Prospectus dated May 1, 1996, as revised July 29, 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).
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 to 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.
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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............................7
Risk Factors, Suitability and Other Investment Practices......9
Calculation of Performance Data..............................15
Dividends and Distributions..................................16
Purchase of Shares...........................................16
Exchange of Shares...........................................17
Redemption of Shares.........................................17
Management...................................................18
Federal Income Taxes.........................................19
The Trust and Its Shares.....................................21
Custodian, Transfer Agent and Dividend-Disbursing Agent......21
Independent Accountants......................................21
Legal Counsel................................................21
Tax Certification Instruction................................22
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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% 0.25%+
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:
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
</TABLE>
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.
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* 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
changed 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%.
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FINANCIAL HIGHLIGHTS
The Tax Exempt Fund's 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. Each
Fund's financial highlights for the period ended March 31, 1996 are unaudited.
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.
<TABLE>
<CAPTION>
For the period
Three months November 2, 1992
ended March 31, 1996 Year ended December 31, (start of business) to
Intermediate Tax Exempt Bond Fund (Unaudited) 1995 1994 1993 December 31, 1992*
- ----------------------------------------------------------------------- ------------ ------------ ------------ -------------------
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $21.40 $19.91 $21.44 $20.42 $20.00
Income from investment operations
Net investment income** $0.26 $0.98 $0.95 $0.93 $0.14
Net realized and unrealized gain (loss) (0.35) 1.49 (1.51) 1.24 0.42
Total from investment operations ($0.09) $2.47 ($0.56) $2.17 $0.56
Less distributions declared to shareholders
From net investment income ($0.26) ($0.98) ($0.95) ($0.93) ($0.14)
From realized gains - - (0.02) (0.22) -
Total distributions declared to shareholders ($0.26) ($0.98) ($0.97) ($1.15) ($0.14)
Net asset value - end of period $21.05 $21.40 $19.91 $21.44 $20.42
Total return (0.42%) 12.65% (2.68%) 10.78% 17.02%t
Net assets at end of period (000's omitted) $31,205 $32,865 $20,514 $17,132 $5,577
Ratios (to average net assets)/Supplemental Data
Expenses ** 0.65% 0.65% 0.65% 0.65% 0.65%t
Net investment income ** 4.94% 4.75% 4.62% 4.36% 4.16%t
Portfolio turnover 22% 140% 157% 126% 62%
** The investment adviser did not impose a portion of its advisory fee. If
this reduction had not been undertaken, the net investment income per
share and the ratios would have been:
Net investment income per share $0.25 $0.95 $0.90 $0.85 $0.12
Ratios (to average net assets):
Expenses 0.80% 0.79% 0.89% 1.15% 1.47%t
Net investment income 4.79% 4.61% 4.38% 3.86% 3.34%t
* Audited by other auditors
t Computed on an annualized basis.
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FINANCIAL HIGHLIGHTS
(CONTINUED)
For the Period
January 2, 1996
(start of business)
Small Cap Tax-Sensitive Equity Fund to March 31, 1996
Net asset value - beginning of period $20.00
Income from investment operations
Net investment income* $0.02
Net realized and unrealized gain (loss) 1.49
Total from investment operations $1.51
Net asset value - end of period $21.51
Total return 7.55% x
Net assets at end of period (000 omitted) $1,580
Ratios (to average daily net assets)/Supplemental Data
Expenses * 0.00% y
Net investment income * 0.53% y
Portfolio turnover 14%
Average commission paid per share $0.04
* The investment adviser voluntarily waived its investment advisory fee and
reimbursed the Fund for its operating expenses. Had these actions not been
taken, the net investment loss per share and the ratios would have been:
Net investment loss per share ($0.29)
Ratios (to average daily net assets):
Expenses 6.92% y
Net investment loss (6.39%) y
x The total return for the period is not annualized.
y Computed on an annualized basis.
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FINANCIAL HIGHLIGHTS
(CONTINUED)
For the Period
January 2, 1996
(start of business)
Tax-Sensitive Equity Fund to March 31, 1996
- -------------------------------------------------------------------------------------------------------
Net asset value - beginning of period $20.00
Income from investment operations
Net investment income $0.12
Net realized and unrealized gain (loss) 1.20
Total from investment operations $1.32
Net asset value - end of period $21.32
Total return 6.60% x
Net assets at end of period (000 omitted) $1,247
Ratios (to average daily net assets)/Supplemental Data
Expenses * 0.00% y
Net investment income * 2.40% y
Portfolio turnover 7%
Average commission paid per share $0.03
* The investment adviser voluntarily waived its investment advisory fee and
reimbursed the Fund for a portion of its operating expenses. Had these
actions not been taken, the net investment income per share and the ratios
would have been:
Net investment loss per share ($0.21)
Ratios (to average daily net assets):
Expenses 6.52% y
Net investment loss (4.12%)y
x The total return for the period is not annualized.
y Computed on an annualized basis.
</TABLE>
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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 which are
taxable to them as ordinary income.
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
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<PAGE>
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 are 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, at the time of investment, 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.
9
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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
$1 billion. The Fund expects to emphasize investments in companies involved with
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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
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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.
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
connection with securities transactions in many foreign countries. Fixed
commissions on foreign stock exchanges are generally higher than negotiated
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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
unfavorab ly 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
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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.
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 two or more 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.
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
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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.
The following table sets forth the historical total return performance of
all tax-sensitive components of fee paying, domestic equity portfolios under
discretionary management by the Adviser that have substantially similar
investment objectives, policies and strategies as the Equity Fund (the
"Tax-Sensitive Equity Components") as measured by the Standish, Ayer & Wood Tax
Sensitive Equity Composite (the "Composite"). As of December 31, 1995, the
Composite consisted of 24 Tax-Sensitive Equity Components representing
approximately $39.1 million in assets. The performance data of the Tax-Sensitive
Equity Components, as represented by the Composite, has been computed in
accordance with the SEC's standardized formula. Because the gross performance
data does not reflect the deduction of investment advisory fees attributable to
the Tax-Sensitive Equity Components, the net performance data may be more
relevant to potential investors in the Equity Fund in their analysis of the
historical experience of the Adviser in managing tax-sensitive components of
equity portfolios with investment objectives, policies and strategies
substantially similar to those of the Equity Fund. The performance of the
Tax-Sensitive Equity Components would be diminished if cash positions of the
related portfolios were allocated to the Tax-Sensitive Equity Components.
STANDISH, AYER & WOOD TAX-SENSITIVE EQUITY COMPOSITE PERFORMANCE
Average Annual
Total Return For 6 Year
The Periods Ended Cumulative
December 31, 1995 Total
----------------- -----
3 Years 5 Years Return
The Composite
Equal Weighted Gross 15.10% 17.70% 121.20%
Equal Weighted Net 14.24% 17.10% 115.00%
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1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ----
The Composite
- -------------
Equal weighted
gross total
return -1.83% 32.23% 12.60% 14.94% -4.83% 38.60%
Equal weighted
net total
return -2.33% 31.73% 12.10% 14.44% -5.33% 38.10%
Size weighted
gross total
return -0.12% 32.16% 10.78% 14.44% -4.17% 38.18%
Size weighted
net total
return -0.62% 31.66% 10.28% 13.94% -4.67% 37.68%
The performance of the Tax-Sensitive Equity Components is not that of any
of the Funds, including the Equity Fund, and is not necessarily indicative of
any Fund's future results. Each Fund's actual total return may vary
significantly from the past and future performance of these Components. While
the Tax-Sensitive Equity Components incur inflows and outflows of cash from
clients, there can be no assurance that the continuous offering of the a Fund's
shares and each Fund's obligation to redeem its shares will not impact the
Fund's performance. In the opinion of the Adviser, so long as the Equity Fund
has at least $1.5 million in net assets, the relative difference in the size
between the Equity Fund and the Tax-Sensitive Equity Components should not
affect the relevance of the performance of the Tax-Sensitive Equity Components
to a potential investor in the Equity Fund. Investment returns and the net asset
value of shares of each Fund, including the Equity Fund, will fluctuate in
response to market and economic conditions as well as other factors and an
investment in a Fund involves the risk of loss.
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 Principal
Underwriter, 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 or its agent 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).
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<PAGE>
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.
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.
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<PAGE>
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.
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
or its agent 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.
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<PAGE>
Telephonic Exchanges
Shareholders who elect telephonic privileges may exchange shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to share-holders 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 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 or its agent 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
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<PAGE>
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.
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
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<PAGE>
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,
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.
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<PAGE>
The Adviser provides fully discretionary management services and counseling
and advisory services to a broad range of clients throughout the United States
and abroad. As of March 31, 1996, the Adviser or its affiliate, Standish
International Management Company, L.P. ("SIMCO"), served 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 $ 9,042,346
Standish Equity Fund 98,282,505
Standish Fixed Income Fund 2,299,158,500
Standish Fixed Income Fund II 10,102,031
Standish Global Fixed Income Fund 149,048,965
Standish Intermediate Tax Exempt Bond Fund 31,199,236
Standish International Equity Fund 51,980,946
Standish International Fixed Income Fund 761,073,675
Standish Massachusetts Intermediate
Tax Exempt Bond Fund 32,270,691
Standish Securitized Fund 53,357,787
Standish Short-Term Asset Reserve Fund 272,188,970
Standish Small Capitalization Equity Fund 196,260,876
Standish Small Cap Tax-Sensitive Equity Fund 1,588,743
Standish Tax-Sensitive Equity Fund 1,261,111
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 $29 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 Managing Director of the Adviser since Jan. 1996 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 0.25% 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, and
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
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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.
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,
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<PAGE>
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.
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.
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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 fcalendar year.
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 May 31, 1996 more than 39% of the then outstanding shares of the
Tax-Sensitive Small Cap Fund were held by BDG & Co., Trustee for Ivy Lane
Foundation, 150 Federal Street, Boston, MA, which was deemed to control the
Tax-Sensitive Small Cap 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
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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.
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.
CUSTODIAN, TRANSFER AGENT AND
DIVIDEND-DISBURSING AGENT
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts
02111, 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.
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No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or in the Statement of Additional Information, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Trust. This Prospectus does not constitute an offering in any
jurisdiction in which such offering may not be lawfully made.
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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 TIN-related
certifications contained in the Account Purchase Application (Application) or
you are otherwise subject to backup withholding. The Fund will not impose backup
withholding as a result of your failure to make any certification, except the
certifications in the Application that directly relate to your TIN and backup
withholding status. 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.
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
89 South Street
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
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