalities.
2. Issue senior securities, except as permitted by paragraphs 3, 7 and 8
below. For purposes of this restriction, the issuance of shares of
beneficial interest in multiple classes or series, the deferral of
trustees' fees, the purchase or sale of options, futures contracts,
forward commitments and repurchase agreements entered into in accordance
with the Fund's investment policies or within the meaning of paragraph 6
below, are not deemed to be senior securities.
3. Borrow money, except (i) from banks for temporary or short-term purposes
or for the clearance of transactions in amounts not to exceed 33 1/3% of
the value of the Fund's total assets (including the amount borrowed) taken
at market value, (ii) in connection with the redemption of Fund shares or
to finance failed settlements of portfolio trades without immediately
liquidating portfolio securities or other assets; (iii) in order to
fulfill commitments or plans to purchase additional securities pending the
anticipated sale of other portfolio securities or assets and (iv) the Fund
may enter into reverse repurchase agreements and forward roll
transactions. For purposes of this investment restriction, investments in
short sales, futures contracts, options on futures contracts, securities
or indices and forward commitments shall not constitute borrowing.
12
<PAGE>
4. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Fund may be
deemed to be an underwriter under the Securities Act of 1933.
5. Purchase or sell real estate except that the Fund may (i) acquire or lease
office space for its own use, (ii) invest in securities of issuers that
invest in real estate or interests therein, (iii) invest in securities
that are secured by real estate or interests therein, (iv) purchase and
sell mortgage-related securities and (v) hold and sell real estate
acquired by the Fund as a result of the ownership of securities.
6. Purchase securities on margin (except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities).
7. Purchase or sell commodities or commodity contracts, except the Fund may
purchase and sell options on securities, securities indices and currency,
futures contracts on securities, securities indices and currency and
options on such futures, forward foreign currency exchange contracts,
forward commitments, securities index put or call warrants and repurchase
agreements entered into in accordance with the Fund's investment policies.
8. Make loans, except that the Fund (1) may lend portfolio securities in
accordance with the Fund's investment policies up to 33 1/3% of the Fund's
total assets taken at market value, (2) enter into repurchase agreements,
and (3) purchase all or a portion of an issue of debt securities, bank
loan participation interests, bank certificates of deposit, bankers'
acceptances, debentures or other securities, whether or not the purchase
is made upon the original issuance of the securities.
For purposes of the fundamental investment restriction (1) regarding
industry concentration, the Adviser generally classifies issuers by industry in
accordance with classifications set forth in the Directory of Companies Filing
Annual Reports With The Securities and Exchange Commission. In the absence of
such classification or if the Adviser determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
it more appropriately considered to be engaged in a different industry, the
Adviser may classify an issuer according to its own sources. For instance,
personal credit finance companies and business credit finance companies are
deemed to be separate industries and wholly-owned finance companies are
considered to be in the industry of their parents if their activities are
primarily related to financing the activities of their parents.
The following restrictions are not fundamental policies and may be changed
by the Trustees without shareholder approval, in accordance with applicable
laws, regulations or regulatory policy. The Fund may not:
A. Make short sales of securities unless (a) after effect is given to any
such short sale, the total market value of all securities sold short would
not exceed 5% of the value of the Fund's net assets or (b) at all times
during which a short position is open it owns an equal amount of such
securities, or by virtue of ownership of convertible or exchangeable
securities it has the right to obtain through the conversion or exchange
of such other securities an amount equal to the securities sold short.
13
<PAGE>
B. Invest in companies for the purpose of exercising control or management.
C. Purchase securities of any other investment company if, as a result, (i)
more than 10% of the Fund's assets would be invested in securities of
other investment companies, (ii) such purchase would result in more than
3% of the total outstanding voting securities of any one such investment
company being held by the Fund or (iii) more than 5% of the Fund's assets
would be invested in any one such investment company. The Fund will not
purchase the securities of any open-end investment company except when
such purchase is part of a plan of merger, consolidation, reorganization
or purchase of substantially all of the assets of any other investment
company, or purchase the securities of any closed-end investment company
except in the open market where no commission or profit to a sponsor or
dealer results from the purchase, other than customary brokerage fees. The
Fund has no current intention of investing in other investment companies.
D. Invest in interests in oil, gas or other exploration or development
programs; however, this policy will not prohibit the acquisition of
securities of companies engaged in the production or transmission of oil,
gas, or other minerals.
E. Invest more than 5% of the assets of the Fund in the securities of any
issuers which, together with their corporate parents, have records of less
than three years' continuous operation, including the operation of any
predecessor, excluding obligations issued or guaranteed by the U.S.
Government or its agencies and securities fully collateralized by such
securities and excluding securities which have been rated investment grade
by at least one nationally recognized statistical rating organization.
F. Invest in securities of any company if any officer or director (Trustee)
of the Trust or of the Adviser owns more than .5% of the outstanding
securities of such company and such officers and directors (Trustees) own
in the aggregate more than 5% of the securities of such company.
G. Invest in securities which are illiquid if, as a result, more than 15% of
its net assets would consist of such securities, including repurchase
agreements maturing in more than seven days, securities that are not
readily marketable, restricted securities not eligible for resale pursuant
to Rule 144A under the 1933 Act, purchased OTC options, certain assets
used to cover written OTC options, and privately issued stripped
mortgage-backed securities.
H. Invest more than 15% of its total assets in restricted securities,
including those eligible for resale under Rule 144A under the 1933 Act.
I. Purchase securities while outstanding bank borrowings exceed 5% of the
Fund's net assets.
J. Invest in real estate limited partnership interests, other than real
estate investment trusts organized as limited partnerships.
K. Purchase or sell (write) options, except pursuant to the limitations
described above.
14
<PAGE>
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, except with respect to restriction (F) above.
In order to permit the sale of shares of the Fund in certain states, the
Board may, in its sole discretion, adopt restrictions on investment policy more
restrictive than those described above. Should the Board determine that any such
more restrictive policy is no longer in the best interest of the Fund and its
shareholders, the Fund may cease offering shares in the state involved and the
Board may revoke such restrictive policy. Moreover, if the states involved shall
no longer require any such restrictive policy, the Board may, in its sole
discretion, revoke such policy.
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, the Fund may, from time to time, advertise
certain total return and yield information. The average annual total return of
the Fund for a period is computed by subtracting the net asset value per share
at the beginning of the period from the net asset value per share at the end of
the period (after adjusting for the reinvestment of any income dividends and
capital gain distributions), and dividing the result by the net asset value per
share at the beginning of the period. In particular, the average annual total
return of the Fund ("T") is computed by using the redeemable value at the end of
a specified period of time ("ERV") of a hypothetical initial investment of
$1,000 ("P") over a period of time ("n") according to the formula P(1+T)n=ERV.
Yield quotations shares are computed by dividing the net investment income
per share during a base period of 30 days, or one month, by the maximum offering
price (net asset value) per share of the Fund on the last day of such base
period in accordance with the following formula:
Yield = 2[((A - B + 1)/CD)^6 - 1]
Where: a=interest earned during the period
b=net expenses accrued for the period
c=the average daily number of shares outstanding during the period
that were entitled to receive dividends
d=the maximum offering price
per share (net asset value) on the last day of the period
For purposes of calculating interest earned on debt obligations as provided
in item "a" above:
(i) The yield to maturity of each obligation held by the Fund is computed
based on the market value of the obligation (including actual accrued
interest, if any) at the close of business each day during the 30-day base
period, or, with respect to obligations purchased during the month, the
purchase price (plus actual accrued interest, if any) on settlement date,
and with respect to obligations sold during the month the sale price (plus
actual accrued interest, if any) between the trade and settlement dates.
15
<PAGE>
(ii) The yield to maturity of each obligation is then divided by 360 and the
resulting quotient is multiplied by the market value of the obligation
(including actual accrued interest, if any) to determine the interest
income on the obligation for each day. The yield to maturity calculation
has been made on each obligation during the 30 day base period.
(iii) Interest earned on all debt obligations during the 30-day or one month
period is then totaled.
(iv) The maturity of an obligation with a call provision(s) is the next call
date on which the obligation reasonably may be expected to be called or,
if none, the maturity date.
With respect to the treatment of discount and premium on mortgage or other
receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("pay downs"), the Fund accounts for gain or
loss attributable to actual monthly pay downs as an increase or decrease to
interest income during the period. In addition, the Fund may elect (i) to
amortize the discount or premium remaining on a security, based on the cost of
the security, to the weighted average maturity date, if such information is
available, or to the remaining term of the security, if the weighted average
maturity date is not available, or (ii) not to amortize the discount or premium
remaining on a security.
The Fund may also quote non-standardized yield, such as yield-to-maturity
("YTM"). YTM represents the rate of return an investor will receive if a
long-term, interest bearing investment, such as a bond, is held to its maturity
date. YTM does not take into account purchase price, redemption value, time to
maturity, coupon yield, and the time between interest payments.
16
<PAGE>
In addition to average annual return and yield quotations, the Fund may
quote quarterly and annual performance on a net (with management and
administration fees deducted) and gross basis as follows:
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
3Q95 1.55% 1.64%
4Q95 2.61 2.70
1995 4.20 4.38
These performance quotations should not be considered as representative of
the Fund's performance for any specified period in the future.
The Fund's performance may be compared in sales literature to the
performance of other mutual funds having similar objectives or to standardized
indices or other measures of investment performance. In particular, the Fund may
compare its performance to the Merrill Lynch 1-3 Year U.S. Treasury Index, the
Merrill Lynch 1-5 Year U.S. Treasury Index and the Merrill Lynch 1 Year Treasury
Bill Index. Comparative performance may also be expressed by reference to a
ranking prepared by a mutual fund monitoring service or by one or more
newspapers, newsletters or financial periodicals. Performance comparisons may be
useful to investors who wish to compare the Fund's past performance to that of
other mutual funds and investment products. Of course, past performance is not a
guarantee of future results.
The Fund's average annual total return for the period from July 3, 1995
(commencement of operations) through December 31, 1995 was 4.20% and the Fund's
average annualized yield for the 30-day period ended December 31, 1995 was
5.82%.
17
<PAGE>
<TABLE>
<CAPTION>
MANAGEMENT
Trustees and Officers
The Trustees and executive officers of the Trust are listed below. All
executive officers of the Trust are affiliates of Standish, Ayer & Wood, Inc.,
the Fund's investment adviser.
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
*D. Barr Clayson, 7/29/35 Vice President and Trustee Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center President,
Boston, MA 02111 Standish International
Management Company, L.P.
Samuel C. Fleming, 9/30/40 Trustee Chairman of the Board
c/o Decision Resources, Inc. and Chief Executive Officer,
1100 Winter Street Decision Resources, Inc.;
Waltham, MA 02154 through 1989, Senior V.P.
Arthur D. Little
Benjamin M. Friedman, 8/5/44 Trustee William Joseph Maier
c/o Harvard University Professor of Political Economy,
Cambridge, MA 02138 Harvard University
John H. Hewitt, 4/11/38 Trustee Trustee, The Peabody
P.O. Box 307 Foundation; Trustee,
So. Woodstock, VT 05071 Visiting Nurse Alliance of Vermont
and New Hampshire
*Edward H. Ladd, 1/3/38 Trustee and Vice President Chairman of the Board
c/o Standish, Ayer & Wood, Inc. and Managing Director,
One Financial Center Standish, Ayer & Wood, Inc. since 1990;
Boston, MA 02111 formerly President of
Standish, Ayer & Wood, Inc.
Caleb Loring III, 11/14/43 Trustee Trustee, Essex Street Associates
c/o Essex Street Associates (family investment trust office);
P.0. Box 5600 Director, Holyoke Mutual Insurance Company
Beverly Farms, MA 01915
*Richard S. Wood, 5/2/54 President and Trustee Vice President, Secretary and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Executive Vice President,
Boston, MA 02111 Standish International Management Company, L.P.
18
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
Richard C. Doll, 7/8/48 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
James E. Hollis III, 11/21/48 Executive Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
David W. Murray, 5/5/40 Treasurer and Secretary Vice President, Treasurer and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Caleb F. Aldrich, 9/20/57 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
Beverly E. Banfield, 7/6/56 Vice President Vice President and Compliance Officer,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Assistant Vice President and Compliance Officer,
Boston, MA 02111 Freedom Capital Management Corp.
(1989-1992)
Nicholas S. Battelle, 6/24/42 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Walter M. Cabot, 1/6/33 Vice President Senior Advisor and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center prior to 1991, President,
Boston, MA 02111 Harvard Management Company
David H. Cameron, 11/2/55 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Karen K. Chandor, 2/13/50 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Lavinia B. Chase, 6/4/46 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Susan B. Coan, 5/1/52 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
19
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
W. Charles Cook II, 2/16/63 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Joseph M. Corrado, 5/13/55 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Dolores S. Driscoll, 2/17/48 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Mark A. Flaherty, 4/24/59 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Anne P. Herrmann, 1/26/56 Vice President Mutual Fund Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ann S. Higgins, 4/8/35 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Senior Operations Manager,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Since December 1995, formerly
Boston, MA 02111 Vice President, Scudder Stevens and Clark
Raymond J. Kubiak, 9/3/57 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Maria D. Furman, 2/3/54 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Phillip D. Leonardi, 4/24/62 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc. since November 1993; formerly, Investment Sales,
One Financial Center Cigna Corporation (1993) and
Boston, MA 02111 Travelers Corporation (1984-1993)
Laurence A. Manchester, 5/24/43 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
20
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
George W. Noyes, 11/12/44 Vice President President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Arthur H. Parker, 8/12/35 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Jennifer A. Pline, 3/8/60 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Howard B. Rubin, 10/29/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Michael C. Schoeck, 10/24/55 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since August, 1993;
One Financial Center formerly, Vice President,
Boston, MA 02111 Commerzbank, Frankfurt, Germany
Austin C. Smith, 7/25/42 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Stephen A. Smith, 3/13/49 Vice President Vice President, since November 2, 1993;
c/o Standish, Ayer & Wood, Inc. formerly, Standish, Ayer & Wood, Inc. Consultant
One Financial Center Cambridge Associates
Boston, MA 02111
David C. Stuehr, 3/1/58 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
James W. Sweeney, 5/15/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ralph S. Tate, 4/2/47 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since April, 1990;
One Financial Center formerly Vice President, Aetna Life & Casualty
Boston, MA 02111
Michael W. Thompson, 3/31/56 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
21
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
Christopher Van Alstyne, 3/24/60 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
</TABLE>
*Indicates that Trustee is an interested person of the Trust for purposes of the
1940 Act.
Compensation of Trustees and Officers
The Fund pays no compensation to the Trust's Trustees affiliated with the
Adviser or to the Trust's officers. None of the Trust's Trustees or officers
have engaged in any financial transactions (other than the purchase or
redemption of the Fund's shares) with the Trust or the Adviser.
The following table sets forth all compensation paid to the Trust's
Trustees as of the fiscal year ended December 31, 1995 and estimates the amount
of such fees to be paid by the Fund during its current fiscal year:
<TABLE>
<CAPTION>
Pension or Retirement Total Compensation
Aggregate Compensation Benefits Accrued as from Fund and
Name of Trustee from the Fund Part of Fund's Expenses Other Funds in Complex*
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
D. Barr Clayson $0 $0 $0
Phyllis L. Cothran** 0 0 0
Richard C. Doll*** 0 0 0
Samuel C. Fleming 63 0 46,000
Benjamin M. Friedman 143 41,750
John H. Hewitt 143 0 41,750
Edward H. Ladd 0 0 0
Caleb Loring, III 143 0 41,750
Richard S. Wood 0 0 0
---------
*As of the date of this Statement of Additional Information, there were 18 mutual funds in the fund complex.
**Ms. Cothran resigned as a Trustee effective January 31, 1995.
***Mr. Doll resigned as a Trustee effective December 6, 1995.
</TABLE>
Certain Shareholders
At February 1, 1996, the Trustees and officers of the Trust as a group
beneficially owned (i.e., had voting and/or investment power) less than 1% of
the then outstanding shares of the Fund. At that date, no person beneficially
owned 5% or more of the outstanding shares of the Fund except:
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
Essex County Gas Company 49%
7 North Hunt Road
P.O. Box 500
Amesbury, MA 01913
San Francisco Opera Association 19%
301 Van Ness Avenue
San Francisco, CA 94102
Mr. Ian M. Cumming 8%
Cumming Foundation
Leucadia National Corporation
529 East South Temple
Salt Lake City, UT 84102
The John Darnaby Cumming Trust 5%
Leucadia National Corporation
529 East South Temple
Salt Lake City, UT 84102
The David Edward Cumming Trust 5%
Leucadia National Corporation
529 East South Temple
Salt Lake City, UT 84102
Ian M. Cumming IRA 5%
L529 East South Temple
Salt Lake City, UT 84102
22
<PAGE>
Investment Adviser
Standish, Ayer & Wood, Inc. serves as investment adviser to the Fund
pursuant to a written investment advisory agreement. The Adviser is a
Massachusetts corporation organized in 1933 and is registered under the
Investment Advisers Act of 1940.
The following, constituting all of the Directors and all of the
shareholders of the Adviser, are the controlling persons of the Adviser: Caleb
F. Aldrich, Nicholas S. Battelle, Walter M. Cabot, Sr., David H. Cameron, Karen
K. Chandor, D. Barr Clayson, Richard C. Doll, Dolores S. Driscoll, Mark A.
Flaherty, Maria D. Furman, James E. Hollis III, Raymond J. Kubiak, Edward H.
Ladd, Laurence A. Manchester, David W. Murray, George W. Noyes, Arthur H.
Parker, Howard B. Rubin, David C. Stuehr, Austin C. Smith, Ralph S.Tate, James
J. Sweeney and Richard S. Wood.
Certain services provided by the Adviser under the advisory agreement are
described in the Prospectus. In addition to those services, the Adviser provides
the Fund with office space for managing its affairs, with the services of
required executive personnel, and with certain clerical services and facilities.
These services are provided without reimbursement by the Fund for any costs
incurred. Under the investment advisory agreement, the Fund pays to the Adviser
a fee at the rate of 0.35% of the Fund's average daily net assets. This fee is
paid monthly. For services to the Fund during the fiscal period from July 3,
1995 (commencement of operations) through December 31, 1995, the Adviser
voluntarily agreed not to impose its advisory fees which would have amounted to
$11,617.
The Adviser has voluntarily agreed to limit certain "Total Fund Operating
Expenses" (excluding litigation, indemnification and other extraordinary
expenses) to 0.45% per annum 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. If such Total Fund Operating Expenses exceed the voluntary
expense limitation, the compensation due to the Adviser shall be reduced by the
amount of the excess, by a reduction or refund thereof at the time such
compensation is payable after the end of each calendar month during the year in
which the limitation is in effect, subject to readjustment during the year.
23
<PAGE>
Pursuant to the investment advisory agreement, the Fund bears expenses of
its operations other than those incurred by the Adviser pursuant to the
investment advisory agreement. Among other expenses, the Fund will pay share
pricing and shareholder servicing fees and expenses; custodian fees and
expenses; legal and auditing fees and expenses; expenses of prospectuses,
statements of additional information and shareholder reports; registration and
reporting fees and expenses; and Trustees' fees and expenses. The advisory
agreement provides that if the total expenses of the Fund in any fiscal year
exceed the most restrictive expense limitation applicable to the Fund in any
state in which shares of the Fund are then qualified for sale, the compensation
due the Adviser shall be reduced by the amount of the excess, by a reduction or
refund thereof at the time such compensation is payable after the end of each
calendar month during the fiscal year, subject to readjustment during the year.
Currently, the most restrictive state expense limitation provision limits the
Fund's expenses to 2 1/2% the first $30 million of average net assets, 2% of the
next $70 million of such net assets and 1 1/2% of such net assets in excess of
$100 million.
Unless terminated as provided below, the investment advisory agreement
continues in full force and effect until June 1, 1997 and for successive periods
of one year thereafter, but only as long as each such continuance after June 1,
1997 is approved annually (i) by either the Trustees of the Trust or by vote of
a majority of the outstanding voting securities (as defined in the 1940 Act) of
the Fund, and, in either event (ii) by vote of a majority of the Trustees of the
Trust who are not parties to the investment advisory agreement or "interested
persons" (as defined in the 1940 Act) of any such party, cast in person at a
meeting called for the purpose of voting on such approval. The investment
advisory agreement may be terminated at any time without the payment of any
penalty by vote of the Trustees of the Trust or by vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the Fund or by the
Adviser, on sixty days' written notice to the other parties. The investment
advisory agreement terminates in the event of its assignment as defined in the
1940 Act.
In an attempt to avoid any potential conflict with portfolio transactions
for the Fund, the Adviser and the Trust have adopted extensive restrictions on
personal securities trading by personnel of the Adviser and its affiliates.
These restrictions include: pre-clearance of all personal securities
transactions and a prohibition of purchasing initial public offerings of
securities. These restrictions are a continuation of the basic principle that
the interests of the Fund and its shareholders come before those of the Adviser,
its affiliates and their employees.
Distributor of the Trust
Standish Fund Distributors, L.P. (the "Principal Underwriter"), an
affiliate of the Adviser, serves as the Trust's exclusive principal underwriter
and holds itself available to receive purchase orders for the Fund's shares. In
that capacity, the Principal Underwriter has been granted the right, as agent of
the Trust, to solicit and accept orders for the purchase of the Fund's shares in
accordance with the terms of the Underwriting Agreement between the Trust and
the Principal Underwriter. Pursuant to the Underwriting Agreement, the Principal
Underwriter has agreed to use its best efforts to obtain orders for the
continuous offering of the Fund's shares. The Principal Underwriter receives no
commissions or other compensation for its services, and has not received any
24
<PAGE>
such amounts in any prior year. The Underwriting Agreement shall continue in
effect with respect to the Fund until two years after its execution and for
successive periods of one year thereafter only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the Fund's
outstanding shares or by the Trustees of the Trust or (ii) by a vote of a
majority of the Trustees of the Trust who are not "interested persons" (as
defined by the 1940 Act) of the parties to the Underwriting Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Underwriting Agreement will terminate automatically if assigned by either party
thereto and is terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust, a vote of a majority of the Trustees who are not
"interested persons" of the Trust, or by a vote of the holders of a majority of
the Fund's outstanding shares, in any case without payment of any penalty on not
more than 60 days' written notice to the other party. The offices of the
Principal Underwriter are located at One Financial Center, 26th Floor, Boston,
Massachusetts 02111.
REDEMPTION OF SHARES
Detailed information on redemption of shares is included in the Prospectus.
The Fund may suspend the right to redeem shares or postpone the date of
payment upon redemption for more than seven days (i) for any period during which
the New York Stock Exchange is closed (other than customary weekend or holiday
closings) or trading on the exchange is restricted; (ii) for any period during
which an emergency exists as a result of which disposal by the Fund of
securities owned by it or determination by the Fund of the value of its net
assets is not reasonably practicable; or (iii) for such other periods as the
Securities and Exchange Commission may permit for the protection of shareholders
of the Fund.
The Fund intends to pay redemption proceeds in cash for all shares
redeemed, but under certain conditions, the Fund may make payment wholly or
partly in portfolio securities. Portfolio securities paid upon redemption of
Fund shares will be valued at their then current market value. The Fund has
elected to be governed by the provisions of Rule 18f-1 under the 1940 Act which
limits the Fund's obligation to make cash redemption payments to any shareholder
during any 90-day period to the lesser of $250,000 or 1% of the Fund's net asset
value at the beginning of such period. An investor may incur brokerage costs in
converting portfolio securities received upon redemption to cash.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for placing the Fund's portfolio transactions
and will do so in a manner deemed fair and reasonable to the Fund and not
according to any formula. The primary consideration in all portfolio
transactions will be prompt execution of orders in an efficient manner at the
most favorable price. In selecting broker-dealers and in negotiating
commissions, the Adviser will consider the firm's reliability, the quality of
its execution services on a continuing basis and its financial condition. When
more than one firm is believed to meet these criteria, preference may be given
to firms which also sell shares of the Fund. In addition, if the Adviser
determines in good faith that the amount of commissions charged by a broker is
25
<PAGE>
reasonable in relation to the value of the brokerage and research services
provided by such broker, the Fund may pay commissions to such broker in an
amount greater than the amount another firm may charge. Research services may
include (i) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, (ii) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts, and (iii) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement and custody). Research services furnished by firms through
which the Fund effects its securities transactions may be used by the Adviser in
servicing its other accounts; not all of these services may be used by the
Adviser in connection with the Fund. The investment advisory fee paid by the
Fund under the advisory agreement will not be reduced as a result of the
Adviser's receipt of research services.
For the fiscal period from July 3, 1995 (commencement of operations)
through December 31, 1995, the Fund did not pay any brokerage commissions.
The Adviser also places portfolio transactions for other advisory accounts.
The Adviser will seek to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities for the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations, the main factors considered by the Adviser will be the
respective investment objectives, the relative size of portfolio holdings of the
same or comparable securities, the availability of cash for investment, the size
of investment commitments generally held, and opinions of the persons
responsible for recommending the investment.
FEDERAL INCOME TAXES
Each series of the Trust, including the Fund, is treated as a separate
entity for accounting and tax purposes. The Fund intends to elect and to qualify
to be treated as a "regulated investment company" under Subchapter M of the
Internal Revenue Code, and intends to continue to so qualify in the future. As
such and by complying with the applicable provisions of the Internal Revenue
Code regarding the sources of its income, the timing of its distributions, and
the diversification of its assets, the Fund will not be subject to Federal
income tax on its investment company taxable income (i.e., all taxable income,
after reduction by deductible expenses, other than its "net capital gain," which
is the excess, if any, of its net long-term capital gain over its net short-term
capital loss) and net capital gain which are distributed to shareholders at
least annually in accordance with the timing requirements of the Internal
Revenue Code.
The Fund will be subject to a 4% non-deductible federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
Fund intends under normal circumstances to avoid liability for such tax by
satisfying such distribution requirements.
26
<PAGE>
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Internal Revenue Code, it will also not be required to pay any Massachusetts
income tax.
The Fund will not distribute net capital gains realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. For federal income tax purposes, the Fund is permitted to carry forward a
net capital loss in any year to offset its own net capital gains, if any, during
the eight years following the year of the loss. To the extent subsequent net
capital gains are offset by such losses, they would not result in federal income
tax liability to the Fund and, as noted above, would not be distributed as such
to shareholders.
If the Fund invests in certain zero coupon securities, increasing rate
securities or, in general, other securities with original issue discount (or
with market discount if the Fund elects to include market discount in income
currently), the Fund must accrue income on such investments prior to the receipt
of the corresponding cash payments. However, the Fund must distribute, at least
annually, all or substantially all of its net income, including such accrued
income, to shareholders to qualify as a regulated investment company under the
Internal Revenue Code and avoid federal income and excise taxes. Therefore, the
Fund may have to dispose of its portfolio securities under disadvantageous
circumstances to generate cash, or may have to leverage itself by borrowing the
cash, to satisfy distribution requirements.
Limitations imposed by the Internal Revenue Code on regulated investment
companies like the Fund may restrict the Fund's ability to enter into futures
and options transactions.
Certain options and futures transactions undertaken by the Fund may cause
the Fund to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as long-term
or short-term (or, in the case of certain options and futures, as ordinary
income or loss) and timing of some capital gains and losses realized by the
Fund. Any net mark to market gains may also have to be distributed to satisfy
the distribution requirements referred to above even though no corresponding
cash amounts may concurrently be received, possibly requiring the disposition of
portfolio securities or borrowing to obtain the necessary cash. Also, certain of
the Fund's losses on its transactions involving options or futures contracts
and/or offsetting portfolio positions may be deferred rather than being taken
into account currently in calculating the Fund's taxable income or gain. Certain
of the applicable tax rules may be modified if the Fund is eligible and chooses
to make one or more of certain tax elections that may be available. These
transactions may therefore affect the amount, timing and character of the Fund's
distributions to shareholders. The Fund will take into account the special tax
rules (including consideration of available elections) applicable to options or
futures contracts in order to minimize any potential adverse tax consequences.
The federal income tax rules applicable to mortgage dollar rolls and
interest rate swaps, caps, floors and collars are unclear in certain respects,
and the Fund may be required to account for these instruments under tax rules in
a manner that, under certain circumstances, may limit its transactions in these
instruments.
27
<PAGE>
Due to possible unfavorable consequences under present tax law, the Fund
does not currently intend to acquire "residual" interests in real estate
mortgage investment conduits ("REMICs"), although the Fund may acquire "regular"
interests in REMICs.
Distributions from the Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Fund's Prospectus whether taken in shares or in cash.
Distributions, if any, in excess of E&P will constitute a return of capital,
which will first reduce an investor's tax basis in Fund shares and thereafter
(after such basis is reduced to zero) will generally give rise to capital gains.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the amount of cash they would have received had they elected to receive
the distributions in cash, divided by the number of shares received.
The Fund's distributions to its corporate shareholders would potentially
qualify in their hands for the corporate dividends received deduction, subject
to certain holding period requirements and limitations on debt financing under
the Code, only to the extent the Fund earned dividend income from stock
investments in U.S. domestic corporations. Although the Fund is not expected to
concentrate its investments in such stock, the Fund is permitted to acquire
preferred stocks, and it is therefore possible that a portion of its
distributions, attributable to the dividends it receives with respect to such
preferred stocks, may qualify for the dividends received deduction. Such
qualifying portion, if any, may affect a corporate shareholder's liability for
alternative minimum tax and/or result in basis reductions in certain
circumstances.
At the time of an investor's purchase of Fund shares, a portion of the
purchase price is often attributable to undistributed net investment income
and/or realized or unrealized appreciation in the Fund's portfolio.
Consequently, subsequent distributions from such income and/or appreciation may
be taxable to such investor even if the net asset value of the investor's shares
is, as a result of the distributions, reduced below the investor's cost for such
shares, and the distributions in reality represent a return of a portion of the
purchase price.
Upon a redemption (including a repurchase) of shares of the Fund, a
shareholder may realize a taxable gain or loss, depending upon the difference
between the redemption proceeds and the shareholder's tax basis in his shares.
Such gain or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands and will be long-term or short-term,
depending upon the shareholder's tax holding period for the shares. Any loss
realized on a redemption may be disallowed to the extent the shares disposed of
are replaced within a period of 61 days beginning 30 days before and ending 30
days after the shares are disposed of, such as pursuant to automatic dividend
reinvestments. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss. Any loss realized upon the redemption of shares
with a tax holding period of six months or less will be treated as a long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain with respect to such shares.
28
<PAGE>
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the Fund. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in the Fund.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value is calculated each day on which the New York
Stock Exchange is open. Currently the New York Stock Exchange is not open on
weekends, New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas. The net asset value
of the Fund's shares is determined as of the close of regular trading on the New
York Stock Exchange (currently 4:00 p.m., New York City time) and is computed by
dividing the value of all securities and other assets of the Fund less all
liabilities by the number of shares outstanding, and adjusting to the nearest
cent per share. Expenses and fees, including the investment advisory fee, are
accrued daily and taken into account for the purpose of determining net asset
value.
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 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. 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.
29
<PAGE>
THE FUND AND ITS SHARES
The Fund is an 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, as amended from time to time (the "Declaration"). Under the Declaration,
the Trustees have authority to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, of the Fund. Each share represents an equal
proportionate interest in the Fund with each other share and is entitled to such
dividends and distributions as are declared by the Trustees. Shareholders are
not entitled to any preemptive, conversion or subscription rights. All shares,
when issued, will be fully paid and non-assessable by the Trust. Upon any
liquidation of the Fund, shareholders are entitled to share pro rata in the net
assets available for distribution.
Pursuant to the Declaration, the Trustees may create additional funds by
establishing additional series of shares in the Trust. The establishment of
additional series would not affect the interests of current shareholders in the
Fund. As of the date of this Statement of Additional Information, the Trustees
have established fourteen other series of the Trust that publicly offer their
shares. Pursuant to the Declaration, the Board may establish and issue multiple
classes of shares for each series of the Trust. As of the date of this Statement
of Additional Information, the Trustees do not have any plan to establish
multiple classes of shares for the Fund. Pursuant to the Declaration of Trust
and subject to shareholder approval (if then required), the Trustees may
authorize the Fund to invest all of its investable assets in a single open-end
investment company that has substantially the same investment objectives,
policies and restrictions as the Fund. As of the date of this Statement of
Additional Information, the Board does not have any plan to authorize the Fund
to so invest its assets.
All Fund shares have equal rights with regard to voting, and shareholders
of the Fund have the right to vote as a separate class with respect to matters
as to which their interests are not identical to those of shareholders of other
classes of the Trust, including the approval of an investment advisory contract
and any change of investment policy requiring the approval of shareholders.
30
<PAGE>
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Declaration disclaims shareholder liability for acts or obligations of the Trust
and requires that notice of this disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Trust or a Trustee. The
Declaration also provides for indemnification from the assets of the Trust for
all losses and expenses of any Trust shareholder held liable for the obligations
of the Trust. Thus, the risk of a shareholder incurring a financial loss on
account of its liability as a shareholder of the Trust is limited to
circumstances in which both inadequate insurance existed and the Trust would be
unable to meet its obligations. The possibility that these circumstances would
occur is remote. Upon payment of any liability incurred by the Trust, the
shareholder paying the liability will be entitled to reimbursement from the
general assets of the Trust. The Declaration also provides that no series of the
Trust is liable for the obligations of any other series. The Trustees intend to
conduct the operations of the Trust to avoid, to the extent possible, ultimate
liability of shareholders for liabilities of the Trust.
ADDITIONAL INFORMATION
The Fund's Prospectus and this Statement of Additional Information omit
certain information contained in the registration statement filed with the
Securities and Exchange Commission, which may be obtained from the Commission's
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment
of the fee prescribed by the rules and regulations promulgated by the
Commission.
FINANCIAL STATEMENTS
The Fund's financial statments for the period from July 3, 1995
(commencement of operations) through December 31, 1995 attached to and
incorporated into this Statement of Additional Information have been audited by
Coopers & Lybrand L.L.P., independent accountants, as set forth in their report
appearing elsewhere herein, and have been so included in reliance upon the
report of Coopers & Lybrand L.L.P. as experts in accounting and auditing.
Coopers & Lybrand L.L.P. will audit the Fund's financial statements for the
fiscal year ending December 31, 1996.
31
<PAGE>
Prospectus dated May 1, 1996
PROSPECTUS
STANDISH FIXED INCOME FUND II
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
Standish Fixed Income Fund II (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 is designed primarily, but not
exclusively, for tax-exempt institutional investors, such as pension and
profit-sharing plans, foundations and endowments.
The Fund's investment objective is to maximize total return, consistent
with preserving principal and liquidity. As a component of this objective, the
Fund seeks a relatively high level of current income. The Fund seeks to achieve
its investment objective primarily through investing in an actively managed
portfolio of investment grade fixed-income securities. Under normal market
conditions, the Fund maintains an average dollar-weighted effective portfolio
maturity from five to thirteen years. Standish, Ayer & Wood, Inc., Boston,
Massachusetts, is the Fund's investment adviser (the "Adviser").
Investors may purchase shares of the Fund form the Trust's principal
underwriter, Standish Fund Distributors, L.P. (the "Principal Underwriter"), at
the address and phone number listed above without a sales commission or other
transaction charges. Unless waived by the Fund, the minimum initial investment
is $100,000. Additional investments may be made in amounts of at least $5,000.
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 (the "SEC") and is available upon request and without charge
by calling or writing the Principal Underwriter 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.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN SHARES OF THE FUND INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
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.
Contents
Expense Information...........................................2
Financial Highlights..........................................3
Investment Objective and Policies.............................4
Risk Factors and Suitability..................................7
Calculation of Performance Data...............................8
Dividends and Distributions...................................8
Purchase of Shares............................................8
Exchange of Shares............................................9
Redemption of Shares..........................................9
Management...................................................10
Federal Income Taxes.........................................11
The Fund and Its Shares......................................12
Custodian, Transfer Agent and Dividend-Disbursing Agent......13
Independent Accountants......................................13
Legal Counsel................................................13
Tax Certification Instructions...............................14
1
<PAGE>
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) 0.00%
12b-1 Fees None
Other Expenses 0.50%
Total Fund Operating Expenses (after expense limitation) 0.50%
<TABLE>
<CAPTION>
<S> <C> <C>
Example: 1 year 3 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: $4 $13
</TABLE>
The purpose of the above table is to assist investors 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 Fund is newly organized and has no operating history.
The figures shown in the caption "Other Expenses," which includes, among other
things, custodian and transfer agent fees, registration costs and payments for
insurance and audit and legal services, and in the hypothetical example are
based on estimates of the Fund's expenses for its first full fiscal year ending
December 31, 1996.
* The Adviser has voluntarily agreed to limit Total Fund Operating Expenses
of the Fund (excluding litigation, indemnification and other extraordinary
expenses) to 0.50% of the Fund's average daily net assets. In the absence of
such agreement, Management Fees, Other Expenses and Total Fund Operating
Expenses are estimated to be approximately 0.40%, 0.89% and 1.29%, respectively,
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.
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 LESS 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 LESS THAN 5%.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights for the years ended December 31, 1993, 1994, and
1995 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.
Further information about the performance of the Fund is contained in the
Fund's Annual Report, which may be obtained from the Principal Underwriter
without charge.
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to maximize total return, consistent
with preserving principal and liquidity. As a component of this objective, the
Fund seeks a relatively high level of current income. The Fund seeks to achieve
its investment objective primarily through investing in a diversified portfolio
of investment grade fixed-income securities. Under normal market conditions, the
Fund maintains an average dollar-weighted effective portfolio maturity from five
to thirteen years. Because of the uncertainty inherent in all investments, no
assurance can be given that the Fund will achieve its investment objective. The
Fund's investment policies are described further in the Statement of Additional
Information.
The Fund may invest in a broad range of fixed-income securities, including
bonds, notes, mortgage-backed and asset-backed securities, preferred stock and
convertible debt securities issued by U.S. corporations or other entities or by
the U.S. Government or its agencies, authorities, instrumentalities or sponsored
enterprises. Under normal market conditions, at least 65% of the Fund's total
assets will be invested in such securities. The Fund may purchase securities
that pay interest on a fixed, variable, floating (including inverse floating),
contingent, in-kind or deferred basis.
Although the Fund is intended primarily for tax-exempt institutional
investors and will be managed without regard to potential tax considerations,
the Fund may invest up to 5% of its net assets in tax-exempt securities, such as
state and municipal bonds, if the Adviser believes they will provide competitive
returns. The Fund's distributions of the interest it earns from such securities
will not be tax-exempt. The Fund may adopt a temporary defensive position during
adverse market conditions by investing without limit in high quality money
market instruments, including short-term U.S. Government securities, negotiable
certificates of deposit, non-negotiable fixed time deposits, bankers'
acceptances, floating-rate notes and repurchase agreements.
The Fund invests exclusively in investment grade fixed-income securities,
i.e., securities which, at the date of investment, are rated within the four
highest grades as determined by Moody's Investors Service, Inc. ("Moody's")
(Aaa, Aa, A or Baa) or by Standard & Poor's Ratings Group ("Standard & Poor's")
Duff & Phelps, Inc. ("Duff") or Fitch Investors Service, Inc. ("Fitch") (AAA,
AA, A or BBB) or their respective equivalent ratings or, if not rated,
determined by the Adviser to be of equivalent credit quality to securities so
rated. Securities rated Baa by Moody's or BBB by Standard & Poor's, Duff or
Fitch and unrated securities of equivalent credit quality are considered medium
grade obligations with speculative characteristics. Adverse changes in economic
conditions or other circumstances are more likely to weaken the issuer's
capacity to pay interest and repay principal on these securities than is the
case for issuers of higher rated securities. It is anticipated that the average
dollar-weighted rated credit quality of the securities in the Fund's portfolio
will be Aa or AA according to Moody's and Standard & Poor's, Duff or Fitch
ratings, respectively, or comparable credit quality as determined by the
Adviser. In the case of a security that is rated differently by two or more
rating services, the higher rating is used in computing the Fund's average
dollar-weighted credit quality. The Fund intends to emphasize investments in
fixed-income securities that have the potential to be upgraded by a rating
service. 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.
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In order to achieve its investment objective, the Fund seeks to add value
by selecting undervalued investments, thus taking advantage of lower prices and
higher yields, rather than by varying the average maturity of its portfolio to
reflect interest rate forecasts. Under normal market conditions, the average
dollar-weighted effective maturity of the Fund's portfolio will be in a range
from five to thirteen years. There is no limit on the maturity of any individual
security purchased by the Fund.
Corporate Debt Obligations
The Fund may invest in corporate debt obligations, including obligations of
industrial, utility and financial issuers. In addition to obligations of
corporations, corporate debt obligations include bank obligations and zero
coupon securities, issued by financial institutions and corporations. The Fund's
investments in corporate debt securities will be rated, at the date of
investment, investment grade. Corporate debt obligations are subject to the risk
of an issuer's inability to meet principal and interest payments on the
obligations and may also be subject to price volatility due to such factors as
market interest rates, market perception of the creditworthiness of the issuer
and general market liquidity. See "Risk Factors and Suitability" for a further
discussion of the risks associated with investments in corporate debt
securities.
U.S. Government Securities
The Fund may invest in all types of U.S. Government securities, including
obligations issued or guaranteed by the U.S. Government or its agencies,
authorities, instrumentalities or sponsored enterprises. Some U.S. Government
securities, such as Treasury bills, notes and bonds, which differ only in their
interest rates, maturities and times of issuance, are supported by the full
faith and credit of the United States of America. Others, such as obligations
issued or guaranteed by U.S. Government agencies, authorities, instrumentalities
or sponsored enterprises are supported either by (a) the full faith and credit
of the U.S. Government (such as securities of the Small Business
Administration), (b) the right of the issuer to borrow from the U.S. Treasury
(such as securities of the Federal Home Loan Banks), (c) the discretionary
authority of the U.S. Government to purchase the agency's obligations (such as
securities of the Federal National Mortgage Association), or (d) only the credit
of the issuer.
The Fund may also invest in separately traded principal and interest
components of securities guaranteed or issued by the U.S. Government or its
agencies, instrumentalities or sponsored enterprises if such components are
traded independently under the Separate Trading of Registered Interest and
Principal of Securities program ("STRIPS") or any similar program sponsored by
the U.S. Government. The Fund may invest in U.S. Government securities which are
zero coupon or deferred interest securities.
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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.
Asset-backed securities can be structured in several ways, the most common
of which has been a "pass-through" model. A certificate representing a
fractional undivided beneficial interest in a trust or corporation created
solely for the purpose of holding the trust's assets is issued to the
asset-backed 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 underlying assets for the account of
the trust, which distributes such amounts to the security holders.
As an alternative structure, the issuer of asset-backed securities
effectively transforms an asset-backed pool into obligations consisting of
several different maturities. Instead of holding an undivided interest in trust
assets, the purchaser of the asset-backed 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 fixed
servicing fee) being allocated first to pay interest and then to retire
principal.
Asset-backed securities present certain risks similar to (as discussed
below) and in addition to those presented by mortgage-backed securities.
Asset-backed securities generally do not have the benefit of a security interest
in collateral that is comparable to mortgage assets and there is the possibility
that, in some cases, recoveries on repossessed collateral may not be available
to support payments on these securities. Asset-backed securities, however, are
not generally subject to the risks associated with prepayments of principal on
the underlying loans.
Mortgage-Backed Securities
The Fund may invest in mortgage-backed securities. Mortgage-backed
securities represent direct or indirect participations in or obligations
collateralized by and payable from mortgage loans secured by real property. Each
mortgage pool underlying mortgage-backed securities will consist of mortgage
loans evidenced by promissory notes secured by first mortgages or first deeds of
trust or other similar security instruments creating a first lien on real
property. An investment in mortgage-backed securities involves certain risks.
Mortgage-backed securities are often subject to more rapid repayment than their
stated maturity dates would indicate as a result of the pass-through or
prepayments of principal on the underlying loans which may increase the
volatility of such investments relative to similarly rated debt securities.
During periods of declining interest rates, prepayment of loans underlying
mortgage-backed securities can be expected to accelerate and thus impair the
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Fund's ability to reinvest the returns of principal at comparable yields. During
periods of rising interest rates, reduced prepayment rates may extend the
average life of mortgage-backed securities and increase the Fund's exposure to
rising interest rates. Accordingly, the market values of such securities will
vary with changes in market interest rates generally and in yield differentials
among various kinds of U.S. Government securities and other mortgage-backed
securities.
Mortgage Pass-Through Securities
The Fund may invest in mortgage pass-through securities, which are fixed or
adjustable rate mortgage-backed securities that provide for monthly payments
that are a "pass-through" of the monthly interest and principal payments
(including any prepayments) made by the individual borrowers on the pooled
mortgage loans, net of any fees or other amounts paid to any guarantor,
administrator and/or servicer of the underlying mortgage loans.
Multiple Class Mortgage-Backed Securities and Collateralized Mortgage
Obligations
The Fund may invest in collateralized mortgage obligations ("CMOs"), which
are multiple class mortgage-backed securities. CMOs provide an investor with a
specified interest in the cash flow from a pool of underlying mortgages or of
other mortgage-backed securities. CMOs are issued in multiple classes, each with
a specified fixed or adjustable interest rate and a final distribution date. In
most cases, payments of principal are applied to the CMO classes in the order of
their respective stated maturities, so that no principal payments will be made
on a CMO class until all other classes having an earlier stated maturity date
are paid in full. Sometimes, however, CMO classes are "parallel pay" (i.e.,
payments of principal are made to two or more classes concurrently).
Eurodollar and Yankee Dollar Investments
The Fund may invest in Eurodollar and Yankee Dollar instruments. Eurodollar
instruments are bonds that pay interest and principal in U.S. dollars held in
banks outside the United States, primarily in Europe. Eurodollar instruments are
usually issued on behalf of multinational companies and foreign governments by
large underwriting groups composed of banks and issuing houses from many
countries. Yankee dollar instruments are U.S. dollar denominated bonds typically
issued in the U.S. by, among others, foreign governments and their agencies and
foreign banks and corporations. These investments involve risks that are
different from investments in securities issued by U.S. issuers, including
potential unfavorable political and economic developments, different tax
provisions, seizure of foreign deposits, currency controls, interest limitations
or other governmental restrictions which might affect payment of principal or
interest.
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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 and broad or specific 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, 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 (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 interest 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 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 will attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for such purposes to not more than 1% 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 believes that short-term interest rates as indicated in
the forward yield curve are too high, the Fund may take a short position in a
near-term Eurodollar futures contract and a long position in a longer-dated
Eurodollar futures contract. Under such circumstances, any unrealized loss in
the near-term Eurodollar futures position would be netted against any unrealized
gain in the longer-dated Eurodollar futures 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 and interest rate 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 Internal Revenue Code of 1986, as amended (the "Code"), for
qualification as a regulated investment company.
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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 or interest rate 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 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
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, they 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 attempt to limit its net
loss exposure resulting from Strategic Transactions entered into for non-hedging
purposes to not more than 1% 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. See the Statement of Additional Information for further information
regarding the Fund's use of Strategic Transactions.
When-Issued Securities and "Delayed Delivery" Securities
The Fund may commit up to 15% of its net assets to purchase securities on a
"when-issued" or "delayed delivery" basis. Although the Fund would generally
purchase securities on a when-issued or delayed delivery basis with the
intention of actually acquiring the securities, the Fund may dispose of a
when-issued or delayed delivery security prior to settlement if the Adviser
deems it appropriate to do so. The payment obligation and the interest rate on
these securities will be fixed at the time the Fund enters into the commitment,
but no income will accrue to the Fund until they are delivered and paid for.
Unless the Fund has entered into an offsetting agreement to sell the securities,
cash or liquid, high grade debt securities equal to the amount of the Fund's
commitment will be segregated and maintained with the custodian for the Fund to
secure the Fund's obligation and in order to partially offset the leverage
inherent in these securities. The market value of the securities when they are
delivered may be less than the amount paid by the Fund.
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Repurchase Agreements
The Fund may invest up to 15% of its net assets in repurchase agreements
under normal circumstances. Repurchase agreements acquired by the Fund will
always be fully collateralized as to principal and interest by money market
instruments and will be entered into only with commercial banks, brokers and
dealers considered creditworthy by the Adviser. If the other party or "seller"
of a repurchase agreement defaults, the Fund might suffer a loss to the extent
that the proceeds from the sale of the underlying securities and other
collateral held by the Fund in connection with the related repurchase agreement
are less than the repurchase price. In addition, in the event of bankruptcy of
the seller or failure of the seller to repurchase the securities as agreed, a
Fund could suffer losses, including loss of interest on or principal of the
security and costs associated with delay and enforcement of the repurchase
agreement.
Forward Roll Transactions
In order to enhance current income, the Fund may enter into forward roll
transactions with respect to mortgage-backed securities to the extent of 10% of
its net assets. 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 grade debt securities 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.
Illiquid and Restricted Securities
The Fund may not invest more than 15% of its total assets in securities
that are subject to restrictions on resale ("restricted securities") under the
Securities Act of 1933, as amended ("1933 Act"), including securities eligible
for resale in reliance on Rule 144A under the 1933 Act. In addition, the Fund
will not invest more than 15% of its net assets in illiquid investments, which
include securities that are not readily marketable, repurchase agreements
maturing in more than seven days, time deposits with a notice or demand period
of more than seven days, swap transactions, certain over-the-counter options,
and restricted securities, unless it is determined, based upon continuing review
of the trading markets for the specific restricted security, that such
restricted security is eligible for resale under Rule 144A and is liquid. The
Board of Trustees has adopted guidelines and delegated to the Adviser the daily
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function of determining and monitoring the liquidity of restricted securities.
The Board of Trustees, however, retains oversight focusing on factors such as
valuation, liquidity and availability of information and is ultimately
responsible for such determinations. Investing in restricted securities eligible
for resale pursuant to Rule 144A could have the effect of increasing the level
of illiquidity in the Fund to the extent that qualified institutional buyers
become for a time uninterested in purchasing these restricted securities. The
purchase price and subsequent valuation of restricted and illiquid securities
normally reflect a discount, which may be significant, from the market price of
comparable securities for which a liquid market exists.
Portfolio Turnover
It is expected that the portfolio turnover rate of the Fund will not exceed
200% in the coming year. A rate of turnover of 100% would occur 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 owned during the year
(excluding short-term securities). A high rate of portfolio turnover (100% or
more) 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 Code.
Investment Restrictions
The foregoing investment policies, including the Fund's investment
objective, are non-fundamental policies which may be changed by the Trust's
Board of Trustees without the approval of shareholders. If there is a change in
the Fund's investment objective, shareholders should consider whether the Fund
remains an appropriate investment in light of their then current financial
positions and needs. The Fund has adopted certain fundamental policies which may
not be changed without the approval of the Fund's shareholders. See "Investment
Restrictions" in the Statement of Additional Information.
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.
RISK FACTORS AND SUITABILITY
The Fund is designed primarily for tax-exempt institutional investors such
as pension or profit-sharing plans, foundations and endowments which seek to
maximize total return and, secondarily, seek a relatively high level of current
income, consistent with preserving principal and liquidity and whose
beneficiaries are in a position to benefit from the tax-deferred reinvestment of
the quarterly income dividends and any capital gains distributions paid by the
Fund. The Fund may also be suitable for other investors, depending upon their
investment goals and financial and tax positions. Although the price of the
Fund's shares may fluctuate more than short-term money market instruments, the
Fund will seek to keep such volatility below that of longer-term debt securities
by limiting its average portfolio maturity. Because of the uncertainty inherent
in all investments, no assurance can be given that the Fund will achieve its
investment objective.
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Yields on debt securities depend on a variety of factors, such as general
conditions in the money and bond markets, and the size, maturity and rating of a
particular issue. Debt securities with longer maturities tend to produce higher
yields and are generally subject to greater potential capital appreciation and
depreciation. The market prices of debt securities in which the Fund invests,
and therefore the Fund's net asset value, usually vary depending upon available
yields, rising when interest rates decline and declining when interest rates
rise.
Because the Fund's investments are interest rate sensitive, the Fund's
performance will depend in large part upon the ability of the Fund to respond to
fluctuations in market prices and interest rates and to utilize appropriate
strategies to maximize returns to the Fund, while attempting to minimize the
risks associated with its invested capital. Operating results will also depend
upon the availability of opportunities for the investment of the Fund's assets,
including purchases and sales of suitable securities. The Fund's use of
Strategic Transactions (including options, futures, options on futures and
swaps) involves certain risks, including a possible lack of correlation between
changes in the value of hedging instruments and the portfolio assets being
hedged, the potential illiquidity of the markets for derivative instruments, the
risks arising from the margin requirements and related leverage factors
associated with such transactions. The use of these management techniques to
increase total return involves the risk of loss if the Adviser is incorrect in
its expectation of fluctuations in securities prices or interest rates. See
"Strategic Transactions."
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
(or any shorter period since inception) 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.
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 (net asset value) 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.
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The Fund may from time to time advertise one or more additional
measurements of performance, including but not limited to historical total
returns, distribution returns, non-standardized yield, results of actual or
hypothetical investments, changes in dividends, distributions or share values,
or any graphic illustration of such data. In addition, the Fund may from time to
time compare its performance with that of other mutual funds with similar
investment objectives, to relevant indices, and to performance rankings prepared
by recognized mutual fund statistical services and may its performance to
alternative investment or savings vehicles and/or to indices or indicators of
economic activity. This data may cover any period of the Fund's operations and
may or may not include the impact of taxes or other factors.
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 Principal
Underwriter, which offers the Fund's 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 in good order by the Principal Underwriter and
payment for the shares is received by the Fund's custodian. Please see the
Fund's account application or call the Principal Underwriter for instructions on
how to make payment of shares to the Fund's custodian. Unless waived by the
Fund, the minimum initial investment is $100,000. Additional investments may be
made in amounts of at least $5,000.
Shares of the Fund may also be purchased through securities dealers. 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 Principal Underwriter by the close of its business day (normally 4:00 p.m.,
New York City time) will be effected as of the close of trading on the New York
Stock Exchange on that day provided that payment for the shares is also received
by the Fund's custodian 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 Principal Underwriter. Shares of the Fund purchased through dealers may be
subject to transaction fees, no part of which will be received by the Fund, the
Principal Underwriter or the Adviser.
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 on the exchange
(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
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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
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. The Fund's investment minimums do not apply to
accounts for which the Adviser or any of its affiliates serves as investment
adviser or to employees of the Adviser or any of its affiliates or to members of
such persons' immediate families. The Fund's investment minimums apply to the
aggregate value invested in omnibus accounts rather than to the investment of
underlying participants in such omnibus accounts.
EXCHANGE OF SHARES
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 Principal Underwriter. 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 Principal Underwriter
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 Principal
Underwriter 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.
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Written Exchanges
Shares of the Fund may be exchanged by written order to the Principal
Underwriter, 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 elected telephonic privileges may exchange shares by
calling the Principal Underwriter at (800) 221-4795. Telephonic privileges are
not available to shareholders automatically. Proper identification will be
required for each telephonic exchange. Please see "Telephone Transactions" below
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 by
the Fund's custodian. 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.
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 by the Principal
Underwriter 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 the Principal
Underwriter, One Financial Center, 26th Floor, Boston, Massachusetts 02111. A
written redemption request must (a) state the name of the Fund and 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(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
15
<PAGE>
(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 that are not
individuals. Redemption proceeds will normally be paid by check mailed within
three business days of receipt by the Principal Underwriter 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 in the case of
payments made by check.
Telephonic Redemption
Shareholders who elect telephonic privileges may redeem shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to shareholders automatically. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instruction on the account
application to a pre-designated account. Redemption proceeds will normally be
paid promptly after receipt of telephonic instructions, but no later than three
business days thereafter, except as described above for shares purchased by
check. 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. Wire charges, if any,
will be deducted from redemption proceeds. Proper identification will be
required for each telephonic redemption.
Repurchase Order
In addition to telephonic and written redemption of Fund shares, the
Principal Underwriter may accept telephone orders from brokers or dealers for
the repurchase of Fund shares. The repurchase price is the net asset value per
share next determined after receipt of the repurchase order by the Principal
Underwriter and the payment for the shares by the Fund's custodian. Brokers and
dealers are obligated to transmit repurchase orders to the Principal Underwriter
prior to the close of the Principal Underwriter's business day (normally 4:00
p.m.). Brokers and dealers may charge for their services in connection with a
repurchase of Fund shares, but neither the Fund nor the Principal Underwriter
imposes a charge for share repurchases.
Telephone Transactions
By maintaining an account that is eligible for telephonic exchange and
redemption privileges, the shareholder authorizes the Adviser, the Principal
Underwriter, the Fund and the Fund's custodian to act upon instructions of any
person to redeem and/or exchange shares from the shareholder's account. Further,
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 Principal Underwriter, nor the Trust, nor the Fund, nor the
16
<PAGE>
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
or exchange, 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. All telephone transaction requests will
be recorded. Shareholders may experience delays in exercising telephone
transaction privileges during periods of abnormal market activity. Accordingly,
during periods of volatile economic and market conditions, shareholders may wish
to consider transmitting redemption and exchange requests in writing.
* * * *
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. The Fund may eliminate duplicate mailings of Fund materials
to shareholders that have the same address of record.
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 and abroad. In addition, the
Adviser or its affiliate, Standish International Management Company, L.P.
("SIMCO"), serves as the investment adviser to each of the following fourteen
funds in the Standish, Ayer & Wood family of funds:
17
<PAGE>
Net Assets
Fund (March 31, 1996)
- --------------------------------------------------------------------------------
Standish Controlled Maturity Fund
Standish Equity Portfolio
Standish Fixed Income Portfolio
Standish Fixed Income Fund II
Standish Global Fixed Income Portfolio
Standish Intermediate Tax Exempt Bond Fund
Standish International Equity Fund
Standish International Fixed Income Fund
Standish Massachusetts Intermediate
Tax Exempt Bond Fund
Standish Securitized Fund
Standish Short-Term Asset Reserve Fund
Standish Small Capitalization Equity Portfolio
Standish Small Cap Tax-Sensitive Equity Fund
Standish Tax-Sensitive Equity Fund
Corporate pension funds are the largest asset under active management by
Standish. Standish's clients also include charitable and educational endowment
funds, financial institutions, trusts and individual investors. As of March 31,
1996, Standish managed approximately $__ billion in assets.
The Fund's portfolio managers are Caleb F. Aldrich and David C. Stuehr.
During the past five years, Mr. Aldrich has served as a Director of the Adviser.
Mr. Stuehr has served as a Director of the Adviser since January, 1995 and,
prior thereto, Mr. Stuehr served as a Vice President (since 1992) and an
Assistant Vice President of the Adviser.
Subject to the supervision and direction of the Trustees, 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 0.40% of the Fund's average daily
net assets. For the period from July 3, 1995 (commencement of operations)
through December 31, 1995 the Adviser voluntarily agreed not to impose any
advisory fee, which would have amounted to $43,238.
Expenses
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, primarily on
the basis of relative net asset values. 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 and shareholder reports which are furnished
to shareholders; registration and reporting fees and expenses; and Trustees'
18
<PAGE>
fees and expenses. The Principal Underwriter bears without subsequent
reimbursement the distribution expenses attributable to the offering and sale of
Fund shares. The Adviser has voluntarily agreed to limit Total Fund Operating
Expenses of the Fund (excluding litigation, indemnification and other
extraordinary expenses) to 0.50% 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. The Adviser has also agreed to limit the Fund's total
operating expenses (excluding brokerage commissions, taxes and extraordinary
expenses) to the permissible limit applicable in any state in which shares of
the Fund are then qualified for sale. For the period from July 3, 1995
(commencement of operations) through December 31, 1995, expenses borne by the
Fund totalled $42,629, which represented 0.40% of the Fund's average daily net
assets after an expense reduction of $94,417.
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 generally 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 intends to elect to be treated and to qualify for taxation as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (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 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 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. Only
the portion of such dividends, if any, attributable to certain dividends the
Fund receives with respect to its preferred stock investments is expected to
qualify, subject to satisfaction of applicable holding period and other
requirements, for the corporate dividends received deduction under the Code.
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<PAGE>
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.
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
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.
20
<PAGE>
At February 1, 1996, more than 25% of the then outstanding shares of the
Fund were held by each of Miss Porter's School, 60 Main Street, Farmington, CT
and Houston General Insurance, P.O. Box 2932, Fort Worth, TX, which were deemed
to control the Fund.
The Trust has established fourteen series that currently offer their shares
to the public 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 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 a request for 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. Immediately prior to the effectiveness of this
Prospectus, the Adviser owned all of the outstanding shares of the Fund.
Inquiries concerning the Fund should be made by contacting the Principal
Underwriter at the address and telephone number listed on the cover of this
Prospectus.
21
<PAGE>
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, the Principal Underwriter and the Adviser.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
22
<PAGE>
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.
23
<PAGE>
STANDISH FIXED INCOME FUND II
Investment Adviser
Standish, Ayer & Wood, Inc.
One Financial Center
Boston, Massachusetts 02111
Principal Underwriter
Standish Fund Distributors, L.P.
One Financial Center
Boston, Massachusetts 02111
Custodian
Investors Bank & Trust Company
24 Federal Street
Boston, Massachusetts 02110
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
Legal Counsel
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
24
<PAGE>
May 1, 1996
STANDISH FIXED INCOME FUND II
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus, but expands
upon and supplements the information contained in the Prospectus dated May 1,
1996, as amended and/or supplemented from time to time (the "Prospectus"), of
Standish Fixed Income Fund II (the "Fund"), a separate investment series of
Standish, Ayer & Wood Investment Trust (the "Trust"). This Statement of
Additional Information should be read in conjunction with the Prospectus which
may be obtained without charge from Standish Fund Distributors, L.P., the
Trust's principal underwriter (the "Principal Underwriter"), by calling the
telephone number or writing to the address listed above. THIS STATEMENT OF
ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO
PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
CONTENTS
Investment Objectives and Policies............................2
Investment Restrictions.......................................7
Calculation of Performance Data...............................8
Management...................................................10
Redemption of Shares.........................................15
Portfolio Transactions.......................................15
Federal Income Taxes.........................................16
Determination of Net Asset Value.............................17
The Fund and Its Shares......................................18
Additional Information.......................................18
Experts on Financial Statements..............................18
1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Fund's Prospectus describes the investment objectives of the Fund and
summarizes the investment policies it will follow. The following discussion
supplements the description of the Fund's investment policies in the Prospectus.
Maturity and Duration
The effective maturity of an individual portfolio security in which the
Fund invests is defined as the period remaining until the earliest date when the
Fund can recover the principal amount of such security through mandatory
redemption or prepayment by the issuer, the exercise by the Fund of a put
option, demand feature or tender option granted by the issuer or a third party
or the payment of the principal on the stated maturity date. The effective
maturity of variable rate securities is calculated by reference to their coupon
resent dates. Thus, the effective maturity of a security may be substantially
shorter than its final stated maturity. Unscheduled prepayments of principal
have the effect of shortening the effective maturities of securities in general
and mortgage-backed securities in particular. Prepayment rates are influenced by
changes in current interest rates and a variety of economic, geographic, social
and other factors and cannot be predicted with certainty. In general,
securities, such as mortgage-backed securities, may be subject to greater
prepayment rates in a declining interest rate environment. Conversely, in an
increasing interest rate environment, the rate of prepayment may be expected to
decrease. A higher than anticipated rate of unscheduled principal prepayments on
securities purchased at a premium or a lower than anticipated rate of
unscheduled payments on securities purchased at a discount may result in a lower
yield (and total return) to the Fund than was anticipated at the time the
securities were purchased. The Fund's reinvestment of unscheduled prepayments
may be made at rates higher or lower than the rate payable on such security,
thus affecting the return realized by the Fund.
Under normal market conditions, the Fund will maintain an option-adjusted
duration in the range of plus or minus 15% of the duration of the Lehman
Government/Corporate Index. Duration of an individual portfolio security is a
measure of the security's price sensitivity taking into account expected cash
flow and prepayments under a wide range of interest rate scenarios. In computing
the duration of its portfolio, the Fund will have to estimate the duration of
obligations that are subject to prepayment or redemption by the issuer taking
into account the influence of interest rates on prepayments and coupon flows.
The Fund may use various techniques to shorten or lengthen the option-adjusted
duration of its portfolio, including the acquisition of debt obligations at a
premium or discount, and the use of mortgage swaps and interest rate swaps,
caps, floors and collars.
Money Market Instruments and Repurchase Agreements
Money market instruments include short-term U.S. Government securities,
commercial paper (promissory notes issued by corporations to finance their
short-term credit needs), negotiable certificates of deposit, non-negotiable
fixed time deposits, bankers' acceptances and repurchase agreements
collateralized by such instruments.
2
<PAGE>
U.S. Government securities include securities which are direct obligations
of the U.S. Government backed by the full faith and credit of the United States,
and securities issued by agencies and instrumentalities of the U.S. Government,
which may be guaranteed by the U.S. Treasury or supported by the issuer's right
to borrow from the Treasury or may be backed by the credit of the federal agency
or instrumentality itself. Agencies and instrumentalities of the U.S. Government
include, but are not limited to, Federal Land Banks, the Federal Farm Credit
Bank, the Central Bank for Cooperatives, Federal Intermediate Credit Banks,
Federal Home Loan Banks and the Federal National Mortgage Association.
Investments in commercial paper will be rated Prime-1 by Moody's Investors
Service, Inc. ("Moody's") or A-1 by Standard & Poor's Ratings Group ("Standard &
Poor's") or Duff 1+ by Duff & Phelps, which are the highest ratings assigned by
these rating services (even if rated lower by one or more of the other
agencies), or which, if not rated or rated lower by one or more of the agencies
and not rated by the other agency or agencies, are judged by the Adviser to be
of equivalent credit quality to the securities so rated.
A repurchase agreement is an agreement under which the Fund acquires money
market instruments (generally U.S. Government securities) from a commercial
bank, broker or dealer, subject to resale to the seller at an agreed-upon price
and date (normally the next business day). The resale price reflects an
agreed-upon interest rate effective for the period the instruments are held by
the Fund and is unrelated to the interest rate on the instruments. The
instruments acquired by the Fund (including accrued interest) must have an
aggregate market value in excess of the resale price and will be held by the
custodian bank for the Fund until they are repurchased. In evaluating whether to
enter a repurchase agreement, the investment adviser, Standish, Ayer & Wood,
Inc. (the "Adviser"), will carefully consider the creditworthiness of the seller
pursuant to procedures reviewed and approved by the Trust's Board of Trustees.
The use of repurchase agreements involves certain risks. For example, if
the seller defaults on its obligation to repurchase the instruments acquired by
the Fund at a time when their market value has declined, the Fund may incur a
loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by the Fund are collateral for a loan by the Fund and
therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that the Fund may not be able to substantiate its interest in the
instruments it acquires. While the Trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
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 and broad or specific fixed-income market movements), to manage the
effective maturity 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.
3
<PAGE>
In the course of pursuing its investment objectives, the Fund may purchase
and sell (write) exchange-listed and over-the-counter put and call options on
securities, 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 (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 interest 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 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 will attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for such purposes to not more than 1% 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 believes that short-term interest rates as indicated in
the forward yield curve are too high, the Fund may take a short position in a
near-term Eurodollar futures contract and a long position in a longer-dated
Eurodollar futures contract. Under such circumstances, any unrealized loss in
the near-term Eurodollar futures position would be netted against any unrealized
gain in the longer-dated Eurodollar futures 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 and interest rate 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 Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"), for qualification as a regulated investment company.
Risks of Strategic Transactions
The use of Strategic Transactions has associated risks including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market or interest rate 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
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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 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
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, they 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 attempt to limit its net
loss exposure resulting from Strategic Transactions entered into for non-hedging
purposes to not more than 1% 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.
General Characteristics of Options
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving options
require segregation of the Fund's assets in special accounts, as described below
under "Use of Segregated Accounts."
A put option gives the purchaser of the option, in consideration for the
payment of a premium, the right to sell, and the writer the obligation to buy
(if the option is exercised), the underlying security, commodity, index or other
instrument at the exercise price. For instance, the Fund's purchase of a put
option on a security might be designed to protect its holdings in the underlying
instrument (or, in some cases, a similar instrument) against a substantial
decline in the market value by giving the Fund the right to sell such instrument
at the option exercise price. A call option, in consideration for the payment of
a premium, gives the purchaser of the option the right to buy, and the seller
the obligation to sell (if the option is exercised), the underlying instrument
at the exercise price. The Fund may purchase a call option on a security,
futures contract, index or other instrument to seek to protect the Fund against
an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
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instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC" options). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example but is also applicable to other
financial intermediaries.
With certain exceptions, exchange listed options generally settle by
physical delivery of the underlying security, although in the future cash
settlement may become available. Index options and Eurodollar instruments are
cash settled for the net amount, if any, by which the option is in-the-money
(i.e., where the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
The Fund's ability to close out its position as a purchaser or seller of an
exchange listed put or call option is dependent, in part, upon the liquidity of
the option market. There is no assurance that a liquid option market on an
exchange will exist. In the event that the relevant market for an option on an
exchange ceases to exist, outstanding options on that exchange would generally
continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct agreement with
the Counterparty. In contrast to exchange listed options, which generally have
standardized terms and performance mechanics, all the terms of an OTC option,
including such terms as method of settlement, term, exercise price, premium,
guarantees and security, are set by negotiation of the parties. The Fund will
generally sell (write) OTC options that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. (To the extent that the Fund does not
do so, the OTC options are subject to the Fund's restriction on investments in
illiquid securities.) The Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.
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Unless the parties provide for it, there is no central clearing or guaranty
function in the OTC option market. As a result, if the Counterparty fails to
make delivery of the security or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York as
"Primary dealers," or broker dealers, domestic banks or other financial
institutions which have received, combined with any credit enhancements, a
long-term debt rating of A from Standard & Poor's or Moody's or an equivalent
rating from any other nationally recognized statistical rating organization
("NRSRO") or which issue debt that is determined to be of equivalent credit
quality by the Adviser. The staff of the Securities and Exchange Commission
("SEC") currently takes the position that, absent the buy-back provisions
discussed above, OTC options purchased by the Fund, and portfolio securities
"covering" the amount of the Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Fund's limitation on investing no more than 15%
of its assets in illiquid securities. However, for options written with "primary
dealers" pursuant to an agreement requiring a closing purchase transaction at a
formula price, the amount which is considered to be illiquid may be calculated
by reference to a formula price.
If the Fund sells (writes) a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Fund's income. The sale (writing) of put options
can also provide income.
The Fund may purchase and sell (write) call options on securities including
U.S. Treasury and agency securities, mortgage-backed and asset-backed
securities, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices and futures contracts. All calls sold by the Fund must be "covered"
(i.e., the Fund must own the securities or the futures contract subject to the
call) or must meet the asset segregation requirements described below as long as
the call is outstanding. In addition, the Fund may cover a written call option
or put option by entering into an offsetting forward contract and/or by
purchasing an offsetting option or any other option which, by virtue of its
exercise price or otherwise, reduces the Fund's net exposure on its written
option position.
Even though the Fund will receive the option premium to help offset any
loss, the Fund may incur a loss if the exercise price is below the market price
for the security subject to the call at the time of exercise. A call sold by the
Fund also exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold.
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The Fund may purchase and sell (write) put options on securities including
U.S. Treasury and agency securities, mortgage-backed and asset-backed
securities, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments (whether or not it holds the above
securities in its portfolio), and on securities indices and futures contracts.
The Fund will not sell put options if, as a result, more than 50% of the Fund's
assets would be required to be segregated to cover its potential obligations
under such put options other than those with respect to futures and options
thereon. In selling put options, there is a risk that the Fund may be required
to buy the underlying security at a price above the market price.
Options on Securities Indices and Other Financial Indices
The Fund may also purchase and sell (write) call and put options on
securities indices and other financial indices. Options on securities indices
and other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement. For example, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the differential between
the closing price of the index and the exercise price of the option, which also
may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount. In addition to
the methods described above, the Fund may cover call options on a securities
index by owning securities whose price changes are expected to be similar to
those of the underlying index, or by having an absolute and immediate right to
acquire such securities without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other securities in its portfolio.
General Characteristics of Futures
The Fund may enter into financial futures contracts or purchase or sell put
and call options on such futures. Futures are generally bought and sold on the
commodities exchanges where they are listed and involve payment of initial and
variation margin as described below. All futures contracts entered into by the
Fund are traded on U.S. exchanges or boards of trade that are licensed and
regulated by the Commodity Futures Trading Commission ("CFTC") or on certain
foreign exchanges.
The sale of futures contracts creates a firm obligation by the Fund, as
seller, to deliver to the buyer the specific type of financial instrument called
for in the contract at a specific future time for a specified price (or, with
respect to index futures and Eurodollar instruments, the net cash amount). The
purchase of futures contracts creates a corresponding obligation by the Fund, as
purchaser to purchase a financial instrument at a specified time and price.
Options on futures contracts are similar to options on securities except that an
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract and obligates the
seller to deliver such position, if the option is exercised.
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The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
regulations of the CFTC relating to exclusions from regulation as a commodity
pool operator. Those regulations currently provide that the Fund may use
commodity futures and option positions (i) for bona fide hedging purposes
without regard to the percentage of assets committed to margin and option
premiums, or (ii) for other purposes permitted by the CTFC to the extent that
the aggregate initial margin and option premiums required to establish such
non-hedging positions (net of the amount that the positions were "in the money"
at the time of purchase) do not exceed 5% of the liquidation value (i.e., the
net asset value) of the Fund's portfolio, after taking into account unrealized
profits and losses on such positions. Typically, maintaining a futures contract
or selling an option thereon requires the Fund to deposit, with a financial
intermediary for the benefit of a futures commission merchant, as security for
its obligations an amount of cash or other specified assets (initial margin)
which initially is typically 1% to 10% of the face amount of the contract (but
may be higher in some circumstances). Additional cash or assets (variation
margin) may be required to be deposited directly with the futures commission
merchant thereafter on a daily basis as the value of the contract fluctuates.
The purchase of an option on financial futures involves payment of a premium for
the option without any further obligation on the part of the Fund. If the Fund
exercises an option on a futures contract it will be obligated to post initial
margin (and potential subsequent variation margin) for the resulting futures
position just it would for any position. Futures contracts and options thereon
are generally settled by entering into an offsetting transaction but there can
be no assurance that the position can be offset prior to settlement at an
advantageous price, nor that delivery will occur. The segregation requirements
with respect to futures contracts and options thereon are described below.
Combined Transactions
The Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, and multiple interest rate
transactions, structured notes and any combination of futures, options, and
interest rate transactions (component transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars
Among the Strategic Transactions into which the Fund may enter are interest
rate and index swaps and the purchase or sale of related caps, floors and
collars. The Fund expects to enter into these transactions primarily for hedging
purposes, including, but not limited to, preserving a return or spread on a
particular investment or portion of its portfolio, as a duration management
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<PAGE>
technique or protecting against an increase in the price of securities the Fund
anticipates purchasing at a later date. Swaps, caps, floors and collars may also
be used to enhance potential gain in circumstances where hedging is not involved
although, as described above, the Fund will attempt to limit its net loss
exposure resulting from swaps, caps, floors and collars and other Strategic
Transactions entered into for such purposes to not more than 1% of the Fund's
net assets at any one time. The Fund will not sell interest rate caps or floors
where it does not own securities or other instruments providing the income
stream the Fund may be obligated to pay. Interest rate swaps involve the
exchange by the Fund with another party of their respective commitments to pay
or receive interest (e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal). An index swap is an
agreement to swap cash flows on a notional amount based on changes in the values
of the reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling such cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain rate of return
within a predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis (i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments). The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by Standard & Poor's or Moody's or has
an equivalent rating from an NRSRO or which issue debt that is determined to be
of equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed. Swaps, caps, floors and collars are considered illiquid for purposes
of the Fund's policy regarding illiquid securities, unless it is determined,
based upon continuing review of the trading markets for the specific security,
that such security is liquid. The Board of Trustees has adopted guidelines and
delegated to the Adviser the daily function of determining and monitoring the
liquidity of swaps, caps, floors and collars. The Board of Trustees, however,
retains oversight focusing on factors such as valuation, liquidity and
availability of information and is ultimately responsible for such
determinations. The staff of the SEC currently takes the position that swaps,
caps, floors and collars are illiquid, and are subject to the Fund's limitation
on investing in illiquid securities.
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Eurodollar Contracts
The Fund may make investments in Eurodollar contracts. Eurodollar contracts
are U.S. dollar-denominated futures contracts or options thereon which are
linked to the London Interbank Offered Rate ("LIBOR"), although foreign
currency-denominated instruments are available from time to time. Eurodollar
futures contracts enable purchasers to obtain a fixed rate for the lending of
funds and sellers to obtain a fixed rate for borrowings. The Fund might use
Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many interest rate swaps and fixed income instruments are
linked.
Use of Segregated Accounts
The Fund will hold securities or other instruments whose values are
expected to offset its obligations under the Strategic Transactions. The Fund
will not enter into Strategic Transactions that expose the Fund to an obligation
to another party unless it owns either (i) an offsetting position in securities
or other options, futures contracts or other instruments or (ii) cash,
receivables or liquid, high grade debt securities with a value sufficient to
cover its potential obligations. The Fund may have to comply with any applicable
regulatory requirements designed to make sure that mutual funds do not use
leverage in Strategic Transactions, and if required, will set aside cash and
other assets in a segregated account with its custodian bank in the amount
prescribed. In that case, the Fund's custodian would maintain the value of such
segregated account equal to the prescribed amount by adding or removing
additional cash or other assets to account for fluctuations in the value of the
account and the Fund's obligations on the underlying Strategic Transaction.
Assets held in a segregated account would not be sold while the Strategic
Transaction is outstanding, unless they are replaced with similar assets. As a
result, there is a possibility that segregation of a large percentage of the
Fund's assets could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
"When-Issued" and "Delayed Delivery" Securities
The Fund may commit up to 15% of its net assets to purchase securities on a
"when-issued" and "delayed delivery" basis, which means that delivery and
payment for the securities will normally take place 15 to 45 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" and "delayed
delivery" 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
custodian bank for the Fund. If the market value of these securities declines,
additional cash or securities will be segregated daily so that the aggregate
market value of the segregated securities equals the amount of the Fund's
commitment.
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Securities purchased on a "when-issued" and "delayed delivery" 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.
Portfolio Turnover
It is not the policy of the Fund to purchase or sell securities for trading
purposes. However, the Fund places no restrictions on portfolio turnover and it
may sell any portfolio security without regard to the period of time it has been
held, except as may be necessary to maintain its status as a regulated
investment company under the Internal Revenue Code. The Fund may therefore
generally change its portfolio investments at any time in accordance with the
Adviser's appraisal of factors affecting any particular issuer or market, or the
economy in general.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental policies in addition to
those described under "Investment Objectives and Policies-Investment
Restrictions" in the Prospectus. The Fund's fundamental policies cannot be
changed unless the change is approved by the lesser of (i) 67% or more of the
voting securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy,
or (ii) more than 50% of the outstanding voting securities of the Fund. The Fund
may not:
1. Invest more than 25% of the current value of its total assets in any
single industry, provided that this restriction shall not apply to U.S.
Government securities or mortgage-backed securities issued or guaranteed
as to principal or interest by the U.S. Government, its agencies or
instrumentalities.
2. Issue senior securities, except as permitted by paragraphs 3, 7 and 8
below. For purposes of this restriction, the issuance of shares of
beneficial interest in multiple classes or series, the deferral of
trustees' fees, the purchase or sale of options, futures contracts,
forward commitments and repurchase agreements entered into in accordance
with the Fund's investment policies or within the meaning of paragraph 6
below, are not deemed to be senior securities.
3. Borrow money, except (i) from banks for temporary or short-term purposes
or for the clearance of transactions in amounts not to exceed 33 1/3% of
the value of the Fund's total assets (including the amount borrowed) taken
at market value, (ii) in connection with the redemption of Fund shares or
to finance failed settlements of portfolio trades without immediately
liquidating portfolio securities or other assets; (iii) in order to
fulfill commitments or plans to purchase additional securities pending the
anticipated sale of other portfolio securities or assets and (iv) the Fund
may enter into reverse repurchase agreements and forward roll
transactions. For purposes of this investment restriction, investments in
short sales, futures contracts, options on futures contracts, securities
or indices and forward commitments shall not constitute borrowing.
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4. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Fund may be
deemed to be an underwriter under the Securities Act of 1933.
5. Purchase or sell real estate except that the Fund may (i) acquire or lease
office space for its own use, (ii) invest in securities of issuers that
invest in real estate or interests therein, (iii) invest in securities
that are secured by real estate or interests therein, (iv) purchase and
sell mortgage-related securities and (v) hold and sell real estate
acquired by the Fund as a result of the ownership of securities.
6. Purchase securities on margin (except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities).
7. Purchase or sell commodities or commodity contracts, except the Fund may
purchase and sell options on securities, securities indices and currency,
futures contracts on securities, securities indices and currency and
options on such futures, forward foreign currency exchange contracts,
forward commitments, securities index put or call warrants and repurchase
agreements entered into in accordance with the Fund's investment policies.
8. Make loans, except that the Fund (1) may lend portfolio securities in
accordance with the Fund's investment policies up to 33 1/3% of the Fund's
total assets taken at market value, (2) enter into repurchase agreements,
and (3) purchase all or a portion of an issue of debt securities, bank
loan participation interests, bank certificates of deposit, bankers'
acceptances, debentures or other securities, whether or not the purchase
is made upon the original issuance of the securities.
For purposes of the fundamental investment restriction (1) regarding
industry concentration, the Adviser generally classifies issuers by industry in
accordance with classifications set forth in the Directory of Companies Filing
Annual Reports With The Securities and Exchange Commission. In the absence of
such classification or if the Adviser determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
it more appropriately considered to be engaged in a different industry, the
Adviser may classify an issuer according to its own sources. For instance,
personal credit finance companies and business credit finance companies are
deemed to be separate industries and wholly-owned finance companies are
considered to be in the industry of their parents if their activities are
primarily related to financing the activities of their parents.
The following restrictions are not fundamental policies and may be changed
by the Trustees without shareholder approval, in accordance with applicable
laws, regulations or regulatory policy. The Fund may not:
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A. Make short sales of securities unless (a) after effect is given to any
such short sale, the total market value of all securities sold short would
not exceed 5% of the value of the Fund's net assets or (b) at all times
during which a short position is open it owns an equal amount of such
securities, or by virtue of ownership of convertible or exchangeable
securities it has the right to obtain through the conversion or exchange
of such other securities an amount equal to the securities sold short.
B. Invest in companies for the purpose of exercising control or management.
C. Purchase securities of any other investment company if, as a result, (i)
more than 10% of the Fund's assets would be invested in securities of
other investment companies, (ii) such purchase would result in more than
3% of the total outstanding voting securities of any one such investment
company being held by the Fund or (iii) more than 5% of the Fund's assets
would be invested in any one such investment company. The Fund will not
purchase the securities of any open-end investment company except when
such purchase is part of a plan of merger, consolidation, reorganization
or purchase of substantially all of the assets of any other investment
company, or purchase the securities of any closed-end investment company
except in the open market where no commission or profit to a sponsor or
dealer results from the purchase, other than customary brokerage fees. The
Fund has no current intention of investing in other investment companies.
D. Invest in interests in oil, gas or other exploration or development
programs; however, this policy will not prohibit the acquisition of
securities of companies engaged in the production or transmission of oil,
gas, or other minerals.
E. Invest more than 5% of the assets of the Fund in the securities of any
issuers which, together with their corporate parents, have records of less
than three years' continuous operation, including the operation of any
predecessor, excluding obligations issued or guaranteed by the U.S.
Government or its agencies and securities fully collateralized by such
securities and excluding securities which have been rated investment grade
by at least one nationally recognized statistical rating organization.
F. Invest in securities of any company if any officer or director (Trustee)
of the Trust or of the Adviser owns more than .5% of the outstanding
securities of such company and such officers and directors (Trustees) own
in the aggregate more than 5% of the securities of such company.
G. Invest in securities which are illiquid if, as a result, more than 15% of
its net assets would consist of such securities, including repurchase
agreements maturing in more than seven days, securities that are not
readily marketable, restricted securities not eligible for resale pursuant
to Rule 144A under the 1933 Act, purchased OTC options, certain assets
used to cover written OTC options, and privately issued stripped
mortgage-backed securities.
H. Invest more than 15% of its total assets in restricted securities,
including those eligible for resale under Rule 144A under the 1933 Act.
I. Purchase securities while outstanding bank borrowings exceed 5% of the
Fund's net assets.
J. Invest in real estate limited partnership interests, other than real
estate investment trusts organized as limited partnerships.
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K. Purchase or sell (write) options, except pursuant to the limitations
described above.
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, except with respect to restriction (F) above.
In order to permit the sale of shares of the Fund in certain states, the
Board may, in its sole discretion, adopt restrictions on investment policy more
restrictive than those described above. Should the Board determine that any such
more restrictive policy is no longer in the best interest of the Fund and its
shareholders, the Fund may cease offering shares in the state involved and the
Board may revoke such restrictive policy. Moreover, if the states involved shall
no longer require any such restrictive policy, the Board may, in its sole
discretion, revoke such policy.
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, the Fund may, from time to time, advertise
certain total return and yield information. The average annual total return of
the Fund for a period is computed by subtracting the net asset value per share
at the beginning of the period from the net asset value per share at the end of
the period (after adjusting for the reinvestment of any income dividends and
capital gain distributions), and dividing the result by the net asset value per
share at the beginning of the period. In particular, the average annual total
return of the Fund ("T") is computed by using the redeemable value at the end of
a specified period of time ("ERV") of a hypothetical initial investment of
$1,000 ("P") over a period of time ("n") according to the formula P(1+T)n=ERV.
Yield quotations shares are computed by dividing the net investment income
per share during a base period of 30 days, or one month, by the maximum offering
price (net asset value) per share of the Fund on the last day of such base
period in accordance with the following formula:
Yield = 2[((A - B + 1)/CD)^6 - 1]
Where: a=interest earned during the period
b=net expenses accrued for the period
c=the average daily number of shares outstanding during the period
that were entitled to receive dividends
d=the maximum offering price
per share (net asset value) on the last day of the period
For purposes of calculating interest earned on debt obligations as provided
in item "a" above:
(i) The yield to maturity of each obligation held by the Fund is computed
based on the market value of the obligation (including actual accrued
interest, if any) at the close of business each day during the 30-day base
period, or, with respect to obligations purchased during the month, the
purchase price (plus actual accrued interest, if any) on settlement date,
and with respect to obligations sold during the month the sale price (plus
actual accrued interest, if any) between the trade and settlement dates.
15
<PAGE>
(ii) The yield to maturity of each obligation is then divided by 360 and the
resulting quotient is multiplied by the market value of the obligation
(including actual accrued interest, if any) to determine the interest
income on the obligation for each day. The yield to maturity calculation
has been made on each obligation during the 30 day base period.
(iii) Interest earned on all debt obligations during the 30-day or one month
period is then totaled.
(iv) The maturity of an obligation with a call provision(s) is the next call
date on which the obligation reasonably may be expected to be called or,
if none, the maturity date.
With respect to the treatment of discount and premium on mortgage or other
receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("pay downs"), the Fund accounts for gain or
loss attributable to actual monthly pay downs as an increase or decrease to
interest income during the period. In addition, the Fund may elect (i) to
amortize the discount or premium remaining on a security, based on the cost of
the security, to the weighted average maturity date, if such information is
available, or to the remaining term of the security, if the weighted average
maturity date is not available, or (ii) not to amortize the discount or premium
remaining on a security.
The Fund may also quote non-standardized yield, such as yield-to-maturity
("YTM"). YTM represents the rate of return an investor will receive if a
long-term, interest bearing investment, such as a bond, is held to its maturity
date. YTM does not take into account purchase price, redemption value, time to
maturity, coupon yield, and the time between interest payments.
In addition to average annual return and yield quotations, the Fund may
quote quarterly and annual performance on a net (with management and
administration fees deducted) and gross basis as follows:
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
3Q95 1.35 1.44
4Q95 4.38 4.48
1995 5.79 5.97
Performance quotations should not be considered as representative of the
Fund's performance for any specified period in the future.
16
<PAGE>
The Fund's performance may be compared in sales literature to the
performance of other mutual funds having similar objectives or to standardized
indices or other measures of investment performance. In particular, the Fund may
compare its performance to the Lehman Government/Corporate Index, which is
generally considered to be representative of the performance of all domestic,
dollar denominated, fixed rate, investment grade bonds, and the Lehman Brothers
Aggregate Index which is composed of securities from the Lehman Brothers
Government/Corporate Bond Index, Mortgage Backed Securities Index and Yankee
Bond Index, and is generally considered to be representative of all unmanaged,
domestic, dollar denominated, fixed rate investment grade bonds. Comparative
performance may also be expressed by reference to a ranking prepared by a mutual
fund monitoring service or by one or more newspapers, newsletters or financial
periodicals. Performance comparisons may be useful to investors who wish to
compare the Fund's past performance to that of other mutual funds and investment
products. Of course, past performance is not a guarantee of future results.
The Fund's average annual total return for the period from July 3, 1995
(commencement of operations) through December 31, 1995 was 5.79% and the Fund's
average annualized yield for the 30 day period ended December 31, 1995 was
6.91%.
17
<PAGE>
<TABLE>
<CAPTION>
MANAGEMENT
Trustees and Officers
The Trustees and executive officers of the Trust are listed below. All
executive officers of the Trust are affiliates of Standish, Ayer & Wood, Inc.,
the Fund's investment adviser.
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
*D. Barr Clayson, 7/29/35 Vice President and Trustee Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center President,
Boston, MA 02111 Standish International
Management Company, L.P.
Samuel C. Fleming, 9/30/40 Trustee Chairman of the Board
c/o Decision Resources, Inc. and Chief Executive Officer,
1100 Winter Street Decision Resources, Inc.;
Waltham, MA 02154 through 1989, Senior V.P.
Arthur D. Little
Benjamin M. Friedman, 8/5/44 Trustee William Joseph Maier
c/o Harvard University Professor of Political Economy,
Cambridge, MA 02138 Harvard University
John H. Hewitt, 4/11/38 Trustee Trustee, The Peabody
P.O. Box 307 Foundation; Trustee,
So. Woodstock, VT 05071 Visiting Nurse Alliance of Vermont
and New Hampshire
*Edward H. Ladd, 1/3/38 Trustee and Vice President Chairman of the Board
c/o Standish, Ayer & Wood, Inc. and Managing Director,
One Financial Center Standish, Ayer & Wood, Inc. since 1990;
Boston, MA 02111 formerly President of
Standish, Ayer & Wood, Inc.
Caleb Loring III, 11/14/43 Trustee Trustee, Essex Street Associates
c/o Essex Street Associates (family investment trust office);
P.0. Box 5600 Director, Holyoke Mutual Insurance Company
Beverly Farms, MA 01915
*Richard S. Wood, 5/2/54 President and Trustee Vice President, Secretary and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Executive Vice President,
Boston, MA 02111 Standish International Management Company, L.P.
18
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
Richard C. Doll, 7/8/48 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
James E. Hollis III, 11/21/48 Executive Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
David W. Murray, 5/5/40 Treasurer and Secretary Vice President, Treasurer and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Caleb F. Aldrich, 9/20/57 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
Beverly E. Banfield, 7/6/56 Vice President Vice President and Compliance Officer,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Assistant Vice President and Compliance Officer,
Boston, MA 02111 Freedom Capital Management Corp.
(1989-1992)
Nicholas S. Battelle, 6/24/42 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Walter M. Cabot, 1/6/33 Vice President Senior Advisor and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center prior to 1991, President,
Boston, MA 02111 Harvard Management Company
David H. Cameron, 11/2/55 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Karen K. Chandor, 2/13/50 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Lavinia B. Chase, 6/4/46 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Susan B. Coan, 5/1/52 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
19
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
W. Charles Cook II, 2/16/63 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Joseph M. Corrado, 5/13/55 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Dolores S. Driscoll, 2/17/48 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Mark A. Flaherty, 4/24/59 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Anne P. Herrmann, 1/26/56 Vice President Mutual Fund Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ann S. Higgins, 4/8/35 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Senior Operations Manager,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Since December 1995, formerly
Boston, MA 02111 Vice President, Scudder Stevens and Clark
Raymond J. Kubiak, 9/3/57 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Maria D. Furman, 2/3/54 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Phillip D. Leonardi, 4/24/62 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc. since November 1993; formerly, Investment Sales,
One Financial Center Cigna Corporation (1993) and
Boston, MA 02111 Travelers Corporation (1984-1993)
Laurence A. Manchester, 5/24/43 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
20
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
George W. Noyes, 11/12/44 Vice President President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Arthur H. Parker, 8/12/35 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Jennifer A. Pline, 3/8/60 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Howard B. Rubin, 10/29/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Michael C. Schoeck, 10/24/55 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since August, 1993;
One Financial Center formerly, Vice President,
Boston, MA 02111 Commerzbank, Frankfurt, Germany
Austin C. Smith, 7/25/42 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Stephen A. Smith, 3/13/49 Vice President Vice President, since November 2, 1993;
c/o Standish, Ayer & Wood, Inc. formerly, Standish, Ayer & Wood, Inc. Consultant
One Financial Center Cambridge Associates
Boston, MA 02111
David C. Stuehr, 3/1/58 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
James W. Sweeney, 5/15/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ralph S. Tate, 4/2/47 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since April, 1990;
One Financial Center formerly Vice President, Aetna Life & Casualty
Boston, MA 02111
Michael W. Thompson, 3/31/56 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
21
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
Christopher Van Alstyne, 3/24/60 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
</TABLE>
*Indicates that Trustee is an interested person of the Trust for purposes of the
1940 Act.
Compensation of Trustees and Officers
The Fund pays no compensation to the Trust's Trustees affiliated with the
Adviser or the Trust's officers. None of the Trust's Trustees or officers have
engaged in any financial transactions (other than the purchase or redemption of
the Fund's shares) with the Trust or the Adviser.
The following table sets forth all compensation paid to the Trust's
Trustees as of the Fund's fiscal year ended December 31, 1995:
<TABLE>
<CAPTION>
Pension or Retirement Total Compensation
Aggregate Compensation Benefits Accrued as from Fund and
Name of Trustee from the Fund Part of Fund's Expenses Other Funds in Complex*
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
D. Barr Clayson $0 $0 $0
Phyllis L. Cothran** 0 0 0
Richard C. Doll*** 0 0 0
Samuel C. Fleming 142 0 46,000
Benjamin M. Friedman 132 0 41,750
John H. Hewitt 132 0 41,750
Edward H. Ladd 0 0 0
Caleb Loring, III 132 0 41,750
Richard S. Wood 0 0 0
- ------------
*As of the date of this Statement of Additional Information, there were 18 mutual funds in the fund complex.
**Ms. Cothran resigned as a Trustee effective January 31, 1995.
***Mr. Doll resigned as a Trustee effective December 6, 1995.
</TABLE>
Certain Shareholders
At February 1, 1996, the Trustees and officers of the Trust as a group
beneficially owned (i.e., had voting and/or investment power) less than 1% of
the then outstanding shares of the Fund. At that date, no person beneficially
owned 5% or more of the outstanding shares of the Fund except:
Name and Address Outstanding Shares
---------------- ------------------
Miss Porter's School 38%
60 Main Street
Farmington, CT 06032
Houston General Insurance Empl. 33%
P. O. Box 2932
Fort Worth, TX 76113
Life Technologies, Inc. Pension Plan 21%
EAMCO
c/o Riggs National Bank
Attn: Mutual Funds Desk
P. O. Box 96211
Washington, DC 20090-6211
The Peabody Foundation, Inc. 7%
Seaward Management Corporation
10 Post Office Square
Boston, MA 02109
Investment Adviser
Standish, Ayer & Wood, Inc. serves as investment adviser to the Fund
pursuant to a written investment advisory agreement. The Adviser is a
Massachusetts corporation organized in 1933 and is registered under the
Investment Advisers Act of 1940.
22
<PAGE>
The following, constituting all of the Directors and all of the
shareholders of the Adviser, are the controlling persons of the Adviser: Caleb
F. Aldrich, Nicholas S. Battelle, Walter M. Cabot, Sr., David H. Cameron, Karen
K. Chandor, D. Barr Clayson, Richard C. Doll, Dolores S. Driscoll, Mark A.
Flaherty, Maria D. Furman, James E. Hollis III, Raymond J. Kubiak, Edward H.
Ladd, Laurence A. Manchester, David W. Murray, George W. Noyes, Arthur H.
Parker, Howard B. Rubin, David C. Stuehr, Austin C. Smith, Ralph S. Tate, James
J. Sweeney and Richard S. Wood.
Certain services provided by the Adviser under the advisory agreement are
described in the Prospectus. In addition to those services, the Adviser provides
the Fund with office space for managing its affairs, with the services of
required executive personnel, and with certain clerical services and facilities.
These services are provided without reimbursement by the Fund for any costs
incurred. Under the investment advisory agreement, the Fund pays to the Adviser
a fee at the annual rate of 0.40% of the Fund's average daily net assets. This
fee is paid monthly. For services to the Fund during the fiscal period from July
3, 1995 (commencement of operations) through December 31, 1995, the Adviser
voluntarily agreed not to impose any investment advisory fee, which would have
amounted to $42,628.
The Adviser has voluntarily agreed to limit certain "Total Fund Operating
Expenses" (excluding litigation, indemnification and other extraordinary
expenses) to 0.50% 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.
23
<PAGE>
Pursuant to the investment advisory agreement, the Fund bears expenses of
its operations other than those incurred by the Adviser pursuant to the
investment advisory agreement. Among other expenses, the Fund will pay share
pricing and shareholder servicing fees and expenses; custodian fees and
expenses; legal and auditing fees and expenses; expenses of prospectuses,
statements of additional information and shareholder reports; registration and
reporting fees and expenses; and Trustees' fees and expenses. The advisory
agreement provides that if the total expenses of the Fund in any fiscal year
exceed the most restrictive expense limitation applicable to the Fund in any
state in which shares of the Fund are then qualified for sale, the compensation
due the Adviser shall be reduced by the amount of the excess, by a reduction or
refund thereof at the time such compensation is payable after the end of each
calendar month during the fiscal year, subject to readjustment during the year.
Currently, the most restrictive state expense limitation provision limits the
Fund's expenses to 2 1/2% the first $30 million of average net assets, 2% of the
next $70 million of such net assets and 1 1/2% of such net assets in excess of
$100 million.
Unless terminated as provided below, the investment advisory agreement
continues in full force and effect until June 1, 1997 and for successive periods
of one year thereafter, but only as long as each such continuance after June 1,
1997 is approved annually (i) by either the Trustees of the Trust or by vote of
a majority of the outstanding voting securities (as defined in the 1940 Act) of
the Fund, and, in either event (ii) by vote of a majority of the Trustees of the
Trust who are not parties to the investment advisory agreement or "interested
persons" (as defined in the 1940 Act) of any such party, cast in person at a
meeting called for the purpose of voting on such approval. The investment
advisory agreement may be terminated at any time without the payment of any
penalty by vote of the Trustees of the Trust or by vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the Fund or by the
Adviser, on sixty days' written notice to the other parties. The investment
advisory agreement terminates in the event of its assignment as defined in the
1940 Act.
In an attempt to avoid any potential conflict with portfolio transactions
for the Fund, the Adviser and the Trust have adopted extensive restrictions on
personal securities trading by personnel of the Adviser and its affiliates.
These restrictions include: pre-clearance of all personal securities
transactions and a prohibition of purchasing initial public offerings of
securities. These restrictions are a continuation of the basic principle that
the interests of the Fund and its shareholders come before those of the Adviser,
its affiliates, and their employees.
Distributor of the Trust
Standish Fund Distributors, L.P. (the "Principal Underwriter"), an
affiliate of the Adviser, serves as the Trust's exclusive principal underwriter
and holds itself available to receive purchase orders for the Fund's shares. In
that capacity, the Principal Underwriter has been granted the right, as agent of
the Trust, to solicit and accept orders for the purchase of the Fund's shares in
accordance with the terms of the Underwriting Agreement between the Trust and
the Principal Underwriter. Pursuant to the Underwriting Agreement, the Principal
Underwriter has agreed to use its best efforts to obtain orders for the
continuous offering of the Fund's shares. The Principal Underwriter receives no
commissions or other compensation for its services, and has not received any
such amounts in any prior year. The Underwriting Agreement shall continue in
effect with respect to the Fund until two years after its execution and for
successive periods of one year thereafter only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the Fund's
outstanding shares or by the Trustees of the Trust or (ii) by a vote of a
majority of the Trustees of the Trust who are not "interested persons" (as
24
<PAGE>
defined by the 1940 Act) of the parties to the Underwriting Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Underwriting Agreement will terminate automatically if assigned by either party
thereto and is terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust, a vote of a majority of the Trustees who are not
"interested persons" of the Trust, or by a vote of the holders of a majority of
the Fund's outstanding shares, in any case without payment of any penalty on not
more than 60 days' written notice to the other party. The offices of the
Principal Underwriter are located at One Financial Center, 26th Floor, Boston,
Massachusetts 02111.
REDEMPTION OF SHARES
Detailed information on redemption of shares is included in the Prospectus.
The Fund may suspend the right to redeem shares or postpone the date of
payment upon redemption for more than seven days (i) for any period during which
the New York Stock Exchange is closed (other than customary weekend or holiday
closings) or trading on the exchange is restricted; (ii) for any period during
which an emergency exists as a result of which disposal by the Fund of
securities owned by it or determination by the Fund of the value of its net
assets is not reasonably practicable; or (iii) for such other periods as the
Securities and Exchange Commission may permit for the protection of shareholders
of the Fund.
The Fund intends to pay redemption proceeds in cash for all shares
redeemed, but under certain conditions, the Fund may make payment wholly or
partly in portfolio securities. Portfolio securities paid upon redemption of
Fund shares will be valued at their then current market value. The Fund has
elected to be governed by the provisions of Rule 18f-1 under the 1940 Act which
limits the Fund's obligation to make cash redemption payments to any shareholder
during any 90-day period to the lesser of $250,000 or 1% of the Fund's net asset
value at the beginning of such period. An investor may incur brokerage costs in
converting portfolio securities received upon redemption to cash.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for placing the Fund's portfolio transactions
and will do so in a manner deemed fair and reasonable to the Fund and not
according to any formula. The primary consideration in all portfolio
transactions will be prompt execution of orders in an efficient manner at the
most favorable price. In selecting broker-dealers and in negotiating
commissions, the Adviser will consider the firm's reliability, the quality of
its execution services on a continuing basis and its financial condition. When
more than one firm is believed to meet these criteria, preference may be given
to firms which also sell shares of the Fund. In addition, if the Adviser
determines in good faith that the amount of commissions charged by a broker is
reasonable in relation to the value of the brokerage and research services
provided by such broker, the Fund may pay commissions to such broker in an
amount greater than the amount another firm may charge. Research services may
include (i) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, (ii) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
25
<PAGE>
portfolio strategy, and the performance of accounts, and (iii) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement and custody). Research services furnished by firms through
which the Fund effects its securities transactions may be used by the Adviser in
servicing its other accounts; not all of these services may be used by the
Adviser in connection with the Fund. The investment advisory fee paid by the
Fund under the advisory agreement will not be reduced as a result of the
Adviser's receipt of research services.
For the fiscal period from July 3, 1995 (commencement of operations)
through December 31, 1995, brokerage commissions paid by the Fund on portfolio
transactions totalled $___________________.
The Adviser also places portfolio transactions for other advisory accounts.
The Adviser will seek to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities for the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations, the main factors considered by the Adviser will be the
respective investment objectives, the relative size of portfolio holdings of the
same or comparable securities, the availability of cash for investment, the size
of investment commitments generally held, and opinions of the persons
responsible for recommending the investment.
FEDERAL INCOME TAXES
Each series of the Trust, including the Fund, is treated as a separate
entity for accounting and tax purposes. The Fund intends to elect and to qualify
to be treated as a "regulated investment company" under Subchapter M of the
Internal Revenue Code, and intends to continue to so qualify in the future. As
such and by complying with the applicable provisions of the Internal Revenue
Code regarding the sources of its income, the timing of its distributions, and
the diversification of its assets, the Fund will not be subject to Federal
income tax on its investment company taxable income (i.e., all taxable income,
after reduction by deductible expenses, other than its "net capital gain," which
is the excess, if any, of its net long-term capital gain over its net short-term
capital loss) and net capital gain which are distributed to shareholders at
least annually in accordance with the timing requirements of the Internal
Revenue Code.
The Fund will be subject to a 4% non-deductible federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
Fund intends under normal circumstances to avoid liability for such tax by
satisfying such distribution requirements.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Internal Revenue Code, it will also not be required to pay any Massachusetts
income tax.
26
<PAGE>
The Fund will not distribute net capital gains realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. For federal income tax purposes, the Fund is permitted to carry forward a
net capital loss in any year to offset its own net capital gains, if any, during
the eight years following the year of the loss. To the extent subsequent net
capital gains are offset by such losses, they would not result in federal income
tax liability to the Fund and, as noted above, would not be distributed as such
to shareholders.
If the Fund invests in certain zero coupon securities, increasing rate
securities or, in general, other securities with original issue discount (or
with market discount if the Fund elects to include market discount in income
currently), the Fund must accrue income on such investments prior to the receipt
of the corresponding cash payments. However, the Fund must distribute, at least
annually, all or substantially all of its net income, including such accrued
income, to shareholders to qualify as a regulated investment company under the
Internal Revenue Code and avoid federal income and excise taxes. Therefore, the
Fund may have to dispose of its portfolio securities under disadvantageous
circumstances to generate cash, or may have to leverage itself by borrowing the
cash, to satisfy distribution requirements.
Limitations imposed by the Internal Revenue Code on regulated investment
companies like the Fund may restrict the Fund's ability to enter into futures
and options transactions.
Certain options and futures transactions undertaken by the Fund may cause
the Fund to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as long-term
or short-term (or, in the case of certain options and futures, as ordinary
income or loss) and timing of some capital gains and losses realized by the
Fund. Any net mark to market gains may also have to be distributed to satisfy
the distribution requirements referred to above even though no corresponding
cash amounts may concurrently be received, possibly requiring the disposition of
portfolio securities or borrowing to obtain the necessary cash. Also, certain of
the Fund's losses on its transactions involving options or futures contracts
and/or offsetting portfolio positions may be deferred rather than being taken
into account currently in calculating the Fund's taxable income or gain. Certain
of the applicable tax rules may be modified if the Fund is eligible and chooses
to make one or more of certain tax elections that may be available. These
transactions may therefore affect the amount, timing and character of the Fund's
distributions to shareholders. The Fund will take into account the special tax
rules (including consideration of available elections) applicable to options or
futures contracts in order to minimize any potential adverse tax consequences.
The federal income tax rules applicable to mortgage dollar rolls and
interest rate swaps, caps, floors and collars are unclear in certain respects,
and the Fund may be required to account for these instruments under tax rules in
a manner that, under certain circumstances, may limit its transactions in these
instruments.
Due to possible unfavorable consequences under present tax law, the Fund
does not currently intend to acquire "residual" interests in real estate
mortgage investment conduits ("REMICs"), although the Fund may acquire "regular"
interests in REMICs.
27
<PAGE>
Distributions from the Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Fund's Prospectus whether taken in shares or in cash.
Distributions, if any, in excess of E&P will constitute a return of capital,
which will first reduce an investor's tax basis in Fund shares and thereafter
(after such basis is reduced to zero) will generally give rise to capital gains.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the amount of cash they would have received had they elected to receive
the distributions in cash, divided by the number of shares received.
The Fund's distributions to its corporate shareholders would potentially
qualify in their hands for the corporate dividends received deduction, subject
to certain holding period requirements and limitations on debt financing under
the Code, only to the extent the Fund earned dividend income from stock
investments in U.S. domestic corporations. Although the Fund is not expected to
concentrate its investments in such stock, the Fund is permitted to acquire
preferred stocks, and it is therefore possible that a portion of its
distributions, attributable to the dividends it receives with respect to such
preferred stocks, may qualify for the dividends received deduction. Such
qualifying portion, if any, may affect a corporate shareholder's liability for
alternative minimum tax and/or result in basis reductions in certain
circumstances.
At the time of an investor's purchase of Fund shares, a portion of the
purchase price is often attributable to undistributed net investment income
and/or realized or unrealized appreciation in the Fund's portfolio.
Consequently, subsequent distributions from such income and/or appreciation may
be taxable to such investor even if the net asset value of the investor's shares
is, as a result of the distributions, reduced below the investor's cost for such
shares, and the distributions in reality represent a return of a portion of the
purchase price.
Upon a redemption (including a repurchase) of shares of the Fund, a
shareholder may realize a taxable gain or loss, depending upon the difference
between the redemption proceeds and the shareholder's tax basis in his shares.
Such gain or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands and will be long-term or short-term,
depending upon the shareholder's tax holding period for the shares. Any loss
realized on a redemption may be disallowed to the extent the shares disposed of
are replaced within a period of 61 days beginning 30 days before and ending 30
days after the shares are disposed of, such as pursuant to automatic dividend
reinvestments. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss. Any loss realized upon the redemption of shares
with a tax holding period of six months or less will be treated as a long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain with respect to such shares.
28
<PAGE>
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the Fund. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in the Fund.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value is calculated each day on which the New York
Stock Exchange is open. Currently the New York Stock Exchange is not open on
weekends, New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas. The net asset value
of the Fund's shares is determined as of the close of regular trading on the New
York Stock Exchange (currently 4:00 p.m., New York City time) and is computed by
dividing the value of all securities and other assets of the Fund less all
liabilities by the number of shares outstanding, and adjusting to the nearest
cent per share. Expenses and fees, including the investment advisory fee, are
accrued daily and taken into account for the purpose of determining net asset
value.
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 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. 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.
29
<PAGE>
THE FUND AND ITS SHARES
The Fund is an 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 as amended from time to time (the "Declaration"). Under the Declaration,
the Trustees have authority to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, of the Fund. Each share represents an equal
proportionate interest in the Fund with each other share and is entitled to such
dividends and distributions as are declared by the Trustees. Shareholders are
not entitled to any preemptive, conversion or subscription rights. All shares,
when issued, will be fully paid and non-assessable by the Trust. Upon any
liquidation of the Fund, shareholders are entitled to share pro rata in the net
assets available for distribution.
Pursuant to the Declaration, the Trustees may create additional funds by
establishing additional series of shares in the Trust. The establishment of
additional series would not affect the interests of current shareholders in the
Fund. As of the date of this Statement of Additional Information, the Trustees
have established fourteen other series of the Trust that publicly offer their
shares. Pursuant to the Declaration, the Board may establish and issue multiple
classes of shares for each series of the Trust. As of the date of this Statement
of Additional Information, the Trustees do not have any plan to establish
multiple classes of shares for the Fund. Pursuant to the Declaration of Trust
and subject to shareholder approval (if then required), the Trustees may
authorize the Fund to invest all of its investable assets in a single open-end
investment company that has substantially the same investment objectives,
policies and restrictions as the Fund. As of the date of this Statement of
Additional Information, the Board does not have any plan to authorize the Fund
to so invest its assets.
All Fund shares have equal rights with regard to voting, and shareholders
of the Fund have the right to vote as a separate class with respect to matters
as to which their interests are not identical to those of shareholders of other
classes of the Trust, including the approval of an investment advisory contract
and any change of investment policy requiring the approval of shareholders.
30
<PAGE>
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of this disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or a Trustee. The Declaration also provides for indemnification from the assets
of the Trust for all losses and expenses of any Trust shareholder held liable
for the obligations of the Trust. Thus, the risk of a shareholder incurring a
financial loss on account of its liability as a shareholder of the Trust is
limited to circumstances in which both inadequate insurance existed and the
Trust would be unable to meet its obligations. The possibility that these
circumstances would occur is remote. Upon payment of any liability incurred by
the Trust, the shareholder paying the liability will be entitled to
reimbursement from the general assets of the Trust. The Declaration also
provides that no series of the Trust is liable for the obligations of any other
series. The Trustees intend to conduct the operations of the Trust to avoid, to
the extent possible, ultimate liability of shareholders for liabilities of the
Trust.
ADDITIONAL INFORMATION
The Fund's Prospectus and this Statement of Additional Information omit
certain information contained in the registration statement filed with the
Securities and Exchange Commission, which may be obtained from the Commission's
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment
of the fee prescribed by the rules and regulations promulgated by the
Commission.
EXPERTS AND FINANCIAL STATEMENTS
The Fund's financial statments for the period from July 3, 1995
(commencement of operations) through December 31, 1995 attached to and
incorporated into this Statement of Additional Information have been audited by
Coopers & Lybrand L.L.P., independent accountants, as set forth in their report
appearing elsewhere herein, and have been so included in reliance upon the
report of Coopers & Lybrand L.L.P., as experts in accounting and auditing.
Coopers & Lybrand L.L.P., will audit the Fund's financial statements for the
fiscal year ending December 31, 1996.
31
<PAGE>
Prospectus dated May 1, 1996
PROSPECTUS
One Financial Center
Boston, Massachusetts 02111
(617) 350-6100
STANDISH TAX-SENSITIVE EQUITY FUND
("EQUITY FUND")
Seeks to maximize after-tax total return, with an emphasis on long-term
growth of capital, through investment primarily in equity securities of
companies that appear to be undervalued.
STANDISH SMALL CAP TAX-SENSITIVE EQUITY FUND ("SMALL CAP FUND")
Seeks to maximize after-tax total return, with an emphasis on long-term
growth of capital, through investment primarily in equity securities of small
capitalization companies that appear to be undervalued.
STANDISH INTERMEDIATE TAX EXEMPT BOND FUND ("TAX EXEMPT FUND")
Seeks to provide a high level of interest income exempt from federal income
taxes, while seeking preservation of shareholders' capital through investing the
Fund's assets in investment grade intermediate-term municipal securities.
Equity Fund, Small Cap Fund and Tax Exempt Fund (collectively, the "Funds")
are members of the Standish, Ayer & Wood family of funds. Each Fund is organized
as a separate diversified investment series of Standish, Ayer & Wood Investment
Trust (the "Trust"), an open-end management investment company. Each Fund's
investment adviser is Standish, Ayer & Wood, Inc., Boston, Massachusetts (the
"Adviser").
Investors may purchase shares of the Funds directly from the Trust's
principal underwriter, Standish Fund Distributors, L.P. (the "Principal
Underwriter"), at the address and phone number listed above without a sales
commission or other transaction charges. Unless waived by the Funds, the minimum
initial investment is $100,000. Additional investments may be made in amounts of
at least $10,000 ($5,000 for the Tax Exempt Fund).
1
<PAGE>
This combined Prospectus is intended to set forth concisely the information
about the Funds 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 Funds and the Trust is
contained in a combined 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 Principal Underwriter 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.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN SHARES OF THE FUNDS INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL
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.
Contents
Expense Information...........................................2
Financial Highlights..........................................4
Investment Objectives and Policies............................5
Risk Factors, Suitability and Other Investment Practices......7
Calculations of Performance Data.............................13
Dividends and Distributions..................................13
Purchase of Shares...........................................13
Exchange of Shares...........................................14
Redemption of Shares.........................................15
Management...................................................16
Federal Income Taxes.........................................17
The Trust and Its Shares.....................................18
Custodian, Transfer Agent and Dividend-Disbursing Agent......19
Independent Accountants......................................19
Legal Counsel................................................19
2
<PAGE>
The Equity Fund and the Small Cap Fund (together, the "Tax-Sensitive Funds")
are designed for investors in the upper federal income tax brackets who are
seeking the highest long-term after-tax total return. In seeking to achieve its
investment objective, the Equity Fund invests primarily in publicly traded
equity securities of United States companies and, to a lesser extent, of foreign
issuers. The Small Cap Fund invests primarily in publicly traded securities,
including securities being issued in initial public offerings, of small
capitalization companies located in the United States and, to a lesser extent,
in foreign countries. The Tax-Sensitive Funds do not normally invest in equity
securities that are restricted as to disposition by federal securities laws or
are otherwise illiquid but may do so to a limited extent under certain
circumstances.
The Tax Exempt Fund is designed for investors in the upper federal income
tax brackets who are seeking a higher level of federally tax-free income than is
normally provided by short-term tax exempt investments, and more price stability
than investments in long-term municipal bonds. Municipal bonds in which the Tax
Exempt Fund invests will be rated, at the time of purchase, within the four
highest ratings by Moody's Investor Services, Inc. ("Moody's"), Standard &
Poor's Ratings Group ("Standard & Poor's") or Fitch Investors Service, Inc.
("Fitch") or, if unrated, determined to be of comparable credit quality.
There can, of course, be no guarantee that a Fund's objective will be
achieved. The Tax-Sensitive Funds are not tax-exempt funds. While the
Tax-Sensitive Funds are managed to consider the impact of federal and state
taxes on shareholders' investment returns, it is expected that the Tax-Sensitive
Funds will earn and distribute taxable income and realize and distribute capital
gains from time to time and neither Tax-Sensitive Fund will be managed
considering any particular state's tax laws.
<TABLE>
<CAPTION>
EXPENSE INFORMATION
Equity Small Cap Tax Exempt
Shareholder Transaction Expenses Fund Fund Fund
---- ---- ----
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases None None None
Maximum Sales Load Imposed on Reinvested Dividends None None None
Deferred Sales Load None None None
Redemption Fees None None None
Exchange Fees None None None
Tax Exempt Fund
Annual Fund Operating Expenses Equity Small Cap (After Expense
(as a percentage of average net assets) Fund Fund Limitation)
---- ---- -----------
Management Fees 0.50% 0.60% 0.26%+
12b-1 Fees None None None
Other Expenses 0.30% 0.25% 0.39%
---- ---- ----
Total Fund Operating Expenses* 0.80% 0.85% 0.65%+
==== ==== ====
(See the next page for footnotes.) Example:
Hypothetically assume that each Fund's annual return is 5% and that its
operating expenses are exactly as just described. For every $1,000 you invested,
you would have paid the following expenses if you closed your account after the
number or years indicated:
</TABLE>
Equity Small Cap Tax Exempt
Fund Fund Fund
---- ---- ----
After 1 Year $ 8 $ 9 $ 7
After 3 Years $26 $27 $21
After 5 Years N/A N/A $36
After 10 Years N/A N/A $81
The purpose of the above table is to assist an investor in understanding
the various costs and expenses of the Funds that an investor in the Funds will
bear directly or indirectly. See "Management - Investment Adviser" and
"Management - Expenses." The Tax-Sensitive Funds are newly organized and have no
operating history. The figures shown in the caption "Other Expenses," which
includes, among other things, custodian and transfer agent fees, registration
costs and payments for insurance and audit and legal services, and in the
hypothetical example are (1) with respect to the Tax-Sensitive Funds, based on
estimates of the Funds' expenses for their initial fiscal years ending September
30, 1996 and (2) with respect to the Tax Exempt Fund, based upon expenses for
the fiscal year ended December 31, 1995 during which time the Adviser agreed not
to impose a portion of its fee.
3
<PAGE>
* The Adviser has voluntarily agreed to limit each Fund's Total Fund
Operating Expenses (excluding litigation, indemnification and other
extraordinary expenses) to the following percentages of each Fund's average
daily net assets for the Fund's fiscal year ending September 30, 1996: Equity
Fund--1.00%; Small Cap Fund--0.90% and Tax Exempt Fund--0.65%. These agreements
are voluntary and temporary and may be discontinued or revised by the Adviser at
any time after September 30, 1996. On February 9, 1996, the Tax Exempt Fund
changes its fiscal year end from December 31 to September 30.
+ After expense limitation. If the Adviser had not agreed to the limits
described above, Management Fees and Total Fund Operating Expenses of the Tax
Exempt Fund would have been 0.40% and 0.79% for the fiscal year ended December
31, 1995.
THE INFORMATION IN THE TABLE AND HYPOTHETICAL EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5%
ANNUAL RETURN, EACH FUND'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN
ACTUAL RETURN GREATER OR LESS THAN 5%.
4
<PAGE>
FINANCIAL HIGHLIGHTS
Equity Fund and Small Cap Fund are newly organized and have no operating
history. The following financial highlights are presented for the Tax Exempt
Fund. The financial highlights for the years ended December 31, 1993, 1994 and
1995 have been audited by Coopers & Lybrand L.L.P., independent accountants,
whose report, together with the financial statements of the Tax Exempt Fund, is
incorporated into the Statement of Additional Information.
Further information about the performance of the Tax Exempt Fund is
contained in the Tax Exempt Fund's Annual Report, which may be obtained from the
Principal Underwriter without charge.
5
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Tax-Sensitive Funds
The Tax-Sensitive Funds are designed for investors in the upper federal
income tax brackets who seek the highest long-term after-tax total return.
Taxable dividends from any source, other than long-term capital gains,
distributed to individuals by mutual funds are currently taxed at federal income
tax rates of up to 39.6%, and the effective tax rate may be higher due to
limitations at higher income levels on allowable deductions and exemptions.
Long-term capital gains distributed to individuals by mutual funds are currently
taxed at federal tax rates of up to 28%. Taxable dividends from any source,
including long-term capital gains, distributed to corporations by mutual funds
are currently taxed at federal income tax rates of up to 35%. Additionally,
state taxes on mutual fund distributions reduce after-tax returns.
The Tax-Sensitive Funds employ various techniques to seek the highest
long-term total return after considering the impact of federal and state income
taxes paid by shareholders on the Funds' distributions.
o The Tax-Sensitive Funds seek to minimize, to the extent practicable,
taxable dividend income by emphasizing securities with low dividend yields
and minimizing investments in debt obligations. The Tax-Sensitive Funds
also intend to be substantially fully invested in equity investments.
o When selling portfolio securities, each Tax-Sensitive Fund will generally
select the highest cost shares of the specific security (and/or, if gains
will be realized, shares that will produce long-term capital gains) in
order to reduce, to the extent practicable, the realization of capital
gains, particularly short-term capital gains. Additionally, each
Tax-Sensitive Fund may, in furtherance of its investment objective, sell
portfolio securities in order to realize capital losses. Realized capital
losses can be used to offset realized capital gains, thus reducing the
amount of capital gains a Fund will distribute.
o The Tax-Sensitive Funds intend to have relatively low annual portfolio
turnover rates under normal circumstances. For taxpayers in the highest tax
brackets, ordinary income is taxed at a higher tax rate than capital gains
on securities held for more than one year ("long-term capital gains").
Ordinary income includes dividends from a Fund's net investment income and
net short-term capital gains. Net long-term capital gains realized and
distributed by the Tax-Sensitive Funds are treated by shareholders as
long-term capital gains for federal income tax purposes. Therefore, each
Tax-Sensitive Fund intends, when practicable and prudent, to hold
appreciated portfolio securities for more than one year in order to reduce
the realization and, therefore, the distribution to shareholders of
short-term capital gains taxable to them as ordinary income.
6
<PAGE>
Although the Tax-Sensitive Funds expect that they will generally use some
or all of the foregoing management techniques in considering the impact of
federal and state income taxes on a shareholder's investment returns, portfolio
management decisions may be made based on other criteria in particular cases,
where warranted by actual or anticipated economic, market or issuer-specific
developments and the Tax-Sensitive Funds may from time to time employ investment
management techniques that produce taxable ordinary income. For example, a
particular security may be sold, even though a Fund may realize a short-term
capital gain, if the value of that security is believed to have peaked or is
anticipated to decline before the Fund would have held it for the long-term
holding period. Similarly, a Fund may from time to time be required to sell
securities it would otherwise have continued to hold in order to generate cash
to pay expenses or satisfy shareholder redemption requests. Further, certain
equity securities and debt obligations in which the Tax-Sensitive Funds will
invest will produce ordinary taxable income on a regular basis.
While attempting to reduce the impact of federal and state income taxes
paid by shareholders on Fund distributions, each of the Tax-Sensitive Funds will
follow a disciplined investment strategy, emphasizing stocks that the Adviser
believes to offer above average potential for capital growth that offer low
dividend yields. Although the precise application of the discipline will vary
according to market conditions, the Adviser intends to use statistical modeling
techniques that utilize stock specific factors, such as current price earnings
ratios, stability of earnings growth, forecasted changes in earnings growth,
trends in consensus analysts' estimates, and measures of earnings results
relative to expectations, to identify equity securities that are attractive as
purchase candidates. Once identified, these securities will be subject to
further fundamental analysis by the Adviser's professional staff before they are
included in the Fund's holdings. Securities selected for inclusion in a Fund's
portfolio will represent various industries and sectors.
Standish Tax-Sensitive Equity Fund
Investment Objective. The Equity Fund seeks to maximize after-tax total
return, consisting of long-term growth of capital with nominal current income,
through investment primarily in equity securities of companies that appear to be
undervalued.
Investment Policies. Under normal circumstances, at least 80% of the Equity
Fund's total assets will be invested in equity and equity-related securities,
such as common stocks and preferred stocks. The Equity Fund may invest in equity
securities of foreign issuers that are listed on a U.S. securities exchange or
traded in the U.S. over-the-counter market, but will not invest more than 10% of
its total assets in such securities that are not so listed or traded.
Although the Equity Fund will prefer long-term capital gains to taxable
dividend income and interest income, the Fund may to a limited extent invest in
debt securities and preferred stocks that are convertible into, or exchangeable
for, common stocks. Generally, such securities will be rated, at the time of
investment, Aaa, Aa or A by Moody's or AAA, AA or A by Standard & Poor's or, if
not rated, are determined by the Adviser to be of comparable credit quality. Up
to 5% of the Fund's total assets invested in convertible debt securities and
preferred stocks may be rated, Baa by Moody's or BBB by Standard & Poor's or, if
not rated, determined by the Adviser to be of comparable credit quality. As a
temporary matter and for defensive purposes, the Fund may purchase investment
grade short-term debt securities, the amount of which will depend on market
conditions and the needs of the Fund. The Fund will attempt to reduce risk by
diversifying its investments within the investment policy set forth above.
7
<PAGE>
The Equity Fund may, but is not required to, utilize various investment
strategies and techniques to seek to hedge various market risks (such as broad
or specific equity market movements and currency exchange rate risks) or to seek
to enhance potential gain. Such strategies and techniques are generally accepted
as part of modern portfolio management and are regularly utilized by many mutual
funds. In the course of pursuing its investment objective, the Equity Fund may:
(i) purchase and write (sell) put and call options on securities, equity indices
and other financial instruments; (ii) purchase and sell financial futures
contracts on U.S. equity indices and options thereon; (iii) enter into
repurchase agreements; (iv) enter into various currency transactions, such as
currency forward contracts, currency futures contracts, currency swaps or
options on currencies or currency futures; and (v) make short sales. These
techniques may produce taxable ordinary income and/or short-term or long-term
capital gains. Although the Fund does not normally invest in equity securities
that are restricted as to disposition by federal securities laws or are
otherwise illiquid, the Fund may so invest up to 15% of its net assets when, in
the opinion of the Adviser, investment opportunities presented by such
securities are particularly attractive. For further information concerning the
securities in which the Equity Fund may invest and the investment strategies and
techniques it may employ, see "Risk Factors, Suitability and Other Investment
Practices and Policies" below in this Prospectus.
Standish Small Cap Tax-Sensitive Equity Fund
Investment Objective. The Small Cap Fund seeks to maximize after-tax total
return, consisting of long-term growth of capital with nominal current income,
through investment primarily in equity securities of small capitalization
companies that appear to be undervalued.
Investment Policies. Under normal circumstances, at least 80% of the Small
Cap Fund's total assets are invested in equity and equity-related securities
(such as common stocks, preferred stocks and options, futures and other
strategic transactions based on common stocks) of small capitalization
companies. The Fund invests in publicly traded securities, including securities
issued in initial public offerings. The Fund may invest up to 15% of its total
assets in foreign equity securities, including securities of foreign issuers
that are listed on a U.S. exchange or traded in the U.S. over-the-counter market
and sponsored and unsponsored American Depositary Receipts (ADRs). As a
temporary matter and for defensive purposes, the Fund may purchase investment
grade short-term debt securities, the amount of which will depend on market
conditions and the needs of the Fund.
The common stocks of small growth capitalization in which the Small Cap
Fund invests have market capitalizations up to and including $700 million.
Market capitalization is determined by multiplying the number of fully diluted
equity shares by the current market price per share. Morningstar Mutual Funds, a
leading mutual fund monitoring service, includes in the small-cap category all
funds that invest in companies with median market capitalizations of less than
8
<PAGE>
$1 billion. The Fund expects to emphasize investments in companies involved with
value added products or services in expanding industries. At times, particularly
when the Adviser believes that securities of small capitalization companies are
overvalued, the Fund's portfolio may include securities of larger, more mature
companies, provided that the value of the securities of such larger, more mature
companies shall not exceed 20% of the Fund's total assets. The Fund will attempt
to reduce risk by diversifying its investments within the investment policy set
forth above.
The Small Cap Fund may, but is not required to, utilize various investment
strategies and techniques to seek to hedge various market risks (such as broad
or specific equity market movements and currency exchange rate risks) or to seek
to enhance potential gain. Such strategies and techniques are generally accepted
as part of modern portfolio management and are regularly utilized by many mutual
funds. In the course of pursuing its investment objective, the Small Cap Fund
may: (i) purchase and write (sell) put and call options on securities, equity
indices and other financial instruments; (ii) purchase and sell financial
futures contracts on U.S. equity indices and options thereon; (iii) enter into
repurchase agreements; (iv) enter into various currency transactions, such as
currency forward contracts, currency futures contracts, currency swaps or
options on currencies or currency futures; and (v) make short sales. These
techniques may produce taxable ordinary income and/or short-term or long-term
capital gains. Although the Fund does not normally invest in equity securities
that are restricted as to disposition by federal securities laws or are
otherwise illiquid, the Fund may so invest up to 15% of its net assets when, in
the opinion of the Adviser, investment opportunities presented by such
securities are particularly attractive. For further information concerning the
securities in which the Small Cap Fund may invest and the investment strategies
and techniques it may employ, see "Risk Factors, Suitability and Other
Investment Practices and Policies" below in this Prospectus.
Standish Intermediate Tax Exempt Bond Fund
Investment Objective. The Tax Exempt Fund seeks to provide a high level of
interest income exempt from federal income taxes, while seeking preservation of
shareholders' capital, through investing the Fund's assets primarily in
investment grade intermediate-term municipal securities. The investment
objective of the Fund is a fundamental policy that may not be changed without
shareholder approval.
Investment Policies. The Tax Exempt Fund seeks to achieve its objective by
investing in a diversified portfolio of municipal securities which are
obligations issued by or on behalf of states, territories and possessions
(including Puerto Rico, the U.S. Virgin Islands and Guam) of the United States,
and the District of Columbia and their political subdivisions, agencies,
authorities and instrumentalities, the interest on which is, in the opinion of
bond counsel to the issuer, excluded from gross income for federal income tax
purposes.
Although the Tax Exempt Fund invests primarily in investment grade
municipal bonds of any maturity, it intends to emphasize high quality
intermediate-term municipal bonds. The Fund's dollar-weighted average portfolio
maturity is normally in a range of three to ten years. However, the Fund may
purchase individual securities with effective maturities which are outside of
this range. A mutual fund with an average maturity longer than that of the Fund
will tend to have a higher yield, but will generally exhibit greater share price
volatility. Conversely, a mutual fund with a shorter maturity will generally
have a lower yield, but will generally offer more price stability. The Fund's
emphasis on high quality securities is expected to reduce its share price
volatility. Because the Fund holds investment grade municipal securities, the
income earned on shares of the Fund will tend to be less than it might be on a
portfolio emphasizing lower quality securities.
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The Tax Exempt Fund may invest, without percentage limitations, in
municipal bonds rated at the time of purchase within one of the four highest
municipal bond ratings by Moody's (Aaa, Aa, A, Baa), Standard & Poor's (AAA, AA,
A, BBB) or Fitch (AAA, AA, A, BBB) or, if unrated, determined by the Adviser to
be of comparable credit quality. The Fund may invest in municipal notes rated
MIG-1 or MIG-2 by Moody's or at least SP-1 or SP-2 by Standard & Poor's or in
municipal notes that are not rated, provided that, in the opinion of the
Adviser, such notes are of a comparable credit quality. See "Securities Ratings"
below for a discussion of securities ratings generally and how these policies
apply to certain types of rated securities.
Although as a matter of fundamental policy it is authorized to do so, the
Tax Exempt Fund does not expect to invest more than 25% of its total assets in
any one of the following sectors of the municipal securities market: hospitals,
ports, airports, colleges and universities, turnpikes and toll roads, housing
bonds, lease rental bonds, industrial revenue bonds or pollution control bonds.
For the purposes of this limitation, securities whose credit is enhanced by bond
insurance, letters of credit or other means are not considered to belong to a
particular sector.
As a fundamental policy, at least 80% of the Tax Exempt Fund's net assets
will normally be invested in tax-exempt municipal securities. Municipal
securities pay interest income that is excluded from gross income for federal
income tax purposes. Also as a fundamental policy, during normal market
conditions, at least 65% of the Fund's net assets will be invested in municipal
bonds. There may be certain occasions, however, during which more than 20% of
the Tax Exempt Fund's assets may be invested in taxable instruments. In unusual
circumstances, as a temporary defensive measure, the Fund may invest in taxable,
fixed income obligations when the Adviser believes that market conditions, such
as rising interest rates or other adverse factors, would cause serious erosion
of portfolio value. In addition, the Fund may also invest up to 20% of its net
assets in taxable, fixed income obligations when there is a yield disparity
between taxable and municipal securities on an after-tax basis which is
favorable for taxable investments. The Fund's taxable investments will generally
be of comparable credit quality and maturity to the municipal securities in
which the Fund invests and will be limited primarily to obligations issued or
guaranteed by the U.S. Government, its agencies, instrumentalities or
authorities; investment grade corporate debt securities; prime commercial paper;
certain certificates of deposit of domestic banks; and repurchase agreements,
secured by U.S. Government securities, with maturities not in excess of seven
days. To the extent that income dividends include income from taxable sources, a
portion of a shareholder's dividend income will be taxable. See "Federal Income
Taxes" in this Prospectus.
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The Tax Exempt Fund may, but is not required to, utilize various investment
strategies and techniques to seek to hedge various market risks (such as broad
or specific fixed income market movements and interest rate risks), to seek to
manage the effective maturity or duration of fixed-income portfolio securities,
or to enhance potential gain. Such strategies and techniques are generally
accepted as part of modern portfolio management and are regularly utilized by
many mutual funds. In the course of pursuing its investment objective, the Tax
Exempt Fund may: (i) purchase and write (sell) put and call options on
securities, fixed-income indices and other financial instruments; (ii) purchase
and sell financial futures contracts and options thereon; (iii) enter into
repurchase agreements; (iv) purchase securities on a forward commitment, when
issued or delayed delivery basis; and (v) enter into various interest rate
transactions, such as swaps, caps, floors and collars. The Fund may also invest
up to 15% of its net assets in the aggregate of restricted securities,
securities for which there are no readily available marked quotations and other
illiquid securities. For further information concerning the securities in which
the Tax Exempt Fund may invest and the investment strategies and techniques it
may employ, see "Risk Factors, Suitability and Other Investment Practices and
Policies" below in this Prospectus.
RISK FACTORS, SUITABILITY AND
OTHER INVESTMENT PRACTICES
Because each Fund owns different types of investments, its performance is
affected by a variety of factors. The value of a Fund's investments and the
income they generate will vary from day to day, and generally reflect interest
rates, market conditions, and other company, political and economic news. When
you sell your shares, they may be worth more or less than what you paid for
them. Because of the uncertainty inherent in all investments, no assurance can
be given that any Fund will achieve its investment objective.
Investing in Small Capitalization Companies
The Small Cap Fund will emphasize, and the Equity Fund may invest in,
smaller, lesser-known companies. Although investments in securities of small
capitalization companies may present greater opportunities for growth, they also
involve greater risks than are customarily associated with investments in
larger, more mature, better known companies. Small capitalization securities may
be subject to more volatile market movements than larger capitalization
securities, such as those included in the S&P 500 Index. Small capitalization
companies may have limited product lines, markets or financial resources, and
they may depend upon a limited or less experienced management group. Small
capitalization securities may be traded only in the over-the-counter market or
on a regional securities exchange and may not be traded daily or in the volume
typical of trading on a national securities exchange. As a result, the
disposition by a Fund of portfolio securities to meet redemptions or otherwise
may require the Fund to sell securities at a discount from market prices, over a
longer period of time or during periods when disposition is not desirable.
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The Small Cap and Equity Funds may participate in initial public offerings
for previously privately held companies whose securities are expected to be
liquid after the offering. Such companies may have a more limited operating
history and/or less experienced management than other companies in which the
Funds invest, which may pose additional risks. The Small Cap Fund will
participate in initial public offerings of companies that are expected to have
market capitalizations of up to $700 million after consummation of the offering.
Foreign Securities
Although Equity Fund intends to invest primarily in equity securities of
U.S. issuers, the Equity Fund may invest (without limitation) in equity
securities of issuers located in any foreign country which securities are listed
on a U.S. exchange or traded in the U.S. over-the-counter market. The Equity
Fund will not invest more than 10% of its total assets in foreign equity
securities that are not so listed or traded. Small Cap Fund may invest up to 15%
of its total assets in equity securities of issuers located in any foreign
country, including but, not limited to, securities of foreign issuers that are
listed on a U.S. exchange or traded in the U.S. over-the-counter market and
sponsored and unsponsored American Depositary Receipts (ADRs). Securities of
foreign issuers, including emerging markets companies, will be selected for
investment by the Equity and Small Cap Funds if the Adviser believes these
securities will offer above average capital growth potential.
Investing in securities of foreign companies and securities denominated in
foreign currencies or utilizing foreign currency transactions involve certain
risks of political, economic and legal conditions and developments not typically
associated with investing in securities of U.S. companies. Such conditions or
developments might include unfavorable changes in currency exchange rates,
exchange control regulations (including currency blockage), civil disorder,
expropriation of assets of companies in which a Fund invests, nationalization of
such companies, imposition of withholding or other foreign taxes on dividend or
interest payments (or, in some cases, capital gains), and possible difficulty in
obtaining and enforcing judgments against a foreign issuer. Also, foreign
securities may not be as liquid and may be more volatile than comparable
domestic securities. Furthermore, issuers of foreign securities are subject to
different, often less comprehensive, accounting, reporting and disclosure
requirements than domestic issuers. The Funds, in connection with purchases and
sales of foreign securities, other than securities denominated in U.S. dollars,
will incur transaction costs in converting currencies. Brokerage commissions in
foreign countries are generally fixed, and other transaction costs related to
securities exchanges are generally higher than in the U.S. Most foreign
securities of the Funds are held by foreign subcustodians that satisfy certain
eligibility requirements. Foreign custodial costs relating to the Funds'
portfolio securities are higher than domestic custodial costs. In addition,
foreign settlement of securities transactions is subject to local law and custom
that is not, generally, as well established or as reliable as U.S. regulation
and custom applicable to settlements of securities transactions and,
accordingly, there is generally perceived to be a greater risk of loss in
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connection with securities transactions in many foreign countries. Fixed
commissions on foreign stock exchanges are generally higher than negotiated
commissions on U.S. exchanges. Finally, transactions in equity securities
effected on some foreign stock exchanges, and consequently the Funds'
investments on such exchanges, may not be settled promptly and therefore such
investments may be less liquid and subject to the risk of fluctuating currency
exchange rates pending settlement. The Equity Fund's policy of investing no more
than 10% of its total assets in foreign securities that are not listed on a U.S.
stock exchange or traded in the U.S. over-the-counter market and the Small Cap
Fund's policy of investing no more than 15% of its total assets in foreign
equity securities are intended to limit each Fund's exposure to the risks
associated with investments in foreign securities.
Investments by the Tax-Sensitive Funds in securities of issuers in emerging
markets involves risks in addition to those discussed above. Many emerging
market countries have experienced substantial, and in some periods extremely
high, rates of inflation for many years. Inflation and rapid fluctuations in
inflation rates have had and may continue to have negative effects on the
economies and securities markets of certain emerging market countries. Moreover,
the economies of individual emerging market countries may differ favorably or
unfavorably from the U.S. economy in such respects as the rate of growth of
gross domestic product, the rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
Municipal Securities
Municipal securities in which the Tax Exempt Fund may invest include debt
obligations issued to obtain funds for various public purposes, including the
construction of a variety of public facilities such as bridges, highways,
housing, hospitals, mass transportation, schools, streets and water and sewer
works. Other public purposes for which municipal securities or bonds may be
issued include the refunding of outstanding obligations, obtaining funds for
general operating expenses and the obtaining of funds to loan to other public
institutions and facilities. In addition, certain types of industrial revenue
bonds are, or have been under prior tax law, issued by or on behalf of public
authorities to obtain funds to provide privately operated housing facilities,
sports facilities, convention or trade show facilities, airport, mass transit,
port or parking facilities, air or water pollution control facilities and
certain local facilities for water supply, gas, electricity, or sewage or solid
waste disposal. The interest on certain such bonds (and the Fund's distributions
to its shareholders from such interest) may be a tax preference item for
purposes of the federal alternative minimum tax: these bonds are sometimes
referred to as "AMT Bonds" and are treated as taxable obligations for the
purposes of the Fund's policies. See "Federal Income Taxes" in this Prospectus.
Municipal bonds are issued in order to meet long-term capital needs and
generally have maturities of more than one year when issued. The two principal
classifications of municipal bonds are "general obligation" and "revenue" bonds.
General obligation bonds are secured by the pledge of the municipality's faith,
credit and taxing power for the payment of principal and interest, and are
considered the safest type of municipal bond. Revenue bonds are payable only
from the revenues derived from a particular project or facility and are
generally dependent solely on a specific revenue source. Industrial revenue
bonds are a specific type of revenue bond backed by the credit and security of a
private user. Assessment bonds, which are issued by a specially created district
or project area which levies a tax (generally on its taxable property) to pay
for an improvement or project, may be considered to belong to either category.
There are, of course, other variations in the safety of municipal bonds, both
within a particular classification and between classifications, depending on
numerous factors. The Tax Exempt Fund is not limited with respect to the
categories of municipal securities it may acquire.
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Municipal securities also include municipal notes, which are generally
issued to satisfy short-term capital needs and have maturities of one year or
less. Municipal notes include tax anticipation notes, revenue anticipation
notes, bond anticipation notes and construction loan notes. The Fund may also
invest in variable rate demand instruments, which are securities with long
stated maturities, but demand features that allow the holder to demand 100% of
the principal plus interest within one to seven days. The coupon varies daily,
weekly or monthly with the market. The price remains at par, which provides
stability to the portfolio while earning market yields. For federal income tax
purposes, the income earned from municipal securities may be entirely tax free,
taxable or subject only to the federal alternative minimum tax.
Securities Ratings
In the case of a security proposed to be purchased by a Fund that is rated
differently by the two rating services, the higher rating is used for purposes
of the Funds' rating policies; provided, however, all securities purchased must
also meet the credit standards of the Adviser. Securities rated Baa by Moody's
or BBB by Standard & Poor's and Fitch and unrated securities of equivalent
credit quality are considered medium grade obligations with speculative
characteristics. Adverse changes in economic conditions or other circumstances
are more likely to weaken the issuer's capacity to pay interest and repay
principal on these securities than is the case for issuers of higher rated
securities. Prior to acquiring unrated securities for a Fund's portfolio, the
Adviser considers the terms of the offering and various other factors in order
to initially determine whether the securities are consistent with the Fund's
investment objective and policies and thereafter to determine the issuer's
comparative credit rating. In the event the rating on a security held in a
Fund's portfolio is downgraded 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.
Temporary and Short-Term Investments
Notwithstanding a Fund's investment objective, each Fund may on occasion,
for temporary defensive purposes to preserve capital or to meet redemption
requests, hold part or all of its assets in cash and investment grade money
market instruments (i.e., securities with maturities of less than one year) and
short-term debt securities (i.e., securities with maturities of one to three
years). Each Fund may also invest uncommitted cash and cash needed to maintain
liquidity for redemptions in investment grade money market instruments and
short-term debt securities. Investments in such securities will be limited to
20% of a Fund's total assets unless the Fund is in a temporary defensive
position.
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The money market instruments and short-term debt securities in which the
Funds may invest consist of obligations issued or guaranteed by the U.S.
Government, its agencies, instrumentalities or authorities; instruments
(including negotiable certificates of deposit, non-negotiable fixed time
deposits and bankers' acceptances) of U.S. banks and foreign banks (the
Tax-Sensitive Funds only); repurchase agreements; and prime commercial paper of
U.S. companies and foreign companies (the Tax-Sensitive Funds only).
The Funds' investments in money market securities will be rated, at the
time of investment, P-1 by Moody's or A-1 by Standard & Poor's. At least 95% of
each Tax-Sensitive Fund's assets invested in short-term debt securities will be
rated, at the time of investment, Aaa, Aa, or A by Moody's or AAA, AA, or A by
Standard & Poor's or, if not rated, determined to be of comparable credit
quality by the Adviser. Up to 5% of each Tax-Sensitive Fund's total assets
invested in short-term debt securities may be invested in securities which are
rated Baa by Moody's or BBB by Standard & Poor's or, if not rated, determined to
be of comparable credit quality by the Adviser.
The Tax Exempt Fund's investments in taxable securities, such as money
market and short-term debt securities, will generally be of comparable credit
quality and maturity to the municipal securities in the Tax Exempt Fund invests.
To the extent that income dividends distributed by the Tax Exempt Fund include
income from taxable sources, a portion of a shareholder's dividend income will
be taxable. See "Federal Income Taxes."
Each Fund may invest up to 15% of its net assets in repurchase agreements
under normal circumstances. Repurchase agreements acquired by the Funds will
always be fully collateralized as to principal and interest by money market
instruments and will be entered into with commercial banks, brokers and dealers
considered creditworthy by the Adviser. If the other party or "seller" of a
repurchase agreement defaults, a Fund might suffer a loss to the extent that the
proceeds from the sale of the underlying securities and other collateral held by
the Fund in connection with the related repurchase agreement are less than the
repurchase price. In addition, in the event of bankruptcy of the seller or
failure of the seller to repurchase the securities as agreed, a Fund could
suffer losses, including loss of interest on or principal of the security and
costs associated with delay and enforcement of the repurchase agreement.
Strategic and Derivative Transactions
Each 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 (Equity Fund and Small Cap Fund only), and broad
or specific market movements), to enhance potential gain or, with respect to the
Tax Exempt Fund, to manage the effective maturity or duration of fixed-income
portfolio securities. 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 Funds may change
over time as new instruments and strategies are developed or regulatory changes
occur.
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In the course of pursuing their respective investment objectives, the Funds
may purchase and sell (write) exchange-listed and over-the-counter put and call
options on securities, equity indices (Equity Fund and Small Cap Fund only),
fixed-income indices (Tax Exempt Fund only) 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. In
addition, Equity Fund and Small Cap Fund may enter into various currency
transactions such as currency forward contracts, currency futures contracts,
currency swaps or options on currencies or currency futures. The risks
associated with the Funds' transactions in options, futures and other types of
derivative securities including swaps may include some or all of the following:
market risk, leverage and volatility risk, correlation risk, credit risk and
liquidity and valuation risk. These investment techniques are referred to herein
as "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 a Fund's portfolio resulting from securities markets
fluctuations, currency exchange rate fluctuations (Equity Fund and Small Cap
Fund only), to protect a 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 duration or maturity of the Tax Exempt Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
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 Funds will attempt to limit their net loss exposure
resulting from Strategic Transactions entered into for such purposes to not more
than 3% of their respective net assets at any one time and, to the extent
necessary, the Funds 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 a 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
believes that the Equity Fund is underweighted in cyclical stocks and
overweighted in consumer stocks, the Equity Fund may buy a cyclical index call
option and sell a cyclical index put option and sell a consumer index call
option and buy a consumer index put option. Under such circumstances, any
unrealized loss in the cyclical position would be netted against any unrealized
gain in the consumer position (and vice versa) for purposes of calculating the
Fund's net loss exposure. The ability of the Funds to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Funds will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. The Funds' activities involving Strategic
Transactions may be limited by the requirements of Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated
investment company and by the Funds' tax-related objectives due to the fact that
Strategic Transactions may produce taxable income or short-term capital gain in
many cases and the applicable tax rules may make it more difficult to control
the timing of gains or losses.
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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 Funds, 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 Funds can realize on their respective investments or cause the
Funds to hold a security they might otherwise sell. The use of currency
transactions by the Equity Fund and Small Cap Fund can result in these Funds
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 a 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 a 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 Funds might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of 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
Funds in writing options on futures and entering into futures transactions is
potentially unlimited, however as described above, each Fund will attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for non-hedging purposes to not more than 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 Funds'
Strategic Transactions is set forth in the Statement of Additional Information.
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Short-Selling
The Tax-Sensitive Funds may make short sales, which are transactions in
which a Fund sells a security it does not own in anticipation of a decline in
the market value of that security or in order to defer the realization of gain
or loss for federal income tax purposes on a similar security previously sold by
the Fund. To complete a short sale transaction, a Fund must borrow the security
sold short in order 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 may
also 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 a 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 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 or (b) otherwise cover
its short position.
A 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. A 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 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 that the Fund may be required to pay in
connection with a short sale.
A 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 Equity and Small Cap Funds may
purchase call options to provide a hedge against an increase in the price of a
security sold short. When a Fund purchases a call option it must 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 and Derivative
Transactions" above.
The Tax-Sensitive Funds anticipate that the frequency of short sales will
vary substantially in different periods, and they do not intend that any
specified portion of their assets, as a matter of practice, will be in short
sales. However, no securities will be sold short if, after effect is given to
any such short sale, the total market value of all securities sold short would
exceed 5% of the value of the respective Fund's net assets.
In addition to the short sales discussed above, the Tax-Sensitive Funds may
make short sales "against-the-box." A short sale is against-the-box if the Fund,
at all times when a short position is open, owns an equal amount of securities
sold short or securities convertible into or exchangeable, without payment of
any further consideration, for an equal amount of the securities of the same
issuer as the securities sold short. 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.
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When-Issued Securities and "Delayed Delivery" Securities
The Tax Exempt Fund may commit up to 40% of its total assets to purchase
securities on a "when-issued" or "delayed delivery" basis, but will only do so
with the intention of actually acquiring the securities. The payment obligation
and the interest rate on these securities will be fixed at the time the Fund
enters into the commitment, but no income will accrue to the Fund until the
securities are delivered and paid for. Unless the Fund has entered into an
offsetting agreement to sell the securities, cash or liquid, high-grade debt
securities equal to the amount of the Fund's commitment will be segregated with
the Fund's custodian to secure the Fund's obligation and to ensure that it is
not leveraged. The market value of the securities when they are delivered may be
less than the amount paid by the Fund. The Fund may sell portfolio securities on
a delayed delivery basis. The market value of the securities when they are
delivered may be more than the amount to be received by the Fund.
Stand-By Commitments
To facilitate liquidity, the Tax Exempt Fund may enter into "stand-by
commitments" permitting it to resell municipal securities to the original seller
at a specified price. Stand-by commitments generally involve no cost.
Any such costs may, however, reduce yields.
Third Party Puts
The Tax Exempt Fund may purchase long-term fixed rate bonds which have been
coupled with an option granted by a third party financial institution allowing
the Fund at specified intervals to tender or put its bonds to the institution
and receive the face value thereof. These third party puts are available in
several different forms, may be represented by custodial receipts or trust
certificates and may be combined with other features. The financial institution
granting the put option does not provide credit enhancement, and typically, if
there is a default on or significant downgrading of the bond, or a loss of its
tax-exempt status, the put option will terminate automatically and the risk to
the Fund will be that of holding a long-term bond. These third party puts will
not be considered to shorten the Fund's maturity.
Illiquid and Restricted Securities
The Equity and Small Cap Funds will normally invest in publicly traded
equity securities and, excluding equity securities received as distributions on
portfolio securities, will not normally hold equity securities which are
illiquid and securities that are subject to legal or contractual restrictions on
resale (i.e., private placements), including securities eligible for resale in
reliance on Rule 144A under the Securities Act of 1933. Each Fund, including the
Tax Exempt Fund, may however invest up to 15% of its net assets in illiquid and
restricted securities when, in the opinion of the Adviser, investment
opportunities presented by such securities are particularly attractive. Illiquid
investments include securities that are not readily marketable, repurchase
agreements maturing in more than seven days, time deposits with a notice or
demand period of more than seven days, certain over-the-counter options, and
restricted securities. The purchase price and subsequent valuation of restricted
and illiquid securities normally reflect a discount, which may be significant,
from the market price of comparable securities for which a liquid market exists.
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Market Changes
Each Fund's net asset value fluctuates as a result of changes in the market
value of portfolio securities. The value of equity securities will fluctuate as
a result of a variety of factors including, but not limited to, general
conditions in the equity markets and the issuer's earning prospects, perceived
value, dividend paying ability, growth rate, market position in the market in
which it operates, and level of financial leverage. Yields on debt securities
depend on a variety of factors, such as general conditions in the money and bond
markets, and the size, maturity and rating of a particular issue. Debt
securities with longer maturities tend to produce higher yields and are
generally subject to greater potential capital appreciation and depreciation.
The market prices of debt securities usually vary depending upon available
yields, rising when interest rates decline and declining when interest rates
rise. Changes by recognized rating services in their ratings of debt securities,
including municipal securities, and in the ability of an issuer to make payments
of interest and repayments of principal will also affect the value of these
investments. Changes in the value of debt securities held in a Fund's portfolio
will not affect cash income derived from those securities but will affect a
Fund's net asset value.
Portfolio Turnover
It is not the policy of any Fund to purchase or sell securities for trading
purposes, and the Tax-Sensitive Funds intend to have low annual portfolio
turnover rates in order to reduce the realization and, therefore, the
distribution to shareholders of capital gains. The Tax Exempt Fund places no
restrictions on portfolio turnover. Notwithstanding the foregoing with respect
to the Tax-Sensitive Funds, a Fund may generally change its portfolio
investments at any time in accordance with the Adviser's appraisal of factors
affecting any particular issuer or market, or the economy in general. It is
expected that the portfolio turnover rates of the Equity Fund and the Small Cap
Fund will not exceed 20% and 50%, respectively, in the coming year. The Tax
Exempt Fund's portfolio turnover rates are listed in the section captioned
"Financial Highlights." 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 owned
during the year (excluding securities with a maturity date of one year or less
at the date of acquisition). A high rate of portfolio turnover (100% or more)
involves a correspondingly greater amount of transaction costs which must be
borne directly by a Fund and thus indirectly by its shareholders. It may also
result in the realization of larger amounts of short-term capital gains, a
Fund's distributions of 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.
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Investment Restrictions and Diversification
Except as otherwise noted, the foregoing investment policies are
non-fundamental policies which may be changed by the Trust's Board of Trustees
without the approval of shareholders of the affected Fund. The investment
objectives of each of the Equity Fund and the Small Cap Fund are
non-fundamental. If there is a change in either of these Fund's investment
objective, shareholders should consider whether the Fund remains an appropriate
investment in light of their then current financial positions and needs. Each of
the Funds has adopted certain fundamental policies that may not be changed
without the approval of their respective shareholders. See "Investment
Restrictions" in the combined Statement of Additional Information.
Each Fund is diversified, as defined in the Investment Company Act of 1940.
As such, each Fund has a fundamental policy that limits its investments so that,
with respect to 75% of its assets (i) no more than 5% of the Fund's total assets
will be invested in the securities of a single issuer and (ii) each Fund will
purchase no more than 10% of the outstanding voting securities of a single
issuer. These limitations do not apply to obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities, repurchase agreements
collateralized by U.S. Government securities or investments in other registered
investment companies.
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 a Fund's assets will not constitute a violation of the
restriction.
Other Investment Companies
Each of the Equity Fund and the Small Cap Fund may invest up to 10% of its
total assets in the securities of other investment companies but may not invest
more than 5% of its total assets in the securities of any one investment company
or acquire more than 3% of the voting securities of any other investment
company. For example, the Equity Fund may invest in Standard & Poor's Depositary
Receipts (commonly referred to as "Spiders"), which are exchange-traded shares
of a closed-end investment company that are designed to replicate the price
performance and dividend yield of the Standard & Poor's 500 Composite Stock
Price Index. The Funds will indirectly bear their proportionate share of any
management fees and other expenses paid by investment companies in which they
invest in addition to the advisory and administration fees paid by the Funds.
However, to the extent that a Fund invests in a registered open-end investment
company, the Adviser will waive its advisory fees on the portion of the Fund's
assets so invested.
Each of the Equity Fund and the Small Cap Fund is authorized to invest all
of its assets in the securities of a single open-end registered investment
company (a "pooled fund") having substantially identical investment objectives,
policies and restrictions as such Fund, notwithstanding any other investment
restriction or policy. Such a structure is commonly referred to as
"master/feeder" or Hub & Spoke(TM). If authorized by the Trustees and subject to
shareholder approval (if then required by applicable law), a Fund would seek to
achieve its investment objective by investing in a pooled fund which would
invest in a portfolio of securities that complies with the Fund's investment
objective, policies and restrictions. The Trustees currently do not intend to
authorize investing in a pooled fund in connection with a master/feeder
structure. Hub & Spoke is a registered trademark of Signature Financial Group,
Inc.
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Suitability
None of the Funds is intended to provide an investment program meeting all
of the requirements of an investor. Notwithstanding each Fund's ability to
spread risk by holding securities of a number of portfolio companies,
shareholders should be able and prepared to bear the risk of investment losses
which may accompany the investments contemplated by the Funds.
Because the Tax-Sensitive Funds are managed to seek the highest long-term
total return after considering the impact of federal and state income taxes paid
by shareholders on the Funds' distributions and the Tax Exempt Fund seeks to
provide a high level of interest income exempt from federal income taxes, the
Funds may not be suitable investments for non-taxable investors or persons
investing through tax deferred vehicles (e.g., individual retirement accounts
(IRAs) or other qualified pension and retirement plans).
CALCULATION OF PERFORMANCE DATA
From time to time the Funds may advertise their total returns and the Tax
Exempt Fund may also advertise its yield and tax equivalent yield. Total return,
yield and tax equivalent yield figures are based on historical earnings and are
not intended to indicate future performance. The "total return" of a Fund refers
to the average annual compounded rates of return over 1, 5 and 10 year periods
(or any shorter period since inception) 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.
The "yield" of the Tax Exempt Fund is computed by dividing the net
investment income per share earned during the period stated in the advertisement
by the maximum offering price (net asset value) 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 Tax Exempt Fund all recurring fees that are charged to all
shareholder accounts and any nonrecurring charges for the period stated.
Tax equivalent yield demonstrates the yield from a taxable investment
necessary to produce an after-tax yield equivalent to that of a fund, such as
the Tax Exempt Fund, which invests primarily in tax-exempt obligations. It is
computed by dividing the tax-exempt portion of the Tax Exempt Fund's yield
(calculated as indicated above) by one, minus a stated income tax rate and
adding the product to the taxable portion (if any) of the Tax Exempt Fund's
yield.
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Taxable Equivalent Yield Table
Federal
Marginal Taxable Equivalent Rates Based on Tax-Exempt Yield of:
Tax Rate 4% 5% 6% 7% 8% 9% 10%
- --------------------------------------------------------------------------------
31.0% 5.80% 7.25% 8.70% 10.14% 11.59% 13.04% 14.49%
36.0% 6.25% 7.81% 9.38% 10.94% 12.50% 14.06% 15.63%
39.6% 6.62% 8.28% 9.93% 11.59% 13.25% 14.90% 16.56%
Each Fund may from time to time advertise one or more additional
measurements of performance, including but not limited to historical cumulative
total returns, distribution returns, non-standardized yield (Tax Exempt Fund
only), results of actual or hypothetical investments, changes in dividends,
distributions or share values, or any graphic illustration of such data. From
time to time, each Fund may also compare its performance with that of other
mutual funds with similar investment objectives, to relevant indices, and to
performance rankings prepared by recognized mutual fund statistical services. In
addition, a Fund's performance may be compared to alternative investment or
savings vehicles and/or to indices or indicators of economic activity. This data
may cover any period of a Fund's operations and may or may not include the
impact of taxes or other factors.
DIVIDENDS AND DISTRIBUTIONS
Each Fund will declare and distribute, at least annually, dividends from
short-term and long-term capital gains, if any, after reduction by capital
losses. The Tax-Sensitive Funds will declare and distribute, at least annually,
any dividends from net investment income. The Tax Exempt Fund will declare daily
and distribute monthly dividends from net investment income. Dividends from net
investment income and capital gains distributions, if any, are automatically
reinvested in additional shares of the appropriate Fund unless the shareholder
elects to receive them in cash. It is possible that a Fund may use equalization
tax accounting in furtherance of its tax objective, which may affect the amount,
timing and character of its distributions. See the Statement of Additional
Information for further information.
PURCHASE OF SHARES
Shares of the Funds may be purchased directly from the Trust, which offers
shares of the Funds to the public on a continuous basis. Shares are sold at the
net asset value per share next computed after the purchase order and payment for
the shares is received in good order by the Principal Underwriter and payment
for the shares is received by the Funds' custodian. Please see the Funds'
account application or call the Principal Underwriter for instructions on how to
make payment of shares to the Funds' custodian. Unless waived by the Funds, the
minimum initial investment is $100,000. Additional investments may be made in
amounts of at least $10,000 ($5,000 for the Tax Exempt Fund.
Shares of the Funds may also be purchased through securities dealers.
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 Principal Underwriter by the close of its business day
(normally 4:00 p.m., New York time) will be effected as of the close of regular
trading on the New York Stock Exchange on that day, provided that payment for
the shares is also received by the Funds' custodian 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 Principal Underwriter by the close of its business
day. Shares of the Funds purchased through dealers may be subject to transaction
fees, no part of which will be received by the Funds, the Principal Underwriter
or the Adviser.
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Each Fund's net asset value per share is computed on 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 time). The net asset value per share is calculated by
determining the value of all a Fund's assets, subtracting all liabilities and
dividing the result by the total number of shares outstanding. Equity and other
taxable securities are valued at the last sales prices, on the valuation date,
on the exchange or national securities market on which they are primarily
traded. Equity and other taxable securities not listed on an exchange or
national securities market, or securities for which there are no reported
transactions, are valued at the last quoted bid prices. Municipal securities are
valued by the Adviser or by an independent pricing service approved by the
Trustees, which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities and
various relationships between securities in determining value. The Tax Exempt
Fund believes that reliable market quotations for municipal securities are
generally not readily available for purposes of valuing its portfolio
securities. As a result, it is likely that most of the valuations of municipal
securities made by the Adviser or provided by such pricing service will be based
upon fair value determined on the basis of the factors listed above (which may
also include use of yield equivalents or matrix pricing). Securities for which
quotations are not readily available and all other assets will be 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 a Fund are valued on an amortized cost
basis. If a 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 its value on such date unless the Trustees determine during such sixty-day
period that amortized cost does not represent fair value. Additional information
concerning the Funds' valuation policies is contained in the Statement of
Additional Information.
Prospective investors should consider the tax implications of buying shares
of a Fund prior to an anticipated taxable dividend or capital gain distribution
from that Fund. A portion of the purchase price of such shares may be
attributable to the taxable income already earned by the Fund and/or net capital
gains already realized by the Fund that will be included in the anticipated
distribution. The distribution will, nevertheless, generally be taxable to the
investor even if it reduces the net asset value of the Fund's shares below the
investor's cost and economically represents a return of a portion of the
investor's purchase price.
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In the sole discretion of the Adviser, each Fund may accept securities
instead of cash for the purchase of Fund shares. The Adviser will determine that
any securities acquired in this manner are consistent with the investment
objective, policies and restrictions of the particular Fund. The securities will
be valued in the manner stated above. The purchase of Fund shares for securities
instead of cash may cause an investor who contributes them to realize a taxable
gain or loss with respect to the securities transferred to the Fund.
Consequently, prospective investors should consult with their own tax advisers
before acquiring Fund shares in exchange for appreciated or depreciated
securities in order to evaluate fully the effect on their particular tax
situations.
The Trust reserves the right in its sole discretion (i) to suspend the
offering of each Fund's shares, (ii) to reject purchase orders when in the best
interest of the particular Fund and (iii) to modify or eliminate the minimum
initial investment requirement in Fund shares. The Funds' investment minimums do
not apply to accounts for which the Adviser or any of its affiliates serves as
investment adviser or to employees of the Adviser or any of its affiliates or to
members of such persons' immediate families. The Funds' investment minimums
apply to the aggregate value invested in omnibus accounts rather than to the
investment of underlying participants in such omnibus accounts.
EXCHANGE OF SHARES
Shares of the Funds may be exchanged for shares of one or more other funds
in the Standish, Ayer & Wood family of funds. Shares of the Funds redeemed in an
exchange transaction are valued at their net asset value next determined after
the exchange request is received by the Principal Underwriter. 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 Principal Underwriter
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 Principal
Underwriter 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 the Funds may be exchanged by written order to the Principal
Underwriter, 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 elected telephonic privileges may exchange shares by
calling the Principal Underwriter at (800) 221-4795. Telephonic privileges are
not available to shareholders automatically. Proper identification will be
required for each telephonic exchange. Please see "Telephone Transactions" below
for more information regarding telephonic transactions.
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<PAGE>
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 by
the Funds' custodian. 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.
REDEMPTION OF SHARES
Shares of the Funds may be redeemed by any of the methods described below
at the net asset value per share next determined after receipt by the Principal
Underwriter 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 Funds may be redeemed by written order to the Principal
Underwriter, One Financial Center, 26th Floor, Boston, Massachusetts 02111. A
written redemption request must (a) state the name of the Fund and 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(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 Funds' 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 that are not
individuals. Redemption proceeds will normally be paid by check mailed within
three business days of receipt by the Principal Underwriter of a written
redemption request in proper form. If shares to be redeemed were recently
purchased by check, the Funds 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 in the case of
payments made by check.
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<PAGE>
Telephonic Redemption
Shareholders who elect telephonic privileges may redeem shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to shareholders automatically. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instruction on the account
application to a pre-designated account. Redemption proceeds will normally be
paid promptly after receipt of telephonic instructions, but no later than three
business days thereafter, except as described above for shares purchased by
check. 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. Wire charges, if any,
will be deducted from redemption proceeds. Proper identification will be
required for each telephonic redemption.
Repurchase Order
In addition to telephonic and written redemption of Fund shares, the
Principal Underwriter may accept telephone orders from brokers or dealers for
the repurchase of Fund shares. The repurchase price is the net asset value per
share next determined after receipt of the repurchase order by the Principal
Underwriter and the payment for the shares by the Funds' custodian. Brokers and
dealers are obligated to transmit repurchase orders to the Principal Underwriter
prior to the close of the Principal Underwriter's business day (normally 4:00
p.m.). Brokers and dealers may charge for their services in connection with a
repurchase of Fund shares, but none of the Funds nor the Principal Underwriter
imposes a charge for share repurchases.
Telephone Transactions
By maintaining an account that is eligible for telephonic exchange and
redemption privileges, the shareholder authorizes the Adviser, the Principal
Underwriter, the Funds and the Funds' custodian to act upon instructions of any
person to redeem and/or exchange shares from the shareholder's account. Further,
the shareholder acknowledges that, as long as the Funds employ reasonable
procedures to confirm that telephonic instructions are genuine, and follows
telephonic instructions that they reasonably believes to be genuine, neither the
Adviser, nor the Principal Underwriter, nor the Trust, nor any of the Funds, nor
the Funds' 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 or exchange, even if such transaction results from any fraudulent or
unauthorized instructions. Depending upon the circumstances, the Funds intend to
employ personal identification or written confirmation of transactions
procedures, and if they do not, the Funds may be liable for any losses due to
unauthorized or fraudulent instructions. All telephone transaction requests will
be recorded. Shareholders may experience delays in exercising telephone
transaction privileges during periods of abnormal market activity. Accordingly,
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<PAGE>
during periods of volatile economic and market conditions, shareholders may wish
to consider transmitting redemption and exchange requests in writing.
* * * *
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 applicable Fund's
portfolio investments at the time of redemption or repurchase. Each Fund intends
to pay cash for all shares redeemed, but under certain conditions, the Funds may
make payments wholly or partially in portfolio securities. Please see the
Statement of Additional Information for further information regarding the Funds'
ability to satisfy redemption requests in-kind.
Because of the cost of maintaining shareholder accounts, the Funds may
redeem, at net asset value, the shares in any account that has a value of less
than $25,000 ($10,000 for the Tax Exempt Fund) as a result of redemptions or
transfers. Before doing so, the applicable 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
that will increase the value of the account to at least $25,000 ($10,000 for the
Tax Exempt Fund). The Funds may eliminate duplicate mailings of Fund materials
to shareholders that have the same address of record.
MANAGEMENT
Trustees
Each 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 each Fund pursuant to
separate investment advisory agreements with the Trust and manages each 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
and abroad. In addition, the Adviser or its affiliate, Standish International
Management Company, L.P. ("SIMCO"), serves as the investment adviser to each of
the following fourteen funds in the Standish, Ayer & Wood family of funds:
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Net Assets
Funds (March 31, 1996)
- --------------------------------------------------------------------------------
Standish Controlled Maturity Fund
Standish Equity Portfolio
Standish Fixed Income Portfolio
Standish Fixed Income Fund II
Standish Global Fixed Income Portfolio
Standish Intermediate Tax Exempt Bond Fund
Standish International Equity Fund
Standish International Fixed Income Fund
Standish Massachusetts Intermediate
Tax Exempt Bond Fund
Standish Securitized Fund
Standish Short-Term Asset Reserve Fund
Standish Small Capitalization Equity Portfolio
Standish Small Cap Tax-Sensitive Equity Fund
Standish Tax-Sensitive Equity Fund
Corporate pension funds are the largest asset under active management by
Standish. Standish's clients also include charitable and educational endowment
funds, financial institutions, trusts and individual investors. As of March 31,
1996, Standish managed approximately $__ billion in assets.
The Equity Fund's portfolio manager is Laurence A. Manchester. During the
past five years, Mr. Manchester has served as a Vice President and Director of
the Adviser.
The Small Cap Fund's portfolio manager is Nicholas S. Battelle. During the
past five years, Mr. Battelle has served as a Vice President and Director of the
Adviser.
The Tax Exempt Fund's portfolio managers are Maria D. Furman and Raymond J.
Kubiak. During the past five years, Ms. Furman has served as a Vice President
and Director of the Adviser and Mr. Kubiak has been a Vice President and, since
1995, a Director of the Adviser.
Subject to the supervision and direction of the Trustees of the Trust, the
Adviser manages each Fund's portfolio in accordance with its stated investment
objective and policies, recommends investment decisions for the Funds, places
orders to purchase and sell securities on behalf of the Funds, and permits the
Funds to use the name "Standish." The Adviser provides all necessary office
space and services of executive personnel for administering the affairs of the
Funds. For these services, each Fund pays the Adviser a fee monthly equal on an
annual basis to the following percentages of each Fund's average daily net asset
value: Equity Fund--0.50%, Small Cap Fund--0.60% and Tax Exempt Fund--0.40%. For
the Tax Exempt Fund's fiscal year ended December 31, 1995, advisory fees paid to
the Adviser represented .25% of the Tax Exempt Fund's average daily net assets
after a fee reduction of $38,426.
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Expenses
Expenses of the Trust that relate to more than one series are allocated
among such series by the Adviser and SIMCO in a manner considered to be
equitable, primarily on the basis of relative net asset values. Each Fund bears
all expenses of its operations other than those incurred by the Adviser under
the investment advisory agreement. Among other expenses, each 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 and shareholder
reports which are furnished to existing shareholders; registration and reporting
fees and expenses; and Trustees' fees and expenses. The Principal Underwriter
bears, without subsequent reimbursement, the distribution expenses attributable
to the offering and sale of Fund shares.
The Adviser has voluntarily agreed for each Fund's fiscal year ending
September 30, 1996 to limit Total Fund Operating Expenses (excluding litigation,
indemnification and other extraordinary expenses) of each Fund to the following
percentages of each Fund's average daily net assets: Equity Fund--1.00%; Small
Cap Fund--0.90%; and Tax Exempt Fund--0.65%. These agreements are voluntary and
temporary and may be discontinued or revised by the Adviser at any time after
September 30, 1996. The Adviser has also agreed to limit each Fund's total
operating expenses (excluding brokerage commissions, taxes and extraordinary
expenses) to the permissible limit applicable in any state in which shares of
the respective Fund are then qualified for sale. If Total Fund Operating
Expenses (as defined above) would exceed the expense limitation, the
compensation due the Adviser for 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,
1995, expenses borne by Tax Exempt Fund amounted to $187,291, which represented
0.65% of average daily net assets after an expense reduction of $38,426.
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 Funds. The Adviser will generally seek to obtain
the best available price and most favorable execution with respect to all
transactions for the Funds. It is not anticipated that the Tax Exempt Fund will
incur a significant amount of brokerage expenses because municipal securities
are generally traded on a "net" basis in principal transactions without the
addition or deduction of brokerage commissions or transfer taxes.
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 that execute orders to purchase
and sell portfolio securities for the Funds.
FEDERAL INCOME TAXES
Each Fund is treated as a separate entity for federal income tax purposes.
The Tax Exempt Fund presently qualifies and intends to continue to qualify, a,nd
each of the Equity and Small Cap Funds intends to elect to be treated and to
qualify, for taxation as a separate "regulated investment company" under the
Internal Revenue Code of 1986, as amended (the "Code"). As a regulated
investment company, each Fund will not be subject to federal income tax on any
net investment income and net realized capital gains that are distributed to
shareholders in accordance with certain timing requirements of the Code.
30
<PAGE>
A Fund will be subject to a 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 Funds 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 of the Equity Fund and Small Cap Fund which are taxable
entities or persons will be subject to federal income tax on dividends and
capital gain distributions (as defined below) made by these Funds. Dividends
paid by the Equity Fund and Small Cap 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. The portion of such dividends
attributable to qualifying dividends that Equity Fund or Small Cap Fund
receives, if any, may qualify for the corporate dividends received deduction,
subject to certain holding period requirements and debt financing limitations
under the Code.
The Tax Exempt Fund intends to satisfy applicable requirements of the Code
so that its distributions to shareholders of the tax-exempt interest it earns
will qualify as "exempt-interest dividends," which shareholders are entitled to
treat as tax-exempt interest. Any portion of an exempt-interest dividend that is
attributable to the interest that the Tax Exempt Fund receives on certain
tax-exempt obligations that are "private activity bonds" and, for corporate
shareholders, the entire exempt-interest dividend, may increase a shareholder's
liability, if any, for alternative minimum tax.
Shareholders receiving social security benefits and certain railroad
retirement benefits may be subject to Federal income tax on a portion of such
benefits as a result of receiving investment income, including tax-exempt income
(such as exempt-interest dividends) and other dividends paid by the Funds.
Shares of the Tax Exempt Fund may not be an appropriate investment for persons
who are "substantial users" of facilities financed by industrial development or
private activity bonds, or persons related to "substantial users." Consult your
tax advisor if you think this may apply to you.
Shareholders in the Tax Exempt Fund which are taxable entities or persons
will be subject to federal income tax on capital gain distributions (as defined
below) from the Tax Exempt Fund and on any other dividends they receive from the
Tax Exempt Fund that are not exempt-interest dividends. Dividends paid by the
Tax Exempt Fund from any taxable net investment income, such as interest income
from taxable debt obligations, accrued market discount recognized by the Fund,
or repurchase agreements, 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. None of the Tax Exempt Fund's
exempt-interest dividends, taxable income dividends or capital gain
distributions will qualify for the corporate dividends received deduction.
31
<PAGE>
Dividends paid by any 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 applicable Fund. Capital gain distributions
do not qualify for the corporate dividends received deduction. Dividends and
capital gain distributions by a Fund may also be subject to state and local or
foreign taxes.
The Equity Fund and the Small Cap Fund anticipate that they 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. These Funds do not expect to
qualify to pass such foreign taxes and any associated tax deductions or credits
through to their shareholders.
Redemptions and repurchases of shares are taxable events on which a
shareholder may recognize a gain or loss. Special rules disallow any losses on
the sale or exchange of shares of the Tax Exempt Fund with a tax holding period
of six months or less, to the extent the shareholder received exempt-interest
dividends with respect to such shares, and recharacterize as long-term any
otherwise allowable losses on the sale or exchange of the shares of any Fund
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 taxable dividends, capital gain
distributions, and the proceeds of redemptions or repurchases of shares, if they
fail to furnish the Funds 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 taxable dividends from the Funds and,
unless a current IRS Form W-8 or an acceptable substitute is furnished to the
Funds, to backup withholding on certain payments from the Funds.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent, if any, that a 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 and/or tax-exempt municipal obligations issued by or on behalf of
the particular state in which the shareholder is subject to tax or a political
subdivision thereof, 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, each Fund will send a notice to its
shareholders that provides information about the federal tax status of
distributions to shareholders for such calendar year.
32
<PAGE>
THE TRUST AND ITS SHARES
Each 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 each Fund. Each share of each 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
Funds 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 Funds 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 Funds do not have preemptive or conversion rights.
Certificates representing shares of the Funds will not be issued.
At February 1, 1996, more than 25% of the then outstanding shares of the
Tax Exempt Fund were held by BDG & Co., c/o Bingham, Dana & Gould, 150 Federal
Street, Boston, MA, which was deemed to control the Tax Exempt Fund.
The Trust has established fourteen series that currently offer their
shares to the public 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 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 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.
33
<PAGE>
Subject to Trustee approval and shareholder approval (if then required),
each of the Equity Fund and the Small Cap Fund may pursue its investment
objective by investing all of its investable assets in a pooled fund.
Inquiries concerning the Funds should be made by contacting the Principal
Underwriter at the address and telephone number listed on the cover of this
Prospectus. Although each Fund is offering only its own shares, since the Funds
use this combined Prospectus, it is possible that one Fund might become liable
for a misstatement or omission in this Prospectus regarding another Fund. The
Trustees have considered this factor in approving the use of this combined
Prospectus.
34
<PAGE>
CUSTODIAN, TRANSFER AGENT AND
DIVIDEND-DISBURSING AGENT
Investors Bank & Trust Company, 24 Federal Street, Boston, Massachusetts
02110, serves as the Funds' transfer and dividend-disbursing agent and as
custodian of all cash and securities of the Funds.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109, serves as independent accountants for the Trust and will audit each
Fund's financial statements annually.
LEGAL COUNSEL
Hale and Dorr, 60 State Street, Boston, Massachusetts 02109, is legal
counsel to the Trust, the Principal Underwriter and the Adviser.
- --------------------------------------------------------------------------------
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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35
<PAGE>
STANDISH TAX-SENSITIVE EQUITY FUND
STANDISH TAX-SENSITIVE SMALL CAP FUND
STANDISH INTERMEDIATE TAX EXEMPT BOND FUND
Investment Adviser
Standish, Ayer & Wood, Inc.
One Financial Center
Boston, Massachusetts 02111
Principal Underwriter
Standish Fund Distributors, L.P.
One Financial Center
Boston, Massachusetts 02111
Custodian
Investors Bank & Trust Company
24 Federal Street
Boston, Massachusetts 02110
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
Legal Counsel
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
36
<PAGE>
May 1, 1996
STANDISH TAX-SENSITIVE EQUITY FUND
STANDISH SMALL CAP TAX-SENSITIVE EQUITY FUND
STANDISH INTERMEDIATE TAX EXEMPT BOND FUND
One Financial Center
Boston, Massachusetts 02111
(617) 350-6100
STATEMENT OF ADDITIONAL INFORMATION
This combined Statement of Additional Information is not a prospectus, but
expands upon and supplements the information contained in the combined
Prospectus dated May 1, 1996, as amended and/or supplemented from time to time
(the "Prospectus"), of Standish Tax-Sensitive Equity Fund ("Equity Fund"),
Standish Small Cap Tax-Sensitive Equity Fund ("Small Cap Fund") and Standish
Intermediate Tax Exempt Bond Fund ("Tax Exempt Fund"), each a separate
investment series of Standish, Ayer & Wood Investment Trust (the "Trust"). The
Equity Fund, Small Cap Fund and Tax Exempt Fund are sometimes referred to herein
individually as the "Fund" and collectively as the "Funds." This Statement of
Additional Information should be read in conjunction with the Funds' Prospectus,
a copy of which may be obtained without charge by writing or calling Standish
Fund Distributors, L.P., the Trust's principal underwriter (the "Principal
Underwriter"), at the address and phone number set forth above.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
Contents
Investment Objectives and Policies............................2
Investment Restrictions......................................10
Calculation of Performance Data..............................13
Management...................................................14
Redemption of Shares.........................................20
Portfolio Transactions.......................................20
Determination of Net Asset Value.............................21
Federal Income Taxes.........................................21
The Trust and Its Shares.....................................24
Additional Information.......................................25
Experts and Financial Statements.............................25
1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Funds' Prospectus describes the investment objective and policies of
each Fund. The following discussion supplements the description of the Funds'
investment policies in the Prospectus. Each Fund's investment adviser is
Standish, Ayer & Wood, Inc. (the "Adviser").
Portfolio Maturity (Tax Exempt Fund)
Under normal market conditions, the Tax Exempt Fund will maintain a
dollar-weighted average portfolio maturity of between three and ten years. This
means that the dollar-weighted average duration of the Fund's portfolio
investments will be less than the duration of a U.S. Treasury obligation with a
remaining stated maturity of three to ten years. Duration represents the
weighted average maturity of expected cash flows (i.e., interest and principal
payments) on one or more debt obligations, discounted to their present values.
The duration of an obligation is always less than or equal to its stated
maturity and is related to the degree of the volatility in the market value of
the obligation. In computing the duration of its portfolio, the Tax Exempt Fund
will have to estimate the duration of debt obligations that are subject to
prepayment or redemption by the issuer, based on projected cash flows from such
obligations. Subject to the requirement that the Fund's dollar-weighted average
portfolio maturity will not exceed ten years, the Fund may invest in individual
debt obligations of any maturity, including obligations with a remaining stated
maturity of less than three or more than ten years. For purposes of the Fund's
investment policy, an instrument will be treated as having a maturity earlier
than its stated maturity date if the instrument has technical features (such as
puts or demand features) or a variable rate of interest which, in the judgment
of the Adviser, will result in the instrument being valued in the market as
though it has the earlier maturity.
Municipal Securities
The Tax Exempt Fund may invest in all kinds of municipal securities,
including municipal notes, municipal bonds, private activity bonds and variable
rate demand instruments.
Because the Tax Exempt Fund holds investment grade municipal securities,
the income earned on shares of the Fund will tend to be less than it might be on
a portfolio emphasizing lower quality securities. Municipal obligations are
subject to the provisions of bankruptcy, insolvency and other laws affecting the
rights and remedies of creditors, such as the Federal Bankruptcy Code, and laws
which may be enacted by Congress or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon municipalities to levy taxes. There is
also the possibility that as a result of litigation or other conditions the
power or ability of any one or more issuers to pay when due principal of and
interest on its or their municipal obligations may be materially affected.
Although the Tax Exempt Fund's quality standards are designed to minimize the
credit risk of investing in the Fund, that risk cannot be entirely eliminated.
Municipal Notes
The Tax Exempt Fund may invest in municipal notes. Municipal notes are
generally issued to satisfy short-term capital needs and generally have
maturities of one year or less. Municipal notes include: tax anticipation notes;
revenue anticipation notes; bond anticipation notes; and construction loan
notes.
2
<PAGE>
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. Revenue anticipation notes are issued in
expectation of receipt of other types of revenue such as Federal revenues
available under the Federal Revenue Sharing Program. Tax anticipation notes and
revenue anticipation notes are generally issued in anticipation of various
seasonal revenues such as income, sales, use, and business taxes. Bond
anticipation notes are sold to provide interim financing. These notes are
generally issued in anticipation of long-term financing in the market. In most
cases, these monies provide for the repayment of the notes. Construction loan
notes are sold to provide construction financing. After the projects are
successfully completed and accepted, many projects receive permanent financing
through the Federal Housing Administration under "Fannie Mae" (the Federal
National Mortgage Association) or "Ginnie Mae" (the Government National Mortgage
Association). There are, of course, a number of other types of notes in which
the Tax Exempt Fund may invest which are issued for different purposes and
secured differently from those described above.
Municipal Bonds
The Tax Exempt Fund may invest in municipal bonds. Municipal bonds, which
meet longer term capital needs and generally have maturities of more than one
year when issued, have two principal classifications:
"General Obligation" Bonds and "Revenue" Bonds.
Issuers of General Obligation Bonds include states, counties, cities, towns
and regional districts. The proceeds of these obligations are used to fund a
wide range of public projects including the construction or improvement of
schools, highways and roads, water and sewer systems and a variety of other
public purposes. The basic security of General Obligation Bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to rate or amount or special assessments.
The principal security for a Revenue Bond is generally the net revenues
derived from a particular facility or group of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source. Revenue
Bonds have been issued to fund a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully insured, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund, some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are secured by annual lease rental payments from the state or
locality to the authority sufficient to cover debt service on the authority's
obligations.
3
<PAGE>
Industrial Development and Pollution Control Bonds (which are types of
private activity bonds), although nominally issued by municipal authorities, are
generally not secured by the taxing power of the municipality but are secured by
the revenues of the authority derived from payments by the industrial user.
Under federal tax legislation, certain types of Industrial Development Bonds and
Pollution Control Bonds may no longer be issued on a tax-exempt basis, although
previously-issued bonds of these types and certain refundings of such bonds are
not affected.
Other Municipal Securities
There is a variety of hybrid and special types of municipal securities as
well as numerous differences in the security of municipal securities both within
and between the two principal classifications above.
Variable Rate Demand Instruments
The Tax Exempt Fund may purchase variable rate demand instruments that are
tax-exempt municipal obligations providing for a periodic adjustment in the
interest rate paid on the instrument according to changes in interest rates
generally. These instruments also permit the Fund to demand payment of the
unpaid principal balance plus accrued interest upon a specified number of days'
notice to the issuer or its agent. The demand feature may be backed by a bank
letter of credit or guarantee issued with respect to such instrument. A bank
that issues a repurchase commitment may receive a fee from the Fund for this
arrangement. The issuer of a variable rate demand instrument may have a
corresponding right to prepay in its discretion the outstanding principal of the
instrument plus accrued interest upon notice comparable to that required for the
holder to demand payment.
The variable rate demand instruments that the Tax Exempt Fund may purchase
are payable on demand on not more than seven calendar days' notice. The terms of
the instruments provide that interest rates are adjustable at intervals ranging
from daily to up to six months, and the adjustments are based upon the current
interest rate environment as provided in the respective instruments. The Adviser
will select the variable rate demand instruments that the Fund will purchase in
accordance with procedures approved by the Trustees to minimize credit risks.
The Adviser may determine that an unrated variable rate demand instrument meets
the Fund's quality criteria by reason of being backed by a letter of credit or
guarantee issued by a bank that meets the quality criteria of the Fund. Thus,
either the credit of the issuer of the municipal obligation or the guarantor
bank or both will meet the quality standards of the Fund.
The interest rate of the underlying variable rate demand instruments may
change with changes in interest rates generally, but the variable rate nature of
these instruments should decrease changes in value due to interest rate
fluctuations. Accordingly, as interest rates decrease or increase, the potential
for capital gain and the risk of capital loss on the disposition of portfolio
securities are less than would be the case with a comparable portfolio of fixed
income securities. Because the adjustment of interest rates on the variable rate
demand instruments is made in relation to movements of the applicable rate
adjustment index, the variable rate demand instruments are not comparable to
long-term fixed interest rate securities. Accordingly, interest rates on the
variable rate demand instruments may be higher or lower than current market
rates for fixed rate obligations of comparable quality with similar final
maturities.
4
<PAGE>
The maturity of the variable rate demand instruments held by the Tax Exempt
Fund will ordinarily be deemed to be the longer of (1) the notice period
required before the Fund is entitled to receive payment of the principal amount
of the instrument or (2) the period remaining until the instrument's next
interest rate adjustment.
Restricted and Illiquid Municipal Securities
An entire issue of Municipal Securities may be purchased by one or a small
number of institutional investors such as the Tax Exempt Fund. Thus, the issue
may not be said to be publicly offered. Unlike securities which must be
registered under the Securities Act of 1933 prior to offer and sale unless an
exemption from such registration is available, municipal securities which are
not publicly offered may nevertheless be readily marketable. A secondary market
exists for many municipal securities which were not publicly offered initially.
Securities purchased for the Fund are subject to the limitations on
holdings of securities which are not readily marketable contained in the Fund's
investment restrictions. The Adviser determines whether a municipal security is
readily marketable based on whether it may be sold in a reasonable time
consistent with the customs of the municipal markets (usually seven days) at a
price (or interest rate) which accurately reflects its value. The Adviser
believes that the quality standards applicable to the Tax Exempt Fund's
investments enhance marketability. In addition, stand-by commitments and demand
obligations also enhance marketability.
Foreign Securities
Foreign securities may be purchased and sold by the Equity and Small Cap
Funds in over-the-counter markets (but persons affiliated with the Fund will not
act as principal in such purchases and sales) or on stock exchanges located in
the countries in which the respective principal offices of the issuers of the
various securities are located, if that is the best available market. Foreign
stock markets are generally not as developed or efficient as those in the United
States. While growing in volume, they usually have substantially less volume
than the New York Stock Exchange, and securities of some foreign companies are
less liquid and more volatile than securities of comparable United States
companies. Fixed commissions on foreign stock exchanges are generally higher
than negotiated commissions on United States exchanges, although the Equity and
Small Cap Funds will endeavor to achieve the most favorable net results on their
foreign portfolio transactions. There is generally less government supervision
and regulation of stock exchanges, brokers and listed companies abroad than in
the United States.
The dividends and interest payable on certain of the Equity and Small Cap
Funds' foreign portfolio securities may be subject to foreign withholding taxes
and in some cases capital gains from such securities may also be subject to
foreign tax, thus reducing the net amount of income or gain available for
distribution to the Equity and Small Cap Funds' respective shareholders.
5
<PAGE>
Investors should understand that the expense ratios of the Equity and Small
Cap Funds may be higher than that of investment companies investing exclusively
in domestic securities because of the cost of maintaining the custody of foreign
securities.
The Small Cap Fund and the Equity Fund may acquire sponsored and
unsponsored ADRs. Unsponsored ADRs are acquired from banks that do not have a
contractual relationship with the issuer of the security underlying the
depositary receipt to issue and secure such depositary receipt. To the extent
that a Fund invests in such unsponsored ADRs there may be an increased
possibility that the Fund may not become aware of events affecting the
underlying security and thus the value of the related depositary receipt. In
addition, certain benefits (e.g., rights offerings) which may be associated with
the security underlying the depositary receipt may not inure to the benefit of
the holder of such depositary receipt.
Money Market Instruments and Repurchase Agreements
The money market instruments in which each Fund may invest include
short-term U.S. Government securities, commercial paper (promissory notes issued
by corporations to finance their short- term credit needs) of foreign (Equity
and Small Cap Funds only) and domestic issuers, negotiable certificates of
deposit, non-negotiable fixed time deposits, bankers' acceptances and repurchase
agreements.
U.S. Government securities include securities which are direct obligations
of the U.S. Government backed by the full faith and credit of the United States,
and securities issued by agencies and instrumentalities of the U.S. Government,
which may be guaranteed by the U.S. Treasury or supported by the issuer's right
to borrow from the U.S. Treasury or may be backed by the credit of the federal
agency or instrumentality itself. Agencies and instrumentalities of the U.S.
Government include, but are not limited to, Federal Land Banks, the Federal Farm
Credit Bank, the Central Bank for Cooperatives, Federal Intermediate Credit
Banks, Federal Home Loan Banks and the Federal National Mortgage Association.
Investments in commercial paper will be rated Prime-1 by Moody's Investors
Service, Inc. ("Moody's") or A-1 by Standard & Poor's Ratings Group ("S&P") or
Duff 1+ by Duff & Phelps, which are the highest ratings assigned by these rating
services (even if rated lower by one or more of the other agencies), or which,
if not rated or rated lower by one or more of the agencies and not rated by the
other agency or agencies, are judged by the Adviser to be of equivalent quality
to the securities so rated. In determining whether securities are of equivalent
quality, the Adviser may take into account, but will not rely entirely on,
ratings assigned by foreign rating agencies.
A repurchase agreement is an agreement under which a Fund acquires money
market instruments (generally U.S. Government securities) from a commercial
bank, broker or dealer, subject to resale to the seller at an agreed-upon price
and date (normally the next business day). The resale price reflects an
agreed-upon interest rate effective for the period the instruments are held by
the Fund and is unrelated to the interest rate on the instruments. The
instruments acquired by the Funds (including accrued interest) must have an
aggregate market value in excess of the resale price and will be held by the
custodian bank for the Funds until they are repurchased. The Trustees will
monitor the standards which the Adviser will use in reviewing the
creditworthiness of any party to a repurchase agreement with the Funds.
6
<PAGE>
The use of repurchase agreements involves certain risks. For example, if
the seller defaults on its obligation to repurchase the instruments acquired by
a Fund at a time when their market value has declined, the Fund may incur a
loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by a Fund are collateral for a loan by the Fund and
therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that a Fund may not be able to substantiate its interest in the
instruments it acquires. While the Trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
Strategic and Derivative Transactions
Each Fund may, but is not required to, utilize various other investment
strategies as described below to seek to hedge various market risks (such as
interest rates, currency exchange rates (Equity and Small Cap Funds) and broad
or specific fixed-income (Tax Exempt Fund) or equity (Equity and Small Cap
Funds) market movements), to manage the effective maturity or duration of
fixed-income securities (Tax Exempt Fund), 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 Funds may change over time as new
instruments and strategies are developed or regulatory changes occur.
In the course of pursuing their respective investment objectives, the Funds
may purchase and sell (write) exchange-listed and over-the-counter put and call
options on securities, equity indices (Equity Fund and Small Cap Fund only),
fixed-income indices (Tax Exempt Fund only) 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. In
addition, Equity Fund and Small Cap Fund may enter into various currency
transactions such as currency forward contracts, currency futures contracts,
currency swaps or options on currencies or currency futures. The risks
associated with the Funds' transactions in options, futures and other types of
derivative securities including swaps may include some or all of the following:
market risk, leverage and volatility risk, correlation risk, credit risk and
liquidity and valuation risk. These investment techniques are referred to herein
as "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 a Fund's portfolio resulting from securities markets
fluctuations, currency exchange rate fluctuations (Equity Fund and Small Cap
Fund only), to protect a 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 duration or maturity of the Tax Exempt Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
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. (Transactions such as writing covered call options are considered to
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involve hedging for the purposes of this limitation.) In calculating a 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
believes that the Equity Fund is underweighted in cyclical stocks and
overweighted in consumer stocks, the Equity Fund may buy a cyclical index call
option and sell a cyclical index put option and sell a consumer index call
option and buy a consumer index put option. Under such circumstances, any
unrealized loss in the cyclical position would be netted against any unrealized
gain in the consumer position (and vice versa) for purposes of calculating the
Fund's net loss exposure. The ability of the Funds to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Funds will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. The Funds' activities involving Strategic
Transactions may be limited by the requirements of Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated
investment company or by the Funds' objective to minimize taxable distributions.
Risks of Strategic and Derivative Transactions
The use of Strategic Transactions has associated risks 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 Funds, 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 Funds can realize on their respective investments or cause the
Funds to hold a security they might otherwise sell. The use of currency
transactions by the Equity Fund and Small Cap Fund can result in these Funds
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 a 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 a 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 Funds might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of 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
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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
Funds in writing options on futures and entering into futures transactions is
potentially unlimited. 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.
Risks of Strategic and Derivative Transactions Outside the United States
When conducted outside the United States, Strategic Transactions may not be
regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities, currencies
and other instruments. The value of such positions also could be adversely
affected by: (i) lesser availability than in the United States of data on which
to make trading decisions, (ii) delays in a Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (iii) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, (iv) lower trading
volume and liquidity, and (v) other complex foreign political, legal and
economic factors. At the same time, Strategic Transactions may offer advantages
such as trading in instruments that are not currently traded in the United
States or arbitrage possibilities not available in the United States.
General Characteristics of Options
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving options
require segregation of a Fund's assets in special accounts, as described below
under "Use of Segregated Accounts."
...A put option gives the purchaser of the option, in consideration for
the payment of a premium, the right to sell, and the writer the obligation to
buy (if the option is exercised) the underlying security, commodity, index, or
other instrument at the exercise price. For instance, a Fund's purchase of a put
option on a security might be designed to protect its holdings in the underlying
instrument (or, in some cases, a similar instrument) against a substantial
decline in the market value by giving the Fund the right to sell such instrument
at the option exercise price. A call option, in consideration for the payment of
a premium, gives the purchaser of the option the right to buy, and the seller
the obligation to sell (if the option is exercised) the underlying instrument at
the exercise price. A Fund may purchase a call option on a security, currency
(Equity and Small Cap Funds), futures contract, index or other instrument to
seek to protect the Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase such instrument. An American style put or call option may
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be exercised at any time during the option period while a European style put or
call option may be exercised only upon expiration or during a fixed period prior
thereto. The Funds are authorized to purchase and sell exchange listed options
and over-the-counter options ("OTC options"). Exchange listed options are issued
by a regulated intermediary such as the Options Clearing Corporation ("OCC"),
which guarantees the performance of the obligations of the parties to such
options. The discussion below uses the OCC as an example, but is also applicable
to other financial intermediaries.
With certain exceptions, exchange listed options generally settle by
physical delivery of the underlying security or currency, although in the future
cash settlement may become available. Index options and Eurodollar instruments
are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
A Fund's ability to close out its position as a purchaser or seller of an
exchange listed put or call option is dependent, in part, upon the liquidity of
the option market. There is no assurance that a liquid option market on an
exchange will exist. In the event that the relevant market for an option on an
exchange ceases to exist, outstanding options on that exchange would generally
continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Funds will generally sell (write) OTC options (other than OTC currency options)
that are subject to a buy-back provision permitting a Fund to require the
Counterparty to sell the option back to the Fund at a formula price within seven
days. (To the extent that the Funds do not do so, the OTC options are subject to
the Funds' restriction on illiquid securities.) The Funds expect generally to
enter into OTC options that have cash settlement provisions, although they are
not required to do so.
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Unless the parties provide for it, there is no central clearing or guaranty
function in the OTC option market. As a result, if the Counterparty fails to
make delivery of the security, currency (Equity and Small Cap Funds) or other
instrument underlying an OTC option it has entered into with a Fund or fails to
make a cash settlement payment due in accordance with the terms of that option,
the Fund will lose any premium it paid for the option as well as any anticipated
benefit of the transaction. Accordingly, the Adviser must assess the
creditworthiness of each such Counterparty or any guarantor or credit
enhancement of the Counterparty's credit to determine the likelihood that the
terms of the OTC option will be satisfied. The Funds will engage in OTC option
transactions only with U.S. Government securities dealers recognized by the
Federal Reserve Bank of New York as "primary dealers", or broker dealers,
domestic or foreign banks or other financial institutions which have received,
combined with any credit enhancements, a long-term debt rating of A from S&P or
Moody's or an equivalent rating from any other nationally recognized statistical
rating organization ("NRSRO") or which issue debt that is determined to be of
equivalent credit quality by the Adviser. The staff of the Securities and
Exchange Commission (the "SEC") currently takes the position that, absent the
buy-back provisions discussed above, OTC options purchased by the Funds, and
portfolio securities "covering" the amount of the Funds' obligation pursuant to
an OTC option sold by them (the cost of the sell-back plus the in-the-money
amount, if any) are illiquid, and are subject to the Funds' limitation on
investing in illiquid securities. However, for options written with "primary
dealers" pursuant to an agreement requiring a closing purchase transaction at a
formula price, the amount which is considered to be illiquid may be calculated
by reference to a formula price.
If a Fund sells (writes) a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Fund's income. The sale (writing) of put options
can also provide income.
Each Fund may purchase and sell (write) call options on equity (Equity and
Small Cap Funds) and debt (Tax Exempt Fund) securities including U.S. Treasury
and agency securities, municipal notes and bonds (Tax Exempt Fund) and
Eurodollar instruments that are traded on U.S. and foreign securities exchanges
and in the over-the-counter markets, and on securities indices, currencies
(Equity and Small Cap Funds) and futures contracts. All call options sold by the
Funds must be "covered" (i.e., the Fund must own the securities or the futures
contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though a Fund will
receive the option premium to help offset any loss, the Fund may incur a loss if
the exercise price is below the market price for the security subject to the
call at the time of exercise. A call option sold by a Fund also exposes the Fund
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the Fund to hold a security or instrument which it might otherwise
have sold.
Each Fund may purchase and sell (write) put options on equity (Equity and
Small Cap Funds) and debt (Tax Exempt Fund) securities including U.S. Treasury
and agency securities, municipal notes and bonds (Tax Exempt Fund) and
Eurodollar instruments (whether or not it holds the above securities in its
portfolio), and on securities indices, currencies (Equity and Small Cap Funds)
and futures contracts. A Fund will not sell put options if, as a result, more
than 50% of the Fund's assets would be required to be segregated to cover its
potential obligations under such put options other than those with respect to
futures and options thereon. In selling put options, there is a risk that a Fund
may be required to buy the underlying security at a price above the market
price.
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Options on Securities Indices and Other Financial Indices
Each Fund may also purchase and sell (write) call and put options on
securities indices and other financial indices. Options on securities indices
and other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement. For example, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the differential between
the closing price of the index and the exercise price of the option, which also
may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount upon exercise
of the option. In addition to the methods described above, the Funds may cover
call options on a securities index by owning securities whose price changes are
expected to be similar to those of the underlying index, or by having an
absolute and immediate right to acquire such securities without additional cash
consideration (or for additional cash consideration held in a segregated account
by the custodian) upon conversion or exchange of other securities in their
portfolios.
General Characteristics of Futures
Each Fund may enter into financial futures contracts or purchase or sell
put and call options on such futures. Futures are generally bought and sold on
the commodities exchanges where they are listed and involve payment of initial
and variation margin as described below. The sale of futures contracts creates a
firm obligation by a Fund, as seller, to deliver to the buyer the specific type
of financial instrument called for in the contract at a specific future time for
a specified price (or, with respect to index futures and Eurodollar instruments,
the net cash amount). The purchase of futures contracts creates a corresponding
obligation by a Fund, as purchaser, to purchase a financial instrument at a
specific time and price. Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the purchaser the
right in return for the premium paid to assume a position in a futures contract
and obligates the seller to deliver such position upon exercise of the option.
The Funds' use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
regulations of the Commodity Futures Trading Commission (the "CTFC") relating to
exclusions from regulation as a commodity pool operator. Those regulations
currently provide that the Funds may use commodity futures and option positions
(i) for bona fide hedging purposes without regard to the percentage of assets
committed to margin and option premiums, or (ii) for other purposes permitted by
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the CTFC to the extent that the aggregate initial margin and option premiums
required to establish such non-hedging positions (net the amount the positions
were "in the money" at the time of purchase) do not exceed 5% of each Fund's
respective net asset value, after taking into account unrealized profits and
losses on such positions. Typically, maintaining a futures contract or selling
an option thereon requires a Fund to deposit with its custodian for the benefit
of a futures commission merchant, as security for its obligations an amount of
cash or other specified assets (initial margin) which initially is typically 1%
to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets (variation margin) may be required to
be deposited directly with the futures commission merchant thereafter on a daily
basis as the value of the contract fluctuates. The purchase of an option on
financial futures involves payment of a premium for the option without any
further obligation on the part of the Funds. If a Fund exercises an option on a
futures contract it will be obligated to post initial margin (and potential
subsequent variation margin) for the resulting futures position just as it would
for any position. Futures contracts and options thereon are generally settled by
entering into an offsetting transaction but there can be no assurance that the
position can be offset prior to settlement at an advantageous price, nor that
delivery will occur. The segregation requirements with respect to futures
contracts and options thereon are described below.
Combined Transactions
Each Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, and multiple interest rate
transactions, structured notes and any combination of futures, options, currency
(Equity and Small Cap Funds), multiple currency transactions (including forward
currency contracts) (Equity and Small Cap Funds) and interest rate transactions
("component" transactions), instead of a single Strategic Transaction, as part
of a single or combined strategy when, in the opinion of the Adviser it is in
the best interests of the Fund to do so. A combined transaction will usually
contain elements of risk that are present in each of its component transactions.
Although combined transactions are normally entered into based on the Adviser's
judgment that the combined strategies will reduce risk or otherwise more
effectively achieve the desired portfolio management goal, it is possible that
the combination will instead increase such risks or hinder achievement of the
portfolio management objective.
Currency Transactions
The Equity and Small Cap Funds may engage in currency transactions with
Counterparties in order to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value or to enhance
potential gain. Currency transactions include currency contracts, exchange
listed currency futures, exchange listed and OTC options on currencies, and
currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional (agreed-upon) difference among two or more currencies and operates
similarly to an interest rate swap, which is described below. A Fund may enter
into over-the-counter currency transactions with Counterparties which have
received, combined with any credit enhancements, a long term debt rating of A by
S&P or Moody's, respectively, or that have an equivalent rating from a NRSRO or
(except for OTC currency options) whose obligations are determined to be of
equivalent credit quality by the Adviser.
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The Equity and Small Cap Funds' dealings in forward currency contracts and
other currency transactions such as futures, options, options on futures and
swaps will generally be limited to hedging involving either specific
transactions or portfolio positions. See "Strategic and Derivative
Transactions." Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of a Fund, which will generally arise
in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
A Fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended wholly or partially to
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to proxy hedging as described below.
Each of the Equity and Small Cap Funds may also cross-hedge currencies by
entering into transactions to purchase or sell one or more currencies that are
expected to decline in value in relation to other currencies to which the Fund
has or in which the Fund expects to have portfolio exposure. For example, a Fund
may hold a French security and the Adviser may believe that French francs will
deteriorate against German marks. The Fund would sell French francs to reduce
its exposure to that currency and buy German marks. This strategy would be a
hedge against a decline in the value of French francs, although it would expose
the Fund to declines in the value of the German mark relative to the U.S.
dollar.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Equity and Small Cap Funds may
also engage in proxy hedging. Proxy hedging is often used when the currency to
which the Fund's portfolio is exposed is difficult to hedge or to hedge against
the dollar. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which certain of a Fund's portfolio securities are or
are expected to be denominated, and to buy U.S. dollars. The amount of the
contract would not exceed the value of the Fund's securities denominated in
linked currencies. For example, if the Adviser considers that the Austrian
schilling is linked to the German deutschemark (the "D-mark"), a Fund holds
securities denominated in schillings and the Adviser believes that the value of
schillings will decline against the U.S. dollar, the Adviser may enter into a
contract to sell D-marks and buy dollars. Proxy hedging involves some of the
same risks and considerations as other transactions with similar instruments.
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Currency transactions can result in losses to the Funds if the currency being
hedged fluctuates in value to a degree or in a direction that is not
anticipated. Further, there is the risk that the perceived linkage between
various currencies may not be present or may not be present during the
particular time that the Funds are engaging in proxy hedging. If a Fund enters
into a currency hedging transaction, the Fund will comply with the asset
segregation requirements described below.
Risks of Currency Transactions
Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to a Fund if it
is unable to deliver or receive currency or funds in settlement of obligations
and could also cause hedges it has entered into to be rendered useless,
resulting in full currency exposure as well as incurring transaction costs.
Buyers and sellers of currency futures are subject to the same risks that apply
to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
Swaps, Caps, Floors, Spreads and Collars
Among the Strategic Transactions into which each of the Funds may enter are
interest rate, currency rate (Equity and Small Cap Funds only) and index swaps
and the purchase or sale of related caps, floors, spreads and collars. The Funds
expect to enter into these transactions primarily for hedging purposes,
including, but not limited to, preserving a return or spread on a particular
investment or portion of its portfolio, protecting against currency fluctuations
(Equity and Small Cap Funds only) as a duration management technique (Tax Exempt
Fund only) or protecting against an increase in the price of securities a Fund
anticipates purchasing at a later date. Swaps, caps, floors, spreads and collars
may also be used to enhance potential gain in circumstances where hedging is not
involved although, as described above, a Fund will attempt to limit its net loss
exposure resulting from swaps, caps, floors, spreads and collars and other
Strategic Transactions entered into for such purposes to not more than 3% of the
Funds' respective net assets at any one time. A Fund will not sell interest rate
caps or floors where it does not own securities or other instruments providing
the income stream the Fund may be obligated to pay. Interest rate swaps involve
the exchange by a Fund with another party of their respective commitments to pay
or receive interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. A currency swap is an
agreement to exchange cash flows on a notional amount of two or more currencies
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based on the relative value differential among them. An index swap is an
agreement to swap cash flows on a notional amount based on changes in the values
of the reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling such cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar or
a spread is a combination of a cap and a floor that preserves a certain rate of
return within a predetermined range of interest rates or values.
The Funds will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Fund receiving or paying, as the case may
be, only the net amount of the two payments. The Funds will not enter into any
swap, cap, floor, spread or collar transaction unless, at the time of entering
into such transaction, the unsecured long-term debt of the Counterparty,
combined with any credit enhancements, is rated at least A by S&P or Moody's or
has an equivalent rating from an NRSRO or the Counterparty issues debt that is
determined to be of equivalent credit quality by the Adviser. If there is a
default by the Counterparty, a Fund may have contractual remedies pursuant to
the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
Caps, floors, spreads and collars are more recent innovations for which
standardized documentation has not yet been fully developed. Swaps, caps,
floors, spreads and collars are considered illiquid for purposes of each Fund's
policy regarding illiquid securities, unless it is determined, based upon
continuing review of the trading markets for the specific security, that such
security is liquid. The Board of Trustees has adopted guidelines and delegated
to the Adviser the daily function of determining and monitoring the liquidity of
swaps, caps, floors, spreads and collars. The Board of Trustees, however,
retains oversight focusing on factors such as valuation, liquidity and
availability of information and is ultimately responsible for such
determinations. The staff of the SEC currently takes the position that swaps,
caps, floors, spreads and collars are illiquid, and are subject to each Fund's
limitation on investing in illiquid securities.
Eurodollar Contracts
Each Fund may make investments in Eurodollar contracts. Eurodollar
contracts are U.S. dollar-denominated futures contracts or options thereon which
are linked to the London Interbank Offered Rate ("LIBOR"), although foreign
currency-denominated instruments are available from time to time. Eurodollar
futures contracts enable purchasers to obtain a fixed rate for the lending of
funds and sellers to obtain a fixed rate for borrowings. A Fund might use
Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many interest rate swaps and fixed income instruments are
linked.
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Use of Segregated Accounts
Each Fund will hold securities or other instruments whose values are
expected to offset its obligations under the Strategic Transactions. A Fund will
not enter into Strategic Transactions that expose the Fund to an obligation to
another party unless it owns either (i) an offsetting position in securities or
other options, futures contracts or other instruments or (ii) cash, receivables
or liquid, high grade debt securities with a value sufficient to cover its
potential obligations. The Funds may have to comply with any applicable
regulatory requirements designed to make sure that mutual funds do not use
leverage in Strategic Transactions, and if required, will set aside cash and
other assets in a segregated account with the custodian bank in the amount
prescribed. In that case, the Funds' custodian would maintain the value of such
segregated account equal to the prescribed amount by adding or removing
additional cash or other assets to account for fluctuations in the value of the
account and the applicable Fund's obligations on the related strategic
transactions. Assets held in a segregated account would not be sold while the
Strategic Transaction is outstanding, unless they are replaced with similar
assets. As a result, there is a possibility that segregation of a large
percentage of a Fund's assets could impede portfolio management or a Fund's
ability to meet redemption requests or other current obligations.
"When-Issued" and "Delayed Delivery" Securities
The Tax Exempt Fund may commit up to 40% of its net assets to purchase
securities on a "when-issued" and "delayed delivery" basis, which means that
delivery and payment for the securities will normally take place 15 to 45 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 Tax Exempt Fund will only make commitments to purchase
"when-issued" and "delayed delivery" 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 Tax Exempt Fund has entered into an offsetting agreement to sell
the securities purchased on a when issued or delayed delivery basis, cash or
liquid, high-grade debt obligations with a market value at least 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 the aggregate market value of the
segregated securities equals the amount of the Fund's commitment.
Securities purchased on a "when-issued" and "delayed delivery" basis may
have a market value on delivery which is less than the amount paid by the Tax
Exempt 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 Tax Exempt
Fund may sell portfolio securities on a delayed delivery basis. The market value
of the securities when they are delivered may be more than the amount to be
received by the Fund.
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Other Investment Companies
The Equity and Small Cap Funds may each, subject to authorization by the
Trustees, invest all of its investable assets in the securities of a single
open-end registered investment company (a "Portfolio"). If authorized by the
Trustees, a Fund would seek to achieve its investment objective by investing in
a Portfolio, which Portfolio would invest in a portfolio of securities that
complies with the Fund's investment objectives, policies and restrictions. The
Trustees do not intend to authorize investing in this manner at this time.
INVESTMENT RESTRICTIONS
Each Fund has adopted certain fundamental and non-fundamental policies in
addition to those described under "Investment Objectives and Policies" in the
Prospectus. A Fund's fundamental policies cannot be changed unless the change is
approved by the lesser of (i) 67% or more of the voting securities present at a
meeting, if the holders of more than 50% of the outstanding voting securities of
that Fund are present or represented by proxy, or (ii) more than 50% of the
outstanding voting securities of that Fund. A Fund's non-fundamental policies
may be changed by the Board of Trustees, without shareholder approval, in
accordance with applicable laws, regulations or regulatory policy.
Standish Intermediate Tax Exempt Bond Fund
As a matter of fundamental policy, the Tax Exempt Fund may not:
1. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Fund may be
deemed to be an underwriter under the Securities Act of 1933.
2. Purchase real estate or real estate mortgage loans, although the Fund may
purchase marketable securities of companies which deal in real estate,
real estate mortgage loans or interests therein and may purchase, hold and
sell real estate acquired as a result of ownership of securities or other
instruments.
3. Purchase securities on margin (except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities).
4. Purchase or sell commodities or commodity contracts except that the Fund
may purchase and sell financial futures contracts and options on financial
futures contracts.
5. 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.
6. Issue senior securities, borrow money or pledge or mortgage its assets,
except that the Fund may borrow from banks as a temporary measure for
extraordinary or emergency purposes (but not investment purposes) in an
amount up to 15% of the current value of its total assets, and 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 borrowings exceed 5% of the
current value of its total assets.
18
<PAGE>
7. Lend portfolio securities, except that the Fund may enter into repurchase
agreements which are terminable within 7 days.
8. Invest more than an aggregate of 15% of the net assets of the Fund in
securities subject to legal or contractual restrictions on resale or for
which there are no readily available market quotations or in other
illiquid securities.
As a matter of non-fundamental policy, the Tax Exempt Fund may not:
A. Make short sales of securities.
B. Invest in companies for the purpose of exercising control or management.
C. Purchase securities of any other investment company except as part of a
merger, consolidation or acquisition of assets.
D. Purchase or write options, except as described under "Strategic and
Derivative Transactions."
E. Invest in interests in oil, gas or other exploration or development
programs or mineral leases; however, this policy will not prohibit the
acquisition of securities of companies engaged in the production or
transmission of oil, gas, or other minerals.
F. Invest more than 5% of the assets of the Fund in the securities of any
issuers which together with their corporate parents have records of less
than three years' continuous operation, including the operation of any
predecessor, other than obligations issued or guaranteed by the U.S.
Government or its agencies, municipal securities which are rated by at
least one nationally recognized municipal bond rating service, and
securities fully collateralized by such securities.
G. Invest in securities of any company if any officer or director (Trustee)
of the Trust or of the Fund's investment adviser owns more than 1/2 of 1%
of the outstanding securities of such company and such officers and
directors (Trustees) own in the aggregate more than 5% of the securities
of such company.
H. Enter into repurchase agreements with respect to more than 15% of its net
assets.
I. Purchase warrants of any issuer, if, as a result of such purchase, more
than 2% of the value of the Fund's total assets would be invested in
warrants which are not listed on an exchange or more than 5% of the value
of the total assets of the Fund would be invested in warrants generally,
whether or not so listed. For these purposes, warrants are to be valued at
the lesser of cost or market, but warrants acquired by the Fund in units
with or attached to debt securities shall be deemed to be without value.
As a matter of non-fundamental policy, the Tax Exempt Fund may not own more
than 10% of the outstanding voting securities of any one issuer. Because
municipal securities are not voting securities, there is no limit on the
percentage of a single issuer's municipal bonds which the Tax Exempt Fund may
own so long as, as to 75% of its total assets, it does not invest more than 5%
of its total assets in the securities of the issuer. Consequently, the Tax
Exempt Fund may invest in a greater percentage of the outstanding securities of
a single issuer than would an investment company which invests in voting
securities.
19
<PAGE>
Although it is allowed to do so, the Tax Exempt Fund does not expect to
invest in securities (other than securities of the U.S. Government, its agencies
or instrumentalities and municipal securities) if more than 25% of the current
value of its total assets would be invested in a single industry. Although
governmental issuers of municipal securities are not considered part of any
"industry," municipal securities backed only by the assets and revenues of
nongovernmental users may, for this purpose, be deemed to be issued by such
nongovernmental users (e.g., industrial development bonds) and constitute an
"industry." Thus, the Tax Exempt Fund does not expect that more than 25% of its
assets will be invested in obligations deemed to be issued by nongovernmental
users in any one industry (e.g., industrial development bonds for health care
facilities) and in taxable obligations of issuers in the same industry. However,
it is possible that the Tax Exempt Fund may invest more than 25% of its assets
in a broader sector of the market for municipal securities.
Determining the issuer of a tax-exempt security will be based upon the
source of assets and revenues committed to meeting interest and principal
payments of each security. A security guaranteed or otherwise backed by full
faith and credit of a governmental entity would generally be considered to
represent a separate security issued by such guaranteeing entity and by the
primary obligor. However, a guarantee of a security shall not be deemed to be a
security issued by the guarantor if the value of all securities guaranteed by
the guarantor and owned by the Tax Exempt Fund is less than 10% of the value of
the total assets of the Fund. Securities backed only by the assets and revenues
of nongovernmental users will be deemed to be issued by such nongovernmental
users.
Standish Tax-Sensitive Equity Fund and Standish Small Cap
Tax-Sensitive Equity Fund
As a matter of fundamental policy, each of the Standish Small Cap
Tax-Sensitive Equity Fund and Standish Tax-Sensitive Equity Fund may not:
1. Invest more than 25% of the current value of its total assets in any
single industry, provided that this restriction shall not apply to U.S.
Government securities or mortgage-backed securities issued or guaranteed
as to principal or interest by the U.S. Government, its agencies or
instrumentalities; provided, however, that the Fund may invest all or part
of its investable assets in an open-end registered investment company with
substantially the same investment objective, policies and restrictions as
the Fund.
2. Issue senior securities. For purposes of this restriction, borrowing money
in accordance with paragraph 3 below, making loans in accordance with
paragraph 8 below, the issuance of shares of beneficial interest in
multiple classes or series, the deferral of trustees' fees, the purchase
or sale of options, futures contracts, forward commitments and repurchase
agreements entered into in accordance with the Fund's investment policies
or within the meaning of paragraph 6 below, are not deemed to be senior
securities.
20
<PAGE>
3. Borrow money, except in amounts not to exceed 33 1/3% of the value of the
Fund's total assets (including the amount borrowed) taken at market value
(i) from banks for temporary or short-term purposes or for the clearance
of transactions, (ii) in connection with the redemption of Fund shares or
to finance failed settlements of portfolio trades without immediately
liquidating portfolio securities or other assets; (iii) in order to
fulfill commitments or plans to purchase additional securities pending the
anticipated sale of other portfolio securities or assets and (iv) the Fund
may enter into reverse repurchase agreements and forward roll
transactions. For purposes of this investment restriction, investments in
short sales, futures contracts, options on futures contracts, securities
or indices and forward commitments shall not constitute borrowing.
4. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Fund may be
deemed to be an underwriter under the Securities Act of 1933; provided,
however, that the Fund may invest all or part of its investable assets in
an open-end registered investment company with substantially the same
investment objective, policies and restrictions as the Fund.
5. Purchase or sell real estate except that the Fund may (i) acquire or lease
office space for its own use, (ii) invest in securities of issuers that
invest in real estate or interests therein, (iii) invest in securities
that are secured by real estate or interests therein, (iv) purchase and
sell mortgage-related securities and (v) hold and sell real estate
acquired by the Fund as a result of the ownership of securities.
6. Purchase securities on margin (except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities).
7. Purchase or sell commodities or commodity contracts, except the Fund may
purchase and sell options on securities, securities indices and currency,
futures contracts on securities, securities indices and currency and
options on such futures, forward foreign currency exchange contracts,
forward commitments, securities index put or call warrants and repurchase
agreements entered into in accordance with the Fund's investment policies.
8. Make loans, except that the Fund (1) may lend portfolio securities in
accordance with the Fund's investment policies up to 33 1/3% of the Fund's
total assets taken at market value, (2) enter into repurchase agreements,
and (3) purchase all or a portion of an issue of debt securities, bank
loan participation interests, bank certificates of deposit, bankers'
acceptances, debentures or other securities, whether or not the purchase
is made upon the original issuance of the securities.
9. With respect to 75% of its total assets, purchase securities of an issuer
(other than the U.S. Government, its agencies, instrumentalities or
authorities or repurchase agreements collateralized by U.S. Government
securities and other investment companies), if:
a. such purchase would cause more than 5% of the Fund's total assets taken at
market value to be invested in the securities of such issuer; or
b. such purchase would at the time result in more than 10% of the outstanding
voting securities of such issuer being held by the Fund; provided,
however, that the Fund may invest all or part of its investable assets in
an open-end registered investment company with substantially the same
investment objective, policies and restrictions as the Fund.
21
<PAGE>
For purposes of the fundamental investment restriction (1) regarding
industry concentration, the Adviser generally classifies issuers by industry in
accordance with classifications set forth in the Directory of Companies Filing
Annual Reports With The Securities and Exchange Commission. In the absence of
such classification or if the Adviser determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
it more appropriately considered to be engaged in a different industry, the
Adviser may classify an issuer according to its own sources. For instance,
personal credit finance companies and business credit finance companies are
deemed to be separate industries and wholly-owned finance companies are
considered to be in the industry of their parents if their activities are
primarily related to financing the activities of their parents.
As a matter of non-fundamental policy, each of the Standish Tax-Sensitive
Equity Fund and Standish Small Cap Tax-Sensitive Equity Fund may not:
A. Make short sales of securities unless (i) either (a) after effect is given
to any such short sale, the total market value of all securities sold
short would not exceed 5% of the value of the Fund's net assets or (b) at
all times during which a short position is open it owns an equal amount of
such securities, or by virtue of ownership of convertible or exchangeable
securities it has the right to obtain through the conversion or exchange
of such other securities an amount equal to the securities sold short,
(ii) the securities sold short are listed on a national securities
exchange and (iii) the value of the securities of any one issuer in which
the Fund is short may not exceed 2% of the Fund's net assets or 2% of the
securities of any class of any issuer.
B. Invest in companies for the purpose of exercising control or management.
C. Purchase a security of other investment companies, except when the
purchase is part of a plan of merger, consolidation, reorganization or
acquisition or except by purchase in the open market where no commission
or profit to a sponsor or dealer results from the purchase other than
customary brokers' commissions and then only if, as a result, (i) more
than 10% of the Fund's assets would be invested in securities of other
investment companies, (ii) more than 3% of the total outstanding voting
securities of any one such investment company would be held by the Fund or
(iii) more than 5% of the Fund's assets would be invested in any one such
investment company; provided, however, that the Fund may invest all or
part of its investable assets in an open-end registered investment company
with substantially the same investment objective, policies and
restrictions as the Fund.
D. Invest in interests in oil, gas or other exploration or development
programs or mineral leases; however, this policy will not prohibit the
acquisition of securities of companies engaged in the production or
transmission of oil, gas, or other minerals.
22
<PAGE>
E. Invest more than 5% of the assets of the Fund in the securities of any
issuers which, together with their corporate parents, have records of less
than three years' continuous operation, including the operation of any
predecessor, excluding obligations issued or guaranteed by the U.S.
Government or its agencies and securities fully collateralized by such
securities and excluding securities which have been rated investment grade
by at least one nationally recognized statistical rating organization;
provided, however, that the Fund may invest all or part of its investable
assets in an open-end investment company with substantially the same
investment objective, policies and restrictions as the Fund.
F. Invest in restricted securities or securities which are illiquid if, as a
result, more than 15% of its net assets would consist of such securities,
including repurchase agreements maturing in more than seven days,
securities that are not readily marketable, restricted securities not
eligible for resale pursuant to Rule 144A under the 1933 Act, purchased
OTC options, certain assets used to cover written OTC options, and
privately issued stripped mortgage-backed securities; provided that the
Fund may invest all or part of its investable assets in an open-end
investment company with substantially the same investment objective,
policies and restrictions as the Fund.
G. Invest in securities of any company if any officer or director (Trustee)
of the Trust or of the Adviser owns more than .5% of the outstanding
securities of such company and such officers and directors (Trustees) own
in the aggregate more than 5% of the securities of such company.
H. Purchase securities while outstanding bank borrowings exceed 5% of the
Fund's net assets.
I. Invest in real estate limited partnership interests, other than real
estate investment trusts organized as limited partnerships.
J. Purchase or sell (write) options, except pursuant to the limitations
described above.
K. Purchase warrants of any issuer, if, as a result of such purchase, more
than 2% of the value of the Fund's total assets would be invested in
warrants which are not listed on an exchange or more than 5% of the value
of the total assets of the Fund would be invested in warrants generally,
whether or not so listed. For these purposes, warrants are to be valued at
the lesser of cost or market, but warrants acquired by the Fund in units
with or attached to debt securities shall be deemed to be without value.
The Equity and Small Cap Funds have no current intention of lending
portfolio securities or entering into reverse repurchase agreements or forward
roll transactions. None of the Funds have any current intention to borrow money
for other than temporary of emergency purposes.
Notwithstanding any other fundamental or non-fundamental investment
restriction or policy, the Equity and Small Cap Funds may each invest all of its
assets in the securities of a single open-end registered investment company with
substantially the same fundamental investment objectives, restrictions and
policies as the Fund.
---------------------
23
<PAGE>
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 a Fund's assets will not constitute a violation of the
restriction, except with respect to restriction letter G above.
In order to permit the sale of shares of the Funds in certain states, the
Board may, in its sole discretion, adopt restrictions of investment policy more
restrictive than those described above. Should the Board determine that any such
more restrictive policy is no longer in the best interest of a Fund and its
shareholders, the Fund may cease offering shares in the state involved and the
Board may revoke such restrictive policy. Moreover, if the states involved shall
no longer require any such restrictive policy, the Board may, in its sole
discretion, revoke such policy.
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, each Fund may, from time to time, advertise
certain total return information and the Tax Exempt Fund may also advertise
certain yield and tax equivalent yield information. The average annual total
return of a Fund for a period is computed by subtracting the net asset value per
share at the beginning of the period from the net asset value per share at the
end of the period (after adjusting for the reinvestment of any income dividends
and capital gain distributions), and dividing the result by the net asset value
per share at the beginning of the period. In particular, the average annual
total return of a Fund ("T") is computed by using the redeemable value at the
end of a specified period of time ("ERV") of a hypothetical initial investment
of $1,000 ("P") over a period of time ("n") according to the formula
P(1+T)n=ERV.
The yield of the Tax Exempt 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. For the purpose
of determining net investment income, the calculation includes, among expenses
of the Tax Exempt Fund, all recurring fees that are charged to all shareholder
accounts and any non-recurring charges for the period stated. In particular, the
yield is determined according to the following formula:
Yield = 2[((A - B + 1)/CD)^6 - 1]
Where: A equals dividends and interest earned during the period; B equals
net expenses accrued for the period; C equals average daily number of shares
outstanding during the period that were entitled to receive dividends; D equals
the maximum offering price per share on the last day of the period.
Tax equivalent yield is the net annualized taxable yield needed to produce
a specified tax exempt yield at a given tax rate based on a specified 30-day (or
one month) period, assuming semi-annual compounding of income. The taxable
equivalent yield for the Tax Exempt Fund is based upon the Fund's current
tax-exempt yield and an investor's marginal tax rate. The formula is:
Portfolio's Tax-Free Yield
-------------------------- = Taxable Equivalent Yield
100% - Marginal Tax Rate
The average annual total return quotation for the Tax Exempt Fund since
inception (November 2, 1992 to December 31, 1995) and for the one year period
ended December 31, 1995 were 6.52% and 12.65%, respectively, and the average
annualized yield for the thirty day period ended December 31, 1995 was 4.39%.
The Tax Exempt Fund's tax equivalent yield for the thirty day period ended
December 31, 1995 was 7.27%, assuming a federal income tax rate of 39.6%.
24
<PAGE>
The Tax Exempt Fund may also quote non-standardized yield, such as
yield-to-maturity ("YTM"). YTM represents the rate of return an investor will
receive if a long-term, interest bearing investment, such as a bond, is held to
its maturity date. YTM does not take into account purchase price, redemption
value, time to maturity, coupon yield, and the time between interest payments.
In addition to average annual return and yield and tax equivalent yield
(Tax Exempt Fund) quotations, each Fund may quote quarterly and annual
performance on a net (with management fees and other operating expenses
deducted) and gross basis. The Tax Exempt Fund's net and gross performance is as
follows:
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
1992 2.79% 2.95%
1Q93 3.46% 3.62%
2Q93 2.63% 2.79%
3Q93 2.94% 3.10%
4Q93 1.35% 1.51%
1993 10.78% 11.47%
1Q94 -3.95% -3.79%
2Q94 1.67% 1.83%
3Q94 0.98% 1.15%
4Q94 -1.29% -1.13%
1994 -2.68% -2.02%
1Q95 4.61% 4.77%
2Q95 1.95% 2.12%
3Q95 2.76% 2.95%
4Q95 2.77% 2.94%
1995 12.65% 13.39%
These performance quotations should not be considered as representative of
the Tax Exempt Fund's performance for any specified period in the future.
Each Fund's performance may be compared in sales literature to the
performance of other mutual funds having similar objectives or to standardized
indices or other measures of investment performance. In particular, the Tax
Exempt Fund may compare its performance to various indices (or particular
components thereof), which are generally considered to be representative of the
performance of all municipal securities such as the Lehman Muni 3-5-7-10 Index.
The Equity and Small Cap Funds may each compare their respective performance to
the S&P 500 Index, which is generally considered to be representative of the
performance of unmanaged common stocks that are publicly traded in the United
States securities markets. In addition, the Small Cap Fund may compare its
performance to the Russell 2000 Index, which is generally considered to be
representative of unmanaged small capitalization stocks in the United States
markets. Comparative performance may also be expressed by reference to a ranking
prepared by a mutual fund monitoring service or by one or more newspapers,
newsletters or financial periodicals. Performance comparisons may be useful to
investors who wish to compare the Fund's past performance to that of other
mutual funds and investment products. Of course, past performance is not a
guarantee of future results.
25
<PAGE>
<TABLE>
<CAPTION>
MANAGEMENT
Trustees and Officers
The Trustees and executive officers of the Trust are listed below. All
executive officers of the Trust are affiliates of Standish, Ayer & Wood, Inc.,
the Fund's investment adviser.
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
*D. Barr Clayson, 7/29/35 Vice President and Trustee Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center President,
Boston, MA 02111 Standish International
Management Company, L.P.
Samuel C. Fleming, 9/30/40 Trustee Chairman of the Board
c/o Decision Resources, Inc. and Chief Executive Officer,
1100 Winter Street Decision Resources, Inc.;
Waltham, MA 02154 through 1989, Senior V.P.
Arthur D. Little
Benjamin M. Friedman, 8/5/44 Trustee William Joseph Maier
c/o Harvard University Professor of Political Economy,
Cambridge, MA 02138 Harvard University
John H. Hewitt, 4/11/38 Trustee Trustee, The Peabody
P.O. Box 307 Foundation; Trustee,
So. Woodstock, VT 05071 Visiting Nurse Alliance of Vermont
and New Hampshire
*Edward H. Ladd, 1/3/38 Trustee and Vice President Chairman of the Board
c/o Standish, Ayer & Wood, Inc. and Managing Director,
One Financial Center Standish, Ayer & Wood, Inc. since 1990;
Boston, MA 02111 formerly President of
Standish, Ayer & Wood, Inc.
Caleb Loring III, 11/14/43 Trustee Trustee, Essex Street Associates
c/o Essex Street Associates (family investment trust office);
P.0. Box 5600 Director, Holyoke Mutual Insurance Company
Beverly Farms, MA 01915
*Richard S. Wood, 5/2/54 President and Trustee Vice President, Secretary and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Executive Vice President,
Boston, MA 02111 Standish International Management Company, L.P.
26
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
Richard C. Doll, 7/8/48 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
James E. Hollis III, 11/21/48 Executive Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
David W. Murray, 5/5/40 Treasurer and Secretary Vice President, Treasurer and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Caleb F. Aldrich, 9/20/57 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
Beverly E. Banfield, 7/6/56 Vice President Vice President and Compliance Officer,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Assistant Vice President and Compliance Officer,
Boston, MA 02111 Freedom Capital Management Corp.
(1989-1992)
Nicholas S. Battelle, 6/24/42 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Walter M. Cabot, 1/6/33 Vice President Senior Advisor and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center prior to 1991, President,
Boston, MA 02111 Harvard Management Company
David H. Cameron, 11/2/55 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Karen K. Chandor, 2/13/50 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Lavinia B. Chase, 6/4/46 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Susan B. Coan, 5/1/52 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
27
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
W. Charles Cook II, 2/16/63 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Joseph M. Corrado, 5/13/55 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Dolores S. Driscoll, 2/17/48 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Mark A. Flaherty, 4/24/59 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Anne P. Herrmann, 1/26/56 Vice President Mutual Fund Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ann S. Higgins, 4/8/35 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Senior Operations Manager,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Since December 1995, formerly
Boston, MA 02111 Vice President, Scudder Stevens and Clark
Raymond J. Kubiak, 9/3/57 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Maria D. Furman, 2/3/54 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Phillip D. Leonardi, 4/24/62 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc. since November 1993; formerly, Investment Sales,
One Financial Center Cigna Corporation (1993) and
Boston, MA 02111 Travelers Corporation (1984-1993)
Laurence A. Manchester, 5/24/43 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
28
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
George W. Noyes, 11/12/44 Vice President President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Arthur H. Parker, 8/12/35 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Jennifer A. Pline, 3/8/60 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Howard B. Rubin, 10/29/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Michael C. Schoeck, 10/24/55 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since August, 1993;
One Financial Center formerly, Vice President,
Boston, MA 02111 Commerzbank, Frankfurt, Germany
Austin C. Smith, 7/25/42 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Stephen A. Smith, 3/13/49 Vice President Vice President, since November 2, 1993;
c/o Standish, Ayer & Wood, Inc. formerly, Standish, Ayer & Wood, Inc. Consultant
One Financial Center Cambridge Associates
Boston, MA 02111
David C. Stuehr, 3/1/58 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
James W. Sweeney, 5/15/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ralph S. Tate, 4/2/47 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since April, 1990;
One Financial Center formerly Vice President, Aetna Life & Casualty
Boston, MA 02111
Michael W. Thompson, 3/31/56 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
29
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
Christopher Van Alstyne, 3/24/60 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
</TABLE>
*Indicates that Trustee is an interested person of the Trust for purposes of the
1940 Act.
30
<PAGE>
Compensation of Trustees and Officers
The Funds pay no compensation to the Trust's Trustees affiliated with the
Adviser or to the Trust's officers. None of the Trust's Trustees or officers
have engaged in any financial transactions (other than the purchase or
redemption of a Fund's shares) with the Trust or the Adviser during the Tax
Exempt Fund's fiscal year ended December 31, 1995.
The following table sets forth all compensation paid to the Trust's
Trustees as of the Tax Exempt Fund's fiscal year ended December 31, 1995 and
estimates the amount of such fees to be paid by the Equity and Small Cap Funds
during their initial fiscal years ending September 30, 1996:
<TABLE>
<CAPTION>
Pension or
Estimated Estimated Estimated Retirement Total
Aggregate Aggregate Aggregate Benefits Compensation*
Compensation Compensation Compensation Accrued as from Funds and
from the from the from the Small Part of Other Funds in
Name of Trustee Tax Exempt Fund Equity Fund* Cap Fund* Fund's Expenses Complex**
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
D. Barr Clayson $0 $0 $0 $0 $0
Phyllis L. Cothran*** 0 0 0 0 0
Richard C. Doll**** 0 0 0 0 0
Samuel C. Fleming 266 39 0 0 41,750
Benjamin M. Friedman 246 34 0 0 36,750
John H. Hewitt 246 34 0 0 36,750
Edward H. Ladd 0 0 0 0 0
Caleb Loring, III 246 34 0 0 36,750
Richard S. Wood 0 0 0 0 0
-------------
*Estimated. The Equity and Small Cap Funds are newly organized.
**As of the date of this Statement of Additional Information, there were 18 mutual funds in the fund complex.
***Ms. Cothran resigned as a Trustee effective January 31, 1995.
****Mr. Doll resigned as Trustee effective December 6, 1995.
</TABLE>
Certain Shareholders
At February 6, 1996, the Trustees and officers of the Trust as a group
beneficially owned (i.e., had voting and/or investment power) less than 1% of
the then outstanding shares of each Fund. At that date, each of the following
persons beneficially owned 5% or more of the then outstanding shares of the Tax
Exempt Fund:
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
BDG & Co. 26%
Bingham Dana & Gould
Trust Development
150 Federal Street
Boston, MA 02110
YK Investment Partnership 10%
191 Waukegan Road
Suite 209
Northfield, IL 60093
Stephanie L. Hascoe 1972 5%
Trust
Hascoe Associates, Inc.
35 Mason Street
Greenwich, CT 06830
Each of the following persons beneficially owned 5% or more of the then
outstanding shares of the Tax Sensitive Equity Fund:
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
Michael Putnam Trust 15%
Department of Classics, Brown University
Providence, RI 02912
Dr. David & Alice Baltimore 12%
A/C #4509012
P.O. Box 1537
Boston, MA 02205
Mary Enriquez Cust FBO Diana Enriquez 12%
Schneider UGMA/TX
Restructuring Associates
1050 17th Street NW
Washington, DC 20036
Mr. & Mrs. Robert J. Driscoll 10%
10 Fulling Mill Lane
Hingham, MA 02043
Laurence A. Manchester 9%
41 Berkeley Street
Newton, MA 02165
Mary Schneider Enriquez Cust FBO 6%
J. Nicholas E. Schneider UGMA/TX
Restructuring Associates
1050 17th Street NW
Washington, CD 20036
31
<PAGE>
Additionally, each of the following persons beneficially owned 5% or more
of the then outstanding shares of the Small Capitalization Tax-Sensitive Equity
Fund:
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
Investors Bank & Trust Custodian FBO 13%
Dorothy Battelle IRA
120 W. Newton Street
Boston, MA 02118
Saturn & Co. 11%
FBO Dr. David & Alice Baltimore
A/C #4509012
P.O. Box 1537
Boston, MA 02205-1537
Mr. & Mrs. Robert J. Driscoll 10%
10 Fulling Mill Lane
Hingham, MA 02043
Frederick C. Cabot 9%
299 Woodland Road
Auburndale, MA 02166
Michael Putnam Trust 9%
Brown University
Dept. of Classics
Providence, RI 02912
Lisen Bonnier Revocable Trust 9%
c/o Bingham Dana & Gould
150 Federal Street
Boston, MA 02110
Investors Bank & Trust Custodian FBO 7%
Nicholas Battelle IRA
120 West Newton Street
Boston, MA 02118
Investment Adviser
Standish, Ayer & Wood, Inc. (the "Adviser") serves as investment adviser to
each Fund pursuant to separate written investment advisory agreements with the
Trust. The Adviser is a Massachusetts corporation organized in 1933 and is
registered under the Investment Advisers Act of 1940.
The following, constituting all of the Directors and all of the
shareholders of the Adviser, are the Adviser's controlling persons: Caleb F.
Aldrich, Nicholas S. Battelle, Walter M. Cabot, Sr., David H. Cameron, Karen K.
Chandor, D. Barr Clayson, Richard C. Doll, Dolores S. Driscoll, Mark A.
Flaherty, Maria D. Furman, James E. Hollis III, Raymond J. Kubiak, Edward H.
Ladd, Laurence A. Manchester, David W. Murray, George W. Noyes, Arthur H.
Parker, Howard B. Rubin, Austin C. Smith, David C. Stuehr, James J. Sweeney,
Ralph S. Tate, and Richard S. Wood.
Certain services provided by the Adviser under the investment advisory
agreements are described in the Prospectus. In addition to those services, the
Adviser provides each Fund with office space for managing its affairs, with the
services of required executive personnel, and with certain clerical services and
facilities. These services are provided by the Adviser without reimbursement by
the Funds for any costs incurred. Under each investment advisory agreement, the
Adviser is paid a fee based upon a percentage of each Fund's average daily net
asset value computed as described in the Prospectus. This fee is paid monthly.
32
<PAGE>
With respect to the Tax Exempt Fund: (a) for the fiscal year ended December
31, 1993, the Adviser agreed not to impose its fees of $49,165 and assumed
$12,010 of expenses; (b) for the fiscal year ended December 31, 1994, the
Adviser agreed not to impose $50,193 of its fee, which would otherwise have been
$82,694; and (c) for the fiscal year ended December 31, 1995, the Adviser agreed
not to impose $38,327 of its fee, which would otherwise have been $116,202.
Pursuant to the investment advisory agreements, each Fund bears the
expenses of its operations other than those incurred by the Adviser pursuant to
the investment advisory agreements. Among other expenses, each Fund will pay
share pricing and shareholder servicing fees and expenses; custodian fees and
expenses; legal and auditing fees and expenses; expenses of prospectuses,
statements of additional information and shareholder reports; registration and
reporting fees and expenses; and Trustees' fees and expenses.
The Adviser has voluntarily agreed for the Tax Exempt's Fund's, Equity
Fund's and Small Cap Fund's fiscal years ending September 30, 1996 to limit
Total Fund Operating Expenses (excluding litigation, indemnification and other
extraordinary expenses) of each such Fund to 0.65%, 1.00% and 0.90% of the Tax
Exempt Fund's, Equity Fund's and Small Cap Fund's respective average daily net
assets. These agreements are voluntary and temporary and may be discontinued or
revised by the Adviser at any time after September 30, 1996. In addition, for
the period from January 2, 1996 (commencement of operations) through March 31,
1996, the Adviser voluntarily agreed to limit Total Fund Operating Expenses
(excluding brokerage commissions, taxes and extraordinary expenses) of the Small
Cap Fund and the Equity Fund to 0.00% of each such Fund's average daily net
assets. If any expense limit is exceeded, the compensation due the Adviser for
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.
Each Fund's investment advisory agreement provides that if the total
expenses (excluding brokerage commissions, taxes and extraordinary expenses) of
the Fund in any fiscal year exceed the most restrictive expense limitation
applicable to the Fund in any state in which shares of the Fund are then
qualified for sale, the compensation due the Adviser shall be reduced by the
amount of the excess, by a reduction or refund thereof at the time such
compensation is payable after the end of each calendar month during the fiscal
year, subject to readjustment during the year. Currently, the most restrictive
state expense limitation provision limits a Fund's expenses to 2 1/2% of the
first $30 million of average net assets, 2% of the next $70 million of such net
assets and 1 1/2% of such net assets in excess of $100 million.
Unless terminated as provided below, the Equity Fund's and the Small Cap
Fund's investment advisory agreements continue in full force and effect until
December 31, 1997 and for successive periods of one year thereafter, and the Tax
Exempt Fund's investment advisory agreement continues in full force and effect
for successive periods of one year, but only as long as each such continuance is
approved annually (i) by either the Trustees of the Trust or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the applicable Fund, and, in either event (ii) by vote of a majority of the
Trustees of the Trust who are not parties to the investment advisory agreement
or "interested persons" (as defined in the 1940 Act) of any such party, cast in
person at a meeting called for the purpose of voting on such approval. Each
investment advisory agreement may be terminated at any time without the payment
of any penalty by vote of the Trustees of the Trust or by vote of a majority of
the outstanding voting securities (as defined in the 1940 Act) of the applicable
Fund or by the Adviser, on sixty days' written notice to the other parties. The
investment advisory agreements terminate in the event of their "assignment," as
defined in the 1940 Act.
33
<PAGE>
In an attempt to avoid any potential conflict with portfolio transactions
for the Funds, the Adviser and the Trust have adopted extensive restrictions on
personal securities trading by personnel of the Adviser and its affiliates.
These restrictions include: pre-clearance of all personal securities
transactions and a prohibition of purchasing initial public offerings of
securities. These restrictions are a continuation of the basic principle that
the interests of the Funds and their shareholders come before those of the
Adviser, its affiliates and their employees.
Distributor of the Trust
Standish Fund Distributors, L.P. (the "Principal Underwriter"), an
affiliate of the Adviser, serves as the Trust's exclusive principal underwriter
and holds itself available to receive purchase orders for the Funds' shares. In
that capacity, the Principal Underwriter has been granted the right, as agent of
the Trust, to solicit and accept orders for the purchase of the Funds' shares in
accordance with the terms of the Underwriting Agreement between the Trust and
the Principal Underwriter. Pursuant to the Underwriting Agreement, the Principal
Underwriter has agreed to use its best efforts to obtain orders for the
continuous offering of the Funds' shares. The Principal Underwriter receives no
commissions or other compensation for its services, and has not received any
such amounts in any prior year. The Underwriting Agreement shall continue in
effect with respect to a Fund until two years after its execution and for
successive periods of one year thereafter only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the Fund's
outstanding shares or by the Trustees of the Trust or (ii) by a vote of a
majority of the Trustees of the Trust who are not "interested persons" (as
defined by the 1940 Act) of the parties to the Underwriting Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Underwriting Agreement will terminate automatically if assigned by either party
thereto and is terminable with respect to a Fund at any time without penalty by
a vote of a majority of the Trustees of the Trust, a vote of a majority of the
Trustees who are not "interested persons" of the Trust, or by a vote of the
holders of a majority of the applicable Fund's outstanding shares, in any case
without payment of any penalty on not more than 60 days' written notice to the
other party. The offices of the Principal Underwriter are located at One
Financial Center, 26th Floor, Boston, Massachusetts 02111.
34
<PAGE>
REDEMPTION OF SHARES
Detailed information on redemption of shares is included in the Prospectus.
The Trust may suspend the right to redeem Fund shares or postpone the date
of payment upon redemption for more than seven days (i) for any period during
which the New York Stock Exchange is closed (other than customary weekend or
holiday closings) or trading on the exchange is restricted; (ii) for any period
during which an emergency exists as a result of which disposal by a Fund of
securities owned by it or determination by a Fund of the value of its net assets
is not reasonably practicable; or (iii) for such other periods as the SEC may
permit for the protection of shareholders of the Funds.
The Trust intends to pay redemption proceeds in cash for all Fund shares
redeemed but, under certain conditions, the Trust may make payment wholly or
partly in Fund portfolio securities. Portfolio securities paid upon redemption
of Fund shares will be valued at their then current market value. The Trust has
elected to be governed by the provisions of Rule 18f-1 under the 1940 Act which
limits the Fund's obligation to make cash redemption payments to any shareholder
during any 90-day period to the lesser of $250,000 or 1% of the Fund's net asset
value at the beginning of such period. An investor may incur brokerage costs in
converting portfolio securities received upon redemption to cash.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for placing each Fund's portfolio transactions
and will do so in a manner deemed fair and reasonable to the Funds and not
according to any formula. The primary consideration in all portfolio
transactions will be prompt execution of orders in an efficient manner at the
most favorable price. In selecting broker-dealers and in negotiating
commissions, the Adviser will consider the firm's reliability, the quality of
its execution services on a continuing basis and its financial condition. When
more than one firm is believed to meet these criteria, preference may be given
to firms which also sell shares of the respective Fund. In addition, if the
Adviser determines in good faith that the amount of commissions charged by a
broker is reasonable in relation to the value of the brokerage and research
services provided by such broker, a Fund may pay commissions to such broker in
an amount greater than the amount another firm may charge. Research services may
include (i) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, (ii) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts, and (iii) effecting
securities transactions and performing functions incidental thereto (such as
clearance and settlement). Research services furnished by firms through which
the Funds effect their securities transactions may be used by the Adviser in
servicing other accounts; not all of these services may be used by the Adviser
in connection with the Funds. The investment advisory fees paid by the Funds
under the advisory agreements will not be reduced as a result of the Adviser's
receipt of research services.
35
<PAGE>
The Adviser also places portfolio transactions for other advisory accounts.
The Adviser will seek to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities for a Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Funds. In
making such allocations, the main factors considered by the Adviser will be the
respective investment objectives, the relative size of portfolio holdings of the
same or comparable securities, the availability of cash for investment, the size
of investment commitments generally held, and opinions of the persons
responsible for recommending the investment.
DETERMINATION OF NET ASSET VALUE
Each Fund's net asset value is calculated each business day on which the
New York Stock Exchange is open. Currently the New York Stock Exchange is not
open on weekends, New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas. The net asset value
of a Fund's shares is determined as of the close of regular trading on the New
York Stock Exchange (currently 4:00 p.m., New York time) and is computed by
dividing the value of all securities and other assets of the Fund less all
liabilities by the number of shares outstanding, and adjusting to the nearest
cent per share. Expenses and fees, including the investment advisory fee, are
accrued daily and taken into account for the purpose of determining net asset
value. Portfolio securities are valued in the manner described in the
Prospectus.
FEDERAL INCOME TAXES
Each series of the Trust, including each Fund, is treated as a separate
entity for accounting and tax purposes. The Tax Exempt Fund presently qualifies
and intends to continue to qualify, and each of the Equity and Small Cap Funds
intends to qualify and elect to be treated, as a "regulated investment company"
under Subchapter M of the Code. As such and by complying with the applicable
provisions of the Code regarding the sources of its income, the timing of its
distributions, and the diversification of its assets, a Fund will not be subject
to Federal income tax on its investment company taxable income (i.e., all
income, after reduction by deductible expenses, other than its "net capital
gain," which is the excess, if any, of its net long-term capital gain over its
net short-term capital loss), net tax-exempt interest (if any) and net capital
gain which are distributed to shareholders at least annually in accordance with
the timing requirements of the Code.
Each Fund will be subject to a 4% non-deductible federal excise tax on
certain taxable amounts not distributed (and not treated as having been
distributed) on a timely basis in accordance with annual minimum distribution
requirements. The Funds intend under normal circumstances to avoid liability for
such tax by satisfying such distribution requirements.
The Funds are not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Funds qualify as regulated investment companies under
the Code, they will also not be required to pay any Massachusetts income tax.
The Funds will not distribute net capital gains realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. For federal income tax purposes, each Fund is permitted to carry forward a
net capital loss in any year to offset its own net capital gains, if any, during
the eight years following the year of the loss. To the extent subsequent net
capital gains are offset by such losses, they would not result in federal income
tax liability to the Funds and, as noted above, would not be distributed as such
to shareholders. The Tax Exempt Fund has $29,197 of capital loss carryforwards,
which expire on December 31, 2002, available to offset future net capital gains.
36
<PAGE>
Limitations imposed by the Code on regulated investment companies like the
Funds may restrict a Fund's ability to enter into futures, options and currency
forward transactions.
Certain options, futures and forward foreign currency transactions (Equity
and Small Cap Funds only) undertaken by a Fund may cause the Fund to recognize
gains or losses from marking to market even though its positions have not been
sold or terminated and affect the character as long-term or short-term (or, in
the case of certain currency forwards, options and futures (Equity and Small Cap
Funds only), as ordinary income or loss) and timing of some capital gains and
losses realized by a Fund. Also, certain losses of a Fund on its transactions
involving options, futures or forward contracts and/or offsetting portfolio
positions may be deferred rather than being taken into account currently in
calculating the Fund's taxable income or gain. Certain of the applicable tax
rules may be modified if a Fund is eligible and chooses to make one or more of
certain tax elections that may be available. These transactions may therefore
affect the amount, timing and character of a Fund's distributions to
shareholders. The Funds will take into account the special tax rules (including
consideration of available elections) applicable to options, futures or forward
contracts in order to minimize any potential adverse tax consequences.
The federal income tax rules applicable to interest rate swaps or currency
swaps (Equity and Small Cap Funds only), and interest rate caps, floors and
collars are unclear in certain respects, and the Funds may be required to
account for these instruments under tax rules in a manner that, under certain
circumstances, may limit their transactions in these instruments.
If either the Equity Fund or the Small Cap Fund acquires stock in certain
non-U.S. corporations that receive at least 75% of their annual gross income
from passive sources (such as interest, dividends, rents, royalties or capital
gain) or hold at least 50% of their assets in investments producing such passive
income ("passive foreign investment companies"), the Fund could be subject to
Federal income tax and additional interest charges on "excess distributions"
received from such companies or gain from the sale of stock in such companies,
even if all income or gain actually received by the Fund is timely distributed
to its shareholders. The Equity and Small Cap Funds would not be able to pass
through to their shareholders any credit or deduction for such a tax. Certain
elections may, if available, ameliorate these adverse tax consequences, but any
such election would require the electing Fund to recognize taxable income or
gain without the concurrent receipt of cash. The Equity and Small Cap Funds may
limit and/or manage their stock holdings in passive foreign investment companies
to minimize their tax liability or maximize their return from these investments.
37
<PAGE>
Foreign exchange gains and losses realized by the Equity and Small Cap
Funds in connection with certain transactions involving foreign
currency-denominated debt securities, if any, certain foreign currency futures
and options, foreign currency forward contracts, foreign currencies, or payables
or receivables denominated in a foreign currency are subject to Section 988 of
the Code, which generally causes such gains and losses to be treated as ordinary
income and losses and may affect the amount, timing and character of
distributions to shareholders. Any such transactions that are not directly
related to a Fund's investment in stock or securities, possibly including
speculative currency positions or currency derivatives not used for hedging
purposes, may increase the amount of gain it is deemed to recognize from the
sale of certain investments held for less than three months, which gain is
limited under the Code to less than 30% of its annual gross income, and could
under future Treasury regulations produce income not among the types of
"qualifying income" from which each Fund must derive at least 90% of its annual
gross income.
The Equity and Small Cap Funds may be subject to withholding and other
taxes imposed by foreign countries with respect to their investments in foreign
securities. Tax conventions between certain countries and the U.S. may reduce or
eliminate such taxes. Investors would be entitled to claim U.S. foreign tax
credits with respect to such taxes, subject to certain provisions and
limitations contained in the Code, only if more than 50% of the value of the
Equity Fund's or Small Cap Fund's respective total assets at the close of any
taxable year were to consist of stock or securities of foreign corporations and
the applicable Fund were to file an election with the Internal Revenue Service.
Because the Equity and Small Cap Funds generally do not expect to meet this 50%
requirement, investors generally will not directly take into account the foreign
taxes, if any, paid by the Equity and Small Cap Funds, and will generally not be
entitled to any related tax deductions or credits. Such taxes will reduce the
amounts the Equity and Small Cap Funds would otherwise have available to
distribute.
Distributions from a Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Funds' Prospectus whether taken in shares or in cash. Amounts
that are not allowable as a deduction in computing taxable income, including
expenses associated with earning tax-exempt interest income, do not reduce
current E&P for this purpose. Distributions, if any, in excess of E&P will
constitute a return of capital, which will first reduce an investor's tax basis
in Fund shares and thereafter (after such basis is reduced to zero) will
generally give rise to capital gains. Shareholders electing to receive
distributions in the form of additional shares will have a cost basis for
federal income tax purposes in each share so received equal to the amount of
cash they would have received had they elected to receive the distributions in
cash, divided by the number of shares received.
38
<PAGE>
For purposes of the dividends received deduction available to corporations,
dividends, if any, received by the Equity and Small Cap Funds from U.S. domestic
corporations in respect of the stock of such corporations held by the Equity and
Small Cap Funds, for U.S. Federal income tax purposes, for at least a minimum
holding period, generally 46 days, and distributed and designated by the Equity
and Small Cap Funds may be treated as qualifying dividends. Distributions by the
Tax Exempt Fund will not qualify for the dividends received deduction. Corporate
shareholders must meet the minimum holding period requirement referred to above
with respect to their shares of the Equity and Small Cap Funds in order to
qualify for the deduction and, if they borrow to acquire such shares, may be
denied a portion of the dividends received deduction. The entire qualifying
dividend, including the otherwise deductible amount, will be included in
determining the excess (if any) of a corporate shareholder's adjusted current
earnings over its alternative minimum taxable income, which may increase its
alternative minimum tax liability. Additionally, any corporate shareholder
should consult its tax adviser regarding the possibility that its basis in its
shares may be reduced, for Federal income tax purposes, by reason of
"extraordinary dividends" received with respect to the shares, for the purpose
of computing its gain or loss on redemption or other disposition of the shares.
Taxable distributions by the Tax Exempt Fund include distributions
attributable to income or gains from the Tax Exempt Fund's taxable investments
or transactions, including (i) gains from the sale of portfolio securities or
the right to when-issued securities prior to issuance or from options or futures
transactions and (ii) income attributable to repurchase agreements, securities
lending, recognized market discount, interest rate swaps, caps, floors or
collars, and a portion of the discount from certain stripped tax-exempt
obligations or their coupons.
Distributions by the Tax Exempt Fund of tax-exempt interest
("exempt-interest dividends") timely designated as such by the Tax Exempt Fund
will be treated as tax-exempt interest under the Code, provided that the Tax
Exempt Fund qualifies as a regulated investment company and at least 50% of the
value of its assets at the end of each quarter of its taxable year is invested
in tax-exempt obligations. Shareholders are required to report their receipt of
tax-exempt interest, including such distributions, on their federal income tax
returns. The portion of the Tax Exempt Fund's distributions designated as
exempt-interest dividends may differ from the actual percentage that its
tax-exempt income comprises of its total income during the period of any
particular shareholder's investment. The Tax Exempt Fund will report to
shareholders the amount designated as exempt-interest dividends for each year.
Interest income from certain types of tax-exempt obligations that are
private activity bonds in which the Tax Exempt Fund may invest is treated as an
item of tax preference for purposes of the federal alternative minimum tax. To
the extent that the Tax Exempt Fund invests in these types of tax-exempt
obligations, shareholders will be required to treat as an item of tax preference
for federal alternative minimum purposes that part of the Tax Exempt Fund's
exempt-interest dividends which is derived from interest on these tax-exempt
obligations. Exempt-interest dividends derived from interest income from
tax-exempt obligations that are not private activity bonds may also be included
in determining corporate "adjusted current earnings" for purposes of computing
the alternative minimum tax liability, if any, of corporate shareholders of the
Tax Exempt Fund.
39
<PAGE>
If the Tax Exempt Fund invests in certain zero coupon securities,
increasing rate securities or, in general, other securities with original issue
discount (or with market discount if the Tax Exempt Fund elects to include
market discount in income currently), the Tax Exempt Fund must accrue income on
such investments prior to the receipt of the corresponding cash payments.
However, the Tax Exempt Fund must distribute, at least annually, all or
substantially all of its net taxable and tax-exempt income, including such
accrued income, to shareholders to qualify as a regulated investment company
under the Code and avoid federal income and excise taxes. Therefore, the Tax
Exempt Fund may have to dispose of its portfolio securities under
disadvantageous circumstances to generate cash, or may have to leverage itself
by borrowing the cash, to satisfy distribution requirements. The Equity and
Small Cap Funds would be subject to the same tax rules but do not expect to
acquire such investments.
The Tax Exempt Fund purchases tax-exempt obligations which are generally
accompanied by an opinion of bond counsel to the effect that interest on such
securities is not included in gross income for federal income tax purposes. It
is not economically feasible to, and the Tax Exempt Fund therefore does not,
make any additional independent inquiry into whether such securities are in fact
tax-exempt. Bond counsels' opinions will generally be based in part upon
covenants by the issuers and related parties regarding continuing compliance
with federal tax requirements. Tax laws enacted during the last decade not only
had the effect of limiting the purposes for which tax-exempt bonds could be
issued and reducing the supply of such bonds, but also increased the number and
complexity of requirements that must be satisfied on a continuing basis in order
for bonds to be and remain tax-exempt. If the issuer of a bond or a user of a
bond-financed facility fails to comply with such requirements at any time,
interest on the bond could become taxable, retroactive to the date the
obligation was issued. In that event, a portion of the Tax Exempt Fund's
distributions attributable to interest the Fund received on such bond for the
current year and for prior years could be characterized or recharacterized as
taxable income.
The Tax Exempt Fund may purchase municipal obligations together with the
right to resell the securities to the seller at an agreed upon price or yield
within a specified period prior to the maturity date of the securities. Such a
right to resell is commonly known as a "put" and is also referred to as a
"standby commitment." The Tax Exempt Fund may pay for a standby commitment
either separately, in cash, or in the form of a higher price for the securities
which are acquired subject to the standby commitment, thus increasing the cost
of securities and reducing the yield otherwise available. Additionally, the Tax
Exempt Fund may purchase beneficial interests in municipal obligations held by
trusts, custodial arrangements or partnerships and/or combined with third-party
puts or other types of features such as interest rate swaps; those investments
may require the Tax Exempt Fund to pay "tender fees" or other fees for the
various features provided.
The Internal Revenue Service (the "Service") has issued a revenue ruling to
the effect that, under specified circumstances, a registered investment company
will be the owner of tax-exempt municipal obligations acquired subject to a put
option. The Service has also issued private letter rulings to certain taxpayers
(which do not serve as precedent for other taxpayers) to the effect that
tax-exempt interest received by a regulated investment company with respect to
such obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The Service has
subsequently announced that it will not ordinarily issue advance ruling letters
as to the identity of a true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation interest therein, to be purchased by
40
<PAGE>
either the seller or a third party. The Tax Exempt Fund intends to take the
position that it is the owner of any municipal obligations acquired subject to a
standby commitment or other third party put and that tax-exempt interest earned
with respect to such municipal obligations will be tax-exempt in its hands.
There is no assurance that the Service will agree with such position in any
particular case. Additionally, the federal income tax treatment of certain other
aspects of these investments, including the treatment of tender fees paid by the
Tax Exempt Fund, in relation to various regulated investment company tax
provisions is unclear. However the Adviser intends to manage the Tax Exempt
Fund's portfolio in a manner designed to minimize any adverse impact from the
tax rules applicable to these investments.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Tax Exempt Fund will not be deductible for federal income tax
purposes to the extent it is deemed related to exempt-interest dividends paid by
the Tax Exempt Fund. Pursuant to published guidelines, the Service may deem
indebtedness to have been incurred for the purpose of purchasing or carrying
shares of the Tax Exempt Fund even though the borrowed funds may not be directly
traceable to the purchase of shares.
At the time of an investor's purchase of Fund shares, a portion of the
purchase price is often attributable to undistributed net investment income
(except in the case of the Tax Exempt Fund) and/or realized or unrealized
appreciation in a Fund's portfolio. Consequently, subsequent distributions from
such income and/or appreciation may be taxable to such investor even if the net
asset value of the investor's shares is, as a result of the distributions,
reduced below the investor's cost for such shares, and the distributions in
reality represent a return of a portion of the purchase price.
The Funds may consider the use of equalization accounting for any taxable
year if it would further the goal of reducing taxable distributions to
shareholders for such year. Under equalization accounting, a Fund's earnings and
profits are allocated in part to redemption proceeds paid by the Fund: although
a redeeming shareholder's tax treatment would not be affected by such an
allocation, in certain circumstances the amounts of realized net income and/or
net capital gains the Fund is required to distribute may be reduced through the
use of equalization accounting. Hence, if a Fund determines that it will use
equalization accounting for a particular year, the amount, timing and character
of its distributions for that year may be affected. The Funds would consider
using equalization accounting for a particular year only if they determine that
such use is consistent with their tax objectives and would produce a benefit for
such year that outweighs any additional tax or accounting complexities or costs.
41
<PAGE>
Upon a redemption (including a repurchase) of shares of the Funds, a
shareholder may realize a taxable gain or loss, depending upon the difference
between the redemption proceeds and the shareholder's tax basis in his shares.
Such gain or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands and will (except as described below)
be long-term or short-term, depending upon the shareholder's tax holding period
for the shares. Any loss realized on a redemption may be disallowed to the
extent the shares disposed of are replaced within a period of 61 days beginning
30 days before and ending 30 days after the shares are disposed of, such as
pursuant to automatic dividend reinvestments. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized upon the redemption of shares with a tax holding period of six months
or less will, with respect to the Tax Exempt Fund, be disallowed to the extent
of all exempt-interest dividends paid with respect to such shares and, with
respect to any Fund, the allowable loss on such a redemption will be treated as
a long-term capital loss to the extent of any amounts treated as distributions
of long-term capital gain with respect to such shares.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Funds in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Funds is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Funds and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the Funds. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in the Funds.
THE TRUST AND ITS SHARES
Each Fund is an 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, as amended from time to time (the "Declaration"). Under
the Declaration, the Trustees have authority to issue an unlimited number of
shares of beneficial interest, par value $.01 per share, of the Funds. Each
share of a Fund represents an equal proportionate interest in the Fund with each
other share and is entitled to such dividends and distributions as are declared
by the Trustees. Shareholders are not entitled to any preemptive, conversion or
subscription rights. All shares, when issued, will be fully paid and
non-assessable by the Trust. Upon any liquidation of a Fund, shareholders are
entitled to share pro rata in the net assets available for distribution.
42
<PAGE>
Pursuant to the Declaration, the Trustees may create additional funds by
establishing additional series of shares in the Trust. The establishment of
additional series would not affect the interests of current shareholders in the
Fund. As of the date of this Statement of Additional Information, the Trustees
have established eleven other series of the Trust that publicly offer their
shares. Pursuant to the Declaration, the Board may establish and issue multiple
classes of shares for each series of the Trust. As of the date of this Statement
of Additional Information, the Trustees do not have any plan to establish
multiple classes of shares for the Fund. Pursuant to the Declaration of Trust
and subject to shareholder approval (if then required), the Trustees may
authorize the Fund to invest all of its investable assets in a single open-end
investment company that has substantially the same investment objectives,
policies and restrictions as the Fund. As of the date of this Statement of
Additional Information, the Board does not have any plan to authorize the Fund
to so invest its assets.
All Fund shares have equal rights with regard to voting, and shareholders
of a Fund have the right to vote as a separate class with respect to matters as
to which their interests are not identical to those of shareholders of other
classes of the Trust, including the approval of an investment advisory contract
and any change of investment policy requiring the approval of shareholders.
Pursuant to the Declaration of Trust and subject to shareholder approval
(if then required), the Trustees may authorize each Fund to invest all or part
of its investable assets in a single open-end investment company that has
substantially the same investment objectives, policies and restrictions as the
Fund. As of the date of this Statement of Additional Information, the Board does
not have any plan to authorize any Fund to so invest its assets.
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Declaration disclaims shareholder liability for acts or obligations of the Trust
and requires that notice of this disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Trust or a Trustee. The
Declaration also provides for indemnification from the assets of the Trust for
all losses and expenses of any Trust shareholder held liable for the obligations
of the Trust. Thus, the risk of a shareholder incurring a financial loss on
account of his or its liability as a shareholder of the Trust is limited to
circumstances in which both inadequate insurance existed and the Trust would be
unable to meet its obligations. The possibility that these circumstances would
occur is remote. Upon payment of any liability incurred by the Trust, the
shareholder paying the liability will be entitled to reimbursement from the
general assets of the Trust. The Declaration also provides that no series of the
Trust is liable for the obligations of any other series. The Trustees intend to
conduct the operations of the Trust to avoid, to the extent possible, ultimate
liability of shareholders for liabilities of the Trust.
43
<PAGE>
ADDITIONAL INFORMATION
The Funds' Prospectus and this Statement of Additional Information omit
certain information contained in the Trust's registration statement filed with
the SEC, which may be obtained from the SEC's principal office at 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of the fee prescribed by the
rules and regulations promulgated by the SEC.
EXPERTS AND FINANCIAL STATEMENTS
The financial statements of the Tax Exempt Fund for the fiscal years ended
December 31, 1993, 1994 and 1995 incorporated by reference from the Tax Exempt
Fund's annual report to shareholders in this Statement of Additional Information
have been audited by Coopers & Lybrand L.L.P., independent accountants, as set
forth in their report appearing elsewhere therein and have been so included in
reliance upon the authority of the report of Coopers & Lybrand L.L.P., as
experts in accounting and auditing. Financial highlights of the Tax Exempt Fund
for the period from November 2, 1992 (commencement of operations) through
December 31, 1992 were audited by Deloitte & Touche LLP, independent auditors,
and have been similarly included in reliance upon the expertise of that firm.
Coopers & Lybrand L.L.P., independent accountants, will audit each Fund's
financial statements for the current fiscal year ending September 30, 1996.
44
<PAGE>
Prospectus dated May 1, 1996
PROSPECTUS
STANDISH INTERNATIONAL FIXED INCOME FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
Standish International Fixed Income Fund (the "Fund") is one Fund in the
Standish, Ayer & Wood family of funds. The Fund is organized as a separate
non-diversified investment series of Standish, Ayer & Wood Investment Trust (the
"Trust"), an open-end management investment company.
The Fund is designed primarily, but not exclusively, for tax-exempt
institutional investors, such as pension and profit-sharing plans, foundations
and endowments. The Fund's investment objective is to maximize total return
while realizing a market level of income, consistent with preserving principal
and liquidity. The Fund seeks to achieve its investment objective primarily
through investing in a portfolio of investment grade fixed-income securities
denominated in foreign and United States currencies. The Fund provides a vehicle
through which investors may participate in the international bond markets. See
"Investment Objective and Policies." Standish International Management Company,
L.P., Boston, Massachusetts, is the Fund's investment adviser (the "Adviser").
Investors may purchase shares of the Fund from the Trust's principal
underwriter, Standish Fund Distributors, L.P. (the "Principal Underwriter"), at
the address and phone number listed above without a sales commission or other
transaction charges. Unless waived by the Fund, the minimum initial investment
is $100,000. Additional investments may be made in amounts of at least $5,000.
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 (the "SEC") and is available upon request and without charge
by calling or writing the Principal Underwriter at the telephone number or
address listed above. The Statement of Additional Information bears the same
date as this Prospectus and is incorporated by referenced into this Prospectus.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN SHARES OF THE FUND INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
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.
CONTENTS
Expense Information...........................................2
Financial Highlights..........................................3
Investment Objective and Policies.............................4
Risk Factors and Suitability..................................8
Calculation of Performance Data...............................8
Dividends and Distributions...................................9
Purchase of Shares............................................9
Exchange of Shares............................................9
Redemption of Shares.........................................10
Management...................................................11
Federal Income Taxes.........................................12
The Fund and Its Shares......................................12
Custodian, Transfer Agent and Dividend Disbursing Agent......13
Independent Accountants......................................13
Legal Counsel................................................13
Appendix A...................................................13
Tax Certification Instructions...............................15
1
<PAGE>
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 0.40%
12b-1 Fees None
Other Expenses 0.11%
Total Fund Operating Expenses 0.51%
<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 $16 $29 $64
</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,"
which includes, among other things, custodian and transfer agent fees,
registration costs and payments for insurance and audit and legal services, is
based on expenses for the Fund's fiscal year ended December 31, 1995.
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 LESS 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 LESS THAN 5%.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights for the years ended December 31, 1993, 1994 and
1995 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.
Further information about the performance of the Fund is contained in the
Fund's Annual Report, which may be obtained from the Principal Underwriter
without charge.
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to maximize total return while realizing
a market level of income, consistent with preserving principal and liquidity.
The Fund seeks to achieve its investment objective primarily through investing
in a non-diversified portfolio of investment grade fixed-income securities
denominated in foreign and United States currencies. Because the Fund will
invest in securities denominated in foreign currencies, including bonds
denominated in the European Currency Unit ("ECU"), exchange rates may have a
significant impact on the performance of the Fund. 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 fundamental
investment policies of the Fund may not be changed by the Trustees of the Trust
without the approval of shareholders. The Fund's investment policies and
restrictions are described further in the Statement of Additional Information
and are not fundamental unless so designated.
Investment Policies
The Fund may invest in a broad range of fixed-income securities denominated
in foreign currencies and U.S. dollars, including bonds, notes, mortgage-backed
and asset-backed securities, preferred stock (including convertible preferred
stock), convertible debt securities, structured notes and debt securities issued
or guaranteed by national, provincial, state or other governments with taxing
authority or by their agencies or by supranational entities. The Fund may invest
in securities that pay interest on a fixed, variable, floating (including
inverse floating), contingent, in-kind or deferred basis. Under normal market
conditions, at least 65% of the total value of the Fund's assets will be
invested in such securities denominated in foreign currencies. Supranational
entities include international organizations designated or supported by
governmental entities to promote economic reconstruction or development, and
international banking institutions and related government agencies. Examples of
supranational entities are the International Bank for Reconstruction and
Development (the World Bank), the European Steel and Coal Community, the Asian
Development Bank and the Inter-American Development Bank.
The Fund expects to emphasize foreign government and agency securities,
securities of U.S. companies denominated in foreign currencies, U.S. Government
and agency securities, mortgage-backed and asset-backed securities and
securities of companies denominated in U.S. dollars. The Fund intends to spread
investments broadly among countries. The Fund will normally include securities
of no fewer than five different countries; however, while maintaining
investments in five countries, the Fund may invest a substantial portion of its
assets in one or more of those five countries. Investors should be aware that
investing in mortgage-backed securities involves risks of fluctuation in yields
and market prices and of early prepayments on the underlying mortgages. See
"Risk Factors and Suitability" for a description of the risks associated with
investments in foreign securities.
Ratings
4
<PAGE>
The Fund will generally invest in investment grade fixed-income securities,
i.e., securities which, at the date of investment, are rated within the four
highest grades as determined by Moody's Investors Service, Inc. ("Moody's")
(Aaa, Aa, A or Baa) or by Standard & Poor's Ratings Group ("Standard & Poor's"),
Duff & Phelps, Inc. ("Duff & Phelps") or IBAC, Inc. ("IBAC") (AAA, AA, A or BBB)
or their respective equivalent ratings or, if not rated, judged by the Adviser
to be of equivalent credit quality to securities so rated. Securities rated Baa
by Moody's or BBB by Standard & Poor's, Duff & Phelps or IBAC and unrated
securities of equivalent credit quality are considered medium grade obligations
with speculative characteristics. Adverse changes in economic conditions or
other circumstances are more likely to weaken the issuer's capacity to pay
interest and repay principal on these securities than is the case for issuers of
higher rated securities.
The Fund may invest up to 5% of its net assets in securities rated, at the
date of investment, either Ba by Moody's or BB by Standard & Poor's, Duff &
Phelps or IBAC or, if not rated, judged by the Adviser to be of equivalent
credit quality to securities so rated ("BB Rated Securities"). Securities rated
Ba by Moody's or BB by Standard & Poor's, Duff & Phelps or IBAC are classified
in the highest category of non-investment grade securities. Such securities may
be considered to be high-yield securities, carry a high degree of risk and are
considered speculative by the major credit rating agencies. The Fund intends to
avoid what it perceives to be the most speculative areas of the BB Rated
Securities universe. See "Risk Factors and Suitability" for a description of the
risks associated with investments in BB Rated Securities.
It is anticipated that the average dollar-weighted rated credit quality of
the securities in the Fund's portfolio will be Aa or AA according to Moody's,
Standard & Poor's, Duff & Phelps or IBAC ratings, respectively, or comparable
credit quality as determined by the Adviser. In the case of a security that is
rated differently by the rating services, the higher rating is used in computing
the Fund's average dollar-weighted credit quality and in connection with the
Fund's policy regarding BB Rated Securities. In the event that the rating on a
security held in the Fund's portfolio is downgraded 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. In determining whether securities are of equivalent credit
quality, the Adviser may take into account, but will not rely entirely on,
ratings assigned by foreign rating agencies. In the case of unrated sovereign,
subnational and sovereign related debt of foreign countries, the Adviser may
take into account, but will not rely entirely on, the ratings assigned to the
issuers of such securities. Appendix A sets forth excerpts from the descriptions
of ratings of corporate debt securities and sovereign, subnational and sovereign
related debt of foreign countries.
The Fund may establish and maintain cash balances for liquidity purposes.
The Fund may also establish and maintain cash balances for temporary defensive
purposes without limitation in the event of, or in anticipation of, a general
decline in the market prices of the securities in which it invests. The Fund's
cash balances may be invested in U.S. and non-dollar denominated high quality
short-term money-market instruments, including, but not limited to, government
obligations, certificates of deposit, bankers' acceptances, commercial paper,
short-term corporate debt securities and repurchase agreements.
5
<PAGE>
In pursuing the Fund's investment objective, the Adviser intends to
emphasize intermediate-term economic fundamentals relating to various countries
in the international economy, rather than evaluate day-to-day fluctuations in
particular currency and bond markets. Credit analysis of the issuers of the
particular securities will also be less important than macroeconomic
considerations. The Adviser will review the economic conditions and prospects
relating to various countries in the international economy and evaluate the
available yield differentials with a view toward maximizing total return.
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 market 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
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 will attempt to limit its net loss exposure resulting
from Strategic Transactions entered into for such purposes to not more than 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
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a
regulated investment company.
6
<PAGE>
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
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 attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for non-hedging purposes to not more than 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.
7
<PAGE>
Non-Diversified Company
The Fund is a "non-diversified" investment company so that with respect to
50% of its assets it will be able to invest more than 5% of its assets in
obligations of one or more issuers, while being limited with respect to the
other half of its assets to investments not exceeding 5% of the Fund's total
assets. (A "diversified" investment company would be required under the
Investment Company Act of 1940, as amended (the "1940 Act"), to maintain at
least 75% of its assets in cash (including foreign currency), cash items, U.S.
Government securities, and other securities limited per issuer to not more than
5% of the investment company's total assets.) In order to qualify as a regulated
investment company under the Code, the Fund, among other things, may not invest
more than 25% of its assets in obligations of any one issuer (other than U.S.
Government securities). In any event, the Fund does not intend to invest more
than 5% of its assets in the securities of any one issuer unless such securities
are issued or guaranteed by a national government or are deemed by the Adviser
to be of comparable credit quality. The Fund does not believe that the credit
risk inherent in the obligations of stable foreign governments is significantly
greater than that of U.S. Government obligations. As a "non-diversified"
investment company, the Fund may invest a greater proportion of its assets in
the securities of a smaller number of issuers and therefore may be subject to
greater market and credit risk than a more broadly diversified fund.
The Fund will not have more than 25% of the current value of its total
assets invested in any single industry, provided that this restriction shall not
apply to debt securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities.
Illiquid and Restricted Securities
The Fund may not invest more than 15% of its net assets in illiquid
investments and securities that are subject to restrictions on resale (i.e.,
private placements or "restricted securities") under the Securities Act of 1933,
as amended ("1933 Act"), including securities eligible for resale in reliance on
Rule 144A under the 1933 Act. Illiquid investments include securities that are
not readily marketable, repurchase agreements maturing in more than seven days,
time deposits with a notice or demand period of more than seven days, certain
over-the-counter options, and restricted securities, unless it is determined,
based upon continuing review of the trading markets for the specific restricted
security, that such restricted security is eligible for resale under Rule 144A
and is liquid. The Board of Trustees has adopted guidelines and delegated to the
Adviser the daily function of determining and monitoring the liquidity of
restricted securities. The Board of Trustees, however, retains oversight
focusing on factors such as valuation, liquidity and availability of information
and is ultimately responsible for such determinations. Investing in restricted
securities eligible for resale pursuant to Rule 144A could have the effect of
increasing the level of illiquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities. The purchase price and subsequent valuation of restricted
and illiquid securities normally reflect a discount, which may be significant,
from the market price of comparable securities for which a liquid market exists.
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Portfolio Turnover
Portfolio turnover is not expected to exceed 250% on an annual basis. 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 owned during the year (excluding
short-term securities). A high rate of portfolio turnover involves a
correspondingly greater amount of transaction 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 Code. The Fund's portfolio turnover rates are
listed in the section captioned "Financial Highlights."
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 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 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
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.
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<PAGE>
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 must 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, 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 to the extent of 10% of
its net assets. 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
exceeding 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-grade 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.
When-Issued and "Delayed Delivery" Securities
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The Fund may commit up to 25% of its net assets to purchase securities on a
"when-issued" or "delayed delivery" basis, but will only do so with the
intention of actually acquiring the securities. The payment obligation and the
interest rate on these securities will be fixed at the time the Fund enters into
the commitment, but no income will accrue to the Fund until they are delivered
and paid for. Unless the Fund has entered into an offsetting agreement to sell
the securities, cash or liquid, high-grade debt securities equal to the amount
of the Fund's commitment will be segregated with the custodian for the Fund, to
secure the Fund's obligation and to ensure that it is not leveraged. The market
value of the securities when they are delivered may be less than the amount paid
by the Fund.
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.
Repurchase Agreements
The Fund may invest up to 25% of its net assets in repurchase agreements
under normal circumstances. In no event will the Fund invest more than an
aggregate of 15% of its assets in repurchase agreements that are not terminable
within seven days. Repurchase agreements acquired by the Fund will always be
fully collateralized as to principal and interest by money market instruments
and will be entered into only with commercial banks, brokers and dealers
considered creditworthy by the Adviser. If the other party or "seller" of a
repurchase agreement defaults, the Fund might suffer a loss to the extent that
the proceeds from the sale of the underlying securities and other collateral
held by the Fund in connection with the related repurchase agreement are less
than the repurchase price. In addition, in the event of bankruptcy of the seller
or failure of the seller to repurchase the securities as agreed, a Fund could
suffer losses, including loss of interest on or principal of the security and
costs associated with delay and enforcement of the repurchase agreement.
Securities Loans
In order to realize additional income, the Fund may lend a portion of the
securities in its portfolio to broker-dealers and financial institutions, who
from time to time may wish to borrow securities, generally to carry out
transactions for which they have contracted. The market value of securities
loaned by the Fund may not exceed 20% of the value of the Fund's total assets,
with a 10% limit for any single borrower.
In order to secure their obligations to return securities borrowed from the
Fund, borrowers will deposit collateral equal to at least 100% of the market
value of the borrowed securities, and the collateral will be "marked to market"
daily. As is the case with any extension of credit, portfolio securities loans
involve certain risks in the event a borrower should fail financially, including
delays or inability to recover the loaned securities or foreclose against the
collateral. The Adviser, under the supervision of the Fund's Board of Trustees,
monitors the creditworthiness of the parties to whom the Fund makes securities
loans.
Investment Restrictions
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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 50% 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; or (iii)
lend portfolio securities, except that the Fund may lend its portfolio
securities with a value up to 20% of its total assets (with a 10% limit for any
borrower) and may enter into repurchase agreements with respect to 25% 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. Certain non-fundamental policies and additional fundamental
policies adopted by the Fund are described in the Statement of Additional
Information.
RISK FACTORS AND SUITABILITY
The Fund is not an appropriate investment for investors seeking complete
stability of principal. The Fund is designed primarily for tax-exempt
institutional investors such as pension or profit-sharing plans, foundations and
endowments which seek to maximize total return and whose beneficiaries are in a
position to benefit from the reinvestment of the quarterly income dividends and
any capital gains distributions paid by the Fund on a tax-deferred basis. The
Fund may also be suitable for other investors, depending upon their investment
goals and financial and tax positions. Investing in foreign securities may
involve a higher degree of risk than investing in domestic securities. Shares of
the Fund should not be regarded as a complete investment program.
Yields on debt securities depend on a variety of factors, such as general
conditions in the money and bond markets, and the size, maturity and rating of a
particular issue. Debt securities with longer maturities tend to produce higher
yields and are generally subject to greater potential capital appreciation and
depreciation. The market prices of debt securities usually vary depending upon
available yields, rising when interest rates decline and declining when interest
rates rise.
Foreign Securities
Investing in securities of foreign companies and securities denominated in
foreign currencies and utilizing foreign currency transactions involves certain
risks of political, economic and legal conditions and developments not typically
associated with investing in securities of U.S. companies. Such conditions or
developments might include unfavorable changes in currency exchange rates,
exchange control regulations (including currency blockage), expropriation of
assets of companies in which the Fund invests, nationalization of such
companies, imposition of withholding taxes on dividend or interest payments, and
possible difficulty in obtaining and enforcing judgments against a foreign
issuer. Also, foreign securities may not be as liquid and may be more volatile
12
<PAGE>
than comparable domestic securities. Furthermore, issuers of foreign securities
are subject to different, often less comprehensive, accounting, reporting and
disclosure requirements than domestic issuers. The Fund, in connection with its
purchases and sales of foreign securities, other than securities denominated in
United States dollars, will incur transaction costs in converting currencies.
Brokerage commissions in foreign countries are generally fixed, and other
transaction costs related to securities exchanges are generally higher than in
the United States. Most foreign securities of the Fund are held by foreign
subcustodians that satisfy certain eligibility requirements. However, foreign
subcustodian arrangements are significantly more expensive than domestic
custody. In addition, foreign settlement of securities transactions is subject
to local law and custom that is not, generally, as well established or as
reliable as U.S. regulation and custom applicable to settlements of securities
transactions and, accordingly, there is generally perceived to be a greater risk
of loss in connection with securities transactions in many foreign countries.
Emerging Markets
The Fund may invest in countries with emerging economies or securities
markets ("Emerging Markets"). Investments in Emerging Markets involves risks in
addition to those generally associated with investments in foreign securities.
Political and economic structures in many Emerging Markets may be undergoing
significant evolution and rapid development, and such countries may lack the
social, political and economic stability characteristics of more developed
countries. As a result, the risks described above relating to investments in
foreign securities, including the risks of nationalization or expropriation of
assets, may be heightened. In addition, unanticipated political or social
developments may affect the values of the Fund's investments and the
availability to the Fund of additional investments in such Emerging Markets. The
small size and inexperience of the securities markets in certain Emerging
Markets and the limited volume of trading in securities in those markets may
make the Fund's investments in such countries less liquid and more volatile than
investments in countries with more developed securities markets (such as the
U.S., Japan and most Western European countries).
CALCULATION OF PERFORMANCE DATA
From time to time the Fund may advertise its yield and total return. Both
yield and total return 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
(or any shorter period since inception) 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.
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.
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<PAGE>
From time to time, the Fund may compare its performance with that of other
mutual funds with similar investment objectives, to bond and other relevant
indices, and to performance rankings prepared by recognized mutual fund
statistical services. In addition, the Fund's performance may be compared to
alternative investment or savings vehicles and/or to indices or indicators of
economic activity.
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 from
short-term and long-term capital gains, 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 Principal
Underwriter, which offers the Fund's 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 in good order by the Principal Underwriter and
payment for the shares is received by the Fund's custodian. Please see the
Fund's account application or call the Principal Underwriter for instructions on
how to make payment of shares to the Fund's custodian. Unless waived by the
Fund, the minimum initial investment is $100,000. Additional investments may be
made in amounts of at least $5,000.
Shares of the Fund may also be purchased through securities dealers. 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, provided that payment for the shares is also received by
the Fund's custodian 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 Principal Underwriter 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, the Principal Underwriter or the Adviser.
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. The Fund values
short-term obligations with maturities of 60 days or less at original cost plus
either accrued interest or amortized discount unless the Trustees determine that
such methods do not approximate fair value. All other investments are valued at
market value or, where market quotations are not readily available, at fair
value as determined in good faith by the Adviser in accordance with procedures
approved by the Trustees of the Trust. Additional information concerning the
Fund's valuation policies is contained in the Statement of Additional
Information.
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<PAGE>
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. The Fund's investment minimums do not apply to
accounts for which the Adviser or any of its affiliates serves as investment
adviser or to employees of the Adviser or any of its affiliates or to members of
such persons' immediate families. The Fund's investment minimums apply to the
aggregate value invested in omnibus accounts rather than to the investment of
underlying participants in such omnibus accounts.
EXCHANGE OF SHARES
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 Principal Underwriter. 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 Principal Underwriter
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 Principal
Underwriter 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 the Fund may be exchanged by written order to the Principal
Underwriter, 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.
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<PAGE>
Telephonic Exchanges
Shareholders who elected telephonic privileges may exchange shares by
calling the Principal Underwriter at (800) 221-4795. Telephonic privileges are
not available to shareholders automatically. Proper identification will be
required for each telephonic exchange. Please see "Telephone Transactions" below
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 by
the Fund's custodian. 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.
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 by the Principal
Underwriter 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 the Principal
Underwriter, One Financial Center, 26th Floor, Boston, Massachusetts 02111. A
written redemption request must (a) state the name of the Fund and 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(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 that are not
individuals. Redemption proceeds will normally be paid by check mailed within
three business days of receipt by the Principal Underwriter 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 in the case of
payments made by check.
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Telephonic Redemption
Shareholders who elect telephonic privileges may redeem shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to shareholders automatically. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instruction on the account
application to a pre-designated account. Redemption proceeds will normally be
paid promptly after receipt of telephonic instructions, but no later than three
business days thereafter, except as described above for shares purchased by
check. 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. Wire charges, if any,
will be deducted from redemption proceeds. Proper identification will be
required for each telephonic redemption.
Repurchase Order
In addition to telephonic and written redemption of Fund shares, the
Principal Underwriter may accept telephone orders from brokers or dealers for
the repurchase of Fund shares. The repurchase price is the net asset value per
share next determined after receipt of the repurchase order by the Principal
Underwriter and the payment for the shares by the Fund's custodian. Brokers and
dealers are obligated to transmit repurchase orders to the Principal Underwriter
prior to the close of the Principal Underwriter's business day (normally 4:00
p.m.). Brokers and dealers may charge for their services in connection with a
repurchase of Fund shares, but neither the Fund nor the Principal Underwriter
imposes a charge for share repurchases.
Telephone Transactions
By maintaining an account that is eligible for telephonic exchange and
redemption privileges, the shareholder authorizes the Adviser, the Principal
Underwriter, the Fund and the Fund's custodian to act upon instructions of any
person to redeem and/or exchange shares from the shareholder's account. Further,
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 Principal Underwriter, nor the Trust, nor the Fund, 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
or exchange, 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. All telephone transaction requests will
be recorded. Shareholders may experience delays in exercising telephone
transaction privileges during periods of abnormal market activity. Accordingly,
during periods of volatile economic and market conditions, shareholders may wish
to consider transmitting redemption and exchange requests in writing.
* * * *
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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 if the value of such
shares has decreased to 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. The Fund may eliminate
duplicate mailings of Fund materials to shareholders that have the same address
of record.
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 International Management Company, L.P. (the "Adviser"), One
Financial Center, Boston, MA 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 Delaware limited partnership which was organized in 1991 and is a
registered investment adviser under the Investment Advisers Act of 1940. The
general partner of the Adviser is Standish, Ayer & Wood, Inc. ("Standish"), One
Financial Center, Boston, MA 02111, which holds a 99.98% partnership interest.
The limited partners, who each hold a 0.01% interest in the Adviser, are Walter
M. Cabot, Sr., Chairman of the Board of the Adviser and a Senior Adviser to
Standish, and D. Barr Clayson, the President of the Adviser and a Managing
Director of Standish. Richard S. Wood, a Vice President and Director of Standish
and the President of the Trust, is the Executive Vice President of the Adviser.
Standish and the Adviser provide fully discretionary management services and
counseling and advisory services to a broad range of clients throughout the
United States and abroad. In addition, Standish or the Adviser serves as the
investment adviser to each of the following fourteen funds in the Standish, Ayer
& Wood family of funds.
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Net Assets
Fund (March 31, 1996)
- --------------------------------------------------------------------------------
Standish Controlled Maturity Fund
Standish Equity Portfolio
Standish Fixed Income Portfolio
Standish Fixed Income Fund II
Standish Global Fixed Income Portfolio
Standish Intermediate Tax Exempt Bond Fund
Standish International Equity Fund
Standish International Fixed Income Fund
Standish Massachusetts Intermediate
Tax Exempt Bond Fund
Standish Securitized Fund
Standish Short-Term Asset Reserve Fund
Standish Small Capitalization Equity Portfolio
Standish Small Cap Tax-Sensitive Equity Fund
Standish Tax-Sensitive Equity Fund
Corporate pension funds are the largest asset under active management by
Standish. Standish's clients also include charitable and educational endowment
funds, financial institutions, trusts and individual investors.
As of March 31, 1996, Standish managed approximately $__ billion in assets.
The Fund's portfolio manager is Richard S. Wood, who has been primarily
responsible for the day-to-day management of the Fund's portfolio since its
inception in January, 1991. During the past five years, Mr. Wood has served as a
Director and Vice President of Standish.
Subject to the supervision and direction of the Trustees, 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 0.40% of the Fund's average
daily net asset value. The Adviser has voluntarily agreed to limit the Fund's
total annual operating expenses (excluding brokerage commissions, taxes and
extraordinary expenses) to 0.80% of the Fund's average daily net assets. The
Adviser may discontinue or modify such limitation in the future at its
discretion, although it has no current intention to do so. The Adviser has also
agreed to limit the Fund's total operating expenses (excluding brokerage
commissions, taxes and extraordinary expenses) to 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 for 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 year ended December 31, 1995, the Fund paid advisory fees to the Adviser at
the annual rate of 0.40% of the Fund's average daily net assets.
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
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 Standish in
an equitable manner. For the fiscal year ended December 31, 1995, expenses borne
by the Fund represented 0.51% of the Fund's average daily net assets.
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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 generally 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 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 will be subject to foreign withholding taxes
or other foreign taxes on income (possibly including capital gains) on certain
of its foreign investments, which will reduce the yield or return from those
investments. Such taxes may be reduced or eliminated pursuant to an income tax
treaty in some cases.
The Fund may qualify to make an election to pass the qualifying foreign
taxes it pays through to its shareholders, who would then include their share of
such taxes in their gross incomes (in addition to the actual dividends and
capital gain distributions received from the Fund) and might be entitled,
subject to certain conditions and limitations under the Code, to a federal
income tax credit or deduction for their share of such taxes. Tax-exempt
shareholders generally will not benefit from this election. If the Fund makes
this election, it will provide necessary information to its shareholders
regarding any foreign taxes passed through to them. If the Fund does not make
this election, it may deduct the foreign taxes it pays in computing the net
income it must distribute to shareholders to satisfy the Code's distribution
requirements.
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, if any, 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
Fund have the right to vote as a separate class with respect to certain matters
under the 1940 Act 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.
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The Trust has established fourteen series that currently offer their shares
to the public 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 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 1940 Act,
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
which represent 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 Principal
Underwriter at the address and telephone number listed on the cover of this
Prospectus.
22
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CUSTODIAN, TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 24 Federal Street, Boston, Massachusetts
02111, 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 and Standish.
--------------------
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.
23
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APPENDIX A
KEY TO MOODY'S RATINGS FOR CORPORATE BONDS AND SOVEREIGN, SUBNATIONAL AND
SOVEREIGN RELATED ISSUERS
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.
Ba -Bonds which are rated Ba are judged to have speculative elements. Their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class. STANDARD &
POOR'S RATINGS FOR CORPORATE BONDS
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.
BB -Debt rated BB is regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such debt will likely
have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse conditions.
STANDARD & POOR'S CHARACTERISTICS OF
SOVEREIGN DEBT OF FOREIGN COUNTRIES
AAA -Stable, predictable governments with demonstrated track record of
responding flexibly to changing economic and political circumstances
Key players in the global trade and financial system
-Prosperous and resilient economies, high per capita incomes
-Low fiscal deficits and government debt, low inflation
-Low external debt
AA -Stable, predictable governments with demonstrated track record of
responding to changing economic and political circumstances
-Tightly integrated into global trade and financial system
-Differ from AAAs only to a small degree because:
-Economies are smaller, less prosperous and generally more vulnerable to
adverse external influences (e.g., protection and terms of trade shocks)
-More variable fiscal deficits, government debt and inflation
-Moderate to high external debt.
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A -Politics evolving toward more open, predictable forms of governance in
environment of rapid economic and social change
-Established trend of integration into global trade and financial system
-Economies are smaller, less prosperous and generally more vulnerable to
adverse external influences (e.g., protection and terms of trade
shocks), but
-Usually rapid growth in output and per capita incomes
-Manageable through variable fiscal deficits, government debt and
inflation
-Usually low but variable debt.
BB -Political factors a source of major uncertainty, either because system
is in transition or due to external threats, or both, often in
environment of rapid economic and social change
-Integration into global trade and financial system growing but untested
-Low to moderate income developing economies but variable performance
and quite vulnerable to adverse external influences
-Variable to high fiscal deficits, government debt and inflation
-Very high and variable debt, often graduates of Brady plan but track
record not well established.
BBB -Political factors a source of significant uncertainty, either because
system is in transition or due to external threats, or both, often in
environment of rapid economic and social change
-Integration into global trade and financial system growing but untested
. -Economies less prosperous and often more vulnerable to adverse external
influences
-Variable to high fiscal deficits, government debt and inflation
-High and variable external debt
BB -Political factors a source of major uncertainty, either because system
is in transition or due to external threats, or both, often in
environment of rapid economic and social change
-Integration into global trade and financial system growing but untested
-Low to moderate income developing economies, but variable performance
and quite vulnerable to adverse external influences
-Variable to high fiscal deficits, government debt and inflation
-Very high and variable debt, often graduates of Brady Plan but track
record not well established.
DESCRIPTION OF DUFF & PHELPS RATINGS FOR CORPORATE BONDS AND FOR SOVEREIGN,
SUBNATIONAL AND SOVEREIGN
RELATED ISSUERS
AAA -Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
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AA -High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions.
A -Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB -Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic
cycles.
BB -Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according
to industry conditions or company fortunes. Overall quality may move up
or down frequently within this category.
IBAC LONG-TERM RATINGS FOR CORPORATE BONDS AND FOR SOVEREIGN, SUBNATIONAL AND
SOVEREIGN RELATED ISSUES
AAA -Obligations for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or
financial conditions are unlikely to increase investment risk
substantially.
AA -Obligations for which there is a very low expectation of investment
risk, Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.
A -Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
BBB -Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest
is adequate, although adverse changes in business, economic or financial
conditions are more likely to lead to increased investment risk than for
obligations in other categories.
BB -Obligations for which there is a possibility of investment risk
developing. Capacity for timely repayment of principal and interest
exists, but is susceptible over time to adverse changes in business,
economic or financial conditions. * * *
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* * *
In the case of sovereign, subnational and sovereign related issuers, the
Fund uses the rating service's foreign currency or domestic (local) currency
rating depending upon how a security in the Fund's portfolio is denominated. In
the case where the Fund holds a security denominated in a domestic (local)
currency and the rating service does not provide a domestic (local) currency
rating for the issuer, the Fund will use the foreign currency rating for the
issuer; in the case where the Fund holds a security denominated in a foreign
currency and the rating service does not provide a foreign currency rating for
the issuer, the Fund will treat the security as being unrated.
27
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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.
28
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STANDISH INTERNATIONAL FIXED INCOME FUND
Investment Adviser
Standish International Management Company, L.P.
One Financial Center
Boston, Massachusetts 02111
Principal Underwriter
Standish Fund Distributors, L.P.
One Financial Center
Boston, Massachusetts 02111
Custodian
Investors Bank & Trust Company
24 Federal Street
Boston, Massachusetts 02110
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
Legal Counsel
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
29
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May 1, 1996
STANDISH INTERNATIONAL FIXED INCOME FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus, but expands
upon and supplements the information contained in the Prospectus dated May 1,
1996, as amended and/or supplemented from time to time (the "Prospectus") of
Standish International Fixed Income Fund (the "Fund"), a separate investment
series of Standish, Ayer & Wood Investment Trust (the "Trust"). This Statement
of Additional Information should be read in conjunction with the Fund's
Prospectus which may be obtained without charge by writing or calling the
Standish Fund Distributors, L.P., the Trust's principal underwriter (the
"Principal Underwriter"), at the address and phone number set forth above.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS
Contents
Investment Objective and Policies.............................2
Investment Restrictions.......................................8
Calculation of Performance Data...............................9
Management...................................................10
Redemption of Shares.........................................15
Portfolio Transactions.......................................15
Determination of Net Asset Value.............................15
The Fund and Its Shares......................................15
Taxation.....................................................16
Additional Information.......................................18
Experts and Financial Statements.............................18
Financial Statement..........................................19
1
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's Prospectus describes the investment objective of the Fund and
summarizes the investment policies it will follow. The following discussion
supplements the description of the Fund's investment policies in the Prospectus.
See the Prospectus for a more complete description of the Fund's investment
objective, policies and restrictions.
Money Market Instruments and Repurchase Agreements
Money market instruments include short-term U.S. and foreign Government
securities, commercial paper (promissory notes issued by corporations to finance
their short-term credit needs), negotiable certificates of deposit,
non-negotiable fixed time deposits, bankers' acceptances and repurchase
agreements.
U.S. Government securities include securities which are direct obligations
of the U.S. Government backed by the full faith and credit of the United States,
and securities issued by agencies and instrumentalities of the U.S. Government,
which may be guaranteed by the U.S. Treasury or supported by the issuer's right
to borrow from the Treasury or may be backed by the credit of the federal agency
or instrumentality itself. Agencies and instrumentalities of the U.S. Government
include, but are not limited to, Federal Land Banks, the Federal Farm Credit
Bank, the Central Bank for Cooperatives, Federal Intermediate Credit Banks,
Federal Home Loan Banks and the Federal National Mortgage Association.
Investments in commercial paper will be rated "Prime-1" by Moody's
Investors Service, Inc. ("Moody's") or "A-1" by Standard & Poor's Rating Group
("S&P"), or Duff 1+ by Duff & Phelps, which are the highest ratings assigned by
these rating services (even if rated lower by one or more of the other
agencies), or which, if not rated or rated lower by one or more of the agencies
and not rated by the other agency or agencies, are judged by Standish
International Management Company, L.P. (the "Adviser") to be of equivalent
quality to the securities so rated. In determining whether securities are of
equivalent quality, the Adviser may take into account, but will not rely
entirely on, ratings assigned by foreign rating agencies.
A repurchase agreement is an agreement under which the Fund acquires money
market instruments (generally U.S. Government securities) from a commercial
bank, broker or dealer, subject to resale to the seller at an agreed-upon price
and date (normally the next business day). The resale price reflects an
agreed-upon interest rate effective for the period the instruments are held by
the Fund and is unrelated to the interest rate on the instruments. The
instruments acquired by the Fund (including accrued interest) must have an
aggregate market value in excess of the resale price and will be held by the
custodian bank for the Fund until they are repurchased. The Trustees will
monitor the standards that the Adviser will use in reviewing the
creditworthiness of any party to a repurchase agreement with the Fund.
The use of repurchase agreements involves certain risks. For example, if
the seller defaults on its obligation to repurchase the instruments acquired by
the Fund at a time when their market value has declined, the Fund may incur a
loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by the Fund are collateral for a loan by the Fund and
therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that the Fund may not be able to substantiate its interest in the
instruments it acquires. While the Trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
2
<PAGE>
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 market 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
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 will attempt to limit its net loss exposure resulting
from Strategic Transactions entered into for such purposes to not more than 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
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a
regulated investment company.
3
<PAGE>
Risks of Strategic Transactions
The use of Strategic Transactions has associated risks 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
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, they 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 attempt to limit its net
loss exposure resulting from Strategic Transactions entered into for non-hedging
purposes to not more than 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.
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General Characteristics of Options
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving options
require segregation of the Fund's assets in special accounts, as described below
under "Use of Segregated Accounts."
A put option gives the purchaser of the option, in consideration for the
payment of a premium, the right to sell, and the writer the obligation to buy
(if the option is exercised), the underlying security, commodity, index,
currency or other instrument at the exercise price. For instance, the Fund's
purchase of a put option on a security might be designed to protect its holdings
in the underlying instrument (or, in some cases, a similar instrument) against a
substantial decline in the market value by giving the Fund the right to sell
such instrument at the option exercise price. A call option, in consideration
for the payment of a premium, gives the purchaser of the option the right to
buy, and the seller the obligation to sell (if the option is exercised), the
underlying instrument at the exercise price. The Fund may purchase a call option
on a security, futures contract, index, currency or other instrument to seek to
protect the Fund against an increase in the price of the underlying instrument
that it intends to purchase in the future by fixing the price at which it may
purchase such instrument. An American style put or call option may be exercised
at any time during the option period while a European style put or call option
may be exercised only upon expiration or during a fixed period prior thereto.
The Fund is authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options"). Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, exchange listed options generally settle by
physical delivery of the underlying security or currency, although in the future
cash settlement may become available. Index options and Eurodollar instruments
are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
exchange listed put or call option is dependent, in part, upon the liquidity of
the option market. There is no assurance that a liquid option market on an
exchange will exist. In the event that the relevant market for an option on an
exchange ceases to exist, outstanding options on that exchange would generally
continue to be exercisable in accordance with their terms.
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The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct agreement with
the Counterparty. In contrast to exchange listed options, which generally have
standardized terms and performance mechanics, all the terms of an OTC option,
including such terms as method of settlement, term, exercise price, premium,
guarantees and security, are set by negotiation of the parties. The Fund will
generally sell (write) OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. To the
extent that the Fund does not do so, the OTC options are subject to the Fund's
restriction on illiquid securities. The Fund expects generally to enter into OTC
options that have cash settlement provisions, although it is not required to do
so.
Unless the parties provide for it, there is no central clearing or guaranty
function in the OTC option market. As a result, if the Counterparty fails to
make delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with U.S.
Government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker-dealers, domestic or foreign banks or other
financial institutions which have received, combined with any credit
enhancements, a long-term debt rating of A from S&P or Moody's or an equivalent
rating from any other nationally recognized statistical rating organization
("NRSRO") or which issue debt that is determined to be of equivalent credit
quality by the Adviser. The staff of the Securities and Exchange Commission (the
"SEC") currently takes the position that, absent the buy-back provisions
discussed above, OTC options purchased by the Fund, and portfolio securities
"covering" the amount of the Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Fund's limitation on investing in illiquid
securities. However, for options written with "primary dealers" in U.S.
Government securities pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount which is considered to be illiquid
may be calculated by reference to a formula price.
If the Fund sells (writes) a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Fund's income. The sale (writing) of put options
can also provide income.
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<PAGE>
The Fund may purchase and sell (write) call options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets, and on securities indices, currencies and futures
contracts. All calls sold by the Fund must be "covered" (i.e., the Fund must own
the securities or the futures contract subject to the call) or must meet the
asset segregation requirements described below as long as the call is
outstanding. Even though the Fund will receive the option premium to help offset
any loss, the Fund may incur a loss if the exercise price is below the market
price for the security subject to the call at the time of exercise. A call sold
by the Fund also exposes the Fund during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold.
The Fund may purchase and sell (write) put options on securities including
U.S. Treasury and agency securities, mortgage backed securities, foreign
sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments (whether or not it holds the
above securities in its portfolio), and on securities indices, currencies and
futures contracts. The Fund will not sell put options if, as a result, more than
50% of the Fund's assets would be required to be segregated to cover its
potential obligations under such put options other than those with respect to
futures and options thereon. In selling put options, there is a risk that the
Fund may be required to buy the underlying security at a price above the market
price.
Options on Securities Indices and Other Financial Indices
The Fund may also purchase and sell (write) call and put options on
securities indices and other financial indices. Options on securities indices
and other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement. For example, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the differential between
the closing price of the index and the exercise price of the option, which also
may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount upon exercise
of the option. In addition to the methods described above, the Fund may cover
call options on a securities index by owning securities whose price changes are
expected to be similar to those of the underlying index, or by having an
absolute and immediate right to acquire such securities without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other securities in its
portfolio.
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<PAGE>
General Characteristics of Futures
The Fund may enter into financial futures contracts or purchase or sell put
and call options on such futures. Futures are generally bought and sold on the
commodities exchanges where they are listed and involve payment of initial and
variation margin as described below. The sale of futures contracts creates a
firm obligation by the Fund, as seller, to deliver to the buyer the specific
type of financial instrument called for in the contract at a specific future
time for a specified price (or, with respect to index futures and Eurodollar
instruments, the net cash amount). The purchase of futures contracts creates a
corresponding obligation by the Fund, as purchaser, to purchase a financial
instrument at a specific time and price. Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such position
upon exercise of the option.
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
regulations of the Commodity Futures Trading Commission (the "CTFC") relating to
exclusions from regulation as a commodity pool operator. Those regulations
currently provide that the Fund may use commodity futures and option positions
(i) for bona fide hedging purposes without regard to the percentage of assets
committed to margin and option premiums, or (ii) for other purposes permitted by
the CTFC to the extent that the aggregate initial margin and option premiums
required to establish such non-hedging positions (net if the amount the
positions were "in the money" at the time of purchase) do not exceed 5% of the
net asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on such positions. Typically, maintaining a futures contract
or selling an option thereon requires the Fund to deposit, with its custodian
for the benefit of a futures commission merchant, as security for its
obligations an amount of cash or other specified assets (initial margin) which
initially is typically 1% to 10% of the face amount of the contract (but may be
higher in some circumstances). Additional cash or assets (variation margin) may
be required to be deposited directly with the futures commission merchant
thereafter on a daily basis as the value of the contract fluctuates. The
purchase of an option on financial futures involves payment of a premium for the
option without any further obligation on the part of the Fund. If the Fund
exercises an option on a futures contract it will be obligated to post initial
margin (and potential subsequent variation margin) for the resulting futures
position just as it would for any position. Futures contracts and options
thereon are generally settled by entering into an offsetting transaction but
there can be no assurance that the position can be offset prior to settlement at
an advantageous price, nor that delivery will occur. The segregation
requirements with respect to futures contracts and options thereon are described
below.
Currency Transactions
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<PAGE>
The Fund may engage in currency transactions with Counterparties in order
to hedge the value of portfolio holdings denominated in particular currencies
against fluctuations in relative value or to enhance potential gain. Currency
transactions include currency contracts, exchange listed currency futures,
exchange listed and OTC options on currencies, and currency swaps. A forward
currency contract involves a privately negotiated obligation to purchase or sell
(with delivery generally required) a specific currency at a future date, which
may be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. A currency swap is an
agreement to exchange cash flows based on the notional (agreed-upon) difference
among two or more currencies and operates similarly to an interest rate swap,
which is described below. A Fund may enter into over-the-counter currency
transactions with Counterparties which have received, combined with any credit
enhancements, a long term debt rating of A by S&P or Moody's, respectively, or
that have an equivalent rating from a NRSRO or (except for OTC currency options)
whose obligations are determined to be of equivalent credit quality by the
Adviser.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will
generally be limited to hedging involving either specific transactions or
portfolio positions. See, "Strategic Transactions". Transaction hedging is
entering into a currency transaction with respect to specific assets or
liabilities of the Fund, which will generally arise in connection with the
purchase or sale of its portfolio securities or the receipt of income therefrom.
Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated or generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended wholly or partially to
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to proxy hedging as described below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value in
relation to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure. For example, the Fund may hold a French government
bond and the Adviser may believe that French francs will deteriorate against
German marks. The Fund would sell French francs to reduce its exposure to that
currency and buy German marks. This strategy would be a hedge against a decline
in the value of French francs, although it would expose the Fund to declines in
the value of the German mark relative to the U.S. dollar.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is typically used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which certain of the Fund's portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Fund's securities denominated in linked
currencies. For example, if the Adviser considers that the Austrian schilling is
linked to the German deutschemark (the "D-mark"), the Fund holds securities
denominated in schillings and the Adviser believes that the value of schillings
will decline against the U.S. dollar, the Adviser may enter into a contract to
sell D-marks and buy dollars. Proxy hedging involves some of the same risks and
considerations as other transactions with similar instruments. Currency
transactions can result in losses to the Fund if the currency being hedged
fluctuates in value to a degree or in a direction that is not anticipated.
Further, there is the risk that the perceived linkage between various currencies
may not be present or may not be present during the particular time that the
Fund is engaging in proxy hedging. If the Fund enters into a currency hedging
transaction, the Fund will comply with the asset segregation requirements
described below.
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<PAGE>
Risks of Currency Transactions
Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to the Fund if
it is unable to deliver or receive currency or funds in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risks that
apply to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
Combined Transactions
The Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple currency transactions
(including forward currency contracts) and multiple interest rate transactions,
structured notes and any combination of futures, options, currency and interest
rate transactions ("component transactions") instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars
10
<PAGE>
Among the Strategic Transactions into which the Fund may enter are interest
rate, currency and index swaps and the purchase or sale of related caps, floors
and collars. The Fund expects to enter into these transactions primarily for
hedging purposes, including, but not limited to, preserving a return or spread
on a particular investment or portion of its portfolio, protecting against
currency fluctuations, as a duration management technique or protecting against
an increase in the price of securities the Fund anticipates purchasing at a
later date. Swaps, caps, floors and collars may also be used to enhance
potential gain in circumstances where hedging is not involved although, as
described above, the Fund will attempt to limit its net loss exposure resulting
from swaps, caps, floors and collars and other Strategic Transactions entered
into for such purposes to not more than 3% of the Fund's net assets at any one
time. The Fund will not sell interest rate caps, floors or collars where it does
not own securities or other instruments providing the income stream the Fund may
be obligated to pay. Interest rate swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain rate of return within a predetermined range of
interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from an NRSRO or which issue debt that is determined to be of equivalent
credit quality by the Adviser. If there is a default by the Counterparty, the
Fund may have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed. Swaps, caps, floors and collars are considered illiquid for purposes
of the Fund's policy regarding illiquid securities, unless it is determined,
based upon continuing review of the trading markets for the specific security,
that such security is liquid. The Board of Trustees has adopted guidelines and
delegated to the Adviser the daily function of determining and monitoring the
liquidity of swaps, caps, floors and collars. The Board of Trustees, however,
retains oversight focusing on factors such as valuation, liquidity and
availability of information and is ultimately responsible for such
determinations. The staff of the SEC currently takes the position that swaps,
caps, floors and collars are illiquid, and are subject to the Fund's limitation
on investing in illiquid securities.
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Eurodollar Contracts
The Fund may make investments in Eurodollar contracts. Eurodollar contracts
are U.S. dollar-denominated futures contracts or options thereon which are
linked to the London Interbank Offered Rate ("LIBOR"), although foreign
currency-denominated instruments are available from time to time. Eurodollar
futures contracts enable purchasers to obtain a fixed rate for the lending of
funds and sellers to obtain a fixed rate for borrowings. The Fund might use
Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many interest rate swaps and fixed income instruments are
linked.
Risks of Strategic Transactions Outside the United States
When conducted outside the United States, Strategic Transactions may not be
regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities, currencies
and other instruments. The value of such positions also could be adversely
affected by: (i) lesser availability than in the United States of data on which
to make trading decisions, (ii) delays in the Fund's ability to act upon
economic events occurring in foreign markets during non-business hours in the
United States, (iii) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States, (iv) lower
trading volume and liquidity, and (v) other complex foreign political, legal and
economic factors. At the same time, Strategic Transactions may offer advantages
such as trading in instruments that are not currently traded in the United
States or arbitrage possibilities not available in the United States.
Use of Segregated Accounts
The Fund will hold securities or other instruments whose values are
expected to offset its obligations under the Strategic Transactions. The Fund
will not enter into Strategic Transactions that expose the Fund to an obligation
to another party unless it owns either (i) an offsetting position in securities
or other options, futures contracts or other instruments or (ii) cash,
receivables or liquid, high grade debt securities with a value sufficient to
cover its potential obligations. The Fund may have to comply with any applicable
regulatory requirements designed to make sure that mutual funds do not use
leverage in Strategic Transactions, and if required, will set aside cash and
other assets in a segregated account with its custodian bank in the amount
prescribed. In that case, the Fund's custodian would maintain the value of such
segregated account equal to the prescribed amount by adding or removing
additional cash or other assets to account for fluctuations in the value of the
account and the Fund's obligations on the underlying Strategic Transactions.
Assets held in a segregated account would not be sold while the Strategic
Transaction is outstanding, unless they are replaced with similar assets. As a
result, there is a possibility that segregation of a large percentage of the
Fund's assets could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
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"When-Issued" and "Delayed Delivery" Securities
The Fund may commit up to 25% of its net assets to purchase securities on a
"when-issued" or "delayed delivery" basis, which means that delivery and payment
for the securities will normally take place 15 to 45 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" and "delayed
delivery" 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 purchased on a "when-issued" or "forward commitment" basis, 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 the aggregate market value of the segregated
securities equals the amount of the Fund's commitment.
Securities purchased on a "when-issued" and "delayed delivery" 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 decline in value when interest rates rise.
Portfolio Turnover
It is not the policy of the Fund to purchase or sell securities for trading
purposes. However, the Fund places no restrictions on portfolio turnover and it
may sell any portfolio security without regard to the period of time it has been
held, except as may be necessary to maintain its status as a regulated
investment company under the Code. The Fund may therefore generally change its
portfolio investments at any time in accordance with the Adviser's appraisal of
factors affecting any particular issuer or market, or relevant economic
conditions.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental policies in addition to
those described under "Investment Objective and Policies -- Investment
Restrictions" in the Prospectus. The Fund's fundamental policies cannot be
changed unless the change is approved by the lesser of (i) 67% or more of the
voting securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy,
or (ii) more than 50% of the outstanding voting securities of the Fund. The Fund
may not:
1. Invest, with respect to at least 50% 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.
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<PAGE>
2. 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.
3. Lend portfolio securities, except that the Fund may lend its portfolio
securities with a value up to 20% of its total assets (with a 10% limit
for any borrower) and may enter into repurchase agreements with respect to
25% of the value of its net assets.
4. Invest more than 25% of the current value of its total assets in any
single industry, provided that this restriction shall not apply to debt
securities issued or guaranteed by the United States government or its
agencies or instrumentalities.
5. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Fund may be
deemed to be an underwriter under the Securities Act of 1933.
6. Purchase real estate or real estate mortgage loans, although the Fund may
purchase marketable securities of companies which deal in real estate,
real estate mortgage loans or interests therein.
7. Purchase securities on margin (except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities).
8. Purchase or sell commodities or commodity contracts except that the Fund
may purchase and sell financial futures contracts and options on financial
futures contracts and engage in foreign currency exchange transactions.
The following restrictions are not fundamental policies and may be changed
by the Trustees without shareholder approval, in accordance with applicable
laws, regulations or regulatory policy. The Fund may not: a. Make short sales of
securities unless
(a) after effect is given to any such short sale, the total market value of
all securities sold short would not exceed 5% of the value of the Fund's
net assets or (b) at all times during which a short position is open it
owns an equal amount of such securities, or by virtue of ownership of
convertible or exchangeable securities it has the right to obtain through
the conversion or exchange of such other securities an amount equal to the
securities sold short.
b. Invest in companies for the purpose of exercising control or management.
c. Purchase the securities of other investment companies, provided that the
Fund may make such a purchase (a) in the open market involving no
commission or profit to a sponsor or dealer (other than the customary
broker's commission), provided that immediately thereafter (i) not more
than 10% of the Fund's total assets would be invested in such securities,
(ii) not more than 5% of the Fund's total assets would be invested in the
securities of any one investment company and (iii) not more than 3% of the
voting stock of any one investment company would be owned by the Fund, or
(b) as part of a merger, consolidation, or acquisition of assets.
14
<PAGE>
d. Purchase or write options, except as described under "Strategic
Transactions."
e. Invest in interests in oil, gas or other exploration or development
programs.
f. Invest more than 5% of the assets of the Fund in the securities of any
issuers which together with their corporate parents have records of less
than three years' continuous operation, including the operation of any
predecessor, other than debt securities issued or guaranteed by U.S. or
foreign national, provincial, state or other governments with taxing
authority or by their agencies or by supranational entities and securities
fully collateralized by such securities.
g. Invest in securities of any company if any officer or director (trustee)
of the Fund or of the Fund's investment adviser owns more than 1/2 of 1%
of the outstanding securities of such company and such officers and
directors (trustees) own in the aggregate more than 5% of the securities
of such company.
h. Invest more than an aggregate of 15% of the net assets of the Fund in (a)
repurchase agreements which are not terminable within seven days, (b)
securities subject to legal or contractual restrictions on resale or for
which there are no readily available market quotations and (c) in other
illiquid securities, including nonnegotiable fixed time deposits.
Purchases of securities of other investment companies permitted under
restriction (c) above could cause the Fund to pay additional management and
advisory fees and distribution fees.
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, except with respect to restriction (g) above.
In order to permit the sale of shares of the Fund in certain states, the
Board may, in its sole discretion, adopt restrictions on investment policy more
restrictive than those described above. Should the Board determine that any such
more restrictive policy is no longer in the best interest of the Fund and its
shareholders, the Fund may cease offering shares in the state involved and the
Board may revoke such restrictive policy. Moreover, if the states involved shall
no longer require any such restrictive policy, the Board may, in its sole
discretion, revoke such policy.
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, the Fund may, from time to time, advertise
certain total return information. The average annual total return of the Fund
for a period is computed by subtracting the net asset value per share at the
beginning of the period from the net asset value per share at the end of the
period (after adjusting for the reinvestment of any income dividends and capital
gain distributions), and dividing the result by the net asset value per share at
the beginning of the period. In particular, the average annual total return of
the Fund ("T") is computed by using the redeemable value at the end of a
specified period of time ("ERV") of a hypothetical initial investment of $1,000
("P") over a period of time ("n") according to the formula P(1+T)n=ERV.
15
<PAGE>
The average annual total return quotations for the Fund for the year ended
December 31, 1995 and since inception (January 2, 1991 to December 31, 1995) are
18.13% and 10.55%, respectively. The Fund's average annualized yield for the 30
day period ended December 31, 1995 was 6.80%. These performance quotations
should not be considered as representative of the Fund's performance for any
specified period in the future.
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. 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 non-recurring charges for the period stated. In particular, yield is
determined according to the following formula:
Yield = 2[((A - B + 1)/CD)^6 - 1]
Where: A equals dividends and interest earned during the period; B equals
net expenses accrued for the period; C equals average daily number of shares
outstanding during the period that were entitled to receive dividends; D equals
the maximum offering price per share on the last day of the period.
The Fund may also quote non-standardized yield, such as yield-to-maturity
("YTM"). YTM represents the rate of return an investor will receive if a
long-term, interest bearing investment, such as a bond, is held to its maturity
date. YTM does not take into account purchase price, redemption value, time to
maturity, coupon yield, and the time between interest payments.
In addition to average annual return quotations, the Fund may quote
quarterly and annual performance on a net (with management and administration
fees deducted) and gross basis as follows:
16
<PAGE>
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
1Q91 (2.90)% (2.75)%
2Q91 (1.76) (1.48)
3Q91 9.99 10.18
4Q91 9.69 9.84
1991 15.07 15.95
1Q92 (2.43) 2.26
2Q92 9.45 9.59
3Q92 4.30 4.44
4Q92 (2.97) (2.82)
1992 8.07 8.71
1Q93 6.18 6.31
2Q93 5.41 5.54
3Q93 5.26 5.40
4Q93 5.06 5.18
1993 23.77 24.38
1Q94 (5.78) (5.66)
2Q94 (4.48) (4.35)
3Q94 (0.95) (0.82)
4Q94 1.84 1.97
1994 (9.22) (8.74)
1Q95 2.59 2.72
2Q95 4.71 4.84
3Q95 4.01 4.16
4Q95 5.74 5.88
1995 18.13 18.75
Performance quotations should not be considered as representative of the
Fund's performance for any specified period in the future.
The Fund's performance may be compared in sales literature to the
performance of other mutual funds having similar objectives or to standardized
indices or other measures of investment performance. In particular, the Fund may
compare its performance to the J.P. Morgan Non-U.S. Government Bond Index, which
is generally considered to be representative of unmanaged government bonds in
foreign markets, and the Lehman Brothers Aggregate Index which is composed of
securities from the Lehman Brothers Government/Corporate Bond Index, Mortgage
Backed Securities Index and Yankee BondIndex, and is generally considered to be
representative of all unmanaged, domestic, dollar denominated, fixed rate
investment grade bonds. Comparative performance may also be expressed by
reference to a ranking prepared by a mutual fund monitoring service or by one or
more newspapers, newsletters or financial periodicals. Performance comparisons
may be useful to investors who wish to compare the Fund's past performance to
that of other mutual funds and investment products. Of course, past performance
is not a guarantee of future results.
17
<PAGE>
<TABLE>
<CAPTION>
MANAGEMENT
Trustees and Officers
The Trustees and executive officers of the Trust are listed below. All
executive officers of the Trust are affiliates of Standish, Ayer & Wood, Inc.,
the Fund's investment adviser.
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
*D. Barr Clayson, 7/29/35 Vice President and Trustee Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center President,
Boston, MA 02111 Standish International
Management Company, L.P.
Samuel C. Fleming, 9/30/40 Trustee Chairman of the Board
c/o Decision Resources, Inc. and Chief Executive Officer,
1100 Winter Street Decision Resources, Inc.;
Waltham, MA 02154 through 1989, Senior V.P.
Arthur D. Little
Benjamin M. Friedman, 8/5/44 Trustee William Joseph Maier
c/o Harvard University Professor of Political Economy,
Cambridge, MA 02138 Harvard University
John H. Hewitt, 4/11/38 Trustee Trustee, The Peabody
P.O. Box 307 Foundation; Trustee,
So. Woodstock, VT 05071 Visiting Nurse Alliance of Vermont
and New Hampshire
*Edward H. Ladd, 1/3/38 Trustee and Vice President Chairman of the Board
c/o Standish, Ayer & Wood, Inc. and Managing Director,
One Financial Center Standish, Ayer & Wood, Inc. since 1990;
Boston, MA 02111 formerly President of
Standish, Ayer & Wood, Inc.
Caleb Loring III, 11/14/43 Trustee Trustee, Essex Street Associates
c/o Essex Street Associates (family investment trust office);
P.0. Box 5600 Director, Holyoke Mutual Insurance Company
Beverly Farms, MA 01915
*Richard S. Wood, 5/2/54 President and Trustee Vice President, Secretary and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Executive Vice President,
Boston, MA 02111 Standish International Management Company, L.P.
18
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
Richard C. Doll, 7/8/48 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
James E. Hollis III, 11/21/48 Executive Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
David W. Murray, 5/5/40 Treasurer and Secretary Vice President, Treasurer and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Caleb F. Aldrich, 9/20/57 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
Beverly E. Banfield, 7/6/56 Vice President Vice President and Compliance Officer,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Assistant Vice President and Compliance Officer,
Boston, MA 02111 Freedom Capital Management Corp.
(1989-1992)
Nicholas S. Battelle, 6/24/42 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Walter M. Cabot, 1/6/33 Vice President Senior Advisor and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center prior to 1991, President,
Boston, MA 02111 Harvard Management Company
David H. Cameron, 11/2/55 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Karen K. Chandor, 2/13/50 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Lavinia B. Chase, 6/4/46 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Susan B. Coan, 5/1/52 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
19
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
W. Charles Cook II, 2/16/63 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Joseph M. Corrado, 5/13/55 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Dolores S. Driscoll, 2/17/48 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Mark A. Flaherty, 4/24/59 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Anne P. Herrmann, 1/26/56 Vice President Mutual Fund Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ann S. Higgins, 4/8/35 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Senior Operations Manager,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Since December 1995, formerly
Boston, MA 02111 Vice President, Scudder Stevens and Clark
Raymond J. Kubiak, 9/3/57 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Maria D. Furman, 2/3/54 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Phillip D. Leonardi, 4/24/62 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc. since November 1993; formerly, Investment Sales,
One Financial Center Cigna Corporation (1993) and
Boston, MA 02111 Travelers Corporation (1984-1993)
Laurence A. Manchester, 5/24/43 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
20
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
George W. Noyes, 11/12/44 Vice President President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Arthur H. Parker, 8/12/35 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Jennifer A. Pline, 3/8/60 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Howard B. Rubin, 10/29/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Michael C. Schoeck, 10/24/55 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since August, 1993;
One Financial Center formerly, Vice President,
Boston, MA 02111 Commerzbank, Frankfurt, Germany
Austin C. Smith, 7/25/42 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Stephen A. Smith, 3/13/49 Vice President Vice President, since November 2, 1993;
c/o Standish, Ayer & Wood, Inc. formerly, Standish, Ayer & Wood, Inc. Consultant
One Financial Center Cambridge Associates
Boston, MA 02111
David C. Stuehr, 3/1/58 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
James W. Sweeney, 5/15/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ralph S. Tate, 4/2/47 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since April, 1990;
One Financial Center formerly Vice President, Aetna Life & Casualty
Boston, MA 02111
Michael W. Thompson, 3/31/56 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
21
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
Christopher Van Alstyne, 3/24/60 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
</TABLE>
*Indicates that Trustee is an interested person of the Trust for purposes of the
1940 Act.
22
<PAGE>
Compensation of Trustees and Officers
The Fund pays no compensation to the Trust's Trustees or officers. None of
the Trust's Trustees or officers have engaged in any financial transactions
(other than the purchase or redemption of the Fund's shares) with the Trust or
the Adviser.
The following table sets forth all compensation paid to the Trust's
Trustees as of the Fund's fiscal year ended December 31, 1995:
<TABLE>
<CAPTION>
Pension or Retirement Total Compensation
Aggregate Compensation Benefits Accrued as from Fund and
Name of Trustee from the Fund Part of Fund's Expenses Other Funds in Complex*
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
D. Barr Clayson $0 $0 $0
Phyllis L. Cothran** 0 0 0
Richard C. Doll*** 0 0 0
Samuel C. Fleming 10,610 0 46,000
Benjamin M. Friedman 9,590 0 41,750
John H. Hewitt 9,590 0 41,750
Edward H. Ladd 0 0 0
Caleb Loring, III 9,590 0 41,750
Richard S. Wood 0 0 0
*As of the date of this Statement of Additional Information, there were 18 funds in the fund complex.
**Ms. Cothran resigned as a Trustee effective January 31, 1995.
***Mr. Doll resigned as a Trustee effective December 6, 1995.
</TABLE>
Certain Shareholders
At February 1, 1996, Trustees and officers of the Trust as a group
beneficially owned (i.e., had voting and/or investment power) less than 1% of
the then outstanding shares of the Fund. At that date, each of the following
persons beneficially owned 5% or more of the then outstanding shares of the
Fund:
Percentage of
Name and Addres Outstanding Shares
- --------------------------------------------------------------------------------
Bell Atlantic Master Trust Pension 8%
Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103
American Telephone & Telegraph Co. 10%
Master Pension Trust
c/o Citibank
111 Wall Street
New York, NY 10005
Maryland State Retirement & Pension System 7%
Room 701
301 West Preston Street
Baltimore, MD
Investment Adviser
Standish International Management Company, L.P. (the "Adviser") serves as
investment adviser to the Fund pursuant to a written investment advisory
agreement with the Trust. The Adviser is a Delaware limited partnership
organized in 1991 and is registered under the 1940 Act. The General Partner of
the Adviser is Standish, Ayer & Wood, Inc. ("Standish"), One Financial Center,
Boston, MA 02111, which holds a 99.98% partnership interest. The Limited
Partners, who each hold a 0.01% interest in the Adviser, are Walter M. Cabot,
Sr., Chairman of the Board of the Adviser and a Director of and a Senior Adviser
to Standish, and D. Barr Clayson, the President of the Adviser and a Managing
Director of Standish. Richard S. Wood, a Vice President and Director of Standish
and the President of the Trust, is the Executive Vice President of the Adviser.
The Adviser succeeded Standish as the Fund`s investment adviser as of October 1,
1991.
23
<PAGE>
The following, constituting all of the Directors and all of the
shareholders of Standish, are Standish's controlling persons: Caleb F. Aldrich,
Nicholas S. Battelle, Walter M. Cabot, Sr., David H. Cameron, Karen K. Chandor,
D. Barr Clayson, Richard C. Doll, Dolores S. Driscoll, Mark A. Flaherty, Maria
D. Furman, James E. Hollis III, Raymond J. Kubiak, Edward H. Ladd, Laurence A.
Manchester, David W. Murray, George W. Noyes, Arthur H. Parker, Howard B. Rubin,
Austin C. Smith, David C. Stuehr, James J. Sweeney, Ralph S. Tate and Richard S.
Wood.
Certain services provided by the Adviser under the advisory agreement are
described in the Prospectus. In addition to those services, the Adviser provides
the Fund with office space for managing its affairs, with the services of
required executive personnel, and with certain clerical services and facilities.
These services are provided without reimbursement by the Fund for any costs
incurred. Under the investment advisory agreement, the Adviser is paid a fee
based on a percentage of the Fund's average net daily asset value computed as
described in the Prospectus. This fee is paid monthly. The rate at which the fee
is paid is described in the Prospectus.
Pursuant to the investment advisory agreement, the Fund bears expenses of
its operations other than those incurred by the Adviser pursuant to the
investment advisory agreement. Among other expenses, the Fund will pay share
pricing and shareholder servicing fees and expenses; custodian fees and
expenses; legal and auditing fees and expenses; expenses of prospectuses,
statements of additional information and shareholder reports provided to
existing shareholders; registration and reporting fees and expenses; and
Trustees' fees and expenses. The investment advisory agreement provides that if
the total annual operating expenses of the Fund (excluding brokerage
commissions, taxes and extraordinary expenses) in any fiscal year exceed the
permissible expense limitation applicable to the Fund in any state in which
shares of the Fund are then qualified for sale, the compensation due the Adviser
shall be reduced by the amount of the excess, by a reduction or refund thereof
at the time such compensation is payable after the end of each calendar month
during the fiscal year, subject to readjustment during the year. The Adviser has
voluntarily agreed to limit the Fund's total operating expenses (excluding
brokerage commissions, taxes and extraordinary expenses) to 0.80% of the Fund's
average daily net assets. The Adviser may discontinue or modify such limitation
in the future at its discretion, although it has no current intention to do so.
For the years ended December 31, 1993, 1994 and 1995 advisory fees payable to
the Adviser totalled $2,820,789, $4,420,708, $3,916,500 respectively.
24
<PAGE>
Unless terminated as provided below, the investment advisory agreement
continues in full force and effect for successive periods of one year, but only
so long as each such continuance is approved annually (i) by either the Trustees
of the Trust or by vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) of the Fund, and, in either event (ii) by vote of a
majority of the Trustees of the Trust who are not parties to the investment
advisory agreement or "interested persons" (as defined in the 1940 Act) of any
such party, cast in person at a meeting called for the purpose of voting on such
approval. The investment advisory agreement may be terminated at any time
without the payment of any penalty by vote of the Trustees of the Trust or by
vote of a majority of the outstanding voting securities (as defined in the 1940
Act) of the Fund or by the Adviser, on sixty days' written notice to the other
parties. The investment advisory agreement terminates in the event of its
assignment as defined in the 1940 Act.
In an attempt to avoid any potential conflict with portfolio transactions
for the Fund, the Adviser and the Trust have adopted extensive restrictions on
personal securities trading by personnel of the Adviser and its affiliates.
These restrictions include: pre-clearance of all personal securities
transactions and a prohibition of purchasing initial public offerings of
securities. These restrictions are a continuation of the basic principle that
the interests of the Fund and its shareholders come before those of the Adviser,
its affiliates and their employees.
Distributor of the Trust
Standish Fund Distributors, L.P. (the "Principal Underwriter"), an
affiliate of the Adviser, serves as the Trust's exclusive principal underwriter
and holds itself available to receive purchase orders for the Fund's shares. In
that capacity, the Principal Underwriter has been granted the right, as agent of
the Trust, to solicit and accept orders for the purchase of the Fund's shares in
accordance with the terms of the Underwriting Agreement between the Trust and
the Principal Underwriter. Pursuant to the Underwriting Agreement, the Principal
Underwriter has agreed to use its best efforts to obtain orders for the
continuous offering of the Fund's shares. The Principal Underwriter receives no
commissions or other compensation for its services, and has not received any
such amounts in any prior year. The Underwriting Agreement shall continue in
effect with respect to the Fund until two years after its execution and for
successive periods of one year thereafter only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the Fund's
outstanding shares or by the Trustees of the Trust or (ii) by a vote of a
majority of the Trustees of the Trust who are not "interested persons" (as
defined by the 1940 Act) of the parties to the Underwriting Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Underwriting Agreement will terminate automatically if assigned by either party
thereto and is terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust, a vote of a majority of the Trustees who are not
"interested persons" of the Trust, or by a vote of the holders of a majority of
the Fund's outstanding shares, in any case without payment of any penalty on not
more than 60 days' written notice to the other party. The offices of the
Principal Underwriter are located at One Financial Center, 26th Floor, Boston,
Massachusetts 02111.
25
<PAGE>
REDEMPTION OF SHARES
Detailed information on redemption of shares is included in the Prospectus.
The Fund may suspend the right to redeem shares or postpone the date of
payment upon redemption for more than seven days (i) for any period during which
the New York Stock Exchange is closed (other than customary weekend or holiday
closings) or trading on the exchange is restricted; (ii) for any period during
which an emergency exists as a result of which disposal by the Fund of
securities owned by it or determination by the Fund of the value of its net
assets is not reasonably practicable; or (iii) for such other periods as the SEC
may permit for the protection of shareholders of the Fund.
The Fund intends to pay in cash for all shares redeemed but, under certain
conditions, the Fund may make payment wholly or partly in portfolio securities.
Portfolio securities paid upon redemption of Fund shares will be valued at their
then current market value. The Fund has elected to be governed by the provisions
of Rule 18f-1 under the 1940 Act which limits the Fund's obligation to make cash
redemption payments to each shareholder during any 90-day period to the lesser
of $250,000 or 1% of the Fund's net asset value at the beginning of such period.
An investor may incur brokerage costs in converting portfolio securities
received upon redemption to cash.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for placing the Fund's portfolio transactions
and will do so in a manner deemed fair and reasonable to the Fund and not
according to any formula. The primary consideration in all portfolio
transactions will be prompt execution of orders in an efficient manner at the
most favorable price. Many transactions in foreign equity securities are
executed by broker-dealers in foreign countries in which commission rates are
fixed and, therefore, are not negotiable (as such rates are in the United
States) and are generally higher than in the United States. In selecting brokers
and in negotiating commissions, the Adviser will consider the firm's
reliability, the quality of its execution services on a continuing basis and its
financial condition. When more than one firm is believed to meet these criteria,
preference may be given to firms which also sell shares of the Fund. In
addition, if the Adviser determines in good faith that the amount of commissions
charged by a broker is reasonable in relation to the value of the brokerage and
research services provided by such broker, the Fund may pay commissions to such
broker in an amount greater than the amount another firm may charge. Research
services may include (i) furnishing advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities, (ii)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts, and (iii) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). Research
services furnished by firms through which the Fund effects its securities
transactions may be used by the Adviser in servicing other accounts; not all of
these services may be used by the Adviser in connection with the Fund. The
investment advisory fee paid by the Fund under the investment advisory agreement
will not be reduced as a result of the Adviser's receipt of research services.
26
<PAGE>
The Adviser also places portfolio transactions for other advisory accounts.
The Adviser will seek to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations, the main factors considered by the Adviser will be the
respective investment objectives, the relative size of portfolio holdings of the
same or comparable securities, the availability of cash for investment, the size
of investment commitments generally held, and opinions of the persons
responsible for recommending the investment.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value is calculated 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 time). Currently, the New York Stock Exchange is not open weekends, New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas. The net asset value of the Fund's shares is
determined as of the close of regular trading on the New York Stock Exchange
(currently 4:00 p.m., New York City time) and is computed by dividing the value
of all securities and other assets of the Fund less all liabilities by the
number of shares outstanding, and rounding to the nearest cent per share.
Expenses and fees, including the investment advisory fee, are accrued daily and
taken into account for the purpose of determining net asset value.
Portfolio securities are valued at the last sale prices 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 price.
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 60 days remaining to maturity when
acquired by the Fund are valued on an amortized cost basis. This is accomplished
by valuing the instrument at cost and then assuming a constant amortization to
maturity of any premium or discount. If the Fund acquires a money market
instrument with more than 60 days remaining to its maturity, it is valued at
current market value until the 60th 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 60-day period that amortized cost does not represent fair
value.
27
<PAGE>
Generally, trading in foreign securities is substantially completed each
day at various times prior to the close of regular trading on the New York Stock
Exchange. The values of such securities used in computing the net asset value of
the Fund's shares are determined as of such times. Foreign currency exchange
rates are also generally determined prior to the close of regular trading on the
New York Stock Exchange. Occasionally, events which affect the values of such
securities and such exchange rates may occur between the times at which they are
determined and the close of regular trading on the New York Stock Exchange and
will therefore not be reflected in the computation of the Fund's net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities are valued at their fair value as determined
in good faith by the Trustees.
THE FUND AND ITS SHARES
The Fund is an 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 as amended from time to time (the "Declaration"). Under the Declaration,
the Trustees have authority to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, of the Fund. Each share represents an equal
proportionate interest in the Fund with each other share and is entitled to such
dividends and distributions as are declared by the Trustees. Shareholders are
not entitled to any preemptive, conversion or subscription rights. All shares,
when issued, will be fully paid and non-assessable by the Trust. Upon any
liquidation of the Fund, shareholders are entitled to share pro rata in the net
assets available for distribution.
Pursuant to the Declaration, the Trustees may create additional funds by
establishing additional series of shares in the Trust. The establishment of
additional series would not affect the interests of current shareholders in the
Fund. As of the date of this Statement of Additional Information, the Trustees
have established fourteen other series of the Trust that publicly offer their
shares. Pursuant to the Declaration, the Board may establish and issue multiple
classes of shares for each series of the Trust. As of the date of this Statement
of Additional Information, the Trustees do not have any plan to establish
multiple classes of shares for the Fund. Pursuant to the Declaration of Trust
and subject to shareholder approval (if then required), the Trustees may
authorize the Fund to invest all of its investable assets in a single open-end
investment company that has substantially the same investment objectives,
policies and restrictions as the Fund. As of the date of this Statement of
Additional Information, the Board does not have any plan to authorize the Fund
to so invest its assets.
All Fund shares have equal rights with regard to voting, and shareholders
of the Fund have the right to vote as a separate class with respect to matters
as to which their interests are not identical to those of shareholders of other
investment series of the Trust, including the approval of an investment advisory
contract and any change of investment policy requiring the approval of
shareholders.
28
<PAGE>
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Declaration disclaims shareholder liability for acts or obligations of the Trust
and requires that notice of this disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Trust or a Trustee. The
Declaration also provides for indemnification from the assets of the Trust for
all losses and expenses of any Trust shareholder held liable for the obligations
of the Trust. Thus, the risk of a shareholder incurring a financial loss on
account of his or its liability as a shareholder of the Trust is limited to
circumstances in which both inadequate insurance existed and the Trust would be
unable to meet its obligations. The possibility that these circumstances would
occur is remote. Upon payment of any liability incurred by the Trust, the
shareholder paying the liability will be entitled to reimbursement from the
general assets of the Trust. The Declaration also provides that no series of the
Trust is liable for the obligations of any other series. The Trustees intend to
conduct the operations of the Trust to avoid, to the extent possible, ultimate
liability of shareholders for liabilities of the Trust.
TAXATION
Each series of the Trust, including the Fund, is treated as a separate
entity for accounting and tax purposes. The Fund has qualified and elected to be
treated as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), and intends to continue to so
qualify in the future. As such and by complying with the applicable provisions
of the Code regarding the sources of its income, the timing of its
distributions, and the diversification of its assets, the Fund will not be
subject to Federal income tax on its investment company taxable income (i.e.,
all income, after reduction by deductible expenses, other than its "net capital
gain," which is the excess, if any, of its net long-term capital gain over its
net short-term capital loss) and net capital gain which are distributed to
shareholders at least annually in accordance with the timing requirements of the
Code.
The Fund will be subject to a 4% non-deductible federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
Fund intends under normal circumstances to avoid liability for such tax by
satisfying such distribution requirements.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Internal Revenue Code, it will also not be required to pay any Massachusetts
income tax.
The Fund will not distribute net capital gains realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. For federal income tax purposes, the Fund is permitted to carry forward a
net capital loss in any year to offset its own net capital gains, if any, during
the eight years following the year of the loss. To the extent subsequent net
capital gains are offset by such losses, they would not result in federal income
tax liability to the Fund and, as noted above, would not be distributed as such
to shareholders. The Fund has $5,704,684 of capital loss carryforwards, which
expire on December 31, 2002, available to offset future net capital gains.
29
<PAGE>
If the Fund invests in certain zero coupon securities, increasing rate
securities or, in general, other securities with original issue discount (or
with market discount if the Fund elects to include market discount in income
currently), the Fund must accrue income on such investments prior to the receipt
of the corresponding cash payments. However, the Fund must distribute, at least
annually, all or substantially all of its net income, including such accrued
income, to shareholders to qualify as a regulated investment company under the
Internal Revenue Code and avoid federal income and excise taxes. Therefore, the
Fund may have to dispose of its portfolio securities under disadvantageous
circumstances to generate cash, or may have to leverage itself by borrowing the
cash, to satisfy distribution requirements.
Limitations imposed by the Internal Revenue Code on regulated investment
companies like the Fund may restrict the Fund's ability to enter into futures,
options and currency forward transactions.
Certain options, futures and forward foreign currency transactions
undertaken by the Fund may cause the Fund to recognize gains or losses from
marking to market even though its positions have not been sold or terminated and
affect the character as long-term or short-term (or, in the case of certain
currency forwards, options and futures, as ordinary income or loss) and timing
of some capital gains and losses realized by the Fund. Also, certain of the
Fund's losses on its transactions involving options, futures or forward
contracts and/or offsetting portfolio positions may be deferred rather than
being taken into account currently in calculating the Fund's taxable income or
gain. Certain of the applicable tax rules may be modified if the Fund is
eligible and chooses to make one or more of certain tax elections that may be
available. These transactions may therefore affect the amount, timing and
character of the Fund's distributions to shareholders. The Fund will take into
account the special tax rules (including consideration of available elections)
applicable to options, futures or forward contracts in order to minimize any
potential adverse tax consequences.
The federal income tax rules applicable to forward roll transactions,
interest rate or currency swaps, caps, floors and collars are unclear in certain
respects, and the Fund may be required to account for these instruments under
tax rules in a manner that, under certain circumstances, may limit its
transactions in these instruments.
If the Fund acquires stock in certain non-U.S. corporations that receive at
least 75% of their annual gross income from passive sources (such as interest,
dividends, rents, royalties or capital gain) or hold at least 50% of their
assets in investments producing such passive income ("passive foreign investment
companies"), the Fund could be subject to Federal income tax and additional
interest charges on "excess distributions" received from such companies or gain
from the sale of stock in such companies, even if all income or gain actually
received by the Fund is timely distributed to its shareholders. The Fund would
not be able to pass through to its shareholders any credit or deduction for such
a tax. Certain elections may, if available, ameliorate these adverse tax
consequences, but any such election would require the Fund to recognize taxable
income or gain without the concurrent receipt of cash. The Fund may limit and/or
manage its stock holdings in passive foreign investment companies to minimize
its tax liability or maximize its return from these investments.
30
<PAGE>
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currency-denominated debt securities,
certain foreign currency futures and options, foreign currency forward
contracts, foreign currencies, or payables or receivables denominated in a
foreign currency are subject to Section 988 of the Code, which generally causes
such gains and losses to be treated as ordinary income and losses and may affect
the amount, timing and character of distributions to shareholders. Any such
transactions that are not directly related to the Fund's investment in stock or
securities, possibly including speculative currency positions or currency
derivatives not used for hedging purposes, may increase the amount of gain it is
deemed to recognize from the sale of certain investments held for less than
three months, which gain is limited under the Code to less than 30% of its
annual gross income, and could under future Treasury regulations produce income
not among the types of "qualifying income" from which the Fund must derive at
least 90% of its annual gross income.
The Fund may be subject to withholding and other taxes imposed by foreign
countries with respect to its investments in foreign securities. Tax conventions
between certain countries and the U.S. may reduce or eliminate such taxes.
Investors may be entitled to claim U.S. foreign tax credits with respect to such
taxes, subject to certain provisions and limitations contained in the Code.
Specifically, if more than 50% of the value of the Fund's total assets at the
close of any taxable year consists of stock or securities of foreign
corporations, the Fund may file an election with the Internal Revenue Service
pursuant to which shareholders of the Fund will be required to (i) include in
ordinary gross income (in addition to taxable dividends actually received) their
pro rata shares of foreign income taxes paid by the Fund even though not
actually received by them, and (ii) treat such respective pro rata portions as
foreign income taxes paid by them.
If the Fund makes this election, shareholders may then deduct such pro rata
portions of foreign income taxes in computing their taxable incomes, or,
alternatively, use them as foreign tax credits, subject to applicable
limitations, against their U.S. Federal income taxes. Shareholders who do not
itemize deductions for Federal income tax purposes will not, however, be able to
deduct their pro rata portion of foreign income taxes paid by the Fund, although
such shareholders will be required to include their share of such taxes in gross
income. Shareholders who claim a foreign tax credit for such foreign taxes may
be required to treat a portion of dividends received from the Fund as a separate
category of income for purposes of computing the limitations on the foreign tax
credit. Tax-exempt shareholders will ordinarily not benefit from this election.
Each year that the Fund files the election described above, it shareholders will
be notified of the amount of (i) each shareholder's pro rata share of foreign
income taxes paid by the Fund and (ii) the portion of Fund dividends which
represents income from each foreign country.
31
<PAGE>
Due to possible unfavorable consequences under present tax law, the Fund
does not currently intend to acquire "residual" interests in real estate
mortgage investment conduits ("REMICs"), although the Fund may acquire "regular"
interests in REMICs.
Distributions from the Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Fund's Prospectus whether taken in shares or in cash.
Distributions, if any, in excess of E&P will constitute a return of capital,
which will first reduce an investor's tax basis in Fund shares and thereafter
(after such basis is reduced to zero) will generally give rise to capital gains.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the amount of cash they would have received had they elected to receive
the distributions in cash, divided by the number of shares received.
At the time of an investor's purchase of Fund shares, a portion of the
purchase price is often attributable to undistributed net investment income
and/or realized or unrealized appreciation in the Fund's portfolio.
Consequently, subsequent distributions from such income and/or appreciation may
be taxable to such investor even if the net asset value of the investor's shares
is, as a result of the distributions, reduced below the investor's cost for such
shares, and the distributions in reality represent a return of a portion of the
purchase price.
Upon a redemption (including a repurchase) of shares of the Fund, a
shareholder may realize a taxable gain or loss, depending upon the difference
between the redemption proceeds and the shareholder's tax basis in his shares.
Such gain or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands and will be long-term or short-term,
depending upon the shareholder's tax holding period for the shares. Any loss
realized on a redemption may be disallowed to the extent the shares disposed of
are replaced within a period of 61 days beginning 30 days before and ending 30
days after the shares are disposed of, such as pursuant to automatic dividend
reinvestments. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss. Any loss realized upon the redemption of shares
with a tax holding period of six months or less will be treated as a long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain with respect to such shares.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
32
<PAGE>
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the Fund. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in the Fund.
ADDITIONAL INFORMATION
The Fund's Prospectus and this Statement of Additional Information omit
certain information contained in the registration statement filed with the
Securities and Exchange Commission, which may be obtained from the Commission's
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment
of the fee prescribed by the rules and regulations promulgated by the
Commission.
EXPERTS AND FINANCIAL STATEMENTS
The financial statements for the fiscal years ended December 31, 1994 and
1995 included in this Statement of Additional Information have been audited by
Coopers & Lybrand L.L.P., independent accountants, as set forth in their report
appearing elsewhere herein, and have been so included in reliance upon the
authority of the report of Coopers & Lybrand L.L.P. as experts in accounting and
auditing. The Fund's financial highlights for the fiscal year ended December 31,
1992 and for the period from January 2, 1991 (commencement of operations)
through December 31, 1991 were audited by Deloitte & Touche LLP, independent
auditors, and have been similarly included in reliance upon the expertise of
that firm. Coopers & Lybrand L.L.P., independent accountants, will audit the
Fund's financial statements for the fiscal year ending December 31, 1996.
33
<PAGE>
Prospectus dated May 1, 1996
PROSPECTUS
STANDISH MASSACHUSETTS INTERMEDIATE TAX EXEMPT BOND FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
Standish Massachusetts Intermediate Tax Exempt Bond Fund (the "Fund") is
one fund in the Standish, Ayer & Wood family of funds. The Fund is organized as
a separate investment series of Standish, Ayer & Wood Investment Trust (the
"Trust"), an open-end management investment company.
The Fund is designed for Massachusetts investors in the upper income tax
brackets who are seeking a higher level of Massachusetts and federally tax-free
income than is normally provided by short-term investments, and more price
stability than investments in long-term municipal bonds. The Fund's investment
objective is to provide a high level of interest income exempt from
Massachusetts and federal income taxes, while seeking preservation of
shareholders' capital, through investing the Fund's assets in investment grade
intermediate-term municipal securities. Municipal bonds in which the Fund
invests will be rated, at the time of investment, within the four highest
ratings by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Ratings Group ("S&P") or Fitch Investors Service, Inc. ("Fitch") or, if unrated,
determined by Standish, Ayer & Wood, Inc. (the "Adviser"), the Fund's investment
adviser, to be of comparable credit quality to the securities so rated. See
"Investment Objective and Policies."
Investors may purchase shares of the Fund from the Trust's principal
underwriter, Standish Fund Distributors, L.P. (the "Principal Underwriter"), at
the address and phone number listed above without a sales commission or other
transaction charges. Unless waived by the Fund, the minimum initial investment
is $100,000. Additional investments may be made in amounts of at least $5,000.
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 Principal Underwriter 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.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN SHARES OF THE FUND INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
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.
CONTENTS
Expense Information...........................................2
Financial Highlights..........................................3
Risk Factors and Suitability .................................7
Calculation of Performance Data...............................8
Purchase of Shares............................................8
Dividends and Distributions...................................8
Exchange of Shares............................................9
Redemption of Shares..........................................9
Management...................................................10
Federal Income Taxes.........................................11
Massachusetts Income Taxes...................................12
The Fund and Its Shares......................................12
Custodian, Transfer Agent and Dividend Disbursing Agent......13
Independent Accountants......................................13
Legal Counsel................................................13
Appendix.....................................................14
Tax Certification Instructions...............................15
1
<PAGE>
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) 0.33%
12b-1 Fees None
Other Expenses 0.32%
Total Fund Operating Expenses (after expense limitation) 0.65%
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Example 1 yr. 3 yrs. 5 yrs. 10 yrs.
- ------- ----- ------ ------ -------
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: $7 $21 $36 $81
</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,"
which includes, among other things, custodian and transfer agent fees,
registration costs and payments for insurance and audit and legal services, is
based upon expenses for the fiscal year ended December 31, 1995, during which
time 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 0.65% 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 the Total Fund Operating Expenses would have
been 0.40% and 0.72%, respectively, for the fiscal year ended December 31, 1995.
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 LESS 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 OF GREATER OR LESS THAN 5%.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights for the years ended December 31, 1993, 1994 and
1995 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.
Further information about the performance of the Fund is contained in the
Fund's Annual Report, which may be obtained from the Principal Underwriter
without charge.
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide a high level of interest
income exempt from Massachusetts and federal income taxes, while seeking
preservation of shareholders' capital, through investing the Fund's assets in
investment grade intermediate-term municipal securities. The Fund seeks to
achieve its objective by investing in a non-diversified portfolio of municipal
securities of issuers located in Massachusetts and other qualifying issuers
(including Puerto Rico, the U.S. Virgin Islands and Guam), the interest on which
is, in the opinion of bond counsel to the issuer, excluded from gross income for
federal income tax purposes and is exempt from Massachusetts personal income tax
("Massachusetts Municipal Securities"). Because of the uncertainty inherent in
all investments, no assurance can be given that the Fund will achieve its
investment objective. The investment objective of the Fund is a fundamental
policy which may not be changed without shareholder approval.
Although the Fund may invest in investment grade Massachusetts Municipal
Securities, it intends to emphasize high quality intermediate-term Massachusetts
Municipal Securities. The dollar-weighted average effective maturity of the
Fund's portfolio will be in a range of three to ten years. However, the Fund may
purchase individual securities with effective maturities which are outside of
this range. Generally, a mutual fund with an average maturity longer than the
Fund will tend to have a higher yield, but will exhibit greater share price
volatility; a fund with a shorter maturity will have a lower yield but will
offer more price stability. The Fund's emphasis on high quality securities is
expected to limit its share price volatility. Because the Fund holds investment
grade municipal securities, the income earned on shares of the Fund will tend to
be less than it might be on a portfolio emphasizing lower quality securities.
The Fund may invest, without percentage limitations, in municipal bonds
rated at the time of purchase within one of the four highest municipal ratings
by Moody's (Aaa, Aa, A, Baa), S&P (AAA, AA, A, BBB) or Fitch (AAA, AA, A, BBB)
or, if not rated, determined by the Adviser to be of comparable credit quality
to the securities so rated. The Fund may invest in municipal notes rated MIG-1
or MIG-2 by Moody's or at least SP-1 or SP-2 by S&P or in municipal notes that
are not rated, provided that, in the opinion of the Adviser, such notes are of
comparable credit quality. In the case of a security that is rated differently
by two or more rating services, the higher rating is used; provided, however,
all securities purchased must also meet the credit standards of the Adviser.
Securities rated Baa by Moody's or BBB by S&P or Fitch may have some speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to weakened capacity to make interest payments and repay
principal than is the case with higher grade securities. Prior to acquiring
unrated securities, the Adviser considers the terms of the offering and various
other factors in order to initially determine whether the securities are
consistent with the Fund's investment objective and policies and thereafter to
determine the issuer's comparative credit rating. In the event the rating on a
security held in the Fund's portfolio is downgraded 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 a sale of
the security. A description of the ratings is contained in the Appendix to this
Prospectus.
4
<PAGE>
The Fund is a non-diversified investment company so that, as a fundamental
investment policy, with respect to 50% of the Fund's total assets, the Fund may
not invest more than 5% of the value of its total assets in securities of any
one issuer or acquire more than 25% of the voting securities of an issuer. This
limitation does not apply to investments issued or guaranteed by the U.S.
Government or its agencies or instrumentalities and does not apply to the other
50% of the Fund's total assets. In order to qualify as a "Regulated Investment
Company" under the Internal Revenue Code, the Fund must, among other
requirements, not invest more than 25% of its assets in the securities of a
single issuer as of the close of each quarter of its taxable year. See "Federal
and Massachusetts Income Taxes."
Although it is authorized to do so, the Fund does not expect to invest more
than 25% of its assets in any one of the following sectors of the municipal
securities market: hospitals, ports, airports, colleges and universities,
turnpikes and toll roads, housing bonds, lease rental bonds, industrial revenue
bonds or pollution control bonds. For the purposes of this limitation,
securities whose credit is enhanced by bond insurance, letters of credit or
other means are not considered to belong to a particular sector.
As a fundamental policy, at least 80% of the Fund's net assets will
normally be invested in Massachusetts Municipal Securities and, during normal
market conditions, at least 65% of the Fund's net assets will be invested in
municipal bonds. There may be certain occasions, however, during which more than
20% of the Fund's assets may be invested in other instruments. In unusual
circumstances, as a temporary defensive measure, the Fund may invest in taxable,
fixed income obligations and/or municipal securities other than Massachusetts
Municipal Securities, when the Adviser believes that market conditions, such as
rising interest rates or other adverse factors, would cause serious erosion of
portfolio value. In addition, the Fund may also invest up to 20% of its net
assets in taxable, fixed income obligations and/or municipal securities other
than Massachusetts Municipal Securities when there is a yield disparity between
these other instruments and Massachusetts Municipal Securities on an after tax
basis. These other investments will generally be of comparable credit quality
and maturity to the Massachusetts Municipal Securities in which the Fund invests
and will be limited primarily to obligations issued or guaranteed by the U.S.
Government, its agencies, instrumentalities or authorities; investment grade
corporate debt securities; municipal securities other than Massachusetts
Municipal Securities; prime commercial paper; certain certificates of deposit of
domestic banks; and repurchase agreements, secured by U.S. Government
securities, with maturities not in excess of seven days. To the extent that
income dividends include income from taxable sources, a portion of a
shareholder's dividend income will be subject to federal and/or Massachusetts
tax. See "Federal and Massachusetts Income Taxes."
Municipal securities include debt obligations issued to obtain funds for
various public purposes, including the construction of a variety of public
facilities such as bridges, highways, housing, hospitals, mass transportation,
schools, streets and water and sewer works. Other public purposes for which
municipal securities or bonds may be issued include the refunding of outstanding
obligations, obtaining funds for general operating expenses and the obtaining of
funds to loan to other public institutions and facilities. In addition, certain
types of industrial revenue bonds are, or have been under prior law, issued by
or on behalf of public authorities to obtain funds to provide privately operated
housing facilities, sports facilities, convention or trade show facilities,
airport, mass transit, port or parking facilities, air or water pollution
control facilities and certain local facilities for water supply, gas,
electricity, or sewage and solid waste disposal. Some of these bonds may be
"private activity bonds," the interest on which is treated as a tax preference
item for purposes of the federal alternative minimum tax. Such bonds are
sometimes referred to as "AMT Bonds" and are treated as taxable obligations for
the purposes of the Fund's policies. See "Federal and Massachusetts Income
Taxes."
5
<PAGE>
Municipal bonds are issued in order to meet long-term capital needs and
generally have maturities of more than one year when issued. The two principal
classifications of municipal bonds are "general obligation" and "revenue" bonds.
General obligation bonds are secured by the pledge of the municipality's faith,
credit and taxing power for the payment of principal and interest, and are
considered the safest type of municipal bond. Revenue bonds are payable only
from the revenues derived from a particular project or facility and are
generally dependent solely on a specific revenue source. Industrial revenue
bonds are a specific type of revenue bond backed by the credit and security of a
private user. Assessment bonds, which are issued by a specially created district
or project area which levies a tax (generally on its taxable property) to pay
for an improvement or project, may be considered to belong to either category.
There are, of course, other variations in the safety of municipal bonds, both
within a particular classification and between classifications, depending on
numerous factors. The Fund is not limited with respect to the categories of
municipal securities it may acquire.
Municipal securities also include municipal notes, which are generally
issued to satisfy short-term capital needs and have maturities of one year or
less. Municipal notes include tax anticipation notes, revenue anticipation
notes, bond anticipation notes and construction loan notes. The Fund may also
invest in variable rate demand instruments, which are securities with long
stated maturities, but demand features that allow the holder to demand 100% of
the principal plus interest within one to seven days. The coupon varies daily,
weekly or monthly with the market. The price remains at par, which provides
stability to the portfolio while earning market yields. For federal income tax
purposes, the income earned from municipal securities may be entirely tax free,
taxable or subject only to the federal alternative minimum tax.
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 and broad or specific 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.
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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, fixed-income indices and other financial instruments; purchase and
sell financial futures contracts and options thereon; and enter into various
interest rate transactions such as swaps, caps, floors or collars (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 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 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 will attempt to limit its net loss
exposure resulting from Strategic Transactions entered into for such purposes to
not more than 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
believes that short-term interest rates as indicated in the forward yield curve
are too high, the Fund may take a short position in a near-term Eurodollar
futures contract and a long position in a longer-dated Eurodollar futures
contract. Under such circumstances, any unrealized loss in the near-term
Eurodollar futures position would be netted against any unrealized gain in the
longer-dated Eurodollar futures 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
Internal Revenue Code of 1986, as amended (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 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
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<PAGE>
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
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 attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for non-hedging purposes to not more than 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.
When-Issued Securities and "Delayed Delivery" Securities
The Fund may commit up to 40% of its net assets to purchase securities on a
"when-issued" or "delayed delivery" basis, but will only do so with the
intention of actually acquiring the securities. The payment obligation and the
interest rate on these securities will be fixed at the time the Fund enters into
the commitment, but no income will accrue to the Fund until they are delivered
and paid for. Unless the Fund has entered into an offsetting agreement to sell
the securities, cash or liquid, high grade debt securities assets equal to the
amount of the Fund's commitment will be segregated with the custodian for the
Fund to secure the Fund's obligation and to ensure that it is not leveraged. The
market value of the securities when they are delivered may be less than the
amount paid by the Fund. The Fund may sell portfolio securities on a delayed
delivery basis. The market value of the securities when they are delivered may
be more than the amount to be received by the Fund.
Repurchase Agreements
The Fund may invest up to 15% of its net assets in repurchase agreements
under normal circumstances. Repurchase agreements acquired by the Fund will
always be fully collateralized as to principal and interest by money market
instruments and will be entered into only with commercial banks, brokers and
dealers considered creditworthy by the Adviser. If the other party or "seller"
of a repurchase agreement defaults, the Fund might suffer a loss to the extent
that the proceeds from the sale of the underlying securities and other
collateral held by the Fund in connection with the related repurchase agreement
are less than the repurchase price. In addition, in the event of bankruptcy of
the seller or failure of the seller to repurchase the securities as agreed, the
Fund could suffer losses, including loss of interest on or principal of the
security and costs associated with delay and enforcement of the repurchase
agreement. Distributions by the Fund of any income from repurchase agreements
will be taxable to investors.
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Stand-By Commitments and Other Puts
To facilitate liquidity, the Fund may enter into "stand-by commitments"
permitting it to resell municipal securities to the original seller at a
specified price. Stand-by commitments generally involve no cost. Any such costs
may, however, reduce yields.
Third Party Puts
The Fund may also purchase long-term fixed rate bonds which have been
coupled with an option granted by a third party financial institution allowing
the Fund at specified intervals to tender or put its bonds to the institution
and receive the face value thereof. These third party puts are available in
several different forms, may be represented by custodial receipts or trust
certificates and may be combined with other features. The financial institution
granting the put option does not provide credit enhancement, and typically, if
there is a default on or significant downgrading of the bond, or a loss of its
tax-exempt status, the put option will terminate automatically and the risk to
the Fund will be that of holding a long-term bond. These third party puts will
not be considered to shorten the Fund's maturity.
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 50% 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 25%
of the outstanding voting securities of any issuer (in determining the issuer of
a tax-exempt security, identification of the issuer will be based upon a
determination of the source of assets and revenues committed to meeting interest
and principal payments of each security); (ii) issue senior securities, borrow
money or pledge or mortgage its assets, except that the Fund may borrow from
banks as a temporary measure for extraordinary or emergency purposes (but not
investment purposes) in an amount up to 15% of the current value of its total
assets, and 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 borrowings exceed 5% of
the current value of its total assets; (iii) lend portfolio securities, except
that the Fund may enter into repurchase agreements which are terminable within
seven days; or (iv) invest more than an aggregate of 15% of the net assets of
the Fund in securities subject to legal or contractual restrictions on resale or
for which there are no readily available market quotations or in other illiquid
securities.
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. Certain non-fundamental policies and additional fundamental
policies adopted by the Fund are described in the Statement of Additional
Information.
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RISK FACTORS AND SUITABILITY
The Fund is designed for investors in the upper income tax brackets who are
seeking a higher level of Massachusetts and federally tax-free income than is
normally provided by tax-free money market or other short-term investments and
more price stability than investments in long-term municipal bonds. The Fund may
also be suitable for other investors, depending upon their investment goals and
financial and tax positions. Generally, a mutual fund with an average maturity
longer than the Fund will tend to have a higher yield, but will exhibit greater
share price volatility; a fund with a shorter maturity will have a lower yield
but will offer more price stability. The Fund's emphasis on high quality
securities is expected to limit its share price volatility.
The classification of the Fund under the Investment Company Act of 1940 as
a "non-diversified" investment company allows it to invest more than 5% of its
assets in the securities of any issuer, subject to certain limitations under the
Code. Because of the relatively small number of issues of Massachusetts
obligations, the Fund is likely to invest a greater percentage of its assets in
the securities of a single issuer than is an investment company which invests in
a broad range of municipal obligations. Therefore, the Fund would be more
susceptible than a diversified fund to any single adverse economic or political
occurrence or development affecting Massachusetts issuers. The Fund will also be
subject to an increased risk of loss if the issuer is unable to make interest or
principal payments or if the market value of such securities declines. It is
also possible that there will not be sufficient availability of suitable
Massachusetts Municipal Securities for the Fund to achieve its objective of
providing income exempt from Massachusetts taxes.
The market value of the Fund's investments will change in response to
changes in interest rates and other factors. During periods of falling interest
rates, the values of long-term fixed-income securities generally rise.
Conversely, during periods of rising interest rates, the values of such
securities generally decline. Changes by recognized rating services in their
ratings of tax-exempt securities and in the ability of an issuer to make
payments of interest and repayments of principal will also affect the value of
these investments. Changes in the value of portfolio securities will not affect
cash income derived from those securities but will affect the Fund's net asset
value.
Certain Risk Considerations Relating to Massachusetts
The Fund is non-diversified and invests primarily in securities issued by
The Commonwealth of Massachusetts, its political subdivisions, including cities
and towns, and its public authorities. Therefore, the economic and financial
condition of the Commonwealth and its authorities and municipalities will have a
significant impact on the Fund's net asset value, yield and investment
performance. The availability of federal funds may affect the economic and
financial condition of the Commonwealth.
In the late 1980s, The Commonwealth of Massachusetts began to suffer a
period of economic decline. Key sections of the economy, such as real estate,
construction, banking and financial services, high technology and defense
related industries either contracted or grew at very slow rates. Consequently,
personal income growth slowed and employment declined. By 1990, the
Commonwealth's unemployment rate significantly exceeded the national average. In
turn, these economic factors contributed to considerable financial problems for
the Commonwealth. Over the period 1987-1990, tax revenues failed to meet
budgeted forecasts and spending in several major expenditure categories grew at
relatively high rates. Sizeable operating deficits occurred in each of these
years, and the Commonwealth at times covered the deficits by borrowing funds in
the capital markets. During 1989-1990, Moody's and S&P downgraded their credit
ratings on Massachusetts' bonds from Aa and AA+ to Baa and BBB, respectively.
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<PAGE>
In fiscal year 1991, a combination of tax rate increases and tightened
expenditure controls helped to stabilize the Commonwealth's financial condition.
State government closed the year with a modest operating loss. Fiscal year 1992
financial reports showed a small surplus. In response to the improvement in
financial operations, Moody's and S&P upgraded the Commonwealth's general
obligation bonds to A and A, respectively. During the two most recent fiscal
years, 1994 and 1995, economic conditions have generally stabilized, although
some sectors remain weak. Financial operations also appear to have stabilized.
Currently, the rating assigned to the Commonwealth's general obligation bonds by
Moody's is A1 and the comparable rating assigned by S&P is A+. Fitch's current
rating for the Commonwealth's general obligation bonds is A+. However, the
Commonwealth's debt ratios are high relative to other states, and state
government has amassed a large unfunded pension liability. Over the course of
time, downturns in economic and financial conditions are likely to recur.
The financial position of the Commonwealth may have an impact on other
issuers of tax-exempt obligations who receive support from the Commonwealth
including municipalities and various public agencies. The Commonwealth may also
choose to implement regulations which could affect the financial condition of
issuers of tax-exempt securities. For example, changes to laws which regulate
rate setting procedures for health care providers in Massachusetts which were
enacted in 1992 may prove detrimental to some hospitals.
Proposition 2 1/2 is a property tax limitation initiative passed by
Massachusetts voters in 1980. In general, Proposition 2 1/2 constrains the
ability of cities and town to raise property tax revenues, virtually the only
local-source revenue available, and this may lead to adverse consequences on the
financial condition of some municipalities. Under Proposition 2 1/2, many cities
and towns were required to reduce their property tax levies to a stated
percentage of the full and fair cash value of their taxable real estate and
personal property. It limited the amount by which the total property taxes
assessed by all cities and towns may increase from year to year.
Limitations on Commonwealth tax revenues have been established both by
legislation enacted in 1986 and by public approval of an initiative petition in
1986. The two measures are inconsistent in several respects, including the
methods of calculating the limits and the exclusions from the limits. The
initiative petition, which took effect on December 4, 1986, contains no
exclusion for debt service on municipal obligations of the Commonwealth.
Commonwealth tax revenues in fiscal years subsequent to passage of the
initiative were lower than the limit set by either the initiative petition or
the legislative enactment. The Executive Office for Administration and Finance
of the Commonwealth has estimated that Commonwealth tax revenues will not reach
the limit imposed by either the initiative petition or the legislative enactment
in fiscal year 1995.
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Massachusetts Municipal Securities also include obligations of the
governments of Puerto Rico, the Virgin Islands and Guam to the extent that
interest on these obligations is exempt from Massachusetts state personal income
tax. The Fund will not invest more than 10% of its net assets in the obligations
of each of the Virgin Islands and Guam, but may invest without limitation in the
obligations of Puerto Rico. Accordingly, the Fund may be adversely affected by
local political and economic conditions and developments within Puerto Rico
affecting the issuers of such obligations. The economy of Puerto Rico is
dominated by the manufacturing and service sectors. Although the economy of
Puerto Rico expanded significantly from 1984 thorough 1989, the rate of this
expansion slowed in 1990 and remains weak. Although the Puerto Rico unemployment
rate has declined substantially since 1985, the seasonally adjusted rate of
unemployment for February 1995 was approximately 12.3%.
CALCULATION OF PERFORMANCE DATA
From time to time the Fund may advertise its yield, tax equivalent yield
and total return, all of which 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
(or any shorter period since inception) 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.
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.
Tax equivalent yield demonstrates the yield from a taxable investment
necessary to produce an after-tax yield equivalent to that of a fund which
invests primarily in tax-exempt obligations. It is computed by dividing the
tax-exempt portion of the Fund's yield (calculated as indicated below) by one,
minus a stated income tax rate that reflects combined federal and Massachusetts
income tax rates (assuming full deductibility of Massachusetts income taxes on
the investor's Federal income tax return and adding the product to the taxable
portion (if any) of the Fund's yield.
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TAXABLE EQUIVALENT YIELD TABLE
Combined
Federal
and MA Taxable Equivalent Rates Based on
Marginal Tax-Exempt Yield of:
Tax Rate* 4% 5% 6% 7% 8% 9% 10%
- --------------------------------------------------------------------------------
39.28% 6.59% 8.23% 9.88% 11.53% 13.18% 14.82% 16.47%
43.68% 7.10% 8.88% 10.65% 12.43% 14.20% 15.98% 17.76%
46.85% 7.53% 9.41% 11.29% 13.17% 15.05% 16.93% 18.81%
*Assuming a Massachusetts tax rate of 12% and federal tax rates of 31%, 36% and
39.6%, respectively.
From time to time, the Fund may compare its performance with that of other
mutual funds with similar investment objectives, to bond and other relevant
indices, and to performance rankings prepared by recognized mutual fund
statistical services. In addition, the Fund's performance may be compared to
alternative investment or savings vehicles and/or to indices or indicators of
economic activity.
DIVIDENDS AND DISTRIBUTIONS
Dividends on shares of the Fund from net investment income will be declared
daily and distributed monthly. 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 Principal
Underwriter, which offers the Fund's 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 in good order by the Principal Underwriter and
payment for the shares is received by the Fund's custodian. Please see the
Fund's account application or call the Principal Underwriter for instructions on
how to make payment of shares to the Fund's custodian. Unless waived by the
Fund, the minimum initial investment is $100,000. Additional investments may be
made in amounts of at least $5,000.
Shares of the Fund may also be purchased through securities dealers. 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 Principal Underwriter 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, provided that payment for the shares is
also received by the Fund's custodian 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 Principal Underwriter 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, the Principal Underwriter 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. Municipal
securities are valued by the Adviser or by an independent pricing service
approved by the Trustees, which uses information with respect to transactions in
bonds, quotations from bond dealers, market transactions in comparable
securities and various relationships between securities in determining value.
The Fund believes that reliable market quotations for municipal securities are
generally not readily available for purposes of valuing its portfolio
securities. As a result, it is likely that most of the valuations made by the
Adviser or provided by such pricing service will be based upon fair value
determined on the basis of the factors listed above (which also include the use
of yield equivalents or matrix pricing). Taxable 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; taxable 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 60
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 60
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 its value on such date unless the Trustees determine during such 60-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. The Fund's investment minimums do not apply to
accounts for which the Adviser or any of its affiliates serves as investment
adviser or to employees of the Adviser or any of its affiliates or to members of
such persons' immediate families. The Fund's investment minimums apply to the
aggregate value invested in omnibus accounts rather than to the investment of
underlying participants in such omnibus accounts.
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EXCHANGE OF SHARES
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 Principal Underwriter. 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 Principal Underwriter
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 Principal
Underwriter 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 the Fund may be exchanged by written order to the Principal
Underwriter, 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 elected telephonic privileges may exchange shares by
calling the Principal Underwriter at (800) 221-4795. Telephonic privileges are
not available to shareholders automatically. Proper identification will be
required for each telephonic exchange. Please see "Telephone Transactions" below
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 by
the Fund's custodian. 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.
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 by the Principal
Underwriter 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.
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<PAGE>
Written Redemption
Shares of the Fund may be redeemed by written order to the Principal
Underwriter, One Financial Center, 26th Floor, Boston, Massachusetts 02111. A
written redemption request must (a) state the name of the Fund and 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(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 that are not
individuals. Redemption proceeds will normally be paid by check mailed within
three business days of receipt by the Principal Underwriter 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 in the case of
payments made by check.
Telephonic Redemption
Shareholders who elect telephonic privileges may redeem shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to shareholders automatically. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instruction on the account
application to a pre-designated account. Redemption proceeds will normally be
paid promptly after receipt of telephonic instructions, but no later than three
business days thereafter, except as described above for shares purchased by
check. 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. Wire charges, if any,
will be deducted from redemption proceeds. Proper identification will be
required for each telephonic redemption.
Repurchase Order
In addition to telephonic and written redemption of Fund shares, the
Principal Underwriter may accept telephone orders from brokers or dealers for
the repurchase of Fund shares. The repurchase price is the net asset value per
share next determined after receipt of the repurchase order by the Principal
Underwriter and the payment for the shares by the Fund's custodian. Brokers and
dealers are obligated to transmit repurchase orders to the Principal Underwriter
prior to the close of the Principal Underwriter's business day (normally 4:00
p.m.). Brokers and dealers may charge for their services in connection with a
repurchase of Fund shares, but neither the Fund nor the Principal Underwriter
imposes a charge for share repurchases.
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<PAGE>
Telephone Transactions
By maintaining an account that is eligible for telephonic exchange and
redemption privileges, the shareholder authorizes the Adviser, the Principal
Underwriter, the Fund and the Fund's custodian to act upon instructions of any
person to redeem and/or exchange shares from the shareholder's account. Further,
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 Principal Underwriter, nor the Trust, nor the Fund, 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
or exchange, 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. All telephone transaction requests will
be recorded. Shareholders may experience delays in exercising telephone
transaction privileges during periods of abnormal market activity. Accordingly,
during periods of volatile economic and market conditions, shareholders may wish
to consider transmitting redemption and exchange requests in writing.
* * * *
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 $10,000 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 $10,000. The Fund may eliminate duplicate mailings of Fund materials
to shareholders that have the same address of record.
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.
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The Adviser provides fully discretionary management services and counseling
and advisory services to a broad range of clients throughout the United States
and abroad. In addition, the Adviser or its affiliate, Standish International
Management Company, L.P. ("SIMCO"), serves as the investment adviser to each of
the following fourteen funds in the Standish, Ayer & Wood family of funds:
Net Assets
Funds (March 31, 1996)
- --------------------------------------------------------------------------------
Standish Controlled Maturity Fund
Standish Equity Portfolio
Standish Fixed Income Portfolio
Standish Fixed Income Fund II
Standish Global Fixed Income Portfolio
Standish Intermediate Tax Exempt Bond Fund
Standish International Equity Fund
Standish International Fixed Income Fund
Standish Massachusetts Intermediate
Tax Exempt Bond Fund
Standish Securitized Fund
Standish Short-Term Asset Reserve Fund
Standish Small Capitalization Equity Portfolio
Standish Small Cap Tax-Sensitive Equity Fund
Standish Tax-Sensitive Equity Fund
Corporate pension funds are the largest asset under active management by
Standish. Standish's clients also include charitable and educational endowment
funds, financial institutions, trusts and individual investors. As of March 31,
1996, Standish managed approximately $__ billion in assets.
The Fund's portfolio managers are Maria D. Furman and Raymond J. Kubiak,
who have been primarily responsible for the day-to-day management of the Fund's
portfolio since its inception in November, 1992. During the past five years, Ms.
Furman has served as a Director and Vice President of the Adviser and Mr. Kubiak
has been a Vice President of the Adviser.
Subject to the supervision and direction of the Trustees, 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 0.40% of average daily net
assets. The Adviser has voluntarily agreed to limit the Fund's aggregate annual
operating expenses (excluding brokerage commissions, taxes and extraordinary
expenses) to 0.65% of the Fund's average daily net assets. The Adviser may
discontinue or modify such limitation in the future at its discretion, although
it has no current intention to do so. The Adviser has also agreed to limit the
18
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Fund's total operating expenses (excluding brokerage commissions, taxes and
extraordinary expenses) to 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 for 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, 1995, the advisory fees paid to the Adviser totalled $124,213,
which represented .40% of the Fund's average daily net assets. During this
period the Adviser voluntarily agreed not to impose $21,818 of its fee.
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
and shareholder reports which are furnished to shareholders; registration and
reporting fees and expenses; and Trustees' fees and expenses. The Principal
Underwriter 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, primarily on the basis of relative net
asset values. For the year ended December 31, 1995, expenses borne by the Fund
amounted to $223,173 which represented 0.65% of the Fund's average daily net
assets after an expense reduction of $21,818.
Portfolio Transactions
It is not anticipated that the Fund will incur a significant amount of
brokerage expenses because municipal securities are generally traded on a "net"
basis in principal transactions without the addition or deduction of brokerage
commissions or transfer taxes. 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 generally
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 treated by 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.
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<PAGE>
The Fund intends to satisfy applicable requirements of the Code so that its
distributions to shareholders of the tax-exempt interest it earns will qualify
as "exempt-interest dividends," which shareholders are entitled to treat as
tax-exempt interest. Any portion of an exempt-interest dividend that is
attributable to the interest the Fund receives on certain tax-exempt obligations
that are "private activity bonds" and, for corporate shareholders, the entire
exempt-interest dividend, may increase a shareholder's liability, if any, for
alternative minimum tax.
Shareholders receiving social security benefits and certain railroad
retirement benefits may be subject to Federal income tax on a portion of such
benefits as a result of receiving investment income, including tax-exempt income
(such as exempt-interest dividends) and other dividends paid by the Fund. Shares
of the Fund may not be an appropriate investment for persons who are
"substantial users" of facilities financed by industrial development or private
activity bonds, or persons related to "substantial users." Consult your tax
advisor if you think this may apply to you.
Shareholders which are taxable entities or persons will be subject to
federal income tax on capital gain distributions from the Fund and on any other
dividends they receive from the Fund that are not exempt-interest dividends.
Dividends paid by the Fund from any taxable net investment income, such as
interest income from taxable debt obligations, accrued market discount
recognized by the Fund, or repurchase agreements, 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.
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. None of the Fund's exempt-interest
dividends, taxable income dividends or capital gain distributions will qualify
for the corporate dividends received deduction. Except as described below under
"Massachusetts Income Taxes," dividends and capital gain distributions may also
be subject to state and local or foreign taxes.
Redemptions and repurchases of shares are taxable events on which a
shareholder may recognize a gain or loss. Special rules disallow 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 exempt-interest dividends with
respect to such shares, and recharacterize as long-term any such losses that are
not disallowed to the extent of any capital gain distributions received with
respect to such shares.
20
<PAGE>
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on taxable 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 taxable 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.
MASSACHUSETTS INCOME TAXES
To the extent that the Fund's exempt-interest dividends are derived from
interest on tax-exempt obligations of the Commonwealth of Massachusetts and its
political subdivisions or Puerto Rico, the U.S. Virgin Islands or Guam and are
properly designated as such, these distributions will also be exempt from
Massachusetts personal income tax. For Massachusetts personal income tax
purposes, dividends from the Fund's taxable net investment income (if any),
federally tax-exempt income from obligations not described in the preceding
sentence, and net short-term capital gains, if any, will generally be taxable as
ordinary income, whether received in cash or additional shares. However, any
dividends that are properly designated as attributable to interest the Fund
receives on direct U.S. Government obligations will not be subject to
Massachusetts personal income tax. Capital gain distributions are generally
taxable as long-term capital gains, regardless of how long shareholders have
held their Fund shares. However, a portion of such a capital gain distribution
will be exempt from Massachusetts personal income tax if it is properly
designated as attributable to gains realized on the sale of certain tax-exempt
bonds issued pursuant to Massachusetts statutes that specifically exempt such
gains from Massachusetts taxation. These bonds are relatively few in number.
Dividends from net investment income (including exempt-interest dividends) and
from net long-term and short-term capital gains will be subject to, and shares
of the Fund will be included in the net worth of intangible property
corporations for purposes of, the Massachusetts corporation excise tax if
received by a corporation subject to such tax.
After the close of each calendar year, the Fund will send a notice to
shareholders that provides information about the federal and Massachusetts 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
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 by
the Trust. Shareholders of the Fund do not have preemptive or conversion rights.
Certificates representing shares of the Fund will not be issued.
21
<PAGE>
At December 31, 1995, more than 25% of the then outstanding shares of the
Fund were held by BDG & Co., c/o Bingham, Dana & Gould Trust Department, 150
Federal Street, Boston, MA, which was deemed to control the Fund.
The Trust has established fourteen series that currently offer their shares
to the public 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 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.
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<PAGE>
Inquiries concerning the Fund should be made by contacting at the Principal
Underwriter at the address and telephone number listed on the cover of this
Prospectus.
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.
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.
23
<PAGE>
APPENDIX A
MOODY'S MUNICIPAL 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.
MOODY'S MUNICIPAL NOTE RATINGS
MIG-1 -Notes which are rated MIG-1 are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing or
by established and broad based access to the market for refinancing, or
both.
MIG-2 -Bonds which are rated MIG-2 are of high quality, with margins of
protection ample, although not as large as in the MIG-1 group.
S & P'S MUNICIPAL BOND RATINGS
AAA -Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
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<PAGE>
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.
S & P'S MUNICIPAL NOTE RATINGS
SP-1 -Notes rated SP-1 indicate a very strong capacity to pay principal and
interest. A "plus" is added for those issues determined to possess
overwhelming safety characteristics.
SP-2 -Notes rated SP-2 indicate a satisfactory capacity to pay principal and
interest.
FITCH'S MUNICIPAL BOND RATINGS
AAA -Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability
to pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA -Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated
"AAA."
A -Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher ratings.
BBB -Bonds rated BBB are considered to be investment grade and satisfactory
credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have adverse
effects on these bonds and, therefore, impair timely payment. The
likelihood that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
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<PAGE>
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.
26
<PAGE>
STANDISH MASSACHUSETTS INTERMEDIATE TAX EXEMPT BOND FUND
Investment Adviser
Standish, Ayer & Wood, Inc.
One Financial Center
Boston, Massachusetts 02111
Custodian
Investors Bank & Trust Company
24 Federal Street
Boston, Massachusetts 02110
Principal Underwriter
Standish Fund Distributors, L.P.
One Financial Center
Boston, Massachusetts 02111
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
Legal Counsel
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
27
<PAGE>
May 1, 1996
STANDISH MASSACHUSETTS INTERMEDIATE TAX EXEMPT BOND FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus, but expands
upon and supplements the information contained in the Prospectus dated May 1,
1996, as amended and/or supplemented from time to time (the "Prospectus"), of
Standish Massachusetts Intermediate Tax Exempt Bond Fund (the "Fund"), a
separate investment series of Standish, Ayer & Wood Investment Trust (the
"Trust"). This Statement of Additional Information should be read in conjunction
with the Fund's Prospectus a copy of which may be obtained without charge by
writing or calling Standish Fund Distributors, L.P., the Trust's principal
underwriter (the "Principal Underwriter") at the address and phone number set
forth above.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
Contents
Investment Objective and Policies ............................2
Investment Restrictions......................................12
Calculation of Performance Data..............................14
Management...................................................15
Redemption of Shares.........................................20
Portfolio Transactions.......................................20
Determination of Net Asset Value.............................21
Federal and Massachusetts Income Taxes.......................21
The Fund and Its Shares......................................23
Additional Information.......................................24
Experts and Financial Statements.............................24
Financial Statements.........................................25
1
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's Prospectus describes the investment objective of the Fund and
summarizes the investment policies it will follow. The following discussion
supplements the description of the Fund's investment policies in the Prospectus.
See the Prospectus for a more complete description of the Fund's investment
objective, policies and restrictions.
The Fund will maintain an effective portfolio maturity of between three and
ten years. This means that the dollar weighted average duration of the Fund's
portfolio investments will be less than the duration of a U.S. Treasury
obligation with a remaining stated maturity of three to ten years. Duration
represents the weighted average maturity of expected cash flows (i.e., interest
and principal payments) on one or more debt obligations, discounted to their
present values. The duration of an obligation is always less than or equal to
its stated maturity and is related to the degree of the volatility in the market
value of the obligation. In computing the duration of its portfolio, the Fund
will have to estimate the duration of debt obligations that are subject to
prepayment or redemption by the issuer, based on projected cash flows from such
obligations. Subject to the requirement that the effective portfolio maturity
will not exceed ten years, the Fund may invest in individual debt obligations of
any maturity, including obligations with a remaining stated maturity of less
than three or more than ten years. For purposes of the Fund's investment policy,
an instrument will be treated as having a maturity earlier than its stated
maturity date if the instrument has technical features (such as puts or demand
features) or a variable rate of interest which, in the judgment of Standish,
Ayer & Wood, Inc. (the "Adviser"), the Fund's investment adviser, will result in
the instrument being valued in the market as though it has the earlier maturity.
Because the Fund holds investment grade municipal securities, the income
earned on shares of the Fund will tend to be less than it might be on a
portfolio emphasizing lower quality securities. Municipal obligations are
subject to the provisions of bankruptcy, insolvency and other laws affecting the
rights and remedies of creditors, such as the Federal Bankruptcy Code, and laws
which may be enacted by Congress or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon municipalities to levy taxes. There is
also the possibility that as a result of litigation or other conditions the
power or ability of any one or more issuers to pay when due principal of and
interest on its or their municipal obligations may be materially affected.
Although the Fund's quality standards are designed to minimize the credit risk
of investing in the Fund, that risk cannot be entirely eliminated.
Municipal Notes
Municipal notes are generally issued to provide for short-term capital
needs and generally have maturities of one year or less. Municipal notes
include: tax anticipation notes; revenue anticipation notes; bond anticipation
notes; and construction loan notes.
2
<PAGE>
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. Revenue anticipation notes are issued in
expectation of receipt of other types of revenue such as Federal revenues
available under the Federal Revenue Sharing Program. Tax anticipation notes and
revenue anticipation notes are generally issued in anticipation of various
seasonal revenues such as income, sales, use, and business taxes. Bond
anticipation notes are sold to provide interim financing. These notes are
generally issued in anticipation of long-term financing in the market. In most
cases, these monies provide for the repayment of the notes. Construction loan
notes are sold to provide construction financing. After the projects are
successfully completed and accepted, many projects receive permanent financing
through the Federal Housing Administration under "Fannie Mae" (the Federal
National Mortgage Association) or "Ginnie Mae" (the Government National Mortgage
Association). There are, of course, a number of other types of notes in which
the Fund may invest which are issued for different purposes and secured
differently from those described above.
Municipal Bonds
Municipal bonds are issued to meet longer term capital needs and generally
have maturities of more than one year when issued. The two principal
classifications of municipal bonds are: "General Obligation" Bonds and "Revenue"
Bonds.
Issuers of General Obligation Bonds include states, counties, cities, towns
and regional districts. The proceeds of these obligations are used to fund a
wide range of public projects including the construction or improvement of
schools, highways and roads, water and sewer systems and a variety of other
public purposes. The basic security of General Obligation Bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to rate or amount or special assessments.
The principal security for a Revenue Bond is generally the net revenues
derived from a particular facility or group of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source. Revenue
Bonds have been issued to fund a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully insured, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund, some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are secured by annual lease rental payments from the state or
locality to the authority sufficient to cover debt service on the authority's
obligations.
3
<PAGE>
Industrial Development and Pollution Control Bonds (which are types of
private activity bonds), although nominally issued by municipal authorities, are
generally not secured by the taxing power of the municipality but are secured by
the revenues of the authority derived from payments by the industrial user.
Under federal tax legislation, certain types of Industrial Development Bonds and
Pollution Control Bonds may no longer be issued on a tax-exempt basis, although
previously-issued bonds of these types and certain refundings of such bonds are
not affected.
Other Municipal Securities
There is a variety of hybrid and special types of municipal securities as
well as numerous differences in the security of municipal securities both within
and between the two principal classifications above.
Variable Rate Demand Instruments
The Fund may purchase variable rate demand instruments that are tax-exempt
municipal obligations providing for a periodic adjustment in the interest rate
paid on the instrument according to changes in interest rates generally. These
instruments also permit the Fund to demand payment of the unpaid principal
balance plus accrued interest upon a specified number of days' notice to the
issuer or its agent. The demand feature may be backed by a bank letter of credit
or guarantee issued with respect to such instrument. A bank that issues a
repurchase commitment may receive a fee from the Fund for this arrangement. The
issuer of a variable rate demand instrument may have a corresponding right to
prepay in its discretion the outstanding principal of the instrument plus
accrued interest upon notice comparable to that required for the holder to
demand payment.
The variable rate demand instruments that the Fund may purchase are payable
on demand on not more than seven calendar days' notice. The terms of the
instruments provide that interest rates are adjustable at intervals ranging from
daily up to six months, and the adjustments are based upon the current interest
rate environment as provided in the respective instruments. The Adviser will
select the variable rate demand instruments that the Fund will purchase in
accordance with procedures approved by the Trustees to minimize credit risks.
The Adviser may determine that an unrated variable rate demand instrument meets
the Fund's quality criteria by reason of being backed by a letter of credit or
guarantee issued by a bank that meets the quality criteria of the Fund. Thus,
either the credit of the issuer of the municipal obligation or the guarantor
bank or both will meet the quality standards of the Fund.
The interest rate of the underlying variable rate demand instruments may
change with changes in interest rates generally, but the variable rate nature of
these instruments should decrease changes in value due to interest rate
fluctuations. Accordingly, as interest rates decrease or increase, the potential
for capital gain and the risk of capital loss on the disposition of portfolio
securities are less than would be the case with a comparable portfolio of fixed
income securities. Because the adjustment of interest rates on the variable rate
demand instruments is made in relation to movements of the applicable rate
adjustment index, the variable rate demand instruments are not comparable to
long-term fixed interest rate securities. Accordingly, interest rates on the
variable rate demand instruments may be higher or lower than current market
rates for fixed rate obligations of comparable quality with similar final
maturities.
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The maturity of the variable rate demand instruments held by the Fund will
ordinarily be deemed to be the longer of (1) the notice period required before
the Fund is entitled to receive payment of the principal amount of the
instrument or (2) the period remaining until the instrument's next interest rate
adjustment.
* * * *
An entire issue of Municipal Securities may be purchased by one or a small
number of institutional investors such as the Fund. Thus, the issue may not be
said to be publicly offered. Unlike securities which must be registered under
the Securities Act of 1933 prior to offer and sale unless an exemption from such
registration is available, municipal securities which are not publicly offered
may nevertheless be readily marketable. A secondary market exists for many
municipal securities which were not publicly offered initially.
Securities purchased for the Fund are subject to the limitations on
holdings of securities which are not readily marketable contained in the Fund's
investment restrictions. The Adviser determines whether a municipal security is
readily marketable based on whether it may be sold in a reasonable time
consistent with the customs of the municipal markets (usually seven days) at a
price (or interest rate) which accurately reflects its value. The Adviser
believes that the quality standards applicable to the Fund's investments enhance
marketability. In addition, stand-by commitments and demand obligations also
enhance marketability.
Money Market Instruments and Repurchase Agreements
The money market instruments in which the Fund may invest include
short-term U.S. Government securities, commercial paper (promissory notes issued
by corporations to finance their short-term credit needs), negotiable
certificates of deposit, non-negotiable fixed time deposits, bankers'
acceptances and repurchase agreements.
U.S. Government securities include securities which are direct obligations
of the U.S. Government backed by the full faith and credit of the United States,
and securities issued by agencies and instrumentalities of the U.S. Government,
which may be guaranteed by the U.S. Treasury or supported by the issuer's right
to borrow from the U.S. Treasury or may be backed by the credit of the federal
agency or instrumentality itself. Agencies and instrumentalities of the U.S.
Government include, but are not limited to, Federal Land Banks, the Federal Farm
Credit Bank, the Central Bank for Cooperatives, Federal Intermediate Credit
Banks, Federal Home Loan Banks and the Federal National Mortgage Association.
Investments in commercial paper will be rated Prime-1 by Moody's Investors
Service, Inc. ("Moody's") or A-1 by Standard & Poor's Ratings Group ("S&P") or
Duff 1+ by Duff & Phelps, Inc. ("Duff & Phelps"), which are the highest ratings
assigned by these rating services (even if rated lower by one or more of the
other agencies), or which, if not rated or rated lower by one or more of the
agencies and not rated by the other agency or agencies, are judged by the
Adviser to be of equivalent quality to the securities so rated. In determining
whether securities are of equivalent quality, the Adviser may take into account,
but will not rely entirely on, ratings assigned by foreign rating agencies.
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A repurchase agreement is an agreement under which the Fund acquires money
market instruments (generally U.S. Government securities) from a commercial
bank, broker or dealer, subject to resale to the seller at an agreed-upon price
and date (normally the next business day). The resale price reflects an
agreed-upon interest rate effective for the period the instruments are held by
the Fund and is unrelated to the interest rate on the instruments. The
instruments acquired by the Fund (including accrued interest) must have an
aggregate market value in excess of the resale price and will be held by the
custodian bank for the Fund until they are repurchased. The Trustees will
monitor the standards which the Adviser will use in reviewing the
creditworthiness of any party to a repurchase agreement with the Fund.
The use of repurchase agreements involves certain risks. For example, if
the seller defaults on its obligation to repurchase the instruments acquired by
the Fund at a time when their market value has declined, the Fund may incur a
loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by the Fund are collateral for a loan by the Fund and
therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that the Fund may not be able to substantiate its interest in the
instruments it acquires. While the Trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
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 and broad or specific 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, fixed-income indices and other financial instruments; purchase and
sell financial futures contracts and options thereon; and enter into various
interest rate transactions such as swaps, caps, floors or collars (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 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 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 will attempt to limit its net loss
exposure resulting from Strategic Transactions entered into for such purposes to
not more than 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
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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
believes that short term interest rates as indicated in the forward yield curve
are too high, the Fund may take a short position in a near-term Eurodollar
futures contract and a long position in a longer-dated Eurodollar futures
contract. Under such circumstances, any unrealized loss in the near-term
Eurodollar futures position would be netted against any unrealized gain in the
longer-dated Eurodollar futures 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
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a
regulated investment company.
Risks of Strategic Transactions
The use of Strategic Transactions has associated risks 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 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 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
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, they 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 attempt to limit its net
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loss exposure resulting from Strategic Transactions entered into for non-hedging
purposes to not more than 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.
General Characteristics of Options
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving options
require segregation of the Fund's assets in special accounts, as described below
under "Use of Segregated Accounts."
A put option gives the purchaser of the option, in consideration for the
payment of a premium, the right to sell, and the writer the obligation to buy
(if the option is exercised) the underlying security, commodity, index, or other
instrument at the exercise price. For instance, the Fund's purchase of a put
option on a security might be designed to protect its holdings in the underlying
instrument (or, in some cases, a similar instrument) against a substantial
decline in the market value by giving the Fund the right to sell such instrument
at the option exercise price. A call option, in consideration for the payment of
a premium, gives the purchaser of the option the right to buy, and the seller
the obligation to sell (if the option is exercised), the underlying instrument
at the exercise price. The Fund may purchase a call option on a security,
futures contract, index or other instrument to seek to protect the Fund against
an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, exchange listed options generally settle by
physical delivery of the underlying security, although in the future cash
settlement may become available. Index options and Eurodollar instruments are
cash settled for the net amount, if any, by which the option is "in-the-money"
(i.e., where the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
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The Fund's ability to close out its position as a purchaser or seller of an
exchange listed put or call option is dependent, in part, upon the liquidity of
the option market. There is no assurance that a liquid option market on an
exchange will exist. In the event that the relevant market for an option on an
exchange ceases to exist, outstanding options on that exchange would generally
continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct agreement with
the Counterparty. In contrast to exchange listed options, which generally have
standardized terms and performance mechanics, all the terms of an OTC option,
including such terms as method of settlement, term, exercise price, premium,
guarantees and security, are set by negotiation of the parties. The Fund will
generally sell (write) OTC options that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. (To the extent that the Fund does not
do so, the OTC options are subject to the Fund's restriction on illiquid
securities.) The Fund expects generally to enter into OTC options that have cash
settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in the OTC option market. As a result, if the Counterparty fails to
make delivery of the security or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York as
"primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received, combined with any credit
enhancements, a long-term debt rating of A from S&P or Moody's or an equivalent
rating from any other nationally recognized statistical rating organization
("NRSRO") or which issue debt that is determined to be of equivalent credit
quality by the Adviser. The staff of the Securities and Exchange Commission (the
"SEC") currently takes the position that, absent the buy-back provisions
discussed above, OTC options purchased by the Fund, and portfolio securities
"covering" the amount of the Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Fund's limitation on investing in illiquid
securities. However, for options written with "primary dealers" in U.S.
Government securities pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount which is considered to be illiquid
may be calculated by reference to a formula price.
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If the Fund sells (writes) a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Fund's income. The sale (writing) of put options
can also provide income.
The Fund may purchase and sell (write) call options on securities including
U.S. Treasury and agency securities, municipal notes and bonds and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets, and on securities indices and futures contracts. All
calls sold by the Fund must be "covered" (i.e., the Fund must own the securities
or futures contract subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though the
Fund will receive the option premium to help offset any loss, the Fund may incur
a loss if the exercise price is below the market price for the security subject
to the call at the time of exercise. A call sold by the Fund exposes the Fund
also during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the Fund to hold a security or instrument which it might otherwise
have sold.
The Fund may purchase and sell (write) put options on securities including
U.S. Treasury and agency securities, municipal notes and bonds and Eurodollar
instruments (whether or not it holds the above securities in its portfolio), and
on securities indices and futures contracts. The Fund will not sell put options
if, as a result, more than 50% of the Fund's assets would be required to be
segregated to cover its potential obligations under such put options other than
those with respect to futures and options thereon. In selling put options, there
is a risk that the Fund may be required to buy the underlying security at a
price above the market price.
Options on Securities Indices and Other Financial Indices
The Fund may also purchase and sell (write) call and put options on
securities indices and other financial indices. Options on securities indices
and other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement. For example, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the differential between
the closing price of the index and the exercise price of the option, which also
may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount. In addition to
the methods described above, the Fund may cover call options on a securities
index by owning securities whose price changes are expected to be similar to
those of the underlying index, or by having an absolute and immediate right to
acquire such securities without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other securities in its portfolio.
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General Characteristics of Futures
The Fund may enter into financial futures contracts or purchase or sell put
and call options on such futures. Futures are generally bought and sold on the
commodities exchanges where they are listed and involve payment of initial and
variation margin as described below. The sale of futures contracts creates a
firm obligation by the Fund, as seller, to deliver to the buyer the specific
type of financial instrument called for in the contract at a specific future
time for a specified price (or, with respect to index futures and Eurodollar
instruments, the net cash amount). The purchase of futures contracts creates a
corresponding obligation by the Fund, as purchaser to purchase a financial
instrument at a specific time and price. Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such position
upon exercise of the option.
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
regulations of the Commodity Futures Trading Commission (the "CTFC") relating to
exclusions from regulation as a commodity pool operator. Those regulations
currently provide that the Fund may use commodity futures and option positions
(i) for bona fide hedging purposes without regard to the percentage of assets
committed to margin and option premiums, or (ii) for other purposes permitted by
the CFTC to the extent that the aggregate initial margin and option premiums
required to establish such non-hedging positions (net of the amount that the
positions were "in the money" at the time of purchase) do not exceed 5% of the
net asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on such positions. Typically, maintaining a futures contract
or selling an option thereon requires the Fund to deposit, with its custodian
for the benefit of a futures commission merchant, as security for its
obligations an amount of cash or other specified assets (initial margin) which
initially is typically 1% to 10% of the face amount of the contract (but may be
higher in some circumstances). Additional cash or assets (variation margin) may
be required to be deposited directly with the futures commission merchant
thereafter on a daily basis as the value of the contract fluctuates. The
purchase of an option on financial futures involves payment of a premium for the
option without any further obligation on the part of the Fund. If the Fund
exercises an option on a futures contract it will be obligated to post initial
margin (and potential subsequent variation margin) for the resulting futures
position just as it would for any position. Futures contracts and options
thereon are generally settled by entering into an offsetting transaction but
there can be no assurance that the position can be offset prior to settlement at
an advantageous price, nor that delivery will occur. The segregation
requirements with respect to futures contracts and options thereon are described
below.
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Combined Transactions
The Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, and multiple interest rate
transactions, structured notes and any combination of futures, options and
interest rate transactions ("component transactions"), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars
Among the Strategic Transactions into which the Fund may enter are interest
rate and index swaps and the purchase or sale of related caps, floors and
collars. The Fund expects to enter into these transactions primarily for hedging
purposes, including, but not limited to, preserving a return or spread on a
particular investment or portion of its portfolio, as a duration management
technique or protecting against an increase in the price of securities the Fund
anticipates purchasing at a later date. Swaps, caps, floors and collars may also
be used to enhance potential gain in circumstances where hedging is not involved
although, as described above, the Fund's net loss exposure resulting from swaps,
caps, floors and collars and other Strategic Transactions entered into for such
purposes will not exceed 3% of the Fund's net assets at any one time. The Fund
will not sell interest rate caps or floors where it does not own securities or
other instruments providing the income stream the Fund may be obligated to pay.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal. An index swap is an agreement to swap cash flows on a notional amount
based on changes in the values of the reference indices. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling such cap to the extent that a specified index exceeds a
predetermined interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain rate of return within a predetermined range of
interest rates or values.
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The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from an NRSRO or the Counterparty issues debt that is determined to be of
equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed. Swaps, caps, floors and collars are considered illiquid for purposes
of the Fund's policy regarding illiquid securities, unless it is determined,
based upon continuing review of the trading markets for the specific security,
that such security is liquid. The Board of Trustees has adopted guidelines and
delegated to the Adviser the daily function of determining and monitoring the
liquidity of swaps, caps, floors and collars. The Board of Trustees, however,
retains oversight focusing on factors such as valuation, liquidity and
availability of information and is ultimately responsible for such
determinations.
The Staff of the SEC currently takes the position that swaps, caps, floors
and collars are illiquid, and are subject to the Fund's limitation on investing
in illiquid securities.
Eurodollar Contracts
The Fund may make investments in Eurodollar contracts. Eurodollar contracts
are U.S. dollar-denominated futures contracts or options thereon which are
linked to the London Interbank Offered Rate ("LIBOR"), although foreign
currency-denominated instruments are available from time to time. Eurodollar
futures contracts enable purchasers to obtain a fixed rate for the lending of
funds and sellers to obtain a fixed rate for borrowings. The Fund might use
Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many interest rate swaps and fixed income instruments are
linked.
Use of Segregated Accounts
The Fund will not use leverage in Strategic Transactions. The Fund will
hold securities or other instruments whose values are expected to offset its
obligations under the Strategic Transactions. The Fund will not enter into
Strategic Transactions that expose the Fund to an obligation to another party
unless it owns either (i) an offsetting position in securities or other options,
futures contracts or other instruments or (ii) cash, receivables or liquid, high
grade debt securities with a value sufficient to cover its potential
obligations. The Fund may have to comply with any applicable regulatory
requirements designed to make sure that mutual funds do not use leverage in
Strategic Transactions, and if required, will set aside cash and other assets in
a segregated account with its custodian bank in the amount prescribed. In that
case, the Fund's custodian would maintain the value of such segregated account
equal to the prescribed amount by adding or removing additional cash or other
assets to account for fluctuations in the value of the account and the Fund's
obligations on the underlying Strategic Transactions. Assets held in a
segregated account would not be sold while the Strategic Transaction is
outstanding, unless they are replaced with similar assets. As a result, there is
a possibility that segregation of a large percentage of the Fund's assets could
impede portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
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"When-Issued" and "Delayed Delivery" Securities
The Fund may commit up to 40% of its net assets to purchase securities on a
"when-issued" and "delayed delivery" basis, which means that delivery and
payment for the securities will normally take place 15 to 45 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" and "delayed
delivery" 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 purchased on a "when-issued" or "delayed delivery basis", cash or
liquid, high-grade debt obligations with a market value at least equal to the
amount of the Fund's commitment will be segregated with the custodian bank for
the Fund. If the market value of these securities declines, additional cash or
securities will be segregated daily so that the aggregate market value of the
segregated securities equals the amount of the Fund's commitment.
Securities purchased on a "when-issued" and "delayed delivery" 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 sell portfolio securities on a delayed delivery basis. The
market value of the securities when they are delivered may be more than the
amount to be received by the Fund.
Special Considerations Relating to Massachusetts Municipal Securities
The financial condition of the Commonwealth of Massachusetts (the
"Commonwealth"), its public authorities and local governments could affect the
market values and marketability of, and therefore the net asset value per share
and the interest income of, the Fund, or result in the default of existing
obligations, including obligations which may be held by the Fund. The following
section provides only a brief summary of the complex factors affecting the
financial condition of Massachusetts, and is based on information obtained from
the Commonwealth, as publicly available on the date of this Statement of
Additional Information. The information contained in such publicly available
documents has not been independently verified. It should be noted that the
creditworthiness of obligations issued by local issuers may be unrelated to the
creditworthiness of the Commonwealth, and that there is no obligation on the
part of the Commonwealth to make payment on such local obligations in the event
of default in the absence of a specific guarantee or pledge provided by the
Commonwealth.
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Economic Factors Summary.
Annual budgeted revenues increased by approximately 0.7% in fiscal 1992 and
7.1% in fiscal 1993. Annual budgeted revenues increased from fiscal 1993 to
fiscal 1994 by approximately 5.7% and by approximately 5.4% in fiscal 1995.
Annual budgeted revenues are projected to increase by 4.5% in fiscal 1996.
Annual budgeted expenditures decreased from fiscal 1991 to fiscal 1992 by
approximately 1.7%, increased by approximately 9.5% in fiscal 1993, increased by
approximately 5.6% in fiscal 1994 and increased by approximately 4.7% in fiscal
1995. Annual budgeted expenditures are estimated to increase by approximately
4.5% in fiscal 1996. Ending fund balances in the budgeted operating funds for
fiscal 1990 were negative $1.104 billion. For fiscal 1991, these funds attained
positive ending balances of $237.1 million, of which $59.2 million was reserved
in the Commonwealth's Stabilization Fund pursuant to state finance law. Fiscal
1992 ended with positive fund balances of $549.4 million, including $230.4
million in the Stabilization Fund. Fiscal 1993 ended with positive fund balances
of $562.5 million, including $309.5 million in the Stabilization Fund. Fiscal
1994 ended with fund balances of $589.3 million, including $382.9 million in the
Stabilization Fund. Fiscal 1995 ended with fund balances of $721.9 million,
including $425.4 in the Stabilization Fund. Fiscal 1996 is estimated to end with
fund balances of approximately $549.4 million, including $446.4 million in the
Stabilization Fund. This would be a 23.5% decrease from fiscal 1995.
1992 Fiscal Year.
Fiscal 1992 ended with an excess of revenues over expenditure of $312.3
million and a positive fund balance of $549.4 million, including $230.4 million
in the Stabilization Fund. Budgeted revenues increased approximately 7% from
fiscal 1991. Budgeted expenditures were 1.7% lower than fiscal 1991 budgeted
expenditures, or $13.42 billion. Spending for certain human services was higher
than initially estimated, including an increase of $268.7 million for the
Medicaid program and $50 million for mental retardation requirements. Fiscal
1992 budgeted expenditures for Medicaid were $2.818 billion, or 1.9% higher than
fiscal 1991. This increase compared favorably with the 19% average annual growth
rate of Medicaid expenditures for fiscal years 1988 through 1991.
Appropriations for the General Relief and the Group Health Insurance
programs were among the appropriations reduced by the Governor prior to signing
the fiscal 1992 budget. The Legislature overrode the Governor's $376 million
reduction of the Group Health Insurance appropriation, which would have
increased the state employee and retiree share of health insurance costs from
10% to 25%. The General Relief program was abolished and replaced by Emergency
Aid to the Elderly, Disabled and Children, which is estimated to have reduced
expenditures in fiscal 1992 by $55.1 million, or $29.1% from the prior year.
After payment in full of the quarterly Local Aid distribution of $514
million, retirement of the Commonwealth's outstanding commercial paper, and
certain other short-term borrowings, the Commonwealth reported a year-end cash
position of approximately $731 million.
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1993 Fiscal Year.
The Commonwealth ended fiscal 1993 with a surplus of revenues over
expenditures of $13.1 million and aggregate ending operating fund balance of
approximately $526.5 million. Budgeted revenues and other sources increased 4.7%
over fiscal 1992 and totaled approximately $14.710 billion, representing a 9.5%
increase over the prior fiscal year.
After payment of all Local Aid and retirement of short-term debt, the
Commonwealth showed a year-end cash position of approximately $662.2 million, as
compared to a projected $485.1 million.
1994 Fiscal Year.
The Commonwealth is in the process of closing its fiscal 1994 financial
records. Financial information for fiscal year 1994 is unaudited.
The Department of Revenue's preliminary figures indicate fiscal 1994 tax
revenue collections were $10.606 billion, $88 million below the Department of
Revenue's fiscal year 1994 tax revenue estimate of $10.694 billion. Fiscal 1994
tax revenue collections were $676 million above fiscal 1993 tax revenues of
$9.930 billion. Budgeted revenues and other sources, including non-tax revenues,
collected in fiscal 1994 were estimated by the Executive Office for
Administration and Finance to have been approximately $15.551 billion. Budgeted
expenditures and other uses of funds in fiscal 1994 were approximately $15.533
billion.
As of June 30, 1994, the Commonwealth showed a year-end cash position of
approximately $757 million, as compared to a projected position of $599 million.
In June, 1993, the Legislature adopted and the Governor signed into law
comprehensive education reform legislation. This legislation required an
increase in expenditures for education purposes above fiscal 1993 base spending
of $1.288 billion of approximately $175 million in fiscal 1994; The Executive
Office for Administration and Finance expects the annual increases in
expenditures above the fiscal 1993 base spending of $1.288 billion to be
approximately $396 million in fiscal 1995, $632 million in fiscal 1996 and $875
million in fiscal 1997. Additional annual increases are also expected in later
fiscal years. The fiscal 1995 budget as signed by the Governor includes $396
million in appropriations to satisfy this legislation.
1995 Fiscal Year.
The Commonwealth has closed its fiscal 1995 financial records and published
its audited financial information. Fiscal 1995 tax revenue collections were
approximately $11.163 billion, approximately $12 million above the Department of
Revenue's revised fiscal year 1995 tax revenue estimate of $11.151 billion,
approximately $556 million, or 5.2%, above fiscal 1994 tax revenues of $10.607
billion. Budgeted revenues and other sources, including non-tax revenues,
collected in fiscal 1995 were approximately $16.387 billion, approximately $837
million, or 5.4%, above fiscal 1994 budgeted revenues of $15.550 billion.
Budgeted expenditures and other uses of funds in fiscal 1995 were approximately
$16.251 billion, approximately $728 million , or 4.7%, above fiscal 1994
budgeted expenditures and uses of $15.523 billion. The Commonwealth ended fiscal
1995 with an operating gain of $137 million and an ending fund balance of $726
million.
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Budgeted revenues and other sources to be collected in fiscal 1996 are
estimated by the Executive Office for Administration and Finance to be
approximately $16.778 billion. This amount includes estimated fiscal 1996 tax
revenues of $11.653 billion, which is approximately $490 million, or 4.3% higher
than fiscal 1995 tax revenues.
In connection with his proposal to reorganize state government, the
Governor also announced on November 1, 1995 that he would propose to reduce the
personal income tax rate on earned income from 5.95% to 5.45%. Legislation to
effectuate such tax reduction is expected to be filed by the Governor in
January, 1996 in conjunction with the filing of his budget recommendations for
fiscal 1997. The cost to the Commonwealth of the proposed tax reduction has been
estimated to be approximately $500 million per year.
1996 Fiscal Year.
The fiscal 1996 budget is based on numerous spending and revenue estimates,
the achievement of which cannot be assured. The budget was enacted by the
Legislature on June 12, 1995 and signed by the Governor on June 21, 1995. Fiscal
1996 appropriations in the Annual Appropriations Act total approximately $16.847
billion, including approximately $25 million in gubernatorial vetoes overridden
by the legislature. In the final supplemental budget for fiscal 1995, approved
on August 24, 1995, another $71.1 million of appropriations were continued for
use in fiscal 1996. The Executive Office for Administration and Finance projects
that fiscal 1996 spending will total approximately $16.998 billion, a $739
million, or 4.5%, increase over fiscal 1995 spending. The largest single
spending increase in the fiscal 1996 budget is approximately $232 million to
continue funding the comprehensive education reform legislation enacted in 1993.
Budgeted revenues and other sources to be collected in fiscal 1996 are
estimated by the Executive Office for Administration and Finance to be
approximately $16.778 billion. This amount includes estimated fiscal 1996 tax
revenues of $11.653 billion, which is approximately $490 million, or 4.3%,
higher than fiscal 1995 tax revenues. The tax revenue projection is based upon
the consensus estimate of approximately $11.639 billion, adjusted for certain
revenue maximization initiatives included in the fiscal 1996 budget totaling $16
million and tax reductions of approximately $2 million resulting from enactment
of bank tax reform legislation in July, 1995. Through September, 1995, tax
revenue collections have totalled approximately $2.805 billion, approximately
$169.8 million, or 6.5%, greater than tax revenue collections for the same
period in fiscal 1995.
Fiscal 1996 non-tax revenues are projected to total approximately $5.173
billion, approximately $55 million, or 1.1%, less than fiscal 1995 non-tax
revenues of approximately $5.228 billion. Federal reimbursements are projected
to increase by approximately $22 million, or 0.7%, from approximately $2.960
billion in fiscal 1995 to approximately $2.982 billion in fiscal 1996, primarily
as a result of increased reimbursements for Medicaid spending, offset by a
reduction in reimbursements received in fiscal 1995 for one-time Medicaid
expenses incurred in fiscal 1994 and fiscal 1995.
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Fiscal 1996 departmental revenues are projected to decline by approximately
$112 million, or 8.3%, from approximately $1,353 billion in fiscal 1995 to
approximately $1.241 billion in fiscal 1996. Major changes in projected non-tax
revenues for fiscal 1996 include a decline in motor vehicle license and
registration fees of approximately $52 million, due mainly to alternate-year
licensing patterns and the delayed impact of the 1991 change to a five-year
driver's license renewal period, a reduction of approximately $17 million in
abandoned property revenues (due to a one-time increase in abandoned property
collections in fiscal 1995 resulting from a change in the Commonwealth's
abandoned property laws) and a decrease of approximately $45 million due to
non-recurring revenues received in fiscal 1995 from hospitals and nursing homes
as part of Medicaid final rate settlements and other reimbursements by municipal
hospitals to the state. These and a number of other smaller reductions are
partially offset by projected increases in departmental revenues of
approximately $20 million due to revenue maximization initiatives included in
the fiscal 1996 budget.
Cash Flow
As of June 30, 1995, the Commonwealth showed a cash position of
approximately $372.5 million, based on preliminary unaudited figures, not
including the Stabilization Fund. This compares to a projected position of
$353.0 million. The fiscal 1995 year-end cash position reflects approximately
$102.9 million in advance payments for fiscal 1996 expenses and approximately
$239.0 million in capital expenditures for which the Commonwealth had not yet
issued bonds or notes to reimburse itself.
The State Treasurer's current cash flow projection for fiscal 1996 contains
monthly forecasts through the end of the fiscal year and projects a year-end
cash position of approximately $388.4 million. This projection is based upon the
budget enacted by the Legislature for fiscal 1996 and incudes a $145 million
contingency reserve. The projection assumes that $115 million in advance
payments for fiscal 1997 expenses will be made prior to June 30, 1996.
The current cash flow projection anticipates no need for the Commonwealth
to borrow for operating needs under its commercial paper program during fiscal
1996. The Commonwealth currently has outstanding $190 million of commercial
paper issued as bond anticipation notes, which are expected to be retired with
the proceeds of bonds issued during fiscal 1996. The Sate Treasurer may issue
additional bond anticipation notes periodically during fiscal 1996 depending on
the timing of future bond sales.
The year-end cash position projected for fiscal 1996 is likely to differ
from the estimated ending balance for the Commonwealth's budgeted operating
funds for fiscal 1996 due to timing differences and the effect of certain
non-budget items.
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Revenues
In order to fund its programs and services, the Commonwealth collects a
variety of taxes and receives revenues from other non tax sources, including the
federal government and various fees, fines, court revenues, assessments,
reimbursements, interest earnings and transfers from its non-budgeted funds. In
fiscal 1994, approximately 68.2% of the Commonwealth's annual revenues were
derived from state taxes. In addition, the federal government provided
approximately 18.7% of annual revenues, with the remaining 13.1% provided from
departmental revenues and transfers from non-budgeted funds.
The major components of state taxes are the income tax, which accounts for
55% of total projected tax revenues in fiscal 1995, the sales and use tax, which
accounted for 22%, and the business corporations tax, which accounted for
approximately 8%. Other tax and excise sources account for the remaining 15% of
total fiscal 1995 tax revenues.
Income Tax
The Commonwealth assesses personal income taxes at flat rates, according to
classes of income, after specified deductions and exemptions. A rate of 5.95% is
applied to income from employment, professions, trades, businesses,
partnerships, rents, royalties, taxable pensions and annuities and interest from
Massachusetts banks; and a rate of 12% is applied to other interest (although
interest on obligations of the United States and of the Commonwealth and its
political subdivisions is exempt), dividends; and a rate ranging from 12% on
capital gains from the sale of assets held for one year and less to 0% on
capital gains from the sale of certain assets held more than six years.
It should be noted that the Massachusetts Water Resources Authority is
undertaking capital projects for the construction and rehabilitation of sewage
collection and treatment facilities in order to bring wastewater discharges into
Boston Harbor into compliance with federal and state pollution control
requirements. The harbor cleanup project is estimated to cost $3.5 billion in
1994 dollars. Work in the project began in 1988 and is expected to be completed
in 1999, with the most significant expenditures occurring between 1990 and 1999.
The majority of the project's expenditures will be paid for by local
communities, in the form of user fees, with federal and state sources making up
the difference.
Under Chapter 151 of the Acts of 1990 up to 15% of state income tax revenue
is pledged to the payment of debt service on approximately $1.045 billion of
outstanding Fiscal Recovery Bonds issued pursuant to Chapter 151.
Partially as a result of income tax rate increases, state income tax
revenues increased from fiscal 1990 to $.,045 billion (excluding $298.3 million
collected pursuant to certain 1989 tax legislation) in fiscal 1991. These
figures represent an increase of approximately 13.0%. State income tax revenues
in fiscal 1992 were $5.337 billion, which represents an increase.
Limitations on Tax Revenues
In Massachusetts efforts to limit and reduce levels of taxation have been
underway for several years. Limits were established on state tax revenues by
legislation enacted on October 25, 1986 and by an initiative petition approved
by the voters on November 4, 1986. The two measures are inconsistent in several
respects.
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Chapter 62F, which was added to the General Laws by initiative petition in
November 1986, establishes a state tax revenue growth limit for each fiscal year
equal to the average positive rate of growth in total wages and salaries in the
Commonwealth, as reported by the federal government, during the three calendar
years immediately preceding the end of such fiscal year. Chapter 62F also
requires that allowable state tax revenues be reduced by the aggregate amount
received by local governmental. units from any newly authorized or increased
local option taxes or excises. Any excess in state tax revenue collections for a
given fiscal year over the prescribed limit, as determined by the State Auditor,
is to be applied as a credit against the then current personal income tax
liability of all taxpayers in the Commonwealth in proportion to the personal
income tax liability of all taxpayers in the Commonwealth for the immediately
preceding tax year. Unlike Chapter 29, as described below, the initiative
petition did not exclude principal and interest payments on Commonwealth debt
obligations from the scope of its tax limit. However, the preamble contained in
Chapter 62F provides that "although not specifically required by anything
contained in this chapter, it is assumed that from allowable state tax revenues
as defined herein the Commonwealth will give priority attention to the funding
of state financial assistance to local governmental units, obligations under the
state governmental pension systems, and payment of principal and interest on
debt and other obligations of the Commonwealth."
The legislation enacted in October 1986, which added Chapter 29B to the
General Laws, also establishes an allowable state revenue growth factor by
reference to total wages and salaries in the Commonwealth. However, rather than
utilizing a three-year average wage and salary growth rate, as used by Chapter
62F, Chapter 29B utilizes an allowable state revenue growth factor equal to
one-third of the positive percentage gain in Massachusetts wages and salaries,
as reported by the federal government, during the three calendar years
immediately preceding the end of a given fiscal year. Additionally, unlike
Chapter 62F, Chapter 29B allows for an increase in maximum state tax revenue to
fund an increase in local aid and excludes from its definition of state tax
revenues (i) income derived from local option taxes and excises, and (ii)
revenues needed to fund debt service costs.
Tax revenues in fiscal 1991 through fiscal 1995 were lower than the limit
set by either Chapter 62F or Chapter 29B. The Executive Office for
Administration and Finance currently estimates that state tax revenues in fiscal
1996 will not reach the limit imposed by either of these statutes.
Commonwealth Programs and Services
Fiscal 1992 budgeted expenditures were $13.420 billion, representing a
decline of 1.7% from the level of budgeted expenditures in fiscal 1991. Fiscal
1993 budgeted expenditures were $14.696 billion, an increase of 9.6% from fiscal
1992. Fiscal 1994 budgeted expenditures were $15.533 billion, an increase of
5.7% from fiscal 1993. Fiscal 1995 budgeted expenditures were $16.259 billion,
an increase of 4.7% from 1994. The Governor's proposed fiscal 1996 budget
recommends budgeted expenditures of $16.259 billion, an increase of 4.5% over
fiscal 1995 expenditures.
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Local Aid
In November 1980, voters in the Commonwealth approved a statewide tax
limitation initiative petition, commonly known as Proposition 2 1/2, to
constrain levels of property taxation and to limit the charges and fees imposed
on cities and towns by certain governmental entities, including county
governments. Proposition 2 1/2, is not a provision of the state constitution and
accordingly is subject to amendment or repeal by the Legislature. Proposition 2
1/2, as amended to date, limits the property taxes that may be levied by any
city or town in any fiscal year to the lesser of (i) 2.5% of the full and fair
cash valuation of the real estate and personal property therein, and (ii) 2.5%
over the previous year's levy limit plus any growth in the tax base from certain
new construction and parcel subdivisions. Proposition 2 1/2 also limits any
increase in the charges and fees assessed by certain governmental entities,
including county governments, on cities and towns to the sum of (1) 2.5% of the
total charges and fees imposed in the preceding fiscal year, and (ii) any
increase in charges for services customarily provided locally or services
obtained by the city or town at its option. The law contains certain override
provisions and, in addition, permits debt service on specific bonds and notes
and expenditures for identified capital project to be excluded from the limits
by a majority vote at a general or special election. At the time Proposition 2
1/2 was enacted, many cities and towns had property tax levels in excess of the
limit and were therefore required to roll back property taxes with a concurrent
loss of revenues. Between fiscal 1981 and fiscal 1993, the aggregate property
tax levy grew from $3.347 billion to $5.249 billion, representing an increase of
approximately 56.8%. By contrast according to federal Bureau of Labor
Statistics, the consumer price index for all urban consumers in Boston grew
during the same period by approximately 80%.
Commonwealth Financial Support for Local Governments
During the 1980's, the Commonwealth increased payments to its cities, towns
and regional school districts ("Local Aid) to mitigate the impact of Proposition
2 1/2 on local programs and services. In fiscal 1996, approximately 19.1% of the
Commonwealth's budget is estimated to be allocated to Local Aid. Local Aid
payments to cities, towns and regional school districts take the form of both
direct and indirect assistance.
Direct Local Aid decreased from $2.608 billion in fiscal 1991 to $2.359
billion in fiscal 1992, increased to $2.547 billion in fiscal 1993, and
increased to $2.727 billion in fiscal 1994. Fiscal 1995 expenditures for direct
Local Aid will be $2.976 billion, which is an increase of approximately 9.1%
above the fiscal 1994 level. It is estimated that fiscal 1996 expenditures for
direct Local Aid will be $3.242 billion, which is an increase of approximately
8.9% above the fiscal 1995 level.
Debt Service
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During the 1980's, state financed capital expenditures grew substantially.
Capital spending by the Commonwealth in the Capital Projects Funds rose from
approximately $600.0 million in fiscal 1987 to $971.0 million in fiscal 1989. In
November 1988, the Executive Office for Administration and Finance established
an administrative limit on state financed capital spending in the Capital
Projects Funds of $925.0 million per fiscal year. Capital expenditures were
$847.0 million, $694.1 million, $575.9 million, $760.9 million and $902.2
million in fiscal 1991, fiscal 1992, fiscal 1993, fiscal 1994 and fiscal 1995,
respectively. Capital expenditures are projected to be approximately $894.0
million in fiscal 1996.
The growth of capital expenditures during the 1980s accounts for the
significant rise in annual debt service expenditures since fiscal 1989. Payments
for debt service on Commonwealth general obligation bonds and notes increased at
an average annual rate of approximately 22.2%, from $770.9 million in fiscal
1990 to $942.3 million in fiscal 1991. Debt service payments in fiscal 1992 were
$898.3 million, representing a 47% decrease from fiscal 1991, which resulted
from a $261.0 million one-time reduction achieved through the issuance of
refunding bonds in September and October 1991. Debt service expenditures for
fiscal 1993, fiscal 1994 and fiscal 1995 were $1.14 billion, $1.155 billion and
$1.230 billion, respectively, and are projected to be $1.196 billion for fiscal
1996. The amounts noted represent debt service payments on Commonwealth debt
(including the Fiscal Recovery Bonds and the Special Obligation Bonds) but do
not include debt service on notes issued to finance certain Medicaid related
liabilities, which were paid in full from non-budgeted Funds. Also excluded are
debt service contract assistance payments to the MBTA ($205.9 million projected
in fiscal 1996), the Massachusetts Convention Center Authority ($24.6 million
projected in fiscal 1996), the Massachusetts Government Land Bank ($6.0 million
projected in fiscal 1996), the Massachusetts Water Pollution Abatement Trust
($16.6 million projected in fiscal 1996) and grants to municipalities under the
school building assistance program to defray a portion of the debt service costs
on local school bonds ($174.9 million projected in fiscal 1996).
In January 1990, legislation was enacted to impose a limit on debt service
in Commonwealth budgets beginning in fiscal 1991. The law, as amended, which is
codified as Section 60B of Chapter 29 of the General Laws, provides that no more
than 10% of the total appropriations in any fiscal year may be expended for
payment of interest and principal on general obligation debt (excluding the
Fiscal Recovery Bonds) of the Commonwealth. This law may be amended or repealed
by the Legislature or may be superseded in the General Appropriation Act for any
year.
It should be noted that the Massachusetts Water Resources Authority is
undertaking capital projects for the construction and rehabilitation of sewage
collection and treatment facilities in order to bring wastewater discharges into
Boston Harbor into compliance with federal and state pollution control
requirements. The harbor cleanup project is estimated to cost $3.5 billion in
1994 dollars. Work in the project began in 1988 and is expected to be completed
in 1999, with the most significant expenditures occurring between 1990 and 1999.
The majority of the project's expenditures will be paid for by local
communities, in the form of user fees, with federal and state sources making up
the difference.
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Ratings
In September, 1992, Standard & Poor's raised its ratings on the
Commonwealth's general obligation debt and related guaranteed bonds from "BBB"
to "A." Moody's also revised its rating from "Baa" to "A" and Fitch Investor's
maintained its "A" rating with a stable trend. In October, 1993, Standard &
Poor's and Fitch Investors raised Massachusetts' general obligation rating from
"A" to "A+." Moody's currently rates the Commonwealth's general obligation debt
to A1. No assurance can be given that the rating agencies will not further
adjust their ratings or their outlooks. A ratings change would probably affect
the value of the Commonwealth's general obligations as well as those of other
entities which rely on the Commonwealth for partial or full funding.
Portfolio Turnover
It is not the policy of the Fund to purchase or sell securities for trading
purposes. However, in order to take advantage of market opportunities to achieve
a higher total return than would be available from an unmanaged portfolio of
securities, the Fund places no restrictions on portfolio turnover and it may
sell any portfolio security without regard to the period of time it has been
held, except as may be necessary to maintain its status as a regulated
investment company under the Code. The Fund may, therefore generally change its
portfolio investments at any time in accordance with the Adviser's appraisal of
factors affecting any particular issuer or market, or the economy in general. A
rate of turnover of 100% would occur 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 owned during the year (excluding short-term
securities). A high rate of portfolio turnover (100% or more) 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 Code.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental policies in addition to
those described under "Investment Objective and Policies--Investment
Restrictions" in the Prospectus. The Fund's fundamental policies cannot be
changed unless the change is approved by the lesser of (i) 67% or more of the
voting securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy,
or (ii) more than 50% of the outstanding voting securities of the Fund. The Fund
may not:
1. Invest, with respect to at least 50% 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 25% of the outstanding
voting securities of any issuer (in determining the issuer of a tax-exempt
security, identification of the issuer will be based upon a determination
of the source of assets and revenues committed to meeting interest and
principal payments of each security).
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2. Issue senior securities, borrow money or pledge or mortgage its assets,
except that the Fund may borrow from banks as a temporary measure for
extraordinary or emergency purposes (but not investment purposes) in an
amount up to 15% of the current value of its total assets, and 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 borrowings exceed 5% of the
current value of its total assets.
3. Lend portfolio securities, except that the Fund may enter into repurchase
agreements which are terminable within seven days.
4. Invest more than an aggregate of 15% of the net assets of the Fund in
securities subject to legal or contractual restrictions on resale or for
which there are no readily available market quotations or in other
illiquid securities.
5. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Fund may be
deemed to be an underwriter under the Securities Act of 1933.
6. Purchase real estate or real estate mortgage loans, although the Fund may
purchase marketable securities of companies which deal in real estate,
real estate mortgage loans or interests therein and may purchase, hold and
sell real estate acquired as a result of ownership of securities or other
instruments.
7. Purchase securities on margin (except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities).
8. Purchase or sell commodities or commodity contracts except that the Fund
may purchase and sell financial futures contracts and options on financial
futures contracts.
The following restrictions are not fundamental policies and may be changed
by the Trustees without shareholder approval, in accordance with applicable
laws, regulations or regulatory policy. The Fund may not:
a. Make short sales of securities.
b. Invest in companies for the purpose of exercising control or management.
c. Purchase securities of any other investment company except as part of a
merger, consolidation or acquisition of assets.
d. Purchase or write options, except as described under "Strategic
Transactions."
e. Invest in interests in oil, gas or other exploration or development
programs.
f. Invest more than 5% of the assets of the Fund in the securities of any
issuers which together with their corporate parents have records of less
than three years' continuous operation, including the operation of any
predecessor, other than obligations issued or guaranteed by the U.S.
Government or its agencies, municipal securities which are rated by at
least one nationally recognized municipal bond rating service, and
securities fully collateralized by such securities.
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g. Invest in securities of any company if any officer or director (Trustee)
of the Trust or of the Fund's investment adviser owns more than 1/2 of 1%
of the outstanding securities of such company and such officers and
directors (Trustees) own in the aggregate more than 5% of the securities
of such company.
h. Enter into repurchase agreements with respect to more than 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, except with respect to restriction (g) above.
In order to permit the sale of shares of the Fund in certain states, the
Board may, in its sole discretion, adopt restrictions on investment policy more
restrictive than those described above. Should the Board determine that any such
more restrictive policy is no longer in the best interest of the Fund and its
shareholders, the Fund may cease offering shares in the state involved and the
Board may revoke such restrictive policy. Moreover, if the states involved shall
no longer require any such restrictive policy, the Board may, in its sole
discretion, revoke such policy.
The Fund does not expect to own more than 25% of the outstanding voting
securities of any one issuer. Because municipal securities are not voting
securities, there is no limit on the percentage of a single issuer's municipal
bonds which the Fund may own except as described in the Prospectus under
"Investment Objectives and Policies." Consequently, the Fund may invest in a
greater percentage of the outstanding securities of a single issuer than would
an investment company which invests in voting securities.
Although it is allowed to do so, the Fund does not expect to invest in
securities (other than securities of the U.S. Government, its agencies and
instrumentalities and municipal securities) if more than 25% of its total assets
would be invested in a single industry. Although governmental issuers of
municipal securities are not considered part of any "industry," municipal
securities backed only by the assets and revenues of nongovernmental users
constitute an "industry." Thus, the Fund does not expect that more than 25% of
the Fund's assets will be invested in obligations deemed to be issued by
nongovernmental users in any one industry (e.g., industrial development bonds
for health care facilities) and in taxable obligations of issuers in the same
industry. However, it is possible that the Fund may invest more than 25% of its
assets in a broader sector of the market for municipal securities.
Determining the issuer of a tax-exempt security, will be based upon the
source of assets and revenues committed to meeting interest and principal
payments of each security. Massachusetts Municipal Securities backed only by the
assets and revenues of nongovernmental users will be deemed to be issued by such
nongovernmental users. Any Massachusetts Municipal Security guaranteed or
otherwise backed by full faith and credit of a governmental entity would
generally be considered to represent a separate security issued by such
guaranteeing
25
<PAGE>
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, the Fund may, from time to time, advertise
certain yield, tax equivalent yield and total return information. The average
annual total return of the Fund for a period is computed by subtracting the net
asset value per share at the beginning of the period from the net asset value
per share at the end of the period (after adjusting for the reinvestment of any
income dividends and capital gain distributions), and dividing the result by the
net asset value per share at the beginning of the period. In particular, the
average annual total return of the Fund ("T") is computed by using the
redeemable value at the end of a specified period of time ("ERV") of a
hypothetical initial investment of $1,000 ("P") over a period of time ("n")
according to the formula P(1+T)n=ERV.
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. 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 non-recurring charges for the period stated. In particular, the yield is
determined according to the following formula:
Yield = 2[((A - B + 1)/CD)^6 - 1]
Where: A equals dividends and interest earned during the period; B equals
net expenses accrued for the period; C equals average daily number of shares
outstanding during the period that were entitled to receive dividends; D equals
the maximum offering price per share on the last day of the period.
Tax equivalent yield is the net annualized taxable yield needed to produce
a specified tax exempt yield at a given tax rate based on a specified 30-day (or
one month) period, assuming semi-annual compounding of income. The taxable
equivalent yield for the Fund is based upon the Fund's current tax-exempt yield
and an investor's marginal tax rate. The formula is:
Portfolio's Tax-Free Yield
-------------------------- =Taxable Equivalent Yield
100% - Marginal Tax Rate
The average annual total return quotation for the Fund since inception
(November 2, 1992 to December 31, 1995) and for the year ended December 31,
1995, respectively, were 6.54% and 12.64%, respectively, and the average
annualized yield and the tax equivalent yield for the thirty day period ended
December 31, 1995 were 4.38% and 8.24%, respectively, assuming a combined
federal and Massachusetts tax rate of 46.85%.
The Fund may also quote non-standardized yield, such as yield-to-maturity
("YTM"). YTM represents that rate of return an investor will receive if a
long-term, interest bearing investment, such as a bond, is held to its maturity
date. YTM does not take into account purchase price, redemption value, time to
maturity, coupon yield, and the time between interest payments.
26
<PAGE>
In addition to average annual return, yield and tax equivalent yield
quotations, the Fund may quote quarterly and annual performance on a net (with
management and administration fees deducted) and gross basis as follows:
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
1992 2.27% 2.43%
1Q93 2.88 3.04
2Q93 2.72 2.88
3Q93 2.74 2.90
4Q93 1.55 1.71
1993 10.24 10.95
1Q94 (4.20) (4.04)
2Q94 1.02 1.18
3Q94 0.50 0.67
4Q94 (1.12) (0.96)
1994 (3.84) (3.20)
1Q95 4.86 5.02
2Q95 2.01 2.18
3Q95 2.69 2.87
4Q95 2.54 2.70
1995 12.64 13.38
These performance quotations should not be considered as representative of
the Fund's performance for any specified period in the future.
The Fund's performance may be compared in sales literature to the
performance of other mutual funds having similar objectives or to standardized
indices or other measures of investment performance. In particular, the Fund may
compare its performance to various indices (or particular components thereof),
which are generally considered to be representative of the performance of
municipal securities such as the Lehman Muni 3-5-7-10 Index. Comparative
performance may also be expressed by reference to a ranking prepared by a mutual
fund monitoring service or by one or more newspapers, newsletters or financial
periodicals. Performance comparisons may be useful to investors who wish to
compare the Fund's past performance to that of other mutual funds and investment
products. Of course, past performance is not a guarantee of future results.
27
<PAGE>
<TABLE>
<CAPTION>
MANAGEMENT
Trustees and Officers
The Trustees and executive officers of the Trust are listed below. All
executive officers of the Trust are affiliates of Standish, Ayer & Wood, Inc.,
the Fund's investment adviser.
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
*D. Barr Clayson, 7/29/35 Vice President and Trustee Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center President,
Boston, MA 02111 Standish International
Management Company, L.P.
Samuel C. Fleming, 9/30/40 Trustee Chairman of the Board
c/o Decision Resources, Inc. and Chief Executive Officer,
1100 Winter Street Decision Resources, Inc.;
Waltham, MA 02154 through 1989, Senior V.P.
Arthur D. Little
Benjamin M. Friedman, 8/5/44 Trustee William Joseph Maier
c/o Harvard University Professor of Political Economy,
Cambridge, MA 02138 Harvard University
John H. Hewitt, 4/11/38 Trustee Trustee, The Peabody
P.O. Box 307 Foundation; Trustee,
So. Woodstock, VT 05071 Visiting Nurse Alliance of Vermont
and New Hampshire
*Edward H. Ladd, 1/3/38 Trustee and Vice President Chairman of the Board
c/o Standish, Ayer & Wood, Inc. and Managing Director,
One Financial Center Standish, Ayer & Wood, Inc. since 1990;
Boston, MA 02111 formerly President of
Standish, Ayer & Wood, Inc.
Caleb Loring III, 11/14/43 Trustee Trustee, Essex Street Associates
c/o Essex Street Associates (family investment trust office);
P.0. Box 5600 Director, Holyoke Mutual Insurance Company
Beverly Farms, MA 01915
*Richard S. Wood, 5/2/54 President and Trustee Vice President, Secretary and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Executive Vice President,
Boston, MA 02111 Standish International Management Company, L.P.
28
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
Richard C. Doll, 7/8/48 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
James E. Hollis III, 11/21/48 Executive Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
David W. Murray, 5/5/40 Treasurer and Secretary Vice President, Treasurer and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Caleb F. Aldrich, 9/20/57 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
Beverly E. Banfield, 7/6/56 Vice President Vice President and Compliance Officer,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Assistant Vice President and Compliance Officer,
Boston, MA 02111 Freedom Capital Management Corp.
(1989-1992)
Nicholas S. Battelle, 6/24/42 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Walter M. Cabot, 1/6/33 Vice President Senior Advisor and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center prior to 1991, President,
Boston, MA 02111 Harvard Management Company
David H. Cameron, 11/2/55 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Karen K. Chandor, 2/13/50 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Lavinia B. Chase, 6/4/46 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Susan B. Coan, 5/1/52 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
29
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
W. Charles Cook II, 2/16/63 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Joseph M. Corrado, 5/13/55 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Dolores S. Driscoll, 2/17/48 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Mark A. Flaherty, 4/24/59 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Anne P. Herrmann, 1/26/56 Vice President Mutual Fund Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ann S. Higgins, 4/8/35 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Senior Operations Manager,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Since December 1995, formerly
Boston, MA 02111 Vice President, Scudder Stevens and Clark
Raymond J. Kubiak, 9/3/57 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Maria D. Furman, 2/3/54 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Phillip D. Leonardi, 4/24/62 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc. since November 1993; formerly, Investment Sales,
One Financial Center Cigna Corporation (1993) and
Boston, MA 02111 Travelers Corporation (1984-1993)
Laurence A. Manchester, 5/24/43 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
30
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
George W. Noyes, 11/12/44 Vice President President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Arthur H. Parker, 8/12/35 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Jennifer A. Pline, 3/8/60 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Howard B. Rubin, 10/29/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Michael C. Schoeck, 10/24/55 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since August, 1993;
One Financial Center formerly, Vice President,
Boston, MA 02111 Commerzbank, Frankfurt, Germany
Austin C. Smith, 7/25/42 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Stephen A. Smith, 3/13/49 Vice President Vice President, since November 2, 1993;
c/o Standish, Ayer & Wood, Inc. formerly, Standish, Ayer & Wood, Inc. Consultant
One Financial Center Cambridge Associates
Boston, MA 02111
David C. Stuehr, 3/1/58 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
James W. Sweeney, 5/15/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ralph S. Tate, 4/2/47 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since April, 1990;
One Financial Center formerly Vice President, Aetna Life & Casualty
Boston, MA 02111
Michael W. Thompson, 3/31/56 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
31
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
Christopher Van Alstyne, 3/24/60 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
</TABLE>
*Indicates that Trustee is an interested person of the Trust for purposes of the
1940 Act.
32
<PAGE>
Compensation of Trustees and Officers
The Fund pays no compensation to the Trust's Trustees affiliated with the
Adviser or to the Trust's officers. None of the Trust's Trustees or officers
engaged in any financial transactions (other than the purchase or redemption of
the Fund's shares) with the Trust or the Adviser during the fiscal year ended
December 31, 1995.
The following table sets forth all compensation paid to the Trust's
Trustees as of the Fund's fiscal year ended December 31, 1995:
<TABLE>
<CAPTION>
Pension or Retirement Total Compensation
Aggregate Compensation Benefits Accrued as from Fund and
Name of Trustee from the Fund Part of Fund's Expenses Other Funds in Complex*
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
D. Barr Clayson $0 $0 $0
Phyllis L. Cothran** 0 0 0
Richard C. Doll*** 0 0 0
Samuel C. Fleming 380 0 46,000
Benjamin M. Friedman 345 0 41,750
John H. Hewitt 345 0 41,750
Edward H. Ladd 0 0 0
Caleb Loring, III 345 0 41,750
Richard S. Wood 0 0 0
*As of the date of this Statement of Additional Information, there were 18 funds in the fund complex.
**Ms. Cothran resigned as a Trustee effective January 31, 1995.
***Mr. Doll resigned as a Trustee effective December 6, 1995.
</TABLE>
Certain Shareholders
At February 1, 1996, Trustees and officers of the Trust as a group
beneficially owned (i.e., had voting and/or investment power) less than 1% of
the then outstanding shares of the Fund. At that date, each of the following
persons beneficially owned 5% or more of the then outstanding shares of the
Fund:
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
BDG & Co. 48%
Bingham Dana & Gould
Trust Department
150 Federal Street
Boston, MA 02110
Investment Adviser
Standish, Ayer & Wood, Inc. (the "Adviser") serves as investment adviser to
the Fund pursuant to a written investment advisory agreement with the Trust. The
Adviser is a Massachusetts corporation organized in 1933 and is registered under
the Investment Advisers Act of 1940.
The following, constituting all of the Directors and all of the
shareholders of the Adviser, are the Adviser's controlling persons: Caleb F.
Aldrich, Nicholas S. Battelle, Walter M. Cabot, Sr., David H. Cameron, Karen K.
Chandor, D. Barr Clayson, Richard C. Doll, Dolores S. Driscoll, Mark A.
Flaherty, Maria D. Furman, James E. Hollis III, Raymond J. Kubiak, Edward H.
Ladd, Laurence A. Manchester, David W. Murray, George W. Noyes, Arthur H.
Parker, Howard B. Rubin, Austin C. Smith, David C. Stuehr, James J. Sweeney,
Ralph S. Tate, and Richard S. Wood.
33
<PAGE>
Certain services provided by the Adviser under the advisory agreement are
described in the Prospectus. In addition to those services, the Adviser provides
the Fund with office space for managing its affairs, with the services of
required executive personnel, and with certain clerical services and facilities.
These services are provided without reimbursement by the Fund for any costs
incurred. Under the investment advisory agreement, the Adviser is paid a fee
based upon a percentage of the Fund's average daily net asset value computed as
described in the Prospectus. This fee is paid monthly. The rate and time at
which the fee is paid is described in the Prospectus. For the fiscal years ended
December 31, 1993, 1994 and 1995, the Adviser agreed not to impose $54,041,
$39,874 and $21,818 of its fees of $70,908, $18,562 and $124,213, respectively.
Pursuant to the investment advisory agreement, the Fund bears expenses of
its operations other than those incurred by the Adviser pursuant to the
investment advisory agreement. Among other expenses, the Fund will pay share
pricing and shareholder servicing fees and expenses; custodian fees and
expenses; legal and auditing fees and expenses; expenses of prospectuses,
statements of additional information and shareholder reports; registration and
reporting fees and expenses; and Trustees' fees and expenses. The advisory
agreement provides that if the total expenses of the Fund in any fiscal year
(excluding brokerage commissions, taxes and extraordinary expenses) exceed the
most restrictive expense limitation applicable to the Fund in any state in which
shares of the Fund are then qualified for sale, the compensation due the Adviser
shall be reduced by the amount of the excess, by a reduction or refund thereof
at the time such compensation is payable after the end of each calendar month
during the fiscal year, subject to readjustment during the year. Currently, the
most restrictive state expense limitation provision limits the Fund's expenses
to 2 1/2% of the first $30 million of average net assets, 2% of the next $70
million of such net assets and 1 1/2% of such net assets in excess of $100
million. The Adviser has voluntarily agreed to limit the Fund's total operating
expenses (excluding brokerage commissions, taxes and extraordinary expenses) to
0.65% of the Fund's average daily net assets. The Adviser may discontinue or
modify such limitation in the future at its discretion, although it has no
current intention to do so.
34
<PAGE>
Unless terminated as provided below, the investment advisory agreement
remains in full force and effect for two years and continues in full force and
effect for successive periods of one year thereafter, but only as long as each
such continuance is approved annually (i) by either the Trustees of the Trust or
by vote of a majority of the outstanding voting securities (as defined in the
1940 Act) of the Fund, and, in either event (ii) by vote of a majority of the
Trustees of the Trust who are not parties to the investment advisory agreement
or "interested persons" (as defined in the 1940 Act) of any such party, cast in
person at a meeting called for the purpose of voting on such approval. The
investment advisory agreement may be terminated at any time without the payment
of any penalty by vote of the Trustees of the Trust or by vote of a majority of
the outstanding voting securities (as defined in the 1940 Act) of the Fund or by
the Adviser, on sixty days' written notice to the other parties. The investment
advisory agreement terminates in the event of its assignment as defined in the
1940 Act.
In an attempt to avoid any potential conflict with portfolio transactions
for the Fund, the Adviser and the Trust have adopted extensive restrictions on
personal securities trading by personnel of the Adviser and its affiliates.
These restrictions include pre-clearance of all personal securities transactions
and a prohibition of purchasing initial public offerings of securities. These
restrictions are a continuation of the basic principle that the interests of the
Fund and its shareholders come before those of the Adviser, its affiliates and
their employees.
Distributor of the Trust
Standish Fund Distributors, L.P. (the "Principal Underwriter"), an
affiliate of the Adviser, serves as the Trust's exclusive principal underwriter
and holds itself available to receive purchase orders for the Fund's shares. In
that capacity, the Principal Underwriter has been granted the right, as agent of
the Trust, to solicit and accept orders for the purchase of the Fund's shares in
accordance with the terms of the Underwriting Agreement between the Trust and
the Principal Underwriter. Pursuant to the Underwriting Agreement, the Principal
Underwriter has agreed to use its best efforts to obtain orders for the
continuous offering of the Fund's shares. The Principal Underwriter receives no
commissions or other compensation for its services, and has not received any
such amounts in any prior year. The Underwriting Agreement shall continue in
effect with respect to the Fund until two years after its execution and for
successive periods of one year thereafter only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the Fund's
outstanding shares or by the Trustees of the Trust or (ii) by a vote of a
majority of the Trustees of the Trust who are not "interested persons" (as
defined by the 1940 Act) of the parties to the Underwriting Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Underwriting Agreement will terminate automatically if assigned by either party
thereto and is terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust, a vote of a majority of the Trustees who are not
"interested persons" of the Trust, or by a vote of the holders of a majority of
the Fund's outstanding shares, in any case without payment of any penalty on not
more than 60 days' written notice to the other party. The offices of the
Principal Underwriter are located at One Financial Center, 26th Floor, Boston,
Massachusetts 02111.
35
<PAGE>
REDEMPTION OF SHARES
Detailed information on redemption of shares is included in the Prospectus.
The Fund may suspend the right to redeem shares or postpone the date of
payment upon redemption for more than seven days (i) for any period during which
the New York Stock Exchange is closed (other than customary weekend or holiday
closings) or trading on the exchange is restricted; (ii) for any period during
which an emergency exists as a result of which disposal by the Fund of
securities owned by it or determination by the Fund of the value of its net
assets is not reasonably practicable; or (iii) for such other periods as the SEC
may permit for the protection of shareholders of the Fund.
The Fund intends to pay redemption proceeds in cash for all shares redeemed
but, under certain conditions, the Fund may make payment wholly or partly in
portfolio securities. Portfolio securities paid upon redemption of Fund shares
will be valued at their then current market value. The Fund has elected to be
governed by the provisions of Rule 18f-1 under the 1940 Acts which limits the
Fund's obligation to make cash redemption payments to any shareholder during any
90-day period to the lesser of $250,000 or 1% of the Fund's net asset value at
the beginning of such period. An investor may incur brokerage costs in
converting portfolio securities received upon redemption to cash.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for placing the Fund's portfolio transactions
and will do so in a manner deemed fair and reasonable to the Fund and not
according to any formula. The primary consideration in all portfolio
transactions will be prompt execution of orders in an efficient manner at the
most favorable price. In selecting broker-dealers and in negotiating
commissions, the Adviser will consider the firm's reliability, the quality of
its execution services on a continuing basis and its financial condition. When
more than one firm is believed to meet these criteria, preference may be given
to firms which also sell shares of the Fund. In addition, if the Adviser
determines in good faith that the amount of commissions charged by a broker is
reasonable in relation to the value of the brokerage and research services
provided by such broker, the Fund may pay commissions to such broker in an
amount greater than the amount another firm may charge. Research services may
include (i) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, (ii) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts, and (iii) effecting
securities transactions and performing functions incidental thereto (such as
clearance and settlement). Research services furnished by firms through which
the Fund effects its securities transactions may be used by the Adviser in
servicing other accounts; not all of these services may be used by the Adviser
in connection with the Fund. The investment advisory fee paid by the Fund under
the advisory agreement will not be reduced as a result of the Adviser's receipt
of research services.
36
<PAGE>
The Adviser also places portfolio transactions for other advisory accounts.
The Adviser will seek to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities for the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations, the main factors considered by the Adviser will be the
respective investment objectives, the relative size of portfolio holdings of the
same or comparable securities, the availability of cash for investment, the size
of investment commitments generally held, and opinions of the persons
responsible for recommending the investment.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value is calculated each business 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). Currently the New York Stock Exchange is not open on
weekends, New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas. The net asset value
of the Fund's shares is determined as of the close of regular trading on the New
York Stock Exchange (currently 4:00 p.m., New York City time) and is computed by
dividing the value of all securities and other assets of the Fund less all
liabilities by the number of shares outstanding, and adjusting to the nearest
cent per share. Expenses and fees, including the investment advisory fee, are
accrued daily and taken into account for the purpose of determining net asset
value.
FEDERAL AND MASSACHUSETTS INCOME TAXES
Federal Income Taxation
Each series of the Trust, including the Fund, is treated as a separate
entity for accounting and tax purposes. The Fund has qualified and elected to be
treated as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), and intends to continue to so
qualify in the future. As such and by complying with the applicable provisions
of the Code regarding the sources of its income, the timing of its
distributions, and the diversification of its assets, the Fund will not be
subject to Federal income tax on its investment company taxable income (i.e.,
all taxable income, after reduction by deductible expenses, other than its "net
capital gain," which is the excess, if any, of its net long-term capital gain
over its net short-term capital loss), net tax-exempt interest, and net capital
gain which are distributed to shareholders at least annually in accordance with
the timing requirements of the Code.
The Fund will be subject to a 4% non-deductible federal excise tax on
certain taxable amounts not distributed (and not treated as having been
distributed) on a timely basis in accordance with annual minimum distribution
requirements. The Fund intends under normal circumstances to avoid liability for
such tax by satisfying such distribution requirements.
37
<PAGE>
The Fund will not distribute net long-term capital gains realized in any
year to the extent that a capital loss is carried forward from prior years
against such gain. For federal income tax purposes, the Fund is permitted to
carry forward a net capital loss in any year to offset its own net capital
gains, if any, during the eight years following the year of the loss. To the
extent subsequent net capital gains are offset by such losses, they would not
result in federal income tax liability to the Fund and, as noted above, would
not be distributed as such to shareholders. The Fund has $429,385 of capital
loss carryforwards, which expire in 2002, available to offset future net capital
gains.
If the Fund invests in certain zero coupon securities, increasing rate
securities or, in general, other securities with original issue discount (or
with market discount if the Fund elects to include market discount in income
currently), the Fund must accrue income on such investments prior to the receipt
of the corresponding cash payments. However, the Fund must distribute, at least
annually, all or substantially all of its net taxable and tax-exempt income,
including such accrued income, to shareholders to qualify as a regulated
investment company under the Code and avoid federal income and excise taxes.
Therefore, the Fund may have to dispose of its portfolio securities under
disadvantageous circumstances to generate cash, or may have to leverage itself
by borrowing the cash, to satisfy distribution requirements.
Limitations imposed by the Code on regulated investment companies like the
Fund may restrict the Fund's ability to enter into futures and options
transactions.
Certain options and futures transactions undertaken by the Fund may cause
the Fund to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as long-term
or short-term and timing of some capital gains and losses realized by the Fund.
Also, certain of the Fund's losses on its transactions involving options or
futures contracts and/or offsetting portfolio positions may be deferred rather
than being taken into account currently in calculating the Fund's taxable gains.
Certain of the applicable tax rules may be modified if the Fund is eligible and
chooses to make one or more of certain tax elections that may be available.
These transactions may therefore affect the amount, timing and character of the
Fund's distributions to shareholders. The Fund will take into account the
special tax rules (including consideration of available elections) applicable to
options and futures contracts in order to minimize any potential adverse tax
consequences.
The federal income tax rules applicable to interest rate swaps, caps,
floors and collars are unclear in certain respects, and the Fund may be required
to account for these instruments under tax rules in a manner that, under certain
circumstances, may limit its transactions in these instruments.
Distributions from the Fund's current or accumulated earnings and profits
("E&P"), as computed for federal income tax purposes, will be taxable as
described in the Fund's Prospectus whether taken in shares or in cash. Amounts
that are not allowable as a deduction in computing taxable income, including
expenses associated with earning tax-exempt interest income, do not reduce
current E&P for this purpose.
38
<PAGE>
Taxable distributions include distributions attributable to income or gains
from the Fund's taxable investments or transactions, including (i) gains from
the sale of portfolio securities or the right to when-issued securities prior to
issuance or from options or futures transactions and (ii) income attributable to
repurchase agreements, securities lending, recognized market discount, interest
rate swaps, caps, floors or collars, and a portion of the discount from certain
stripped tax-exempt obligations or their coupons.
Distributions, if any, in excess of E&P will constitute a return of
capital, which will first reduce an investor's tax basis in Fund shares and
thereafter (after such basis is reduced to zero) will generally give rise to
capital gains. Shareholders electing to receive distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the amount of cash they would have received had they
elected to receive the distributions in cash, divided by the number of shares
received.
Distributions of tax-exempt interest ("exempt-interest dividends") timely
designated as such by the Fund will be treated as tax-exempt interest under the
Code, provided that the Fund qualifies as a regulated investment company and at
least 50% of the value of its assets at the end of each quarter of its taxable
year is invested in tax-exempt obligations. Shareholders are required to report
their receipt of tax-exempt interest, including such distributions, on their
federal income tax returns. The portion of the Fund's distributions designated
as exempt-interest dividends may differ from the actual percentage that its
tax-exempt income comprises of its total income during the period of any
particular shareholder's investment. The Fund will report to shareholders the
amount designated as exempt-interest dividends for each year.
Interest income from certain types of tax-exempt obligations that are
private activity bonds in which the Fund may invest is treated as an item of tax
preference for purposes of the federal alternative minimum tax. To the extent
that the Fund invests in these types of tax-exempt obligations, shareholders
will be required to treat as an item of tax preference for federal alternative
minimum purposes that part of the Fund's exempt-interest dividends which is
derived from interest on these tax-exempt obligations. Exempt-interest dividends
derived from interest income from tax-exempt obligations that are not private
activity bonds may also be included in determining corporate "adjusted current
earnings" for purposes of computing the alternative minimum tax liability, if
any, of corporate shareholders of the Fund.
The Fund purchases tax-exempt obligations which are generally accompanied
by an opinion of bond counsel to the effect that interest on such securities is
not included in gross income for federal income tax purposes and, in most cases,
is exempt from Massachusetts income tax. It is not economically feasible to, and
the Fund therefore does not, make any additional independent inquiry into
whether such securities are in fact tax-exempt. Bond counsels' opinions will
generally be based in part upon covenants by the issuers and related parties
regarding continuing compliance with federal tax requirements. Tax laws enacted
during the last decade not only had the effect of limiting the purposes for
which tax-exempt bonds could be issued and reducing the supply of such bonds,
but also increased the number and complexity of requirements that must be
satisfied on a continuing basis in order for bonds to be and remain tax-exempt.
If the issuer of a bond or a user of a bond-financed facility fails to comply
with such requirements at any time, interest on the bond could become taxable,
retroactive to the date the obligation was issued. In that event, a portion of
the Fund's distributions attributable to interest the Fund received on such bond
for the current year and for prior years could be characterized or
recharacterized as taxable income.
39
<PAGE>
The Fund may purchase municipal obligations together with the right to
resell the securities to the seller at an agreed upon price or yield within a
specified period prior to the maturity date of the securities. Such a right to
resell is commonly known as a "put" and is also referred to as a "standby
commitment." The Fund may pay for a standby commitment either separately, in
cash, or in the form of a higher price for the securities which are acquired
subject to the standby commitment, thus increasing the cost of securities and
reducing the yield otherwise available. Additionally, the Fund may purchase
beneficial interests in municipal obligations held by trusts, custodial
arrangements or partnerships and/or combined with third-party puts or other
types of features such as interest rate swaps; those investments may require the
Fund to pay "tender fees" or other fees for the various features provided.
The Internal Revenue Service (the "Service") has issued a revenue ruling to
the effect that, under specified circumstances, a registered investment company
will be the owner of tax-exempt municipal obligations acquired subject to a put
option. The Service has also issued private letter rulings to certain taxpayers
(which do not serve as precedent for other taxpayers) to the effect that
tax-exempt interest received by a regulated investment company with respect to
such obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The Service has
subsequently announced that it will not ordinarily issue advance ruling letters
as to the identity of a true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation interest therein, to be purchased by
either the seller or a third party. The Fund intends to take the position that
it is the owner of any municipal obligations acquired subject to a standby
commitment or other third party put and that tax-exempt interest earned with
respect to such municipal obligations will be tax-exempt in its hands. There is
no assurance that the Service will agree with such position in any particular
case. Additionally, the federal income tax treatment of certain other aspects of
these investments, including the treatment of tender fees paid by the Fund, in
relation to various regulated investment company tax provisions is unclear.
However the Adviser intends to manage the Fund's portfolio in a manner designed
to minimize any adverse impact from the tax rules applicable to these
investments.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Fund will not be deductible for federal income tax purposes to the
extent it is deemed related to exempt-interest dividends paid by the Fund.
Pursuant to published guidelines, the Service may deem indebtedness to have been
incurred for the purpose of purchasing or carrying shares of the Fund even
though the borrowed funds may not be directly traceable to the purchase of
shares.
40
<PAGE>
At the time of an investor's purchase of Fund shares, a portion of the
purchase price is often attributable to realized or unrealized appreciation in
the Fund's portfolio. Consequently, subsequent distributions from such
appreciation may be taxable to such investor even if the net asset value of the
investor's shares is, as a result of the distributions, reduced below the
investor's cost for such shares, and the distributions in reality represent a
return of a portion of the purchase price.
Upon a redemption (including a repurchase) of shares of the Fund, a
shareholder may realize a taxable gain or loss, depending upon the difference
between the redemption proceeds and the shareholder's tax basis in his shares.
Such gain or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands and will (except as described below)
be long-term or short-term, depending upon the shareholder's tax holding period
for the shares. Any loss realized on a redemption may be disallowed to the
extent the shares disposed of are replaced within a period of 61 days beginning
30 days before and ending 30 days after the shares are disposed of, such as
pursuant to automatic dividend reinvestments. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized upon the redemption of shares with a tax holding period of six months
or less will be disallowed to the extent of all exempt-interest dividends paid
with respect to such shares and, if not thus disallowed, will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain with respect to such shares.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the Fund. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in the Fund.
Massachusetts Income Taxation
Distributions from the Fund will be treated for Massachusetts tax purposes
as described in the Fund's prospectus, whether taken in cash or reinvested in
additional shares.
41
<PAGE>
Recent tax legislation provides that, beginning in 1996, long-term capital
gains will generally be taxed in Massachusetts on a sliding scale at rates
ranging from 5% to 0%, with the applicable tax rate declining as the tax holding
period of the asset (beginning on the later of January 1, 1995 or the date of
actual acquisition) increases from more than one year to more than six years.
This legislation may be challenged in court as violative of the Massachusetts
Constitution, and it is not possible to predict whether any such challenge will
be successful. The legislation does not specify, and it is accordingly not
clear, what Massachusetts tax rate will be applicable to a mutual fund's capital
gain dividends, i.e., distributions from the excess of its net long-term capital
gain over its net short-term capital loss that are treated as long-term capital
gains under the Code, for taxable years beginning after 1995.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Code, it will also not be required to pay any Massachusetts income tax.
THE FUND AND ITS SHARES
The Fund is an 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 as amended from time to time (the "Declaration"). Under the Declaration,
the Trustees have authority to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, of the Fund. Each share represents an equal
proportionate interest in the Fund with each other share and is entitled to such
dividends and distributions as are declared by the Trustees. Shareholders are
not entitled to any preemptive, conversion or subscription rights. All shares,
when issued, will be fully paid and non-assessable by the Trust. Upon any
liquidation of the Fund, shareholders are entitled to share pro rata in the net
assets available for distribution.
Pursuant to the Declaration, the Trustees may create additional funds by
establishing additional series of shares in the Trust. The establishment of
additional series would not affect the interests of current shareholders in the
Fund. As of the date of this Statement of Additional Information, the Trustees
have established fourteen other series of the Trust that publicly offer their
shares. Pursuant to the Declaration, the Board may establish and issue multiple
classes of shares for each series of the Trust. As of the date of this Statement
of Additional Information, the Trustees do not have any plan to establish
multiple classes of shares for the Fund. Pursuant to the Declaration of Trust
and subject to shareholder approval (if then required), the Trustees may
authorize the Fund to invest all of its investable assets in a single open-end
investment company that has substantially the same investment objectives,
policies and restrictions as the Fund. As of the date of this Statement of
Additional Information, the Board does not have any plan to authorize the Fund
to so invest its assets.
All Fund shares have equal rights with regard to voting, and shareholders
of the Fund have the right to vote as a separate class with respect to matters
as to which their interests are not identical to those of shareholders of other
investment series of the Trust, including the approval of an investment advisory
contract and any change of investment policy requiring the approval of
shareholders.
42
<PAGE>
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Declaration disclaims shareholder liability for acts or obligations of the Trust
and requires that notice of this disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Trust or a Trustee. The
Declaration also provides for indemnification from the assets of the Trust for
all losses and expenses of any Trust shareholder held liable for the obligations
of the Trust. Thus, the risk of a shareholder incurring a financial loss on
account of his or its liability as a shareholder of the Trust is limited to
circumstances in which both inadequate insurance existed and the Trust would be
unable to meet its obligations. The possibility that these circumstances would
occur is remote. Upon payment of any liability incurred by the Trust, the
shareholder paying the liability will be entitled to reimbursement from the
general assets of the Trust. The Declaration also provides that no series of the
Trust is liable for the obligations of any other series. The Trustees intend to
conduct the operations of the Trust to avoid, to the extent possible, ultimate
liability of shareholders for liabilities of the Trust.
ADDITIONAL INFORMATION
The Fund's Prospectus and this Statement of Additional Information omit
certain information contained in the registration statement filed with the
Securities and Exchange Commission, which may be obtained from the Commission's
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment
of the fee prescribed by the rules and regulations promulgated by the
Commission.
EXPERTS AND FINANCIAL STATEMENTS
The financial statements for the fiscal years ended December 31, 1994 and
1995 included in this Statement of Additional Information have been audited by
Coopers & Lybrand L.L.P., independent accountants, as set forth in their report
appearing elsewhere herein, and have been so included in reliance upon the
authority of the report of Coopers & Lybrand L.L.P. as experts in accounting and
auditing. The Fund`s financial highlights for the period from November 2, 1992
(commencement of operations) through December 31, 1992 were audited by Deloitte
& Touche LLP, independent auditors, and have been similarly included in reliance
upon the expertise of that firm. Coopers & Lybrand L.L.P., independent
accountants, will audit the Fund's financial statements for the fiscal year
ending December 31, 1996.
43
<PAGE>
Prospectus dated May 1, 1996
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 seeks
capital appreciation when market factors, such as declining interest rates,
indicate that capital appreciation may be available without significant risk to
principal. The Fund seeks 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"). Because of the uncertainty
inherent in all invests, no assurance can be given that the Fund will achieve
its investment objective.
Investors may purchase shares of the Fund from the Trust's principal
underwriter, Standish Fund Distributors, L.P. (the "Principal Underwriter"), at
the address and phone number listed above 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 Principal Underwriter 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.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN SHARES OF THE FUND INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
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.
Contents
Highlights of this Prospectus.................................2
Expense Information...........................................3
Financial Highlights..........................................4
Investment Objective and Policies.............................5
Risk Factors and Suitability.................................11
Calculation of Performance Data..............................12
Dividends and Distributions..................................12
Purchase of Shares...........................................12
Exchange 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
1
<PAGE>
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 fourteen series that currently offer their shares
to the public 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 seeks
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 are 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 "Investment Objective and Policies" and "Strategic
Transactions" in this Prospectus.
Securitized Assets Generally
The Fund will invest in securities that 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, 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.
2
<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.
Investment Adviser
Standish, Ayer & Wood, Inc. (the "Adviser") serves as 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.
3
<PAGE>
Purchase of Shares
The Principal Underwriter offers shares of the Fund for sale 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 Principal Underwriter 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.
- --------------------------------------------------------------------------------
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) 0.19%
12b-1 Fees None
Other Expenses 0.26%
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
</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,"
which includes, among other things, custodian and transfer agent fees,
registration costs and payments for insurance and audit and legal services, is
based upon the Fund's expenses for the fiscal year ended December 31, 1995
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 0.51%, respectively, of the Fund's average daily net assets for the
fiscal year ended December 31, 1995.
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%.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights for the years ended December 31, 1993, 1994, and
1995 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.
Further information about the performance of the Fund is contained in the
Fund's Annual Report, which may be obtained from the Principal Underwriter
without charge.
5
<PAGE>
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 seeks
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 seeks 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 and engage in other active management techniques.
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 due to
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
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 is 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. 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.
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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.
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.
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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.
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.
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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 and 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.
Real Estate Mortgage Investment Conduits (REMICs)
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.
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.
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In accordance with procedures adopted by the Board of Trustees, the Adviser
may determine whether or not a particular government issued IO or PO STRIP
backed by fixed rate mortgages is liquid. Private IO and PO STRIPs are
considered illiquid for purposes of the Fund's investment restrictions.
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,
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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.
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.
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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. The Fund may, however, invest up
to 15% of its net assets in securities which are rated, at the time of
investment, 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 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."
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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
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. 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
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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
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 will attempt to limit its net loss exposure resulting
from Strategic Transactions entered into for such purposes to not more than 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
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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
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 attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for non-hedging purposes to not more than 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 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; 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
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.
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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 must 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 grade 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.
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. If the other party or "seller" of a repurchase
agreement defaults, the Fund might suffer a loss to the extent that the proceeds
from the sale of the underlying securities and other collateral held by the Fund
in connection with the related repurchase agreement are less than the repurchase
price. In addition, in the event of bankruptcy of the seller or failure of the
seller to repurchase the securities as agreed, a Fund could suffer losses,
including loss of interest on or principal of the security and costs associated
with delay and enforcement of the repurchase agreement.
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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. Certain non-fundamental policies and 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.
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
(or any shorter period since inception) 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.
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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.
From time to time, the Fund may compare its performance with that of other
mutual funds with similar investment objectives, to relevant indices, and to
performance rankings prepared by recognized mutual fund statistical services. In
addition, the Fund's performance may be compared to alternative investment or
savings vehicles and/or to indices or indicators of economic activity.
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 Principal
Underwriter, which offers the Fund's 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 in good order by the Principal Underwriter and
payment for the shares is received by the Fund's custodian. Please see the
Fund's account application or call the Principal Underwriter for instructions on
how to make payment of shares to the Fund's custodian. 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.
Shares of the Fund may also be purchased through securities dealers. 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 Principal Underwriter 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, provided that payment for the shares is
also received by the Fund's custodian 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 Principal Underwriter 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, the Principal Underwriter 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. The Fund's investment minimums do not apply to
accounts for which the Adviser or any of its affiliates serves as investment
adviser or to employees of the Adviser or any of its affiliates or to members of
such persons' immediate families. The Fund's investment minimums apply to the
aggregate value invested in omnibus accounts rather than to the investment of
underlying participants in such omnibus accounts.
EXCHANGE OF SHARES
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 Principal Underwriter. 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 Principal Underwriter
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 Principal
Underwriter 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.
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Written Exchanges
Shares of the Fund may be exchanged by written order to the Principal
Underwriter, 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 elected telephonic privileges may exchange shares by
calling the Principal Underwriter at (800) 221-4795. Telephonic privileges are
not available to shareholders automatically. Proper identification will be
required for each telephonic exchange. Please see "Telephone Transactions" below
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 by
the Fund's custodian. 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.
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 by the Principal
Underwriter 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 the Principal
Underwriter, One Financial Center, 26th Floor, Boston, Massachusetts 02111. A
written redemption request must (a) state the name of the Fund and 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(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
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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 that are not
individuals. Redemption proceeds will normally be paid by check mailed within
three business days of receipt by the Principal Underwriter 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 in the case of
payments made by check.
Telephonic Redemption
Shareholders who elect telephonic privileges may redeem shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to shareholders automatically. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instruction on the account
application to a pre-designated account. Redemption proceeds will normally be
paid promptly after receipt of telephonic instructions, but no later than three
business days thereafter, except as described above for shares purchased by
check. 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. Wire charges, if any,
will be deducted from redemption proceeds. Proper identification will be
required for each telephonic redemption.
Repurchase Order
In addition to telephonic and written redemption of Fund shares, the
Principal Underwriter may accept telephone orders from brokers or dealers for
the repurchase of Fund shares. The repurchase price is the net asset value per
share next determined after receipt of the repurchase order by the Principal
Underwriter and the payment for the shares by the Fund's custodian. Brokers and
dealers are obligated to transmit repurchase orders to the Principal Underwriter
prior to the close of the Principal Underwriter's business day (normally 4:00
p.m.). Brokers and dealers may charge for their services in connection with a
repurchase of Fund shares, but neither the Fund nor the Principal Underwriter
imposes a charge for share repurchases.
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Telephone Transactions
By maintaining an account that is eligible for telephonic exchange and
redemption privileges, the shareholder authorizes the Adviser, the Principal
Underwriter, the Fund and the Fund's custodian to act upon instructions of any
person to redeem and/or exchange shares from the shareholder's account. Further,
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 Principal Underwriter, nor the Trust, nor the Fund, 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
or exchange, 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. All telephone transaction requests will
be recorded. Shareholders may experience delays in exercising telephone
transaction privileges during periods of abnormal market activity. Accordingly,
during periods of volatile economic and market conditions, shareholders may wish
to consider transmitting redemption and exchange requests in writing.
* * * *
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. The Fund may eliminate duplicate mailings of Fund materials
to shareholders that have the same address of record.
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.
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The Adviser provides fully discretionary management services and counseling
and advisory services to a broad range of clients throughout the United States
and abroad. In addition, the Adviser or its affiliate, Standish International
Management Company, L.P. ("SIMCO"), serves as the investment adviser to each of
the following fourteen funds in the Standish, Ayer & Wood family of funds:
Net Assets
Fund (March 31, 1996)
- --------------------------------------------------------------------------------
Standish Controlled Maturity Fund
Standish Equity Portfolio
Standish Fixed Income Portfolio
Standish Fixed Income Fund II
Standish Global Fixed Income Portfolio
Standish Intermediate Tax Exempt Bond Fund
Standish International Equity Fund
Standish International Fixed Income Fund
Standish Massachusetts Intermediate
Tax Exempt Bond Fund
Standish Securitized Fund
Standish Short-Term Asset Reserve Fund
Standish Small Capitalization Equity Portfolio
Standish Small Cap Tax-Sensitive Equity Fund
Standish Tax-Sensitive Equity Fund
Corporate pension funds are the largest asset under active management by
Standish. Standish's clients also include charitable and educational endowment
funds, financial institutions, trusts and individual investors. As of March 31,
1996, Standish managed approximately $__ billion in 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. The Adviser has voluntarily agreed to
limit the Fund's total annual operating expenses (excluding brokerage
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commissions, taxes, litigation, indemnification and other extraordinary
expenses) to 0.45% of average daily net assets. The Adviser may discontinue or
modify such limitation in the future at its discretion, although it has no
current intention to do so. The Adviser has also agreed to limit the Fund's
total operating expenses (excluding brokerage commissions, taxes and
extraordinary expenses) to 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, 1995, advisory fees paid by the Fund represented 0.20% of the
Fund's average daily net assets, after a fee reduction of $31,998.
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
and shareholder reports which are furnished to shareholders; registration and
reporting fees and expenses; and Trustees' fees and expenses. The Principal
Underwriter 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,
1995, expenses borne by the Fund represented 0.45% of average daily net assets,
after an expense reduction of $31,998.
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 generally 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.
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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 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.
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.
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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
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 December 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 fourteen series that currently offer their shares
to the public 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 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.
27
<PAGE>
Inquiries concerning the Fund should be made by contacting the Principal
Underwriter at the address and telephone number listed on the cover of this
Prospectus.
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
28
<PAGE>
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.
29
<PAGE>
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.
30
<PAGE>
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
<PAGE>
STANDISH SECURITIZED FUND
Investment Adviser
Standish, Ayer & Wood, Inc.
One Financial Center
Boston, Massachusetts 02111
Custodian
Investors Bank & Trust Company
24 Federal Street
Boston, Massachusetts 02110
Principal Underwriter
Standish Fund Distributors, L.P.
One Financial Center
Boston, Massachusetts 02111
Independent Accountants
Coopers & Lybrand L.L.P
One Post Office Square
Boston, Massachusetts 02109
Legal Counsel
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
32
<PAGE>
May 1, 1996
STANDISH SECURITIZED FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus, but expands
upon and supplements the information contained in the Prospectus dated May 1,
1996, as amended and/or supplemented from time to time (the "Prospectus"), of
Standish Securitized Fund (the "Fund"), a separate investment series of
Standish, Ayer & Wood Investment Trust (the "Trust"). This Statement of
Additional Information should be read in conjunction with the Fund's Prospectus,
a copy which may be obtained without charge from Standish Fund Distributors,
L.P., the Trust's principal underwriter (the "Principal Underwriter"), at the
address or phone number set forth above.
THE STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
CONTENTS
Investment Objective and Policies ............................2
Investment Restrictions.......................................9
Calculation of Performance Data..............................10
Management...................................................12
Redemption of Shares.........................................17
Portfolio Transactions.......................................17
Federal Income Taxes.........................................18
Determination of Net Asset Value.............................19
The Fund and Its Shares......................................20
Additional Information.......................................20
Experts and Financial Statements.............................20
Financial Statements........................................21
1
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's Prospectus describes the investment objective of the Fund and
summarizes the investment policies it will follow. The following discussion
supplements the description of the Fund's investment policies in the Prospectus.
See the Prospectus for a more complete description of the Fund's investment
objective, policies and restrictions.
Mortgage-Related Obligations
Some of the characteristics of mortgage-related obligations and the issuers
or guarantors of such securities are described below.
Life of Mortgage-Related Obligations
The average life of mortgage-related obligations is likely to be
substantially less than the stated maturities of the mortgages in the mortgage
pools underlying such securities. Prepayments or refinancing of principal by
mortgagors and mortgage foreclosures will usually result in the return of the
greater part of principal invested long before the maturity of the mortgages in
the pool.
As prepayment rates of individual mortgage pools will vary widely, it is
not possible to predict accurately the average life of a particular issue of
mortgage-related obligations. However, with respect to GNMA Certificates,
statistics published by the FHA are normally used as an indicator of the
expected average life of an issue. The actual life of a particular issue of GNMA
Certificates, however, will depend on the coupon rate of the underlying
mortgages, with higher interest rate mortgages being more prone to prepayment or
refinancing.
GNMA Certificates
The Government National Mortgage Association ("GNMA") was established in
1968 when the Federal National Mortgage Association ("FNMA") was separated into
two organizations, GNMA and FNMA. GNMA is a wholly-owned government corporation
within the Department of Housing and Urban Development. GNMA developed the first
mortgage-backed pass-through instrument in 1970 for Farmers Home
Administration-FMHA-insured, Federal Housing Administration-FHA-insured and for
Veterans Administration-or VA-guaranteed mortgages ("government mortgages").
GNMA purchases government mortgages and occasionally conventional mortgages
to support the housing market. GNMA is known primarily, however, for its role as
guarantor of pass-through securities collateralized by government mortgages.
Under the GNMA securities guarantee program, government mortgages that are
pooled must be less than one year old by the date GNMA issues its commitment.
Loans in a single pool must be of the same type in terms of interest rate and
maturity. The minimum size of a pool is $1 million for single-family mortgages
and $500,000 for manufactured housing and project loans.
Under the GNMA II program, loans with different interest rates can be
included in a single pool and mortgages originated by more than one lender can
be assembled in a pool. In addition, loans made by a single lender can be
packaged in a custom pool (a pool containing loans with specific characteristics
or requirements).
2
<PAGE>
GNMA Guarantee
The National Housing Act authorizes GNMA to guarantee the timely payment of
principal of and interest on securities backed by a pool of mortgages insured by
FHA or FMHA, or guaranteed by VA. The GNMA guarantee is backed by the full faith
and credit of the United States. GNMA is also empowered to borrow without
limitation from the U.S. Treasury if necessary to make any payments required
under its guarantee.
Yield Characteristics of GNMA Certificates
The coupon rate of interest on GNMA Certificates is lower than the interest
rate paid on the VA-guaranteed, FMHA-insured or FHA-insured mortgages underlying
the Certificates, but only by the amount of the fees paid to GNMA and the
issuer. For the most common type of mortgage pool, containing single-family
dwelling mortgages, GNMA receives an annual fee of 0.06% of the outstanding
principal for providing its guarantee, and the issuer is paid an annual fee of
0.44% for assembling the mortgage pool and for passing through monthly payments
of interest and principal to GNMA Certificate holders.
The coupon rate by itself, however, does not indicate the yield which will
be earned on the GNMA Certificates for several reasons. First, GNMA Certificates
may be issued at a premium or discount, rather than at par, and, after issuance,
GNMA Certificates may trade in the secondary market at a premium or discount.
Second, interest is paid monthly, rather than semi-annually as with traditional
bonds. Monthly compounding has the effect of raising the effective yield earned
on GNMA Certificates. Finally, the actual yield of each GNMA Certificate is
influenced by the prepayment experience of the mortgage pool underlying the GNMA
Certificate. If mortgagors prepay their mortgages, the principal returned to
GNMA Certificate holders may be reinvested at higher or lower rates.
Market for GNMA Certificates
Since the inception of the GNMA mortgage-backed securities program in 1970,
the amount of GNMA Certificates outstanding has grown rapidly. The size of the
market and the active participation in the secondary market by securities
dealers and many types of investors make the GNMA Certificates a highly liquid
instrument. Prices of GNMA Certificates are readily available from securities
dealers and depend on, among other things, the level of market rates, the GNMA
Certificate's coupon rate and the prepayment experience of the pools of
mortgages backing each GNMA Certificate.
FHLMC Participation Certificates
The Federal Home Loan Mortgage Corporation ("FHLMC") was created by the
Emergency Home Finance Act of 1970. It is a private corporation, initially
capitalized by the Federal Home Loan Bank System, charged with supporting the
mortgage lending activities of savings and loan associations by providing an
active secondary market for conventional mortgages. To finance its mortgage
purchases, FHLMC issues FHLMC Participation Certificates and Collateralized
Mortgage Obligations ("CMOs").
Participation Certificates represent an undivided interest in a pool of
mortgage loans. FHLMC purchases whole loans or participations on 30-year and
15-year fixed-rate mortgages, adjustable-rate mortgages ("ARMs") and home
improvement loans. Under certain programs, it will also purchase FHA and VA
mortgages.
3
<PAGE>
Loans pooled for FHLMC must have a minimum coupon rate equal to the
Participation Certificate rate specified at delivery, plus a required spread for
the corporation and a minimum servicing fee, generally 0.375% (37.5 basis
points). The maximum coupon rate on loans is 2% (200 basis points) in excess of
the minimum eligible coupon rate for Participation Certificates.
FHLMC requires a minimum commitment of $1 million in mortgages but imposes
no maximum amount. Negotiated deals require a minimum commitment of $10 million.
FHLMC guarantees timely payment of the interest and the ultimate payment of
principal of its Participation Certificates. This guarantee is backed by
reserves set aside to protect against losses due to default.
The FHLMC CMO is divided into varying maturities with prepayment set
specifically for holders of the shorter term securities. The CMO is designed to
respond to investor concerns about early repayment of mortgages.
FHLMC's CMOs are general obligations, and FHLMC will be required to use its
general funds to make principal and interest payments on CMOs if payments
generated by the underlying pool of mortgages are insufficient to pay principal
and interest on the CMO.
A CMO is a cash-flow bond in which mortgage payments from underlying
mortgage pools pay principal and interest to CMO bondholders. The CMO is
structured to address two major shortcomings associated with traditional
pass-through securities: payment frequency and prepayment risk. Traditional
pass-through securities pay interest and amortized principal on a monthly basis
whereas CMOs normally pay principal and interest semi-annually. In addition,
mortgage-backed securities carry the risk that individual mortgagors in the
mortgage pool may exercise their prepayment privileges, leading to irregular
cash flow and uncertain average lives, durations and yields.
A typical CMO structure contains four tranches, which are generally
referred to as classes A, B, C and Z. Each tranche is identified by its coupon
and maturity. The first three classes are usually current interest-bearing bonds
paying interest on a quarterly or semi-annual basis, while the fourth Class Z,
is an accrual bond. Amortized principal payments and prepayments from the
underlying mortgage collateral redeem principal of the CMO sequentially;
payments from the mortgages first redeem principal on the Class A bonds. When
principal of the Class A bonds has been redeemed, the payments then redeem
principal on the Class B bonds. This pattern of using principal payments to
redeem each bond sequentially continues until the Class C bonds have been
retired. At this point, Class Z bonds begin paying interest and amortized
principal on their accrued value.
The final tranche of a CMO is usually a deferred interest bond, commonly
referred to as the Z bond. This bond accrues interest at its coupon rate but
does not pay this interest until all previous tranches have been fully retired.
While earlier classes remain outstanding, interest accrued on the Z bond is
compounded and added to the outstanding principal. The deferred interest period
ends when all previous tranches are retired, at which point the Z bond pays
periodic interest and principal until it matures. The Adviser would purchase a Z
bond for the Fund if it expected interest rates to decline.
4
<PAGE>
FNMA Securities
FNMA was created by the National Housing Act of 1938. In 1968, the agency
was separated into two organizations, GNMA to support a secondary market for
government mortgages and FNMA to act as a private corporation supporting the
housing market.
FNMA pools may contain fixed-rate conventional loans on one-to-four-family
properties. Seasoned FHA and VA loans, as well as conventional growing equity
mortgages, are eligible for separate pools. FNMA will consider other types of
loans for securities pooling on a negotiated basis.
A single pool may include mortgages with different loan-to-value ratios and
interest rates, though rates may not vary beyond two percentage points.
Privately-Issued Mortgage Loan Pools
Savings associations, commercial banks and investment bankers issue
pass-through securities secured by a pool of mortgages.
Generally, only conventional mortgages on single-family properties are
included in private issues, though seasoned loans and variable rate mortgages
are sometimes included. Private placements allow purchasers to negotiate terms
of transactions. Maximum amounts for individual loans may exceed the loan limit
set for government agency purchases. Pool size may vary, but the minimum is
usually $20 million for public offerings and $10 million for private placements.
Privately-issued mortgage-related obligations do not carry government or
quasi-government guarantees. Rather, mortgage pool insurance generally is used
to insure against credit losses that may occur in the mortgage pool. Pool
insurance protects against credit losses to the extent of the coverage in force.
Each mortgage, regardless of original loan-to-value ratio, is insured to 100% of
principal, interest and other expenses, to a total aggregate loss limit stated
on the policy. The aggregate loss limit of the policy generally is 5% to 7% of
the original aggregate principal of the mortgages included in the pool.
In addition to the insurance coverage to protect against defaults on the
underlying mortgages, mortgage-backed securities can be protected against the
nonperformance or poor performance of servicers. Performance bonding of
obligations such as those of the servicers under the origination, servicing or
other contractual agreement will protect the value of the pool of insured
mortgages and enhance the marketability.
The rating received by a mortgage security will be a major factor in its
marketability. For public issues, a rating is always required, but it may be
optional for private placements depending on the demands of the marketplace and
investors.
Before rating an issue, a rating agency such as Standard & Poor's Ratings
Group ("Standard & Poor's") or Moody's Investors Service, Inc. ("Moody's") will
consider several factors, including: the creditworthiness of the issuer; the
issuer's track record as an originator and servicer; the type, term and
characteristics of the mortgages, as well as loan-to-value ratio and loan
amounts; the insurer and the level of mortgage insurance and hazard insurance
provided. Where an equity reserve account or letter of credit is offered, the
rating agency will also examine the adequacy of the reserve and the strength of
the issuer of the letter of credit.
5
<PAGE>
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
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 will attempt to limit its net loss exposure resulting
from Strategic Transactions entered into for such purposes to not more than 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. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the ability of Standish, Ayer
& Wood (the "Adviser") 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 Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"), for qualification as a regulated investment company.
6
<PAGE>
Risks of Strategic Transactions
The use of Strategic Transactions has associated risks 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 put options) or
lower than (in the case 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
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 attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for non-hedging purposes to not more than 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.
General Characteristics of Options
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving options
require segregation of the Fund's assets in special accounts, as described below
under "Use of Segregated Accounts."
7
<PAGE>
A put option gives the purchaser of the option, in consideration for the
payment of a premium, the right to sell, and the writer the obligation to buy
(if the option is exercised), the underlying security, commodity, index,
currency or other instrument at the exercise price. For instance, the Fund's
purchase of a put option on a security might be designed to protect its holdings
in the underlying instrument (or, in some cases, a similar instrument) against a
substantial decline in the market value by giving the Fund the right to sell
such instrument at the option exercise price. A call option, in consideration
for the payment of a premium, gives the purchaser of the option the right to
buy, and the seller the obligation to sell (if the option is exercised), the
underlying instrument at the exercise price. The Fund may purchase a call option
on a security, financial future, index, currency or other instrument to seek to
protect the Fund against an increase in the price of the underlying instrument
that it intends to purchase in the future by fixing the price at which it may
purchase such instrument. An American style put or call option may be exercised
at any time during the option period while a European style put or call option
may be exercised only upon expiration or during a fixed period prior thereto.
The Fund is authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options"). Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, exchange listed options generally settle by
physical delivery of the underlying security or currency, although in the future
cash settlement may become available. Index options and Eurodollar instruments
are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
exchange listed put or call option is dependent, in part, upon the liquidity of
the option market. There is no assurance that a liquid option market on an
exchange will exist. In the event that the relevant market for an option on an
exchange ceases to exist, outstanding options on that exchange would generally
continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
8
<PAGE>
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct agreement with
the Counterparty. In contrast to exchange listed options, which generally have
standardized terms and performance mechanics, all the terms of an OTC option,
including such terms as method of settlement, term, exercise price, premium,
guarantees and security, are set by negotiation of the parties. The Fund will
generally sell (write) OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. (To
the extent that the Fund does not do so, the OTC options are subject to the
Fund's restriction on illiquid securities.) The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in the OTC option market. As a result, if the Counterparty fails to
make delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with U.S.
Government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received, combined with any credit
enhancements, a long-term debt rating of A from Standard & Poor's or Moody's or
an equivalent rating from any other nationally recognized statistical rating
organization ("NRSRO") or that issue long-term debt determined to be of
equivalent credit quality by the Adviser. The staff of the Securities and
Exchange Commission ("SEC") currently takes the position that, absent the
buy-back provisions discussed above, OTC options purchased by the Fund, and
portfolio securities "covering" the amount of the Fund's obligation pursuant to
an OTC option sold by it (the cost of the sell-back plus the in-the-money
amount, if any) are illiquid, and are subject to the Fund's limitation on
investing no more than 15% of its net assets in illiquid securities. However,
for options written with "primary dealers" in U.S. Government securities
pursuant to an agreement requiring a closing transaction at a formula price, the
amount which is considered to be illiquid may be calculated by reference to a
formula price.
If the Fund sells (writes) a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Fund's income. The sale (writing) of put options
can also provide income.
The Fund may purchase and sell (write) call options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets, and on securities indices, currencies and futures
9
<PAGE>
contracts. All calls sold by the Fund must be "covered" (i.e., the Fund must own
the securities or futures contract subject to the call) or must meet the asset
segregation requirements described below as long as the call is outstanding.
Even though the Fund will receive the option premium to help protect it against
loss, a call sold by the Fund exposes the Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or
instrument which it might otherwise have sold.
The Fund may purchase and sell (write) put options on securities including
U.S. Treasury and agency securities, mortgage backed securities, foreign
sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments (whether or not it holds the
above securities in its portfolio), and on securities indices, currencies and
futures contracts. The Fund will not sell put options if, as a result, more than
50% of the Fund's assets would be required to be segregated to cover its
potential obligations under such put options other than those with respect to
futures and options thereon. In selling put options, there is a risk that the
Fund may be required to buy the underlying security at a disadvantageous price
above the market price.
Options on Securities Indices and Other Financial Indices
The Fund may also purchase (write) and sell call and put options on
securities indices and other financial indices. Options on securities indices
and other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement. For example, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the differential between
the closing price of the index and the exercise price of the option, which also
may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount. In addition to
the methods described above, the Fund may cover call options on a securities
index by owning securities whose price changes are expected to be similar to
those of the underlying index, or by having an absolute and immediate right to
acquire such securities without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other securities in its portfolio.
General Characteristics of Futures
The Fund may enter into financial futures contracts or purchase or sell put
and call options on such futures. Futures are generally bought and sold on the
commodities exchanges where they are listed with payment of initial and
variation margin as described below. The sale of futures contracts creates a
firm obligation by the Fund, as seller, to deliver to the buyer the specific
type of financial instrument called for in the contract at a specific future
time for a specified price (or, with respect to index futures and Eurodollar
instruments, the net cash amount). The purchase of futures contracts creates a
corresponding obligation by the Fund, as purchaser. Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
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<PAGE>
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
regulations of the Commodity Futures Trading Commission (the "CTFC") relating to
exclusions from regulation as a commodity pool operator. Those regulations
currently provide that the Fund may use commodity futures and option positions
(i) for bona fide hedging purposes without regard to the percentage of assets
committed to margin and option premiums, or (ii) for other purposes permitted by
the CTFC to the extent that the aggregate initial margin and option premiums
required to establish such non-hedging positions (net of the amount the
positions were "in the money" at the time of purchase) do not exceed 5% of the
net asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on such positions. Typically, maintaining a futures contract
or selling an option thereon requires the Fund to deposit with a financial
intermediary as security for its obligations an amount of cash or other
specified assets (initial margin) which initially is typically 1% to 10% of the
face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the value of the contract fluctuates. The
purchase of an option on financial futures involves payment of a premium for the
option without any further obligation on the part of the Fund. If the Fund
exercises an option on a futures contract it will be obligated to post initial
margin (and potential subsequent variation margin) for the resulting futures
position just as it would for any position. Futures contracts and options
thereon are generally settled by entering into an offsetting transaction but
there can be no assurance that the position can be offset prior to settlement at
an advantageous price, nor that delivery will occur. The segregation
requirements with respect to futures contracts and options thereon are described
below.
Currency Transactions
The Fund may engage in currency transactions with Counterparties in order
to hedge the value of portfolio holdings denominated in particular currencies
against fluctuations in relative value or to enhance potential gain. Currency
transactions include forward currency contracts, exchange listed currency
futures, exchange listed and OTC options on currencies, and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. A currency swap is
an agreement to exchange cash flows based on the notional (agreed-upon)
difference among two or more currencies and operates similarly to an interest
rate swap, which is described below. A Fund may enter into over-the-counter
currency transactions with Counterparties which have received, combined with any
credit enhancements, a long term debt rating of A by Standard & Poor's or
Moody's, respectively, or that have an equivalent rating from a NRSRO or (except
for OTC currency options) are determined to be of equivalent credit quality by
the Adviser.
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<PAGE>
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will
generally be limited to hedging involving either specific transactions or
portfolio positions. See "Strategic Transactions." Transaction hedging is
entering into a currency transaction with respect to specific assets or
liabilities of the Fund, which will generally arise in connection with the
purchase or sale of its portfolio securities or the receipt of income therefrom.
Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated or generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended wholly or partially to
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to proxy hedging as described below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value to
other currencies to which the Fund has or in which the Fund expects to have
portfolio exposure. For example, the Fund may hold a French government bond and
the Adviser may believe that French francs will deteriorate against German
marks. The Fund would sell French francs to reduce its exposure to that currency
and buy German marks. This strategy would be a hedge against a decline in the
value of French francs, although it would expose the Fund to declines in the
value of the German mark relative to the U.S. dollar.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is primarily used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which certain of the Fund's portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Fund's securities denominated in linked
currencies. For example, if the Adviser considers that the Austrian schilling is
linked to the German deutsche mark (the "D-mark"), the Fund holds securities
denominated in schillings and the Adviser believes that the value of schillings
will decline against the U.S. dollar, the Adviser may enter into a contract to
sell D-marks and buy dollars. Proxy hedging involves some of the same risks and
considerations as other transactions with similar instruments. Currency
transactions can result in losses to the Fund if the currency being hedged
fluctuates in value to a degree or in a direction that is not anticipated.
Further, there is the risk that the perceived linkage between various currencies
may not be present or may not be present during the particular time that the
Fund is engaging in proxy hedging. If the Fund enters into a currency hedging
transaction, the Fund will comply with the asset segregation requirements
described below.
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<PAGE>
Risks of Currency Transactions
Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to the Fund if
it is unable to deliver or receive currency or funds in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risks that
apply to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
Combined Transactions
The Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple currency transactions
(including forward currency contracts) and multiple interest rate transactions,
structured notes and any combination of futures, options, currency and interest
rate transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars
Among the Strategic Transactions into which the Fund may enter are interest
rate, currency and index swaps and the purchase or sale of related caps, floors
and collars. The Fund expects to enter into these transactions primarily for
hedging purposes, including, but not limited to, preserving a return or spread
on a particular investment or portion of its portfolio, protecting against
currency fluctuations, as a duration management technique or protecting against
an increase in the price of securities the Fund anticipates purchasing at a
later date. Swaps, caps, floors and collars may also be used to enhance
potential gain in circumstances where hedging is not involved although, as
described above, the Fund will attempt to limit its net loss exposure resulting
from swaps, caps, floors and collars and other Strategic Transactions entered
into for such purposes to not more than 3% of the Fund's net assets at any one
13
<PAGE>
time. The Fund will not sell interest rate caps, floors or collars where it does
not own securities or other instruments providing the income stream the Fund may
be obligated to pay. Interest rate swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain rate of return within a predetermined range of
interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from a NRSRO or is determined to be of equivalent credit quality by the
Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed. Swaps, caps,
floors and collars are considered illiquid for purposes of the Fund's policy
regarding illiquid securities, unless it is determined, based upon continuing
review of the trading markets for the specific security, that such security is
liquid. The Board of Trustees has adopted guidelines and delegated to the
Adviser the daily function of determining and monitoring the liquidity of swaps,
caps, floors and collars. The Board of Trustees, however, retains oversight
focusing on factors such as valuation, liquidity and availability of information
and is ultimately responsible for such determinations. The Staff of the SEC
currently takes the position that swaps, caps, floors and collars are illiquid,
and are subject to the Fund's limitation on investing in illiquid securities.
14
<PAGE>
Eurodollar Instruments
The Fund may make investments in Eurodollar instruments. Eurodollar
instruments are U.S. dollar-denominated futures contracts or options thereon
which are linked to the London Interbank Offered Rate ("LIBOR"), although
foreign currency-denominated instruments are available from time to time.
Eurodollar futures contracts enable purchasers to obtain a fixed rate for the
lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
Risks of Strategic Transactions Outside the United States
When conducted outside the United States, Strategic Transactions may not be
regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities, currencies
and other instruments. The value of such positions also could be adversely
affected by: (i) lesser availability than in the United States of data on which
to make trading decisions, (ii) delays in the Fund's ability to act upon
economic events occurring in foreign markets during non-business hours in the
United States, (iii) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States, (iv) lower
trading volume and liquidity, and (v) other complex foreign political, legal and
economic factors. At the same time, Strategic Transactions may offer advantages
such as trading in instruments that are not currently traded in the United
States or arbitrage possibilities not available in the United States.
Use of Segregated Accounts
The Fund will hold securities or other instruments whose values are
expected to offset its obligations under the Strategic Transactions. The Fund
will not enter into Strategic Transactions that expose the Fund to an obligation
to another party unless it owns either (i) an offsetting position in securities
or other options, futures contracts or other instruments or (ii) cash,
receivables or liquid, high grade debt securities with a value sufficient to
cover its potential obligations. The Fund may have to comply with any applicable
regulatory requirements designed to make sure that mutual funds do not use
leverage in Strategic Transactions, and if required, will set aside cash and
other assets in a segregated account with its custodian bank in the amount
prescribed. In that case, the Fund's custodian would maintain the value of such
segregated account equal to the prescribed amount by adding or removing
additional cash or other assets to account for fluctuations in the value of the
account and the Fund's obligations on the underlying Strategic Transaction.
Assets held in a segregated account would not be sold while the Strategic
Transaction is outstanding, unless they are replaced with similar assets. As a
result, there is a possibility that segregation of a large percentage of the
Fund's assets could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
15
<PAGE>
Money Market Instruments and Repurchase Agreements
Money market instruments include short-term U.S. Government securities,
commercial paper (promissory notes issued by corporations to finance their
short-term credit needs), negotiable certificates of deposit, non-negotiable
fixed time deposits, bankers' acceptances, floating rate notes and repurchase
agreements.
U.S. Government securities include securities which are direct obligations
of the U.S. Government backed by the full faith and credit of the United States,
and securities issued by agencies and instrumentalities of the U.S. Government,
which may be guaranteed by the U.S. Treasury or supported by the issuer's right
to borrow from the Treasury and may be backed by the credit of the federal
agency or instrumentality itself. Agencies and instrumentalities of the U.S.
Government include, but are not limited to Federal Land Banks, the Federal Farm
Credit Bank, the Central Bank for Cooperatives, Federal Intermediate Credit
Banks, Federal Home Loan Banks and the Federal National Mortgage Association.
Investments in commercial paper will be rated "Prime-1" by Moody's or "A-1"
by Standard & Poor's , or Duff 1+ by Duff & Phelps, which are the highest
ratings assigned by these rating services (even if rated lower by one or more of
the other agencies), or which, if not rated or rated lower by one or more of the
agencies and not rated by the other agency or agencies, are judged by the
Adviser to be of equivalent quality to the securities so rated. In determining
whether securities are of equivalent quality, the Adviser may take into account,
but will not rely entirely on, ratings assigned by foreign rating agencies.
A repurchase agreement is an agreement under which the Fund acquires money
market instruments (generally U.S. Government securities, bankers' acceptances
or certificates of deposit) from a commercial bank, broker or dealer, subject to
resale to the seller at an agreed-upon price and date (normally the next
business day). The resale price reflects an agreed-upon interest rate effective
for the period the instruments are held by the Fund and is unrelated to the
interest rate on the instruments. The instruments acquired by the Fund
(including accrued interest) must have an aggregate market value in excess of
the resale price and will be held by the Fund's custodian bank until they are
repurchased. The Trustees will consider the standards which the Adviser will use
in reviewing the creditworthiness of any party to a repurchase agreement with
the Fund.
The use of repurchase agreements involves certain risks. For example, if
the seller defaults on its obligation to repurchase the instruments acquired by
the Fund at a time when their market value has declined, the Fund may incur a
loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by the Fund are collateral for a loan by the Fund and
therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that the Fund may not be able to substantiate its interest in the
instruments it acquires. While the Trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
16
<PAGE>
Portfolio Turnover
It is not the policy of the Fund to purchase or sell securities for trading
purposes. However, the Fund places no restrictions on portfolio turnover and it
may sell any portfolio security without regard to the period of time it has been
held, except as may be necessary to maintain its status as a regulated
investment company under the Internal Revenue Code. The Fund may therefore
generally change its portfolio investments at any time in accordance with the
Adviser's appraisal of factors affecting any particular issuer or market, or the
economy in general.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental policies in addition to
those described under "Investment Objective and Policies & Investment
Restrictions" in the Prospectus. The Fund's fundamental policies cannot be
changed unless the change is approved by the lesser of (i) 67% or more of the
voting securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy,
or (ii) more than 50% of the outstanding voting securities of the Fund. The Fund
may not:
1. 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.
2. 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.
3. Lend portfolio securities, except that the Fund may enter into repurchase
agreements with respect to 15% of the value of its net assets.
4. Invest more than 25% of the current value of its total assets in any
single industry except the real estate industry.
5. Underwrite the securities of other issuers, except to the extent that in
connection with the disposition of portfolio securities the Fund may be
deemed to be an underwriter under the Securities Act of 1933.
6. Purchase securities on margin (except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities).
7. Purchase or sell commodities, commodity contracts, or real estate, except
that the Fund may purchase and sell obligations which are secured by real
estate or by mortgages on real estate, securities of issuers which invest
or deal in real estate, or have a call on real estate or are convertible
into real estate, and the Fund may purchase and sell financial futures
contracts and options on financial futures contracts and engage in foreign
currency exchange transactions.
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<PAGE>
8. Purchase the securities of other investment companies, except that the
Fund may make such a purchase (a) in the open market involving no
commission or profit to a sponsor or dealer (other than the customary
broker's commission), provided that immediately thereafter (i) not more
than 10% of the Fund's total assets would be invested in such securities,
(ii) not more than 5% of the Fund's total assets would be invested in the
securities of any one investment company and (iii) not more than 3% of the
voting stock of any one investment company would be owned by the Fund, or
(b) as part of a merger, consolidation, or acquisition of assets.
The following restrictions are not fundamental policies and may be changed
by the Trustees without shareholder approval, in accordance with applicable
laws, regulations or regulatory policy. The Fund may not: a. Make short sales of
securities unless
(a) after effect is given to any such short sale, the total market value of
all securities sold short would not exceed 5% of the value of the Fund's
net assets or (b) at all times during which a short position is open it
owns an equal amount of such securities, or by virtue of ownership
of convertible or exchangeable securities it has the right to obtain
through the conversion or exchange of such other securities an amount
equal to the securities sold short.
b. Invest in companies for the purpose of exercising control or management.
c. Purchase or write options, except as described under "Strategic
Transactions".
d. Invest in interests in oil, gas or other exploration or development
programs.
e. Invest more than 5% of the assets of the Fund in the securities of any
issuers which together with their corporate parents have records of less
than three years' continuous operation, including the operation of any
predecessor, other than obligations issued or guaranteed by the U.S.
Government or its agencies or insured in full or in part by a private
mortgage insurer, and securities fully collateralized by such securities.
f. Invest in securities of any company if any officer or director (Trustee)
of the Trust or of the Fund's investment adviser owns more than 1/2 of 1%
of the outstanding securities of such company and such officers and
directors (Trustees) own in the aggregate more than 5% of the securities
of such company.
g. Invest more than an aggregate of 15% of the net assets of the Fund in (a)
repurchase agreements which are not terminable within seven days, (b)
securities subject to legal or contractual restrictions on resale or for
which there are no readily available market quotations, and (c) in other
illiquid securities.
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<PAGE>
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, except with respect to restriction (f) above.
In order to permit the sale of shares of the Fund in certain states, the
Board may, in its sole discretion, adopt restrictions on investment policy more
restrictive than those described above. Should the Board determine that any such
more restrictive policy is no longer in the best interest of the Fund and its
shareholders, the Fund may cease offering shares in the state involved and the
Board may revoke such restrictive policy. Moreover, if the states involved shall
no longer require any such restrictive policy, the Board may, in its sole
discretion, revoke such policy.
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, the Fund may, from time to time, advertise
certain total return and yield information. The average annual total return of
the Fund for a period is computed by subtracting the net asset value per share
at the beginning of the period from the net asset value per share at the end of
the period (after adjusting for the reinvestment of any income dividends and
capital gain distributions), and dividing the result by the net asset value per
share at the beginning of the period. In particular, the average annual total
return of the Fund ("T") is computed by using the redeemable value at the end of
a specified period of time ("ERV") of a hypothetical initial investment of
$1,000 ("P") over a period of time ("n") according to the formula P(1+T)n=ERV.
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. 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 non-recurring charges for the period stated. In particular, yield is
determined according to the following formula:
Yield = 2[((A - B + 1)/CD)^6 - 1]
Where: A equals dividends and interest earned during the period; B equals
expenses accrued for the period (net of reimbursements); C equals average daily
number of shares outstanding during the period that were entitled to receive
dividends; D equals the maximum offering price per share on the last day of the
period.
The average annual total return quotations for the Fund for the one and
five year periods ended December 31, 1995, and since inception (August 31, 1989
to December 31, 1995) are 16.32%, 8.53% and 9.20%, respectively, and the average
annualized yield for the thirty day period ended December 31, 1995 was 6.89%.
The Fund may also quote non-standardized yield, such as yield-to-maturity
("YTM"). YTM represents the rate of return an investor will receive if a
long-term, interest bearing investment, such as a bond, is held to its maturity
date. YTM does not take into account purchase price, redemption value, time to
maturity, coupon yield, and the time between interest payments.
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<PAGE>
In addition to average annual return and yield quotations, the Fund may
quote quarterly and annual performance on a net (with management and
administration fees deducted) and gross basis as follows:
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
3/89 0.00% (0.04)%
4/89 4.01 4.17
1989 4.01 4.21
1/90 0.45 0.57
2/90 3.58 3.69
3/90 1.29 1.40
4/90 5.79 5.91
1990 11.49 11.99
1/91 2.89 3.00
2/91 1.84 1.95
3/91 5.16 5.27
4/91 4.90 5.03
1991 15.57 16.10
1/92 (1.58) (1.47)
2/92 4.38% 4.49%
3/92 1.80 1.91
4/92 (.49) (.38)
1992 4.07 4.52
1/93 4.37 4.48
2/93 2.56 2.67
3/93 2.38 2.49
4/93 0.38 0.49
1993 10.02 10.48
1/94 (2.53) (2.42)
2/94 (0.83) (0.72)
3/94 0.89 1.00
4/94 0.33 0.44
1994 (2.16) (1.72)
1/95 4.78 4.89
2/95 5.31 5.43
3/95 2.16 2.27
4/95 3.19 3.32
1995 16.32 16.85
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These performance quotations should not be considered as representative of
the Fund's performance for any specified period in the future.
The Fund's performance may be compared in sales literature to the
performance of other mutual funds having similar objectives or to standardized
indices or other measures of investment performance. In particular, the Fund may
compare its performance to the Salomon Mortgage Index and the Shearson Mortgage
Index, which are considered to be representative of the performance of fixed
rate securitized mortgage pools of GNMA, FNMA and FHLMC securities, and the
Lehman Brothers Aggregate Index which is composed of securities from the Lehman
Brothers Government/Corporate Bond Index, Mortgage Backed Securities Index and
Yankee Bond Index, and is generally considered to be representative of all
unmanaged, domestic, dollar denominated, fixed rate investment grade bonds.
Comparative performance may also be expressed by reference to a ranking prepared
by a mutual fund monitoring service or by one or more newspapers, newsletters or
financial periodicals. Performance comparisons may be useful to investors who
wish to compare the Fund's past performance to that of other mutual funds and
investment products. Of course, past performance is not a guarantee of future
results.
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<TABLE>
<CAPTION>
MANAGEMENT
Trustees and Officers
The Trustees and executive officers of the Trust are listed below. All
executive officers of the Trust are affiliates of Standish, Ayer & Wood, Inc.,
the Fund's investment adviser.
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
*D. Barr Clayson, 7/29/35 Vice President and Trustee Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center President,
Boston, MA 02111 Standish International
Management Company, L.P.
Samuel C. Fleming, 9/30/40 Trustee Chairman of the Board
c/o Decision Resources, Inc. and Chief Executive Officer,
1100 Winter Street Decision Resources, Inc.;
Waltham, MA 02154 through 1989, Senior V.P.
Arthur D. Little
Benjamin M. Friedman, 8/5/44 Trustee William Joseph Maier
c/o Harvard University Professor of Political Economy,
Cambridge, MA 02138 Harvard University
John H. Hewitt, 4/11/38 Trustee Trustee, The Peabody
P.O. Box 307 Foundation; Trustee,
So. Woodstock, VT 05071 Visiting Nurse Alliance of Vermont
and New Hampshire
*Edward H. Ladd, 1/3/38 Trustee and Vice President Chairman of the Board
c/o Standish, Ayer & Wood, Inc. and Managing Director,
One Financial Center Standish, Ayer & Wood, Inc. since 1990;
Boston, MA 02111 formerly President of
Standish, Ayer & Wood, Inc.
Caleb Loring III, 11/14/43 Trustee Trustee, Essex Street Associates
c/o Essex Street Associates (family investment trust office);
P.0. Box 5600 Director, Holyoke Mutual Insurance Company
Beverly Farms, MA 01915
*Richard S. Wood, 5/2/54 President and Trustee Vice President, Secretary and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Executive Vice President,
Boston, MA 02111 Standish International Management Company, L.P.
22
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
Richard C. Doll, 7/8/48 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
James E. Hollis III, 11/21/48 Executive Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
David W. Murray, 5/5/40 Treasurer and Secretary Vice President, Treasurer and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Caleb F. Aldrich, 9/20/57 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
Beverly E. Banfield, 7/6/56 Vice President Vice President and Compliance Officer,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Assistant Vice President and Compliance Officer,
Boston, MA 02111 Freedom Capital Management Corp.
(1989-1992)
Nicholas S. Battelle, 6/24/42 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Walter M. Cabot, 1/6/33 Vice President Senior Advisor and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center prior to 1991, President,
Boston, MA 02111 Harvard Management Company
David H. Cameron, 11/2/55 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Karen K. Chandor, 2/13/50 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Lavinia B. Chase, 6/4/46 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Susan B. Coan, 5/1/52 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
23
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
W. Charles Cook II, 2/16/63 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Joseph M. Corrado, 5/13/55 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Dolores S. Driscoll, 2/17/48 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Mark A. Flaherty, 4/24/59 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Anne P. Herrmann, 1/26/56 Vice President Mutual Fund Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ann S. Higgins, 4/8/35 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Senior Operations Manager,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Since December 1995, formerly
Boston, MA 02111 Vice President, Scudder Stevens and Clark
Raymond J. Kubiak, 9/3/57 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Maria D. Furman, 2/3/54 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Phillip D. Leonardi, 4/24/62 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc. since November 1993; formerly, Investment Sales,
One Financial Center Cigna Corporation (1993) and
Boston, MA 02111 Travelers Corporation (1984-1993)
Laurence A. Manchester, 5/24/43 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
24
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
George W. Noyes, 11/12/44 Vice President President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Arthur H. Parker, 8/12/35 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Jennifer A. Pline, 3/8/60 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Howard B. Rubin, 10/29/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Michael C. Schoeck, 10/24/55 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since August, 1993;
One Financial Center formerly, Vice President,
Boston, MA 02111 Commerzbank, Frankfurt, Germany
Austin C. Smith, 7/25/42 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Stephen A. Smith, 3/13/49 Vice President Vice President, since November 2, 1993;
c/o Standish, Ayer & Wood, Inc. formerly, Standish, Ayer & Wood, Inc. Consultant
One Financial Center Cambridge Associates
Boston, MA 02111
David C. Stuehr, 3/1/58 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
James W. Sweeney, 5/15/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ralph S. Tate, 4/2/47 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since April, 1990;
One Financial Center formerly Vice President, Aetna Life & Casualty
Boston, MA 02111
Michael W. Thompson, 3/31/56 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
25
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
Christopher Van Alstyne, 3/24/60 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
</TABLE>
*Indicates that Trustee is an interested person of the Trust for purposes of the
1940 Act.
26
<PAGE>
Compensation of Trustees and Officers
The Fund pays no compensation to the Trust's Trustees affiliated with the
Adviser or the Trust's officers. None of the Trust's Trustees or officers have
engaged in any financial transactions (other than the purchase or redemption of
the Fund's shares) with the Trust or the Adviser.
The following table sets forth all compensation paid to the Trust's
Trustees as of the Fund's fiscal year ended December 31, 1995:
<TABLE>
<CAPTION>
Pension or Retirement Total Compensation
Aggregate Compensation Benefits Accrued as from Fund and
Name of Trustee from the Fund Part of Fund's Expenses Other Funds in Complex*
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
D. Barr Clayson $0 $0 $0
Phyllis L. Cothran** 0 0 0
Richard C. Doll*** 0 0 0
Samuel C. Fleming 658 0 46,000
Benjamin M. Friedman 600 0 41,750
John H. Hewitt 600 0 41,750
Edward H. Ladd 0 0 0
Caleb Loring, III 600 0 41,750
Richard S. Wood 0 0 0
*As of the date of this Statement of Additional Information there were 18 funds in the fund complex.
**Ms. Cothran resigned as a Trustee effective January 31, 1995.
***Mr. Doll regisned as a trustee effective December 6, 1995.
</TABLE>
Certain Shareholders
At February 1, 1996, Trustees and officers of the Trust as a group
beneficially owned (i.e., had voting and/or investment power) less than 1% of
the then outstanding shares of the Fund. At that date, each of the following
persons beneficially owned 5% or more of the then outstanding shares of the
Fund:
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
Allendale Mutual Insurance Company 76%
Allendale Park
P.O. Box 7500
Johnston, RI 02919
Colonial Williamsburg Pension 9%
The Colonial Williamsburg Foundation
P.O. Box C
Williamsburg, VA 23187
Potter & Co. A/C 43922020 7%
Bank of Boston
150 Royall Way
Canton, MA
As long as Allendale Mutual Insurance Company is entitled to vote so large
a percentage of the outstanding shares of the Fund, that Company will determine
whether a proposal submitted to the shareholders of the Fund will be approved or
disapproved.
27
<PAGE>
Investment Adviser
Standish, Ayer & Wood, Inc. serves as investment adviser to the Fund
pursuant to a written investment advisory agreement. The Adviser is a
Massachusetts corporation organized in 1933 and is registered under the
Investment Advisers Act of 1940.
The following, constituting all of the Directors and all of the
shareholders of the Adviser, are the controlling persons of the Adviser: Caleb
F. Aldrich, Nicholas S. Battelle, Walter M. Cabot, Sr., David H. Cameron, Karen
K. Chandor, D. Barr Clayson, Richard C. Doll, Dolores S. Driscoll, Mark A.
Flaherty, James E. Hollis III, Raymond J. Kubiak, Edward H. Ladd, Laurence A.
Manchester, David W. Murray, George W. Noyes, Maria D. O'Malley, Arthur H.
Parker, Howard B. Rubin, David C. Stuehr, Austin C. Smith, James J. Sweeney and
Richard S. Wood.
Certain services provided by the Adviser under the advisory agreement are
described in the Prospectus. In addition to those services, the Adviser provides
the Fund with office space for managing its affairs, with the services of
required executive personnel, and with certain clerical services and facilities.
These services are provided without reimbursement by the Fund for any costs
incurred. Under the investment advisory agreement, the Adviser is paid a fee
based upon a percentage of the Fund's average daily net asset value computed as
described in the Prospectus. This fee is paid monthly. The Adviser has
voluntarily agreed to limit the Fund's total operating expenses (excluding
brokerage commissions, taxes and extraordinary expenses) to 0.45% of the Fund's
average daily net assets. The Adviser may discontinue or modify such limitation
in the future at its discretion, although it has no current intention to do so.
For services to the Fund for the fiscal year ended December 31, 1993, the
Adviser voluntarily did not impose $28,494 of its fee, which would otherwise
have been $218,785. For services to the Fund for the fiscal year ended December
31, 1994, the Adviser voluntarily did not impose $24,168, of its fee, which
would otherwise have been $173,421. For services to the Fund for the fiscal year
ended December 1, 1995, the Adviser voluntarily did not impose $31,998 of its
fee, which would otherwise have been $139,890.
28
<PAGE>
Pursuant to the investment advisory agreement, the Fund bears expenses of
its operations other than those incurred by the Adviser pursuant to the
investment advisory agreement. Among other expenses, the Fund will pay share
pricing and shareholder servicing fees and expenses; custodian fees and
expenses; legal and auditing fees and expenses; expenses of prospectuses,
statements of additional information and shareholder reports; registration and
reporting fees and expenses; and Trustees' fees and expenses. The advisory
agreement provides that if the total expenses of the Fund in any fiscal year
exceed the most restrictive expense limitation applicable to the Fund in any
state in which shares of the Fund are then qualified for sale, the compensation
due the Adviser shall be reduced by the amount of the excess, by a reduction or
refund thereof at the time such compensation is payable after the end of each
calendar month during the fiscal year, subject to readjustment during the year.
Currently, the most restrictive state expense limitation provision limits the
Fund's expenses to 2 1/2% the first $30 million of average net assets, 2% of the
next $70 million of such net assets and 1 1/2% of such net assets in excess of
$100 million.
Unless terminated as provided below, the investment advisory agreement
continues in full force and effect for successive periods of one year, but only
so long as each such continuance is approved annually (i) by either the Trustees
of the Trust or by vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) of the Fund, and, in either event (ii) by vote of a
majority of the Trustees of the Trust who are not parties to the investment
advisory agreement or "interested persons" (as defined in the 1940 Act) of any
such party, cast in person at a meeting called for the purpose of voting on such
approval. The investment advisory agreement may be terminated at any time
without the payment of any penalty by vote of the Trustees of the Trust or by
vote of a majority of the outstanding voting securities (as defined in the 1940
Act) of the Fund or by the Adviser, on sixty days' written notice to the other
parties. The investment advisory agreement terminates in the event of its
assignment as defined in the 1940 Act.
In an attempt to avoid any potential conflict with portfolio transactions
for the Fund, the Adviser and the Trust have adopted extensive restrictions on
personal securities trading by personnel of the Adviser and its affiliates.
These restrictions include: pre-clearance of all personal securities
transactions and a prohibition of purchasing initial public offerings of
securities. These restrictions are a continuation of the basic principle that
the interests of the Fund and its shareholders come before those of the Adviser,
its affiliates and their employees.
Distributor of the Trust
Standish Fund Distributors, L.P. (the "Principal Underwriter"), an
affiliate of the Adviser, serves as the Trust's exclusive principal underwriter
and holds itself available to receive purchase orders for the Fund's shares. In
that capacity, the Principal Underwriter has been granted the right, as agent of
the Trust, to solicit and accept orders for the purchase of the Fund's shares in
accordance with the terms of the Underwriting Agreement between the Trust and
the Principal Underwriter. Pursuant to the Underwriting Agreement, the Principal
Underwriter has agreed to use its best efforts to obtain orders for the
continous offering of the Fund's shares. The Principal Underwriter receives no
commissions or other compensation for its services, and has not received any
such amounts in any prior year. The Underwriting Agreement shall continue in
effect with respect to the Fund until two years after its execution and for
successive periods of one year thereafter only if it is approved at least
29
<PAGE>
annually thereafter (i) by a vote of the holders of a majority of the Fund's
outstanding shares or by the Trustees of the Trust or (ii) by a vote of a
majority of the Trustees of the Trust who are not "interested persons" (as
defined by the 1940 Act) of the parties to the Underwriting Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Underwriting Agreement will terminate automatically if assigned by either party
thereto and is terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust, a vote of a majority of the Trustees who are not
"interested persons" of the Trust, or by a vote of the holders of a majority of
the Fund's outstanding shares, in any case without payment of any penalty on not
more than 60 days' written notice to the other party. The offices of the
Principal Underwriter are located at One Financial Center, 26th Floor, Boston,
Massachusetts 02111.
REDEMPTION OF SHARES
Detailed information on redemption of shares is included in the Prospectus.
The Fund may suspend the right to redeem shares or postpone the date of
payment upon redemption for more than seven days (i) for any period during which
the New York Stock Exchange is closed (other than customary weekend or holiday
closings) or trading on the exchange is restricted; (ii) for any period during
which an emergency exists as a result of which disposal by the Fund of
securities owned by it or determination by the Fund of the value of its net
assets is not reasonably practicable; or (iii) for such other periods as the
Securities and Exchange Commission may permit for the protection of shareholders
of the Fund.
The Fund intends to pay in cash for all shares redeemed, but under certain
conditions, the Fund may make payment wholly or partly in portfolio securities.
Portfolio securities paid upon redemption of Fund shares will be valued at their
then current market value. The Fund has elected to be governed by the provisions
of Rule 18f-1 under the 1940 Act which limits the Fund's obligtion to make cash
redemption payments to any shareholder during any 90-day period to the lesser of
$250,000 or 1% of the Fund's net asset value at the beginning of such period. An
investor may incur brokerage costs in converting portfolio securities received
upon redemption to cash.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for placing the Fund's portfolio transactions
and will do so in a manner deemed fair and reasonable to the Fund and not
according to any formula. The primary consideration in all portfolio
transactions will be prompt execution of orders in an efficient manner at the
most favorable price. In selecting broker-dealers and in negotiating
commissions, the Adviser will consider the firm's reliability, the quality of
its execution services on a continuing basis and its financial condition. When
more than one firm is believed to meet these criteria, preference may be given
to firms which also sell shares of the Fund. In addition, if the Adviser
determines in good faith that the amount of commissions charged by a broker is
reasonable in relation to the value of the brokerage and research services
provided by such broker, the Fund may pay commissions to such broker in an
amount greater than the amount another firm may charge. Research services may
include (i) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, (ii) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
30
<PAGE>
portfolio strategy, and the performance of accounts, and (iii) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement and custody). Research services furnished by firms through
which the Fund effects its securities transactions may be used by the Adviser in
servicing its other accounts; not all of these services may be used by the
Adviser in connection with the Fund. The investment advisory fee paid by the
Fund under the advisory agreement will not be reduced as a result of the
Adviser's receipt of research services.
The Adviser also places portfolio transactions for other advisory accounts.
The Adviser will seek to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities for the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations, the main factors considered by the Adviser will be the
respective investment objectives, the relative size of portfolio holdings of the
same or comparable securities, the availability of cash for investment, the size
of investment commitments generally held, and opinions of the persons
responsible for recommending the investment.
FEDERAL INCOME TAXES
Each series of the Trust, including the Fund, is treated as a separate
entity for accounting and tax purposes. The Fund has qualified and elected to be
treated as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), and intends to continue to so
qualify in the future. As such and by complying with the applicable provisions
of the Code regarding the sources of its income, the timing of its
distributions, and the diversification of its assets, the Fund will not be
subject to Federal income tax on its investment company taxable income (i.e.,
all income, after reduction by deductible expenses, other than its "net capital
gain," which is the excess, if any, of its net long-term capital gain over its
net short-term capital loss) and net capital gain which are distributed to
shareholders at least annually in accordance with the timing requirements of the
Code.
The Fund will be subject to a 4% non-deductible federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
Fund intends under normal circumstances to avoid liability for such tax by
satisfying such distribution requirements.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Code, it will also not be required to pay any Massachusetts income tax.
31
<PAGE>
The Fund will not distribute net long-term capital gains realized in any
year to the extent that a capital loss is carried forward from prior years
against such gain. For federal income tax purposes, the Fund is permitted to
carry forward a net capital loss in any year to offset its own net capital
gains, if any, during the eight years following the year of the loss. To the
extent subsequent net capital gains are offset by such losses, they would not
result in federal income tax liability to the Fund and, as noted above, would
not be distributed as such to shareholders. The Fund has $1,745,441 of capital
loss carryforwards, which expire on December 31, 2002, available to offset
future net capital gains.
If the Fund invests in certain zero coupon securities, increasing rate
securities or, in general, other securities with original issue discount (or
with market discount if the Fund elects to include market discount in income
currently), the Fund must accrue income on such investments prior to the receipt
of the corresponding cash payments. However, the Fund must distribute, at least
annually, all or substantially all of its net income, including such accrued
income, to shareholders to qualify as a regulated investment company under the
Code and avoid federal income and excise taxes. Therefore, the Fund may have to
dispose of its portfolio securities under disadvantageous circumstances to
generate cash, or may have to leverage itself by borrowing the cash, to satisfy
distribution requirements.
Limitations imposed by the Code on regulated investment companies like the
Fund may restrict the Fund's ability to enter into futures, options and currency
forward transactions.
Certain options, futures and forward foreign currency transactions
undertaken by the Fund may cause the Fund to recognize gains or losses from
marking to market even though its positions have not been sold or terminated and
affect the character as long-term or short-term (or, in the case of certain
currency forwards, options and futures, as ordinary income or loss) and timing
of some capital gains and losses realized by the Fund. Any net mark to market
gains may also have to be distributed to satisfy the distribution requirements
referred to above even though no corresponding cash amounts may concurrently be
received, possibly requiring the disposition of portfolio securities or
borrowing to obtain the necessary cash. Also, certain of the Fund's losses on
its transactions involving options, futures or forward contracts and/or
offsetting portfolio positions may be deferred rather than being taken into
account currently in calculating the Fund's taxable income or gain. Certain of
the applicable tax rules may be modified if the Fund is eligible and chooses to
make one or more of certain tax elections that may be available. These
transactions may therefore affect the amount, timing and character of the Fund's
distributions to shareholders. The Fund will take into account the special tax
rules (including consideration of available elections) applicable to options,
futures or forward contracts in order to minimize any potential adverse tax
consequences.
The federal income tax rules applicable to mortgage dollar rolls and
interest rate or currency swaps, caps, floors and collars are unclear in certain
respects, and the Fund may be required to account for these instruments under
tax rules in a manner that, under certain circumstances, may limit its
transactions in these instruments.
32
<PAGE>
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currency-denominated debt securities, if
any, certain foreign currency futures and options, foreign currency forward
contracts, foreign currencies, or payables or receivables denominated in a
foreign currency are subject to Section 988 of the Code, which generally causes
such gains and losses to be treated as ordinary income and losses and may affect
the amount, timing and character of distributions to shareholders. Any such
transactions that are not directly related to the Fund's investment in stock or
securities, possibly including speculative currency positions or currency
derivatives not used for hedging purposes, may increase the amount of gain it is
deemed to recognize from the sale of certain investments held for less than
three months, which gain is limited under the Code to less than 30% of its
annual gross income, and could under future Treasury regulations produce income
not among the types of "qualifying income" from which the Fund must derive at
least 90% of its annual gross income.
The Fund may be subject to withholding and other taxes imposed by foreign
countries with respect to its investments in foreign securities. Tax conventions
between certain countries and the U.S. may reduce or eliminate such taxes.
Investors would be entitled to claim U.S. foreign tax credits with respect to
such taxes, subject to certain provisions and limitations contained in the Code,
only if more than 50% of the value of the Fund's total assets at the close of
any taxable year were to consist of stock or securities of foreign corporations
and the Fund were to file an election with the Internal Revenue Service. Because
the Fund will not meet this 50% requirement, investors will not directly take
into account the foreign taxes, if any, paid by the Fund, and will not be
entitled to any related tax deductions or credits. Such taxes will reduce the
amounts the Fund would otherwise have available to distribute.
Due to possible unfavorable consequences under present tax law, the Fund
does not currently intend to acquire "residual" interests in real estate
mortgage investment conduits ("REMICs"), although the Fund may acquire "regular"
interests in REMICs.
Distributions from the Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Fund's Prospectus whether taken in shares or in cash.
Distributions, if any, in excess of E&P will constitute a return of capital,
which will first reduce an investor's tax basis in Fund shares and thereafter
(after such basis is reduced to zero) will generally give rise to capital gains.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the amount of cash they would have received had they elected to receive
the distributions in cash, divided by the number of shares received.
At the time of an investor's purchase of Fund shares, a portion of the
purchase price is often attributable to undistributed net investment income
and/or realized or unrealized appreciation in the Fund's portfolio.
Consequently, subsequent distributions from such income and/or appreciation may
be taxable to such investor even if the net asset value of the investor's shares
is, as a result of the distributions, reduced below the investor's cost for such
shares, and the distributions in reality represent a return of a portion of the
purchase price.
33
<PAGE>
Upon a redemption (including a repurchase) of shares of the Fund, a
shareholder may realize a taxable gain or loss, depending upon the difference
between the redemption proceeds and the shareholder's tax basis in his shares.
Such gain or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands and will be long-term or short-term,
depending upon the shareholder's tax holding period for the shares. Any loss
realized on a redemption may be disallowed to the extent the shares disposed of
are replaced within a period of 61 days beginning 30 days before and ending 30
days after the shares are disposed of, such as pursuant to automatic dividend
reinvestments. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss. Any loss realized upon the redemption of shares
with a tax holding period of six months or less will be treated as a long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain with respect to such shares.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Funds in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in a Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the Fund. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in the Fund.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value is calculated each day on which the New York
Stock Exchange is open. Currently the New York Stock Exchange is not open on
weekends, New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas. The net asset value
of the Fund's shares is determined as of the close of regular trading on the New
York Stock Exchange (currently 4:00 p.m., New York City time) and is computed by
dividing the value of all securities and other assets of the Fund less all
liabilities by the number of shares outstanding, and adjusting to the nearest
cent per share. Expenses and fees, including the investment advisory fee, are
accrued daily and taken into account for the purpose of determining net asset
value.
34
<PAGE>
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 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. 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.
THE FUND AND ITS SHARES
The Fund is an 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 as amended from time to time (the "Declaration"). Under the Declaration,
the Trustees have authority to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, of the Fund. Each share represents an equal
proportionate interest in the Fund with each other share and is entitled to such
dividends and distributions as are declared by the Trustees. Shareholders are
not entitled to any preemptive, conversion or subscription rights. All shares,
when issued, will be fully paid and non-assessable by the Trust. Upon any
liquidation of the Fund, shareholders are entitled to share pro rata in the net
assets available for distribution.
Pursuant to the Declaration, the Trustees may create additional funds by
establishing additional series of shares in the Trust. The establishment of
additional series would not affect the interests of current shareholders in the
Fund. As of the date of this Statement of Additional Information, the Trustees
have established fourteen other series of the Trust that publicly offer their
shares. Pursuant to the Declaration, the Board may establish and issue multiple
classes of shares for each series of the Trust. As of the date of this Statement
of Additional Information, the Trustees do not have any plan to establish
multiple classes of shares for the Fund. Pursuant to the Declaration of Trust
and subject to shareholder approval (if then required), the Trustees may
authorize the Fund to invest all of its investable assets in a single open-end
investment company that has substantially the same investment objectives,
policies and restrictions as the Fund. As of the date of this Statement of
Additional Information, the Board does not have any plan to authorize the Fund
to so invest its assets.
35
<PAGE>
All Fund shares have equal rights with regard to voting, and shareholders
of the Fund have the right to vote as a separate class with respect to matters
as to which their interests are not identical to those of shareholders of other
classes of the Trust, including the approval of an investment advisory contract
and any change of investment policy requiring the approval of shareholders.
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of this disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or a Trustee. The Declaration also provides for indemnification from the assets
of the Trust for all losses and expenses of any Trust shareholder held liable
for the obligations of the Trust. Thus, the risk of a shareholder incurring a
financial loss on account of its liability as a shareholder of the Trust is
limited to circumstances in which both inadequate insurance existed and the
Trust would be unable to meet its obligations. The possibility that these
circumstances would occur is remote. Upon payment of any liability incurred by
the Trust, the shareholder paying the liability will be entitled to
reimbursement from the general assets of the Trust. The Declaration also
provides that no series of the Trust is liable for the obligations of any other
series. The Trustees intend to conduct the operations of the Trust to avoid, to
the extent possible, ultimate liability of shareholders for liabilities of the
Trust.
ADDITIONAL INFORMATION
The Fund's Prospectus and this Statement of Additional Information omit
certain information contained in the registration statement filed with the
Securities and Exchange Commission, which may be obtained from the Commission's
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment
of the fee prescribed by the rules and regulations promulgated by the
Commission.
EXPERTS AND FINANCIAL STATEMENTS
The financial statements for the fiscal years ended December 31, 1994 and
1995 included in this Statement of Additional Information have been audited by
Coopers & Lybrand L.L.P., independent accountants, as set forth in their report
appearing elsewhere herein, and have been so included in reliance upon the
authority of the report of Coopers & Lybrand L.L.P. as experts in accounting and
auditing. The Fund's financial highlights for the fiscal years ended December
31, 1992, 1991 and 1990 were audited by Deloitte & Touche LLP, independent
auditors, and have been similarly included in reliance upon the expertise of
that firm. Coopers & Lybrand L.L.P., independent accountants, will audit the
Fund's financial statements for the fiscal year ending December 31, 1996.
36
<PAGE>
Prospectus dated May 1, 1996
PROSPECTUS
STANDISH SHORT-TERM ASSET RESERVE FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
Standish Short-Term Asset Reserve 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 is designed for
corporate investors, pension and profit-sharing plans, state and local
governments, foundations, endowment funds and individuals.
The Fund's investment objective is to achieve a high level of current
interest income, consistent with preserving principal and liquidity. The Fund
seeks to achieve its investment objective primarily by investing in a
diversified portfolio of investment grade money market instruments and
short-term fixed income securities with a maximum average dollar-weighted
maturity of eighteen months. The Fund also expects to engage, to a limited
degree, in options and futures transactions. See "Investment Policies."
Standish, Ayer & Wood, Inc. (the "Adviser"), Boston, Massachusetts is the Fund's
investment adviser.
Investors may purchase shares of the Fund from the Trust's principal
underwriter, Standish Fund Distributors, L.P. (the "Principal Underwriter"), at
the address and phone number listed above 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
$100,000. The Fund is not a money market fund, the net asset value of its shares
may fluctuate and the Fund may not be able to return dollar-for-dollar the money
invested.
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 Principal Underwriter 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.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN SHARES OF THE FUND INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
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.
Contents
Expense Information...........................................2
Financial Highlights..........................................3
Investment Objective and Policies.............................4
Risk Factors and Suitability..................................8
Calculation of Performance Data...............................8
Dividends and Distributions...................................9
Purchase of Shares............................................9
Exchange of Shares............................................9
Redemption of Shares..........................................9
Management...................................................10
Federal Income Taxes.........................................11
The Fund and Its Shares......................................12
Custodian, Transfer Agent and Dividend-Disbursing Agent......13
Independent Accountants......................................13
Legal Counsel................................................13
Appendix A...................................................14
Tax Certification Instructions...............................15
1
<PAGE>
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 0.25%
12b-1 Fees None
Other Expenses 0.08%
Total Fund Operating Expenses 0.33%
<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: 3 11 19 42
</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," which
includes, among other things, custodian and transfer agent fees, registration
costs and payments for insurance and audit and legal services, is based upon the
Fund's expenses for the fiscal year ended December 31, 1995.
THE INFORMATION IN THE TABLE AND HYPOTHETICAL EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY
BE GREATER OR LESS 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 LESS THAN 5%.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights for the years ended December 31, 1993, 1994 and
1995 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.
Further information about the performance of the Fund is contained in the
Fund's Annual Report, which may be obtained from the Principal Underwriter
without charge.
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to achieve a high level of current
income consistent with preserving principal and liquidity. The Fund will seek to
achieve its investment objective primarily through investing in a diversified
portfolio of investment grade money market instruments and short-term fixed
income securities whose average dollar-weighted maturity will normally be from
six to fifteen months and will not exceed eighteen months. 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
non-fundamental policies of the Fund may be changed by the Trustees of the Trust
without the approval of shareholders. The Fund's investment policies are
described further in the Statement of Additional Information.
Investment Policies
The Fund may invest in a broad range of investment grade money market
instruments and short-term fixed-income securities. The Fund's investments will
consist of obligations issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities ("U.S. Government securities"), instruments of
U.S. and foreign banks (including negotiable certificates of deposit,
non-negotiable fixed time deposits and bankers' acceptances), prime commercial
paper of U.S. and foreign companies, collateralized mortgage obligations, other
mortgage-backed securities, asset-backed securities, repurchase agreements, debt
securities that make regular interest payments at variable or floating rates,
structured notes and, from time to time, preferred stock. The Fund may purchase
securities on a when-issued or forward commitment basis and enter into reverse
repurchase agreements. In addition, the Fund expects to engage, to a limited
degree, in forward roll transactions, futures and options transactions and a
variety of interest rate transactions, including swaps, caps and floors.
The Fund will be managed without regard to any potential tax considerations
of its investors. The Fund may invest up to 10% of its total assets in
tax-exempt securities, such as state and municipal bonds, if the Adviser
believes these securities will provide competitive returns.
Ratings
The Fund will invest at least 85% of its assets in securities which are
rated Aaa, Aa, A or P-1 by Moody's Investors Service, Inc. ("Moody's") or AAA,
AA, A or A-1 by Standard & Poor's Ratings Group ("Standard & Poor's") or, if not
rated, determined to be of comparable investment quality by the Adviser. Up to
15% of the Fund's assets may be invested in securities which are rated Baa or
P-2 by Moody's or BBB or A-2 by Standard & Poor's or, if not rated, determined
to be of comparable investment quality by the Adviser. The Fund may invest in a
security so rated by one rating agency although the security may not be rated by
the other rating agency. In the event the rating on a security held in the
Fund's portfolio is downgraded 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.
Securities rated BBB by Standard & Poor's or Baa by Moody'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 for higher grade bonds. It is anticipated
that the average dollar-weighted credit quality of the securities in the Fund's
portfolio will be at least Aa or AA according to Moody's and Standard & Poor's
ratings, or of comparable quality as determined by the Adviser. 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. Appendix A sets forth excerpts from the
descriptions of ratings of debt securities.
4
<PAGE>
Maturities
All securities held by the Fund will carry a maturity date, redemption
date, put date, coupon reset date or average life of 3.25 years or less from the
date of settlement, except that, with respect to no more than 10% of the Fund's
net assets, such time period may be between 3.25 and 5 years, and such time
period limitation shall not apply to certain U.S. Treasury notes or bonds. (U.S.
Treasury notes or bonds with maturities of longer than 3.25 years may be
purchased by the Fund in conjunction with the sale of note or bond futures
contracts or with certain equivalent options positions which are designed to
hedge the notes or bonds in such a way as to create a synthetic short-term
instrument.) It is anticipated that the Fund's dollar-weighted average maturity
will be relatively short (approximately six months) when the Adviser expects
interest rates to rise and relatively long (approximately fifteen months) when
the Adviser expects interest rates to decline. Under normal conditions, the Fund
expects the dollar-weighted average maturity of the portfolio to be six to
fifteen months. The Fund's dollar-weighted average maturity will not exceed
eighteen months.
U.S. Government Securities
U.S. Government securities are either (i) backed by the full faith and
credit of the U.S. Government (e.g., U.S. Treasury bills), (ii) guaranteed as to
the payment of principal and interest by the U.S. Treasury (e.g., GNMA
mortgaged-backed securities), (iii) supported by the issuing agency's or
instrumentality's right to borrow from the U.S. Treasury (e.g., Federal National
Mortgage Association Discount Notes), or (iv) supported only by the issuing
agency's or instrumentality's own credit (e.g., securities of each of the
Federal Home Loan Banks). Such guarantees of the securities in the Fund,
however, do not guarantee the market value of the shares of the Fund. With
respect to securities supported only by the credit of the issuing agency or
instrumentality or by an additional line of credit with the U.S. Treasury, there
is no guarantee that the U.S. Government will continue to provide support to
such agencies or instrumentalities.
Foreign Bank Instruments
The Fund may invest in Eurodollar Certificates of Deposit ("ECDs"),
Eurodollar Time Deposits ("ETDs") and Yankee Certificates of Deposit ("Yankee
CDs") that are subject to risks different than those associated with the
obligations of domestic banks. ECDs are U.S. dollar-denominated certificates of
deposit issued by foreign branches of domestic banks; ETDs are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or in a foreign
bank; and Yankee CDs are U.S. dollar-denominated certificates of deposit issued
5
<PAGE>
by a U.S. branch of a foreign bank and held in the U.S. Risks associated with an
investment in these securities include adverse international economic
developments, foreign governmental restrictions that may adversely affect the
payment of principal or interest, foreign withholding or other taxes on interest
income, difficulties in obtaining or enforcing a judgment against the issuing
bank, and the possible impact of interruptions in the flow of international
currency transactions. Different risks may also exist for ECDs, ETDs, and Yankee
CDs because the banks issuing these instruments, or their domestic or foreign
branches, are not necessarily subject to the same regulatory requirements that
apply to domestic banks, such as reserve requirements, loan limitations,
examinations, accounting, auditing, and recordkeeping, and the public
availability of information. These factors will be carefully considered by the
Adviser in selecting investments for the Fund.
Mortgage-Backed Securities
The Fund may invest in mortgage pass-through certificates and
multiple-class pass-through securities, such as collateralized mortgage
obligations. See "Risk Factors and Suitability" for a description of the risks
associated with mortgage-backed securities.
Mortgage-Backed Pass-Through Securities. Mortgage-backed "pass-through
securities" represent participation interests in pools of residential mortgage
loans and are issued by the U.S. Government or private lenders and guaranteed by
the U.S. Government or one of its agencies or instrumentalities.
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 Federal Home Loan Mortgage
Corporation, Federal National Mortgage Corporation and by non-governmental
financial institutions and other mortgage lenders and 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 generally
are retired in sequence. CMOs are designed to be retired as the underlying
mortgage loans in the mortgage pool are repaid. In making investments in CMOs,
the Adviser will usually select CMOs with a stable average life and will take
into account the following considerations: the total return on CMOs will vary
with interest rates, which cannot be predicted; the maturity of the CMOs is
variable and is not known at the time of purchase; and prepayments on the CMOs
will depend upon prevailing interest rates and the CMOs may have a shorter life
than expected.
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
6
<PAGE>
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 asset 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.
Such securities can be structured in several ways, the most common of which
has been a "pass-through" model. 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" certificate, payments of principal and
interest to security holders are not dependent on prepayments, although
prepayments alter the yield and average life of the bonds.
Forward Roll Transactions
In order to enhance current income, the Fund may enter into forward roll
transactions with respect to mortgage-backed securities to the extent of 10% of
its net assets. 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
7
<PAGE>
future at a lower 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 grade 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.
Structured or Hybrid Notes
The Fund may invest in "structured" or "hybrid" notes. The distinguishing
feature of a structured or hybrid note is that the amount of interest and/or
principal payable on the note is based on the performance of a benchmark asset
or market other than fixed-income securities or interest rates. Examples of
these benchmarks include stock prices, currency exchange rates and physical
commodity prices. Investing in a structured note allows the Fund to gain
exposure to the benchmark market while fixing the maximum loss that the Fund may
experience in the event that market does not perform as expected. Depending on
the terms of the note, the Fund may forego all or part of the interest and
principal that would be payable on a comparable conventional note; the Fund's
loss cannot exceed this foregone interest and/or principal. An investment in
structured or hybrid notes involves risks similar to those associated with a
direct investment in the benchmark asset.
Preferred Stock
The Fund may, from time to time, invest up to 10% of its total assets in
preferred stock, such as auction rate or fixed rate preferred stock, if the
Adviser believes that such investments would be appropriate substitutes for
money market instruments or other short-term fixed income securities. Any
investment in preferred stock will comply with the Fund's requirements with
regard to ratings and maturities described above.
Strategic Transactions
Consistent with maintaining stability of principal, 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 and broad or specific
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, fixed income indices and other financial instruments; purchase and
sell financial futures contracts and options thereon; and enter into various
interest rate transactions such as swaps, caps, floors or collars (collectively,
8
<PAGE>
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 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 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 will attempt to limit its net loss
exposure resulting from Strategic Transactions entered into for such purposes to
not more than 1% 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
believes that short-term interest rates as indicated in the forward yield curve
are too high, the Fund may take a short position in a near-term Eurodollar
futures contract and a long position in a longer-dated Eurodollar futures
contract. Under such circumstances, any unrealized loss in the near-term
Eurodollar futures position would be netted against any unrealized gain in the
longer-dated Eurodollar futures 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
Internal Revenue Code of 1986, as amended (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 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
9
<PAGE>
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
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, they 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 attempt to limit its net
loss exposure resulting from Strategic Transactions entered into for non-hedging
purposes to not more than 1% 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 Trans-actions is set
forth in the Statement of Additional Information.
When-Issued Securities and Forward Commitments
The Fund may commit up to 10% of its net assets to purchase securities on a
"when-issued" basis. Although the Fund would generally purchase securities on a
when-issued basis with the intention of actually acquiring the securities, the
Fund may dispose of a when-issued security prior to settlement if the Adviser
deems it appropriate to do so. The payment obligation and the interest rate on
these securities will be fixed at the time the Fund enters into the commitment,
but no income will accrue to the Fund until they are delivered and paid for.
Unless the Fund has entered into an offsetting agreement to sell the securities,
cash or liquid, high grade debt securities equal to the amount of the Fund's
commitment will be segregated with the Fund's custodian, to secure the Fund's
obligation and to ensure that it is not leveraged. The market value of the
securities when they are delivered may be less than the amount paid by the Fund.
With respect to up to 25% of its net assets, 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.
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Repurchase Agreements
The Fund may invest up to 25% of its net assets in repurchase agreements
under normal circumstances. Repurchase agreements acquired by the Fund will
always be fully collateralized as to principal and interest by money market
instruments and will be entered into only with commercial banks, brokers and
dealers considered creditworthy by the Fund. If the other party or "seller" of a
repurchase agreement defaults, the Fund might suffer a loss to the extent that
the proceeds from the sale of the underlying securities and other collateral
held by the Fund in connection with the related repurchase agreement are less
than the repurchase price. In addition, in the event of bankruptcy of the seller
or failure of the seller to repurchase the securities as agreed, the Fund could
suffer losses, including loss of interest on or principal of the security and
costs associated with delay and enforcement of the repurchase agreement.
Reverse Repurchase Agreements
Under a reverse repurchase agreement, the Fund would sell securities and
agree to repurchase them at a mutually agreed upon date and price. The Fund
intends to enter into reverse repurchase agreements to provide cash to satisfy
redemption requests and thereby avoid otherwise having to sell securities during
unfavorable market conditions in order to meet such redemptions. At the time the
Fund enters into a reverse repurchase agreement, it will establish a segregated
account with the Fund's custodian containing liquid, high grade debt securities
having a value not less than the repurchase price (including accrued interest)
and will subsequently monitor the account to maintain such value. Reverse
repurchase agreements involve the risk that the market value of the securities
which the Fund is obligated to repurchase may decline below the repurchase
price. In the event the buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver
may receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
determination. The staff of the Securities and Exchange Commission considers
reverse repurchase agreements to be borrowings by the Fund under the Investment
Company Act of 1940. See "Investment Restrictions."
Portfolio Turnover
Portfolio turnover is not expected to exceed 200% on an annual basis. A
rate of turnover of 100% would occur, for example, if the value of the lesser of
purchases or sales of portfolio securities for a particular year equaled the
average monthly value of portfolio securities owned during the year (excluding
securities with a maturity date of one year or less at the date of acquisition).
A high rate of portfolio turnover (100% or more) involves a correspondingly
higher transaction cost which must be borne directly by the Fund and thus
indirectly by its shareholders. It may also result in the Fund's realization of
larger amounts of 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 Code.
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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, enter into reverse repurchase agreements
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, (c) enter into reverse
repurchase agreements in an amount up to 15% of the current value of its total
assets, and (d) 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) make loans of
portfolio securities, except that the Fund may enter into repurchase agreements
with respect to 25% of the value of its net assets; or (iv) invest more than 25%
of its total assets in a single industry except that this restriction shall not
apply to government securities. For the purposes of the foregoing restriction,
the industry classification of an asset-backed security is determined by its
underlying assets. For example, certificates for automobile receivables and
certificates for amortizing revolving debts constitute two different industries.
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. Certain non-fundamental policies and additional fundamental
policies adopted by the Fund are described in the Statement of Additional
Information.
RISK FACTORS AND SUITABILITY
The Fund is not a money market fund and is not an appropriate investment
for investors seeking complete stability of principal. The Fund is designed for
corporate investors, pension and profit-sharing plans, state and local
governments, foundations, endowment funds and individuals. The Fund will attempt
to achieve a higher than money market return for its shareholders. Although the
net asset value of the Fund's shares may fluctuate more than money market
instruments in response to changes in interest rates, the Fund will seek to keep
such volatility below that of longer term debt securities by limiting the
maturity of the securities in its portfolio but may not be able to return
dollar-for-dollar the money invested. See "Investment Objectives and Policies"
above for a further description of the risks associated with an investment in
the Fund.
Yields on debt securities depend on a variety of factors, such as general
conditions in the money and bond markets, and the size, maturity and rating of a
particular issue. Debt securities with longer maturities tend to produce higher
yields and are generally subject to greater potential capital appreciation and
depreciation. The market prices of debt securities usually vary depending upon
available yields, rising when interest rates decline and declining when interest
rates rise.
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Mortgage-Backed Securities
Mortgage-backed securities are subject to both regular and early
prepayments of principal, which will affect the value of the securities in the
Fund's portfolio and, therefore, the Fund's current and total returns. While it
is not possible to predict accurately the life of a particular issue of
mortgage-backed securities held by the Fund, the actual life of a
mortgage-backed security is likely to be substantially less than the original
final 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 a security are paid 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,
mortgage-backed securities, and adjustable rate mortgage-backed securities in
particular, may be 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 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.
Leverage
The use of forward roll transactions and reverse repurchase agreements
involves leverage. Leverage allows any investment gains made with the additional
monies received (in excess of the costs of the forward roll transaction or
reverse repurchase agreement) 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.
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 (or any shorter period since
inception) 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.
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The "yield" of the Fund is computed by dividing the net investment income
per share earned during the most recent practicable 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.
From time to time, the Fund may compare its performance with that of other
mutual funds with similar investment objectives, to bond and other relevant
indices, and to performance rankings prepared by recognized mutual fund
statistical services. In addition, the Fund's performance may be compared to
alternative investment or savings vehicles and/or to indices or indicators of
economic activity.
DIVIDENDS AND DISTRIBUTIONS
Dividends on shares of the Fund will be declared daily from net investment
income and distributed monthly. 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
distributions from capital gains, 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 Principal
Underwriter, which offers the Fund's 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 in good order by the Principal Underwriter and
payment for the shares is received by the Fund's custodian. Please see the
Fund's account application or call the Principal Underwriter for instructions on
how to make payment of shares to the Fund's custodian. Unless waived by the
Fund, the minimum initial investment is $1,000,000. Additional investments may
be made in amounts of at least $100,000.
Shares of the Fund may also be purchased through securities dealers. 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 Principal Underwriter 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, provided that payment for the shares is
also received by the Fund's custodian 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 Principal Underwriter 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, the Principal Underwriter or the
Adviser.
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 for which market quotations are readily available are valued at
current market value. Securities are valued at the last sales prices 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, and CMOs and
asset-backed securities 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.
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The Board of Trustees has approved determining the current market value of
securities with one year or less remaining to maturity on a spread basis. To the
extent this method is employed, it would be used in conjunction with the
periodic use of market quotations. Under the spread process, the Adviser would
determine in good faith the current market value of these portfolio securities
by comparing their quality, maturity and liquidity characteristics to those of
U.S. Treasury bills. Money market instruments with less than sixty days
remaining to maturity when acquired by the Fund may be valued on an amortized
cost basis. If the Fund acquires a money market instrument with more than sixty
days remaining to its maturity, it may be valued at current market value until
the sixtieth day prior to maturity and may 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 contributes 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. The Fund's investment minimums do not apply to
accounts for which the Adviser or any of its affiliates serves as investment
adviser or to employees of the Adviser or any of its affiliates or to members of
such persons' immediate families. The Fund's investment minimums apply to the
aggregate value invested in omnibus accounts rather than to the investment of
underlying participants in such omnibus accounts.
EXCHANGE OF SHARES
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 Principal Underwriter. 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 Principal Underwriter
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 Principal
Underwriter 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 the Fund may be exchanged by written order to the Principal
Underwriter, 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.
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<PAGE>
Telephonic Exchanges
Shareholders who elected telephonic privileges may exchange shares by
calling the Principal Underwriter at (800) 221-4795. Telephonic privileges are
not available to shareholders automatically. Proper identification will be
required for each telephonic exchange. Please see "Telephone Transactions" below
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 by the Fund's custodian. 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.
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 by the
Principal Underwriter 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 the Principal
Underwriter, One Financial Center, 26th Floor, Boston, Massachusetts 02111. A
written redemption request must (a) state the name of the Fund and 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(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 that are not
individuals. Redemption proceeds will normally be paid by check mailed within
three business days of receipt by the Principal Underwriter 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 in the case of
payments made by check.
Telephonic Redemption
Shareholders who elect telephonic privileges may redeem shares by
calling the Principal Underwriter at (800) 221-4795. Telephonic privileges are
not available to shareholders automatically. Redemption proceeds will be mailed
or wired in accordance with the shareholder's instruction on the account
application to a pre-designated account. Redemption proceeds will normally be
paid promptly after receipt of telephonic instructions, but no later than three
business days thereafter, except as described above for shares purchased by
check. 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. Wire charges, if any,
will be deducted from redemption proceeds. Proper identification will be
required for each telephonic redemption.
Repurchase Order
In addition to telephonic and written redemption of Fund shares, the
Principal Underwriter may accept telephone orders from brokers or dealers for
the repurchase of Fund shares. The repurchase price is the net asset value per
share next determined after receipt of the repurchase order by the Principal
Underwriter and the payment for the shares by the Fund's custodian. Brokers and
dealers are obligated to transmit repurchase orders to the Principal Underwriter
prior to the close of the Principal Underwriter's business day (normally 4:00
p.m.). Brokers and dealers may charge for their services in connection with a
repurchase of Fund shares, but neither the Fund nor the Principal Underwriter
imposes a charge for share repurchases.
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<PAGE>
Telephone Transactions
By maintaining an account that is eligible for telephonic exchange and
redemption privileges, the shareholder authorizes the Adviser, the Principal
Underwriter, the Fund and the Fund's custodian to act upon instructions of any
person to redeem and/or exchange shares from the shareholder's account. Further,
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 Principal Underwriter, nor the Trust, nor the Fund, 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
or exchange, 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. All telephone transaction requests will
be recorded. Shareholders may experience delays in exercising telephone
transaction privileges during periods of abnormal market activity. Accordingly,
during periods of volatile economic and market conditions, shareholders may wish
to consider transmitting redemption and exchange requests in writing.
* * * *
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 $250,000 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 $250,000. The Fund may eliminate duplicate mailings of Fund
materials to shareholders that have the same address of record.
MANAGEMENT
Trustees
The Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, a Massachusetts business trust organized on August 13, 1986.
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 will, from
time to time, determine jointly the appropriate maturity of the Fund's
portfolio. This determination will be made after a review of economic, interest
rate and yield curve analysis. The Board of Trustees will periodically review
and approve the maturity decisions made by the Adviser.
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The Adviser provides fully discretionary management services and counseling
and advisory services to a broad range of clients throughout the United States
and abroad. In addition, the Adviser or its affiliate, Standish International
Management Company, L.P. ("SIMCO"), serves as the investment adviser to each of
the following fourteen funds in the Standish, Ayer & Wood family of funds:
Net Assets
Funds (March 31, 1996)
----- ----------------
Standish Controlled Maturity Fund
Standish Equity Portfolio
Standish Fixed Income Portfolio
Standish Fixed Income Fund II
Standish Global Fixed Income Portfolio
Standish Intermediate Tax Exempt Bond Fund
Standish International Equity Fund
Standish International Fixed Income Fund
Standish Massachusetts Intermediate
Tax Exempt Bond Fund
Standish Securitized Fund
Standish Short-Term Asset Reserve Fund
Standish Small Capitalization Equity Portfolio
Standish Small Cap Tax-Sensitive Equity Fund
Standish Tax-Sensitive Equity Fund
Corporate pension funds are the largest asset under active management by
Standish. Standish's clients also include charitable and educational endowment
funds, financial institutions, trusts and individual investors. As of March 31,
1996, Standish managed approximately $__ billion in assets.
The Fund's portfolio manager is Jennifer A. Pline, who is primarily
responsible for the day-to-day management of the Fund's portfolio and has served
in this capacity since January 1, 1991. During the past five years, Ms. Pline
has served as a Vice President of the Adviser.
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, and permits the
Fund to use the name "Standish." The Adviser provides all necessary office space
and services of executive personnel for administering the affairs of the Fund.
For these services, the Fund pays a fee monthly at the annual rate of 0.25% of
average daily net asset value. In addition, the Adviser has agreed to limit the
Fund's aggregate annual operating expenses (excluding brokerage commissions,
taxes and extraordinary expenses) to the lower of (a) 0.50% of the Fund's
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 for 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. Prior to July 1, 1995,
the Adviser served as co-investment adviser to the Fund with a joint venture
partner of the Adviser. For the fiscal year ended December 31, 1995, advisory
fees amounted to 0.25% of the Fund's average daily net assets which were paid
equally to the Adviser and its joint venture partner prior to June 30, 1995 and
entirely to the Adviser thereafter.
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<PAGE>
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
and shareholder reports which are furnished to existing shareholders;
registration and reporting fees and expenses; and Trustees' fees and expenses.
The Principal Underwriter bears, without subsequent reimbursement, the
distribution expenses attributable to the offering and sale of Fund shares.
Expenses of the Trust that relate to more than one series are allocated among
such series by the Adviser in an equitable manner, primarily on the basis of the
net asset values. For the fiscal year ended December 31, 1995, expenses borne by
the Fund daily represented 0.33% of the Fund's average net assets.
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 generally seeks 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 a factor 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 a 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 and from 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, or only a small portion, of such dividends is expected to qualify for
the 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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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
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.
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The Trust has established fourteen series that currently offer their shares
to the public 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 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 each investment series 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 Fund should be made by contacting the Principal
Underwriter at the 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, the Principal Underwriter and the Adviser.
- --------------------------------------------------------------------------------
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.
22
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APPENDIX A
MOODY'S MONEY MARKET INSTRUMENT RATINGS
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following
characteristics:
-Leading market positions in well-established industries.
-High rates of return on funds employed.
-Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
-Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
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.
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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 MONEY MARKET INSTRUMENT RATINGS
A-1 -This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong.
A-2 -Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated "A-1."
STANDARD & POOR'S BOND RATINGS
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
section2(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.
25
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STANDISH SHORT-TERM ASSET RESERVE FUND
INVESTMENT ADVISER
Standish, Ayer & Wood, Inc.
One Financial Center
Boston, Massachusetts 02111
PRINCIPAL UNDERWRITER
Standish Fund Distributors, L.P.
One Financial Center
Boston, Massachusetts 02111
CUSTODIAN
Investors Bank & Trust Company
24 Federal Street
Boston, Massachusetts 02110
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
LEGAL COUNSEL
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
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May 1, 1996,
STANDISH SHORT-TERM ASSET RESERVE FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus, but expands
upon and supplements the information contained in the Prospectus dated May 1,
1996, as amended and/or supplemented from time to time (the "Prospectus"), of
Standish Short-Term Asset Reserve Fund (the "Fund"), a separate investment
series of Standish, Ayer & Wood Investment Trust (the Trust). This Statement of
Additional Information should be read in conjunction with the Fund's Prospectus,
a copy of which may be obtained without charge by writing or calling Standish
Fund Distributors, the Trust's principal underwriter (the "Principal
Underwriter"), at the address and phone number set forth above.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
Contents
General Information and History...............................2
Investment Objective and Policies............................ 2
Investment Restrictions.......................................7
Calculation of Performance Data...............................8
Management....................................................9
Redemption of Shares.........................................14
Portfolio Transactions.......................................15
Determination of Net Asset Value.............................15
The Fund and Its Shares......................................15
Taxation ....................................................16
Additional Information.......................................17
Experts and Financial Statements.............................17
Financial Statements.........................................18
1
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GENERAL INFORMATION AND HISTORY
Effective July 1, 1995, the Fund changed its name from Consolidated
Standish Short-Term Asset Reserve Fund to Standish Short-Term Asset Reserve
Fund.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's Prospectus describes the investment objective of the Fund and
summarizes the investment policies it will follow. The following discussion
supplements the description of the Fund's investment policies in the Prospectus.
See the Prospectus for a more complete description of the Fund's investment
objective, policies and restrictions.
Maturity
The effective maturity of an individual portfolio security in which the
Fund invests is defined as the period remaining until the earliest date when the
Fund can recover the principal amount of such security through mandatory
redemption or prepayment by the issuer, the exercise by the Fund of a put
option, demand feature or tender option granted by the issuer or a third party
or the payment of the principal on the stated maturity date. The effective
maturity of variable rate securities is calculated by reference to their coupon
reset dates. Thus, the effective maturity of a security may be substantially
shorter than its final stated maturity. Unscheduled prepayments of principal
have the effect of shortening the effective maturities of securities in general
and mortgage-backed securities in particular. Prepayment rates are influenced by
changes in current interest rates and a variety of economic, geographic, social
and other factors and cannot be predicted with certainty. In general,
securities, such as mortgage-backed securities, may be subject to greater
prepayment rates in a declining interest rate environment. Conversely, in an
increasing interest rate environment, the rate of prepayment may be expected to
decrease. A higher than anticipated rate of unscheduled principal prepayments on
securities purchased at a premium or a lower than anticipated rate of
unscheduled payments on securities purchased at a discount may result in a lower
yield (and total return) to the Fund than was anticipated at the time the
securities were purchased. The Fund's reinvestment of unscheduled prepayments
may be made at rates higher or lower than the rate payable on such security,
thus affecting the return realized by the Fund.
Money Market Instruments and Repurchase Agreements
Money market instruments include short-term U.S. Govern-ment securities,
U.S. and foreign commercial paper (promissory notes issued by corporations to
finance their short-term credit needs), negotiable certificates of deposit,
non-negotiable fixed time deposits, bankers' acceptances and repurchase
agreements.
U.S. Government securities include securities which are direct obligations
of the U.S. Government backed by the full faith and credit of the United States,
and securities issued by agencies and instrumentalities of the U.S. Government,
which may be guaranteed by the U.S. Treasury or supported by the issuer's right
to borrow from the Treasury and may be backed by the credit of the federal
agency or instrumentality itself. Agencies and instrumentalities of the U.S.
Government include, but are not limited to, Federal Land Banks, the Federal Farm
Credit Bank, the Central Bank for Cooperatives, Federal Intermediate Credit
Banks, Federal Home Loan Banks and the Federal National Mortgage Association.
2
<PAGE>
A repurchase agreement is an agreement under which the Fund acquires money
market instruments (generally U.S. Government securities) from a commercial
bank, broker or dealer, subject to resale to the seller at an agreed-upon price
and date (normally the next business day). The resale price reflects an
agreed-upon interest rate effective for the period the instruments are held by
the Fund and is unrelated to the interest rate on the instruments. The
instruments acquired by the Fund (including accrued interest) must have an
aggregate market value in excess of the resale price and will be held by the
Fund's custodian bank until they are repurchased. The Trustees will monitor the
standards that the Adviser, Standish, Ayer & Wood, Inc. (the "Adviser"), will
use in reviewing the creditworthiness of any party to a repurchase agreement
with the Fund.
The use of repurchase agreements involves certain risks. For example, if
the seller defaults on its obligation to repurchase the instruments acquired by
the Fund at a time when their market value has declined, the Fund may incur a
loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by the Fund are collateral for a loan by the Fund and
therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that the Fund may not be able to substantiate its interest in the
instruments it acquires. While the Trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
Structured or Hybrid Notes
As more fully described in the Prospectus, the Fund may invest in
structured or hybrid notes. It is expect that not more than 5% of the Fund's net
assets will be at risk as a result of such investments. In addition to the risks
associated with a direct investment in the benchmark asset, investments in
structured and hybrid notes involve the risk that the issuer or counterparty to
the obligation will fail to perform its contractual obligations. Certain
structured or hybrid notes may also be leveraged to the extent that the
magnitude of any change in the interest rate or principal payable on the
benchmark asset is a multiple of the change in the reference price. Leverage
enhances the price volatility of the security and, therefore, the Fund's net
asset value. Further, certain structured or hybrid notes may be illiquid for
purposes of the Fund's limitation on investments in illiquid securities.
Strategic Transactions
Consistent with maintaining stability of principal, 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 and broad or specific
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.
3
<PAGE>
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, fixed-income indices and other financial instruments; purchase and
sell financial futures contracts and options thereon; and enter into various
interest rate transactions such as swaps, caps, floors or collars (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 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 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 will attempt to limit its net loss
exposure resulting from Strategic Transactions entered into for such purposes to
not more than 1% 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
believes that short term interest rates as indicated in the forward yield curve
are too high, the Fund may take a short position in a near-term Eurodollar
futures contract and a long position in a longer-dated Eurodollar futures
contract. Under such circumstances, any unrealized loss in the near-term
Eurodollar futures position would be netted against any unrealized gain in the
longer-dated Eurodollar futures 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
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a
regulated investment company.
Risks of Strategic Transactions
The use of strategic Transactions has associated risks 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
4
<PAGE>
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 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
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, they 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 attempt to limit its net
loss exposure resulting from Strategic Transactions entered into for non-hedging
purposes to not more than 1% 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.
General Characteristics of Options
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving options
require segregation of the Fund's assets in special accounts, as described below
under "Use of Segregated Accounts."
A put option gives the purchaser of the option, in consideration for the
payment of a premium, the right to sell, and the writer the obligation to buy
(if the option is exercised), the underlying security, commodity, index, or
other instrument at the exercise price. For instance, the Fund's purchase of a
put option on a security might be designed to protect its holdings in the
underlying instrument (or, in some cases, a similar instrument) against a
substantial decline in the market value by giving the Fund the right to sell
such instrument at the option exercise price. A call option, in consideration
for the payment of a premium, gives the purchaser of the option the right to
buy, and the seller the obligation to sell (if the option is exercised), the
underlying instrument at the exercise price. The Fund may purchase a call option
on a security, futures contract index or other instrument to seek to protect the
Fund against an increase in the price of the underlying instrument that it
intends to purchase in the future by fixing the price at which it may purchase
5
<PAGE>
such instrument. An American style put or call option may be exercised at any
time during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, exchange listed options generally settle by
physical delivery of the underlying security, although in the future cash
settlement may become available. Index options and Eurodollar instruments are
cash settled for the net amount, if any, by which the option is in-the-money
(i.e., where the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
The Fund's ability to close out its position as a purchaser or seller of an
exchange listed put or call option is dependent, in part, upon the liquidity of
the option market. There is no assurance that a liquid option market on an
exchange will exist. In the event that the relevant market for an option on an
exchange ceases to exist, outstanding options on that exchange would generally
continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct agreement with
the Counterparty. In contrast to exchange listed options, which generally have
standardized terms and performance mechanics, all the terms of an OTC option,
including such terms as method of settlement, term, exercise price, premium,
guarantees and security, are set by negotiation of the parties. The Fund will
generally sell (write) OTC options that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. (To the extent that the Fund does not
do so, the OTC options are subject to the Fund's restriction on illiquid
securities.) The Fund expects generally to enter into OTC options that have cash
settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in the OTC option market. As a result, if the Counterparty fails to
make delivery of the security or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
6
<PAGE>
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York as
"primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received, combined with any credit
enhancements, a long-term debt rating of A from Standard & Poor's Ratings Group
("S&P") or Moody's Investor Services, Inc. ("Moody's") or an equivalent rating
from any other nationally recognized statistical rating organization ("NRSRO")
or which issue debt that is determined to be of equivalent credit quality by the
Adviser. The staff of the Securities and Exchange Commission ("SEC") currently
takes the position that, absent the buy-back provision discussed above, OTC
options purchased by the Fund, and portfolio securities "covering" the amount of
the Fund's obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any) are illiquid, and are subject to
the Fund's limitation on investing in illiquid securities. However, for options
written with "primary dealers" in U.S. Government securities pursuant to an
agreement requiring a closing purchase transaction at a formula price, the
amount which is considered to be illiquid may be calculated by reference to a
formula price.
If the Fund sells (writes) a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Fund's income. The sale (writing) of put options
can also provide income.
The Fund may purchase and sell (write) call options on securities,
including U.S. Treasury and agency securities, and Eurodollar instruments, that
are traded on U.S. and foreign securities exchanges and in the over-the-counter
markets, and on securities indices and futures contracts. All calls sold by the
Fund must be "covered" (i.e., the Fund must own the securities or the futures
contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though the Fund will
receive the option premium to help offset any loss, the Fund may incur a loss if
the exercise price is below the market price for the security subject to the
call at the time of exercise. A call sold by the Fund also exposes the Fund
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the Fund to hold a security or instrument which it might otherwise
have sold.
The Fund may purchase and sell (write) put options on securities, including
U.S. Treasury and agency securities, and Eurodollar instruments (whether or not
it holds the above securities in its portfolio), and on securities indices and
futures contracts. The Fund will not sell put options if, as a result, more than
50% of the Fund's assets would be required to be segregated to cover its
potential obligations under such put options other than those with respect to
futures and options thereon. In selling put options, there is a risk that the
Fund may be required to buy the underlying security at a price above the market
price.
7
<PAGE>
Options on Securities Indices and Other Financial Indices
The Fund may also purchase and sell (write) call and put options on
securities indices and other financial indices. Options on securities indices
and other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement. For example, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the differential between
the closing price of the index and the exercise price of the option, which also
may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount. In addition to
the methods described above, the Fund may cover call options on a securities
index by owning securities whose price changes are expected to be similar to
those of the underlying index, or by having an absolute and immediate right to
acquire such securities without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other securities in its portfolio.
General Characteristics of Futures
The Fund may enter into financial futures contracts or purchase or sell put
and call options on such futures. Futures are generally bought and sold on the
commodities exchanges where they are listed and involve payment of initial and
variation margin as described below. The sale of futures contracts creates a
firm obligation by the Fund, as seller, to deliver to the buyer the specific
type of financial instrument called for in the contract at a specific future
time for a specified price (or, with respect to index futures and Eurodollar
instruments, the net cash amount). The purchase of futures contracts creates a
corresponding obligation by the Fund, as purchaser to purchase a financial
instrument at a specified time and price. Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such position
in the event the option is exercised.
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
regulations of the Commodity Futures Trading Commission (the "CTFC") relating to
exclusions from regulation as a commodity pool operator. Those regulations
currently provide that the Fund may use commodity futures and option positions
(i) for bona fide hedging purposes without regard to the percentage of assets
committed to margin and option premiums, or (ii) for other purposes permitted by
the CTFC to the extent that the aggregate initial margin and option premiums
required to establish such non-hedging positions (net of the amount the
8
<PAGE>
positions were "in the money" at the time of purchase) do not exceed 5% of the
net asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on such positions. Typically, maintaining a futures contract
or selling an option thereon requires the Fund to deposit, with its custodian
for the benefit of a futures commission merchant, as security for its
obligations an amount of cash or other specified assets (initial margin) which
initially is typically 1% to 10% of the face amount of the contract (but may be
higher in some circumstances). Additional cash or assets (variation margin) may
be required to be deposited directly with the futures commission merchant
thereafter on a daily basis as the value of the contract fluctuates. The
purchase of an option on financial futures involves payment of a premium for the
option without any further obligation on the part of the Fund. If the Fund
exercises an option on a futures contract it will be obligated to post initial
margin (and potential subsequent variation margin) for the resulting futures
position just it would for any position. Futures contracts and options thereon
are generally settled by entering into an offsetting transaction but there can
be no assurance that the position can be offset prior to settlement at an
advantageous price, nor that delivery will occur. The segregation requirements
with respect to futures contracts and options thereon are described below.
Combined Transactions
The Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, and multiple interest rate
transactions, structured notes and any combination of futures, options and
interest rate transactions ("component transactions"), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars
Among the Strategic Transactions into which the Fund may enter are interest
rate and index swaps and the purchase or sale of related caps, floors and
collars. The Fund expects to enter into these transactions primarily for hedging
purposes, including, but not limited to, preserving a return or spread on a
particular investment or portion of its portfolio, protecting against currency
fluctuations, as a duration management technique or protecting against an
increase in the price of securities the Fund anticipates purchasing at a later
date. Swaps, caps, floors and collars may also be used to enhance potential gain
in circumstances where hedging is not involved although, as described above, the
Fund will attempt to limit its net loss exposure resulting from swaps, caps,
floors and collars and other Strategic Transactions entered into for such
purposes to not more than 1% of the Fund's net assets at any one time. The Fund
will not sell interest rate caps or floors where it does not own securities or
other instruments providing the income stream the Fund may be obligated to pay.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
9
<PAGE>
principal. An index swap is an agreement to swap cash flows on a notional amount
based on changes in the values of the reference indices. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling such cap to the extent that a specified index exceeds a
predetermined interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain rate of return within a predetermined range of
interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from an NRSRO or the Counterparty issues debt that is determined to be of
equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed. Swaps, caps, floors and collars are considered illiquid for purposes
of the Fund's policy regarding illiquid securities, unless it is determined,
based upon continuing review of the trading markets for the specific security,
that such security is liquid. The Board of Trustees has adopted guidelines and
delegated to the Adviser the daily function of determining and monitoring the
liquidity of swaps, caps, floors and collars. The Board of Trustees, however,
retains oversight focusing on factors such as valuation, liquidity and
availability of information and is ultimately responsible for such
determinations. The Staff of the SEC currently takes the position that swaps,
caps, floors and collars are illiquid, and are subject to the Fund's limitation
on investing in illiquid securities.
Eurodollar Contracts
The Fund may make investments in Eurodollar contracts. Eurodollar contracts
are U.S. dollar-denominated futures contracts or options thereon which are
linked to the London Interbank Offered Rate ("LIBOR"), although foreign
currency-denominated contracts are available from time to time. Eurodollar
futures contracts enable purchasers to obtain a fixed rate for the lending of
funds and sellers to obtain a fixed rate for borrowings. The Fund might use
Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many interest rate swaps and fixed income instruments are
linked.
10
<PAGE>
Use of Segregated Accounts
The Fund will hold securities or other instruments whose values are
expected to offset its obligations under the Strategic Transactions. The Fund
will not enter into Strategic Transactions that expose the Fund to an obligation
to another party unless it owns either (i) an offsetting position in securities
or other options, futures contracts or other instruments or (ii) cash,
receivables or liquid, high-grade debt securities with a value sufficient to
cover its potential obligations. The Fund may have to comply with any applicable
regulatory requirements designed to make sure that mutual funds do not use
leverage in Strategic Transactions, and if required, will set aside cash and
other assets in a segregated account with its custodian bank in the amount
prescribed. In that case, the Fund's custodian would maintain the value of such
segregated account equal to the prescribed amount by adding or removing
additional cash or other assets to account for fluctuations in the value of the
account and the Fund's obligations on the related Strategic Transactions. Assets
held in a segregated account would not be sold while the Strategic Transaction
is outstanding, unless they are replaced with similar assets. As a result, there
is a possibility that segregation of a large percentage of the Fund's assets
could impede portfolio management or the Fund's ability to meet redemption
requests or other current obligations.
"When-Issued" and "Forward Commitment" Securities
The Fund may commit up to 10% of its net assets to purchase securities on a
"when-issued" basis, which means that delivery and payment for the securities
will normally take place 15 to 45 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.
The Fund may also, with respect to up to 25% of its net assets, enter into
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
Unless the Fund has entered into an offsetting agreement to sell the
securities purchased on a "when-issued" or "forward commitment" basis, cash,
U.S. Government securities or other 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 the
aggregate market value of the segregated securities equals the amount of the
Fund's commitment.
Securities purchased on a "when-issued" or "forward commitment" 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" and "forward commitment" 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.
11
<PAGE>
Portfolio Turnover
The Fund places no restrictions on portfolio turnover and it may sell any
portfolio security without regard to the period of time it has been held, except
as may be necessary to maintain its status as a regulated investment company
under the Code. The Fund may, therefore, generally change its portfolio
investments at any time in accordance with the Adviser's appraisal of factors
affecting any particular issuer or market, or the economy in general. Portfolio
turnover is not expected to exceed 200% on an annual basis.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental policies in addition to
those described under "Investment Objective and Policies -- Investment
Restrictions" in the Prospectus. The Fund's fundamental policies cannot be
changed unless the change is approved by the lesser of (i) 67% or more of the
voting securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy,
or (ii) more than 50% of the outstanding voting securities of the Fund. The Fund
may not:
1. 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.
2. Issue senior securities, borrow money or securities, enter into reverse
repurchase agreements 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, (c) enter into reverse repurchase
agreements in an amount up to 15% of the current value of its total
assets, and (d) 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.
3. Make loans of portfolio securities, except that the Fund may enter into
repurchase agreements with respect to 25% of the value of its net assets.
4. Invest more than 25% of its total assets in a single industry except that
this restriction shall not apply to government securities. For purposes of
this restriction, the industry classification of an asset-backed security
is determined by its underlying assets. For example, certificates for
automobile receivables and certificates for amortizing revolving debts
constitute two different industries.
5. Invest more than 25% of the current value of its total assets in any
single industry, provided that this restriction shall not apply to
government securities.
6. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Fund may be
deemed to be an underwriter under the Securities Act of 1933.
12
<PAGE>
7. Purchase real estate or real estate mortgage loans, although the Fund may
purchase CMOs, mortgage-backed pass-through securities and marketable
securities of companies which deal in real estate.
8. Purchase securities on margin (except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities).
9. Purchase or sell commodities or commodity contracts except that the Fund
may engage in financial futures contracts and related options
transactions.
10. Purchase the securities of other investment companies, provided that the
Fund may make such a purchase (a) in the open market involving no
commission or profit to a sponsor or dealer (other than the customary
broker's commission), provided that immediately thereafter (i) not more
than 10% of the Fund's total assets would be invested in such securities,
(ii) not more than 5% of the Fund's total assets would be invested in the
securities of any one investment company and (iii) not more than 3% of the
voting stock of any one investment company would be owned by the Fund, or
(b) as part of a merger, consolidation, or acquisition of assets.
The following restrictions are not fundamental policies and may be changed
by the Trustees without shareholder approval, in accordance with applicable
laws, regulations or regulatory policy. The Fund may not:
a. Make short sales of securities or purchase securities on margin, but the
Fund may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of securities.
b. Invest in companies for the purpose of exercising control or management.
c. Purchase or write options, except pursuant to the limitations described
above (See "Investment Objective and Policies Strategic Transactions").
d. Invest in interests in oil, gas or other exploration or development
programs.
e. Invest more than 5% of the assets of the Fund in the securities of any
issuers which, together with their corporate parents, have records of less
than three years' continuous operation, including the operation of any
predecessor, other than obligations issued or guaranteed by the U.S.
Government or its agencies, and securities fully collateralized by such
securities.
f. Invest in securities of any company if any officer or director (trustee)
of the Trust or of the Fund's investment adviser owns more than 1/2 of 1%
of the outstanding securities of such company and such officers and
directors (trustees) own in the aggregate more than 5% of the securities
of such company.
g. Invest more than an aggregate of 10% of the net assets of the Fund in (a)
repurchase agreements which are not terminable within seven days, (b)
securities subject to legal or contractual restrictions on resale or for
which there are no readily available market quotations and (c) in other
illiquid securities, including non-negotiable fixed time deposits of
longer than seven days and certain asset-backed securities.
13
<PAGE>
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, except with respect to restriction (f) above.
In order to permit the sale of shares of the Fund in certain states, the
Board may, in its sole discretion, adopt restrictions on investment policy more
restrictive than those described above. Should the Board determine that any such
more restrictive policy is no longer in the best interest of the Fund and its
shareholders, the Fund may cease offering shares in the state involved and the
Board may revoke such restrictive policy. Moreover, if the states involved shall
no longer require any such restrictive policy, the Board may, in its sole
discretion, revoke such policy.
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, the Fund may, from time to time, advertise
certain total return and yield information. The average annual total return of
the Fund for a period is computed by subtracting the net asset value per share
at the beginning of the period from the net asset value per share at the end of
the period (after adjusting for the reinvestment of any income dividends and
capital gain distributions), and dividing the result by the net asset value per
share at the beginning of the period. In particular, the average annual total
return of the Fund ("T") is computed by using the redeemable value at the end of
a specified period of time ("ERV") of a hypothetical initial investment of
$1,000 ("P") over a period of time ("n") according to the formula P(1+T)n=ERV.
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. 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 non-recurring charges for the period stated. In particular, yield is
determined according to the following formula:
Yield = 2[((A - B/CD) + 1)^6 - 1]
Where: A equals dividends and interest earned during the period; B equals
net expenses accrued for the period; C equals average daily number of shares
outstanding during the period that were entitled to receive dividends; D equals
the maximum offering price per share on the last day of the period.
The average annual total return quotations for the Fund for the one and
five year periods ended December 31, 1995, and since inception (January 3, 1989
to December 31, 1995) are 7.85%, 5.76% and 6.74%, respectively, and the average
annualized yield for the thirty day period ended December 31, 1995 was 5.79%.
These performance quotations should not be considered as representative of the
Fund's performance for any specified period in the future.
The Fund may also quote non-standardized yield, such as yield-to-maturity
("YTM"). YTM represents the rate of return an investor will receive if a
long-term, interest-bearing investment, such as a bond, is held to its maturity
date. YTM does not take into account purchase price, redemption value, time to
maturity, coupon yield, and the time between interest payments.
In addition to average annual return and yield quotations, the Fund may
quote quarterly and annual performance on a net (with management fees and other
operating expenses deducted) and gross basis as follows:
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
1/89 1.58% 1.70%
2/89 3.52 3.64
3/89 1.71 1.82
4/89 2.38 2.51
1989 9.50 10.01
1/90 1.34 1.45
2/90 2.56 2.69
3/90 2.17 2.27
4/90 2.62 2.73
1990 8.97 9.45
1/91 2.10 2.20
2/91 1.97 2.07
3/91 2.62 2.71
4/91 2.39 2.47
1991 9.41 9.79
1/92 0.84% 0.91%
2/92 2.08 2.17
3/92 1.18 1.28
4/92 0.17 0.27
1992 4.33 4.70
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
1/93 1.90 1.98
2/93 1.10 1.19
3/93 1.20 1.28
4/93 0.78 0.86
1993 5.08 5.41
1/94 0.06 0.14
2/94 0.06 0.14
3/94 1.31 1.39
4/94 0.83 0.91
1994 2.27 2.60
1/95 2.08 2.16
2/95 2.14 2.22
3/95 1.55 1.62
4/95 1.89 1.97
1995 7.85 8.20
14
<PAGE>
These performance quotations should not be considered as representative of
the Fund's performance for any specified period in the future.
The Fund's performance may be compared in sales literature to the
performance of other mutual funds having similar objectives or to standardized
indices or other measures of investment performance. In particular, the Fund may
compare its performance to The IBC/Donoghue Money Market Average/All Taxable
Index, which is generally considered to be representative of the performance of
domestic, taxable money market funds, and the One Year Treasury Bills. However,
the average maturity of the Fund's portfolio is longer than that of a money
market fund and, unlike a money market fund, the net asset value of the Fund's
shares may fluctuate. Comparative performance may also be expressed by reference
to a ranking prepared by a mutual fund monitoring service or by one or more
newspapers, newsletters or financial periodicals. Performance comparisons may be
useful to investors who wish to compare the Fund's past performance to that of
other mutual funds and investment products. Of course, past performance is not a
guarantee of future results.
15
<PAGE>
<TABLE>
<CAPTION>
MANAGEMENT
Trustees and Officers
The Trustees and executive officers of the Trust are listed below. All
executive officers of the Trust are affiliates of Standish, Ayer & Wood, Inc.,
the Fund's investment adviser.
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
*D. Barr Clayson, 7/29/35 Vice President and Trustee Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center President,
Boston, MA 02111 Standish International
Management Company, L.P.
Samuel C. Fleming, 9/30/40 Trustee Chairman of the Board
c/o Decision Resources, Inc. and Chief Executive Officer,
1100 Winter Street Decision Resources, Inc.;
Waltham, MA 02154 through 1989, Senior V.P.
Arthur D. Little
Benjamin M. Friedman, 8/5/44 Trustee William Joseph Maier
c/o Harvard University Professor of Political Economy,
Cambridge, MA 02138 Harvard University
John H. Hewitt, 4/11/38 Trustee Trustee, The Peabody
P.O. Box 307 Foundation; Trustee,
So. Woodstock, VT 05071 Visiting Nurse Alliance of Vermont
and New Hampshire
*Edward H. Ladd, 1/3/38 Trustee and Vice President Chairman of the Board
c/o Standish, Ayer & Wood, Inc. and Managing Director,
One Financial Center Standish, Ayer & Wood, Inc. since 1990;
Boston, MA 02111 formerly President of
Standish, Ayer & Wood, Inc.
Caleb Loring III, 11/14/43 Trustee Trustee, Essex Street Associates
c/o Essex Street Associates (family investment trust office);
P.0. Box 5600 Director, Holyoke Mutual Insurance Company
Beverly Farms, MA 01915
*Richard S. Wood, 5/2/54 President and Trustee Vice President, Secretary and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Executive Vice President,
Boston, MA 02111 Standish International Management Company, L.P.
16
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
Richard C. Doll, 7/8/48 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
James E. Hollis III, 11/21/48 Executive Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
David W. Murray, 5/5/40 Treasurer and Secretary Vice President, Treasurer and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Caleb F. Aldrich, 9/20/57 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
Beverly E. Banfield, 7/6/56 Vice President Vice President and Compliance Officer,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Assistant Vice President and Compliance Officer,
Boston, MA 02111 Freedom Capital Management Corp.
(1989-1992)
Nicholas S. Battelle, 6/24/42 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Walter M. Cabot, 1/6/33 Vice President Senior Advisor and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center prior to 1991, President,
Boston, MA 02111 Harvard Management Company
David H. Cameron, 11/2/55 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Karen K. Chandor, 2/13/50 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Lavinia B. Chase, 6/4/46 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Susan B. Coan, 5/1/52 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
17
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
W. Charles Cook II, 2/16/63 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Joseph M. Corrado, 5/13/55 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Dolores S. Driscoll, 2/17/48 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Mark A. Flaherty, 4/24/59 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Anne P. Herrmann, 1/26/56 Vice President Mutual Fund Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ann S. Higgins, 4/8/35 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Senior Operations Manager,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Since December 1995, formerly
Boston, MA 02111 Vice President, Scudder Stevens and Clark
Raymond J. Kubiak, 9/3/57 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Maria D. Furman, 2/3/54 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Phillip D. Leonardi, 4/24/62 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc. since November 1993; formerly, Investment Sales,
One Financial Center Cigna Corporation (1993) and
Boston, MA 02111 Travelers Corporation (1984-1993)
Laurence A. Manchester, 5/24/43 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
18
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
George W. Noyes, 11/12/44 Vice President President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Arthur H. Parker, 8/12/35 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Jennifer A. Pline, 3/8/60 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Howard B. Rubin, 10/29/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Michael C. Schoeck, 10/24/55 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since August, 1993;
One Financial Center formerly, Vice President,
Boston, MA 02111 Commerzbank, Frankfurt, Germany
Austin C. Smith, 7/25/42 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Stephen A. Smith, 3/13/49 Vice President Vice President, since November 2, 1993;
c/o Standish, Ayer & Wood, Inc. formerly, Standish, Ayer & Wood, Inc. Consultant
One Financial Center Cambridge Associates
Boston, MA 02111
David C. Stuehr, 3/1/58 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
James W. Sweeney, 5/15/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ralph S. Tate, 4/2/47 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since April, 1990;
One Financial Center formerly Vice President, Aetna Life & Casualty
Boston, MA 02111
Michael W. Thompson, 3/31/56 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
19
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
Christopher Van Alstyne, 3/24/60 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
</TABLE>
*Indicates that Trustee is an interested person of the Trust for purposes of the
1940 Act.
Compensation of Trustees and Officers
The Fund pays no compensation to the Trust's Trustees affiliated with the
Adviser or to the Trust's officers. None of the Trust's Trustees or officers
have engaged in any financial transactions (other than the purchase or
redemption of the Fund's shares) with the Trust or the Adviser.
The following table sets forth all compensation paid to the Trust's
Trustees as of the fiscal year ended December 31, 1995:
<TABLE>
<CAPTION>
Pension or Retirement Total Compensation
Aggregate Compensation Benefits Accrued as from Fund and
Name of Trustee from the Fund Part of Fund's Expenses Other Funds in Complex*
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
D. Barr Clayson $0 $0 $0
Phyllis L. Cothran** 0 0 0
Richard C. Doll*** 0 0 0
Samuel C. Fleming 3,183 0 46,000
Benjamin M. Friedman 2,886 0 41,750
John H. Hewitt 2,886 0 41,750
Edward H. Ladd 0 0 0
Caleb Loring, III 2,886 0 41,750
Richard S. Wood 0 0 0
*As of the date of this statement of Additional Information, there were 18 funds
in the complex.
**Ms. Cothran resigned as a Trustee effective January 31, 1995.
***Mr. Doll resigned as a Trustee effective December 6, 1995.
</TABLE>
20
<PAGE>
Certain Shareholders.
At February 1, 1996, Trustees and officers of the Trust as a group
beneficially owned (i.e., had voting and/or investment power) less than 1% of
the then outstanding shares of the Fund. At that date, each of the following
persons beneficially owned 5% or more of the then outstanding shares of the
Fund:
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
Virginia Portfolio c/o Peregrin Financial 19%
84 State Street, Suite 900
Boston, MA 02109
Healthkeepers of Virginia 13%
P.O. Box 26623
Richmond, VA 23261
Emory University Cash Reserve 10%
Mr. M. Wayne Coon
Emory University
1762 Clifton Road, Suite 306
Atlanta, GA 30322
Shands Teaching Hospital & Clinics Inc. 7%
Bankers Trust Trustee
P.O. Box 100336
Gainesville, FL 32610
Nature Conservancy 7%
Nature Conservancy Action Fund
1233-A Cedars Court
Charlottesville, VA 23261
The Nature Conservancy Endowment Fund 6%
1815 North Lynn Street
Arlington, VA 22209
Consolidated Holdings Corporation 5%
1105 North Market Street, Suite 1300
P.O. Box 8985
Wilmington, DE 19899
Investment Adviser
Standish, Ayer & Wood, Inc. (the "Adviser") serves as investment adviser to
the Fund pursuant to a written investment advisory agreement. The Adviser is a
Massachusetts corporation organized in 1933 and is registered under the
Investment Advisers Act of 1940.
The following, constituting all of the Directors and all of the
shareholders of the Adviser, are the controlling persons of the Adviser: Caleb
F. Aldrich, Nicholas S. Battelle, Walter M. Cabot, Sr., David H. Cameron, Karen
K. Chandor, D. Barr Clayson, Richard C. Doll, Dolores S. Driscoll, Mark A.
Flaherty, Maria D. Furman, James E. Hollis III, Raymond J. Kubiak, Edward H.
Ladd, Laurence A. Manchester, David W. Murray, George W. Noyes, Arthur H.
Parker, Howard B. Rubin, Austin C. Smith, David C. Stuehr, James J. Sweeney,
Ralph S. Tate, and Richard S. Wood.
21
<PAGE>
Certain services provided by the Adviser under the advisory agreement are
described in the Prospectus. In addition to those services, the Adviser provides
the Fund with office space for managing its affairs, with the services of
required executive personnel, and with certain clerical services and facilities.
These services are provided without reimbursement by the Fund for any costs
incurred. Under the investment advisory agreement, the Adviser is paid a fee
based upon a percentage of the Fund's average daily net asset value computed as
described in the Prospectus. The rate and time at which the fee is paid are
described in the Prospectus. Prior to July 1, 1995, Standish and Consolidated
Investment Corporation ("Consolidated") served as the Fund's co-investment
advisers pursuant to a written investment advisory agreement. For services to
the Fund during the fiscal years ended December 31, 1993 and 1994, and for the
period from January 1, 1995 through June 30, 1995, Standish and Consolidated
received fees of $783,478, $730,191 and $345,111, respectively, which were
shared equally by Standish and Consolidated. For its services as the Fund's sole
investment adviser during the period from July 1, 1995 through December 31,
1995, Standish received fees of $360,018.
Pursuant to the investment advisory agreement, the Fund bears expenses of
its operations other than those incurred by the Adviser pursuant to the
investment advisory agreement. Among other expenses, the Fund will pay share
pricing and shareholder servicing fees and expenses; custodian fees and
expenses; legal and auditing fees and expenses; expenses of prospectuses,
statements of additional information and shareholder reports; registration and
reporting fees and expenses; and Trustees' fees and expenses. The advisory
agreement provides that if the total expenses of the Fund in any fiscal year
exceed the lower of 0.50% of the Fund's average daily net assets or the most
restrictive expense limitation applicable to the Fund in any state in which
shares of the Fund are then qualified for sale, the compensation due the Adviser
shall be reduced by the amount of the excess, by a reduction or refund thereof
at the time such compensation is payable after the end of each calendar month
during the fiscal year, subject to readjustment during the year. Currently, the
most restrictive state expense limitation provision limits the Fund's expenses
to 2 1/2% of the first $30 million of average net assets, 2% of the next $70
million of such net assets and 1 1/2% of such net assets in excess of $100
million.
Unless terminated as provided below, the Investment Advisory Agreement
continues in full force and effect until June 30, 1997 and for successive
periods of one year, but only so long as each such continuance is approved
annually (i) by either the Trustees of the Trust or by vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the Fund, and, in
either event (ii) by vote of a majority of the Trustees of the Trust who are not
parties to the Investment Advisory Agreement or "interested persons" (as defined
in the 1940 Act) of any such party, cast in person at a meeting called for the
purpose of voting on such approval. The Investment Advisory Agreement may be
terminated at any time without the payment of any penalty by vote of the
Trustees of the Trust or by vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the Fund or by the Investment
Adviser, on sixty days' written notice to the other parties. The Investment
Advisory Agreement terminates in the event of its assignment as defined in the
1940 Act.
22
<PAGE>
In an attempt to avoid any potential conflict with portfolio transactions
for the Fund, the Adviser and the Trust have adopted extensive restrictions on
personal securities trading by personnel of the Adviser and its affiliates.
These restrictions include: pre-clearance of all personal securities
transactions and a prohibition of purchasing initial public offerings of a
security. These restrictions are a continuation of the basic principle that the
interests of the Fund and its shareholders come before those of the Adviser, its
affiliates and their employees.
Distributor of the Trust
Standish Fund Distributors, L.P. (the "Principal Underwriter"), an
affiliate of the Adviser, serves as the Trust's exclusive principal underwriter
and holds itself available to receive purchase orders for the Fund's shares. In
that capacity, the Principal Underwriter has been granted the right, as agent of
the Trust, to solicit and accept orders for the purchase of the Fund's shares in
accordance with the terms of the Underwriting Agreement between the Trust and
the Principal Underwriter. Pursuant to the Underwriting Agreement, the Principal
Underwriter has agreed to use its best efforts to obtain orders for the
continuous offering of the Fund's shares. The Principal Underwriter receives no
commissions or other compensation for its services, and has not received any
such amounts in any prior year. The Underwriting Agreement shall continue in
effect with respect to the Fund until two years after its execution and for
successive periods of one year thereafter only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the Fund's
outstanding shares or by the Trustees of the Trust or (ii) by a vote of a
majority of the Trustees of the Trust who are not "interested persons" (as
defined by the 1940 Act) of the parties to the Underwriting Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Underwriting Agreement will terminate automatically if assigned by either party
thereto and is terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust, a vote of a majority of the Trustees who are not
"interested persons" of the Trust, or by a vote of the holders of a majority of
the Fund's outstanding shares, in any case without payment of any penalty on not
more than 60 days' written notice to the other party. The offices of the
Principal Underwriter are located at One Financial Center, 26th Floor, Boston,
Massachusetts 02111.
REDEMPTION OF SHARES
Detailed information on redemption of shares is included in the Prospectus.
The Fund may suspend the right to redeem shares or postpone the date of
payment upon redemption for more than seven days (i) for any period during which
the New York Stock Exchange is closed (other than customary weekend or holiday
closings) or trading on the exchange is restricted; (ii) for any period during
which an emergency exists as a result of which disposal by the Fund of
securities owned by it or determination by the Fund of the value of its net
assets is not reasonably practicable; or (iii) for such other periods as the
Securities and Exchange Commission may permit for the protection of shareholders
of the Fund.
23
<PAGE>
The Fund intends to pay redemption proceeds in cash for all shares redeemed
but, under certain conditions, the Fund may make payment wholly or partly in
portfolio securities. Portfolio securities paid upon redemption of Fund shares
will be valued at their then current market value. The Fund has elected to be
governed by the provisions of Rule 18f-1 under the 1940 Act which limits the
Fund's obligation to make cash redemption payments to any shareholder during any
90-day period to the lesser of $250,000 or 1% of the Fund's net asset value at
the beginning of such period. An investor may incur brokerage costs in
converting portfolio securities received upon redemption to cash.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for placing the Fund's portfolio transactions
and will do so in a manner deemed fair and reasonable to the Fund and not
according to any formula. The primary consideration in all portfolio
transactions will be prompt execution of orders in an efficient manner at the
most favorable price. In selecting broker-dealers and in negotiating
commissions, the Adviser will consider the firm's reliability, the quality of
its execution services on a continuing basis and its financial condition. When
more than one firm is believed to meet these criteria, preference may be given
to firms which also sell shares of the Fund. In addition, if the Adviser
determines in good faith that the amount of commissions charged by a broker is
reasonable in relation to the value of the brokerage and research services
provided by such broker, the Fund may pay commissions to such broker in an
amount greater than the amount another firm may charge. Research services may
include (i) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, (ii) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts, and (iii) effecting
securities transactions and performing functions incidental thereto (such as
clearance and settlement). Research services furnished by firms through which
the Fund effects its securities transactions may be used by the Adviser in
servicing other accounts; not all of these services may be used by the Adviser
in connection with the Fund. The investment advisory fee paid by the Fund under
the advisory agreement will not be reduced as a result of the Adviser's receipt
of research services.
The Adviser also place portfolio transactions for other advisory accounts.
The Adviser will seek to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities for the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations, the main factors considered by the Adviser will be the
respective investment objectives, the relative size of portfolio holdings of the
same or comparable securities, the availability of cash for investment, the size
of investment commitments generally held, and opinions of the persons
responsible for recommending the investment.
24
<PAGE>
DETERMINATION OF NET ASSET VALUE
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). Currently the New York Stock Exchange is not open on
weekends, New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas. The net asset value
per share is arrived at 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 for which market quotations are readily
available are valued at current market value. Securities are valued at the last
sales prices 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, and CMOs
and asset-backed securities 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.
The Board of Trustees has approved determining the current market value of
securities with one year or less remaining to maturity on a spread basis which
will be employed in conjunction with the periodic use of market quotations.
Under the spread process, the Adviser determines in good faith the current
market value of these portfolio securities by comparing their quality, maturity
and liquidity characteristics to those of United States Treasury bills. Money
market instruments with less than sixty days remaining to maturity when acquired
by the Fund may be valued on an amortized cost basis. If the Fund acquires a
money market instrument with more than sixty days remaining to its maturity, it
may be valued at current market value until the sixtieth day prior to maturity
and may 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.
THE FUND AND ITS SHARES
The Fund is an 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 as amended from time to time (the "Declaration"). Under the Declaration,
the Trustees have authority to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, of the Fund. Each share represents an equal
proportionate interest in the Fund with each other share and is entitled to such
dividends and distributions as are declared by the Trustees. Shareholders are
not entitled to any preemptive, conversion or subscription rights. All shares,
when issued, will be fully paid and non-assessable by the Trust. Upon any
liquidation of the Fund, shareholders are entitled to share pro rata in the net
assets available for distribution.
Pursuant to the Declaration, the Trustees may create additional funds by
establishing additional series of shares in the Trust. The establishment of
additional series would not affect the interests of current shareholders in the
Fund. As of the date of this Statement of Additional Information, the Trustees
have established fourteen other series of the Trust that publicly offer their
shares. Pursuant to the Declaration, the Board may establish and issue multiple
classes of shares for each series of the Trust. As of the date of this Statement
of Additional Information, the Trustees do not have any plan to establish
multiple classes of shares for the Fund. Pursuant to the Declaration of Trust
and subject to shareholder approval (if then required), the Trustees may
authorize the Fund to invest all of its investable assets in a single open-end
investment company that has substantially the same investment objectives,
policies and restrictions as the Fund. As of the date of this Statement of
Additional Information, the Board does not have any plan to authorize the Fund
to so invest its assets.
25
<PAGE>
All Fund shares have equal rights with regard to voting, and shareholders
of the Fund have the right to vote as a separate class with respect to matters
as to which their interests are not identical to those of shareholders of other
classes of the Trust, including the approval of an investment advisory contract
and any change of investment policy requiring the approval of shareholders.
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of this disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or a Trustee. The Declaration also provides for indemnification from the assets
of the Fund for all losses and expenses of any Trust shareholder held liable for
the obligations of the Trust. Thus, the risk of a shareholder incurring a
financial loss on account of its liability as a shareholder of the Trust is
limited to circumstances in which both inadequate insurance existed and the
Trust would be unable to meet its obligations. The possibility that these
circumstances would occur is remote. Upon payment of any liability incurred by
the Trust, the shareholder paying the liability will be entitled to
reimbursement from the general assets of the Trust. The Declaration also
provides that no series of the Trust is liable for the obligations of any other
series. The Trustees intend to conduct the operations of the Trust to avoid, to
the extent possible, ultimate liability of shareholders for liabilities of the
Trust.
TAXATION
Each series of the Trust, including the Fund, is treated as a separate
entity for accounting and tax purposes. The Fund has qualified and elected to be
treated as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), and intends to continue to so
qualify in the future. As such and by complying with the applicable provisions
of the Code regarding the sources of its income, the timing of its
distributions, and the diversification of its assets, the Fund will not be
subject to Federal income tax on its investment company taxable income (i.e.,
all income, after reduction by deductible expenses, other than its "net capital
gain," which is the excess, if any, of its net long-term capital gain over its
net short-term capital loss) and net capital gain which are distributed to
shareholders in accordance with the timing requirements of the Code.
The Fund will be subject to a 4% non-deductible federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
Fund intends under normal circumstances to avoid liability for such tax by
satisfying such distribution requirements.
26
<PAGE>
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Code, it will also not be required to pay any Massachusetts income tax.
The Fund will not distribute net capital gains realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. For federal income tax purposes, the Fund is permitted to carry forward a
net capital loss in any year to offset its own net capital gains, if any, during
the eight years following the year of the loss. To the extent subsequent net
capital gains are offset by such losses, they would not result in federal income
tax liability to the Fund and, as noted above, would not be distributed as such
to shareholders. The Fund has $3,071,161, $1,512,610, $5,263,400, and $568,968
of capital loss carryforwards, which expire on December 31, 2000, December 31,
2001, December 31, 2002, and December 31, 2003, respectively, available to
offset future net capital gains.
If the Fund invests in zero coupon securities, increasing rate securities
or, in general, other securities with original issue discount (or with market
discount if the Fund elects to include market discount in income currently), the
Fund generally must accrue income on such investments prior to the receipt of
the corresponding cash payments. However, the Fund must distribute, at least
annually, all or substantially all of its net income, including such accrued
income, to shareholders to qualify as a regulated investment company under the
Code and avoid federal income and excise taxes. Therefore, the Fund may have to
dispose of its portfolio securities under disadvantageous circumstances to
generate cash, or may have to leverage itself by borrowing the cash, to satisfy
distribution requirements.
Limitations imposed by the Code on regulated investment companies like the
Fund may restrict the Fund's ability to enter into futures and options
transactions.
Certain options and futures transactions undertaken by the Fund may cause
the Fund to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as long-term
or short-term and timing of some capital gains and losses realized by the Fund.
Any net mark to market gains may also have to be distributed to satisfy the
distribution requirements referred to above even though no corresponding cash
amounts may concurrently be received, possibly requiring the disposition of
portfolio securities or borrowing to obtain the necessary cash. Also, certain of
the Fund's losses on its transactions involving options or futures contracts
and/or offsetting portfolio positions may be deferred rather than being taken
into account currently in calculating the Fund's taxable income or gain. Certain
of the applicable tax rules may be modified if the Fund is eligible and chooses
to make one or more of certain tax elections that may be available. These
transactions may therefore affect the amount, timing and character of the Fund's
distributions to shareholders. The Fund will take into account the special tax
rules (including consideration of available elections) applicable to options or
futures contracts in order to minimize any potential adverse tax consequences.
27
<PAGE>
The federal income tax rules applicable to forward rolls and interest rate
swaps, floors, caps and collars are unclear in certain respects, and the Fund
may be required to account for these instruments under tax rules in a manner
that, under certain circumstances, may limit its transactions in these
instruments.
Due to possible unfavorable consequences under present tax law, the Fund
does not currently intend to acquire "residual" interests in real estate
mortgage investment conduits ("REMICs"), although the Fund may acquire "regular"
interests in REMICs.
Distributions from the Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Fund's Prospectus whether taken in shares or in cash.
Distributions, if any, in excess of E&P will constitute a return of capital,
which will first reduce an investor's tax basis in Fund shares and thereafter
(after such basis is reduced to zero) will generally give rise to capital gains.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the amount of cash they would have received had they elected to receive
the distributions in cash, divided by the number of shares received.
At the time of an investor's purchase of Fund shares, a portion of the
purchase price may be attributable to realized or unrealized appreciation in the
Fund's portfolio. Consequently, subsequent distributions from appreciation may
be taxable to such investor even if the net asset value of the investor's shares
is, as a result of the distributions, reduced below the investor's cost for such
shares, and the distributions in reality represent a return of a portion of the
purchase price.
Upon a redemption (including a repurchase) of shares of the Fund, a
shareholder may realize a taxable gain or loss, depending upon the difference
between the redemption proceeds and the shareholder's tax basis in his shares.
Such gain or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands and will be long-term or short-term,
depending upon the shareholder's tax holding period for the shares. Any loss
realized on a redemption may be disallowed to the extent the shares disposed of
are replaced with other shares of the Fund within a period of 61 days beginning
30 days before and ending 30 days after the shares are disposed of, such as
pursuant to automatic dividend reinvestments. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized upon the redemption of shares with a tax holding period of six months
or less will be treated as a long-term capital loss to the extent of any amounts
treated as distributions of long-term capital gain with respect to such shares.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
adviser for more information.
28
<PAGE>
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
adviser as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the Fund. Non-U.S. investors should consult their tax adviser regarding such
treatment and the application of foreign taxes to an investment in the Fund.
ADDITIONAL INFORMATION
The Fund's Prospectus and this Statement of Additional Information omit
certain information contained in the registration statement filed with the
Securities and Exchange Commission, which may be obtained from the Commission's
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment
of the fee prescribed by the rules and regulations promulgated by the
Commission.
EXPERTS AND FINANCIAL STATEMENTS
The financial statements for the fiscal years ended December 31, 1993, 1994
and 1995 included in this Statement of Additional Information have been audited
by Coopers & Lybrand L.L.P., independent accountants, as set forth in their
report appearing elsewhere herein, and have been so included in reliance upon
the authority of the report of Coopers & Lybrand L.L.P. as experts in accounting
and auditing. The Fund's financial highlights for the fiscal years ended
December 31, 1992, 1991 and 1990 were audited by Deloitte & Touche LLP,
independent auditors, and have been similarly included in reliance upon the
expertise of that firm. Coopers & Lybrand L.L.P., independent accountants, will
audit the Fund's financial statements for the year ending December 31, 1996.
29
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Financial Highlights of the following series of the Registrant will be
included in the related Prospectuses: Standish Controlled Maturity Fund,
Standish Fixed Income Fund II, Standish Securitized Fund, Standish Massachusetts
Intermediate Tax Exempt Bond Fund, Standish Intermediate Tax Exempt Bond Fund,
Standish Short-Term Asset Reserve Fund and Standish International Fixed Income
Fund.
The following financial statements will be included in the Statements
of Additional Information of the above-referenced series of the Registrant:
Schedule of Portfolio Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes In Net Assets
Financial Highlights
Notes to Financial Statements
(b) Exhibits:
(1) Agreement and Declaration of Trust dated August 13, 1986*
(1A) Certificate of Designation of Standish Fixed Income Fund**
(1B) Certificate of Designation of Standish International Fund**
(1C) Certificate of Designation of Standish Securitized Fund**
(1D) Certificate of Designation of Standish Short-Term Asset
Reserve Fund**
(1E) Certificate of Designation of Standish Marathon Fund*
(1F) Certificate of Amendment dated November 21, 1989*
1
<PAGE>
(1G) Certificate of Amendment dated November 29, 1989*
(1H) Certificate of Amendment dated April 24, 1990*
(1I) Certificate of Designation of Standish Equity Fund**
(1J) Certificate of Designation of Standish International Fixed
Income Fund**
(1K) Certificate of Designation of Standish Intermediate Tax Exempt
Bond Fund*
(1L) Certificate of Designation of Standish Massachusetts
Intermediate Tax Exempt Bond Fund*
(1M) Certificate of Designation of Standish Global Fixed Income
Fund*
(1N) Certificate of Designation of Standish Controlled Maturity
Fund and Standish Fixed Income Fund II*
(1O) Certificate of Designation of Standish Tax- Sensitive Small
Cap Equity Fund and Standish Tax-Sensitive Equity Fund**
(2) Bylaws of the Registrant*
(3) Not applicable
(4) Not applicable
(5A) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish Fixed Income
Fund**
(5B) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish Securitized
Fund**
(5C) Form of Investment Advisory Agreement between the Registrant
and Standish, Ayer & Wood, Inc. relating to Standish
Short-Term Asset Reserve Fund****
(5D) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish Small
Capitalization Equity Fund (formerly Standish Marathon Fund)**
2
<PAGE>
(5E) Investment Advisory Agreement dated September 13, 1989 between
the Registrant and Standish, Ayer & Wood, Inc. relating to
Standish Fixed Income Fund**
(5F) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish Equity Fund**
(5G) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish International
Fixed Income Fund**
(5H) Assignment of Investment Advisory Agreement between the
Registrant and Standish, Ayer & Wood, Inc. relating to
Standish International Fixed Income Fund**
(5I) Form of Investment Advisory Agreement between the Registrant
and Standish, Ayer & Wood, Inc. relating to Standish
Intermediate Tax Exempt Bond Fund**
(5J) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish Massachusetts
Intermediate Tax Exempt Bond Fund**
(5K) Investment Advisory Agreement between Standish International
Management Company, L.P. relating to Standish Global Fixed
Income Fund**
(5L) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish Controlled
Maturity Fund**
(5M) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish Fixed Income
Fund II**
(5N) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish Small Cap
Tax-Sensitive Equity Fund**
(5O) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish Tax-Sensitive
Equity Fund**
(6) Form of Underwriting Agreement between the Registrant and
Standish Fund Distributors, L.P.***
(7) Not applicable
3
<PAGE>
(8) Master Custody Agreement between the Registrant and Investors
Bank & Trust Company***
(9) Transfer Agency and Shareholder Service Agreement**
(10A) Opinion and Consent of Counsel for Standish Fixed Income
Fund**
(10B) Opinion and Consent of Counsel for Standish Securitized Fund**
(10C) Opinion and Consent of Counsel for Standish Short-Term Asset
Reserve Fund**
(10D) Opinion and Consent of Counsel for Standish Small
Capitalization Equity Fund (formerly Standish Marathon Fund)**
(10E) Opinion and Consent of Counsel for Standish Equity Fund**
(10F) Opinion and Consent of Counsel for Standish International
Fixed Income Fund**
(10G) Opinion and Consent of Counsel for Standish Intermediate Tax
Exempt Bond Fund**
(10H) Opinion and Consent of Counsel for Standish Massachusetts
Intermediate Tax Exempt Bond Fund**
(10I) Opinion and Consent of Counsel for Standish Global Fixed
Income Fund**
(10J) Opinion and Consent of Counsel for the Registrant**
(11A) Opinion and Consent of Independent Public Accountants****
(11B) Consent of Independent Public Accountants***
(12) Not applicable
(13) Form of Initial Capital Agreement between the Registrant and
Standish, Ayer & Wood, Inc.**
(14) Not applicable
(15) Not applicable
(16) Performance Calculations**
4
<PAGE>
(17A) Financial Data Schedule of Standish Controlled Maturity
Fund****
(17B) Financial Data Schedule of Standish Fixed Income Fund II****
(17C) Financial Data Schedule of Standish Global Fixed Income
Fund****
(17E) Financial Data Schedule of Standish Securitized Fund****
(17F) Financial Data Schedule of Standish Short-Term Asset Reserve
Fund****
(17G) Financial Data Schedule of Standish International Fixed Income
Fund****
(17H) Financial Data Schedule of Standish Tax-Sensitive Equity
Fund****
(17I) Financial Data Schedule of Standish Massachusetts Intermediate
Tax Exempt Bond Fund****
(17J) Financial Data Schedule of Standish Intermediate Tax Exempt
Bond Fund****
(18) Not applicable
(19A) Power of Attorney (Richard S. Wood)**
(19B) Power of Attorney (David W. Murray)**
(19C) Power of Attorney (Samuel C. Fleming)**
(19D) Power of Attorney (Benjamin M. Friedman)**
(19E) Power of Attorney (John H. Hewitt)**
(19F) Power of Attorney (Edward H. Ladd)**
(19G) Power of Attorney (Caleb Loring III)**
(19H) Power of Attorney (D. Barr Clayson)**
--------------------
* Filed as an exhibit to Registration
Statement No. 33-10615 and incorporated
herein by reference thereto.
** Filed as an exhibit to Registration
Statement No. 33-8214 and incorporated
herein by reference thereto.
*** Filed herewith.
**** To be filed by amendment
5
<PAGE>
Item 25. Persons Controlled by or under Common Control
with Registrant
No person is directly or indirectly controlled by or under common
control with the Registrant.
Item 26. Number of Holders of Securities
Set forth below is the number of record holders, as of December 31,
1995, of the shares of each series of the Registrant.
Number of Record
Title of Class Holders
-------------- -------
Shares of beneficial interest, par value $.01, of:
Standish Fixed Income Fund 422
Standish Securitized Fund 15
Standish Short-Term Asset
Reserve Fund 121
Standish International Fixed
Income Fund 196
Standish Global Fixed Income Fund 46
Standish Equity Fund 140
Standish Small Capitalization
Equity Fund 427
Standish Massachusetts Intermediate
Tax Exempt Bond Fund 82
Standish Intermediate Tax Exempt
Bond Fund 101
Standish International Equity Fund 213
Standish Controlled Maturity Fund 9
Standish Fixed Income Fund II 3
Standish Small Cap Tax-Sensitive
Equity Fund -0-
Standish Tax-Sensitive Equity Fund -0-
Item 27. Indemnification
Under the Registrant's Agreement and Declaration of Trust, any past or
present Trustee or officer of the Registrant is indemnified to the fullest
extent permitted by law against liability and all expenses reasonably incurred
by him in connection with any action, suit or proceeding to which he may be a
6
<PAGE>
party or is otherwise involved by reason of his being or having been a Trustee
or officer of the Registrant. The Agreement and Declaration of Trust of the
Registrant does not authorize indemnification where it is determined, in the
manner specified in the Declaration, that such Trustee or officer has not acted
in good faith in the reasonable belief that his actions were in the best
interest of the Registrant. Moreover, the Declaration does not authorize
indemnification where such Trustee or officer is liable to the Registrant or its
shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his or her duties.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to Trustees, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by any such Trustee, officer or controlling person
against the Registrant in connection with the securities being registered, and
the Commission is still of the same opinion, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Advisers
The business and other connections of the officers and Directors of
Standish, Ayer & Wood, Inc. ("Standish, Ayer & Wood"), the investment adviser to
all series of the Registrant other than Standish International Equity Fund,
Standish Global Fixed Income Fund Standish International Fixed Income Fund are
listed on the Form ADV of Standish, Ayer & Wood as currently on file with the
Commission (File No. 801-584), the text of which is hereby incorporated by
reference.
The business and other connections of the officers and partners of
Standish International Management Company, L.P. ("Standish International"), the
investment adviser to Standish International Equity Fund, Standish Global Fixed
Income Fund and Standish International Fixed Income Fund, are listed on the Form
ADV of Standish International as currently on file with the Commission (File No.
801-639338), the text of which is hereby incorporated by reference.
7
<PAGE>
The following sections of each such Form ADV are incorporated herein by
reference:
(a) Items 1 and 2 of Part 2;
(b) Section IV, Business Background, of
each Schedule D.
Item 29. Principal Underwriter
(a) Prior to or concurrent with the effectiveness of this
Post-Effective Amendment to the Registrant's Registration Statement on Form N-1A
it is expected that Standish Fund Distributors, L.P. will serve as the principal
underwriter of each of the series of the Registrant as listed in Item 26 above.
(b)Directors and Officers of Standish Fund Distributors, L.P.:
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
- ---- ---------------- ---------------
James E. Hollis, III Chief Executive Officer Vice President
Beverly E. Banfield Chief Operating Officer Vice President
The General Partner of Standish Fund Distributors, L.P. is Standish,
Ayer & Wood, Inc.
(c) Not applicable.
Item 30. Location of Accounts and Records
The Registrant maintains the records required by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 to 31a-3 inclusive thereunder at
its principal office, located at One Financial Center, Boston, Massachusetts
02111. Certain records, including records relating to the Registrant's
shareholders and the physical possession of its securities, may be maintained
pursuant to Rule 31a-3 at the main offices of the Registrant's transfer and
dividend disbursing agent and custodian.
8
<PAGE>
Item 31. Management Services
Not applicable
Item 32. Undertakings
(a) Not applicable.
(b) With respect to each of Standish Small Cap
Tax-Sensitive Equity Fund and Standish Tax- Sensitive
Equity Fund, the Registrant undertakes to file a
post-effective amendment, using financial statements
which need not be certified, within four to six
months from the effective date of the Post-Effective
Amendment to its Registration Statement registering
shares of such Funds.
(c) The Registrant undertakes to furnish each person to
whom a Prospectus is delivered a copy of Registrant's
latest annual report to shareholders, upon request
and without charge.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Boston and
The Commonwealth of Massachusetts on the 26th day of February, 1996.
STANDISH, AYER & WOOD
INVESTMENT TRUST
/s/ David W. Murray
David W. Murray, Treasurer
The term "Standish, Ayer & Wood Investment Trust" means and refers to
the Trustees from time to time serving under the Agreement and Declaration of
Trust of the Registrant dated August 13, 1986, a copy of which is on file with
the Secretary of State of The Commonwealth of Massachusetts. The obligations of
the Registrant hereunder are not binding personally upon any of the Trustees,
shareholders, nominees, officers, agents or employees of the Registrant, but
bind only the trust property of the Registrant, as provided in the Agreement and
Declaration of Trust of the Registrant. The execution of this Registration
Statement has been authorized by the Trustees of the Registrant and this
Registration Statement has been signed by an authorized officer of the
Registrant, acting as such, and neither such authorization by such Trustees nor
such execution by such officer shall be deemed to have been made by any of them,
but shall bind only the trust property of the Registrant as provided in its
Declaration of Trust.
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated.
10
<PAGE>
Signature Title Date
Richard S. Wood* Trustee and President February 26, 1996
- ----------------------
Richard S. Wood (principal executive
officer)
David W. Murray* Treasurer (principal February 26, 1996
- ----------------------
David W. Murray financial and accounting
officer) and Secretary
D. Barr Clayson* Trustee and Vice February 26, 1996
- ----------------------
D. Barr Clayson President
Samuel C. Fleming* Trustee February 26, 1996
Samuel C. Fleming
Benjamin M. Friedman* Trustee February 26, 1996
Benjamin M. Friedman
John H. Hewitt* Trustee February 26, 1996
John H. Hewitt
Edward H. Ladd* Trustee February 26, 1996
Edward H. Ladd
Caleb Loring III* Trustee February 26, 1996
Caleb Loring III
*By: /s/ David W. Murray
David W. Murray
Attorney-In-Fact
11
<PAGE>
EXHIBIT INDEX
Exhibit
(6) Form of Underwriting Agreement between the Registrant and Standish Fund
Distributors, L.P.
(8) Master Custody Agreement between the Registrant and Investors Bank &
Trust Company
FORM OF UNDERWRITING AGREEMENT
THIS UNDERWRITING AGREEMENT, dated this 29th day of February, 1996, by
and between Standish, Ayer and Wood Investment Trust, a Massachusetts business
trust (the "Trust"), and Standish Fund Distributors, L.P., a Delaware limited
partnership (the "Underwriter").
W I T N E S S E T H
-------------------
WHEREAS, the Trust is registered as an open-end, management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
and has an effective registration statement (the "Registration Statement") with
the Securities and Exchange Commission (the "Commission") for the purpose of
registering shares of beneficial interest for offering under the Securities Act
of 1933, as amended (the "1933 Act");
WHEREAS, the Underwriter is registered as a broker-dealer with the
Commission and is a member in good standing of the National Association of
Securities Dealers, Inc. (the "NASD");
WHEREAS, the parties hereto deem it mutually advantageous that the
Underwriter should act as Principal Underwriter, as defined in the 1940 Act, for
the sale of the shares of beneficial interest of each series of the Trust which
the Trustees may or have established from time to time and make subject to this
Agreement by listing on Exhibit A hereto (individually, a "Portfolio" and
collectively, the "Portfolios"); and
NOW, THEREFORE, in consideration of the mutual covenants and benefits
set forth herein, the Trust and the Underwriter do hereby agree as follows:
1. The Trust does hereby grant to the Underwriter the right and option
to purchase shares of beneficial interest of each Portfolio (the "Shares") for
sale to investors, either directly or indirectly through other broker-dealers.
The Underwriter is not required to purchase any specified number of Shares, but
will purchase from the Trust only a sufficient number of Shares as may be
necessary to fill unconditional orders received from time to time by the
Underwriter for the benefit of investors.
2. The Underwriter shall use its best efforts (but only in states in
which it may lawfully do so) to obtain from investors unconditional orders for
Shares authorized for issue by the Trust and registered under the 1933 Act,
provided that the Underwriter may in its sole discretion refuse to accept orders
for Shares from any particular applicant. The Underwriter shall offer Shares at
the net asset value of the Shares, to be calculated for each Portfolio of Shares
as described in the Registration Statement, including the prospectuses, filed
with the Commission and in effect at the time of the offering.
1
<PAGE>
3. Any right granted to the Principal Underwriter to accept orders for
shares or make sales on behalf of the Trust will not apply to shares issued in
connection with the merger or consolidation of any other investment company with
the Trust, or any Portfolio, or its acquisition, by purchase or otherwise, of
all or substantially all the assets of any investment company or substantially
all the outstanding shares of any such company, and such right shall not apply
to shares that may be offered or otherwise issued by the Trust to shareholders
by virtue of their being shareholders of the Trust.
4. The Trust, on behalf of the respective Portfolio, shall receive the
applicable net asset value on all sales of shares by the Principal Underwriter
as agent of the Trust.
5. The Principal Underwriter shall not have "custody" (as such term is
interpreted by the staff of the Commission) of Trust assets, including payments
made pursuant to orders accepted by the Principal Underwriter. In this regard,
the Principal Underwriter shall not accept payment for Shares made by wire
transfer and shall not accept payment for Shares made by draft, other than
drafts made payable to the Trust. To the extent the Principal Underwriter
accepts drafts made payable to the Trust, the Principal Underwriter shall
deliver such drafts accompanied by proper applications for the purchase of
Shares to the Trust's custodian no later than 12:00 p.m. (Boston time) on the
first business day following the receipt by the Principal Underwriter of such
payments and applications.
6. The Trust will use its best efforts to register from time to time
under the 1933 Act such number of Shares not already so registered as the
Underwriter may be expected to sell on behalf of the Trust. The Underwriter and
the Trust agree to cooperate in taking such action as may be necessary from time
to time to qualify Shares so registered for sale by the Underwriter or the Trust
in any states mutually agreeable and to maintain such qualification. This
Agreement relates to the issue and sale of Shares that are duly authorized and
registered and available for sale by the Trust, including redeemed or
repurchased Shares if and to the extent that they may legally be sold and if,
but only if, the Trust sees fit to sell them.
2
<PAGE>
7. If and whenever the determination of net asset value is suspended
and until such suspension is terminated, the Underwriter shall not accept
further orders for Shares except unconditional orders placed with the
Underwriter before the Underwriter had knowledge of the suspension. In addition,
the Trust reserves the right to suspend sales and the Underwriter's authority to
accept orders for Shares on behalf of the Trust if, in the judgment of a
majority of the Board of Trustees or a majority of the Executive Committee of
such Board, if such body exists, it is in the best interests of the Trust to do
so, such suspension to continue for such period as may be determined by such
majority; and in that event, the Underwriter shall not sell any Shares on behalf
of the Trust while such suspension remains in effect except for Shares necessary
to cover unconditional orders accepted by the Underwriter before the Underwriter
had knowledge of the suspension.
8. This Agreement shall become effective on the date first written
above and shall terminate on any anniversary thereof if its terms and renewal
have not been approved by a majority vote of the Trustees of the Trust voting in
person, including a majority of its Trustees who are not "interested persons" of
the Trust and who have no direct or indirect financial interest in the operation
of the Underwriting Agreement (the "Qualified Trustees"), at a meeting of
Trustees called for the purpose of voting on such approval. This Agreement may
also be terminated at any time, without payment of any penalty, by the Trust on
60 days' written notice to the Underwriter, or by the Underwriter upon similar
notice to the Trust. This Agreement may also be terminated by a party upon five
(5) days' written notice to the other party in the event that the Commission has
issued an order or obtained an injunction or other court order suspending
effectiveness of the Registration Statement covering the Shares of the Trust.
Finally, this Agreement may also be terminated by the Trust upon five (5) days'
written notice to the Underwriter if the NASD has expelled the Underwriter or
suspended its membership in that organization.
9. No provisions of this Agreement may be changed, waived, discharged
or terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought.
10. The parties to this Agreement acknowledge and agree that all
liabilities of the Trust arising hereunder, whether direct or indirect, of any
nature whatsoever shall be satisfied out of the assets of the Trust and that no
Trustee, officer or holder of shares of beneficial interest of the Trust shall
be personally liable for any of the foregoing liabilities. No Portfolio of the
Trust shall be responsible for the liabilities or obligations of any other
Portfolio. The Trust's Declaration of Trust, as amended from time to time, is on
file in the Office of Secretary of State of The Commonwealth of Massachusetts,
and a copy of the Trust's Declaration of Trust, as amended from time to time,
has been provided to the Underwriter. The Declaration of Trust describes in
detail the respective responsibilities and limitations on liability of the
Trustees, officers, and holders of Shares of the Trust.
3
<PAGE>
11. Nothing contained herein shall relieve the Trust of any obligation
under its investment advisory agreement or any other contract with any affiliate
of the Underwriter.
12. This Agreement shall automatically terminate in the event of its
assignment (as that term is defined in the 1940 Act).
13. In the event of any dispute between the parties, this Agreement
shall be construed according to the laws of The Commonwealth of Massachusetts
provided that nothing herein shall be construed in a manner inconsistent with
the 1940 Act, 1933 Act or any rule or order of the Securities and Exchange
Commission thereunder.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their duly authorized officers as of day and year first above
written.
ATTEST: STANDISH, AYER AND WOOD
INVESTMENT TRUST on behalf of
each of its series
By:____________________________ By:____________________________
Its:___________________________ Its:___________________________
ATTEST: STANDISH FUND DISTRIBUTORS, L.P.
By:____________________________ By:____________________________
Its:___________________________ Its:___________________________
5
<PAGE>
EXHIBIT A
Portfolios:
1. Standish Intermediate Tax Exempt Bond Fund
2. Standish Small Cap Tax-Sensitive Equity Fund
3. Standish Tax-Sensitive Equity Fund
Effective: February 29, 1996
Portfolios:
4. Standish Equity Fund
5. Standish Fixed Income Fund
6. Standish Global Fixed Income Fund
7. Standish Small Capitalization Equity Fund
Effective: February 29, 1996
Portfolios:
8. Standish Controlled Maturity Fund
9. Standish Fixed Income Fund II
10. Standish International Fixed Income Fund
11. Standish International Equity Fund
12. Standish Massachusetts Intermediate Tax Exempt Bond Fund
13. Standish Securitized Fund
14. Standish Short-Term Asset Reserve Fund
Effective: February 29, 1996
6
MASTER CUSTODIAN AGREEMENT
between
STANDISH, AYER & WOOD INVESTMENT TRUST
and
INVESTORS BANK & TRUST COMPANY
1
<PAGE>
TABLE OF CONTENTS
Page
----
1. Bank Appointed Custodian........................................... 1
2. Definitions........................................................ 1
2.1 Authorized Person................................... 1
2.2 Board_ ............................................. 1
2.3 Security............................................ 1
2.4 Portfolio Security.................................. 1
2.5 Officers' Certificate............................... 2
2.6 Book-Entry System................................... 2
2.7 Depository.......................................... 2
2.8 Proper Instructions................................. 2
2.9 Foreign Securities.................................. 2
3. Separate Accounts.................................................. 2
4. Certification as to Authorized Persons............................. 3
5. Custody of Cash.................................................... 3
5.1 Purchase of Securities.............................. 3
5.2 Redemptions ..................................... 3
5.3 Distributions and Expenses of Fund.................. 3
5.4 Payment in Respect of Securities.................... 4
5.5 Repayment of Loans.................................. 4
5.6 Repayment of Cash................................... 4
5.7 Foreign Exchange Transactions....................... 4
5.8 Other Authorized Payments........................... 4
5.9 Termination......................................... 4
6. Securities......................................................... 4
6.1 Segregation and Registration........................ 4
6.2 Voting and Proxies.................................. 5
6.3 Book-Entry System................................... 5
6.4 Use of a Depository................................. 6
6.5 Use of Book-Entry System for Commercial Paper....... 7
6.6 Use of Immobilization Programs...................... 8
6.7 Eurodollar CDs...................................... 8
6.8 Options and Futures Transactions.................... 9
6.9 Segregated Account.................................. 9
6.10 Interest Bearing Call or Time Deposits.............. 11
6.11 Transfer of Securities.............................. 11
7. Redemptions .................................................... 13
8. Merger, Dissolution, etc. of Fund.................................. 13
9. Actions of Bank Without Prior Authorization........................ 13
2
<PAGE>
Page
----
10. Collection; Defaults............................................... 14
11. Maintenance of Records; Accounting Services........................ 14
12. Fund Evaluation.................................................... 14
13. Concerning the Bank ............................................. 16
13.1 Performance of Duties and
Standard of Care.................................. 16
13.2 Agents and Subcustodians............................ 17
13.3 Duties of the Bank with Respect to Property
Held Outside of the United States................. 18
13.4 Insurance........................................... 21
13.5 Fees and Expenses of Bank........................... 21
13.6 Advances by Bank................................... 21
14. Termination........................................................ 22
15. Confidentiality.................................................... 22
16. Notices............................................................ 23
17. Amendments......................................................... 23
18. Parties............................................................ 23
19. Governing Law...................................................... 23
20. Counterparts....................................................... 23
21. Limitations of Liability........................................... 23
22. Single Agreement................................................... 23
3
<PAGE>
MASTER CUSTODIAN AGREEMENT
AGREEMENT made as of this 29th day of February, 1995, between STANDISH,
AYER & WOOD INVESTMENT TRUST, a Massachusetts business trust (the "Fund"), and
INVESTORS BANK & TRUST COMPANY (the "Bank").
The Fund, an open-end management investment company, on behalf of the
individual portfolios listed on Appendix A hereto, desires to place and maintain
portfolio securities and cash in the custody of the Bank. The Bank has at least
the minimum qualifications required by Section 17(f)(1) of the Investment
Company Act of 1940, as amended, (the "1940 Act") to act as custodian of the
portfolio securities and cash of the Fund, and has indicated its willingness to
so act, subject to the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements contained herein, the parties hereto agree as follows:
1. Bank Appointed Custodian. The Fund hereby appoints the Bank as
custodian of its portfolio securities and cash delivered to the Bank as
hereinafter described and the Bank agrees to act as such upon the terms and
conditions hereinafter set forth.
2. Definitions. Whenever used herein, the terms listed below will have
the following meaning:
2.1 Authorized Person. Authorized Person will mean any of the persons
duly authorized to give Proper Instructions or otherwise act on behalf of the
Fund by appropriate resolution of its Board, and set forth in a certificate as
required by Section 4 hereof.
2.2 Board. Board will mean the Board of Directors or the Board of
Trustees of the Fund, as the case may be.
2.3 Security. The term security as used herein will have the same
meaning as when such term is used in the Securities Act of 1933, as amended,
including, without limitation, any note, stock, treasury stock, bond, debenture,
evidence of indebtedness, certificate of interest or participation in any profit
sharing agreement, collateral-trust certificate, preorganization certificate or
subscription, transferable share, investment contract, voting-trust certificate,
certificate of deposit for a security, fractional undivided interest in oil,
gas, or other mineral rights, any put, call, straddle, option, or privilege on
any security, certificate of deposit, or group or index of securities (including
any interest therein or based on the value thereof), or any put, call, straddle,
option, or privilege entered into on a national securities exchange relating to
a foreign currency, or, in general, any interest or instrument commonly known as
a "security", or any certificate of interest or participation in, temporary or
interim certificate for, receipt for, guarantee of, or warrant or right to
subscribe to, or option contract to purchase or sell any of the foregoing, and
futures, forward contracts and options thereon.
4
<PAGE>
2.4 Portfolio Security. Portfolio Security will mean any security
owned by the Fund.
2.5 Officers' Certificate. Officers' Certificate will mean, unless
otherwise indicated, any request, direction, instruction, or certification in
writing signed by any two Authorized Persons of the Fund.
2.6 Book-Entry System. Book-Entry System shall mean the Federal
Reserve-Treasury Department Book Entry System for United States government,
instrumentality and agency securities operated by the Federal Reserve Bank, its
successor or successors and its nominee or nominees.
2.7 Depository. Depository shall mean The Depository Trust Company
("DTC"), a clearing agency registered with the Securities and Exchange
Commission under Section 17A of the Securities Exchange Act of 1934, as amended,
("Exchange Act") its successor or successors and its nominee or nominees. The
term "Depository" shall further mean and include any other person authorized to
act as a depository under the 1940 Act, its successor or successors and its
nominee or nominees, specifically identified in a certified copy of a resolution
of the Board.
2.8 Proper Instructions. Proper Instructions shall mean (i)
instructions regarding the purchase or sale of Portfolio Securities, and
payments and deliveries in connection therewith, given by an Authorized Person
as shall have been designated in an Officers' Certificate, such instructions to
be given in such form and manner as the Bank and the Fund shall agree upon from
time to time, and (ii) instructions (which may be continuing instructions)
regarding other matters signed or initialed by such one or more persons from
time to time designated in an Officers' Certificate as having been authorized by
the Board. Oral instructions will be considered Proper Instructions if the Bank
reasonably believes them to have been given by a person authorized to give such
instructions with respect to the transaction involved. The Fund shall cause all
oral instructions to be promptly confirmed in writing. The Bank shall act upon
and comply with any subsequent Proper Instruction which modifies a prior
instruction and the sole obligation of the Bank with respect to any follow-up or
confirmatory instruction shall be to make reasonable efforts to detect any
discrepancy between the original instruction and such confirmation and to report
such discrepancy to the Fund. The Fund shall be responsible, at the Fund's
expense, for taking any action, including any reprocessing, necessary to correct
any such discrepancy or error, and to the extent such action requires the Bank
to act the Fund shall give the Bank specific Proper Instructions as to the
action required. Upon receipt of an Officers' Certificate as to the
authorization by the Board accompanied by a detailed description of procedures
approved by the Fund, Proper Instructions may include communication effected
directly between electro-mechanical or electronic devices provided that the
Board and the Bank are satisfied that such procedures afford adequate safeguards
for the Fund's assets.
2.9 Foreign Securities. The term Foreign Securities as used herein will
have the same meaning as when such term is used in rule 17f-5 of the 1940 Act.
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3. Separate Accounts. If the Fund has more than one series or portfolio,
the Bank will segregate the assets of each series or portfolio to which this
Agreement relates into a separate account for each such series or portfolio
containing the assets of such series or portfolio (and all investment earnings
thereon). Unless the context otherwise requires, any reference in this Agreement
to any actions to be taken by the Fund shall be deemed to refer to the Fund
acting on behalf of one or more of its series, any reference in this Agreement
to any assets of the Fund, including, without limitation, any portfolio
securities and cash and earnings thereon, shall be deemed to refer only to
assets of the applicable series, any duty or obligation of the Bank hereunder to
the Fund shall be deemed to refer to duties and obligations with respect to the
individual series and any obligation or liability of the Fund hereunder shall be
binding only with respect to the individual series, and shall be discharged only
out of the assets of such series.
It is agreed that for the purposes of this Agreement, that each of the
series of the Fund listed on Appendix A, individually and not jointly, shall be
deemed to be a party hereto. It is also understood that each of such entities
shall be deemed to be entering into a seperate agreement with the Bank that it
is as if each of such entities has signed a seperate Agreement with the Bank and
that a single document is being signed simply to facilitate the execution and
administration of the Agreement.
4. Certification as to Authorized Persons. The Secretary or Assistant
Secretary of the Fund will at all times maintain on file with the Bank his or
her certification to the Bank, in such form as may be acceptable to the Bank, of
(i) the names and signatures of the Authorized Persons and (ii) the names of the
Board, it being understood that upon the occurrence of any change in the
information set forth in the most recent certification on file (including
without limitation any person named in the most recent certification who is no
longer an Authorized Person as designated therein), the Secretary or Assistant
Secretary of the Fund, will sign a new or amended certification setting forth
the change and the new, additional or omitted names or signatures. The Bank will
be entitled to rely and act upon any Officers' Certificate given to it by the
Fund which has been signed by Authorized Persons named in the most recent
certification.
5. Custody of Cash. As custodian for the Fund, the Bank will open and
maintain a separate account or accounts in the name of the Fund or in the name
of the Bank, as Custodian of the Fund, and will deposit to the account of the
Fund all of the cash of the Fund, except for cash held by a subcustodian
appointed pursuant to Sections 13.2 or 13.3 hereof, including borrowed funds,
delivered to the Bank, subject only to draft or order by the Bank acting
pursuant to the terms of this Agreement. Upon receipt by the Bank of Proper
Instructions (which may be continuing instructions) or in the case of payments
for redemptions and repurchases of outstanding shares of common stock of the
Fund, notification from the Fund's transfer agent as provided in Section 7,
requesting such payment, designating the payee or the account or accounts to
which the Bank will release funds for deposit, and stating that it is for a
purpose permitted under the terms of this Section 5, specifying the applicable
subsection, the Bank will make payments of cash held for the accounts of the
Fund, insofar as funds are available for that purpose, only as permitted in
subsections 5.1-5.9 below.
5.1 Purchase of Securities. Upon the purchase of securities for the
Fund, against contemporaneous receipt of such securities by the Bank registered
in the name of the Fund or in the name of, or properly endorsed and in form for
transfer to, the Bank, or a nominee of the Bank, or receipt for the account of
the Bank pursuant to the provisions of Section 6 below, each such payment to be
made at the purchase price shown on a broker's confirmation (or transaction
report in the case of Book Entry Paper) of purchase of the securities received
by the Bank before such payment is made, as confirmed in the Proper Instructions
received by the Bank before such payment is made.
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5.2 Redemptions. In such amount as may be necessary for the
repurchase or redemption of common shares of the Fund offered for repurchase or
redemption in accordance with Section 7 of this Agreement.
5.3 Distributions and Expenses of Fund. For the payment on the
account of the Fund of dividends or other distributions to shareholders as may
from time to time be declared by the Board, interest, taxes, management or
supervisory fees, distribution fees, fees of the Bank for its services hereunder
and reimbursement of the expenses and liabilities of the Bank as provided
hereunder, fees of any transfer agent, fees for legal, accounting, and auditing
services, or other operating expenses of the Fund.
5.4 Payment in Respect of Securities. For payments in connection with
the conversion, exchange or surrender of Portfolio Securities or securities
subscribed to by the Fund held by or to be delivered to the Bank.
5.5 Repayment of Loans. To repay loans of money made to the Fund,
but, in the case of final payment, only upon redelivery to the Bank of any
Portfolio Securities pledged or hypothecated therefor and upon surrender of
documents evidencing the loan;
5.6 Repayment of Cash. To repay the cash delivered to the Fund for
the purpose of collateralizing the obligation to return to the Fund certificates
borrowed from the Fund representing Portfolio Securities, but only upon
redelivery to the Bank of such borrowed certificates.
5.7 Foreign Exchange Transactions. For payments in connection with
foreign exchange contracts or options to purchase and sell foreign currencies
for spot and future delivery which may be entered into by the Bank on behalf of
the Fund upon the receipt of Proper Instructions, such Proper Instructions to
specify the currency broker or banking institution (which may be the Bank, or
any other subcustodian or agent hereunder, acting as principal) with which the
contract or option is made, and the Bank shall have no duty with respect to the
selection of such currency brokers or banking institutions with which the Fund
deals or for their failure to comply with the terms of any contract or option.
5.8 Other Authorized Payments. For other authorized transactions of
the Fund, or other obligations of the Fund incurred for proper Fund purposes;
provided that before making any such payment the Bank will also receive a
certified copy of a resolution of the Board signed by an Authorized Person
(other than the Person certifying such resolution) and certified by its
Secretary or Assistant Secretary, naming the person or persons to whom such
payment is to be made, and either describing the transaction for which payment
is to be made and declaring it to be an authorized transaction of the Fund, or
specifying the amount of the obligation for which payment is to be made, setting
forth the purpose for which such obligation was incurred and declaring such
purpose to be a proper corporate purpose.
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5.9 Termination: upon the termination of this Agreement as
hereinafter set forth pursuant to Section 8 and Section 14 of this Agreement.
6. Securities.
6.1 Segregation and Registration. Except as otherwise provided
herein, and except for securities to be delivered to any subcustodian appointed
pursuant to Sections 13.2 or 13.3 hereof, the Bank as custodian, will receive
and hold pursuant to the provisions hereof, in a separate account or accounts
and physically segregated at all times from those of other persons, any and all
Portfolio Securities which may now or hereafter be delivered to it by or for the
account of the Fund (or series of the Fund in accordance with Section 3). All
such Portfolio Securities will be held or disposed of by the Bank for, and
subject at all times to, the instructions of the Fund pursuant to the terms of
this Agreement. Subject to the specific provisions herein relating to Portfolio
Securities that are not physically held by the Bank, the Bank will register all
Portfolio Securities (unless otherwise directed by Proper Instructions or an
Officers' Certificate), in the name of a registered nominee of the Bank as
defined in the Internal Revenue Code and any Regulations of the Treasury
Department issued thereunder, and will execute and deliver all such certificates
in connection therewith as may be required by such laws or regulations or under
the laws of any state. The Bank will use its best efforts to the end that the
specific Portfolio Securities held by it hereunder will be at all times
identifiable.
The Fund will from time to time furnish to the Bank appropriate
instruments to enable it to hold or deliver in proper form for transfer, or to
register in the name of its registered nominee, any Portfolio Securities which
may from time to time be registered in the name of the Fund.
6.2 Voting and Proxies. Neither the Bank nor any nominee of the Bank
will vote any of the Portfolio Securities held hereunder, except in accordance
with Proper Instructions or an Officers' Certificate. The Bank will execute and
deliver, or cause to be executed and delivered, to the Fund all notices, proxies
and proxy soliciting materials with respect to such Securities, such proxies to
be executed by the registered holder of such Securities (if registered otherwise
than in the name of the Fund), but without indicating the manner in which such
proxies are to be voted.
6.3 Book-Entry System. Provided (i) the Bank has received a certified
copy of a resolution of the Board specifically approving deposits of Fund assets
in the Book-Entry System, and (ii) for any subsequent changes to such
arrangements following such approval, the Board has reviewed and approved the
arrangement and has not delivered an Officer's Certificate to the Bank
indicating that the Board has withdrawn its approval:
(a).....The Bank may keep Portfolio Securities in the Book-Entry
System provided that such Portfolio Securities are represented in an account
("Account") of the Bank (or its agent) in such System which shall not include
any assets of the Bank (or such agent) other than assets held as a fiduciary,
custodian, or otherwise for customers;
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(b).....The records of the Bank (and any such agent) with respect
to the Fund's participation in the Book-Entry System through the Bank (or any
such agent) will identify by book entry Portfolio Securities which are included
with other securities deposited in the Account and shall at all times during the
regular business hours of the Bank (or such agent) be open for inspection by
duly authorized officers, employees or agents of the Fund. Where securities are
transferred to the Fund's account, the Bank shall also, by book entry or
otherwise, identify as belonging to the Fund a quantity of securities in
fungible bulk of securities (i) registered in the name of the Bank or its
nominee, or (ii) shown on the Bank's account on the books of the Federal Reserve
Bank;
(c).....The Bank (or its agent) shall pay for securities
purchased for the account of the Fund or shall pay cash collateral against the
return of Portfolio Securities loaned by the Fund upon (i) receipt of advice
from the Book-Entry System that such Securities have been transferred to the
Account, and (ii) the making of an entry on the records of the Bank (or its
agent) to reflect such payment and transfer for the account of the Fund. The
Bank (or its agent) shall transfer securities sold or loaned for the account of
the Fund upon
(i) receipt of advice from the Book-Entry System that
payment for securities sold or payment of the initial cash collateral against
the delivery of securities loaned by the Fund has been transferred to the
Account; and
(ii) the making of an entry on the records of the Bank
(or its agent) to reflect such transfer and payment for the account of the Fund.
Copies of all advices from the Book-Entry System of transfers of securities for
the account of the Fund shall identify the Fund, be maintained for the Fund by
the Bank and shall be provided to the Fund at its request. The Bank shall send
the Fund a confirmation, as defined by Rule 17f-4 of the 1940 Act, of any
transfers to or from the account of the Fund;
(d) The Bank will promptly provide the Fund with any report
obtained by the Bank or its agent on the Book-Entry System's accounting system,
internal accounting control and procedures for safeguarding securities deposited
in the Book-Entry System;
(e) The Bank shall be liable to the Fund for any loss or
damage to the Fund resulting from use of the Book-Entry System by reason of any
gross negligence, willful misfeasance or bad faith of the Bank or any of its
agents or of any of its or their employees or from any reckless disregard by the
Bank or any such agent of its duty to use its best efforts to enforce such
rights as it may have against the Book-Entry System; at the election of the
Fund, it shall be entitled to be subrogated for the Bank in any claim against
the Book-Entry System or any other person which the Bank or its agent may have
as a consequence of any such loss or damage if and to the extent that the Fund
has not been made whole for any loss or damage;
6.4 Use of a Depository. Provided (i) the Bank has received a
certified copy of a resolution of the Board specifically approving deposits in
DTC or other such Depository and (ii) for any subsequent changes to such
arrangements following such approval, the Board has reviewed and approved the
arrangement and has not delivered an Officer's Certificate to the Bank
indicating that the Board has withdrawn its approval:
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(a).....The Bank may use a Depository to hold, receive, exchange,
release, lend, deliver and otherwise deal on behalf of the Fund with Portfolio
Securities including stock dividends, rights and other items of like nature, and
to receive and remit to the Bank on behalf of the Fund all income and other
payments thereon and to take all steps necessary and proper in connection with
the collection thereof;
(b).....Registration of Portfolio Securities may be made in the
name of any nominee or nominees used by such Depository;
(c).....Payment for securities purchased and sold may be made
through the clearing medium employed by such Depository for transactions of
participants acting through it. Upon any purchase of Portfolio Securities,
payment will be made only upon delivery of the securities to or for the account
of the Fund and the Fund shall pay cash collateral against the return of
Portfolio Securities loaned by the Fund only upon delivery of the Securities to
or for the account of the Fund; and upon any sale of Portfolio Securities,
delivery of the Securities will be made only against payment thereof or, in the
event Portfolio Securities are loaned, delivery of Securities will be made only
against receipt of the initial cash collateral to or for the account of the
Fund; and
(d).....The Bank shall be liable to the Fund for any loss or
damage to the Fund resulting from use of a Depository by reason of any gross
negligence, willful misfeasance or bad faith of the Bank or its employees or
from any reckless disregard by the Bank of its duty to use its best efforts to
enforce such rights as it may have against a Depository; at the election of the
Fund, it shall be entitled to be subrogated for the Bank in any claim against
the Depository or any other person which the Bank or its agent may have as a
consequence of any such loss or damage if and to the extent that the Fund has
not been made whole for any loss or damage. In this connection, the Bank shall
use its best efforts to ensure that:
(i) The Depository obtains replacement of any
certificated Portfolio Security deposited with it in the event such Security is
lost, destroyed, wrongfully taken or otherwise not available to be returned to
the Bank upon its request;
(ii) Any proxy materials received by a Depository with
respect to Portfolio Securities deposited with such Depository are forwarded
immediately to the Bank for prompt transmittal to the Fund;
(iii) Such Depository immediately forwards to the Bank
confirmation of any purchase or sale of Portfolio Securities and of the
appropriate book entry made by such Depository to the Fund's account;
(iv) Such Depository prepares and delivers to the Bank
such records with respect to the performance of the Bank's obligations and
duties hereunder as may be necessary for the Fund to comply with the
recordkeeping requirements of Section 31(a) of the 1940 Act and Rule 31(a)
thereunder; and
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(v) Such Depository delivers to the Bank and the Fund all
internal accounting control reports, whether or not audited by an independent
public accountant, as well as such other reports as the Fund may reasonably
request in order to verify the Portfolio Securities held by such Depository.
6.5 Use of Book-Entry System for Commercial Paper. Provided (i) the
Bank has received a certified copy of a resolution of the Board specifically
approving participation in a system maintained by the Bank for the holding of
commercial paper in book-entry form ("Book-Entry Paper") and (ii) for each year
following such approval the Board has received and approved the arrangements,
upon receipt of Proper Instructions and upon receipt of confirmation from an
Issuer (as defined below) that the Fund has purchased such Issuer's Book-entry
Paper, the Bank shall issue and hold in book-entry form, on behalf of the Fund,
commercial paper issued by issuers with whom the Bank has entered into a
book-entry agreement (the "Issuers"). In maintaining its Book-entry Paper
System, the Bank agrees that:
(a) the Bank will maintain all Book-Entry Paper held by the
Fund in an account of the Bank that includes only assets held by it for
customers;
(b) the records of the Bank with respect to the Fund's
purchase of Book-Entry Paper through the Bank will identify, by book-entry,
Commercial Paper belonging to the Fund which is included in the Book-Entry Paper
System and shall at all times during the regular business hours of the Bank be
open for inspection by duly authorized officers, employees or agents of the
Fund;
(c) The Bank shall pay for Book-Entry Paper purchased for the
account of the Fund upon contemporaneous (i) receipt of advice from the Issuer
that such sale of Book-Entry Paper has been effected, and (ii) the making of an
entry on the records of the Bank to reflect such payment and transfer for the
account of the Fund;
(d) The Bank shall cancel such Book-Entry Paper obligation
upon the maturity thereof upon contemporaneous (i) receipt of advice that
payment for such Book-Entry Paper has been transferred to the Fund, and (ii) the
making of an entry on the records of the Bank to reflect such payment for the
account of the Fund;
(e) the Bank shall transmit to the Fund a transaction journal
confirming each transaction in Book-Entry Paper for the account of the Fund on
the next business day following the transaction; and
(f) the Bank will send to the Fund such reports on its system
of internal accounting control with respect to the Book-Entry Paper System as
the Fund may reasonably request from time to time.
6.6 Use of Immobilization Programs. Provided (i) the Bank has
received a certified copy of a resolution of the Board specifically approving
the maintenance of Portfolio Securities in an immobilization program operated by
a bank which meets the requirements of Section 26(a)(1) of the 1940 Act, and
(ii) for each year following such approval the Board has reviewed and approved
the arrangement and has not delivered an Officer's Certificate to the Bank
indicating that the Board has withdrawn its approval, the Bank shall enter into
such immobilization program with such bank acting as a subcustodian hereunder.
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6.7 Eurodollar CDs. Any Portfolio Securities which are Eurodollar CDs
may be physically held by the European branch of the U.S. banking institution
that is the issuer of such Eurodollar CD (a "European Branch"), provided that
such Securities are identified on the books of the Bank as belonging to the Fund
and that the books of the Bank identify the European Branch holding such
Securities. Notwithstanding any other provision of this Agreement to the
contrary, except as stated in the first sentence of this subsection 6.7, the
Bank shall be under no other duty with respect to such Eurodollar CDs belonging
to the Fund, and shall have no liability to the Fund or its shareholders with
respect to the actions, inactions, whether negligent or otherwise of such
European Branch in connection with such Eurodollar CDs, except for any loss or
damage to the Fund resulting from the Bank's own gross negligence, willful
misfeasance or bad faith in the performance of its duties hereunder.
6.8 Options and Futures Transactions.
(a) Puts and Calls Traded on Securities Exchanges, NASDAQ or
Over-the-Counter.
1. The Bank shall take action as to put options ("puts") and call
options ("calls") purchased or sold (written) by the Fund regarding escrow or
other arrangements (i) in accordance with the provisions of any agreement
entered into upon receipt of Proper Instructions between the Bank, any
broker-dealer registered under the Exchange Act and a member of the National
Association of Securities Dealers, Inc. (the "NASD"), and, if necessary, the
Fund relating to the compliance with the rules of the Options Clearing
Corporation and of any registered national securities exchange, or of any
similar organization or organizations.
2. Unless another agreement requires it to do so, the Bank shall
be under no duty or obligation to see that the Fund has deposited or is
maintaining adequate margin, if required, with any broker in connection with any
option, nor shall the Bank be under duty or obligation to present such option to
the broker for exercise unless it receives Proper Instructions from the Fund.
The Bank shall have no responsibility for the legality of any put or call
purchased or sold on behalf of the Fund, the propriety of any such purchase or
sale, or the adequacy of any collateral delivered to a broker in connection with
an option or deposited to or withdrawn from a Segregated Account (as defined in
subsection 6.9 below). The Bank specifically, but not by way of limitation,
shall not be under any duty or obligation to: (i) periodically check or notify
the Fund that the amount of such collateral held by a broker or held in a
Segregated Account is sufficient to protect such broker of the Fund against any
loss; (ii) effect the return of any collateral delivered to a broker; or (iii)
advise the Fund that any option it holds, has or is about to expire. Such duties
or obligations shall be the sole responsibility of the Fund.
(b) Puts, Calls and Futures Traded on Commodities Exchanges
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1. The Bank shall take action as to puts, calls and futures
contracts ("Futures") purchased or sold by the Fund in accordance with the
provisions of any agreement among the Fund, the Bank and a Futures Commission
Merchant registered under the Commodity Exchange Act, relating to compliance
with the rules of the Commodity Futures Trading Commission and/or any Contract
Market, or any similar organization or organizations, regarding account deposits
in connection with transactions by the Fund.
2. The responsibilities and liabilities of the Bank as to
futures, puts and calls traded on commodities exchanges, any Futures Commission
Merchant account and the Segregated Account shall be limited as set forth in
subparagraph (a)(2) of this Section 6.8 as if such subparagraph referred to
Futures Commission Merchants rather than brokers, and Futures and puts and calls
thereon instead of options.
6.9 Segregated Account. The Bank shall upon receipt of Proper
Instructions establish and maintain a Segregated Account or Accounts for and on
behalf of the Fund, into which Account or Accounts may be transferred upon
receipt of Proper Instructions, cash and/or Portfolio Securities:
(a) in accordance with the provisions of any agreement among the
Fund, the Bank and a broker-dealer registered under the Exchange Act and a
member of the NASD or any Futures Commission Merchant registered under the
Commodity Exchange Act, relating to compliance with the rules of the Options
Clearing Corporation and of any registered national securities exchange or the
Commodity Futures Trading Commission or any registered Contract Market, or of
any similar organizations regarding escrow or other arrangements in connection
with transactions by the Fund;
(b) for the purpose of segregating cash or securities in
connection with options purchased or written by the Fund or commodity futures
purchased or written by the Fund;
(c) for the deposit of liquid assets, such as cash, U.S.
Government securities or other high grade debt obligations, having a market
value (marked to market on a daily basis) at all times equal to not less than
the aggregate purchase price due on the settlement dates of all the Fund's then
outstanding forward commitment or "when-issued" agreements relating to the
purchase of Portfolio Securities and all the Fund's then outstanding commitments
under reverse repurchase agreements entered into with broker-dealer firms;
(d) for the purposes of compliance by the Fund with the
procedures required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the Securities and Exchange Commission
relating to the maintenance of Segregated Accounts by registered investment
companies;
(e) for other proper corporate purposes, but only, in the case of
this clause (e), upon receipt of, in addition to Proper Instructions, a
certified copy of a resolution of the Board, or of the Executive Committee
signed by an officer of the Fund and certified by the Secretary or an Assistant
Secretary, setting forth the purpose or purposes of such Segregated Account and
declaring such purposes to be proper corporate purposes.
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(f) Assets may be withdrawn from the Segregated Account pursuant
to Proper Instructions only
(i) with respect to assets deposited in accordance with the
provisions of any agreements referenced in (a) or (b)
above, in accordance with the provisions of such
agreements;
(ii) with respect to assets deposited pursuant to (c) or (d)
above, for sale or delivery to meet the Fund's
obligations under outstanding firm commitment when
issued agreements for the purchase of Portfolio
Securities and under reverse repurchase agreements;
(iii)for exchange for other liquid assets of equal or
greater value deposited in the Segregated Account;
(iv) to the extent that the Fund's outstanding forward
commitment or when-issued agreements for the purchase
of portfolio securities or reverse repurchase
agreements are sold to other parties or the Fund's
obligations thereunder are met from assets of the Fund
other than those in the Segregated Account;
(v) for delivery upon settlement of a forward commitment
agreement for the sale of Portfolio Securities; or
(vi) with respect to assets deposited pursuant to (e) above,
in accordance with the purposes of such account as set
forth in Proper Instructions.
6.10 Interest Bearing Call or Time Deposits. The Bank shall, upon
receipt of Proper Instructions relating to the purchase by the Fund of
interest-bearing fixed-term and call deposits, transfer cash, by wire or
otherwise, in such amounts and to such bank or banks as shall be indicated in
such Proper Instructions. The Bank shall include in its records with respect to
the assets of the Fund appropriate notation as to the amount of each such
deposit, the banking institution with which such deposit is made (the "Deposit
Bank"), and shall retain such forms of advice or receipt evidencing the deposit,
if any, as may be forwarded to the Bank by the Deposit Bank. Such deposits shall
be deemed Portfolio Securities of the Fund and the responsibility of the Bank
therefore shall be the same as and no greater than the Bank's responsibility in
respect of other Portfolio Securities of the Fund.
6.11 Transfer of Securities. The Bank will transfer, exchange,
deliver or release Portfolio Securities held by it hereunder, insofar as such
Securities are available for such purpose, provided that before making any
transfer, exchange, delivery or release under this Section the Bank will receive
Proper Instructions requesting such transfer, exchange or delivery stating that
it is for a purpose permitted under the terms of this Section 6.11, specifying
the applicable subsection, or describing the purpose of the transaction with
sufficient particularity to permit the Bank to ascertain the applicable
subsection, only
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(a) upon sales of Portfolio Securities for the account of the
Fund, against contemporaneous receipt by the Bank of payment therefor in full,
each such payment to be in the amount of the sale price shown in a broker's
confirmation of sale of the Portfolio Securities received by the Bank before
such payment is made, as confirmed in the Proper Instructions received by the
Bank before such payment is made;
(b) in exchange for or upon conversion into other securities
alone or other securities and cash pursuant to any plan of merger,
consolidation, reorganization, share split-up, change in par value,
recapitalization or readjustment or otherwise, upon exercise of subscription,
purchase or sale or other similar rights represented by such Portfolio
Securities, or for the purpose of tendering shares in the event of a tender
offer therefor, provided however that in the event of an offer of exchange,
tender offer, or other exercise of rights requiring the physical tender or
delivery of Portfolio Securities, the Bank shall have no liability for failure
to so tender in a timely manner unless such Proper Instructions are received by
the Bank at least two business days prior to the date required for tender, and
unless the Bank (or its agent or subcustodian hereunder) has actual possession
of such Security at least two business days prior to the date of tender;
(c) upon conversion of Portfolio Securities pursuant to their
terms into other securities;
(d) for the purpose of redeeming in kind shares of the Fund upon
authorization from the Fund;
(e) in the case of option contracts owned by the Fund, for
presentation to the endorsing broker;
(f) when such Portfolio Securities are called, redeemed or
retired or otherwise become payable;
(g) for the purpose of effectuating the pledge of Portfolio
Securities held by the Bank in order to collateralize loans made to the Fund by
any bank, including the Bank; provided, however, that such Portfolio Securities
will be released only upon payment to the Bank for the account of the Fund of
the moneys borrowed, except that in cases where additional collateral is
required to secure a borrowing already made, and such fact is made to appear in
the Proper Instructions, further Portfolio Securities may be released for that
purpose without any such payment. In the event that any such pledged Portfolio
Securities are held by the Bank, they will be so held for the account of the
lender, and after notice to the Fund from the lender in accordance with the
normal procedures of the lender, that an event of deficiency or default on the
loan has occurred, the Bank may deliver such pledged Portfolio Securities to or
for the account of the lender;
(h) for the purpose of releasing certificates representing
Portfolio Securities, against contemporaneous receipt by the Bank of the fair
market value of such security, as set forth in the Proper Instructions received
by the Bank before such payment is made;
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(i) for the purpose of delivering securities lent by the Fund to
a bank or broker dealer, but only against receipt in accordance with street
delivery custom except as otherwise provided herein, of adequate collateral as
agreed upon from time to time by the Fund and the Bank, and upon receipt of
payment in connection with any repurchase agreement relating to such securities
entered into by the Fund;
(j) for other authorized transactions of the Fund or for other
proper corporate purposes; provided that before making such transfer, the Bank
will also receive a certified copy of resolutions of the Board, signed by an
authorized officer of the Fund (other than the officer certifying such
resolution) and certified by its Secretary or Assistant Secretary, specifying
the Portfolio Securities to be delivered, setting forth the transaction in or
purpose for which such delivery is to be made, declaring such transaction to be
an authorized transaction of the Fund or such purpose to be a proper corporate
purpose, and naming the person or persons to whom delivery of such securities
shall be made; and
(k) upon termination of this Agreement as hereinafter set forth
pursuant to Section 8 and Section 14 of this Agreement.
As to any deliveries made by the Bank pursuant to subsections (a), (b),
(c), (e), (f), (g), (h) and (i) securities or cash receivable in exchange
therefor shall be delivered to the Bank.
7. Redemptions. In the case of payment of assets of the Fund held by the
Bank in connection with redemptions and repurchases by the Fund of outstanding
shares of beneficial interest, the Bank will rely on notification by the Fund's
transfer agent of receipt of a request for redemption and certificates, if
issued, in proper form for redemption before such payment is made. Payment shall
be made in accordance with the Articles and By-laws of the Fund, from assets
available for said purpose.
8. Merger, Dissolution, etc. of Fund. In the case of the following
transactions, not in the ordinary course of business, namely, the merger of the
Fund into or the consolidation of the Fund with another investment company, the
sale by the Fund of all, or substantially all, of its assets to another
investment company, or the liquidation or dissolution of the Fund and
distribution of its assets, the Bank will deliver the Portfolio Securities held
by it under this Agreement and disburse cash only upon the order of the Fund set
forth in an Officers' Certificate, accompanied by a certified copy of a
resolution of the Board authorizing any of the foregoing transactions. Upon
completion of such delivery and disbursement and the payment of the fees,
disbursements and expenses of the Bank, this Agreement will terminate.
9. Actions of Bank Without Prior Authorization. Notwithstanding anything
herein to the contrary, unless and until the Bank receives an Officers'
Certificate to the contrary, it will without prior authorization or instruction
of the Fund or the transfer agent:
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9.1 Endorse for collection and collect on behalf of and in the name
of the Fund all checks, drafts, or other negotiable or transferable instruments
or other orders for the payment of money received by it for the account of the
Fund and hold for the account of the Fund all income, dividends, interest and
other payments or distribution of cash with respect to the Portfolio Securities
held thereunder;
9.2 Present for payment all coupons and other income items held by it
for the account of the Fund which call for payment upon presentation and hold
the cash received by it upon such payment for the account of the Fund;
9.3 Receive and hold for the account of the Fund all securities
received as a distribution on Portfolio Securities as a result of a stock
dividend, share split-up, reorganization, recapitalization, merger,
consolidation, readjustment, distribution of rights and similar securities
issued with respect to any Portfolio Securities held by it hereunder.
9.4 Execute as agent on behalf of the Fund all necessary ownership
and other certificates and affidavits required by the Internal Revenue Code or
the regulations of the Treasury Department issued thereunder, or by the laws of
any state, now or hereafter in effect, inserting the Fund's name on such
certificates as the owner of the securities covered thereby, to the extent it
may lawfully do so and as may be required to obtain payment in respect thereof.
The Bank will execute and deliver such certificates in connection with Portfolio
Securities delivered to it or by it under this Agreement as may be required
under the provisions of the Internal Revenue Code and any Regulations of the
Treasury Department issued thereunder, or under the laws of any State;
9.5 Present for payment all Portfolio Securities which are called,
redeemed, retired or otherwise become payable, and hold cash received by it upon
payment for the account of the Fund; and
9.6 Exchange interim receipts or temporary securities for definitive
securities.
10. Collections and Defaults. The Bank will use all reasonable efforts
to collect any funds which may to its knowledge become collectible arising from
Portfolio Securities, including dividends, interest and other income, and to
transmit to the Fund notice actually received by it of any call for redemption,
offer of exchange, right of subscription, reorganization or other proceedings
affecting such Securities. If Portfolio Securities upon which such income is
payable are in default or payment is refused after due demand or presentation,
the Bank will notify the Fund in writing of any default or refusal to pay within
two business days from the day on which it receives knowledge of such default or
refusal. In addition, the Bank will send the Fund a written report once each
month showing any income on any Portfolio Security held by it which is more than
ten days overdue on the date of such report and which has not previously been
reported.
11. Maintenance of Records and Accounting Services. The Bank will
maintain records with respect to transactions for which the Bank is responsible
pursuant to the terms and conditions of this Agreement, and in compliance with
the applicable rules and regulations of the 1940 Act, and under any applicable
federal and state law and will furnish the Fund daily with a statement of
condition of the Fund. The Bank will furnish to the Fund at the end of every
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month, and at the close of each quarter of the Fund's fiscal year, a list of the
Portfolio Securities and the aggregate amount of cash held by it for the Fund.
The books and records of the Bank pertaining to its actions under this Agreement
and reports by the Bank or its independent accountants concerning its accounting
system, procedures for safeguarding securities and internal accounting controls
will be open to inspection and audit at reasonable times by officers of or
auditors employed by the Fund and will be preserved by the Bank in the manner
and in accordance with the applicable rules and regulations under the 1940 Act.
With respect to any books and records relating to the Trust pertaining to Fund
shares which are in the possession of the Bank, the Bank agrees to permit
examination of such books and records at any time or from time to time during
the Bank's business hours by representatives or designees of the Securities and
Exchange Commission (the "SEC") and to promptly furnish, upon demand and to the
location specified by the SEC, true, correct, complete and current hard copies
of any or all or any part of such books and records.
The Bank shall perform fund accounting and shall keep the books of
account and render statements or copies from time to time as reasonably
requested by the Treasurer or any executive officer of the Fund.
The Bank shall assist generally in the preparation of reports to
shareholders and others, audits of accounts, and other ministerial matters of
like nature.
The books and records maintained by the Bank on behalf of the Fund are
the property of the Fund and will be surrendered upon request in accordance with
Section 14.
12. Fund Evaluation. The Bank shall compute and, unless otherwise
directed by the Board, determine as of the close of regular trading on the New
York Stock Exchange on each day on which said Exchange is open for unrestricted
trading and as of such other days, or hours, if any, as may be authorized by the
Board, the net asset value and the public offering price of a share of capital
stock of the Fund, such determination to be made in accordance with the
provisions of the Articles and By-laws of the Fund and Prospectus and Statement
of Additional Information relating to the Fund, and valuation procedures
approved by the Board, and any applicable resolutions of the Board at the time
in force and applicable, as they may from time to time be amended. Current
copies of each such document are to be made available by the Fund to the Bank on
a timely basis. The Bank shall promptly notify the Fund, the proper exchange and
the NASD or such other persons as the Fund may request of the results of such
computation and determination. In computing the net asset value hereunder, the
Bank may rely in good faith upon information furnished to it by any Authorized
Person in respect of (i) the manner of accrual of the liabilities of the Fund
and in respect of liabilities of the Fund not appearing on its books of account
kept by the Bank, (ii) reserves, if any, authorized by the Board or that no such
reserves have been authorized, (iii) the source of the quotations to be used in
computing the net asset value, (iv) the value to be assigned to any security for
which no price quotations are available, and (v) the method of computation of
the public offering price on the basis of the net asset value of the shares, and
the Bank shall not be responsible for any loss occasioned by such reliance or
for any good faith reliance on any quotations received from a source pursuant to
(iii) above.
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(a) The Bank shall compute the Yield Calculation for the Fund for
the stated periods of time as shall be mutually agreed upon, and communicate in
a timely manner the result of such computation to the Fund.
(b) In performing the Yield Calculation, the Bank will derive
from the records it generates and maintains for the Fund pursuant Section 11
hereof, the items of data necessary for the computation. The Bank shall have no
responsibility to review, confirm, or otherwise assume any duty or liability
with respect to the accuracy or correctness of any such data supplied to it by
the Fund, any of the Fund's designated agents or any of the Fund's designated
third party providers.
(c) At the request of the Bank, the Fund shall provide, and the
Bank shall be entitled to rely on, written standards and guidelines to be
followed by the Bank in interpreting and applying the computation methods set
forth in the Releases or any Subsequent Staff Positions as they specifically
apply to the Fund. In the event that the computation methods in the Releases or
the Subsequent Staff Positions or the application to the Fund of a standard or
guideline is not free from doubt or in the event there is any question of
interpretation as to the characterization of a particular security or any aspect
of a security or a payment with respect thereto (e.g., original issue discount,
participating debt security, income or return of capital, etc.) or otherwise or
as to any other element of the computation which is pertinent to the Fund, the
Fund or its designated agent shall have the full responsibility for making the
determination of how the security, or payment is to be treated for purposes of
the computation and how the computation is to be made and shall inform the Bank
thereof on a timely basis. The Bank shall have no responsibility to make
independent determinations with respect to any item which is covered by this
Section, and shall not be responsible for its computations made in accordance
with such determinations so long as such computations are mathematically
correct.
(d) The Fund shall keep the Bank informed of all publicly
available information and of any non-public advice, or information obtained by
the Fund from its independent auditors or by its personnel or the personnel of
its investment adviser, or Subsequent Staff Positions related to the
computations to be undertaken by the Bank pursuant to this Agreement and the
Bank shall not be deemed to have knowledge of such information (except as
contained in the Releases) unless it has been furnished to the Bank in writing.
13. Concerning the Bank.
13.1 Performance of Duties and Standard of Care. In performing its
duties hereunder and any other duties listed on any Schedule hereto, if any, the
Bank will be entitled to receive and act upon the advice of independent counsel
of its own selection, which may be counsel for the Fund, and will be without
liability for any action taken or thing done or omitted to be done in accordance
with this Agreement in good faith in conformity with such advice. In the
performance of its duties hereunder, the Bank will be protected and not be
liable, and will be indemnified and held harmless for any action taken or
omitted to be taken by it in good faith reliance upon the terms of this
Agreement, any Officers' Certificate, Proper Instructions, resolution of the
Board, telegram, notice, request, certificate or other instrument reasonably
believed by the Bank to be genuine and for any other loss to the Fund except in
the case of its gross negligence, willful misfeasance or bad faith in the
performance of its duties or reckless disregard of its obligations and duties
hereunder.
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The Bank will be under no duty or obligation to inquire into and will
not be liable for:
(a) the validity of the issue of any Portfolio Securities
purchased by or for the Fund, the legality of the purchases thereof or the
propriety of the price incurred therefor;
(b) the legality of any sale of any Portfolio Securities by or
for the Fund or the propriety of the amount for which the same are sold;
(c) the legality of an issue or sale of any common shares of the
Fund or the sufficiency of the amount to be received therefor;
(d) the legality of the repurchase of any common shares of the
Fund or the propriety of the amount to be paid therefor;
(e) the legality of the declaration of any dividend by the Fund
or the legality of the distribution of any Portfolio Securities as payment in
kind of such dividend; and
(f) any property or moneys of the Fund unless and until received
by it, and any such property or moneys delivered or paid by it pursuant to the
terms hereof.
Moreover, the Bank will not be under any duty or obligation to ascertain
whether any Portfolio Securities at any time delivered to or held by it for the
account of the Fund are such as may properly be held by the Fund under the
provisions of its Articles, By-laws, any federal or state statutes or any rule
or regulation of any governmental agency.
Notwithstanding anything in this Agreement to the contrary, in no event
shall the Bank be liable hereunder or to any third party:
(a) for any losses or damages of any kind resulting from acts of
God, earthquakes, fires, floods, storms or other disturbances of nature,
epidemics, strikes, riots, nationalization, expropriation, currency
restrictions, acts of war, civil war or terrorism, insurrection, nuclear fusion,
fission or radiation, the interruption, loss or malfunction of utilities,
transportation, or computers (hardware or software) and computer facilities, the
unavailability of energy sources and other similar happenings or events except
as results from the Bank's own gross negligence; or
(b) for special, punitive or consequential damages arising from
the provision of services hereunder, even if the Bank has been advised of the
possibility of such damages.
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13.2 Agents and Subcustodians with Respect to Property of the Fund
Held in the United States. The Bank may employ agents in the performance of its
duties hereunder and shall be responsible for the acts and omissions of such
agents as if performed by the Bank hereunder. Without limiting the foregoing,
certain duties of the Bank hereunder may be performed by one or more affiliates
of the Bank.
Upon receipt of Proper Instructions, the Bank may employ subcustodians,
provided that any such subcustodian meets at least the minimum qualifications
required by Section 17(f)(1) of the 1940 Act to act as a custodian of the Fund's
assets with respect to property of the Fund held in the United States. The Bank
shall have no liability to the Fund or any other person by reason of any act or
omission of any subcustodian and the Fund shall indemnify the Bank and hold it
harmless from and against any and all actions, suits and claims, arising
directly or indirectly out of the performance of any subcustodian. Upon request
of the Bank, the Fund shall assume the entire defense of any action, suit, or
claim subject to the foregoing indemnity. The Fund shall pay all fees and
expenses of any subcustodian.
13.3 Duties of the Bank with Respect to Property of the Fund Held
Outside of the United States.
(a) Appointment of Foreign Sub-Custodians. The Fund hereby
authorizes and instructs the Bank to employ as sub-custodians for the Fund's
Portfolio Securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories designated in
the Fund's Board Meeting (each, a "Selected Foreign Sub-Custodian"). Upon
receipt of Proper Instructions, together with a certified resolution of the
Fund's Board of Trustees, the Bank and the Fund may agree to designate
additional foreign banking institutions and foreign securities depositories to
act as Selected Foreign Sub-Custodians hereunder. Upon receipt of Proper
Instructions, the Fund may instruct the Bank to cease the employment of any one
or more such Selected Foreign Sub-Custodians for maintaining custody of the
Fund's assets, and the Bank shall so cease to employ such sub-custodian as soon
as alternate custodial arrangements have been implemented.
(b) Foreign Securities Depositories. Except as may otherwise be
agreed upon in writing by the Bank and the Fund, assets of the Fund shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as Selected Foreign
Sub-Custodians pursuant to the terms hereof. Where possible, such arrangements
shall include entry into agreements containing the provisions set forth in
subparagraph (d) hereof. Notwithstanding the foregoing, except as may otherwise
be agreed upon in writing by the Bank and the Fund, the Fund authorizes the
deposit in Euro-clear, the securities clearance and depository facilities
operated by Morgan Guaranty Trust Company of New York in Brussels, Belgium, of
foreign Portfolio Securities eligible for deposit therein and to utilize such
securities depository in connection with settlements of purchases and sales of
securities and deliveries and returns of securities, until notified to the
contrary pursuant to subparagraph (a) hereunder.
(c) Segregation of Securities. The Bank shall identify on its
books as belonging to the Fund the foreign Portfolio Securities held by each
Selected Foreign Sub-Custodian. Each agreement pursuant to which the Bank
employs a foreign banking institution shall require that such institution
establish a custody account for the Bank and hold in that account, foreign
Portfolio Securities and other assets of the Fund, and, in the event that such
institution deposits foreign Portfolio Securities in a foreign securities
depository, that it shall identify on its books as belonging to the Bank the
securities so deposited.
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(d) Agreements with Foreign Banking Institutions. Each of the
agreements pursuant to which a foreign banking institution holds assets of the
Fund (each, a "Foreign Sub-Custodian Agreement") shall be substantially in the
form previously made available to the Fund and shall provide that: (a) the
Fund's assets will not be subject to any right, charge, security interest, lien
or claim of any kind in favor of the foreign banking institution or its
creditors or agent, except a claim of payment for their safe custody or
administration (including, without limitation, any fees or taxes payable upon
transfers or reregistration of securities); (b) beneficial ownership of the
Fund's assets will be freely transferable without the payment of money or value
other than for custody or administration (including, without limitation, any
fees or taxes payable upon transfers or reregistration of securities); (c)
adequate records will be maintained identifying the assets as belonging to Bank;
(d) officers of or auditors employed by, or other representatives of the Bank,
including to the extent permitted under applicable law, the independent public
accountants for the Fund, will be given access to the books and records of the
foreign banking institution relating to its actions under its agreement with the
Bank; and (e) assets of the Fund held by the Selected Foreign Sub-Custodian will
be subject only to the instructions of the Bank or its agents.
(e) Access of Independent Accountants of the Fund. Upon request
of the Fund, the Bank will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of any
foreign banking institution employed as a Selected Foreign Sub-Custodian insofar
as such books and records relate to the performance of such foreign banking
institution under its Foreign Sub-Custodian Agreement.
(f) Reports by Bank. The Bank will supply to the Fund from time
to time, as mutually agreed upon, statements in respect of the securities and
other assets of the Fund held by Selected Foreign Sub-Custodians, including but
not limited to an identification of entities having possession of the Foreign
Portfolio Securities and other assets of the Fund.
(g) Transactions in Foreign Custody Account. Transactions with
respect to the assets of the Fund held by a Selected Foreign Sub-Custodian shall
be effected pursuant to Proper Instructions from the Fund to the Bank and shall
be effected in accordance with the applicable Foreign Sub-Custodian Agreement.
If at any time any Foreign Portfolio Securities shall be registered in the name
of the nominee of the Selected Foreign Sub-Custodian, the Fund agrees to hold
any such nominee harmless from any liability by reason of the registration of
such securities in the name of such nominee.
Notwithstanding any provision of this Agreement to the contrary,
settlement and payment for Foreign Portfolio Securities received for the account
of the Fund and delivery of Foreign Portfolio Securities maintained for the
account of the Fund may be effected in accordance with the customary established
securities trading or securities processing practices and procedures in the
jurisdiction or market in which the transaction occurs, including, without
limitation, delivering securities to the purchaser thereof or to a dealer
therefor (or an agent for such purchaser or dealer) against a receipt with the
expectation of receiving later payment for such securities from such purchaser
or dealer.
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In connection with any action to be taken with respect to the Foreign
Portfolio Securities held hereunder, including, without limitation, the exercise
of any voting rights, subscription rights, redemption rights, exchange rights,
conversion rights or tender rights, or any other action in connection with any
other right, interest or privilege with respect to such Securities
(collectively, the "Rights"), the Bank shall promptly transmit to the Fund such
information in connection therewith as is made available to the Bank by the
Foreign Sub-Custodian, and shall promptly forward to the applicable Foreign
Sub-Custodian any instructions, forms or certifications with respect to such
Rights, and any instructions relating to the actions to be taken in connection
therewith, as the Bank shall receive from the Fund pursuant to Proper
Instructions. Notwithstanding the foregoing, the Bank shall have no further duty
or obligation with respect to such Rights, including, without limitation, the
determination of whether the Fund is entitled to participate in such Rights
under applicable U.S. and foreign laws, or the determination of whether any
action proposed to be taken with respect to such Rights by the Fund or by the
applicable Foreign Sub-Custodian will comply with all applicable terms and
conditions of any such Rights or any applicable laws or regulations, or market
practices within the market in which such action is to be taken or omitted.
(h) Liability of Selected Foreign Sub-Custodians. Each Foreign
Sub-Custodian Agreement with a foreign banking institution shall require the
institution to exercise reasonable care in the performance of its duties and to
indemnify, and hold harmless, the Bank and each Fund from and against certain
losses, damages, costs, expenses, liabilities or claims arising out of or in
connection with the institution's performance of such obligations, all as set
forth in the applicable Foreign Sub-Custodian Agreement. The Fund acknowledges
that the Bank, as a participant in Euro-clear, is subject to the Terms and
Conditions Governing the Euro-Clear System, a copy of which has been made
available to the Fund. The Fund acknowledges that pursuant to such Terms and
Conditions, Morgan Guaranty Brussels shall have the sole right to exercise or
assert any and all rights or claims in respect of actions or omissions of, or
the bankruptcy or insolvency of, any other depository, clearance system or
custodian utilized by Euro-clear in connection with the Fund's securities and
other assets.
(i) Liability of Bank. The Bank shall have no more or less
responsibility or liability on account of the acts or omissions of any Selected
Foreign Sub-Custodian employed hereunder than any such Selected Foreign
Sub-Custodian has to the Bank and, without limiting the foregoing, the Bank
shall not be liable for any loss, damage, cost, expense, liability or claim
resulting from nationalization, expropriation, currency restrictions, or acts of
war or terrorism, political risk (including, but not limited to, exchange
control restrictions, confiscation, insurrection, civil strife or armed
hostilities) other losses due to Acts of God, nuclear incident or any loss where
the Selected Foreign Sub-Custodian has otherwise exercised reasonable care.
(j) Monitoring Responsibilities. The Bank shall furnish annually
to the Fund, information concerning the Selected Foreign Sub-Custodians employed
hereunder for use by the Fund in evaluating such Selected Foreign Sub-Custodians
to ensure compliance with the requirements of Rule 17f-5 of the 1940 Act. In
addition, the Bank will promptly inform the Fund in the event that the Bank is
notified by a Selected Foreign Sub-Custodian that there appears to be a
substantial likelihood that its shareholders' equity will decline below $200
million (U.S. dollars or the equivalent thereof) or that its shareholders'
equity has declined below $200 million (in each case computed in accordance with
generally accepted U.S. accounting principles) or any other capital adequacy
test applicable to it by exemptive order, or if the Bank has actual knowledge of
any material loss of the assets of the Fund held by a Foreign Sub-Custodian.
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(k) Tax Law. The Bank shall have no responsibility or liability
for any obligations now or hereafter imposed on the Fund or the Bank as
custodian of the Fund by the tax laws of any jurisdiction, and it shall be the
responsibility of the Fund to notify the Bank of the obligations imposed on the
Fund or the Bank as the custodian of the Fund by the tax law of any non-U.S.
jurisdiction, including responsibility for withholding and other taxes,
assessments or other governmental charges, certifications and governmental
reporting. The sole responsibility of the Custodian with regard to such tax law
shall be to use reasonable efforts to assist the Fund with respect to any claim
for exemption or refund under the tax law of jurisdictions for which the Fund
has provided such information.
13.4 Insurance. The Bank shall use the same care with respect to the
safekeeping of Portfolio Securities and cash of the Fund held by it as it uses
in respect of its own similar property but it need not maintain any special
insurance for the benefit of the Fund.
13.5. Fees and Expenses of Bank. The Fund will pay or reimburse the
Bank from time to time for any transfer taxes payable upon transfer of Portfolio
Securities made hereunder, and for all necessary proper disbursements, expenses
and charges made or incurred by the Bank in the performance of this Agreement
(including any duties listed on any Schedule hereto, if any) including any
indemnities for any loss, liabilities or expense to the Bank as provided above.
For the services rendered by the Bank hereunder, the Fund will pay to the Bank
such compensation or fees at such rate and at such times as shall be agreed upon
in writing by the parties from time to time. The Bank will also be entitled to
reimbursement by the Fund for all reasonable expenses incurred in conjunction
with termination of this Agreement.
13.6 Advances by Bank. The Bank may, in its sole discretion, advance
funds on behalf of the Fund to make any payment permitted by this Agreement upon
receipt of any proper authorization required by this Agreement for such payments
by the Fund. Should such a payment or payments, with advanced funds, result in
an overdraft (due to insufficiencies of the Fund's account with the Bank, or for
any other reason) this Agreement deems any such overdraft or related
indebtedness, a loan made by the Bank to the Fund payable on demand and bearing
interest at the current rate charged by the Bank for such loans unless the Fund
shall provide the Bank with agreed upon compensating balances. The Fund agrees
that the Bank shall have a continuing lien and security interest to the extent
of any overdraft or indebtedness, in and to any property at any time held by it
for the Fund's benefit or in which the Fund has an interest and which is then in
the Bank's possession or control (or in the possession or control of any third
party acting on the Bank's behalf). The Fund authorizes the Bank, in its sole
discretion, at any time to charge any overdraft or indebtedness, together with
interest due thereon against any balance of account standing to the credit of
the Fund on the Bank's books.
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14. Termination.
14.1 This Agreement may be terminated at any time without penalty
upon sixty days written notice delivered by either party to the other by means
of registered mail, and upon the expiration of such sixty days this Agreement
will terminate; provided, however, that the effective date of such termination
may be postponed to a date not more than ninety days from the date of delivery
of such notice (i) by the Bank in order to prepare for the transfer by the Bank
of all of the assets of the Fund held hereunder, and (ii) by the Fund in order
to give the Fund an opportunity to make suitable arrangements for a successor
custodian. At any time after the termination of this Agreement, the Fund will,
at its request, have access to the records of the Bank relating to the
performance of its duties as custodian.
14.2 In the event of the termination of this Agreement, the Bank will
immediately upon receipt or transmittal, as the case may be, of notice of
termination, commence and prosecute diligently to completion the transfer of all
cash and the delivery of all Portfolio Securities duly endorsed and all records
maintained under Section 11 to the successor custodian when appointed by the
Fund. The obligation of the Bank to deliver and transfer over the assets of the
Fund held by it directly to such successor custodian will commence as soon as
such successor is appointed and will continue until completed as aforesaid. If
the Fund does not select a successor custodian within ninety (90) days from the
date of delivery of notice of termination the Bank may, subject to the
provisions of subsection (14.3), deliver the Portfolio Securities and cash of
the Fund held by the Bank to a bank or trust company of its own selection which
meets the requirements of Section 17(f)(1) of the 1940 Act and has a reported
capital, surplus and undivided profits aggregating not less than $2,000,000, to
be held as the property of the Fund under terms similar to those on which they
were held by the Bank, whereupon such bank or trust company so selected by the
Bank will become the successor custodian of such assets of the Fund with the
same effect as though selected by the Board.
14.3 Prior to the expiration of ninety (90) days after notice of
termination has been given, the Fund may furnish the Bank with an order of the
Fund advising that a successor custodian cannot be found willing and able to act
upon reasonable and customary terms and that there has been submitted to the
shareholders of the Fund the question of whether the Fund will be liquidated or
will function without a custodian for the assets of the Fund held by the Bank.
In that event the Bank will deliver the Portfolio Securities and cash of the
Fund held by it, subject as aforesaid, in accordance with one of such
alternatives which may be approved by the requisite vote of shareholders, upon
receipt by the Bank of a copy of the minutes of the meeting of shareholders at
which action was taken, certified by the Fund's Secretary and an opinion of
counsel to the Fund in form and content satisfactory to the Bank.
15. Confidentiality. Both parties hereto agree than any non-public
information obtained hereunder concerning the other party is confidential and
may not be disclosed to any other person without the consent of the other party,
except as may be required by applicable law or at the request of a governmental
agency. The parties further agree that a breach of this provision would
irreparably damage the other party and accordingly agree that each of them is
entitled, without bond or other security, to an injunction or injunctions to
prevent breaches of this provision.
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16. Notices. Any notice or other instrument in writing authorized or
required by this Agreement to be given to either party hereto will be
sufficiently given if addressed to such party and mailed or delivered to it at
its office at the address set forth below; namely:
(a) In the case of notices sent to the Fund to:
Standish Ayer & Wood Investment Trust
One Financial Center
Boston, MA 02111
(b) In the case of notices sent to the Bank to:
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
Attention: James Keenan
or at such other place as such party may from time to time designate in writing.
17. Amendments. This Agreement may not be altered or amended, except by
an instrument in writing, executed by both parties, and in the case of the Fund,
such alteration or amendment will be authorized and approved by its Board.
18. Parties. This Agreement will be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns;
provided, however, that this Agreement will not be assignable by the Fund
without the written consent of the Bank or by the Bank without the written
consent of the Fund, authorized and approved by its Board; and provided further
that termination proceedings pursuant to Section 14 hereof will not be deemed to
be an assignment within the meaning of this provision.
19. Governing Law. This Agreement and all performance hereunder will be
governed by the laws of the Commonwealth of Massachusetts.
20. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but such
counterparts shall, together, constitute only one instrument.
21. Limitation of Liability. A copy of the Declaration of Trust of the
Fund is on file with the Secretary of the Fund and notice is hereby given that
this Agreement has been executed on behalf of the Fund by an officer of the Fund
as an officer and not individually and the obligations of the Fund arising out
of this Agreement are not binding upon any of the trustees, officers or
shareholders of the Fund individually but are binding only upon the assets and
property of the Fund.
22. Single Agreement. This Agreement (including any exhibits, appendices
and schedules hereto) constitutes the entire agreement between the Bank and the
Fund as to the subject matter hereof and supersedes any and all agreements,
representations and warranties, written or oral, regarding such subject matter
made prior to the time at which this Agreement has been executed and delivered
between the Bank and the Fund.
26
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the day
and year first written above.
Standish, Ayer & Wood Investment Trust
By:__________________________________________
Name:
Title:
ATTEST:
- ----------------------------
Investors Bank & Trust Company
By:__________________________________________
Name:
Title:
ATTEST:
- ----------------------------
DATE:______________________
27
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APPENDIX A
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Standish Intermediate Tax Exempt Bond Fund
Standish International Fixed Income Fund
Standish Fixed Income Fund
Standish Short-Term Asset Reserve Fund
Standish Equity Fund
Standish Small Capitalization Equity Fund
Standish Securitized Fund
Standish Global Fixed Income Fund
Standish Controlled Maturity Fund
Standish Fixed Income Fund II
Standish Tax-Sensitive Equity Fund
Standish Small Cap Tax-Sensitive Equity Fund
Standish International Equity Fund*
* Fund Accounting Services only
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